sbh-10q_20180630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2018

-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    No 

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    No 

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

 

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

 

Smaller reporting company

 

(Do not check if a smaller reporting company)

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act.

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

As of July 27, 2018, there were 120,140,854 shares of the issuer’s common stock outstanding.

 

 

 

 


TABLE OF CONTENTS

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

6

Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

28

Item 3. Quantitative And Qualitative Disclosures About Market Risk

34

Item 4. Controls And Procedures

34

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

35

Item 1a. Risk Factors

35

Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds

35

Item 3. Defaults Upon Senior Securities

35

Item 4. Mine Safety Disclosures

35

Item 5. Other Information

35

Item 6. Exhibits

36

 

 


2


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:

 

anticipating and effectively responding to changes in consumer and professional stylist preferences and buying trends in a timely manner;

 

the success of our strategic initiatives, including our store refresh program and increased marketing efforts, to enhance the customer experience, attract new customers, drive brand awareness and improve customer loyalty;

 

our ability to successfully implement our long-term strategic and growth initiatives;

 

our ability to efficiently manage and control our costs and the success of our cost control plans, including our recent restructuring plans;

 

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

 

the timing and acceptance of new product introductions;

 

shifts in the mix of products sold during any period;

 

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;

 

our dependence upon manufacturers who have developed or could develop their own distribution businesses which compete directly with ours;

 

the possibility of material interruptions in the supply of products by our third‑party manufacturers or distributors or increases in the prices of the products we purchase from our third‑party manufacturers or distributors;

 

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

 

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

 

the success of our e-commerce businesses;

 

diversion of professional products sold by Beauty Systems Group to mass retailers or other unauthorized resellers;

 

the operational and financial performance of our Armstrong McCall, L.P. franchise‑based business, which we refer to as Armstrong McCall;

 

successfully identifying acquisition candidates and successfully completing and integrating desirable acquisitions;

 

opening and operating new stores profitably;

 

the volume of traffic to our stores;

 

the challenges of conducting business outside the United States;

 

the impact of Britain’s separation from the European Union and related or other disruptive events in the United Kingdom, the European Union or other geographies in which we conduct business;

 

rising labor and rental costs;

 

protecting our intellectual property rights, particularly our trademarks;

 

the risk that our products may infringe on the intellectual property rights of others;

 

successfully updating and integrating our information technology systems;

 

disruption in our information technology systems;

 

a significant data security breach, including misappropriation of our customers’, employees’ or suppliers’ confidential information, and the potential costs related thereto;

 

the costs and diversion of management’s attention required to investigate and remediate a data security breach and to continuously upgrade our information technology security systems to address evolving cyber-security threats;

3


 

the ultimate determination of the extent or scope of the potential liabilities relating to our past or any future data security incidents;

 

our ability to attract and retain highly skilled management and other personnel;

 

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;

 

our substantial indebtedness;

 

the possibility that we may incur substantial additional debt, including secured debt, in the future;

 

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

 

changes in interest rates increasing the cost of servicing or refinancing our debt; and

 

the costs and effects of litigation.

The events described in the forward-looking statements might not occur or 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.

 

4


WHERE YOU CAN FIND MORE INFORMATION

Our quarterly financial results and other important information are available by calling our Investor Relations Department at (940) 297-3877.

We maintain 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 Securities and Exchange Commission (“SEC”). The information contained on this website should not be considered to be a part of this or any other report filed with or furnished to the SEC.

 

5


PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements.

The following condensed consolidated balance sheets as of June 30, 2018 and September 30, 2017, the condensed consolidated statements of earnings and condensed consolidated statements of comprehensive income for the three and nine months ended June 30, 2018 and 2017, and the condensed consolidated statements of cash flows for the nine months ended June 30, 2018 and 2017 are those of Sally Beauty Holdings, Inc. and its subsidiaries.

6


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value data)

 

 

 

June 30,

2018

 

 

September 30,

2017

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

76,855

 

 

$

63,759

 

Trade accounts receivable, net

 

 

48,682

 

 

 

46,986

 

Accounts receivable, other

 

 

45,903

 

 

 

45,255

 

Inventory

 

 

950,978

 

 

 

930,855

 

Other current assets

 

 

42,089

 

 

 

55,223

 

Total current assets

 

 

1,164,507

 

 

 

1,142,078

 

Property and equipment, net of accumulated depreciation of $593,545 at

   June 30, 2018 and $546,061 at September 30, 2017

 

 

296,614

 

 

 

313,717

 

Goodwill

 

 

536,111

 

 

 

537,791

 

Intangible assets, excluding goodwill, net of accumulated amortization of

   $130,057 at June 30, 2018 and $121,550 at September 30, 2017

 

 

75,738

 

 

 

80,305

 

Other assets

 

 

22,742

 

 

 

25,116

 

Total assets

 

$

2,095,712

 

 

$

2,099,007

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

68,992

 

 

$

96,082

 

Accounts payable

 

 

310,488

 

 

 

307,752

 

Accrued liabilities

 

 

166,505

 

 

 

166,527

 

Income taxes payable

 

 

3,148

 

 

 

2,233

 

Total current liabilities

 

 

549,133

 

 

 

572,594

 

Long-term debt

 

 

1,769,314

 

 

 

1,771,853

 

Other liabilities

 

 

33,774

 

 

 

20,140

 

Deferred income tax liabilities, net

 

 

69,700

 

 

 

98,036

 

Total liabilities

 

 

2,421,921

 

 

 

2,462,623

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized 500,000 shares; 120,226 and

   129,710 shares issued and 119,882 and 129,585 shares outstanding at

   June 30, 2018 and September 30, 2017, respectively

 

 

1,199

 

 

 

1,296

 

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

 

 

 

 

 

 

Additional paid-in capital

 

 

 

 

 

 

Accumulated deficit

 

 

(235,401

)

 

 

(283,076

)

Accumulated other comprehensive loss, net of tax

 

 

(92,007

)

 

 

(81,836

)

Total stockholders’ deficit

 

 

(326,209

)

 

 

(363,616

)

Total liabilities and stockholders’ deficit

 

$

2,095,712

 

 

$

2,099,007

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales

 

$

996,283

 

 

$

998,043

 

 

$

2,966,568

 

 

$

2,964,122

 

Cost of goods sold

 

 

502,913

 

 

 

495,404

 

 

 

1,500,247

 

 

 

1,481,669

 

Gross profit

 

 

493,370

 

 

 

502,639

 

 

 

1,466,321

 

 

 

1,482,453

 

Selling, general and administrative expenses

 

 

378,598

 

 

 

367,247

 

 

 

1,118,345

 

 

 

1,101,355

 

Restructuring charges

 

 

12,544

 

 

 

5,054

 

 

 

24,513

 

 

 

14,265

 

Operating earnings

 

 

102,228

 

 

 

130,338

 

 

 

323,463

 

 

 

366,833

 

Interest expense

 

 

24,501

 

 

 

26,969

 

 

 

73,779

 

 

 

80,616

 

Earnings before provision for income taxes

 

 

77,727

 

 

 

103,369

 

 

 

249,684

 

 

 

286,217

 

Provision for income taxes

 

 

19,501

 

 

 

36,830

 

 

 

46,823

 

 

 

106,860

 

Net earnings

 

$

58,226

 

 

$

66,539

 

 

$

202,861

 

 

$

179,357

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.48

 

 

$

0.49

 

 

$

1.63

 

 

$

1.28

 

Diluted

 

$

0.48

 

 

$

0.49

 

 

$

1.62

 

 

$

1.28

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

120,901

 

 

 

135,450

 

 

 

124,331

 

 

 

139,888

 

Diluted

 

 

121,673

 

 

 

136,159

 

 

 

125,111

 

 

 

140,634

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

8


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net earnings

 

$

58,226

 

 

$

66,539

 

 

$

202,861

 

 

$

179,357

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(22,168

)

 

 

17,686

 

 

 

(11,986

)

 

 

7,044

 

Interest rate caps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair value

 

 

434

 

 

 

 

 

 

2,555

 

 

 

 

Income taxes related to changes in fair value

 

 

(126

)

 

 

 

 

 

(740

)

 

 

 

Other comprehensive income (loss), net of tax

 

 

(21,860

)

 

 

17,686

 

 

 

(10,171

)

 

 

7,044

 

Total comprehensive income

 

$

36,366

 

 

$

84,225

 

 

$

192,690

 

 

$

186,401

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

9


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended June 30,

 

 

 

2018

 

 

2017

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

202,861

 

 

$

179,357

 

Adjustments to reconcile net earnings to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

81,428

 

 

 

83,972

 

Share-based compensation expense

 

 

8,237

 

 

 

8,590

 

Amortization of deferred financing costs

 

 

2,842

 

 

 

2,364

 

Loss on extinguishment of debt

 

 

876

 

 

 

 

Deferred income taxes

 

 

(25,132

)

 

 

11,325

 

Changes in (exclusive of effects of acquisitions):

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(2,171

)

 

 

90

 

Accounts receivable, other

 

 

(914

)

 

 

(4,185

)

Inventory

 

 

(24,119

)

 

 

(36,221

)

Other current assets

 

 

12,973

 

 

 

5,355

 

Other assets

 

 

341

 

 

 

622

 

Accounts payable and accrued liabilities

 

 

10,180

 

 

 

(26,685

)

Income taxes payable

 

 

801

 

 

 

886

 

Other liabilities

 

 

13,727

 

 

 

(2,623

)

Net cash provided by operating activities

 

 

281,930

 

 

 

222,847

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Payments for property and equipment, net

 

 

(62,171

)

 

 

(66,529

)

Acquisitions, net of cash acquired

 

 

(9,175

)

 

 

 

Net cash used by investing activities

 

 

(71,346

)

 

 

(66,529

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

369,319

 

 

 

296,500

 

Repayments of long-term debt

 

 

(401,222

)

 

 

(215,519

)

Debt issuance costs

 

 

(1,151

)

 

 

 

Payments for common stock repurchased

 

 

(164,838

)

 

 

(286,995

)

Proceeds from exercises of stock options

 

 

1,317

 

 

 

16,941

 

Net cash used by financing activities

 

 

(196,575

)

 

 

(189,073

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

(913

)

 

 

233

 

Net increase (decrease) in cash and cash equivalents

 

 

13,096

 

 

 

(32,522

)

Cash and cash equivalents, beginning of period

 

 

63,759

 

 

 

86,622

 

Cash and cash equivalents, end of period

 

$

76,855

 

 

$

54,100

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

83,344

 

 

$

103,493

 

Income taxes paid

 

$

53,559

 

 

$

84,319

 

Capital expenditures incurred but not paid

 

$

3,264

 

 

$

1,200

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

10


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

1.   Basis of Presentation

The condensed consolidated interim financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC, although we believe that the disclosures made are adequate to make the information not misleading. These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Sally Beauty Holdings, Inc. and its consolidated subsidiaries’ (“Sally Beauty” or the “Company” or “we”) Annual Report on Form 10-K for the fiscal year ended September 30, 2017. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, these condensed consolidated interim financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly our consolidated financial position as of June 30, 2018 and September 30, 2017, our consolidated results of operations and consolidated comprehensive income for the three and nine months ended June 30, 2018 and 2017, and our consolidated cash flows for the nine months ended June 30, 2018 and 2017.

The condensed consolidated interim financial statements included herein have been prepared on a going concern basis of accounting. Each quarter, management evaluates, based on relevant conditions and events, our ability to continue as a going concern for at least one year from the date our financial statements are issued. Based on management’s assessment, we have concluded that there does not exist substantial doubt about our ability to continue as a going concern as of the date the condensed consolidated interim financial statements included herein were issued.

Certain amounts for the prior fiscal periods have been reclassified to conform to the current fiscal period presentation, in connection with the retroactive adoption of two new accounting pronouncements in the current fiscal year. See Note 3 below for additional information.

2.   Significant Accounting Policies

We adhere to the same accounting policies in the preparation of our condensed consolidated interim financial statements as we do in the preparation of our full-year consolidated financial statements. As permitted under GAAP, interim accounting for certain expenses, including income taxes, is based on full-year assumptions. For interim financial reporting purposes, income taxes are recorded based upon estimated annual effective income tax rates.

3.   Accounting Changes and Recent Accounting Pronouncements

Accounting Changes

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Income Taxes, which requires that deferred tax assets, net of related valuation allowances, and deferred tax liabilities be reported as noncurrent in a classified balance sheet. We adopted the new standard retrospectively effective October 1, 2017. Accordingly, the adoption of ASU No. 2015-17 resulted in a decrease in current deferred income tax assets of $28.4 million, a decrease in current deferred income tax liabilities, included in accrued liabilities, of $2.0 million, a net increase in noncurrent deferred income tax assets, included in other assets, of $4.3 million and a net decrease in noncurrent deferred income tax liabilities of $22.1 million in our previously reported consolidated balance sheet as of September 30, 2017.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which will supersede Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition. A core principle of the new guidance is that an entity should measure revenue in connection with its sale of goods and services to a customer based on the consideration to which the entity expects to be entitled in exchange for each of those goods and services. The new standard must be adopted using either the retrospective or cumulative effect transition method. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. In connection with the adoption of ASU No. 2014-09, we expect to change our classification of deferred revenue and product cost in connection with certain sales of salon equipment to customers. We are in the process of designing changes to our processes and controls to ensure the timely identification of new revenue streams that may affect our revenue recognition processes in the future. We are also assessing the disclosure requirements contained in the new standard and anticipate being compliant with the additional disclosures about our revenue recognition practices required by the new standard. We anticipate electing the modified retrospective transition method upon adoption at October 1, 2018. We have not yet adopted this accounting pronouncement and we do not believe, based on our assessment, that adoption will have a material effect on our consolidated results of operations and consolidated financial position.

11


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, which will require most leases to be reported on the balance sheet as a right-of-use asset and a lease liability. Under the new guidance, the lease liability must be measured initially based on the present value of future lease payments, subject to certain conditions. The right-of-use asset must be measured initially based on the amount of the liability, plus certain initial direct costs. The new guidance further requires that leases be classified at inception as either (a) operating leases or (b) finance leases. For operating leases, periodic expense will generally be flat (straight-line) throughout the life of the lease. For finance leases, periodic expense will decline (similar to capital leases under prior rules) over the life of the lease. The new standard must be adopted using a modified retrospective transition method. For public companies, this standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We will adopted this pronouncement on October 1, 2019. We have completed a preliminary assessment of the potential impact of adopting ASU No. 2016-02 on our consolidated financial statements. At June 30, 2018, adoption of ASU No. 2016-02 would have resulted in recognition of a right-of-use asset in the estimated amount of approximately $600.0 million and a lease liability for a similar amount in our consolidated balance sheet. We do not believe adoption of ASU No. 2016-02 will have a material impact on our consolidated results of operations or consolidated cash flows. The amount of the right-of-use asset and the lease liability we ultimately recognize may materially differ from this preliminary estimate, including as a result of future organic growth in our business, changes in interest rates, and potential acquisitions.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities, which is intended to better align an entity’s risk management activities and its financial reporting for hedging relationships. ASU No. 2017-12 will change both the designation and measurement guidance for a qualifying hedging relationship and the presentation of the impact of the hedging relationship on the entity’s financial statements. In addition, ASU No. 2017-12 contains targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness and eliminates the requirement for an entity to separately measure and report hedge ineffectiveness. For public companies, these amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We have not yet adopted the accounting pronouncement and do not believe, based on our preliminary assessment, that adoption will have a material effect on our consolidated financial statements.

4.   Fair Value Measurements

Fair value on recurring basis

Consistent with the three-level hierarchy defined in ASC Topic 820, Fair Value Measurement, as amended, we categorize our financial assets and liabilities as follows (in thousands):

 

 

 

 

As of June 30, 2018

 

 

As of September 30, 2017

 

Assets

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Level 2

 

$

183

 

 

$

779

 

Interest rate caps

 

Level 2

 

 

7,734

 

 

 

5,178

 

Total assets

 

 

 

$

7,917

 

 

$

5,957

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Level 2

 

$

 

 

$

207

 

 

Other fair value disclosures

 

 

 

 

As of June 30, 2018

 

 

As of September 30, 2017

 

 

 

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes

 

Level 1

 

$

950,000

 

 

$

889,115

 

 

$

950,000

 

 

$

973,750

 

Other long-term debt

 

Level 2

 

 

910,265

 

 

 

894,924

 

 

 

941,480

 

 

 

946,180

 

Total debt

 

 

 

$

1,860,265

 

 

$

1,784,039

 

 

$

1,891,480

 

 

$

1,919,930

 

12


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

 

5.   Accumulated Stockholders’ Deficit

In August 2017, we announced that our Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $1.0 billion of its common stock over an approximate four-year period expiring on September 30, 2021 (the “2017 Share Repurchase Program”) and terminated our similar share repurchase program approved by our Board in 2014 (the “2014 Share Repurchase Program”). During the nine months ended June 30, 2018 and 2017, we repurchased and subsequently retired approximately 9.9 million and 13.1 million shares of our common stock at an aggregate cost of $164.6 million and $286.5 million, excluding common stock surrendered by grantees to satisfy tax withholding obligations, under the 2017 Share Repurchase Program and the 2014 Share Repurchase Program, respectively. We reduced common stock and additional paid-in capital, in the aggregate, by these amounts. However, as required by GAAP, to the extent that share repurchase amounts exceeded the balance of additional paid-in capital prior to our recording of such repurchases, we recorded the excess in accumulated deficit.

The change in accumulated other comprehensive loss (“AOCL”) was as follows (in thousands):

 

 

Foreign Currency Translation Adjustments

 

 

Interest Rate Caps

 

 

Total

 

Balance at September 30, 2017

 

$

(80,752

)

 

$

(1,084

)

 

$

(81,836

)

Other comprehensive (loss) income before reclassification, net of tax

 

 

(11,986

)

 

 

1,815

 

 

 

(10,171

)

Balance at June 30, 2018

 

$

(92,738

)

 

$

731

 

 

$

(92,007

)

 

6.   Earnings Per Share

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net earnings

 

$

58,226

 

 

$

66,539

 

 

$

202,861

 

 

$

179,357

 

Weighted average basic shares

 

 

120,901

 

 

 

135,450

 

 

 

124,331

 

 

 

139,888

 

Dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock option and stock award programs

 

 

772

 

 

 

709

 

 

 

780

 

 

 

746

 

Weighted average diluted shares

 

 

121,673

 

 

 

136,159

 

 

 

125,111

 

 

 

140,634

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.48

 

 

$

0.49

 

 

$

1.63

 

 

$

1.28

 

Diluted

 

$

0.48

 

 

$

0.49

 

 

$

1.62

 

 

$

1.28

 

 

 

For the three and nine months ended June 30, 2018, options to purchase 5.2 million shares of our common stock were outstanding but not included in our computations of diluted earnings per share, since these options were anti-dilutive. For the three and nine months ended June 30, 2017, options to purchase 4.8 million shares of our common stock were outstanding but not included in the computations of diluted earnings per share, since these options were anti-dilutive.

13


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

7.   Share-Based Payments

Performance-Based Awards

The following table presents a summary of the activity for our performance unit awards assuming 100% payout:

 

Performance Unit Awards

 

Number

of Shares

(in Thousands)

 

 

Weighted

Average Fair

Value Per

Share

 

 

Weighted

Average

Remaining

Vesting Term

(in Years)

 

Unvested at September 30, 2017

 

 

197

 

 

$

24.50

 

 

 

1.5

 

Granted

 

 

215

 

 

 

17.42

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(61

)

 

 

20.60

 

 

 

 

 

Unvested at June 30, 2018

 

 

351

 

 

$

20.86

 

 

 

1.5

 

 

Service-Based Awards

The following table presents a summary of the activity for our stock option awards:

 

 

 

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, 2017

 

 

5,211

 

 

$

24.12

 

 

 

5.6

 

 

$

3,867

 

Granted

 

 

1,220

 

 

 

17.23

 

 

 

 

 

 

 

 

 

Exercised

 

 

(144

)

 

 

9.14

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

(819

)

 

 

23.78

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2018

 

 

5,468

 

 

$

23.03

 

 

 

5.7

 

 

$

1,487

 

Exercisable at June 30, 2018

 

 

3,202

 

 

$

24.06

 

 

 

4.0

 

 

$

1,395

 

 

 

The following table presents a summary of the activity for our Restricted Stock Awards:

 

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, 2017

 

 

125

 

 

$

26.00

 

 

 

1.3

 

Granted

 

 

326

 

 

 

16.98

 

 

 

 

 

Vested

 

 

(50

)

 

 

24.44

 

 

 

 

 

Forfeited

 

 

(56

)

 

 

19.79

 

 

 

 

 

Unvested at June 30, 2018

 

 

345

 

 

$

18.74

 

 

 

2.4

 

 

 

14


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

The following table presents a summary of the activity for our Restricted Stock Units:

 

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, 2017

 

 

 

 

$

 

 

 

 

Granted

 

 

74

 

 

 

17.34

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(7

)

 

 

17.42

 

 

 

 

 

Unvested at June 30, 2018

 

 

67

 

 

$

17.34

 

 

 

0.2

 

 

8.   Goodwill and Intangible Assets

In December 2017, we acquired certain assets and business operations of H. Chalut Ltee (“Chalut”), a 21-store professional-only distributor of beauty supplies operating in Quebec, Canada, for $8.8 million, of which $5.5 million was allocated to goodwill.  During the three months ended June 30, 2018, we finalized our valuation of the Chalut acquisition and recognized a decrease in goodwill with a corresponding increase in intangible assets of $4.7 million.  

During the three months ended March 31, 2018, we completed our annual assessment for impairment of goodwill and other intangible assets. No material impairment losses were recognized in the current or prior periods presented in connection with goodwill and other intangible assets.

For the three months ended June 30, 2018 and 2017, amortization expense related to other intangible assets was $3.2 million, and, for the nine months ended June 30, 2018 and 2017, amortization expense was $8.8 million and $9.9 million, respectively.

9.   Short-term Borrowings and Long-term Debt

At June 30, 2018, we had $417.8 million available for borrowing under the ABL facility, including the Canadian sub-facility. At June 30, 2018, we were in compliance with the agreements and instruments governing our debt, including our financial covenants.

On March 27, 2018, we entered into an Amendment No. 1 with respect to our term loan B pursuant to which the interest rate spread on the variable-rate tranche of approximately $548.6 million was reduced by 25 basis points to 2.25%. In connection with this amendment, we incurred and capitalized financing costs of approximately $1.0 million. This amount is reported as a deduction from the term loan B and is being amortized over the term of the term loan B using the effective interest method. Additionally, we recorded a loss on extinguishment of debt in the amount of approximately $0.9 million, including cost resulting from certain creditors exiting the loan syndication.

10.    Derivative Instruments and Hedging Activities

During the nine months ended June 30, 2018, we did not purchase or hold any derivative instruments for trading or speculative purposes.

Designated Cash Flow Hedges

In July 2017, we purchased two interest rate caps with an initial aggregate notional amount of $550 million (the “interest rate caps”) to mitigate the exposure to higher interest rates in connection with our term loan B. The interest rate caps expire on June 30, 2023 and are designated as cash flow hedges.

Non-designated Cash Flow Hedges

At June 30, 2018, we held foreign currency forward contracts with an aggregate notional amount of $50.2 million based upon exchange rates at June 30, 2018. These derivative instruments expire at various dates through September 30, 2018.

15


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

The table below presents the fair value of our derivative financial instruments (in thousands):

 

 

 

Asset Derivatives

 

 

Liability Derivatives

 

 

 

Classification

 

June 30,

2018

 

 

September 30,

2017

 

 

Classification

 

June 30,

2018

 

 

September 30,

2017

 

Derivatives designated as hedging

  instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate caps

 

Other assets

 

$

7,734

 

 

$

5,178

 

 

N/A

 

$

 

 

$

 

Derivatives not designated as hedging

   instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current

assets

 

 

183

 

 

 

779

 

 

Accrued

liabilities

 

 

 

 

 

207

 

 

 

 

 

$

7,917

 

 

$

5,957

 

 

 

 

$

 

 

$

207

 

 

The effects of our derivative financial instruments on our condensed consolidated statements of earnings were not material for the three and nine months ended June 30, 2018 and 2017.

11. Income Taxes

On December 22, 2017, the U.S. enacted comprehensive amendments to the Internal Revenue Code of 1986 (“U.S. Tax Reform”). Among other things, U.S. Tax Reform (a) reduces the federal statutory tax rate for corporate taxpayers, (b) provides for a deemed repatriation of undistributed foreign earnings by U.S. taxpayers and makes other fundamental changes on how foreign earnings will be taxed by the U.S. and (c) otherwise modifies corporate tax rules in significant ways. In accordance with ASC Topic 740, Income Taxes, entities must revalue their deferred income taxes considering the new tax rates and recognize any impact of the deemed repatriation of undistributed foreign earnings on their financial statements based on the enacted tax law.

In December 2017, the SEC provided guidance allowing registrants to record provisional amounts, during a specified measurement period, when the necessary information is not available, prepared or analyzed in reasonable detail to account for the impact of U.S. Tax Reform. Accordingly, we have reported the revaluation of deferred income taxes and the impact of the deemed repatriation on our consolidated interim financial statements based on provisional amounts. Specifically, in the nine months ended June 30, 2018, we recognized a provisional income tax benefit of $36.4 million in connection with the revaluation and income tax accounting method changes related to our deferred income tax assets and liabilities, and a provisional income tax charge of $11.4 million for federal and state income taxes, including $10.4 million payable beyond one year, related to accumulated but undistributed earnings of our foreign operations. In the three months ended June 30, 2018, we recognized a deferred income tax benefit of $2.7 million primarily in connection with income tax accounting method changes adopted for our federal income tax return for the fiscal year ended September 30, 2017.

For the fiscal year ending September 30, 2018, our U.S. federal statutory tax rate is 24.5% and, for fiscal years after that, 21.0%. Among the factors that could affect the accuracy of our provisional amounts is uncertainty about the statutory tax rate applicable to our deferred income tax assets and liabilities, since the actual rate will be dependent on the timing of realization or settlement of such assets and liabilities. At June 30, 2018, we estimated the dates when such realization or settlement would occur. The actual dates when such realization or settlement occurs may be significantly different from our estimates, which could result in the ultimate revaluation of our deferred income taxes to be different from our provisional amounts. In addition, there is uncertainty about the impact of expected Internal Revenue Service (“IRS”) guidance intended to interpret the most complex provisions of U.S. Tax Reform. Our liability for federal and state income taxes applicable to undistributed earnings of our foreign operations may be materially different from our provisional amount as a result of such future IRS guidance and interpretation and in connection with estimates related to the amount of undistributed foreign earnings and cash balances.

Effective for fiscal years beginning after December 31, 2017, U.S. Tax Reform subjects taxpayers to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. In January 2018, FASB Staff provided guidance that an entity can make an accounting policy election to either recognize deferred taxes related to items giving rise to GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Given the uncertainty about the impact of expected IRS guidance related to the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy.

We are currently assessing the potential additional impact of U.S. Tax Reform on our business and consolidated financial statements, and expect to complete such assessment on or before September 30, 2018.

16


Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

The difference between our U.S. federal statutory income tax rate and our effective income tax rate is summarized below:

 

 

Three Months Ended

June 30, 2018

 

Nine Months Ended

June 30, 2018

U.S. federal statutory income tax rate

24.5

%

 

24.5

%

State income taxes, net of federal tax benefit

2.9

 

 

3.1

 

Effect of foreign operations

1.0

 

 

1.0

 

Deferred tax revaluation, including adoption

of income tax method changes

(3.5)

 

 

(14.6)

 

Deemed repatriation tax

 

 

4.6

 

Other, net

0.2

 

 

0.2

 

Effective tax rate

25.1

%

 

18.8

%

 

12.   Business Segments

Segment data for the three and nine months ended June 30, 2018 and 2017 is as follows (in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Nine Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sally Beauty Supply ("SBS")

 

$

591,583

 

 

$

594,880

 

 

$

1,757,272

 

 

$

1,760,732

 

Beauty Systems Group ("BSG")

 

 

404,700

 

 

 

403,163

 

 

 

1,209,296

 

 

 

1,203,390

 

Total

 

$

996,283

 

 

$

998,043

 

 

$

2,966,568

 

 

$

2,964,122

 

Earnings before provision for income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBS

 

$

94,912

 

 

$

104,880

 

 

$

271,834

 

 

$

294,245

 

BSG

 

 

62,039

 

 

 

67,327

 

 

 

186,553

 

 

 

193,630

 

Segment operating earnings

 

 

156,951

 

 

 

172,207

 

 

 

458,387

 

 

 

487,875

 

Unallocated expenses

 

 

(42,179

)

 

 

(36,815

)

 

 

(110,411

)

 

 

(106,777

)

Restructuring charges

 

 

(12,544

)

 

 

(5,054

)

 

 

(24,513

)

 

 

(14,265

)

Consolidated operating earnings

 

 

102,228

 

 

 

130,338

 

 

 

323,463