UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 8, 2015
HRG GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 1-4219 | 74-1339132 | ||
(State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) | ||
450 Park Avenue, 29th Floor, New York, New York | 10022 | |||
(Address of principal executive offices) | (Zip Code) | |||
Registrant's telephone number, including area code: (212) 906-8555
Former name or former address, if changed since last report.
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
q | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
q | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
q | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
q | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 2.02. | Results of Operations and Financial Condition. |
The following information, including the Exhibits referenced in this Item 2.02, to the extent the Exhibits discusses financial results of HRG Group, Inc. (the “Company”), are being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.
On May 8, 2015, the Company issued a press release (the “Press Release”) discussing, among other things, its financial results for its quarterly period ended March 31, 2015. A copy of the Press Release is furnished as Exhibit 99.1 to this Report.
As previously announced, the Company will host a conference call on May 8, 2015 to discuss its financial results for its quarterly period ended March 31, 2015. A copy of the presentation (the "Company Presentation") to be used during the conference call is attached hereto as Exhibit 99.2 to this Report.
Item 9.01 | Financial Statements and Exhibits. |
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Exhibits
Exhibit No. | Description | |
99.1 | Press Release | |
99.2 | Company Presentation | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HRG GROUP, INC. | |||
/s/ Thomas A. Williams | |||
Name: Thomas A. Williams | |||
Title: Executive Vice President and Chief Financial Officer | |||
Dated: May 8, 2015
HRG Group, Inc. Reports Second Quarter Results Achieves Revenues of $1.37 Billion as Compared to $1.34 Billion in the Second Quarter of 2014 Currency-Consistent Revenues Increase 6.3% |
NEW YORK - May 8, 2015 -- HRG Group, Inc. (“HRG” or the “Company”; NYSE: HRG), a diversified holding company focused on owning and acquiring businesses that it believes can, in the long term, generate sustainable free cash flow or attractive returns on investment, today announced its consolidated results for the second quarter of Fiscal 2015 ended on March 31, 2015 (the “Fiscal 2015 Quarter”). The results include HRG's four segments:
• | Consumer Products, which consists of Spectrum Brands Holdings, Inc. (“Spectrum Brands”; NYSE: SPB); |
• | Insurance, which includes Fidelity & Guaranty Life (“FGL”; NYSE: FGL) and Front Street Re, Ltd. (“Front Street”); |
• | Energy, which consists of Compass Production Partners, LP (“Compass”), a subsidiary of HGI Energy Holdings, LLC (“HGI Energy”) engaged in the operation, acquisition and development of conventional oil and natural gas assets in the U.S.; and |
• | Asset Management, which includes Salus Capital Partners, LLC (“Salus”), Energy & Infrastructure Capital (“EIC”) and CorAmerica Capital, LLC (“CorAmerica”). |
"This quarter, we posted solid overall revenue growth on a currency-consistent basis and our operating results were in-line with our expectations despite the ongoing impact of certain limited headwinds that have affected our performance this year," said Omar Asali, President and Chief Executive Officer of HRG. "We continue to expect record revenue and cash flow from Consumer Products in Fiscal 2015 and couldn't be more enthusiastic over Spectrum Brands' recently announced agreement to purchase Armored AutoGroup, which demonstrates our ongoing appetite for accretive deals. Our M&A strategy will continue to complement the multiple organic growth opportunities that exist in further expanding this segment.
"Turning to Insurance, strong sales of FGL's core fixed annuities demonstrate the market's continued receptivity for our products, and the $341 million of annuity sales generated from new products that were launched within the last year spotlights FGL's ability to create products that resonate well in the market," continued Asali. "FGL recently began a process to consider strategic alternatives; we believe that shareholders could benefit from FGL participating in this robust M&A environment.
"Lastly, we have taken actions this quarter to improve the strategic and competitive positioning of our businesses. For instance, we simplified our priorities in Asset Management, and in Energy, where severe reductions in oil and gas prices have continued to affect that segment's financial results, we remain vigilant with our cost structure and are exploring opportunities to transact and enhance long-term equity value."
Second Quarter Fiscal 2015 Consolidated Highlights:
• | HRG recorded total Revenues of $1.4 billion for the Fiscal 2015 Quarter, an increase of $30.3 million, or 2.3%, as compared to the second quarter of fiscal 2014 (the "Fiscal 2014 Quarter"). Revenue excluding the impact of $54.8 million of unfavorable foreign exchange in Consumer Products increased 6.3%. The increase was driven primarily by higher Consumer Products revenues as compared to the Fiscal 2014 Quarter, which more than offset lower Energy revenues. |
• | Consolidated Operating loss of $174.0 million in the Fiscal 2015 Quarter compared to the $16.2 million of Operating income reported in the Fiscal 2014 Quarter, a decrease of $190.2 million. The decrease was due primarily to the recognition of impairments in the Insurance, Energy and Asset Management segments, as described below in the Additional Items section. |
• | Over the six month period ending March 31, 2015 (the "Fiscal 2015 Six Months"), HRG received dividends of $37.0 million from its subsidiaries, which excludes $4.5 million of interest payments made by HRG on behalf of HGI Energy with respect to certain intercompany notes issued by HGI Energy to other HRG |
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subsidiaries. In Fiscal 2015, the Company expects to receive approximately $77 million in dividends from its subsidiaries, which includes the $37.0 million already received and excludes $9.0 million of interest payments made and expected to be made by HRG on behalf of HGI Energy in Fiscal 2015.
• | HRG ended the Fiscal 2015 Six Months with corporate cash and investments of approximately $252.6 million (primarily held at HRG and HGI Funding LLC), a decrease of $40.4 million from the comparable balance of $293.0 million held as of December 31, 2014 due primarily to the scheduled payment of semi-annual interest on the Company's notes. |
• | Net loss attributable to common and participating preferred stockholders of $228.3 million, or $1.16 per common share attributable to controlling interest during the Fiscal 2015 Quarter, compared to a Net loss attributable to common and participating preferred stockholders of $87.6 million, or $0.63 per common share attributable to controlling interest during the Fiscal 2014 Quarter. The loss increased due primarily to the lower Operating income in the current period, as described herein. |
Additional Items:
Non-Cash Impairments
Energy
Pursuant to SEC reporting requirements, Compass performed a ceiling test at the end of the quarter utilizing simple average spot prices for the trailing twelve month period for proved reserves, which may not be indicative of actual market values or forward strip prices for those reserves. As a result of this test, Compass recorded a non-cash impairment of $146.6 million to its proved oil and natural gas properties during the quarter, due primarily to the decline in oil and natural gas prices. This impairment is reflected in the Operating income of the Energy segment for the Fiscal 2015 Quarter.
Over the first six months of Fiscal 2015, Compass has recorded $336.6 million in non-cash impairments to its oil and natural gas properties and expects to incur additional, non-cash impairments to its properties in Fiscal 2015 if oil and gas prices do not increase.
Insurance and Asset Management
In 2013, Salus originated a $250 million term loan to RadioShack Corp. ("RadioShack"), which resulted in a net exposure to HRG's Insurance and Asset Management segments of $150.0 million after taking into account $100.0 million in non-qualifying participation by a third party. During the Fiscal 2015 Quarter, RadioShack filed for Chapter 11 bankruptcy protection. The full amount of the Salus loan was outstanding at the time of this filing, and the extent of Salus' eventual recovery is dependent on the proceeds that are realized through both the sale of RadioShack's assets as well as the litigation of certain matters.
As of the close of the quarter, the expected recovery on the term loan, excluding any additional proceeds realized, resulted in an impairment to HRG of $105.0 million, which is reflected in the consolidated financial statements under Impairments and Bad Debt Expense. Within the segments, $65.0 million of this amount was recorded in Asset Management and $40 million, after eliminations, was recorded in Insurance. In accordance with US GAAP and our Insurance segment's accounting policies, the impairment is reflected in Insurance, in part, as a Net Investment Loss and a reduction to revenue and then reclassified to Impairments and Bad Debt Expense in the presentation of the Company's consolidated financial statements.
Debt
As of March 31, 2015, the Company had approximately $604.4 million in aggregate principal amount of its 7.875% Senior Secured Notes due 2019 (the "Senior Secured Notes") outstanding and approximately $750.0 million in aggregate principal amount of the 7.75% Senior Notes due 2022 (the "Senior Notes") outstanding. These amounts do not include the debt that has been issued at the Company's subsidiaries.
Following the close of the quarter, the Company issued an additional $100.0 million in aggregate principal amount of new Senior Secured Notes priced at 104.5%. The newly issued notes were incremental to, and will vote together with, the $604.4 million in aggregate principal amount of Senior Secured Notes that existed prior to the offering.
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Frederick's of Hollywood ("FOH")
Three of the Company's consolidated subsidiaries are lenders to FOH in an aggregate amount of $59.6 million. In the presentation of HRG's consolidated results for the Fiscal 2015 Quarter, this intercompany indebtedness is eliminated. Shortly after the close of the quarter, FOH filed for bankruptcy protection and the Company will deconsolidate FOH's results from HRG's consolidated financial statements beginning with the third quarter of Fiscal 2015 and the subsidiaries' loans to FOH will no longer be eliminated. Recovery on this debt will be dependent on the outcome of the bankruptcy proceedings, and the Company is evaluating potential impairments to the loans held by the subsidiaries.
Common Stock Buyback Program
As part of its previously announced $100 million share repurchase program, the Company purchased 0.2 million shares at an average price of $13.49 for an aggregate $3.2 million during the Fiscal 2015 Quarter. Since the program's inception in May 2014, the Company has purchased 6.9 million shares at an average price of $12.71 as of March 31, 2015 for an aggregate $87.7 million.
Under this repurchase program, an additional $12.3 million was available, as of March 31, 2015, for subsequent repurchases, subject to the discretion of HRG's management or Board. Subject to certain conditions, the program authorizes purchases to be made from time to time in one or more open market or private transactions and does not require HRG to purchase any specific number of shares. The program may be suspended or terminated at any time.
HRG’s consolidated results in the Fiscal 2015 Quarter also reflect an $8.3 million increase in interest expense relative to the Fiscal 2014 Quarter, as higher overall debt levels were only partially offset by refinancing activities to lower interest rate debt at HRG and its subsidiaries.
Additionally, HRG incurred a tax benefit of $4.0 million in the Fiscal 2015 Quarter and a 1.7% effective tax rate as compared to a $13.3 million benefit in the Fiscal 2014 Quarter and a 19.2% effective tax rate. The decrease in tax benefit in the current quarter was due to a nonrecurring tax benefit in the Fiscal 2014 Quarter related to the recognition of certain deferred tax assets.
Quarterly Segment Highlights:
Consumer Products
• | Consumer Products Revenues increased $45.3 million, or 4.4%, to $1.1 billion in the Fiscal 2015 Quarter, as the impact of newly acquired businesses more than offset the negative impact of $54.8 million in unfavorable foreign exchange. Excluding the impact of foreign exchange, revenue increased $100.1 million, or 9.8%. The segment's Operating income decreased 4.4% to $88.4 million, as compared to $92.5 million for the Fiscal 2014 Quarter, due primarily to the impact of costs related to acquisition of new businesses and their integration. |
• | During the quarter, Spectrum Brands completed the acquisitions of both Proctor & Gamble's European pet food brands, IAMS and Eukanuba, for $116.0 million, as well as Salix, the world's leading distributor of premium, natural rawhide dog treats and chews, for $148.0 million. Both transactions are expected to be complementary to Spectrum's existing assets in pet supplies. |
• | On April 28, 2015, Spectrum Brands announced that its Board of Directors approved a $0.33 per share quarterly common stock dividend, a 10% increase from the $0.30 dividend declared in the Fiscal 2014 Quarter. Over the past two years, the quarterly dividend paid to Spectrum Brands common stockholders has increased 32%. |
Insurance
• | Sales of fixed indexed annuities increased 89%, or $282 million, over the Fiscal 2014 Quarter to $600 million; new products introduced in 2014 contributed $341 million of fixed indexed annuity sales in the current period. |
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• | Insurance Revenues decreased 41.3%, from $274.1 million to $161.0 million due to lower net investment gains as compared to the Fiscal 2014 Quarter, driven by the credit impairment losses related to the Insurance segment's investments in RadioShack as discussed above. |
• | Operating loss for the Insurance segment increased $88.7 million to $62.4 million from the Fiscal 2014 Quarter due primarily to the impairment that negatively affected segment revenues. |
Energy
• | The Energy segment reported Revenue of $26.0 million, a decrease of $13.2 million, or 33.7%, from the Fiscal 2014 Quarter, as lower commodity prices were only partially offset by the impact of the acquisition of the full interest in Compass in the first fiscal quarter of 2015. |
Asset Management
• | The Asset Management segment contributed $5.1 million to consolidated revenues for the Fiscal 2015 Quarter, a decrease of $4.7 million over the Fiscal 2014 Quarter due principally to a lower amount of realized interest income at Salus. |
Detail on Second Quarter Segment Results:
Consumer Products:
Note: Adjusted EBITDA-Consumer Products, as described below, is a non-U.S. GAAP measure that excludes interest, income tax expense, certain purchase accounting fair value adjustments, restructuring and related charges, acquisition and integration related charges, depreciation and amortization expenses and stock-based compensation - see "Non-U.S. GAAP Measures" and the reconciliation of Adjusted EBITDA-Consumer Products to the Consumer Product segment's net income or loss in the tables accompanying this release.
Consumer Products reported consolidated net sales of $1,067.0 million for the Fiscal 2015 Quarter, an increase of $45.3 million, or 4.4%, as compared to $1,021.7 million in the Fiscal 2014 Quarter. The increase was due primarily to the impact of newly acquired pet supply businesses, which more than offset a $54.8 million negative impact from unfavorable foreign exchange as the Euro continued to weaken relative to the US dollar as compared to the Fiscal 2014 Quarter. Excluding the net impact of foreign exchange, sales increased $100.1 million, or 9.8%, as compared to the Fiscal 2014 Quarter, with increased sales in all product categories except consumer batteries, which declined due primarily to ongoing competitor discounting.
Gross profit, representing net Consumer Products sales minus Consumer Products cost of goods sold, increased $15.1 million, or 4.2%, to $374.7 million in the Fiscal 2015 Quarter. The increase was driven by the same factors that affected revenue. Gross profit margin, representing gross profit as a percentage of Consumer Products net sales, decreased immaterially to 35.1% in the Fiscal 2014 Quarter.
Operating income decreased $4.1 million, or 4.4%, to $88.4 million in the Fiscal 2015 Quarter, as compared to $92.5 million in the Fiscal 2014 Quarter, due primarily to the impact of unfavorable foreign exchange as well as increased selling, general and administrative costs related to acquisitions as well as costs related to their integration.
Consumer Products adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA-Consumer Products”) was $159.1 million for the Fiscal 2015 Quarter, an increase of $2.6 million, or 1.7%, as compared to the Fiscal 2014 Quarter. Excluding the net unfavorable impact of $22.2 million in foreign exchange, Adjusted EBITDA-Consumer Products increased $24.8 million, or 15.8%.
After the close of the Fiscal 2015 Quarter, on April 28, 2015, Spectrum Brands announced that its Board of Directors declared a quarterly dividend of $0.33 per share on Spectrum Brands’ common stock. This is a 10% increase in the quarterly dividend declared for Fiscal 2015 as compared to the $0.30 quarterly dividend paid per share in connection with Fiscal 2014. The newly-declared dividend, which is a regular taxable cash dividend, is payable on June 16, 2015 to all Spectrum Brands stockholders of record as of the close of business on May 19, 2015.
For more information on HRG's Consumer Products segment, interested parties should read Spectrum Brands' announcements and public filings with the Securities and Exchange Commission, including Spectrum Brands' most recent quarterly earnings announcement, which may be accessed at www.spectrumbrands.com.
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Insurance:
Note: Insurance AOI, as described below, 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 fixed indexed annuities ("FIA") embedded derivative liability, impairments and bad debt expense in subsidiaries and effect of class action litigation reserves, and the effects of acquisition-related reinsurance transactions - see "Non-U.S. GAAP Measures" and a reconciliation of Insurance AOI to the Insurance segment's reported income in the tables accompanying this release. In the second quarter of 2014, the Insurance AOI definition was revised from a pre-tax basis to an after-tax basis. Insurance AOI now includes now includes interest expense and an effective tax rate of 35% is now applied to reconciling items made to net income.
The Insurance segment recorded annuity sales, which are recorded as deposit liabilities (i.e. contract holder funds) in accordance with the accounting principles that are generally accepted in the United States, of $610.0 million for the Fiscal 2015 Quarter. This was a decrease of $118.0 million, or 16.2%, as compared to the $728.0 million of sales recorded in the Fiscal 2014 Quarter, which included over $400 million of opportunistic multi-year guaranteed annuity sales generated from a program that was not offered again in the current period. During the Fiscal 2015 Quarter, FGL grew fixed indexed annuities by 89% over the Fiscal 2014 Quarter, due to ongoing marketing initiatives with existing distribution partners as well as the launch of new products introduced in the last year, which contributed $341 million of new sales to the current period.
Net investment income increased $24.4 million, or 12.2%, to $224.6 million for the Fiscal 2015 Quarter from $200.2 million for the Fiscal 2014 Quarter, as the yield on average invested assets at FGL increased 200 basis points to 4.72%. Operating loss increased $88.7 million, or 337.3%, to $62.4 million for the Fiscal 2015 Quarter from an operating income of $26.3 million for the Fiscal 2014 Quarter, due primarily to the non-cash impairment described in the Additional Items section as well as an increase in FGL's insurance reserves made in connection with lower risk free market rates observed in the Fiscal 2015 Quarter.
The segment recorded an Insurance AOI of $17.0 million for the Fiscal 2015 Quarter, a decrease of $34.4 million, or 67%, from $51.4 million for the Fiscal 2014 Quarter. The decrease was primarily due to a $35.0 million benefit from a tax planning strategy implemented in the Fiscal 2014 Quarter, which reduced a tax valuation allowance.
The Insurance segment had approximately $19.3 billion of assets under management as of March 31, 2015. The investment portfolio continues to be conservatively positioned in its credit and duration profile and well matched against its liabilities.
As of March 31, 2015, HRG's Insurance segment had a net U.S. GAAP book value of $1.1 billion (excluding Accumulated Other Comprehensive Income (“AOCI”) of $661.3 million). As of March 31, 2015, the Insurance segment's available for sale investment portfolio had $925.2 million in net unrealized gains on a U.S. GAAP basis.
Recently, FGL commenced a review of its strategic alternatives, which may result in a sale of the company. No assurance can be provided that this exploration will result in a transaction, or that any transaction, if pursued, will be consummated. The exploration of strategic alternatives may be terminated at any time and without notice, and neither the Company nor any of its affiliates intend to disclose developments with respect to this process unless and until determined otherwise.
For more information on HRG's Insurance segment, interested parties should read Fidelity & Guaranty Life’s announcements and public filings with the Securities & Exchange Commission, including Fidelity & Guaranty Life’s most recent quarterly earnings announcement, available at www.fglife.com.
Energy:
Note: Adjusted EBITDA-Energy is a non-U.S. GAAP measure that excludes interest expense, depreciation, amortization and depletion, accretion of discount on asset retirement obligations, non-cash write-downs of assets, gain on remeasurement of investment to fair value, non-recurring other operating items, non-cash changes in the fair value of derivatives, cash settlements on derivative financial instruments and stock-based compensation - see “Non-U.S. GAAP Measures” and a reconciliation of Adjusted EBITDA-Energy to the Energy segment's operating income below.
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Oil and natural gas revenues were $26.0 million for the Fiscal 2015 Quarter, a decrease of $13.2 million, or 33.7%, from the Fiscal 2014 Quarter. The decline in revenues was due primarily to lower prices for oil, natural gas and natural gas liquids as well as expected decreases in natural gas production, offset by the additional revenue earned through the acquisition of a full ownership interest in Compass. Average sales prices for oil and natural gas liquids declined by 53% and 55%, respectively, in the current quarter as compared to the Fiscal 2014 Quarter.
Operating loss for the Fiscal 2015 Quarter was $161.3 million, a decrease of $89.5 million from the Fiscal 2014 Quarter Operating loss of $71.8 million, due primarily to the impairment previously discussed in the "Additional Items" section. Excluding impairments, the Operating loss of $13.9 million for the Fiscal 2015 Quarter was a decrease of $12.4 million from the Fiscal 2014 Quarter due to the impact of the lower revenues, as well as higher operating and general expense related to the incurrence of certain costs as Compass continues its transition from its former joint venture structure.
Energy segment adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA-Energy") was $5.5 million for the Fiscal 2015 Quarter, a decrease of $10.9 million, or 66.5%, from the Fiscal 2014 Quarter, due to the same factors that affected revenue.
For the Fiscal 2015 Quarter, the Energy segment's production was 126 Mbbl of oil, 151 Mbbl of natural gas liquids and 6,404 Mmcf of natural gas. In the current period, average daily production at Compass was 90 Mmcfe as compared to 71 Mmcfe in the Fiscal 2014 Quarter, with the increase due primarily to the acquisition of the full interest in Compass, as the prior period reflects only the Company's proportional interest in Compass' production, which more than offset the impact of natural production declines.
Asset Management:
The Asset Management segment reported revenues of $5.1 million for the Fiscal 2015 Quarter, a decrease of $4.7 million, or 48.0%, from the $9.8 million reported in the Fiscal 2014 Quarter. The decrease is due primarily to a lower amount of interest income generated at Salus. Additionally, the revenue decline reflects the wind down of operations at Five Island after Front Street terminated its asset management agreement with that firm during the quarter.
During the Fiscal 2015 Quarter, Salus originated $2.0 million of new asset-based loan commitments in the Fiscal 2015 Quarter, and together with its affiliated co-lenders FGL and FSR, had $660.2 million of loans outstanding as of March 31, 2015, net of allowance for credit losses of $33.8 million.
The Asset Management segment reported an Operating loss of $67.4 million for the Fiscal 2015 Quarter, a decline of $71.4 million as compared to the operating income of $4.0 million generated during the Fiscal 2014 Quarter, due primarily to the $62.6 million impairment and bad debt expense described in the Additional Items section. Excluding this item, the operating loss of $4.8 million reflected costs incurred to support the expansion of the segment into infrastructure investing and commercial and residential real estate.
Conference Call
HRG Group, Inc. will host a live conference call to discuss its results on Friday, May 8, 2015 at 10 a.m. Eastern Daylight Time. To join the event, participants may call 1.844.856.8663 (U.S. callers) or 1.779.232.4737 (international callers), using conference ID number 79310305. Alternatively, a live webcast of the conference call can be accessed by interested parties through the Investor Relations section of the HRG Website, www.HRGgroup.com.
For those unable to listen to the live broadcast of the conference call, a telephonic replay of the call will be available through midnight May 11, 2015 by dialing 1.855.859.2056 (U.S. callers) or 1.404.537.3406 (international callers), ID number 79310305. A replay will also be available on the company's website.
About HRG Group, Inc.
HRG Group, Inc. (formerly "Harbinger Group Inc.") is a diversified holding company focused on owning and acquiring businesses that the Company believes can, in the longer term, generate sustainable free cash flow or attractive returns on investment. HRG's principal operations are conducted through businesses that: offer branded consumer products (such as consumer batteries, residential locksets, residential builders' hardware, faucets, shaving and grooming products, personal care products, small household appliances, specialty pet supplies, lawn, garden and home pest control products, and personal insect repellents); offer life insurance and annuity products; provide asset-backed loans; and own energy
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assets. Although HRG intends to own or seek to acquire controlling equity interests, the Company may also make investments in debt instruments and hold minority equity interests in companies. HRG is headquartered in New York and traded on the New York Stock Exchange under the symbol HRG. For more information on HRG, visit: www.HRGgroup.com.
Forward Looking Statements
“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995: This document contains, and certain oral statements made by our representatives from time to time may contain, forward-looking statements, including those statements regarding the completion of the Armored AutoGroup acquisition, the completion of any related financings (including HRG's participation therein), any transaction involving FGL, and the achievement of any expected benefits of such transactions, expected dividends from our subsidiaries, our or our subsidiaries' capital needs and potential acquisitions, dispositions or other transactions by us or our subsidiaries, expectations with respect to foreign exchange rates and commodity prices and expectations regarding our common stock buyback program, for which the manner of purchase, the number of shares to be purchased and the timing of purchases will be based on the price of HRG's common stock, general business and market conditions and applicable legal requirements, and is subject to the discretion of HRG's management. Generally, forward-looking statements include information concerning possible or assumed future distributions from subsidiaries, other actions, events, results, strategies and expectations and are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans,” “seeks,” “estimates,” “projects,” “may,” “will” “could,” “might,” or “continues” or similar expressions. Such forward-looking statements are subject to risks and uncertainties that could cause actual results, events and developments to differ materially from those set forth in or implied by such statements. These statements are based on the beliefs and assumptions of HRG's management and the management of HRG's subsidiaries (including target businesses). Factors that could cause actual results, events and developments to differ include, without limitation: the completion of the Armored AutoGroup acquisition, the completion of any related financings (including HRG's participation therein), or the ability to reach a transaction agreement involving FGL, and the achievement of any expected benefits of such transactions; the ability of HRG's subsidiaries (including, target businesses following their acquisition) to generate sufficient net income and cash flows to make upstream cash distributions; the decision of HRG subsidiaries' boards to make upstream cash distributions, which is subject to numerous factors such as restrictions contained in applicable financing agreements, state and regulatory restrictions and other relevant consideration as determined by the applicable board; HRG's liquidity, which may be impacted by a variety of factors, including the capital needs of HRG's current and future subsidiaries; capital market conditions; commodity market conditions; foreign exchange rates; HRG's and its subsidiaries' ability to identify any suitable future acquisition or disposition opportunities, including realizing such transaction's expected benefits, efficiencies/cost avoidance or savings, income and margins, growth, economies of scale, streamlined/combined operations, economic performance and conditions to, and the timetable for, completing applicable financial reporting requirements; litigation; potential and contingent liabilities; management's plans; changes in regulations; taxes; and the risks that may affect the performance of the operating subsidiaries of HRG and those factors listed under the caption “Risk Factors” in HRG's most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission. All forward-looking statements described herein are qualified by these cautionary statements and there can be no assurance that the actual results, events or developments referenced herein will occur or be realized. HRG does not undertake any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operation results, except as required by law.
Non-U.S. GAAP Measures
Management believes that certain non-U.S. GAAP financial measures may be useful in certain instances to provide additional meaningful comparisons between current results and results in prior operating periods. Reconciliations of such measures to the most comparable U.S. GAAP measures are included herein.
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We exclude the impact of foreign currency losses of $54.8 million on the measure of revenue growth of the quarter, which is based on a non-GAAP financial measure. While such adjustments are an integral part of the overall performance of the business, macroeconomic factors can overshadow the underlying performance. We believe this measure assists in understanding the trends in our business.
Adjusted EBITDA is a non-GAAP financial measure used in our Consumer Products (“Adjusted EBITDA - Consumer Products”) and Energy (“Adjusted EBITDA - Energy”) segments and one of the measures used for determining Spectrum Brands and Compass’ debt covenant compliance. “Insurance AOI” is a non-US GAAP financial measure frequently used throughout the insurance industry and is an economic measure the Insurance segment uses to evaluate financial performance each period. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) represent net income adjusted to exclude interest expense, income taxes and depreciation, depletion and amortization. Adjusted EBITDA excludes certain items that are unusual in nature or not comparable from period to period and other non-recurring operating items, accretion of discount on asset retirement obligations, non-cash changes in the fair value of derivatives, non-cash write-downs of assets, and stock-based compensation. Adjusted EBITDA is a metric used by management and frequently used by the financial community and provides 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. Computations of EBITDA and Adjusted EBITDA may differ from computations of similarly titled measures of other companies due to differences in the inclusion or exclusion of items in our computations as compared to those of others. Insurance AOI is calculated by adjusting the Insurance segment’s net income to eliminate (i) the impact of net investment gains, including other-than-temporary impairment losses recognized in operations, but excluding gains and losses on derivatives; (ii) the effect of changes in the rates used to discount the FIA embedded derivative liability; (iii) the impact of certain litigation reserves and (iv) impairments and bad debt expense from subsidiaries. All adjustments to Insurance AOI are net of the corresponding value of business acquired, deferred acquisition costs and income tax impact related to these adjustments as appropriate. While these adjustments are an integral part of the overall performance of the Insurance segment, market conditions impacting these items can overshadow the underlying performance of the business. Accordingly, we believe using a measure which excludes their impact is effective in analyzing the trends of our operations and together with net income, we believe Insurance AOI provides meaningful financial metric that helps investors understand our underlying results and profitability.
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.
For further information contact:
HRG Group, Inc. James Hart, SVP Communications Tel: 212.906.8542 Email: jhart@HRGgroup.com | ||
Source: HRG Group, Inc.
(Tables Follow)
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HRG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
March 31, 2015 | September 30, 2014 | ||||||
(Unaudited) | (Audited) | ||||||
ASSETS | |||||||
Investments: | |||||||
Fixed maturities | $ | 17,810.6 | $ | 17,211.5 | |||
Equity securities | 671.7 | 768.1 | |||||
Derivatives | 268.3 | 296.3 | |||||
Asset-based loans | 660.2 | 811.6 | |||||
Other invested assets | 341.8 | 165.0 | |||||
Total investments | 19,752.6 | 19,252.5 | |||||
Cash and cash equivalents | 1,279.6 | 1,319.2 | |||||
Receivables, net | 670.0 | 585.1 | |||||
Inventories, net | 819.0 | 635.2 | |||||
Accrued investment income | 181.2 | 184.9 | |||||
Reinsurance recoverable | 2,402.7 | 2,397.6 | |||||
Deferred tax assets | 173.6 | 186.7 | |||||
Properties, including oil and natural gas properties, net | 943.9 | 908.6 | |||||
Goodwill | 1,543.0 | 1,524.8 | |||||
Intangibles, including deferred acquisition costs and value of business acquired, net | 2,767.3 | 2,683.7 | |||||
Other assets | 922.1 | 421.9 | |||||
Total assets | $ | 31,455.0 | $ | 30,100.2 | |||
LIABILITIES AND EQUITY | |||||||
Insurance reserves: | |||||||
Contractholder funds | $ | 17,521.0 | $ | 16,463.5 | |||
Future policy benefits | 4,065.5 | 3,655.5 | |||||
Liability for policy and contract claims | 59.6 | 58.1 | |||||
Funds withheld from reinsurers | 37.7 | 38.0 | |||||
Total insurance reserves | 21,683.8 | 20,215.1 | |||||
Debt | 5,623.7 | 5,157.8 | |||||
Accounts payable and other current liabilities | 871.3 | 1,033.0 | |||||
Employee benefit obligations | 75.9 | 86.2 | |||||
Deferred tax liabilities | 524.4 | 533.3 | |||||
Other liabilities | 811.8 | 817.8 | |||||
Total liabilities | 29,590.9 | 27,843.2 | |||||
Commitments and contingencies | |||||||
HRG Group, Inc. stockholders' equity: | |||||||
Common stock | 2.0 | 2.0 | |||||
Additional paid-in capital | 1,429.5 | 1,472.3 | |||||
Accumulated deficit | (614.4 | ) | (276.3 | ) | |||
Accumulated other comprehensive income | 251.8 | 243.6 | |||||
Total HRG Group, Inc. stockholders' equity | 1,068.9 | 1,441.6 | |||||
Noncontrolling interest: | 795.2 | 815.4 | |||||
Total permanent equity | 1,864.1 | 2,257.0 | |||||
Total liabilities and equity | $ | 31,455.0 | $ | 30,100.2 | |||
9
HRG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Fiscal Quarter | Fiscal Six Months | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Revenues: | ||||||||||||||||
Net consumer and other product sales | $ | 1,086.5 | $ | 1,021.7 | $ | 2,175.3 | $ | 2,122.3 | ||||||||
Oil and natural gas | 26.0 | 39.2 | 60.3 | 74.7 | ||||||||||||
Insurance premiums | 14.5 | 14.8 | 26.2 | 28.7 | ||||||||||||
Net investment income | 225.0 | 206.4 | 455.8 | 407.6 | ||||||||||||
Net investment (losses) gains | (3.9 | ) | 40.9 | 48.1 | 182.8 | |||||||||||
Insurance and investment product fees and other | 23.4 | 18.2 | 44.2 | 35.1 | ||||||||||||
Total revenues | 1,371.5 | 1,341.2 | 2,809.9 | 2,851.2 | ||||||||||||
Operating costs and expenses: | ||||||||||||||||
Cost of consumer products and other goods sold | 707.0 | 662.1 | 1,419.0 | 1,381.5 | ||||||||||||
Oil and natural gas direct operating costs | 23.3 | 17.1 | 43.8 | 33.2 | ||||||||||||
Benefits and other changes in policy reserves | 195.2 | 196.5 | 436.7 | 431.2 | ||||||||||||
Selling, acquisition, operating and general expenses | 352.5 | 330.9 | 717.9 | 646.2 | ||||||||||||
Impairments and bad debt expense | 249.3 | 81.0 | 499.5 | 82.8 | ||||||||||||
Amortization of intangibles | 18.2 | 37.4 | 50.0 | 80.8 | ||||||||||||
Total operating costs and expenses | 1,545.5 | 1,325.0 | 3,166.9 | 2,655.7 | ||||||||||||
Operating (loss) income | (174.0 | ) | 16.2 | (357.0 | ) | 195.5 | ||||||||||
Interest expense | (85.5 | ) | (77.2 | ) | (166.1 | ) | (161.2 | ) | ||||||||
Loss from the change in the fair value of the equity conversion feature of preferred stock | — | (3.5 | ) | — | (50.7 | ) | ||||||||||
Gain on contingent purchase price reduction | 5.5 | — | 5.5 | 0.5 | ||||||||||||
Other income (expense), net | 12.5 | (4.6 | ) | 186.5 | (16.5 | ) | ||||||||||
Loss from continuing operations before income taxes | (241.5 | ) | (69.1 | ) | (331.1 | ) | (32.4 | ) | ||||||||
Income tax (benefit) expense | (4.0 | ) | (13.3 | ) | 12.8 | 25.0 | ||||||||||
Net loss | (237.5 | ) | (55.8 | ) | (343.9 | ) | (57.4 | ) | ||||||||
Less: Net (loss) income attributable to noncontrolling interest | (9.2 | ) | 19.7 | (5.8 | ) | 44.9 | ||||||||||
Net loss attributable to controlling interest | (228.3 | ) | (75.5 | ) | (338.1 | ) | (102.3 | ) | ||||||||
Less: Preferred stock dividends and accretion | — | 12.1 | — | 24.3 | ||||||||||||
Net loss attributable to common and participating preferred stockholders | $ | (228.3 | ) | $ | (87.6 | ) | $ | (338.1 | ) | $ | (126.6 | ) | ||||
Net loss per common share attributable to controlling interest: | ||||||||||||||||
Basic | $ | (1.16 | ) | $ | (0.63 | ) | $ | (1.71 | ) | $ | (0.91 | ) | ||||
Diluted | $ | (1.16 | ) | $ | (0.63 | ) | $ | (1.71 | ) | $ | (0.91 | ) | ||||
10
HRG GROUP, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS BY SEGMENT
(In millions)
Fiscal Quarter | Fiscal Six Months | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Revenues: | ||||||||||||||||
Consumer Products | $ | 1,067.0 | $ | 1,021.7 | $ | 2,134.8 | $ | 2,122.3 | ||||||||
Insurance | 161.0 | 274.1 | 471.8 | 647.2 | ||||||||||||
Energy | 26.0 | 39.2 | 60.3 | 74.7 | ||||||||||||
Asset Management | 5.1 | 9.8 | 13.1 | 14.3 | ||||||||||||
Intersegment elimination (a) | 92.9 | (3.6 | ) | 89.4 | (7.3 | ) | ||||||||||
Consolidated segment revenues | 1,352.0 | 1,341.2 | 2,769.4 | 2,851.2 | ||||||||||||
Corporate and Other | 19.5 | — | 40.5 | — | ||||||||||||
Total revenues | $ | 1,371.5 | $ | 1,341.2 | $ | 2,809.9 | $ | 2,851.2 | ||||||||
Operating (loss) income: | ||||||||||||||||
Consumer Products | $ | 88.4 | $ | 92.5 | $ | 204.0 | $ | 217.6 | ||||||||
Insurance | (62.4 | ) | 26.3 | (37.2 | ) | 111.6 | ||||||||||
Energy | (161.3 | ) | (71.8 | ) | (356.3 | ) | (65.8 | ) | ||||||||
Asset Management | (67.4 | ) | 4.0 | (68.5 | ) | 0.1 | ||||||||||
Intersegment elimination (a) | 53.3 | (4.0 | ) | 49.3 | (7.7 | ) | ||||||||||
Total segment operating (loss) income | (149.4 | ) | 47.0 | (208.7 | ) | 255.8 | ||||||||||
Corporate and Other and eliminations | (24.6 | ) | (30.8 | ) | (148.3 | ) | (60.3 | ) | ||||||||
Consolidated operating (loss) income | (174.0 | ) | 16.2 | (357.0 | ) | 195.5 | ||||||||||
Interest expense | (85.5 | ) | (77.2 | ) | (166.1 | ) | (161.2 | ) | ||||||||
Loss from the change in the fair value of the equity conversion feature of preferred stock | — | (3.5 | ) | — | (50.7 | ) | ||||||||||
Gain on contingent purchase price reduction | 5.5 | — | 5.5 | 0.5 | ||||||||||||
Other income (expense), net | 12.5 | (4.6 | ) | 186.5 | (16.5 | ) | ||||||||||
Loss from continuing operations before income taxes | $ | (241.5 | ) | $ | (69.1 | ) | $ | (331.1 | ) | $ | (32.4 | ) | ||||
(a) The Intersegment eliminations represent the reversal and reclassification of impairments recorded in our Insurance Segment, as well as normal intercompany transactions for the period. The Insurance segment eliminations include the reversal of intercompany asset impairments of $42.4, a reclassification of $40.0 of impairments resulting from the RadioShack bankruptcy from Net investment losses to Bad debt expense and the reversal of impairments of $24.8 already reflected in the Asset Management segment.
11
HRG GROUP, INC. AND SUBSIDIARIES
ADJUSTED EBITDA AND ADJUSTED OPERATING INCOME RECONCILIATIONS
(In millions)
The table below shows the adjustments made to the reported net income of the Consumer Products segment to calculate its Adjusted EBITDA (unaudited):
Fiscal Quarter | Fiscal Six Months | |||||||||||||||
Reconciliation to reported net income: | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Reported net income - Consumer Products segment | $ | 27.9 | $ | 33.9 | $ | 77.9 | $ | 88.3 | ||||||||
Add back: | ||||||||||||||||
Interest expense | 49.2 | 47.4 | 93.6 | 104.4 | ||||||||||||
Income tax expense | 8.1 | 10.5 | 28.6 | 23.3 | ||||||||||||
Purchase accounting fair value adjustment | 2.2 | — | 3.0 | — | ||||||||||||
Restructuring and related charges | 4.4 | 7.9 | 11.8 | 12.3 | ||||||||||||
Acquisition and integration related charges | 11.9 | 6.3 | 20.0 | 11.8 | ||||||||||||
Other | 1.7 | — | 1.8 | — | ||||||||||||
Adjusted EBIT - Consumer Products segment | 105.4 | 106.0 | 236.7 | 240.1 | ||||||||||||
Depreciation and amortization, net of accelerated depreciation | ||||||||||||||||
Depreciation of properties | 18.7 | 18.7 | 37.1 | 36.5 | ||||||||||||
Amortization of intangibles | 21.2 | 20.5 | 41.7 | 40.7 | ||||||||||||
Stock-based compensation | 13.8 | 11.3 | 19.4 | 17.9 | ||||||||||||
Adjusted EBITDA - Consumer Products segment | $ | 159.1 | $ | 156.5 | $ | 334.9 | $ | 335.2 | ||||||||
The table below shows the adjustments made to the reported net loss of the Energy segment to calculate its Adjusted EBITDA (unaudited):
Fiscal Quarter | Fiscal Six Months | |||||||||||||||
Reconciliation to reported net loss: | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Reported net loss - Energy segment | $ | (160.5 | ) | $ | (82.5 | ) | $ | (200.0 | ) | $ | (84.6 | ) | ||||
Interest expense | 4.4 | 3.9 | 8.9 | 8.6 | ||||||||||||
Depreciation, amortization and depletion | 12.5 | 10.2 | 26.0 | 21.4 | ||||||||||||
EBITDA - Energy segment | (143.6 | ) | (68.4 | ) | (165.1 | ) | (54.6 | ) | ||||||||
Accretion of discount on asset retirement obligations | 0.7 | 0.5 | 1.3 | 1.0 | ||||||||||||
Impairments and bad debt expense | 146.6 | 81.0 | 336.6 | 81.0 | ||||||||||||
Gain on remeasurement of investment to fair value | — | — | (141.2 | ) | — | |||||||||||
Non-recurring other operating items | 1.3 | — | 2.3 | — | ||||||||||||
(Gain) loss on derivative financial instruments | (5.3 | ) | 6.8 | (24.0 | ) | 10.2 | ||||||||||
Cash settlements on derivative financial instruments | 5.5 | (3.5 | ) | 7.9 | (3.3 | ) | ||||||||||
Stock based compensation expense | 0.3 | — | 0.6 | 0.1 | ||||||||||||
Adjusted EBITDA - Energy segment | $ | 5.5 | $ | 16.4 | $ | 18.4 | $ | 34.4 | ||||||||
The table below shows the adjustments made to the reported net (loss) income of the Insurance segment to calculate its adjusted operating income (unaudited):
Fiscal Quarter | Fiscal Six Months | |||||||||||||||
Reconciliation to reported net (loss) income : | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Reported net (loss) income - Insurance segment: | $ | (112.7 | ) | $ | 43.1 | $ | (104.0 | ) | $ | 96.3 | ||||||
Effect of investment losses (gains), net of offsets | 50.4 | (4.6 | ) | 50.5 | (8.6 | ) | ||||||||||
Effect of change in FIA embedded derivative discount rate, net of offsets | 16.7 | 11.8 | 38.7 | (4.1 | ) | |||||||||||
Impairments and bad debt expense from subsidiary | 62.6 | — | 62.6 | — | ||||||||||||
Effect of class action litigation reserves, net of offsets | — | 1.1 | (0.5 | ) | 1.1 | |||||||||||
Adjusted operating income - Insurance segment | $ | 17.0 | $ | 51.4 | $ | 47.3 | $ | 84.7 | ||||||||
12
May 8th, 2015 2nd Quarter Conference Call Private & Confidential
Private & Confidential 2 Agenda Quarterly Overview & Operating Highlights Omar Asali, President and CEO Financial Highlights Tom Williams, Chief Financial Officer (NYSE: HRG)
Private & Confidential Safe Harbor Disclaimer 3 Limitations on the Use of Information. This company overview has been prepared by HRG Group Inc. (the “Company” or “HRG”) solely for informational purposes, and not for the purpose of updating any information or forecast with respect to the Company or any of its affiliates or any other purpose. This information is subject to change without notice and should not be relied upon for any purpose. Neither the Company nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein and no such party shall have any liability for such information. In furnishing this information and making any oral statements, neither the Company nor any of its affiliates undertakes any obligation to provide the recipient with access to any additional information or to update or correct such information. The information herein or in any oral statements (if any) are prepared as of the date hereof or as of such earlier dates as presented herein; neither the delivery of this document nor any other oral statements regarding the affairs of Company or its affiliates shall create any implication that the information contained herein or the affairs of the Company or its affiliates have not changed since the date hereof or after the dates presented herein (as applicable); that such information is correct as of any time subsequent to its date; or that such information is an indication regarding the performance of the Company or any of its affiliates since the time of the Company’s or such affiliates latest public filings or disclosure. These materials and any related oral statements are not all- inclusive and shall not be construed as legal, tax, investment or any other advice. You should consult your own counsel, accountant or business advisors. Special Note Regarding Forward-Looking Statements. This document contains, and certain oral statements made by our representatives from time to time may contain, forward-looking statements, including those statements regarding the completion of the Armored AutoGroup acquisition, the completion of any related financings (including HRG's participation therein), any transaction involving FGL, and the achievement of any expected benefits of such transactions, expected dividends from our subsidiaries, our or our subsidiaries' capital needs and potential acquisitions, dispositions or other transactions by us or our subsidiaries, expectations with respect to foreign exchange rates and commodity prices and expectations regarding our common stock buyback program, for which the manner of purchase, the number of shares to be purchased and the timing of purchases will be based on the price of HRG's common stock, general business and market conditions and applicable legal requirements, and is subject to the discretion of HRG's management. Generally, forward-looking statements include information concerning possible or assumed future distributions from subsidiaries, other actions, events, results, strategies and expectations and are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans,” “seeks,” “estimates,” “projects,” “may,” “will” “could,” “might,” or “continues” or similar expressions. Such forward-looking statements are subject to risks and uncertainties that could cause actual results, events and developments to differ materially from those set forth in or implied by such statements. These statements are based on the beliefs and assumptions of HRG's management and the management of HRG's subsidiaries (including target businesses). Factors that could cause actual results, events and developments to differ include, without limitation: the completion of the Armored AutoGroup acquisition, the completion of any related financings (including HRG's participation therein), or the ability to reach a transaction agreement involving FGL, and the achievement of any expected benefits of such transactions; the ability of HRG's subsidiaries (including, target businesses following their acquisition) to generate sufficient net income and cash flows to make upstream cash distributions; the decision of HRG subsidiaries' boards to make upstream cash distributions, which is subject to numerous factors such as restrictions contained in applicable financing agreements, state and regulatory restrictions and other relevant consideration as determined by the applicable board; HRG's liquidity, which may be impacted by a variety of factors, including the capital needs of HRG's current and future subsidiaries; capital market conditions; commodity market conditions; foreign exchange rates; HRG's and its subsidiaries' ability to identify any suitable future acquisition or disposition opportunities, including realizing such transaction's expected benefits, efficiencies/cost avoidance or savings, income and margins, growth, economies of scale, streamlined/combined operations, economic performance and conditions to, and the timetable for, completing applicable financial reporting requirements; litigation; potential and contingent liabilities; management's plans; changes in regulations; taxes; and the risks that may affect the performance of the operating subsidiaries of HRG and those factors listed under the caption “Risk Factors” in HRG's most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission. All forward-looking statements described herein are qualified by these cautionary statements and there can be no assurance that the actual results, events or developments referenced herein will occur or be realized. HRG does not undertake any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operation results, except as required by law. Non-U.S. GAAP Measures. Management believes that certain non-U.S. GAAP financial measures may be useful in certain instances to provide additional meaningful comparisons between current results and results in prior operating periods. Reconciliations of such measures to the most comparable U.S. GAAP measures are included herein. Adjusted EBITDA is a non-GAAP financial measure used in our Consumer Products (“Adjusted EBITDA - Consumer Products”) and Energy (“Adjusted EBITDA - Energy”) segments and one of the measures used for determining Spectrum Brands and Compass’ debt covenant compliance. “Insurance AOI” is a non-US GAAP financial measure frequently used throughout the insurance industry and is an economic measure the Insurance segment uses to evaluate financial performance each period. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) represent net income adjusted to exclude interest expense, income taxes and depreciation, depletion and amortization. Adjusted EBITDA excludes certain items that are unusual in nature or not comparable from period to period and other non-recurring operating items, accretion of discount on asset retirement obligations, non-cash changes in the fair value of derivatives, non-cash write-downs of assets, and stock- based compensation. Adjusted EBITDA is a metric used by management and frequently used by the financial community and provides 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. Computations of EBITDA and Adjusted EBITDA may differ from computations of similarly titled measures of other companies due to differences in the inclusion or exclusion of items in our computations as compared to those of others. Insurance AOI is calculated by adjusting the Insurance segment’s net income to eliminate (i) the impact of net investment gains, including other-than-temporary impairment losses recognized in operations, but excluding gains and losses on derivatives; (ii) the effect of changes in the rates used to discount the FIA embedded derivative liability; (iii) the impact of certain litigation reserves; and (iv) impairments and bad debt expense from subsidiaries. All adjustments to Insurance AOI are net of the corresponding value of business acquired, deferred acquisition costs and income tax impact related to these adjustments as appropriate. While these adjustments are an integral part of the overall performance of the Insurance segment, market conditions impacting these items can overshadow the underlying performance of the business. Accordingly, we believe using a measure which excludes their impact is effective in analyzing the trends of our operations and together with net income, we believe Insurance AOI provides meaningful financial metric that helps investors understand our underlying results and profitability. We exclude the impact of foreign currency loses of $55 million and the net investment gains (losses) on the measure of revenue growth of the quarter, which is based on a non-GAAP financial measure. While these adjustments are an integral part of the overall performance of the business, macroeconomic factors and volatility caused by portfolio repositioning and derivative movements can overshadow the underlying performance. We believe this measure assists in understanding the trends in our business. 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. By accepting this document, each recipient agrees to and acknowledges the foregoing terms and conditions.
Quarterly Overview & Operating Highlights Omar Asali Private & Confidential
Private & Confidential Operating results this quarter were in-line with our expectations Solid overall revenue growth on a currency- consistent basis, with progress made on key initiatives at our subsidiaries 5 HRG Summary Consolidated results performed within expectations Impact of macro-economic headwinds have largely been addressed or mitigated where possible Successfully managed key leadership transitions Recent strategic actions improve our positioning for long-term success We remain focused on: —Allocating our capital with maximum efficiency —Delivering growth in our key platforms — Increasing net asset value
Private & Confidential HRG State of the Business 6 Consumer Products Asset Management Energy Other Insurance & Reinsurance Continue to expect record Fiscal 2015 Expect stronger 2nd half than 1st half Exciting new M&A CEO transition successfully completed 1. Debt held at HRG as of March 31, 2015 and does not give effect to $100 million secured issuance completed in April of 2015. 2. As of March 31, 2015. 3. As of March 31, 2015, corporate cash, cash equivalents and investments held at HRG. 4. G&A, as defined, includes salaries, benefits and facilities expenses. Debt1: $1.4BN Consolidated Assets2: ~$31.5BN Cash and Investments3: $252.6MM Exploring strategic alternatives for our investment Business continues to meet its strategic, financial objectives CEO transition successfully completed Commodities pricing presents challenges and opportunities Operations being managed conservatively Cash flow maximization; de- levering is priority Simplified our strategy and targeting improved financial performance G&A reduction program4 40% reduction in Corporate OpEx Headcount reduced from 30 to 21 Annual run-rate now under $8 million, excluding performance bonuses, deal costs
Private & Confidential Spectrum continues to execute against its business plan and deliver strong growth 7 Consumer Products Continue to expect 6th consecutive year of record financial performance —Good first half performance; even stronger second half expected Very solid second quarter: —Growth in revenue, Adjusted EBITDA despite continued F/X pressure — Increased revenue in all product categories except batteries Operating expenses continue to be tightly-managed —Gross profit margin remains a robust 35+% Integrations of newly-acquired assets are progressing ahead of plan —Spectrum has a solid track record of realizing M&A revenue, cost synergies Growth strategy underway to accelerate organic business performance
Private & Confidential Spectrum has a superior track record of identifying highly- attractive, accretive M&A transactions that diversify its revenue, cash flow streams 8 Consumer Products Announced definitive agreement to acquire Armored AutoGroup for $1.4 billion in cash and assumed debt —Accretive transaction, adding $440+ million of net sales and $140+ million of Adjusted EBITDA —Very healthy free cash flow: over $60 million in first full fiscal year after closing Expands Spectrum into growing and highly-profitable automotive aftermarket category —Portfolio of well-known brands with leading market share positions Opportunities for additional efficiencies and topline growth — International expansion, cross-selling into automotive aftermarket channel Expected close by June 30th —Financing via equity, debt issuance —HRG has Board authorization to participate in equity issuance
Private & Confidential Our Insurance Segment is very healthy, being exceptionally well- managed and is positioned for ongoing growth 9 Insurance Segment FGL’s investment portfolio continues to perform very well: —Average yield on assets purchased: 4.7% —Average yield on portfolio increased 20 basis points from 2Q14 Average assets under management at FGL increased 8%, or $1.3 billion —Average NAIC rating remains approximately 1.5 $600 million of fixed indexed annuity sales, up 89% over 2Q14 —New products introduced within the last year contributed $341 million —MYGA program was de-emphasized this quarter due to current rate environment GAAP book increased to $1.7 billion
Private & Confidential Our Energy Segment is comprised of long- lived, lower-decline rate and lower geologic risk conventional oil and gas assets 10 Energy Segment Performance continues to be affected by the severe decline in commodity pricing: —Average sales price of oil and gas liquids down 53% and 55%, respectively, from 2Q14 Transition to standalone operation progressing on-schedule —Solid team in place —Decision-making is clear, more nimble Strategic priorities for the segment are clear: —Manage operations at Compass as efficiently as possible —Mitigate impact of commodity pricing through hedging —Reduce leverage —Seek best pathway to protect & build equity value
Private & Confidential We have taken steps this quarter to simplify our focus in Asset Management 11 Asset Management Quarterly results affected by RadioShack bankruptcy — Impairment due to lower-than-expected recovery on collateralized assets The loss of this capital is unacceptable to us —Management changes at Salus —Co-presidents named to lead business moving forward Our strategic priorities for this segment are to: —Re-focus Salus and help recover the capital it is owed —Continue to build CorAmerica and EIC, our commercial/residential real estate and energy platforms, respectively
Private & Confidential Our Path Forward in 2015 12 NEAR-TERM Have Board authorization to participate in Spectrum equity offering LONGER-TERM If a transaction at FGL is consummated, may use proceeds to: — Delever at HRG — Invest in new vertical INTERMEDIATE-TERM FGL exploring options to maximize shareholder value Guiding Principles Efficient capital allocation Increased stream of dividends & cash flows Improving HRG credit metrics Maintaining investment discipline Building long-term book value
Financial Highlights Tom Williams Private & Confidential
Private & Confidential Consolidated revenues of $1.37 billion at HRG Currency-neutral revenue growth of 6.3% at HRG as compared to the Fiscal 2014 Quarter 14 2Q Revenue Highlights REVENUES (in millions) $1,022 $1,122 2Q14 2Q15 +9.8% 2Q14 2Q15 Note: each segment is presented on its own scale and is not intended to offer a comparison to any other segment; Corporate & Other segment not shown (revenue of $0 and $19.5 million in 2Q14 and 2Q15, respectively) Consumer Products1 Insurance (41.3%) $39 $26 2Q14 2Q15 (33.7%) $10 $5 2Q14 2Q15 Energy2 Asset Management (48.0%) Reported revenue increased 4.4% Growth in all product categories except batteries, which were affected by promotions Impairment on investment suppressed revenue growth $610 million in annuity sales this quarter, providing pipeline for future growth 50+% declines in oil and natural gas commodity prices Offset somewhat by contributions of full interest in Compass as of October 31st Reduced interest income at Salus due to RadioShack bankruptcy Competencies in energy, real estate investing ramping 1. Growth rate shown excluding impact of $54.8 million in unfavorable foreign exchange. 2. Reflects 74.4% proportional interest in Compass Production GP, LLC through October 31, 2014 3. Presents Insurance Segment revenue excluding $40.9 and $(101.5) of net investment gains (losses) in 2Q14 and 2Q15, respectively 2Q14 2Q15 As reported Excluding net Investment gains (losses)3 $233 $263 12.6% $274 $161 Unfavorable impact from foreign exchange
Private & Confidential In 2013, Salus originated a term loan to RadioShack Corp., with a net exposure of $150 million to our Insurance and Asset Management segments Recent commodity pricing resulted in non- cash impairments to our oil & gas properties 15 Significant Items Impacting Results RadioShack bankruptcy filing — Extent of the recovery of our investment depends on the proceeds realized in asset sales as well as resolution of ongoing litigation — Expected recovery, excluding any additional proceeds from litigation, resulted in a non-cash impairment of $105 million to our consolidated results this quarter: — $65 million reflected in Asset Management as an operating expense — $40 million, after eliminations, reflected in Insurance as a reduction to revenue Non-cash Energy charge —Required ceiling test limitation under the full cost method of accounting uses historical prices — Current commodity pricing generating industry-wide impairments — Triggered $146.6 million in non- cash impairments to our oil & gas properties
Private & Confidential Consolidated operating income of $78 million this quarter, excluding the impact of asset impairments 16 2Q Profitability Highlights PROFITABILITY MEASURES1, (in millions) $157 $180 2Q14 2Q15 $51 $17 2Q14 2Q15 Consumer Products (Adjusted EBITDA)2 Insurance (Adjusted Operating Income) $16 $6 2Q14 2Q15 Energy (Adjusted EBITDA)3 Asset Management (Operating Income (Loss))4 Strong year-over- year growth in currency-neutral Adjusted EBITDA Integration of newly acquired assets progressing ahead of schedule 2014 period reflects a $35 million non- recurring tax benefit Underlying trends remain strong & healthy Lower realized commodity prices for oil and natural gas Incurrence of certain costs for transition to standalone operations Note: each segment is presented on its own scale and is not intended to offer a comparison to any other segment; Corporate & Other segment not shown (Operating loss of $(30.9) and $(24.6) million in 2Q14 and 2Q15, respectively) 1. Review appendix for reconciliations to appropriate GAAP measures. 2. Growth rate shown excluding $22.2 million in unfavorable impact from foreign exchange. 3. Reflects 74.4% proportional interest in Compass Production GP, LLC through October 31, 2014. 4. Excludes impact of a $65.0 impairment. +15.8% (66.5%) (66.9%) Profitability impacted of reduction in revenues Unfavorable impact from foreign exchange $4 ($2) 2Q14 2Q15
Private & Confidential Our capital structure, and our relationships with the capital markets, are strong We are well-positioned to continue investing in our business for ongoing growth 17 Capital Structure Update HRG has received $37.0 million in dividends* from its subsidiaries this fiscal year —We continue to expect approximately $77 million** in total dividends in Fiscal 2015 — Spectrum and FGL are our largest providers of dividend income with $25.6 million paid so far this year, and these businesses are performing in-line with expectations Corporate cash and investments: $252.6 million —Decrease of $40 million from 1st quarter balance due principally to payment on interest obligations Continued participation in buyback program — Acquired 6.9 million shares since program’s inception at average price of $12.71 — $12.3 million remained available for use in existing authorization after March 31st In April, we successfully raised $100 million through tack-on to existing 7.875% Senior Secured notes —Offer was more than 3x over-subscribed * Excludes $4.5 million of interest payments made by HRG on behalf of HGI Energy with respect to certain intercompany notes issued by HGI Energy to other HRG subsidiaries ** Includes the $37.0 million of dividends already received and excludes $9.0 million of interest payments made and expected to be made by HRG on behalf of HGI Energy in Fiscal 2015
Private & Confidential 2Q 2015 Sum of the Parts Valuation (Dilutive) without AOCI 18 As of the close of the second quarter, the estimated net value of our assets and liabilities was $14.36 per share of diluted common stock. SUM OF THE PARTS VALUATION – ESTIMATED VALUE VS. COMMON STOCK PRICE ($) $12.73 $5.64 $0.08 $1.89 $0.01 $0.90 -$6.89 $14.36 $12.48 Difference of $1.88 or 13.1% Discount Spectrum Brands1 Insurance Segment2 Total Estimated Value8 March 31st Common Stock Price9 HGI Funding LLC4 HGI Asset Mgmt Holdings LLC5 Cash6 Debt & Other Liabilities7 HGI Energy Holdings LLC3 1. The valuation of HRG’s interest in Spectrum Brands (NYSE: SPB) is based on the volume weighted average closing price (“VWAP”) of SPB shares for the 20 day trading period of $92.39 through March 31, 2015 multiplied by the 27,756,905 SPB shares owned by HRG. 2. The valuation of HRG’s interest in the insurance segment reflects the sum of the per-share-value of its interests in (i) Fidelity & Guaranty Life (NYSE: FGL) based on the VWAP of FGL shares for the 20-day trading period of $21.36 through March 31, 2015 multiplied by the 47,000,000 shares owned by HRG (or $4.98 per share); and (ii) of the $5.64 per share book value of the Insurance segment, Front Street Re (Holdings) Ltd. represents a net book value of $133.8 million, or $0.66 per share. 3. The valuation of HGI Energy Holdings LLC reflects its net book of value as of March 31, 2015. 4. The valuation of HGI Funding LLC reflects its net book value as of March 31, 2015 (which includes 3,438,039 SPB shares and the market value of other securities owned by HGI Funding). 5. The valuation of HGI Asset Management Holdings LLC, reflects its net book of value as of March 31, 2015. 6. Total cash consists of cash at HRG as of March 31, 2015. 7. Debt and other liabilities includes the face value of all liabilities at HRG as of March 31, 2015. 8. Per share amount for each of the above mentioned assets and liabilities is calculated by dividing the total valuation of such asset or liability by the 201,464,946 shares of HRG common stock (NYSE: HRG) outstanding as of March 31, 2015, which amount does gives effect to dilution for the vesting of all outstanding restricted shares (4,793,594). 9. The closing price for HRG’s shares of common stock March 31, 2015. Note: Book value as reflected above is not necessarily indicative of market value
Questions and Answers Private & Confidential
May 8th, 2015 2nd Quarter Conference Call Private & Confidential
Appendix Private & Confidential
Private & Confidential Reconciliation of Adjusted EBITDA of Consumer Products Segment to U.S. GAAP Net Income (Unaudited) 22 RECONCILIATION OF ADJUSTED EBITDA OF CONSUMER PRODUCTS SEGMENT TO U.S. GAAP NET INCOME (UNAUDITED) ($ in Millions) 2015 2014 2015 2014 Reported net income - Consumer Products segment 27.9$ 33.9$ 77.9$ 88.3$ Add back: Interest expense 49.2 47.4 93.6 104.4 Income tax expense 8.1 10.5 28.6 23.3 Purchase accounting fair value adjustment 2.2 - 3.0 - Restructuring and related charges 4.4 7.9 11.8 12.3 Acquisition and integration related charges 11.9 6.3 20.0 11.8 Other 1.7 - 1.8 - Adjusted EBIT - Consumer Products segment 105.4 106.0 236.7 240.1 Depreciation and amortization, net of accelerated depreciation Depreciation of properties 18.7 18.7 37.1 36.5 Amortization of intangibles 21.2 20.5 41.7 40.7 Stock-based compensation 13.8 11.3 19.4 17.9 Adjusted EBITDA - Consumer Products segment 159.1$ 156.5$ 334.9$ 335.2$ Fiscal Quarter (a) Fiscal Six Months (b) a. For the three months ended March 31, 2015 and March 31, 2014, respectively. b. For the six months ended March 31, 2015 and March 31, 2014, respectively.
Private & Confidential Reconciliation of Adjusted EBITDA of Energy Segment to U.S. GAAP Net Loss (Unaudited) 23 RECONCILIATION OF ADJUSTED EBITDA OF ENERGY SEGMENT TO U.S. GAAP NET LOSS (UNAUDITED) ($ in Millions) 2015 2014 2015 2014 Reported net loss - Energy segment (160.5)$ (82.5)$ (200.0)$ (84.6)$ Interest expense 4.4 3.9 8.9 8.6 Depreciation, amortization and depletion 12.5 10.2 26.0 21.4 EBITDA - Energy segment (143.6) (68.4) (165.1) (54.6) Accretion of discount on asset retirement obligations 0.7 0.5 1.3 1.0 Impairments and bad debt expense 146.6 81.0 336.6 81.0 Gain on remeasurement of investment to fair value - - (141.2) - Non-recurring other operating items 1.3 - 2.3 - (Gain) Loss on derivative financing instruments (5.3) 6.8 (24.0) 10.2 Cash settlements on derivative financial instruments 5.5 (3.5) 7.9 (3.3) Stock-based compensation expense 0.3 - 0.6 0.1 Adjusted EBITDA - Energy segment 5.5$ 16.4$ 18.4$ 34.4$ Fiscal Quarter (a) Fiscal Six Months (b) a. For the three months ended March 31, 2015 and March 31, 2014, respectively. b. For the six months ended March 31, 2015 and March 31, 2014, respectively.
Private & Confidential Reconciliation of Adjusted Operating Income of Insurance Segment to U.S. GAAP Net (Loss) Income (Unaudited) 24 RECONCILIATION OF ADJUSTED OPERATING INCOME OF INSURANCE SEGMENT TO U.S. GAAP NET (LOSS) INCOME (UNAUDITED) ($ in Millions) 2015 2014 2015 2014 Reported net (loss) income - Insurance segment (112.7)$ 43.1$ (104.0)$ 96.3$ Effect of investment losses (gains), net of offsets 50.4 (4.6) 50.5 (8.6) Effect of change in FIA embedded derivative discount rate, net of offsets 16.7 11.8 38.7 (4.1) Bad debt losses from subsidiary 62.6 - 62.6 - Effect of class action litigation reserves, net of offsets - 1.1 (0.5) 1.1 Adjusted Operating Income - Insurance Segment 17.0$ 51.4$ 47.3$ 84.7$ Fiscal Quarter (a) Fiscal Six Months (b) a. For the three months ended March 31, 2015 and March 31, 2014, respectively. b. For the six months ended March 31, 2015 and March 31, 2014, respectively.