XNYS:SBH Sally Beauty Holdings Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2012

 

-OR-

 

¨                   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 1-33145

 


 

SALLY BEAUTY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

36-2257936

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

3001 Colorado Boulevard

 

 

Denton, Texas

 

76210

(Address of principal executive
offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (940) 898-7500

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  x  NO  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  YES  o  NO  x

 

As of July 26, 2012, there were 180,077,985 shares of the issuer’s common stock outstanding.

 

 

 




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In this Quarterly Report, references to “the Company,” “Sally Beauty,” “our company,” “we,” “our,” “ours” and “us” refer to Sally Beauty Holdings, Inc. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.

 

Cautionary Notice Regarding Forward-Looking Statements

 

Statements in this Quarterly Report on Form 10-Q and in the documents incorporated by reference herein which are not purely historical facts or which depend upon future events may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or similar expressions may also identify such forward-looking statements.

 

Readers are cautioned not to place undue reliance on forward-looking statements as such statements speak only as of the date they were made. Any forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including, but not limited to, risks and uncertainties related to:

 

·             the highly competitive nature of, and the increasing consolidation of, the beauty products distribution industry;

·             anticipating changes in consumer preferences and buying trends and managing our product lines and inventory;

·             potential fluctuation in our same store sales and quarterly financial performance;

·             our dependence upon manufacturers who may be unwilling or unable to continue to supply products to us;

·             the possibility of material interruptions in the supply of products by our manufacturers or third-party distributors;

·             products sold by us being found to be defective in labeling or content;

·             compliance with laws and regulations or becoming subject to additional or more stringent laws and regulations;

·             product diversion to mass retailers or other unauthorized resellers;

·             the operational and financial performance of our Armstrong McCall, L.P. (“Armstrong McCall”) franchise-based business;

·             the success of our internet-based businesses;

·             successfully identifying acquisition candidates and successfully completing desirable acquisitions;

·             integrating businesses acquired in the future;

·             opening and operating new stores profitably;

·             the impact of the health of the economy upon our business;

·             the success of our cost control plans;

·             protecting our intellectual property rights, particularly our trademarks;

·             conducting business outside the United States;

·             disruption in our information technology systems;

·             severe weather, natural disasters or acts of violence or terrorism;

·             the preparedness of our accounting and other management systems to meet financial reporting and other requirements and the upgrade of our existing financial reporting system;

·             being a holding company, with no operations of our own, and depending on our subsidiaries for cash;

·             our substantial indebtedness;

·             the possibility that we may incur substantial additional debt in the future;

·             restrictions and limitations in the agreements and instruments governing our debt;

·             generating the significant amount of cash needed to service all of our debt and refinancing all or a portion of our indebtedness or obtaining additional financing;

·             changes in interest rates increasing the cost of servicing our debt;

·             the potential impact on us if the financial institutions we deal with become impaired;

·             the costs and effects of litigation; and

·             the representativeness of our historical consolidated financial information with respect to our future financial position, results of operations or cash flows.

 

Additional factors that could cause actual events or results to differ materially from the events or results described in the forward-looking statements can be found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, as filed with the Securities and Exchange Commission. The events described in the forward-looking statements might not occur or

 

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might occur to a different extent or at a different time than we have described. As a result, our actual results may differ materially from the results contemplated by these forward-looking statements. We assume no obligation to publicly update or revise any forward-looking statements.

 

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WHERE YOU CAN FIND MORE INFORMATION

 

Sally Beauty’s quarterly financial results and other important information are available by calling the Investor Relations Department at (940) 297-3877.

 

Sally Beauty maintains a website at www.sallybeautyholdings.com where investors and other interested parties may obtain, free of charge, press releases and other information as well as gain access to our periodic filings with the SEC. The information contained on this website does not constitute part of this Quarterly Report on Form 10-Q.

 

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PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

The following consolidated balance sheets as of June 30, 2012 and September 30, 2011, the consolidated statements of earnings for the three and nine months ended June 30, 2012 and 2011, and the consolidated statements of cash flows for the nine months ended June 30, 2012 and 2011 are those of Sally Beauty Holdings, Inc. and its consolidated subsidiaries.

 

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SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales

 

$

886,991

 

$

836,576

 

$

2,641,087

 

$

2,431,945

 

Cost of products sold and distribution expenses

 

442,612

 

426,045

 

1,338,065

 

1,250,208

 

Gross profit

 

444,379

 

410,531

 

1,303,022

 

1,181,737

 

Selling, general and administrative expenses

 

291,533

 

259,007

 

873,736

 

803,296

 

Depreciation and amortization

 

16,299

 

15,273

 

47,792

 

44,161

 

Operating earnings

 

136,547

 

136,251

 

381,494

 

334,280

 

Interest expense

 

26,925

 

27,741

 

113,240

 

85,058

 

Earnings before provision for income taxes

 

109,622

 

108,510

 

268,254

 

249,222

 

Provision for income taxes

 

40,135

 

39,367

 

100,820

 

89,852

 

Net earnings

 

$

69,487

 

$

69,143

 

$

167,434

 

$

159,370

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.38

 

$

0.38

 

$

0.91

 

$

0.87

 

Diluted

 

$

0.37

 

$

0.37

 

$

0.88

 

$

0.85

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

Basic

 

182,756

 

183,164

 

184,598

 

182,817

 

Diluted

 

188,496

 

188,592

 

189,901

 

187,783

 

 

The accompanying condensed notes, together with the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011, are an integral part of these financial statements.

 

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SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except par value data)

 

 

 

June 30,
2012

 

September 30,
2011

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

53,974

 

$

63,481

 

Trade accounts receivable, less allowance for doubtful accounts of $2,386 at June 30, 2012 and $2,086 at September 30, 2011

 

58,715

 

61,996

 

Accounts receivable, other

 

42,186

 

33,530

 

Inventory

 

718,995

 

665,246

 

Prepaid expenses

 

26,938

 

26,360

 

Deferred income tax assets, net

 

28,577

 

28,535

 

Total current assets

 

929,385

 

879,148

 

Property and equipment, net of accumulated depreciation of $339,457 at June 30, 2012 and $317,677 at September 30, 2011

 

189,746

 

182,489

 

Goodwill

 

528,564

 

505,873

 

Intangible assets, excluding goodwill, net of accumulated amortization of $55,782 at June 30, 2012 and $45,467 at September 30, 2011

 

130,797

 

129,658

 

Other assets

 

35,009

 

31,432

 

Total assets

 

$

1,813,501

 

$

1,728,600

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt

 

$

54,966

 

$

3,004

 

Accounts payable

 

266,752

 

262,114

 

Accrued liabilities

 

157,499

 

185,509

 

Income taxes payable

 

644

 

9,379

 

Total current liabilities

 

479,861

 

460,006

 

Long-term debt

 

1,456,382

 

1,410,111

 

Other liabilities

 

22,932

 

26,154

 

Deferred income tax liabilities, net

 

56,287

 

51,311

 

Total liabilities

 

2,015,462

 

1,947,582

 

Stockholders’ deficit:

 

 

 

 

 

Common stock, $0.01 par value. Authorized 500,000 shares; 179,940 and 184,502 shares issued and 179,607 and 184,057 shares outstanding at June 30, 2012 and September 30, 2011, respectively

 

1,796

 

1,841

 

Preferred stock, $0.01 par value. Authorized 50,000 shares; none issued

 

 

 

Additional paid-in capital

 

528,321

 

681,256

 

Accumulated deficit

 

(711,871

)

(879,305

)

Treasury stock, 15 shares at September 30, 2011, at cost

 

 

(103

)

Accumulated other comprehensive loss, net of tax

 

(20,207

)

(22,671

)

Total stockholders’ deficit

 

(201,961

)

(218,982

)

Total liabilities and stockholders’ deficit

 

$

1,813,501

 

$

1,728,600

 

 

The accompanying condensed notes, together with the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011, are an integral part of these financial statements.

 

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SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)

(Unaudited)

 

 

 

Nine Months Ended
June 30,

 

 

 

2012

 

2011

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net earnings

 

$

167,434

 

$

159,370

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

47,792

 

44,161

 

Share-based compensation expense

 

13,801

 

12,737

 

Amortization of deferred financing costs

 

4,164

 

5,196

 

Excess tax benefit from share-based compensation

 

(10,647

)

(1,954

)

Net loss on disposal of property and equipment

 

14

 

205

 

Net loss on extinguishment of debt

 

38,376

 

2,245

 

Deferred income taxes

 

(154

)

1,192

 

Changes in (exclusive of effects of acquisitions):

 

 

 

 

 

Trade accounts receivable

 

4,457

 

(3,111

)

Accounts receivable, other

 

(8,143

)

(2,617

)

Inventory

 

(44,329

)

(38,723

)

Prepaid expenses

 

(465

)

(2,490

)

Other assets

 

5,147

 

2,767

 

Accounts payable and accrued liabilities

 

(19,063

)

9,878

 

Income taxes payable

 

1,437

 

5,752

 

Other liabilities

 

(3,260

)

529

 

Net cash provided by operating activities

 

196,561

 

195,137

 

Cash Flows from Investing Activities:

 

 

 

 

 

Capital expenditures

 

(44,253

)

(43,117

)

Proceeds from sale of property and equipment

 

93

 

148

 

Acquisitions, net of cash acquired

 

(43,154

)

(83,922

)

Net cash used by investing activities

 

(87,314

)

(126,891

)

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

1,876,300

 

379,505

 

Repayments of long-term debt

 

(1,801,933

)

(458,250

)

Debt issuance costs

 

(26,858

)

(5,386

)

Repurchase of common stock

 

(200,000

)

 

Proceeds from exercises of stock options

 

23,080

 

6,681

 

Excess tax benefit from share-based compensation

 

10,647

 

1,954

 

Net cash used by financing activities

 

(118,764

)

(75,496

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

10

 

473

 

Net decrease in cash and cash equivalents

 

(9,507

)

(6,777

)

Cash and cash equivalents, beginning of period

 

63,481

 

59,494

 

Cash and cash equivalents, end of period

 

$

53,974

 

$

52,717

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

Interest paid (a)

 

$

109,094

 

$

94,074

 

Income taxes paid

 

$

102,689

 

$

85,426

 

 


(a)  For the nine months ended June 30, 2012, interest paid includes $24.4 million in call premiums paid upon the redemption of certain notes.

 

The accompanying condensed notes, together with the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011, are an integral part of these financial statements.

 

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Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

1.   Description of Business and Basis of Presentation

 

Description of Business

 

Sally Beauty Holdings, Inc. and its consolidated subsidiaries (“Sally Beauty” or “the Company”) sell professional beauty supplies through its Sally Beauty Supply retail stores primarily in the U.S., Puerto Rico, Canada, Mexico, Chile, the United Kingdom, Ireland, Belgium, France, Germany, the Netherlands and Spain. Additionally, the Company distributes professional beauty products to salons and salon professionals through its Beauty Systems Group (“BSG”) store operations and a commissioned, direct sales force that calls on salons primarily in the U.S., Puerto Rico, Canada, the United Kingdom and certain other countries in Europe, and to franchises in the southern and southwestern regions of the U.S., and in Mexico through the operations of its subsidiary Armstrong McCall. Certain beauty products sold by BSG and Armstrong McCall are sold under exclusive territory agreements with the manufacturers of the products.

 

In November 2006, CDRS Acquisition LLC (or “CDRS”) and CD&R Parallel Fund VII, L.P. (together with CDRS, the “CDR Investors”) invested an aggregate of $575.0 million in cash equity in Sally Beauty in exchange for approximately 48% of our common stock on an undiluted basis. On May 10, 2012, we disclosed in a Current Report on Form 8-K that the Company had entered into an agreement pursuant to which the Company repurchased (and retired) 7,551,444 shares of its common stock from the CDR Investors, in a private transaction, at $26.485 per share. The Company funded this transaction (approximately $200.0 million) primarily with borrowings in the amount of $160.0 million under its revolving credit facility (the “ABL facility”) and with cash from operations. As of June 30, 2012, the CDR Investors owned approximately 12.8% of the outstanding shares of our common stock on an undiluted basis. On July 23, 2012, the CDR Investors disposed of all of the outstanding shares of our common stock held by them.

 

Basis of Presentation

 

The consolidated interim financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. In the opinion of management, these consolidated financial statements reflect all adjustments which are of a normal recurring nature and which are necessary to present fairly the Company’s consolidated financial position as of June 30, 2012 and September 30, 2011, its consolidated results of operations for the three and nine months ended June 30, 2012 and 2011, and its consolidated cash flows for the nine months ended June 30, 2012 and 2011.

 

All references in these notes to “management” are to the management of Sally Beauty.

 

2.   Significant Accounting Policies

 

The consolidated interim financial statements included herein are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These consolidated interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011. The Company adheres to the same accounting policies in the preparation of its interim financial statements. As permitted under GAAP, interim accounting for certain expenses, including income taxes, is based on full year assumptions. Such amounts are expensed in full in the year incurred. For interim financial reporting purposes, income taxes are recorded based upon estimated annual effective income tax rates.

 

The results of operations for these interim periods are not necessarily indicative of the results that may be expected for any future interim period or the entire fiscal year.

 

3.   Recent Accounting Pronouncements and Accounting Changes

 

Recent Accounting Pronouncements

 

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-28 which amended Accounting Standards Codification (“ASC”) Topic 350, Intangibles-Goodwill and Other (“ASC 350”). This amendment modified the goodwill impairment test for reporting units with a zero or negative carrying amount, by requiring that Step 2 of the goodwill impairment test be performed for such reporting units if it is more likely than not that an impairment of goodwill exists. The Company adopted this amendment during the first quarter of its fiscal year 2012 and its adoption did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

In December 2010, the FASB issued ASU No. 2010-29 which amended ASC Topic 805, Business Combinations. This amendment requires that a public company that enters into business combinations that are material on an individual or aggregate

 

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Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

basis disclose certain pro-forma information for the current and the immediately preceding fiscal year. This amendment also expands the supplemental pro-forma disclosures to include a description of the nature and amount of material, non-recurring pro-forma adjustments directly attributable to such business combination or business combinations. The Company adopted this amendment during the first quarter of its fiscal year 2012 and its adoption did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

In May 2011, the FASB issued ASU No. 2011-04 which amended ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). This amendment changed the title of ASC 820 to “Fair Value Measurement” and adopted fair value measurement and disclosure guidance that is generally consistent with the corresponding International Financial Reporting Standards (“IFRS”) guidance. More specifically, this amendment changed certain requirements for measuring fair value or for disclosing information about fair value measurements or, alternatively, clarified the FASB’s intent about the application of existing fair value measurement and disclosure guidance. The Company adopted this amendment during the second quarter of its fiscal year 2012 and its adoption did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

In September 2011, the FASB issued ASU No. 2011-08 which amended ASC 350. This amendment allows an entity to first assess relevant qualitative factors in order to determine whether it is necessary to perform the two-step quantitative goodwill impairment test otherwise required under ASC 350. In effect, the amendment eliminates the need to calculate the fair value of a reporting unit in connection with the goodwill impairment test unless the entity determines, based on the qualitative assessment, that it is more likely than not that the reporting unit’s fair value is less than its carrying amount. As permitted, the Company adopted this amendment during the second quarter of its fiscal year 2012 and its adoption did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

We have not yet adopted and are currently assessing any potential effect of the following pronouncement on our consolidated financial statements:

 

In June 2011, the FASB issued ASU No. 2011-05 which amended ASC Topic 220, Comprehensive Income (“ASC 220”). This amendment, which must be applied retrospectively, will allow an entity the option to present the components of net income, as well as total comprehensive income and the components of other comprehensive income, either in a single continuous statement of comprehensive income or in two separate consecutive statements. This amendment also eliminates the option to present the components of other comprehensive income in the statement of stockholders’ equity but does not change the items that must be reported. In addition, in December 2011, the FASB issued ASU No. 2011-12 which further amended ASC 220. More specifically, this amendment provided for deferral, until further action by the FASB, of the effective date for changes to the presentation of reclassifications of items out of accumulated other comprehensive income required by ASU No. 2011-05. For public companies, these amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Early application is permitted.

 

Accounting Changes

 

The Company made no accounting changes during the nine months ended June 30, 2012.

 

4.   Fair Value Measurements

 

At June 30, 2012, the Company’s financial instruments consist of cash and cash equivalents, trade and other accounts receivable, accounts payable, foreign currency collar and forward agreements and debt. The carrying amounts of cash and cash equivalents, trade and other accounts receivable, and accounts payable approximate fair value due to the short-term nature of these financial instruments.

 

The Company measures on a recurring basis and discloses its financial instruments under the provisions of ASC 820, as amended. The Company defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level hierarchy for measuring fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels of that hierarchy are defined as follows:

 

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;

 

Level 2 - Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data; and

 

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Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

Level 3 - Unobservable inputs for the asset or liability.

 

Consistent with this hierarchy, the Company categorized certain of its financial assets and liabilities as follows at June 30, 2012 (in thousands):

 

 

 

As of June 30, 2012

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

Foreign currency forwards (a)

 

$

39

 

 

$

39

 

 

Foreign currency collars (a)

 

331

 

 

331

 

 

Total assets

 

$

370

 

 

$

370

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Long-term debt (b)(c)

 

$

1,604,848

 

$

1,543,500

 

$

61,348

 

 

Foreign currency forwards (a)

 

603

 

 

603

 

 

Total liabilities

 

$

1,605,451

 

$

1,543,500

 

$

61,951

 

 

 

Consistent with this hierarchy, the Company categorized certain of its financial assets and liabilities as follows at September 30, 2011 (in thousands):

 

 

 

As of September 30, 2011

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

Foreign currency forwards (a)

 

$

424

 

 

$

424

 

 

Foreign currency collars (a)

 

680

 

 

680

 

 

Total assets

 

$

1,104

 

 

$

1,104

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Long-term debt (b)(c)

 

$

1,420,337

 

$

725,288

 

$

695,049

 

 

Hedged interest rate swaps (a)

 

6,450

 

 

6,450

 

 

Foreign currency forwards (a)

 

528

 

 

528

 

 

Total liabilities

 

$

1,427,315

 

$

725,288

 

$

702,027

 

 

 


(a)          Foreign currency options, collars and forwards, and interest rate swaps are valued for purposes of this disclosure using widely accepted valuation techniques, such as discounted cash flow analyses, and reasonable estimates, such as projected market interest rates and projected foreign currency exchange rates, as appropriate. Please see Note 10 for more information about the Company’s foreign currency options, collars and forwards, and interest rate swaps.

(b)         In November 2011, the Company, through certain of its domestic subsidiaries, issued $750.0 million aggregate principal amount of the Company’s 6.875% senior notes due 2019 (the “senior notes due 2019”) and, in December 2011, it redeemed its senior notes due 2014 and its senior subordinated notes due 2016 with the net proceeds from such debt issuance. In May 2012, the Company through certain of its domestic subsidiaries, issued $700.0 million aggregate principal amount of the Company’s 5.75% senior notes due 2022 (the “senior notes due 2022”) and repaid in full its borrowings under the senior term loan B facility. Please see Note 9 for more information about the Company’s debt.

(c)          Long-term debt (including borrowings under the ABL facility), which is carried at amortized cost in the Company’s consolidated financial statements, is generally valued for purposes of this disclosure using widely accepted valuation techniques, such as discounted cash flow analyses, and observable inputs, such as market interest rates, except for the senior and senior subordinated notes (prior to their December 2011 redemption), the senior notes due 2019 and the senior notes due 2022. The senior and senior subordinated notes (prior to their December 2011 redemption) were, and the senior notes due 2019 and senior notes due 2022 are, valued using unadjusted quoted market prices for such debt securities. Please see Note 9 for more information about the Company’s debt.

 

12



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

5.  Net Earnings Per Share

 

Basic net earnings per share, is calculated by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted net earnings per share, is calculated similarly but includes the potential dilution from the exercise of all outstanding stock options and stock awards, except when the effect would be anti-dilutive.

 

The following table sets forth the computations of basic and diluted earnings per share (in thousands, except per share data):

 

 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net earnings

 

$

69,487

 

$

69,143

 

$

167,434

 

$

159,370

 

Total weighted average basic shares

 

182,756

 

183,164

 

184,598

 

182,817

 

Dilutive securities:

 

 

 

 

 

 

 

 

 

Stock option and stock award programs

 

5,740

 

5,428

 

5,303

 

4,966

 

Total weighted average diluted shares

 

188,496

 

188,592

 

189,901

 

187,783

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.38

 

$

0.38

 

$

0.91

 

$

0.87

 

Diluted

 

$

0.37

 

$

0.37

 

$

0.88

 

$

0.85

 

 

At June 30, 2012, options to purchase 44,340 shares of the Company’s common stock were outstanding but not included in the computation of diluted earnings per share for the nine months ended June 30, 2012 since these options were anti-dilutive. Anti-dilutive options are: (a) out-of-the-money options (options the exercise price of which is greater than the average price per share of the Company’s common stock during the period), and (b) in-the-money options (options the exercise price of which is less than the average price per share of the Company’s common stock during the period) for which the sum of assumed proceeds, including unrecognized compensation expense, exceeds the average price per share for the period. At June 30, 2011, all outstanding options to purchase shares of the Company’s common stock were dilutive.

 

6.   Comprehensive Income and Accumulated Other Comprehensive (Loss) Income

 

Comprehensive income consists of net earnings, foreign currency translation adjustments and deferred gain on interest rate swaps as follows (in thousands):

 

 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net earnings

 

$

69,487

 

$

69,143

 

$

167,434

 

$

159,370

 

Other comprehensive income adjustments:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (a)

 

(10,578

)

3,018

 

(1,483

)

15,033

 

Deferred gain on interest rate swaps (b) 

 

1,027

 

1,160

 

3,947

 

3,997

 

Comprehensive income

 

$

59,936

 

$

73,321

 

$

169,898

 

$

178,400

 

 


(a)          Amounts are net of income tax of $0.2 million for the three and nine months ended June 30, 2012. There were no income tax amounts related to foreign currency translation adjustments recorded in other comprehensive income for the three and nine months ended June 30, 2011.

 

(b)         Amounts are net of income tax of $0.7 million for each of the three months ended June 30, 2012 and 2011; and net of income tax of $2.5 million for each of the nine months ended June 30, 2012 and 2011.

 

13



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

The components of accumulated other comprehensive loss, net of tax, as of June 30, 2012 and September 30, 2011 are as follows (in thousands):

 

 

 

June 30,
2012

 

September 30,
2011

 

Cumulative foreign currency translation adjustments (a)

 

$

(20,207

)

$

(18,724

)

Deferred (losses) on interest rate swaps, net of tax (b) 

 

 

(3,947

)

Total accumulated other comprehensive loss, net of tax

 

$

(20,207

)

$

(22,671

)

 


(a)          Amount is net of income tax of $0.2 million at June 30, 2012.

(b)         Amount is net of income tax of $2.5 million at September 30, 2011. Please see Note 10 for more information about the Company’s interest rate swaps.

 

7.   Share-Based Payments

 

The Company measures the cost of services received from employees, directors and consultants in exchange for an award of equity instruments based on the fair value of the award on the date of grant, and recognizes compensation expense on a straight-line basis over the vesting period or over the period ending on the date a participant becomes eligible for retirement, if earlier.

 

The Company granted approximately 2.0 million and 3.0 million stock options and approximately 32,000 and 199,000 restricted share awards to its employees and consultants during the nine months ended June 30, 2012 and 2011, respectively. Upon issuance of such grants, the Company recognized accelerated share-based compensation expense of $5.3 million and $5.0 million in the nine months ended June 30, 2012 and 2011, respectively, in connection with certain retirement eligible employees who are eligible to continue vesting awards upon retirement under the provisions of the Sally Beauty Holdings, Inc. 2010 Omnibus Incentive Plan (the “2010 Plan”) and certain predecessor share-based compensation plans such as the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan (the “2007 Plan”). In addition, the Company granted approximately 26,000 and 43,000 restricted stock units to its non-employee directors during the nine months ended June 30, 2012 and 2011, respectively.

 

The following table presents the total compensation cost charged against income and included in selling, general and administrative expenses for the periods presented for all share-based compensation arrangements and the related tax benefits recognized in our consolidated statements of earnings (in thousands):

 

 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Share-based compensation expense

 

$

2,825

 

2,462

 

$

13,801

 

$

12,737

 

Income tax benefit related to share-based compensation expense

 

$

674

 

955

 

$

4,933

 

$

4,942

 

 

Stock Options

 

Each option has an exercise price that equals the closing market price of the Company’s common stock on the date of grant and generally has a maximum term of 10 years. Options generally vest ratably over a four-year period and are generally subject to forfeiture until the vesting period is complete, subject to certain retirement provisions contained in the 2010 Plan and certain predecessor share-based compensation plans such as the 2007 Plan.

 

14



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

The following table presents a summary of the activity for the Company’s stock option awards for the nine months ended June 30, 2012:

 

 

 

Number of
Outstanding
Options (in
Thousands)

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term (in
Years)

 

Aggregate
Intrinsic
Value (in
Thousands)

 

Outstanding at September 30, 2011

 

13,778

 

$

8.50

 

6.8

 

$

111,571

 

Granted

 

1,979

 

19.21

 

 

 

 

 

Exercised

 

(2,995

)

7.71

 

 

 

 

 

Forfeited or expired

 

(166

)

11.15

 

 

 

 

 

Outstanding at June 30, 2012

 

12,596

 

$

10.34

 

6.7

 

$

193,992

 

 

 

 

 

 

 

 

 

 

 

Exercisable at June 30, 2012

 

6,556

 

$

8.42

 

5.5

 

$

113,524

 

 

The following table summarizes information about stock options under the Company’s share-based compensation plans at June 30, 2012:

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of
Exercise
Prices

 

Number
Outstanding
at June 30,
2012 (in
Thousands)

 

Weighted
Average
Remaining
Contractual
Term (in
Years)

 

Weighted
Average
Exercise
Price

 

Number
Exercisable
at June 30,
2012 (in
Thousands)

 

Weighted
Average
Exercise
Price

 

$2.00 – 5.24

 

1,786

 

5.6

 

$

4.81

 

1,184

 

$

4.59

 

$7.42 – 19.21

 

10,810

 

6.9

 

11.25

 

5,372

 

9.27

 

Total

 

12,596

 

6.7

 

$

10.34

 

6,556

 

$

8.42

 

 

The Company uses the Black-Scholes option pricing model to value the Company’s stock options for each stock option award. Using this option pricing model, the fair value of each stock option award is estimated on the date of grant. The fair value of the Company’s stock option awards is expensed on a straight-line basis over the vesting period (generally four years) of the stock options or to the date a participant becomes eligible for retirement, if earlier.

 

The weighted average assumptions relating to the valuation of the Company’s stock options are as follows:

 

 

 

Nine Months Ended
June 30,

 

 

 

2012

 

2011

 

Expected life (in years)

 

5.0

 

5.0

 

Expected volatility

 

58.4

%

59.0

%

Risk-free interest rate

 

1.1

%

1.1

%

Dividend yield

 

0.0

%

0.0

%

 

The expected life of options represents the period of time that the options granted are expected to be outstanding and is based on historical experience of employees of the Company who have been granted stock options. The expected volatility used for awards made during the nine months ended June 30, 2012, reflects the average volatility for the Company’s common stock. For awards made prior to the fiscal year 2012, the expected volatility used was derived using the average volatility of both the Company and similar companies (based on industry sector) since it was not practicable to estimate the Company’s expected volatility on a stand-alone basis due to a lack of sufficient trading history. The risk-free interest rate is based on the five-year zero-coupon U.S. Treasury notes as of the date of the grant. Since the Company does not currently expect to pay dividends, the dividend yield used is 0%.

 

15



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

The weighted average fair value of the stock options issued to the Company’s grantees at the date of grant in the nine months ended June 30, 2012 and 2011 was $9.60 and $5.74 per option, respectively. The total intrinsic value of options exercised during the nine months ended June 30, 2012 was $41.0 million. Cash proceeds from these option exercises were $23.1 million and the income tax benefit realized from these option exercises was $14.3 million.

 

At June 30, 2012, approximately $17.1 million of total unrecognized compensation costs related to unvested stock option awards are expected to be recognized over the weighted average period of 2.5 years.

 

Stock Awards

 

Restricted Stock Awards

 

The Company from time to time grants restricted stock awards to employees and consultants under the 2010 Plan. A restricted stock award is an award of shares of the Company’s common stock (which have full voting and dividend rights but are restricted with regard to sale or transfer) the restrictions over which lapse ratably over a specified period of time (generally five years). Restricted stock awards are independent of stock option grants and are generally subject to forfeiture if employment terminates prior to these restrictions lapsing, subject to certain retirement provisions of the 2010 Plan and certain predecessor share-based compensation plans such as the 2007 Plan.

 

The Company expenses the cost of the restricted stock awards, which is determined to equal the fair value of the restricted stock award at the date of grant, on a straight-line basis over the period (the “vesting period”) in which the restrictions on these stock awards lapse (“vesting”) or over the period ending on the date a participant becomes eligible for retirement, if earlier. For these purposes, the fair value of the restricted stock award is determined based on the closing market price of the Company’s common stock on the date of grant.

 

The following table presents a summary of the activity for the Company’s restricted stock awards for the nine months ended June 30, 2012:

 

Restricted Stock Awards

 

Number of
Shares (in
Thousands)

 

Weighted
Average Fair
Value Per Share

 

Weighted
Average
Remaining
Vesting Term
(in Years)

 

Unvested at September 30, 2011

 

445

 

$

9.12

 

3.1

 

Granted

 

32

 

19.21

 

 

 

Vested

 

(144

)

8.70

 

 

 

Forfeited

 

 

 

 

 

Unvested at June 30, 2012

 

333

 

$

10.27

 

2.6

 

 

At June 30, 2012, approximately $1.9 million of total unrecognized compensation costs related to unvested restricted stock awards are expected to be recognized over the weighted average period of 2.6 years.

 

Restricted Stock Units

 

The Company currently grants Restricted Stock Unit awards (“RSU” or “RSUs”), which generally vest less than one year from the date of grant, pursuant to the 2010 Plan. To date, the Company has only granted RSU awards to its non-employee directors. RSUs represent an unsecured promise of the Company to issue shares of common stock of the Company. Upon vesting, such RSUs are generally retained by the Company as deferred stock units that are not distributed until six months after the independent director’s service as a director terminates. RSUs are independent of stock option grants and are generally subject to forfeiture if service terminates prior to the vesting of the units. Participants have no voting rights with respect to unvested RSUs. Under the 2010 Plan, the Company may settle the vested deferred stock units with shares of the Company’s common stock or in cash.

 

The Company expenses the cost of the RSUs, which is determined to be the fair value of the RSUs at the date of grant, on a straight-line basis over the vesting period (generally one year). For these purposes, the fair value of the RSU is determined based on the closing market price of the Company’s common stock on the date of grant.

 

16



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

The following table presents a summary of the activity for the Company’s RSUs for the nine months ended June 30, 2012:

 

Restricted Stock Units

 

Number of
Shares (in
Thousands)

 

Weighted
Average Fair
Value Per Share

 

Weighted
Average
Remaining
Vesting Term
(in Years)

 

Unvested at September 30, 2011

 

 

$

 

 

Granted

 

26

 

19.21

 

 

 

Vested

 

 

 

 

 

Forfeited

 

 

 

 

 

Unvested at June 30, 2012

 

26

 

$

19.21

 

0.3

 

 

At June 30, 2012, approximately $0.1 million of total unrecognized compensation costs related to unvested RSUs are expected to be recognized over the weighted average period of 0.3 years.

 

8.   Goodwill and Intangible Assets

 

The change in the carrying amounts of goodwill by operating segment for the nine months ended June 30, 2012 is as follows (in thousands):

 

 

 

Sally Beauty
Supply

 

Beauty Systems
Group

 

Total

 

Balance at September 30, 2011

 

$

75,536

 

$

430,337

 

$

505,873

 

Additions and purchase price adjustments (a)

 

14,982

 

9,189

 

24,171

 

Foreign currency translation

 

(2,683

)

1,203

 

(1,480

)

Balance at June 30, 2012

 

$

87,835

 

$

440,729

 

$

528,564

 

 


(a)          Please see Note 12 for additional information about businesses acquired.

 

The Company performs its goodwill impairment test during the second quarter of its fiscal year. As permitted, the Company adopted the provisions of ASU 2011-08 in connection with its goodwill impairment test for the fiscal year 2012. There were no goodwill impairment losses recognized in the current or prior periods presented.

 

The following table provides the carrying value for intangible assets with indefinite lives, excluding goodwill, and the gross carrying value and accumulated amortization for intangible assets subject to amortization by operating segment at June 30, 2012 (in thousands):

 

 

 

Sally Beauty
Supply

 

Beauty Systems
Group

 

Total

 

Balance at June 30, 2012:

 

 

 

 

 

 

 

Intangible assets with indefinite lives:

 

 

 

 

 

 

 

Trade names

 

$

26,636

 

$

27,341

 

$

53,977

 

Total

 

26,636

 

27,341

 

53,977

 

Intangible assets subject to amortization:

 

 

 

 

 

 

 

Gross carrying amount

 

26,120

 

106,482

 

132,602

 

Accumulated amortization

 

(9,032

)

(46,750

)

(55,782

)

Net value

 

17,088

 

59,732

 

76,820

 

Total intangible assets, excluding goodwill, net

 

$

43,724

 

$

87,073

 

$

130,797

 

 

As described in Note 12, during the nine months ended June 30, 2012, intangible assets subject to amortization in the amount of $11.8 million were recorded in connection with the Company’s November 2011 acquisition of Kappersservice Floral B.V. and two related companies (together, the “Floral Group”) based on their estimated fair values.

 

17



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

Amortization expense was $3.6 million and $3.1 million for the three months ended June 30, 2012 and 2011, respectively; and $10.3 million and $9.2 million for the nine months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, future amortization expense related to intangible assets subject to amortization is estimated to be as follows (in thousands):

 

Fiscal Year:

 

 

 

2012

 

$

3,430

 

2013

 

12,253

 

2014

 

11,847

 

2015

 

11,318

 

2016

 

10,168

 

Thereafter

 

27,804

 

 

 

$

76,820

 

 

9.   Short-term Borrowings and Long-term Debt

 

Details of long-term debt are as follows (in thousands):

 

 

 

As of
June 30, 2012

 

Maturity
Dates

 

Interest Rates

 

ABL facility

 

$

53,000

 

Nov. 2015

 

(i)      Prime plus (1.25% to 1.75%) or;

 

 

 

 

 

 

 

(ii)     LIBOR plus (2.25% to 2.75%)

 

Senior notes due 2019

 

750,000

 

Nov. 2019

 

6.875%

 

Senior notes due 2022

 

700,000

 

June 2022

 

5.750%

 

Other (a)

 

2,746

 

2012-2015

 

4.05% to 5.79%

 

Total

 

$

1,505,746

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital leases and other

 

$

5,602

 

 

 

 

 

Less: current portion

 

(54,966

)

 

 

 

 

Total long-term debt

 

$

1,456,382

 

 

 

 

 

 


(a)     Represents pre-acquisition debt of Pro-Duo NV and Sinelco Group BVBA (“Sinelco”).

 

The Company, through its subsidiaries (Sally Investment Holdings LLC (“Sally Investment”) and Sally Holdings LLC (“Sally Holdings”)), incurred $1,850.0 million of indebtedness in connection with the Company’s separation from its former parent, Alberto-Culver Company, in November 2006. These borrowings included: (i) drawing on a revolving (asset-based lending (“ABL”)) credit facility in the amount of $70.0 million, (ii) entering into two senior term loan facilities (term loans A and B) in an aggregate amount of $1,070.0 million and (iii) together (jointly and severally) with another of the Company’s indirect subsidiaries, Sally Capital Inc., issuing senior notes in an aggregate amount of $430.0 million and senior subordinated notes in an aggregate amount of $280.0 million. Borrowings under the senior term loan A facility were repaid in full in the fiscal year 2010.

 

In November 2010, Sally Holdings entered into a new $400 million, five-year ABL facility and terminated its prior ABL credit facility (the “prior ABL facility”). The terms of the ABL facility contain a commitment fee of 0.50% on the unused portion of the facility. Borrowings under the ABL facility are secured by substantially all of our assets, those of Sally Investment, a wholly-owned subsidiary of Sally Beauty and the direct parent of Sally Holdings, those of our domestic subsidiaries, those of our Canadian subsidiaries and a pledge of certain intercompany notes. Such borrowings bear interest at Prime plus 1.25% to 1.75% or LIBOR plus 2.25% to 2.75%. In connection with our termination of the prior ABL facility we expensed approximately $1.6 million in unamortized deferred financing costs. This amount is included in interest expense in the Company’s consolidated statements of earnings.

 

In November 2011, Sally Holdings and Sally Capital Inc. (collectively, the “Issuers”), both wholly-owned subsidiaries of the Company, the Company and certain of its domestic subsidiaries entered into an agreement pursuant to which the Issuers sold in a private placement $750.0 million aggregate principal amount of the Issuers’ 6.875% Senior Notes due 2019 (the “senior notes due 2019”). The senior notes due 2019 bear interest at an annual rate of 6.875% and were issued at par. In connection with the issuance of such notes the Company incurred and capitalized financing costs of approximately $15.2 million. These deferred financing costs are included in other assets on our consolidated balance sheets and are being amortized over the term of the senior notes due 2019 using the effective interest method. In June 2012, the Company exchanged the senior notes due 2019 for

 

18



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

notes that are registered pursuant to a registration statement, which was effective May 2012, and otherwise are identical to the senior notes due 2019.

 

In December 2011, the Issuers used the net proceeds from the issuance of the senior notes due 2019: (i) to redeem $430.0 million aggregate principal amount outstanding of the Issuers’ 9.25% senior notes due 2014, (ii) to redeem $275.0 million aggregate principal amount outstanding of the Issuers’ 10.50% senior subordinated notes due 2016 (together with the senior notes due 2014, the “Old Notes”), pursuant to the terms of the indentures governing the Old Notes, and (iii) to pay accrued and unpaid interest on the Old Notes, and fees and expenses incurred in connection with issuance of the senior notes due 2019 and redemption of the Old Notes. In connection with our redemption of the Old Notes we recorded a charge to earnings in the amount of approximately $34.6 million, including approximately $24.4 million in call premiums paid and approximately $10.2 million in unamortized deferred financing costs expensed. This amount is included in interest expense in the Company’s consolidated statements of earnings.

 

In May 2012, the Issuers, the Company and certain of the Company’s domestic subsidiaries entered into an agreement pursuant to which the Issuers sold $700.0 million aggregate principal amount of the Issuers’ 5.75% Senior Notes due 2022 (the “senior notes due 2022”). The senior notes due 2022 bear interest at an annual rate of 5.75%, were issued at par, and are registered securities pursuant to a registration statement filed with the SEC in May 2012. In connection with the issuance of such notes, the Company incurred and capitalized financing costs of approximately $13.0 million. These deferred financing costs are included in other assets on our consolidated balance sheets and are being amortized over the term of the senior notes due 2022 using the effective interest method.

 

Sally Holdings used the net proceeds from the debt offering: (i) to repay in full the aggregate principal amount outstanding (approximately $596.9 million) under its senior term loan B facility due 2013, plus accrued and unpaid interest thereon, (ii) to pay approximately $90.0 million of borrowings outstanding under the ABL facility, and (iii) to pay fees and expenses incurred in connection with the offering. In connection with our repayment of the senior term loan B facility, we expensed approximately $3.2 million in unamortized deferred financing costs. This amount is included in interest expense in the Company’s consolidated statements of earnings.

 

During the first half of its fiscal year 2012 prior to its repayment and termination, the Company had made optional prepayments in the aggregate amount of $100.0 million on the senior term loan B facility. In connection with such prepayments the Company expensed approximately $0.6 million in unamortized deferred financing costs. This amount is included in interest expense in the Company’s consolidated statements of earnings.

 

Borrowings under the ABL facility are secured by substantially all of our assets, those of Sally Investment, those of our domestic subsidiaries, those of our Canadian subsidiaries and a pledge of certain intercompany notes.

 

The senior notes due 2019 and the senior notes due 2022 (hereafter, the “senior notes due 2019 and 2022”) are unsecured obligations of the Issuers and are jointly and severally guaranteed by the Company and Sally Investment, and by each material domestic subsidiary of the Company. Interest on the senior notes due 2019 and 2022 is payable semi-annually, during the Company’s first and third fiscal quarters.

 

The senior notes due 2019 carry optional redemption features whereby the Company has the option to redeem the notes, in whole or in part, on or after November 15, 2017 at par, plus accrued and unpaid interest, if any, and on or after November 15, 2015 at par plus a premium declining ratably to par, plus accrued and unpaid interest, if any. Prior to November 15, 2015, the notes may be redeemed, in whole or in part, at a redemption price equal to par plus a make-whole premium as provided in the indenture, plus accrued and unpaid interest, if any. In addition, on or prior to November 15, 2014, the Company has the right to redeem at par plus a specified premium, plus accrued and unpaid interest, if any, up to 35% of the aggregate principal amount of notes originally issued, subject to certain limitations, with the proceeds from certain kinds of equity offerings, as defined in the indenture.

 

The senior notes due 2022 carry optional redemption features whereby the Company has the option to redeem the notes, in whole or in part, on or after June 1, 2020 at par, plus accrued and unpaid interest, if any, and on or after June 1, 2017 at par plus a premium declining ratably to par, plus accrued and unpaid interest, if any. Prior to June 1, 2017, the notes may be redeemed, in whole or in part, at a redemption price equal to par plus a make-whole premium as provided in the indenture, plus accrued and unpaid interest, if any. In addition, on or prior to June 1, 2015, the Company has the right to redeem at par plus a specified premium, plus accrued and unpaid interest, if any, up to 35% of the aggregate principal amount of notes originally issued, subject to certain limitations, with the proceeds from certain kinds of equity offerings, as defined in the indenture.

 

Maturities of the Company’s long-term debt are as follows as of June 30, 2012 (in thousands):

 

19



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

Twelve months ending June 30:

 

 

 

2013

 

$

54,238

 

2014

 

962

 

2015

 

546

 

2016

 

 

2017

 

 

Thereafter

 

1,450,000

 

 

 

$

1,505,746

 

Capital leases and other

 

5,602

 

Less: current portion

 

(54,966

)

Total

 

$

1,456,382

 

 

We are a holding company and do not have any material assets or operations other than ownership of equity interests of our subsidiaries. The agreements and instruments governing the debt of Sally Holdings and its subsidiaries contain material limitations on their ability to pay dividends and other restricted payments to us which, in turn, constitute material limitations on our ability to pay dividends and other payments to our stockholders.

 

The indentures governing the senior notes due 2019 and 2022 contain terms which restrict the ability of Sally Beauty’s subsidiaries to incur additional indebtedness. However, in addition to certain other material exceptions, the Company may incur additional indebtedness under the indentures if its Consolidated Coverage Ratio, after giving pro forma effect to the incurrence of such indebtedness, exceeds 2.0 to 1.0 (“Incurrence Test”). At June 30, 2012, the Company’s Consolidated Coverage Ratio was approximately 6.1 to 1.0. Consolidated Coverage Ratio is defined as the ratio of (i) Consolidated EBITDA, as defined in the indentures, for the period containing the most recent four consecutive fiscal quarters, to (ii) Consolidated Interest Expense, as defined in the indentures, for such period.

 

The indentures governing the senior notes due 2019 and 2022 restrict Sally Holdings and its subsidiaries from making certain dividends and distributions to equity holders and certain other restricted payments (hereafter, a “Restricted Payment” or “Restricted Payments”), to us. However, the indentures permit the making of such Restricted Payments if, at the time of the making of such Restricted Payment, the Company satisfies the Incurrence Test as described above and the cumulative amount of all Restricted Payments made since the issue date of the applicable senior notes does not exceed the sum of: (a) 50% of Sally Holdings’ and its subsidiaries’ cumulative consolidated net earnings since July 1, 2006, plus (b) the proceeds from the issuance of certain equity securities or conversions of indebtedness to equity, in each case, since the issue date of the applicable senior notes plus (c) the net reduction in investments in unrestricted subsidiaries since the issue date of the applicable senior notes plus (d) the return of capital with respect to any sales or dispositions of certain minority investments since the issue date of the applicable senior notes. Further, in addition to certain other baskets, the indentures permit the Company to make additional Restricted Payments in an unlimited amount if, after giving pro forma effect to the incurrence of any indebtedness to make such Restricted Payment, the Company’s Consolidated Total Leverage Ratio (as defined in the indentures) is less than 3.25 to 1.00. At June 30, 2012, the Company’s Consolidated Total Leverage Ratio was approximately 2.5 to 1.0. Consolidated Total Leverage Ratio is defined as the ratio of (i) Consolidated Total Indebtedness, as defined in the indentures, minus cash and cash equivalents on-hand up to $100.0 million, in each case, as of the most recently-ended fiscal quarter to (ii) Consolidated EBITDA, as defined in the indentures, for the period containing the most recent four consecutive fiscal quarters.

 

In June 2012, the Company, Sally Holdings and the other parties to the ABL facility entered into an amendment (hereafter, “the Amendment”) to the ABL facility which, among other things, relaxed the restrictions regarding the making of Restricted Payments. Under the ABL facility, as amended, Sally Holdings may make Restricted Payments to us if availability under the ABL facility exceeds certain thresholds, and no default then exists under the facility. For Restricted Payments up to $30.0 million during each fiscal year, borrowing availability must exceed the lesser of $80.0 million or 20% of the borrowing base for 45 days prior to such Restricted Payment. For Restricted Payments in excess of that amount, the same borrowing availability must be maintained and the Consolidated Fixed-Charge Coverage Ratio (as defined in the ABL facility) must equal or exceed 1.2 to 1.0 (up from 1.1 to 1.0 prior to the Amendment). Consolidated Fixed-Charge Coverage Ratio is defined as the ratio of (i) Consolidated EBITDA, as defined in the ABL facility, minus certain unfinanced capital expenditures and tax payments to (ii) fixed charges, as specified in the ABL facility. However, pursuant to the Amendment, the calculation of the Consolidated Fixed-Charge Coverage Ratio now excludes from fixed charges any Restricted Payments. Further, the Amendment increased the level of the Consolidated Fixed-Charge Coverage Ratio that the Company must satisfy to 1.1 to 1.0 (from 1.0 to 1.0) during any period that availability under the ABL facility is less than the greater of $40.0 million or 15% of the borrowing base. As of June 30, 2012, the Consolidated Fixed-Charge Coverage Ratio was approximately 3.2 to 1.0.

 

When used in this quarterly report, the phrase “Consolidated EBITDA” is intended to have the meaning ascribed to such phrase in the ABL facility or the indentures governing the senior notes due 2019 and 2022, as appropriate. EBITDA is not a recognized

 

20



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

measurement under GAAP and should not be considered a substitute for financial performance and liquidity measures determined in accordance with GAAP, such as net earnings, operating earnings and operating cash flows.

 

The ABL facility and the indentures governing the senior notes due 2019 and 2022 contain other covenants regarding restrictions on assets dispositions, granting of liens and security interests, prepayment of certain indebtedness and other matters and customary events of default, including customary cross-default and/or cross-acceleration provisions. As of June 30, 2012, all the net assets of our consolidated subsidiaries were unrestricted from transfer under our credit arrangements.

 

10.    Derivative Instruments and Hedging Activities

 

Risk Management Objectives of Using Derivative Instruments

 

The Company is exposed to a wide variety of risks, including risks arising from changing economic conditions. The Company manages its exposure to certain economic risks (including liquidity, credit risk, and changes in interest rates and in foreign currency exchange rates) primarily (a) by closely managing its cash flows from operating and investing activities and the amounts and sources of its debt obligations; (b) by assessing periodically the creditworthiness of its business partners; and (c) through the use of derivative instruments from time to time (including interest rate swaps, and foreign currency options, collars and forwards) by Sally Holdings.

 

The Company from time to time has used interest rate swaps, as part of its overall economic risk management strategy, to add stability to the interest payments due in connection with its debt obligations. Interest payments related to the senior term loans were impacted by changes in LIBOR.

 

The Company from time to time uses foreign currency options, collars and forwards, as part of its overall economic risk management strategy, to fix the amount of certain foreign assets and obligations relative to its functional and reporting currency (the U.S. dollar) or to add stability to cash flows resulting from its net investments (including intercompany notes not permanently invested) and earnings denominated in foreign currencies. The Company’s foreign currency exposures at times offset each other thus providing a natural hedge against its foreign currency risk. In connection with the remaining foreign currency risk, the Company uses foreign currency options, collars and forwards to effectively fix the foreign currency exchange rate applicable to specific anticipated foreign currency-denominated cash flows thus limiting the potential fluctuations in such cash flows as a result of foreign currency market movements.

 

As of June 30, 2012, the Company did not purchase or hold any derivative instruments for trading or speculative purposes.

 

Designated Cash Flow Hedges

 

In 2008, Sally Holdings entered into certain interest rate swap agreements with an aggregate notional amount of $300 million. These agreements expired in May 2012 and were designated and qualified as effective cash flow hedges, in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”). Accordingly, changes in the fair value of these derivative instruments (which were adjusted quarterly) were recorded, net of income tax, in accumulated other comprehensive (loss) income (“OCI”) until the swap agreements expired. Amounts reported in OCI related to interest rate swaps were reclassified into interest expense, as a yield adjustment, in the same period in which interest on hedged variable-rate debt obligations affected earnings. Interest expense resulting from such reclassifications was $1.7 million and $2.6 million during the three months ended June 30, 2012 and 2011, respectively; and $6.7 million and $7.6 million during the nine months ended June 30, 2012 and 2011, respectively. There were no amounts remaining in OCI at June 30, 2012.

 

Non-designated Cash Flow Hedges

 

The Company uses foreign currency options and collars including, at June 30, 2012, collars with an aggregate notional amount of $3.6 million to manage the exposure to the U.S. dollar resulting from certain of our Sinelco Group subsidiaries’ purchases of merchandise from third-party suppliers. Sinelco’s functional currency is the Euro. The foreign currency collar agreements held by the Company at June 30, 2012, have contractual Euro to U.S. dollar exchange rates between 1.4000 and 1.4612, are with a single counterparty and expire in equal monthly amounts through September 2012.

 

In addition, the Company currently uses foreign currency forwards to mitigate its exposure to changes in foreign currency exchange rates in connection with certain intercompany balances not permanently invested. At June 30, 2012, we hold: (a) a foreign currency forward which enables us to sell approximately €30.4 million ($38.4 million, at the June 30, 2012 exchange rate) at the contractual exchange rate of 1.2469, (b) a foreign currency forward which enables us to sell approximately $2.3 million Canadian dollars ($2.2 million, at the June 30, 2012 exchange rate) at the contractual exchange rate of 1.0189, (c) a foreign currency forward which enables us to buy approximately $4.6 million Canadian dollars ($4.5 million, at the June 30, 2012 exchange rate) at the contractual exchange rate of 1.0278, (d) a foreign currency forward which enables us to sell approximately 28.8 million Mexican pesos ($2.2 million, at the June 30, 2012 exchange rate) at the contractual exchange rate of

 

21



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

13.3941 and (e) a foreign currency forward which enables us to buy approximately £0.6 million ($0.9 million, at the June 30, 2012 exchange rate) at the contractual exchange rate of 1.5557. All foreign currency forwards held by the Company at June 30, 2012 are with a single counterparty other than the counterparty on the foreign currency collar agreements discussed above, and expire on or before September 30, 2012.

 

The Company’s foreign currency derivatives are not designated as hedges and do not currently meet the hedge accounting requirements of ASC 815. Accordingly, the changes in fair value of these derivative instruments, which are adjusted quarterly, are recorded in our consolidated statements of earnings. Selling, general and administrative expenses reflect net gains of $2.2 million and net losses of $0.3 million for the three months ended June 30, 2012 and 2011, respectively; and net gains of $2.6 million and net losses of $0.7 million for the nine months ended June 30, 2012 and 2011, respectively, including marked-to-market adjustments, in connection with all of the Company’s foreign currency derivatives.

 

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of June 30, 2012 (in thousands):

 

Tabular Disclosure of Fair Values of Derivative Instruments

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

As of June 30, 2012

 

As of June 30, 2012

 

 

 

Balance Sheet
Location

 

Fair Value

 

Balance Sheet
Location

 

Fair Value

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

Other assets

 

$

 

Accrued liabilities

 

$

 

Total derivatives designated as hedging instruments

 

 

 

$

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign Currency Collars and Forwards

 

Prepaid expenses

 

$

370

 

Accrued liabilities

 

$

603

 

Total derivatives not designated as hedging instruments

 

 

 

$

370

 

 

 

$

603

 

 

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of September 30, 2011 (in thousands):

 

Tabular Disclosure of Fair Values of Derivative Instruments

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

As of September 30, 2011

 

As of September 30, 2011

 

 

 

Balance Sheet
Location

 

Fair Value

 

Balance Sheet
Location

 

Fair Value

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

Other assets

 

$

 

Accrued liabilities

 

$

6,450

 

Total derivatives designated as hedging instruments

 

 

 

$

 

 

 

$

6,450

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments: 

 

 

 

 

 

 

 

 

 

Foreign Currency Collars and Forwards

 

Prepaid expenses

 

$

1,104

 

Accrued liabilities

 

$

528

 

Total derivatives not designated as hedging instruments

 

 

 

$

1,104

 

 

 

$

528

 

 

22



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

The table below presents the effect of the Company’s derivative financial instruments on the statements of earnings for the three months ended June 30, 2012 (in thousands):

 

Tabular Disclosure of the Effect of Derivative Instruments on the

Statement of Earnings for the

Three Months Ended June 30, 2012

 

Derivatives in Cash Flow
Hedging Relationships

 

Amount of
Gain or
(Loss)
Recognized
in OCI on
Derivative
(Effective
Portion),
net of tax

 

Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)

 

Amount of
Gain or (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

 

Location of Gain or
(Loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)

 

Amount of Gain or
(Loss) Recognized
in Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

 

Interest Rate Swaps

 

$

1,027

 

Interest expense

 

$

(1,670

)

Interest expense

 

$

 

 

Derivatives Not Designated as Hedging
Instruments

 

Location of Gain or
(Loss) Recognized in
Income on Derivative

 

Amount of
Gain or (Loss)
Recognized in
Income on
Derivative

 

 

 

 

 

Foreign Currency Options, Collars and Forwards

 

Selling, general and administrative expenses

 

$

2,239

 

 

 

 

 

Total derivatives not designated as hedging instruments

 

 

 

$

2,239

 

 

 

 

 

 

The table below presents the effect of the Company’s derivative financial instruments on the statements of earnings for the three months ended June 30, 2011 (in thousands):

 

Tabular Disclosure of the Effect of Derivative Instruments on the

Statement of Earnings for the

Three Months Ended June 30, 2011

 

Derivatives in Cash Flow
Hedging Relationships

 

Amount of
Gain or
(Loss)
Recognized
in OCI on
Derivative
(Effective
Portion),
net of tax

 

Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)

 

Amount of
Gain or (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

 

Location of Gain or
(Loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

 

Amount of Gain or
(Loss) Recognized
in Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

 

Interest Rate Swaps

 

$

1,160

 

Interest expense

 

$

(2,551

)

Interest expense

 

$

 

 

Derivatives Not Designated as Hedging
Instruments

 

Location of Gain or
(Loss) Recognized in
Income on Derivative

 

Amount of
Gain or (Loss)
Recognized in
Income on
Derivative

 

 

 

 

 

Foreign Currency Options and Forwards

 

Selling, general and administrative expenses

 

$

(305

)

 

 

 

 

Total derivatives not designated as hedging instruments

 

 

 

$

(305

)

 

 

 

 

 

23



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

The table below presents the effect of the Company’s derivative financial instruments on the statements of earnings for the nine months ended June 30, 2012 (in thousands):

 

Tabular Disclosure of the Effect of Derivative Instruments on the

Statement of Earnings for the

Nine Months Ended June 30, 2012

 

Derivatives in Cash Flow
Hedging Relationships

 

Amount of
Gain or
(Loss)
Recognized
in OCI on
Derivative
(Effective
Portion),
net of tax

 

Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)

 

Amount of
Gain or (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

 

Location of Gain or
(Loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)

 

Amount of Gain or
(Loss) Recognized
in Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

 

Interest Rate Swaps

 

$

3,947

 

Interest expense

 

$

(6,731

)

Interest expense

 

$

 

 

Derivatives Not Designated as Hedging
Instruments

 

Location of Gain or
(Loss) Recognized in
Income on Derivative

 

Amount of
Gain or (Loss)
Recognized in
Income on
Derivative

 

 

 

 

 

Foreign Currency Options, Collars and Forwards

 

Selling, general and administrative expenses

 

$

2,611

 

 

 

 

 

Total derivatives not designated as hedging instruments

 

 

 

$

2,611

 

 

 

 

 

 

The table below presents the effect of the Company’s derivative financial instruments on the statements of earnings for the nine months ended June 30, 2011 (in thousands):

 

Tabular Disclosure of the Effect of Derivative Instruments on the

Statement of Earnings for the

Nine Months Ended June 30, 2011

 

Derivatives in Cash Flow
Hedging Relationships

 

Amount of
Gain or
(Loss)
Recognized
in OCI on
Derivative
(Effective
Portion),
net of tax

 

Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)

 

Amount of
Gain or (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

 

Location of Gain or
(Loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

 

Amount of Gain or
(Loss) Recognized
in Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

 

Interest Rate Swaps

 

$

3,997

 

Interest expense

 

$

(7,584

)

Interest expense

 

$

 

 

Derivatives Not Designated as Hedging
Instruments

 

Location of Gain or
(Loss) Recognized in
Income on Derivative

 

Amount of
Gain or (Loss)
Recognized in
Income on
Derivative

 

 

 

 

 

Foreign Currency Options and Forwards

 

Selling, general and administrative expenses

 

$

(714

)

 

 

 

 

Total derivatives not designated as hedging instruments

 

 

 

$

(714

)

 

 

 

 

 

24



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

Credit-risk-related Contingent Features

 

The Company’s foreign operations expose the Company to fluctuations in foreign currency exchange rates and foreign interest rates. These fluctuations may impact, among other things, the amount of the Company’s future cash flows in terms of the functional currencies of the Company and certain of its foreign subsidiaries. The Company currently uses foreign currency collars to manage the exposure to certain non-Euro currencies resulting from our Sinelco Group subsidiaries’ purchases of merchandise from third-party suppliers. Sinelco’s functional currency is the Euro.

 

In addition, at June 30, 2012, Sally Holdings held certain foreign currency forward agreements which expire on or before September 30, 2012. These derivative instruments are intended to mitigate the Company’s exposure to changes in foreign currency exchange rates in connection with certain non-U.S. dollar denominated intercompany balances not permanently invested. The Company’s functional currency is the U.S. dollar.

 

The counterparties to all our derivative instruments are deemed by the Company to be of substantial resources and strong creditworthiness. However, these transactions result in exposure to credit risk in the event of default by a counterparty. The financial crisis affecting the banking systems and financial markets in recent years resulted in many well-known financial institutions becoming less creditworthy or having diminished liquidity which could expose us to an increased level of counterparty credit risk. In the event that a counterparty defaults in its obligation under our derivative instruments, we could incur substantial financial losses. However, at the present time, no such losses are deemed probable.

 

11.   Income Taxes

 

The Company and its subsidiaries file consolidated income tax returns in the U.S. federal jurisdiction and some state jurisdictions.

 

In January 2012, the IRS concluded the field work associated with their examination of the Company’s consolidated federal income tax returns for the fiscal years ended September 30, 2007 and 2008 and issued their examination report. The Company is appealing certain disputed items and it does not anticipate the ultimate resolution of these items to have a material impact on the Company’s financial statements.

 

The IRS is currently conducting an examination of the Company’s consolidated federal income tax returns for the fiscal years ended September 30, 2009, 2010 and 2011. The IRS had previously audited the Company’s consolidated federal income tax returns through the tax year ended September 30, 2006, thus our statute remains open from the year ended September 30, 2007 forward. Our foreign subsidiaries are impacted by various statutes of limitations, which are generally open from 2004 forward. Generally, states’ statutes in the United States are open for tax reviews from 2005 forward.

 

12.   Business Combinations

 

On November 1, 2011, the Company acquired the Floral Group for approximately €22.8 million (approximately $31.2 million), subject to certain adjustments. The Floral Group is a distributor of professional beauty products with 19 stores located in the Netherlands. The results of operations of the Floral Group are included in the Company’s consolidated financial statements subsequent to the acquisition date. The assets acquired and liabilities assumed were recorded at their respective fair values at the acquisition date. Goodwill of $15.0 million (which is not expected to be deductible for tax purposes) and intangible assets subject to amortization of $11.8 million were recorded as a result of this acquisition based on their estimated fair values. The acquisition was funded with cash from operations and with borrowings on our ABL facility in the amount of approximately $17.0 million. In addition, during the nine months ended June 30, 2012, the Company completed several other individually immaterial acquisitions at an aggregate cost of approximately $12.4 million and recorded additional goodwill in the amount of $9.2 million (the majority of which is expected to be deductible for tax purposes) in connection with such acquisitions. Generally, we funded these acquisitions with cash from operations. The assets acquired and liabilities assumed in connection with these acquisitions were recorded based on their respective fair values at the acquisition date.

 

25



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

13.   Business Segments

 

The Company’s business is organized into two separate segments: (i) Sally Beauty Supply, a domestic and international chain of cash and carry retail stores which offers professional beauty supplies to both salon professionals and retail customers primarily in North America, Puerto Rico, and parts of South America and Europe and (ii) BSG, including its franchise-based business Armstrong McCall, a full service beauty supply distributor which offers professional brands of beauty products directly to salons and salon professionals through its own sales force and professional-only stores (including franchise stores) in generally exclusive geographical territories in North America, Puerto Rico and parts of Europe.

 

Sales between segments, which were eliminated in consolidation, were not material during the nine months ended June 30, 2012 and 2011. Segment data for the three and nine months ended June 30, 2012 and 2011 is as follows (in thousands):

 

 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales:

 

 

 

 

 

 

 

 

 

Sally Beauty Supply

 

$

553,419

 

$

517,189

 

$

1,643,749

 

$

1,489,040

 

BSG

 

333,572

 

319,387

 

997,338

 

942,905

 

Total

 

$

886,991

 

$

836,576

 

$

2,641,087

 

$

2,431,945

 

Earnings before provision for income taxes:

 

 

 

 

 

 

 

 

 

Segment operating profit:

 

 

 

 

 

 

 

 

 

Sally Beauty Supply

 

$

117,622

 

$

103,251

 

$

330,023

 

$

280,748

 

BSG (a) 

 

46,667

 

56,694

 

135,590

 

125,363

 

Segment operating profit

 

164,289

 

159,945

 

465,613

 

406,111

 

Unallocated expenses (a)(b)

 

(24,917

)

(21,232

)

(70,318

)

(59,094

)

Share-based compensation expense

 

(2,825

)

(2,462

)

(13,801

)

(12,737

)

Interest expense (c)

 

(26,925

)

(27,741

)

(113,240

)

(85,058

)

Earnings before provision for income taxes

 

$

109,622

 

$

108,510

 

$

268,254

 

$

249,222

 

 


(a)            For the three and nine months ended June 30, 2011, consolidated operating earnings reflect a net favorable impact of $21.3 million, including a $27.0 million credit from a litigation settlement and certain non-recurring charges of $5.7 million. This net benefit of $21.3 million is reflected in the BSG segment and in unallocated expenses in the amount of $19.0 million and $2.3 million, respectively.

(b)           Unallocated expenses consist of corporate and shared costs.

(c)            For the three and nine months ended June 30, 2012, interest expense includes losses on extinguishment of debt in the aggregate amount of $3.2 million and $37.8 million, respectively, in connection with the Company’s redemption of its senior notes due 2014 and senior subordinated notes due 2016, and repayment of its senior term loan B with the net proceeds of the Company’s new senior notes due 2019 and senior notes due 2022.

 

26



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

14.   Guarantor and Non-Guarantor Condensed Consolidated Financial Statements

 

The following condensed consolidating financial information presents the condensed consolidated balance sheets as of June 30, 2012 and September 30, 2011, the condensed consolidated statements of earnings for the three and nine months ended June 30, 2012 and 2011, and the condensed consolidated statements of cash flows for the nine months ended June 30, 2012 and 2011 of: (i) Sally Beauty Holdings, Inc., or the “Parent;” (ii) Sally Holdings LLC and Sally Capital Inc., or the “Issuers;” (iii) the guarantor subsidiaries; (iv) the non-guarantor subsidiaries; (v) elimination entries necessary for consolidation purposes; and (vi) Sally Beauty on a consolidated basis.

 

Investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions.  Separate financial statements and other disclosures with respect to the subsidiary guarantors have not been provided as management believes the following information is sufficient, as guarantor subsidiaries are 100 percent indirectly owned by the Parent and all guarantees are full and unconditional. Additionally, substantially all of the assets of the guarantor subsidiaries are pledged under the ABL facility and consequently may not be available to satisfy the claims of general creditors.

 

27



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidating Balance Sheet

June 30, 2012

(In thousands)

 

 

 

Parent

 

Sally
Holdings
LLC and
Sally Capital
Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Consolidating
Eliminations

 

Sally Beauty
Holdings,
Inc. and
Subsidiaries

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

 

$

21,952

 

$

32,022

 

$

 

$

53,974

 

Trade accounts and accounts receivable, other, less allowance for doubtful accounts

 

1

 

 

66,722

 

34,178

 

 

100,901

 

Due from affiliates

 

 

2

 

898,393

 

2,651

 

(901,046

)

 

Inventory

 

 

 

542,558

 

176,437

 

 

718,995

 

Prepaid expenses

 

1,647

 

81

 

11,403

 

13,807

 

 

26,938

 

Deferred income tax assets, net

 

(346

)

 

31,661

 

(2,738

)

 

28,577

 

Property and equipment, net

 

 

 

133,354

 

56,392

 

 

189,746

 

Investment in subsidiaries

 

(106,646

)

2,103,078

 

339,040

 

 

(2,335,472

)

 

Goodwill and other intangible assets, net

 

 

 

478,233

 

181,128

 

 

659,361

 

Other assets

 

 

29,111

 

1,052

 

4,846

 

 

35,009

 

Total assets

 

$

(105,344

)

$

2,132,272

 

$

2,524,368

 

$

498,723

 

$

(3,236,518

)

$

1,813,501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ (Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

 

$

213,397

 

$

53,355

 

$

 

$

266,752

 

Due to affiliates

 

109,867

 

719,687

 

2,651

 

68,841

 

(901,046

)

 

Accrued liabilities

 

454

 

12,348

 

119,396

 

25,301

 

 

157,499

 

Income taxes payable

 

(12,292

)

4,534

 

4,596

 

3,806

 

 

644

 

Long-term debt

 

 

1,503,000

 

272

 

8,076

 

 

1,511,348

 

Other liabilities

 

 

 

21,343

 

1,589

 

 

22,932

 

Deferred income tax liabilities, net

 

(1,412

)

(651

)

59,635

 

(1,285

)

 

56,287

 

Total liabilities

 

96,617

 

2,238,918

 

421,290

 

159,683

 

(901,046

)

2,015,462

 

Total stockholders’ (deficit) equity

 

(201,961

)

(106,646

)

2,103,078

 

339,040

 

(2,335,472

)

(201,961

)

Total liabilities and stockholders’ (deficit) equity

 

$

(105,344

)

$

2,132,272

 

$

2,524,368

 

$

498,723

 

$

(3,236,518

)

$

1,813,501

 

 

28



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidating Balance Sheet

September 30, 2011

(In thousands)

 

 

 

Parent

 

Sally
Holdings
LLC and
Sally Capital
Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Consolidating
Eliminations

 

Sally Beauty
Holdings,
Inc. and
Subsidiaries

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

 

$

22,583

 

$

40,898

 

$

 

$

63,481

 

Trade accounts and accounts receivable, other, less allowance for doubtful accounts

 

 

 

62,749

 

32,777

 

 

95,526

 

Due from affiliates

 

59,249

 

3

 

763,741

 

3,597

 

(826,590

)

 

Inventory

 

 

 

505,893

 

159,353

 

 

665,246

 

Prepaid expenses

 

1,233

 

63

 

11,397

 

13,667

 

 

26,360

 

Deferred income tax assets, net

 

(346

)

 

31,661

 

(2,780

)

 

28,535

 

Property and equipment, net

 

1

 

 

130,165

 

52,323

 

 

182,489

 

Investment in subsidiaries

 

(281,690

)

1,862,684

 

331,346

 

 

(1,912,340

)

 

Goodwill and other intangible assets, net

 

 

 

476,206

 

159,325

 

 

635,531

 

Other assets

 

 

20,411

 

5,650

 

5,371

 

 

31,432

 

Total assets

 

$

(221,553

)

$

1,883,161

 

$

2,341,391

 

$

464,531

 

$

(2,738,930

)

$

1,728,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ (Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

2

 

$

 

$

204,300

 

$

57,812

 

$

 

$

262,114

 

Due to affiliates

 

 

728,546

 

62,846

 

35,198

 

(826,590

)

 

Accrued liabilities

 

380

 

33,165

 

124,888

 

27,076

 

 

185,509

 

Income taxes payable

 

(1,679

)

4,438

 

2,453

 

4,167

 

 

9,379

 

Long-term debt

 

 

1,401,855

 

340

 

10,920

 

 

1,413,115

 

Other liabilities

 

 

 

24,975

 

1,179

 

 

26,154

 

Deferred income tax liabilities, net

 

(1,274

)

(3,153

)

58,905

 

(3,167

)

 

51,311

 

Total liabilities

 

(2,571

)

2,164,851