What changed in this filing

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Item 1. Financial Statements

2022-02-02 compared with 2021-07-29 · 100 added, 136 removed, 206 unchanged (53% of the section changed)

Financial Statements.

The following condensed consolidated balance sheets as of June 30, 2021, and September 30, 2020, the condensed consolidated statements of earnings (loss), condensed consolidated statements of comprehensive income (loss) and the condensed consolidated statements of stockholders’ equity (deficit) for the three and nine months ended June 30, 2021 and 2020, and the condensed consolidated statements of cash flows for the nine months ended June 30, 2021 and 2020, are those of Sally Beauty Holdings, Inc.

and its subsidiaries.

SALLY BEAUTY HOLDINGS, INC.

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Property and equipment, net of accumulated depreciation of $ 784,622 at

June 30, 2021, and $ 694,709 at September 30, 2020

December 31, 2021, and $ 767,403 at September 30, 2021

Operating lease assets

Intangible assets, excluding goodwill, net of accumulated amortization of

$ 37,847 at June 30, 2021, and $ 63,491 at September 30, 2020

$ 39,670 at December 31, 2021, and $ 38,957 at September 30, 2021

Liabilities and Stockholders’ Equity

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113,138 shares issued and 109,977 and 112,913 shares outstanding at

June 30, 2021, and September 30, 2020, respectively

December 31, 2021, and September 30, 2021, respectively

Preferred stock, $ 0.01 par value.

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AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings (Loss)

Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

Three Months Ended

Nine Months Ended

Cost of goods sold

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Interest expense

Earnings (loss) before provision for income taxes

Provision (benefit) for income taxes

Net earnings (loss)

Earnings (loss) per share:

Earnings before provision for income taxes

Provision for income taxes

Earnings per share:

Weighted-average shares:

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AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

Three Months Ended

Nine Months Ended

Net earnings (loss)

Other comprehensive income (loss):

Other comprehensive (loss) income:

Foreign currency translation adjustments

1 unchanged sentence

Foreign exchange contracts, net of tax

Other comprehensive income (loss), net of tax

Total comprehensive income (loss)

Other comprehensive (loss) income, net of tax

Total comprehensive income

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

1 unchanged sentence

AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

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Stock issued for equity awards

Employee withholding taxes paid related to net share settlement

Repurchases and cancellations of

Balance at December 31, 2021

Other comprehensive loss

Share-based compensation

Stock issued for equity awards

Balance at March 31, 2021

Other comprehensive income

Share-based compensation

Stock issued for equity awards

Balance at June 30, 2021

Stockholders’

Comprehensive

Stockholders’

Balance at September 30, 2020

Cumulative effect of ASC 842

Other comprehensive income

Repurchases and cancellations of

Share-based compensation

Stock issued for equity awards

Employee withholding taxes paid related to net share settlement

Balance at December 31, 2020

Other comprehensive loss

Repurchases and cancellations of

Share-based compensation

Stock issued for equity awards

Balance at March 31, 2020

Other comprehensive income

Share-based compensation

Stock issued for stock options

Balance at June 30, 2020

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

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(In thousands)

Nine Months Ended June 30,

Three Months Ended December 31,

Cash Flows from Operating Activities:

Adjustments to reconcile net earnings to net cash provided by operating

Adjustments to reconcile net earnings to net cash (used) provided by operating

Depreciation and amortization

1 unchanged sentence

Amortization of deferred financing costs

Loss (gain) on early extinguishment of debt

Loss on disposal of equipment and other property

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Other liabilities

Net cash provided by operating activities

Net cash (used) provided by operating activities

Cash Flows from Investing Activities:

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Cash Flows from Financing Activities:

Proceeds from issuance of long-term debt

Repayments of long-term debt

Debt issuance costs

Payments for common stock repurchased

Proceeds from equity awards

Net cash (used) provided by financing activities

Employee withholding taxes paid related to net share settlement of equity awards

Net cash used by financing activities

Effect of foreign exchange rate changes on cash and cash equivalents

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Notes to Condensed Consolidated Financial Statements

Significant Accounting Policies

Business Operations

Sally Beauty Holdings is an international specialty retailer and distributor of professional beauty supplies with operations in North America, South America and Europe.

We are one of the largest distributers of professional beauty supplies in the U.S.

based on store count, operating under two segments, Sally Beauty Supply (“SBS”) and Beauty Systems Group (“BSG”).

Our operations consist of company-operated stores, franchise stores and several e-commerce platforms.

Within BSG, we also have one of the largest networks of distributor sales consultants (“DSCs”) for professional beauty products in North America, who sell directly to salons and salon professionals.

SBS targets retail consumers, salons and salon professionals, while BSG targets salons and salons professionals.

Basis of Presentation

The condensed consolidated interim financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC.

Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC, although we believe that the disclosures included herein are adequate to make the information not misleading.

These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.

In the opinion of management, these condensed consolidated interim financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly our consolidated financial position as of June 30, 2021 and September 30, 2020, and our consolidated results of operations, consolidated comprehensive income, and consolidated statements of stockholders’ equity for the three and nine months ended June 30, 2021 and 2020, our consolidated cash flows for the nine months ended June 30, 2021 and 2020.

Our operating results for the three and nine months ended June 30, 2021, may not be indicative of the results that may be expected for the full fiscal year ending September 30, 2021, in particular as a result of the uncertainty around the continuing effects of the COVID-19 pandemic on future periods.

Due to the uncertainty over the duration and severity of the economic and operational impacts of COVID-19, the adverse impact of the pandemic may continue further into our fiscal year 2021 and possibly beyond, and it may be material.

Significant Accounting Policies

In the opinion of management, these condensed consolidated interim financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly our consolidated financial position as of December 31, 2021 and September 30, 2021, and our consolidated results of operations, consolidated comprehensive income, consolidated statements of stockholders’ equity and our consolidated cash flows for the for the three months ended December 31, 2021 and 2020.

Principles of Consolidation

The condensed consolidated interim financial statements include all accounts of Sally Beauty Holdings, Inc.

and its subsidiaries.

All intercompany accounts and transactions have been eliminated in consolidation.

All amounts are in U.S.

Accounting Policies

We adhere to the same accounting policies in the preparation of our condensed consolidated interim financial statements as we do in the preparation of our full year consolidated financial statements.

As permitted under GAAP, interim accounting for certain expenses, including income taxes, is based on full-year assumptions.

For interim financial reporting purposes, income taxes are recorded based upon estimated annual effective income tax rates.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU No.

2019-12 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 are currently evaluating the impact of this update, but based on our preliminary assessment we do not believe that adoption of this update will have a material impact on our results of operations or financial position.

For interim financial reporting purposes, income taxes are recorded based upon our estimated annual effective income tax.

Use of Estimates

In order to present our financial statements in conformity with GAAP, we are required to make certain estimates and assumptions that impact our interim financial statements and supplementary disclosures.

These estimates may use forecasted financial information based on reasonable information available, however are subject to change in the future.

Additionally, unknown future impacts of COVID-19 may impact those estimates and assumptions as well.

Significant estimates and assumptions are part of our accounting for sales allowances, deferred revenue, valuation of inventory, amortization and depreciation, intangibles and goodwill, and other reserves.

We believe these estimates and assumptions are reasonable however they are based on management’s current knowledge of events and actions and changes in facts and circumstances may result in revised estimates, and impact actual results.

Impact of COVID-19

Our operating results for the three months ended December 31, 2021, may not be indicative of the results that may be expected for the full fiscal year ending September 30, 2022, in particular as a result of the uncertainty around the continuing effects of the COVID-19 pandemic and its variants on future periods.

While trends have been improving, we cannot reasonably predict the effects of the pandemic or expect these positive trends to continue.

If we become negatively impacted, we may have to consider adjustments to our strategic plans, inventory, liquidity, operational and capital expenditure plans.

Additionally, as the uncertainty of the economy as a result of COVID-19 continues to be prolonged, it may have an impact on our net sales and operations, and may require changes to our reserves including adjustments, write-downs and restructuring charges.

Revenue Recognition

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We estimate sales returns based on historical data.

Changes to our contract liabilities for the period were as follows (in thousands):

September 30, 2020

Changes to our contract liabilities, which are included in accrued liabilities in our condensed balance sheets, for the periods were as follows (in thousands):

Three Months Ended December 31,

Beginning Balance

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

Revenue recognized from beginning liability

June 30, 2021

See Note 11, Business Segments , for additional information regarding the disaggregation of our sales revenue.

Ending Balance

See Note 9, Segment Reporting , for additional information regarding the disaggregation of our sales revenue.

Fair Value Measurements

Fair value on recurring basis

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

Financial instruments measured on recurring basis

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

(in thousands)

Classification

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Financial Assets:

Cash equivalents

Cash and cash equivalents

Foreign exchange contracts

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Accrued liabilities

Other fair value disclosures

June 30, 2021

Financial instruments not measured at fair value

Carrying amounts and the related estimated fair value of our long-term debt, excluding capital lease obligations and debt issuance costs, are as follows:

December 31, 2021

September 30, 2021

(in thousands)

Fair Value Hierarchy Level

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The table above excludes amounts, if any, related to our ABL facility as the balance approximates fair value due to the short-term nature of our borrowings.

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.

Stockholders’ Equity

Share Repurchases

In August 2017, our Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $ 1.0 billion of its common stock, subject to certain limitations governed by our debt agreements, over an approximate four-year period expiring on September 30, 2021 .

See Note 13, Subsequent Event , for more information on our share repurchase program.

In July 2021, our Board of Directors approved a term extension of the share repurchase program for the four-year period ending September 30, 2025 .

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

Three Months Ended

Nine Months Ended

Number of shares repurchased

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Reclassification to net earnings, net of tax

Balance at June 30, 2021

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

Balance at December 31, 2021

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

Weighted-Average Shares

1 unchanged sentence

Three Months Ended

Nine Months Ended

Weighted-average basic shares

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Anti-dilutive options excluded from our computation of diluted shares

Potentially dilutive stock option and stock award programs excluded from our computation of diluted shares

Goodwill and Intangible Assets

During the three months ended March 31, 2021, we completed our annual assessment for impairment of goodwill and other intangible assets.

For goodwill, we used a qualitative analysis and our actual and forecasted results are exceeding the estimates from the last quantitative test .

We considered potential triggering events and determined there were none during the three months ended December 31, 2021.

No material impairment losses were recognized in the current or prior periods presented in connection with our goodwill and other intangible assets.

For the three months ended June 30, 2021 and 2020, amortization expense related to other intangible assets was $ 1.6 million and $ 2.2 million, respectively, and for the nine months ended June 30, 2021 and 2020, amortization expense was $ 5.0 million and $ 6.8 million, respectively.

Additionally during the nine months ended June 30, 2021, the increase in goodwill was primarily from the effects of foreign currency exchange rates of $ 6.1 million.

Short-term Borrowings and Long-term Debt

At June 30, 2021, there were no outstanding borrowings under our ABL facility and we had $ 481.7 million available for borrowing, thereunder, including our Canadian sub-facility, subject to the conditions contained therein.

During the three months ended June 30, 2021, we entered into a third amendment to our ABL facility which 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.

During the three months ended March 31, 2021, we paid the remaining $ 213.2 million of aggregate outstanding principal on our term loan B fixed tranche at par, excluding accrued interest.

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

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 June 30, 2021, we elected to repay $ 8.3 million of aggregate outstanding principal on our term loan B variable tranche.

This optional prepayment did not have any early prepayment penalties.

In connection with the prepayment, we recognized a loss on extinguishment of debt of $ 0.1 million from the write-off of unamortized deferred financing costs.

As of June 30, 2021, we still have $ 414.4 million remaining on our term loan B variable tranche.

The agreements governing our ABL facility, term loan B and the senior notes 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 with customary events of default, including customary cross-default and/or cross-acceleration provisions.

As of June 30, 2021, we were in compliance with all debt covenants, and all the net assets of our consolidated subsidiaries were unrestricted from transfer.

Three Months Ended

(in thousands)

Intangible assets amortization expense

Additionally, during the three months ended December 31, 2021, the decrease in goodwill was primarily from the effects of foreign currency exchange rates of $ 0.9 million.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

September 30,

Compensation and benefits

Deferred revenue

Rental obligations

Interest payable

Insurance reserves

Property and other taxes

Operating accruals and other

Total accrued liabilities

Derivative Instruments and Hedging Activities

During the nine months ended June 30, 2021, we did no t purchase or hold any derivative instruments for trading or speculative purposes.

During the three months ended December 31, 2021, we did no t purchase or hold any derivative instruments for trading or speculative purposes.

See Note 3, Fair Value Measurements , for the classification and fair value of our derivative instruments.

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dollars by our foreign subsidiaries.

At June 30, 2021, the notional amount we held through these forwards, based upon exchange rates at June 30, 2021, was as follows (in thousands):

At December 31, 2021, the notional amount we held through these forwards, based upon exchange rates at December 31, 2021, was as follows (in thousands):

Notional Currency

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As the forwards are exercised, the realized value is recognized into cost of goods sold based on inventory turns.

For the three and nine months ended June 30, 2021, we recognized a loss of $ 0.3 million and a gain of $ 0.1 million, respectively, into cost of goods sold on our condensed consolidated statements of earnings.

Based on June 30, 2021 valuations and exchange rates, we expect to reclassify losses of approximately $ 1.0 million into cost of goods sold over the next 12 months.

For the three months ended December 31, 2021 and 2020, we recognized a loss of $ 0.3 million and a gain of $ 0.4 million, respectively, into cost of goods sold on our condensed consolidated statements of earnings.

Based on December 31, 2021 valuations and exchange rates, we expect to reclassify losses of approximately $ 0.6 million into cost of goods sold over the next 12 months.

Interest Rate Caps

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Over the next 12 months, we expect to reclassify approximately $ 1.8 million into interest expense, which represents the original value of the expiring caplets.

The effects of our interest rate caps on our condensed consolidated statements of earnings were not material for the three and nine months ended June 30, 2021.

Business Segments

Segment data for the three and nine months ended June 30, 2021 and 2020, is as follows (in thousands):

For the three months ended December 31, 2021, we recognized expense of approximately $ 0.4 million into interest expense on our condensed consolidated statements of earnings.

The effects of our interest rate caps on our condensed consolidated statements of earnings were not material for the three months ended December 31, 2020.

Segment Reporting

Segment data for the three months ended December 31, 2021 and 2020, is as follows (in thousands):

Three Months Ended

Nine Months Ended

Sally Beauty Supply ("SBS")

Beauty Systems Group ("BSG")

Earnings (loss) before provision for income taxes:

Earnings before provision for income taxes:

Segment operating earnings:

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Interest expense

Earnings (loss) before provision for income taxes

Sales between segments, which are eliminated in consolidation, were not material during the three and nine months ended June 30, 2021 and 2020.

Earnings before provision for income taxes

Sales between segments, which are eliminated in consolidation, were not material during the three months ended December 31, 2021 and 2020.

Disaggregation of net sales by segment

The following tables disaggregate our segment revenues by merchandise category.

We have reclassified certain prior year amounts to conform to current year presentation.

Three Months Ended

Nine Months Ended

Skin and nail care

Styling tools

Salon supplies and accessories

Textured hair products

Styling tools and supplies

Skin and cosmetics

Other beauty items

Three Months Ended

Nine Months Ended

Skin and nail care

Styling tools

Styling tools and supplies

Skin and cosmetics

Other beauty items

Promotional items

The following tables disaggregate our segment revenue by sales channels:

Three Months Ended

Nine Months Ended

Company-operated stores

1 unchanged sentence

Three Months Ended

Nine Months Ended

Company-operated stores

1 unchanged sentence

Franchise stores

For the three months ended June 30, 2021 and 2020, our effective tax rates were 26.7 % and 9.1 %, respectively.

The effective tax rate for the third quarter of the prior year was negatively impacted by foreign losses for which a tax benefit could not be recognized.

For the nine months ended June 30, 2021 and 2020, our effective tax rates were 26.6 % and 37.2 %, respectively.

The decrease in the effective tax rate was primarily due to greater losses in the prior year from foreign subsidiaries for which a tax benefit could not be recognized and the establishment of a valuation allowance in a foreign subsidiary in the prior year.

Refer to the following rate reconciliation for more details relating to the period over period differences in the effective tax rate:

Three Months Ended

Nine Months Ended

federal statutory income tax rate

State income taxes, net of federal tax benefit

Effect of foreign operations

Foreign valuation allowances (1)

Deemed repatriation tax (1)

Other, net (1)

Effective tax rate

For the three months ended June 30, 2020, the impact of these and certain other tax impacting items is opposite the customary relationship due to the loss before the provision for income taxes that was incurred.

A lower effective tax rate is not beneficial in situations where a pre-tax book loss has been incurred.

Subsequent Event

In 2017 the Board of Directors approved a share repurchase program authorizing us to repurchase up to $ 1.0 billion of our common stock through September 30, 2021 .

On July 22, 2021, the Board approved a term extension of the share repurchase program for the four-year period ending September 30, 2025 .

Under the extension we are authorized to purchase our common stock up to the amount remaining under the Board’s 2017 authorization, which is currently $ 726.1 million.

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

What changed 10-Q

Item 1. Financial Statements