Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following section discusses management’s view of Sally Beauty’s financial condition and results of operations for fiscal year 2020 compared to fiscal year 2019. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, for a discussion of the financial condition and results of operations for fiscal year 2019 compared to fiscal year 2018. This section should be read in conjunction with the audited consolidated financial statements of Sally Beauty and the related notes included elsewhere in this Annual Report. This Management’s Discussion and Analysis of Financial Condition and Results of Operations section may contain forward-looking statements. See “Cautionary Notice Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements that could cause results to differ materially from those reflected in such forward-looking statements.
Highlights of the Fiscal Year Ended September 30, 2020:
•
During the fiscal year, our results of operation were severely impacted by COVID-19 as we temporarily shut down virtually all global customer-facing store operations during parts of our second and third fiscal quarters.
•
Consolidated net sales for the fiscal year decreased $362.1 million, or 9.3%, to $3,514.3 million and included a negative impact from changes in foreign currency exchange rates of $5.6 million, or 0.1% of consolidated net sales;
•
Consolidated same store sales for the fiscal year decreased 8.1%, while our consolidated e-commerce sales increased by 102.6% compared to the prior fiscal year;
•
Consolidated gross profit decreased by $194.9 million, or 10.2%, to $1,715.6 million. Gross margin decreased 50 basis points to 48.8% compared to the prior fiscal year;
•
Consolidated operating earnings for the fiscal year decreased $199.7 million, or 43.6%, to $258.8 million. Operating margin decreased 440 basis points to 7.4% compared to the prior fiscal year;
•
Consolidated net earnings for the fiscal year decreased $158.4 million, or 58.3%, to $113.2 million;
•
Diluted earnings per share for the fiscal year were $0.99 compared to $2.26 for the prior fiscal year;
•
Cash provided by operations was $426.9 million for the fiscal year compared to $320.4 million for the prior fiscal year;
•
In the first half of our fiscal year, we repurchased and retired approximately 4.7 million shares of our common stock at an aggregate cost of $61.4 million; and
•
During the fiscal year, we launched two new private label rewards credit cards branded for SBS and BSG to benefit our retail and professional customer by providing elevated loyalty perks and unique benefits;
Impact of COVID-19 on Our Business and Business Strategy Update
Our results of operations for the fiscal year 2020 were significantly impacted by the effects of COVID-19 as we experienced a rolling shut down of customer-facing operations at all global stores starting in mid-March through mid-April, followed by the rolling restart of store operations from mid-April until the end of June, when almost all stores were re-opened. Store re-openings were triggered by local regulation; the adoption of our new COVID-19 related safety protocols involving store cleaning, masks, and gloves; limiting the number of customers in stores at one time; in-store social distancing guidelines; and the recall from furlough of sufficient store staff. By the end of our third fiscal quarter, we had re-opened substantially all global customer-facing store operations and saw strong consumer and professional demand in our re-opened stores. However, this demand was below pre-COVID-19 levels as market disruptions, including but not limited to salon closures, customer occupancy restrictions and consumer concerns over safety, persisted due to COVID-19.
The impact of COVID-19 led us to reprioritize our transformation plans to accelerate key digital and supply chain initiatives, and pivot to cash management and expense reduction. As such, during our third fiscal quarter, we amended our ABL facility to increase the revolving commitment thereunder from $500.0 million to $600.0 million.
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Also in our third fiscal quarter, to further strengthen our liquidity, we sold $300.0 million of 8.75% senior secured second-lien notes due 2025 (“Senior Secured Notes”). During our fourth fiscal quarter, we made significan t progress in the implementation of our new merchandising system and began operations within our new North Texas distribution node. Additionally, due to the evolving COVID-19 pandemic and the related business uncertainty, we continue to defer non-digital c apital investments and address our short-term cost structure.
The effects of the COVID-19 pandemic and related responses had a material impact on our fiscal year 2020 results of operations, cash flows and financial position. Furthermore, due to the uncertainty over the duration and severity of the economic and operational impacts of COVID-19, the material adverse impact of the pandemic may continue into our fiscal year 2021 and possibly beyond.
Results of Operations
Key Operating Metrics
The following table sets forth, for the periods indicated, information concerning key measures we rely on to assess our operating performance (dollars in thousands):
2020 vs 2019
Fiscal Year Ended September 30,
Amount
%
2020
2019
Change
Change
Net sales:
SBS
$
2,080,703
$
2,293,094
$
(212,391
)
(9.3
)%
BSG
1,433,627
1,583,317
(149,690
)
(9.5
)%
Consolidated
$
3,514,330
$
3,876,411
$
(362,081
)
(9.3
)%
Gross profit:
SBS
$
1,132,436
$
1,272,263
$
(139,827
)
(11.0
)%
BSG
583,158
638,279
(55,121
)
(8.6
)%
Consolidated
$
1,715,594
$
1,910,542
$
(194,948
)
(10.2
)%
Segment gross margin:
SBS
54.4
%
55.5
%
(110
)
bps
BSG
40.7
%
40.3
%
40
bps
Consolidated
48.8
%
49.3
%
(50
)
bps
Net earnings:
Segment operating earnings:
SBS
$
237,588
$
366,412
$
(128,824
)
(35.2
)%
BSG
194,206
239,572
(45,366
)
(18.9
)%
Segment operating earnings
431,794
605,984
(174,190
)
(28.7
)%
Unallocated expenses and restructuring (a) (b)
173,034
147,511
25,523
17.3
%
Consolidated operating earnings
258,760
458,473
(199,713
)
(43.6
)%
Interest expense
98,793
96,309
2,484
2.6
%
Earnings before provision for income taxes
159,967
362,164
(202,197
)
(55.8
)%
Provision for income taxes
46,722
90,541
(43,819
)
(48.4
)%
Net earnings
$
113,245
$
271,623
$
(158,378
)
(58.3
)%
Number of stores at end-of-period (including franchises):
SBS
3,653
3,695
(42
)
(1.1
)%
BSG
1,385
1,366
19
1.4
%
Consolidated
5,038
5,061
(23
)
(0.5
)%
Same store sales growth (decline)
SBS
(8.1
)%
0.4
%
(850
)
bps
BSG
(8.3
)%
0.2
%
(850
)
bps
Consolidated
(8.1
)%
0.3
%
(840
)
bps
(a)
Unallocated expenses represent certain corporate costs (such as payroll, share-based compensation, employee benefits and travel expense for corporate staff, certain professional fees and corporate governance expenses) that have not been charged to our segments and are included in selling, general and administrative expenses in our consolidated statements of earnings.
(b)
Restructuring relates to Project Surge and our Transformation Plan. See Note 19 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report for more information about our restructuring plans.
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The Fiscal Year Ended September 30, 2020 compared to the Fiscal Year Ended September 30, 2019
Net Sales
SBS . The decrease in net sales for SBS was primarily driven by the following (in thousands):
Same store sales
$
(173,951
)
Stores outside same store sales
(13,823
)
Foreign currency exchange
(4,567
)
Other (a)
(20,050
)
Total
$
(212,391
)
(a)
Other consists of non-store sales, which include catalog and internet sales of our Sinelco Group subsidiaries.
The decrease in SBS net sales was a result of lower unit volume caused primarily by the impact of the temporary closure of all our customer-facing store operations due to the effects of COVID-19 during our second and third fiscal quarters, partially offset by strong demand upon re-opening. The challenges faced by lower unit volume were partially offset by an increase in average unit prices, resulting from the cancellation of most promotional activity.
BSG . The decrease in net sales for BSG was driven by the following (in thousands):
Same store sales
$
(89,906
)
Distributor sales consultants
(38,971
)
Foreign currency exchange
(1,034
)
Other (a)
(19,779
)
Total
$
(149,690
)
(a)
Other consists of stores outside same store sales and sales to our franchisees.
The decrease in BSG net sales was a result of lower unit volume primarily as a result of the temporary closure of all of our customer-facing store operations in the U.S. and Canada due to the effects of COVID-19 during our second and third fiscal quarters . The negative impact of the temporary closures were partially offset by an increase in average unit prices resulting primarily from lower promotional activity.
Gross Profit
SBS . SBS’s gross profit decreased as a result of lower sales and a lower gross margin. SBS’s gross margin decreased primarily as a result of aggressive inventory clearance actions in the third quarter and lower vendor allowances, partially offset by the positive impact from fewer promotions and favorable product mix.
BSG . BSG’s gross profit decreased as a result of lower sales, partially offset by a higher gross margin. BSG’s gross margin increased primarily from fewer promotions, partially offset by lower vendor allowances.
Selling, General and Administrative Expenses
SBS . SBS’s selling, general and administrative expenses decreased $11.0 million, or 1.2%. This decrease was driven by lower compensation and compensation-related expense of $51.5 million, primarily as a result of previously announced furloughs related to COVID-19. This decrease was partially offset by an increase in shipping costs of $34.5 million, resulting primarily from the increase in e-commerce sales volume, and incremental store expense for personal protective equipment.
BSG . BSG’s selling, general and administrative expenses decreased $9.8 million, or 2.4%. This decrease reflects lower compensation and compensation-related expense of $18.2 million, primarily as a result of previously announced furloughs related to COVID-19. This decrease was partially offset by an increase in shipping costs of $7.9 million, resulting primarily from increased e-commerce volume.
Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, increased $10.8 million, or 7.3%. This increase was primarily from costs associated with specific expert capability builds in areas like marketing, merchandising, e-commerce and digital product, and costs associated with disaster payments in response to COVID-19, partially offset by lower compensation expenses, as a result of previously announced furloughs related to COVID-19.
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Restructuring
For fiscal year 2020, we incurred restructuring charges of $14.0 million in connection with Project Surge and the Transformation Plan. For fiscal year 2019, restructuring represents gains of $8.4 million in connection with the sale of our secondary headquarters and fulfillment center and our Marinette, Wisconsin fulfillment center, partially offset by expenses incurred in connection with the 2018 Restructuring Plan of $7.7 million. See Note 19 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report for more information about our restructuring plans.
Interest Expense
Interest expense was slightly higher as a result of a higher average outstanding balance on our ABL during the second-half of fiscal year 2020 and the incremental interest expense from the issuance of our Senior Secured Notes, partially offset by a lower outstanding principal balances on our term loan B and a lower average interest rate on our term loan B variable tranche.
Provision for Income Taxes
For fiscal year 2020 and 2019, our effective tax rate was 29.2% and 25.0%, respectively. The increase in the effective tax rate was primarily driven by the establishment of a valuation allowance in a foreign subsidiary and increased foreign losses, as compared to the prior period, which cannot be tax benefitted.
Our effective tax rate may fluctuate on a quarterly and/or annual basis due to various factors, including but not limited to, total earnings and the mix of earnings by jurisdiction, new tax laws, as well as changes in valuation allowances and uncertain tax positions.
Liquidity and Capital Resources
At September 30, 2020, cash and cash equivalents were $514.2 million. Based upon the current level of operations and anticipated growth, we anticipate that existing cash balances (excluding certain amounts permanently invested in connection with foreign operations), funds expected to be generated by operations and funds available under the ABL facility will be sufficient to fund working capital requirements, potential acquisitions, finance anticipated capital expenditures, including information technology upgrades and store remodels and debt repayments over the next 12 months. Due to the impact of COVID-19, we have shifted our focus to being proactive in maintaining our financial flexibility.
Working capital (current assets less current liabilities) increased $162.2 million to $869.7 million at September 30, 2020, compared to $707.5 million at September 30, 2019, resulting primarily from the increase in our cash and cash equivalents, partially offset by the reduction in our inventory, as a result of the impact of COVID-19 and aggressive inventory clearance actions during the year, and the impact of the adoption of the new lease standard. The ratio of current assets to current liabilities was 2.54 to 1.00 at September 30, 2020, compared to 2.55 to 1.00 at September 30, 2019.
We utilize our ABL facility for the issuance of letters of credit, for certain working capital and liquidity needs and to manage normal fluctuations in our operational cash flow. In that regard, we may from time to time draw funds under the ABL facility for general corporate purposes including funding of capital expenditures, acquisitions, interest payments due on our indebtedness, paying down other debt and share repurchases. During the fiscal year ended September 30, 2020, the weighted average interest rate on our borrowings under the ABL facility was 3.4%. The amounts drawn are generally paid down with cash provided by our operating activities. As of September 30, 2020, Sally Holdings had $435.0 million available for borrowings under the ABL facility, subject to borrowing base limitations and outstanding letters of credit of $18.6 million.
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Share Repurchase Programs
During the fiscal years 2020, 2019 and 2018, we repurchased and subsequently retired approximately 4.7 million shares, 3.6 million shares and 10.0 million shares, respectively, of our common stock under the 2017 Share Repurchase Program or the 2014 Share Repurchase Program at a cost of $61.4 million, $46.6 million and $165.9 million, respectively. All the fiscal year 2020 shares repurchases occurred during the first half of the fiscal year. We funded these share repurchases with cash from operations and borrowings under the ABL facility. As of September 30, 2020, we had approximately $726.1 million of additional share repurchase authorization remaining under the 2017 Share Repurchase Program .
Historical Cash Flows
For the fiscal years 2020, 2019 and 2018, our primary sources of cash have been funds provided by operating activities and, when necessary, borrowings under our ABL facility, as appropriate. The primary non-operating uses of cash during the past three years were for share repurchases, debt service and capital expenditures.
The following table shows our sources and uses of cash for the periods presented (in thousands):
Fiscal Year Ended September 30,
2020
2019
Change
Net cash provided by operating activities
$
426,889
$
320,415
$
106,474
Net cash used by investing activities
(123,775
)
(95,867
)
(27,908
)
Net cash provided (used) by financing activities
139,761
(229,308
)
369,069
Effect of foreign currency exchange rate changes on cash and cash equivalents
(219
)
(1,040
)
821
Net increase (decrease) in cash and cash equivalents
$
442,656
$
(5,800
)
$
448,456
Net Cash Provided by Operating Activities
Net cash provided by operating activities increased for fiscal year 2020, compared to fiscal year 2019, primarily due to a reduction in our inventory balance, driven by fewer inventory purchases due to the impact of COVID-19 and a concerted merchandising effort to rationalize our assortment during the third and fourth quarters. Additionally, we experienced a reduction in vendor receivables resulting from fewer vendor co-op arrangements due to the impact of COVID-19 and a concerted effort to reduce the collection time.
Net Cash Used by Investing Activities
Net cash used by investing activities was higher for fiscal year 2020, compared to fiscal year 2019, primarily due to cash proceeds in the prior year from the sale our secondary headquarters and fulfillment center in Denton, Texas and our fulfillment center in Marinette, Wisconsin, an increase in capital expenditures primarily from investments in our information technology systems and the acquisition of La Maison Ami-Co (1981) Inc.
Net Cash provided (Used) by Financing Activities
We had net cash provided by financing activity for fiscal year 2020, compared to net cash used in fiscal year 2019, primarily as a result of the issuance of our Senior Secured Notes during our third fiscal quarter.
Long-Term Debt
At September 30, 2020, we have $1,813.2 million in outstanding principal under a term loan B and senior notes, not including capital leases, unamortized debt issuance costs or debt discounts, in the aggregate, of $16.1 million. There were no outstanding balances under the ABL facility at September 30, 2020. See Note 12 of the Notes to Consolidated Financial Statements in Item 8 contained in this Annual Report for additional information about our debt.
We are currently in compliance with the agreements and instruments governing our debt, including our financial covenants.
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Capital Requirements
During fiscal year ended 2020, we had total capital expenditures of approximately $94.4 million, excluding amounts paid in connection with the prior year, primarily in connection with information technology projects, new store openings, store maintenance and the build out of our new North Texas distribution node.
Contractual Obligations
The following table summarizes our contractual obligations at September 30, 2020 (in thousands):
Payments Due by Period
Less than
1 year
1-3 years
3-5 years
More than
5 years
Total
Long-term debt obligations, including interest (a)
$
105,564
$
211,070
$
1,338,656
$
689,523
$
2,344,813
Obligations under operating leases (b)
170,522
227,657
108,380
95,944
602,503
Purchase obligations (c)
13,182
10,230
—
—
23,412
Other long-term obligations (d)(e)
4,333
22,026
4,669
3,307
34,335
Total
$
293,601
$
470,983
$
1,451,705
$
788,774
$
3,005,063
(a)
Long-term debt obligations include obligations under capital leases and future interest payments on our debt outstanding as of September 30, 2020. The amounts shown above do not include unamortized discount or deferred debt issuance costs reflected in our consolidated balance sheets since those amounts do not represent contractual obligations.
(b)
The amounts reported for operating leases do not include common area maintenance (CAM), property taxes or other executory costs. The amounts shown above do not include immaterial contingent liabilities for operating leases for which we are liable in the event of default by a franchisee.
(c)
Purchase obligations reflect legally binding non-cancellable agreements that are entered into by us to purchase goods or services, that specify minimum quantities to be purchased and with fixed or variable price provisions. Amounts shown do not reflect open purchase orders, mainly for merchandise, to be fulfilled within one year, which are generally cancellable or contracts that tend to be reoccurring in nature and similar in amount year over year.
(d)
Other long-term obligations, including current portion, principally represent obligations under insurance and self-insurance programs and deferral of social security taxes in connection with the Coronavirus Aid, Relief, and Economic Security Act. These obligations are included in accrued liabilities and other liabilities, as appropriate, in our consolidated balance sheets.
(e)
The table above does not include an estimated $2.1 million of unrecognized tax benefits due to uncertainty regarding the realization and timing of the related future cash flows, if any.
The information contained in the table above with regards to our long-term debt obligations is based on the current terms of such debt obligations and does not reflect any assumptions about our ability or intent to refinance any of our debt either on or before their maturity. In the event that we refinance some or all of debt either on or before their maturity, actual payments for some of the periods shown may differ materially from the amounts reported herein. In addition, other future events, including potential increases in interest rates, could cause actual payments to differ materially from these amounts.
Off-Balance Sheet Financing Arrangements
At September 30, 2020, we did not have any off-balance sheet financing arrangements other than obligations under letters of credit, as discussed above.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”) requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure. Actual results could differ from the estimates and assumptions used, which could have a material impact to financial statements. We believe the following are our most critical accounting estimates that require subjective judgement, estimates and assumptions:
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Valuation of Inventory
During fiscal year 2020, we changed how we value our inventory. See Note 3 of the Notes to Consolidated Financial Statements in Item 8 contained in this Annual Report for more information related to the change in our valuation method. At September 30, 2020, inventory is stated at the lower of weighted average cost or net realizable value. At September 30, 2019, inventory was stated at the lower of cost using first-in first-out (“FIFO”) or net realizable value. In assessing the net realizable value of inventory, we will adjust the carrying value of inventory for estimated shrinkage, damage and obsolescence using consider several key factors including estimates of the future demand for our products, historical turn-over rates, the age and sales history of the inventory, and historic as well as anticipated changes in SKUs.
We estimate inventory shrinkage between physical counts and product damage based upon our historical experience. Actual results differing from these estimates could significantly affect our carrying value of inventory and cost of goods sold. Inventory shrinkage, in the aggregate, averaged less than 1.0% of consolidated net sales in fiscal years 2020, 2019 and 2018. A 10% increase or decrease in our estimate of inventory shrinkage and obsolescence reserves at September 30, 2020, would impact net earnings by approximately $1.6 million.
Vendor Rebates and Concessions
We deem cash consideration received from a vendor to be a reduction of the cost of goods sold 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. The majority of cash consideration we receive is considered to be a reduction of inventory and a subsequent reduction in cost of goods sold as the related products are sold. We consider the facts and circumstances of the various contractual agreements with vendors in order to determine the appropriate classification of amounts received in our consolidated statements of earnings. We record cash consideration expected to be received from vendors in accounts receivables, other at the amount we believe will be collected. These receivables could be significantly affected if the actual amounts subsequently collected differ from our expectations.
Insurance
We retain a substantial portion of the risk related to employee health (primarily in the U.S.), workers’ compensation, general and product liability. However, we maintain stop-loss coverage to limit the exposure related to certain insurance risks. We base our health insurance liability estimate on trends in claim payment history, historical trends in claims incurred but not yet reported, and other components such as expected increases in medical costs, projected premium costs and the number of plan participants. Additionally, we base our estimates for workers’ compensation, general and product liability on an actuarial analysis performed by an independent third-party actuary. We review our insurance liability on a regular basis and adjust our accruals accordingly.
Changes in facts and circumstances may lead to a change in the estimated liability due to revisions of the estimated ultimate costs that affect our liability insurance coverage. Our liabilities could be significantly affected if actual results differ from our expectations or prior actuarial analyses. A 10% increase or decrease in our insurance liabilities at September 30, 2020, would impact net earnings by approximately $1.5 million.
The changes in our insurance liabilities were as follows (in thousands):
Fiscal Year Ended September 30,
2020
2019
Balance at beginning of period
$
20,294
$
19,956
Self-insurance expense
59,963
63,963
Payments, net of employee contributions
(58,821
)
(63,625
)
Balance at end of period
$
21,436
$
20,294
Income Taxes
We record income tax provisions in our consolidated financial statements based on an estimate of current income tax liabilities. The development of these provisions requires judgments about tax positions, potential outcomes and timing. If we prevail in tax matters for which provisions have been established or are required to settle matters in excess of established provisions, our effective tax rate for a particular period could be significantly affected.
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Additionally, deferred in come taxes are recognized for the future tax consequences attributable to differences between our financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are estimated to be recovered or settled. We believe that it is more-likely-than-not that our results of operations in the future will generate sufficient taxable inc ome to realize our deferred tax assets, net of the valuation allowance currently recorded. We have recorded a valuation allowance to account for uncertainties regarding the recoverability of certain deferred tax assets, primarily foreign loss carryforwards . In the future, if we determine that certain deferred tax assets will not be realizable, the related adjustments could significantly affect our effective tax rate at that time. An estimated tax benefit related to an uncertain tax position is recorded in o ur 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.
Assessment of Long-Lived Assets for Impairment
We review long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable based on estimated undiscounted future cash flows. Long-lived assets are reviewed at the lowest level of identifiable cash flows, which is at the store level. In assessing for impairment, we determine the fair value of each individual store by discounting projected future cash flows over the remaining lease term. There are significant estimates and assumptions used to arrive at estimated future cash flows, including local market conditions and growth rates. If the carrying amount of the store, which includes the operating lease asset, asset exceeds the sum of its undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the store.
Based on our assessments and after considering potential triggering events, including COVID-19, we recognized an impairment loss of $4.1 million in the fiscal year ended September 30, 2020, in connection with our long-lived assets. No material impairment losses were recognized in fiscal years 2019 or 2018.
Assessment of Goodwill and Intangible Assets for Impairment
We review goodwill and intangible assets for impairment annually, or when events or circumstances indicate it is more-likely-than-not that the value of the asset may be impaired. In assessing these types of assets for impairment, there are significant estimates and assumptions used to determine the fair value, including relevant market and economic conditions, anticipated future revenues and cash flows, royalty rates and discount rates .
Goodwill is tested for impairment by comparing the fair value of each reporting unit to its carrying value. In determining the fair value of a reporting unit, we use a discounted cash flow model. If it is determined that the fair value of a reporting unit is less than its carrying value, an impairment charge will be recorded to bring the carrying value down to its fair value. At March 31, 2020, the date of our annual impairment test, a 10% decrease in either reporting unit’s fair value would not have resulted in an impairment.
Like goodwill, our indefinite-lived intangible assets are tested for impairment by comparing the fair value of each asset to its carrying value. As of September 30, 2020, our indefinite-lived assets comprised of only tradenames. To determine the fair value of each tradename, we use the relief-from-royalty method, which estimates what a third-party would be willing to pay in royalties to receive a benefit from the use of the asset. It if is determined that the asset’s fair value is less than its carrying value, then an impairment charge is recorded to reduce the carrying value down to its fair value. No impairment losses were recognized in fiscal years 2020, 2019 or 2018.
Recent Accounting Pronouncements
See Note 3 of the Notes to Consolidated Financial Statements in Item 8 contained in this Annual Report for information about recent accounting pronouncements.
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