NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in millions, except per share and unit measures or as otherwise specified)
(1) Description of Business
HRG Group, Inc. (“
HRG
” and collectively with its respective subsidiaries, the “
Company
”) is a diversified holding company focused on owning businesses that the
Company
believes can, in the long term, generate sustainable free cash flow or attractive returns on investment.
HRG
’s shares of common stock trade on the New York Stock Exchange (“
NYSE
”) under the symbol “
HRG
.”
The
Company
’s reportable business segments are organized in a manner that reflects how
HRG
’s management views those business activities. Accordingly, the
Company
currently operates its business in
four
reporting segments: (i)
Consumer Products
, (ii)
Insurance
, (iii)
Energy
, and (iv)
Asset Management
. For the results of operations by segment, and other segment data, see
Note 15
,
Segment Data
.
Consumer Products Segment
The
Consumer Products
segment represents the
Company
’s
57.8%
controlling interest in Spectrum Brands Holdings, Inc. (“
Spectrum Brands
”).
Spectrum Brands
is a diversified global branded consumer products company with positions in seven major product categories: consumer batteries, small appliances, global pet supplies, home and garden control products, personal care products, hardware and home improvement products and global auto care.
Insurance Segment
As of
June 30, 2016
, the
Company
’s insurance operations were conducted through Front Street Re (Delaware) Ltd., (“
Front Street
”) and its Bermuda and Cayman-based wholly-owned life and annuity reinsurers, Front Street Re Ltd. (“
Front Street Bermuda
”) and Front Street Re (Cayman) Ltd. (“
Front Street Cayman
”), respectively.
During the
three months ended June 30, 2016
,
Front Street
was provided information on a recapture notice of a reinsurance agreement between third parties covering a block of long-term care business. The original reinsurance agreement was entered into on a funds withheld modified coinsurance basis and the assuming company had retroceded
74.9%
of the assumed business to Ability Reinsurance (Bermuda) which was subsequently merged with
Front Street Cayman
upon the acquisition of Ability Reinsurance (Bermuda) in 2014. As a result of the recapture notice, during the three and
nine months ended June 30, 2016
, Front Street’s funds withheld receivables and insurance reserves decreased by approximately
$83.0
.
The Company also owns
80.4%
of Fidelity & Guaranty Life, (“
FGL
”). Through its wholly-owned subsidiaries, Fidelity & Guaranty Life Insurance Company (“
FGL Insurance
”) and Fidelity & Guaranty Life Insurance Company of New York,
FGL
is a provider of various types of fixed annuities and life insurance products in the U.S.
As discussed further in
Note 4
,
Divestitures
, on November 8, 2015, Anbang Insurance Group Co., Ltd., a joint-stock insurance company established in the People’s Republic of China (“
Anbang
”), AB Infinity Holding, Inc., a wholly-owned subsidiary of Anbang (“
AB Infinity
”), and AB Merger Sub, Inc., a wholly-owned subsidiary of AB Infinity (“
Merger Sub
”), entered into a definitive merger agreement (the “
FGL Merger Agreement
” and such merger, the “
FGL Merger
”) to acquire
FGL
for
$26.80
per share. As a result of the
FGL Merger Agreement
, as of
June 30, 2016
, the
Company
’s ownership interest in
FGL
has been classified as held for sale in the accompanying
Condensed Consolidated Balance Sheets
and
FGL
’s operations were classified as discontinued operations in the accompanying
Condensed Consolidated Statements of Operations
and the accompanying
Condensed Consolidated Statements of Cash Flows
and reported separately for all periods presented. Prior to the transaction,
FGL
was included in the Company’s
Insurance
segment. As a result of classifying
FGL
as held for sale, all segmented information has been adjusted to exclude
FGL
from the
Insurance
segment. See
Note 4
,
Divestitures
.
Energy Segment
The
Energy
segment represents the Company’s wholly-owned subsidiary, HGI Energy Holdings, LLC (“
HGI Energy
”) and HGI Energy’s wholly-owned subsidiary, Compass Production GP, LLC (“
Compass GP
”) and its respective subsidiaries (collectively, “
Compass
”).
Compass
is an owner and operator of conventional oil and natural gas properties in East Texas and North Louisiana.
On December 1, 2015,
Compass
completed the sale of its oil and gas interests located in the Holly, Waskom and Danville Fields in East Texas and North Louisiana (the “
Compass Asset Sale
”). At closing, proceeds from the transaction, which were approximately
$147.5
, less estimated expenses of
$1.9
, were used primarily to reduce borrowings under
Compass
’ existing credit facility (the “
Compass Credit Agreement
”). For the
nine months ended June 30, 2016
,
Compass
received an additional
$5.9
as a result of resolving certain title and consent matters in connection with the
Compass Asset Sale
.
As further discussed in
Note 17
,
Subsequent Events
, on July 1, 2016, subsequent to the end of the fiscal quarter, the
Company
, through
HGI Energy
, entered into an agreement to sell its equity interests in
Compass
to a third party for a cash purchase price of
$145.0
(such agreement, the “
Compass Sale Agreement
” and such sale, the “
Compass Sale
”). The purchase price will be reduced
by the balance of
Compass
Credit Agreement outstanding at closing (
$125.0
as of
June 30, 2016
) and is subject to other customary closing purchase price adjustments for title and environmental defects. The closing of the
Compass Sale
is subject to the satisfaction of customary closing conditions.
HRG
is a party to the
Compass Sale Agreement
for the purpose of satisfying
HGI Energy
’s post-closing obligations to the buyer. Upon the completion of the
Compass Sale
,
HGI Energy
’s existing notes,
$100.0
notional aggregate amount held by the
Company
’s affiliates, will be canceled and replaced with
$92.0
notional aggregate amount of new notes of
HGI Energy
and
HGI Energy
will be recapitalized with an equity contribution of
$110.0
in assets or cash to satisfy its future obligations.
Given the inherent decline in the production potential of its existing asset base,
Compass
’ indebtedness and the continued declines in commodity prices, if the Compass Sale is not completed,
Compass
may also pursue a variety of strategies to generate cash flows and reduce its leverage, including pursuing dispositions, acquisitions, other strategic transactions and the issuance of debt and equity securities.
Asset Management Segment
The
Asset Management
segment represents the
Company
’s ownership of Salus Capital Partners, LLC (“
Salus
”), an asset based lender, and CorAmerica Capital, LLC (“
CorAmerica
”), a commercial real estate lender. During the
three months ended June 30, 2016
, the operations of Energy & Infrastructure Capital, LLC (“
EIC
”), a debt capital investment manager focused on direct lending to companies in the North America energy and infrastructure sectors, were wound down.
(2) Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements
Basis of Presentation
The accompanying unaudited
Condensed Consolidated Financial Statements
of the
Company
included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“
SEC
”). The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information. All such adjustments are of a normal recurring nature. Although the
Company
believes that the disclosures are adequate to make the information presented not misleading, certain information and note disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“
U.S. GAAP
”), have been condensed or omitted pursuant to such rules and regulations. Certain prior amounts have been reclassified or combined to conform to the current year presentation. These reclassifications and combinations had no effect on previously reported net loss attributable to controlling interest or accumulated deficit. These interim financial statements should be read in conjunction with the
Company
’s annual consolidated financial statements and notes thereto included in the
Company
’s Annual Report on Form 10-K for the fiscal year ended
September 30, 2015
, filed with the
SEC
on November 20, 2015 (the “Form 10-K”). The results of operations for the
nine months ended June 30, 2016
are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending
September 30, 2016
.
The
Company
’s fiscal year ends on September 30 and the quarters end on the last calendar day of the months of December, March and June. The
Company
’s significant subsidiary,
Spectrum Brands
’ fiscal year ends September 30 and its interim fiscal quarters end every thirteenth Sunday, except for its first fiscal quarter which may end on the fourteenth Sunday following September 30. The
Company
does not adjust for the difference in fiscal periods between
Spectrum Brands
and itself, as such difference would be less than 93 days, pursuant to Regulation S-X Rule 3A-02.
At
June 30, 2016
, the noncontrolling interest component of total equity primarily represents the
42.2%
share of
Spectrum Brands
and the
19.6%
of
FGL
not owned by
HRG
.
Assets Held for Sale and Discontinued Operations
The
Company
reports a business as held for sale when management has approved or received approval to sell the business and is committed to a formal plan, the business is available for immediate sale, the business is being actively marketed, the sale is anticipated to occur during the next twelve months and certain other specified criteria are met, in accordance with Accounting Standard Codification (“ASC”) Topic 360,
Property, Plant and Equipment
(“
ASC 360
”). A business classified as held for sale is recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value less cost to sell, a loss is recognized. Assets and liabilities related to a business classified as held for sale are segregated in the current and prior balance sheets in the period in which the business is classified as held for sale. Transactions between the businesses held for sale and businesses held for use that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations and balances held for sale. If a business is classified as held for sale after the balance sheet date but before the financial statements are issued or are available to be issued, the business continues to be classified as held and used in those financial statements when issued or when available to be issued.
The
Company
reports the results of operations of a business as discontinued operations if a disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the business is classified as held for sale,
in accordance with
ASC 360
and Accounting Standards Update (“ASU”) No. 2014-08,
Presentation of Financial Statements (Topic 2015) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
(“ASU 2014-08”). The results of discontinued operations are reported in “
(Loss) income from discontinued operations, net of tax
” in the accompanying
Condensed Consolidated Statements of Operations
for current and prior periods commencing in the period in which the business meets the criteria of a discontinued operation, and include any gain or loss recognized on closing or adjustment of the carrying amount to fair value less cost to sell. Transactions between the businesses held for sale and businesses held for use that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations and balances held for sale.
The guidance above does not apply to oil and gas properties that are accounted for using the full-cost method of accounting as prescribed by the U.S. SEC (Regulation S-X, Rule 4-10, Financial Accounting and Reporting for Oil and Gas Producing Activities Pursuant to the Federal Securities Laws and the Energy Policy and Conservation Act of 1975) unless the disposal represents all or substantially all of a full cost pool as a discontinued operation.
Adoption of Recent Accounting Pronouncements
Debt Issuance Costs
In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-03,
Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-03”). The accounting guidance requires that debt issuance costs related to a recognized debt liability be reported in the accompanying
Condensed Consolidated Balance Sheets
as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for annual periods and interim periods within those annual periods beginning after March 31, 2016 and early adoption is permitted. The Company elected to early adopt ASU 2015-03 effective March 31, 2016. The Company applied the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented was adjusted to reflect the period-specific effects of applying the new guidance. The reclassification of unamortized debt issuance costs resulted in reductions in other assets and debt of
$102.9
as of September 30, 2015. Other than this reclassification, the adoption of this guidance did not have an impact in the Company’s
Condensed Consolidated Financial Statements
.
Simplifying the Accounting for Measurement-Period Adjustments
In September 2015, the FASB issued ASU No. 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
(“ASU 2015-16”).
ASU 2015-16 simplifies the presentation of provisional amounts recognized in a business combination during the measurement period (one year from the date of acquisition). Whereas the prior guidance required retrospective adjustment of prior periods, ASU 2015-16 eliminates this requirement. The Company adopted ASU 2015-16 effective March 31, 2016, resulting in the recognition of adjustments to goodwill of
$3.4
during the
nine months ended June 30, 2016
related to Spectrum Brands’ acquisition of Armored AutoGroup Parent Inc. (“AAG”) See
Note 8
,
Goodwill and Intangibles
for adjustments to goodwill.
Balance Sheet Classification of Deferred Taxes
In November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”). ASU 2015-17 requires that the presentation of deferred tax assets and liabilities be classified as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The Company elected to early adopt ASU 2015-07 effective March 31, 2016. The Company applied the new guidance on a retrospective basis, resulting in a reclassification reducing both deferred tax assets and deferred tax liabilities by
$39.1
in the accompanying
Condensed Consolidated Balance Sheets
at September 30, 2015.
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”)
.
ASU 2016-09 provides for changes to the accounting for share-based payment awards issued to employees, primarily income taxes upon award vesting or settlement, cash flow presentations of excess tax benefits and employee withheld taxes paid, as well as an entity forfeiture policy election. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period. The Company has elected to early adopt ASU 2016-09 for the three months ended June 30, 2016 using a modified retrospective approach, effective as if adopted the first day of the fiscal year, October 1, 2015.
Under the new guidance, all excess tax benefits and tax deficiencies related to employee stock compensation will be recognized within income tax expense. Under prior guidance, excess tax benefits were recognized to additional paid-in capital and tax deficiencies were only recognized to the extent they exceeded the pool of excess tax benefits.
As of September 30, 2015, there was
$28.4
of unrecognized deferred tax assets attributable to excess tax benefits that were not previously recognized as they did not reduce income taxes payable. The cumulative adjustment for the adoption of ASU 2016-09
did not have an impact on net equity as the incremental deferred tax assets were fully offset by a corresponding increase in the deferred tax asset valuation allowance as of September 30, 2015.
For the three months ended December 31, 2015, there was an additional
$4.3
of unrecognized deferred tax assets attributable to excess tax benefits that were not previously recognized. The Company did not record an adjustment for the adoption of ASU 2016-09 as the incremental deferred tax assets were also fully offset by a corresponding increase in the deferred tax asset valuation allowance as of December 31, 2015.
The impact of the adoption of ASU 2016-09 to the Company’s previously reported quarterly results for the three and six months ended March 31, 2016 was as follows:
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Three months ended March 31, 2016
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Six months ended March 31, 2016
|
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Reported
|
|
Adjustment
|
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As Revised
|
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Reported
|
|
Adjustment
|
|
As Revised
|
Income tax expense (benefit)
|
$
|
8.9
|
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|
$
|
(17.4
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)
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$
|
(8.5
|
)
|
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$
|
10.8
|
|
|
$
|
(17.4
|
)
|
|
$
|
(6.6
|
)
|
Net income from continuing operations
|
11.6
|
|
|
17.4
|
|
|
29.0
|
|
|
54.2
|
|
|
17.4
|
|
|
71.6
|
|
Net (loss) income
|
(1.5
|
)
|
|
17.4
|
|
|
15.9
|
|
|
5.5
|
|
|
17.4
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|
|
22.9
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Net income attributable to noncontrolling interest
|
33.3
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|
7.3
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|
40.6
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|
|
74.2
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|
|
7.3
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|
|
81.5
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|
Net (loss) income attributable to controlling interest
|
(34.8
|
)
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|
10.1
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|
(24.7
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)
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(68.7
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)
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|
10.1
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|
(58.6
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)
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Earnings Per Share
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Basic (loss) income from continuing operations
|
$
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(0.10
|
)
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|
$
|
0.09
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|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.09
|
|
|
$
|
0.04
|
|
Basic earnings per share
|
(0.18
|
)
|
|
0.05
|
|
|
(0.12
|
)
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|
(0.35
|
)
|
|
0.05
|
|
|
(0.30
|
)
|
Diluted (loss) income from continuing operations
|
$
|
(0.10
|
)
|
|
$
|
0.09
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.09
|
|
|
$
|
0.04
|
|
Diluted earnings per share
|
(0.18
|
)
|
|
0.05
|
|
|
(0.12
|
)
|
|
(0.35
|
)
|
|
0.05
|
|
|
(0.30
|
)
|
Further, as part of the adoption, the Company elected to account for forfeitures in compensation cost as they occur. The cumulative impact for the change in election was not material and was recognized in the
three months ended June 30, 2016
.
Oil and Natural Gas Properties
Ceiling Test
Pursuant to Rule 4-10(c)(4) of Regulation S-X,
Compass
is required to compute its ceiling test using the simple average first day of the month spot price for the trailing 12 month period for oil and natural gas at the end of each fiscal quarter. The ceiling test involves comparing the net book value of the full cost pool, after taxes, to the full cost ceiling limitation defined below. In the event the full cost ceiling limitation is less than the full cost pool,
Compass
is required to record a ceiling test impairment of its oil and natural gas properties. The full cost ceiling limitation is computed as the sum of the present value of estimated future net revenues from
Compass
’ proved reserves by applying the average price as prescribed by the
SEC
Release No. 33-8995, less estimated future expenditures (based on current costs) to develop and produce the proved reserves, discounted at 10%, plus the cost of properties not being amortized and the lower of cost or estimated fair value of unproved properties included in the costs being amortized, net of income tax effects.
The ceiling test is computed using the simple average first day of the month spot price for the trailing 12 month period using the first day of each month. As of
June 30, 2016
, the trailing 12 month period month reference prices were
$2.24
per Million British Thermal Units (“
Mmbtu
”) for natural gas at Henry Hub (“
HH
”), and
$43.12
per barrel (“
Bbl
”) of oil for West Texas Intermediate (“
WTI
”) at Cushing, Oklahoma. Each of the reference prices for oil and natural gas are further adjusted for quality factors and regional differentials to derive estimated future net revenues. The price used for natural gas liquids was
$16.72
per
Bbl
and was based on the trailing 12 month period month average of realized prices. Under full cost accounting rules, any ceiling test impairments of oil and natural gas properties may not be reversed in subsequent periods. Since
Compass
does not designate its derivative financial instruments as hedging instruments,
Compass
is not allowed to use the impacts of the derivative financial instruments in the ceiling test computations.
During the three and
nine months ended June 30, 2016
,
Compass
recognized impairments of
$17.6
and
$93.2
, respectively, to its proved oil and natural gas properties due to the continued decline in oil and natural gas prices.
For the
three months ended June 30, 2015
, Compass recognized impairments to its proved oil and natural gas properties of
$102.8
primarily due to a decline in oil and natural gas prices. During the
nine months ended June 30, 2015
,
Compass
recognized impairments of
$439.4
to its proved oil and natural gas properties due to the sharp decline in oil and natural gas prices, as well as the acquisition by
HGI Energy
of EXCO Resources, Inc.’s (“EXCO”) interest in
Compass
, which triggered the remeasurement of the
Company
’s initial basis in
Compass
at fair value which increased
Compass
’ full cost pool. The purchase price for the acquisition was based on both the income and market approach models which incorporate, among other things, market prices based on the New York Mercantile Exchange (“
NYMEX
”) futures as of the acquisition date, which the
Company
believes reflects an independent proxy point for determining fair value. The ceiling test, however, requires companies using the full cost accounting method to
price period-ending proved reserves using the simple average first day of the month spot price for the trailing 12 month period, which may not be indicative of actual market values. As a result,
Compass
’ full cost pool exceeded its ceiling test limitation at
June 30, 2015
resulting in impairment.
As a result of the continued decline in oil and natural gas prices, if the Compass Sale is not completed,
Compass
expects to incur additional impairments to its oil and natural gas properties in fiscal year 2016 if prices do not increase. The possibility and amount of any future impairment is difficult to predict, and will depend, in part, upon future oil and natural gas prices to be utilized in the ceiling test, estimates of proved reserves and future capital expenditures and operating costs.
The ceiling test calculation and impairment evaluation are based upon estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves, in projecting the future rates of production and in the timing of development activities. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities of oil, natural gas and natural gas liquids that are ultimately recovered.
Insurance Subsidiary Financial Information and Regulatory Matters
FGL Insurance
’s statutory carrying value of Raven Reinsurance Company (“
Raven Re
”), its wholly-owned subsidiary, reflects the effect of permitted practices
Raven Re
received to treat the available amount of a letter of credit as an admitted asset which increased
Raven Re
’s statutory capital and surplus by
$207.5
and
$226.3
at
June 30, 2016
and
September 30, 2015
, respectively.
Raven Re
is also permitted to follow Iowa prescribed statutory accounting practice for its reserves on reinsurance assumed from
FGL Insurance
which increased
Raven Re
’s statutory capital and surplus by
$3.2
and
$2.5
at
June 30, 2016
and
September 30, 2015
, respectively. Without such permitted statutory accounting practices,
Raven Re
’s statutory capital and surplus would be negative
$0.1
and negative
$33.1
as of
June 30, 2016
and
September 30, 2015
, respectively, and its risk-based capital would fall below the minimum regulatory requirements. The letter of credit facility is collateralized by debt securities rated by the National Association of Insurance Commissioners (“NAIC”) as “NAIC-1.” If the permitted practice was revoked, the letter of credit could be replaced by the collateral assets with Nomura Bank International plc’s consent.
FGL Insurance
’s carrying value of
Raven Re
at
June 30, 2016
and
September 30, 2015
was
$210.6
and
$195.6
, respectively.
On November 1, 2013,
FGL Insurance
re-domesticated from Maryland to Iowa. After re-domestication,
FGL Insurance
elected to apply Iowa-prescribed accounting practices that permit Iowa-domiciled insurers to report equity call options used to economically hedge fixed indexed annuity (“
FIA
”) index credits at amortized cost for statutory accounting purposes and to calculate
FIA
statutory reserves such that index credit returns will be included in the reserve only after crediting to the annuity contract. This resulted in a
$26.2
increase to statutory capital and surplus at
June 30, 2016
.
(3) Significant Risks and Uncertainties
Use of Estimates and Assumptions
The preparation of the Company’s
Condensed Consolidated Financial Statements
in conformity with
U.S. GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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 and assumptions used.
Concentrations of Investments
As of
June 30, 2016
, the
Company
’s most significant investment in
one
industry was the
Company
’s asset-based loan in the apparel industry with carrying value of
$12.3
, or
24.3%
of the Company’s investment portfolio. As of
September 30, 2015
, the Company’s most significant investment in one industry was the Company’s asset-based loan in the electronics industry with carrying value of
$45.9
, or
16.5%
, of the
Company
’s investments portfolio. No investment in a single issuer exceeded
10%
of the
Company
’s stockholders’ equity as of
June 30, 2016
and
September 30, 2015
.
Concentration of Securities Included in Funds Withheld Receivables
As of
June 30, 2016
and
September 30, 2015
, Front Street’s most significant exposure related to the securities underlying the funds withheld receivables was to the financial sector and the energy, mining and metals industries.
As of
June 30, 2016
and
September 30, 2015
, the carrying value of the fixed maturity securities in the financial sector was
$225.5
, or
13.6%
, and
$269.7
, or
15.8%
, respectively, of Front Street’s funds withheld receivables. At
June 30, 2016
and
September 30, 2015
, the holdings in this sector included investments in
80
and
107
different issuers, respectively, with the top
ten
investments accounting for
47.4%
and
41.0%
, respectively, of the total holdings in this sector.
As of
June 30, 2016
and
September 30, 2015
, the carrying value of the fixed maturity securities in the energy, mining and metals industries was
$200.4
, or
12.1%
, and
$236.6
, or
13.8%
, respectively, of Front Street’s funds withheld receivables. At
June 30,
2016
and
September 30, 2015
, the holdings in these industries included investments in
80
and
98
different issuers, respectively, with the top
ten
investments accounting for
43.4%
and
39.7%
, respectively, of the total holdings in these industries.
There were no holdings in a single issuer included in the funds withheld receivables that exceeded 10% of the
Company
’s stockholders’ equity as of
June 30, 2016
and
September 30, 2015
.
Concentrations of Financial and Capital Markets Risk
The
Company
is exposed to financial and capital markets risk, including changes in interest rates and credit spreads which can have an adverse effect on the Company’s results of operations, financial condition and liquidity. The
Company
expects to continue to face challenges and uncertainties that could adversely affect its results of operations and financial condition.
The
Company
’s exposure to such financial and capital markets risk relates primarily to the market price and cash flow variability associated with changes in interest rates. A rise in interest rates, in the absence of other countervailing changes, will increase the net unrealized loss position of Front Street’s funds withheld receivables and, if long-term interest rates rise dramatically within a six to twelve month time period, certain of the Front Street’s reinsured products may be exposed to disintermediation risk. Disintermediation risk refers to the risk that policyholders may surrender their contracts in a rising interest rate environment, requiring Front Street to liquidate assets in an unrealized loss position. This risk is mitigated to some extent by surrender charge protection provided by the products reinsured by Front Street.
Receivables
The allowance for uncollectible receivables as of
June 30, 2016
and
September 30, 2015
was
$46.0
and
$44.0
, respectively. 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 represents approximately
15.0%
and
12.7%
of the
Company
’s “
Receivables, net
” in the accompanying
Condensed Consolidated Balance Sheets
at
June 30, 2016
and
September 30, 2015
, respectively.
(4) Divestitures
FGL Merger Agreement
On November 8, 2015,
FGL
,
Anbang
,
AB Infinity
, and
Merger Sub
entered into the
FGL Merger Agreement
. Pursuant to the
FGL Merger Agreement
and subject to the terms and conditions set forth therein,
Merger Sub
will merge with and into
FGL
, with
FGL
continuing as the surviving entity, which will become a direct, wholly-owned subsidiary of
AB Infinity
and an indirect, wholly-owned subsidiary of
Anbang
. Pursuant to the
FGL Merger Agreement
, at the effective time of the
FGL Merger
, each issued and outstanding share of
FGL
common stock will be canceled and converted automatically into the right to receive
$26.80
per share in cash, without interest, other than any shares of common stock owned by
FGL
as treasury stock or otherwise or owned by
Anbang
,
AB Infinity
or
Merger Sub
(which will be canceled and no payment will be made with respect thereto), shares of common stock granted pursuant to
FGL
’s equity plans and those shares of common stock with respect to appraisal rights under Delaware law are properly exercised and not withdrawn.
The completion of the FGL Merger is subject to the satisfaction of a number of closing conditions, including the receipt of regulatory approvals from the Iowa Insurance Division, New York Department of Financial Services, Vermont Department of Financial Regulation, China Insurance Regulatory Commission, and the Committee on Foreign Investment in the United States (“CFIUS”).
On November 25, 2015,
FGL
obtained the requisite approval for the
FGL Merger
from the Vermont Department of Financial Regulation. On March 14, 2016,
FGL
received notification from
CFIUS
that it had concluded all action under Section 721 of the Defense Production Act of 1950, as amended, and determined that there are no unresolved national security concerns with respect to the
FGL Merger
. The parties are not required to file a notification of the
FGL Merger
under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, due to an available exemption. The adoption of the
FGL Merger Agreement
by
FGL
’s stockholders required the affirmative vote or written consent of holders of at least a majority of the outstanding shares of
FGL
’s common stock. On November 8, 2015, FS Holdco II Ltd., a wholly-owned subsidiary of the Company and the direct holder of
47.0 million
shares of
FGL
’s common stock representing approximately
80.5%
of the outstanding shares of
FGL
’s common stock, delivered a written consent adopting, authorizing, accepting and approving in all respects the
FGL Merger Agreement
and the transactions contemplated thereby, including the merger.
Anbang
continues to work on securing the required regulatory approvals and the parties are committed to securing such approvals, however, the closing of the
FGL Merger
, and the timing thereof, is subject to the regulatory review and approval process. In the event that the
FGL Merger Agreement
is terminated, under specified circumstances,
FGL
may be required to pay a termination fee to
Anbang
and its subsidiaries of
$51.5
.
At
June 30, 2016
, the Company determined that as a result of the
FGL Merger Agreement
, the Company’s ownership interest in FGL met the criteria established by
ASC 360
to classify it as held for sale. The following table summarizes the major categories of assets and liabilities classified as held for sale in the accompanying
Condensed Consolidated Balance Sheets
at
June 30, 2016
and
September 30, 2015
:
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
September 30,
2015
|
Assets
|
|
|
|
Investments, including loans and receivables from affiliates
|
$
|
20,665.6
|
|
|
$
|
19,206.7
|
|
Cash and cash equivalents
|
719.5
|
|
|
501.8
|
|
Accrued investment income
|
191.6
|
|
|
191.2
|
|
Reinsurance recoverable
|
3,475.9
|
|
|
3,578.7
|
|
Deferred tax assets
|
52.7
|
|
|
194.7
|
|
Properties
|
17.1
|
|
|
14.4
|
|
Deferred acquisition costs and value of business acquired, net
|
1,101.1
|
|
|
1,048.6
|
|
Other assets
|
182.1
|
|
|
248.4
|
|
Write-down of assets of business held for sale to fair value less cost to sell
|
(240.7
|
)
|
|
—
|
|
Total assets held for sale
|
$
|
26,164.9
|
|
|
$
|
24,984.5
|
|
Liabilities
|
|
|
|
Insurance reserves
|
$
|
23,575.8
|
|
|
$
|
22,560.1
|
|
Debt
|
300.0
|
|
|
298.3
|
|
Accounts payable and other current liabilities
|
39.3
|
|
|
43.7
|
|
Other liabilities
|
641.0
|
|
|
518.8
|
|
Total liabilities held for sale
|
$
|
24,556.1
|
|
|
$
|
23,420.9
|
|
The balances included in the accompanying
Condensed Consolidated Balance Sheets
and in the table above reflect transactions between the businesses held for sale and businesses held for use that are expected to continue to exist after the closing of the FGL Merger. Such transactions are not eliminated to reflect the continuing operations and balances held for sale. As a result, adjustments to the carrying value of certain intercompany assets recorded by FGL, were reversed upon consolidation in the Company’s
Condensed Consolidated Financial Statements
.
Below is a summary of the impact of such intercompany balances in the accompanying
Condensed Consolidated Balance Sheets
:
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
September 30,
2015
|
Assets
|
|
|
|
Funds withheld receivable
|
$
|
1,011.2
|
|
|
$
|
1,058.0
|
|
Other assets
|
15.4
|
|
|
15.9
|
|
Assets of business held for sale
|
1,531.2
|
|
|
1,769.8
|
|
Total assets
|
$
|
2,557.8
|
|
|
$
|
2,843.7
|
|
Liabilities
|
|
|
|
Insurance reserves
|
$
|
1,143.2
|
|
|
$
|
1,226.8
|
|
Debt
|
198.9
|
|
|
330.7
|
|
Accounts payable and other current liabilities
|
0.3
|
|
|
1.6
|
|
Other liabilities
|
9.6
|
|
|
11.0
|
|
Liabilities of business held for sale
|
1,205.8
|
|
|
1,273.6
|
|
Total liabilities
|
$
|
2,557.8
|
|
|
$
|
2,843.7
|
|
The carrying value of the
Company
’s interest in
FGL
was higher than the fair value less cost to sell based on the sales price at
June 30, 2016
and as a result, the Company recorded a write-down of assets of business held for sale of
$217.2
and
$240.7
for the three and
nine months ended June 30, 2016
, respectively.
In accordance with ASU 2014-08, the Company has determined that the FGL Merger Agreement represented a strategic shift for the Company and, accordingly, has presented the results of operations for
FGL
as discontinued operations in the accompanying
Condensed Consolidated Statements of Operations
.
The following table summarizes the components of “
Net (loss) income from discontinued operations
” in the accompanying
Condensed Consolidated Statements of Operations
for the three and
nine months ended June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Nine months ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
|
|
Insurance premiums
|
$
|
20.8
|
|
|
$
|
17.2
|
|
|
$
|
52.4
|
|
|
$
|
43.0
|
|
Net investment income (a)
|
236.3
|
|
|
212.1
|
|
|
685.2
|
|
|
628.1
|
|
Net investment (losses) gains (b)
|
(21.0
|
)
|
|
76.8
|
|
|
3.5
|
|
|
101.9
|
|
Insurance and investment product fees and other
|
33.0
|
|
|
23.2
|
|
|
93.5
|
|
|
65.1
|
|
Total revenues
|
269.1
|
|
|
329.3
|
|
|
834.6
|
|
|
838.1
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Benefits and other changes in policy reserves
|
216.3
|
|
|
78.5
|
|
|
585.3
|
|
|
474.1
|
|
Selling, acquisition, operating and general expenses
|
25.6
|
|
|
27.2
|
|
|
82.2
|
|
|
84.8
|
|
Amortization of intangibles
|
7.4
|
|
|
77.4
|
|
|
41.3
|
|
|
85.7
|
|
Total operating costs and expenses
|
249.3
|
|
|
183.1
|
|
|
708.8
|
|
|
644.6
|
|
Operating income
|
19.8
|
|
|
146.2
|
|
|
125.8
|
|
|
193.5
|
|
Interest expense
|
(5.1
|
)
|
|
(5.9
|
)
|
|
(16.9
|
)
|
|
(17.7
|
)
|
Other income (expense), net
|
1.9
|
|
|
2.1
|
|
|
4.4
|
|
|
(2.9
|
)
|
Write-down of assets of business held for sale to fair value less cost to sell
|
(217.2
|
)
|
|
—
|
|
|
(240.7
|
)
|
|
—
|
|
Net (loss) income before income taxes
|
(200.6
|
)
|
|
142.4
|
|
|
(127.4
|
)
|
|
172.9
|
|
Income tax expense (c)
|
7.8
|
|
|
39.5
|
|
|
129.7
|
|
|
47.2
|
|
Net (loss) income
|
(208.4
|
)
|
|
102.9
|
|
|
(257.1
|
)
|
|
125.7
|
|
Less: net income attributable to noncontrolling interest
|
1.9
|
|
|
16.6
|
|
|
13.1
|
|
|
17.1
|
|
Net (loss) income - attributable to controlling interest
|
$
|
(210.3
|
)
|
|
$
|
86.3
|
|
|
$
|
(270.2
|
)
|
|
$
|
108.6
|
|
(a) Included in the net investment income attributable to
FGL
is interest income of
$1.1
for the
three months ended June 30, 2016
and
2015
and
$3.4
for the
nine months ended June 30, 2016
and
2015
on debt instruments issued by entities consolidated by
HRG
as they will continue to exist following the closing of the FGL Merger. The corresponding interest expense is recorded in continuing operations in the accompanying
Condensed Consolidated Statements of Operations
.
(b) Included in “Net investments (losses) gains” are charges related to the change in expected recovery rates of asset-based loans. Such charges are presented as “
Impairments and bad debt expense
” on the Company’s accompanying
Condensed Consolidated Statements of Operations
.
(c) Included in the income tax expense for the
nine months ended June 30, 2016
was a
$90.9
of net income tax expense related to the establishment of a deferred tax liability of
$253.0
at
June 30, 2016
as a result of classifying the Company’s ownership interest in FGL as held for sale. The deferred tax liability was partially offset by a
$162.1
reduction of valuation allowance on HRG’s net operating and capital loss carryforwards expected to offset the FGL taxable gain at
June 30, 2016
. The remaining liability is expected to be offset by current year losses recognized in continuing operations except for
$15.0
of estimated alternative minimum taxes.
Compass Asset Sale and Compass Sale
As discussed in
Note 1
,
Description of Business
, on December 1, 2015,
Compass
completed the sale of its oil and gas interests located in the Holly, Waskom and Danville Fields in East Texas and North Louisiana. The
Company
accounted for the sale in accordance with ASC Topic 932, Property, Plant and Equipment: Extractive Activities - Oil and Gas and recorded a gain on sale of oil and natural gas assets of
$105.6
for the
nine months ended June 30, 2016
. The Holly, Waskom and Danville Fields did not represent all or substantially all of
Compass
’ full-cost method assets and, as a result, the operations associated with these assets were presented as continuing operations in the accompanying
Condensed Consolidated Statements of Operations
.
Further, as discussed in
Note 1
,
Description of Business
, on July 1, 2016, the Company entered into the Compass Sale Agreement. The Company’s interest in Compass met all of the held for sale criteria established by
ASC 360
on July 1, 2016, subsequent to the end of the third fiscal quarter of 2016. The disposal represents all of the remaining oil and gas properties that were accounted for using the full-cost method as of June 30, 2016. The operations of Compass will be presented as discontinued operations starting in the fourth fiscal quarter of 2016. See
Note 17
,
Subsequent Events
for additional details.
(5) Investments
The
Company
’s consolidated investments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Cost or Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Carrying Value
|
Asset-based loans
|
$
|
48.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48.2
|
|
|
$
|
48.2
|
|
Other invested assets
|
2.5
|
|
|
—
|
|
|
—
|
|
|
2.5
|
|
|
2.5
|
|
Total Investments
|
$
|
50.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50.7
|
|
|
$
|
50.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015
|
|
(As Adjusted)
|
|
Cost or Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Carrying Value
|
Corporate fixed-maturity securities, available-for-sale
|
$
|
14.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14.1
|
|
|
$
|
14.1
|
|
Equity securities - held for trading
|
18.7
|
|
|
14.1
|
|
|
—
|
|
|
32.8
|
|
|
32.8
|
|
Asset-based loans
|
226.7
|
|
|
—
|
|
|
—
|
|
|
226.7
|
|
|
226.7
|
|
Other invested assets
|
5.3
|
|
|
—
|
|
|
—
|
|
|
5.3
|
|
|
5.3
|
|
Total Investments
|
$
|
264.8
|
|
|
$
|
14.1
|
|
|
$
|
—
|
|
|
$
|
278.9
|
|
|
$
|
278.9
|
|
Asset-based Loans
As of
June 30, 2016
and
September 30, 2015
, the
Company
’s portfolio of asset-based loans receivable originated by
Salus
and its co-lender
Front Street
consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
September 30,
2015
|
|
|
|
(As Adjusted)
|
Asset-based loans, net of deferred fees, by major industry:
|
|
|
|
Apparel
|
$
|
34.9
|
|
|
$
|
66.0
|
|
Jewelry
|
16.8
|
|
|
36.9
|
|
Manufacturing
|
11.9
|
|
|
32.7
|
|
Electronics
|
5.2
|
|
|
45.9
|
|
Other
|
13.2
|
|
|
93.1
|
|
Total asset-based loans
|
82.0
|
|
|
274.6
|
|
Less: Allowance for credit losses
|
33.8
|
|
|
47.9
|
|
Total asset-based loans, net
|
$
|
48.2
|
|
|
$
|
226.7
|
|
The
Company
establishes its allowance for credit losses through a provision for credit losses based on
Salus
’ evaluation of the credit quality of its loan portfolio. The following table presents the activity in its allowance for credit losses for the three and
nine months ended June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Nine months ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
47.8
|
|
|
$
|
22.7
|
|
|
$
|
47.9
|
|
|
$
|
5.5
|
|
Provision for credit losses
|
(11.7
|
)
|
|
9.4
|
|
|
2.7
|
|
|
77.7
|
|
Charge-offs
|
(5.2
|
)
|
|
—
|
|
|
(19.7
|
)
|
|
(51.1
|
)
|
Recoveries
|
2.9
|
|
|
—
|
|
|
2.9
|
|
|
—
|
|
Balance at end of period
|
$
|
33.8
|
|
|
$
|
32.1
|
|
|
$
|
33.8
|
|
|
$
|
32.1
|
|
Credit Quality Indicators
Salus
monitors credit quality as indicated by various factors and utilizes such information in its evaluation of the adequacy of the allowance for credit losses. As of
June 30, 2016
and
September 30, 2015
, there were
eleven
and nine loans with a net carrying value of
$68.4
and
$79.8
, respectively, considered delinquent by
Salus
and placed on non-accrual status. It is
Salus
’ policy to
discontinue accruing interest when there is a reasonable doubt as to collectability in the normal course of business. Nonaccrual loans are considered impaired for reporting purposes and are individually evaluated for impairment.
During the three and
nine months ended June 30, 2016
, the
Company
recognized charge-offs of
$5.2
and
$19.7
, respectively. For the three and
nine months ended June 30, 2016
, the
Company
recorded net decreases in the allowance for credit losses of
$16.9
and
$17.0
, respectively, and recoveries of
$2.9
for the three and
nine months ended June 30, 2016
. The internal risk rating of
one
and
seven
delinquent loans was categorized as doubtful during the three and
nine months ended June 30, 2016
, respectively.
Salus
has assessed the adequacy of its allowance for credit losses and believes the level of allowance for credit losses to be adequate to mitigate inherent losses in the portfolio.
During the
nine months ended June 30, 2015
, the
Company
recognized charge-offs of
$51.1
. For the three and
nine months ended June 30, 2015
, the
Company
also recorded additional net increases in the provision of credit losses of
$9.4
and
$26.6
, respectively. The internal risk rating of
three
and
four
delinquent loan was categorized as doubtful during the three and
nine months ended June 30, 2015
, respectively.
During the fiscal year ended
September 30, 2015
, the bankruptcy court overseeing the Chapter 11 proceedings of RadioShack Corp. (“RadioShack”) approved the sale of 1,743 of the company’s stores to General Wireless Inc., an affiliate of Standard General LP. Salus was the lender under RadioShack’s
$250.0
term loan placed in December 2013 with a net exposure to Salus and Front Street of
$93.0
and
$7.0
, respectively, after giving effect to a
$50.0
participation by FGL and a non-qualifying participation of
$100.0
held by a third party. During the fiscal year ended
September 30, 2015
, the
$100.0
held by a third party was repaid in full because this third party had the right of first payment in the case of a bankruptcy under an intercreditor agreement with Salus. During the
nine months ended June 30, 2015
, the Company recognized charge-offs of
$51.1
, excluding any charge-offs related to FGL’s participations which are included in “
(Loss) income from discontinued operations, net of tax
” in the accompanying
Condensed Consolidated Statements of Operations
; and an additional net increase in the provision of credit losses of
$19.2
related to the loan with RadioShack.
During the three and
nine months ended June 30, 2016
, Salus and Front Street received a partial repayment on the loan to RadioShack of
$43.4
, excluding
$21.7
repayment on FGL’s participation on the loan. At
June 30, 2016
, the Company expects additional
$5.0
of future recoveries of the loan to RadioShack, excluding
$2.5
related to FGL’s participation on the loan that is included in “
Assets of business held for sale
” in the accompanying
Condensed Consolidated Balance Sheets
. As a result of the higher than expected recovery rates during the quarter, the Company reversed
$18.0
of previously recorded allowance for credit losses, excluding
$9.0
of realized gains by FGL recorded in “
(Loss) income from discontinued operations, net of tax
” in the accompanying
Condensed Consolidated Statements of Operations
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal Risk Rating
|
|
Pass
|
|
Special Mention
|
|
Substandard
|
|
Doubtful
|
|
Total
|
June 30, 2016
|
$
|
—
|
|
|
$
|
1.3
|
|
|
$
|
11.2
|
|
|
$
|
69.5
|
|
|
$
|
82.0
|
|
September 30, 2015 (As Adjusted)
|
$
|
69.0
|
|
|
$
|
32.4
|
|
|
$
|
74.0
|
|
|
$
|
99.2
|
|
|
$
|
274.6
|
|
(6) Derivatives
The fair value of outstanding derivatives recorded in the accompanying
Condensed Consolidated Balance Sheets
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Classification
|
|
June 30,
2016
|
|
September 30,
2015
|
|
|
|
|
|
|
(As Adjusted)
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Receivables, net
|
|
$
|
6.6
|
|
|
$
|
5.2
|
|
Commodity swaps
|
|
Receivables, net
|
|
1.3
|
|
|
—
|
|
Commodity swaps
|
|
Other assets
|
|
0.3
|
|
|
—
|
|
Foreign exchange contracts
|
|
Other assets
|
|
0.6
|
|
|
0.4
|
|
Total asset derivatives designated as hedging instruments
|
|
|
|
8.8
|
|
|
5.6
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Call options
|
|
Funds withheld receivables
|
|
9.4
|
|
|
5.4
|
|
Call options
|
|
Other assets
|
|
4.5
|
|
|
1.0
|
|
Commodity contracts
|
|
Receivables, net
|
|
0.3
|
|
|
7.9
|
|
Foreign exchange contracts
|
|
Receivables, net
|
|
0.4
|
|
|
0.4
|
|
Total asset derivatives
|
|
|
|
$
|
23.4
|
|
|
$
|
20.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
Classification
|
|
June 30,
2016
|
|
September 30,
2015
|
|
|
|
|
|
|
(As Adjusted)
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
Interest rate swaps
|
|
Accounts payable and other current liabilities
|
|
$
|
1.3
|
|
|
$
|
1.4
|
|
Interest rate swaps
|
|
Other liabilities
|
|
0.5
|
|
|
1.2
|
|
Commodity swaps
|
|
Accounts payable and other current liabilities
|
|
0.4
|
|
|
4.7
|
|
Commodity swaps
|
|
Other liabilities
|
|
—
|
|
|
0.8
|
|
Foreign exchange contracts
|
|
Accounts payable and other current liabilities
|
|
1.7
|
|
|
1.5
|
|
Foreign exchange contracts
|
|
Other liabilities
|
|
0.1
|
|
|
—
|
|
Total liability derivatives designated as hedging instruments
|
|
|
|
4.0
|
|
|
9.6
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Embedded derivatives in Front Street's assumed FIA business
|
|
Insurance reserves
|
|
133.5
|
|
|
142.3
|
|
Foreign exchange
|
|
Accounts payable and other current liabilities
|
|
0.6
|
|
|
0.1
|
|
Commodity contracts
|
|
Accounts payable and other current liabilities
|
|
1.6
|
|
|
0.1
|
|
Total liability derivatives
|
|
|
|
$
|
139.7
|
|
|
$
|
152.1
|
|
For derivative instruments that are used to economically hedge the fair value of
Spectrum Brands
’ 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. The
Company
recognizes all derivative instruments as assets or liabilities in the accompanying
Condensed Consolidated Balance Sheets
at fair value.
The following summarizes the impact of derivative instruments on the accompanying
Condensed Consolidated Statements of Operations
for the three and
nine months ended June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
Effective portion
|
|
Ineffective portion
|
|
Effective portion
|
|
Ineffective portion
|
|
|
Classification
|
|
Gain (Loss) in AOCI
|
|
Gain (Loss) reclassified to Earnings
|
|
Gain (Loss)
|
|
Gain (Loss) in AOCI
|
|
Gain (Loss) reclassified to Earnings
|
|
Gain (Loss)
|
Interest rate swaps
|
|
Interest expense
|
|
$
|
(0.2
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
—
|
|
|
$
|
(0.4
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
—
|
|
Commodity swaps
|
|
Cost of consumer products and other goods sold
|
|
2.1
|
|
|
(0.8
|
)
|
|
0.1
|
|
|
(0.7
|
)
|
|
—
|
|
|
—
|
|
Foreign exchange contracts
|
|
Net consumer and other product sales
|
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
Foreign exchange contracts
|
|
Cost of consumer products and other goods sold
|
|
8.0
|
|
|
0.1
|
|
|
—
|
|
|
(6.8
|
)
|
|
8.6
|
|
|
—
|
|
|
|
|
|
$
|
9.6
|
|
|
$
|
(1.1
|
)
|
|
$
|
0.1
|
|
|
$
|
(7.8
|
)
|
|
$
|
8.1
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30,
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
Effective portion
|
|
Ineffective portion
|
|
Effective portion
|
|
Ineffective portion
|
|
|
Classification
|
|
Gain (Loss) in AOCI
|
|
Gain (Loss) reclassified to Earnings
|
|
Gain (Loss)
|
|
Gain (Loss) in AOCI
|
|
Gain (Loss) reclassified to Earnings
|
|
Gain (Loss)
|
Interest rate swaps
|
|
Interest expense
|
|
$
|
(0.5
|
)
|
|
$
|
(1.4
|
)
|
|
$
|
—
|
|
|
$
|
(2.4
|
)
|
|
$
|
(1.4
|
)
|
|
$
|
—
|
|
Commodity swaps
|
|
Cost of consumer products and other goods sold
|
|
2.9
|
|
|
(3.8
|
)
|
|
0.1
|
|
|
(2.4
|
)
|
|
0.3
|
|
|
—
|
|
Foreign exchange contracts
|
|
Net consumer and other product sales
|
|
(0.4
|
)
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
Foreign exchange contracts
|
|
Cost of consumer products and other goods sold
|
|
6.8
|
|
|
5.0
|
|
|
—
|
|
|
14.0
|
|
|
21.0
|
|
|
—
|
|
|
|
|
|
$
|
8.8
|
|
|
$
|
(0.2
|
)
|
|
$
|
0.1
|
|
|
$
|
9.3
|
|
|
$
|
19.9
|
|
|
$
|
—
|
|
During the three and
nine months ended June 30, 2016
and
2015
, the Company recognized the following gains and losses on its derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Nine months ended June 30,
|
Classification
|
|
Derivatives Not Designated as Hedging Instruments
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Net investment gains (losses)
|
|
Call options
|
|
$
|
0.2
|
|
|
$
|
(0.3
|
)
|
|
$
|
0.7
|
|
|
$
|
1.9
|
|
Other income and expense:
|
|
|
|
|
|
|
|
|
|
|
Benefits and other changes in policy reserves
|
|
Embedded derivatives in Front Street's assumed FIA business
|
|
$
|
3.0
|
|
|
$
|
6.9
|
|
|
$
|
8.8
|
|
|
$
|
1.8
|
|
Other (expense) income, net
|
|
Oil and natural gas commodity contracts
|
|
(2.2
|
)
|
|
(2.7
|
)
|
|
0.3
|
|
|
21.3
|
|
|
|
Foreign exchange contracts
|
|
0.8
|
|
|
5.0
|
|
|
1.6
|
|
|
(2.4
|
)
|
Additional Disclosures
Call options.
Derivative financial instruments included within or outside of the funds withheld receivables at fair value in the accompanying
Condensed Consolidated Balance Sheets
are in the form of call options receivable to Front Street. Front Street hedges exposure to product related equity market risk by entering into derivative transactions. These options hedge Front Street’s share of the FIA index credit. The change in fair value is recognized within “
Net investment gains (losses)
” in the accompanying
Condensed Consolidated Statements of Operations
.
Embedded derivatives in Front Street’s assumed FIA business
. Front Street has assumed FIA contracts that permit the holder to elect an interest rate return or an equity index linked component, where interest credited to the contracts is linked to the performance of various equity indices, primarily the Standard & Poor’s Ratings Services (“S&P”) 500 Index. This feature represents an embedded derivative under U.S. GAAP. The FIA embedded derivative is valued at fair value and included in the “
Insurance reserves
” in the accompanying
Condensed Consolidated Balance Sheets
with changes in fair value included as a component of “
Benefits and other changes in policy reserves
” in the accompanying
Condensed Consolidated Statements of Operations
.
Interest Rate Swaps.
When it deems appropriate, Spectrum Brands has used 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
Accumulated other comprehensive income (loss)
(“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 counterparties included in accrued liabilities or receivables, respectively, and recognized in earnings as an adjustment to interest from the underlying debt to which the swap is designated. As of
June 30, 2016
and
September 30, 2015
, Spectrum Brands had a series of U.S. dollar denominated interest rate swaps outstanding which effectively fix the interest on floating rate debt, exclusive of lender spreads, at
1.36%
for a notional principal amount of
$300.0
through April 2017. The derivative net losses estimated to be reclassified from AOCI into earnings over the next 12 months is
$0.8
, net of tax. Spectrum Brands’ interest rate swap derivative financial instruments at
June 30, 2016
and
September 30, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
September 30, 2015
|
|
|
Notional
|
|
Remaining Years
|
|
Notional
|
|
Remaining Years
|
Interest rate swaps - fixed
|
|
$
|
300.0
|
|
|
0.8
|
|
$
|
300.0
|
|
|
1.5
|
Foreign exchange contracts - cash flow hedges
. Spectrum Brands 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 Spectrum Brands 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 consumer and other product sales
” or “
Cost of consumer products and other goods sold
”, respectively, in the accompanying
Condensed Consolidated Statements of Operations
. At
June 30, 2016
, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through September 2017. The derivative net gains estimated to be reclassified from AOCI into earnings over the next 12 months is
$2.4
, net of tax. At
June 30, 2016
and
September 30, 2015
,
Spectrum Brands
had foreign exchange derivative contracts designated as cash flow hedges with a notional value of
$224.7
and
$300.6
, respectively.
Commodity swaps - cash flow hedges.
Spectrum Brands is exposed to risk from fluctuating prices for raw materials, specifically zinc and brass used in its manufacturing processes. Spectrum Brands 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, 2016
, Spectrum Brands had a series of zinc and brass swap contracts outstanding through September 2017. The derivative net gains estimated to be reclassified from AOCI into earnings over the next 12 months is
$0.3
, net of tax. Spectrum Brands had the following commodity swap contracts outstanding as of
June 30, 2016
and
September 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
September 30, 2015
|
|
|
Notional
|
|
Contract Value
|
|
Notional
|
|
Contract Value
|
Zinc swap contracts (tons)
|
|
7.2
|
|
$
|
13.6
|
|
|
10.8
|
|
$
|
22.2
|
|
Brass swap contracts (tons)
|
|
1.0
|
|
|
4.3
|
|
|
1.8
|
|
|
8.5
|
|
Foreign exchange contracts - not designated as hedges for accounting purposes.
Spectrum Brands 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 Spectrum Brands to exchange foreign currencies for U.S. Dollars, Canadian Dollars (“CAD”), Euros or Australian Dollars. These foreign exchange contracts are fair value hedges of a related liability or asset recorded in the accompanying
Condensed Consolidated Balance Sheets
. The gain or loss on the foreign exchange 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, 2016
, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through August 2016. At
June 30, 2016
and
September 30, 2015
, Spectrum Brands had
$197.1
and
$126.8
, respectively, of notional value for such foreign exchange derivative contracts outstanding.
During the three and
nine months ended June 30, 2016
, Salus entered into a foreign exchange swap contract to economically hedge foreign exchange risk related to asset-based loans originated in CAD. The foreign exchange contract is a fair value hedge of a related liability or asset recorded in the accompanying
Condensed Consolidated Balance Sheets
. The gain or loss on the foreign exchange 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, 2016
, Salus had one foreign exchange derivative contract outstanding through
September 30, 2016
with
$15.5
of notional value outstanding.
Commodity Swaps - not designated as hedges for accounting purposes.
Spectrum Brands 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. Spectrum Brands hedges a portion of the risk associated with these materials through the use of commodity swaps. The commodity 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 the fair value of the commodity swap contracts are adjusted through earnings when the realized gains or losses affect earnings upon settlement of the commodity swap contracts. The commodity swap contracts effectively fix the floating price on a specified quantity of silver through a specified date. At
June 30, 2016
, Spectrum Brands had a series of commodity swaps outstanding through August 2016. Spectrum Brands had the following commodity swaps outstanding as of
June 30, 2016
and
September 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
September 30, 2015
|
|
|
Notional
|
|
Contract Value
|
|
Notional
|
|
Contract Value
|
Silver (troy oz.)
|
|
5
|
|
$
|
0.1
|
|
|
25
|
|
$
|
0.4
|
|
Oil and natural gas commodity contracts.
Compass
’ natural gas and oil commodity contracts are comprised of swap contracts, collars and three-way collars (“
Derivative Financial Instruments
”). Swap contracts allow
Compass
to receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. A three-way collar is a combination of options including a sold call, a purchased put and a sold put. A three-way collar allows
Compass
to participate in the upside of commodity prices to the ceiling of the call option and provides
Compass
with partial downside protection through the combination of the put options.
Compass
’ primary objective in entering into
Derivative Financial Instruments
is to manage its exposure to commodity price fluctuations, protect its returns on investments and achieve a more predictable cash flow in connection with its operations. These transactions limit exposure to declines in commodity prices, but also limit the benefits
Compass
would realize if commodity prices increase. When prices for oil and natural gas are volatile, a significant portion of the effect of its
Derivative Financial Instruments
management activities consists of non-cash income or expense due to changes in the fair value of its
Derivative Financial Instruments
. Cash losses or gains only arise from payments made or received on monthly settlements of contracts or if
Compass
terminates a contract prior to its expiration.
Compass
does not designate its
Derivative Financial Instruments
as hedging instruments for financial reporting purposes and, as a result,
Compass
recognizes the change in the respective
Derivative Financial Instruments
’ fair value in earnings.
Settlements in the normal course of maturities of
Derivative Financial Instruments
result in cash receipts from, or cash disbursements to,
Compass
’ derivative contract counterparties. Changes in the fair value of
Compass
’
Derivative Financial Instruments
, which
includes both cash and non-cash changes in fair value, are included in “
Net investment gains (losses)
” in the accompanying
Condensed Consolidated Statements of Operations
with a corresponding increase or decrease in the
Condensed Consolidated Balance Sheets
fair value amounts.
The following table presents
Compass
’ volumes and fair value of the oil and natural gas
Derivative Financial Instruments
as of
June 30, 2016
(presented on a calendar-year basis):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume Mmbtus/Mbbls
|
|
Weighted average strike price per Mmbtu/Bbl
|
|
Fair Value at June 30, 2016
|
Natural gas:
|
|
|
|
|
|
|
Two-way collars:
|
|
|
|
|
|
|
June - December 2016
|
|
1,840
|
|
|
|
|
$
|
(0.5
|
)
|
Short call
|
|
|
|
$
|
2.77
|
|
|
|
Long put
|
|
|
|
2.15
|
|
|
|
June - October 2016
|
|
1,230
|
|
|
|
|
(0.5
|
)
|
Short call
|
|
|
|
2.48
|
|
|
|
Long put
|
|
|
|
2.15
|
|
|
|
November 2016 - March 2017
|
|
2,265
|
|
|
|
|
(0.6
|
)
|
Short call
|
|
|
|
3.36
|
|
|
|
Long put
|
|
|
|
2.70
|
|
|
|
January 2017 - March 2017
|
|
450
|
|
|
|
|
—
|
|
Short call
|
|
|
|
3.80
|
|
|
|
Long put
|
|
|
|
3.05
|
|
|
|
Swaps:
|
|
|
|
|
|
|
January 2017 - March 2017
|
|
450
|
|
|
|
|
—
|
|
Short call
|
|
|
|
3.35
|
|
|
|
Total natural gas
|
|
6,235
|
|
|
|
|
(1.6
|
)
|
Oil:
|
|
|
|
|
|
|
Three-way collars:
|
|
|
|
|
|
|
July - December 2016
|
|
18
|
|
|
|
|
—
|
|
Short call
|
|
|
|
$
|
54.00
|
|
|
|
Long put
|
|
|
|
40.00
|
|
|
|
May - December 2016
|
|
92
|
|
|
|
|
0.3
|
|
Short call
|
|
|
|
76.00
|
|
|
|
Long put
|
|
|
|
56.00
|
|
|
|
Short put
|
|
|
|
42.00
|
|
|
|
Total oil
|
|
110
|
|
|
|
|
0.3
|
|
Total oil and natural gas Derivative Financial Instruments
|
|
|
|
|
|
$
|
(1.3
|
)
|
At
September 30, 2015
,
Compass
had outstanding
Derivative Financial Instruments
to mitigate price volatility covering
3,380
Billion British Thermal Units (“
Mmbtu
s”) of natural gas and
273
Thousand Barrels (“Mbbls”) of oil. At
June 30, 2016
, the average forward
NYMEX
oil prices per
Bbl
for the next 12 months was
$50.94
, and the average forward
NYMEX
natural gas prices per
Mmbtu
for the next 12 months was
$3.13
.
Compass
’
Derivative Financial Instruments
covered approximately
36%
and
42%
of production volumes for the three and
nine months ended June 30, 2016
, respectively, and
64%
and
58%
of production volumes for the three and
nine months ended June 30, 2015
, respectively.
Credit Risk
Spectrum Brands
is exposed to the risk of default by the counterparties with which
Spectrum Brands
transacts and generally does not require collateral or other security to support financial instruments subject to credit risk.
Spectrum Brands
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.
Spectrum Brands
considers these exposures when measuring its credit reserve on its derivative assets, which was insignificant as of
June 30, 2016
and
September 30, 2015
.
Spectrum Brands
’ standard contracts do not contain credit risk related contingent features whereby
Spectrum Brands
would be required to post additional cash collateral as a result of a credit event. However,
Spectrum Brands
is typically required to post
collateral in the normal course of business to offset its liability positions. As of
June 30, 2016
, there was
no
cash collateral outstanding. As of
September 30, 2015
, there was
$3.5
of posted cash collateral related to such liability positions. In addition, as of
June 30, 2016
and
September 30, 2015
,
Spectrum Brands
had no posted standby letters of credit related to such liability positions. The cash collateral is included in “
Receivables, net
” within the accompanying
Condensed Consolidated Balance Sheets
.
Compass
places
Derivative Financial Instruments
with the financial institutions that are lenders under the
Compass Credit Agreement
that it believes have high quality credit ratings. To mitigate risk of loss due to default,
Compass
has entered into master netting agreements with its counterparties on its
Derivative Financial Instruments
that allow it to offset its asset position with its liability position in the event of a default by the counterparty.
Front Street is exposed to credit risk in the event of non-performance by its counterparties on call options. Front Street seeks to reduce the risk associated with such agreements by purchasing such options from large, well-established financial institutions, but there can be no assurance that Front Street will not suffer losses in the event of counterparty non-performance. No collateral was posted by its counterparties; accordingly, the maximum amount of loss due to credit risk that Front Street would incur if parties to the call options failed completely to perform according to the terms of the contracts is
$4.5
.
Earnings from FIA reinsurance are primarily generated from the excess of net investment income earned over the sum of interest credited to policyholders and the cost of hedging the risk on FIA policies, known as the net investment spread. With respect to FIAs, the cost of hedging the risk includes the expenses incurred to fund the annual index credits. Proceeds received upon expiration or early termination of call options purchased to fund annual index credits are recorded as part of the fair value changes associated with reinsurance contracts in the accompanying
Condensed Consolidated Statements of Operations
, and are largely offset by an expense for index credits earned on annuity contractholder fund balances.
(7) Fair Value of Financial Instruments
The
Company
’s consolidated assets and liabilities measured at fair value are summarized according to the hierarchy previously described as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
September 30, 2015
|
|
|
|
|
|
|
|
|
|
(As Adjusted)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Call options
|
$
|
—
|
|
|
$
|
13.9
|
|
|
$
|
—
|
|
|
$
|
13.9
|
|
|
$
|
—
|
|
|
$
|
6.4
|
|
|
$
|
—
|
|
|
$
|
6.4
|
|
Foreign exchange contracts
|
—
|
|
|
7.6
|
|
|
—
|
|
|
7.6
|
|
|
—
|
|
|
6.0
|
|
|
—
|
|
|
6.0
|
|
Commodity contracts
|
—
|
|
|
1.9
|
|
|
—
|
|
|
1.9
|
|
|
—
|
|
|
7.9
|
|
|
—
|
|
|
7.9
|
|
Corporate fixed maturity securities AFS
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14.1
|
|
|
14.1
|
|
Equity securities - trading
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32.8
|
|
|
—
|
|
|
—
|
|
|
32.8
|
|
Other invested assets
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.8
|
|
|
2.8
|
|
Funds withheld receivables
|
143.0
|
|
|
1,443.3
|
|
|
74.7
|
|
|
1,661.0
|
|
|
45.8
|
|
|
1,579.9
|
|
|
84.4
|
|
|
1,710.1
|
|
Total financial assets
|
$
|
143.0
|
|
|
$
|
1,466.7
|
|
|
$
|
74.7
|
|
|
$
|
1,684.4
|
|
|
$
|
78.6
|
|
|
$
|
1,600.2
|
|
|
$
|
101.3
|
|
|
$
|
1,780.1
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Front Street future policyholder benefit liability
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
608.9
|
|
|
$
|
608.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
629.2
|
|
|
$
|
629.2
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives in Front Street's assumed FIA business
|
—
|
|
|
—
|
|
|
133.5
|
|
|
133.5
|
|
|
—
|
|
|
—
|
|
|
142.3
|
|
|
142.3
|
|
Commodity contracts
|
—
|
|
|
2.0
|
|
|
—
|
|
|
2.0
|
|
|
—
|
|
|
5.6
|
|
|
—
|
|
|
5.6
|
|
Interest rate contracts
|
—
|
|
|
1.8
|
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
2.6
|
|
|
—
|
|
|
2.6
|
|
Foreign exchange contracts
|
—
|
|
|
2.4
|
|
|
—
|
|
|
2.4
|
|
|
—
|
|
|
1.6
|
|
|
—
|
|
|
1.6
|
|
Total financial liabilities
|
$
|
—
|
|
|
$
|
6.2
|
|
|
$
|
742.4
|
|
|
$
|
748.6
|
|
|
$
|
—
|
|
|
$
|
9.8
|
|
|
$
|
771.5
|
|
|
$
|
781.3
|
|
Valuation Methodologies
Fixed Maturity Securities, Equity Securities and Other Invested Assets
The
Company
measures the fair value of its securities based on assumptions used by market participants in pricing the security. The appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity or equity security, and the
Company
will then consistently apply the valuation methodology to measure the security’s fair value. The
Company
’s fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market
transactions involving identical or comparable securities. Sources of inputs to the market approach include a third-party pricing service, independent broker quotations or pricing matrices. The
Company
uses observable and unobservable inputs in its valuation methodologies. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators and industry and economic events are monitored and further market data will be acquired when certain thresholds are met. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. For broker-quoted only securities, quotes from market makers or broker-dealers are obtained from sources recognized to be market participants. Management believes the broker quotes are prices at which trades could be executed based on historical trades executed at broker-quoted or slightly higher prices. The
Company
did not adjust prices received from third parties as of
September 30, 2015
. However, the
Company
does analyze the third-party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within the fair value hierarchy.
Funds Withheld Receivables and Future Policyholder Benefits Liability
Front Street
elected to apply the fair value option to account for its funds withheld receivables, non-funds withheld assets and future policyholder benefits reserve related to its assumed reinsurance.
Front Street
measures fair value of the funds withheld receivables based on the fair values of the securities in the underlying funds withheld portfolio held by the cedant. The non-funds withheld assets held by
Front Street
, backing the future policyholder benefits reserve, are measured at fair value. Policy loans included in the funds withheld receivables are measured at fair value, which approximates amortized cost.
Front Street
uses a discounted cash flows approach to measure the fair value of the future policyholder benefits reserve. The cash flows associated with future policy premiums and benefits are generated using best estimate assumptions (plus a risk margin, where applicable) and are consistent with market prices, where available. Risk margins are typically applied to non-observable, non-hedgeable market inputs such as mortality, morbidity, lapse, discount rate for non-performance risk, discount rate for risk margin, surrenders, etc. Mortality relates to the occurrence of death. Mortality assumptions are based upon the experience of the cedant as well as past and emerging industry experience, when available. Morbidity relates to the occurrence of a claim status and is a key assumption for the long term care business. Morbidity assumptions are based upon the experience of the cedant as well as past and emerging industry experience, when available. Mortality and morbidity assumptions may be different by sex, underwriting class and policy type. Assumptions are also made for future mortality and morbidity improvements.
Front Street determines the discount rate based on the market yields on the underlying assets backing the liabilities plus a risk margin to reflect uncertainty and adjusts the discount rate to reflect the credit risk of Front Street. Policies are terminated through surrenders and maturities, where surrenders represent the voluntary terminations of policies by policyholders and maturities are determined by policy contract terms. Surrender assumptions are based upon cedant experience adjusted for expected future conditions. As of December 31, 2015, Front Street began discounting the liability cash flows by using the market yields on the underlying assets backing the liabilities plus a risk margin to reflect uncertainty and adjusts the discount rate to reflect the credit risk of Front Street. In prior periods, the discount rate was based on risk free rates plus non-performance spreads plus a risk margin and a factor to reflect own credit risk. The change in discount rate methodology reduced the fair value of the
Front Street future policyholder benefit liability
by
$7.0
at December 31, 2015.
Derivatives
The fair values of the embedded derivatives in Front Street’s assumed
FIA
business are derived using market indices, pricing assumptions and historical data. The significant unobservable inputs used in the fair value measurement of the embedded derivatives in Front Street’s assumed
FIA
business are market value of option, interest swap rates, mortality multiplier, surrender rates, and non-performance spread. The mortality multiplier at
June 30, 2016
and
September 30, 2015
was applied to the Annuity 2000 mortality tables. Significant increases (decreases) in the market value of option in isolation would result in a higher or lower, respectively, fair value measurement. Significant increases or decreases in interest swap rates, mortality multiplier, surrender rates, or non-performance spread in isolation would result in a lower or higher, respectively, fair value measurement. Generally, a change in any one unobservable input would not result in a change in any other unobservable input.
Compass
evaluates derivative assets and liabilities in accordance with master netting agreements with the derivative counterparties, and reports them on a gross or net basis in the accompanying
Condensed Consolidated Balance Sheets
as determined by the nature of the trade with the counterparty. Net derivative asset values are determined primarily by quoted futures prices and utilization of the risk-free rate curves and net derivative liabilities are determined by utilization of the risk-free rate curve. The risk-free rates of
Compass
’ counterparties are based on the London Interbank Offered Rate (“
LIBOR
”) curve as of the end of the reporting period.
Compass
’ oil derivatives are swap contracts for notional
Bbl
s of oil at fixed
NYMEX
WTI
oil prices. The asset and liability values attributable to oil derivatives as of the end of the reporting period are based on (i) the contracted notional volumes, (ii) independent active
NYMEX
futures price quotes for
WTI
oil, and (iii) the applicable risk-free rate curve, as described above.
Compass
’ natural gas derivatives are swap contracts and three-way collar contracts for notional
Mmbtu
s of natural gas at posted price indexes, including
NYMEX
HH
swap contracts. The asset and liability values attributable to natural gas derivatives as of the end of the reporting period are based on (i) the contracted notional volumes, (ii) independent active
NYMEX
futures price quotes for
HH
for natural gas swaps, (iii) the applicable risk-free rate curve, as described above, and (iv) the implied rate of volatility inherent in the option contracts.
Spectrum Brands
’ derivative assets and liabilities are valued on a recurring basis using internal models, which are based on market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities, which are generally based on quoted or observed market prices and classified as Level 2. The fair value of certain derivatives is estimated using pricing models based on contracts with similar terms and risks. Modeling techniques assume market correlation and volatility, such as using prices of one delivery point to calculate the price of the contract’s different delivery point. The nominal value of interest rate transactions is discounted using applicable forward interest rate curves. In addition, by applying a credit reserve which is calculated based on credit default swaps or published default probabilities for the actual and potential asset value, the fair value of
Spectrum Brands
’ derivative assets reflects the risk that the counterparties to these contracts may default on the obligations. Likewise, by assessing the requirements of a reserve for non-performance which is calculated based on the probability of default by
Spectrum Brands
, it adjusts its derivative liabilities to reflect the price at which a potential market participant would be willing to assume
Spectrum Brands
’ liabilities.
The
Company
has not changed its valuation techniques in measuring the fair value of any derivative assets and liabilities during the quarter.
Quantitative information regarding significant unobservable inputs used for recurring Level 3 fair value measurements of financial instruments carried at fair value as of
June 30, 2016
and
September 30, 2015
(as adjusted) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
|
|
Range (Weighted average)
|
Assets
|
|
June 30,
2016
|
|
September 30,
2015
|
|
Valuation Technique
|
|
Unobservable Input(s)
|
|
June 30,
2016
|
|
September 30,
2015
|
Corporate fixed maturity securities AFS
|
|
$
|
—
|
|
|
$
|
14.1
|
|
|
Broker-quoted
|
|
Offered quotes
|
|
—%
|
|
83%
|
Other invested assets
|
|
—
|
|
|
2.8
|
|
|
Discounted Cash Flow
|
|
Probability of collection
|
|
—%
|
|
50%
|
|
|
|
|
|
|
|
|
Discount rate
|
|
—%
|
|
10%
|
Funds withheld receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity and equity securities AFS
|
|
43.7
|
|
|
39.5
|
|
|
Matrix pricing
|
|
Quoted prices
|
|
78% - 123% (107%)
|
|
100% - 122% (112%)
|
Fixed maturity securities AFS
|
|
14.7
|
|
|
19.5
|
|
|
Discounted Cash Flow
|
|
Discount rate
|
|
6% - 13% (7%)
|
|
6% - 12% (8%)
|
Fixed maturity securities AFS
|
|
4.9
|
|
|
6.7
|
|
|
Broker-quoted
|
|
Offered quotes
|
|
98%
|
|
99% - 103% (101%)
|
Loan participations
|
|
2.8
|
|
|
9.7
|
|
|
Market pricing
|
|
Offered quotes
|
|
81% - 100% (83%)
|
|
100%
|
Policy loans
|
|
8.6
|
|
|
9.0
|
|
|
Loan value
|
|
Not applicable
|
|
100%
|
|
100%
|
Total
|
|
$
|
74.7
|
|
|
$
|
101.3
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Front Street future policyholder benefit liability
|
|
$
|
608.9
|
|
|
$
|
629.2
|
|
|
Discounted cash flow
|
|
Non-performance risk spread
|
|
0.36%
|
|
0.16% - 0.46%
|
|
|
|
|
|
|
|
|
Risk margin to reflect uncertainty
|
|
0.50%
|
|
0.50% - 1.00%
|
Embedded derivatives in Front Street's assumed FIA business
|
|
133.5
|
|
|
142.3
|
|
|
Discounted cash flow
|
|
Market value of option
|
|
0% - 24%
(2%)
|
|
0% - 32%
(1%)
|
|
|
|
|
|
|
|
|
SWAP rates
|
|
1%
|
|
2%
|
|
|
|
|
|
|
|
|
Mortality multiplier
|
|
80%
|
|
80%
|
|
|
|
|
|
|
|
|
Surrender rates
|
|
0.50% - 75%
(13%)
|
|
0.50% - 75%
(13%)
|
|
|
|
|
|
|
|
|
Non-performance risk spread
|
|
0.25%
|
|
0.25%
|
Total
|
|
$
|
742.4
|
|
|
$
|
771.5
|
|
|
|
|
|
|
|
|
|
The significant unobservable inputs used in the fair value measurement of the
Front Street
future policyholder benefit liability are non-performance risk spread and risk spread to reflect uncertainty. Significant increases (decreases) in non-performance risk spread and risk margin to reflect uncertainty would result in a lower (higher) fair value measurement.
The following tables summarize changes to the
Company
’s financial instruments carried at fair value and classified within Level 3 of the fair value hierarchy for the three and
nine months ended June 30, 2016
and
2015
. The gains and losses below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2016
|
|
Balance at Beginning
of Period
|
|
Total Gains (Losses)
|
|
|
|
|
|
|
|
Net transfer In (Out) of
Level 3
|
|
Balance at End of
Period
|
|
|
Included in
Earnings
|
|
Included in
AOCI
|
|
Purchases
|
|
Sales
|
|
Settlements
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds withheld receivables
|
$
|
73.9
|
|
|
$
|
(0.3
|
)
|
|
$
|
—
|
|
|
$
|
4.4
|
|
|
$
|
(2.8
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
—
|
|
|
$
|
74.7
|
|
Total assets at fair value
|
$
|
73.9
|
|
|
$
|
(0.3
|
)
|
|
$
|
—
|
|
|
$
|
4.4
|
|
|
$
|
(2.8
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
—
|
|
|
$
|
74.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning
of Period
|
|
Total (Gains) Losses
|
|
|
|
|
|
|
|
Net transfer In (Out) of
Level 3
|
|
Balance at End of
Period
|
|
|
Included in
Earnings
|
|
Included in
AOCI
|
|
Purchases
|
|
Sales
|
|
Settlements
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Front Street future policyholder benefit liability
|
$
|
654.0
|
|
|
$
|
14.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(59.2
|
)
|
|
$
|
—
|
|
|
$
|
608.9
|
|
Embedded derivatives in Front Street's assumed FIA business
|
136.5
|
|
|
(3.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
133.5
|
|
Total liabilities at fair value
|
$
|
790.5
|
|
|
$
|
11.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(59.2
|
)
|
|
$
|
—
|
|
|
$
|
742.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, 2016
|
|
Balance at Beginning
of Period
|
|
Total Gains (Losses)
|
|
|
|
|
|
|
|
Net transfer In (Out) of
Level 3
|
|
Balance at End of
Period
|
|
|
Included in
Earnings
|
|
Included in
AOCI
|
|
Purchases
|
|
Sales
|
|
Settlements
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate fixed maturity securities AFS
|
$
|
14.1
|
|
|
$
|
(0.5
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(13.6
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other invested assets
|
2.8
|
|
|
2.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5.5
|
)
|
|
—
|
|
|
—
|
|
Funds withheld receivables
|
84.4
|
|
|
(2.0
|
)
|
|
—
|
|
|
12.5
|
|
|
(19.2
|
)
|
|
(1.0
|
)
|
|
—
|
|
|
74.7
|
|
Total assets at fair value
|
$
|
101.3
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
12.5
|
|
|
$
|
(32.8
|
)
|
|
$
|
(6.5
|
)
|
|
$
|
—
|
|
|
$
|
74.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning
of Period
|
|
Total (Gains) Losses
|
|
|
|
|
|
|
|
Net transfer In (Out) of
Level 3
|
|
Balance at End of
Period
|
|
|
Included in
Earnings
|
|
Included in
AOCI
|
|
Purchases
|
|
Sales
|
|
Settlements
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Front Street future policyholder benefit liability
|
$
|
629.2
|
|
|
$
|
34.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(54.6
|
)
|
|
$
|
—
|
|
|
$
|
608.9
|
|
Embedded derivatives in Front Street's assumed FIA business
|
142.3
|
|
|
(8.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
133.5
|
|
Total liabilities at fair value
|
$
|
771.5
|
|
|
$
|
25.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(54.6
|
)
|
|
$
|
—
|
|
|
$
|
742.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2015
|
|
Balance at Beginning
of Period
|
|
Total Gains (Losses)
|
|
|
|
|
|
|
|
Net transfer In (Out) of
Level 3
|
|
Balance at End of
Period
|
|
|
Included in
Earnings
|
|
Included in
AOCI
|
|
Purchases
|
|
Sales
|
|
Settlements
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent purchase price reduction receivable
|
$
|
47.0
|
|
|
$
|
3.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(50.0
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate fixed maturity securities AFS
|
15.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15.8
|
|
Funds withheld receivables
|
75.0
|
|
|
(0.7
|
)
|
|
—
|
|
|
1.9
|
|
|
(6.2
|
)
|
|
—
|
|
|
—
|
|
|
70.0
|
|
Total assets at fair value
|
$
|
137.8
|
|
|
$
|
2.3
|
|
|
$
|
—
|
|
|
$
|
1.9
|
|
|
$
|
(6.2
|
)
|
|
$
|
(50.0
|
)
|
|
$
|
—
|
|
|
$
|
85.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning
of Period
|
|
Total (Gains) Losses
|
|
|
|
|
|
|
|
Net transfer In (Out) of
Level 3
|
|
Balance at End of
Period
|
|
|
Included in
Earnings
|
|
Included in
AOCI
|
|
Purchases
|
|
Sales
|
|
Settlements
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Front Street future policyholder benefit liability
|
$
|
584.5
|
|
|
$
|
(23.4
|
)
|
|
$
|
—
|
|
|
$
|
47.7
|
|
|
$
|
—
|
|
|
$
|
(14.2
|
)
|
|
$
|
—
|
|
|
$
|
594.6
|
|
Embedded derivatives in Front Street's assumed FIA business
|
155.9
|
|
|
(6.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
149.0
|
|
Total liabilities at fair value
|
$
|
740.4
|
|
|
$
|
(30.3
|
)
|
|
$
|
—
|
|
|
$
|
47.7
|
|
|
$
|
—
|
|
|
$
|
(14.2
|
)
|
|
$
|
—
|
|
|
$
|
743.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, 2015
|
|
Balance at Beginning
of Period
|
|
Total Gains (Losses)
|
|
|
|
|
|
|
|
Net transfer In (Out) of
Level 3
|
|
Balance at End of
Period
|
|
|
Included in
Earnings
|
|
Included in
AOCI
|
|
Purchases
|
|
Sales
|
|
Settlements
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent purchase price reduction receivable
|
$
|
41.5
|
|
|
$
|
8.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(50.0
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate fixed maturity securities AFS
|
16.3
|
|
|
—
|
|
|
(0.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15.8
|
|
Funds withheld receivables
|
59.4
|
|
|
(0.6
|
)
|
|
—
|
|
|
23.9
|
|
|
(12.7
|
)
|
|
—
|
|
|
—
|
|
|
70.0
|
|
Total assets at fair value
|
$
|
117.2
|
|
|
$
|
7.9
|
|
|
$
|
(0.5
|
)
|
|
$
|
23.9
|
|
|
$
|
(12.7
|
)
|
|
$
|
(50.0
|
)
|
|
$
|
—
|
|
|
$
|
85.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning
of Period
|
|
Total (Gains) Losses
|
|
|
|
|
|
|
|
Net transfer In (Out) of
Level 3
|
|
Balance at End of
Period
|
|
|
Included in
Earnings
|
|
Included in
AOCI
|
|
Purchases
|
|
Sales
|
|
Settlements
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Front Street future policyholder benefit liability
|
$
|
151.3
|
|
|
$
|
(0.8
|
)
|
|
$
|
—
|
|
|
$
|
468.2
|
|
|
$
|
—
|
|
|
$
|
(24.1
|
)
|
|
$
|
—
|
|
|
$
|
594.6
|
|
Embedded derivatives in Front Street's assumed FIA business
|
150.8
|
|
|
(1.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
149.0
|
|
Total liabilities at fair value
|
$
|
302.1
|
|
|
$
|
(2.6
|
)
|
|
$
|
—
|
|
|
$
|
468.2
|
|
|
$
|
—
|
|
|
$
|
(24.1
|
)
|
|
$
|
—
|
|
|
$
|
743.6
|
|
The
Company
reviews the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3, or between other levels, at the beginning fair value for the reporting period in which the changes occur. There were no transfers between Level 1 and Level 2 and no net transfers in or out of Level 3 for the three and
nine months ended June 30, 2016
and
2015
.
Non-Recurring Fair Value Measurements
Goodwill, intangible assets and other long-lived assets are tested annually or if an event occurs that indicates an impairment loss may have been incurred using fair value measurements with unobservable inputs (Level 3).
Financial Assets and Liabilities Not Measured at Fair Value
The carrying amount, estimated fair value and the level of the fair value hierarchy of the
Company
’s financial instrument assets and liabilities which are not measured at fair value in the accompanying
Condensed Consolidated Balance Sheets
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Carrying Amount
|
Assets (a)
|
|
|
|
|
|
|
|
|
|
Other invested assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2.5
|
|
|
$
|
2.5
|
|
|
$
|
2.5
|
|
Asset-based loans
|
—
|
|
|
—
|
|
|
48.2
|
|
|
48.2
|
|
|
48.2
|
|
Total financial assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50.7
|
|
|
$
|
50.7
|
|
|
$
|
50.7
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities (a)
|
|
|
|
|
|
|
|
|
|
Investment contracts, included in contractholder funds and other insurance reserves
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
906.5
|
|
|
$
|
906.5
|
|
|
$
|
1,009.7
|
|
Total debt (b)
|
—
|
|
|
6,045.8
|
|
|
80.1
|
|
|
6,125.9
|
|
|
5,944.5
|
|
Total financial liabilities
|
$
|
—
|
|
|
$
|
6,045.8
|
|
|
$
|
986.6
|
|
|
$
|
7,032.4
|
|
|
$
|
6,954.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015
|
|
(As Adjusted)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Carrying Amount
|
Assets (a)
|
|
|
|
|
|
|
|
|
|
Other invested assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2.5
|
|
|
$
|
2.5
|
|
|
$
|
2.5
|
|
Asset-based loans
|
—
|
|
|
—
|
|
|
226.7
|
|
|
226.7
|
|
|
226.7
|
|
Total financial assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
229.2
|
|
|
$
|
229.2
|
|
|
$
|
229.2
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities (a)
|
|
|
|
|
|
|
|
|
|
Investment contracts, included in contractholder funds and other insurance reserves
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
960.3
|
|
|
$
|
960.3
|
|
|
$
|
1,084.5
|
|
Total debt (b)
|
—
|
|
|
6,398.0
|
|
|
99.1
|
|
|
6,497.1
|
|
|
6,310.5
|
|
Total financial liabilities
|
$
|
—
|
|
|
$
|
6,398.0
|
|
|
$
|
1,059.4
|
|
|
$
|
7,457.4
|
|
|
$
|
7,395.0
|
|
(a) The carrying amounts of cash and cash equivalents, trade receivables, accounts payable and accrued investment income approximate fair value due to their short duration and, accordingly, they are not presented in the tables above.
(b) The fair values of debt set forth above are generally based on quoted or observed market prices.
Valuation Methodology
Investment Contracts and Other Insurance Reserves
Investment contracts assumed from
FGL
by
Front Street
include deferred annuities,
FIA
s and immediate annuities. The fair value of deferred annuity and
FIA
s is based on their cash surrender value (which is the cost the
Company
would incur to extinguish the liability) as these contracts are generally issued without an annuitization date. See “
Funds Withheld Receivables and Future Policyholder Benefits Liability”
section above for discussion of the calculation of the fair value of the insurance reserves.
Asset-based loans
The fair value of the asset-based loans originated by
Salus
approximate their net carrying value. Such loans carry a variable rate that are typically revolving in nature and can be settled at the demand of either party. Nonaccrual loans are considered impaired for reporting purposes and are measured and recorded at fair value on a non-recurring basis. As the loans are collateral dependent,
Salus
measures such impairment based on the estimated fair value of eligible proceeds. This is generally based on estimated market prices from an independently prepared appraisal. The impaired loan balance represents those nonaccrual loans for which impairment was recognized during the quarter.
(8) Goodwill and Intangibles
A summary of the changes in the carrying amounts of goodwill and intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
|
|
Goodwill
|
|
Indefinite Lived
|
|
Definite Lived
|
|
Total
|
Balance at September 30, 2015 (As Adjusted)
|
$
|
2,487.4
|
|
|
$
|
1,490.3
|
|
|
$
|
990.0
|
|
|
$
|
2,480.3
|
|
Adjustments
|
3.4
|
|
|
1.0
|
|
|
2.0
|
|
|
3.0
|
|
Impairments
|
(10.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Periodic amortization
|
—
|
|
|
—
|
|
|
(70.5
|
)
|
|
(70.5
|
)
|
Effect of translation
|
(0.4
|
)
|
|
(12.4
|
)
|
|
(0.8
|
)
|
|
(13.2
|
)
|
Balance at June 30, 2016
|
$
|
2,479.7
|
|
|
$
|
1,478.9
|
|
|
$
|
920.7
|
|
|
$
|
2,399.6
|
|
Goodwill and indefinite lived trade name intangibles are not amortized and are tested for impairment at least annually at the
Company
’s August financial period end, or more frequently if an event or circumstance indicates that an impairment loss may have been incurred between annual impairment tests.
During the three and
nine months ended June 30, 2016
, the Company concluded that an interim impairment test of goodwill for its CorAmerica reporting unit was necessary. This conclusion was based on certain indicators of impairment, primarily related to an amendment, which becomes effective September 1, 2016, to an investment management agreement (“IMA”) to which CorAmerica is a party. The amendment changes the asset management fee structure, which is expected to result in a significant decrease to CorAmerica’s projected future revenues. In addition, the counterparty has reduced its allocation of investments into commercial mortgage loans, which is expected to reduce new loan originations by CorAmerica and reduce CorAmerica’s projected future revenues.
Goodwill Impairment Test
As noted above, during the three and
nine months ended June 30, 2016
, the Company determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment analysis for the CorAmerica reporting unit. The Company estimated the fair value of the CorAmerica reporting unit using the income approach. Under the income approach, the Company calculated the fair value of the CorAmerica reporting unit based on the present value of estimated future cash flows. The Company’s estimate of discounted cash flows for each reporting unit required significant judgment. Cash flow projections are based on management’s estimates of revenue and operating margins, taking into consideration existing agreements, industry and market conditions. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to CorAmerica’s ability to execute on the projected cash flows. The evaluation was management’s best estimate of projected fair values. Management’s estimate of implied fair value of goodwill was zero and, consequently, resulted in a goodwill impairment charge of
$10.7
. The goodwill impairment charge was reflected in “
Impairments and bad debt expense
” on the accompanying
Condensed Consolidated Statements of Operations
.
Definite Lived Intangible Assets
The range and weighted average useful lives for definite lived intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
September 30, 2015
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
Customer relationships
|
$
|
984.0
|
|
|
$
|
(288.7
|
)
|
|
$
|
695.3
|
|
|
$
|
985.2
|
|
|
$
|
(247.4
|
)
|
|
$
|
737.8
|
|
Technology assets
|
236.3
|
|
|
(91.0
|
)
|
|
145.3
|
|
|
238.6
|
|
|
(78.1
|
)
|
|
160.5
|
|
Trade names
|
165.4
|
|
|
(85.3
|
)
|
|
80.1
|
|
|
165.4
|
|
|
(73.7
|
)
|
|
91.7
|
|
|
$
|
1,385.7
|
|
|
$
|
(465.0
|
)
|
|
$
|
920.7
|
|
|
$
|
1,389.2
|
|
|
$
|
(399.2
|
)
|
|
$
|
990.0
|
|
At
June 30, 2016
, the range and weighted average useful lives for definite-lived intangibles assets were as follows:
|
|
|
|
|
|
Asset Type
|
|
Range
|
|
Weighted Average
|
Customer relationships
|
|
2 to 20 years
|
|
18.5 years
|
Technology assets
|
|
4 to 18 years
|
|
11.1 years
|
Trade names
|
|
8 to 17 years
|
|
16.2 years
|
Amortization expense for definite lived intangible assets for the
three months ended June 30, 2016
and
2015
was
$23.5
and
$22.3
, respectively, and
$70.5
and
$64.0
for the
nine months ended June 30, 2016
and
2015
, respectively. Excluding the impact of any future acquisitions or change in foreign currency, the
Company
estimates annual amortization expense of amortizable intangible assets for the next five fiscal years will be as follows:
|
|
|
|
|
|
Fiscal Year
|
|
Estimated Amortization Expense
|
2016
|
|
$
|
93.9
|
|
2017
|
|
93.0
|
|
2018
|
|
86.2
|
|
2019
|
|
85.1
|
|
2020
|
|
84.9
|
|
(9) Debt
The
Company
’s consolidated debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
September 30, 2015
|
|
|
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Interest rate
|
|
|
|
|
|
|
(As Adjusted)
|
|
|
HRG
|
|
|
|
|
|
|
|
|
|
|
7.875% Senior Secured Notes, due July 15, 2019
|
|
$
|
864.4
|
|
|
7.9
|
%
|
|
$
|
864.4
|
|
|
7.9
|
%
|
|
Fixed rate
|
7.75% Senior Unsecured Notes, due January 15, 2022
|
|
890.0
|
|
|
7.8
|
%
|
|
890.0
|
|
|
7.8
|
%
|
|
Fixed rate
|
Spectrum Brands
|
|
|
|
|
|
|
|
|
|
|
Term Loan, due June 23, 2022
|
|
1,103.1
|
|
|
3.6
|
%
|
|
1,226.9
|
|
|
3.9
|
%
|
|
Variable rate, see below
|
CAD Term Loan, due June 23, 2022
|
|
57.4
|
|
|
4.6
|
%
|
|
55.7
|
|
|
4.4
|
%
|
|
Variable rate, see below
|
Euro Term Loan, due June 23, 2022
|
|
116.7
|
|
|
3.5
|
%
|
|
255.8
|
|
|
3.5
|
%
|
|
Variable rate, see below
|
6.375% Senior Notes, due November 15, 2020
|
|
520.0
|
|
|
6.4
|
%
|
|
520.0
|
|
|
6.4
|
%
|
|
Fixed rate
|
6.625% Senior Notes, due November 15, 2022
|
|
570.0
|
|
|
6.6
|
%
|
|
570.0
|
|
|
6.6
|
%
|
|
Fixed rate
|
6.125% Notes, due December 15, 2024
|
|
250.0
|
|
|
6.1
|
%
|
|
250.0
|
|
|
6.1
|
%
|
|
Fixed rate
|
5.75% Notes, due July 15, 2025
|
|
1,000.0
|
|
|
5.8
|
%
|
|
1,000.0
|
|
|
5.8
|
%
|
|
Fixed rate
|
Revolver Facility, expiring June 23, 2020
|
|
198.5
|
|
|
3.6
|
%
|
|
—
|
|
|
—
|
%
|
|
Variable rate, see below
|
Other notes and obligations
|
|
15.4
|
|
|
11.9
|
%
|
|
11.2
|
|
|
10.2
|
%
|
|
Variable
|
Obligations under capitalized leases
|
|
107.9
|
|
|
5.5
|
%
|
|
88.2
|
|
|
5.7
|
%
|
|
Various
|
Compass
|
|
|
|
|
|
|
|
|
|
|
Compass Credit Agreement, due February 14, 2018
|
|
125.0
|
|
|
3.8
|
%
|
|
327.0
|
|
|
3.0
|
%
|
|
Variable rate, see below
|
HGI Energy
|
|
|
|
|
|
|
|
|
|
|
9.0% HGI Energy Note to FGL*, due February 14, 2021
|
|
50.0
|
|
|
9.0
|
%
|
|
50.0
|
|
|
9.0
|
%
|
|
Fixed rate
|
Salus
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated long-term debt of consolidated variable-interest entity
|
|
40.4
|
|
|
—
|
%
|
|
40.4
|
|
|
—
|
%
|
|
Variable rate, see below
|
Long-term debt of consolidated variable-interest entity with FGL*
|
|
148.9
|
|
|
6.0
|
%
|
|
274.0
|
|
|
3.9
|
%
|
|
Variable rate, see below
|
Unaffiliated secured borrowings under non-qualifying loan participations
|
|
2.2
|
|
|
—
|
%
|
|
8.8
|
|
|
10.5
|
%
|
|
Fixed rate
|
Secured borrowings under non-qualifying loan participations with FGL*
|
|
—
|
|
|
—
|
%
|
|
4.2
|
|
|
4.5
|
%
|
|
Variable rate, see below
|
Promissory note to FGL*
|
|
—
|
|
|
—
|
%
|
|
2.5
|
|
|
5.3
|
%
|
|
Fixed rate
|
Total
|
|
6,059.9
|
|
|
|
|
6,439.1
|
|
|
|
|
|
Original issuance discounts on debt, net of premiums
|
|
(23.8
|
)
|
|
|
|
(25.7
|
)
|
|
|
|
|
Unamortized debt issue costs
|
|
(91.6
|
)
|
|
|
|
(102.9
|
)
|
|
|
|
|
Total debt
|
|
5,944.5
|
|
|
|
|
6,310.5
|
|
|
|
|
|
Less current maturities and short-term debt
|
|
37.5
|
|
|
|
|
45.1
|
|
|
|
|
|
Non-current portion of debt
|
|
$
|
5,907.0
|
|
|
|
|
$
|
6,265.4
|
|
|
|
|
|
*
The debt balances included in the accompanying
Condensed Consolidated Balance Sheets
and in the table above reflect transactions between the businesses held for sale and businesses held for use that are expected to continue to exist after the close of the FGL Merger. Such transactions are not eliminated in the
Condensed Consolidated Financial Statements
in order to appropriately reflect the continuing operations and balances held for sale.
Spectrum Brands
Interest terms
Certain of
Spectrum Brands
’ debt instruments are subject to variable interest rates. At
June 30, 2016
,
Spectrum Brands
’ variable interest rate terms were as follows: (i) for the U.S. dollar denominated term loan facility (the “USD Term Loan”), either adjusted
LIBOR
, subject to a
0.75%
floor, plus
2.75%
per annum, or base rate plus
1.75%
per annum; (ii) for the CAD denominated term loan facility (the “CAD Term Loan”), either Canadian Dollar Offered Rate, subject to a
0.75%
floor plus
3.5%
per annum, or base rate plus
2.5%
per annum; (iii) for the Euro denominated term loan facility (the “Euro Term Loan”), Euro Interbank Offered Rate, subject to a
0.75%
floor, plus
2.75%
per annum, with no base rate option available; and (iv) for the revolving credit facility (the “Revolver Facility”), either adjusted
LIBOR
plus
2.75%
per annum or base rate plus
1.75%
per annum. As a result of borrowings and payments under the Revolver Facility, at
June 30, 2016
, the Company had borrowing availability of
$276.9
, net outstanding letters of credit of
$24.6
.
Compass
As of
June 30, 2016
,
Compass
had
$125.0
of outstanding indebtedness under the
Compass Credit Agreement
. The borrowing base is redetermined semi-annually, with
Compass
and the lenders having the right to request interim unscheduled redeterminations in certain circumstances. The interest rate grid ranges from
LIBOR
plus
294
bps to
375
bps (or Alternate Base Rate (“ABR”) plus
475
bps to
575
bps), depending on the percentages of drawn balances to the borrowing base as defined in the agreement. On
June 30, 2016
, the one month
LIBOR
was
0.5%
which resulted in an interest rate of approximately
3.8%
.
On
November 13, 2015, Compass entered into an amendment to the terms of the Compass Credit Agreement
that included a modification of the Consolidated Leverage Ratio (as defined in the Compass Credit Agreement) whereby the maximum permitted ratio at the end of each quarter was increased to 6.00 to 1.00 through September 30, 2016. The maximum permitted Consolidated Coverage Ratio (as defined in the Compass Credit Agreement) for each quarter ending after October 1, 2016 will be 4.50 to 1.00. The amendment also provided for the reduction of the borrowing base to
$320.0
on November 13, 2015. Following the completion of the Compass Asset Sale and paydown of Compass’ indebtedness, the borrowing base under the Compass Credit Agreement was further reduced to
$175.0
.
Concurrently with such amendment, HRG’s wholly-owned subsidiary, HGI Funding
, LLC (“HGI Funding”), determined to amend
its guarantee in order to continue to provide a guarantee (the “Guarantee”) of a limited portion, up to
$30.0
,
of the debt under the Compass Credit Agreement until the date of Compass’ May 2016 borrowing base redetermination and committed to make a debt or equity contribution to Compass on the date of such redetermination in an amount to be determined based on the amount of the borrowing base at such time.
The guarantee was also amended to provide that HGI Funding may elect to guaranty an additional portion of the debt under the Compass Credit Agreement (the “Optional Guarantee”) in order to cure defaults under the Consolidated Leverage Ratio
on any test date through September 30, 2016. This provision was removed in a further amendment
(as detailed below).
The secured amount is secured by a pledge of assets chosen by the Company that may consist of a combination of cash and marketable securities with a determined value equal to the maximum secured amount then applicable. In measuring the determined value of the pledged assets, cash is valued at
100.0%
and marketable securities are valued at
33.3%
of fair market value thereafter (measured as the 20 day average close price of such marketable securities)
.
On December 23, 2015, Compass received the consent of the lenders under the Compass Credit Agreement to delay the delivery of Compass’ unqualified audited financial statements for the fiscal year ended September 30, 2015 until March 31, 2016. Such financial statements had previously been required to be delivered within 90 days following the end of such fiscal year.
On March 29, 2016, Compass entered into a further amendment to the terms of the Compass Credit Agreement that included a modification of the Applicable Spread (as defined in the Compass Credit Agreement) whereby (i) the ABR Spread (as defined in the Compass Credit Agreement) was increased from a range of
0.75%
-
1.75%
, based on the Borrowing Base Usage (as defined in the Compass Credit Agreement), to a spread of
1.25%
-
2.25%
and (ii) the Eurodollar spread was increased from a range of
1.75%
-
2.75%
to a range of
2.25%
-
3.25%
. Additionally, the commitment fee was raised to
0.50%
at all Borrowing Base Usage levels, up from
0.375%
when the Borrowing Base Usage was less than
50.0%
. The amendment further provided for a redetermination of Compass’ borrowing base on or about
May 16, 2016
with scheduled redeterminations to begin December 1, 2016 and proceed every June 1 and December 1 thereafter. Finally, the amendment included a limited waiver of the event of default that would have occurred due to the existence of a going concern qualification in the audited consolidated financial statements of Compass for the fiscal year ended
September 30, 2015
.
On May 20, 2016, Compass entered into a further amendment to the terms of the Compass Credit Agreement that, among other things, reintroduced a covenant to maintain a consolidated cash interest coverage ratio of no more than 1.10 to 1.00, determined as of the end of each fiscal quarter ending on or after
June 30, 2016
through and including the fiscal quarter ending
June 30, 2017
. The amendment also provided that the consolidated leverage ratio will not be tested for any quarter ending prior to September 30, 2017 and reduced the borrowing base to
$135.0
. In connection with the reduction in the borrowing base, Compass was required to prepay
$35.0
towards the outstanding amounts under the Compass Credit Agreement prior to June 3, 2016, which funds were
contributed by HRG as an equity contribution, and will be required to make a further prepayment of
$12.5
on or prior to December 30, 2016. The December 30 prepayment will coincide with an automatic reduction in the commitments of the lenders under the Compass Credit Agreement on a dollar-for-dollar basis. The amendment added requirements that Compass increase mortgage coverage on properties calculated in the borrowing base from
80.0%
to
90.0%
of the then-current borrowing base value and place control agreements on non-excluded deposit accounts of Compass. Finally, the amendment included a limited waiver of the event of default which occurred due to the late delivery of the audited consolidated financial statements of Compass for the fiscal year ended
September 30, 2015
. As of
June 30, 2016
,
$125.0
was drawn under the Compass Credit Agreement. The Compass Credit Agreement matures on February 14, 2018.
In connection with the amendment detailed in the foregoing paragraph, HGI Funding entered into an amendment of its Guarantee of a portion of the debt under the Compass Credit Agreement and agreed to extend the Guarantee.
The expiration date of the Guarantee occurs on the first day, on or following the December 2016 borrowing base redetermination, on which no borrowing base deficiency exists.
Following such amendment, HGI Funding is required to maintain secured amounts in its collateral account equal to two times the amount of the Guarantee and the maximum aggregate obligations of HGI Funding increased to
$40.0
.
The amendment also removed the ability of HGI Funding to make Optional Guarantees in order to cure defaults with respect to the Consolidated Leverage Ratio since the Consolidated Leverage Ratio has been suspended until September 30, 2017.
As of
June 30, 2016
,
Compass
was in good standing under the covenants specified in the
Compass Credit Agreement
, as amended.
Compass
is presently current on all obligations related to the
Compass Credit Agreement
.
HGI Energy
In February 2013, in connection with the Company’s acquisition of an interest in Compass, HGI Energy entered into note purchase agreements, one of which was with FGL for
$50.0
notional aggregate principal amount due February 14, 2021 (the “HGI Energy Note to FGL”). The HGI Energy Note to FGL earns interest at
9.0%
per annum, payable semi-annually in arrears on January 1 and July 1. The HGI Energy Note to FGL is subordinated in seniority to the Compass Credit Agreement.
Salus
Salus
acts as co-lender under some of the asset-based loans that it originates, and such loans are structured to meet the definition of a “participating interest” as defined under
ASC 860-10, Transfers and Servicing
. For loans originated with co-lenders that have terms that result in such a co-lender not having a qualifying “participating interest,”
Salus
recognizes the whole, undivided loan.
Salus
also reflects a secured borrowing owing to the co-lender representing their share in the undivided whole loan. As of
June 30, 2016
and
September 30, 2015
,
Salus
had
$2.2
and
$8.8
, respectively, of such secured borrowings to unaffiliated co-lenders outstanding related to non-qualifying “participating interests.” As of
June 30, 2016
, Salus had no secured borrowings under non-qualifying loan participation with FGL and as of
September 30, 2015
, the balance was
$4.2
.
In February 2013, September 2013 and February 2015,
Salus
completed a collateralized loan obligation (“
CLO
”) securitization of up to
$578.5
notional aggregate principal amount. At
June 30, 2016
and
September 30, 2015
, the outstanding notional aggregate principal amount was
$232.5
and
$357.7
, respectively, of which
$40.4
was taken up by unaffiliated entities and consisted entirely of subordinated debt, and
$148.9
and
$274.0
, respectively, was taken up by FGL and included in “
Assets of business held for sale
” in the accompanying
Condensed Consolidated Balance Sheets
. The obligations of the securitization is secured by the assets of the Variable Interest Entity (“
VIE
”), primarily asset-based loan receivables, and at
June 30, 2016
carried a variable interest rate ranging from
LIBOR
plus
2.4%
to
LIBOR
plus
11.5%
for the senior tranches. The subordinated tranches carry residual interest subject to maintenance of certain covenants. Due to losses incurred in the
CLO
, at
June 30, 2016
and
September 30, 2015
, the
CLO
was not accruing interest on the subordinated debt.
In February 2015, Salus signed a
$2.5
senior secured promissory note with FGL originally due on May 29, 2015 with fixed interest of
5.3%
to be paid semi-annually. The note was repaid in full during the
nine months ended June 30, 2016
.
(10) Stock-Based Compensation
The
Company
recognized consolidated stock-based compensation expense of
$18.4
and
$22.6
during the
three months ended June 30, 2016
and
2015
, respectively, and
$58.4
and
$56.6
during the
nine months ended June 30, 2016
and
2015
, respectively. Stock-based compensation expense is principally included in “
Selling, acquisition, operating and general expenses
” in the accompanying
Condensed Consolidated Statements of Operations
.
A summary of stock options outstanding as of
June 30, 2016
and related activity during the
nine months
then ended are as follows (option amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HRG
|
Stock Option Awards
|
|
Options
|
|
Weighted Average Exercise Price
|
|
Weighted
Average Grant
Date Fair Value
|
Stock options outstanding at September 30, 2015
|
|
4,770
|
|
|
$
|
9.25
|
|
|
$
|
3.70
|
|
Granted
|
|
28
|
|
|
13.93
|
|
|
5.07
|
|
Exercised
|
|
(497
|
)
|
|
8.25
|
|
|
3.24
|
|
Stock options outstanding at June 30, 2016
|
|
4,301
|
|
|
9.40
|
|
|
3.77
|
|
Stock options vested and exercisable at June 30, 2016
|
|
3,266
|
|
|
8.39
|
|
|
3.36
|
|
Stock options outstanding and expected to vest
|
|
4,301
|
|
|
9.40
|
|
|
3.77
|
|
A summary of restricted stock, restricted stock units and performance restricted stock units outstanding as of
June 30, 2016
and related activity during the
nine months
then ended, under
HRG
and
Spectrum Brands
are as follows (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
HRG
|
Restricted Stock Awards
|
|
Shares
|
|
Weighted
Average Grant
Date Fair Value
|
Nonvested restricted stock outstanding at September 30, 2015
|
|
4,283
|
|
|
$
|
11.74
|
|
Granted
|
|
99
|
|
|
13.93
|
|
Exercised/Released
|
|
(2,315
|
)
|
|
10.93
|
|
Nonvested restricted stock outstanding at June 30, 2016
|
|
2,067
|
|
|
12.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HRG
|
|
Spectrum Brands
|
Restricted Stock Units
|
|
Units
|
|
Weighted
Average Grant
Date Fair Value
|
|
Units
|
|
Weighted
Average Grant
Date Fair Value
|
Restricted stock units outstanding at September 30, 2015
|
|
42
|
|
|
$
|
12.33
|
|
|
608
|
|
|
$
|
87.50
|
|
Granted
|
|
6
|
|
|
13.93
|
|
|
588
|
|
|
94.78
|
|
Vested/Exercised
|
|
—
|
|
|
—
|
|
|
(544
|
)
|
|
86.81
|
|
Forfeited or Expired
|
|
—
|
|
|
—
|
|
|
(156
|
)
|
|
94.75
|
|
Restricted stock units outstanding at June 30, 2016
|
|
48
|
|
|
12.52
|
|
|
496
|
|
|
94.63
|
|
A summary of warrants outstanding as of
June 30, 2016
and related activity during the
nine months
then ended, under
HRG
‘s incentive plan are as follows (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HRG
|
Warrants
|
|
Units
|
|
Weighted Average Exercise Price
|
|
Weighted
Average Grant
Date Fair Value
|
Warrants outstanding at September 30, 2015
|
|
1,800
|
|
|
$
|
13.13
|
|
|
$
|
3.22
|
|
Warrants outstanding at June 30, 2016
|
|
1,800
|
|
|
13.13
|
|
|
3.22
|
|
Warrants vested and exercisable at June 30, 2016
|
|
600
|
|
|
13.13
|
|
|
3.22
|
|
Warrants outstanding and expected to vest
|
|
1,200
|
|
|
13.13
|
|
|
3.22
|
|
HRG
During the
nine months ended June 30, 2016
,
HRG
granted stock option awards, restricted stock awards and restricted stock unit awards representing approximately
28 thousand
,
99 thousand
and
6 thousand
shares, respectively. HRG granted no stock option awards, restricted stock units or restricted stock awards during the
three months ended June 30, 2016
. All of these grants are time based, and vest either immediately, or over a period of up to
3
years. The total fair value of the stock grants during the
nine months ended June 30, 2016
on their respective grant dates was approximately
$1.6
. During the
nine months ended June 30, 2016
, stock option awards and restricted stock awards with a total fair value of
$30.5
vested. The total intrinsic value of share options exercised during the
nine months ended June 30, 2016
was
$2.6
, for which
HRG
received cash of
$4.1
in settlement.
During the
nine months ended June 30, 2015
,
HRG
granted stock option awards, restricted stock awards and restricted stock unit awards representing approximately
900 thousand
,
1,885 thousand
and
48 thousand
shares, respectively. HRG granted stock option
awards and restricted stock unit awards representing approximately
78 thousand
and
42 thousand
shares during the
three months ended June 30, 2015
. HRG granted no restricted stock awards during the
three months ended June 30, 2015
. All of these grants are time based, and vest either immediately, or over a period of up to
3
years. The total fair value of the stock grants during the
nine months ended June 30, 2015
on their respective grant dates was approximately
$30.5
. During the
nine months ended June 30, 2015
, stock option awards and restricted stock awards with a total fair value of
$31.4
vested. The total intrinsic value of stock options exercised during the
nine months ended June 30, 2015
was
$3.9
, for which
HRG
received cash of
$3.9
in settlement.
Under
HRG
’s executive bonus plan for the fiscal year ending
September 30, 2016
, executives will be paid in cash, stock, stock options and restricted stock shares. The equity grants are expected to be granted in the first quarter of the fiscal year ending
September 30,
2017
, and to vest, either immediately, or between
1
and
3
years from the grant date.
As of
June 30, 2016
, there was approximately
$7.2
of total unrecognized compensation cost related to unvested share-based compensation agreements previously granted, which is expected to be recognized over a weighted-average period of
1.01 years
.
The fair values of restricted stock and restricted stock unit awards are determined based on the market price of
HRG
’s common stock on the grant date. The fair value of stock option awards and warrants are determined using the Black-Scholes option pricing model.
The following assumptions were used in the determination of these grant date fair values for options awarded using the Black-Scholes option pricing model:
|
|
|
|
|
|
Nine months ended June 30,
|
|
2016
|
|
2015
|
Risk-free interest rate
|
1.65% to 1.74%
|
|
1.57% to 1.87%
|
Assumed dividend yield
|
—%
|
|
—%
|
Expected option term
|
5.0 to 5.5 years
|
|
5.0 to 6.5 years
|
Volatility
|
37.4% to 37.9%
|
|
37.1% to 39.0%
|
The weighted-average remaining contractual term of outstanding stock option awards and warrants at
June 30, 2016
was
6.93 years
.
Spectrum Brands
Spectrum Brands
granted restricted stock units representing approximately
16 thousand
and
588 thousand
shares during the three and
nine months ended June 30, 2016
, respectively. Of these grants,
192 thousand
restricted stock units vested immediately and
50 thousand
restricted stock units are time-based and vest over a period of
1
to
3
years. The remaining
346 thousand
are both performance and time-based and vest over a period of up to
2
years. The total market value of the restricted stock units on the dates of the grants was approximately
$55.7
. The remaining unrecognized pre-tax compensation cost related to restricted stock units at
June 30, 2016
was
$28.6
.
Spectrum Brands
granted restricted stock units representing approximately
22 thousand
and
551 thousand
shares during the three and
nine months ended June 30, 2015
, respectively. The
551 thousand
restricted stock units granted during the
nine months ended June 30, 2015
included
133 thousand
restricted stock units that vested immediately and
141 thousand
restricted stock units are time-based and vest over a period of
1
to
3
years. The remaining
277 thousand
restricted stock units are performance and time-based and vest over a period ranging from
1
to
2
years. The total market value of the restricted shares on the date of the grant was approximately
$49.8
. The remaining unrecognized pre-tax compensation cost related to restricted stock units at
June 30, 2015
was
$36.3
.
The fair value of restricted stock units is determined based on the market price of
Spectrum Brands
’ common stock on the grant date.
(11) Income Taxes
For the three and
nine months ended June 30, 2016
, the
Company
’s effective tax rate of
(7.9)%
and
(8.7)%
, respectively, differed from the expected U.S. statutory tax rate of
35.0%
and was impacted by the change in judgment in the realizability on a portion of Spectrum Brand’s U.S. net operating loss (“NOL”) carryforwards that were previously recorded with valuation allowance and recognition of a portion of tax benefits on current year losses from the Energy and Corporate and Other segments in the U.S. that are more likely than not to be realized based on the expected taxable gain from the FGL Merger. For the
nine months ended June 30, 2016
, the effective tax rate was reduced due to
$5.9
of non-recurring items related to the impact of tax law changes and changes in state deferred tax rates on Spectrum Brands’ net deferred tax liabilities. The effective tax rate for the three and
nine months ended June 30, 2016
also includes the effect of
$25.5
of income tax expense recognized by Spectrum Brands for a tax contingency reserve for a tax exposure in Germany, as well as the effect of the adoption of ASU 2016-09 that resulted in the recognition of excess tax benefits in the Company’s provision for income taxes rather than paid-in capital of
$11.6
and
$29.0
for the three and
nine months ended June 30, 2016
, respectively. See
Note 2
,
Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements
, for additional discussion of the adoption of ASU 2016-09.
In December 2015, Spectrum Brands received a ruling from the Internal Revenue Service which resulted in approximately
$88.0
of U.S. net operating losses being restored. The ruling created additional U.S. deferred tax assets and valuation allowance during the three and
nine months ended June 30, 2016
. During the
nine months ended June 30, 2016
, Spectrum Brands determined it is more likely than not its U.S. deferred tax assets will be used to reduce taxable income, except for tax attributes subject to ownership change limitations, capital losses, and certain state operating losses and credits that will expire unused. Spectrum Brands estimates the total unused tax benefits are approximately
$211.0
and has projected to release approximately
$109.0
of valuation allowance during the year ending September 30, 2016. Approximately
$25.0
of the valuation allowance release results from additional deferred tax assets created by the adoption of ASU 2016-09. For the
nine months ended June 30, 2016
, Spectrum Brands included
$95.0
of the valuation allowance release in the calculation of the estimated annual effective tax rate for the current fiscal year, and
$14.0
as a discrete income tax benefit.
For the three and
nine months ended June 30, 2015
, the
Company
’s effective tax rates of
20.8%
and
6.0%
, respectively, differed from the expected U.S. statutory tax rate of
35.0%
and were impacted by pretax losses including significant impairment and bad debt expense in the
Company
’s Energy and Asset Management segments in the U.S., and certain pretax losses from foreign jurisdictions for which the Company concluded that the tax benefits are not more-likely-than-not to be realized, resulting in the recording of valuation allowances. The
nine months ended June 30, 2015
included recognition of a nonrecurring net income tax benefit of
$12.3
attributable to tax impact related to the impairment of certain Frederick’s of Hollywood Inc. (“
FOH
”) indefinite lived intangible assets. Due to the indefinite life of these assets for book purposes, the related deferred tax liability was not regarded as a source of taxable income to support the realization of deferred tax assets. Consequently, the impairment recorded resulted in a reduction to the deferred tax liability previously recorded. In addition, for the three and
nine months ended June 30, 2015
, the Company recognized a
$31.0
income tax benefit from the reversal of a portion of Spectrum Brands’ U.S. valuation allowance on deferred tax assets in connection with the purchase of AAG. As a result of the business combination, Spectrum Brands determined that a portion of its pre-existing deferred tax assets are more likely than not to be realized by the combined entity and a portion of the valuation allowance should be eliminated. The discrete tax benefits related to the reversal of Spectrum Brands’ valuation allowance and impairments at FOH reduced the Company’s income tax expense for the three and
nine months ended June 30, 2015
.
The majority of NOL, capital loss and tax credit carryforwards of HRG and Spectrum Brands have historically been subject to valuation allowances, as the Company concluded that all or a portion of the related tax benefits are not more-likely-than-not to be realized. Utilization of a portion of the NOL, capital loss and tax credit carryforwards of HRG and Spectrum Brands are subject to limitations under Internal Revenue Code (“IRC”) Sections 382 and 383. Such limitations resulted from ownership changes of more than 50 percentage points over a three-year period. The consummation of the FGL Merger is expected to result in the reversal of a significant portion of the Company’s valuation allowance previously recorded against tax attribute carryforwards that are expected to be realized against the taxable gain.
(12) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (“EPS”) (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Nine months ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income (loss) from continuing operations attributable to controlling interest
|
$
|
77.4
|
|
|
$
|
(161.9
|
)
|
|
$
|
78.7
|
|
|
$
|
(522.3
|
)
|
Net (loss) income from discontinued operations attributable to controlling interest
|
(210.3
|
)
|
|
86.3
|
|
|
(270.2
|
)
|
|
108.6
|
|
Net loss attributable to controlling interest
|
$
|
(132.9
|
)
|
|
$
|
(75.6
|
)
|
|
$
|
(191.5
|
)
|
|
$
|
(413.7
|
)
|
|
|
|
|
|
|
|
|
Participating common shares at end of period
|
198,624
|
|
|
197,083
|
|
|
198,624
|
|
|
197,083
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shares - basic and diluted
|
$
|
(132.9
|
)
|
|
$
|
(75.6
|
)
|
|
$
|
(191.5
|
)
|
|
$
|
(413.7
|
)
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic
|
198,589
|
|
|
196,878
|
|
|
198,256
|
|
|
197,920
|
|
Dilutive effect of unvested restricted stock and restricted stock units
|
1,718
|
|
|
—
|
|
|
1,964
|
|
|
—
|
|
Dilutive effect of stock options
|
1,319
|
|
|
—
|
|
|
1,223
|
|
|
—
|
|
Weighted-average shares outstanding - diluted
|
201,626
|
|
|
196,878
|
|
|
201,443
|
|
|
197,920
|
|
|
|
|
|
|
|
|
|
Net loss per common share attributable to controlling interest:
|
|
|
|
|
|
|
|
Basic income (loss) from continuing operations
|
$
|
0.39
|
|
|
$
|
(0.82
|
)
|
|
$
|
0.40
|
|
|
$
|
(2.64
|
)
|
Basic (loss) income from discontinued operations
|
(1.06
|
)
|
|
0.44
|
|
|
(1.37
|
)
|
|
0.55
|
|
Basic
|
$
|
(0.67
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.97
|
)
|
|
$
|
(2.09
|
)
|
|
|
|
|
|
|
|
|
Diluted income (loss) from continuing operations
|
$
|
0.38
|
|
|
$
|
(0.82
|
)
|
|
$
|
0.39
|
|
|
$
|
(2.64
|
)
|
Diluted (loss) income from discontinued operations
|
(1.04
|
)
|
|
0.44
|
|
|
(1.34
|
)
|
|
0.55
|
|
Diluted
|
$
|
(0.66
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.95
|
)
|
|
$
|
(2.09
|
)
|
The number of shares of common stock outstanding used in calculating the weighted average thereof reflects the actual number of
HRG
common stock outstanding, excluding unvested restricted stock.
The following were excluded from the calculation of “Diluted net loss per common share attributable to controlling interest” because the as-converted effect of the unvested restricted stock and stock units, stock options and warrants would have been anti-dilutive (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Nine months ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Unvested restricted stock and restricted stock units
|
—
|
|
|
3,014
|
|
|
—
|
|
|
2,701
|
|
Stock options
|
—
|
|
|
1,282
|
|
|
—
|
|
|
1,358
|
|
Anti-dilutive warrants
|
1,800
|
|
|
2,400
|
|
|
1,800
|
|
|
2,400
|
|
(13) Commitments and Contingencies
The
Company
has aggregate accruals for its legal, environmental and regulatory matters of approximately
$8.7
at
June 30, 2016
, of which
$4.4
relates to liabilities of business held for sale. These accruals relate primarily to the matters described below. In addition, the
Company
and its subsidiaries are involved in other litigation and claims arising out of their prior businesses and arising in the ordinary course out of their current businesses, which include, among other things, indemnification and other claims and litigations involving
HRG
’s and its subsidiaries’ business practices, transactions, workers compensation matters, environmental matters, and personal injury claims. However, based on currently available information, including legal defenses available to the
Company
, and given the aforementioned accruals and related insurance coverage, the
Company
does not believe that the outcome of these legal, environmental and regulatory matters will have a material effect on its financial position, results of operations or cash flows.
Legal and Environmental Matters
HRG
HRG was named as a nominal defendant, and members of its Board were named as defendants in a purported class and derivative action filed in March 2014 by Haverhill Retirement System (“Plaintiff”) in the Delaware Court of Chancery (the “Court”). Harbinger Capital Partners LLC and certain of its affiliated funds (“HCP”) and Leucadia National Corporation (“Leucadia”), each a stockholder of HRG, were also named as defendants in the complaint. The complaint alleged, among other things, that the defendants breached their fiduciary duties in connection with transactions involving Leucadia. On January 7, 2016, the Court approved a stipulation under which the Plaintiff agreed to dismiss the action. HRG has paid the Plaintiff’s counsel
$0.2
in attorney’s fees and expenses and the Plaintiff has dismissed its action against the defendants.
HRG was named as a nominal defendant, and members of its Board were named as defendants, in a derivative action filed in December 2010 by Alan R. Kahn in the Court. HCP was also named as a defendant. The plaintiff alleged that HRG’s acquisition of HCP’s shares of Spectrum Brands in exchange for shares of common stock of HRG from HRG was financially unfair to HRG and its public stockholders, and sought unspecified damages and the rescission of the transaction. On November 24, 2015, the parties filed a Stipulation of Settlement with the Court (“Settlement”). The Settlement was approved by the court on February 4, 2016, and the action was dismissed. Pursuant to the terms of the Settlement, HCP and the Company’s insurer paid a total of
$3.8
into a settlement fund that will, net of distribution and notice costs and the fee and expense award to plaintiff's counsel, be distributed to stockholders of the Company other than stockholders affiliated with HCP, the members of the Company’s board of directors at the time of the challenged transaction and certain other persons. HRG will not contribute any payment to the settlement fund.
Spectrum Brands
Spectrum Brands
is a defendant in various other matters of litigation generally arising out of the ordinary course of business.
Spectrum Brands
does not believe that the resolution of any other matters or proceedings presently pending will have a material adverse effect on its results of operations, financial condition, liquidity or cash flows.
Spectrum Brands
has accrued approximately
$4.3
for the estimated costs associated with environmental remediation activities at some of its current and former manufacturing sites.
Spectrum Brands
believes that any additional liability that may result from resolution of these matters in excess of the amounts provided for will not have a material adverse effect on the financial condition, results of operations or cash flows of
Spectrum Brands
.
Spectrum Brands
is subject to various federal, state and local environmental laws and regulations.
Spectrum Brands
believes it is in substantial compliance with all such environmental laws that are applicable to its operations.
FGL (business held for sale)
FGL is involved in various pending or threatened legal proceedings, including purported class actions, arising in the ordinary course of business. In some instances, these proceedings include claims for unspecified or substantial punitive damages and similar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. In the opinion of FGL’s management and in light of existing insurance and other potential indemnification, reinsurance and established accruals, such litigation is not expected to have a material adverse effect on FGL’s financial position, although it is possible that the results of operations and cash flows could be materially affected by an unfavorable outcome in any one period.
FGL
is assessed amounts by the state guaranty funds to cover losses to policyholders of insolvent or rehabilitated insurance companies. Those mandatory assessments may be partially recovered through a reduction in future premium taxes in certain states. At
June 30, 2016
,
FGL
has accrued
$3.0
for guaranty fund assessments that is expected to be offset by estimated future premium tax deductions of
$2.9
.
FGL
has received inquiries from a number of state regulatory authorities regarding its use of the U.S. Social Security Administration’s Death Master File (the “
Death Master File
”) and compliance with state claims practices regulation. Legislation requiring insurance companies to use the
Death Master File
to identify potential claims has been enacted in a number of states. As a result of these legislative and regulatory developments, in May 2012,
FGL
undertook an initiative to use the
Death Master File
and other publicly available databases to identify persons potentially entitled to benefits under life insurance policies, annuities and retained asset accounts. In addition, FGL has received audit and examination notices from several state agencies responsible for escheatment and unclaimed property regulation in those states and in some cases has challenged the audits including litigation against the Controller for the State of California which is subject to a stay. FGL believes its current accrual will cover the reasonably estimated liability arising out of these developments, however costs that cannot be reasonably estimated as of the date of this filing are possible as a result of ongoing regulatory developments and other future requirements related to these matters.
On July 5, 2013, Plaintiff Eddie L. Cressy filed a putative class complaint captioned
Cressy v. Fidelity Guaranty
[sic]
Life Insurance Company, et. al.
(“
Cressy
”) in the
Superior Court of California, County of Los Angeles (the “LA Court”), Case No. BC-514340. The complaint was filed after the Plaintiff was unable to maintain an action in federal court. The complaint asserts,
inter alia,
that
the Plaintiff and members of the putative class relied on defendants’ advice in purchasing allegedly unsuitable equity-indexed insurance policies.
On January 2, 2015, the LA Court entered final judgment in
Cressy
, certifying the class for settlement purposes, and approving the class settlement reached on April 4, 2014. On August 10, 2015, FGL tendered
$1.3
to the settlement administrator for a claim review fund. The Company implemented an interest enhancement feature for certain policies as part of the class settlement, which enhancement began on October 12, 2015. On December 11, 2015, the parties filed a joint motion to amend the January 2, 2015 final order and judgment, to extend the deadline for settlement completion from January 28, 2016 to October 24, 2016.
At
June 30, 2016
, FGL estimated the total cost for the settlement, legal fees and other costs related to
Cressy
would be
$9.2
, with a liability for the unpaid portion of the estimate of
$0.6
. FGL has incurred and paid
$5.0
related to legal fees and other costs and
$3.3
related to settlement costs as of
June 30, 2016
. Based on the information currently available, FGL does not expect the actual cost for settlement, legal fees and other related costs to differ materially from the amount accrued.
On January 7, 2015, a putative class action complaint was filed in the United States District Court, Western District of Missouri, captioned Dale R. Ludwick, on behalf of herself and all others similarly situated (“Plaintiff Ludwick”) v. Harbinger Group Inc. (HRG’s former corporate name), FGL Insurance, Raven Re, and Front Street Cayman (the “Defendants”). The complaint alleged violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), requested injunctive and declaratory relief, sought unspecified compensatory damages for the putative class in an amount not specified, treble damages, and other relief, and claims Plaintiff Ludwick overpaid for her annuity. On April 13, 2015, the Defendants filed a joint motion to dismiss the complaint. On February 12, 2016, the District Court granted the Defendants’ joint motion to dismiss. On March 3, 2016, Plaintiff Ludwick filed a notice of appeal. As of
June 30, 2016
,
HRG
and
FGL
did not have sufficient information to determine whether
FGL
is exposed to any losses that would be either probable or reasonably estimable beyond an expense contingency estimate of
$1.5
, which was accrued during the
nine months ended June 30, 2016
.
Compass
Various federal, state and local laws and regulations covering discharge of materials into the environment, or otherwise relating to the protection of the environment, may affect
Compass
’ operations and the costs of its oil and natural gas exploitation, development and production operations.
Compass
does not anticipate that it will be required in the foreseeable future to expend amounts material in relation to the financial statements taken as a whole by reason of environmental laws and regulations. Because these laws and regulations are constantly being changed,
Compass
is unable to predict the conditions and other factors over which
Compass
does not exercise control that may give rise to environmental liabilities affecting it.
Salus
On March 17, 2015,
Salus
, in its capacity as agent for certain secured lenders of RadioShack under a
$250.0
term loan, filed an adversary complaint in the RadioShack bankruptcy cases pending in the United States Bankruptcy Court for the District of Delaware against certain other secured asset-based lenders (including Standard General L.P., its affiliates and certain hedge fund lenders) of RadioShack (the “
ABL Lenders
”) under a
$585.0
term and revolving loan facility. The adversary complaint sought (i) a determination that the liens securing the term loan provided by
Salus
to RadioShack have priority over the
ABL Lenders
’ liens with respect to the termed out portion of the
ABL Lenders
’ loans to RadioShack and (ii) disgorgement of payments received from RadioShack by the
ABL Lenders
in connection with the termed out loans. The
ABL Lenders
moved to dismiss the adversary complaint, and on May 11, 2016, the bankruptcy court issued a memorandum opinion and related order (the “Memorandum Opinion and Order”) granting such motion to dismiss with prejudice. On May 24, 2016,
Salus
filed a notice of appeal of the Memorandum Opinion and Order. On June 8, 2016,
Salus
entered into a stipulation with the defendant
ABL Lenders
regarding distribution of the encumbered cash to
Salus
and on June 10, 2016 the bankruptcy court entered the order approving such stipulation. In accordance with the stipulation,
Salus
dismissed the appeal, with prejudice, on June 15, 2016.
Guarantees
HGI Funding has an agreement with FGL to guarantee, subject to certain terms and in the event of nonperformance by the third party borrowers and Salus, the fulfillment of accumulated foreign exchange losses recoverable under one loan originated by Salus that is denominated in CAD. At
June 30, 2016
and
September 30, 2015
, Salus’ obligation to FGL related to such foreign exchange losses was
$8.6
and
$10.7
, respectively.
See
Note 9
,
Debt
for details of the limited unconditional and irrevocable guarantee that was provided by HGI Funding for certain of the payment obligations under the
Compass Credit Agreement
.
Unfunded Asset Based Lending Commitments
Salus and FGL have unfunded investment commitments as of
June 30, 2016
based upon the timing of when investments are executed compared to when the actual investments are funded, as some investments require that funding occur over a period of months or years.
Through
Salus
, the
Company
enters into commitments to extend credit to meet the financing needs of its asset based lending customers upon satisfaction of certain conditions. At
June 30, 2016
, the notional amount of unfunded, legally binding lending commitments was approximately
$25.4
, of which
$20.8
expires in
1
year or less, and the remainder expires between
1
and
5
years.
FGL has unfunded investment commitments of
$114.7
as of
June 30, 2016
.
(14) Related Party Transactions
In connection with a March 2014 transaction by and among funds affiliated with HCP and
Leucadia
, HCP sold to Leucadia
23.0 million
shares of HRG common stock and transferred a portion of its rights under an existing registration rights agreement.
On October 7, 2015,
FGL
entered into an engagement letter (the “Engagement Letter”) with Jefferies LLC (“Jefferies”) pursuant to which Jefferies agreed (on a non-exclusive basis) to provide financial advisory services to
FGL
in connection with a transaction involving a merger or other similar transaction with respect to at least a majority of the capital stock of
FGL
. Jefferies is a wholly owned subsidiary of Leucadia, which through subsidiaries beneficially owns more than 10% of HRG’s outstanding shares of common stock.
HRG
is also a party to the Engagement Letter. Under the Engagement Letter, Jefferies is entitled to receive a fee which represents a percentage of the value of the transaction, plus reimbursement for all reasonable out-of-pocket expenses incurred by Jefferies in connection with their engagement.
FGL
has also agreed to indemnify Jefferies for certain liabilities in connection with their engagement.
HRG
is required to reimburse
FGL
for compensation paid by
FGL
to Jefferies under certain circumstances. Specifically, if compensation to Jefferies becomes payable in respect of a transaction that involves a disposition of shares of
FGL
held by
HRG
(and not other stockholders of
FGL
),
HRG
will reimburse
FGL
for the full amount of such compensation. If compensation to Jefferies becomes payable in respect of a transaction that involves a disposition of shares of
FGL
held by
HRG
and a disposition of not more than 50% of the shares of
FGL
held by stockholders of
FGL
other than
HRG
,
HRG
will reimburse
FGL
for its pro rata portion of such compensation (based on its relative number of shares compared to those held by stockholders of
FGL
other than
HRG
).
On October 9, 2015,
HGI Funding
entered into a stock purchase agreement, by and among
HGI Funding
, HC2 Holdings, Inc. (“
HC2
”) and the purchasers party thereto, whereby
HGI Funding
sold its remaining equity interest in
HC2
at a price of
$7.50
per share for an aggregate purchase price of
$35.1
. Jefferies agreed to purchase
1.2 million
shares in the transaction at a purchase price of
$7.50
per share. In addition, Mr. Falcone purchased
540.0 thousand
shares in the transaction through an
HCP
fund, at a purchase price of
$7.50
per share.
On October 23, 2015,
Front Street Cayman
sold bonds issued by Phoenix Life Insurance Company and received approximately
$14.0
in aggregate proceeds from the sale. Jefferies acted as the principal in the transaction.
FGL
has invested in
CLO
securities issued by Fortress Credit Opportunities III CLO LP (“FCO III”) and also invested in securities issued by Fortress Credit BSL Limited (“Fortress BSL”). The parent of both FCO III and Fortress BSL is Fortress Investment Group LLC (“Fortress”), which has acquired interests greater than 10% ownership in
HRG
as of
June 30, 2016
. The collateral managers of both FCO III and Fortress BSL are affiliates of funds managed by affiliates of Fortress. Such CLOs had an aggregate total carrying value of
$182.0
and
$182.6
as of
June 30, 2016
and
September 30, 2015
, respectively. The Company’s net investment income from such securities was
$2.2
and
$6.2
for the three and
nine months ended June 30, 2016
, respectively, and
$1.9
and
$6.2
for the three and
nine months ended June 30, 2015
, respectively.
(15) Segment Data
The
Company
follows the accounting guidance which establishes standards for reporting information about operating segments in interim and annual financial statements. The
Company
’s reportable business segments are organized in a manner that reflects how
HRG
’s management views those business activities. Accordingly, the
Company
currently operates its business in
four
reporting segments: (i) Consumer Products, (ii) Insurance, (iii) Energy and (iv) Asset Management.
The following schedules present the
Company
’s segment information for the three and
nine months ended June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Nine months ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
|
|
|
Consumer Products
|
|
$
|
1,361.6
|
|
|
$
|
1,247.5
|
|
|
$
|
3,790.0
|
|
|
$
|
3,382.3
|
|
Insurance
|
|
70.2
|
|
|
(68.0
|
)
|
|
99.8
|
|
|
(72.4
|
)
|
Energy
|
|
9.7
|
|
|
24.3
|
|
|
36.0
|
|
|
84.6
|
|
Asset Management
|
|
1.2
|
|
|
7.2
|
|
|
8.8
|
|
|
20.3
|
|
Intersegment elimination
|
|
4.4
|
|
|
14.0
|
|
|
15.5
|
|
|
57.2
|
|
Consolidated segment revenues
|
|
1,447.1
|
|
|
1,225.0
|
|
|
3,950.1
|
|
|
3,472.0
|
|
Corporate and Other
|
|
—
|
|
|
2.2
|
|
|
—
|
|
|
42.7
|
|
Total revenues
|
|
$
|
1,447.1
|
|
|
$
|
1,227.2
|
|
|
$
|
3,950.1
|
|
|
$
|
3,514.7
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Consumer Products
|
|
$
|
206.8
|
|
|
$
|
135.7
|
|
|
$
|
497.8
|
|
|
$
|
339.7
|
|
Insurance
|
|
3.6
|
|
|
(28.6
|
)
|
|
1.8
|
|
|
(79.3
|
)
|
Energy
|
|
(22.0
|
)
|
|
(114.3
|
)
|
|
(113.2
|
)
|
|
(470.6
|
)
|
Asset Management
|
|
(1.7
|
)
|
|
(14.2
|
)
|
|
(20.0
|
)
|
|
(82.7
|
)
|
Intersegment elimination
|
|
39.0
|
|
|
(12.0
|
)
|
|
33.2
|
|
|
15.7
|
|
Total segment operating income (loss)
|
|
225.7
|
|
|
(33.4
|
)
|
|
399.6
|
|
|
(277.2
|
)
|
Corporate and Other and eliminations
|
|
(17.0
|
)
|
|
(41.1
|
)
|
|
(39.8
|
)
|
|
(189.4
|
)
|
Consolidated operating income (loss)
|
|
208.7
|
|
|
(74.5
|
)
|
|
359.8
|
|
|
(466.6
|
)
|
Interest expense
|
|
(98.4
|
)
|
|
(149.1
|
)
|
|
(291.7
|
)
|
|
(306.6
|
)
|
Gain on sale of oil and gas properties
|
|
—
|
|
|
—
|
|
|
105.6
|
|
|
—
|
|
Gain on deconsolidation of subsidiary
|
|
—
|
|
|
38.5
|
|
|
—
|
|
|
38.5
|
|
Gain upon gaining control of equity method investment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
141.2
|
|
Other (expense) income, net
|
|
(3.3
|
)
|
|
3.0
|
|
|
(1.7
|
)
|
|
49.9
|
|
Income (loss) from continuing operations before income taxes
|
|
107.0
|
|
|
(182.1
|
)
|
|
172.0
|
|
|
(543.6
|
)
|
Income tax benefit
|
|
(8.4
|
)
|
|
(37.8
|
)
|
|
(15.0
|
)
|
|
(32.6
|
)
|
Net income (loss) from continuing operations
|
|
115.4
|
|
|
(144.3
|
)
|
|
187.0
|
|
|
(511.0
|
)
|
(Loss) income from discontinued operations, net of tax
|
|
(208.4
|
)
|
|
102.9
|
|
|
(257.1
|
)
|
|
125.7
|
|
Net loss
|
|
(93.0
|
)
|
|
(41.4
|
)
|
|
(70.1
|
)
|
|
(385.3
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
39.9
|
|
|
34.2
|
|
|
121.4
|
|
|
28.4
|
|
Net loss attributable to controlling interest
|
|
$
|
(132.9
|
)
|
|
$
|
(75.6
|
)
|
|
$
|
(191.5
|
)
|
|
$
|
(413.7
|
)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30,
|
Net change in cash due to continuing operating activities
|
2016
|
|
2015
|
Consumer Products
|
$
|
117.9
|
|
|
$
|
(158.7
|
)
|
Insurance
|
(8.6
|
)
|
|
(54.8
|
)
|
Energy
|
(18.2
|
)
|
|
9.7
|
|
Asset Management
|
(15.3
|
)
|
|
(7.1
|
)
|
Intersegment elimination
|
117.7
|
|
|
28.6
|
|
Net change in cash due to segment operating activities
|
193.5
|
|
|
(182.3
|
)
|
Net change in cash due to corporate and other operating activities
|
(94.6
|
)
|
|
(87.8
|
)
|
Consolidated change in cash due to continuing operating activities
|
$
|
98.9
|
|
|
$
|
(270.1
|
)
|
(16) Consolidating Financial Information
The following schedules present the
Company
’s accompanying
Condensed Consolidated Balance Sheets
information at
June 30, 2016
and
September 30, 2015
, and accompanying
Condensed Consolidated Statements of Operations
information for the
nine months ended June 30, 2016
and
2015
. These schedules present the individual segments of the
Company
and their contribution to the
Condensed Consolidated Financial Statements
. Amounts presented will not necessarily be the same as those in the individual financial statements of the
Company
’s subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests. In addition, some of the
Company
’s subsidiaries use a classified balance sheet which also leads to differences in amounts reported for certain line items.
The Corporate and Other column primarily reflects the parent company’s investment in its subsidiaries, invested cash portfolio and corporate long term debt, and the results of
FOH
for the
nine months ended June 30, 2015
. The elimination adjustments are for intercompany assets and liabilities, adjustments to align segment accounting policies with the consolidated basis, interest and dividends, the parent company’s investment in capital stocks of subsidiaries, and various reclasses of debit or credit balances to the amounts in consolidation. Purchase accounting adjustments have been pushed down to the appropriate subsidiary.
HRG Group, Inc. - Condensed Consolidating Balance Sheets Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Consumer Products
|
|
Insurance
|
|
Energy
|
|
Asset Management
|
|
Corporate and Other
|
|
Discontinued Operations
|
|
Eliminations and adjustments
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
—
|
|
|
$
|
4.3
|
|
|
$
|
—
|
|
|
$
|
48.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2.4
|
)
|
|
$
|
50.7
|
|
Investments in subsidiaries and affiliates
|
|
—
|
|
|
4.4
|
|
|
—
|
|
|
—
|
|
|
2,216.4
|
|
|
—
|
|
|
(2,220.8
|
)
|
|
—
|
|
Affiliated loans and receivables
|
|
—
|
|
|
20.3
|
|
|
—
|
|
|
0.8
|
|
|
0.3
|
|
|
—
|
|
|
(21.4
|
)
|
|
—
|
|
Cash and cash equivalents
|
|
117.0
|
|
|
33.9
|
|
|
5.7
|
|
|
118.6
|
|
|
212.3
|
|
|
—
|
|
|
—
|
|
|
487.5
|
|
Funds withheld receivables
|
|
—
|
|
|
1,698.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37.1
|
)
|
|
1,661.0
|
|
Receivables, net
|
|
650.1
|
|
|
0.5
|
|
|
6.3
|
|
|
1.0
|
|
|
0.4
|
|
|
—
|
|
|
—
|
|
|
658.3
|
|
Inventories, net
|
|
842.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
842.3
|
|
Deferred tax assets
|
|
9.3
|
|
|
17.5
|
|
|
—
|
|
|
0.1
|
|
|
183.8
|
|
|
—
|
|
|
68.6
|
|
|
279.3
|
|
Properties, including oil and natural gas properties, net
|
|
523.2
|
|
|
—
|
|
|
114.1
|
|
|
0.7
|
|
|
1.1
|
|
|
—
|
|
|
—
|
|
|
639.1
|
|
Goodwill
|
|
2,479.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,479.7
|
|
Intangibles
|
|
2,399.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,399.6
|
|
Other assets
|
|
114.0
|
|
|
14.8
|
|
|
1.1
|
|
|
0.4
|
|
|
1.4
|
|
|
—
|
|
|
16.7
|
|
|
148.4
|
|
Assets of business held for sale
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,164.9
|
|
|
—
|
|
|
26,164.9
|
|
Total assets
|
|
$
|
7,135.2
|
|
|
$
|
1,793.8
|
|
|
$
|
127.2
|
|
|
$
|
170.4
|
|
|
$
|
2,615.7
|
|
|
$
|
26,164.9
|
|
|
$
|
(2,196.4
|
)
|
|
$
|
35,810.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance reserves
|
|
$
|
—
|
|
|
$
|
1,649.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
103.1
|
|
|
$
|
1,752.1
|
|
Debt
|
|
3,875.4
|
|
|
—
|
|
|
123.4
|
|
|
37.1
|
|
|
1,709.6
|
|
|
—
|
|
|
199.0
|
|
|
5,944.5
|
|
Accounts payable and other current liabilities
|
|
797.7
|
|
|
4.2
|
|
|
15.2
|
|
|
3.3
|
|
|
81.0
|
|
|
—
|
|
|
1.0
|
|
|
902.4
|
|
Employee benefit obligations
|
|
82.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4.8
|
|
|
—
|
|
|
—
|
|
|
87.5
|
|
Deferred tax liabilities
|
|
552.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
261.6
|
|
|
—
|
|
|
1.3
|
|
|
815.3
|
|
Other liabilities
|
|
23.2
|
|
|
4.1
|
|
|
22.3
|
|
|
5.8
|
|
|
3.3
|
|
|
—
|
|
|
5.6
|
|
|
64.3
|
|
Affiliated debt and payables
|
|
—
|
|
|
0.1
|
|
|
100.1
|
|
|
183.6
|
|
|
—
|
|
|
—
|
|
|
(283.8
|
)
|
|
—
|
|
Liabilities of business held for sale
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,556.1
|
|
|
—
|
|
|
24,556.1
|
|
Total liabilities
|
|
5,331.4
|
|
|
1,657.4
|
|
|
261.0
|
|
|
229.8
|
|
|
2,060.3
|
|
|
24,556.1
|
|
|
26.2
|
|
|
34,122.2
|
|
Total stockholders’ equity
|
|
1,017.3
|
|
|
136.4
|
|
|
(133.8
|
)
|
|
(56.9
|
)
|
|
555.4
|
|
|
1,259.6
|
|
|
(2,222.6
|
)
|
|
555.4
|
|
Noncontrolling interests
|
|
786.5
|
|
|
—
|
|
|
—
|
|
|
(2.5
|
)
|
|
—
|
|
|
349.2
|
|
|
—
|
|
|
1,133.2
|
|
Total permanent equity
|
|
1,803.8
|
|
|
136.4
|
|
|
(133.8
|
)
|
|
(59.4
|
)
|
|
555.4
|
|
|
1,608.8
|
|
|
(2,222.6
|
)
|
|
1,688.6
|
|
Total liabilities and equity
|
|
$
|
7,135.2
|
|
|
$
|
1,793.8
|
|
|
$
|
127.2
|
|
|
$
|
170.4
|
|
|
$
|
2,615.7
|
|
|
$
|
26,164.9
|
|
|
$
|
(2,196.4
|
)
|
|
$
|
35,810.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015
(As Adjusted)
|
|
Consumer Products
|
|
Insurance
|
|
Energy
|
|
Asset Management
|
|
Corporate and Other
|
|
Discontinued Operations
|
|
Eliminations and adjustments
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
—
|
|
|
$
|
23.7
|
|
|
$
|
—
|
|
|
$
|
223.9
|
|
|
$
|
32.8
|
|
|
$
|
—
|
|
|
$
|
(1.5
|
)
|
|
$
|
278.9
|
|
Investment in subsidiaries and affiliates
|
|
—
|
|
|
10.6
|
|
|
—
|
|
|
—
|
|
|
2,014.7
|
|
|
—
|
|
|
(2,025.3
|
)
|
|
—
|
|
Affiliated loans and receivables
|
|
—
|
|
|
31.1
|
|
|
—
|
|
|
1.1
|
|
|
0.1
|
|
|
—
|
|
|
(32.3
|
)
|
|
—
|
|
Cash and cash equivalents
|
|
247.9
|
|
|
18.0
|
|
|
34.2
|
|
|
94.7
|
|
|
300.4
|
|
|
—
|
|
|
—
|
|
|
695.2
|
|
Funds withheld receivables
|
|
—
|
|
|
1,743.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(33.7
|
)
|
|
1,710.1
|
|
Receivables, net
|
|
586.6
|
|
|
25.6
|
|
|
19.1
|
|
|
0.7
|
|
|
0.8
|
|
|
—
|
|
|
0.1
|
|
|
632.9
|
|
Inventories, net
|
|
780.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
780.8
|
|
Deferred tax assets
|
|
9.3
|
|
|
23.6
|
|
|
—
|
|
|
0.2
|
|
|
3.9
|
|
|
—
|
|
|
14.2
|
|
|
51.2
|
|
Properties, including oil and natural gas properties, net
|
|
507.1
|
|
|
—
|
|
|
288.9
|
|
|
1.1
|
|
|
1.3
|
|
|
—
|
|
|
—
|
|
|
798.4
|
|
Goodwill
|
|
2,476.7
|
|
|
—
|
|
|
—
|
|
|
10.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,487.4
|
|
Intangibles
|
|
2,480.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,480.3
|
|
Other assets
|
|
105.1
|
|
|
7.4
|
|
|
1.1
|
|
|
2.1
|
|
|
1.5
|
|
|
—
|
|
|
17.1
|
|
|
134.3
|
|
Assets of business held for sale
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,984.5
|
|
|
—
|
|
|
24,984.5
|
|
Total assets
|
|
$
|
7,193.8
|
|
|
$
|
1,883.8
|
|
|
$
|
343.3
|
|
|
$
|
334.5
|
|
|
$
|
2,355.5
|
|
|
$
|
24,984.5
|
|
|
$
|
(2,061.4
|
)
|
|
$
|
35,034.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance reserves
|
|
$
|
—
|
|
|
$
|
1,731.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
124.1
|
|
|
$
|
1,856.0
|
|
Debt
|
|
3,905.9
|
|
|
—
|
|
|
325.9
|
|
|
42.9
|
|
|
1,705.1
|
|
|
—
|
|
|
330.7
|
|
|
6,310.5
|
|
Accounts payable and other current liabilities
|
|
993.0
|
|
|
5.4
|
|
|
33.6
|
|
|
7.7
|
|
|
53.7
|
|
|
—
|
|
|
2.2
|
|
|
1,095.6
|
|
Employee benefit obligations
|
|
88.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4.8
|
|
|
—
|
|
|
—
|
|
|
92.9
|
|
Deferred tax liabilities
|
|
572.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.9
|
|
|
—
|
|
|
—
|
|
|
574.5
|
|
Other liabilities
|
|
27.3
|
|
|
7.1
|
|
|
39.1
|
|
|
10.3
|
|
|
3.3
|
|
|
—
|
|
|
8.4
|
|
|
95.5
|
|
Affiliated debt and payables
|
|
—
|
|
|
—
|
|
|
102.2
|
|
|
313.1
|
|
|
—
|
|
|
—
|
|
|
(415.3
|
)
|
|
—
|
|
Liabilities of business held for sale
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23,420.9
|
|
|
—
|
|
|
23,420.9
|
|
Total liabilities
|
|
5,586.9
|
|
|
1,744.4
|
|
|
500.8
|
|
|
374.0
|
|
|
1,768.8
|
|
|
23,420.9
|
|
|
50.1
|
|
|
33,445.9
|
|
Total stockholders’ equity
|
|
900.4
|
|
|
139.4
|
|
|
(157.2
|
)
|
|
(41.8
|
)
|
|
586.7
|
|
|
1,270.7
|
|
|
(2,111.5
|
)
|
|
586.7
|
|
Noncontrolling interests
|
|
706.5
|
|
|
—
|
|
|
(0.3
|
)
|
|
2.3
|
|
|
—
|
|
|
292.9
|
|
|
—
|
|
|
1,001.4
|
|
Total permanent equity
|
|
1,606.9
|
|
|
139.4
|
|
|
(157.5
|
)
|
|
(39.5
|
)
|
|
586.7
|
|
|
1,563.6
|
|
|
(2,111.5
|
)
|
|
1,588.1
|
|
Total liabilities and equity
|
|
$
|
7,193.8
|
|
|
$
|
1,883.8
|
|
|
$
|
343.3
|
|
|
$
|
334.5
|
|
|
$
|
2,355.5
|
|
|
$
|
24,984.5
|
|
|
$
|
(2,061.4
|
)
|
|
$
|
35,034.0
|
|
HRG Group, Inc. - Condensed Consolidating Statements of Operations Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, 2016
|
|
Consumer Products
|
|
Insurance
|
|
Energy
|
|
Asset Management
|
|
Corporate and Other
|
|
Discontinued Operations
|
|
Eliminations and adjustments
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consumer and other product sales
|
|
$
|
3,790.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,790.0
|
|
Oil and natural gas
|
|
—
|
|
|
—
|
|
|
36.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
36.0
|
|
Net investment income
|
|
—
|
|
|
2.1
|
|
|
—
|
|
|
7.9
|
|
|
—
|
|
|
—
|
|
|
43.3
|
|
|
53.3
|
|
Net investment gains (losses)
|
|
—
|
|
|
97.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(33.1
|
)
|
|
64.6
|
|
Insurance and investment product fees and other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.9
|
|
|
—
|
|
|
—
|
|
|
5.3
|
|
|
6.2
|
|
Total revenues
|
|
3,790.0
|
|
|
99.8
|
|
|
36.0
|
|
|
8.8
|
|
|
—
|
|
|
—
|
|
|
15.5
|
|
|
3,950.1
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of consumer products and other goods sold
|
|
2,355.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,355.8
|
|
Oil and natural gas direct operating costs
|
|
—
|
|
|
—
|
|
|
35.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35.4
|
|
Benefits and other changes in policy reserves
|
|
—
|
|
|
93.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19.1
|
)
|
|
74.3
|
|
Selling, acquisition, operating and general expenses
|
|
865.9
|
|
|
4.6
|
|
|
20.6
|
|
|
14.6
|
|
|
39.8
|
|
|
—
|
|
|
2.3
|
|
|
947.8
|
|
Impairments and bad debt expense
|
|
—
|
|
|
—
|
|
|
93.2
|
|
|
14.2
|
|
|
—
|
|
|
—
|
|
|
(0.9
|
)
|
|
106.5
|
|
Amortization of intangibles
|
|
70.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
70.5
|
|
Total operating costs and expenses
|
|
3,292.2
|
|
|
98.0
|
|
|
149.2
|
|
|
28.8
|
|
|
39.8
|
|
|
—
|
|
|
(17.7
|
)
|
|
3,590.3
|
|
Operating income (loss)
|
|
497.8
|
|
|
1.8
|
|
|
(113.2
|
)
|
|
(20.0
|
)
|
|
(39.8
|
)
|
|
—
|
|
|
33.2
|
|
|
359.8
|
|
Equity in net income of subsidiaries
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(61.0
|
)
|
|
—
|
|
|
61.0
|
|
|
—
|
|
Interest expense
|
|
(175.8
|
)
|
|
—
|
|
|
(5.3
|
)
|
|
—
|
|
|
(107.2
|
)
|
|
—
|
|
|
(3.4
|
)
|
|
(291.7
|
)
|
Affiliated interest expense
|
|
—
|
|
|
—
|
|
|
(6.8
|
)
|
|
(3.1
|
)
|
|
0.5
|
|
|
—
|
|
|
9.4
|
|
|
—
|
|
Gain on sale of oil and gas properties
|
|
—
|
|
|
—
|
|
|
105.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
105.6
|
|
Other (expense) income, net
|
|
(6.5
|
)
|
|
—
|
|
|
—
|
|
|
0.6
|
|
|
3.8
|
|
|
—
|
|
|
0.4
|
|
|
(1.7
|
)
|
Income (loss) from continuing operations before income taxes
|
|
315.5
|
|
|
1.8
|
|
|
(19.7
|
)
|
|
(22.5
|
)
|
|
(203.7
|
)
|
|
—
|
|
|
100.6
|
|
|
172.0
|
|
Income tax expense (benefit)
|
|
46.9
|
|
|
5.1
|
|
|
—
|
|
|
0.2
|
|
|
(12.2
|
)
|
|
—
|
|
|
(55.0
|
)
|
|
(15.0
|
)
|
Net income (loss) from continuing operations
|
|
268.6
|
|
|
(3.3
|
)
|
|
(19.7
|
)
|
|
(22.7
|
)
|
|
(191.5
|
)
|
|
—
|
|
|
155.6
|
|
|
187.0
|
|
(Loss) income from discontinued operations, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(257.1
|
)
|
|
—
|
|
|
(257.1
|
)
|
Net income (loss)
|
|
268.6
|
|
|
(3.3
|
)
|
|
(19.7
|
)
|
|
(22.7
|
)
|
|
(191.5
|
)
|
|
(257.1
|
)
|
|
155.6
|
|
|
(70.1
|
)
|
Less: Net income (loss) attributable to noncontrolling interest
|
|
113.5
|
|
|
—
|
|
|
—
|
|
|
(5.2
|
)
|
|
—
|
|
|
13.1
|
|
|
—
|
|
|
121.4
|
|
Net income (loss) attributable to controlling interest
|
|
$
|
155.1
|
|
|
$
|
(3.3
|
)
|
|
$
|
(19.7
|
)
|
|
$
|
(17.5
|
)
|
|
$
|
(191.5
|
)
|
|
$
|
(270.2
|
)
|
|
$
|
155.6
|
|
|
$
|
(191.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, 2015
|
|
Consumer Products
|
|
Insurance
|
|
Energy
|
|
Asset Management
|
|
Corporate and Other
|
|
Discontinued Operations
|
|
Eliminations and adjustments
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consumer and other product sales
|
|
$
|
3,382.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,425.0
|
|
Oil and natural gas
|
|
—
|
|
|
—
|
|
|
84.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
84.6
|
|
Net investment income
|
|
—
|
|
|
7.6
|
|
|
—
|
|
|
20.2
|
|
|
—
|
|
|
—
|
|
|
37.6
|
|
|
65.4
|
|
Net investment (losses) gain
|
|
—
|
|
|
(80.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14.6
|
|
|
(65.4
|
)
|
Insurance and investment product fees and other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
5.0
|
|
|
5.1
|
|
Total revenues
|
|
3,382.3
|
|
|
(72.4
|
)
|
|
84.6
|
|
|
20.3
|
|
|
42.7
|
|
|
—
|
|
|
57.2
|
|
|
3,514.7
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of consumer products and other goods sold
|
|
2,179.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30.9
|
|
|
—
|
|
|
—
|
|
|
2,210.3
|
|
Oil and natural gas operating costs
|
|
—
|
|
|
—
|
|
|
66.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
66.1
|
|
Benefits and other changes in policy reserves
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33.3
|
|
|
33.9
|
|
Selling, acquisition, operating and general expenses
|
|
799.2
|
|
|
6.3
|
|
|
49.7
|
|
|
30.8
|
|
|
141.0
|
|
|
—
|
|
|
3.0
|
|
|
1,030.0
|
|
Impairments and bad debt expense
|
|
—
|
|
|
—
|
|
|
439.4
|
|
|
72.2
|
|
|
60.2
|
|
|
—
|
|
|
5.2
|
|
|
577.0
|
|
Amortization of intangibles
|
|
64.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
64.0
|
|
Total operating costs and expenses
|
|
3,042.6
|
|
|
6.9
|
|
|
555.2
|
|
|
103.0
|
|
|
232.1
|
|
|
—
|
|
|
41.5
|
|
|
3,981.3
|
|
Operating income (loss)
|
|
339.7
|
|
|
(79.3
|
)
|
|
(470.6
|
)
|
|
(82.7
|
)
|
|
(189.4
|
)
|
|
—
|
|
|
15.7
|
|
|
(466.6
|
)
|
Equity in net loss of subsidiaries
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(247.1
|
)
|
|
—
|
|
|
247.1
|
|
|
—
|
|
Interest expense
|
|
(206.5
|
)
|
|
—
|
|
|
(7.3
|
)
|
|
—
|
|
|
(88.5
|
)
|
|
—
|
|
|
(4.3
|
)
|
|
(306.6
|
)
|
Affiliated interest expense
|
|
—
|
|
|
—
|
|
|
(6.8
|
)
|
|
(14.8
|
)
|
|
(2.9
|
)
|
|
—
|
|
|
24.5
|
|
|
—
|
|
Gain on deconsolidation of subsidiary
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
38.5
|
|
|
—
|
|
|
—
|
|
|
38.5
|
|
Gain upon gaining control of equity method investment
|
|
—
|
|
|
—
|
|
|
141.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
141.2
|
|
Other (expense) income, net
|
|
(5.6
|
)
|
|
—
|
|
|
21.6
|
|
|
(1.4
|
)
|
|
41.5
|
|
|
—
|
|
|
(6.2
|
)
|
|
49.9
|
|
Income (loss) from continuing operations before income taxes
|
|
127.6
|
|
|
(79.3
|
)
|
|
(321.9
|
)
|
|
(98.9
|
)
|
|
(447.9
|
)
|
|
—
|
|
|
276.8
|
|
|
(543.6
|
)
|
Income tax expense (benefit)
|
|
4.8
|
|
|
(27.7
|
)
|
|
—
|
|
|
—
|
|
|
(13.2
|
)
|
|
—
|
|
|
3.5
|
|
|
(32.6
|
)
|
Net income (loss) from continuing operations
|
|
122.8
|
|
|
(51.6
|
)
|
|
(321.9
|
)
|
|
(98.9
|
)
|
|
(434.7
|
)
|
|
—
|
|
|
273.3
|
|
|
(511.0
|
)
|
Income from discontinued operations, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
125.7
|
|
|
—
|
|
|
125.7
|
|
Net income (loss)
|
|
122.8
|
|
|
(51.6
|
)
|
|
(321.9
|
)
|
|
(98.9
|
)
|
|
(434.7
|
)
|
|
125.7
|
|
|
273.3
|
|
|
(385.3
|
)
|
Less: Net income (loss) attributable to noncontrolling interest
|
|
51.3
|
|
|
—
|
|
|
(0.8
|
)
|
|
(18.2
|
)
|
|
(21.0
|
)
|
|
17.1
|
|
|
—
|
|
|
28.4
|
|
Net income (loss) attributable to controlling interest
|
|
$
|
71.5
|
|
|
$
|
(51.6
|
)
|
|
$
|
(321.1
|
)
|
|
$
|
(80.7
|
)
|
|
$
|
(413.7
|
)
|
|
$
|
108.6
|
|
|
$
|
273.3
|
|
|
$
|
(413.7
|
)
|
(17) Subsequent Events
ASC Topic 855,
“Subsequent Events”
(“ASC 855”), establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 requires the Company to evaluate events that occur after the balance sheet date through the date the Company’s financial statements are issued and to determine whether adjustments to or additional disclosures in the financial statements are necessary. The Company has evaluated subsequent events through the date these financial statements were issued.
As discussed in
Note 1
,
Description of Business
, on July 1, 2016, HGI Energy entered into the Compass Sale Agreement. As discussed in
Note 4
,
Divestitures
, the Company’s interest in Compass met all of the held for sale criteria established by ASC 360 on July 1, 2016, subsequent to the end of the third fiscal quarter of 2016. The disposal represents all of the oil and gas properties that are accounted for using the full-cost method and the operations of Compass will be presented as discontinued operations starting in the fourth fiscal quarter of 2016.
The following table summarizes the components of Compass’ assets and liabilities included in the accompanying
Condensed Consolidated Balance Sheets
at
June 30, 2016
and
September 30, 2015
:
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
September 30, 2015
|
Assets
|
|
|
|
Cash and cash equivalents
|
$
|
5.4
|
|
|
$
|
34.0
|
|
Receivables, net
|
6.3
|
|
|
19.1
|
|
Properties, including oil and natural gas properties, net
|
114.1
|
|
|
288.9
|
|
Other assets
|
1.1
|
|
|
1.1
|
|
Total assets
|
126.9
|
|
|
343.1
|
|
Liabilities
|
|
|
|
Debt
|
123.4
|
|
|
325.9
|
|
Accounts payable and other current liabilities
|
15.2
|
|
|
33.6
|
|
Other liabilities
|
22.3
|
|
|
39.1
|
|
Total liabilities
|
160.9
|
|
|
398.6
|
|
Net Compass assets (liabilities) included in HRG’s Condensed Consolidated Balance Sheets
|
(34.0
|
)
|
|
(55.5
|
)
|
Less: noncontrolling interest
|
—
|
|
|
0.3
|
|
Total carrying value of HRG’s interest in Compass’ net assets (liabilities)
|
$
|
(34.0
|
)
|
|
$
|
(55.2
|
)
|
At
June 30, 2016
, the carrying value of the Company’s interest in Compass was lower than the fair value less cost to sell based on the sales price.
The following table summarizes the components of income attributable to Compass included in the accompanying
Condensed Consolidated Statements of Operations
for the three and
nine months ended June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Nine months ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
|
|
Oil and natural gas revenues
|
$
|
9.7
|
|
|
$
|
24.2
|
|
|
$
|
36.0
|
|
|
$
|
84.6
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Oil and natural gas direct operating costs
|
9.1
|
|
|
22.3
|
|
|
35.4
|
|
|
66.1
|
|
Selling, acquisition, operating and general expenses
|
5.0
|
|
|
13.5
|
|
|
20.6
|
|
|
49.7
|
|
Impairments and bad debt expense
|
17.6
|
|
|
102.7
|
|
|
93.3
|
|
|
439.4
|
|
Total operating costs and expenses
|
31.7
|
|
|
138.5
|
|
|
149.3
|
|
|
555.2
|
|
Operating loss
|
(22.0
|
)
|
|
(114.3
|
)
|
|
(113.3
|
)
|
|
(470.6
|
)
|
Interest expense
|
1.6
|
|
|
2.9
|
|
|
5.3
|
|
|
7.3
|
|
Gain on sale of oil and gas properties
|
—
|
|
|
—
|
|
|
(105.6
|
)
|
|
—
|
|
Other income (loss), net
|
2.4
|
|
|
2.4
|
|
|
—
|
|
|
(21.6
|
)
|
Net loss
|
(26.0
|
)
|
|
(119.6
|
)
|
|
(13.0
|
)
|
|
(456.3
|
)
|
Less: net loss (income) attributable to noncontrolling interest
|
—
|
|
|
(0.2
|
)
|
|
0.1
|
|
|
(0.8
|
)
|
Net loss attributable to common and participating preferred stockholders
|
$
|
(26.0
|
)
|
|
$
|
(119.4
|
)
|
|
$
|
(13.1
|
)
|
|
$
|
(455.5
|
)
|