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Harbinger Group Inc. Reports $1 Billion In Revenues For Third Quarter Fiscal 2012 On Continued Progress At Operating Subsidiaries

Non-U.S. GAAP Measures

Management believes that certain non-GAAP financial measures may be useful in certain instances to provide additional meaningful comparisons between current results and results in prior operating periods. Spectrum Brands uses adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”), a non-U.S. GAAP financial measure. Management believes that adjusted EBITDA is significant to gaining an understanding of Spectrum Brands’ results as it is frequently used by the financial community to provide insight into an organization’s operating trends and facilitates comparisons between peer companies, since interest, taxes, depreciation and amortization can differ greatly between organizations as a result of differing capital structures and tax strategies. Adjusted EBITDA can also be a useful measure of a company’s ability to service debt and is one of the measures used for determining Spectrum Brands’ debt covenant compliance. Adjusted EBITDA excludes certain items that are unusual in nature or not comparable from period to period. See Table 3 for a reconciliation of Adjusted EBITDA to the Consumer Products segment’s operating income. FGL uses adjusted operating income, a non-U.S. GAAP financial measure frequently used throughout the insurance industry. Management believes the adjustments made to reported operating income (loss) of the insurance segment in order to derive adjusted operating income (loss) are significant to gaining an understanding of FGL’s results of operations. For example, FGL could have strong operating results in a given period, yet show operating income that is materially less, if during the period the fair value of its derivative assets hedging the FIA index credit obligations decrease due to general equity market conditions but the FIA liability related to the index credit obligation did not decrease in the same proportion as the derivative asset because of non-equity market factors such as interest rate movements. Similarly, FGL could also have poor operating results yet show operating income that is materially greater, if during the period the fair value of the derivative assets increase but the FIA liability increase is less than the fair value change of the derivative assets. FGL hedges its FIA index credits with a combination of static and dynamic strategies, which can result in earnings volatility. The management and board of directors of FGL review adjusted operating income (loss) and reported operating income (loss) as part of their examination of FGL’s overall financial results. However, these examples illustrate the significant impact derivative and embedded derivative movements can have on reporting operating income (loss). Accordingly, the management and board of directors of FGL perform an independent review and analysis of these items, as part of their review of FGL’s hedging results each period. See Table 4 for a reconciliation of adjusted operating income to the Insurance segment’s operating income. Management provides the aforementioned information to investors to assist in comparisons of past, present and future operating results and to assist in highlighting the results of on-going operations. While management believes that non-U.S. GAAP measurements are useful supplemental information, such adjusted results are not intended to replace U.S. GAAP financial results and should be read in conjunction with those U.S. GAAP results.

                           

Table 1:

 
HARBINGER GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
Three Month Period Ended Nine Month Period Ended
July 1, 2012 July 3, 2011 (a) July 1, 2012 July 3, 2011 (a)
(Unaudited) (Unaudited)
Revenues:
Consumer Products and Other:
Net sales $ 824,803   $ 804,635   $ 2,419,859   $ 2,359,586  
Insurance and Financial Services:
Premiums 12,044 25,118 42,170 25,118
Net investment income 179,297 176,885 539,057 176,885
Net investment gains (losses) (12,906 ) 1,228 254,616 1,228
Insurance and investment product fees and other   8,922     26,424     28,161     26,424  
  187,357     229,655     864,004     229,655  
Total revenues   1,012,160     1,034,290     3,283,863     2,589,241  
Operating costs and expenses:
Consumer Products and Other:
Cost of goods sold 533,107 510,941 1,584,106 1,511,215
Selling, general and administrative expenses   209,770     222,939     638,186     690,493  
  742,877     733,880     2,222,292     2,201,708  
Insurance and Financial Services:
Benefits and other changes in policy reserves 140,990 129,959 559,702 129,959
Acquisition and operating expenses, net of deferrals 20,010 28,595 100,763 28,595
Amortization of intangibles   26,880     21,340     111,979     21,340  
  187,880     179,894     772,444     179,894  
Total operating costs and expenses   930,757     913,774     2,994,736     2,381,602  
Operating income 81,403 120,516 289,127 207,639
Interest expense (54,447 ) (51,904 ) (194,417 ) (192,650 )

(Increase) decrease in fair value of equity conversion feature of preferred  stock

(125,540 ) 5,960 (124,010 ) 5,960
Bargain purchase gain from business acquisition - 158,341 - 158,341
Gain on contingent purchase price reduction - - 41,000 -
Other income (expense), net   (17,446 )   1,126     (25,947 )   1,089  
Income (loss) from continuing operations before income taxes (116,030 ) 234,039 (14,247 ) 180,379
Income tax expense (benefit)   (5,855 )   3,720     50,605     63,906  
Net income (loss) (110,175 ) 230,319 (64,852 ) 116,473
Less: Net income (loss) attributable to noncontrolling interest   24,925     13,015     18,765     (18,811 )
Net income (loss) attributable to controlling interest (135,100 ) 217,304 (83,617 ) 135,284
Less: Preferred stock dividends and accretion   13,980     5,963     45,559     5,963  
Net income (loss) attributable to common and
participating preferred stockholders $ (149,080 ) $ 211,341   $ (129,176 ) $ 129,321  
 
Net income (loss) per common share attributable
to controlling interest:
Basic $ (1.07 ) $ 1.16   $ (0.93 ) $ 0.71  
Diluted $ (1.07 ) $ 1.16   $ (0.93 ) $ 0.71  
 
(a) Retrospectively adjusted for the finalization of provisional acquisition accounting balances.
 
 
 

Table 2:

 
HARBINGER GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
      July 1,       September 30,
2012 2011 (a)
(Unaudited)

                              ASSETS

Consumer Products and Other:
Cash and cash equivalents $ 262,261 $ 321,352
Short-term investments 204,241 350,638
Receivables, net 428,440 394,283
Inventories, net 552,515 434,630
Prepaid expenses and other current assets   85,460     143,654  

Total current assets

1,532,917 1,644,557
Properties, net 208,888 206,799
Goodwill 688,045 610,338
Intangibles, net 1,716,977 1,683,909
Deferred charges and other assets   94,454     97,324  
  4,241,281     4,242,927  
Insurance and Financial Services:
Investments:
Fixed maturities, available-for-sale, at fair value 15,069,952 15,367,474
Equity securities, available-for-sale, at fair value 242,264 287,043
Derivative investments 160,565 52,335
Asset-backed loans and other invested assets   92,424     44,279  
Total investments 15,565,205 15,751,131
Cash and cash equivalents 1,570,565 816,007
Accrued investment income 183,453 212,848
Reinsurance recoverable 2,326,425 1,612,036
Intangibles, net 410,879 457,167
Deferred tax assets 131,937 207,729
Other assets   151,604     291,043  
  20,340,068     19,347,961  
Total assets $ 24,581,349   $ 23,590,888  

                                  LIABILITIES AND EQUITY

Consumer Products and Other:
Current portion of long-term debt $ 28,251 $ 16,090
Accounts payable 251,932 328,635
Accrued and other current liabilities   251,820     317,629  
Total current liabilities 532,003 662,354
Long-term debt 2,296,404 2,032,690
Equity conversion feature of preferred stock 199,360 75,350
Employee benefit obligations 80,353 89,857
Deferred tax liabilities 369,444 338,679
Other liabilities   30,188     44,957  
  3,507,752     3,243,887  
Insurance and Financial Services:
Contractholder funds 15,285,816 14,549,970
Future policy benefits 3,602,729 3,598,208
Liability for policy and contract claims 113,192 56,650
Note payable - 95,000
Other liabilities   474,245     381,597  
  19,475,982     18,681,425  
Total liabilities   22,983,734     21,925,312  
 
Commitments and contingencies
 
Temporary equity:
Redeemable preferred stock   313,450     292,437  
 
Harbinger Group Inc. stockholders' equity:
Common stock 1,402 1,393
Additional paid-in capital 854,776 872,683
Accumulated deficit (257,259 ) (128,083 )
Accumulated other comprehensive income   253,812     149,448  
Total Harbinger Group Inc. stockholders' equity 852,731 895,441
Noncontrolling interest   431,434     477,698  
Total permanent equity   1,284,165     1,373,139  
Total liabilities and equity $ 24,581,349   $ 23,590,888  
 
(a) Derived from the audited consolidated financial statements as of September 30, 2011 and retrospectively adjusted for the finalization of
provisional acquisition accounting balances.
 
 
                       
 

Table 3:

 
 

Reconciliation of adjusted EBITDA of Consumer Products segment to U.S. GAAP operating income

 
Three Months Ended Nine Months Ended
July 1, 2012 July 3, 2011

July 1, 2012

July 3, 2011

Adjusted EBITDA of Consumer Products segment $ 133   $ 127   $ 359   $ 343  
 

Reconciliation to reported operating income:

Reported operating income - consumer products segment $ 95 $ 79 $ 234 $ 195
Add: Other income (expense) not included above (1 ) (1 ) (2 ) (2 )
Add back:
Restructuring and related charges 4 7 16 18
Acquisition and integration related charges 5 8 20 31
Depreciation and amortization, net of accelerated depreciation   30     34     91     101  
Adjusted EBITDA - consumer products segment $ 133   $ 127   $ 359   $ 343  
 
 
                         
 

Table 4:

 

Reconciliation of adjusted operating income (pre-tax) of insurance segment to U.S. GAAP operating income

 
Three Months Ended Nine Months Ended
July 1, 2012 July 3, 2011

July 1, 2012

July 3, 2011

Adjusted operating income of Insurance segment (pre-tax) $ 5   $ 28   $ 43   $ 28  
 

Reconciliation to reported operating income (loss):

Reported operating income (loss) - insurance segment $ (1 ) $ 50 $ 92 $ 50
Effect of investment (gains) losses, net of offsets (17 ) (12 ) (72 ) (12 )
Effect of change in FIA embedded derivative discount rate, net of offsets 18 (14 ) 11 (14 )
Effects of transaction-related reinsurance   5     4     12     4  
Adjusted operating income - pre-tax $ 5   $ 28   $ 43   $ 28  
 
 




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