News Column

Harbinger Group Reports First Quarter Fiscal 2014 Results

February 11, 2014

Harbinger Group Inc., a diversified holding company focused on acquiring and growing businesses that are undervalued or fairly valued with attractive financial or strategic characteristics, announced its consolidated results for the first quarter of Fiscal 2014 ended on December 31, 2013 ("Fiscal 2014 Quarter").

In a release on February 6, the Company noted that the results include HGI's four segments:

-Consumer Products, which consists of Spectrum Brands Holdings, Inc. ("Spectrum Brands"; NYSE: SPB);

-Insurance, which includes Fidelity & Guaranty Life ("FGL"; NYSE: FGL) and Front Street Re, ("Front Street");

-Energy, which includes the company's interest in an oil and gas joint venture with EXCO Resources, Inc. (the "EXCO/HGI JV"); and

-Financial Services, which includes Salus Capital Partners, ("Salus") and Five Island Asset Management, ("Five Island").

Philip Falcone, HGI Chairman and Chief Executive Officer, said, "HGI's performance this quarter demonstrates the continued success of our diversified holding company model. We delivered strong results, including 24 percent growth in revenues. While the year- over-year operating income comparison was affected by significant investment portfolio gains in the Insurance segment last year, our operating profitability and cash flow were strong. At the same time, we have marked solid progress in implementing our strategy to grow our existing businesses, strengthen our capital structure, increase our investor base, and diversify the businesses in which we operate. We remain well-positioned for continued growth and value creation."

Omar Asali, President of HGI, said, "Our results this quarter reflect positive performance in each of our operating segments. In particular, Consumer Products' operating profit grew by 83.3 percent and sales by 26.5 percent compared to the previous year quarter, illustrating the continued benefits of the HHI acquisition and the power of Spectrum Brands' value proposition to consumers. Our insurance segment -- anchored by FGL, which completed its successful IPO in December -- recorded annuity sales of $540.6 million, an increase of approximately 119 percent from the prior year period. In our Financial Services segment, Salus initiated $312.2 million of new asset-based loan commitments during the quarter. And the EXCO/ HGI JV generated solid operating income and cash flow."

First Quarter Fiscal 2014 Highlights:

-HGI recorded total revenues of $1.5 billion, for the Fiscal 2014 Quarter, an increase of $287.7 million, or 23.5 percent compared to the first quarter of fiscal 2013 ("Fiscal 2013 Quarter").

-Consolidated operating income of $179.3 million in the Fiscal 2014 Quarter, compared to $215.4 million in the Fiscal 2013 Quarter, a decrease of $36.1 million (16.8 percent).

-Net loss attributable to common and participating preferred stockholders decreased to $39.0 million, or $0.28 per common share attributable to controlling interest ($0.28 diluted) during the Fiscal 2014 Quarter, compared to net income attributable to common and participating preferred stockholders of $62.0 million, or $0.31 per common share attributable to controlling interest ($0.03 diluted) during the Fiscal 2013 Quarter.

-HGI ended the quarter with corporate cash and short-term investments of approximately $301.3 million (primarily held at HGI and HGI Funding).

-HGI received dividends of approximately $50.7 million from its subsidiaries, including a $43.0 million special dividend from FGL paid out of the proceeds from FGL's initial public offering in December 2013, and $7.7 million from Spectrum Brands.

Quarterly Segment Highlights:

-Consumer Products segment's operating profit for the Fiscal 2014 Quarter increased $56.8 million, or 83.3 percent, to $125.0 million compared to $68.2 million for the Fiscal 2013 Quarter. In conjunction with its first quarter Fiscal 2014 release on January 29, Spectrum Brands announced that its Board of Directors approved a 20 percent increase in the quarterly common stock dividend to $0.30 per share from $0.25.

-In addition, in December 2013, Spectrum Brands amended a senior secured term loan, which provided for borrowings of $215.0 million and EUR225.0 million. The proceeds of the amendment were used to refinance a portion of the term loan, which was scheduled to mature December 17, 2019.

-Insurance segment's operating profit for the Fiscal 2014 Quarter decreased by $78.3 million, to $85.3 million from $163.6 million for the Fiscal 2013 Quarter. Insurance segment's adjusted operating income ("Insurance AOI") increased by $24.4 million, or 78.0 percent, to $55.7 million.

-In December 2013, FGL debuted on the New York Stock Exchange after raising net proceeds of $173.0 million in an initial public offering. HGI, which did not sell shares as part of the IPO, continues to own 80.7 percent of FGL common stock.

-Front Street closed a reinsurance treaty with Bankers Life Insurance Company, its inaugural reinsurance transaction with a non- affiliated party, for approximately $153.0 million of the company's annuity business.

-Financial Services segment contributed approximately $4.5 million to consolidated revenues for the Fiscal 2014 Quarter, and had a net loss of $8.8 million resulting from increased overhead to support growth together with interest and foreign exchange revaluation losses.

-Salus originated $312.2 million of new asset-based loan commitments in the Fiscal 2014 Quarter and had $801.0 million of loans outstanding as of December 31, 2013.

-Energy segment reported revenues of $35.5 million and an operating profit of $6.0 million for the Fiscal 2014 Quarter. On January 28, subsequent to the end of the quarter, Matthew Grubb, former President and Chief Operating Officer for SandRidge Energy, Inc., was named Chief Executive Officer and President of the EXCO/ HGI JV.

HGI's consolidated revenues for the Fiscal 2014 Quarter were $1.5 billion compared to $1.2 billion for the Fiscal 2013 Quarter. The increase was primarily driven by the full period effect of the acquisition of the hardware and home improvement product line ("HHI") in our Consumer Products segment during the Fiscal 2013 Quarter, our acquisition of an equity interest in the EXCO/HGI JV in February 2013 and an increase in investment income resulting from the deployment of cash in our Insurance segment.

HGI's consolidated operating income for the Fiscal 2014 Quarter decreased $36.1 million, or 16.8 percent, to $179.3 million compared to $215.4 million for the Fiscal 2013 Quarter. The decrease was primarily the result of lower operating profit originating from the Insurance segment due to the conclusion of the portfolio repositioning that had resulted in higher realized investment gains in the Fiscal 2013 Quarter, and higher corporate expenses primarily due to higher stock based compensation expense amortization. These decreases in operating income were offset by higher operating income from the Consumer Products segment due to the inclusion of a full quarter of results from the HHI acquisition in the Fiscal 2014 Quarter and an overall decrease in acquisition and integration related charges.

Net loss attributable to common and participating preferred stockholders was $39.0 million, or $0.28 per common share attributable to controlling interest ($0.28 diluted) in the Fiscal 2014 Quarter, compared to net income attributable to common and participating preferred stockholders of $62.0 million, or $0.31 per common share attributable to controlling interest ($0.03 diluted) during the Fiscal 2013 Quarter.

HGI's Fiscal 2014 Quarter results include a $47.2 million loss from the change in the fair value of the equity conversion feature of HGI's preferred stock which was the result of a 14.3 percent increase in HGI's stock price from $10.37 to $11.85 per share during the quarter, and a $59.1 million decrease in interest expense, that was primarily due to a decrease in acquisition and other financing costs as compared to the Fiscal 2013 Quarter, along with refinancing to lower interest rate debt during the course of Fiscal 2013.

Additionally, HGI incurred a tax expense totaling $38.3 million, which was primarily driven by the profitability of FGL's life insurance business, pre-tax losses in the United States and some foreign jurisdictions for which the tax benefits are offset by valuation allowances, an increase in the fair value of the equity conversion feature of the HGI's preferred stock with no tax benefit, tax amortization of certain indefinite lived intangibles, and tax expense on income in certain foreign jurisdictions for which HGI will not receive tax credits in the United States due to its tax loss position. Partially offsetting these factors was a partial release of U.S. valuation allowances as a result of a recent acquisition by Spectrum Brands.

Consumer Products reported consolidated record net sales of $1.1 billion for the Fiscal 2014 Quarter, an increase of $230.3 million, or 26.5 percent, compared to $0.9 billion in the Fiscal 2013 Quarter. The increase in sales was primarily due to the full period effect of the inclusion of sales from the HHI acquisition and increases in sales of home and garden control and electric personal care products. Including HHI in the full prior year period on a pro forma basis, HHI sales increased $52.6 million to $278.4 million in the Fiscal 2014 Quarter. These increases were offset in part by decreases in sales in other product lines, primarily within the pet supplies product lines.

Consumer Products delivered adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA-Consumer Products") of $178.8 million for the Fiscal 2014 Quarter, up $18.3 million, or 11.4 percent quarter-on-quarter including HHI in the prior year period on a pro forma basis, primarily due to higher sales of HHI products resulting from the improving U.S. housing market, improved manufacturing productivity, cost reduction initiatives and strong expense management. Adjusted EBITDA-Consumer Products as a percentage of Consumer Products net sales increased to 16.2 percent versus 15.1 percent in the Fiscal 2013 Quarter, including HHI in the prior year period on a pro forma basis.

Legacy Spectrum Brands delivered Adjusted EBITDA-Consumer Products of $129.2 million in the Fiscal 2014 Quarter versus $127.0 million in the Fiscal 2013 Quarter, an increase of 1.7 percent excluding the negative impact of foreign exchange. This increase represents the thirteenth consecutive quarter of year-over-year Adjusted EBITDA-Consumer Products growth, with the Adjusted EBITDA- Consumer Products margin improving to 15.7 percent compared to 15.2 percent last year.

Operating income increased $56.8 million to $125.0 million in the Fiscal 2014 Quarter, compared to $68.2 million in the Fiscal 2013 Quarter. Gross profit, representing net consumer products sales minus consumer products cost of goods sold, for the Fiscal 2014 Quarter was $381.2 million, compared to $288.2 million for the Fiscal 2013 Quarter, representing a $93.0 million increase. The increase in gross profit was driven by the full period effect of the inclusion of the HHI acquisition, which contributed $98.0 million in gross profit. Gross profit margin, representing gross profit as a percentage of consumer products net sales, for the quarter was 34.6 percent compared to 33.1 percent in the Fiscal 2013 Quarter. This increase was driven by favorable product mix and increased productivity.

After the close of the Fiscal 2014 Quarter, on January 29, Spectrum Brands announced that its Board of Directors declared a quarterly dividend of $0.30 per share on Spectrum Brands' common stock, which is an increase of 20 percent compared to the previous quarterly dividend of $0.25 per share. The dividend, which is a regular taxable cash dividend, is payable on March 18, to stockholders of record as of the close of business on February 19.

The insurance segment recorded annuity sales, which for generally accepted accounting principles in the U.S. ("GAAP") purposes are recorded as deposit liabilities (i.e. contract holder funds), for the Fiscal 2014 Quarter of $540.6 million, compared to $247.3 million for the Fiscal 2013 Quarter, a quarter-over-quarter increase of approximately 119 percent. A successful sales promotion of traditional deferred annuities primarily drove the increase in the quarter. On a sequential basis, annuity sales increased 119 percent as compared to the Fiscal 2013 fourth quarter. Additionally, during the Fiscal 2014 Quarter, FGL grew indexed universal life sales by approximately 7 percent on a sequential basis.

The Insurance segment had Income from continuing operations before income taxes of $79.7 million for the Fiscal 2014 Quarter, compared to $164.5 million for the Fiscal 2013 Quarter. The Insurance segment reported operating income of $85.3 million for the quarter versus operating income of $163.6 million for the Fiscal 2013 Quarter. The decrease is primarily due to higher realized investment gains in the Fiscal 2013 Quarter.

The segment recorded Insurance AOI of $55.7 million for the Fiscal 2014 Quarter, an increase of $24.4 million, or 78.0 percent, from $31.3 million for the Fiscal 2013 Quarter. This increase is primarily due to an increase in net investment spread during the Fiscal 2014 Quarter.

FGL had approximately $18.0 billion of assets under management as of December 31, 2013, compared to $17.4 billion as of September 30, 2013. The investment portfolio continues to be conservatively positioned in its credit and duration profile and well matched against its liabilities.

As of December 31, 2013, HGI's Insurance segment had a net U.S. GAAP book value of $1.3 billion (excluding Accumulated Other Comprehensive Income ("AOCI") of $106.1 million), up from $1.2 billion as of September 30, 2013. As of December 31, 2013, the Insurance segment's available for sale investment portfolio had $216.3 million in net unrealized gains on a U.S. GAAP basis.

In December 2013, FGL debuted on the New York Stock Exchange after raising net proceeds $173.0 million in an initial public offering. FGL presented 9,750,000 shares of common stock in a primary offering at a price to the public of $17 per share. FGL also granted the underwriters an option to purchase an additional 1,463,000 shares of common stock that was subsequently exercised, valuing the company at $989.6 million. Fidelity & Guaranty Life Insurance Company also re-domiciled to Des Moines, Iowa on November 1, 2013.

Additionally, on December 18, 2013, Front Street closed a reinsurance treaty with Bankers Life Insurance Company, under which Bankers Life Insurance Company ceded $153.0 million of its annuity business to Front Street. The agreement is another important step for Front Street in its growth as a provider of customized reinsurance solutions to the life insurance and fixed annuity industry.

Oil and natural gas revenues were $35.5 million for the Fiscal 2014 Quarter. Operating income for the Fiscal 2014 Quarter was $6.0 million. Energy segment adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA-Energy") for the Fiscal 2014 Quarter were $18.0 million.

For the Fiscal 2014 Quarter, the Energy segment's production net was 101.0 Mbbl of oil, 142.0 Mbbl of natural gas liquids and 5,427.0 Mmcf of natural gas. For the same period, the segment's developmental activities in the Permian basin included 5 wells spud, 4 wells completed and 3 wells turned to sales. The production during the quarter consisted of 5.3 Bcfe from the East Texas/North Louisiana region and 1.6 Bcfe from the Permian basin. For the period from inception to December 31, 2013, the Energy segment's developmental activities in the Permian basin included 19 wells spud and 19 wells completed and 18 turned-to-sales. For the same period, the segment's net production was 25 Bcfe, consisting of approximately 80 percent natural gas, 11 percent natural gas liquids and 9 percent oil.

On January 28, subsequent to the end of the quarter, Matthew Grubb was named Chief Executive Officer and President of EXCO/HGI GP. Grubb will be responsible for providing operational leadership to the EXCO/HGI JV and guiding its growth through continued efficient production and development of its existing assets. Grubb will also be working with HGI and EXCO in executing opportunistic, cash-flow accretive acquisitions.

The Financial Services segment's revenues for the Fiscal 2014 Quarter decreased $3.9 million to $4.5 million from $8.4 million in the Fiscal 2013 Quarter. The decrease in revenues during the three months is as a result of a non-recurrence of a success fee on a loan in the Fiscal 2013 Quarter which was offset in part by an increase in asset-based loans originated and serviced by the operations of Salus to $801.0 million from $207.4 million in the Fiscal 2013 Quarter. The segment reported an operating loss of $3.9 million for the Fiscal 2014 Quarter, compared to operating income of $5.1 million during the Fiscal 2013 Quarter, a decrease of $9.0 million. The Financial Services segment had a net loss of $8.8 million resulting from the decrease in revenue previously discussed, increased overhead to support growth and foreign exchange revaluation losses.

Also contributing to revenues and operating income in the Fiscal 2014 Quarter was an increase in asset management fees earned from the Insurance segment by the operations of Five Island, an asset management company, with up to $0.5 billion, as of December 31, 2013, in assets under management.

During the Fiscal 2014 Quarter, Salus closed on 5 transactions, representing $312.2 million in total commitments to a variety of well recognized businesses.

Harbinger Group Inc. is a diversified holding company.

More Information:

http://www.harbingergroupinc.com

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