Spectrum Brands Holdings, Inc. - Quarter Report: 2011 April (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-4219

Harbinger Group Inc.

(Exact name of registrant as specified in its charter)

Delaware		74-1339132
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
450 Park Avenue, 27th Floor		10022
New York, NY		(Zip Code)
(Address of principal executive offices)

(212) 906-8555
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ or No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o or No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o or No þ

There were 139,201,939 shares of the registrant’s common stock outstanding as of May 11, 2011.

 

 

HARBINGER GROUP INC.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of April 3, 2011 and September 30, 2010			3
Condensed Consolidated Statements of Operations for the Three and Six Month Periods Ended April 3, 2011 and April 4, 2010			4
Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended April 3, 2011 and April 4, 2010			5
Notes to Condensed Consolidated Financial Statements			6
(1) Basis of Presentation			6
(2) Comprehensive Loss			7
(3) Derivative Financial Instruments			7
(4) Fair Value of Financial Instruments			10
(5) Goodwill and Intangibles			11
(6) Debt			12
(7) Defined Benefit Plans			13
(8) Stock Compensation			15
(9) Income Taxes			16
(10) Net Loss Per Common Share			17
(11) Commitments and Contingencies			17
(12) Acquisitions			19
(13) Restructuring and Related Charges			20
(14) Other Required Disclosures			21
(15) Related Party Transactions			23
(16) Subsequent Events			24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures about Market Risk			36
Item 4. Controls and Procedures			37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			42
Item 1A. Risk Factors			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			82
Item 3. Defaults Upon Senior Securities			82
Item 4. (Removed and Reserved)			82
Item 5. Other Information			82
Item 6. Exhibits			83
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I: FINANCIAL INFORMATION

Item 1.		Financial Statements

HARBINGER GROUP INC. AND SUBSIDIARIES

		April 3, 2011				September 30, 2010
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	469,323			$	256,831
Short-term investments			67,928				53,965
Receivables, net			413,702				406,447
Inventories, net			561,043				530,342
Prepaid expenses and other current assets			86,546				94,078
Total current assets			1,598,542				1,341,663
Properties, net			202,043				201,309
Goodwill			617,724				600,055
Intangibles, net			1,757,330				1,769,360
Deferred charges and other assets			102,044				103,808
Total assets		$	4,277,683			$	4,016,195
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt		$	31,841			$	20,710
Accounts payable			253,585				333,683
Accrued and other current liabilities			292,932				313,617
Total current liabilities			578,358				668,010
Long-term debt			2,138,604				1,723,057
Employee benefit obligations			97,891				97,946
Deferred income taxes			304,430				277,843
Other liabilities			64,437				71,512
Total liabilities			3,183,720				2,838,368
Commitments and contingencies
Harbinger Group Inc. stockholders’ equity:
Common stock			1,392				1,392
Additional paid-in capital			863,176				855,767
Accumulated deficit			(232,329	)			(150,309	)
Accumulated other comprehensive income (loss)			4,550				(5,195	)
Total Harbinger Group Inc. stockholders’ equity			636,789				701,655
Noncontrolling interest			457,174				476,172
Total equity			1,093,963				1,177,827
Total liabilities and equity		$	4,277,683			$	4,016,195

See accompanying notes to condensed consolidated financial statements.

HARBINGER GROUP INC. AND SUBSIDIARIES

		Three Month Period Ended								Six Month Period Ended
		April 3, 2011				April 4, 2010				April 3, 2011				April 4, 2010
		(Unaudited)								(Unaudited)
Net sales		$	693,885			$	532,586			$	1,554,952			$	1,124,526
Cost of goods sold			438,446				323,006				1,000,274				730,484
Gross profit			255,439				209,580				554,678				394,042
Selling, general and administrative expenses			233,010				163,809				467,554				329,512
Operating income			22,429				45,771				87,124				64,530
Interest expense			82,690				48,410				140,747				97,892
Other (income) expense, net			(616	)			6,338				37				6,984
Loss from continuing operations before reorganization items and income taxes			(59,645	)			(8,977	)			(53,660	)			(40,346	)
Reorganization items expense, net			—				—				—				3,646
Loss from continuing operations before income taxes			(59,645	)			(8,977	)			(53,660	)			(43,992	)
Provision for income taxes			25,140				10,057				60,186				32,556
Loss from continuing operations			(84,785	)			(19,034	)			(113,846	)			(76,548	)
Loss from discontinued operations, net of tax			—				—				—				(2,735	)
Net loss			(84,785	)			(19,034	)			(113,846	)			(79,283	)
Less: Net loss attributable to noncontrolling interest			22,835				—				31,826				—
Net loss attributable to controlling interest		$	(61,950	)		$	(19,034	)		$	(82,020	)		$	(79,283	)
Net loss per common share — basic and diluted:
Loss from continuing operations		$	(0.45	)		$	(0.15	)		$	(0.59	)		$	(0.59	)
Loss from discontinued operations			—				—				—				(0.02	)
Net loss		$	(0.45	)		$	(0.15	)		$	(0.59	)		$	(0.61	)
Weighted average common shares outstanding — basic and diluted			139,202				129,600				139,200				129,600
Amounts attributable to controlling interest:
Loss from continuing operations		$	(61,950	)		$	(19,034	)		$	(82,020	)		$	(76,548	)
Loss from discontinued operations			—				—				—				(2,735	)
Net loss		$	(61,950	)		$	(19,034	)		$	(82,020	)		$	(79,283	)

See accompanying notes to condensed consolidated financial statements.

HARBINGER GROUP INC. AND SUBSIDIARIES

		Six Month Period Ended
		April 3, 2011				April 4, 2010
		(Unaudited)
Cash flows from operating activities:
Net loss		$	(113,846	)		$	(79,283	)
Loss from discontinued operations			—				(2,735	)
Loss from continuing operations			(113,846	)			(76,548	)
Adjustments to reconcile loss from continuing operations to net cash used in continuing operating activities:
Depreciation of properties			23,356				25,244
Amortization of intangibles			28,634				20,864
Stock-based compensation			14,346				6,393
Amortization of debt issuance costs			7,232				1,839
Amortization of debt discount			3,291				12,246
Write off of debt issuance costs on refinanced debt			15,420				—
Write off of unamortized discount on refinanced debt			8,950				—
Deferred income taxes			58,172				23,480
Administrative related reorganization items			—				3,646
Payments for administrative related reorganization items			—				(45,782	)
Non-cash increase to cost of goods sold due to fresh-start reporting inventory valuation			—				34,494
Non-cash interest expense on 12% Notes			—				13,383
Other non-cash adjustments			5,630				7,474
Changes in operating assets and liabilities:
Receivables			(6,508	)			(3,416	)
Inventories			(30,320	)			(35,896	)
Prepaid expenses and other current assets			(6,036	)			1,831
Accounts payable			(80,298	)			(15,769	)
Accrued and other current liabilities			(52,161	)			(71,831	)
Other			(9,754	)			26,634
Net cash used in continuing operating activities			(133,892	)			(71,714	)
Net cash used in discontinued operating activities			(259	)			(9,290	)
Net cash used in operating activities			(134,151	)			(81,004	)
Cash flows from investing activities:
Purchases of investments			(51,918	)			—
Maturities of investments			37,955				—
Capital expenditures			(18,728	)			(10,843	)
Business acquisition, net of cash acquired			(10,278	)			—
Proceeds from sales of assets			7,128				208
Other investing activities, net			(1,530	)			—
Net cash used in investing activities			(37,371	)			(10,635	)
Cash flows from financing activities:
Proceeds from issuance of senior secured notes			345,055				—
Proceeds from revolving credit facility, net			118,000				38,867
Proceeds from other debt financing			22,496				27,820
Term loan repayments, net			(71,700	)			—
Other debt repayments			(367	)			(8,096	)
Debt issuance costs			(20,266	)			(2,950	)
Term loan prepayment penalties			(6,800	)			—
Other financing activities, net			(1,508	)			204
Net cash provided by financing activities			384,910				55,845
Effect of exchange rate changes on cash and cash equivalents			(896	)			(880	)
Effect of exchange rate changes on cash and cash equivalents due to Venezuela hyperinflation			—				(5,640	)
Net increase (decrease) in cash and cash equivalents			212,492				(42,314	)
Cash and cash equivalents at beginning of period			256,831				97,800
Cash and cash equivalents at end of period		$	469,323			$	55,486

See accompanying notes to condensed consolidated financial statements.

HARBINGER GROUP INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except per share figures)

Note 1. Basis of Presentation

On January 7, 2011, Harbinger Group Inc. (“HGI” and, prior to June 16, 2010, its accounting predecessor as described below, collectively with their respective subsidiaries, the “Company”) completed the acquisition of a controlling financial interest (the “Spectrum Brands Acquisition”) in Spectrum Brands Holdings, Inc. (“Spectrum Brands”) under the terms of a contribution and exchange agreement (the “Exchange Agreement”) with Harbinger Capital Partners Master Fund I, Ltd. (the “Master Fund”), Harbinger Capital Partners Special Situations Fund, L.P. and Global Opportunities Breakaway Ltd. (collectively, the “Principal Stockholders”). The Principal Stockholders contributed approximately 54.5% of the outstanding Spectrum Brands common stock to the Company and, in exchange for such contribution, the Company issued to the Principal Stockholders 119,909,829 shares of its common stock. Subsequent to the Spectrum Brands Acquisition, the Principal Stockholders own approximately 93.3% of the Company’s outstanding common stock and the Principal Stockholders directly own approximately 12.8% of the outstanding Spectrum Brands common stock. Spectrum Brands is a diversified global branded consumer products company which, as of April 3, 2011, represents the Company’s sole business segment.

Spectrum Brands was formed in connection with the combination (the “SB/RH Merger”) of Spectrum Brands, Inc. (“SBI”), a global branded consumer products company, and Russell Hobbs, Inc. (“Russell Hobbs”), a global branded small appliance company. The SB/RH Merger was consummated on June 16, 2010. As a result of the SB/RH Merger, both SBI and Russell Hobbs are wholly-owned subsidiaries of Spectrum Brands and Russell Hobbs is a wholly-owned subsidiary of SBI. Spectrum Brands issued an approximately 65% controlling financial interest to the Principal Stockholders and an approximately 35% noncontrolling financial interest to other stockholders (other than the Principal Stockholders) in the SB/RH Merger. Prior to the SB/RH Merger, the Principal Stockholders owned approximately 40% and 100% of the outstanding common stock of SBI and Russell Hobbs, respectively. Spectrum Brands trades on the New York Stock Exchange (“NYSE”) under the symbol “SPB.”

Immediately prior to the Spectrum Brands Acquisition, the Principal Stockholders held a controlling financial interest in both HGI and Spectrum Brands. As a result, the Spectrum Brands Acquisition is considered a transaction between entities under common control under Accounting Standards Codification (“ASC”) Topic 805 — “Business Combinations,” and is accounted for similar to the pooling of interest method. In accordance with the guidance in ASC Topic 805, the assets and liabilities transferred between entities under common control are recorded by the receiving entity based on their carrying amounts (or at the historical cost basis of the parent, if these amounts differ). Although HGI was the issuer of shares in the Spectrum Brands Acquisition, during the historical periods presented Spectrum Brands was an operating business and HGI was not. Therefore, Spectrum Brands has been reflected as the predecessor and receiving entity in the Company’s financial statements to provide a more meaningful presentation of the transaction to the Company’s stockholders. Accordingly, the Company’s financial statements have been retrospectively adjusted to reflect as the Company’s historical financial statements, those of Spectrum Brands and SBI, and HGI’s assets and liabilities have been recorded at the Principal Stockholders’ basis as of the date that common control was first established (June 16, 2010). As SBI was the accounting acquirer in the SB/RH Merger, the financial statements of SBI are included as the Company’s predecessor entity for periods preceding the SB/RH Merger.

In connection with the Spectrum Brands Acquisition, the Company changed its fiscal year end from December 31 to September 30 to conform to the fiscal year end of Spectrum Brands. As a result of this change in fiscal year end, the Company’s quarterly reporting periods for fiscal year 2011, subsequent to the Spectrum Brands Acquisition, end on April 3, 2011 and July 3, 2011.

The accompanying unaudited Condensed Consolidated Financial Statements of the Company (which present SBI as the accounting predecessor prior to June 16, 2010) 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 footnote 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 (“US GAAP”), have been condensed or omitted pursuant to such rules and regulations. The year-end unaudited Condensed Consolidated Balance Sheet as of September 30, 2010 reflects the combination of HGI with Spectrum Brands retrospective to June 16, 2010, as discussed above and does not include all disclosures required by US GAAP. These interim financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto of Spectrum Brands and HGI, both of which are included in the Company’s Prospectus filed with the SEC on May 9, 2011. The results of operations for the six months ended April 3, 2011 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending September 30, 2011.

Note 2. Comprehensive Loss

Comprehensive loss and the components of other comprehensive loss, net of tax, for the three and six month periods ended April 3, 2011 and April 4, 2010 are as follows:

		Three Months								Six Months
		2011				2010				2011				2010
Net loss		$	(84,785	)		$	(19,034	)		$	(113,846	)		$	(79,283	)
Other comprehensive income (loss):
Foreign currency translation			23,944				(5,321	)			19,870				(6,436	)
Valuation allowance adjustments			433				(2,022	)			1,076				(3,121	)
Pension liability adjustments			—				(52	)			—				(52	)
Net unrealized (loss) on derivative instruments			(7,244	)			(2,194	)			(3,065	)			(3,398	)
Net change to derive comprehensive loss for the period			17,133				(9,589	)			17,881				(13,007	)
Comprehensive loss			(67,652	)			(28,623	)			(95,965	)			(92,290	)
Less: Comprehensive loss (income) attributable to the noncontrolling interest:
Net loss			22,835				—				31,826				—
Other comprehensive loss (income)			(7,796	)			—				(8,136	)			—
			15,039				—				23,690				—
Comprehensive loss attributable to the controlling interest		$	(52,613	)		$	(28,623	)		$	(72,275	)		$	(92,290	)

Net exchange gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries are accumulated, net of taxes and noncontrolling interest, in the “Accumulated other comprehensive income (loss)” (“AOCI”) section of HGI’s stockholders’ equity. Also included are the effects of exchange rate changes on intercompany balances of a long-term nature and transactions designated as hedges of net foreign investments.

The changes in accumulated foreign currency translation for the three and six month periods ended April 3, 2011 and April 4, 2010 were primarily attributable to the impact of translation of the net assets of the Company’s European operations, primarily denominated in Euros and Pounds Sterling.

Note 3. Derivative Financial Instruments

Derivative financial instruments are used by Spectrum Brands principally in the management of its interest rate, foreign currency and raw material price exposures. Spectrum Brands does not hold or issue derivative financial instruments for trading purposes. When hedge accounting is elected at inception, Spectrum Brands formally designates the financial instrument as a hedge of a specific underlying exposure if such criteria are met, and documents both the risk management objectives and strategies for undertaking the hedge. Spectrum Brands formally assesses, both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the forecasted cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the forecasted cash flows of the underlying exposures being hedged. Any ineffective portion of a financial instrument’s change in fair value is immediately recognized in earnings. For derivatives that are not designated as cash flow hedges, or do not qualify for hedge accounting treatment, the change in the fair value is also immediately recognized in earnings.

The fair value of outstanding derivative contracts recorded in the accompanying Condensed Consolidated Balance Sheets were as follows:

Asset Derivatives		Classification		April 3, 2011				September 30, 2010
Derivatives designated as hedging instruments:
Commodity contracts		Receivables		$	2,567			$	2,371
Commodity contracts		Deferred charges and other assets			1,600				1,543
Foreign exchange contracts		Receivables			807				20
Foreign exchange contracts		Deferred charges and other assets			41				55
Total asset derivatives designated as hedging instruments					5,015				3,989
Derivatives not designated as hedging instruments:
Foreign exchange contracts		Receivables			18				—
Total asset derivatives				$	5,033			$	3,989

Liability Derivatives		Classification		April 3, 2011				September 30, 2010
Derivatives designated as hedging instruments:
Interest rate contracts		Accounts payable		$	3,701			$	3,734
Interest rate contracts		Accrued and other current liabilities			862				861
Interest rate contracts		Other liabilities			—				2,032
Commodity contracts		Accounts payable			155				—
Foreign exchange contracts		Accounts payable			12,538				6,544
Foreign exchange contracts		Other liabilities			2,100				1,057
Total liability derivatives designated as hedging instruments					19,356				14,228
Derivatives not designated as hedging instruments:
Foreign exchange contracts		Accounts payable			13,697				9,698
Foreign exchange contracts		Other liabilities			21,459				20,887
Total liability derivatives				$	54,512			$	44,813

Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

The following table summarizes the pretax impact of derivative instruments designated as cash flow hedges on the accompanying Condensed Consolidated Statements of Operations for the three and six month periods ended April 3, 2011 and April 4, 2010:

										Amount of Gain (Loss)
		Amount of Gain (Loss)								Reclassified								Amount of Gain (Loss) Recognized in								Location of Gain
		Recognized in AOCI on								from AOCI into Income								Income on Derivatives (Ineffective Portion								(Loss)
Derivatives in Cash Flow		Derivatives (Effective								(Effective								and Amount Excluded from Effectivess								Recognized in
Hedging Relationships		Portion)								Portion)								Testing)								Income on
Three Months		2011				2010				2011				2010				2011				2010				Derivatives
Comodity contracts		$	(150	)		$	(1,210	)		$	784			$	620			$	(6	)		$	70			Cost of goods sold
Interest rate contracts			(67	)			(5,893	)			(839	)			(1,740	)			(148	)			—			Interest expense
Foreign exchange contracts			616				(231	)			(88	)			(92	)			—				—			Net sales
Foreign exchange contracts			(12,732	)			2,466				(1,967	)			509				—				—			Cost of goods sold
Total		$	(12,333	)		$	(4,868	)		$	(2,110	)		$	(703	)		$	(154	)		$	70
Six Months		2011				2010				2011				2010				2011				2010
Comodity contracts		$	1,873			$	2,446			$	1,334			$	951			$	(5	)		$	141			Cost of goods sold
Interest rate contracts			(60	)			(11,646	)			(1,688	)			(2,978	)			(250	)			—			Interest expense
Foreign exchange contracts			227				(350	)			(207	)			(186	)			—				—			Net sales
Foreign exchange contracts			(10,790	)			2,045				(4,092	)			(219	)			—				—			Cost of goods sold
Total		$	(8,750	)		$	(7,505	)		$	(4,653	)		$	(2,432	)		$	(255	)		$	141

Fair Value Hedges

For derivative instruments that are used to economically hedge the fair value of Spectrum Brands’ third party and intercompany foreign exchange payments, commodity purchases and interest rate payments, the gain (loss) is recognized in earnings in the period of change associated with the derivative contract. During the three and six month periods ended April 3, 2011 and April 4, 2010 Spectrum Brands recognized the following respective gains (losses) on derivative contracts:

																		Location of Gain (Loss)
Derivatives Not Designated		Amount of Gain (Loss) Recognized in																Recognized in Income on
as Hedging Instruments		Income on Derivatives																Derivatives
		Three Months								Six Months
		2011				2010				2011				2010
Commodity contracts		$	—			$	149			$	—			$	191			Cost of goods sold
Foreign exchange contracts			(18,948	)			(459	)			(9,890	)			(2,289	)		Other (income) expense, net
Total		$	(18,948	)		$	(310	)		$	(9,890	)		$	(2,098	)

Additional Disclosures

Cash Flow Hedges

Spectrum Brands uses interest rate swaps to manage its interest rate risk. The swaps are designated as cash flow hedges with the changes in fair value recorded in AOCI and as a derivative hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counter-parties included in accrued liabilities or receivables, respectively, and recognized in earnings as an adjustment to interest expense from the underlying debt to which the swap is designated. At April 3, 2011, Spectrum Brands had a portfolio of U.S. dollar denominated interest rate swaps outstanding, which effectively fix the interest on floating rate debt, (exclusive of lender spreads) as follows: 2.25% for a notional principal amount of $300,000 through December 2011 and 2.29% for a notional principal amount of $300,000 through January 2012. At September 30, 2010, Spectrum Brands had a portfolio of U.S. dollar-denominated interest rate swaps outstanding, which effectively fixed the interest on floating rate debt, (exclusive of lender spreads) as follows: 2.25% for a notional principal amount of $300,000 through December 2011 and 2.29% for a notional principal amount of $300,000 through January 2012 (the “U.S. dollar swaps”). The derivative net loss on these contracts recorded in AOCI at April 3, 2011 was $(908), net of tax benefit of $1,021 and noncontrolling interest of $758. The derivative net loss on the U.S. dollar swaps contracts recorded in AOCI at September 30, 2010 was $(1,458), net of tax benefit of $1,640 and noncontrolling interest of $1,217. At April 3, 2011, the portion of derivative net losses estimated to be reclassified from AOCI into earnings over the next 12 months is $(908), net of tax and noncontrolling interest.

Spectrum Brands periodically enters into forward foreign exchange contracts to hedge the risk from forecasted foreign 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, Canadian Dollars or Japanese Yen. These foreign exchange contracts are cash flow hedges of fluctuating foreign exchange related to sales or product or raw material purchases. Until the sale or purchase is recognized, the fair value of the related hedge is recorded in AOCI and as a derivative hedge asset or liability, as applicable. At the time the sale or purchase is recognized, the fair value of the related hedge is reclassified as an adjustment to “Net sales” or purchase price variance in “Cost of goods sold”. At April 3, 2011 Spectrum Brands had a series of foreign exchange derivative contracts outstanding through September 2012 with a contract value of $314,521. At September 30, 2010, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through June 2012 with a contract value of $299,993. The derivative net loss on these contracts recorded in AOCI at April 3, 2011 was $(5,325), net of tax benefit of $4,021 and noncontrolling interest of $4,445. The derivative net loss on these contracts recorded in AOCI at September 30, 2010 was $(2,900), net of tax benefit of $2,204 and noncontrolling interest of $2,422. At April 3, 2011, the portion of derivative net losses estimated to be reclassified from AOCI into earnings over the next 12 months is $(4,543) net of tax and noncontrolling interest.

Spectrum Brands is exposed to risk from fluctuating prices for raw materials, specifically zinc used in its manufacturing processes. Spectrum Brands hedges a portion of the risk associated with 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 April 3, 2011 Spectrum Brands had a series of such swap contracts outstanding through September 2012 for 11 tons with a contract value of $23,141. At September 30, 2010, Spectrum Brands had a series of such swap contracts outstanding through September 2012 for 15 tons with a contract value of $28,897. The derivative net gain on these contracts recorded in AOCI at April 3, 2011 was $1,420, net of tax expense of $1,390 and noncontrolling interest of $1,186. The derivative net gain on these contracts recorded in AOCI at September 30, 2010 was $1,230, net of tax expense of $1,201 and noncontrolling interest of $1,026. At April 3, 2011, the portion of derivative net gains estimated to be reclassified from AOCI into earnings over the next 12 months is $856, net of tax and noncontrolling interest.

Fair Value Hedges

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, 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 derivative hedge contracts is recorded in earnings as an offset to the change in value of the related liability or asset at each period end. At April 3, 2011 and September 30, 2010, Spectrum Brands had $318,520 and $333,562, respectively, of such foreign exchange derivative notional value contracts outstanding.

Credit Risk

Spectrum Brands is exposed to the default risk of the counterparties with which Spectrum Brands transacts. 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 primarily concentrated with a foreign financial institution counterparty. Spectrum Brands considers these exposures when measuring its credit reserve on its derivative assets, which were $71 and $75 at April 3, 2011 and September 30, 2010, respectively. Additionally, Spectrum Brands does not require collateral or other security to support financial instruments subject to credit risk.

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. At both April 3, 2011 and September 30, 2010, Spectrum Brands had posted cash collateral of $2,363 related to such liability positions. In addition, at both April 3, 2011 and September 30, 2010, Spectrum Brands had posted standby letters of credit of $4,000 related to such liability positions. The cash collateral is included in “Receivables” within the accompanying Condensed Consolidated Balance Sheets.

Note 4. Fair Value of Financial Instruments

The carrying amounts and estimated fair values of the Company’s consolidated financial instruments for which the disclosure of fair values is required were as follows (asset/(liability)):

		April 3, 2011								September 30, 2010
		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
Cash and cash equivalents		$	469,323			$	469,323			$	256,831			$	256,833
Short-term investments (including related interest receivable of $66 and $68)			67,994				67,986				54,033				54,005
Total debt			(2,170,445	)			(2,305,693	)			(1,743,767	)			(1,868,754	)
Derivatives:
Interest rate swap agreements			(4,563	)			(4,563	)			(6,627	)			(6,627	)
Commodity swap and option agreements			4,012				4,012				3,914				3,914
Foreign exchange forward agreements			(48,928	)			(48,928	)			(38,111	)			(38,111	)

The carrying amounts of receivables and accounts payable approximate fair value and, accordingly, they are not presented in the table above. The fair values of cash equivalents and short-term investments, which consist principally of U.S. Treasury instruments classified as held-to-maturity, and the fair values of long-term debt set forth above are generally based on quoted or observed market prices.

The Company’s derivatives are valued using internal models, which are based on market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities (Level 2).

Goodwill, intangible assets and other long-lived assets are also tested annually or if a triggering event occurs that indicates an impairment loss may have been incurred (See Note 5) using fair value measurements with unobservable inputs (Level 3).

See Note 7 with respect to fair value measurements of the Company’s pension plan assets.

Note 5. Goodwill and Intangibles

A summary of the changes in the carrying amounts of goodwill and intangible assets, which relate entirely to Spectrum Brands, is as follows:

						Intangible Assets
		Goodwill				Indefinite Lived				Amortizable				Total
Balance at September 30, 2010		$	600,055			$	857,478			$	911,882			$	1,769,360
Business acquisition (Note 12)			10,029				1,100				—				1,100
Trade name acquisition			—				1,530				—				1,530
Amortization during period			—				—				(28,634	)			(28,634	)
Effect of translation			7,640				7,376				6,598				13,974
Balance at April 3, 2011		$	617,724			$	867,484			$	889,846			$	1,757,330

Intangible assets are recorded at cost or at fair value if acquired in a purchase business combination. Customer relationships and proprietary technology intangibles are amortized, using the straight-line method, over their estimated useful lives of approximately four to 20 years. Excess of cost over fair value of net assets acquired (goodwill) and indefinite lived trade name intangibles are not amortized.

Goodwill and indefinite lived intangible assets are tested for impairment at least annually at Spectrum Brands’ August financial period end, and more frequently if an event or circumstance indicates that an impairment loss may have been incurred between annual impairment tests. As a result of a realignment of reporting units, goodwill and indefinite lived trade name intangibles were tested for impairment as of October 1, 2010. Spectrum Brands concluded that the fair values of its reporting units and indefinite lived trade name intangible assets were in excess of the carrying amounts of those assets and, accordingly, no impairment of goodwill or indefinite lived trade name intangibles was recorded.

Intangible assets subject to amortization include proprietary technology, customer relationships and certain trade names, which are summarized as follows:

		April 3, 2011												September 30, 2010
						Accumulated												Accumulated								Amortizable
		Cost				Amortization				Net				Cost				Amortization				Net				Life
Technology assets		$	67,614			$	10,117			$	57,497			$	67,097			$	6,305			$	60,792			8-17 years
Customer relationships			751,703				59,013				692,690				741,016				35,865				705,151			15-20 years
Trade names			149,700				10,041				139,659				149,689				3,750				145,939			4-12 years
		$	969,017			$	79,171			$	889,846			$	957,802			$	45,920			$	911,882

Amortization expense for the three and six month periods ended April 3, 2011 and April 4, 2010 is as follows:

		Three Months								Six Months
		2011				2010				2011				2010
Technology assets		$	1,649			$	1,547			$	3,297			$	3,092
Customer relationships			9,526				8,918				19,058				17,709
Trade names			3,140				32				6,279				63
		$	14,315			$	10,497			$	28,634			$	20,864

The Company estimates annual amortization expense for the next five fiscal years will approximate $55,630 per year.

Note 6. Debt

The Company’s consolidated debt consists of the following:

		April 3, 2011								September 30, 2010
		Amount				Rate				Amount				Rate
HGI:
10.625% Senior Secured Notes, due November 15, 2015		$	350,000				10.625	%		$	—				—
Spectrum Brands:
Term loan, refinanced February 1, 2011, currently due June 17, 2016			678,300				5.1	%			750,000				8.1	%
9.5% Senior Secured Notes, due June 15, 2018			750,000				9.5	%			750,000				9.5	%
12% Notes, due August 28, 2019			245,031				12.0	%			245,031				12.0	%
ABL Revolving Credit Facility, currently expiring April 21, 2016			118,000				4.5	%			—				4.1	%
Other notes and obligations			36,623				14.1	%			13,605				10.8	%
Capitalized lease obligations			11,819				5.2	%			11,755				5.2	%
			2,189,773								1,770,391
Original issuance discounts on debt			(19,328	)							(26,624	)
Less current maturities			31,841								20,710
Long-term debt		$	2,138,604							$	1,723,057

HGI

On November 15, 2010, HGI issued $350,000 aggregate principal amount of 10.625% Senior Secured Notes due November 15, 2015 (“10.625% Notes”). The 10.625% Notes were sold only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain persons in offshore transactions in reliance on Regulation S, but have future registration requirements. The 10.625% Notes were issued at a price equal to 98.587% of the principal amount thereof, with an original issue discount (“OID”) aggregating $4,945. Interest on the 10.625% Notes is payable semi-annually, commencing on May 15, 2011 and ending November 15, 2015. The 10.625% Notes are collateralized with a first priority lien on substantially all of the assets directly held by HGI, including stock in its subsidiaries (with the exception of Zap.Com Corporation, but including Spectrum Brands) and HGI’s directly held cash and investment securities.

HGI has the option to redeem the 10.625% Notes prior to May 15, 2013 at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the date of redemption. At any time on or after May 15, 2013, HGI may redeem some or all of the 10.625% Notes at certain fixed redemption prices expressed as percentages of the principal amount, plus accrued and unpaid interest. At any time prior to November 15, 2013, HGI may redeem up to 35% of the original aggregate principal amount of the 10.625% Notes with net cash proceeds received by HGI from certain equity offerings at a price equal to 110.625% of the principal amount of the 10.625% Notes redeemed, plus accrued and unpaid interest, if any, to the date of redemption, provided that redemption occurs within 90 days of the closing date of such equity offering, and at least 65% of the aggregate principal amount of the 10.625% Notes remains outstanding immediately thereafter.

The indenture governing the 10.625% Notes contains covenants limiting, among other things, and subject to certain qualifications and exceptions, the ability of HGI, and, in certain cases, HGI’s subsidiaries, to incur additional indebtedness; create liens; engage in sale-leaseback transactions; pay dividends or make distributions in respect of capital stock; make certain restricted payments; sell assets; engage in certain transactions with affiliates; or consolidate or merge with, or sell substantially all of its assets to, another person. HGI is also required to maintain compliance with certain financial tests, including minimum liquidity and collateral coverage ratios that are based on the fair market value of the collateral, including the shares of Spectrum Brands common stock owned by HGI. At April 3, 2011, the Company was in compliance with all covenants under the 10.625% Notes.

HGI incurred $11,600 of costs in connection with its issuance of the 10.625% Notes. These costs are classified as “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheet as of April 3, 2011 and, along with the OID, are being amortized to interest expense utilizing the effective interest method over the term of the 10.625% Notes.

Spectrum Brands

In connection with the SB/RH Merger, on June 16, 2010, Spectrum Brands (i) entered into a senior secured term loan pursuant to a senior credit agreement (the “Senior Credit Agreement”) consisting of a $750,000 U.S. dollar term loan due June 16, 2016 (the “Term Loan”), (ii) issued $750,000 in aggregate principal amount of 9.5% Senior Secured Notes due June 15, 2018 (the “9.5% Notes”) and (iii) entered into a $300,000 U.S. dollar asset based revolving loan facility due June 16, 2014 (the “ABL Revolving Credit Facility”). The proceeds from such financing were used to repay Spectrum Brands’ then-existing senior term credit facility and Spectrum Brands’ then-existing asset based revolving loan facility, to pay fees and expenses in connection with the refinancing and for general corporate purposes.

On February 1, 2011, Spectrum Brands completed the refinancing of its Term Loan, which, at that time, had an aggregate amount outstanding of $680,000, with a new senior secured term loan facility (the “New Term Loan”, together with the amended ABL Revolving Credit Facility, the “Senior Credit Facilities”) at a lower interest rate. The New Term Loan was issued at par and has a maturity date of June 17, 2016. Subject to certain mandatory prepayment events, the New Term Loan is subject to repayment according to a scheduled amortization, with the final payment of all amounts outstanding, plus accrued and unpaid interest, due at maturity. Among other things, the New Term Loan provides for interest at a rate per annum equal to, at Spectrum Brands’ option, the LIBO rate (adjusted for statutory reserves) subject to a 1.00% floor plus a margin equal to 4.00%, or an alternate base rate plus a margin equal to 3.00%.

The New Term Loan contains financial covenants with respect to debt, including, but not limited to, a maximum leverage ratio and a minimum interest coverage ratio, which covenants, pursuant to their terms, become more restrictive over time. In addition, the New Term Loan contains customary restrictive covenants, including, but not limited to, restrictions on Spectrum Brands’ ability to incur additional indebtedness, create liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures, engage in mergers or acquire or sell assets. Pursuant to a guarantee and collateral agreement, Spectrum Brands’ and its domestic subsidiaries have guaranteed their respective obligations under the New Term Loan and related loan documents and have pledged substantially all of their respective assets to secure such obligations. The New Term Loan also provides for customary events of default, including payment defaults and cross-defaults on other material indebtedness.

In connection with voluntary prepayments of $70,000 under the Term Loan and the refinancing of the remaining $680,000 balance of the Term Loan, during the six month period ended April 3, 2011, Spectrum Brands recorded charges to interest expense aggregating $34,751, consisting of (i) the write off or accelerated amortization of debt issuance costs of $15,420 and $3,581, respectively, (ii) the write off of original issue discount of $8,950 and (iii) prepayment penalties of $6,800. Spectrum Brands incurred $8,648 of fees in connection with the New Term Loan, which are classified as “Deferred charges and other assets” in the accompanying Condensed Consolidated Balance Sheet as of April 3, 2011 and are being amortized to interest expense utilizing the effective interest method over the term of the New Term Loan.

Spectrum Brands is subject to certain limitations under the indenture governing the 12% Notes maturing August 28, 2019 (the “12% Notes”) as a result of the Fixed Charge Coverage Ratio, as defined under that indenture, being below 2:1. Until the test is satisfied, Spectrum Brands and certain of its subsidiaries are limited in their ability to make significant acquisitions or incur significant additional senior credit facility debt beyond the Senior Credit Facilities. Spectrum Brands does not expect its inability to satisfy the Fixed Charge Coverage Ratio test to impair its ability to provide adequate liquidity to meet the short-term and long-term liquidity requirements of its existing businesses, although no assurance can be given in this regard.

As a result of borrowings and payments under the ABL Revolving Credit Facilities at April 3, 2011, Spectrum Brands had aggregate borrowing availability of approximately $81,527, net of lender reserves of $28,568. At April 3, 2011, Spectrum Brands had outstanding letters of credit of $36,121 under the ABL Revolving Credit Facility.

On April 21, 2011, Spectrum Brands completed an amendment of its $300,000 ABL Revolving Credit Facility that extended its maturity date to April 21, 2016 and lowered the interest rate (see Note 16).

Note 7. Defined Benefit Plans

HGI

HGI has a noncontributory defined benefit pension plan (the “HGI Pension Plan”) covering certain former U.S. employees. During 2006, the Pension Plan was frozen which caused all existing participants to become fully vested in their benefits.

Additionally, HGI has an unfunded supplemental pension plan (the “Supplemental Plan”) which provides supplemental retirement payments to certain former senior executives of the Company. The amounts of such payments equal the difference between the amounts received under the HGI Pension Plan and the amounts that would otherwise be received if HGI Pension Plan payments were not reduced as the result of the limitations upon compensation and benefits imposed by Federal law. Effective December 1994, the Supplemental Plan was frozen.

Spectrum Brands

Spectrum Brands has various defined benefit pension plans (“Spectrum Brands Pension Plans”) covering some of its employees in the U.S. and certain employees in other countries, primarily the United Kingdom and Germany. The Spectrum Brands Pension Plans generally provide benefits of stated amounts for each year of service. Spectrum Brands funds its U.S. pension plans in accordance with the requirements of the defined benefit plans and, where applicable, in amounts sufficient to satisfy the minimum funding requirements of applicable laws. Additionally, in compliance with the Spectrum Brands funding policy, annual contributions to non-U.S. defined benefit plans are equal to the actuarial recommendations or statutory requirements in the respective countries.

Spectrum Brands also sponsors or participates in a number of other non-U.S. pension arrangements, including various retirement and termination benefit plans, some of which are covered by local law or coordinated with government-sponsored plans, which are not significant in the aggregate and therefore are not included in the information presented below. Spectrum Brands also has various nonqualified deferred compensation agreements with certain of its employees. Under certain of these agreements, Spectrum Brands has agreed to pay certain amounts annually for the first 15 years subsequent to retirement or to a designated beneficiary upon death. It is management’s intent that life insurance contracts owned by Spectrum Brands will fund these agreements. Under the remaining agreements, Spectrum Brands has agreed to pay such deferred amounts in up to 15 annual installments beginning on a date specified by the employee, subsequent to retirement or disability, or to a designated beneficiary upon death.

Spectrum Brands also provides postretirement life insurance and medical benefits to certain retirees under two separate contributory plans.

Consolidated

The components of consolidated net periodic benefit and deferred compensation benefit costs and contributions made during the periods are as follows:

		Three Months								Six Months
		2011				2010				2011				2010
Service cost		$	817			$	725			$	1,635			$	1,450
Interest cost			2,772				1,813				5,543				3,626
Expected return on assets			(2,216	)			(1,272	)			(4,433	)			(2,544	)
Amortization of prior service cost			—				1				—				3
Recognized net actuarial loss			97				1				194				3
Employee contributions			(129	)			(88	)			(257	)			(177	)
Net periodic pension cost		$	1,341			$	1,180			$	2,682			$	2,361
Contributions made during period		$	1,952			$	1,635			$	3,011			$	2,003

Based on the currently enacted minimum pension plan funding requirements, the Company expects to make contributions during the remaining six months of fiscal 2011 totaling approximately $4,300.

Fair value measurements of the Company’s defined benefit plan assets are as follows:

		April 3,				September 30,
		2011(A)				2010(A)
U.S. Defined Benefit Plan Assets:
Common collective trusts—equity		$	45,002			$	36,723
Common collective trusts—fixed income			18,241				22,067
U.S. Defined Benefit Plan Assets		$	63,243			$	58,790
International Defined Benefit Plan Assets:
Common collective trusts—equity		$	32,408			$	28,090
Common collective trusts—fixed income			10,621				9,725
Insurance contracts—general fund			42,041				40,347
Other			5,101				3,120
International Defined Benefit Plan Assets		$	90,171			$	81,282
Total Defined Benefit Plan Assets		$	153,414			$	140,072

Note 8. Stock Compensation

The Company recognized stock-based compensation expense associated with stock option awards issued by HGI and restricted stock awards and restricted stock units issued by Spectrum Brands. For the three and six month periods ended April 3, 2011, the Company recognized consolidated stock-based compensation expense of $8,703 and $14,346, or $3,102 and $5,120 net of taxes and noncontrolling interest, respectively. For the three and six month periods ended April 4, 2010, the Company recognized $3,197 and $6,393, or $2,078 and $4,155, net of taxes, respectively. The Company includes stock-based compensation in “Selling, general and administrative expenses”.

HGI

Total stock compensation expense associated with stock option awards recognized by HGI during the three and six month periods ended April 3, 2011 was $29 and $59, respectively.

A summary of HGI’s outstanding stock options as of April 3, 2011, and changes during the period, is as follows:

						Weighted
						Average
		Shares				Exercise Price
HGI stock options outstanding at September 30, 2010			509			$	5.62
Granted			—				—
Exercised			(6	)			2.96
Forfeited or expired			—				—
HGI stock options outstanding at April 3, 2011			503				5.65
Exercisable at April 3, 2011			409				5.35
Vested or expected to vest at April 3, 2011			503			$	5.65

Unrecognized compensation cost related to unvested stock options of HGI was approximately $207 as of April 3, 2011.

Spectrum Brands

Total stock compensation expense associated with restricted stock awards and restricted stock units recognized by Spectrum Brands during the three and six month periods ended April 3, 2011 was $8,674, or $3,073 net of taxes and noncontrolling interest, and $14,287, or $5,061 net of taxes and noncontrolling interest, respectively. Total stock compensation expense associated with restricted stock awards recognized by Spectrum Brands during the three and six month periods ended April 4, 2010 was $3,197, or $2,078 net of taxes, and $6,393, or $4,155 net of taxes, respectively.

Spectrum Brands granted approximately 1,580 restricted stock units during the six-month period ended April 3, 2011. Of these grants, 15 restricted stock units are time-based and vest over a one year period and 18 restricted stock units are time-based and vest over a three year period. The remaining 1,547 restricted stock units are performance and time-based with 665 units vesting over a two year period and 882 units vesting over a three year period. The total market value of the restricted stock units on the dates of the grants was approximately $46,034.

Spectrum Brands granted approximately 629 shares of restricted stock awards during the six month period ended April 4, 2010. Of these grants, 18 shares are time-based and vest after a one year period and 611 shares are time-based and vest over a two year period. All vesting dates are subject to the recipient’s continued employment with the Company, except as otherwise permitted by the Spectrum Brands’ board of directors or in certain cases if the employee is terminated without cause. The total market value of the restricted stock awards on the date of grant was approximately $14,555.

The fair value of restricted stock awards and restricted stock units is determined based on the market price of Spectrum Brands’ shares of common stock on the grant date.

A summary of the Spectrum Brands’ non-vested restricted stock awards and restricted stock units as of April 3, 2011, and changes during the period, is as follows:

						Weighted
		Units/				Average Grant
Restricted Stock Awards		Shares				Date Fair Value				Fair Value
Restricted SB Holdings stock awards at September 30, 2010			446			$	23.56			$	10,508
Vested			(310	)			23.12				(7,166	)
Restricted SB Holdings stock awards at April 3, 2011			136			$	24.57			$	3,342

						Weighted
		Units/				Average Grant
Restricted Stock Units		Shares				Date Fair Value				Fair Value
Restricted SB Holdings stock units at September 30, 2010			249			$	28.22			$	7,028
Granted			1,580				29.14				46,034
Forfeited			(10	)			28.80				(288	)
Vested			(65	)			28.83				(1,874	)
Restricted SB Holdings stock units at April 3, 2011			1,754			$	29.02			$	50,900

Unrecognized compensation cost related to unvested restricted stock awards and restricted stock units of Spectrum Brands was approximately $1,130 as of April 3, 2011.

Note 9. Income Taxes

The Company reported a provision for income taxes, despite a pretax loss from continuing operations, in each of the periods presented based on an estimated annual consolidated effective tax rate of (112)% and (74)% for the 2011 and 2010 year-to-date periods, respectively. Such rates differ from the U.S. federal statutory rate of 35% principally due to (i) deferred income tax provision related to the change in book versus tax basis of indefinite lived intangibles, which are amortized for tax purposes but not for book purposes, (ii) pretax losses in the United States and some foreign jurisdictions for which no tax benefit can be recognized due to full valuation allowances that have been provided on the Company’s net operating loss carryforward tax benefits and other deferred tax assets and (iii) pretax income in other jurisdictions that is subject to tax.

The Company files income tax returns in the United States federal jurisdiction and various state, local and foreign jurisdictions and is subject to ongoing examination by the various taxing authorities. The Company’s major taxing jurisdictions are the United States, United Kingdom and Germany. The Company believes its tax reserves are adequate in relation to the potential for additional assessments in each of the jurisdictions in which it is subject to taxation. The Company regularly assesses the likelihood of additional tax assessments in those jurisdictions and, if necessary, adjust its reserves as additional information or events require.

HGI is effectively settled with respect to United States income tax audits for years prior to 2008. With limited exceptions, HGI is no longer subject to state and local income tax audits for years prior to 2007. Spectrum Brands and Russell Hobbs are effectively settled with respect to U.S. income tax audits for years prior to 2006 and 2008, respectively. However, the federal net operating loss carry-forward from their fiscal years ended September 30, 2006 and June 30, 2008, respectively, continues to be subject to Internal Revenue Service examination until the year that such net operating loss carry-forwards are utilized.

The Company recognizes in its consolidated financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. At April 3, 2011 and September 30, 2010, the Company had $11,619 and $13,174, respectively, of unrecognized tax benefits related to uncertain tax positions. The Company also had approximately $6,000 of accrued interest and penalties related to the uncertain tax positions at those dates.

Note 10. Net Loss Per Common Share

“Net loss per common share — basic” is computed by dividing “Net loss attributable to controlling interest” by the weighted average number of common shares outstanding during the respective period. “Net loss per common share — diluted” in each of the periods presented was the same as “Net loss per common share — basic” as the Company reported a net loss and, therefore, the effect of all potentially dilutive securities on the net loss would have been anti-dilutive.

The number of common shares outstanding used in calculating the weighted average thereof reflects: (i) for periods prior to the June 16, 2010 date of the SB/RH Merger, the number of Spectrum Brands common shares outstanding multiplied by the 1:1 Spectrum Brands share exchange ratio used in the SB/RH Merger and the 4.32 HGI share exchange ratio used in the Spectrum Brands Acquisition, (ii) for the period from June 16, 2010 to the January 7, 2011 date of the Spectrum Brands Acquisition, the number of HGI common shares outstanding plus the 119,910 HGI common shares subsequently issued in connection with the Spectrum Brands Acquisition and (iii) for the period subsequent to and including January 7, 2011, the actual number of HGI common shares outstanding.

At April 3, 2011, there were 503 potential common shares issuable upon the exercise of stock options excluded from the calculation of “Net loss per common share — diluted” because the associated exercise prices were greater than the average market price of the Company’s common stock, or because their impact would be anti-dilutive due to the Company’s net loss for the period. Those stock options had a weighted average exercise price of $5.65 per share.

Note 11. Commitments and Contingencies

Legal and Environmental Matters

HGI

In 2004, Utica Mutual Insurance Company (“Utica Mutual”) commenced an action against HGI in the Supreme Court for the County of Oneida, State of New York, seeking reimbursement under a general agreement of indemnity entered into by HGI in the late 1970s. Based upon the discovery to date, Utica Mutual is seeking reimbursement for payments it claims to have made under (1) a worker’s compensation bond and (2) certain reclamation bonds which were issued to certain former subsidiaries and are alleged by Utica Mutual to be covered by the general agreement of indemnity. While the precise amount of Utica Mutual’s claim is unclear, it appears it is claiming approximately $500, including approximately $200 relating to the workers compensation bond and approximately $300 relating to the reclamation bonds.

In 2005, HGI was notified by Weatherford International Inc. (“Weatherford”) of a claim for reimbursement of approximately $200 in connection with the investigation and cleanup of purported environmental contamination at two properties formerly owned by a non-operating subsidiary of HGI. The claim was made under an indemnification provision provided by HGI to Weatherford in a 1995 asset purchase agreement and relates to alleged environmental contamination that purportedly existed on the properties prior to the date of the sale. Weatherford has also advised HGI that Weatherford anticipates that further remediation and cleanup may be required, although Weatherford has not provided any information regarding the cost of any such future clean up. HGI has challenged any responsibility to indemnify Weatherford. HGI believes that it has meritorious defenses to the claim, including that the alleged contamination occurred after the sale of the property, and intends to vigorously defend against it.

HGI is a nominal defendant, and the members of its board of directors are named as defendants in a derivative action filed in December 2010 by Alan R. Kahn in the Delaware Court of Chancery. The plaintiff alleges that the Spectrum Brands Acquisition was financially unfair to HGI and its public stockholders and seeks unspecified damages and the rescission of the transaction. The Company believes the allegations are without merit and intends to vigorously defend this matter.

In addition to the matters described above, HGI is involved in other litigation and claims incidental to its current and prior businesses. These include multiple complaints in Mississippi and Louisiana state courts and in a federal multi-district litigation alleging injury from exposure to asbestos on offshore drilling rigs and shipping vessels formerly owned or operated by HGI’s offshore drilling and bulk-shipping affiliates.

Spectrum Brands

Spectrum Brands has provided for approximately $8,600 in the estimated costs associated with the resolution of claims for environmental remediation activities at some of its current and former manufacturing sites. Spectrum Brands believes that any additional liability 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.

In December 2009, San Francisco Technology, Inc. filed an action in the Federal District Court for the Northern District of California against Spectrum Brands, as well as a number of unaffiliated defendants, claiming that each of the defendants had falsely marked patents on certain of its products in violation of Article 35, Section 292 of the U.S. Code and seeking to have civil fines imposed on each of the defendants for such claimed violations. Spectrum Brands is reviewing the claims but is unable to estimate any possible loss at this time.

Applica Consumer Products, Inc. (“Applica”), a wholly-owned subsidiary of Spectrum Brands, was a defendant in NACCO Industries, Inc. et al. v. Applica Incorporated et al., Case No. C.A. 2541-VCL, which was filed in the Court of Chancery of the State of Delaware in November 2006. The complaints in this action alleged a claim for, among other things, breach of contract and breach of implied covenant of good faith against Applica and a number of tort claims against certain entities affiliated with the Principal Stockholders. The claims against Applica related to the alleged breach of the merger agreement between Applica and NACCO Industries, Inc. (“NACCO”) and one of its affiliates, which agreement was terminated following Applica’s receipt of a superior merger offer from the Principal Stockholders. In February 2011, the parties to the litigation reached a full and final settlement of their disputes. Neither Spectrum Brands, Applica or any other subsidiary of Spectrum Brands was required to make any payments in connection with the settlement.

Applica is a defendant in three asbestos lawsuits in which the plaintiffs have alleged injury as the result of exposure to asbestos in hair dryers distributed by that subsidiary over 20 years ago. Although Applica never manufactured such products, asbestos was used in certain hair dryers distributed by it prior to 1979. Spectrum Brands believes that these actions are without merit, but may be unable to resolve the disputes successfully without incurring significant expenses which Spectrum Brands is unable to estimate at this time. At this time, Spectrum Brands does not believe it has coverage under its insurance policies for the asbestos lawsuits.

Spectrum Brands is a defendant in various other matters of litigation generally arising out of the ordinary course of business.

Consolidated

The Company has aggregate reserves for its legal and environmental matters of approximately $8,900 at April 3, 2011, which reserves relate primarily to the matters described above. However, based on currently available information, including legal defenses available to the Company, and given the aforementioned reserves and related insurance coverage, the Company does not believe that the outcome of these legal and environmental matters will have a material effect on its financial position, results of operations or cash flows.

Guarantees

Throughout its history, the Company has entered into indemnifications in the ordinary course of business with customers, suppliers, service providers, business partners and, in certain instances, when it sold businesses. Additionally, the Company has indemnified its directors and officers who are, or were, serving at the request of the Company in such capacities. Although the specific terms or number of such arrangements is not precisely known due to the extensive history of past operations, costs incurred to settle claims related to these indemnifications have not been material to the Company’s financial statements. The Company has no reason to believe that future costs to settle claims related to its former operations will have a material impact on its financial position, results of operations or cash flows.

Note 12. Acquisitions

Russell Hobbs

On June 16, 2010, Spectrum Brands consummated the SB/RH Merger, pursuant to which SBI became a wholly-owned subsidiary of Spectrum Brands and Russell Hobbs became a wholly owned subsidiary of SBI. The results of Russell Hobbs’ operations since June 16, 2010 are included in the accompanying Condensed Consolidated Statements of Operations for the three and six month periods ended April 3, 2011.

The total purchase price for Russell Hobbs was allocated to the preliminary net tangible and intangible assets based upon their preliminary fair values at June 16, 2010. The excess of the purchase price over the preliminary net tangible assets and intangible assets was recorded as goodwill. The preliminary allocation of the purchase price was based upon a valuation for which the estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet finalized relate to certain legal matters, amounts for income taxes including deferred tax accounts, amounts for uncertain tax positions, and net operating loss carryforwards inclusive of associated limitations, and the final allocation of goodwill. Spectrum Brands expects to continue to obtain information to assist it in determining the fair values of the net assets acquired at the acquisition date during the measurement period. There were no adjustments to the preliminary purchase price allocation for Russell Hobbs during the six month period ended April 3, 2011.

Supplemental Pro Forma Information

The following table reflects the Company’s pro forma results for the three and six month periods ended April 3, 2011 and April 4, 2010, had the results of Russell Hobbs been included for all periods beginning after September 30, 2009.

		Three Months								Six Months
		2011				2010				2011				2010
Net Sales:
Reported net sales		$	693,885			$	532,586			$	1,554,952			$	1,124,526
Russell Hobbs adjustment			—				157,831				—				406,520
Pro forma net sales		$	693,885			$	690,417			$	1,554,952			$	1,531,046
Loss from continuing operations:
Reported loss from continuing operations		$	(84,785	)		$	(19,034	)		$	(113,846	)		$	(76,548	)
Russell Hobbs adjustment			—				(414	)			—				18,959
Pro forma loss from continuing operations		$	(84,785	)		$	(19,448	)		$	(113,846	)		$	(57,589	)
Basic and diluted loss per share from continuing operations (A):
Reported basic and diluted loss per share from continuing operations		$	(0.45	)		$	(0.15	)		$	(0.59	)		$	(0.59	)
Russell Hobbs adjustment			—				—				—				0.15
Pro forma basic and diluted loss per share from continuing operations		$	(0.45	)		$	(0.15	)		$	(0.59	)		$	(0.44	)

Seed Resources, LLC

On December 3, 2010, Spectrum Brands completed the $10,524 cash acquisition of Seed Resources, LLC (“Seed Resources”). Seed Resources is a wild seed cake producer through its Birdola premium brand seed cakes. This acquisition was not significant individually. Spectrum Brands accounted for the acquisition under the acquisition method of accounting. The results of Seed Resources’ operations since December 3, 2010 are included in the accompanying Condensed Consolidated Statements of Operations for the three and six month periods ended April 3, 2011. The preliminary purchase price of $12,500 (representing cash paid of $10,524 and contingent consideration accrued of $1,976), including a $1,100 trade name intangible asset and $10,029 of goodwill, for this acquisition was based upon a preliminary valuation. Spectrum Brands’ estimates and assumptions for this acquisition are subject to change as Spectrum Brands obtains additional information for its estimates during the respective measurement period. The primary areas of the purchase price allocation that are not yet finalized relate to certain legal matters, income and non-income based taxes and residual goodwill.

Note 13. Restructuring and Related Charges

The Company reports restructuring and related charges associated with manufacturing and related initiatives of Spectrum Brands in “Cost of goods sold.” Restructuring and related charges reflected in “Cost of goods sold” include, but are not limited to, termination, compensation and related costs associated with manufacturing employees, asset impairments relating to manufacturing initiatives, and other costs directly related to the restructuring or integration initiatives implemented. The Company reports restructuring and related charges relating to administrative functions of Spectrum Brands in “Selling, general and administrative expenses”, which include, but are not limited to, initiatives impacting sales, marketing, distribution, or other non-manufacturing related functions. Restructuring and related charges reflected in “Selling, general and administrative expenses” include, but are not limited to, termination and related costs, and any asset impairments relating to the functional areas described above, and other costs directly related to the initiatives implemented.

In 2009, Spectrum Brands implemented a series of initiatives to reduce operating costs as well as evaluate Spectrum Brands’ opportunities to improve its capital structure (the “Global Cost Reduction Initiatives”). In 2008, Spectrum Brands implemented an initiative within certain of its operations in China to reduce operating costs and rationalize Spectrum Brands’ manufacturing structure. These initiatives included the plan to exit Spectrum Brands’ Ningbo, China battery manufacturing facility (the “Ningbo Exit Plan”). In 2007, Spectrum Brands began managing its business in three vertically integrated, product-focused lines of business (the “Global Realignment Initiative”). In 2007, Spectrum Brands implemented an initiative in Latin America to reduce operating costs (the “Latin American Initiatives”). In 2006, Spectrum Brands implemented a series of initiatives within certain of its European operations to reduce operating costs and rationalize Spectrum Brands’ manufacturing structure (the “European Initiatives”).

The following table summarizes restructuring and related charges incurred by initiative for the three and six month periods ended April 3, 2011 and April 4, 2010 and where those charges are classified in the accompanying Condensed Consolidated Statements of Operations:

Restructuring and Related Charges

																		Charges				Expected				Total
																		Since				Future				Projected				Expected Completion
		Three Months								Six Months								Inception				Charges				Costs				Date
Initiative:		2011				2010				2011				2010
Global Cost Reduction		$	4,378			$	3,669			$	8,107			$	11,389			$	46,951			$	13,709			$	60,660			January 31, 2015
Ningbo Exit Plan			250				637				100				1,333				29,628				—				29,628			Substantially Complete
Global Realignment			519				1,194				2,505				(983	)			91,092				973				92,065			June 30, 2013
European			—				—				—				—				26,965				—				26,965			Substantially Complete
Latin American			—				(109	)			—				79				11,447				—				11,447			Complete
		$	5,147			$	5,391			$	10,712			$	11,818			$	206,083			$	14,682			$	220,765
		Three Months								Six Months
Classification:		2011				2010				2011				2010
Cost of goods sold		$	2,053			$	1,989			$	2,647			$	3,640
Selling, general and administrative			3,094				3,402				8,065				8,178
		$	5,147			$	5,391			$	10,712			$	11,818

The following table summarizes the remaining accrual balance associated with the initiatives and the activity during the six month period ended April 3, 2011:

Remaining Accrual Balance

		Accrual Balance at								Cash				Non-Cash				Accrual Balance				Expensed as
		September 30, 2010				Provisions				Expenditures				Items				at April 3, 2011				Incurred(A)
Global Cost Reduction
Termination benefits		$	6,447			$	3,867			$	(3,120	)		$	250			$	7,444			$	134
Other costs			4,005				501				(1,968	)			515				3,053				3,605
			10,452				4,368				(5,088	)			765				10,497				3,739
Ningbo Exit Plan
Termination benefits			—				—				—				—				—				—
Other costs			491				24				(143	)			(372	)			—				76
			491				24				(143	)			(372	)			—				76
Global Realignment
Termination benefits			8,721				1,207				(5,473	)			(681	)			3,774				—
Other costs			2,281				133				(400	)			474				2,488				1,165
			11,002				1,340				(5,873	)			(207	)			6,262				1,165
European
Termination benefits			1,801				—				(290	)			70				1,581				—
Other costs			47				—				(37	)			(10	)			—				—
			1,848				—				(327	)			60				1,581				—
Latin American
Termination benefits			—				—				—				—				—				—
Other costs			—				—				—				—				—				—
			—				—				—				—				—				—
		$	23,793			$	5,732			$	(11,431	)		$	246			$	18,340			$	4,980