Harbinger Group Inc. ("HGI"; NYSE: HRG), a diversified holding company focused on acquiring and growing attractive businesses, today announced its consolidated results for the fourth quarter and full year period ended on September 30, 2012 (“Fiscal 2012”). The results include HGI’s Consumer Products business, which consists of Spectrum Brands Holdings, Inc. (“Spectrum Brands”; NYSE: SPB), and HGI’s Insurance and Financial Services group, which includes HGI’s Fidelity & Guaranty Life Holdings, Inc. (“FGL”) and Salus Capital Partners, LLC (“Salus”) operating subsidiaries. Fiscal 2012 Highlights:
- Total revenues increased 29% from the year ended September 30, 2011 (“Fiscal 2011”), primarily driven by growth in the Insurance segment, including the benefit of a full year of operations of FGL, which was acquired in April 2011.
- HGI received total dividends of approximately $71 million from its operating subsidiaries in Fiscal 2012. In September, Spectrum Brands paid a special one-time dividend of $1.00 per share, resulting in approximately $30 million to HGI; FGL paid cumulative dividends of $40 million, and Salus paid an inaugural dividend of $1 million in its first year of operation.
- Upon completion of a recently announced joint venture with EXCO Resources, HGI expects dividends from all subsidiaries to exceed $100 million annually and to surpass HGI's existing interest and dividend payments.
- For Fiscal 2012, the Consumer Products segment recorded record net sales of $3.25 billion, a 2% increase from Fiscal 2011; excluding negative foreign exchange impact, net sales grew 4% versus prior year.
- Consumer Products segment operating income grew 32% and adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) increased 6% versus the prior year (or 10% excluding unfavorable foreign exchange impact) on higher sales, synergy benefits and cost reduction initiatives. Adjusted EBITDA margin on a full-year basis approximated 15% of sales.
- Insurance segment products sales for Fiscal 2012 were $1.9 billion, led by the successful introduction of Prosperity EliteSM which resulted in FGL solidifying a top ten market position in the competitive fixed index annuity marketplace.
- As of September 30, 2012, HGI’s Insurance segment had a net US GAAP book value of $1.2 billion (including accumulated other comprehensive income ("AOCI") of $434 million), almost double the book value of $667 million (including AOCI of $159 million) at the end of Fiscal 2011. Net unrealized gains on available for sale investments were $1.1 billion on a U.S. GAAP basis ($1.2 billion on a statutory basis). FGL's investment portfolio continues to be conservatively positioned, as it holds cash in excess of $1.0 billion, has shortened portfolio duration, and remains well matched against its liability profile.
- Salus, in its first year of operation, originated $260 million of asset-based loan commitments, for which $181 million of loans were outstanding as of September 30, 2012, and contributed approximately $1 million to HGI's consolidated earnings for Fiscal 2012.
- HGI stock price appreciation of 66% from $5.07 to $8.43 per share during Fiscal 2012 resulted in a $157 million liability increase related to the fair value of the preferred stock equity conversion feature, which represents a non-cash charge to HGI's net income.
- Net income attributable to common and participating preferred stockholders increased 35% to $30 million, or $0.15 per common share attributable to controlling interest, from $22 million, or $0.11 per common share attributable to controlling interest, in Fiscal 2011.
- The non-cash accretion rate on HGI’s preferred stock decreased from 2% for the third and fourth fiscal quarters to 0% commencing in the first quarter of fiscal 2013 due to a 163% increase in HGI’s net asset value since the issuance of its preferred stock in May 2011 as calculated in accordance with the terms of its Certificates of Designation.
- HGI ended the year with corporate cash and short-term investments of approximately $433 million (cash primarily held at HGI and HGI Funding LLC), which supports its business strategy and growth of existing businesses.
“Proof of the compelling value proposition of our investment model can be seen in the strong performance of our Insurance and Financial Services group, including the continued success of FGL’s new fixed indexed annuity Prosperity Elite SM product. We also launched an innovative new fixed indexed universal life insurance product that will further strengthen FGL’s life portfolio.“Spectrum Brands – our Consumer Products business – also performed well, delivering solid operating income and Adjusted EBITDA growth. Spectrum Brands’ recently announced acquisition of Stanley Black & Decker’s Hardware & Home Improvement Group will further enhance revenues and cash flows, and add to its powerful group of consumer brands. “Finally, we are excited about the new joint venture with EXCO Resources, announced earlier this month, that will establish and anchor our new Energy operating business. This transaction will add a long-life, proven conventional oil and gas business with strong cash flows. “Overall cash flows from our operating subsidiaries – combined with expected cash flows from the new joint venture with EXCO – should exceed $100 million next fiscal year, which would more than cover HGI’s existing annual interest and dividend payments.” Detail on Fiscal 2012 Results: HGI's consolidated revenues for Fiscal 2012 were $4.48 billion, compared to $3.48 billion for Fiscal 2011. Revenues for Consumer Products, which reflect the Spectrum Brands business, were $3.25 billion in Fiscal 2012 compared to $3.19 billion last year, an increase of 2% (or 4% excluding negative foreign exchange impact). The Insurance and Financial Services group contributed $1.2 billion to HGI’s revenues in Fiscal 2012 compared to $291 million in Fiscal 2011. Insurance and Financial Services group results reflect strong operational performance and the benefit of a full year of operations of FGL, which was acquired in April 2011. HGI’s consolidated operating income was $409 million for Fiscal 2012 compared to operating income of $164 million in Fiscal 2011. HGI reported consolidated net income attributable to common and participating preferred stockholders of $30 million, or $0.15 per common share attributable to controlling interest, in Fiscal 2012, compared to $22 million, or $0.11 per common share attributable to controlling interest, in Fiscal 2011.
HGI’s Fiscal 2012 results include an income tax benefit of $85 million, reflecting the net release of $198 million of valuation allowance by FGL, which is based on FGL’s assessment of the amount of FGL’s deferred tax assets that are more-likely-than-not realizable, and a $41 million gain resulting from a reduction in the contingent purchase price of FGL. These favorable items were partially offset by the $157 million increase in the fair market value of the equity conversion feature of HGI’s preferred stock which results in a charge to earnings.HGI continued to have a strong financial position to support its business strategy. At September 30, 2012, HGI had corporate cash and short-term investments of approximately $433 million. The non-cash accretion rate on HGI’s preferred stock is determined based on the value of HGI’s net assets (the “Preferred Stock NAV”) as calculated in accordance with the terms of the Certificates of Designation of HGI’s preferred stock. The non-cash accretion rate on HGI’s preferred stock reduced from 2% for the third and fourth fiscal quarters to 0% commencing in the first fiscal quarter of 2013 due to an increase in Preferred Stock NAV. The accretion rate is calculated as of September 30 and March 31 of each year, and is set for six months after the date of calculation. The Preferred Stock NAV as of September 30, 2012, calculated in accordance with the Certificates of Designation, was approximately $1.46 billion. This calculation will result in a quarterly non-cash accretion at an annualized rate of 0% for the first two quarters of Fiscal 2013, although it could increase to 2% or 4% in subsequent periods based upon changes in the Preferred Stock NAV. Consumer Products: Consumer Products operating income increased to $302 million in Fiscal 2012 from $228 million in Fiscal 2011, representing an increase of 32% driven primarily by higher sales and efficiency gains. Consumer Products delivered record Adjusted EBITDA of $485 million, up 6% year-on-year (or 10% excluding the negative impact of foreign exchange). Adjusted EBITDA is a non-U.S. GAAP measure that excludes interest, income tax expense, restructuring and related charges, acquisition and integration related charges, intangible asset impairment and depreciation and amortization expenses - see “Non-U.S. GAAP Measures” and Table 3 for a reconciliation of Adjusted EBITDA to the Consumer Product segment’s operating income.
Net sales increased $65 million, or 2%, to $3,252 million in Fiscal 2012 from $3,187 million in Fiscal 2011. Excluding negative foreign exchange impacts of $73 million, net sales increased $138 million, or 4%. The pet supplies, home and garden control products, electric shaving and grooming products, and electric personal care products all reported higher revenues in the full year compared to the previous year, with the strongest growth in the higher margin pet supplies and home and garden product lines, which reported year-on-year sales increases of 6% and 9% respectively, helped by gains due to the FURminator and Black Flag acquisitions.Consumer Products gross profit, representing net sales minus cost of goods sold, for Fiscal 2012 was $1,115 million compared to $1,129 million during Fiscal 2011, representing a $14 million decrease. Gross profit margin, representing gross profit as a percentage of net sales, for Fiscal 2012 decreased to 34% from 35% in Fiscal 2011. The decrease in gross profit and gross profit margin for Fiscal 2012 was driven by $36 million of negative foreign exchange impacts, a $17 million increase in commodity prices and higher costs for sourced goods, primarily from Asia, and a $12 million increase in costs due to changes in product mix. These factors contributing to the decline in gross profit were tempered by increased organic sales which contributed $31 million of gross profit and Fiscal 2012 acquisitions which contributed $23 million of gross profit. For more information on HGI’s Consumer Products segment, interested parties should read Spectrum Brands’ announcements and public filings, including Spectrum Brands’ fourth quarter earnings announcement, by visiting Spectrum Brands’ website: www.spectrumbrands.com. Insurance and Financial Services: Insurance fixed indexed annuities (“FIA”) product sales grew 152% from Fiscal 2011 to $1.6 billion on market share gains by Prosperity Elite SM indexed annuities, solidifying FGL’s position as a top ten writer of FIAs, and bringing total FIA sales in the first nine months of calendar 2012 to over $1.2 billion. Full year fiscal 2011 FIA sales include $327 million in sales for the six-month period prior to HGI’s acquisition of FGL. Policy surrenders were lower than expected as a result of strong renewals of maturing blocks of multi-year rate guaranteed annuities policies and lower fixed index annuity surrenders as a result of favorable index credits resulting from strong equity market conditions. FGL has approximately $17.8 billion of cash and invested assets under management as of September 30, 2012 compared to $16.6 billion as of September 30, 2011. In the first full fiscal year of HGI ownership, the Insurance segment reported operating income of $164 million for Fiscal 2012 driven by $132 million realized investment gains net of insurance related intangibles amortization. The realized investment gains were a result of strategic portfolio re-positioning trades to shorten the overall portfolio duration in anticipation of rising interest rates. Additionally, since September 30, 2011, FGL moved $12.5 billion of assets to in-house management, which reduced external asset management fees by $4 million.
As of September 30, 2012, FGL’s continued profitability since its acquisition has resulted in FGL management changing its view with respect to its judgment regarding the realization of certain deferred tax assets in future years. As a result of the change in judgment, FGL recorded a $198 million tax benefit due to a net release of its valuation allowance for Fiscal 2012, of which $186 million was in the fourth quarter.Adjusted operating income was $62 million (pre-tax) for Fiscal 2012. Adjusted operating income is a non-U.S. GAAP insurance industry measure that eliminates the impact of realized investment gains (losses), the effect of interest rate changes on the FIA embedded derivative liability, and the effects of acquisition-related reinsurance transactions – see “Non-U.S. GAAP Measures” and Table 4 for a reconciliation of adjusted operating income to the Insurance segment’s operating income. As of September, 30, 2012, the HGI’s Insurance segment had a net U.S. GAAP book value of $1.2 billion (including AOCI of $434 million), almost double the book value of $667 million at the end of Fiscal 2011. As of September 30, 2012, the Insurance segment’s available for sale investment portfolio had net unrealized gains on a U.S. GAAP basis of $1.1 billion compared to net unrealized gains of $1.2 billion on a statutory basis. FGL's investment portfolio continues to be conservatively positioned, as it holds cash in excess of $1.0 billion, has shortened portfolio duration, and remains well matched against its liability profile. Recent Business Highlights: Following the end of Fiscal 2012, HGI made two significant announcements: On November 5, 2012, HGI announced a joint venture with EXCO Resources, Inc. (“EXCO”; NYSE: XCO) to create a private oil and gas limited partnership (the “Partnership”) that will purchase and operate EXCO’s producing U.S. conventional oil and gas assets for a total consideration of $725 million. The transaction further diversifies HGI by establishing a new Energy operating business to complement its Consumer Products and Insurance and Financial Services businesses. Following the closing of the transaction, which is expected to occur in early calendar-year 2013, HGI expects dividends from all subsidiaries to exceed $100 million annually and to surpass HGI's existing interest and dividend payments. The full press release announcing the transaction can be found at the Investor Relations section of HGI’s website at www.harbingergroupinc.com. On October 9, 2012, HGI’s Spectrum Brands operating subsidiary announced that it had signed a definitive agreement to acquire the Hardware & Home Improvement Group (“HHI”) of Stanley Black & Decker, Inc. (NYSE: SWK) for $1.4 billion in cash. The transaction will add a leading maker of residential locksets, residential builders' hardware and faucets with #1 positions in key North American markets and a portfolio of renowned brands to Spectrum Brands. It is expected that the transaction will increase Spectrum Brands’ top-line growth and margins and be significantly and immediately accretive to Spectrum Brands’ earnings per share, EBITDA and free cash flow. The transaction, which includes certain assets of Tong Lung Metal Industry Co. Ltd. (“Tong Lung”), a Taiwanese manufacturer of residential and commercial locksets, is expected to close in two stages: The financing and the acquisition of HHI are expected to close during Spectrum Brands’ first quarter of fiscal 2013 ending December 31, 2012. The acquisition of the Tong Lung assets is expected to occur during Spectrum Brands’ second quarter of fiscal 2013. Additional detail on the transaction can be found on Spectrum Brands’ website: www.spectrumbrands.com. Fourth Quarter 2012 Highlights:
- Total revenues for the fourth quarter of Fiscal 2012 were $1.2 billion, compared to $889 million in the same period last year, an increase of 35%.
- Net income attributable to common and participating preferred stockholders increased to $159 million, or $0.79 per common share attributable to controlling interest, compared to a net loss of $107 million, or ($0.77) per common share attributable to controlling interest, in the same quarter Fiscal 2011.
- Consumer Products segment recorded record net sales of $833 million in the fourth quarter of Fiscal 2012, compared to $827 million last year.
- Consumer Products segment operating income more than doubled to $68 million versus $33 million in the prior year driven primarily by the non-recurrence of asset impairment charges. Adjusted EBITDA increased 11% versus the prior year on higher sales, synergy benefits and cost reduction initiatives.
- Insurance segment reported operating income of $72 million for the fourth quarter of Fiscal 2012, compared to an operating loss of $68 million in the same period of Fiscal 2011. Adjusted operating income was $19 million (pre-tax) for the fourth quarter of Fiscal 2012, compared to $20 million for the same period last year. The $1 million decrease is primarily due to holding a higher level of excess cash in 2012.
- Insurance FIA product sales grew 55% from the fourth quarter of Fiscal 2011 to $260 million on market share gains by Prosperity EliteSM indexed annuities.
Non-U.S. GAAP MeasuresManagement 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 (“Adjusted 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 increases 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.
|HARBINGER GROUP INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands)|
|September 30, 2012||September 30, 2011|
|Consumer Products and Other:|
|Cash and cash equivalents||$||408,889||$||321,352|
|Prepaid expenses and other current assets||86,272||143,654|
|Total current assets||1,544,039||1,644,557|
|Deferred charges and other assets||82,141||97,324|
|Insurance and Financial Services:|
|Fixed maturities, available-for-sale, at fair value||16,088,913||15,367,474|
|Equity securities, available-for-sale, at fair value||248,087||287,043|
|Asset-backed loans and other invested assets||198,868||44,279|
|Cash and cash equivalents||1,061,822||816,007|
|Accrued investment income||191,577||212,848|
|Deferred tax assets||279,636||207,729|
|LIABILITIES AND EQUITY|
|Consumer Products and Other:|
|Current portion of long-term debt||$||16,414||$||16,090|
|Accrued and other current liabilities||336,908||317,629|
|Total current liabilities||679,265||662,354|
|Equity conversion feature of preferred stock||231,950||75,350|
|Employee benefit obligations||95,113||89,857|
|Deferred tax liabilities||382,390||338,679|
|Insurance and Financial Services:|
|Future policy benefits||3,614,788||3,598,208|
|Liability for policy and contract claims||91,082||56,650|
|Commitments and contingencies|
|Redeemable preferred stock||319,225||292,437|
|Harbinger Group Inc. stockholders' equity:|
|Additional paid-in capital||861,191||872,683|
|Accumulated other comprehensive income||413,172||149,448|
|Total Harbinger Group Inc. stockholders' equity||1,177,597||895,441|
|Total permanent equity||1,598,973||1,373,139|
|Total liabilities and equity||$||25,200,491||$||23,590,888|
|HARBINGER GROUP INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)|
|Three Month Period Ended September 30,||Year Ending September 30,|
|Consumer Products and Other:|
|Insurance and Financial Services:|
|Net investment income||183,676||192,955||722,733||369,840|
|Net investment gains (losses)||155,384||(168,119)||410,000||(166,891)|
|Insurance and investment product fees and other||12,090||22,491||40,251||48,915|
|Operating costs and expenses:|
|Consumer Products and Other:|
|Cost of goods sold||552,651||546,833||2,136,757||2,058,049|
|Selling, general and administrative expenses||232,569||256,648||870,755||947,140|
|Insurance and Financial Services:|
|Benefits and other changes in policy reserves||217,670||117,673||777,372||247,632|
|Acquisition and operating expenses, net of deferrals||24,922||43,795||125,685||72,390|
|Amortization of intangibles||48,677||(32,455)||160,656||(11,115)|
|Total operating costs and expenses||1,076,489||932,494||4,071,225||3,314,096|
|(Increase) decrease in fair value of equity conversion feature of preferred stock||(32,590)||-||(156,600)||27,910|
|Bargain purchase gain from business acquisition||-||-||-||158,341|
|Gain on contingent purchase price reduction||-||-||41,000||-|
|Other income (expense), net||8,474||(21,881)||(17,473)||(42,743)|
|Income (loss) before income taxes||39,633||(122,445)||25,386||57,934|
|Income tax (benefit) expense||(135,887)||(13,351)||(85,282)||50,555|
|Net income (loss)||175,520||(109,094)||110,668||7,379|
|Less: Net income (loss) attributable to noncontrolling interest||2,347||(15,869)||21,112||(34,680)|
|Net income (loss) attributable to controlling interest||173,173||(93,225)||89,556||42,059|
|Less: Preferred stock dividends and accretion||14,082||13,870||59,641||19,833|
|Net income (loss) attributable to common and|
|participating preferred stockholders||$||159,091||$||(107,095)||$||29,915||$||22,226|
|Net income (loss) per common share attributable|
|to controlling interest:|
|Reconciliation of Adjusted EBITDA of Consumer Products segment to U.S. GAAP operating income (in millions).|
|Three Months Ended September 30,||Year Ended September 30,|
|Adjusted EBITDA of Consumer Products segment||$||126||$||114||$||485||$||457|
|Reconciliation to reported operating income:|
|Reported operating income - consumer products segment||$||68||$||33||$||302||$||228|
|Add: Other income (expense) not included above||1||(1)||(1)||(3)|
|Intangible asset impairment||-||32||-||32|
|Restructuring and related charges||3||11||19||29|
|Acquisition and integration related charges||11||6||31||37|
|Depreciation and amortization, net of accelerated depreciation||43||33||134||134|
|Adjusted EBITDA - consumer products segment||$||126||$||114||$||485||$||457|
|Reconciliation of adjusted operating income (pre-tax) of Insurance segment to U.S. GAAP operating income (loss) (in millions).|
|Three Months Ended September 30,||Year Ended September 30,|
|Adjusted operating income of Insurance segment (pre-tax)||$||19||$||20||$||62||$||48|
|Reconciliation to reported operating income (loss):|
|Reported operating income (loss) - insurance segment||$||72||$||(68)||$||164||$||(18)|
|Effect of investment gains, net of offsets||(60)||11||(132)||(1)|
|Effect of change in FIA embedded derivative discount rate, net of offsets||7||57||18||43|
|Effects of acquisition-related reinsurance||-||20||12||24|
|Adjusted operating income - pre-tax||$||19||$||20||$||62||$||48|