What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2022-11-17 compared with 2021-11-22 · 252 added, 239 removed, 961 unchanged (34% of the section changed)

64 unchanged sentences

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 2023 Annual Meeting of Stockholders under the headings “Corporate Governance, the Board, and Its Committees,” “Compensation Committee Interlocks and Insider Participation” and “Related Party Transactions.”

PRINCIPAL ACCO UNTING FEES AND SERVICES

PRINCIPAL ACCO UNT ING 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 2023 Annual Meeting of Stockholders under the heading “Proposal 3 – Ratification of Selection of Auditors.”

18 unchanged sentences

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

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 †

Amendment No.

2 dated September 2, 2020, 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 4.12 to the Company’s Annual Report on Form 10-K/A filed on December 8, 2022

Amendment No.

3 dated May 11, 2021, 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 4.13 to the Company’s Annual Report on Form 10-K/A filed on December 8, 2022

Sally Beauty Holdings, Inc.

32 unchanged sentences

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

Henrich and the Company effective June 10, 2019, Marlo Cormier and the Company effective April 9, 2020, 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

2012 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc.

3 unchanged sentences

Sally Beauty Holdings, Inc.

Annual Incentive Plan*

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*

Consulting Agreement between Christian A.

Brickman and the Company effective September 30, 2021*

Offer Letter to Denise Paulonis, dated as of August 26, 2021*

Annual Incentive Plan, which is incorporated herein by reference from Exhibit 10.23 from the Company’s Annual report on Form 10-K filed on November 22, 2021

2022 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holding, Inc.

2019 Omnibus Incentive Plan *

2022 Form of Restricted Stock Unit Agreement pursuant to the Sally Beauty Holding, Inc.

2019 Omnibus Incentive Plan *

2022 Form of Performance Unit Award Agreement in connection to Relative Total Shareholder Return pursuant to the Sally Beauty Holding, Inc.

2019 Omnibus Incentive Plan *

2022 Form of Performance Unit Award Agreement in connection to FY2023 Adjusted Operating Income pursuant to the Sally Beauty Holding, Inc.

2019 Omnibus Incentive Plan *

2022 Form of Performance Unit Award Agreement in connection to FY2024 Adjusted Operating Income pursuant to the Sally Beauty Holding, Inc.

2019 Omnibus Incentive Plan *

2022 Form of Performance Unit Award Agreement in connection to FY2025 Adjusted Operating Income pursuant to the Sally Beauty Holding, Inc.

2019 Omnibus Incentive Plan *

List of Subsidiaries of Sally Beauty Holdings, Inc.*

39 unchanged sentences

November 17, 2022

/s/ Timothy R.

/s/ Rachel R.

November 17, 2022

/s/ Jeffrey Boyer

November 17, 2022

Jeffrey Boyer

/s/ Marshall E.

8 unchanged sentences

November 17, 2022

/s/ Lawrence P.

November 17, 2022

9 unchanged sentences

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Financial Statements:

8 unchanged sentences

Sally Beauty Holdings, Inc.:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

Opinions on the Consolidated Financial Statement s 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).

and subsidiaries (the Company) as of September 30, 2022 and 2021, the related consolidated statements of earnings, comprehensive income, stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended September 30, 2022, 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, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

2 unchanged sentences

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2022 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).

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has elected to change its method of accounting for inventory located in the U.S.

13 unchanged sentences

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

Definition and Limitations of Internal Control Over Financial Reporting

Definition and Limitations of Internal Control Over Financial Reportin g

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.

9 unchanged sentences

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).

As discussed in Note 1 to the consolidated financial statements, accounts receivable, other, consists primarily of amounts due 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.

Accounts receivable, other was $38.2 million as of September 30, 2022.

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.

4 unchanged sentences

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.

We also confirmed outstanding vendor receivables directly with the Company’s vendors and compared the confirmed amount to the amount previously recognized by the Company for a sample of vendor rebates and concessions.

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

61 unchanged sentences

(In thousands)

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

Other comprehensive (loss) income, net of tax

Total comprehensive income

11 unchanged sentences

Amortization of deferred financing costs

Net loss/(gain) on disposal and impairment of assets

Impairment of long-lived assets, including operating lease assets

Net (gain)/loss on disposal of long-lived assets

Net loss on extinguishment of debt

36 unchanged sentences

(In thousands)

Accumulated Other

Comprehensive

Stockholders’

Income (Loss)

Equity (Deficit)

Comprehensive

Balance at September 30, 2019

Other comprehensive loss,

Cumulative effect of ASC 842 adoption

Other comprehensive income,

Repurchases of common stock

1 unchanged sentence

Stock issued for equity awards

Employee withholding taxes paid

related to net share settlement

Balance at September 30, 2020

Cumulative effect of ASC 842 adoption

Other comprehensive income,

Repurchases of common stock

Share-based compensation

Stock issued for equity awards

Employee withholding taxes paid

related to net share settlement

Balance at September 30, 2021

Other comprehensive income,

Repurchases of common stock

Share-based compensation

Stock issued for equity awards

Employee withholding taxes paid

related to net share settlement

Balance at September 30, 2022

4 unchanged sentences

Fiscal Years ended September 30, 2022, 2021 and 2020

Basis of Presentation and Significant Accounting Policies

Basis of Presentation

1 unchanged sentence

All significant intercompany accounts and transactions have been eliminated in consolidation.

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.

In accordance with GAAP, we make 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.

Cash represents currency on hand, debit and credit card receivables 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 is determined by estimating expected credit losses based on historical trends.

At September 30, 2022 and 2021, our allowance for doubtful accounts was $ 1.1 million for both years.

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.

5 unchanged sentences

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

Cost of goods sold includes actual product costs, the cost of transportation to our distribution centers, operating costs 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 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

Sally Beauty Holdings, Inc.

2 unchanged sentences

Fiscal Years ended September 30, 2022, 2021 and 2020

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.

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.

Furthermore, during fiscal year 2022, we established inventory reserves in connection with our Distribution Center Consolidation and Store Optimization Plan within restructuring.

Please see Note 16, Restructuring , for more information on our restructuring plans.

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 .

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

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

7 unchanged sentences

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.

During fiscal year 2022, we recognized an impairment loss in connection with our Distribution Center Consolidation and Store Optimization Plan within restructuring.

Please see Note 16, Restructuring , for more information on our restructuring plans.

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.

Leasehold improvements are depreciated 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.

7 unchanged sentences

Total property and equipment, net

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.

Sally Beauty Holdings, Inc.

2 unchanged sentences

Fiscal Years ended September 30, 2022, 2021 and 2020

Depreciation expense for the fiscal years 2022, 2021 and 2020 was $ 95.9 million, $ 93.2 million and $ 95.5 million, respectively, and is included in selling, general and administrative expenses, or cost of goods sold if associated with our distribution centers, in our consolidated statements of earnings.

During fiscal year 2022, we recognized an impairment loss in connection with our Distribution Center Consolidation and Store Optimization Plan within restructuring.

Please see Note 16, Restructuring , for more information on our restructuring plans.

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.

Long-lived assets, including operating lease assets and property and equipment, 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.

If the carrying amount of an asset exceeds its undiscounted future cash flows, an impairment charge may be recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset using a discounted cash flow approach.

When we commit to an exit plan of scale that we believe will result in the disposal of long-lived assets prior to the end their useful lives, the approval of such plan may be considered a triggering event and therefore require a reassessment of asset carrying values for recoverability, based on projected cash flows.

If the carrying values are not recoverable, write-downs or impairment charges may be required to bring carrying values of certain long-lived assets, including operating lease asset, to fair value.

For fiscal year 2022, we recognized an impairment loss of $ 24.8 million in connection with our Distribution Center Consolidation and Store Optimization Plan within restructuring.

Please see Note 16, Restructuring , for more information on our restructuring plans.

Goodwill and Indefinite-lived Intangible Assets

9 unchanged sentences

Indefinite-lived Intangible Assets

Our intangible assets with indefinite lives consist of trade names acquired in business combinations .

Our intangible assets with indefinite lives consist of trade names acquired in business combinations or asset purchases .

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.

3 unchanged sentences

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.

Sally Beauty Holdings, Inc.

2 unchanged sentences

Fiscal Years ended September 30, 2022, 2021 and 2020

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.

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.

6 unchanged sentences

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.

Additionally, we have assessed all revenue streams for principal versus agent considerations and have concluded we are the principal for the vast majority of all our transactions.

See Note 15, Segments and Disaggregated Revenue , 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 sell merchandise through our company-operated stores, digital platforms, to our franchisees and by using DSCs.

These sales generally have one single performance obligation and revenue is recognized at the point of sale or upon shipment of the merchandise, whenever control of items sold transfers to the customer.

Shipping fees charged through digital channels are considered a separate performance obligation and are recognized in net sales;

while, the related shipping cost is recognized in selling, general and administrative expenses.

We extend credit to certain customers, primarily salon professionals, which generally have 30 day payment terms.

2 unchanged sentences

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.

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 net sales 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.

Private Label Rewards Credit Cards

In fiscal year 2019, we signed a multi-year agreement with a third-party bank (the “Bank”) to launch a private label credit card program in the U.S., and rolled out our first Sally Beauty and Cosmo Prof branded credit cards during fiscal year 2020.

Under the agreement, the Bank manages our customer’s credit approval and credit card accounts;

while, we facilitate credit applications and provide licensing to our brand and marketing services.

The Bank accepts all customer default risks associated with these accounts.

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 is being 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 contribute funding for the program marketing expenses and are recognized in net sales in our consolidated statements of earnings.

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

Sally Beauty Holdings, Inc.

3 unchanged sentences

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.

Our Sally Beauty Rewards Program in the U.S.

and Canada, enables customers to earn points based on their status for every dollar spent on qualifying SBS purchases.

The program is free to join, and it provides our loyalty customers the ability to earn points on their SBS purchases, that convert to Sally Beauty Rewards certificates when select thresholds are attained.

Points earned expire after twelve months of inactivity and certificates issued expire 30 days after earned.

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):

As such, we defer revenue for future rewards on a standalone value per point, net of estimated breakage based on historical data, within accrued liabilities on our consolidated balance sheets.

The following table shows the amount of performance-based contract liabilities on our consolidated balance sheets as of September 30, 2022 and 2021 (in thousands):

September 30,

4 unchanged sentences

Total liability

Changes to our contract liabilities for fiscal year 2021 were as follows (in thousands):

Changes to our performance-based contract liabilities for fiscal year 2022 were as follows (in thousands):

September 30, 2021

3 unchanged sentences

Advertising Costs

Advertising costs relate mainly to print advertisements, digital marketing, trade shows and product education for salon professionals.

Advertising costs relate mainly to digital and web advertising, in-store and traditional print advertisements, customer relationship management, 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.

2 unchanged sentences

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 measure the cost of services received from certain of our employees and Board of 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.

18 unchanged sentences

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.

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

9 unchanged sentences

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.

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2021, 2020 and 2019

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848).

This ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions impacted by reference rate reform if certain criteria are met.

In response to the concerns about structural risks of interbank offered rates and, particularly, the risk of cessation of LIBOR, regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable, or transaction based and less susceptible to manipulation.

The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued.

We do not believe this ASU will have a material impact to our consolidated financial statements.

Fair Value Measurements

6 unchanged sentences

The three levels of that hierarchy are defined as follows:

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2022, 2021 and 2020

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;

10 unchanged sentences

Financial Assets

Cash equivalents

Cash and cash equivalents

Interest rate caps

Foreign exchange contracts

Other current assets

Financial Liabilities

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.

Foreign exchange contracts

Accrued liabilities

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

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

As of September 30,

1 unchanged sentence

Long-term debt

Other long-term debt

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

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

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2021, 2020 and 2019

The fair value of the term loan B 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.

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.

The Board approved a share repurchase program authorizing us to repurchase up to $ 1.0 billion of our common stock through September 30, 2025.

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

3 unchanged sentences

The amounts above do not include approximately 59,000 , 71,000 and 159,000 shares surrendered by grantees to satisfy personal income tax withholdings obligations upon vesting of equity-based awards valued at approximately $ 1.2 million, $ 1.0 million and $ 0.3 million during the fiscal years 2022, 2021 and 2020, respectively.

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2022, 2021 and 2020

We reduced common stock and additional paid-in capital, in the aggregate, by these amounts.

22 unchanged sentences

At September 30, 2022, 2021 and 2020, options to purchase approximately 2.4 million, 3.9 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.

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2021, 2020 and 2019

Share-Based Payments

7 unchanged sentences

compensation expense

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2022, 2021 and 2020

The Omnibus Plan award types are as follows:

1 unchanged sentence

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 fiscal years 2022 and 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 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.

1 unchanged sentence

During the fiscal years ended September 30, 2022, 2021 and 2020, the fair value of our performance awards was $ 17.40 , $ 15.33 and $ 16.65 , respectively.

Expense is determined upon issuance and recognized based on projections of future performance and actual results.

Market-based awards:

13 unchanged sentences

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.

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2021, 2020 and 2019

Performance-Based Awards

3 unchanged sentences

Unvested at September 30, 2021

Adjustment for performance achievement

Unvested at September 30, 2022

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.

As of September 30, 2022, based on current projections, we do no t expect to recognize any expense related to unvested performance awards.

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2022, 2021 and 2020

Market-Based Awards

5 unchanged sentences

As of September 30, 2022, approximately $ 3.6 million of total unrecognized compensation costs related to unvested market awards are expected to be recognized over the weighted average period of 2.0 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:

The weighted average assumptions used in the Monte Carlo model relating to the valuation of our rTSR awards issued in fiscal years 2022 and 2021 were as follows:

Fiscal Year Ended September 30,

Expected term (in years)

11 unchanged sentences

Exercisable at September 30, 2022

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,

Expected life (in years)

Expected term (in years)

Expected volatility

5 unchanged sentences

Since we do not currently expect to pay dividends, the dividend yield used for this purpose is 0 % .

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2022, 2021 and 2020

The weighted average fair value per share at the date of grant of the stock options awarded during the fiscal years 2022, 2021 and 2020 was $ 8.12 , $ 5.66 and $ 5.86 , respectively.

22 unchanged sentences

Balance Sheet Classification

Operating lease

Operating lease (a)

Operating lease assets

11 unchanged sentences

Total lease liabilities

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

During the fiscal year 2022, we recognized impairment charges related to our Distribution Center Consolidation and Store Optimization Plan.

See Note 16, Restructuring , for more information on the Distribution Center Consolidation and Store Optimization Plan.

Our lease costs consisted of the following (in thousands):

For the Year Ended September 30,

Statement of Earnings Classification

Operating lease costs (a)

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

Operating lease costs

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

Finance lease costs:

3 unchanged sentences

Interest expense

Variable lease costs (c)

Variable lease costs (b)

Selling, general and administrative expenses

Total lease costs

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

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

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

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

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

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

For the year ended September 30, 2021 and 2020, we recognized benefits of $ 3.1 million and $ 11.7 million for rent abatements related to COVID-19, respectively.

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2021, 2020 and 2019

As of September 30, 2022, the approximate future lease payments under our leases under ASC 842, Leases , are as follows (in thousands):

4 unchanged sentences

Present value of lease liabilities

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2022, 2021 and 2020

The table above does not include operating leases we have entered into of approximately $ 7.9 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,

For the Fiscal Year Ended September 30,

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

15 unchanged sentences

Balance at September 30, 2020

Acquisitions (a)

Foreign currency translation

2 unchanged sentences

Balance at September 30, 2022

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.

Sally Beauty Holdings, Inc.

4 unchanged sentences

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, 2022 and 2021, we had the following (in thousands):

20 unchanged sentences

Compensation and benefits

Interest payable

Deferred revenue

Interest payable

Rental obligations

3 unchanged sentences

Total accrued liabilities

We have reclassified certain prior year amounts out of operating accruals and other into deferred revenue to conform to current year presentation.

Sally Beauty Holdings, Inc.

12 unchanged sentences

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.

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 has a revolving commitment of $ 500.0 million and a maturity date of May 11, 2026 .

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 %.

2 unchanged sentences

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, 2022 there was $ 68.5 million in outstanding borrowings under our ABL facility;

while, there were no outstanding borrowings under our ABL facility at September 30, 2021.

At September 30, 2022, we had $ 412.9 million available for borrowing, thereunder, including our Canadian sub-facility, subject to borrowing base limitations, as reduced by outstanding letters of credit .

5 unchanged sentences

LIBOR plus 2.25%

Fixed-rate tranche

Senior notes due Nov.

Senior notes due Apr.

Senior notes due Dec.

capital lease obligations

finance lease obligations

unamortized debt issuance costs

2 unchanged sentences

Total long-term debt

Maturities of our debt, excluding finance leases and our ABL facility, are as follows at September 30, 2022 (in thousands):

Sally Beauty Holdings, Inc.

2 unchanged sentences

Fiscal Years ended September 30, 2022, 2021 and 2020

Maturities of our debt, excluding capital leases, are as follows at September 30, 2021 (in thousands):

In July 2017, we entered into a seven-year term loan pursuant to which we borrowed $ 850 million (the “term loan B”).

2 unchanged sentences

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 fiscal year 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.

Additionally in fiscal year 2021, we elected to repay $ 8.3 million aggregate principal amount of our term loan B variable tranche and recognized a loss on extinguishment of debt of $ 0.1 million from the write-off of unamortized deferred financing costs.

Furthermore, we continue to make quarterly optional $ 1.4 million principal payments.

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.

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.

The senior notes due December 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.

Interest on these notes is payable semi-annually, during our first and third fiscal quarters.

During fiscal year 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.

During fiscal year 2020, we closed on $ 300.0 million of Senior Secured Second Lien Notes due 2025 (“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.

On May 31, 2022, we called the entire outstanding balance of $ 300.0 million of our Senior Secured Notes at par plus a premium.

In connection with the repayment we recognized losses on extinguishment of debt in the aggregate amount of $ 16.4 million, which included a $ 13.1 million call premium and the write-off of $ 3.3 million in unamortized deferred financing costs.

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.

Sally Beauty Holdings, Inc.

10 unchanged sentences

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.

As of September 30, 2022, we expect to reclassify approximately $ 0.3 million in net gains into cost of goods sold over the next 12 months.

During the fiscal year ended September 30, 2022, we reclassified $ 0.1 million of net gains into cost of goods sold.

Interest Rate Caps

1 unchanged sentence

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.

Over the next 12 months, we expect to reclassify gains of approximately $ 2.3 million into interest expense as the one-month LIBOR rate is above the strike price of these contracts as of September 30, 2022.

During the fiscal year ended September 30, 2022, we reclassified $ 1.7 million into interest expense.

Non-Designated Cash Flow Hedges

We also use foreign exchange contracts to mitigate our exposure to exchange rate changes in connection with certain intercompany balances not permanently invested.

At September 30, 2022, we held forwards, which expire on various dates during the first four months of fiscal year 2023, with a notional amount, based upon exchange rates at September 30, 2022, as follows (in thousands):

Notional Currency

Notional Amount

Canadian Dollar

British Pound

We record changes in fair value and realized gains or losses related to the foreign currency forwards into selling, general and administrative expenses.

The effects of these foreign exchange contracts on our condensed consolidated financial statements were losses of $ 9.6 million and $ 3.0 million for the years ended September 30, 2022 and 2021, respectively.

401(k) and Profit Sharing Plan

5 unchanged sentences

We recognized expense of $ 6.8 million, $ 6.2 million and $ 5.8 million in the fiscal years ended September 30, 2022, 2021 and 2020, 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.

Sally Beauty Holdings, Inc.

2 unchanged sentences

Fiscal Years ended September 30, 2022, 2021 and 2020

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, 2022, 2021 and 2020, we did no t make a profit sharing contribution to the 401(k) Plans.

Tax Law Changes

2 unchanged sentences

There was not a material impact on our income tax expense for the fiscal years ended September 30, 2022, 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.

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.

8 unchanged sentences

Total provision for income taxes

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.

4 unchanged sentences

Effect of foreign operations

Foreign valuation allowances

Tax law change - GILTI

Deemed repatriation tax

Valuation allowances

Deferred tax impact of foreign branch conversion

Unrecognized tax benefit

Share-based payment awards

Effective tax rate

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2022, 2021 and 2020

The tax effects of temporary differences that give rise to our deferred tax assets and liabilities are as follows (in thousands):

14 unchanged sentences

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.

During fiscal year 2022, existing valuation allowances were reduced by approximately $ 19.9 million, primarily for net operating loss carry-forwards of various members of the affiliated group in foreign jurisdictions.

The Company determined that it is "more likely than not" that future earnings will be sufficient to offset the net operating losses.

We continue to record a valuation allowance to account for uncertainties regarding recoverability of certain deferred tax assets, primarily foreign loss carry-forwards and tax credit carry-forwards.

Domestic earnings before provision for income taxes were $ 205.2 million, $ 288.0 million and $ 168.0 million in the fiscal years 2022, 2021 and 2020, 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.

Foreign earnings before provision for income taxes of $ 38.9 million in the fiscal year 2022, $ 36.9 million in the fiscal year 2021 and a loss before provision for income taxes of $ 8.0 million in the fiscal year 2020.

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.

For fiscal year 2022 and 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.

2 unchanged sentences

If undistributed earnings of our foreign operations were not considered permanently reinvested as of September 30, 2022, an immaterial amount of additional deferred taxes would have been provided.

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2021, 2020 and 2019

At September 30, 2022 and 2021, we had total operating loss carry-forwards of $ 110.8 million and $ 125.7 million, respectively, of which $ 60.9 million and $ 109.4 million, respectively, are subject to a valuation allowance.

7 unchanged sentences

Of the remaining tax credit carry-forwards, at September 30, 2022, $ 0.8 million expire between 2024 and 2028, $ 0.4 million expire between 2035 and 2037 and $ 1.2 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 .

Total tax credit carry-forwards of $ 11.9 million and $ 12.6 million are subject to a valuation allowance at September 30, 2022 and 2021, respectively.

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2022, 2021 and 2020

The changes in the amount of unrecognized tax benefits are as follows (in thousands):

7 unchanged sentences

If recognized, these positions would affect our effective tax rate.

At September 30, 2022, the Company recorded $ 7.6 million of uncertain tax benefits related to transfer pricing matters.

We maintain our tax positions are fully supportable.

We recognize interest and penalties, accrued in connection with unrecognized tax benefits, in provision for income taxes.

4 unchanged sentences

Our consolidated federal income tax return for the fiscal year ended September 30, 2021, 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 consolidated federal income tax return for the fiscal year ended September 30, 2018 is currently under IRS Appeals.

Our statute remains open for the fiscal year ended September 30, 2018, forward.

1 unchanged sentence

Our foreign income tax returns are impacted by various statutes of limitations, which are generally open from 2017 forward.

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2021, 2020 and 2019

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.

Segments and Disaggregated Revenue

39 unchanged sentences

The following tables disaggregate our segment revenues by merchandise category.

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

Fiscal Year Ended September 30,

Skin and nail care

Styling tools

Salon supplies and accessories

Textured hair

Styling tools and supplies

Skin and cosmetics

Other beauty items

Fiscal Year Ended September 30,

Skin and nail care

Styling tools

Styling tools and supplies

Skin and cosmetics

Other beauty items

Promotional items

The following table disaggregates our segment revenue by sales channels:

9 unchanged sentences

Restructuring

Restructuring expense and gains for the fiscal years ended September 30, 2021, 2020 and 2019, are as follows (in thousands):

Project Surge

Restructuring expenses, included in Cost of Goods Sold (“COGS”) and Restructuring for the fiscal years ended September 30, 2022, 2021 and 2020, are as follows (in thousands):

Included in COGS

Distribution Center Consolidation

and Store Optimization Plan

Transformation Plan

Total expense (gain)

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):

Total in COGS

Included in Restructuring

Distribution Center Consolidation

and Store Optimization Plan

Transformation Plan

Project Surge

Total in Restructuring

Total Restructuring Expenses

Distribution Center Consolidation and Store Optimization Plan

In the fourth quarter of fiscal year 2022, our Board approved the Distribution Center Consolidation and Store Optimization Plan (“the Plan”) consisting of the planned closure of 330 SBS stores and 35 BSG stores.

Stores identified for early closure were part of a strategic evaluation which included a market analysis of certain locations where we believe we are able to recapture demand and improve profitability.

By optimizing our store base, we can further focus on our customers’ shopping experience and our product offerings as well as result in long term value to our shareholders and customers.

Additionally, this Plan includes the closure of two BSG distribution centers in Clackamas, Oregon and Pottsville, Pennsylvania.

Consolidating this work into our larger distribution centers will increase product availability, shorten delivery times and reduce overall costs as we focus on driving results.

This Plan will continue to be executed throughout fiscal year 2023 and beyond, and therefore it may include future charges related to store closures such as exit costs, lease negotiation penalties, termination benefits and adjustments to estimates.

The liability related to our Distribution Center Consolidation and Store Optimization Plan, which is included in accrued liabilities on our consolidated balance sheets, is as follows (in thousands):

Distribution Center Consolidation and Store Optimization Plan

September 30,

Cash Payments

Non-Cash Amounts

September 30,

Workforce reductions

Facility closures

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.

Impairment - operating lease assets (a)

Impairment - property and equipment (a)

Inventory adjustments (COGS) (b)

Impairment - operating lease assets (a)

Impairment - property and equipment (a)

Inventory adjustments (COGS) (b)

Total Distribution Center Consolidation

and Store Optimization Plan

Sally Beauty Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Fiscal Years ended September 30, 2022, 2021 and 2020

Remaining carrying value for the long-lived assets, including operating lease assets, were not material and approximate their fair value.

Inventory adjustments in COGS are related to obsolescence associated with planned closures.

Other expenses include closure-related costs.

Transformation Plan

2 unchanged sentences

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

Furthermore, our Board approved the divestiture of our operations in Peru.

All these together make up our Transformation Plan.

3 unchanged sentences

Cash Payments

Non-Cash Amounts

September 30,

1 unchanged sentence

Facility closures

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.

Inventory adjustments (COGS)

Net expense incurred during the fiscal year ended September 30, 2022, represents costs and adjustments for SBS.

Project Surge

In fiscal year 2020, we announced the launch of 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 focused on several operating elements, including a review of our talent and operating structure.

We did no t incur any additional expenses or liabilities related to Project Surge in fiscal 2022.

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

What changed 10-K

Item 9A. Controls and Procedures