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Harbinger Group Inc Reports Operating Results (10-K)
Posted by: gurufocus (IP Logged)
Date: November 28, 2012 10:34PM
Harbinger Group Inc (HRG) filed Annual Report for the period ended 2012-09-30.
Highlight of Business Operations:Small appliance net sales decreased $6 million, or 1%, during Fiscal 2012 compared to Fiscal 2011. Excluding negative foreign exchange impacts of $14 million, small appliance sales increased $8 million, or 1%. Latin American and European constant currency sales increases of $16 million and $12 million, respectively, were tempered by a $19 million decrease in North American sales. Latin American sales gains resulted from distribution gains with existing customers as well as price increases. European sales increases were attributable to market share gains in the United Kingdom and expansion of the Russell Hobbs brand throughout Europe. Decreased North American sales were a result of a concerted effort to eliminate certain low margin promotions that occurred in Fiscal 2011.
Net investment gains, reduced by impairment losses, recognized in operations fluctuate from period to period based upon changes in the interest rate and economic environment and the timing of the sale of investments or the recognition of other-than-temporary impairments. For Fiscal 2012 and 2011, fixed maturity available-for-sale securities and equity securities had net investment gains of $287 million and $22 million, respectively, related to security sales offset by other-than-temporary impairments of $23 million and $18 million, respectively, during the year. The other-than-temporary impairments for Fiscal 2012 included impairment losses of $17 million related to change of intent on securities held and $6 million of credit impairments. Realized gains for Fiscal 2012 also included $30 million of gains associated with the asset transfer on October 17, 2011 for the closing of the final acquisition-related reinsurance transaction with Wilton Re. The $30 million of gains were payable to Wilton Re as part of the initial asset transfer. For Fiscal 2012 and 2011, there were also net realized and unrealized gains (losses) of $146 million and $(171) million, respectively, on derivative instruments purchased to hedge the annual index credits for FIA contracts.
Costs of Goods Sold/Gross Profit. Gross profit, representing net sales minus cost of goods sold, for Fiscal 2012 was $1,115 million compared to $1,129 million during Fiscal 2011, representing a $14 million decrease. Our gross profit margin, representing gross profit as a percentage of net sales, for Fiscal 2012 decreased to 34.3% from 35.4% in Fiscal 2011. The decrease in gross profit and gross profit margin for Fiscal 2012 was driven by $36 million of negative foreign exchange impacts, a $17 million increase in commodity prices and higher costs for sourced goods, primarily from Asia, a $12 million increase in costs due to changes in product mix and a $2 million increase in restructuring and related charges. These factors contributing to the decline in gross profit were tempered by increased organic sales which contributed $31 million of gross profit and Fiscal 2012 acquisitions which contributed $23 million of gross profit.
Benefits and Other Changes in Policy Reserves. Benefits and other changes in policy reserves of $777 million and $248 million for Fiscal 2012 and 2011, respectively, include the change in the FIA embedded derivative liability which includes the market value option liability change and the present value of future credits and guarantee liability change. The market value option liability increased $178 million and decreased $264 million for Fiscal 2012 and 2011, respectively, primarily due to changes in the equity markets during those periods. The present value of future credits and guarantee liability increased $7 million and $121 million for Fiscal 2012 and 2011, respectively. The increase in Fiscal 2012 was primarily due to lower risk free rates during the year. Fair value accounting for derivative instruments and the embedded derivatives in the FIA contracts creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liability in our fixed index annuity contracts. The change in fair value of the embedded derivatives will not correspond to the change in fair value of the derivatives (purchased call options and futures contracts) because the purchased derivatives cover the next annual index period while the embedded derivative liability covers estimated credits over the expected life of the FIA contracts. Additionally, there were index credits, interest credits and bonuses of $382 million and $292 million, annuity payments of $242 million and $127 million and policy benefits and other reserve movements of $32 million and $28 million during Fiscal 2012 and 2011, respectively. Changes in index credits are attributable to changes in the underlying indices and the amount of funds allocated by policyholders to the respective index options. Benefits also include claims incurred during the period in excess of contractholder fund balances, traditional life benefits and the change in reserves for traditional life insurance products.
Cash used in investing activities was $186 million for Fiscal 2012, as compared to cash provided of $532 million for Fiscal 2011. The $718 million decrease in cash provided by investing activities is principally due to a decrease in net cash provided from acquisitions of $869 million, cash used by Salus in originating $181 million of asset-backed loans in Fiscal 2012 and the non-recurrence of a $7 million cash inflow related to the sale of assets held for sale in Fiscal 2011, all partially offset by a $343 million increase in cash provided from sales, maturities and repayments, net of purchases, of fixed maturity securities and other investments principally due to a reduction of investment purchases with excess cash at HGI corporate. The $869 million decrease in net cash provided from acquisitions relates to the $139 million, net of cash acquired, acquisition of FURminator, Inc., and the $44 million acquisition of Black Flag in Fiscal 2012, as compared to the $695 million of net cash provided from the acquisition of FGL and the $11 million of cash used in the acquisition of Seed Resources, Inc., net of cash acquired, in Fiscal 2011.
Stocks Discussed: HRG,