Sally Beauty Holdings, Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES Background. Attached as exhibits to this Annual Report on Form 10-K are certifications of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), which are required in accordance with Rule 13a-14 of the Exchange Act. This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications. Part II, Item 8 — Financial Statements and Supplementary Data of this Annual Report on Form 10-K sets forth the attestation report of KPMG LLP, our independent registered public accounting firm, regarding its audit of our internal control over financial reporting. This section should be read in conjunction with the certifications and the KPMG attestation report for a more complete understanding of the topics presented. Controls Evaluation and Related CEO and CFO Certifications. Our management, with the participation of our CEO and CFO, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report. The controls evaluation was conducted by our Disclosure Committee, comprised of senior representatives from our finance, accounting, internal audit, and legal departments under the supervision of our CEO and CFO. Certifications of our CEO and our CFO, which are required in accordance with Rule 13a-14 of the Exchange Act, are attached as exhibits to this Annual Report. This “Controls and Procedures” section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented. Limitations on the Effectiveness of Controls. We do not expect our disclosure controls and procedures will prevent all errors and all fraud. A system of controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Because of the limitations in all such systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Furthermore, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how unlikely. Because of these inherent limitations in a cost-effective system of controls and procedures, misstatements or omissions due to error or fraud may occur and not be detected. Scope of the Controls Evaluation. The evaluation of our disclosure controls and procedures included a review of their objectives and design, our implementation of the controls and procedures and the effect of the controls and procedures on the information generated for use in this Annual Report. In the course of the evaluation, we sought to identify whether we had any data errors, control problems or acts of fraud and to confirm appropriate corrective action, including process improvements, was being undertaken if needed. This type of evaluation is performed on a quarterly basis so conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K. Many of the components of our disclosure controls and procedures are also evaluated by our internal audit department, by our legal department and by personnel in our finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures on an ongoing basis, and to maintain them as dynamic systems that change as conditions warrant. Conclusions regarding Disclosure Controls. Based on the required evaluation of our disclosure controls and procedures, our CEO and CFO have concluded that, as of September 30, 2021, we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control over Financial Reporting. Management of the Company, including the CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control - 37 - system was designed to provide reasonable assurance to management and our Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. A system of internal controls may become inadequate over time because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2021 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on this assessment, management has concluded that, as of September 30, 2021, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles based on such criteria. Report of Independent Registered Public Accounting Firm . Please refer to KPMG’s Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting on page F-1 of the financial statements, which begin on page 47 of this Annual Report. 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. ITEM 9B. OTHER INFORMATION None. - 38 - PART III ITEM 10. DIRECTORS, EXECUTIVE O FFICERS AND CORPORATE GOVERNANCE The Board of Directors has adopted: (i) Corporate Governance Guidelines and a (ii) Code of Business Conduct and Ethics that apply to directors, officers and employees. Copies of these documents and the committee charters are available on our website at www.sallybeautyholdings.com and are available in print to any person, without charge, upon written request to our Vice President of Investor Relations. 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. 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 2022 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.” ITEM 11. EXECUT IVE 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 2022 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.” ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL O WNERS 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 2022 Annual Meeting of Stockholders under the heading “Beneficial Ownership of Company’s Stock.” EQUITY COMPENSATION PLAN INFORMATION The following table gives information as of September 30, 2021, about our common stock that may be issued under all of our existing equity compensation plans: Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) (a) Weighted average exercise price of outstanding options, warrants and rights (2) (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (3) (c) Equity compensation plans approved by security holders 6,567,580 $ 18.46 7,082,919 Equity compensation plans not approved by security holders N/A N/A N/A Total 6,567,580 $ 18.46 7,082,919 (a) 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. The Company currently grants awards only under the 2019 Plan. (b) Calculation of weighted-average exercise price of outstanding awards includes stock options, but does not include shares of restricted stock or restricted stock units that convert to shares of common stock for no consideration. (c) Represents shares that are available for issuance pursuant to the 2019 Plan, all of which are available as full value awards. - 39 - ITEM 13. 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 2022 Annual Meeting of Stockholders under the headings “Corporate Governance, the Board, and Its Committees,” “Compensation Committee Interlocks and Insider Participation” and “Related Party Transactions.” ITEM 14. 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 2022 Annual Meeting of Stockholders under the heading “Proposal 3 – Ratification of Selection of Auditors.” - 40 - PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Documents filed as part of this Annual Report: (a) List of Financial Statements and Financial Statement Schedules See “Index to Financial Statements” which is located on page 47 of this Annual Report. (b) Exhibits The following exhibits are filed as part of this Annual Report or are incorporated herein by reference: Exhibit No. Description 3.1 Third Restated Certificate of Incorporation of Sally Beauty Holdings, Inc., dated January 30, 2014, which is incorporated herein by reference from Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on January 30, 2014 3.2 Amended and Restated Bylaws of Sally Beauty Holdings, Inc., dated April 26, 2017, which is incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 28, 2017 4.1 Amended and Restated Credit Agreement dated July 6, 2017, among the Borrowers, the Guarantors, the Lenders party thereto, the Administrative Agent, the Collateral Agent, the Syndication Agent and the Documentation Agent (as such terms are defined therein), which is incorporated herein by reference from Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on July 6, 2017 † 4.2 Amended and Restated Security Agreement by Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC, as the domestic borrowers and the other domestic borrowers and domestic guarantors party hereto from time to time and Bank of America, N.A. as collateral agent dated as of July 26, 2013, which is incorporated herein by reference from Exhibit 4.4 to the Company’s Annual Report on Form 10-K filed on November 14, 2013 † 4.3 Amended and Restated General Security Agreement by Beauty Systems Group (Canada), Inc., as the Canadian borrower and Bank of America, N.A., (acting through its Canada branch), as Canadian agent dated as of July 26, 2013, which is incorporated herein by reference from Exhibit 4.5 to the Company’s Annual Report on Form 10-K filed on November 14, 2013 † 4.4 Joinder to Loan Documents, dated as of December 20, 2011, 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 Holdings, Inc., Sally Investment Holdings LLC and Bank of America, N.A., as administrative agent and as collateral agent, which is incorporated herein by reference from Exhibit 4.10 to the Company’s Quarterly Report on Form 10-Q filed on February 2, 2012 † 4.5 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 † 4.6 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. 4.7 Indenture, dated as of May 18, 2012, by and among Sally Holdings LLC, Sally Capital Inc., the guarantors listed therein and Wells Fargo Bank, National Association, which is incorporated herein by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 18, 2012 - 41 - Exhibit No. Description 4.8 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 4.9 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 4.1 to the Company’s Current Report on Form 8-K filed on July 6, 2017 † 4.10 Amendment No. 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 4.11 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 † 10.1 Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 4.4 to the Company’s Registration Statement on Form S-8 filed on May 3, 2007 10.2 2007 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 27, 2007 10.3 2009 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.24 to the Company’s Annual Report on Form 10-K filed on November 20, 2008 10.4 Tax Sharing Agreement, dated as of November 16, 2006, made and entered into by and among Sally Beauty Holdings, Inc., Sally Investment Holdings LLC and Sally Holdings LLC, which is incorporated herein by reference from Exhibit 10.14 of the Quarterly Report on Form 10-Q of Sally Holdings LLC and Sally Capital Inc. filed on August 29, 2007 10.5 2010 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan , which is incorporated herein by reference from Exhibit 10.29 to the Company’s Annual Report on Form 10-K filed on November 19, 2009 10.6 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 10.7 Sally Beauty Holdings, Inc. Amended and Restated 2010 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.39 to the Company’s Annual Report on Form 10-K filed on November 15, 2012 10.8 2011 Form of Restricted Stock Agreement for Employees pursuant to the Sally Beauty Holdings, Inc. Amended and Restated 2010 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.33 to the Company’s Annual Report on Form 10-K filed on November 18, 2010 10.9 2011 Form of Stock Option Agreement for Employees pursuant to the Sally Beauty Holdings, Inc. Amended and Restated 2010 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.34 to the Company’s Annual Report on Form 10-K filed on November 18, 2010 10.10 2011 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. Amended and Restated 2010 Omnibus Incentive Plan , which is incorporated herein by reference from Exhibit 10.25 to the Company’s Annual Report on Form 10-K filed November 15, 2012 - 42 - Exhibit No. Description 10.11 2016 Form of Performance Unit Award Agreement pursuant to the Sally Beauty Holdings, Inc. Amended and Restated 2010 Omnibus Incentive Plan , which is incorporated herein by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on February 4, 2016 10.12 Sally Beauty Holdings, Inc. 2019 Omnibus Incentive Plan, which is incorporated herein by reference from Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed on December 19, 2018 10.13 2019 Form of Performance Unit Award Agreement pursuant to the Sally Beauty Holdings, Inc. 2019 Omnibus Incentive Plan , which is incorporated herein by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on February 5, 2019 10.14 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holding, Inc. 2019 Omnibus Incentive Plan , which is incorporated herein by reference from Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on February 5, 2019 10.15 Form of Stock Option Agreement pursuant to the Sally Beauty Holdings, Inc. 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 10.16 Form of Restricted Stock Agreement pursuant to the Sally Beauty Holdings, Inc. 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 10.17 Form of Severance Agreement between each of Mark G. Spinks and the Company effective July 31, 2015, Scott C. Sherman and the Company effective October 1, 2017, John M. Henrich and the Company effective June 10, 2019, Pamela K. Kohn and the Company effective October 3, 2019, and Denise Paulonis and the Company effective October 1, 2021, which is incorporated herein by reference from Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on November 5, 2012 10.18 2012 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. Amended and Restated 2010 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.37 to the Company’s Annual Report on Form 10-K filed on November 15, 2012 10.19 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 10.20 Sally Beauty Holdings, Inc. Annual Incentive Plan* 10.21 Separation agreement between Christian A. Brickman and the Company effective as of August 26, 2021, including Release of Claims effective as of October 1, 2021* 10.22 Consulting Agreement between Christian A. Brickman and the Company effective September 30, 2021* 10.23 Offer Letter to Denise Paulonis, dated as of August 26, 2021* 21.1 List of Subsidiaries of Sally Beauty Holdings, Inc.* 22 List of Subsidiary Guarantors * 23.1 Consent of KPMG* 31.1 Rule 13(a)-14(a)/15(d)-14(a) Certification of Denise Paulonis* 31.2 Rule 13(a)-14(a)/15(d)-14(a) Certification of Marlo M. Cormier* 32.1 Section 1350 Certification of Denise Paulonis* 32.2 Section 1350 Certification of Marlo M. Cormier* - 43 - Exhibit No. Description 101 The following financial information from our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Earnings; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows; (v) Consolidated Statements of Stockholders’ Equity (Deficit) and (vi) the Notes to Consolidated Financial Statements* 104 Cover Page Interactive Data File (formatted as Inline XBRL) and contained in Exhibit 101 * Included herewith † Certain schedules and exhibits have been omitted pursuant to Item 601(b) (2) of Regulation S-K. The Registrant agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule or exhibit upon request. (c) Financial Statement Schedules None ITEM 16. FORM 10-K SUMMARY None - 44 - SIGNATURES 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 19 th day of November, 2021. SALLY BEAUTY HOLDINGS, INC. By: /s/ Denise Paulonis Denise Paulonis President, Chief Executive Officer and Director By: /s/ Marlo M. Cormier Marlo M. Cormier Senior Vice President, Chief Financial Officer By: /s/ Kim McIntosh Kim McIntosh Group Vice President, Controller and Chief Accounting Officer - 45 - 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. Signature Title Date /s/ Denise Paulonis President, Chief Executive Officer and Director (Principal Executive Officer) November 19, 2021 Denise Paulonis /s/ Marlo M. Cormier Senior Vice President, Chief Financial Officer (Principal Financial Officer) November 19, 2021 Marlo M. Cormier /s/ Kim McIntosh Group Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) November 19, 2021 Kim McIntosh /s/ Robert R. McMaster Chairman of the Board of Directors November 19, 2021 Robert R. McMaster /s/ Timothy R. Baer Director November 19, 2021 Timothy R. Baer /s/ Marshall E. Eisenberg Director November 19, 2021 Marshall E. Eisenberg /s/ Diana S. Ferguson Director November 19, 2021 Diana S. Ferguson /s/ Dorlisa K. Flur Director November 19, 2021 Dorlisa K. Flur /s/ James M. Head Director November 19, 2021 James M. Head /s/ Linda Heasley Director November 19, 2021 Linda Heasley /s/ John A. Miller Director November 19, 2021 John A. Miller /s/ Susan R. Mulder Director November 19, 2021 Susan R. Mulder /s/ Erin Nealy Cox Director November 19, 2021 Erin Nealy Cox /s/ Edward W. Rabin Director November 19, 2021 Edward W. Rabin - 46 - SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Financial Statements Years ended September 30, 2021, 2020 and 2019 INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm F-1 Consolidated Financial Statements: Consolidated Balance Sheets as of September 30, 2021 and 2020 F-3 Consolidated Statements of Earnings for the years ended September 30, 2021, 2020 and 2019 F-4 Consolidated Statements of Comprehensive Income for the years ended September 30, 2021, 2020 and 2019 F-5 Consolidated Statements of Cash Flows for the years ended September 30, 2021, 2020 and 2019 F-6 Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended September 30, 2021, 2020 and 2019 F-7 Notes to Consolidated Financial Statements for the years ended September 30, 2021, 2020 and 2019 F-8 - 47 - Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Sally Beauty Holdings, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Sally Beauty Holdings, Inc. and subsidiaries (the Company) as of September 30, 2021 and 2020, 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, 2021, 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, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Changes in Accounting Principle 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 The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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. We believe that our audits provide a reasonable basis for our opinions. F-1 Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (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. 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 judgments. The communication of a 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. Evaluation of 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. Other accounts receivable was $34.0 million as of September 30, 2021. 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 and measurement of the receivable. 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. We recalculated the amount of the receivable based on the inputs and the terms of the agreements. 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. /s/ KPMG LLP We have served as the Company’s auditor since 2006. Dallas, Texas November 19, 2021 F-2 SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2021 and 2020 (In thousands, except par value data) 2021 2020 Assets Current assets: Cash and cash equivalents $ 400,959 $ 514,151 Trade accounts receivable, net 32,623 35,590 Accounts receivable, other 33,958 20,839 Inventory 871,349 814,503 Other current assets 44,686 48,014 Total current assets 1,383,575 1,433,097 Property and equipment, net 307,377 315,029 Operating lease assets 537,673 525,634 Goodwill 541,209 540,038 Intangible assets, excluding goodwill, net 55,532 58,283 Other assets 21,766 23,066 Total assets $ 2,847,132 $ 2,895,147 Liabilities and Stockholders’ Equity Current liabilities: Current maturities of long-term debt $ 194 $ 180 Accounts payable 291,632 236,333 Accrued liabilities 206,155 170,665 Current operating lease liabilities 156,234 153,267 Income taxes payable 10,666 2,917 Total current liabilities 664,881 563,362 Long-term debt 1,382,530 1,796,897 Long-term operating lease liabilities 404,147 394,375 Other liabilities 29,056 32,976 Deferred income tax liabilities, net 85,777 92,094 Total liabilities 2,566,391 2,879,704 Stockholders’ equity: Common stock, $ 0.01 par value. Authorized 500,000 shares; 113,138 and 116,986 shares issued and 112,913 and 116,725 shares outstanding at September 30, 2021 and 2020, respectively 1,129 1,124 Preferred stock, $ 0.01 par value. Authorized 50,000 shares; none issued — — Additional paid-in capital 17,286 1,913 Accumulated earnings 356,967 117,109 Accumulated other comprehensive loss, net of tax ( 94,641 ) ( 104,703 ) Total stockholders’ equity 280,741 15,443 Total liabilities and stockholders’ equity $ 2,847,132 $ 2,895,147 The accompanying notes are an integral part to these consolidated financial statements. F-3 SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Earnings Fiscal Years ended September 30, 2021, 2020 and 2019 (In thousands, except per share data) 2021 2020 2019 Net sales $ 3,874,997 $ 3,514,330 $ 3,876,411 Cost of goods sold 1,921,663 1,798,736 1,965,869 Gross profit 1,953,334 1,715,594 1,910,542 Selling, general and administrative expenses 1,530,280 1,442,809 1,452,751 Restructuring 4,611 14,025 ( 682 ) Operating earnings 418,443 258,760 458,473 Interest expense 93,509 98,793 96,309 Earnings before provision for income taxes 324,934 159,967 362,164 Provision for income taxes 85,076 46,722 90,541 Net earnings $ 239,858 $ 113,245 $ 271,623 Earnings per share: Basic $ 2.13 $ 0.99 $ 2.27 Diluted $ 2.10 $ 0.99 $ 2.26 Weighted average shares: Basic 112,653 113,881 119,636 Diluted 114,212 114,680 120,283 The accompanying notes are an integral part of these consolidated financial statements. F-4 SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Fiscal Years ended September 30, 2021, 2020 and 2019 (In thousands) 2021 2020 2019 Net earnings $ 239,858 $ 113,245 $ 271,623 Other comprehensive income (loss): Foreign currency translation adjustments 9,957 11,821 ( 22,576 ) Interest rate caps, net of tax 918 198 ( 4,566 ) Foreign exchange contracts, net of tax ( 813 ) 565 ( 154 ) Other comprehensive income (loss), net of tax 10,062 12,584 ( 27,296 ) Total comprehensive income $ 249,920 $ 125,829 $ 244,327 The accompanying notes are an integral part of these consolidated financial statements. F-5 SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Fiscal Years ended September 30, 2021, 2020 and 2019 (In thousands) 2021 2020 2019 Cash Flows from Operating Activities: Net earnings $ 239,858 $ 113,245 $ 271,623 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 102,201 106,779 107,658 Share-based compensation expense 11,656 8,426 9,180 Amortization of deferred financing costs 4,212 4,118 3,786 Net loss/(gain) on disposal and impairment of assets 290 3,562 ( 7,544 ) Net loss on extinguishment of debt 4,260 38 951 Deferred income taxes ( 7,336 ) 13,691 5,532 Changes in (exclusive of effects of acquisitions): Trade accounts receivable 2,923 10,031 4,399 Accounts receivable, other ( 13,972 ) 41,463 ( 20,432 ) Inventory ( 52,277 ) 149,845 ( 20,272 ) Other current assets 976 ( 15,654 ) 7,418 Other assets 4,360 ( 2,007 ) ( 3,225 ) Accounts payable and accrued liabilities 79,851 ( 26,876 ) ( 42,719 ) Income taxes payable 8,041 ( 5,489 ) 6,144 Operating lease assets and liabilities 730 10,339 — Other liabilities ( 3,913 ) 15,378 ( 2,084 ) Net cash provided by operating activities 381,860 426,889 320,415 Cash Flows from Investing Activities: Payments for property and equipment ( 73,904 ) ( 110,858 ) ( 107,755 ) Proceeds from sales of property and equipment 235 53 15,312 Acquisitions, net of cash acquired ( 2,350 ) ( 12,970 ) ( 3,424 ) Net cash used by investing activities ( 76,019 ) ( 123,775 ) ( 95,867 ) Cash Flows from Financing Activities: Proceeds from issuance of long-term debt 22 1,087,504 593,504 Repayments of long-term debt ( 422,258 ) ( 882,921 ) ( 777,538 ) Debt issuance costs ( 1,300 ) ( 6,257 ) — Payments for common stock repurchased — ( 61,357 ) ( 47,434 ) Proceeds from exercises of stock options 3,568 2,792 2,160 Net cash (used) provided by financing activities ( 419,968 ) 139,761 ( 229,308 ) Effect of foreign exchange rate changes on cash and cash equivalents 935 ( 219 ) ( 1,040 ) Net (decrease) increase in cash and cash equivalents ( 113,192 ) 442,656 ( 5,800 ) Cash and cash equivalents, beginning of period 514,151 71,495 77,295 Cash and cash equivalents, end of period $ 400,959 $ 514,151 $ 71,495 Supplemental Cash Flow Information: Interest paid $ 88,982 $ 83,123 $ 95,171 Income taxes paid $ 79,765 $ 49,869 $ 83,783 Capital expenditures incurred but not paid $ 19,932 $ 9,772 $ 26,233 The accompanying notes are an integral part of these consolidated financial statements. F-6 SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity (Deficit) Fiscal Years ended September 30, 2021, 2020 and 2019 (In thousands) Additional Accumulated Accumulated Other Total Common Stock Paid-in Earnings Comprehensive Stockholders’ Shares Amount Capital (Deficit) Income (Loss) Equity (Deficit) Balance at September 30, 2018 119,926 $ 1,199 $ — $ ( 179,764 ) $ ( 89,991 ) $ ( 268,556 ) Net earnings — — — 271,623 — 271,623 Other comprehensive loss, net of tax — — — — ( 27,296 ) ( 27,296 ) Repurchases of common stock ( 3,562 ) ( 36 ) ( 11,336 ) ( 36,062 ) — ( 47,434 ) Share-based compensation 209 2 9,178 — — 9,180 Stock issued for equity awards 152 2 2,158 — — 2,160 Balance at September 30, 2019 116,725 1,167 — 55,797 ( 117,287 ) ( 60,323 ) Cumulative effect of ASC 842 adoption — — — 76 — 76 Net earnings — — — 113,245 — 113,245 Other comprehensive income, net of tax — — — — 12,584 12,584 Repurchases of common stock ( 4,702 ) ( 46 ) ( 9,302 ) ( 52,009 ) — ( 61,357 ) Share-based compensation 159 1 8,425 — — 8,426 Stock issued for equity awards 223 2 2,790 — — 2,792 Balance at September 30, 2020 112,405 1,124 1,913 117,109 ( 104,703 ) 15,443 Net earnings — — — 239,858 — 239,858 Other comprehensive income, net of tax — — — — 10,062 10,062 Share-based compensation — — 11,656 — — 11,656 Stock issued for equity awards 508 5 3,717 — — 3,722 Balance at September 30, 2021 112,913 $ 1,129 $ 17,286 $ 356,967 $ ( 94,641 ) $ 280,741 The accompanying notes are an integral part of these consolidated financial statements. F-7 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 1. Basis of Presentation The consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation. 2. Significant Accounting Policies The preparation of financial statements in conformity with GAAP requires us to interpret and apply accounting standards and to develop and follow accounting policies consistent with such standards. The following is a summary of the significant accounting policies used in preparing our consolidated financial statements. Use of Estimates In accordance with GAAP, management makes estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent liabilities in the consolidated financial statements. Actual results may differ from these estimates in amounts that may be material to our consolidated financial statements. Cash and Cash Equivalents 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 Trade accounts receivable consist of credit extended directly to certain customers who meet our credit requirements in the ordinary course of business and are stated at their carrying values, net of an allowance for doubtful accounts. Our allowance for doubtful accounts is regularly reviewed on the basis of our historical collection data and current customer information. Customer account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. At September 30, 2021 and 2020, our allowance for doubtful accounts was $ 1.1 million and $ 1.9 million, respectively. Other accounts receivable consist primarily of amounts due from vendors under various contractual agreements and include volume rebates and other promotional considerations. Inventory and Cost of Goods Sold 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. Inventory is stated at the lower of weighted average cost 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. When assessing the net realizable value of inventory, we consider several factors including estimates of future demand for our products, historical turn-over rates, the age and sales history of the inventory, and historic and anticipated changes in stock keeping units. Physical inventory counts are performed at substantially all stores and significant distribution centers at least annually. Upon completion of physical inventory counts, our consolidated financial statements are adjusted to reflect actual quantities on hand. Between physical counts, we estimate inventory shrinkage based on our historical experience. 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 F-8 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 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. 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. 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. Lease Accounting 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, respectively in operating lease assets and leasehold improvements, primarily as a result of the impact of COVID-19, within selling, general and administrative expenses. Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated or amortized over the lesser of the estimated useful lives of the assets or the term of the related lease, including renewals considered reasonably assured. Expenditures for maintenance and repairs are included in selling, general and administrative expenses when incurred, while expenditures for major renewals and improvements that substantially extend the useful life of an asset are capitalized. The following table summarizes our property and equipment balances and their estimated useful lives (dollars in thousands): Life September 30, (in years) 2021 2020 Land N/A $ 10,119 $ 10,120 Buildings and building improvements 5 – 40 57,049 54,521 Leasehold improvements 2 – 10 326,595 304,404 Furniture, fixtures and equipment 2 – 10 681,017 640,693 Total property and equipment, gross 1,074,780 1,009,738 Accumulated depreciation and amortization ( 767,403 ) ( 694,709 ) Total property and equipment, net $ 307,377 $ 315,029 Depreciation expense for the fiscal years 2021, 2020 and 2019 was $ 93.2 million, $ 95.5 million and $ 96.1 million, respectively, and is included in selling, general and administrative expenses in our consolidated statements of earnings. F-9 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 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 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 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 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 events or changes in circumstances indicate 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. Furthermore, we considered potential triggering events each quarter, including fluctuations of our stock price, and determined there were no such events during the current fiscal year. 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, 2021 and 2020, 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. When assessing goodwill for impairment, we may perform a qualitative assessment which evaluates macro-economic conditions, current and projected cash flows, and other events or changes in circumstances to determine if a quantitative assessment is necessary. For fiscal year 2021, we completed a qualitative assessment and determined that while COVID-19 had a macro-economic impact, there were no material impacts to the reporting units to require a quantitative assessment. We have no t recorded any impairment charges related to goodwill in the current or prior fiscal years presented. Indefinite-lived Intangible Assets Our intangible assets with indefinite lives consist of trade names acquired in business combinations . 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, as of January 31 st , and whenever events or changes in circumstances indicate 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. When assessing intangible assets with indefinite lives for impairment, we compare the fair value of each asset against its carrying value. Fair value is based on the relief-from-royalty method. Based on our assessments, no material impairment charges related to intangible assets were recorded in the current or prior fiscal years presented. Self-Insurance Programs We self-insure the risks related to workers’ compensation, general and auto liability, property and certain employee-related healthcare benefits. We have obtained third-party excess insurance coverage to limit our exposure per occurrence and aggregate cash outlay. F-10 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 We record an estimated liability for the ultimate cost of claims incurred and unpaid as of the balance sheet date, which includes claims filed and estimated losses incurred but not yet reported. We estimate the ultimate cost based on an analysis of our historical data and actuarial estimates. These estimates are reviewed on a regular basis to ensure the recorded liability is adequate. The current and long-term portions of these liabilities are recorded at their present value and included in accrued liabilities and other liabilities in our consolidated balance sheets, respectively. Revenue Recognition Substantially all of our revenue is derived through the sale of merchandise. Revenue is recognized net of estimated sales returns and sales taxes. We estimate sales returns based on historical data. Additionally, we have assessed all revenue streams for principal versus agent considerations and have concluded we are the principal for all transactions. See Note 17 for additional information regarding the disaggregation of our revenue. Merchandise Revenues The majority of our revenue comes from the sale of products in our company-operated stores. These sales generally have one single performance obligation and the revenue is recognized at the point of sale. However, discounts and incentives issued at the point of sale to entice a customer to a future purchase are treated as a separate performance obligation. As such, we allocate a portion of the revenue generated from the point of sale to each of the additional performance obligations separately using explicitly stated amounts or our best estimate using historical data. We also sell merchandise on our online platforms, to our franchisees and by using distributor sales consultants. These sales generally have one single performance obligation and revenue is recognized upon the shipment of the merchandise. Any shipping and handling fees charged to the customer are recognized as revenue, while any shipping and handling costs to get the merchandise shipped is recognized in cost of goods sold. We extend credit to certain customers, primarily salon professionals, which generally have 30 day payment terms. Based on the nature of theses receivables, no significant financing component exists. Gift Cards The revenue from the sale of our gift cards is recognized at the time the gift card is used to purchase merchandise, which is generally within one year from the date of purchase. Our gift cards do not carry expiration dates or impose post-sale fees. Based on historical experience, a certain amount of our gift cards will not be redeemed, also referred to as “gift card breakage.” We recognize revenue related to gift card breakage within revenue in our consolidated statements of earnings over time proportionately to historical redemption patterns. The gift cards are issued and represent liabilities of either of our operating entities, Sally Beauty Supply LLC or Beauty Systems Group LLC, which are both limited liability companies formed in the state of Virginia. 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. In addition, we can earn other amounts 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. F-11 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 Customer Loyalty Rewards 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 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. and Canadian SBS stores or through our sallybeauty.com website including on our SBS mobile commerce-based app, on their next purchase. Based on the rewards loyalty program policies, points expire after twelve months of inactivity and certificates will expire after a specific time period from the date of issuance. Certificates generated from our rewards loyalty program provide a material right to customers and represent a separate performance obligation. Rewards loyalty points are accrued at the standalone value per point, net of estimated breakage, and are included within accrued liabilities on our consolidated balance sheets. We recognize the revenue when the customer redeems the certificate. Points and certificates are issued by and represent liabilities of Sally Beauty Supply LLC. The following table shows the amount of contract liabilities on our consolidated balance sheets as of September 30, 2021 and 2020 (in thousands): September 30, Contracts Balance Sheet Classification 2021 2020 Gift cards Accrued liabilities $ 5,299 $ 5,066 Rewards loyalty program Accrued liabilities 11,445 8,881 Total liability $ 16,744 $ 13,947 Changes to our contract liabilities for fiscal year 2021 were as follows (in thousands): September 30, 2020 $ 13,947 Loyalty points and gift cards issued but not redeemed, net of estimated breakage 15,226 Revenue recognized from beginning liability ( 12,429 ) September 30, 2021 $ 16,744 Advertising Costs Advertising costs relate mainly to print advertisements, digital marketing, trade shows and product education for salon professionals. Advertising costs incurred in connection with print advertisements are expensed the first time the advertisement is run. Other advertising costs are expensed when incurred. Advertising costs were $ 70.9 million, $ 72.7 million and $ 73.3 million for the fiscal years 2021, 2020 and 2019, respectively, and are included in selling, general and administrative expenses in our consolidated statements of earnings. Share-based Compensation We measure the cost of services received from our employees and directors in exchange for an award of equity instruments based on the fair value of the award on the date of grant which are expensed ratably over the vesting period, except for awards issued to retirement eligible participants, which are expensed on an accelerated basis. We recognize the impact of forfeitures as they occur. Share-based compensation expense is included in selling, general and administrative expenses in our consolidated statements of earnings. Income Taxes We recognize deferred income taxes for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing 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 anticipated to be recovered or settled. The effect on deferred taxes of a change in income tax rates is recognized in the consolidated statements of earnings in the period of enactment. 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. F-12 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 Foreign Currency The functional currency of each of our foreign operations is generally the respective local currency. Balance sheet accounts are translated into U.S. dollars (our reporting currency) at the rates of exchange in effect at the balance sheet date, while the results of operations and cash flows are generally translated using average exchange rates for the periods presented. Individually material transactions, if any, are translated using the actual rate of exchange on the transaction date. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss in our consolidated balance sheets. Foreign currency transaction gains or losses, including changes in the fair value (i.e., marked-to-market adjustments) of certain foreign exchange contracts we hold, are included in selling, general and administrative expenses in our consolidated statements of earnings when incurred and were not significant in any of the periods presented in the accompanying consolidated financial statements. 3. Accounting Changes and Recent Accounting Pronouncements Accounting Changes 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. 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. 2016-02. 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 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 prospective basis, retrospective basis, and a modified retrospective basis dependent on the specific change. We do not believe that adoption of this update will have a material impact on our results of operations or financial position. F-13 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 4. Fair Value Measurements Our financial instruments consist of cash equivalents, trade and other accounts receivable, accounts payable, derivative instruments, including foreign exchange contracts and interest rate caps, and debt. The carrying amounts of cash equivalents, trade and other accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these financial instruments. We measure on a recurring basis and disclose the fair value of our financial instruments under the provisions of ASC Topic 820, Fair Value Measurement , as amended (“ASC 820”). We define “fair value” as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level hierarchy for measuring fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels of that hierarchy are defined as follows: Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 - Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data; and Level 3 - Unobservable inputs for the asset or liability. Fair value on recurring basis Consistent with the fair value hierarchy, we categorized our financial assets and liabilities as follows (in thousands): As of September 30, Classification Pricing Category 2021 2020 Financial Assets Cash equivalents Cash and cash equivalents Level 1 $ — $ 194,612 Interest rate caps Other assets Level 2 35 27 Total assets $ 35 $ 194,639 Financial Liabilities None Cash equivalents, at September 30, 2021, 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. Other fair value disclosures Carrying amounts and the related estimated fair value of our long-term debt, excluding capital lease obligations, are as follows: As of September 30, 2021 2020 Pricing Category Carrying Value Fair Value Carrying Value Fair Value Long-term debt Senior notes Level 1 979,961 1,019,635 $ 1,177,380 $ 1,217,707 Other long-term debt Level 2 413,000 411,451 635,788 619,397 Total debt $ 1,392,961 $ 1,431,086 $ 1,813,168 $ 1,837,104 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. F-14 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 5. Accumulated Stockholders’ Equity Share Repurchases In August 2017, our Board of Directors (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 . In July 2021, the Board approved a term extension of the program through September 30, 2025. Information related to our shares repurchased and subsequently retired were as follows (in thousands): Fiscal Year Ended September 30, 2021 2020 2019 Number of shares repurchased — 4,702 3,562 Total cost of share repurchased $ — $ 61,357 $ 46,621 The amounts above do not include approximately 71,000 , 159,000 and 209,000 shares surrendered by grantees to satisfy personal income tax withholdings obligations upon vesting of equity-based awards valued at approximately $ 1.0 million, $ 0.3 million and $ 0.8 million during the fiscal years 2021, 2020 and 2019, respectively. We reduced common stock and additional paid-in capital, in the aggregate, by these amounts. However, as required by GAAP, to the extent share repurchase amounts exceeded the balance of additional paid-in capital prior to such repurchases, we recorded the excess in accumulated stockholders’ equity on our consolidated balance sheets. We funded these share repurchases with cash from operations and borrowings under the ABL facility, as appropriate. Accumulated other Comprehensive Loss The change in accumulated other comprehensive loss (“AOCL”) was as follows (in thousands): Foreign Currency Translation Adjustments Interest Rate Caps Foreign Exchange Contracts Total Balance at September 30, 2019 $ ( 113,932 ) $ ( 3,201 ) $ ( 154 ) $ ( 117,287 ) Other comprehensive income (loss) before reclassifications, net of tax 11,821 ( 411 ) ( 531 ) 10,879 Reclassification to net earnings, net of tax — 609 1,096 1,705 Balance at September 30, 2020 ( 102,111 ) ( 3,003 ) 411 ( 104,703 ) Other comprehensive income (loss) before reclassifications, net of tax 9,957 ( 282 ) ( 1,070 ) 8,605 Reclassification to net earnings, net of tax — 1,200 257 1,457 Balance at September 30, 2021 $ ( 92,154 ) $ ( 2,085 ) $ ( 402 ) $ ( 94,641 ) The tax impact for the changes in other comprehensive loss and the reclassifications to net earnings was not material. 6. Weighted Average Shares The following table sets forth the computations of basic and diluted earnings per share (in thousands): Fiscal Year Ended September 30, 2021 2020 2019 Weighted-average basic shares 112,653 113,881 119,636 Dilutive securities: Stock option and stock award programs 1,559 799 647 Weighted-average diluted shares 114,212 114,680 120,283 At September 30, 2021, 2020 and 2019, options to purchase approximately 3.9 million, 4.7 million and 4.7 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. F-15 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 7. Share-Based Payments Our Sally Beauty Holdings, Inc. 2019 Omnibus Incentive Plan (the "Omnibus Plan") allows us to grant 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 Plan. The following table presents total compensation cost for all share-based compensation arrangements, and the related income tax benefits recognized in our consolidated statement of earnings (in thousands): Fiscal Year Ended September 30, 2021 2020 2019 Share-based compensation expense $ 11,656 $ 8,426 $ 9,180 Income tax benefit related to share-based compensation expense $ 2,834 $ 2,059 $ 2,357 The Omnibus Plan award types are as follows: Performance-based awards: Our performance awards vest over three years upon the satisfaction of the employee service condition and our level of achievement with respect to a mix of certain specified performance targets. For fiscal year 2021, we issued performance awards with a financial performance target based on the growth on adjusted consolidated operating income (“AOI”) for each of the next three years. For the fiscal year 2020 and 2019 performance awards, the performance targets included growth of AOI and return on invested capital during the three-year performance period. For each performance award, a grantee may earn from 0 % to 200 % of the original awarded amount. Fair value of our performance awards related to the achievement of financial performance targets are based on our stock price on the date of grant. During the fiscal years ended September 30, 2021, 2020 and 2019, the fair value of our performance awards was $ 15.33 , $ 16.65 and $ 17.22 , respectively. Market-based awards: In fiscal year 2021, we issued market-based awards that vest over three years and are dependent on the level of achievement of relative total shareholder return (“rTSR”) against a group of peer companies measured over a three-year period. For each rTSR, a grantee may earn from 0 % to 200 % of the original awarded amount. The fair value was determined by using the Monte Carlo simulation model due to the award being subject to a market condition. Expense is determined upon issuance and is recognized regardless of whether the market performance target is achieved. Stock options: Stock option awards are valued using the Black-Scholes option pricing model to estimate the fair value of each stock option award on the date of grant and expense ratably over the vesting period, generally three years . Stock options have a ten year life. Restricted stock: Restricted stock awards (“RSA”) and restricted stock units (“RSU”) are valued using the closing market price of our common stock on the date of grant. Expense is recognized ratably over the vesting period, generally three years for RSAs and RSUs issued to employees and one year for RSUs issued to our independent directors. An RSA award is an award of our shares that have full voting rights and dividend rights, but are restricted with regard to sale or transfer. These restrictions lapse over the vesting period. RSUs awarded to our independent directors may elect, upon receipt of such award, to defer until a later date delivery of the shares of our common stock that would otherwise be issued on the vesting date. RSUs granted to independent directors 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. F-16 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 Performance-Based Awards The following table presents a summary of the activity for our performance awards assuming 100 % payout: Performance Awards Number of Shares (in Thousands) Weighted Average Fair Value Per Share Unvested at September 30, 2020 542 $ 17.06 Granted 142 15.33 Vested — — Forfeited ( 382 ) 17.16 Unvested at September 30, 2021 302 $ 16.59 As of September 30, 2021, approximately $ 1.2 million of total unrecognized compensation costs related to unvested performance awards are expected to be recognized over the weighted average period of 1.5 years. Market-Based Awards The following table presents a summary of the activity for our market awards: Market Awards Number of Shares (in Thousands) Weighted Average Fair Value Per Share Unvested at September 30, 2020 — $ — Granted 142 20.96 Vested — — Forfeited ( 52 ) 20.96 Unvested at September 30, 2021 90 $ 20.96 As of September 30, 2021, approximately $ 1.4 million of total unrecognized compensation costs related to unvested market awards are expected to be recognized over the weighted average period of 2.1 years. The weighted average assumptions used in the Monte Carlo model relating to the valuation of our rTSR issued in fiscal year 2021 were as follows: Expected term (in years) 2.7 Expected volatility 59.4 % Risk-free interest rate 0.2 % Dividend yield 0.0 % Service-Based Awards Stock Option Awards The following table presents a summary of the activity for our stock option awards: Number of Outstanding Options (in Thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in Years) Aggregate Intrinsic Value (in Thousands) Outstanding at September 30, 2020 4,738 $ 20.92 6.2 $ — Granted 1,638 9.13 Exercised ( 268 ) 17.20 Forfeited or expired ( 943 ) 14.96 Outstanding at September 30, 2021 5,165 $ 18.46 4.6 $ 9,627 Exercisable at September 30, 2021 3,653 $ 21.49 2.9 $ 983 F-17 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 The weighted average assumptions used in the Black-Scholes model relating to the valuation of our stock options are as follows: Fiscal Year Ended September 30, 2021 2020 2019 Expected life (in years) 6.0 5.0 5.0 Expected volatility 44.5 % 35.8 % 30.5 % Risk-free interest rate 0.4 % 1.7 % 3.0 % Dividend yield 0.0 % 0.0 % 0.0 % The expected life of options awarded represents the period of time such options are expected to be outstanding and is based on our historical experience. The risk-free interest rate is based on the zero-coupon U.S. Treasury notes with a term comparable to the expected life of an award at the date of the grant. Since we do not currently expect to pay dividends, the dividend yield used for this purpose is 0 % . The weighted average fair value per share at the date of grant of the stock options awarded during the fiscal years 2021, 2020 and 2019 was $ 3.85 , $ 5.66 and $ 5.86 , respectively. The aggregate fair value of stock options vested during the fiscal years 2021, 2020 and 2019 was $ 3.4 million, $ 2.7 million and $ 5.1 million, respectively. The aggregate intrinsic value of options exercised during the fiscal years 2021, 2020 and 2019 was $ 0.7 million, $ 0.5 million and $ 0.9 million, respectively. The total cash received during the fiscal years 2021, 2020 and 2019 from these option exercises was $ 4.6 million, $ 3.0 million and $ 2.2 million, respectively, and the tax benefit realized for the tax deductions from these option exercises was $ 0.1 million, $ 0.1 million and $ 0.2 million, respectively. At September 30, 2021, approximately $ 3.8 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. RSAs The following table presents a summary of the activity for our RSAs: Restricted Stock Awards Number of Shares (in Thousands) Weighted Average Fair Value Per Share Unvested at September 30, 2020 419 $ 16.32 Granted — — Vested ( 107 ) 15.99 Forfeited ( 87 ) 16.45 Unvested at September 30, 2021 225 $ 16.44 At September 30, 2021, approximately $ 1.0 million of total unrecognized compensation costs related to unvested RSAs are expected to be recognized over the weighted average period of 1.1 years. RSUs The following table presents a summary of the activity for our RSUs: Restricted Stock Units Number of Shares (in Thousands) Weighted Average Fair Value Per Share Unvested at September 30, 2020 91 $ 16.47 Granted 819 9.32 Vested ( 140 ) 13.90 Forfeited ( 202 ) 9.09 Unvested at September 30, 2021 568 $ 9.41 At September 30, 2021, approximately $ 2.6 million of total unrecognized compensation costs related to unvested RSUs are expected to be recognized over the weighted average period of 2.0 years. F-18 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 8. Leases Our operating and finance leases consisted of the following (in thousands): September 30, Balance Sheet Classification 2021 2020 Assets: Operating lease Operating lease assets $ 537,673 $ 525,634 Finance lease Property and equipment, net 2,556 2,888 Total lease assets $ 540,229 $ 528,522 Liabilities: Current: Operating lease Current operating lease liabilities $ 156,234 $ 153,267 Finance lease Current maturities of long-term debt 194 180 Long-term: Operating lease Long-term operating lease liabilities 404,147 394,375 Finance lease Long-term debt 485 684 Total lease liabilities $ 561,060 $ 548,506 Our lease costs, net of immaterial sublease income, consisted of the following (in thousands): For the Year Ended September 30, Statement of Earnings Classification 2021 2020 Operating lease costs (a) Cost of goods sold and selling, general and administrative expenses (b) $ 193,583 $ 192,484 Finance lease costs: Amortization of leased assets Selling, general and administrative expenses 328 303 Interest on lease liabilities Interest expense 14 36 Variable lease costs (c) Selling, general and administrative expenses 53,698 45,191 Total lease costs $ 247,623 $ 238,014 (a) Includes costs related to short-term leases, which are immaterial. (b) Certain supply chain-related amounts are included in cost of goods sold. (c) 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, 2021 and 2020, we recognized benefits of $ 3.1 million and $ 11.7 million for rent abatements related to COVID-19, respectively. F-19 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 As of September 30, 2021, the approximate future lease payments under our leases under ASC 842, Leases , are as follows (in thousands): Fiscal Year Operating leases Finance leases 2022 $ 173,990 $ 197 2023 135,971 197 2024 98,874 191 2025 69,565 158 2026 48,331 — Thereafter 100,415 — Total undiscounted lease payments 627,146 743 Less: imputed interest 66,765 64 Present value of lease liabilities $ 560,381 $ 679 The table above does not include operating leases we have entered into of approximately $ 27.8 million that have not commenced, primarily related to future retail stores. Other lease information is as follows (dollars in thousands): For the Year Ended September 30, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows – operating leases $ 189,012 $ 183,808 Operating cash flows – finance leases 14 36 Financing cash flows – finance leases 202 34 Supplemental non-cash information on lease liabilities: Lease assets obtained in exchange for new operating lease liabilities $ 180,945 $ 204,245 Lease assets obtained in exchange for new finance lease liabilities 22 4 September 30, 2021 2020 Weighted-average remaining lease term (in years): Operating leases 5.1 5.1 Finance leases 3.7 3.8 Weighted-average discount rate: Operating leases 4.5 % 4.4 % Finance leases 0.3 % 0.3 % 9. Goodwill and Intangible Assets The changes in the carrying amounts of goodwill during the fiscal years 2021 and 2020 are as follows (in thousands): SBS BSG Total Balance at September 30, 2019 $ 76,905 $ 453,881 530,786 Acquisitions — 5,342 5,342 Foreign currency translation 4,281 ( 371 ) 3,910 Balance at September 30, 2020 $ 81,186 $ 458,852 $ 540,038 Acquisitions 231 ( 1,582 ) ( 1,351 ) Foreign currency translation 743 1,779 2,522 Balance at September 30, 2021 $ 82,160 $ 459,049 $ 541,209 F-20 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 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. As of September 30, 2021 and 2020, we had the following (in thousands): September 30, 2021 September 30, 2020 Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net Definite-lived Intangible assets: Customer relationships $ 32,621 $ ( 26,246 ) $ 6,375 $ 47,787 $ ( 38,876 ) $ 8,911 Distribution rights 11,660 ( 9,251 ) 2,409 24,509 ( 21,570 ) 2,939 Other intangible assets 5,238 ( 3,460 ) 1,778 5,300 ( 3,045 ) 2,255 Total definite-lived intangible assets 49,519 ( 38,957 ) 10,562 77,596 ( 63,491 ) 14,105 Indefinite-lived Intangible assets: Trade names 44,970 — 44,970 44,178 — 44,178 Total intangible assets, excluding goodwill, net $ 94,489 $ ( 38,957 ) $ 55,532 $ 121,774 $ ( 63,491 ) $ 58,283 Our definite-lived intangible assets are amortized on a straight-line basis over the period that we expected an economic benefit, typically over periods of three to ten years . For the fiscal years ended September 30, 2021, 2020 and 2019, amortization expense related to intangible assets totaled $ 6.6 million, $ 9.0 million and $ 11.3 million, respectively. As of September 30, 2021, the expected future amortization expense related to definite-lived intangible assets is as follows (in thousands): Fiscal Year: 2022 $ 4,017 2023 2,867 2024 1,894 2025 1,439 2026 345 Thereafter — $ 10,562 10. Accrued Liabilities Accrued liabilities consist of the following (in thousands): September 30, 2021 2020 Compensation and benefits $ 73,344 $ 54,749 Interest payable 24,101 29,048 Deferred revenue 18,543 16,728 Rental obligations 10,501 8,964 Insurance reserves 5,934 4,796 Property and other taxes 3,853 4,109 Operating accruals and other 69,879 52,271 Total accrued liabilities $ 206,155 $ 170,665 F-21 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 11. Commitments and Contingencies Commitments Letters of Credit We had $ 18.3 million and $ 18.6 million of outstanding letters of credit as of September 30, 2021 and 2020, respectively. Contingencies Legal Proceedings The Company is, from time to time, involved in various claims and lawsuits incidental to the conduct of its business in the ordinary course. We do not believe that the ultimate resolution of these matters will have a material adverse impact on our consolidated financial position, results of operations or cash flows. 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, 2021 and 2020. 12. Debt Short-term Debt In May 2021, we entered into a third amendment to our five-year asset-based senior secured loan facility (the "ABL facility") with a syndicate of banks, which reduced the revolving commitment thereunder from $ 600.0 million to $ 500.0 million and extended the maturity to May 11, 2026 . In connection with the amendment, we incurred $ 1.3 million in debt issuance costs that will be amortized over the life of the ABL facility. The interest rate on the ABL facility is variable and determined at our option as (i) prime plus 0.25 % or 0.50 % or (ii) London Interbank Offered Rate plus 1.25 % or 1.50 %. In addition, the terms of the ABL facility contain a commitment fee of 0.20 % on the unused portion of the facility. Borrowings under the ABL facility are secured by a first-priority lien in and upon the accounts and inventory (and the proceeds thereof) of the Company and its guarantor subsidiaries. Furthermore, 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, 2021 and 2020, there were no outstanding borrowings under our ABL facility. At September 30, 2021, we had $ 468.5 million available for borrowing, thereunder, including our Canadian sub-facility, subject to borrowing base limitations, as reduced by outstanding letters of credit . Long-term Debt Long-term debt consists of the following (dollars in thousands): September 30, 2021 2020 Interest Rates Term loan B: Variable-rate tranche $ 413,000 $ 422,625 LIBOR plus 2.25% Fixed-rate tranche — 213,163 4.500 % Senior notes due Nov. 2023 — 197,419 5.500 % Senior notes due Apr. 2025 300,000 300,000 8.750 % Senior notes due Dec. 2025 679,961 679,961 5.625 % Total $ 1,392,961 $ 1,813,168 Plus: capital lease obligations 679 864 Less: unamortized debt issuance costs and discount, net 10,916 16,955 Total debt $ 1,382,724 $ 1,797,077 Less: current maturities 194 180 Total long-term debt $ 1,382,530 $ 1,796,897 F-22 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 Maturities of our debt, excluding capital leases, are as follows at September 30, 2021 (in thousands): Fiscal Year: 2022-2023 $ — 2024 413,000 2025 300,000 2026 679,961 Thereafter — Total $ 1,392,961 Term Loan B In July 2017, we entered into a seven-year term loan pursuant to which we borrowed $ 850 million (the “term loan B”). 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. 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. In January 2021, we paid the remaining $ 213.2 million aggregate principal amount of our term loan B fixed tranche at par, excluding accrued interest. In connection with the repayment, we recognized a $ 1.4 million loss on the extinguishment of debt from the write-off of unamortized deferred financing costs. Additionally in June 2021, we elected to repay $ 8.3 million aggregate principal amount of our term loan B variable tranche. Furthermore in September 2021, we elected to repay an additional $ 1.4 million aggregate principal amount. These optional prepayments did not have any early prepayment penalties. In connection with the prepayments, we recognized a loss on extinguishment of debt of $ 0.1 million from the write-off of unamortized deferred financing costs. Senior Notes 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. Interest on the senior notes due 2023 and 2025 is payable semi-annually, during our first and third fiscal quarters. On April 1, 2021, we called the entire outstanding balance of $ 197.4 million of our 5.50 % senior notes due 2023 at par plus a premium. In connection with the repayment, we recognized losses on extinguishment of debt in the aggregate amount of $ 2.8 million, which included a $ 1.8 million call premium and the write-off of $ 1.0 million in unamortized deferred financing costs. 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. Covenants 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, 2021, we are in compliance with all debt covenants and all the net assets of our consolidated subsidiaries were unrestricted from transfer. F-23 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 13. Derivative Instruments As of September 30, 2021, we did no t purchase or hold any derivative instruments for trading or speculative purposes. See Note 4 for the classification and fair value of our derivative instruments. Designated Cash Flow Hedges Foreign Currency Forwards During the fiscal year ended September 30, 2021, we entered into foreign currency forwards to mitigate the exposure to exchange rate changes on inventory purchases in USD by our foreign subsidiaries over fiscal year 2021. As of September 30, 2021, all of our foreign currency forward derivatives instruments had settled. 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, 2021, we expect to reclassify approximately $ 0.5 million in net losses into cost of goods sold over the next 12 months. During the fiscal year ended September 30, 2021, we reclassified $ 0.3 million of net losses into cost of goods sold. Interest Rate Caps In July 2017, we purchased two interest rate caps with an initial aggregate notional amount of $ 550 million (the “interest rate caps”). The interest rate caps are made up of individual caplets that expire monthly through June 30, 2023 and are designated as cash flow hedges. Over the next 12 months, we expect to reclassify approximately $ 1.7 million into interest expense, which represents the original value of the expiring caplets. During the fiscal year ended September 30, 2021, we reclassified $ 1.2 million into interest expense. 14. 401(k) and Profit Sharing Plan We offer 401(k) Plans to our U.S. and Puerto Rico employees who meet certain eligibility requirements. The U.S. 401(k) Plan allows employees to contribute immediately upon hire, while the Puerto Rico 401(k) Plan allows employees to contribute after one year of employment. Under the terms of each 401(k) Plan, employees may contribute a percentage of their annual compensation up to certain maximums, as defined by each 401(k) Plan and by statutory limitations. We currently match a portion of employee contributions, as defined by each 401(k) Plan. We recognized expense of $ 6.2 million, $ 5.8 million and $ 6.2 million in the fiscal years ended September 30, 2021, 2020 and 2019, respectively, related to such matching contributions and these amounts are included in selling, general and administrative expenses in our consolidated statements of earnings. In addition, pursuant to the 401(k) Plans, we may elect to make voluntary profit sharing contributions to the accounts of eligible employees as determined by the Compensation Committee of the Board. During the fiscal years ended September 30, 2021, 2020 and 2019, we did no t make a profit sharing contribution to the 401(k) Plans. F-24 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 15. Income Taxes U.S. Tax Law Changes In response to the global pandemic related to COVID-19, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted 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 fiscal years ended September 30, 2021 and 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. enacted comprehensive amendments to the Internal Revenue Code of 1986 (“U.S. Tax Reform”). Among other things, U.S. Tax Reform (a) reduced the federal statutory tax rate for corporate taxpayers, (b) provided for a deemed repatriation of undistributed foreign earnings by U.S. taxpayers and made other fundamental changes on how foreign earnings will be taxed by the U.S. and (c) otherwise modified corporate tax rules in significant ways. The U.S. 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 fiscal year 2019. Notwithstanding this inconsistency, we remain confident in our interpretation of the Internal Revenue Code and intend to defend this position through litigation, if necessary. However, if we are ultimately unsuccessful in defending our position, we may be required to reverse the benefit. Beginning with our first quarter of fiscal year 2019, we are subject to taxation on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. 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 years 2021, 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. The provision for income taxes for the fiscal years 2021, 2020 and 2019 consists of the following (in thousands): Fiscal Year Ended September 30, 2021 2020 2019 Current: Federal $ 64,526 $ 22,282 $ 59,855 Foreign 14,869 6,120 10,132 State 14,364 4,730 15,339 Total current portion 93,759 33,132 85,326 Deferred: Federal ( 6,054 ) 10,177 4,905 Foreign ( 1,195 ) 1,321 ( 1,498 ) State ( 1,434 ) 2,092 1,808 Total deferred portion ( 8,683 ) 13,590 5,215 Total provision for income taxes $ 85,076 $ 46,722 $ 90,541 F-25 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 The difference between the U.S. statutory federal income tax rate and the effective income tax rate is summarized below: Fiscal Year Ended September 30, 2021 2020 2019 U.S. federal statutory income tax rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal tax benefit 3.0 3.4 3.4 Effect of foreign operations 0.8 ( 0.4 ) 0.2 Foreign valuation allowances 0.6 4.6 ( 0.2 ) Tax law change - GILTI — ( 1.0 ) — Deemed repatriation tax — 0.2 ( 0.3 ) Share-based payment awards 0.6 1.2 0.6 Other, net 0.2 0.2 0.3 Effective tax rate 26.2 % 29.2 % 25.0 % The tax effects of temporary differences that give rise to our deferred tax assets and liabilities are as follows (in thousands): September 30, 2021 2020 Deferred tax assets attributable to: Foreign loss carryforwards $ 34,007 $ 35,091 Accrued liabilities 18,662 8,871 Share-based compensation expense 8,392 8,988 U.S. foreign tax credits 11,199 11,199 U.S. federal social security tax deferral 3,089 4,038 Inventory adjustments 2,754 2,131 Other 2,984 1,101 Total deferred tax assets 81,087 71,419 Valuation allowance ( 51,810 ) ( 50,543 ) Total deferred tax assets, net 29,277 20,876 Deferred tax liabilities attributable to: Depreciation and amortization 109,038 107,672 Net deferred tax liability $ 79,761 $ 86,796 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. Domestic earnings before provision for income taxes were $ 288.0 million, $ 168.0 million and $ 328.3 million in the fiscal years 2021, 2020 and 2019, respectively. Foreign earnings before provision for income taxes of $ 36.9 million in the fiscal year 2021, 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 in the fiscal year 2019. 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. We do not expect the outcome of current or future tax audits to have a material adverse effect on our consolidated financial condition, results of operations or cash flow. As of September 30, 2021, applicable deferred tax liabilities have been provided for undistributed foreign earnings in excess of foreign working capital and cash requirements. As a result of U.S. Tax Reform, the repatriation of cash to the U.S. is generally no longer taxable for federal income tax purposes, but could be subject to foreign withholding taxes and state income taxes. If undistributed earnings of our foreign operations were not considered permanently reinvested as of September 30, 2021, an immaterial amount of additional deferred taxes would have been provided. F-26 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 At September 30, 2021 and 2020 , we had total operating loss carry-forwards of $ 125.7 million and $ 128.2 million, respectively, of which $ 109.4 million and $ 111.7 million, respectively, are subject to a valuation allowance. At September 30, 2021 , operating loss carry-forwards of $ 3.0 million expire between 2021 and 2032 and operating loss carry-forwards of $ 122.7 million have no expiration date. At September 30, 2021 and 2020 , we had tax credit carry-forwards of $ 14.1 million and $ 13.8 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. Tax Reform. This credit expires in 2028. We do not believe the realization of the U.S. foreign tax credit is more-likely-than-not, so a valuation allowance has been recorded against its full value. Of the remaining tax credit carry-forwards, at September 30, 2021 , $ 1.2 million expire between 2024 and 2028, $ 0.3 million expire between 2032 and 2036 and $ 1.4 million have no expiration date. Total tax credit carry-forwards of $ 12.6 million are subject to a valuation allowance at September 30, 2021 and 2020 . The changes in the amount of unrecognized tax benefits are as follows (in thousands): Fiscal Year Ended September 30, 2021 2020 Balance at beginning of the fiscal year $ 2,053 $ 2,000 Increases related to prior year tax positions 5 — Decreases related to prior year tax positions ( 2 ) ( 4 ) Increases related to current year tax positions 195 250 Lapse of statute ( 159 ) ( 193 ) Balance at end of fiscal year $ 2,092 $ 2,053 If recognized, these positions would affect our effective tax rate. We recognize interest and penalties, accrued in connection with unrecognized tax benefits, in provision for income taxes. Accrued interest and penalties, in the aggregate, were $ 0.3 million and $ 0.2 million at September 30, 2021 and 2020, respectively. Because existing tax positions will continue to generate increased liabilities for unrecognized tax benefits over the next 12 months, and the fact that from time to time our tax returns are routinely under audit by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during the next 12 months. 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. Our consolidated federal income tax return for the fiscal year ended September 30, 2019, is currently under IRS examination. Our consolidated federal income tax return for the fiscal year ended September 30, 2018 is currently under IRS Appeals for the aforementioned issue related to the transition tax on unrepatriated earnings. Our statute remains open for the fiscal year ended September 30, 2018, forward. Our U.S. state income tax returns are impacted by various statutes of limitations and are generally open for the fiscal year ended September 30, 2018 and future years. Our foreign income tax returns are impacted by various statutes of limitations, which are generally open from 2016 forward. F-27 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 16. Acquisitions 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 preliminarily 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. During fiscal year 2021, we recorded post-acquisition adjustments from our purchase of Ami-Co that reduced goodwill and established $ 2.5 million in intangible assets subject to amortization. Additionally, we released $ 1.6 million in holdbacks in connection with the Ami-Co acquisition during the fiscal year. In addition, we completed several other individually immaterial acquisitions during the fiscal years 2021 and 2020 in the aggregate cost of approximately $ 0.7 million and $ 5.7 million, respectively. As a result of these acquisitions, we recorded intangible assets subject to amortization in fiscal years 2021 and 2020 of approximately $ 0.6 million and $ 3.9 million, respectively. 17. 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. Our business is organized into two reportable segments: (i) SBS, a domestic and international chain of retail stores and a consumer-facing e-commerce website that offers professional beauty supplies to both salon professionals and retail customers primarily in North America, Puerto Rico, and parts of Europe and South America and (ii) BSG, including its franchise-based business Armstrong McCall, a full service distributor of beauty products and supplies that offers professional beauty products directly to salons and salon professionals through its professional-only stores, e-commerce platforms and its own sales force in partially exclusive geographical territories in the U.S. and Canada. The accounting policies of both of our reportable segments are the same as described in the summary of significant accounting policies contained in Note 2. Sales between segments, which were eliminated in consolidation, were not material for the fiscal years ended September 30, 2021, 2020 and 2019. F-28 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 Business Segments Information Segment data for the fiscal years 2021, 2020 and 2019 are as follows (in thousands): 2021 2020 2019 Net sales (for the fiscal year indicated): SBS $ 2,278,382 $ 2,080,703 $ 2,293,094 BSG 1,596,615 1,433,627 1,583,317 Total $ 3,874,997 $ 3,514,330 $ 3,876,411 Earnings before provision for income taxes: Segment operating earnings: SBS $ 417,658 $ 237,588 $ 366,412 BSG 205,078 194,206 239,572 Segment operating earnings 622,736 431,794 605,984 Unallocated expenses 199,682 159,009 148,193 Restructuring 4,611 14,025 ( 682 ) Consolidated operating earnings 418,443 258,760 458,473 Interest expense 93,509 98,793 96,309 Earnings before provision for income taxes $ 324,934 $ 159,967 $ 362,164 Depreciation and amortization: SBS $ 61,887 $ 65,207 $ 65,561 BSG 28,597 29,324 28,568 Corporate 11,717 12,248 13,529 Total $ 102,201 $ 106,779 $ 107,658 Payments for property and equipment: SBS $ 43,165 $ 73,130 $ 69,802 BSG 24,880 27,338 18,997 Corporate 5,859 10,390 18,956 Total $ 73,904 $ 110,858 $ 107,755 Total assets (as of September 30): SBS $ 1,235,427 $ 1,370,745 $ 973,304 BSG 1,179,263 1,106,801 1,012,336 Sub-total 2,414,690 2,477,546 1,985,640 Corporate 432,442 417,601 112,806 Total $ 2,847,132 $ 2,895,147 $ 2,098,446 Unallocated expenses consist of corporate and shared costs and are included in selling, general and administrative expenses in our consolidated statements of earnings. In the fiscal years 2021, 2020 and 2019, no single customer accounted for 10 % or more of revenue. F-29 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 Geographic Area Information Certain geographic data is as follows (in thousands): 2021 2020 2019 Net sales (for the fiscal year indicated): United States $ 3,228,091 $ 2,914,171 $ 3,169,821 Other countries 646,906 600,159 706,590 Total $ 3,874,997 $ 3,514,330 $ 3,876,411 Long-lived assets (as of September 30): United States $ 267,839 $ 264,936 $ 259,815 United Kingdom 15,089 20,183 24,476 Other countries 24,449 29,910 35,337 Total $ 307,377 $ 315,029 $ 319,628 Disaggregated Revenues The following tables disaggregate our segment revenues by merchandise category: Fiscal Year Ended September 30, SBS 2021 2020 2019 Hair color 35.6 % 33.0 % 29.4 % Hair care 18.9 % 18.9 % 20.4 % Skin and nail care 13.9 % 14.3 % 14.8 % Styling tools 12.3 % 12.8 % 13.5 % Salon supplies and accessories 7.6 % 8.1 % 6.6 % Textured hair 5.9 % 5.8 % 7.1 % Other beauty items 5.8 % 7.1 % 8.2 % Total 100.0 % 100.0 % 100.0 % Fiscal Year Ended September 30, BSG 2021 2020 2019 Hair color 43.7 % 40.6 % 39.5 % Hair care 36.8 % 35.0 % 35.1 % Skin and nail care 7.0 % 8.0 % 8.1 % Styling tools 6.4 % 6.2 % 3.4 % Other beauty items 2.3 % 3.4 % 6.3 % Promotional items 3.8 % 6.8 % 7.6 % Total 100.0 % 100.0 % 100.0 % The following table disaggregates our segment revenue by sales channels: SBS BSG Fiscal Year Ended September 30, Fiscal Year Ended September 30, 2021 2020 2019 2021 2020 2019 Company-operated stores 94.1 % 91.8 % 96.9 % 69.1 % 68.9 % 69.4 % E-commerce 5.9 % 8.0 % 2.8 % 9.2 % 8.7 % 4.8 % Franchise stores — 0.2 % 0.3 % 7.5 % 7.1 % 7.6 % Distributor sales consultants — — — 14.2 % 15.3 % 18.2 % Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % F-30 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2021, 2020 and 2019 18. Restructuring Restructuring expense and gains for the fiscal years ended September 30, 2021, 2020 and 2019, are as follows (in thousands): 2021 2020 2019 Project Surge $ 1,451 $ 1,511 $ — Transformation Plan 3,160 12,514 ( 682 ) Total expense (gain) $ 4,611 $ 14,025 $ ( 682 ) 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 Liability at September 30, 2020 Expenses Cash Payments Adjustments Liability at September 30, 2021 Workforce reductions $ — $ 1,061 $ 981 $ — $ 80 Facility closures — — — — — Other — 390 390 — — Total $ — $ 1,451 $ 1,371 $ — $ 80 Expenses incurred during the fiscal year ended September 30, 2021, represent costs incurred by SBS of $ 0.7 million, corporate of $ 0.5 million and BSG of $ 0.2 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 Liability at September 30, 2020 Expenses Cash Payments Adjustments Liability at September 30, 2021 Workforce reductions $ 65 $ 1,327 $ 674 $ — $ 718 Facility closures — 790 368 — 422 Other — 1,043 1,043 — — Total $ 65 $ 3,160 $ 2,085 $ — $ 1,140 Expenses incurred during the fiscal year ended September 30, 2020, represent costs incurred by SBS of $ 3.2 million. In addition, SBS recognized $ 1.4 million in cost related to inventory write-downs in connection with the plan within cost of products sold. F-31