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TMCNet:  SB/RH HOLDINGS, LLC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[February 05, 2014]

SB/RH HOLDINGS, LLC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Introduction SB/RH Holdings, LLC, a Delaware corporation ("SB/RH" or the "Company"), is a global branded consumer products company. SB/RH Holdings, LLC, is a wholly owned subsidiary of Spectrum Brands Holdings, Inc. ("SB Holdings"). SB Holdings' common stock trades on the New York Stock Exchange (the "NYSE") under the symbol "SPB." Unless the context indicates otherwise, the terms the "Company," "Spectrum," "we," "our" or "us" are used to refer to SB/RH and its subsidiaries.


Business Overview We manufacture and market alkaline, zinc carbon and hearing aid batteries, herbicides, insecticides and repellants and specialty pet supplies. We design and market rechargeable batteries, battery-powered lighting products, electric shavers and accessories, grooming products and hair care appliances. We also design, market and distribute a broad range of branded small household appliances and personal care products. We design, market, distribute and sell certain hardware, home improvement and plumbing products, and are a leading U.S.

provider of residential locksets and builders' hardware and a leading provider of faucets. Our manufacturing and product development facilities are located in the United States ("U.S."), Europe, Latin America and Asia. Substantially all of our rechargeable batteries, chargers and portable lighting products, shaving and grooming products, small household appliances and personal care products are manufactured by third-party suppliers, primarily located in Asia.

We sell our products in approximately 140 countries through a variety of trade channels, including retailers, wholesalers and distributors, hearing aid professionals, industrial distributors and original equipment manufacturers ("OEMs") and enjoy strong name recognition in our markets under the Rayovac, VARTA and Remington brands, each of which has been in existence for more than 80 years, and under the Tetra, 8-in-1, Dingo, Nature's Miracle, Spectracide, Cutter, Hot Shot, Black & Decker, George Foreman, Russell Hobbs, Farberware, Black Flag, FURminator, Kwikset, Weiser, Baldwin, National Hardware, Stanley, FANAL, Pfister and various other brands.

Our diversified global branded consumer products have positions in seven major product categories: consumer batteries, small appliances, pet supplies, electric shaving and grooming, electric personal care, home and garden controls, and hardware and home improvement.

Our chief operating decision-maker manages the businesses in four vertically integrated, product-focused reporting segments: (i) Global Batteries & Appliances, which consists of our worldwide battery, electric shaving and grooming, electric personal care, and small appliances primarily in the kitchen and home product categories ("Global Batteries & Appliances"); (ii) Global Pet Supplies, which consists of our worldwide pet supplies business ("Global Pet Supplies"); (iii) Home and Garden, which consists of our home and garden and insect control business (the "Home and Garden"); and (iv) Hardware & Home Improvement, which consists of the Company's worldwide hardware, home improvement and plumbing business ("Hardware & Home Improvement"). Management reviews our performance based on these segments. For information pertaining to our business segments, see Note 12, "Segment Results" of Notes to Condensed Consolidated Financial Statements (Unaudited), included in this Quarterly Report on Form 10-Q.

Global and geographic strategic initiatives and financial objectives are determined at the corporate level. Each business segment is responsible for implementing defined strategic initiatives and achieving certain financial objectives and has a general manager responsible for sales and marketing initiatives and the financial results for all product lines within that business segment.

Our operating performance is influenced by a number of factors including: general economic conditions; foreign exchange fluctuations; trends in consumer markets; consumer confidence and preferences; our overall product line mix, including pricing and gross margin, which vary by product line and geographic market; pricing of certain raw materials and commodities; energy and fuel prices; and our general competitive position, especially as impacted by our competitors' advertising and promotional activities and pricing strategies.

Results of Operations Fiscal Quarter Ended December 29, 2013 Compared to Fiscal Quarter Ended December 30, 2012 In this Quarterly Report on Form 10-Q we refer to the three month period ended December 29, 2013 as the "Fiscal 2014 Quarter," and the three month period ended December 30, 2012 as the "Fiscal 2013 Quarter." 36-------------------------------------------------------------------------------- Table of Contents Net Sales. Net sales for the Fiscal 2014 Quarter increased $231 million to $1,101 million from $870 million in the Fiscal 2013 Quarter, a 26% increase. The following table details the principal components of the change in net sales from the Fiscal 2013 Quarter to the Fiscal 2014 Quarter (in millions): Net Sales Fiscal 2013 Quarter Net Sales $ 870 Increase in hardware and home improvement products 244 Increase in electronic personal care products 5 Increase in home and garden control products 4 Decrease in small appliances (1 ) Decrease in electric shaving and grooming products (2 ) Decrease in consumer batteries (7 ) Decrease in pet supplies (10 ) Foreign currency impact, net (2 ) Fiscal 2014 Quarter Net Sales $ 1,101 Consolidated net sales by product line for the Fiscal 2014 Quarter and the Fiscal 2013 Quarter, are as follows (in millions): Fiscal Quarter 2014 2013 Product line net sales Consumer batteries $ 265 $ 271 Hardware and home improvement products 278 34 Small appliances 217 220 Pet supplies 129 140 Electric shaving and grooming products 91 93 Electric personal care products 87 82 Home and garden control products 34 30 Total net sales to external customers $ 1,101 $ 870 Global consumer battery sales decreased $6 million, or 2%, during the Fiscal 2014 Quarter versus the Fiscal 2013 Quarter. On a constant currency basis, global consumer battery sales decreased $7 million. The decline in global consumer battery sales on a constant currency basis was attributable to one-time sales, predominately of flashlights, of approximately $10 million related to storm activity in the Fiscal 2013 Quarter. This was tempered by increased alkaline battery sales in North America. In Europe, battery growth was driven by a combination of new customer listings, distribution gains at certain existing customers, and promotions. Latin American battery revenues were essentially unchanged on a foreign currency neutral basis.

Hardware and home improvement sales were $278 million in the Fiscal 2014 Quarter and $34 million in the Fiscal 2013 Quarter, reflecting the results of the residential hardware and home improvement business (the "HHI Business") subsequent to the acquisition on December 17, 2012. A portion of the HHI Business, consisting of certain assets of Tong Lung Metal Industry Co. Ltd., a Taiwan Corporation (the "TLM Business") are included in the sales of hardware and home improvement subsequent to its acquisition on April 8, 2013. On a proforma basis, as if the acquisition had occurred at the beginning of the Fiscal 2013 Quarter, hardware and home improvement sales increased $52 million to $278 million in the Fiscal 2014 Quarter, versus $226 million in the Fiscal 2013 Quarter. This increase was driven by a $20 million increase in security product sales, a $7 million increase in hardware product sales and a $7 million increase in plumbing product sales, primarily attributable to the recovery of the U.S. housing market and international growth in hardware coupled with $18 million in sales related to the TLM Business during the Fiscal 2014 Quarter, as prior year proforma results do not include the TLM Business.

Small appliance sales decreased $3 million, or 1%, during the Fiscal 2014 Quarter compared to the Fiscal 2013 Quarter, driven by decreased North American sales of $7 million, partially offset by increased European and Latin American sales of $5 37-------------------------------------------------------------------------------- Table of Contents million and $1 million, respectively. Foreign exchange negatively impacted small appliance sales by $2 million. Decreased North American sales were attributable to competitor discounting at a major retailer and the timing of holiday shipments. European small appliance sales gains resulted from successful regional expansion and additional promotions at key retailers, whereas Latin American sales gains were due to increased seasonal promotions.

Pet supply sales decreased $11 million, or 8%, during the Fiscal 2014 Quarter, due to declines of $6 million and $4 million in aquatic and companion animal sales, respectively. The declines were driven by retailer inventory reductions coupled with the non-recurrence of companion animal promotions from the Fiscal 2013 Quarter. Unfavorable foreign exchange negatively impacted pet supply sales by $1 million.

During the Fiscal 2014 Quarter, electric shaving and grooming product sales decreased $2 million, or 2%, due to a $6 million decrease in North American sales, tempered by a $3 million increase in European sales and slight gains in Latin America. The declines in North American sales resulted from the non-recurrence of promotions from the Fiscal 2013 Quarter and customer inventory management, whereas European sales gains were driven by successful new product launches and promotions.

Electric personal care sales increased $5 million in the Fiscal 2014 Quarter compared to the Fiscal 2013 Quarter. Geographically, North American and Latin American sales increased $3 million and $2 million, respectively. Increased North American sales were a result of distribution gains and successful promotions. Latin American sales gains were attributable to distribution gains in Brazil and new product introductions in Central America.

Home and garden control product sales increased $4 million, or 11%, during the Fiscal 2014 Quarter compared to the Fiscal 2013 Quarter, attributable to a $4 million increase in lawn and garden control sales driven by strong retail customer demand.

Gross Profit. Gross profit for the Fiscal 2014 Quarter was $381 million versus $288 million for the Fiscal 2013 Quarter. The increase in Gross profit was driven by the full quarterly contribution from the HHI Business, which accounted for an increase of $98 million in Gross profit. Our gross profit margin for the Fiscal 2014 Quarter increased to 34.6% from 33.1% in the Fiscal 2013 Quarter.

The increase in gross profit margin was driven by favorable product mix and increased productivity.

Operating Expenses. Operating expenses for the Fiscal 2014 Quarter totaled $256 million compared to $219 million for the Fiscal 2013 Quarter, representing an increase of $37 million. The increase in operating expenses during the Fiscal 2014 Quarter is primarily attributable to the acquisition of the HHI Business which accounted for an increase of $59 million in operating expenses, tempered by a $15 million decrease in Acquisition and integration related charges.

Operating expenses were further reduced by a $3 million decrease in Restructuring and related charges, primarily attributable to lower Fiscal 2014 Quarter expenses from the Global Expense Rationalization Initiative announced in the fiscal year ended September 30, 2013 ("Fiscal 2013"), compared to Fiscal 2013 Quarter expenses from the Global Cost Reduction Initiatives announced in the fiscal year ended September 30, 2009, and additional savings across all segments from our cost reduction initiatives.

See Note 2, "Significant Accounting Policies-Acquisition and Integration Related Charges," and Note 13, "Restructuring and Related Charges" to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for additional information regarding our Acquisition and integration related charges.

Segment Results. As discussed above, we manage our business in four reportable segments: (i) Global Batteries & Appliances; (ii) Global Pet Supplies; (iii) Home and Garden; and (iv) Hardware & Home Improvement.

The operating segment profits do not include restructuring and related charges, acquisition and integration related charges, interest expense, interest income and income tax expense. Corporate expenses primarily include general and administrative expenses and global long-term incentive compensation plans which are evaluated on a consolidated basis and not allocated to our operating segments. All depreciation and amortization included in income from operations is related to operating segments or corporate expense. Costs are allocated to operating segments or corporate expense according to the function of each cost center.

All capital expenditures are related to operating segments. Variable allocations of assets are not made for segment reporting.

Financial information pertaining to our reportable segments is contained in Note 11, "Segment Results," to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q.

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") is a metric used by management and frequently used by the financial community which provides insight into an organization's operating trends and 38-------------------------------------------------------------------------------- Table of Contents facilitates comparisons between peer companies, since interest, taxes, depreciation and amortization can differ greatly between organizations as a result of differing capital structures and tax strategies. Adjusted EBITDA can also be a useful measure of a company's ability to service debt and is one of the measures used for determining our debt covenant compliance. Adjusted EBITDA excludes certain items that are unusual in nature or not comparable from period to period. While we believe that Adjusted EBITDA is useful supplemental information, such adjusted results are not intended to replace our Generally Accepted Accounting Principles' ("GAAP") financial results and should be read in conjunction with those GAAP results.

Below are reconciliations of GAAP Net income (loss), as adjusted, to Adjusted Earnings Before Interest and Taxes ("EBIT") and to Adjusted EBITDA for each segment and for Consolidated SB/RH for the Fiscal 2014 Quarter and the Fiscal 2013 Quarter:

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