NOTE 3 – DIVESTITURES

The following table summarizes the components of Income From Discontinued Operations, Net of Tax in the accompanying Condensed Consolidated Statement of Income for the three and six month periods ended March 31, 2019 and 2018.


	Three Month Periods Ended				Six Month Periods Ended
(in millions)	March 31, 2019		March 31, 2018		March 31, 2019		March 31, 2018
Income from discontinued operations before income taxes - GBL	$	965.5	$	3.9	$	981.4	$	27.6
(Loss) income from discontinued operations before income taxes - GAC		(6.2)		11.9		(115.5)		17.6
Income from discontinued operations before income taxes - HRG Insurance Operations		—		—		—		476.4
Income from discontinued operations before income taxes		959.3		15.8		865.9		521.6
Income tax expense from discontinued operations		175.7		4.5		165.5		28.9
Income from discontinued operations, net of tax		783.6		11.3		700.4		492.7
Income from discontinued operations, net of tax attributable to noncontrolling interest		—		7.6		—		21.7
Income from discontinued operations, net of tax attributable to controlling interest	$	783.6	$	3.7	$	700.4	$	471.0

GBL

On January 2, 2019, the Company completed the sale of its GBL business pursuant to the GBL acquisition agreement with Energizer for cash proceeds of $1,956.2 million, resulting in a pre-tax gain on sale of $996.3 million, including the estimated settlement of customary purchase price adjustments for working capital and assumed indebtedness, recognition of tax and legal indemnifications under the acquisition agreement and an estimated contingent purchase price adjustment for the settlement of the planned divestiture of the Varta® consumer batteries business by Energizer. The results of operations and gain on sale for disposal of the GBL business are recognized as a component of discontinued operations.

The GBL acquisition agreement provides for a purchase price adjustment that is contingent upon the completion of the divestiture of the Varta® consumer battery, chargers, portable power and portable lighting business in the EMEA region by Energizer, including manufacturing and distribution facilities in Germany. The purchase price adjustment includes a potential downward adjustment equal to 75% of the difference between the divestiture sale price and the target sale price of $600 million, not to exceed $200 million, or a potential upward adjustment equal to 25% of the excess purchase price. Energizer has asserted they anticipate the divestiture will be completed in the 2019 fiscal year. The Company has estimated a contingent settlement of $200.0 million for the planned Varta® divestiture in accordance with the GBL acquisition agreement.

The Company and Energizer have agreed to indemnify each other for losses arising from certain breaches of the GBL acquisition agreement and for certain other matters. In particular, Spectrum has agreed to indemnify Energizer for certain liabilities relating to the assets retained by Spectrum, and Energizer has agreed to indemnify Spectrum for certain liabilities assumed by Energizer, in each case as described in the acquisition agreement. The Company recognized $49.0 million related to indemnifications in accordance with the acquisition agreement.

As of March 31, 2019, the Company has recognized an estimated net settlement payable of $229.1 million in Other Current Liabilities on the Company’s Condensed Consolidated Financial Statements associated with GBL acquisition agreement, including the subsequent settlement of customary purchase price adjustments for working capital and assumed indebtedness, tax and legal indemnifications, contingent purchase price adjustment for the settlement of the planned Varta® consumer batteries business and other agreed-upon funding in accordance with the agreement.

Spectrum and Energizer entered into a related agreement that became effective upon the consummation of the acquisition including a customary transition services agreement (“TSA”) and reverse TSA. The TSA and reverse TSA are recognized as a component of continuing operations for periods following the completion of the GBL sale. See Note 17 – Related Party Transactions for additional discussion.

The following table summarizes the assets and liabilities of GBL classified as held for sale as of September 30, 2018.


(in millions)	September 30, 2018
Assets
Trade receivables, net	$	99.3
Other receivables		17.9
Inventories		127.8
Prepaid expenses and other current assets		23.0
Property, plant and equipment, net		160.5
Deferred charges and other		13.4
Goodwill		226.6
Intangible assets, net		304.0
Total assets of business held for sale	$	972.5
Liabilities
Current portion of long-term debt		6.3
Accounts payable		124.1
Accrued wages and salaries		25.0
Other current liabilities		82.6
Long-term debt, net of current portion		45.0
Deferred income taxes		20.9
Other long-term liabilities		60.6
Total liabilities of business held for sale	$	364.5

NOTE 3 – DIVESTITURES (continued)

The following table summarizes the components of income from discontinued operations before income taxes associated with the GBL divestiture in the accompanying Consolidated Statements of Operations for the three and six month periods ended March 31, 2019 and 2018 with the close of the GBL divestiture on January 2, 2019.



	Three Month Period Ended				Six Month Period Ended
(in millions)	March 31, 2019		March 31, 2018		March 31, 2019		March 31, 2018
Net sales	$	—	$	196.8	$	249.0	$	458.0
Cost of goods sold		—		121.0		164.6		291.2
Gross profit		—		75.8		84.4		166.8
Operating expenses		2.3		59.9		57.0		113.8
Operating income		(2.3)		15.9		27.4		53.0
Interest expense		10.0		11.9		23.3		25.2
Other non-operating expense, net		—		0.1		0.5		0.2
Gain on sale		(996.3)		—		(996.3)		—
Reclassification of accumulated other comprehensive income		18.5		—		18.5		—
Income from discontinued operations before income taxes	$	965.5	$	3.9	$	981.4	$	27.6

Beginning in January 2018, the Company ceased the recognition of depreciation and amortization of long-lived assets associated with GBL, therefore no depreciation and amortization is recognized during the three and six month periods ended March 31, 2019. For the six month period ended March 31, 2018, the depreciation and amortization expense of $8.3 million was recognized. Interest expense consists of interest from debt directly held by subsidiaries of the business held for sale, including interest from capital leases, and interest on Term Loans required to be paid down using proceeds received on disposal on sale of a business. The Company paid down the Term Loans subsequent to the completion of the GBL divestiture. See Note 11 – Debt for further discussion. No impairment loss was recognized as the proceeds from the disposal of the business were in excess of the carrying value. During the three and six month period ended March 31, 2019 the Company incurred transaction costs of $2.3 million and $12.9 million, respectively, associated with the divestiture, which were recognized as a component of income from discontinued operations.

During the three and six month periods ended March 31, 2018, the Company incurred transaction costs of $16.9 million and $19.3 million, respectively. Transaction costs are expensed as incurred and include fees for investment banking services, legal, accounting, due diligence, tax, valuation and various other services necessary to complete the transaction. Subsequent to the completion of the divestiture, the Company has incurred incremental costs to facilitate separation of shared operations, development of transferred shared service operations, platforms and personnel transferred under the transaction which have been recognized as Transaction Related Charges as part of continuing operations on the Company’s Condensed Consolidated Statement of Income. See Note 2 – Basis of Presentation & Significant Accounting Policies for further detail.

GAC

On January 28, 2019, the Company completed the sale of its GAC business pursuant to the GAC acquisition agreement with Energizer for $938.7 million in cash proceeds and $242.1 million in stock consideration of common stock of Energizer, resulting in the write-down of net assets held for sale of $110.8 million during the six month period ended March 31, 2019, including the estimated settlement of customary purchase price adjustments for working capital and assumed indebtedness, and recognition of tax and legal indemnifications in accordance with the GAC acquisition agreement. The results of operations and write-down of net assets held for sale for the disposal of the GAC business were recognized as a component of discontinued operations.

The Company and Energizer have agreed to indemnify each other for losses arising from certain breaches of the GAC acquisition agreement and for certain other matters. In particular, Spectrum has agreed to indemnify Energizer for certain liabilities relating to the assets retained by Spectrum, and Energizer has agreed to indemnify Spectrum for certain liabilities assumed by Energizer, in each case as described in the acquisition agreement.

As of March 31, 2019, the Company has recognized an estimated net settlement receivable of $8.4 million in Non-Trade Receivables on the Company’s Condensed Consolidated Financial Statements associated with GAC acquisition agreement, including the subsequent settlement of customary purchase price adjustments for working capital and assumed indebtedness, tax and legal indemnifications, and other agreed-upon funding in accordance with the agreement.

The Company and Energizer entered into related agreements ancillary to the GAC acquisition that became effective upon the consummation of the acquisition, including a TSA and reverse TSA, a supply agreement with the Company’s H&G business, as well as a shareholder agreement. The TSA and reverse TSA are recognized as a component of continuing operations for periods following the completion of the GAC sale. The supply agreement with the Company’s H&G business is recognized as a component of net sales and continuing operations. Sales from the Company’s H&G segment to GAC discontinued operations prior to the divestiture have been recognized as a component of net sales and continuing operations for all comparable periods. See Note 17 – Related Party Transactions for additional discussion.

NOTE 3 – DIVESTITURES (continued)

The following table summarizes the assets and liabilities of GAC classified as held for sale as of September 30, 2018.


(in millions)	September 30, 2018
Assets
Trade receivables, net	$	55.2
Other receivables		4.1
Inventories		72.8
Prepaid expenses and other current assets		2.9
Property, plant and equipment, net		58.2
Deferred charges and other		10.7
Goodwill		841.8
Intangible assets, net		384.4
Total assets of business held for sale	$	1,430.1
Liabilities
Current portion of long-term debt		0.4
Accounts payable		50.6
Accrued wages and salaries		3.2
Other current liabilities		13.3
Long-term debt, net of current portion		31.5
Deferred income taxes		71.6
Other long-term liabilities		2.5
Total liabilities of business held for sale	$	173.1

The following table summarizes the components of income from discontinued operations before income taxes associated with the GAC divestiture in the accompanying Condensed Consolidated Statements of Operations for the three and six month periods ended March 31, 2019 and 2018, with the close of the GAC divestiture on January 28, 2019.



	Three Month Period Ended				Six Month Period Ended
(in millions)	March 31, 2019		March 31, 2018		March 31, 2019		March 31, 2018
Net sales	$	22.1	$	118.3	$	87.7	$	187.2
Cost of goods sold		13.2		78.8		52.5		116.5
Gross profit		8.9		39.5		35.2		70.7
Operating expenses		8.0		27.3		35.7		52.3
Operating income (loss)		0.9		12.2		(0.5)		18.4
Interest expense		0.2		0.5		0.7		1.0
Other non-operating expense (income), net		0.1		(0.2)		0.2		(0.2)
Write-down of assets of business held for sale to fair value less cost to sell		3.5		—		110.8		—
Reclassification of accumulated other comprehensive income		3.3		—		3.3		—
(Loss) income from discontinued operations before income taxes	$	(6.2)	$	11.9	$	(115.5)	$	17.6

The three and six month periods ended March 31, 2018, included depreciation and amortization of $3.9 million and $7.9 million, respectively. Beginning in November 2018, the Company ceased the recognition of depreciation and amortization of long-lived assets associated with GAC, resulting in $1.4 million of depreciation and amortization recognized during the six month period ended March 31, 2019. Interest expense consists of interest from debt directly held by subsidiaries of the business held for sale, including interest from capital leases. During the six month period ended March 31, 2019, the Company recognized a $110.8 million write-down on net assets held for sale associated with the GAC divestiture attributable to the expected fair value to be realized from the sale, net of transaction costs.

During the three and six month periods ended March 31, 2019, the Company incurred transaction costs of $3.0 million and $8.8 million associated with the divestiture which have been recognized as a component of Income From Discontinued Operations on the Condensed Consolidated Statements of Income. Transaction costs are expensed as incurred and include fees for investment banking services, legal, accounting, due diligence, tax, valuation and various other services necessary to complete the transactions. Subsequent to the completion of the divestiture, the Company has incurred incremental costs to facilitate separation of shared operations, development of transferred shared service operations, platforms and personnel transferred under the transaction which have been recognized as Transaction Related Charges as part of continuing operations on the Company’s Condensed Consolidated Statement of Income. See Note 2 – Basis of Presentation & Significant Accounting Policies for further detail.

NOTE 3 – DIVESTITURES (continued)

HRG - Insurance Operations

On November 30, 2017, Fidelity and Guaranty Life (“FGL”) completed the FGL Merger pursuant to which, except for certain shares specified in the FGL Merger Agreement, each issued and outstanding share of common stock of FGL was automatically canceled and converted into the right to receive $31.10 in cash, without interest. The total consideration received by HRG Group Inc. as a result of the completion of the FGL Merger was $1,488.3 million. Also on November 30, 2017, Front Street Re (Delaware) Ltd. (“Front Street”) sold to CF Corporation and its related entities (collectively, the “CF Entities”) all of the issued and outstanding shares of Front Street for $65 million, which was subject to reduction for customary transaction expenses. In addition, $6.5 million of the purchase price was deposited in escrow for a period of 15 months to support any indemnification claims that might be made (if any) by the CF entities. The operations of FGL were classified as discontinued operations through November 30, 2017 in the accompanying Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows.

The following table summarizes the components of income from discontinued operations from discontinued operations from the HRG Insurance Operations divestiture in the accompanying Condensed Consolidated Statements of Income for the three and six month periods ended March 31, 2018, with completion of divestiture on November 30, 2017.



(in millions)	Six Month Period Ended March 31, 2018
Revenues
Insurance premiums	$	6.8
Net investment income		181.9
Net investment gains		154.8
Other		35.1
Total revenues		378.6
Operating costs and expenses
Benefits and other changes in policy reserves		241.3
Selling, acquisition, operating and general expenses		52.8
Amortization of intangibles		35.8
Total operating costs and expenses		329.9
Operating income		48.7
Interest expense and other		4.0
Write-down of assets of business held for sale to fair value less cost to sell		(14.2)
Reclassification of accumulated other comprehensive income		445.9
Income from discontinued operations before income taxes	$	476.4

Property, Plant, and Equipment and long-lived assets classified as held for sale are measured at the lower of their carrying value or fair value less cost to sell. As of September 30, 2017, the carrying value of HRG’s interest in FGL and Front Street exceeded their respective estimated fair value less cost to sell by $402.2 million and $19.0 million, respectively. The higher carrying value of FGL was primarily due to the increase in unrealized gains, net of offsets in FGL’s investment portfolio, with the effects of the unrealized gains, net of offsets, being recorded in accumulated other comprehensive income. Upon the completion of the FGL Merger, HRG deconsolidated its ownership interest in FGL, which resulted in the reclassification of $445.9 million of accumulated other comprehensive income attributable from FGL to income from discontinued operations in the fiscal year 2018. Additionally, subsequent to the close of the FGL Merger, the Company recognized a $5.9 million tax benefit allocated to HRG insurance discontinued operations during the third quarter of fiscal year 2018, associated with the reversal of valuation allowance realized with the completion of the Spectrum Merger.

NOTE 3 – DIVESTITURES (continued)

HPC

In December 2017 the Company entered into a plan to divest its HPC division, as a component of its GBA business, and was actively marketing the HPC business, including discussions with third parties for the potential sale of the HPC business. As a result, the HPC business met the criteria for recognition as assets held for sale and was reported as held for sale and included as a component of discontinued operations. Subsequently, in November 2018, the Company made a strategic decision to cease marketing and actively pursuing a sale of the HPC division and to continue to manage and operate the business for continued use. As a result, the HPC net assets were reclassified as held for use and the operating results and cash flows are included within the Company’s income from continuing operations for both the three and six month periods ended March 31, 2019 and 2018. Upon recognition of the Company’s change in plan to sell HPC, the net assets were measured at the carrying amount before HPC was classified as held for sale and adjusted for depreciation and amortization expense that would have been recognized had the business been continuously classified as held and used. There was no impairment or loss recognized when the decision to not sell was made.

Amounts previously reported as discontinued operations for the three month period ended March 31, 2018 have been reclassified as part of the Company’s income from continuing operations and assets held for use to conform with the current period. The following tables summarize the effect of the change in plan to sell the HPC business and reclassification of the GAC business to discontinued operations on the previously reported condensed consolidated statements of income for the three and six month periods ended March 31, 2018.


	Three Months Period Ended March 31, 2018
(in millions)	As Previously Reported		Effect of HPC Reclassification From Held For Sale to Held and Used		After HPC Reclassification		Effect of GAC Reclassification From Held and Used to Held For Sale		After GAC Reclassification
Net sales	$	766.1	$	231.0	$	997.1	$	114.5	$	882.6
Cost of goods sold		494.8		156.8		651.6		75.0		576.6
Gross profit		271.3		74.2		345.5		39.5		306.0
Operating expenses		242.4		59.6		302.0		27.3		274.7
Operating income		28.9		14.6		43.5		12.2		31.3
Interest expense		67.6		0.6		68.2		0.5		67.7
Other non-operating (income) expense, net		(0.2)		—		(0.2)		(0.2)		—
(Loss) income from operations before income taxes	$	(38.5)	$	14.0	$	(24.5)	$	11.9	$	(36.4)


	Six Months Period Ended March 31, 2018
(in millions)	As Previously Reported		Effect of HPC Reclassification From Held For Sale to Held and Used		After HPC Reclassification		Effect of GAC Reclassification From Held and Used to Held For Sale		After GAC Reclassification
Net sales	$	1,412.6	$	573.0	$	1,985.6	$	180.7	$	1,804.9
Cost of goods sold		898.6		391.7		1,290.3		110.0		1,180.3
Gross profit		514.0		181.3		695.3		70.7		624.6
Operating expenses		458.5		135.5		594.0		52.3		541.7
Operating income		55.5		45.8		101.3		18.4		82.9
Interest expense		143.1		0.9		144.0		1.0		143.0
Other non-operating (income) expense, net		(1.2)		0.3		(0.9)		(0.2)		(0.7)
(Loss) income from operations before income taxes	$	(86.4)	$	44.6	$	(41.8)	$	17.6	$	(59.4)

During the first quarter of fiscal year 2019, the Company recognized $29.0 million of incremental depreciation and amortization expenses included in General and Administrative Expenses on the Company’s Condensed Consolidated Statements of Income associated with long-lived assets that had ceased depreciating or amortizing during the period in which the assets were held for sale in order to reflect the carrying value of HPC net assets as if they had been held for use during that period.

During the three and six month period ended March 31, 2019, the Company incurred HPC divestiture related transaction costs of $0.9 million and $5.5 million, respectively, which are included in Transactions Related Charges as a component of continuing operations on the Company’s Condensed Consolidated Statements of Income.