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Acquisitions
 12 Months Ended
Sep. 30, 2011
Acquisitions [Abstract]  
Acquisitions
 
   
(22)   Acquisitions
 
FGL
 
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 $350,000, which amount could be reduced by up to $50,000 post closing if certain regulatory approval is not received (as discussed further below). The Company incurred approximately $22,700 of expenses related to the FGL Acquisition, including $5,000 of the $350,000 cash purchase price which has been re-characterized as an expense since the seller made a $5,000 expense reimbursement to the Master Fund upon closing of the FGL Acquisition. Such expenses are included in “Selling, general and administrative expenses” in the Consolidated Statement of Operations for the year ended September 30, 2011. The FGL Acquisition continued HGI’s strategy of obtaining controlling equity stakes in subsidiaries that operate across a diversified set of industries.
 
Net Assets Acquired
 
The acquisition of FGL has been accounted for under the acquisition method of accounting which requires the total purchase price to be allocated to the assets acquired and liabilities assumed based on their estimated fair values. The fair values assigned to the assets acquired and liabilities assumed are based on valuations using management’s best estimates and assumptions and are preliminary pending the completion of the valuation analysis of selected assets and liabilities. During the measurement period (which is not to exceed one year from the acquisition date), the Company is required to retrospectively adjust the provisional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets or liabilities as of that date. Certain estimated values are not yet finalized and are subject to change, which could result in significant retrospective adjustments affecting the bargain purchase gain described below and other previously reported amounts. The more significant items which are provisional and subject to change during the measurement period include deferred income taxes, particularly the related valuation allowance, and the contingent purchase price reduction, both as described below. The following table summarizes the preliminary amounts recognized at fair value for each major class of assets acquired and liabilities assumed as of the FGL Acquisition Date:
 
         
Investments, cash and accrued investment income, including cash acquired of $1,040,470
  $ 17,705,419  
Reinsurance recoverable
    929,817  
Intangibles (VOBA)
    577,163  
Deferred tax assets
    256,584  
Other assets
    72,801  
         
Total assets acquired
    19,541,784  
         
Contractholder funds and future policy benefits
    18,415,022  
Liability for policy and contract claims
    60,400  
Note payable
    95,000  
Other liabilities
    475,285  
         
Total liabilities assumed
    19,045,707  
         
Net assets acquired
    496,077  
Cash consideration, net of $5,000 re-characterized as expense
    345,000  
         
Bargain purchase gain
  $ 151,077  
         
 
The application of acquisition accounting resulted in a bargain purchase gain of $151,077, which is reflected in the Consolidated Statement of Operations for the year ended September 30, 2011. The amount of the bargain purchase gain is equal to the amount by which the fair value of net assets acquired exceeded the consideration transferred. The Company believes that the resulting bargain purchase gain is reasonable based on the following circumstances: (a) the seller was highly motivated to sell FGL, as it had publicly announced its intention to do so approximately a year prior to the sale, (b) the fair value of FGL’s investments and statutory capital increased between the date that the purchase price was initially negotiated and the FGL Acquisition Date, (c) as a further inducement to consummate the sale, the seller waived, among other requirements, any potential upward adjustment of the purchase price for an improvement in FGL’s statutory capital between the date of the initially negotiated purchase price and the FGL Acquisition Date and (d) an independent appraisal of FGL’s business indicated that its fair value was in excess of the purchase price.
 
Contingent Purchase Price Reduction
 
As contemplated by the terms of the F&G Stock Purchase Agreement and more fully described in Note 26, Front Street Re, Ltd. (“Front Street”), a recently formed Bermuda-based reinsurer and wholly-owned subsidiary of the Company, subject to regulatory approval, will enter into a reinsurance agreement (the “Front Street Reinsurance Transaction”) with FGL whereby Front Street would reinsure up to $3,000,000 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 $1,000,000 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 F&G Stock Purchase Agreement provides for up to a $50,000 post-closing reduction in purchase price if the Front Street Reinsurance Transaction is not approved by the Maryland Insurance Administration or is approved subject to certain restrictions or conditions. Based on management’s assessment as of September 30, 2011, it is not probable that the purchase price will be required to be reduced; therefore no value was assigned to the contingent purchase price reduction as of the FGL Acquisition Date.
 
Reserve Facility
 
As discussed in Note 20, pursuant to the F&G Stock Purchase Agreement on April 7, 2011, FGL recaptured all of the life business ceded to OM Re. OM Re transferred assets with a fair value of $653,684 to FGL in settlement of all of OM Re’s obligations under these reinsurance agreements. Such amounts are reflected in FGL’s purchase price allocation. Further, on April 7, 2011, FGL ceded on a coinsurance basis a significant portion of this business to Raven Re. Certain transactions related to Raven Re such as the surplus note issued to OMGUK in the principal amount of $95,000, which was used to partially capitalize Raven Re and the Structuring Fee of $13,750 are also reflected in FGL’s purchase price allocation. See Note 20 for additional details.
 
Intangible Assets
 
VOBA represents the estimated fair value of the right to receive future net cash flows from in-force contracts in a life insurance company acquisition at the acquisition date. VOBA is being amortized over the expected life of the contracts in proportion to either gross premiums or gross profits, depending on the type of contract. Total gross profits include both actual experience as it arises and estimates of gross profits for future periods. FGL will regularly evaluate and adjust the VOBA balance with a corresponding charge or credit to earnings for the effects of actual gross profits and changes in assumptions regarding estimated future gross profits. The amortization of VOBA is reported in “Amortization of intangibles” in the Consolidated Statement of Operations. The proportion of the VOBA balance attributable to each of the product groups associated with this acquisition is as follows: 80.4% related to FIA’s, and 19.6% related to deferred annuities.
 
Refer to Note 10 for FGL’s estimated future amortization of VOBA, net of interest, for the next five fiscal years.
 
Deferred Taxes
 
The future tax effects of temporary differences between financial reporting and tax bases of assets and liabilities are measured at the balance sheet date and are recorded as deferred income tax assets and liabilities. The acquisition of FGL is considered a non-taxable acquisition under tax accounting criteria, therefore, the tax basis of assets and liabilities reflect an historical (carryover) basis at the FGL Acquisition Date. However, since assets and liabilities reported under US GAAP are adjusted to fair value as of the FGL Acquisition Date, the deferred tax assets and liabilities are also adjusted to reflect the effects of those fair value adjustments. This resulted in shifting FGL into a significant net deferred tax asset position at the FGL Acquisition Date, principally due to the write-off of DAC and the establishment of a significantly lesser amount of VOBA which resulted in reducing the associated deferred tax liabilities and thereby shifting FGL’s net deferred tax position. This shift, coupled with the application of certain tax limitation provisions that apply in the context of a change in ownership transaction, most notably Section 382 of the Internal Revenue Code (the “IRC”), relating to “Limitation in Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership Change,” as well as other applicable provisions under Sections 381-384 of the IRC, require FGL to evaluate the realization of FGL’s gross deferred tax asset position and the need to establish a valuation allowance against it. Management determined that a valuation allowance against a portion of the gross deferred tax asset (“DTA”) would be required.
 
The components of the net deferred tax assets as of the FGL Acquisition Date are as follows:
 
         
Deferred tax assets:
       
DAC
  $ 96,764  
Insurance reserves and claim related adjustments
    401,659  
Net operating losses
    128,437  
Capital losses (carryovers and deferred)
    267,468  
Tax credits
    75,253  
Other deferred tax assets
    27,978  
         
Total deferred tax assets
    997,559  
Valuation allowance
    (405,370 )  
         
Deferred tax assets, net of valuation allowance
    592,189  
         
Deferred tax liabilities:
       
VOBA
    202,007  
Investments
    121,160  
Other deferred tax liabilities
    12,438  
         
Total deferred tax liabilities
    335,605  
         
Net deferred tax assets
  $ 256,584  
         
 
Results of FGL since the FGL Acquisition Date
 
The following table presents selected financial information reflecting results for FGL that are included in the Consolidated Statement of Operations for the year ended September 30, 2011:
 
         
    For the Period
    April 6, 2011 to
    September 30, 2011
 
Total revenues
  $ 290,866  
Income, net of taxes
    23,703  
 
Russell Hobbs
 
On June 16, 2010, SBI merged with Russell Hobbs. Russell Hobbs is a designer, marketer and distributor of a broad range of branded small household appliances. Russell Hobbs markets and distributes small kitchen and home appliances, pet and pest products and personal care products. Russell Hobbs has a broad portfolio of recognized brand names, including Black & Decker, George Foreman, Russell Hobbs, Toastmaster, LitterMaid, Farberware, Breadman and Juiceman. Russell Hobbs’ customers include mass merchandisers, specialty retailers and appliance distributors primarily in North America, South America, Europe and Australia. The results of Russell Hobbs operations since June 16, 2010 are included in the accompanying Consolidated Statements of Operations for Fiscal 2010 and 2011.
 
In accordance with ASC Topic 805, Spectrum Brands accounted for the SB/RH Merger by applying the acquisition method of accounting. The acquisition method of accounting requires that the consideration transferred in a business combination be measured at fair value as of the closing date of the acquisition. Inasmuch as Russell Hobbs was a private company and its common stock was not publicly traded, the closing market price of the SBI common stock at June 16, 2010 was used to calculate the purchase price. The total purchase price of Russell Hobbs was approximately $597,579 determined as follows:
 
         
SBI closing price per share on June 16, 2010
  $ 28.15  
         
Purchase price — Russell Hobbs allocation — 20,704 shares(1)(2)
  $ 575,203  
Cash payment to pay off Russell Hobbs’ North American credit facility
    22,376  
         
Total purchase price of Russell Hobbs
  $ 597,579  
         
 
 
     
(1)   Number of shares calculated based upon conversion formula, as defined in the merger agreement, using balances as of June 16, 2010.
 
(2)   The fair value of 271 shares of unvested restricted stock units as they relate to post combination services will be recorded as operating expense over the remaining service period and were assumed to have no fair value for the purchase price.
 
Purchase Price Allocation
 
The total purchase price for Russell Hobbs was allocated to the net tangible and intangible assets based upon their fair values at June 16, 2010 as set forth below. The excess of the purchase price over the net tangible assets and intangible assets was recorded as goodwill. As measurement period for the SB/RH Merger has closed, during which no adjustments were made to the preliminary purchase price allocation. The final purchase price allocation for Russell Hobbs is as follows:
 
         
Current assets
  $ 307,809  
Properties
    15,150  
Intangibles
    363,327  
Goodwill(a)
    120,079  
Other assets
    15,752  
         
Total assets acquired
    822,117  
         
Current liabilities
    142,046  
Total debt
    18,970  
Other liabilities
    63,522  
         
Total liabilities assumed
    224,538  
         
Net assets acquired
  $ 597,579  
         
 
 
     
(a)   Consists of $25,426 of tax deductible Goodwill
 
Pre-Acquisition Contingencies Assumed
 
Spectrum Brands has evaluated pre-acquisition contingencies relating to Russell Hobbs that existed as of the acquisition date. Based on the evaluation, Spectrum Brands has determined that certain pre-acquisition contingencies are probable in nature and estimable as of the acquisition date. Accordingly, Spectrum Brands has recorded its best estimates for these contingencies as part of the purchase price allocation for Russell Hobbs. As the measurement period has closed, adjustments to pre-acquisition contingency amounts are reflected in the Company’s results of operations.
 
ASC Topic 805 requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Accordingly, Spectrum Brands performed a valuation of the assets and liabilities of Russell Hobbs at June 16, 2010. Significant adjustments as a result of the purchase price allocation are summarized as follows:
 
   
•  Inventories — An adjustment of $1,721 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.
 
•  Deferred tax liabilities, net — An adjustment of $43,086 was recorded to adjust deferred taxes for the fair value allocations made in accounting for the purchase.
 
•  Properties, net — An adjustment of $(455) was recorded to adjust the net book value of properties to fair value giving consideration to their highest and best use. The valuation of Spectrum Brands’ properties’ were 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 $363,327 as of June 16, 2010. 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 relationship, 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 93% which was supported by historical retention rates. Income taxes were estimated at 36% and amounts were discounted using a rate of 15.5%. The customer relationships were valued at $38,000 under this approach.
 
     
  •  Spectrum Brands valued 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 Russell Hobbs 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 2.0% to 5.5% 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 subjected 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 1%-14% annually with a terminal year growth rate of 3%. Income taxes were estimated in a range of 30%-38% and amounts were discounted using rates between 15.5%-16.5%. Trade name and trademarks were valued at $170,930 under this approach.
 
  •  Spectrum Brands valued a trade name license agreement using the income approach, specifically the multi-period excess earnings method. In determining the fair value of the trade name license agreement, 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 trade name license agreement after deducting contributory asset charges. The incremental after-tax cash flows attributable to the subject intangible asset are then discounted to their present value. In estimating the fair value of the trade name license agreement net sales were estimated to grow at a rate of (3)%-1% annually. Spectrum Brands assumed a twelve year useful life of the trade name license agreement. Income taxes were estimated at 37% and amounts were discounted using a rate of 15.5%. The trade name license agreement was valued at $149,200 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 Russell Hobbs 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 were 2% 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 ranging from 9 to 11 years. In estimating the fair value of the technologies, net sales were estimated to grow at a rate of 3%-12% annually. Income taxes were estimated at 37% and amounts were discounted using the rate of 15.5%. The technology assets were valued at $4,100 under this approach.
 
Supplemental Pro Forma Information — Unaudited
 
The following table reflects the Company’s unaudited pro forma results for Fiscal 2011 and Fiscal 2010 had the results of Russell Hobbs and FGL been included for all periods beginning after September 30, 2009, as if the respective acquisitions were completed on October 1, 2009:
 
                 
    Successor  
    2011     2010  
 
Revenues:
               
Reported revenues
  $ 3,477,782     $ 2,567,011  
FGL adjustment(a)
    685,767       953,911  
Russell Hobbs adjustment
    —       543,952  
                 
Pro forma revenues
  $ 4,163,549     $ 4,064,874  
                 
Income (loss) from continuing operations:
               
Reported income (loss) from continuing operations
  $ 115     $ (195,507 )
FGL adjustment(a)
    84,912       (206,441 )
Russell Hobbs adjustment
    —       (5,504 )
                 
Pro forma income (loss) from continuing operations
  $ 85,027     $ (407,452 )
                 
Income (loss) per common share from continuing operations:
               
Reported basic income (loss) per share from continuing operations
  $ 0.07     $ (1.13 )
FGL adjustment
    0.42       (1.56 )
Russell Hobbs adjustment
    —       (0.04 )
                 
Pro forma basic income (loss) per share from continuing operations
  $ 0.49     $ (2.73 )
                 
Pro forma diluted income (loss) per share from continuing operations
  $ 0.49     $ (2.73 )
                 
 
 
     
(a)   The FGL adjustments primarily reflect the following pro forma adjustments applied to FGL’s historical results:
 
     
  •  Reduction in net investment income to reflect amortization of the premium on fixed maturity securities — available-for-sale resulting from the fair value adjustment of these assets;
 
  •  Reversal of amortization associated with the elimination of FGL’s historical DAC;
 
  •  Amortization of VOBA associated with the establishment of VOBA arising from the acquisition;
 
  •  Adjustments to reflect the impacts of the recapture of the life business from OM Re and the retrocession of the majority of the recaptured business and the reinsurance of certain life business previously not reinsured to an unaffiliated third party reinsurer;
 
  •  Adjustments to eliminate interest expense on notes payable to seller and add interest expense on new surplus note payable;
 
  •  Amortization of reserve facility Structuring Fee;
 
  •  Adjustments to reflect the full-period effect of interest expense on the initial $350,000 of 10.625% Notes issued on November 15, 2010, the proceeds of which were used to fund the FGL Acquisition.
 
  •  Reversal of the change in the deferred tax valuation allowance included in the income tax provision.
 
Other Acquisitions
 
During Fiscal 2011, Spectrum Brands completed several business acquisitions which were not significant individually or collectively. The largest of these was the $10,524 cash acquisition of Seed Resources, LLC (“Seed Resources”) on December 3, 2010. Seed Resources is a wild seed cake producer through its Birdola premium brand seed cakes. The acquisition was accounted for under the acquisition method of accounting. The results of Seed Resources’ operations since December 3, 2010 are included in the accompanying Consolidated Statement of Operations for the year ended September 30, 2011. The preliminary purchase price of $12,500 (representing cash paid of $10,524 and contingent consideration accrued of $1,976), including $1,100 of trade name intangible assets and $10,029 of goodwill, for this acquisition was based upon a preliminary valuation. Spectrum Brands’ estimates and assumptions for this acquisition are subject to change as Spectrum Brands obtains additional information for its estimates during the measurement period. The primary areas of the purchase price allocation that are not yet finalized relate to certain legal matters, income and non-income based taxes and residual goodwill.
 
Acquisition and Integration Related Charges
 
Acquisition and integration related charges reflected in “Selling, general and administrative expenses” include, but are not limited to transaction costs such as banking, legal and accounting professional fees directly related to an acquisition, termination and related costs for transitional and certain other employees, integration related professional fees and other post business combination related expenses. Such charges in Fiscal 2011 relate primarily to the SB/RH Merger, the Spectrum Brands Acquisition and the FGL Acquisition and in Fiscal 2010 relate primarily to the SB/RH Merger. There were no acquisition and integration related charges in the Fiscal 2009 periods presented.
 
The following table summarizes acquisition and integration related charges incurred by the Company during Fiscal 2011 and Fiscal 2010:
 
                 
    2011     2010  
 
Banking, legal and accounting professional fees
  $ 32,410     $ 31,611  
Integration costs
    23,084       3,777  
Employee termination charges
    8,105       9,713  
                 
Total acquisition and integration related charges
  $ 63,599     $ 45,101