10-Q 1 hrg-3312013xq2.htm 10-Q HRG-3.31.2013-Q2
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form 10-Q
 
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to
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
incorporation or organization)
(I.R.S. Employer
Identification No.)
450 Park Avenue, 30th Floor
New York, NY
10022
(Address of principal executive offices)
(Zip Code)
(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  x    or    No  ¨.
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  x    or    No  ¨.
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.
Large Accelerated Filer
¨
 
Accelerated Filer
¨
Non-accelerated Filer
x
(Do not check if a smaller reporting company)
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  ¨    or    No  x
There were 144,028,151 shares of the registrant’s common stock outstanding as of May 6, 2013.
 



HARBINGER GROUP INC.
TABLE OF CONTENTS
 
 
Page
PART I. FINANCIAL INFORMATION
 
PART II. OTHER INFORMATION
 

2


PART I: FINANCIAL INFORMATION
Item  1.
Financial Statements
HARBINGER GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
 
March 31,
2013
 
September 30,
2012
 
(Unaudited)
 
 
ASSETS
 
 
 
Investments:
 
 
 
Fixed maturities
$
16,183.5

 
$
16,088.9

Equity securities
313.4

 
394.9

Derivatives
262.6

 
200.7

Asset-backed loans
241.6

 
180.1

Other invested assets
32.4

 
53.8

Total investments
17,033.5

 
16,918.4

Cash and cash equivalents
1,475.0

 
1,470.7

Receivables, net
593.4

 
414.4

Inventories, net
705.4

 
452.6

Accrued investment income
169.5

 
191.6

Reinsurance recoverable
2,330.4

 
2,363.1

Deferred tax assets
167.7

 
312.7

Properties, including oil and natural gas properties, net
965.6

 
221.6

Goodwill
1,434.0

 
694.2

Intangibles, including DAC and VOBA, net
2,467.5

 
1,988.5

Other assets
374.7

 
172.6

Total assets
$
27,716.7

 
$
25,200.4

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Insurance reserves:
 
 
 
Contractholder funds
$
15,409.9

 
$
15,290.4

Future policy benefits
3,569.1

 
3,614.8

Liability for policy and contract claims
68.4

 
91.1

Funds withheld from reinsurers
40.4

 
54.7

Total insurance reserves
19,087.8

 
19,051.0

Debt
4,596.7

 
2,167.0

Accounts payable and other current liabilities
795.5

 
754.2

Equity conversion feature of preferred stock
202.7

 
232.0

Employee benefit obligations
104.5

 
95.1

Deferred tax liabilities
515.2

 
382.4

Other liabilities
488.9

 
600.6

Total liabilities
25,791.3

 
23,282.3

 
 
 
 
 Commitments and contingencies

 

 
 
 
 
 Temporary equity:
 
 
 
 Redeemable preferred stock
326.8

 
319.2

 
 
 
 
 Harbinger Group Inc. stockholders' equity:
 
 
 
Common stock
1.4

 
1.4

Additional paid-in capital
859.5

 
861.2

Accumulated deficit
(81.9
)
 
(98.2
)
Accumulated other comprehensive income
392.9

 
413.2

Total Harbinger Group Inc. stockholders' equity
1,171.9

 
1,177.6

 Noncontrolling interest
426.7

 
421.3

Total permanent equity
1,598.6

 
1,598.9

Total liabilities and equity
$
27,716.7

 
$
25,200.4

 
 
 
 

See accompanying notes to condensed consolidated financial statements.

3


HARBINGER GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
 
Three months ended
 
Six months ended
 
March 31, 2013
 
April 1, 2012
 
March 31, 2013
 
April 1, 2012
 
(Unaudited)
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
Net consumer product sales
$
987.8

 
$
746.3

 
$
1,858.0

 
$
1,595.1

Oil and natural gas
16.7

 

 
16.7

 

Insurance premiums
14.1

 
13.3

 
27.9

 
30.1

Net investment income
172.0

 
173.0

 
350.1

 
359.8

Net investment gains
206.7

 
163.6

 
353.2

 
267.5

Insurance and investment product fees and other
14.6

 
9.5

 
28.3

 
19.2

Total revenues
1,411.9

 
1,105.7

 
2,634.2

 
2,271.7

Operating costs and expenses:
 
 
 
 
 
 
 
Consumer products cost of goods sold
664.9

 
486.3

 
1,247.0

 
1,051.0

Oil and natural gas direct operating costs
8.8

 

 
8.8

 

Benefits and other changes in policy reserves
240.9

 
241.8

 
324.5

 
418.7

Selling, acquisition, operating and general expenses
314.3

 
222.9

 
568.9

 
478.8

Amortization of intangibles
49.0

 
58.8

 
135.6

 
115.5

Total operating costs and expenses
1,277.9

 
1,009.8

 
2,284.8

 
2,064.0

Operating income
134.0

 
95.9

 
349.4

 
207.7

Interest expense
(75.7
)
 
(84.1
)
 
(218.8
)
 
(140.0
)
(Loss) gain from the change in the fair value of the equity conversion feature of preferred stock
(39.6
)
 
(26.4
)
 
29.3

 
1.5

Gain on contingent purchase price reduction

 
41.0

 

 
41.0

Other expense, net
(3.2
)
 
(9.7
)
 
(11.9
)
 
(8.5
)
Income from continuing operations before income taxes
15.5

 
16.7

 
148.0

 
101.7

Income tax expense
66.0

 
16.9

 
130.4

 
56.4

Net (loss) income
(50.5
)
 
(0.2
)
 
17.6

 
45.3

Less: Net loss attributable to noncontrolling interest
(17.2
)
 
(12.2
)
 
(23.2
)
 
(6.2
)
Net (loss) income attributable to controlling interest
(33.3
)
 
12.0

 
40.8

 
51.5

Less: Preferred stock dividends and accretion
12.2

 
15.9

 
24.3

 
31.6

Net (loss) income attributable to common and participating preferred stockholders
$
(45.5
)
 
$
(3.9
)
 
$
16.5

 
$
19.9

 
 
 
 
 
 
 
 
Net (loss) income per common share attributable to controlling interest:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
(0.33
)
 
$
(0.03
)
 
$
0.08

 
$
0.10

Diluted
$
(0.33
)
 
$
(0.03
)
 
$
0.06

 
$
0.10


See accompanying notes to condensed consolidated financial statements.



4


HARBINGER GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
 
Three months ended
 
Six months ended
 
March 31,
2013
 
April 1,
2012
 
March 31,
2013
 
April 1,
2012
 
(Unaudited)
 
(Unaudited)
Net (loss) income
$
(50.5
)
 
$
(0.2
)
 
$
17.6

 
$
45.3

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation (losses) gains
(20.4
)
 
18.5

 
(17.6
)
 
3.6

Net unrealized gain on derivative instruments
 
 
 
 
 
 
 
Changes in derivative instruments before reclassification adjustment
1.5

 
(3.2
)
 
1.4

 
(2.8
)
Net reclassification adjustment for losses included in net income

 
1.1

 
0.4

 
3.5

Changes in derivative instruments after reclassification adjustment
1.5

 
(2.1
)
 
1.8

 
0.7

Changes in deferred income tax asset/liability
(1.1
)
 
1.4

 
(1.1
)
 
0.4

Deferred tax valuation allowance adjustments
0.4

 
(0.5
)
 
0.4

 
(0.2
)
Net unrealized gain on derivative instruments
0.8

 
(1.2
)
 
1.1

 
0.9

Actuarial adjustments to pension plans
 
 
 
 
 
 
 
Changes in actuarial adjustments before reclassification adjustment
(0.9
)
 

 
(1.6
)
 
0.3

Net reclassification adjustment for losses included in cost of goods sold
0.3

 
0.1

 
0.6

 
0.2

Net reclassification adjustment for losses included in selling and general and administrative expenses
0.2

 
0.1

 
0.4

 
0.1

Changes in actuarial adjustments to pension plans
(0.4
)
 
0.2

 
(0.6
)
 
0.6

Changes in deferred income tax asset/liability
0.2

 

 
0.3

 
(0.1
)
Net actuarial adjustments to pension plans
(0.2
)
 
0.2

 
(0.3
)
 
0.5

Unrealized investment gains (losses):
 
 
 
 
 
 
 
Changes in unrealized investment gains before reclassification adjustment
53.9

 
210.0

 
180.2

 
286.3

Net reclassification adjustment for gains included in net income
(74.5
)
 
(64.6
)
 
(246.5
)
 
(133.8
)
Changes in unrealized investment gains after reclassification adjustment
(20.6
)
 
145.4

 
(66.3
)
 
152.5

Adjustments to intangible assets
22.3

 
(36.6
)
 
50.3

 
(31.2
)
Changes in deferred income tax asset/liability
(0.7
)
 
(38.1
)
 
5.5

 
(42.5
)
Net unrealized gain on investments
1.0

 
70.7

 
(10.5
)
 
78.8

Non-credit related other-than-temporary impairment:
 
 
 
 
 
 
 
Changes in non-credit related other-than-temporary impairment

 
(0.7
)
 

 
(1.6
)
Adjustments to intangible assets

 
0.2

 

 
0.6

Changes in deferred income tax asset/liability

 
0.2

 

 
0.3

Net non-credit related other than-temporary impairment

 
(0.3
)
 

 
(0.7
)
Net change to derive comprehensive income (loss) for the period
(18.8
)
 
87.9

 
(27.3
)
 
83.1

Comprehensive (loss) income
(69.3
)
 
87.7

 
(9.7
)
 
128.4

Less: Comprehensive (loss) income attributable to the noncontrolling interest:
 
 
 
 
 
 
 
Net (loss) income
(17.2
)
 
(12.2
)
 
(23.2
)
 
(6.2
)
Other comprehensive (loss) income
(8.4
)
 
7.4

 
(7.1
)
 
1.7

 
(25.6
)
 
(4.8
)
 
(30.3
)
 
(4.5
)
Comprehensive (loss) income attributable to the controlling interest
$
(43.7
)
 
$
92.5

 
$
20.6

 
$
132.9


See accompanying notes to condensed consolidated financial statements.


5


HARBINGER GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 
Six months ended
 
March 31,
2013
 
April 1,
2012
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net (loss) income
$
17.6

 
$
45.3

Adjustments to reconcile net (loss) income to operating cash flows:
 
 
 
Depreciation of properties
34.4

 
19.0

Amortization of intangibles
135.6

 
115.5

Stock-based compensation
22.2

 
11.8

Amortization of debt issuance costs
5.5

 
4.8

Amortization of debt discount
0.5

 
0.4

Write-off of debt issuance costs on retired debt
15.5

 
2.6

Write-off of debt discount on retired debt
3.0

 
(0.5
)
Deferred income taxes
150.1

 
63.9

Gain on contingent purchase price reduction

 
(41.0
)
Cost of trading securities acquired for resale

 
(639.0
)
Proceeds from trading securities sold

 
779.7

Interest credited/index credits to contractholder account balances
313.4

 
336.0

Amortization of fixed maturity discounts and premiums
22.2

 
47.3

Net recognized gains on investments and derivatives
(374.7
)
 
(257.8
)
Charges assessed to contractholders for mortality and administration
(16.0
)
 
(6.6
)
Deferred policy acquisition costs
(71.5
)
 
(97.3
)
Cash transferred to reinsurer

 
(176.8
)
Non-cash increase to cost of goods sold due to the sale of HHI Business acquisition inventory
31.0

 

Non-cash restructuring and related charges

 
1.4

Changes in operating assets and liabilities:
(376.2
)
 
(102.4
)
Net change in cash due to operating activities
(87.4
)
 
106.3

Cash flows from investing activities:
 
 
 
Proceeds from investments sold, matured or repaid
6,016.3

 
3,223.2

Cost of investments acquired
(5,916.2
)
 
(2,194.3
)
Acquisitions, net of cash acquired
(1,903.5
)
 
(185.1
)
Asset-backed loans originated, net
(63.0
)
 
(32.8
)
Capital expenditures
(25.2
)
 
(18.7
)
Proceeds from sales of assets

 
0.1

Other investing activities, net
(100.0
)
 
0.8

Net change in cash due to investing activities
(1,991.6
)
 
793.2

Cash flows from financing activities:
 
 
 
Proceeds from issuance of new debt
2,945.1

 
528.8

Repayment of debt, including tender and call premiums
(919.5
)
 
(369.5
)
Revolving credit facility activity
355.1

 
50.0

Debt issuance costs
(78.6
)
 
(9.9
)
Purchases of subsidiary stock, net
(16.0
)
 
(82.9
)
Contractholder account deposits
772.8

 
1,216.3

Contractholder account withdrawals
(950.3
)
 
(1,033.1
)
Dividend paid by subsidiary to noncontrolling interest
(5.8
)
 

Dividends paid on preferred stock
(16.7
)
 
(15.2
)
Other financing activities, net

 
(1.0
)
Net change in cash due to financing activities
2,086.1

 
283.5

Effect of exchange rate changes on cash and cash equivalents
(2.8
)
 
(0.7
)
Net increase in cash and cash equivalents
4.3

 
1,182.3

Cash and cash equivalents at beginning of period
1,470.7

 
1,137.4

Cash and cash equivalents at end of period
$
1,475.0

 
$
2,319.7

See accompanying notes to condensed consolidated financial statements.

6


HARBINGER GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in millions, except share and per share figures)
(1) Description of Business
Description of the Business
Harbinger Group Inc. ("HGI" and, collectively with its respective subsidiaries, the "Company") is a diversified holding company, the outstanding common stock of which is 74.6% owned, collectively, by Harbinger Capital Partners Master Fund I, Ltd. (the "Master Fund"), Global Opportunities Breakaway Ltd. and Harbinger Capital Partners Special Situations Fund, L.P. (together, the "Principal Stockholders"), not giving effect to the conversion rights of the Company's Series A Participating Convertible Preferred Stock (the "Series A Preferred Stock") or the Series A-2 Participating Convertible Preferred Stock (the "Series A-2 Preferred Stock", together the "Preferred Stock"). Such common stock ownership by the Principal Stockholders represents a voting interest of 55.6% in relation to the existing voting rights of all HGI’s common and preferred stockholders. HGI’s shares of common stock trade on the New York Stock Exchange ("NYSE") under the symbol "HRG."
HGI is focused on obtaining controlling equity stakes in companies that operate across a diversified set of industries and growing acquired businesses. As such, the Company has gained controlling interests in Spectrum Brands Holdings, Inc., a Delaware corporation (collectively with its consolidated subsidiaries, where applicable, "Spectrum Brands"), and Fidelity & Guaranty Life Holdings, Inc., a Delaware corporation ("FGL") and formed Salus Capital Partners, LLC ("Salus") and HGI Energy Holdings, LLC ("HGI Energy"). As of March 31, 2013, the Company’s beneficial ownership of the outstanding common stock of Spectrum Brands was 57.4%. Spectrum Brands is a global branded consumer products company which trades on the NYSE under the symbol "SPB." FGL, a wholly-owned subsidiary, is a provider of annuity and life insurance products in the United States of America. Salus is a provider of secured asset-based loans to entities across a variety of industries. HGI Energy holds an 74.5% equity investment in an oil and natural gas joint venture.
In December 2012 and January 2013, the Company closed a secondary offering, in which the Principal Stockholders offered a total of 23.0 million shares of common stock at a price to the public of $7.50 per share. The Company did not receive any proceeds from the sale of shares in this offering.
In December 2012, the Company issued $700.0 aggregate principal amount 7.875% Senior Secured Notes due 2019 (the "7.875% Notes") and used part of the proceeds of the offering to accept for purchase $498.0 aggregate principal amount of its 10.625% Senior Secured Notes due 2015 (the "10.625% Notes") pursuant to a tender offer (the "Tender Offer") for the 10.625% Notes. Additionally, the Company deposited sufficient funds in trust with the trustee under the indenture governing the 10.625% Notes in satisfaction and discharge of the remaining $2.0 aggregate principal amount of the 10.625% Notes. The remainder of the proceeds will be used for working capital by the Company and its subsidiaries and for general corporate purposes, including the financing of future acquisitions and businesses.
In December, Spectrum Brands acquired the residential hardware and home improvement business (the "HHI Business") from Stanley Black & Decker, Inc. ("Stanley Black & Decker"), which includes (i) the equity interests of certain subsidiaries of Stanley Black & Decker engaged in the business and (ii) certain assets of Stanley Black & Decker used or held for use in connection with the business (the "Hardware Acquisition"). The HHI Business has a broad portfolio of recognized brand names, including Kwikset, Weiser, Baldwin, National Hardware, Stanley, FANAL and Pfister, as well as patented technologies such as Smartkey, a rekeyable lockset technology, and Smart Code Home Connect. On April 8, 2013, the Company completed the Hardware Acquisition, which included the acquisition of certain assets of Tong Lung Metal Industry Co. Ltd., a Taiwan Corporation ("TLM Taiwan"), which is involved in the production of residential locksets. For information pertaining to the Hardware Acquisition, see Note 3, Acquisitions.
Also in December 2012, Spectrum Brands Escrow Corp. issued $520.0 aggregate principal amount of 6.375% Senior Notes due 2020 (the "6.375% Notes") and $570.0 aggregate principal amount of 6.625% Senior Notes due 2022 (the "6.625% Notes"). The 6.375% Notes and the 6.625% Notes were assumed by Spectrum Brands, in connection with the Hardware Acquisition. Spectrum Brands used the net proceeds from the offering to fund a portion of the purchase price and related fees and expenses for the Hardware Acquisition. Spectrum Brands

7


financed the remaining portion of the Hardware Acquisition with a new $800.0 term loan facility, of which $100.0 is in Canadian dollar equivalents (the "Term Loan"). A portion of the Term Loan proceeds were also used to refinance the former term loan facility, maturing June 17, 2016, which had an aggregate amount outstanding of $370.2 prior to refinancing. Refer to Note 8, Debt, as well as Note 3, Acquisitions, in the accompanying Condensed Consolidated Financial Statements.
Lastly, in December 2012, FGL entered into a coinsurance agreement (the "Reinsurance Agreement") with Front Street Re (Cayman) Ltd. ("Front Street Cayman"), also an indirect subsidiary of the Company. Pursuant to the Reinsurance Agreement, Front Street Cayman will reinsure approximately 10%, or approximately $1,500.0 of FGL’s policy liabilities, on a funds-withheld basis. In connection with the Reinsurance Agreement, Front Street Cayman, FGL and an indirect subsidiary of the Company, Five Island Asset Management, LLC ("Five Island"), also entered into an investment management agreement, pursuant to which Five Island will manage the assets securing Front Street Cayman’s reinsurance obligations under the Reinsurance Agreement, which assets are held by FGL in a segregated account. The assets in the segregated account will be invested in accordance with FGL’s existing guidelines.
In February 2013, HGI finalized a joint venture with EXCO Resources, Inc. ("EXCO") to create a private oil and natural gas partnership (the "EXCO/HGI Partnership"), through the Company's wholly-owned subsidiary HGI Energy. In connection with its formation, the EXCO/HGI Partnership entered into a credit agreement which had an initial borrowing base of $400.0, maturing on February 14, 2018 (the "EXCO/HGI Partnership Credit Agreement"). In March 2013, the EXCO/HGI Partnership acquired all of the shallow Cotton Valley assets from an affiliate of BG Group plc ("BG Group") for $130.9, funded with borrowings from the EXCO/HGI Partnership Credit Agreement.
Also in February 2013, Salus announced the closing of Salus CLO 2012-1, Ltd., a $250.0 collateralized loan obligation ("CLO") vehicle, initially funded with $175.5 of the asset-backed loans that it had originated through that date. Refer to Note 15, Other Required Disclosures, in the accompanying Condensed Consolidated Financial Statements.
In March 2013, FGL issued $300.0 aggregate principal amount of its 6.375% senior notes due April 1, 2021, at par value. FGL used a portion of the net proceeds from the issuance to pay a dividend to HGI and expects to use the remainder for general corporate purposes, to support the growth of its subsidiary life insurance company. Refer to Note 8, Debt, in the accompanying Condensed Consolidated Financial Statements.
In addition to acquiring controlling interests, HGI may make investments in debt instruments, acquire minority equity interests in companies and expand its operating businesses. The Company also owns 97.9% of Zap.Com Corporation ("Zap.Com"), a public shell company that may seek assets or businesses to acquire or may sell assets and/or liquidate.
The Company’s reportable business segments are organized in a manner that reflects how HGI’s management views those business activities. Accordingly, the Company currently operates its business in four reporting segments: (i) Consumer Products, (ii) Insurance, (iii) Energy, and (iv) Financial Services. For the results of operations by segment, and other segment data, see Note 17, Segment Data.


8


(2) Basis of Presentation, Significant Accounting Policies and Practices and Recent Accounting Pronouncements
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of the Company included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information. All such adjustments are of a normal recurring nature. Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and 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, except for such significant accounting policies that were adopted during the quarter relating to new business ventures, which are detailed below. Certain prior year amounts have been reclassified or combined to conform to the current year presentation. These reclassifications and combinations had no effect on previously reported results of operations or accumulated deficit. These interim financial statements should be read in conjunction with the Company’s annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on November 27, 2012 (the "Form 10-K"). The results of operations for the six months ended March 31, 2013 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending September 30, 2013.

Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of the Company, its majority-owned subsidiaries, those variable interest entities ("VIEs") where the Company is the primary beneficiary, and it's proportional share of the gross net assets of equity method investments in extractive industries ("Proportionate consolidation"). Intercompany accounts and transactions have been eliminated. Results of operations of acquired companies are included from the dates of acquisition and for VIEs, from the dates that the Company became the primary beneficiary.
The Company has elected to account for its investments in extractive industries that it does not control, but over which it can exert significant influence (specifically, the EXCO/HGI Partnership), by using the proportionate consolidation method allowed for equity-method investments in extractive industries, under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 932, Extractive Industries. Under this method, the Company consolidates its proportionate share of the assets and liabilities of the equity method investment, using a gross presentation.
A variable interest entity is an entity that lacks equity investors or whose equity investors do not have a controlling financial interest in the entity through their equity investments. The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and consolidates the VIE. A corporation is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
The Company, through its subsidiary, Salus, primarily uses VIEs for its securitization activities, in which Salus transfers whole loans into a trust or other vehicle such that the assets are legally isolated from the creditors of Salus. Assets held in a trust can only be used to settle obligations of the trust. The creditors of these trusts typically have no recourse to Salus except in accordance with the obligations under standard representations and warranties. When Salus is the servicer of whole loans held in a securitization trust, Salus has the power to direct the most significant activities of the trust. Salus consolidates a whole-loan securitization trust if it has the power to direct the most significant activities and also holds securities issued by the trust or has other contractual arrangements, other than standard representations and warranties, that could potentially be significant to the trust.

Oil and natural gas properties
Full Cost Method
The accounting for, and disclosure of, oil and natural gas producing activities require that the EXCO/HGI Partnership choose between two GAAP alternatives; the full cost method or the successful efforts method. The

9


EXCO/HGI Partnership chose to use the full cost method of accounting, which involves capitalizing all intangible drilling costs, lease and well equipment and exploration and development costs incurred plus acquired proved and unproved leaseholds. Once the EXCO/HGI Partnership incurs costs, they are recorded in the depletable pool of proved properties or in unproved properties, collectively, the full cost pool. The EXCO/HGI Partnership's unproved property costs, which include unproved oil and natural gas properties, properties under development, and major development projects, collectively totaled $52.9 and $48.5 as of March 31, 2013 and February 14, 2013, respectively, and are not subject to depletion. The EXCO/HGI Partnership reviews its unproved oil and natural gas property costs on a quarterly basis to assess for impairment and transfer unproved costs to proved properties as a result of extensions or discoveries from drilling operations or determination that no proved reserves are attributable to such costs. The EXCO/HGI Partnership expects these costs to be evaluated over approximately four years and transferred to the depletable portion of the full cost pool during that time. The EXCO/HGI Partnership has not recorded any impairments of undeveloped properties for the period from inception to March 31, 2013.
Capitalization of Interest
When the EXCO/HGI Partnership acquires significant amounts of undeveloped acreage, it capitalizes interest on the acquisition costs in accordance with FASB ASC Subtopic 835-20, Capitalization of Interest. When the unproved property costs are moved to proved developed and undeveloped oil and natural gas properties, or the properties are sold, the EXCO/HGI Partnership will cease capitalizing interest.
Depletion
The EXCO/HGI Partnership calculates depletion using the unit-of-production method. Under this method, the sum of the full cost pool, excluding the book value of unproved properties, and all estimated future development costs are divided by the total estimated quantities of proved reserves. This rate is applied to the EXCO/HGI Partnership's total production for the quarter, and the appropriate expense is recorded. The EXCO/HGI Partnership capitalizes the portion of general and administrative costs, including share-based compensation, that is attributable to its exploration, exploitation and development activities.
Sales, dispositions and other oil and natural gas property retirements are accounted for as adjustments to the full cost pool, with no recognition of gain or loss, unless the disposition would significantly alter the amortization rate and/or the relationship between capitalized costs and Proved Reserves.
Ceiling Test Exemption
Pursuant to Rule 4-10(c)(4) of Regulation S-X, the EXCO/HGI Partnership was required to compute its ceiling test using the simple average spot price for the trailing twelve month period for oil and natural gas as of March 31, 2013. The computation resulted in the carrying costs of the EXCO/HGI Partnership's unamortized proved oil and natural gas properties exceeding the March 31, 2013 ceiling test limitation by approximately $234.0. As a result of a temporary exemption received from the SEC to exclude the acquisition of the EXCO/HGI Partnership's conventional oil and natural gas properties from the ceiling test, the need to recognize impairment for the quarter ended March 31, 2013 was eliminated.

The EXCO/HGI Partnership's pricing for these acquisitions are based on models which incorporate, among other things, market prices based on New York Mercantile Exchange ("NYMEX") futures. The ceiling test requires companies using the full cost accounting method to price period ending proved reserves using the simple average spot price for the trailing twelve month period, which may not be indicative of actual market values. Given the short passage of time between closing of these acquisitions and the required ceiling test computation, HGI requested, and received, an exemption from the SEC to exclude the acquisition of these oil and natural gas properties from the ceiling test assessments for a period of twelve months following the corresponding acquisition dates.

The request for exemption was made because the EXCO/HGI Partnership believes the fair value of the aforementioned acquisitions can be demonstrated beyond a reasonable doubt to exceed their unamortized costs. The EXCO/HGI Partnership's expectation of future prices is principally based on NYMEX futures contracts, adjusted for basis differentials, for a period of five years. After a five year period the EXCO/HGI Partnership has elected to use flat pricing as the NYMEX futures contracts become more thinly traded. Generally, the flat price used for the sixth year through the economic life of the property is management's internal long-term price estimate, which is, in part, based on an extension of the NYMEX pricing. The EXCO/HGI Partnership believes the NYMEX futures contracts reflect an independent proxy for fair value. Management's internal valuation

10


model demonstrated that the fair value of these acquired oil and natural gas properties clearly exceeded the calculated ceiling test limitation as of March 31, 2013 beyond a reasonable doubt.

The EXCO/HGI Partnership recognizes that, due to the volatility associated with oil and natural gas prices, a downward trend in market prices could occur. If such a case were to occur and is deemed to be other than a temporary trend, the EXCO/HGI Partnership would assess these acquisitions for impairment during the requested exemption period. Further, if the EXCO/HGI Partnership cannot demonstrate that fair value exceeds the calculated ceiling test limitation during the requested exemption periods prior to issuance of its financial statements, the EXCO/HGI Partnership will recognize impairment related to these acquisitions.
The ceiling test calculation is based upon estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves, in projecting the future rates of production and in the timing of development activities. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities of oil and natural gas that are ultimately recovered.

Gas gathering assets
Gas gathering assets are capitalized at cost and depreciated on a straight line basis over their estimated useful lives of up to 14 years.

Deferred abandonment and asset retirement obligations
The EXCO/HGI Partnership applies FASB ASC 410-20, Asset Retirement and Environmental Obligations ("ASC 410-20"), to account for estimated future plugging and abandonment costs. ASC 410-20 requires legal obligations associated with the retirement of long-lived assets to be recognized at their estimated fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost is capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. The EXCO/HGI Partnership's asset retirement obligations primarily represent the present value of the estimated amount it will incur to plug, abandon and remediate proved producing properties at the end of their productive lives, in accordance with applicable state laws.
The EXCO/HGI Partnership's asset retirement obligations are determined using discounted cash flow methodologies based on inputs that are not readily available in public markets. The EXCO/HGI Partnership has no assets that are legally restricted for purposes of settling asset retirement obligations.

Revenue recognition and gas imbalances
The EXCO/HGI Partnership uses the sales method of accounting for oil and natural gas revenues. Under the sales method, revenues are recognized based on actual volumes of oil and natural gas sold to purchasers. Gas imbalances at March 31, 2013 were not significant.

Gathering and transportation
The EXCO/HGI Partnership generally sells oil and natural gas under two types of agreements which are common in the industry. Both types of agreements include a transportation charge. One is a net-back arrangement, under which the EXCO/HGI Partnership sells oil or natural gas at the wellhead and collects a price, net of the transportation incurred by the purchaser. In this case, The EXCO/HGI Partnership records sales at the price received from the purchaser, net of the transportation costs. Under the other arrangement, the EXCO/HGI Partnership sells oil or natural gas at a specific delivery point, pays transportation to a third party and receives proceeds from the purchaser with no transportation deduction. In this case, the EXCO/HGI Partnership records the transportation cost as gathering and transportation expense. Due to these two distinct selling arrangements, The EXCO/HGI Partnership's computed realized prices, before the impact of derivative financial instruments, includes revenues which are reported under two separate bases.

Overhead reimbursement fees
The EXCO/HGI Partnership has classified fees from overhead charges billed to working interest owners, including itself, as a reduction of general and administrative expenses in the accompanying Condensed

11


Consolidated Statements of Operations. The EXCO/HGI Partnership's share of these charges was $0.6 and was classified as oil and natural gas production costs.

Environmental costs
Environmental costs that relate to current operations are expensed as incurred. Remediation costs that relate to an existing condition caused by past operations are accrued when it is probable that those costs will be incurred and can be reasonably estimated based upon evaluations of currently available facts related to each site.

Recent Accounting Pronouncements
Presentation of Comprehensive Income
In June 2011, the FASB issued Accounting Standards Update 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income," which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, comprehensive income must be reported in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. The guidance requiring disclosure of the income statement location where gains and losses reclassified out of comprehensive income are included was deferred in December 2011. In November 2012, the FASB clarified its position on the reclassification disclosures, allowing disclosure of reclassification adjustments on the face of the comprehensive income statement or in the notes to the financial statements. The accounting guidance requiring a comprehensive income statement is now effective for the Company. The Company has implemented all required disclosures.
Impairment Testing
Also effective October 1, 2012, the Company implemented new guidance intended to simplify how the Company tests for impairments of goodwill and indefinite-lived intangible assets. The guidance will allow the Company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative impairment tests for goodwill and indefinite-lived intangible assets. The Company will no longer be required to calculate, respectively for goodwill and indefinite-lived intangible assets, the fair value of a reporting unit, or the fair value of an indefinite-lived intangible asset, unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The Company will apply this new guidance upon its annual impairment analysis of its goodwill and indefinite-lived intangible assets, in August 2013. The Company does not expect the adoption of this guidance to have a significant impact on its consolidated financial statements.
Offsetting Assets and Liabilities
In December 2011, the FASB issued amended disclosure requirements for offsetting financial assets and financial liabilities to allow investors to better compare financial statements prepared under US GAAP with financial statements prepared under International Financial Reporting Standards. The new standards are effective for us beginning in the first quarter of our fiscal year ending September 30, 2014. The Company is currently evaluating the impact of this new accounting guidance on the disclosures included in its consolidated financial statements.

(3) Acquisitions
Spectrum Brands’ Acquisition of Stanley Black & Decker’s Hardware and Home Improvement Business
On December 17, 2012, Spectrum Brands completed the cash acquisition of the HHI Business from Stanley Black & Decker, which includes (i) the equity interests of certain subsidiaries of Stanley Black & Decker engaged in the business and (ii) certain assets of Stanley Black & Decker used or held for use in connection with the business.

12


The following table summarizes the preliminary consideration paid for the HHI Business:
 
 
December 17,
2012
Negotiated sales price, excluding TLM Taiwan
 
$
1,300.0

Preliminary working capital and other adjustments
 
(10.6
)
Preliminary purchase price
 
$
1,289.4

The HHI Business is a major manufacturer and supplier of residential locksets, residential builders' hardware and faucets with a portfolio of recognized brand names, including Kwikset, Weiser, Baldwin, National Hardware, Stanley, FANAL and Pfister, as well as patented technologies such as the SmartKey, a re-keyable lockset technology, and Smart Code Home Connect. HHI Business customers include retailers, non-retail distributors and homebuilders. Headquartered in Lake Forest, California, the HHI Business has a global sales force and operates manufacturing and distribution facilities in the U.S., Canada, Mexico and Asia.
A portion of the Hardware Acquisition consisting of the purchase of certain assets of TLM Taiwan closed on April 8, 2013. Spectrum Brands paid Stanley Black & Decker the negotiated sales price of $100.0 on December 17, 2012, which was held in escrow until the close of the TLM Taiwan acquisition. This payment was made in conjunction with the close of the HHI Business acquisition and is classified within Other assets in the Company's Condensed Consolidated Balance Sheets.
The results of HHI Business operations since December 17, 2012 are included in the Company's Condensed Consolidated Statements of Operations.
Preliminary Valuation of Assets and Liabilities
The preliminary fair values of net tangible and intangible assets acquired and liabilities assumed in connection with the purchase of the HHI Business have been recognized in the Condensed Consolidated Balance Sheets based upon their preliminary values at December 17, 2012, as set forth below. The excess of the purchase price over the preliminary fair values of the net tangible assets and intangible assets was recorded as goodwill, and includes value associated with greater product diversity, stronger relationships with core retail partners, cross-selling opportunities in all channels and a new platform for potential future global growth using the Spectrum Brands' existing international infrastructure, most notably in Europe. The majority of goodwill recorded is not expected to be deductible for income tax purposes. The preliminary fair values were based upon a preliminary valuation and the estimates and assumptions used in such valuation are subject to change, which could be significant, within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary valuation that are not yet finalized relate to the fair values of certain tangible assets and liabilities acquired, 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 valuation allowance, the determination of identifiable intangible assets and the final amount of residual goodwill. Additionally, finalized fair values associated with deferred tax accounts could have a material effect on Spectrum Brands' estimated reversal of its consolidated U.S. valuation allowances recognized during the measurement period. See Note 12, Income Taxes, for further information. 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.

13


The preliminary valuation of the assets acquired and liabilities assumed for the HHI Business, including a reconciliation to the preliminary valuation reported as of December 30, 2012, is as follows:
 
Preliminary Valuation
 
 
 
Preliminary Valuation
 
December 30,
2012
 
Adjustments/reclassifications
 
March 31,
2013
Cash
$
17.4

 
$
5.8

 
$
23.2

Accounts receivable
104.6

 
4.4

 
109.0

Inventory
207.1

 
(2.4
)
 
204.7

Prepaid expenses and other
13.3

 
(4.1
)
 
9.2

Property, plant and equipment
104.5

 
(5.2
)
 
99.3

Intangible assets
470.0

 

 
470.0

Other long-term assets
3.1

 

 
3.1

Total assets acquired
920.0

 
(1.5
)
 
918.5

Accounts payable
130.1

 
8.0

 
138.1

Deferred tax liability - current
7.1

 

 
7.1

Accrued liabilities
37.5

 
(0.6
)
 
36.9

Deferred tax liability - long-term
104.7

 
11.2

 
115.9

Other long-term liabilities
11.2

 
(2.2
)
 
9.0

Total liabilities assumed
290.6

 
16.4

 
307.0

Total identifiable net assets
629.4

 
(17.9
)
 
611.5

Non-controlling interests
(2.2
)
 
(2.2
)
 
(4.4
)
Goodwill
662.2

 
20.1

 
682.3

Total net assets acquired
$
1,289.4

 
$

 
$
1,289.4


During the three month period ended March 31, 2013, Spectrum Brands recorded adjustments to the preliminary valuation of assets and liabilities resulting in a net increase to goodwill of $20.1.  The preliminary goodwill increased $11.2 as a result of recording certain state and foreign valuation allowances against deferred tax assets,  $5.2 resulting from a reduction in certain property, plant and equipment asset values and $2.4 from a reduction in inventory asset values.  The changes in estimates were the result of additional accounting information provided by Stanley Black & Decker during the period. Spectrum Brands believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but it is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to further change. Spectrum Brands expects to complete the purchase accounting process as soon as practicable but no later than one year from the acquisition date.
Preliminary Pre-Acquisition Contingencies Assumed
Spectrum Brands has evaluated and continues to evaluate pre-acquisition contingencies relating to the HHI Business that existed as of the acquisition date. Based on the evaluation to date, Spectrum Brands has preliminarily determined that certain pre-acquisition contingencies are probable in nature and estimable as of the acquisition date. Accordingly, Spectrum Brands has preliminarily recorded its best estimates for these contingencies as part of the preliminary valuation of the assets and liabilities acquired for the HHI Business. Spectrum Brands continues to gather information relating to all pre-acquisition contingencies that it has assumed from the HHI Business. Any changes to the pre-acquisition contingency amounts recorded during the measurement period will be included in the final valuation and related amounts recognized. Subsequent to the end of the measurement period any adjustments to pre-acquisition contingency amounts will be reflected in the Company's Condensed Consolidated Statements of Operations.
Preliminary Valuation Adjustments
Spectrum Brands performed a preliminary valuation of the assets and liabilities of the HHI Business at December 17, 2012. Significant adjustments as a result of the valuation and the bases for their determination are summarized as follows:
Inventories - An adjustment of $31.0 was recorded to adjust inventory to fair value. Finished goods were valued at estimated selling prices less the sum of costs of disposal and a reasonable profit allowance for the selling effort.

14


Property, plant and equipment, net - An adjustment of $4.0 was recorded to adjust the net book value of property, plant and equipment to fair value giving consideration to the highest and best use of the assets. The valuation of the property, plant and equipment was based on the cost approach.
Certain indefinite-lived intangible assets were valued using a relief from royalty methodology. Customer relationships and certain definite-lived intangible assets were valued using a multi-period excess earnings method. The total fair value of indefinite and definite lived intangibles was $470.0 as of December 17, 2012. A summary of the significant key inputs is as follows:
Spectrum Brands valued customer relationships using the income approach, specifically the multi-period excess earnings method. In determining the fair value of the customer relationships, the multi-period excess earnings approach values the intangible asset at the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting contributory asset charges. The incremental after-tax cash flows attributable to the subject intangible asset are then discounted to their present value. Only expected sales from current customers were used, which included an expected growth rate of 3%. Spectrum Brands assumed a customer retention rate of approximately 95%, which was supported by historical retention rates. Income taxes were estimated at 35% and amounts were discounted using a rate of 12%. The customer relationships were valued at $74.0 under this approach and will be amortized over 20 years.
Spectrum Brands valued indefinite lived trade names and trademarks using the income approach, specifically the relief from royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the trade name was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions of the HHI Business related trademarks and trade names, other similar trademark licensing and transaction agreements and the relative profitability and perceived contribution of the trademarks and trade names. Royalty rates used in the determination of the fair values of trade names and trademarks ranged from 3.0% - 5.0% of expected net sales related to the respective trade names and trademarks. Spectrum Brands anticipates using the majority of the trade names and trademarks for an indefinite period as demonstrated by the sustained use of each subject trademark. In estimating the fair value of the trademarks and trade names, net sales for significant trade names and trademarks were estimated to grow at a rate of 2.5% - 5.0% annually with a terminal year growth rate of 2.5%. Income taxes were estimated at 35.0% and amounts were discounted using a rate of 12.0%. Trade name and trademarks were valued at $330.0 under this approach.
Spectrum Brands valued a definite lived trade name using the income approach, specifically the relief from royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the trade name was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions of the HHI Business related trademarks and trade names, other similar trademark licensing and transaction agreements and the relative profitability and perceived contribution of the trademarks and trade names. The royalty rate used in the determination of the fair values of trade name was 3.5% of expected net sales related to the respective trade name. Spectrum Brands assumed an 8 year useful life of the trade name. In estimating the fair value of the trade name, net sales for the trade name were estimated to grow at a rate of 2.5% - 5.0% annually. Income taxes were estimated at 35.0% and amounts were discounted using a rate of 12.0%. The trade name was valued at $3.0 under this approach.
Spectrum Brands valued a trade name license agreement using the income approach, specifically the relief from royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the trade name was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions of the HHI Business related trademarks and trade names, other similar trademark licensing and transaction agreements and the relative profitability and perceived contribution of the trademarks and trade names. The royalty rate used in the determination of the fair value of the trade name license agreement was 4.0% of expected net sales related to the respective trade name. In estimating the fair value of the trade name license agreement, net sales were estimated to grow at a rate of 2.5% - 5.0% annually. Spectrum Brands assumed a 5 year useful life of the trade name license agreement. Income taxes were estimated at

15


35.0% and amounts were discounted using a rate of 12.0%. The trade name license agreement was valued at $12.0 under this approach.
Spectrum Brands valued technology using the income approach, specifically the relief from royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the technology was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions of the HHI Business, related licensing agreements and the importance of the technology and profit levels, among other considerations. Royalty rates used in the determination of the fair values of technologies ranged from 4.0%- 5.0% of expected net sales related to the respective technology. Spectrum Brands anticipates using these technologies through the legal life of the underlying patent and therefore the expected life of these technologies was equal to the remaining legal life of the underlying patents which was 10 years. In estimating the fair value of the technologies, net sales were estimated to grow at a rate of 2.5% - 31.0% annually. Income taxes were estimated at 35.0% and amounts were discounted using the rate of 12.0%. The technology assets were valued at $51.0 under this approach.
Deferred tax liabilities, net - An adjustment of $122.9 was recorded to adjust deferred taxes for the preliminary fair value adjustments made in accounting for the purchase.

Shaser

On November 8, 2012, Spectrum Brands completed the cash acquisition of an approximately 56% interest in Shaser Biosciences, Inc. ("Shaser"). Shaser is a global technology leader in developing energy-based, aesthetic dermatological technology for home use devices. This acquisition was not significant individually.

The following table summarizes the preliminary consideration paid for Shaser:
 
 
November 8,
2012
Negotiated sales price
 
$
50.0

Preliminary working capital adjustment
 
(0.4
)
Preliminary purchase price
 
$
49.6

The purchase agreement provides Spectrum Brands with an option, exercisable solely at Spectrum Brands' discretion, to acquire the remaining 44% interest of Shaser (the "Call Option"). The Call Option is exercisable any time between January 1, 2017 and March 31, 2017 at a price equal to 1.0x trailing revenues or 7.0x adjusted trailing earnings before interest taxes depreciation and amortization ("EBITDA"), as defined, for calendar year ended December 31, 2016.
As of March 31, 2013, Spectrum Brands has paid approximately half of the negotiated sales price to the seller. The remaining purchase consideration was paid on April 2, 2013.
The results of Shaser's operations since November 8, 2012 are included in the Company's Condensed Consolidated Statements of Operations.
Preliminary Valuation of Assets and Liabilities
The assets acquired and liabilities assumed in the Shaser acquisition have been measured at their fair values at November 8, 2012 as set forth below. The excess of the purchase price over the fair values of the net tangible assets and identifiable intangible assets was recorded as goodwill, which includes value associated with the assembled workforce including an experienced research team, and is not expected to be deductible for income tax purposes. The preliminary fair values recorded were determined based upon a preliminary valuation and the estimates and assumptions used in such valuation are subject to change, which could be significant, within the measurement period (up to one year from the acquisition date). The primary areas of acquisition accounting that are not yet finalized relate to amounts for income taxes including deferred tax accounts, uncertain tax positions and net operating loss carryforwards inclusive of associated limitations and valuation allowances, certain legal matters and residual goodwill.

16


The preliminary fair values recorded for the assets acquired and liabilities assumed for Shaser are as follows:
 
Preliminary Valuation
 
 
 
Preliminary Valuation
 
December 30,
2012
 
Adjustments/reclassifications
 
March 31,
2013
Cash
$
0.9

 
$

 
$
0.9

Intangible asset
35.5

 
(2.7
)
 
32.8

Other assets
2.7

 

 
2.7

Total assets acquired
39.1

 
(2.7
)
 
36.4

Total liabilities assumed
14.4

 
(1.0
)
 
13.4

Total identifiable net assets
24.7

 
(1.7
)
 
23.0

Non-controlling interest
(39.0
)
 

 
(39.0
)
Goodwill
63.9

 
1.7

 
65.6

Total identifiable net assets
$
49.6

 
$

 
$
49.6


During the three month period ended March 31, 2013, Spectrum Brands recorded adjustments to the preliminary valuation of assets and liabilities resulting in a net increase to goodwill of $1.7.  Goodwill increased as a result further information received to support a key valuation factor that impacted the valuation of the technology asset acquired.  This revised information was provided by Shaser during the period. Spectrum Brands believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but it is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to further change. Spectrum Brands expects to complete the purchase accounting process as soon as practicable but in any event, no later than one year from the acquisition date.
Preliminary Pre-Acquisition Contingencies Assumed
Spectrum Brands evaluated and continues to evaluate pre-acquisition contingencies relating to Shaser that existed as of the acquisition date. Based on the evaluation to date, Specrum Brands has preliminarily determined that certain pre-acquisition contingencies are probable in nature and estimable as of the acquisition date. Accordingly, Spectrum Brands has preliminarily recorded its best estimates for these contingencies as part of the preliminary accounting for Shaser. Spectrum Brands continues to gather information relating to all pre-acquisition contingencies that it has assumed from Shaser. Any changes to the pre-acquisition contingency amounts recorded during the measurement period will be included in the final valuation and related amounts recognized. Subsequent to the end of the measurement period any adjustments to pre-acquisition contingency amounts will be reflected in Spectrum Brands' results of operations.
Preliminary Valuation Adjustments
Spectrum Brands performed a preliminary valuation of the acquired proprietary technology assets, the non-controlling interest and the Call Option related to Shaser at November 8, 2012. A summary of the significant key inputs is as follows:

Spectrum Brands valued the technology assets using the income approach, specifically the relief from royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the technology was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions of Shaser, related licensing agreements and the importance of the technology and profit levels, among other considerations. The royalty rate used in the determination of the fair value of the technology asset was 10.5% of expected net sales related to the technology. Spectrum Brands anticipates using the technology through the legal life of the underlying patent and therefore the expected life of the technology was equal to the remaining legal life of the underlying patent which was 13 years. In estimating the fair value of the technology, net sales were estimated to grow at a long-term rate of 3.0% annually. Income taxes were estimated at 35.0% and amounts were discounted using the rate of 11.0%. The technology asset was valued at approximately $32.8 under this approach.
Spectrum Brands valued the non-controlling interest in Shaser, a private company, by applying both income and market approaches. Under these methods, the non-controlling value was determined by using a discounted cash flow method, a guideline companies method, and a recent transaction

17


approach. In estimating the fair value of the non-controlling interest, key assumptions include (i) cash flow projections based on market participant data and estimates by Spectrum Brands management, with net sales estimated to grow at a terminal growth rate of 3.0% annually, income taxes estimated at 35.0%, and amounts discounted using a rate of 12.0%, (ii) financial multiples of companies deemed to be similar to Shaser, and (iii) adjustments because of lack of control or lack of marketability that market participants would consider when estimating the fair value of the non-controlling interest in Shaser. The non-controlling interest was valued at $39.0 under this approach.
Spectrum Brands, in connection with valuing the non-controlling interest in Shaser, also valued the Call Option. In addition to the valuation methods and key assumptions discussed above, Spectrum Brands compared the forecasted revenue and EBITDA multiples, as defined, associated with the Call Option to current guideline companies. The Call Option was determined to have an immaterial value under this approach.
EXCO/HGI Partnership

The EXCO/HGI Partnership was formed through transactions between subsidiaries of EXCO and HGI, resulting in the formation of the General Partner and the Partnership. Under the terms of the respective agreements, the EXCO/HGI Partnership acquired certain oil and natural gas assets from EXCO for $725.0 of total consideration, subject to certain customary closing adjustments of $32.5, or a net purchase price of $692.5. Immediately after the closing and the consummation of the transactions, the ownership in the Partnership was 73.5% by HGI and 24.5% by EXCO and 2% by the General Partner. In addition, HGI and EXCO each own a 50% member interest in the General Partner and each have equal representation on the General Partner's board of directors. The ownership of the Partnership and General Partnership translates into an economic ownership of the EXCO/HGI Partnership of 74.5%. At the closing, HGI contributed approximately $348.3 in cash (reflecting the effect of preliminary closing adjustments and the economic benefits related to the July 1, 2012 effective date) to the EXCO/HGI Partnership and EXCO contributed $692.5 of net assets in exchange for cash of $573.3, and retained an interest in the joint venture of $119.1. The payment to EXCO was funded through a combination of cash from HGI's contribution, and borrowings under the EXCO/HGI Partnership Credit Agreement.
On March 5, 2013, the EXCO/HGI Partnership acquired certain of the shallow Cotton Valley assets from an affiliate of BG Group for $130.9, after customary preliminary purchase price adjustments. This acquisition includes oil and natural gas assets in the Danville, Waskom and Holly fields in East Texas and North Louisiana. The assets acquired by the EXCO/HGI Partnership represented an incremental working interest in certain properties previously owned by the EXCO/HGI Partnership. The acquisition was funded with borrowings from the EXCO/HGI Partnership Credit Agreement.
The EXCO/HGI Partnership accounted for the acquisitions in accordance with ASC 805-10, Business Combinations. The following table presents a summary of the fair value of assets acquired and liabilities assumed as part of the acquisition:
 
EXCO's Contributed Assets
February 14, 2013
 
BG Cotton Valley Assets
March 5, 2013
 
EXCO/HGI Partnership
 
HGI's Proportionate Interest
 
EXCO/HGI Partnership
 
HGI's Proportionate Interest
Assets acquired:
 
 
 
 
 
 
 
Cash
$
0.1

 
$
0.1

 
$

 
$

Oil and natural gas properties
 
 
 
 
 
 
 
Unproved oil and natural gas properties
65.1

 
48.5

 
7.2

 
5.4

Proved developed and undeveloped oil and natural gas properties
632.2

 
471.0

 
131.2

 
97.7

Total oil and natural gas properties
697.3

 
519.5

 
138.4

 
103.1

Other assets
32.7

 
24.5

 

 

Liabilities assumed:
 
 
 
 
 
 
 
Accounts payable and other current liabilities
(14.1
)
 
(10.5
)
 

 

Other liabilities
(23.5
)
 
(17.5
)
 
(7.5
)
 
(5.6
)
Total purchase price
$
692.5

 
$
516.1

 
$
130.9

 
$
97.5


18



The EXCO/HGI Partnership performed a valuation of the assets acquired and liabilities assumed at February 14 and March 5, 2013. A summary of the key inputs are as follows:
   
Oil and Natural Gas Properties - HGI's proportionate share of the fair value allocated to oil and natural gas properties was $519.5 and $103.1, respectively. The fair value of oil and natural gas properties was determined based on a discounted cash flow model of the estimated reserves. The estimated quantities of reserves utilized assumptions based on the partnership's internal geological, engineering data and financial data. The EXCO/HGI Partnership utilized NYMEX forward strip prices to value the reserves for a period of five years and then held prices flat thereafter. We then applied various discount rates depending on the classification of reserves and other risk characteristics.

Gas Gathering Assets - HGI's proportionate share of the fair value allocated to gas gathering assets was $21.5. The fair value of these assets was determined based on a market approach using other recent transactions involving gathering and processing assets. The EBITDA multiple based on these market transactions was applied to the projected EBITDA of the gas gathering assets in order to calculate the fair value.

Asset Retirement Obligations - HGI's proportionate share of the fair value allocated to asset retirement obligations was $18.5 and $5.6, respectively. These asset retirement obligations represent the present value of the estimated amount to be incurred to plug, abandon and remediate proved producing properties at the end of their productive lives, in accordance with applicable state laws. The fair value was determined based on a discounted cash flow model, which included assumptions of the estimated current abandonment costs, discount rate, inflation rate, and timing associated with the incurrence of these costs. The asset retirement obligations are primarily included in "Other liabilities" in the Condensed Consolidated Balance Sheets.
FGL Acquisition Update
On April 6, 2011, the Company acquired all of the outstanding shares of capital stock of FGL and certain intercompany loan agreements between the seller, as lender, and FGL, as borrower, for cash consideration of $350.0 (including $5.0 re-characterized as an expense), which amount could be reduced by up to $50.0 post closing (as discussed further below).
Contingent Purchase Price Reduction
As contemplated by the terms of the F&G Stock Purchase Agreement, Front Street Re, Ltd. ("Front Street"), a then recently formed Bermuda-based reinsurer and wholly-owned subsidiary of the Company sought to enter into a reinsurance agreement (the "Front Street Reinsurance Transaction") with FGL whereby Front Street would reinsure up to $3,000.0 of insurance obligations under annuity contracts of FGL, and Harbinger Capital Partners II LP ("HCP II"), an affiliate of the Principal Stockholders, would be appointed the investment manager of up to $1,000.0 of assets securing Front Street’s reinsurance obligations under the reinsurance agreement. These assets would be deposited in a reinsurance trust account for the benefit of FGL.
The Front Street Reinsurance Transaction required the approval of the Maryland Insurance Administration (the "MIA"). The F&G Stock Purchase Agreement provides that, the seller may be required to pay up to $50.0 as a post-closing reduction in purchase price if, among other things, the Front Street Reinsurance Transaction is not approved by the MIA or is approved subject to certain restrictions or conditions. FGL received written notice, dated January 10, 2012, from the MIA, rejecting the Front Street Reinsurance Transaction, as proposed by the respective parties. HGI is pursuing all available options to recover the full purchase price reduction, including the commencement of litigation against the seller; however, the outcome of any such action is subject to risk and uncertainty and there can be no assurance that any or all of the $50.0 purchase price reduction will be obtained by HGI.
Prior to the receipt of the written rejection notice from the MIA, management believed, based on the facts and circumstances at that time, that the likelihood was remote that the purchase price would be required to be reduced. Therefore a fair value of zero had been assigned to the contingent purchase price reduction as of the FGL Acquisition date and at each subsequent quarterly remeasurement date through January 1, 2012. Management now believes that it is near certain that the purchase price will be required to be reduced by the full $50.0 amount and has estimated a fair value of $41.0 for the contingent receivable as of March 31, 2013 (essentially unchanged from September 30, 2012 and April 1, 2012), reflecting appropriate discounts for potential litigation and

19


regulatory action, length of time until expected payment is received and a credit insurance risk premium. Such $41.0 estimated fair value of the contingent receivable has been reflected in "Receivables, net" in the Condensed Consolidated Balance Sheets as of March 31, 2013. A corresponding credit to "Gain on contingent purchase price reduction" was recorded in earnings during Fiscal 2012.
Supplemental Pro Forma Information
The following table reflects the Company’s pro forma results as if the Hardware Acquisition and the acquisition of the Company's interest in the EXCO/HGI Partnership was completed on October 1, 2011 and the results of the HHI Business and the EXCO/HGI Partnership had been included in the full three and six months ended March 31, 2013 and April 1, 2012.

 
Three months ended
 
Six months ended
 
March 31, 2013
 
April 1, 2012
 
March 31, 2013
 
April 1, 2012
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Reported revenues
$
1,411.9

 
$
1,105.7

 
$
2,634.2

 
$
2,271.7

HHI adjustment 

 
232.2

 
191.8

 
463.9

EXCO/HGI Partnership adjustment
17.1

 
38.4

 
53.7

 
82.3

Pro forma revenues
$
1,429.0

 
$
1,376.3

 
$
2,879.7

 
$
2,817.9

 
 
 
 
 
 
 
 
Net income:
 
 
 
 
 
 
 
Reported net income
$
(50.5
)
 
$
(0.2
)
 
$
17.6

 
$
45.3

HHI adjustment 

 
10.1

 
4.9

 
23.1

EXCO/HGI Partnership adjustment
(0.9
)
 
(2.9
)
 
(0.5
)
 
0.4

Pro forma net income
$
(51.4
)
 
$
7.0

 
$
22.0

 
$
68.8

 
 
 
 
 
 
 
 
Basic net income per common share attributable to controlling interest:
 
 
 
 
 
 
 
Reported net loss per common share
$
(0.33
)
 
$
(0.03
)
 
$
0.08

 
$
0.10

HHI adjustment 

 
0.07

 
0.04

 
0.17

EXCO/HGI Partnership adjustment
(0.01
)
 
(0.02
)
 

 

Pro forma net income per common share
$
(0.34
)
 
$
0.02

 
$
0.12

 
$
0.27

 
 
 
 
 
 
 
 
Diluted net income per common share attributable to controlling interest:
 
 
 
 
 
 
 
Reported diluted net loss per common share
$
(0.33
)
 
$
(0.03
)
 
$
0.06

 
$
0.10

HHI adjustment 

 
0.07

 
0.02

 
0.17

EXCO/HGI Partnership adjustment
(0.01
)
 
(0.02
)
 

 

Pro forma diluted net income per common share
$
(0.34
)
 
$
0.02

 
$
0.08

 
$
0.27


Acquisition and Integration Related Charges
Acquisition and integration related charges reflected in "Selling, acquisition, operating and general expenses" in the accompanying Condensed Consolidated Statements of Operations include, but are not limited to transaction costs such as banking, legal and accounting professional fees directly related to an acquisition or potential acquisition, termination and related costs for transitional and certain other employees, integration related professional fees and other post business combination related expenses. Such charges for the three and six months ended March 31, 2013 relate primarily to the Hardware Acquisition and the EXCO/HGI Partnership acquisition, and for the three and six months ended April 1, 2012 relate primarily to the Spectrum Brands merger with Russell Hobbs, Inc. (the "SB/RH Merger") and the acquisition of FURminator.

20


The following table summarizes acquisition and integration related charges incurred by the Company for the three and six months ended March 31, 2013 and April 1, 2012:
 
Three months ended
 
Six months ended
 
March 31, 2013
 
April 1, 2012
 
March 31, 2013
 
April 1, 2012
SB/RH Merger
 
 
 
 
 
 
 
Integration costs
$
0.8

 
$
2.8

 
$
1.9

 
$
5.2

Employee termination charges
0.2

 
1.9

 
0.3

 
2.5

Legal and professional fees

 
0.3

 
0.1

 
0.9

 
1.0

 
5.0

 
2.3

 
8.6

HHI Business
 
 
 
 
 
 
 
Legal and professional fees
6.5

 

 
21.0

 

Integration costs
3.6

 

 
3.7

 

Employee termination charges
0.1

 

 
0.1

 

 
10.2

 

 
24.8

 

 
 
 
 
 
 
 
 
FGL

 

 

 
0.1

EXCO/HGI Partnership
4.1

 

 
9.1

 

FURminator
0.6

 
2.1

 
1.2

 
4.6

BlackFlag

 
0.5

 

 
1.8

Shaser
0.2

 

 
4.4

 

Other
0.6

 
0.8

 
2.1

 
2.4

Total acquisition and integration related charges
$
16.7

 
$
8.4

 
$
43.9

 
$
17.5



21


(4) Investments
HGI’s investments consist of (1) marketable equity securities classified as trading and carried at fair value with unrealized gains and losses recognized in earnings, including certain securities for which the Company has elected the fair value option under Accounting Standards Codification ("ASC") Topic 825, Financial Instruments, which would otherwise have been classified as available-for-sale, and (2) U.S. Treasury securities and a certificate of deposit classified as held-to-maturity and carried at amortized cost, which approximates fair value. FGL’s debt and equity securities have been designated as available-for-sale and are carried at fair value with unrealized gains and losses included in AOCI, net of associated adjustments for value of business acquired ("VOBA"), deferred acquisition costs ("DAC") and deferred income taxes. The Company’s consolidated investments are summarized as follows:
 
March 31, 2013
 
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Carrying Value
 
 
 
 
 
 
 
 
 
 
Fixed-maturity securities, available-for sale
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
1,388.5

 
$
30.6

 
$
(0.7
)
 
$
1,418.4

 
$
1,418.4

Commercial mortgage-backed securities
506.8

 
39.9

 
(0.5
)
 
546.2

 
546.2

Corporates
10,118.0

 
686.3

 
(13.0
)
 
10,791.3

 
10,791.3

Hybrids
438.8

 
28.1

 

 
466.9

 
466.9

Municipals
969.1

 
109.4

 
(0.8
)
 
1,077.7

 
1,077.7

Agency residential mortgage-backed securities
122.2

 
4.1

 
(0.3
)
 
126.0

 
126.0

Non-agency residential mortgage-backed securities
1,209.5

 
91.6

 
(2.6
)
 
1,298.5

 
1,298.5

U.S. Government
447.1

 
11.5

 
(0.1
)
 
458.5

 
458.5

Total fixed maturities
15,200.0

 
1,001.5

 
(18.0
)
 
16,183.5

 
16,183.5

Equity securities
 
 
 
 
 
 
 
 
 
Available-for-sale
247.4

 
10.2

 
(1.9
)
 
255.7

 
255.7

Held for trading
102.1

 

 
(44.4
)
 
57.7

 
57.7

Total equity securities
349.5

 
10.2

 
(46.3
)
 
313.4

 
313.4

Derivatives
141.8

 
124.6

 
(3.8
)
 
262.6

 
262.6

Asset-backed loans
241.6

 

 

 
241.6

 
241.6

Other invested assets
 
 
 
 
 
 
 
 
 
Policy loans and other invested assets
32.4

 

 

 
32.4

 
32.4

Total investments
$
15,965.3

 
$
1,136.3

 
$
(68.1
)
 
$
17,033.5

 
$
17,033.5



22


 
September 30, 2012
 
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Carrying Value
 
 
 
 
 
 
 
 
 
 
Fixed-maturity securities, available-for-sale
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
1,010.9

 
$
18.6

 
$
(1.6
)
 
$
1,027.9

 
$
1,027.9

Commercial mortgage-backed securities
520.0

 
36.2

 
(2.4
)
 
553.8

 
553.8

Corporates
10,211.8

 
807.2

 
(10.0
)
 
11,009.0

 
11,009.0

Hybrids
519.0

 
18.8

 
(9.6
)
 
528.2

 
528.2

Municipals
1,083.2

 
141.9

 
(1.1
)
 
1,224.0

 
1,224.0

Agency residential mortgage-backed securities
149.5

 
5.8

 
(0.3
)
 
155.0

 
155.0

Non-agency residential mortgage-backed securities
629.1

 
35.8

 
(4.3
)
 
660.6

 
660.6

U.S. Government
917.5

 
12.9

 

 
930.4

 
930.4

Total fixed-maturity securities
15,041.0

 
1,077.2

 
(29.3
)
 
16,088.9

 
16,088.9

Equity securities
 
 
 
 
 
 
 
 
 
Available-for-sale
237.5

 
11.9

 
(1.3
)
 
248.1

 
248.1

Held for trading
191.8

 

 
(45.0
)
 
146.8

 
146.8

Total equity securities
429.3

 
11.9

 
(46.3
)
 
394.9

 
394.9

Derivatives
142.1

 
67.0

 
(8.4
)
 
200.7

 
200.7

Asset-backed loans
180.1

 

 

 
180.1

 
180.1

Other invested assets
 
 
 
 
 
 
 
 
 
U.S. Treasuries and certificate of deposit, held-to-maturity
35.0

 

 

 
35.0

 
35.0

Policy loans and other invested assets
18.8

 

 

 
18.8

 
18.8

Total other invested assets
53.8

 

 

 
53.8

 
53.8

Total investments
$
15,846.3

 
$
1,156.1

 
$
(84.0
)
 
$
16,918.4

 
$
16,918.4


Included in AOCI were unrealized gains of $0.9 and unrealized losses of $1.9 related to the non-credit portion of other-than-temporary impairments on non-agency residential-mortgage-backed securities at both March 31, 2013 and September 30, 2012.

Securities held on deposit with various state regulatory authorities had a fair value of $20.4 and $20.7 at March 31, 2013 and September 30, 2012, respectively.

23



Maturities of Fixed-maturity Securities
The amortized cost and fair value of fixed maturity available-for-sale securities by contractual maturities, as applicable, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.
 
March 31, 2013
 
Amortized Cost
 
 Fair Value
Corporate, Non-structured Hybrids, Municipal and U.S. Government securities:
 
 
 
Due in one year or less
$
615.2

 
$
619.4

Due after one year through five years
2,888.8

 
2,985.3

Due after five years through ten years
3,702.2

 
3,958.0

Due after ten years
4,683.2

 
5,144.6

Subtotal
11,889.4

 
12,707.3

Other securities which provide for periodic payments:
 
 
 
Asset-backed securities
1,388.5

 
1,418.4

Commercial-mortgage-backed securities
506.8

 
546.2

Structured hybrids
83.6

 
87.1

Agency residential mortgage-backed securities
122.2

 
126.0

Non-agency residential mortgage-backed securities
1,209.5

 
1,298.5

Total fixed maturity available-for-sale securities
$
15,200.0

 
$
16,183.5


Securities in an Unrealized Loss Position
As part of FGL’s ongoing securities monitoring process, FGL evaluates whether securities in an unrealized loss position could potentially be other-than-temporarily impaired. Excluding the non-credit portion of other-than-temporary impairments on non-agency residential-mortgage backed securities, FGL has concluded that the fair values of the securities presented in the table below were not other-than-temporarily impaired as of March 31, 2013. This conclusion is derived from the issuers’ continued satisfaction of the securities’ obligations in accordance with their contractual terms along with the expectation that they will continue to do so. Also contributing to this conclusion is FGL’s determination that it is more likely than not that FGL will not be required to sell these securities prior to recovery, an assessment of the issuers’ financial condition, and other objective evidence. As it specifically relates to asset-backed securities and commercial mortgage-backed securities, the present value of cash flows expected to be collected is at least the amount of the amortized cost basis of the security and FGL’s management has the intent to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value. The fair value and gross unrealized losses of available-for-sale securities, aggregated by investment category, were as follows:

24


 
March 31, 2013
 
Less than 12 months
 
12 months or longer
 
Total
 
Fair Value
 
Gross Unrealized
Losses
 
Fair Value
 
Gross Unrealized
Losses
 
Fair Value
 
Gross Unrealized
Losses
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
116.3

 
$
(0.5
)
 
$
21.8

 
$
(0.2
)
 
$
138.1

 
$
(0.7
)
Commercial-mortgage-backed securities

 

 
0.2

 
(0.5
)
 
0.2

 
(0.5
)
Corporates
1,044.4

 
(11.2
)
 
125.3

 
(1.8
)
 
1,169.7

 
(13.0
)
Equities
17.7

 
(0.7
)
 
32.2

 
(1.2
)
 
49.9

 
(1.9
)
Municipals
79.1

 
(0.8
)
 

 

 
79.1

 
(0.8
)
Agency residential mortgage-backed securities
4.9

 
(0.2
)
 
4.1

 
(0.1
)
 
9.0

 
(0.3
)
Non-agency residential mortgage-backed securities
143.4

 
(1.6
)
 
68.3

 
(1.0
)
 
211.7

 
(2.6
)
U.S. Government
20.0

 
(0.1
)
 

 

 
20.0

 
(0.1
)
Total available-for-sale securities
$
1,425.8

 
$
(15.1
)
 
$
251.9

 
$
(4.8
)
 
$
1,677.7

 
$
(19.9
)
Total number of available-for-sale securities in an unrealized loss position
 
 
213

 
 
 
51

 
 
 
264


 
September 30, 2012
 
Less than 12 months
 
12 months or longer
 
Total
 
Fair Value
 
Gross Unrealized
Losses
 
Fair Value
 
Gross Unrealized
Losses
 
Fair Value
 
Gross Unrealized
Losses
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
169.8

 
$
(1.0
)
 
$
7.5

 
$
(0.6
)
 
$
177.3

 
$
(1.6
)
Commercial-mortgage-backed securities
0.8

 
(0.8
)
 
10.7

 
(1.6
)
 
11.5

 
(2.4
)
Corporates
411.3

 
(8.1
)
 
45.5

 
(1.9
)
 
456.8

 
(10.0
)
Equities

 

 
44.5

 
(1.3
)
 
44.5

 
(1.3
)
Hybrids
13.4

 
(0.4
)
 
107.7

 
(9.2
)
 
121.1

 
(9.6
)
Municipals
71.1

 
(1.1
)
 

 

 
71.1

 
(1.1
)
Agency residential mortgage-backed securities
1.8

 
(0.2
)
 
6.1

 
(0.1
)
 
7.9

 
(0.3
)
Non-agency residential mortgage-backed securities
12.9

 
(0.3
)
 
101.8

 
(4.0
)
 
114.7

 
(4.3
)
Total available-for-sale securities
$
681.1

 
$
(11.9
)
 
$
323.8

 
$
(18.7
)
 
$
1,004.9

 
$
(30.6
)
Total number of available-for-sale securities in an unrealized loss position
 
 
100

 
 
 
56

 
 
 
156

At March 31, 2013 and September 30, 2012, securities in an unrealized loss position were primarily concentrated in investment grade corporate debt instruments, residential mortgage-backed securities and equities. Total unrealized losses were $19.9 and $30.6 at March 31, 2013 and September 30, 2012, respectively. Although the absolute level of unrealized losses has declined, the largest component of the unrealized loss position remains in the corporates finance sector, as spreads in this industry sector remain above historical levels. Spreads remain elevated in the commercial mortgage-backed and non-agency residential mortgage backed sectors of the structured market, but with conviction growing in the strength of the recovery in the U.S. housing market, FGL is adding to non-agency residential mortgage backed securities at these higher, attractive spreads. In general, FGL targets non-agency residential mortgage holdings in the National Association of Insurance Commissioners

25


("NAIC") 1 rating category. Hybrids continue to strengthen due to regulatory changes that encourage issuers to retire outstanding securities, and as a result, the unrealized loss position in hybrids has improved from September 30, 2012 to March 31, 2013.

Base interest rates remain low due to ongoing efforts by central banks to maintain an accommodative monetary. As a result, risk assets continue to perform well, including during the March 31, 2013 three and six month periods. 
At March 31, 2013 and September 30, 2012, securities with a fair value of $0.1 and $1.2, respectively, were depressed greater than 20% of amortized cost (excluding United States Government and United States Government sponsored agency securities), which represented less than 1% of the carrying values of all investments. The improvement in unrealized loss positions from September 30, 2012 is primarily due to two factors: (i) securities at depressed prices were sold over the past fiscal quarter, reducing the size of holdings at an unrealized loss position and (ii) improving risk sentiment has lifted the market prices of investment grade bonds and structured securities. Based upon FGL’s current evaluation of these securities in accordance with its impairment policy and its intent to retain these investments for a period of time sufficient to allow for recovery in value, FGL has determined that these securities are not other-than-temporarily impaired.
Credit Loss Portion of Other-than-temporary Impairments
The following table provides a reconciliation of the beginning and ending balances of the credit loss portion of other-than-temporary impairments on fixed maturity securities held by FGL for the three and six months ended March 31, 2013 and April 1, 2012, for which a portion of the other-than-temporary impairment was recognized in AOCI:
 
Three months ended
 
Six months ended
 
March 31, 2013
 
April 1, 2012
 
March 31, 2013
 
April 1, 2012
Balance at the beginning of the period
$
2.7

 
$
2.1

 
$
2.7

 
$
0.7

Increases attributable to credit losses on securities:
 
 
 
 
 
 
 
Other-than-temporary impairment was not previously recognized

 
0.5

 

 
1.9

Balance at the end of the period
$
2.7

 
$
2.6

 
$
2.7

 
$
2.6

For the three and six months ended March 31, 2013, FGL recognized impairment losses in operations totaling $0.4 and $0.9, respectively, including credit impairments of $0.1 and $0.3 and change-of-intent impairments of $0.3 and $0.7 and had an amortized cost of $2.7 and a fair value of $1.8 at the time of impairment. For the three and six months ended April 1, 2012, FGL recognized impairment losses in operations totaling $4.1 and 17.3, respectively, including credit impairments of $2.6 for both periods, and change-of-intent impairments of $1.6 and $14.7 and had an amortized cost of $86.9 and a fair value of $68.0 at the time of impairment. Details underlying write-downs taken as a result of other-than-temporary impairments that were recognized in earnings and included in net realized gains on securities were as follows:
 
Three months ended
 
Six months ended
 
March 31,
2013
 
April 1,
2012
 
March 31,
2013
 
April 1,
2012
Other-than-temporary impairments recognized in net income: