Income Taxes

Income tax expense (benefit) was calculated based upon the following components of income from continuing operations before income taxes:



	Year ended September 30,
	2013			2012			2011
Income from continuing operations before income taxes:
United States	$	(78.9	)	$	(146.5	)	$	(74.8	)
Outside the United States	197.2			171.9			132.7
Total income from continuing operations before taxes	$	118.3		$	25.4		$	57.9

The components of income tax (benefit) expense were as follows:



	Year ended September 30,
	2013			2012			2011
Current:
Federal	$	(32.5	)	$	74.4		$	(0.9	)
Foreign	47.7			38.1			32.7
State	1.4			(0.4		)	2.3
Total current	16.6			112.1			34.1
Deferred:
Federal	169.0			(199.2		)	(20.6		)
Foreign	2.1			5.2			28.1
State	(0.4		)	(3.4		)	9.0
Total deferred	170.7			(197.4		)	16.5
Income tax expense (benefit)	$	187.3		$	(85.3	)	$	50.6

The differences between income taxes expected at the U.S. Federal statutory income tax rate of 35.0% and reported income tax expense (benefit) are summarized as follows:



	Year ended September 30,
	2013			2012			2011
Expected income tax (benefit) expense at Federal statutory rate	$	41.4		$	8.9		$	20.3
Valuation allowance for deferred tax assets	152.8			(142.1		)	72.3
Preferred stock equity conversion feature	35.6			54.8			(9.5		)
Residual tax on foreign earnings	(7.0		)	29.8			19.0
Foreign rate differential	(18.8		)	(14.1		)	(12.6		)
Bargain purchase gain	—			—			(55.4		)
Gain on contingent purchase price reduction	—			(14.3		)	—
Permanent items	5.7			9.5			10.7
Non-deductible stock based compensation	1.7			—			—
Exempt foreign income	(5.9		)	(5.8		)	(0.4		)
Unrecognized tax benefits	4.1			(4.4		)	(2.8		)
State and local income taxes	(32.2		)	(8.5		)	1.2
Dividends received deduction	1.4			(0.9		)	—
Inflationary adjustments	(0.2		)	(0.8		)	(1.5		)
Capitalized transaction costs	5.6			0.3			2.8
Deferred tax correction of immaterial prior period error	—			—			4.9
Other	3.1			2.3			1.6
Reported income tax expense (benefit)	$	187.3		$	(85.3	)	$	50.6
Effective tax rate	158.3		%	(335.9		)%	87.3		%

For the year ended September 30, 2013, the Company’s effective tax rate of 158.3% was negatively impacted by the following: (i) the profitability of our life insurance group which files its own consolidated Federal income tax return; (ii) pretax losses in the United States and some foreign jurisdictions for which the Company concluded that the tax benefits are not more-likely-than-not realizable, resulting in valuation allowances; (iii) book expense for the increase in the fair value of the equity conversion feature of Preferred Stock, for which no tax benefit is available; (iv) tax amortization of certain indefinite lived intangibles; and (v) tax expense on income in certain foreign jurisdictions that will not be creditable in the United States due to the Company’s U.S. taxable loss position. In addition, the Company is not permanently reinvesting income from its foreign operations, thereby subjecting unremitted foreign earnings to the U.S. Federal statutory income tax rate of 35%. The Company's effective tax rate was favorably impacted by a partial release of U.S. valuation allowances against deferred tax assets that are more-likely-than-not realizable as a result of a recent acquisition by Spectrum Brands and a change in the realizability of deferred tax assets related to the FGL life insurance companies.

For the year ended September 30, 2012, the Company’s effective tax rate of (335.9)%, representing a tax benefit despite pretax income, was positively impacted by the net release of valuation allowance attributed to the Company’s determination that certain of its deferred tax assets are more likely than not realizable and a contingent purchase price reduction. The Company’s effective tax rate was negatively impacted by an expense for the increase in fair value of the equity conversion feature of Preferred Stock, for which no tax benefit is available, and deferred tax provision related to the change in book versus tax basis of indefinite lived intangibles, which are amortized for tax purposes, but not for book purposes. In addition, for Fiscal 2012 and forward, the Company has asserted that it is no longer permanently reinvesting the income from its foreign operations, thereby subjecting non-U.S. unremitted earnings to the U.S. Federal statutory income tax rate of 35%.

For the year ended September 30, 2011, the Company’s effective tax rate of 87.3% was negatively impacted by the net establishment of valuation allowances against losses in the United States and some foreign jurisdictions. In addition, no tax benefits were recognized on the Company’s indefinite lived intangibles, which are amortized for tax purposes, but not for book purposes. The Company’s effective tax rate was positively impacted by the recognition of a bargain purchase gain from the FGL Acquisition, for which no income tax provision was required. In addition, permanently reinvested income in the foreign jurisdictions in which the Company operates is subject to lower tax rates than the U.S. Federal statutory income tax rate.

The following table summarizes the components of deferred income tax assets and liabilities:



	September 30, 2013			September 30, 2012
Current deferred tax assets:
Employee benefits	$	15.4		$	29.5
Restructuring	7.1			8.1
Inventories and receivables	24.3			22.5
Employee compensation	5.4			—
Marketing and promotional accruals	14.1			8.3
Capitalized transaction costs	0.1			0.1
Unrealized losses on mark-to-market securities	12.6			10.2
Other	23.9			15.1
Valuation allowance	(55.0		)	(49.0		)
Total current deferred tax assets	47.9			44.8
Current deferred tax liabilities:
Inventories and receivables	(2.7		)	(2.6		)
Unrealized gains	(0.4		)	(1.2		)
Other	(11.7		)	(7.9		)
Total current deferred tax liabilities	(14.8		)	(11.7		)
Noncurrent deferred tax assets:
Employee benefits	$	49.5		$	37.5
Restructuring and purchase accounting	0.3			0.4
Net operating loss, credit and capital loss carry forwards	1,029.5			914.5
Prepaid royalty	7.0			7.0
Properties	9.7			3.2
Capitalized transaction costs	0.6			—
Unrealized losses on mark-to-market securities	2.1			12.7
Long-term debt	0.7			4.0
Intangibles	3.9			4.3
Deferred acquisition costs	0.4			9.9
Insurance reserves and claim related adjustments	477.7			620.3
Outside basis differences on partnership interests	21.3			—
Other	32.8			30.8
Valuation allowance	(762.2		)	(611.1		)
Total noncurrent deferred tax assets	873.3			1,033.5
Noncurrent deferred tax liabilities:
Properties	(27.5		)	(15.3		)
Unrealized gains	(13.1		)	(15.8		)
Intangibles	(735.5		)	(596.2		)
Value of business acquired	(67.3		)	(36.5		)
Deferred acquisition costs	(63.7		)	—
Tax on unremitted foreign earnings	(18.6		)	(29.2		)
Investments	(156.5		)	(438.7		)
Other	(23.4		)	(4.5		)
Total noncurrent deferred tax liabilities	(1,105.6		)	(1,136.2		)
Total gross deferred tax assets	$	921.2		$	1,078.3
Total gross deferred tax liabilities	$	(1,120.4	)	$	(1,147.9	)

In accordance with ASC Topic 740, the Company establishes valuation allowances for deferred tax assets that, in its judgment, are not more-likely-than-not realizable. These judgments are based on projections of future income, including tax-planning strategies, by individual tax jurisdiction. Changes in industry and economic conditions and the competitive environment may impact the accuracy of these projections. In accordance with ASC Topic 740, during each reporting period, the Company assesses the likelihood that its deferred tax assets will be realized and determines if adjustments to its valuation allowances are appropriate. As a result of this assessment, for the years ended September 30, 2013, 2012, and 2011, the Company had a net charge (release) of valuation allowance to earnings totaling $152.8, $(142.1) and $72.3, respectively, as more fully described below.

HGI

As a result of HGI’s cumulative losses over the past three years, management concluded at September 30, 2013, that a valuation allowance was required for its entire net deferred tax asset balance. HGI’s valuation allowance at September 30, 2013, totaled $204.0. This resulted from the Company’s conclusion that tax benefits on its pretax losses are not more-likely-than-not realizable. HGI has approximately $302.8 of U.S. Federal net operating loss (“NOL”) carryforwards which, if unused, will expire in years 2029 through 2033. HGI has approximately $36.3 of U.S. Federal capital loss carryforwards which, if unused, will expire through 2016 and 2018. HGI has approximately $454.4 of U.S. state NOL carryforwards which, if unused, will expire in years 2029 through 2033.

On September 27, 2013, HGI triggered a change of ownership, as defined under Internal Revenue Code (the "IRC") Section 382, that subjects the utilization of HGI’s U.S. Federal and state net operating losses and other tax attributes to certain limitations.

Management has concluded that its deferred tax assets on U.S. Federal and state NOL's are not more-likely-than-not realizable. The Company also concluded that a valuation allowance was required for HGI’s entire net deferred tax asset balance at September 30, 2012, in the amount of $97.8.

Spectrum Brands

At September 30, 2013, Spectrum Brands has U.S. Federal and state and local NOL carryforwards of $1,515.3 and $1,551.3, respectively. If unused, they will expire through 2033. Spectrum Brands has foreign loss carryforwards totaling $111.2 which will expire beginning in 2014. Certain of the foreign net operating losses have indefinite carryforward periods. Spectrum Brands is subject to an annual limitation on use of its NOL carryforwards that arose prior to its emergence from bankruptcy. Spectrum Brands has had multiple changes of ownership, as defined under IRC Section 382, that subject the utilization of Spectrum Brands' U.S. Federal and state net operating losses and other tax attributes to certain limitations. In addition, separate return year limitations apply to Spectrum Brands' utilization of U.S. Federal and state and local NOL carryforwards acquired from Russell Hobbs. Management concluded that its deferred tax assets on its U.S. and foreign net operating loss carryforwards are not more-likely-than-not realizable. Accordingly, Spectrum Brands has provided a full valuation allowance against these deferred tax assets.

As of September 30, 2013 and 2012, Spectrum Brands’ valuation allowances totaled approximately $454.6 and $384.8, respectively. These valuation allowances were recorded on: (i) U.S. net deferred tax assets totaling $421.7 and $349.3, respectively; and (ii) foreign net deferred tax assets totaling $32.8 and $35.5, respectively. The net increase in Spectrum Brands’ valuation allowance during the year ended September 30, 2013 totaled $69.8, of which $72.4 relates to U.S. net deferred tax assets, and $(2.6) relates to foreign net deferred tax assets. In addition, as a result of an acquisition, Spectrum Brands was able to release $49.8 of its U.S. valuation allowance during Fiscal 2013. The release was attributable to $49.8 of net deferred tax liabilities recorded on the acquiree’s opening balance sheet that are available to offset other U.S. net deferred tax assets. Spectrum Brands was able to release $14.5 of its U.S. valuation allowance resulting from an acquisition during Fiscal 2012. The release was attributable to $14.5 of net deferred tax liabilities recorded on the acquiree's opening balance sheet that are available to offset other U.S. net deferred tax assets.

Effective October 1, 2012, Spectrum Brands began recording residual U.S. and foreign taxes on current foreign earnings in accordance with its change in position under ASC 740. To the extent necessary, the Company intends to utilize earnings of foreign subsidiaries generated after September 30, 2011, to support management’s plans to voluntarily accelerate its pay down of U.S. debt, fund distributions to shareholders, fund U.S. acquisitions and satisfy ongoing U.S. operational cash flow requirements. As a result, earnings of the Company’s non-U.S. subsidiaries after September 30, 2011 are not considered permanently reinvested, except in jurisdictions where repatriation is either precluded or restricted by law. Accordingly, the Company is providing residual U.S. and foreign deferred taxes to these earnings to the extent they cannot be repatriated in a tax-free manner. As a result for the year ending September 30, 2013, Spectrum Brands recorded residual taxes on approximately $12.5 of distributions of foreign earnings and $45.7 of earnings not yet taxed in the U.S. resulting in an increase in tax expense, net of a corresponding adjustment to Spectrum Brands’ domestic valuation allowance, of approximately $0.1. For the year ended September 30, 2012, Spectrum Brands recorded residual U.S. and foreign taxes on approximately $21.1 of distributions and $76.5 of earnings not yet taxed in the U.S., resulting in an increase in tax expense, net of a corresponding adjustment to Spectrum Brands’ domestic valuation allowance, of approximately $3.3.

Remaining undistributed earnings of Spectrum Brands’ foreign operations total approximately $409.6 at September 30, 2013, and are permanently reinvested. Spectrum Brands has determined that it is not practical to calculate the residual U.S. income tax on the foregoing permanently reinvested unremitted foreign earnings.

FGH

At September 30, 2013, FGH’s deferred tax assets were primarily the result of U.S. NOL, capital loss and tax credit carryforwards and insurance reserves. Its net deferred tax asset position at September 30, 2013 and 2012, before consideration of its recorded valuation allowance, totaled $399.2 and $457.1, respectively. Valuation allowances of $158.7 and $177.5 was recorded against its gross deferred tax asset balance at September 30, 2013 and 2012, respectively. FGH’s net deferred tax asset position at September 30, 2013 and 2012, after taking into account the valuation allowance, is $240.5 and $279.6, respectively. For the years ended September 30, 2013 and 2012, FGH recorded a net valuation allowance release of $18.9 (comprised of a full year valuation release of $(20.7) related to the life insurance companies, partially offset by an increase to valuation allowance of $1.8 related to the non-life companies) and $197.8 (comprised of a full year valuation release of $(204.7) related to the life insurance companies, partially offset by an increase to valuation allowance of $6.9 related to FGH’s non−life companies), respectively, based on management’s reassessment of the amount of its deferred tax assets that are more-likely-than-not realizable.

At September 30, 2013, FGH’s valuation allowance of $158.7 consisted of a partial valuation allowance of $118.8 on capital loss carryforwards and a full valuation allowance of $39.9 on non-life insurance net deferred taxes. At September 30, 2012, FGH’s valuation allowance of $177.5 consisted of a partial valuation allowance of $145.9 on capital loss carryforwards and a full valuation allowance of $31.7 on non-life insurance net deferred taxes.

As a consequence of FGH’s acquisition on April 6, 2011, utilization of certain tax attributes (carry-forwards) became limited at the FGL Acquisition date under IRC sections 382 and 383. On September 27, 2013, FGH triggered a subsequent change of ownership, as defined under IRC Section 382; the resulting limitation is higher than the original limitation calculated on April 6, 2011. Consequently, this limitation is not expected to impact FGH’s utilization of its tax attributes. In addition, FGH experienced cumulative losses during the three-year period preceding its acquisition. These are among the factors the Company considered in establishing a valuation allowance against FGH’s deferred tax asset position at the FGL Acquisition Date.

At each reporting date, FGH management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. As of September 30, 2013, management considered the following positive and negative evidence concerning the future realization of FGH’s deferred tax assets:

Positive Evidence:


•	FGH has three years of cumulative US GAAP pre-tax income;


•	FGH’s internal projections of taxable income estimated in future periods reflect a continuation of this trend;


•	FGH has projected that the reversal of taxable temporary timing differences will unwind in the twenty-year projection period;


•	FGH has refined tax planning strategies to utilize capital loss carryforwards by selling assets with acquisition date built-in gains;


•	FGH has a history of utilizing all significant tax attributes before they expire; and


•	FGH’s inventory of limited attributes has been significantly reduced as a result of a tax planning transaction that required amending certain tax returns.

Negative Evidence:


•	Tax rules limit the ability to use carryforwards in future years;


•	There is a brief carryback/carryforward period for life insurance company capital losses (i.e. 3-year carryback/ 5-year carryforward period.)

Based on its assessment of the evidence above, management determined that sufficient positive evidence exists as of September 30, 2013 to conclude that it is “more likely than not” that additional deferred taxes of FGH are more-likely-than-not realizable, and therefore, reduced the valuation allowance accordingly in the amount of $18.9.

At September 30, 2013 and 2012, FGH has NOL carryforwards of $92.7 and $87.0, respectively, which, if unused, will expire in years 2026 through 2033. FGH has capital loss carryforwards totaling $350.4 and $551.9 at September 30, 2013 and 2012, respectively, which if unused, will expire in years 2014 through 2018. In addition, at September 30, 2013 and 2012, FGH has low income housing tax credit carryforwards totaling $54.2 and $52.8, respectively, which, if unused, will expire in years 2017 through 2033 and alternative minimum tax credits of $6.3 and $7.6, respectively, that may be carried forward indefinitely. Certain tax attributes are subject to an annual limitation as a result of the acquisition of FGH by the Company, which constitutes a change of ownership, as defined under IRC Sections 382 and 383.

Uncertain Tax Positions

The total amount of unrecognized tax benefits (“UTBs”) at September 30, 2013 and 2012 are $13.8 and $5.9, respectively. If recognized in the future, $10.1 of UTBs would impact the effective tax rate and $3.7 of UTB's would create deferred tax assets against which the Company would record a full valuation allowance. The Company records interest and penalties related to uncertain tax positions in income tax expense. At September 30, 2013 and 2012, the Company’s accrued balances of interest and penalties on uncertain tax positions totaled $3.7 and $3.6, respectively. For Fiscal 2013, 2012 and 2011, interest and penalties (decreased) increased income tax expense by $0.0, $(1.2) and $(1.4), respectively.

At September 30, 2013, filed income tax returns for certain of the Company’s legal entities in various jurisdictions are undergoing income tax audits. The Company cannot predict the ultimate outcome of these examinations. However, it is reasonably possible that during the next 12 months some portion of previously unrecognized tax benefits could be recognized.

The Company believes its income tax reserves for UTB’s are adequate, consistent with the principles of ASC Topic 740. The Company regularly assesses the likelihood of additional tax assessments by jurisdiction and, if necessary, adjusts its tax reserves based on new information or developments.

The following table summarizes changes to the Company’s UTB reserves, excluding related interest and penalties:



	Amount
Unrecognized tax benefits at September 30, 2010	$	13.2
Gross increase — tax positions in prior period	1.6
Gross decrease — tax positions in prior period	(0.8		)
Gross increase — tax positions in current period	0.6
Settlements	(1.9		)
Lapse of statutes of limitations	(3.7		)
Unrecognized tax benefits at September 30, 2011	9.0
Gross increase — tax positions in prior period	0.7
Gross decrease — tax positions in prior period	(1.3		)
Gross increase — tax positions in current period	0.8
Settlements	(1.7		)
Lapse of statutes of limitations	(1.6		)
Unrecognized tax benefits at September 30, 2012	5.9
Gross increase — tax positions in prior period	9.1
Gross decrease — tax positions in prior period	(0.3		)
Gross increase — tax positions in current period	0.5
Settlements	(0.1		)
Lapse of statutes of limitations	(1.3		)
Unrecognized tax benefits at September 30, 2013	$	13.8

HGI files U.S. Federal consolidated and state and local combined and separate income tax returns. HGI’s consolidated and combined returns do not include Spectrum Brands or FGH (life insurance group), each of which files their own consolidated federal, and combined and separate state and local income tax returns. HGI’s U.S. federal income tax returns for years prior to and including 2010 are no longer subject to audit by the taxing authorities. Except for certain immaterial jurisdictions, HGI’s state and local income tax returns are no longer subject to audit for years prior to 2008. HGI’s U.S. Federal NOL carryforwards from the fiscal years ended September 30, 2010 and prior, will continue to be subject to Internal Revenue Service examination until the statute of limitations expires for the years in which these NOL carryforwards are ultimately utilized.

Spectrum Brands files U.S. Federal consolidated and state and local combined and separate income tax returns as well as foreign income tax returns in various jurisdictions. They are subject to ongoing examination by various taxing authorities. Spectrum Brand’s major taxing jurisdictions are the United States, United Kingdom and Germany.

U.S. Federal income tax returns of Spectrum Brands and Russell Hobbs are no longer subject to audit for fiscal years prior to 2010. However, Federal NOL carryforwards from the fiscal years ended September 30, 2009 and prior, will continue to be subject to Internal Revenue Service examination until the statute of limitations expires for the years in which these NOL carryforwards are ultimately utilized. Filings in various U.S. state and local jurisdictions are also subject to audit; to date, no significant audit matters have arisen.

U.S. Federal income tax returns of FGH for years prior to 2009 are no longer subject to examination by the taxing authorities. Except for certain immaterial jurisdictions, FGH is no longer subject to state and local income tax audits for years prior to 2009. However, Federal NOL carryforwards from tax years ended June 30, 2006 and December 31, 2006, respectively, continue to be subject to Internal Revenue Service examination until the statute of limitations expires for the years in which these NOL carryforwards are ultimately utilized.