What changed in this filing

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Item 9A. Controls and Procedures

2020-11-24 compared with 2019-11-25 · 394 added, 285 removed, 1075 unchanged (39% of the section changed)

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Changes in Internal Control over Financial Reporting.

During our last fiscal quarter there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

During our last fiscal quarter, other than as described below, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

During our last fiscal quarter, we implemented the retail stock ledger module of the JDA merchandising and supply chain platform (“JDA”).

JDA is hosted on a cloud platform (Infrastructure as a Service);

SBH manages all systems hosted by this cloud infrastructure.

This platform is used as our inventory system of record for physical quantities and for the application of inventory costing, including cost of sales.

JDA affects our processes and internal control environment for U.S.

and Canada operations.

In connection with this implementation, management implemented new controls for relevant business processes specifically related to JDA and modified any existing processes and controls to encompass JDA.

OTHER INFORMATION

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We intend to disclose on our website at www.sallybeautyholdings.com any substantive amendment to, or waiver from, a provision of the Code of Business Conduct and Ethics that applies to these individuals or persons performing similar functions.

Delinquent Section 16(a) Reports

Section 16(a) of the Exchange Act requires our directors and executive officers, and certain persons who own more than ten percent of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other security interests of Sally Beauty Holdings, Inc.

To our knowledge, based solely on a review of SEC EDGAR filings and written representations that no other reports were required during the fiscal year ended September 30, 2019, we believe that all of our directors and officers complied with all Section 16(a) filing requirements during fiscal year 2019, except:

Mark Spinks who inadvertently failed to file on a timely basis one Form 4 with respect to the disposition of 11,538 shares of our common stock on November 13, 2018, and the following persons, each of whom inadvertently failed to file one Form 4 with respect to the receipt of shares of our common stock on September 30, 2018:

Marshall Eisenberg (7,175 shares);

Linda Heasley (7,175 shares);

John Miller (7,175 shares);

Kelly Mooney (717 shares);

Denise Paulonis (2,901 shares);

and Edward Rabin (5,381 shares).

A remedial report has been filed with respect to each such exception.

The additional information required by Item 10 of this Annual Report on Form 10-K is incorporated herein by reference from our Proxy Statement related to the 2021 Annual Meeting of Stockholders under the headings “Proposal 1 – Election of Directors,” “Executive Officers,” “Corporate Governance, the Board, and Its Committees” and “Report of the Audit Committee.”

EXECUT IVE COMPENSATION

E XECUTIVE COMPENSATION

The information required by Item 11 of this Annual Report on Form 10-K is incorporated herein by reference from our Proxy Statement related to the 2021 Annual Meeting of Stockholders under the headings “Directors’ Compensation and Benefits,” “Narrative Discussion of Director Compensation Table,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation” and “Compensation Committee Interlocks and Insider Participation.”

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL O WNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 of this Annual Report on Form 10-K is incorporated herein by reference from our Proxy Statement related to the 2021 Annual Meeting of Stockholders under the heading “Beneficial Ownership of Company’s Stock.”

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approved by security holders

Includes options issued and available for exercise and shares available for issuance in connection with past awards under the Sally Beauty Holdings, Inc.

Includes options issued and available for exercise in connection with awards under the Sally Beauty Holdings, Inc.

2019 Omnibus Incentive Plan (the “2019 Plan”) and predecessor share-based compensation plans.

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CERTAIN RELATIONSHIPS AND RELATE D TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 of this Annual Report on Form 10-K is incorporated herein by reference from our Proxy Statement related to the 2020 Annual Meeting of Stockholders under the headings “Corporate Governance, the Board, and Its Committees,” “Compensation Committee Interlocks and Insider Participation” and “Certain Relationships and Related Party Transactions.”

The information required by Item 13 of this Annual Report on Form 10-K is incorporated herein by reference from our Proxy Statement related to the 2021 Annual Meeting of Stockholders under the headings “Corporate Governance, the Board, and Its Committees,” “Compensation Committee Interlocks and Insider Participation” and “Related Party Transactions.”

PRINCIPAL ACCO UNTING FEES AND SERVICES

The information required by Item 14 of this Annual Report on Form 10-K is incorporated herein by reference from our Proxy Statement related to the 2021 Annual Meeting of Stockholders under the heading “Proposal 3 – Ratification of Selection of Auditors.”

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Documents filed as part of this Annual Report:

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Joinder to Loan Documents, dated as of May 28, 2015, by and among Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC, Beauty Systems Group (Canada), Inc., SBH Finance B.V., the Guarantors named therein, Sally Beauty Military Supply LLC, Loxa Beauty LLC and Bank of America, N.A., as administrative agent and as collateral agent, which is incorporated herein by reference from Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2015 †

First Amendment to Amended and Restated Credit Agreement dated April 15, 2020 among the Borrowers, the Parent Guarantors, the Administrative Agent, the Syndication Agent, the Documentation Agent, and the Lenders party thereto (as such terms are defined therein), which is incorporated herein by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 16, 2020.

Indenture, dated as of May 18, 2012, by and among Sally Holdings LLC, Sally Capital Inc.

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Third Supplemental Indenture, dated as of May 28, 2015, by and among Loxa Beauty LLC , Sally Beauty Military Supply LLC, Sally Holdings LLC, Sally Capital Inc., each existing Parent Guarantor and Subsidiary Guarantor listed therein and Wells Fargo Bank, National Association, which is incorporated herein by reference from Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2015

Third Supplemental Indenture, dated as of December 3, 2015, by and among Sally Holdings LLC, Sally Capital Inc., the guarantors listed therein and Wells Fargo Bank, National Association (including the form of Note attached as an exhibit thereto), which is incorporated herein by reference from Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on December 3, 2015

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1 dated March 27, 2018, to Credit Agreement dated July 6, 2017, among the Borrowers, the Parent Guarantors, the Administrative Agent, the Syndication Agent, the Documentation Agent, and the Lenders party thereto (as such terms are defined therein), which is incorporated herein by reference from Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on May 3, 2018

Tax Allocation Agreement, dated as of June 19, 2006, among Alberto-Culver Company, New Aristotle Holdings, Inc., New Sally Holdings, Inc.

and Sally Holdings, Inc., which is incorporated herein by reference from Exhibit 10.1 to Amendment No.

3 to the Company’s Registration Statement on Form S-4 (File No.

333-136259) filed on October 10, 2006

First Amendment to the Tax Allocation Agreement, dated as of October 3, 2006, among Alberto-Culver Company, New Aristotle Holdings, Inc., New Sally Holdings, Inc.

and Sally Holdings, Inc., which is incorporated herein by reference from Exhibit 10.2 to Amendment No.

3 to the Company’s Registration Statement on Form S-4 (File No.

333-136259) filed on October 10, 2006

Second Amendment to the Tax Allocation Agreement, dated as of October 26, 2006, among Alberto-Culver Company, New Aristotle Holdings, Inc., New Sally Holdings, Inc.

and Sally Holdings, Inc., which is incorporated herein by reference from Exhibit 10.01 to the Company’s Current Report on Form 8-K filed on October 30, 2006

Indenture, dated as of April 24, 2020, by and among Sally Holdings LLC, Sally Capital Inc., the guarantors listed therein and Wells Fargo, National Association, which is incorporated herein by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 27, 2020 †

Sally Beauty Holdings, Inc.

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2007 Omnibus Incentive Plan , which is incorporated herein by reference from Exhibit 10.31 to the Company’s Annual Report on Form 10-K filed on November 19, 2009

Form of Amended and Restated Indemnification Agreement with Directors , which is incorporated herein by reference from Exhibit 10.33 to the Company’s Annual Report on Form 10-K filed on November 19, 2009

Form of Amended and Restated Indemnification Agreement with Directors , which is incorporated

herein by reference from Exhibit 10.33 to the Company’s Annual Report on Form 10-K filed on Novembe r 19, 2009

Sally Beauty Holdings, Inc.

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Form of Stock Option Agreement pursuant to the Sally Beauty Holdings, Inc.

2019 Omnibus Incentive Plan *

2019 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.20 from the Company’s Annual Report on Form 10-K filed on November 25, 2019

Form of Restricted Stock Agreement pursuant to the Sally Beauty Holdings, Inc.

2019 Omnibus Incentive Plan *

2019 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.21 from the Company’s Annual Report on Form 10-K filed on November 25, 2019

Offer Letter to Christian A.

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Sally Beauty Holdings, Inc.

Annual Incentive Plan *

Sally Beauty Holdings, Inc.

Third Amended and Restated Independent Director Compensation Policy, which is incorporated herein by reference from Exhibit 10.30 to the Company’s Annual Report on Form 10-K filed on November 15, 2016

Annual Incentive Plan, which is incorporated herein by reference from

Exhibit 10.25 from the Company’s Annual Report on Form 10-K filed on November 25, 2019

Sally Beauty Holdings, Inc.

Fourth Amended and Restated Independent Director Compensation Policy, which is incorporated herein by reference from Exhibit 10.28 to the Company’s Annual Report on Form 10-K filed on November 14, 2018

Preferability letter from KPMG LLP regarding a change in accounting method*

List of Subsidiaries of Sally Beauty Holdings, Inc.*

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Rule 13(a)-14(a)/15(d)-14(a) Certification of Christian A.

Rule 13(a)-14(a)/15(d)-14(a) Certification of Aaron E.

Rule 13(a)-14(a)/15(d)-14(a) Certification of Marlo M.

Section 1350 Certification of Christian A.

Section 1350 Certification of Aaron E.

Section 1350 Certification of Marlo M.

The following financial information from our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language):

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FORM 10-K SUMMARY

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 22nd day of November, 2019.

SALLY BEAUTY HOLDINGS, INC.

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President, Chief Executive Officer and Director

Senior Vice President, Chief Financial Officer

and President – Sally Beauty Supply

/s/ Kenneth M.

Interim Controller and Interim

Principal Accounting Officer

Senior Vice President, Chief Financial Officer and

Chief Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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November 23, 2020

Senior Vice President, Chief Financial Officer and President – Sally Beauty Supply

(Principal Financial Officer)

November 22, 2019

/s/ Kenneth M.

Interim Controller and Interim Principal Accounting Officer

(Principal Accounting Officer)

Senior Vice President, Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer)

November 23, 2020

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November 23, 2020

/s/ Timothy R.

November 23, 2020

/s/ Marshall E.

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November 23, 2020

/s/ Dorlisa K.

November 23, 2020

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Linda Heasley

/s/ Joseph C.

November 23, 2020

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November 23, 2020

November 22, 2019

/s/ Denise Paulonis

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Consolidated Statements of Cash Flows for the years ended September 30, 2020, 2019 and 2018

Consolidated Statements of Stockholders’ Deficit for the years ended September 30, 2019, 2018 and 2017

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended September 30, 2020, 2019 and 2018

Notes to Consolidated Financial Statements for the years ended September 30, 2020, 2019 and 2018

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We have audited the accompanying consolidated balance sheets of Sally Beauty Holdings, Inc.

and subsidiaries (the Company) as of September 30, 2019 and 2018, the related consolidated statements of earnings, comprehensive income, cash flows, and stockholders’ deficit for each of the years in the three-year period ended September 30, 2019, and the related notes (collectively, the consolidated financial statements).

and subsidiaries (the Company) as of September 30, 2020 and 2019, the related consolidated statements of earnings, comprehensive income, cash flows and stockholders’ equity (deficit) for each of the years in the three-year period ended September 30, 2020, and the related notes (collectively, the consolidated financial statements).

We also have audited the Company’s internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Change in Accounting Principles

As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for leases as of October 1, 2019 due to the adoption of ASU No.

2016-02, Leases (Topic 842).

As discussed in Note 3 to the consolidated financial statements, the Company has elected to change its method of accounting for inventory located in the U.S.

and Canada at both its distribution centers and store fronts as of August 1, 2020 from lower of cost or net realizable value on a first-in first-out (“FIFO”) basis to lower of cost or net realizable value using the weighted average cost method.

Basis for Opinions

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Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audits also included performing such other procedures as we considered necessary in the circumstances.

audits also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audits provide a reasonable basis for our opinions.

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(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable

assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Evaluation of vendor rebates and concessions

As discussed in Note 2 to the consolidated financial statements, other accounts receivable of $61.4 million consists primarily of amounts earned from the Company’s vendors under contractual agreements (collectively referred to as vendor rebates and concessions).

As discussed in Note 2 to the consolidated financial statements, other accounts receivable consists primarily of amounts earned from the Company’s vendors under contractual agreements (collectively referred to as vendor rebates and concessions).

These agreements are often specific to a particular product or promotion for a specified period of time, which results in a high volume of agreements, each with potentially non-standardized terms and conditions governing how the rebate is earned and calculated.

Therefore, the inputs used to calculate the vendor rebates and concessions, which can include financial and non-financial data from multiple sources, will vary depending on the specific terms of the agreements.

We identified the evaluation of vendor rebates and concessions as a critical audit matter because of the challenging auditor judgment required to assess the non-standardized terms of the agreements and the nature and source of the inputs used in the recognition of the receivable.

The primary procedures we performed to address this critical audit matter included the following.

We tested certain internal controls over the Company’s process to calculate vendor rebates and concessions, including controls over the derivation of key inputs and the evaluation of the contractual terms of the agreements.

Other accounts receivable was $20.8 million as of September 30, 2020.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to calculate vendor rebates and concessions.

This included controls over the derivation of key inputs and the evaluation of the contractual terms of the agreements.

For a sample of the vendor rebates and concessions, we evaluated the nature and source of the inputs used, and the terms of the contractual agreements.

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We also compared the amount of cash received to the amount previously recognized by the Company for a sample of the vendor rebates and concessions that were collected subsequent to year end.

Assessment of goodwill for impairment

As discussed in Notes 2 and 9 to the consolidated financial statements, the Company tests goodwill for impairment at least annually and whenever events or changes in circumstances indicate that it is more likely

than not that the fair value of a reporting unit is less than its carrying amount.

The total goodwill balance as of September 30, 2020 was $540.0 million, of which $81.2 million and $458.8 million were allocated to the Sally Beauty Supply reporting unit and the Beauty Systems Group reporting unit, r espectively.

As a result of the novel coronavirus (“COVID-19”) global pandemic the Company experienced a significant reduction in sales due to the rolling shut down of customer facing operations at all stores beginning in March 2020.

The Company also exper ienced a decline in market capitalization leading up to March 31, 2020, the end of the Company’s fiscal second quarter.

As a result, the Company determined that a triggering event had occurred, which required the performance of an interim goodwill impairme nt test as of March 31, 2020.

The Company used the discounted cash flow method to determine the fair value of its reporting units.

We identified the assessment of goodwill for impairment as a critical audit matter.

Significant auditor judgment, and the need to involve valuation professionals with specialized skills and knowledge, was required to evaluate forecasted revenues, and the discount rates used by the Company to determine the fair values of the Company’s reporting units.

As a result of the impact of COVID-19 on the Company’s business at the time of the impairment test, there was significant uncertainty associated with these inputs .

The involvement of valuation professionals was also necessary due to the specialized skills and knowledge required to assess the Company’s estimate of fair value as determined by the discounted cash flow models compared to the Company’s market capitalization at the reporting date.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s goodwill impairment assessment process.

This included controls over forecasted revenues used in the Company’s analysis and controls related to the development of the discount rate.

We performed sensitivity analyses over the revenue forecasts and discount rate to assess their impact on the Company’s determination of the fair value of the reporting units.

We evaluated the Company’s revenue projections by comparing the Company’s historical forecasts to actual results, and by comparing the forecast for the period subsequent to March 31, 2020 to actual results through the end of the fiscal year as stores began to reopen.

We involved valuation professionals with specialized skills and knowledge, who assisted in:

evaluating the Company’s discount rate, by comparing it against a discount rate that was independently developed using publicly available third-party market data for comparable entities,

performing sensitivity analyses for the fair values using various discount rates,

calculating the reporting units’ implied fair value earnings multiples as derived from the Company’s discounted cash flow value, and comparing them to the observed earnings multiples from a set of comparable public companies, and,

assessing the Company’s estimated fair values of its reporting units on a combined basis compared to the Company’s market capitalization.

We have served as the Company’s auditor since 2006.

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Property and equipment, net

Operating lease assets

Intangible assets, excluding goodwill, net

Liabilities and Stockholders’ Deficit

Liabilities and Stockholders’ Equity (Deficit)

Current liabilities:

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Accrued liabilities

Current operating lease liabilities

Income taxes payable

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Long-term debt

Long-term operating lease liabilities

Other liabilities

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Total liabilities

Stockholders’ deficit:

Stockholders’ equity (deficit):

Common stock, $ 0.01 par value.

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Additional paid-in capital

Accumulated earnings (deficit)

Accumulated earnings

Accumulated other comprehensive loss, net of tax

Total stockholders’ deficit

Total liabilities and stockholders’ deficit

Total stockholders’ equity (deficit)

Total liabilities and stockholders’ equity (deficit)

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

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Income taxes payable

Operating lease assets and liabilities

Other liabilities

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Proceeds from exercises of stock options

Net cash used by financing activities

Net cash provided (used) by financing activities

Effect of foreign exchange rate changes on cash and

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AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Deficit

Consolidated Statements of Stockholders’ Equity (Deficit)

Fiscal Years ended September 30, 2020, 2019 and 2018

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Income (Loss)

Equity (Deficit)

Balance at September 30, 2017

Other comprehensive income

Other comprehensive loss,

Repurchases of common stock

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Balance at September 30, 2019

Other comprehensive loss,

Cumulative effect of ASC 842 adoption

Other comprehensive income,

Repurchases of common stock

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Cash and Cash Equivalents

Cash represents currency on hand, debt and credit card receivable and third-party online payment systems transactions, while cash equivalents consist of highly liquid investments which have an original maturity of three months or less.

Cash and cash equivalents are stated at cost, which approximates fair value.

Cash represents currency on hand, debit and credit card receivable and third-party online payment systems transactions, while cash equivalents consist of highly liquid investments which have an original maturity of three months or less.

Trade Accounts Receivable and Accounts Receivable, Other

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Inventory and Cost of Goods Sold

Inventory is stated at the lower of cost (FIFO) or net realizable value.

Effective August 1, 2020, we changed how we value our inventory.

See Note 3 for more information related to the change in our costing method.

At September 30, 2020, inventory is stated at the lower of weighted average cost or net realizable value.

At September 30, 2019, inventory is stated at the lower of cost using FIFO or net realizable value.

Inventory cost reflects actual product costs, the cost of transportation to our distribution centers and certain shipping and handling costs, such as freight from the distribution centers to the stores and handling costs incurred at the distribution centers.

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We have policies and processes in place that are intended to minimize inventory shrinkage.

Cost of goods sold includes actual product costs, the cost of transportation to our distribution centers, operating cost associated with our distribution centers (including employee compensation expense, depreciation and amortization, rent and other occupancy-related expenses), vendor rebates and allowances, inventory shrinkage and certain

Sally Beauty Holdings, Inc.

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Fiscal Years ended September 30, 2020, 2019 and 2018

shipping and handling costs, such as freight from the distribution centers to the stores.

All other shipping and handling costs are included in selling, general and administrative expenses when incurred.

rent and other occupancy-related expenses), vendor rebates and allowances, inventory shrinkage and certain shipping and handling costs, such as freight from the distribution centers to the stores.

All other shipping and handling costs are included in se lling, general and administrative expenses when incurred.

We deem cash consideration received from a supplier to be a reduction of the cost of inventory purchased, unless it is in exchange for an asset or service or a reimbursement of a specific, incremental, identifiable cost incurred by us in selling the vendor’s products.

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Lease Accounting

The majority of our lease agreements are for company-operated stores, warehouse/distribution facilities and office space and are accounted for as operating leases.

Rent expense (including any rent abatements or escalation charges) is recognized on a straight-line basis from the date we take possession of the property to begin preparation of the site for occupancy to the end of the lease term, including renewal options that are considered reasonably assured.

Certain lease agreements to which we are a party provide for contingent rents that are determined as a percentage of revenues in excess of specified levels.

We record a contingent rent liability, along with the corresponding rent expense, when the specified levels of revenue have been achieved or when we determine that achieving the specified levels of revenue during the fiscal year is probable.

Certain lease agreements to which we are a party provide for tenant improvement allowances.

Tenant improvement allowances are recorded as deferred lease credits, included in accrued liabilities and other liabilities, as appropriate, on our consolidated balance sheets, and amortized on a straight-line basis over the lease term (including renewal options that are determined reasonably assured) as a reduction of rent expense.

The amortization period used for deferred lease credits is generally consistent with the amortization period used for the constructed leasehold improvement asset for a given office, store or warehouse facility.

Substantially all of our leases are operating leases and relate primarily to retail stores and warehousing properties with lease terms of five to ten years .

Some of our leases include options to extend the agreement by a certain number of years, typically five years .

At the lease commencement date, an operating lease liability and related operating lease asset are recognized and typically do not assume renewals unless we are reasonably certain that we will exercise the option.

The operating lease liabilities are calculated using the present value of lease payments.

The discount rate used is either the rate implicit in the lease, when known, or our estimated incremental borrowing rate.

Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

Because we do not generally borrow on a collateralized basis, we derive an appropriate incremental borrowing rate using the interest rate we pay on our non-collateralized borrowings, adjusted for the amount of the lease payments, the lease term and the effect of designating specific collateral with a value equal to the unpaid lease payments for that lease.

We apply the incremental borrowing rate on a portfolio basis given the impact of applying it on a lease by lease basis would be immaterial.

Operating lease assets are valued based on the initial operating lease liabilities plus any prepaid rent and direct costs from executing the leases, reduced by tenant improvement allowances and any rent abatement.

Operating lease assets are tested for impairment in the same manner as our long-lived assets.

During fiscal year 2020, we impaired approximately $ 1.9 million in operating lease assets and leasehold improvements, primarily as a result of the impact of COVID-19, within selling, general and administrative expenses.

See Note 19 for additional information related to impairments in connection with our restructuring activity.

See Note 3 for additional information regarding the accounting change in connection with the adoption of Accounting Standards Update (“ASU”) No.

2016-02, Leases (Topic 842) (“ASU No.

Property and Equipment

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Total property and equipment, net

Depreciation expense for the fiscal years 2019, 2018 and 2017 was $ 96.1 million, $ 97.2 million and $ 99.2 million, respectively, and is included in selling, general and administrative expenses in our consolidated statements of earnings.

Valuation of Long-Lived Assets and Definite-lived Intangible Assets

Long-lived assets, such as property and equipment, including store equipment, and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.

The recoverability of long-lived assets and intangible assets subject to amortization is assessed by comparing the net carrying amount of each asset to the total estimated undiscounted future cash flows expected to be generated by the asset.

If the carrying amount of an asset exceeds its undiscounted

Sally Beauty Holdings, Inc.

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Fiscal Years ended September 30, 2020, 2019 and 2018

future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

Depreciation expense for the fiscal years 2020, 2019 and 2018 was $ 95.5 million, $ 96.1 million and $ 97.2 million, respectively, and is included in selling, general and administrative expenses in our consolidated statements of earnings.

Valuation of Long-Lived Assets and Definite-lived Intangible Assets

Long-lived assets and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.

If the carrying amount of an asset exceeds its undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

Goodwill and Indefinite-lived Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination.

G oodwill is tested for impairment at least annually, as of January 31 st , and whenever indications of potential impairment exist.

Components within the same reportable segment are aggregated and deemed a single reporting unit if the components have similar economic characteristics.

As of September 30, 2019, our reporting units consisted of Sally Beauty Supply (“SBS”) and Beauty Systems Group (“BSG”).

G oodwill is tested for impairment at least annually, as of January 31 st , and whenever events or changes in circumstances indicate that its carrying amount may be less than its recoverable amount, to determine whether or not it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

As a result of COVID-19, we performed an interim assessment for impairment of goodwill as of March 31, 2020, which updated our assumptions around the growth, timing and discount rate applied to future cash flows in connection with our business restart.

Due to the uncertainty around COVID-19, our projected future cash flows may differ materially from actual results.

Furthermore, we considered potential triggering events, including the fluctuation of our stock price, and determined there were none during the remaining fiscal year, as our assumptions relative to future cash flows had improved over the fiscal year, and our market capitalization had increased since March 31, 2020.

Components within the same operating segment are aggregated and deemed a single reporting unit if the components have similar economic characteristics.

As of September 30, 2020 and 2019, our reporting units consisted of Sally Beauty Supply (“SBS”) and Beauty Systems Group (“BSG”).

We assign goodwill to the reporting unit which consolidates the acquisition.

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Upon acquisition of these identifiable intangible assets, we base our valuation on the information and assumptions available to us at the time of acquisition, using income and market approaches to determine fair value.

These assets are evaluated for impairment annually or whenever indications of potential impairment exist.

These assets are evaluated for impairment annually, as of January 31 st , and whenever events or changes in circumstances indicate that the asset’s carrying amount may be less than its recoverable amount, to determine whether or not it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount.

Like goodwill, as a result of COVID-19, we performed an interim assessment for these assets as of March 31, 2020, which updated our assumptions around the growth, timing, and discount rate applied to future cash flows in connection with our business restart.

When assessing intangible assets with indefinite lives for impairment, we compare the fair value of each asset against its carrying value.

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Based on our assessments, no material impairment charges related to intangible assets were recorded in the current or prior fiscal years presented.

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2020, 2019 and 2018

Self-Insurance Programs

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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.

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2019, 2018 and 2017

We also sell merchandise on our online platforms, to our franchisees and by using distributor sales consultants.

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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.

Private Label Rewards Credit Card

In September 2019, we signed a multi-year agreement with a third-party bank (the “Bank”) to launch a private label rewards credit card.

Under the agreement, the Bank will manage and extend credit to our SBS and BSG customers and we will provide licensing to our brand, marketing services and facilitate credit applications.

The Bank will be the sole owner of the private label rewards credit card accounts and takes on the risk of default by the private label rewards card holders.

In connection with signing the agreement, we received a refundable payment from the Bank that we recorded as deferred revenue within other liabilities on our consolidated balance sheets and will recognize on a straight-line basis over the initial term of the agreement into net sales in our consolidated statements of earnings.

Pursuant to the agreement, the Bank will reimburse us for certain expenses we incur for the launch and marketing of the Program.

Amounts reimbursed are recognized in net sales in our consolidated statements of earnings.

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2020, 2019 and 2018

addition, we can earn other amoun ts from the Bank, including incentive payments for achieving performance targets and the activation of credit cards.

During the fiscal year ended September 30, 2020, we commenced operations and started to roll out our first SBS and BSG branded credit cards .

Customer Loyalty Rewards

We 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 SBS stores and through our sallybeauty.com website, including on our new SBS mobile commerce-based app.

Our Sally Beauty Rewards Loyalty Program in the U.S.

and Canada, enables customers to earn points based on their status for every dollar spent on merchandise purchased in our SBS stores and through our sallybeauty.com website, including on our new SBS mobile commerce-based app.

When a specific tier has been reached, a customer will receive a certificate which can be used at any of our U.S.

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Points and certificates are issued by and represent liabilities of Sally Beauty Supply LLC.

Private Label Credit Card

In September 2019, we signed a multi-year agreement with a third-party bank (the “Bank”) to launch a private label credit card (the “Program”).

Under the agreement, the Bank will manage and extend credit to our SBS and BSG customers and we will provide licensing to our brand, marketing services and facilitate credit applications.

The Bank will be the sole owner of the private label credit card accounts and takes on the risk of default by the private label card holders.

As of September 30, 2019, Program operations have not yet commenced.

Pursuant to the agreement, the Bank will reimburse us for certain expenses we incur for the launch and marketing of the Program.

Amounts reimbursed are recognized in net sales in our consolidated statements of earnings.

In addition, we can earn other amounts from the Bank, including incentive payments for achieving performance targets and the activation of credit cards.

The following table shows the amount of contract liabilities on our consolidated balance sheets as of September 30, 2020 and 2019 (in thousands):

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Total liability

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2019, 2018 and 2017

Changes to our contract liabilities for fiscal year 2020 were as follows (in thousands):

September 30, 2019

Loyalty points and gift cards issued but not redeemed, net of estimated breakage

Revenue recognized from beginning liability

September 30, 2020

Advertising Costs

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A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets to the amount expected to be realized unless it is more-likely-than-not that such assets will be realized in full.

The estimated tax benefit of an uncertain tax position is recorded in our consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax position will withstand challenge, if any, from applicable taxing authorities.

The estimated tax benefit of an

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2020, 2019 and 2018

uncertain tax position is recorded in our consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax position will withstand challenge, if any, from applicable taxing authorities.

Foreign Currency

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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.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2016-02 which requires most leases to be reported on the balance sheet as a right-of-use asset and a lease liability.

On October 1, 2019, 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

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2019, 2018 and 2017

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 consolidated balance sheets as of September 30, 2019 and our consolidated statements of earnings for the fiscal year ended September 30, 2019 (in thousands):

Effect of ASU No.

2014-09 Adoption on Consolidated Balance Sheet

Accounts receivable, other

Accrued liabilities

Effect of ASU No.

2014-09 Adoption on Consolidated Statement of Earnings

Selling, general and administrative expenses

2016-02 using a modified retrospective transition method without restating comparative periods.

We have elected the package of practical expedients permitted within the transition guidance under the new standard relating to the identification, classification and initial direct costs of leases commencing before the effective date of Topic 842.

In addition, we have elected to not recognize a right-of-use asset or lease obligation for short-term leases with an initial term of 12 months or less.

The adoption of ASU No.

2016-02, as amended, resulted in the recognition of an operating lease asset of $ 513.9 million and an operating lease liability of $ 523.5 million.

Existing straight-line rent liability, prepaid rent and accrued rent were reclassified from certain other assets and liabilities into the operating lease asset.

Furthermore, the cumulative effect of the adoption of ASU No.

2016-02 resulted in a $ 0.1 million adjustment to accumulated earnings resulting from the impairment of certain operating lease assets as well certain deferred tax balances that were written off as a result of the adoption of the new standard.

The impact on our consolidated results of operations or consolidated cash flows was not material.

See Note 8 for additional information in connection with ASU No.

Effective August 1, 2020, we changed our method of accounting for inventory located in the U.S.

and Canada at both our distribution centers and store fronts.

Prior to August 2020, we valued inventory at the lower of cost or net realizable value on a FIFO basis.

Effective August 1, 2020, all company-wide inventories have been valued at the lower of cost or net realizable value using the weighted average cost method.

These changes were made in connection with the implementation of a new perpetual inventory system, which provides us with better information to manage inventory.

We believe the weighted average cost method is preferable to the FIFO cost method because it results in greater precision in the determination of cost of goods sold and inventories at the SKU level and results in a consistent inventory valuation method for all of the Company’s inventories.

We recorded the cumulative effect of this change in accounting principle as of August 1, 2020.

The effects of this change in accounting principle as of August 1, 2020 were not material to our consolidated financial statements.

Prior to implementation of the new perpetual inventory system, we were not able to determine the impact of the change to the weighted average cost method.

Therefore, we did not retroactively apply the change to prior periods.

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, but companies can adopt using the effective date method or the comparative 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 using the effective date method.

We have completed a preliminary assessment of the potential impact of adopting ASU No.

2016-02 on our consolidated financial statements.

At September 30, 2019, we estimate that the adoption of ASU No.

2016-02 would have resulted in recognition of a lease liability in the estimated amount of approximately $ 500.0 million and a right-of-use asset for a similar amount, which will be adjusted by reclassifications of existing lease assets and liability, on our consolidated balance sheet.

We are currently in the final stages of implementing changes to our processes, controls and systems and expect to be compliant upon required 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.

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (“ASC 740”), which simplifies the accounting for income taxes by removing an exception related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period with year to date losses and the recognition of deferred tax liabilities for outside basis differences.

Additionally, the update clarifies and simplifies other areas of ASC 740, Income Taxes .

For public companies, the amendments in the update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

Early adoption is permitted, but all amendments must be adopted at once.

The amendments in this update have different adoption methods including

Sally Beauty Holdings, Inc.

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Fiscal Years ended September 30, 2020, 2019 and 2018

prospective basis, retrospective basis, and a modified retrospective basis dependent on the specific change.

We are currently evaluating the impact of this update.

Fair Value Measurements

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Financial Assets

Cash equivalents

Cash and cash equivalents

Interest rate caps

Financial Liabilities

Cash equivalents, at September 30, 2020, consist of highly liquid investments which mature daily and are valued using unadjusted quoted market prices for such securities.

The fair value for interest rate caps were measured using widely accepted valuation techniques, such as discounted cash flow analyses, and observable inputs, such as market interest rates.

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Other long-term debt

The fair value of the senior notes was measured using unadjusted quoted market prices.

The fair value of other long-term debt was measured using quoted market prices for similar debt securities in active markets or widely accepted valuation techniques, such as discounted cash flow analyses, using observable inputs, such as market interest rates.

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Fiscal Years ended September 30, 2020, 2019 and 2018

Accumulated Stockholders’ Deficit

The fair value of the senior notes was measured using unadjusted quoted market prices.

Accumulated Stockholders’ Equity (D eficit)

Share Repurchases

In August 2017, we announced that the Board approved a share repurchase program authorizing us to repurchase up to $ 1.0 billion of our common stock over an approximate four-year period expiring on September 30, 2021 (the “2017 Share Repurchase Program”) and terminated the 2014 Share Repurchase Program.

During the fiscal years ended September 30, 2019, 2018 and 2017, we repurchased and subsequently retired approximately 3.6 million shares, 10.0 million shares and 16.1 million shares of our common stock at a cost of approximately $ 46.6 million, $ 165.9 million and $ 346.1 million, respectively, under the 2017 Share Repurchase Program and the 2014 Share Repurchase Program (prior to termination of the 2014 Share Repurchase Program in August 2017).

In August 2017, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $ 1.0 billion of our common stock over an approximate four-year period expiring on September 30, 2021 (the “2017 Share Repurchase Program”).

Information related to our shares repurchased and subsequently retired were as follows (in thousands):

Fiscal Year Ended September 30,

Number of shares repurchased

Total cost of share repurchased

The amounts above do not include approximately 159,000 , 209,000 and 177,595 shares surrendered by grantees to satisfy personal income tax withholdings obligations upon vesting of equity-based awards valued at approximately $ 0.3 million, $ 0.8 million and $ 0.8 million during the fiscal years 2020, 2019 and 2018, 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 such repurchases, we recorded the excess in accumulated deficit.

However, as required by GAAP, to the extent that share repurchase amounts exceeded the balance of additional paid-in capital prior to such repurchases, we recorded the excess in accumulated stockholders’ equity (deficit) on our consolidated balance sheets.

We funded these share repurchases with cash from operations and borrowings under the ABL facility, as appropriate.

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Balance at September 30, 2018

Other comprehensive income (loss) before

Other comprehensive loss before

reclassifications, net of tax

Reclassification to net earnings, net of tax

Balance at September 30, 2019

Other comprehensive loss before

Other comprehensive income (loss) before

reclassifications, net of tax

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

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2020, 2019 and 2018

Weighted Average Shares

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At September 30, 2020, 2019 and 2018, options to purchase approximately 4.7 million, 4.7 million and 5.2 million shares, respectively, of our common stock were outstanding but not included in the computation of diluted earnings per share, because these options were anti-dilutive.

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2019, 2018 and 2017

Share-Based Payments

Our Sally Beauty Holdings, Inc.

2019 Omnibus Incentive Plan and the 2010 Omnibus Incentive Plan as amended (the "Omnibus Plans") allows us to grant performance-based awards and service-based awards to its employees up to 8.0 million shares of our common stock, plus an additional number of shares based on the number of shares outstanding as of the beginning of the current plan that have subsequently been terminated, expired unexercised, cash-settled, cancelled, forfeited or lapsed for any reason.

Currently, we have awarded grants to employees and non-employee directors under the terms of the Omnibus Plans.

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RSUs granted prior to the fiscal year 2012, 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.

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2020, 2019 and 2018

Performance-Based Awards

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Unvested at September 30, 2020

As of September 30, 2019, the maximum compensation expense that could be potentially recognized in connection with unvested performance awards is approximately $ 11.6 million, which is expected to be recognized over the weighted average period of 1.9 years.

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2019, 2018 and 2017

As of September 30, 2020, as a result of the economic impacts of COVID-19, it was not probable that any of the performance targets for the unvested awards would be met.

As such, we reversed out approximately $ 1.7 million of expense previously recorded in prior fiscal years related to these unvested awards.

Service-Based Awards

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The aggregate fair value of stock options that vested during the fiscal years 2020, 2019 and 2018 was $ 2.7 million, $ 5.1 million and $ 7.7 million, respectively.

The aggregate intrinsic value of options exercised during the fiscal years 2019, 2018 and 2017 was $ 0.9 million, $ 1.3 million and $ 7.7 million, respectively.

The total cash received during the fiscal years 2019, 2018 and 2017 from these option exercises was $ 2.2 million, $ 1.4 million and $ 17.3 million, respectively, and the tax benefit realized for the tax deductions from these option exercises was $ 0.2 million, $ 0.3 million and $ 2.9 million, respectively.

At September 30, 2019, approximately $ 4.4 million of total unrecognized compensation costs related to unvested stock option awards are expected to be recognized over the weighted average period of 1.7 years.

Sally Beauty Holdings, Inc.

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Fiscal Years ended September 30, 2020, 2019 and 2018

The aggregate intrinsic value of options exercised during the fiscal years 2020, 2019 and 2018 was $ 0.5 million, $ 0.9 million and $ 1.3 million, respectively.

The total cash received during the fiscal years 2020, 2019 and 2018 from these option exercises was $ 3.0 million, $ 2.2 million and $ 1.4 million, respectively, and the tax benefit realized for the tax deductions from these option exercises was $ 0.1 million, $ 0.2 million and $ 0.3 million, respectively.

At September 30, 2020, approximately $ 4.9 million of total unrecognized compensation costs related to unvested stock option awards are expected to be recognized over the weighted average period of 1.8 years.

The following table presents a summary of the activity for our RSAs:

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Unvested at September 30, 2020

At September 30, 2019, all RSUs previously awarded have vested and there are no unrecognized compensation costs in connection therewith.

At September 30, 2020, approximately $ 0.2 of total unrecognized compensation costs related to unvested RSUs are expected to be recognized over the weighted average period of 0.1 years.

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2020, 2019 and 2018

Our operating and finance leases consisted of the following (in thousands):

Balance Sheet Classification

September 30, 2020

Operating lease

Operating lease assets

Finance lease

Property and equipment, net

Total lease assets

Operating lease

Current operating lease liabilities

Finance lease

Current maturities of long-term debt

Operating lease

Long-term operating lease liabilities

Finance lease

Long-term debt

Total lease liabilities

Our lease costs, net of immaterial sublease income, consisted of the following (in thousands):

Statement of Earnings (Loss) Classification

Fiscal Year Ended

September 30, 2020

Operating lease costs (a)

Cost of goods sold and selling, general and administrative expenses (b)

Finance lease costs:

Amortization of leased assets

Selling, general and administrative expenses

Interest on lease liabilities

Interest expense

Variable lease costs (c)

Selling, general and administrative expenses

Total lease costs

Includes costs related to short-term leases, which are immaterial.

Certain supply chain-related amounts are included in cost of goods sold.

Includes common area maintenance, real estate taxes and insurance related to leases.

In response to COVID-19, the FASB issued interpretive guidance that provides an option for entities to make a policy election for lease concessions as a result of COVID-19, provided that the modified contracts result in total cash flows that are substantially the same or less than the original contracts.

This policy election allows for lease concessions to be treated as though enforceable rights and obligations for those concessions existed (regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contracts).

We have elected to apply this policy election and have included rent abatements related to COVID-19 into variable lease costs.

For the year ended September 30, 2020, we have recognized a benefit of $ 11.7 million for rent abatements.

As of September 30, 2020, the approximate future lease payments under our leases under ASC 842, Leases , are as follows (in thousands):

Operating leases

Finance leases

Total undiscounted lease payments

imputed interest

Present value of lease liabilities

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2020, 2019 and 2018

The table above does not include operating leases we have entered into of approximately $ 11.1 million that have not commenced, primarily related to future retail stores.

As of September 30, 2019, our future minimum lease payments under non-cancelable operating leases as reported under the previous accounting standard, ASC 840, Leases , were as follows (in thousands):

Other lease information is as follows (dollars in thousands):

Fiscal Year Ended

September 30, 2020

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows – operating leases

Operating cash flows – finance leases

Financing cash flows – finance leases

Supplemental non-cash information on lease liabilities:

Lease assets obtained in exchange for new operating lease liabilities

Lease assets obtained in exchange for new finance lease liabilities

September 30, 2020

Weighted-average remaining lease term (in years):

Operating leases

Finance leases

Weighted-average discount rate:

Operating leases

Finance leases

Goodwill and Intangible Assets

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Balance at September 30, 2020

The following table reflects our other intangible assets, excluding goodwill, on our consolidated balance sheets.

Once an intangible becomes fully amortized, the original cost and accumulated amortization is removed in the

Sally Beauty Holdings, Inc.

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Fiscal Years ended September 30, 2020, 2019 and 2018

The following table reflects our other intangible assets, excluding goodwill, on our consolidated balance sheets.

Once an intangible becomes fully amortized, the original cost and accumulated amortization is removed in the subsequent period.

In the table below, prior year amounts for definite-lived intangible assets have been conformed to the current year’s presentation.

subsequent period.

In the table b elow, prior year amounts for definite-lived intangible assets have been conformed to the current year’s presentation.

As of September 30, 2020 and 2019 , we had the following (in thousands):

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Compensation and benefits

Deferred revenue

Interest payable

Deferred revenue

Rental obligations

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Property and other taxes

Loss contingency obligation

Operating accruals and other

Total accrued liabilities

Commitments and Contingencies

Letters of Credit

Sally Beauty Holdings, Inc.

2 unchanged sentences

Fiscal Years ended September 30, 2020, 2019 and 2018

Commitments and Contingencies

Our leases relate primarily to retail stores and warehousing properties.

At September 30, 2019, future minimum payments, excluding amounts related taxes, insurance, maintenance and special assessments, under non-cancelable operating leases are as follows (in thousands):

Certain of our leases include payments of contingent rent based on a percentage of sales, renewal options and escalation clauses.

Contingent rentals were not material for any fiscal years presented.

Aggregate rental expense for all operating leases amounted to $ 250.4 million, $ 249.8 million and $ 242.0 million for the fiscal years 2019, 2018 and 2017, respectively.

Letters of Credit

We had $ 18.6 million and $ 18.0 million of outstanding letters of credit as of September 30, 2020 and 2019, respectively.

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Data Security Incidents

As previously disclosed, we experienced data security incidents during the fiscal years 2014 and 2015 (together, the “data security incidents”).

The data security incidents involved the unauthorized installation of malicious software (“malware”) on our information technology systems, including our point-of-sale systems that may have placed at risk certain payment card data for some transactions.

The costs that we have incurred to date in connection with the data security incidents include assessments by payment card networks, professional advisory fees and legal fees relating to investigating and remediating the data security incidents.

During the fiscal year 2017, we entered into agreement pursuant to which all existing claims and assessments by certain payment card networks were settled.

As previously disclosed, we experienced data security incidents in prior years that involved the unauthorized installation of malicious software (“malware”) on our information technology systems, including our point-of-sale systems that may have placed at risk certain payment card data for some transactions.

We received an assessment from another payment card network during fiscal year 2018 in connection with the data security incidents and recognized $ 7.9 million of expenses.

The assessment was based on the network’s claims against our acquiring banks for costs that it asserts its issuing banks incurred in connection with the data security incidents, including incremental counterfeit fraud losses and non-ordinary course operating expenses, such as card reissuance costs.

As of September 30, 2018, we had a $ 14.3 million loss contingency liability related to the data security incidents.

During the fiscal year 2019, we paid the full amount of the assessment, and, we believe that, we have no remaining liability related to the data security incidents.

As of September 30, 2019, we had paid the full amount of the assessment, and, we believe that, we have no remaining liability related to the data security incidents as of September 30, 2020 or 2019.

Liabilities for loss contingencies, arising from claims, assessments, litigation, fines, penalties, the data security incidents and other sources, are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

We have no significant liabilities for loss contingencies at September 30, 2019 and 2018, except as disclosed above.

We have no significant liabilities for loss contingencies at September 30, 2020 and 2019.

Sally Beauty Holdings, Inc.

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Borrowings under the ABL facility are secured by the accounts, inventory and credit card receivables (and related general intangibles and other property) of our domestic subsidiaries.

On April 15, 2020, we entered into an amendment to our ABL facility to, among other things, increased the revolving commitment thereunder from $ 500.0 million to $ 600.0 million, established a FILO (first-in, last-out) tranche of indebtedness in the amount of $ 20.0 million, increased pricing on the revolving loans and modified certain covenant and reporting terms.

The ABL facility continues to be secured by a first-priority lien in and upon the accounts and inventory (and the proceeds thereof) of the Company and its guarantor subsidiaries.

The ABL facility is also secured by a second-priority lien in and upon the remaining assets of the Company and its guarantor subsidiaries.

At September 30, 2020 and 2019, we did no t have any outstanding borrowing under the ABL facility.

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Senior notes due Nov.

Senior notes due Apr.

Senior notes due Dec.

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Borrowings under the term loan B are secured by a first-priority lien in and upon substantially all of the assets of the Company and its domestic subsidiaries other than the accounts, inventory (and the proceeds thereof) and other assets that secure the ABL facility on a first priority basis.

In addition, the variable-rate tranche contains provisions requiring quarterly repayments of principal in an amount equal to 0.25 % of the original amount for the variable-rate tranche.

The term loan B matures on July 5, 2024 .

Interest is payable monthly on the variable-rate tranche and quarterly on the fixed-rate tranche.

During the fiscal year ended September 30, 2019, we paid down $ 115.0 million aggregate principal amount of our term loan B, in addition to the previously required quarterly payments.

In connection with debt repayment, we recognized a $ 1.4 million loss on the extinguishment of debt from the write-off of unamortized deferred financing costs.

In March 2018, the Borrowers 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 was reduced by 25 basis points to LIBOR plus 2.25 %.

Sally Beauty Holdings, Inc.

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Fiscal Years ended September 30, 2020, 2019 and 2018

The senior notes due 2023 and the senior notes due 2025, which we refer to collectively as “the senior notes due 2023 and 2025,” are unsecured obligations that are jointly and severally guaranteed by Sally Beauty Holdings, Inc.

During the fiscal year ended September 30, 2020, we paid down $ 86.8 million aggregate principal amount of our term loan B fixed tranche at a weighted-average price of 99.4 %, excluding accrued interest.

In connection with our term loan B fixed tranche repayments, we recognized a net $ 0.2 million gain on the extinguishment of debt.

This gain was a result of the discount paid under the face value of approximately $ 0.6 million, partially offset from the loss of approximately $ 0.4 million from the write-off of unamortized deferred financing costs.

The senior notes due 2023 and the senior notes due December 2025, which we refer to collectively as “the senior notes due 2023 and 2025,” are unsecured obligations that are jointly and severally guaranteed by Sally Beauty Holdings, Inc.

and Sally Investment, and by each material domestic subsidiary.

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Please see Note 17 for certain condensed financial statement data pertaining to Sally Beauty Holdings, Inc., the Issuers, the guarantor subsidiaries and the non-guarantor subsidiaries.

During the fiscal year ended September 30, 2019, we repurchased $ 62.2 million of our senior notes due 2025 at a weighted-average price of 98.1 % and $ 2.6 million of our senior notes due 2023 at par.

As a result, we recognized a $ 0.5 million gain on the extinguishment of debt, including a gain of approximately $ 1.2 million from the discount paid under the face value of the accepted 2025 Notes and the write-off of $ 0.7 million in unamortized deferred financing costs.

The agreements governing our ABL facility, term loan B and the senior notes due 2023 and 2025 contain a customary covenant package that places restrictions on the disposition of assets, the granting of liens and security interests, the prepayment of certain indebtedness, and other matters and customary events of default, including customary cross-default and/or cross-acceleration provisions.

During the fiscal year ended September 30, 2020, we repurchased $ 7.9 million of our senior notes due December 2025 at a weighted-average price of 98.7 %, excluding accrued interest.

As a result, we recognized a $ 0.1 million gain on the extinguishment of debt.

On April 24, 2020, we closed on $ 300.0 million of our Senior Secured Notes and received $ 295.5 million in net proceeds from the Senior Secured Notes offering.

The notes bear interest at a rate of 8.75 % and were issued at par.

The Senior Secured Notes are guaranteed on a senior secured basis by the guarantors who have guaranteed obligations under our senior secured credit facilities and our existing notes.

The agreements governing our debt contain a customary covenant package that places restrictions on the disposition of assets, the granting of liens and security interests, the prepayment of certain indebtedness, and other matters and customary events of default, including customary cross-default and/or cross-acceleration provisions.

As of September 30, 2020, we are in compliance with all debt covenants and all the net assets of our consolidated subsidiaries were unrestricted from transfer.

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We record, net of income tax, the changes in fair value related to the foreign currency forwards into AOCL and recognize realized gain or loss into cost of goods sold based on inventory turns.

As of September 30, 2019 exchange rates, we expect to reclassify approximately $ 0.3 million into cost of goods sold over the next 12 months.

As of September 30, 2020, we expect to reclassify approximately $ 0.6 million into cost of goods sold over the next 12 months.

During the fiscal year ended September 30, 2020, we reclassified $ 1.1 million of net losses into cost of goods sold.

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The interest rate caps are made up of individual caplets that expire monthly through June 30, 2023 and are designated as cash flow hedges.

During the fiscal year ended September 30, 2019, we dedesignated one interest rate cap and terminated $ 115.0 million in notional amount, concurrent with the repayment of $ 115.0 million of the term loan B variable tranche.

Subsequently, we redesignated the remaining notional amounts of the interest rate cap.

Once we determined the hedged transaction related to $ 115.0 million of the term loan B variable tranche principal was probable not to occur, we reclassified a loss of $ 1.2 million from AOCL into interest expense.

Furthermore, changes in fair value of the remaining hedged 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 $ 1.2 million into interest expense, which represents the original value of the expiring caplets.

During the fiscal year ended September 30, 2020, we reclassified $ 0.6 million into interest expense.

Sally Beauty Holdings, Inc.

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Fiscal Years ended September 30, 2020, 2019 and 2018

During the fiscal year ended September 30, 2019, we reclassified $ 1.6 million, which includes the $ 1.2 million loss, out of AOCI into interest expense.

Non-Designated Cash Flow Hedges

During the fiscal years ended September 30, 2018 and 2017, we used foreign currency forwards to mitigate the exposure to exchange rate changes on inventory purchases in USD by our foreign subsidiaries.

We did not have any material non-designated foreign currency forwards during fiscal year 2019.

During the fiscal years ended September 30, 2018 and 2017, we recognized a gain of $ 1.6 million and a loss of $ 2.8 million, respectively, into selling, general and administrative expenses.

During the fiscal year ended September 30, 2018, we used foreign currency forwards to mitigate the exposure to exchange rate changes on inventory purchases in USD by our foreign subsidiaries.

We did not have any material non-designated foreign currency forwards during fiscal years 2020 or 2019.

During the fiscal year ended September 30, 2018, we recognized a gain of $ 1.6 million into selling, general and administrative expenses.

401(k) and Profit Sharing Plan

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During the fiscal years ended September 30, 2020, 2019 and 2018, we did no t make a profit sharing contribution to the 401(k) Plans.

Tax Law Changes

In response to the global pandemic related to COVID-19, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020.

The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, temporary suspension of certain payment requirements for the employer portion of social security taxes, and the creation of certain refundable employee retention credits.

There was not a material impact on our income tax expense for the twelve months ended September 30, 2020, related to the CARES Act.

We will continue to monitor legislative developments related to COVID-19 and will record the associated income tax impacts in the periods that guidance is finalized or when we are able to reasonably estimate an impact.

On December 22, 2017, the U.S.

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and (c) otherwise modified corporate tax rules in significant ways.

Also in December 2017, the SEC issued Staff Accounting Bulletin No.

118 (“SAB 118”) which 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.

We have completed our analysis on our provisional calculations within the measurement period provided by SAB 118.

As a result, we identified certain immaterial adjustments to our provisional calculations, including a benefit of $ 3 million related to the transition tax on unremitted earnings of our foreign operations.

Treasury Department has issued final regulations covering the one-time transition tax on unrepatriated foreign earnings, which was enacted as part of U.S Tax Reform.

Certain guidance included in these final regulations is inconsistent with our interpretation of the enacted tax law that led to the recognition of a $ 2.5 million benefit in the first quarter of the current fiscal year.

Notwithstanding this inconsistency, we remain confident in our interpretation of the Internal Revenue Code and intend to defend this position through litigation, if necessary.

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We have made the policy election to record this tax as a period cost at the time it is incurred.

The impact from GILTI was immaterial for fiscal year 2019.

The impact from GILTI was immaterial for fiscal years 2020 and 2019.

For the fiscal year ended September 30, 2020, the provision for income taxes also includes a benefit due to a reduction of prior year tax related to GILTI.

The benefit is a result of favorable final Regulations being issued by the Department of Treasury in July 2020, which can be applied retroactively.

Sally Beauty Holdings, Inc.

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Effect of foreign operations

Foreign valuation allowances

Tax law change - GILTI

Deferred tax revaluation, including adoption

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Deemed repatriation tax

Share-based payment awards

Effective tax rate

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foreign tax credits

Unrecognized tax benefits

federal social security tax deferral

Inventory adjustments

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Depreciation and amortization

Inventory adjustments

Total deferred tax liabilities

Net deferred tax liability

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We believe that it is more-likely-than-not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets, net of the valuation allowance.

We have recorded a valuation allowance to account for uncertainties regarding recoverability of certain deferred tax assets, primarily foreign loss carry-forwards.

We have recorded a valuation allowance to account for uncertainties regarding recoverability of certain deferred tax assets, primarily fo reign loss carry-forwards.

Domestic earnings before provision for income taxes were $ 168.0 million, $ 328.3 million and $ 300.4 million in the fiscal years 2020, 2019 and 2018, respectively.

Foreign operations had earnings before provision for income taxes of $ 33.9 million, $ 28.0 million and $ 13.2 million in the fiscal years 2019, 2018 and 2017, respectively.

Foreign operations had a loss before provision for income taxes of $ 8.0 million in the fiscal year 2020 and earnings before provision for income taxes of $ 33.9 million and $ 28.0 million in the fiscal years 2019 and 2018, respectively.

Tax reserves are evaluated and adjusted as appropriate, while taking into account the progress of audits by various taxing jurisdictions and other changes in relevant facts and circumstances evident at each balance sheet date.

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At September 30, 2020, operating loss carry-forwards of $ 6.2 million expire between 2021 and 2032 and operating loss carry-forwards of $ 122.0 million have no expiration date.

At September 30, 2019 and 2018, we had tax credit carry-forwards of $ 11.2 million and $ 11.6 million, respectively, This includes a U.S.

foreign tax credit carry-forward of $ 8.8 million as a result of the deemed repatriation tax under U.S.

At September 30, 2020 and 2019, we had tax credit carry-forwards of $ 13.8 million and $ 11.2 million, respectively.

This includes a U.S.

foreign tax credit carry-forward of $ 11.2 million primarily as a result of the deemed repatriation tax under U.S.

This credit expires in 2028.

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An estimate of the amount of such change, or a range thereof, cannot reasonably be made at this time.

However, we do not expect the change, if any, to have a material effect on our consolidated financial condition or results of operations within the next 12 months.

Sally Beauty Holdings, Inc.

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Fiscal Years ended September 30, 2020, 2019 and 2018

However, we do not expect the change, if any, to have a material effect on our consolidated financial condition or results of operations within the next 12 months.

Our consolidated federal income tax return for the fiscal year ended September 30, 2018 is currently under IRS examination.

Our con solidated federal income tax return for the fiscal years ended September 30, 2019 and 2018, are currently under IRS examination.

Our statute remains open for the fiscal year ended September 30, 2017, forward.

state and foreign income tax returns are impacted by various statutes of limitations, which are generally open from 2014 forward.

state income tax returns are impacted by various statutes of limitations and are generally open for the fiscal year ended September 30, 2017 and future years.

Our foreign income tax returns are impacted by various statutes of limitations, which are generally open from 2015 forward.

On September 28, 2020 , we acquired La Maison Ami-Co (1981) Inc.

(“Ami-Co”), a professional beauty products distributor with ten stores in the province of Quebec, Canada, for approximately $ 8.9 million, pending certain holdbacks.

In addition, this acquisition includes exclusive distribution rights in Quebec to premier professional hair color and hair care brands.

We accounted for this acquisition using the acquisition method of accounting for business combinations and funded by cash on hand.

Upon acquisition, we preliminary recorded goodwill of $ 5.3 million, which is not expected to be deductible for tax purposes, in connection with this acquisition.

The results of operations of Ami-Co subsequent to the acquisition date and the goodwill recorded in connection with the acquisition was included within our BSG segment.

The acquisition of Ami-Co was not material to our results of operations.

In addition, we completed several other individually immaterial acquisitions during the fiscal year 2020 in the aggregate cost of approximately $ 5.7 million and recorded intangible assets subject to amortization of $ 3.9 million.

In the fiscal year ended September 30, 2018, we acquired certain assets and business operations of H.

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This acquisition was accounted for using the acquisition method of accounting for business combinations and funded by cash from operations and borrowing under the ABL facility.

The results of operations of Chalut are included in our BSG reportable segment subsequent to the acquisition date.

The results of operations of Chalut are included in our BSG segment subsequent to the acquisition date.

We recorded intangible assets subject to amortization of $ 4.7 million and goodwill of $ 0.7 million, which is expected to be deductible for tax purposes, in connection with this acquisition.

The goodwill in connection with the acquisition was assigned to our BSG reportable segment.

The goodwill in connection with the acquisition was assigned to our BSG segment.

The acquisition of Chalut was not material to the results of operations.

For the fiscal years ended September 30, 2019 and 2017, we did no t acquire any substantial businesses.

For the fiscal year ended September 30, 2019, we did no t acquire any substantial businesses.

Segments and Disaggregated Revenue

Our segments are defined on how our chief operating decision maker, which we consider the Chief Executive Officer and Chief Financial Officer together, regularly reviews performance and allocates resources to our operating segments, which relies on internal management reporting.

We then aggregate operating segments based on the nature of the customer base and method used to distribute products into reportable segments.

Our business is organized into two reportable segments:

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Styling tools

Multicultural products

Salon supplies and accessories

Textured hair

Other beauty items

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Fiscal Years ended September 30, 2020, 2019 and 2018

Separate Financial Information of Guarantor Subsidiaries

Certain 100 % wholly owned domestic subsidiaries (“guarantor subsidiaries”), as defined in our credit agreements, of Sally Beauty serve as guarantors to the ABL facility, term loan B and senior notes due 2023 and 2025 .

Sep arate Financial Information of Guarantor Subsidiaries

The guarantees related to these debt instruments are full and unconditional, joint and several and have certain restrictions on the ability to pay restricted payments to Sally Beauty Holdings, Inc.

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Property and equipment, net

Operating lease assets

Investment in subsidiaries

Goodwill and other intangible

Liabilities and Stockholders’ (Deficit)

Liabilities and Stockholders’ Equity

Accounts payable

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Long-term debt

Operating lease liabilities

Other liabilities

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Total liabilities

Total stockholders’ (deficit) equity

Total stockholders’ equity (deficit)

Total liabilities and stockholders’

(deficit) equity

equity (deficit)

Sally Beauty Holdings, Inc.

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Goodwill and other intangible

Liabilities and Stockholders’ (Deficit)

Liabilities and Stockholders’ Equity

Accounts payable

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Total liabilities

Total stockholders’ (deficit) equity

Total stockholders’ equity (deficit)

Total liabilities and stockholders’

(deficit) equity

equity (deficit)

Sally Beauty Holdings, Inc.

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Provision (benefit) for income taxes

Equity in earnings of subsidiaries,

Other comprehensive loss, net of tax

Total comprehensive income (loss)

Equity (loss) in earnings of subsidiaries,

Net earnings (loss)

Other comprehensive income, net of tax

Total comprehensive income

Sally Beauty Holdings, Inc.

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Fiscal Years ended September 30, 2020, 2019 and 2018

Condensed Consolidating Statement of Earnings and Comprehensive Income

Condensed Consolidating Stat ement of Earnings and Comprehensive Income

Fiscal Year Ended September 30, 2019

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Equity in earnings of subsidiaries,

Other comprehensive income (loss),

Total comprehensive income (loss)

Other comprehensive loss,

Total comprehensive income

Sally Beauty Holdings, Inc.

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Fiscal Years ended September 30, 2020, 2019 and 2018

Condensed Consolidating Statement of Earnings and Comprehensive Income

Condensed Consolidating Stat ement of Earnings and Comprehensive Income

Fiscal Year Ended September 30, 2018

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Repayments of long-term debt

Debt issuance cost

Payments for common

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Due to affiliates

Net cash provided (used) by financing

Net cash provided by financing

Effect of foreign exchange rate changes

on cash and cash equivalents

Net increase (decrease) in cash and

Net increase in cash and

cash equivalents

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Repayments of long-term debt

Debt issuance cost

Payments for common

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on cash and cash equivalents

Net increase in cash and

Net increase (decrease) in cash and

cash equivalents

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equipment, net

Acquisitions, net of cash acquired

Due from affiliates

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Repayments of long-term debt

Debt issuance costs

Debt issuance cost

Payments for common

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on cash and cash equivalents

Net increase (decrease) in cash and

Net increase in cash and

cash equivalents

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Restructuring expense and gains for the fiscal years ended September 30, 2020, 2019 and 2018, are as follows (in thousands):

Supply Chain Modernization

2018 Restructuring Plan

2017 Restructuring Plan

Project Surge

Transformation Plan

Total expense (gain)

Supply Chain Modernization

In February 2019, we announced that we were assessing our supply chain in an effort to minimize out-of-stocks, optimize inventory levels, reduce costs and explore new replenishment and fulfillment options.

As part of our supply chain modernization plans, we sold our secondary headquarters and fulfillment center in Denton, Texas, and our Marinette, Wisconsin, fulfillment facility, anticipate closing other select distribution centers and upgrading our e-commerce capabilities.

Additionally, we will be opening a new automated and concentrated distribution center which will service SBS stores and e-commerce sales, as well as BSG stores, full service sales and e-commerce sales in fiscal year 2020.

The liability related to the supply chain modernization, which is included in accrued liabilities on our consolidated balance sheets, is as follows (in thousands):

Supply Chain Modernization

Project Surge

In November 2019, we announced that we were launching Project Surge, which takes the successful elements of the North American Sally Beauty transformation and integrates them into our European operations, with the support and participation of several key leaders from the corporate headquarters.

As part of this plan, we are focusing on several operating elements, including a review of our talent and operating structure.

The liability related to Project Surge, which is included in accrued liabilities on our consolidated balance sheets, is as follows (in thousands):

Project Surge

September 30,

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Facility closures

Expenses incurred during the fiscal year ended September 30, 2019, represent costs incurred by SBS of $ 1.5 million, BSG of $ 1.5 million and corporate of $ 0.7 million.

The above table does not include an $ 8.4 million gain from selling our secondary headquarters and fulfillment center in Denton, Texas, and our fulfillment center in Marinette, Wisconsin.

2018 Restructuring Plan

In November 2017, our Board of Directors approved a restructuring plan (the “2018 Restructuring Plan”) focused primarily on significantly improving the profitability of our international businesses, with particular focus on our European operations.

In April 2018, we announced an expansion of the 2018 Restructuring Plan that contained cost reduction initiatives designed to help fund important long-term growth initiatives.

The expansion to the 2018 Restructuring Plan included headcount reductions primarily at our corporate headquarters in Denton, Texas.

As of December 31, 2018, the 2018 Restructuring Plan was substantially complete and we do not anticipate any additional material costs for the 2018 Restructuring Plan.

The liability related to the 2018 Restructuring Plan, which is included in accrued liabilities on our consolidated balance sheets, is as follows (in thousands):

2018 Restructuring Plan

Expenses incurred during the fiscal year ended September 30, 2020, represent costs incurred by SBS of $ 1.4 million and corporate of $ 0.1 million.

Transformation Plan

We previously disclosed a plan to focus on certain core business strategies.

In addition to optimizing our supply chain network with changes to our transportation model and network of nodes, we are improving our marketing and digital commerce capabilities, and advancing our merchandising transformation efforts.

In addition, we expanded our plan and announced a reduction in workforce within our field and headquarters.

All these together, make up our Transformation Plan.

The liability related to the Transformation Plan, which is included in accrued liabilities on our consolidated balance sheets, is as follows (in thousands):

Transformation Plan

September 30,

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Workforce reductions

Expenses incurred during the fiscal year ended September 30, 2020, represent costs incurred by SBS of $ 6.5 million, corporate of $ 4.1 million and BSG of $ 1.9 million.

Additionally, other expenses in the table above includes a non-cash asset impairment of $ 2.3 million related to the re-measurement of certain long-lived assets and operating lease assets.

These assets had a carrying value of $ 8.0 million and were adjusted down to their estimated fair values.

The fair value measurements for these purposes were based on unobservable inputs (Level 3).

Sally Beauty Holdings, Inc.

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Fiscal Years ended September 30, 2020, 2019 and 2018

Expenses incurred during the fiscal year ended September 30, 2019, represent costs incurred by SBS of $ 1.1 million and corporate of $ 2.8 million.

2017 Restructuring Plan

In January 2017, the Board approved a restructuring plan (the “2017 Restructuring Plan”) for our businesses that included the closure of four administrative offices in the U.S.

and Canada, reductions in both salaried and hourly workforce and certain other cost reduction activities.

In addition, we expanded the 2017 Restructuring Plan to encompass some other underperforming international operations.

There was no material liability for the 2017 Restructuring Plan as of September 30, 2019.

Quarterly Financial Data (Unaudited)

Certain unaudited quarterly consolidated statement of earnings information for the fiscal years ended September 30, 2020 and 2019 is summarized below (in thousands, except per share data):

Earnings per share (a)

Net earnings (loss)

Earnings (loss) per share (a)

Earnings per share (a)

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures