Reproduction steps:
1. Open the attached project "HandlesRotationHandleBug.zip";
2. Open the HandleBug.scene;
3. Select the GameObject in the scene (it has two child objects);
4. Observe the difference between the circle handles around these objects;

Expected results: Both handles should look exactly the same.
Actual results: The handle which uses localRotation inherits its parent rotation even if Handles.matrix is set to transform.localToWorldMatrix(child1).

Reproduced on: 5.5.3p3, 5.6.3f1, 2017.1.0p3, 2017.2.0b6, 2017.3.0a4.