Income Taxes

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



	Fiscal
	2015			2014		2013
(Loss) income from continuing operations before income taxes:
United States	$	(630.8	)	$	9.2	$	(78.9	)
Outside the United States	190.0			204.0		197.2
Total (loss) income from continuing operations before taxes	$	(440.8	)	$	213.2	$	118.3

The components of income tax expense were as follows:



	Fiscal
	2015			2014			2013
Current:
Federal	$	(0.3	)	$	64.2		$	(32.5	)
Foreign	40.4			46.6			47.7
State	4.5			6.2			1.4
Total current	44.6			117.0			16.6
Deferred:
Federal	19.3			12.4			169.0
Foreign	11.2			(8.3		)	2.1
State	(3.5		)	(9.6		)	(0.4		)
Total deferred	27.0			(5.5		)	170.7
Income tax expense	$	71.6		$	111.5		$	187.3

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



	Fiscal
	2015			2014			2013
Expected income tax expense at Federal statutory rate	$	(154.3	)	$	74.6		$	41.4
State and local income taxes - net of federal income tax benefit	(7.3		)	0.8			(32.2		)
Valuation allowance for deferred tax assets	328.6			(47.4		)	151.8
Preferred stock equity conversion feature	—			4.4			35.6
Residual tax on foreign earnings	24.8			90.9			(7.0		)
Foreign rate differential	(29.0		)	(23.1		)	(18.8		)
Foreign tax law changes	—			(7.7		)	—
State tax law and rate changes	(54.5		)	—			—
NOL adjustments	9.2			—			—
Gain on deconsolidation	(23.3		)	—			—
Non-deductible goodwill impairment	9.9			—			—
Permanent items	14.4			7.9			7.4
Exempt foreign income	(4.7		)	(5.7		)	(5.9		)
Unrecognized tax benefits	(1.5		)	2.2			4.1
Purchase accounting benefit	(22.8		)	—			—
Outside basis difference	(16.2		)	—			—
Capitalized transaction costs	—			1.0			5.6
Other	(1.7		)	13.6			5.3
Reported income tax expense	$	71.6		$	111.5		$	187.3
Effective tax rate	(16.2		)%	52.3		%	158.3		%

For Fiscal 2015, the Company’s effective tax rate of (16.2)% differed from the expected U.S. statutory tax rate of 35.0%; and was primarily driven by: (i) pretax losses in certain foreign and U.S. entities and jurisdictions, book valuations and impairments and bad debt expense in our Insurance, Energy, Asset Management and Corporate and Other segments in the U.S. for which we concluded that a majority of the tax benefits are not more-likely-than-not to be realized, resulting in the recording of valuation allowances; and (ii) FGL’s life insurance subsidiaries which files its own consolidated Federal income tax return. Partially offsetting these items in Fiscal 2015 were: (i) income earned outside the U.S. that is subject to statutory tax rates lower than 35.0%; and ii) recognition of a $22.8 income tax benefit from the reversal of a portion of Spectrum Brands’ U.S. valuation allowance on deferred tax assets in connection with the purchase of AAG. As a result of the AAG Acquisition, Spectrum determined that a portion of its pre-existing deferred tax assets are more likely than not to be realized by the combined entity and a portion of the historical valuation allowance was no longer required. In addition, the Company recognized a nonrecurring net income tax benefit of $11.7 attributable to the tax impact related to the impairment of certain FOH indefinite lived intangible assets for which a deferred tax liability was previously recorded. Due to the indefinite life of these assets for book purposes, the related deferred tax liability was not regarded as a source of taxable income to support the realization of deferred tax assets.

For Fiscal 2014, the Company’s effective tax rate of 52.3% differed from the expected U.S. statutory tax rate of 35.0% and was primarily driven by: (i) pretax losses in the U.S. and some foreign jurisdictions for which the Company concluded that the tax benefits are not more-likely-than-not realizable, resulting in valuation allowances; and (ii) the profitability of FGL’s life insurance subsidiaries which files its own consolidated Federal income tax return. Partially offsetting these items in Fiscal 2014 were: (i) income earned outside the U.S. that is subject to statutory rates lower than 35.0%; and (ii) the partial release of U.S. valuation allowances by FGL’s life insurance subsidiaries, totaling $40.1, attributable to a tax planning strategy that will allow for the utilization of capital loss carryforwards, that management previously concluded were more-likely-than-not unrealizable.

For Fiscal 2013, the Company’s effective tax rate of 158.3% differed from the expected U.S. statutory tax rate of 35.0% and was primarily driven by: (i) pretax losses in the U.S. and some foreign jurisdictions for which the Company concluded that the tax benefits are not more-likely-than-not realizable, resulting in valuation allowances ; (ii)the profitability of FGL’s life insurance subsidiaries which files its own consolidated Federal income tax return ; (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 U.S. 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 earnings to the U.S. Federal statutory income tax rate of 35.0%. 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 FGL’s life insurance subsidiaries.

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



	September 30,
	2015			2014
Deferred tax assets:
Employee benefits	$	84.2		$	84.3
Restructuring	4.1			7.0
Inventories and receivables	35.3			25.6
Marketing and promotional accruals	14.4			16.0
Net operating loss, credit and capital loss carry forwards	1,040.2			930.6
Prepaid royalty	6.3			6.6
Unrealized losses on mark-to-market securities	19.9			15.0
Insurance reserves and claim related adjustments	467.5			483.8
Insurance receivables	21.2			—
Outside basis difference	217.3			43.8
Investments	24.0			—
Other	139.5			101.2
Total deferred tax assets	2,073.9			1,713.9
Less: Valuation allowance	1,019.9			778.5
Net deferred tax assets	1,054.0			935.4

Deferred tax liabilities:
Property, plant and equipment	(15.1		)	(13.5		)
Unrealized gains	(23.8		)	(21.2		)
Intangibles	(855.9		)	(735.6		)
Value of business acquired	(65.0		)	(20.8		)
Deferred acquisition costs	(209.0		)	(104.2		)
Investments	(87.4		)	(338.3		)
Insurance reserves and claim related adjustments	(14.9		)	—
Redemption of long term debt	(11.8		)	(10.0		)
Other	(99.7		)	(38.4		)
Total deferred tax liabilities	(1,382.6		)	(1,282.0		)
Net deferred tax liability	$	(328.6	)	$	(346.6	)

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 Fiscal 2015, 2014, and 2013, the Company had a net charge (release) of valuation allowance to earnings totaling $328.6, $(47.4) and $151.8, respectively, as more fully described below.

HRG

As a result of HRG’s cumulative losses over the past 3 years, management concluded at September 30, 2015, that a valuation allowance was required for its entire net deferred tax asset balance. HRG’s valuation allowance at September 30, 2015 and 2014 totaled $594.5 and $279.9, respectively. This resulted from the Company’s conclusion that tax benefits on its pretax losses are not more-likely-than-not realizable. At September 30, 2015 and 2014 HRG had approximately $815.3 and $497.3, respectively of gross U.S. Federal net operating loss (“NOL”) carryforwards, which, if unused, will expire in years 2030 through 2035. HRG had approximately $77.8 and $35.5 of gross U.S. Federal capital loss carryforwards at September 30, 2015 and 2014, respectively, which, if unused, will expire through 2020. At September 30, 2015 and 2014, HRG had approximately $109.8 and $16.3, respectively of tax benefits related to U.S. state NOL carryforwards at September 30, 2015, which, if unused, will expire in years 2030 through 2035. At September 30, 2015, HRG has an additional gross $17.1 of Federal and state NOLs related to share-based compensation for which tax benefits will be recognized to Additional paid-in capital when those carryforwards are used.

During Fiscal 2015, HRG increased its valuation allowance for deferred tax assets by $314.6, of which $254.2 was related to an increase in valuation allowance against U.S. federal net deferred tax assets and $60.4 was related to an increase in valuation allowance against state net deferred tax assets. Included in the net increase for U.S. deferred tax assets was an increase of $316.4 resulted from book revaluation, impairments and bad debt expense in the Insurance, Energy, Asset Management and Corporate and Other segments. During Fiscal 2014, HRG increased its valuation allowance for deferred tax assets by $75.9, of which $98.7 was related to an increase in valuation allowance against U.S. net deferred taxes and $22.8 was related to a decrease in valuation allowance against state net deferred taxes.

On September 30, 2013, HRG triggered a change of ownership, as defined under Internal Revenue Code (the “IRC”) Section 382 which limits the utilization of HRG’s U.S. Federal and state net operating losses and other tax attributes. The amount of the limitation is based on a number of factors, including the value of HRG’s stock (as defined for tax purposes) on the date of the ownership change, its net unrealized gain position on that date (as defined for tax purposes), the occurrence of realized gains in years subsequent to the ownership change, and the effects of subsequent changes in ownership, if any. Such factors, including the recognition of unrealized gains, may not be relied upon when assessing the realizability of HRG’s deferred tax assets on its U.S. Federal and state net operating losses. HRG has considered the impact of the 2013 Section 382 ownership change and the related limitations in assessing its need for a valuation allowance. There has been no further ownership change since the September 30, 2013, ownership change.

Spectrum Brands

At September 30, 2015, Spectrum Brands had gross U.S. Federal NOL carryforwards of $894.5 and tax effected benefits related to state NOLs of $68.7. Spectrum Brands has an additional $59.6 of gross Federal and state NOLs related to share-based compensation for which benefits will be recognized to Additional paid-in capital when those carryforwards are used. If unused, they will expire through 2035. Spectrum Brands has gross foreign loss carryforwards totaling $127.6 which will expire beginning in Fiscal 2016. 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 in the fiscal year ended September 30, 2009. Spectrum Brands has had multiple changes of ownership, as defined under IRC Section 382 of the Internal Revenue Code of 1986 as amended, that limits the utilization of Spectrum Brands’ U.S. Federal and state net operating losses and other tax attributes. The annual limitation is based on a number of factors, including the value of the Spectrum Brands’ stock (as defined for tax purposes) on the date of the ownership change, its net unrealized gain position on that date, the occurrence of realized gains in years subsequent to the ownership change, and the effects of subsequent ownership changes (as defined for tax purposes), if any. Due to these limitations, Spectrum Brands estimates, as of September 30, 2015, that $272.9 of U.S. Federal NOLs with a federal tax benefit of $95.5 and $16.7 of the tax benefit related to state NOLs will expire unused even if Spectrum Brands generates sufficient income to otherwise use all of its NOLs. In addition, separate return year limitations apply to limit Spectrum Brands’ utilization of the acquired Russell Hobbs U.S. Federal and state NOLs to future income of the Russell Hobbs subgroup. Spectrum Brands also projects, as of September 30, 2015, that $29.4 of its foreign NOLs will not be used. Spectrum Brands has provided a full valuation allowance against these deferred tax assets.

As of September 30, 2015 and 2014, Spectrum Brands’ valuation allowances totaled approximately $305.4 and $333.1, respectively. These valuation allowances were recorded on: (i) U.S. net deferred tax assets totaling $268.7 and $299.1, respectively; and (ii) foreign net deferred tax assets totaling $36.7 and $34.0, respectively. During Fiscal 2015, Spectrum decreased its valuation allowance for deferred tax assets by $27.7, of which $30.4 was related to a decrease in valuation allowance against U.S. net deferred tax assets and $2.7 related to an increase in the valuation allowance against foreign net deferred tax assets. Included in the net decrease for U.S. deferred tax assets was a decrease of $22.8 of Spectrum’s U.S. valuation allowance resulted from the AAG acquisition. During Fiscal 2014, Spectrum Brands decreased its valuation allowance for deferred tax assets by $121.5, of which $122.6 was related to a decrease in the valuation allowance against U.S. net deferred tax assets and $1.1 was related to an increase in the valuation allowance against foreign net deferred tax assets. Included in the net decrease for U.S. deferred tax assets was a decrease of $62.6 of Spectrum’s U.S. valuation allowance resulting from one time internal restructuring and debt financing activities.

Effective October 1, 2012, Spectrum Brands began recording residual U.S. and foreign taxes on current foreign earnings in accordance with its change in policy not to permanently reinvest current and certain prior period foreign earnings. To the extent necessary, Spectrum Brands intends to utilize earnings of foreign subsidiaries generated after September 30, 2011, to support the plans of Spectrum Brands 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, current and certain prior period earnings of Spectrum Brands’ 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, Spectrum Brands is providing residual U.S. and foreign deferred taxes to these earnings to the extent they cannot be repatriated in a tax-free manner. For Fiscal 2015, Spectrum Brands recorded U.S. residual taxes on approximately $37.5 of distributions from foreign earnings and no earnings not yet taxed in the U.S., resulting in a decrease in income tax expense of $0.3. For Fiscal 2014, Spectrum Brands recorded residual taxes on approximately $190.5 of distributions from foreign earnings and $3.1 of earnings not yet taxed in the U.S., resulting in an increase in income tax expense of approximately $0.1.

Remaining undistributed earnings of Spectrum Brands’ foreign operations totaled approximately $183.8 at September 30, 2015, and are permanently reinvested. Accordingly, no U.S. residual income taxes have been provided on those earnings. If at some future date these earnings cease to be permanently invested, Spectrum Brands may be subject to U.S. income taxes and foreign withholding and other taxes on such amounts, which cannot reasonably estimated at this time.

FGL

At September 30, 2015, FGL’s deferred tax assets were primarily the result of U.S. NOL, capital loss and tax credit carryforwards and insurance reserves. FGL’s net deferred tax asset position at September 30, 2015 and 2014, before consideration of its recorded valuation allowance, totaled $348.7 and $256.2, respectively. Valuation allowances of $120.2 and $118.8 were recorded against its gross deferred tax asset balance at September 30, 2015 and 2014, respectively. FGL’s net deferred tax asset position at September 30, 2015 and 2014, after taking into account the valuation allowance, was $228.5 and $137.4, respectively. For Fiscal 2015 and 2014, FGL recorded a net valuation allowance increase of $1.3 (comprised of a full year valuation decrease of $4.3 related to FGL’s operating insurance subsidiaries, partially offset by an increase to valuation allowance of $5.6 related to the non-life subsidiaries) and $40.1 (comprised of a full year valuation decrease of $43.0 related to FGL’s operating insurance subsidiaries, partially offset by an increase to valuation allowance of $2.9 related to the non-life insurance subsidiaries), respectively.

FGL maintains a valuation allowance against certain IRC section 382 limited capital loss carryforwards of its operating insurance subsidiaries and the deferred tax assets of its non-life insurance subsidiaries. A valuation allowance has been recorded against capital loss carryforwards limited under IRC section 382 to reduce the associated deferred tax assets to an amount that is more-likely than not realizable. The non-life insurance subsidiaries file as part of the HRG consolidated group and have a history of losses and insufficient sources of future taxable income in order to recognize any portion of their deferred tax assets.

For Fiscal 2015, FGL’s valuation allowance of $120.2 consisted of a partial valuation allowance of $73.7 on capital loss carryforwards and a full valuation allowance of $46.5 on net deferred tax assets related to non-life insurance subsidiaries. For Fiscal 2014, FGL’s valuation allowance of $118.8 consisted of a partial valuation allowance of $78.0 on capital loss carryforwards and a full valuation allowance of $40.8 on net deferred tax assets related to non-life insurance subsidiaries.

Utilization of certain tax attributes (carryforwards) were subject to limitation under IRC sections 382 and 383 as a result of the change of ownership that occurred when FGL was acquired by HRG in 2011. On September 27, 2013, FGL 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 FGL’s utilization of its tax attributes. In addition, FGL experienced cumulative losses during the three-year period preceding its acquisition. These were among the factors FGL considered in establishing a valuation allowance against FGL’s deferred tax asset position at the acquisition date.

During Fiscal 2014, market conditions changed sufficiently that FGL determined it was prudent and feasible to adopt a new tax planning strategy. The strategy involved repositioning a portion of the investment portfolio to trigger $100.0 in net unrealized built-in gains (“NUBIG”). The sale of these assets resulted in an increase to FGL’s Section 382 limit (i.e. the “adjusted limit”), enabling FGL to utilize capital loss carryforwards that will offset NUBIG-related gains. This strategy made it more likely than not that the amount of capital loss carryforwards needed to offset those gains will be utilized. Therefore, FGL released a portion of the valuation allowance previously recorded against its deferred tax asset related to capital loss carryforwards. During Fiscal 2015, the entire $100.0 of NUBIG had been recognized, resulting in the realization of $35.0 of tax benefits. FGL currently has capital loss carryforwards of $210.5 that are set to expire on December 31, 2015. A full valuation allowance has been set against those deferred tax assets that are not more likely than not to be realized.

At September 30, 2015 and 2014, FGL had NOL carryforwards of $92.2 and $92.5, respectively, which, if unused, will expire in years 2026 through 2035. FGL had capital loss carryforwards totaling $216.9 and $259.1 at September 30, 2015 and 2014, respectively, which if unused, will expire in years 2016 through 2020. In addition, at September 30, 2015 and 2014, FGL had low income housing tax credit carryforwards totaling $54.3 and $54.3, respectively, which, if unused, will expire in years 2017 through 2035 and alternative minimum tax credits of $6.3 and $6.3, respectively that may be carried forward indefinitely. Certain tax attributes are subject to an annual limitation as a result of the acquisition of FGL 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, 2015 and 2014 were $16.1 and $12.6, respectively. If recognized in the future, $12.7 of UTBs would impact the effective tax rate and $3.4 of UTBs would create deferred tax assets against for which the Company would record a full valuation allowance. Consistent with the Company’s accounting policy election, when applicable the Company records interest and penalties related to uncertain tax positions in income tax expense. At September 30, 2015 and 2014, the Company’s accrued balances of interest and penalties on uncertain tax positions totaled $2.8 and $4.1, respectively. For Fiscal 2015 and 2014, interest and penalties increased income tax expense by $0.9 and $1.8, respectively.

At September 30, 2015, previously filed income tax returns for certain of the Company’s legal entities in various jurisdictions were undergoing income tax audits. The Company cannot predict the ultimate outcome of these examinations, but believes all matters of uncertainty have been properly recorded. However, it is reasonably possible that during the next 12 months some portion of UTBs could be recognized. Depending on the timing and final terms of actual settlements with the taxing authorities, the Company estimates that it is reasonably possible the amount of unrecognized tax benefits would be reduced up to $2.0 within the next twelve months. HRG files U.S. Federal consolidated and state and local combined and separate income tax returns. HRG’s consolidated and combined returns do not include Spectrum Brands, Front Street, or FGL (life insurance subsidiaries), each of which files their own consolidated Federal, and combined and separate state and local income tax returns. HRG’s U.S. Federal income tax returns for years prior to and including 2012 are no longer subject to audit by the taxing authorities. Except for certain immaterial jurisdictions, HRG’s state and local income tax returns are no longer subject to audit for years prior to 2012. However, the NOL related to tax years ended December 31, 2011 and prior will continue to be subject to the IRS and state taxing authority examination until the statute of limitations expires for the years in which the tax attributes are utilized by HRG.

The Company believes its income tax reserves for UTBs 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:



	Fiscal
	2015			2014			2013
Unrecognized tax benefits at beginning of year	$	12.6		$	13.8		$	5.9
Gross increase — tax positions in prior period	4.7			2.7			9.1
Gross decrease — tax positions in prior period	(1.9		)	(1.4		)	(0.3		)
Gross increase — tax positions in current period	1.8			0.8			0.5
Settlements	(0.8		)	(2.5		)	(0.1		)
Lapse of statutes of limitations	(0.3		)	(0.8		)	(1.3		)
Unrecognized tax benefits at end of year	$	16.1		$	12.6		$	13.8

The Internal Revenue Service (“IRS”) is currently conducting an examination of HRG’s 2013 federal consolidated tax return. In addition, the New York State and New York City tax returns for the 2011 through 2013 tax years are under audit. As of September 30, 2015, the Company is not aware of any significant audit matters related to the U.S federal and state examinations.

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 U.S., 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 and including 2012. However, Federal NOL carryforwards from the fiscal years ended September 30, 2012 and prior will continue to be subject to IRS 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 FGL for years prior to 2012 are no longer subject to examination by the taxing authorities. With limited exception, FGL is no longer subject to state and local income tax audits for years prior to 2012. 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. At September 30, 2015 and 2014, FGL does not have any UTBs. FGL regularly assesses the likelihood of additional tax assessments by jurisdiction to determine whether a liability for uncertain tax positions is required.