| Divestitures |
NOTE 3 – DIVESTITURES The following table summarizes the components of Income from Discontinued Operations, Net of Tax in the accompanying Consolidated Statement of Income for the years ended September 30, 2019, 2018, and 2017: | | | | | | | | | | (in millions) | | 2019 | | 2018 | | 2017 | Income from discontinued operations before income taxes - GBL | | $ | 974.9 | | $ | 21.8 | | $ | 84.5 | (Loss) income from discontinued operations before income taxes - GAC | | | (115.7) | | | (31.9) | | | 94.5 | Income from discontinued operations before income taxes - HRG Insurance Operations | | | — | | | 476.4 | | | 287.1 | Income from discontinued operations before income taxes | | | 859.2 | | | 466.3 | | | 466.1 | Income tax expense from discontinued operations | | | 199.3 | | | 21.3 | | | 176.8 | Income from discontinued operations, net of tax | | | 659.9 | | | 445.0 | | | 289.3 | Income from discontinued operations, net of tax attributable to noncontrolling interest | | | — | | | 33.2 | | | 92.7 | Income from discontinued operations, net of tax attributable to controlling interest | | $ | 659.9 | | $ | 411.8 | | $ | 196.6 |
GBL On January 2, 2019, the Company completed the sale of its GBL business pursuant to the GBL acquisition agreement with Energizer for cash proceeds of $1,956.2 million, resulting in a pre-tax gain on sale of $989.8 million, including the settlement of customary purchase price adjustments for working capital and assumed indebtedness, recognition of tax and legal indemnifications under the acquisition agreement and an estimated contingent purchase price adjustment for the settlement of the planned divestiture of the Varta® consumer batteries business by Energizer. The results of operations and gain on sale for disposal of the GBL business are recognized as a component of discontinued operations. The GBL acquisition agreement provides for a purchase price adjustment that is contingent upon the completion of the divestiture of the Varta® consumer battery, chargers, portable power and portable lighting business in the EMEA region by Energizer, including manufacturing and distribution facilities in Germany. The purchase price adjustment includes a potential downward adjustment equal to 75% of the difference between the divestiture sale price and the target sale price of $600 million, not to exceed $200 million, or a potential upward adjustment equal to 25% of the excess purchase price. On May 29, 2019, Energizer entered into an agreement to sell the Varta® consumer batteries business and, in accordance with the terms and conditions of the GBL acquisition agreement, the Company will be expected to contribute $200.0 million to Energizer in connection with the sale of the Varta® consumer batteries business and has recognized $200.0 million in Indemnification Payable to Energizer on the Company’s Consolidated Statement of Financial Position. The Company and Energizer have agreed to indemnify each other for losses arising from certain breaches of the GBL acquisition agreement and for certain other matters. The Company has agreed to indemnify Energizer for certain liabilities relating to the assets retained by the Company, and Energizer has agreed to indemnify the Company for certain liabilities assumed by Energizer, in each case as described in the acquisition agreement. As of September 30, 2019, the Company has recognized $48.0 million related to indemnifications in accordance with the acquisition agreement, including $34.3 million within Indemnification Payable to Energizer on the Company’s Consolidated Statement of Financial Position primarily attributable to current income tax indemnifications and $13.7 million within Other Long-Term Liabilities on the Company’s Consolidated Statement of Financial Position primarily attributable to income tax indemnifications associated with previously recognized uncertain tax benefits. The Company and Energizer entered into related agreements that became effective upon the consummation of the acquisition including a customary transition services agreement (“TSA”) and reverse TSA. The TSA and reverse TSA are recognized as a component of continuing operations for periods following the completion of the GBL sale. See Note 17 – Related Party Transactions for additional discussion.
NOTE 3 – DIVESTITURES (continued) The following table summarizes the assets and liabilities of GBL classified as held for sale as of September 30, 2018. | | | | (in millions) | | September 30, 2018 | Assets | | | | Trade receivables, net | | $ | 99.3 | Other receivables | | | 17.9 | Inventories | | | 127.8 | Prepaid expenses and other current assets | | | 23.0 | Property, plant and equipment, net | | | 160.5 | Deferred charges and other | | | 13.4 | Goodwill | | | 226.6 | Intangible assets, net | | | 304.0 | Total assets of business held for sale | | $ | 972.5 | Liabilities | | | | Current portion of long-term debt | | | 6.3 | Accounts payable | | | 124.1 | Accrued wages and salaries | | | 25.0 | Other current liabilities | | | 82.6 | Long-term debt, net of current portion | | | 45.0 | Deferred income taxes | | | 20.9 | Other long-term liabilities | | | 60.6 | Total liabilities of business held for sale | | $ | 364.5 |
The following table summarizes the components of income from discontinued operations before income taxes associated with the GBL divestiture in the accompanying Consolidated Statements of Operations for the years ended September 30, 2019, 2018 and 2017 with the close of the GBL divestiture on January 2, 2019. | | | | | | | | | | | | | | | | | | | | (in millions) | | 2019 | | 2018 | | 2017 | Net sales | | $ | 249.0 | | $ | 870.5 | | $ | 865.6 | Cost of goods sold | | | 164.6 | | | 553.2 | | | 539.3 | Gross profit | | | 84.4 | | | 317.3 | | | 326.3 | Operating expenses | | | 57.0 | | | 241.0 | | | 193.6 | Operating income | | | 27.4 | | | 76.3 | | | 132.7 | Interest expense | | | 23.3 | | | 53.5 | | | 48.3 | Other non-operating expense (income), net | | | 0.5 | | | 1.0 | | | (0.1) | Gain on sale | | | (989.8) | | | — | | | — | Reclassification of accumulated other comprehensive income | | | 18.5 | | | — | | | — | Income from discontinued operations before income taxes | | $ | 974.9 | | $ | 21.8 | | $ | 84.5 |
Beginning in January 2018, the Company ceased the recognition of depreciation and amortization of long-lived assets associated with GBL therefore no depreciation and amortization was recognized during the year ended September 30, 2019. For the years ended September 30, 2018 and 2017, depreciation and amortization expense of $8.3 million and $30.9 million, respectively, was recognized. Interest expense consists of interest from debt directly held by subsidiaries of the business held for sale, including interest from capital leases, and interest on Term Loans required to be paid down using proceeds received on disposal on sale of a business. The Company paid down the Term Loans after the completion of the GBL divestiture. See Note 12 – Debt for further discussion. No impairment loss was recognized as the proceeds from the disposal of the business were more than the carrying value. During the year ended September 30, 2019, the Company recognized adjustments to gain on sale for changes to tax and legal indemnifications and other agreed-upon funding under the acquisition agreement for the period following the completion of the sale on January 2, 2019. During the year ended September 30, 2019, the Company incurred transaction costs of $12.9 million associated with the divestiture, which were recognized as a component of income from discontinued operations. During the year ended September 30, 2018, the Company incurred transaction costs of $60.7 million. Transaction costs were expensed as incurred and include fees for investment banking services, legal, accounting, due diligence, tax, valuation and various other services necessary to complete the transaction. After the completion of the divestiture, the Company incurred incremental costs to facilitate separation of shared operations, development of transferred shared service operations, platforms and personnel transferred under the transaction which have been recognized as Transaction Related Charges as part of continuing operations on the Company’s Consolidated Statement of Income. See Note 2 – Significant Accounting Policies and Practices for further detail. GAC On January 28, 2019, the Company completed the sale of its GAC business pursuant to the GAC acquisition agreement with Energizer for $938.7 million in cash proceeds and $242.1 million in stock consideration of common stock of Energizer, resulting in the write-down of net assets held for sale of $111.0 million during the year ended September 30, 2019, including the estimated settlement of customary purchase price adjustments for working capital and assumed indebtedness, and recognition of tax and legal indemnifications in accordance with the GAC acquisition agreement. The results of operations and write-down of net assets held for sale for the disposal of the GAC business were recognized as a component of discontinued operations. The Company and Energizer have agreed to indemnify each other for losses arising from certain breaches of the GAC acquisition agreement and for certain other matters. The Company has agreed to indemnify Energizer for certain liabilities relating to the assets retained by the Company, and Energizer has agreed to indemnify the Company for certain liabilities assumed by Energizer, in each case as described in the acquisition agreement. As of September 30, 2019, the Company has recognized $1.4 million related to indemnifications in accordance with the acquisition agreement within Other Long-Term Liabilities on the Company’s Consolidated Statement of Financial Position primarily attributable to income tax indemnifications associated with previously recognized uncertain tax benefits. NOTE 3 – DIVESTITURES (continued) As of September 30, 2019, the Company has recognized an estimated net settlement receivable of $3.9 million in Non-Trade Receivables on the Company’s Consolidated Financial Statements associated with GAC acquisition agreement, including the subsequent settlement of customary purchase price adjustments for working capital and assumed indebtedness, tax and legal indemnifications, and other agreed-upon funding in accordance with the agreement. The Company and Energizer entered into related agreements ancillary to the GAC acquisition that became effective upon the consummation of the acquisition, including a TSA and reverse TSA, a supply agreement with the Company’s H&G business, as well as a shareholder agreement. The TSA and reverse TSA are recognized as a component of continuing operations for periods following the completion of the GAC sale. The supply agreement with the Company’s H&G business is recognized as a component of net sales and continuing operations. Sales from the Company’s H&G segment to GAC discontinued operations prior to the divestiture have been recognized as a component of net sales and continuing operations for all comparable periods. See Note 17 – Related Party Transactions for additional discussion. The following table summarizes the assets and liabilities of GAC classified as held for sale as of September 30, 2018. | | | | (in millions) | | September 30, 2018 | Assets | | | | Trade receivables, net | | $ | 55.2 | Other receivables | | | 4.1 | Inventories | | | 72.8 | Prepaid expenses and other current assets | | | 2.9 | Property, plant and equipment, net | | | 58.2 | Deferred charges and other | | | 10.7 | Goodwill | | | 841.8 | Intangible assets, net | | | 384.4 | Total assets of business held for sale | | $ | 1,430.1 | Liabilities | | | | Current portion of long-term debt | | | 0.4 | Accounts payable | | | 50.6 | Accrued wages and salaries | | | 3.2 | Other current liabilities | | | 13.3 | Long-term debt, net of current portion | | | 31.5 | Deferred income taxes | | | 71.6 | Other long-term liabilities | | | 2.5 | Total liabilities of business held for sale | | $ | 173.1 |
The following table summarizes the components of income from discontinued operations before income taxes associated with the GAC divestiture in the accompanying Consolidated Statements of Operations for the three years ended September 30, 2019, 2018, and 2017, with the close of the GAC divestiture on January 28, 2019: | | | | | | | | | | | | | | | | | | | | (in millions) | | 2019 | | 2018 | | 2017 | Net sales | | $ | 87.7 | | $ | 465.6 | | $ | 446.9 | Cost of goods sold | | | 52.5 | | | 284.9 | | | 233.7 | Gross profit | | | 35.2 | | | 180.7 | | | 213.2 | Operating expenses | | | 35.7 | | | 117.8 | | | 117.2 | Operating (loss) income | | | (0.5) | | | 62.9 | | | 96.0 | Interest expense | | | 0.7 | | | 2.1 | | | 1.4 | Other non-operating expense, net | | | 0.2 | | | 0.2 | | | 0.1 | Write-down of assets of business held for sale to fair value less cost to sell | | | 111.0 | | | 92.5 | | | — | Reclassification of accumulated other comprehensive income | | | 3.3 | | | — | | | — | (Loss) Income from discontinued operations before income taxes | | $ | (115.7) | | $ | (31.9) | | $ | 94.5 |
Beginning in November 2018, the Company ceased the recognition of depreciation and amortization of long-lived assets associated with GAC, resulting in $1.4 million of depreciation and amortization recognized during the year ended September 30, 2019. During the years ended September 30, 2018 and 2017, the Company recognized depreciation and amortization of $16.3 million and $21.1 million, respectively. Interest expense consists of interest from debt directly held by subsidiaries of the business held for sale, including interest from capital leases. During the year ended September 30, 2019, the Company recognized a $111.0 million write-down on net assets held for sale associated with the GAC divestiture attributable to the expected fair value to be realized from the sale, net of transaction costs. The impairment was primarily driven by the change in value of stock consideration to be received as a component of the purchase price from Energizer. During the year ended September 30, 2019, the Company incurred transaction costs of $8.8 million associated with the divestiture which have been recognized as a component of income from discontinued operations on the Consolidated Statements of Income. No transaction costs associated with the divestiture were incurred during the year ended September 30, 2018. Transaction costs are expensed as incurred and include fees for investment banking services, legal, accounting, due diligence, tax, valuation and various other services necessary to complete the transactions. After the completion of the divestiture, the Company incurred incremental costs to facilitate separation of shared operations, development of transferred shared service operations, platforms and personnel transferred under the transaction which have been recognized as Transaction Related Charges as part of continuing operations on the Company’s Consolidated Statement of Income. See Note 2 – Significant Accounting Policies and Practices for further detail.
NOTE 3 – DIVESTITURES (continued) HRG - Insurance Operations On November 30, 2017, Fidelity & Guaranty Life (“FGL”), a former majority owned subsidiary of HRG, completed its merger (the “FGL Merger”) with CF Corporation and its related entities (collectively, the “CF Entities”) in accordance with its previously disclosed Agreement and Plan of Merger (the “FGL Merger Agreement”), pursuant to which, except for certain shares specified in the FGL Merger Agreement, each issued and outstanding share of common stock of FGL was automatically canceled and converted into the right to receive $31.10 in cash, without interest. The total consideration received by HRG Group Inc. as a result of the completion of the FGL Merger was $1,488.3 million. In addition, pursuant to a share purchase agreement, as of November 30, 2017, Front Street Re (Delaware) Ltd. sold to the CF Entities all of the issued and outstanding shares of Front Street for $65 million, which was subject to reduction for customary transaction expenses. In addition, $6.5 million of the purchase price was deposited in escrow for a period of 15 months to support any indemnification claims that might be made (if any) by the CF entities. The operations of FGL were classified as held for sale in the accompanying Consolidated Statement of Financial Position at September 30, 2017 and as discontinued operations through November 30, 2017 in the accompanying Consolidated Statements of Operations and Consolidated Statements of Cash Flows. Additionally, HRG, FS Holdco II Ltd. (“FS Holdco”) and the CF Entities entered into an agreement (the “338 Agreement”) on May 24, 2017 pursuant to which the CF Entities agreed that FS Holdco may, at its option, cause the relevant CF Entity and FS Holdco to make a joint election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended, with respect to the FGL Merger and the deemed share purchases of FGL’s subsidiaries (the “338 Tax Election”). Pursuant to the 338 Agreement, if FS Holdco elects to make the 338 Tax Election, FS Holdco and/or CF Corporation will be required to make a payment for the election to the other. On March 8, 2018, FS Holdco exercised the 338 Tax Election and the CF Entities were required to pay FS Holdco $26.6 million during the three month period ended June 30, 2018. The following table summarizes the major categories of assets and liabilities of FGL classified as held for sale in the accompanying Consolidated Statement of Financial Position as of September 30, 2017. | | | | (in millions) | | September 30, 2017 | Assets | | | | Investments, including loans and receivables from affiliates | | $ | 23,211.1 | Funds withheld receivables | | | 742.7 | Cash and cash equivalents | | | 914.5 | Accrued investment income | | | 231.3 | Reinsurance recoverable | | | 2,358.8 | Deferred acquisition costs and value of business acquired, net | | | 1,163.6 | Other assets | | | 125.4 | Write-down of assets of businesses held for sale to fair value less cost to sell | | | (421.2) | Total assets of business held for sale | | $ | 28,326.2 | Liabilities | | | | Insurance reserves | | | 24,989.6 | Debt | | | 405.0 | Accounts payable and other current liabilities | | | 56.2 | Deferred tax liabilities | | | 68.0 | Other long-term liabilities | | | 831.9 | Total liabilities of business held for sale | | $ | 26,350.7 |
The following table summarizes the components of Income from Discontinued Operations – HRG Insurance Operations, in the accompanying Consolidated Statements of Income for the years ending September 30, 2018 and 2017: | | | | | | | | | | | | | (in millions) | | 2018 | | 2017 | Revenues | | | | | | | Insurance premiums | | $ | 6.8 | | $ | 43.9 | Net investment income | | | 181.9 | | | 1,050.7 | Net investment gains | | | 154.8 | | | 377.4 | Other | | | 35.1 | | | 169.5 | Total revenues | | | 378.6 | | | 1,641.5 | Operating costs and expenses | | | | | | | Benefits and other changes in policy reserves | | | 241.3 | | | 925.9 | Selling, acquisition, operating and general expenses | | | 52.8 | | | 148.2 | Amortization of intangibles | | | 35.8 | | | 197.5 | Total operating costs and expenses | | | 329.9 | | | 1,271.6 | Operating income | | | 48.7 | | | 369.9 | Interest expense and other | | | 4.0 | | | 24.4 | Write-down of assets of business held for sale to fair value less cost to sell | | | (14.2) | | | (58.4) | Reclassification of accumulated other comprehensive income | | | 445.9 | | | — | Income from discontinued operations before income taxes | | $ | 476.4 | | $ | 287.1 |
Property, Plant, and Equipment and long-lived assets classified as held for sale are measured at the lower of their carrying value or fair value less cost to sell. As of September 30, 2017, the carrying value of HRG’s interest in FGL and Front Street exceeded their respective estimated fair value less cost to sell by $402.2 million and $19.0 million, respectively. The higher carrying value of FGL was primarily due to the increase in unrealized gains, net of offsets in FGL’s investment portfolio, with the effects of the unrealized gains, net of offsets, being recorded in accumulated other comprehensive income. Upon the completion of the FGL Merger, HRG deconsolidated its ownership interest in FGL, which resulted in the reclassification of $445.9 million of accumulated other comprehensive income attributable from FGL to income from discontinued operations during the year ended September 30, 2018. Additionally, subsequent to the close of the FGL Merger, the Company recognized a $5.9 million tax benefit allocated to HRG insurance operations discontinued operations during the year ended September 30, 2018, associated with the reversal of valuation allowance realized with the completion of the Spectrum Merger.
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