Summary of SPECTRUM BRANDS HOLDINGS, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Spectrum Brands Holdings, Inc., a Delaware corporation ("SB Holdings"), is a global branded consumer products company and was created in connection with the combination of Spectrum Brands, Inc. ("Spectrum Brands"), a global branded consumer products company, and Russell Hobbs, Inc. ("Russell Hobbs"), a global branded small appliance company, to form a new combined company (the "Merger"). The Merger was consummated on June 16, 2010. As a result of the Merger, both Spectrum Brands and Russell Hobbs became wholly-owned subsidiaries of SB Holdings. Russell Hobbs was subsequently merged into Spectrum Brands. SB Holdings' common stock trades on the New York Stock Exchange under the symbol "SPB."
Unless the context indicates otherwise, the terms the "Company," "Spectrum," "we," "our" or "us" are used to refer to SB Holdings and its subsidiaries subsequent to the Merger and Spectrum Brands prior to the Merger. 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. With the addition of Russell Hobbs we design, market and distribute a broad range of branded small household appliances and personal care products. 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 and chargers, shaving and grooming products, small household appliances, personal care products and portable lighting products are manufactured by third-party suppliers, primarily located in Asia.
We sell our products in approximately 120 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, Spectracide, Cutter, Black & Decker, George Foreman, Russell Hobbs, Farberware, Black Flag, FURminator and various other brands.
Our diversified global branded consumer products have positions in seven major product categories: consumer batteries; pet supplies; home and garden control products; electric shaving and grooming products; small appliances; electric personal care products; and portable lighting. Our chief operating decision-maker manages the businesses in three vertically integrated, product-focused reporting segments: (i) Global Batteries & Appliances, which consists of our worldwide battery, electric shaving and grooming, electric personal care, portable lighting 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"); and (iii) Home and Garden Business, which consists of our home and garden and insect control business (the "Home and Garden Business"). 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 and Fiscal Nine Month Period Ended July 1, 2012 Compared to Fiscal Quarter and Fiscal Nine Month Period Ended July 3, 2011 In this Quarterly Report on Form 10-Q we refer to the three months ended July 1, 2012 as the "Fiscal 2012 Quarter," the nine month period ended July 1, 2012 as the "Fiscal 2012 Nine Months," the three month period ended July 3, 2011 as the "Fiscal 2011 Quarter" and the nine month period ended July 3, 2011 as the "Fiscal 2011 Nine Months."

Net Sales. Net sales for the Fiscal 2012 Quarter increased $20 million to $825 million from $805 million in the Fiscal 2011 Quarter, a 3% increase. The following table details the principal components of the change in net sales from the Fiscal

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2011 Quarter to the Fiscal 2012 Quarter (in millions):


                                                    Net Sales
Fiscal 2011 Quarter Net Sales                      $     805
Increase in pet supplies                                  17
Increase in home and garden control products              12
Increase in small appliances                               9
Increase in electric shaving and grooming products         4
Increase in consumer batteries                             4
Increase in electric personal care products                4
Decrease in portable lighting products                    (1 )
Foreign currency impact, net                             (29 )
Fiscal 2012 Quarter Net Sales                      $     825

Net sales for the Fiscal 2012 Nine Months increased $60 million to $2,420 million from $2,360 million in the Fiscal 2011 Nine Months, a 3% increase. The following table details the principal components of the change in net sales from the Fiscal 2011 Nine Months to the Fiscal 2012 Nine Months (in millions):

                                                    Net Sales
Fiscal 2011 Nine Months Net Sales                  $    2,360
Increase in pet supplies                                   28
Increase in home and garden control products               27
Increase in small appliances                               18
Increase in consumer batteries                             15
Increase in electric personal care products                10
Increase in electric shaving and grooming products          9
Decrease in portable lighting products                     (3 )
Foreign currency impact, net                              (44 )
Fiscal 2012 Nine Months Net Sales                  $    2,420

Consolidated net sales by product line for the Fiscal 2012 Quarter, the Fiscal 2011 Quarter, the Fiscal 2012 Nine Months, and the Fiscal 2011 Nine Months are as follows (in millions):

                                           Fiscal Quarter            Fiscal Nine Months
                                            2012         2011          2012           2011
Product line net sales
Consumer batteries                     $    190         $ 198    $      623         $   627
Small appliances                            173           170           576             567
Pet supplies                                157           144           449             425
Home and garden control products            167           155           300             273
Electric personal care products              54            53           195             191
Electric shaving and grooming products       63            62           215             211
Portable lighting products                   21            23            62              66
Total net sales to external customers  $    825         $ 805    $    2,420         $ 2,360

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Global consumer battery sales decreased $8 million, or 4%, during the Fiscal 2012 Quarter versus the Fiscal 2011 Quarter. Excluding the impact of negative foreign exchange of $12 million global consumer battery sales increased $4 million, or 2%. The growth of global consumer battery sales on a constant currency basis was driven by new customer listings as well as increased shelf space at existing customers, coupled with price increases, primarily in Latin America, and geographic expansion. Global consumer battery sales decreased $4 million, or 1% for the Fiscal 2012 Nine Months versus the Fiscal 2011 Nine Months. Excluding negative foreign exchange impacts of $19 million, global consumer battery sales increased $15 million, or 2% due to the factors discussed above for the Fiscal 2012 Quarter.

Small appliance sales increased $3 million, or 2%, during the Fiscal 2012 Quarter compared to the Fiscal 2011 Quarter, driven by increases in Latin America and Europe of $8 million and $6 million, respectively, tempered by decreased North American sales of $5 million. Foreign exchange negatively affected small appliance sales by $6 million. 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 resulted from the nonrecurrence of Fiscal 2011 Quarter low margin promotions. For the Fiscal 2012 Nine Months, small appliance sales increased $9 million, or 2%, driven by the factors discussed for the Fiscal 2012 Quarter, coupled with increased North American sales in the first six months of the fiscal year ending September 30, 2012 ("Fiscal 2012") attributable to successful new product introductions and increased placement at a major customer.
Pet supply sales increased $13 million, or 9%, during the Fiscal 2012 Quarter, led by increases in companion animal and aquatics sales of $13 million and $4 million, respectively, tempered by $4 million in negative foreign currency impacts. Gains in companion animal sales were due to the FURminator acquisition and growth in the Nature's Miracle brand in the U.S., whereas gains in aquatics sales resulted from increases in North American aquarium starter kits and pond related sales, including new distribution at major retailers. For the Fiscal 2012 Nine Months, pet supply sales increased $24 million compared to the Fiscal 2011 Nine Months, driven by the strong Fiscal 2012 Quarter sales discussed above, which were tempered by lower European aquatics sales. Foreign exchange negatively impacted the Fiscal 2012 Nine Months sales by $4 million. Home and garden control product sales increased $12 million, or 7%, during the Fiscal 2012 Quarter compared to the Fiscal 2011 Quarter, driven by increased household insect control sales of $11 million, resulting from strong retail distribution gains with existing customers and the Black Flag acquisition. Sales for the Fiscal 2012 Nine Months increased $27 million, or 10%, due to the factors discussed for the Fiscal 2012 Quarter.
Electric personal care sales increased $1 million, or 2%, for the Fiscal 2012 Quarter compared to the Fiscal 2011 Quarter, driven by increased Latin American and North American sales of $3 million and $2 million, respectively. These increases were attributable to continued success in new product categories and distribution gains in Latin America. The sales increases were tempered by a decrease in European sales of $1 million coupled with $3 million of negative foreign currency exchange. For the Fiscal 2012 Nine Months, electric personal care sales increased $4 million, or 2%, compared to the Fiscal 2011 Nine Months due to the same factors discussed for the Fiscal 2012 Quarter. Foreign exchange negatively impacted the Fiscal 2012 Nine Months sales by $5 million. During the Fiscal 2012 Quarter, electric shaving and grooming product sales increased $1 million, or 2%, led by a $4 million increase in European sales and a $1 million increase in sales in Latin America. These gains were tempered by slight declines in North America and negative foreign exchange of $3 million. European sales gains were driven by successful promotions for new product launches, while the increase in Latin American sales was due to distribution and customer gains. Electric shaving and grooming sales for the Fiscal 2012 Nine Months increased $4 million, or 2%, driven by the gains discussed for the Fiscal 2012 Quarter, tempered by the elimination of lower margin North American promotions in the first quarter of Fiscal 2012.
Portable lighting sales in the Fiscal 2012 Quarter decreased $2 million compared to the Fiscal 2011 Quarter. The declines were attributable to a slight North American sales decline of $1 million, coupled with negative foreign exchange impacts of $1 million. Portable lighting sales for the Fiscal 2012 Nine Months decreased $4 million compared to the Fiscal 2011 Nine Months due to the non-recurrence of successful promotions during the first quarter of the year ended September 30, 2011 ("Fiscal 2011") and negative foreign currency exchange of $1 million.
Gross Profit. Gross profit for the Fiscal 2012 Quarter was $292 million versus $294 million for the Fiscal 2011 Quarter. Our gross profit margin for the Fiscal 2012 Quarter decreased to 35.4% from 36.5% in the Fiscal 2011 Quarter. The decrease in gross profit and gross profit margin resulted from a $3 million increase in commodity prices, increased costs from sourced goods, primarily from Asia, and a $2 million decrease due to changes in our customer freight programs during Fiscal 2012, which reduced sales and drove offsetting decreases in distribution expenses. These decreases in gross profit were tempered by increased sales which contributed $5 million in gross profit.

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Gross profit for the Fiscal 2012 Nine Months was $836 million versus $848 million for the Fiscal 2011 Nine Months. Our gross profit margin decreased to 34.5% from 36.0% in the Fiscal 2012 Nine Months. The decrease in gross profit and gross profit margin for the Fiscal 2012 Nine Months was driven by a $12 million increase in commodity prices, increased costs from sourced goods, primarily from Asia, a $17 million increase in costs due to changes in product mix and a $3 million decrease due to the adjustment to customer freight programs discussed for the Fiscal 2012 Quarter. Further contributing to the decrease in gross margin during the Fiscal 2012 Nine Months was a $4 million increase in Restructuring and related charges included in cost of goods sold due to our announced closure of a zinc carbon battery manufacturing facility in Colombia. These decreases in gross profit were tempered by increased sales which contributed $21 million in gross profit.
Operating Expense. Operating expenses for the Fiscal 2012 Quarter totaled $197 million versus $215 million for the Fiscal 2011 Quarter, representing a decrease of $18 million. The decrease in operating expenses during the Fiscal 2012 Quarter is primarily attributable to decreased stock compensation expense of $4 million, decreased Restructuring and related charges of $3 million and decreased Acquisition and integration charges of $2 million. Further contributing to the lower operating expenses are synergies recognized subsequent to the Merger, savings from our global cost reduction initiatives and positive foreign exchange impacts of $8 million.
Operating expenses for the Fiscal 2012 Nine Months totaled $602 million versus $653 million for the Fiscal 2011 Nine Months, a decrease of $51 million. The decrease in operating expenses during the Fiscal 2012 Nine Months was driven by synergies being recognized subsequent to the Merger of $22 million, decreased Acquisition and integration charges of $11 million, positive foreign exchange impacts of $12 million and decreased stock compensation expense of $7 million. See "Acquisition and Integration Related Charges" below, as well as Note 2, Significant Accounting Policies-Acquisition and Integration 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 three reportable segments: (i) Global Batteries & Appliances; (ii) Global Pet Supplies; and
(iii) our Home and Garden Business. 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 12, "Segment Results," to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q. 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 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 EBIT and to Adjusted EBITDA for each segment and for Consolidated SB Holdings for the Fiscal 2012 Quarter, Fiscal 2012 Nine Months, the Fiscal 2011 Quarter and Fiscal 2011 Nine Months:

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Global Home and Corporate / Batteries & Global Pet Garden Unallocated Consolidated Fiscal 2012 Quarter Appliances Supplies Business Items(a) SB Holdings
(in millions)
Net income (loss), as
adjusted (a) $ 41 $ 19 $ 44 $ (45 ) $ 59 Income tax benefit - - - (5 ) (5 ) Interest expense - - - 40 40 Restructuring and related
charges 2 2 - - 4 Acquisition and
integration related
charges 3 2 - - 5 Adjusted EBIT $ 46 $ 23 $ 44 $ (10 ) $ 103 Depreciation and
amortization (b) 16 7 3 4 30 Adjusted EBITDA $ 62 $ 30 $ 47 $ (6 ) $ 133

Global Home and Corporate / Batteries & Global Pet Garden Unallocated Consolidated Fiscal 2012 Nine Months Appliances Supplies Business Items(a) SB Holdings

(in millions)
Net income (loss), as
adjusted (a) $ 166 $ 47 $ 59 $ (229 ) $ 43 Income tax expense - - - 39 39 Interest expense - - - 150 150 Restructuring and
related charges 7 7 1 1 16 Acquisition and
integration related
charges 11 3 1 5 20 Adjusted EBIT $ 184 $ 57 $ 61 $ (34 ) $ 268 Depreciation and
amortization (b) 46 20 9 16 91 Adjusted EBITDA $ 230 $ 77 $ 70 $ (18 ) $ 359

Global Home and Corporate / Batteries & Global Pet Garden Unallocated Consolidated Fiscal 2011 Quarter Appliances Supplies Business Items(a) SB Holdings

(in millions)
Net income (loss), as
adjusted (a) $ 40 $ 15 $ 42 $ (68 ) $ 29 Income tax expense - - - 9 9 Interest expense - - - 40 40 Restructuring and
related charges 1 4 1 1 7 Acquisition and
integration related
charges 5 - - 3 8 Adjusted EBIT $ 46 $ 19 $ 43 $ (15 ) $ 93 Depreciation and
amortization (b) 17 6 3 8 34 Adjusted EBITDA $ 63 $ 25 $ 46 $ (7 ) $ 127

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Global Home and Corporate / Batteries & Global Pet Garden Unallocated Consolidated Fiscal 2011 Nine Months Appliances Supplies Business Items(a) SB Holdings
(in millions)
Net income (loss), as
adjusted (a) $ 155 $ 43 $ 49 $ (288 ) $ (41 ) Income tax expense - - - 69 69 Interest expense - - - 166 166 Restructuring and
related charges 2 10 2 4 18 Acquisition and
integration related
charges 24 - - 7 31 Other (1 ) - - - (1 ) Adjusted EBIT $ 180 $ 53 $ 51 $ (42 ) $ 242 Depreciation and
amortization (b) 51 18 9 23 101 Adjusted EBITDA $ 231 $ 71 $ 60 $ (19 ) $ 343

(a) It is our policy to record Income tax (benefit) expense and interest expense on a consolidated basis. Accordingly, such amounts are not reflected in the operating results of the operating segments and are presented within Corporate / Unallocated Items.

(b) Included within depreciation and amortization is amortization of unearned restricted stock compensation.

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Global Batteries & Appliances

Fiscal Quarter Fiscal Nine Months 2012 2011 2012 2011 (in millions)
Net sales to external customers $ 501 $ 505 $ 1,670 $ 1,661 Segment profit $ 47 $ 45 $ 186 $ 180 Segment profit as a % of net sales 9.4 % 9.0 % 11.1 % 10.9 % Segment Adjusted EBITDA $ 62 $ 63 $ 230 $ 231 Assets as of July 1, 2012 and
September 30, 2011 $ 2,183 $ 2,275 $ 2,183 $ 2,275

Segment net sales to external customers in the Fiscal 2012 Quarter decreased $4 million to $501 million from $505 million during the Fiscal 2011 Quarter, a 1% decrease, driven by unfavorable foreign currency exchange translation which impacted net sales in the Fiscal 2012 Quarter by approximately $25 million. Excluding exchange, segment sales increased by $21 million, led by increased small appliances sales of $9 million. Geographically, Latin American small appliance sales increased $8 million, followed by an increase in European small appliance sales of $6 million, tempered by a $5 million decrease in North American small appliance sales. Latin American sales gains were attributable to price increases and distribution gains with existing customers, whereas European sales increases resulted from market share gains in the United Kingdom and expansion of the Russell Hobbs brand throughout Europe. The decline in North American small appliances sales resulted from the nonrecurrence of low margin promotions that occurred during the Fiscal 2011 Quarter. Excluding foreign exchange, electric shaving and grooming sales increased $4 million, driven by increases of $4 million related to successful new product launches in Europe and $1 million of distribution gains with existing customers in Latin America, tempered by a slight decrease in North American sales. Electric personal care product sales increased $4 million, excluding foreign exchange impacts, led by increased Latin American and North American sales of $3 million and $2 million, respectively, resulting from successful new product introductions and distribution gains in Latin America. The gains in electric personal care product sales were tempered by a $1 million decrease in European sales driven by declining women's hair straightener sales which is attributed to a change in fashion trends. Excluding foreign exchange impacts, global consumer batteries sales increased $4 million, driven by new customer listings as well as increased shelf space at existing customers, coupled with price increases, primarily in Latin America, and geographic expansion. Excluding foreign exchange, portable lighting sales decreased $1 million driven by declines in North America. . . .