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Derivative Financial Instruments | 3 Months Ended
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Dec. 31, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments | Derivatives The fair value of outstanding derivatives recorded in the accompanying Condensed Consolidated Balance Sheets were as follows:
Asset Derivatives |  | Classification |  | December 31, 2015 |  | September 30, 2015
|  |  |  |  |  | (As Adjusted)
Derivatives designated as hedging instruments: |  |  |  |  |  |
Foreign exchange contracts |  | Receivables, net |  | $ | 6.7 |  |  | $ | 5.2 |
Foreign exchange contracts |  | Other assets |  | 0.8 |  |  | 0.4 |
Total asset derivatives designated as hedging instruments |  |  |  | 7.5 |  |  | 5.6 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |
Call options |  | Funds withheld receivables |  | 8.1 |  |  | 5.4 |
Call options |  | Other assets |  | 2.2 |  |  | 1.0 |
Commodity contracts |  | Receivables, net |  | 1.3 |  |  | 7.9 |
Foreign exchange contracts |  | Receivables, net |  | 0.1 |  |  | 0.4 |
Total asset derivatives |  |  |  | $ | 19.2 |  |  | $ | 20.3 |
Liability Derivatives |  | Classification |  | December 31, 2015 |  | September 30, 2015
|  |  |  |  |  | (As Adjusted)
Derivatives designated as hedging instruments: |  |  |  |  |  |
Interest rate swaps |  | Accounts payable and other current liabilities |  | $ | 1.2 |  |  | $ | 1.4 |
Interest rate swaps |  | Other liabilities |  | 0.7 |  |  | 1.2 |
Commodity swaps |  | Accounts payable and other current liabilities |  | 4.3 |  |  | 4.7 |
Commodity swaps |  | Other liabilities |  | 0.8 |  |  | 0.8 |
Foreign exchange contracts |  | Accounts payable and other current liabilities |  | — |  |  | 1.5 |
Foreign exchange contracts |  | Other liabilities |  | 0.1 |  |  | — |
Total liability derivatives designated as hedging instruments |  |  |  | 7.1 |  |  | 9.6 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |
Embedded derivatives in Front Street's assumed FIA business |  | Insurance reserves |  | 139.9 |  |  | 142.3 |
Foreign exchange |  | Accounts payable and other current liabilities |  | 0.6 |  |  | 0.1 |
Commodity contracts |  | Accounts payable and other current liabilities |  | — |  |  | 0.1 |
Total liability derivatives |  |  |  | $ | 147.6 |  |  | $ | 152.1 |
For derivative instruments that are used to economically hedge the fair value of Spectrum Brands’ third party and intercompany foreign currency payments, commodity purchases and interest rate payments, the gain (loss) associated with the derivative contract is recognized in earnings in the period of change. The Company recognizes all derivative instruments as assets or liabilities in the Condensed Consolidated Balance Sheets at fair value. The following table summarizes the impact of the effective portions of cash flow hedges and the gains and losses recognized in the Condensed Consolidated Statements of Operations for the three months ended December 31, 2015 and 2014:
|  |  |  | Three months ended December 31,
|  |  |  | 2015 |  | 2014
|  | Classification |  | Gain (Loss) in AOCI |  | Gain (Loss) reclassified to Earnings |  | Gain (Loss) in AOCI |  | Gain (Loss) reclassified to Earnings
Interest rate swaps |  | Interest expense |  | $ | 0.3 |  |  | $ | (0.5 | ) |  | $ | (0.6 | ) |  | $ | (0.5 | )
Commodity swaps |  | Cost of consumer products and other goods sold |  | (1.0 | ) |  | (1.4 | ) |  | (1.2 | ) |  | 0.4 |
Foreign exchange contracts |  | Net consumer and other product sales |  | (0.1 | ) |  | — |  |  | 0.1 |  |  | — |
Foreign exchange contracts |  | Cost of consumer products and other goods sold |  | 5.4 |  |  | 2.1 |  |  | 9.4 |  |  | 4.9 |
|  |  |  | $ | 4.6 |  |  | $ | 0.2 |  |  | $ | 7.7 |  |  | $ | 4.8 |
During the three months ended December 31, 2015 and 2014, the Company recognized the following gains and losses on its derivatives:
|  |  |  | Three months ended December 31,
Classification |  | Derivatives Not Designated as Hedging Instruments |  | 2015 |  | 2014
Revenues: |  |  |  |  |  |
Net investment gains |  | Call options |  | $ | 1.9 |  |  | $ | 2.7 |
Other income and expense: |  |  |  |  |  |
Benefits and other changes in policy reserves |  | Embedded derivatives in Front Street's assumed FIA business |  | $ | 2.4 |  |  | $ | (6.2 | )
Other income, net |  | Oil and natural gas commodity contracts |  | 1.7 |  |  | 18.7 |
|  | Foreign exchange contracts |  | (2.1 | ) |  | (1.7 | )
Additional Disclosures Call options. Derivative financial instruments included within or outside of the funds withheld receivables at fair value on the Condensed Consolidated Balance Sheets are in the form of call options receivable to Front Street. Front Street hedges exposure to product related equity market risk by entering into derivative transactions. These options hedge Front Street’s share of the FIA index credit. The change in fair value is recognized within “Net investment losses” in the accompanying Condensed Consolidated Statements of Operations. Embedded derivatives in Front Street's assumed FIA business. Front Street has assumed FIA contracts that permit the holder to elect an interest rate return or an equity index linked component, where interest credited to the contracts is linked to the performance of various equity indices, primarily the Standard & Poor’s Ratings Services (“S&P”) 500 Index. This feature represents an embedded derivative under U.S. GAAP. The FIA embedded derivative is valued at fair value and included in the “Insurance reserves” in the accompanying Condensed Consolidated Balance Sheets with changes in fair value included as a component of “Benefits and other changes in policy reserves” in the accompanying Condensed Consolidated Statements of Operations. Interest Rate Swaps. When it deems appropriate, Spectrum Brands has used interest rate swaps to manage its interest rate risk. The swaps are designated as cash flow hedges with the changes in fair value recorded in Accumulated other comprehensive loss (“AOCI”) and as a derivative hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counterparties included in accrued liabilities or receivables, respectively, and recognized in earnings as an adjustment to interest from the underlying debt to which the swap is designated. As of December 31, 2015 and September 30, 2015, Spectrum Brands had a series of U.S. dollar denominated interest rate swaps outstanding which effectively fix the interest on floating rate debt, exclusive of lender spreads, at 1.36% for a notional principal amount of $300.0 through April 2017. The derivative net losses estimated to be reclassified from AOCI into earnings over the next 12 months is $0.7, net of tax. Foreign exchange contracts. Spectrum Brands periodically enters into forward foreign exchange contracts to hedge the risk from forecasted foreign currency denominated third party and intercompany sales or payments. These obligations generally require Spectrum Brands to exchange foreign currencies for U.S. Dollars, Euros, Pounds Sterling, Australian Dollars, Brazilian Reals, Mexican Pesos, Canadian Dollars or Japanese Yen. These foreign exchange contracts are cash flow hedges of fluctuating foreign exchange rates related to sales of product or raw material purchases. Until the sale or purchase is recognized, the fair value of the related cash flow hedge is recorded in AOCI and as a derivative hedge asset or liability, as applicable. At the time the sale or purchase is recognized, the fair value of the related cash flow hedge is reclassified as an adjustment to “Net consumer and other product sales” or “Cost of consumer products and other goods sold”, respectively, in the accompanying Condensed Consolidated Statements of Operations. At December 31, 2015, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through September 2017. The derivative net losses estimated to be reclassified from AOCI into earnings over the next 12 months is $2.9, net of tax. At December 31, 2015 and September 30, 2015, Spectrum Brands had foreign exchange derivative contracts designated as cash flow hedges with a notional value of $220.5 and $300.6, respectively. Commodity swaps. Spectrum Brands is exposed to risk from fluctuating prices for raw materials, specifically zinc and brass used in its manufacturing processes. Spectrum Brands hedges a portion of the risk associated with the purchase of these materials through the use of commodity swaps. The hedge contracts are designated as cash flow hedges with the fair value changes recorded in AOCI and as a hedge asset or liability, as applicable. The unrecognized changes in fair value of the hedge contracts are reclassified from AOCI into earnings when the hedged purchase of raw materials also affects earnings. The swaps effectively fix the floating price on a specified quantity of raw materials through a specified date. At December 31, 2015, Spectrum Brands had a series of zinc and brass swap contracts outstanding through September 2017. The derivative net losses estimated to be reclassified from AOCI into earnings over the next 12 months is $2.1, net of tax. Spectrum Brands had the following commodity swap contracts outstanding as of December 31, 2015 and September 30, 2015:
|  | December 31, 2015 |  | September 30, 2015
|  | Notional |  | Contract Value |  | Notional |  | Contract Value
Zinc swap contracts (tons) |  | 11.6 |  | $ | 22.6 |  |  | 10.8 |  | $ | 22.2 |
Brass swap contracts (tons) |  | 1.4 |  | 6.5 |  |  | 1.8 |  |  | 8.5 |
Foreign exchange contracts. Spectrum Brands periodically enters into forward and swap foreign exchange contracts to economically hedge the risk from third party and intercompany payments resulting from existing obligations. These obligations generally require Spectrum Brands to exchange foreign currencies for U.S. Dollars, Canadian Dollars, Euros or Australian Dollars. These foreign exchange contracts are fair value hedges of a related liability or asset recorded in the accompanying Condensed Consolidated Balance Sheets. The gain or loss on the foreign exchange contracts is recorded in earnings as an offset to the change in value of the related liability or asset at each period end. At December 31, 2015, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through March 2016. At December 31, 2015 and September 30, 2015, Spectrum Brands had $160.7 and $126.8, respectively, of notional value for such foreign exchange derivative contracts outstanding. Commodity Swaps. Spectrum Brands periodically enters into commodity swap contracts to economically hedge the risk from fluctuating prices for raw materials, specifically the pass-through of market prices for silver used in manufacturing purchased watch batteries. Spectrum Brands hedges a portion of the risk associated with these materials through the use of commodity swaps. The commodity swap contracts are designated as economic hedges with the unrealized gain or loss recorded in earnings and as an asset or liability at each period end. The unrecognized changes in fair value of the commodity swap contracts are adjusted through earnings when the realized gains or losses affect earnings upon settlement of the commodity swap contracts. The commodity swap contracts effectively fix the floating price on a specified quantity of silver through a specified date. At December 31, 2015, Spectrum Brands had a series of commodity swaps outstanding through August 2016. Spectrum Brands had the following commodity swap contracts outstanding as of December 31, 2015 and September 30, 2015:
|  | December 31, 2015 |  | September 30, 2015
|  | Notional |  | Contract Value |  | Notional |  | Contract Value
Silver (troy oz.) |  | 15 |  | $ | 0.2 |  |  | 25 |  | $ | 0.4 |
Oil and natural gas commodity contracts. Compass’ natural gas and oil commodity contracts are comprised of swap contracts, collars and three-way collars (“Derivative Financial Instruments”). Swap contracts allow Compass to receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. A three-way collar is a combination of options including a sold call, a purchased put and a sold put. A three-way collar allows Compass to participate in the upside of commodity prices to the ceiling of the call option and provides Compass with partial downside protection through the combination of the put options. Compass’ primary objective in entering into Derivative Financial Instruments is to manage its exposure to commodity price fluctuations, protect its returns on investments and achieve a more predictable cash flow in connection with its operations. These transactions limit exposure to declines in commodity prices, but also limit the benefits Compass would realize if commodity prices increase. When prices for oil and natural gas are volatile, a significant portion of the effect of its Derivative Financial Instruments management activities consists of non-cash income or expense due to changes in the fair value of its Derivative Financial Instruments. Cash losses or gains only arise from payments made or received on monthly settlements of contracts or if Compass terminates a contract prior to its expiration. Compass does not designate its Derivative Financial Instruments as hedging instruments for financial reporting purposes and, as a result, Compass recognizes the change in the respective Derivative Financial Instruments’ fair value in earnings. Settlements in the normal course of maturities of Derivative Financial Instruments result in cash receipts from, or cash disbursements to, Compass’ derivative contract counterparties. Changes in the fair value of Compass’ Derivative Financial Instruments, which includes both cash and non-cash changes in fair value, are included in “Net investment losses” in the accompanying Condensed Consolidated Statements of Operations with a corresponding increase or decrease in the Condensed Consolidated Balance Sheets fair value amounts. The following table presents Compass’ volumes and fair value of the oil and natural gas Derivative Financial Instruments as of December 31, 2015 (presented on a calendar-year basis):
|  | Volume Mmbtus/Mbbls |  | Weighted average strike price per Mmbtu/Bbl |  | Fair Value at December 31, 2015
Natural gas two-way collars (February - December 2016) |  | 3,350 |  |  |  |  | $ | (0.2 | )
Short call |  |  |  | 2.77 |  |  |
Long put |  |  |  | 2.15 |  |  |
Total natural gas |  | 3,350 |  |  |  |  | $ | (0.2 | )
Oil three-way collars (January - December 2016) |  | 183 |  |  |  |  | $ | 1.5 |
Short call |  |  |  | 76.00 |  |  |
Long put |  |  |  | 56.00 |  |  |
Short Put |  |  |  | 42.00 |  |  |
Total oil |  | 183 |  |  |  |  | $ | 1.5 |
Total oil and natural gas derivatives |  |  |  |  |  | $ | 1.3 |
At September 30, 2015, Compass had outstanding Derivative Financial Instruments to mitigate price volatility covering 3,380 Mmbtu s of natural gas and 273 Thousand Barrels (“Mbbls”) of oil. At December 31, 2015, the average forward NYMEX oil prices per Bbl for the remainder of 2016 was $41.44, and the average forward NYMEX natural gas prices per Mmbtu for 2016 was $2.50. Compass’ Derivative Financial Instruments covered approximately 60% of production volumes for the three months ended December 31, 2015 and 71% of production volumes for the three months ended December 31, 2014. Credit Risk Spectrum Brands is exposed to the risk of default by the counterparties with which Spectrum Brands transacts and generally does not require collateral or other security to support financial instruments subject to credit risk. Spectrum Brands monitors counterparty credit risk on an individual basis by periodically assessing each such counterparty’s credit rating exposure. The maximum loss due to credit risk equals the fair value of the gross asset derivatives that are concentrated with certain domestic and foreign financial institution counterparties. Spectrum Brands considers these exposures when measuring its credit reserve on its derivative assets, which was insignificant as of December 31, 2015 and September 30, 2015. Spectrum Brands’ standard contracts do not contain credit risk related contingent features whereby Spectrum Brands would be required to post additional cash collateral as a result of a credit event. However, Spectrum Brands is typically required to post collateral in the normal course of business to offset its liability positions. As of December 31, 2015 and September 30, 2015, there was $4.1 and $3.5, respectively, of posted cash collateral related to such liability positions. In addition, as of December 31, 2015 and September 30, 2015, Spectrum Brands had no posted standby letters of credit related to such liability positions. The cash collateral is included in “Receivables, net” within the accompanying Condensed Consolidated Balance Sheets. Compass places Derivative Financial Instruments with the financial institutions that are lenders under the Compass Credit Agreement that it believes have high quality credit ratings. To mitigate risk of loss due to default, Compass has entered into master netting agreements with its counterparties on its Derivative Financial Instruments that allow it to offset its asset position with its liability position in the event of a default by the counterparty. Front Street is exposed to credit risk in the event of non-performance by its counterparties on call options. Front Street seeks to reduce the risk associated with such agreements by purchasing such options from large, well-established financial institutions, but there can be no assurance that Front Street will not suffer losses in the event of counterparty non-performance. No collateral was posted by its counterparties; accordingly, the maximum amount of loss due to credit risk that Front Street would incur if parties to the call options failed completely to perform according to the terms of the contracts is $2.2. Earnings from FIA reinsurance are primarily generated from the excess of net investment income earned over the sum of interest credited to policyholders and the cost of hedging the risk on FIA policies, known as the net investment spread. With respect to FIAs, the cost of hedging the risk includes the expenses incurred to fund the annual index credits. Proceeds received upon expiration or early termination of call options purchased to fund annual index credits are recorded as part of the fair value changes associated with reinsurance contracts in the accompanying Condensed Consolidated Statements of Operations, and are largely offset by an expense for index credits earned on annuity contract holder fund balances.

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