sbh-10q_20181231.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: DECEMBER 31, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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

 

 

 

 

 

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 January 31, 2019, there were 120,550,819 shares of the issuer’s common stock outstanding.

 

 

 

 


TABLE OF CONTENTS

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

5

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

26

Item 3. Quantitative And Qualitative Disclosures About Market Risk

30

Item 4. Controls And Procedures

30

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

32

Item 1a. Risk Factors

32

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

32

Item 3. Defaults Upon Senior Securities

32

Item 4. Mine Safety Disclosures

32

Item 5. Other Information

32

Item 6. Exhibits

33

 

 


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 and 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. The most important factors which could cause our actual results to differ from our forward-looking statements are set forth in our description of risk factors in Item 1A contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, which should be read in conjunction with the forward-looking statements in this report. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement.

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.

 

3


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.

 

4


PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements.

The following condensed consolidated balance sheets as of December 31, 2018 and September 30, 2018, the condensed consolidated statements of earnings, condensed consolidated statements of comprehensive income, condensed consolidated statements of cash flows and the condensed statements of shareholders’ deficit for the three months ended December 31, 2018 and 2017 are those of Sally Beauty Holdings, Inc. and its subsidiaries.

5


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value data)

 

 

 

December 31,

2018

 

 

September 30,

2018

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

102,771

 

 

$

77,295

 

Trade accounts receivable, net

 

 

43,649

 

 

 

48,417

 

Accounts receivable, other

 

 

48,127

 

 

 

42,073

 

Inventory

 

 

982,497

 

 

 

944,338

 

Other current assets

 

 

40,819

 

 

 

42,960

 

Total current assets

 

 

1,217,863

 

 

 

1,155,083

 

Property and equipment, net of accumulated depreciation of $624,012 at

   December 31, 2018 and $611,021 at September 30, 2018

 

 

303,157

 

 

 

308,357

 

Goodwill

 

 

532,601

 

 

 

535,925

 

Intangible assets, excluding goodwill, net of accumulated amortization of

   $135,049 at December 31, 2018 and $132,724 at September 30, 2018

 

 

69,601

 

 

 

72,698

 

Other assets

 

 

21,392

 

 

 

25,351

 

Total assets

 

$

2,144,614

 

 

$

2,097,414

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

5,500

 

 

$

5,501

 

Accounts payable

 

 

307,487

 

 

 

303,241

 

Accrued liabilities

 

 

157,144

 

 

 

180,287

 

Income taxes payable

 

 

14,580

 

 

 

2,144

 

Total current liabilities

 

 

484,711

 

 

 

491,173

 

Long-term debt

 

 

1,768,306

 

 

 

1,768,808

 

Other liabilities

 

 

26,969

 

 

 

30,022

 

Deferred income tax liabilities, net

 

 

79,359

 

 

 

75,967

 

Total liabilities

 

 

2,359,345

 

 

 

2,365,970

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized 500,000 shares; 120,541 and

   120,145 shares issued and 120,041 and 119,926 shares outstanding at

   December 31, 2018 and September 30, 2018, respectively

 

 

1,200

 

 

 

1,199

 

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

 

 

 

 

 

 

Additional paid-in capital

 

 

4,802

 

 

 

 

Accumulated deficit

 

 

(114,037

)

 

 

(179,764

)

Accumulated other comprehensive loss, net of tax

 

 

(106,696

)

 

 

(89,991

)

Total stockholders’ deficit

 

 

(214,731

)

 

 

(268,556

)

Total liabilities and stockholders’ deficit

 

$

2,144,614

 

 

$

2,097,414

 

 

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

 

6


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

Net sales

 

$

989,453

 

 

$

994,964

 

Cost of goods sold

 

 

508,748

 

 

 

508,335

 

Gross profit

 

 

480,705

 

 

 

486,629

 

Selling, general and administrative expenses

 

 

366,987

 

 

 

371,286

 

Restructuring charges

 

 

3,980

 

 

 

5,210

 

Operating earnings

 

 

109,738

 

 

 

110,133

 

Interest expense

 

 

24,489

 

 

 

24,016

 

Earnings before provision for income taxes

 

 

85,249

 

 

 

86,117

 

Provision for income taxes

 

 

19,522

 

 

 

2,853

 

Net earnings

 

$

65,727

 

 

$

83,264

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.55

 

 

$

0.65

 

Diluted

 

$

0.54

 

 

$

0.65

 

Weighted average shares:

 

 

 

 

 

 

 

 

Basic

 

 

119,989

 

 

 

127,784

 

Diluted

 

 

120,979

 

 

 

128,645

 

 

 

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

7


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

Net earnings

 

$

65,727

 

 

$

83,264

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(13,463

)

 

 

(255

)

Interest rate caps, net of tax

 

 

(2,830

)

 

 

(803

)

Foreign exchange contracts, net of tax

 

 

(412

)

 

 

 

Other comprehensive loss, net of tax

 

 

(16,705

)

 

 

(1,058

)

Total comprehensive income

 

$

49,022

 

 

$

82,206

 

 

 

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

8


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2018

 

 

2017

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

65,727

 

 

$

83,264

 

Adjustments to reconcile net earnings to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

26,506

 

 

 

27,090

 

Share-based compensation expense

 

 

3,354

 

 

 

3,111

 

Amortization of deferred financing costs

 

 

990

 

 

 

921

 

Deferred income taxes

 

 

4,597

 

 

 

(31,350

)

Changes in (exclusive of effects of acquisitions):

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

4,203

 

 

 

(2,427

)

Accounts receivable, other

 

 

(6,379

)

 

 

(2,008

)

Inventory

 

 

(45,924

)

 

 

(8,055

)

Other current assets

 

 

1,745

 

 

 

9,105

 

Other assets

 

 

(187

)

 

 

(290

)

Accounts payable and accrued liabilities

 

 

(13,855

)

 

 

3,764

 

Income taxes payable

 

 

12,406

 

 

 

10,069

 

Other liabilities

 

 

(2,927

)

 

 

11,010

 

Net cash provided by operating activities

 

 

50,256

 

 

 

104,204

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Payments for property and equipment, net

 

 

(23,710

)

 

 

(22,499

)

Acquisitions, net of cash acquired

 

 

(451

)

 

 

(9,175

)

Net cash used by investing activities

 

 

(24,161

)

 

 

(31,674

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

126,500

 

 

 

126,505

 

Repayments of long-term debt

 

 

(127,876

)

 

 

(119,067

)

Payments for common stock repurchased

 

 

 

 

 

(64,612

)

Proceeds from exercises of stock options

 

 

1,449

 

 

 

275

 

Net cash used by financing activities

 

 

73

 

 

 

(56,899

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

(692

)

 

 

(78

)

Net increase (decrease) in cash and cash equivalents

 

 

25,476

 

 

 

15,553

 

Cash and cash equivalents, beginning of period

 

 

77,295

 

 

 

63,759

 

Cash and cash equivalents, end of period

 

$

102,771

 

 

$

79,312

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

40,630

 

 

$

36,331

 

Income taxes paid

 

 

3,770

 

 

 

3,607

 

Capital expenditures incurred but not paid

 

$

4,000

 

 

$

2,486

 

 

 

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

 

 

 


 

9


SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Deficit

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

Common Stock

Paid-in

 

 

Accumulated

 

 

Treasury

 

 

Comprehensive

 

 

Stockholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Loss

 

 

Deficit

 

Balance at September 30, 2018

 

119,926

 

 

$

1,199

 

 

$

 

 

$

(179,764

)

 

$

 

 

$

(89,991

)

 

$

(268,556

)

Net earnings

 

 

 

 

 

 

 

 

 

 

65,727

 

 

 

 

 

 

 

 

 

65,727

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,705

)

 

 

(16,705

)

Repurchases and cancellations of

   common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

3,354

 

 

 

 

 

 

 

 

 

 

 

 

3,354

 

Stock issued for stock options

 

115

 

 

 

1

 

 

 

1,448

 

 

 

 

 

 

 

 

 

 

 

 

1,449

 

Balance at December 31, 2018

 

120,041

 

 

$

1,200

 

 

$

4,802

 

 

$

(114,037

)

 

$

 

 

$

(106,696

)

 

$

(214,731

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

Common Stock

Paid-in

 

 

Accumulated

 

 

Treasury

 

 

Comprehensive

 

 

Stockholders’

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Loss

 

 

Deficit

 

Balance at September 30, 2017

 

129,585

 

 

$

1,296

 

 

$

 

 

$

(283,076

)

 

$

 

 

$

(81,836

)

 

$

(363,616

)

Net earnings

 

 

 

 

 

 

 

 

 

 

83,264

 

 

 

 

 

 

 

 

 

83,264

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,058

)

 

 

(1,058

)

Repurchases and cancellations of

   common stock

 

(3,848

)

 

 

(39

)

 

 

(3,386

)

 

 

(61,187

)

 

 

 

 

 

 

 

 

 

(64,612

)

Share-based compensation

 

 

 

 

 

 

 

3,111

 

 

 

 

 

 

 

 

 

 

 

 

3,111

 

Stock issued for stock options

 

62

 

 

 

1

 

 

 

275

 

 

 

 

 

 

 

 

 

 

 

 

276

 

Balance at December 31, 2017

 

125,799

 

 

$

1,258

 

 

$

 

 

$

(260,999

)

 

$

 

 

$

(82,894

)

 

$

(342,635

)

 

 

 

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

 

 

10


 

 

Sally Beauty Holdings, Inc. and Subsidiaries

Notes to Condensed 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. Accordingly, 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 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 our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. 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 December 31, 2018 and September 30, 2018, our consolidated results of operations, consolidated comprehensive income and our consolidated cash flows for the three months ended December 31, 2018 and 2017.

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 May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, (“ASU No. 2014-09”) which introduced new guidance that established how 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. On October 1, 2018, we adopted ASU No. 2014-09 using the modified retrospective transition method. Additionally, in connection with the adoption, we designed changes to our internal control procedures and updated processes to ensure appropriate recognition and presentation of financial information. This adoption did not have a material effect on our consolidated financial statements or on our internal controls over financial reporting. We do not believe that the adoption will have a material effect on our consolidated financial statements on an ongoing basis. The comparative periods continue to be presented under the accounting standards in effect during those periods.

In connection with the adoption of ASU No. 2014-09, we now present our sales returns allowance on a gross basis rather than a net liability basis. As such, we recognize a return asset from the right to recover merchandise from customers (included in other current assets) and a return liability from the amount to be returned to the customer (included in accrued liabilities) within our consolidated balance sheets. Additionally, we now recognize revenue for our gift cards not expected to be redeemed (“gift card breakage”) within revenue in our consolidated statements of earnings.

The following tables set forth the impact of adopting this standard on our condensed consolidated balance sheets and consolidated statements of earnings as of and for the three months ended December 31, 2018 (in thousands):

 

Effect of ASU No. 2014-09 Adoption on Condensed Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excluding

 

 

 

 

 

 

 

 

 

 

 

ASU No. 2014-09

 

 

ASU No. 2014-09

 

 

 

As reported

 

 

Effect

 

 

Effect

 

Other current assets

 

$

40,819

 

 

$

38,180

 

 

$

2,639

 

Accrued liabilities

 

$

157,144

 

 

$

154,505

 

 

$

2,639

 

 

11


 

 

Effect of ASU No. 2014-09 Adoption on Condensed Consolidated Statement of Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excluding

 

 

 

 

 

 

 

 

 

 

 

ASU No. 2014-09

 

 

ASU No. 2014-09

 

 

 

As reported

 

 

Effect

 

 

Effect

 

Net Sales

 

$

989,453

 

 

$

989,378

 

 

$

75

 

Gross Profit

 

 

480,705

 

 

 

480,630

 

 

 

75

 

Selling, general and administrative expenses

 

$

366,987

 

 

$

366,912

 

 

$

75

 

See note 4, Revenue Recognition, for additional information in connection with ASU No. 2014-09.

Recent Accounting Pronouncements

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 adopt 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 December 31, 2018, adoption of ASU No. 2016-02 would have resulted in recognition of a right-of-use asset in the estimated amount of approximately $525.0 million and a lease liability for a similar amount in our consolidated balance sheet. We are currently in the process of implementing changes to our processes, controls and systems in order to be compliant upon adoption of the new standard. 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.

4.   Revenue Recognition

Substantially all of our revenue is derived through the sale of merchandise. Revenue is recognized net of estimated sales returns and sales taxes. We estimate sales returns based on historical data. Additionally, we have assessed all revenue streams for principal versus agent considerations and have concluded we are the principal for all transactions.

See Note 12, Business Segments, for additional information regarding the disaggregation of our sales revenue.

Merchandise Revenues

The majority of our revenue comes from the sale of products in our company-operated stores. These sales generally have one single performance obligation and the revenue is recognized at the point of sale. Discounts and incentives issued at the point of sale to entice a customer to a future purchase are treated as a separate performance obligation.  As such, we allocate a portion of the revenue generated from the point of sale to each of the additional performance obligations separately using explicitly stated amounts or our best estimate using historical data.

We also sell merchandise on our online platforms, to our franchisees and by using distributor sales consultants. These sales generally have one single performance obligation and revenue is recognized upon the shipment of the merchandise. Any shipping and handling fees charged to the customer are recognized as revenue, while any shipping and handling costs to get the merchandise shipped is recognized in cost of goods sold.

We do extend credit to certain customers, primarily salon professionals, which generally have 30 day payment terms. Based on the nature of theses receivables, no significant financing component exists.  

Gift Cards

The revenue from the sale of our gift cards is recognized at the time the gift card is used to purchase merchandise, which is generally within a year. Our gift cards do not carry expiration dates or impose post-sale fees. Based on historical experience, a certain amount of our gift cards will not be redeemed, also referred to as “gift card breakage.” We recognize revenue related to gift card breakage within revenue in our consolidated statements of earnings over time proportionately to historical redemption patterns. The gift cards are issued and represent liabilities of either of our operating entities, Sally Beauty Supply LLC or Beauty Systems Group LLC, which are both limited liability companies formed in the state of Virginia.

12


 

 

Customer Loyalty Rewards

We recently launched our new Sally Beauty Rewards Loyalty Program nationwide during the first quarter of fiscal year 2019 to the U.S. and Canada, which enables customers to earn points based on their status for every dollar spent on merchandise purchased in our Sally Beauty Supply (“SBS”) stores and through our sallybeauty.com website. When a specific tier has been reached, a customer will receive a certificate which can be used at any of our U.S. and Canada SBS stores or through our sallybeauty.com website on their next purchase. Based on the rewards loyalty program policies, points expire after twelve months of inactivity and certificates will expire after a specific time period from the date of issuance. Certificates generated from our rewards loyalty program provide a material right to customers and represent a separate performance obligation. Rewards loyalty points are accrued at the standalone value per point, net of estimated breakage, and are included within accrued liabilities on our consolidated balance sheets. We recognize the revenue when the customer redeems the certificate. Points and certificates are issued by and represent liabilities of Sally Beauty Supply LLC.

The following table shows the amount of our gift card and rewards loyalty program liabilities included in accrued liabilities within our condensed consolidated balance sheets as of December 31, 2018 and September 30, 2018 (in thousands):

 

 

December 31,

2018

 

 

September 30,

2018

 

Gift cards

 

$

5,766

 

 

$

4,144

 

Rewards loyalty program

 

 

7,246

 

 

 

1,165

 

Total liability

 

$

13,012

 

 

$

5,309

 

As of December 31, 2018 and 2017, we did not have any contract assets.

5.   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 December 31, 2018

 

 

As of September 30, 2018

 

Assets

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Level 2

 

$

24

 

 

$

 

Interest rate caps

 

Level 2

 

 

4,551

 

 

 

8,367

 

Total assets

 

 

 

$

4,575

 

 

$

8,367

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Level 2

 

$

583

 

 

$

 

 

Other fair value disclosures

 

 

 

 

As of December 31, 2018

 

 

As of September 30, 2018

 

 

 

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes

 

Level 1

 

$

950,000

 

 

$

882,240

 

 

$

950,000

 

 

$

911,490

 

Other long-term debt

 

Level 2

 

 

843,995

 

 

 

794,054

 

 

 

845,383

 

 

 

824,951

 

Total debt

 

 

 

$

1,793,995

 

 

$

1,676,294

 

 

$

1,795,383

 

 

$

1,736,441

 

13


 

 

 

6.   Accumulated Other Comprehensive Loss

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

 

 

Foreign Currency Translation Adjustments

 

 

Interest Rate Caps

 

 

Foreign Exchange Contracts

 

 

Total

 

Balance at September 30, 2018

 

$

(91,356

)

 

$

1,365

 

 

$

 

 

$

(89,991

)

Other comprehensive loss before reclassification, net of tax

 

 

(13,463

)

 

 

(2,839

)

 

 

(412

)

 

 

(16,714

)

Reclassification to net earnings, net of tax

 

 

 

 

 

9

 

 

 

 

 

 

9

 

Balance at December 31, 2018

 

$

(104,819

)

 

$

(1,465

)

 

$

(412

)

 

$

(106,696

)

The tax impact for the changes in other comprehensive loss and the reclassifications to net earnings were not material.

7.   Weighted Average Shares

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

 

 

 

Three Months Ended

December 31,

 

 

 

2018

 

 

2017

 

Weighted average basic shares

 

 

119,989

 

 

 

127,784

 

Dilutive securities:

 

 

 

 

 

 

 

 

Stock option and stock award programs

 

 

990

 

 

 

861

 

Weighted average diluted shares

 

 

120,979

 

 

 

128,645

 

 

 

For the three months ended December 31, 2018, options to purchase 5.7 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 months ended December 31, 2017, options to purchase 5.8 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.

8.   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, 2018

 

 

349

 

 

$

20.88

 

 

 

1.3

 

Granted

 

 

 

 

 

 

 

 

 

 

Vested

 

 

(23

)

 

 

23.45

 

 

 

 

 

Forfeited

 

 

(66

)

 

 

23.10

 

 

 

 

 

Unvested at December 31, 2018

 

 

260

 

 

$

20.10

 

 

 

1.4

 

 

14


 

 

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, 2018

 

 

5,405

 

 

$

23.04

 

 

 

5.4

 

 

$

3,161

 

Granted

 

 

948

 

 

 

18.14

 

 

 

 

 

 

 

 

 

Exercised

 

 

(98

)

 

 

15.90

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

(350

)

 

 

25.24

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2018

 

 

5,905

 

 

$

22.24

 

 

 

6.3

 

 

$

1,527

 

Exercisable at December 31, 2018

 

 

3,870

 

 

$

23.93

 

 

 

4.8

 

 

$

1,336

 

 

 

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, 2018

 

 

219

 

 

$

16.98

 

 

 

2.1

 

Granted

 

 

287

 

 

 

18.14

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(6

)

 

 

17.63

 

 

 

 

 

Unvested at December 31, 2018

 

 

500

 

 

$

17.66

 

 

 

2.3

 

 

 

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, 2018

 

 

 

 

$

 

 

 

 

Granted

 

 

88

 

 

 

18.14

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

Unvested at December 31, 2018

 

 

88

 

 

$

18.14

 

 

 

0.7

 

 

9.   Short-term Borrowings and Long-term Debt

At December 31, 2018, we had $481.4 million available for borrowing under the ABL facility, including the Canadian sub-facility. At December 31, 2018, we were in compliance with the agreements and instruments governing our debt, including our financial covenants.


15


 

 

10.    Derivative Instruments and Hedging Activities

During the three months ended December 31, 2018, we did not purchase or hold any derivative instruments for trading or speculative purposes.

Designated Cash Flow Hedges

Foreign Currency Forwards

In December 2018, we entered into foreign currency forwards to mitigate the exposure to exchange rate changes on inventory purchases in USD by our foreign subsidiaries. At December 31, 2018, the notional amount we held through these forwards, based upon exchange rates at December 31, 2018, was as follows (in thousands):

Notional Currency

 

Notional Amount

 

EUR

 

$

16,085

 

MXP

 

 

14,342

 

GBP

 

 

6,642

 

CAD

 

 

3,748

 

Total

 

$

40,817

 

 

 

We record quarterly, net of income tax, the changes in fair value related to the foreign currency forwards into AOCL. As the forwards are exercised, the realized value will be recognized into cost of goods sold based on inventory turns. Based on December 31, 2018 valuations and exchange rates, we expect to reclassify approximately $0.5 million into cost of goods sold over the next 12 months.

Interest Rate Caps

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 are comprised of individual caplets that expire ratably through June 30, 2023 and are designated as cash flow hedges. Accordingly, changes in fair value of the interest rate caps are recorded quarterly, net of income tax, and are included in AOCL. Over the next 12 months, we expect to reclassify approximately $0.3 million into interest expense, which represents the original value of the expiring caplets.

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

 

 

 

Asset Derivatives

 

 

Liability Derivatives

 

 

 

Classification

 

December 31,

2018

 

 

September 30,

2018

 

 

Classification

 

December 31,

2018

 

 

September 30,

2018

 

Derivatives designated as hedging

  instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate caps

 

Other assets

 

$

4,551

 

 

$

8,367

 

 

N/A

 

$

 

 

$