Sally Beauty Holdings, Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES Background. Attached as exhibits to this Annual Report on Form 10-K are certifications of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), which are required in accordance with Rule 13a-14 of the Exchange Act. This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications. Part II, Item 8 — Financial Statements and Supplementary Data of this Annual Report on Form 10-K sets forth the attestation report of KPMG LLP, our independent registered public accounting firm, regarding its audit of our internal control over financial reporting. This section should be read in conjunction with the certifications and the KPMG attestation report for a more complete understanding of the topics presented. Controls Evaluation and Related CEO and CFO Certifications. Our management, with the participation of our CEO and CFO, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report. The controls evaluation was conducted by our Disclosure Committee, comprised of senior representatives from our finance, accounting, internal audit and legal departments under the supervision of our CEO and CFO. Certifications of our CEO and our CFO, which are required in accordance with Rule 13a-14 of the Exchange Act, are attached as exhibits to this Annual Report. This “Controls and Procedures” section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented. Limitations on the Effectiveness of Controls. We do not expect our disclosure controls and procedures will prevent all errors and all fraud. A system of controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Because of the limitations in all such systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Furthermore, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how unlikely. Because of these inherent limitations in a cost-effective system of controls and procedures, misstatements or omissions due to error or fraud may occur and not be detected. Scope of the Controls Evaluation. The evaluation of our disclosure controls and procedures included a review of their objectives and design, our implementation of the controls and procedures and the effect of the controls and procedures on the information generated for use in this Annual Report. In the course of the evaluation, we sought to identify whether we had any data errors, control problems or acts of fraud and to confirm appropriate corrective action, including process improvements, was being undertaken if needed. This type of evaluation is performed on a quarterly basis so conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K. Many of the components of our disclosure controls and procedures are also evaluated by our internal audit department, by our legal department and by personnel in our finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures on an ongoing basis and to maintain them as dynamic systems that change as conditions warrant. Conclusions regarding Disclosure Controls. Based on the required evaluation of our disclosure controls and procedures, our CEO and CFO have concluded that, as of September 30, 2022, we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control over Financial Reporting. Management of the Company, including the CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control - 37 - system was designed to provide reasonable assurance to management and our Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. A system of internal controls may become inadequate over time because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2022 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on this assessment, management has concluded that, as of September 30, 2022, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles based on such criteria. Report of Independent Registered Public Accounting Firm . Please refer to KPMG’s Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting on page F-1 of the financial statements, which begin on page 47 of this Annual Report. Changes in Internal Control over Financial Reporting. During our last fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. - 38 - PART III ITEM 10. DIRECTORS, EXECUTIVE O FFICERS AND CORPORATE GOVERNANCE The Board of Directors has adopted: (i) Corporate Governance Guidelines and a (ii) Code of Business Conduct and Ethics that apply to directors, officers and employees. Copies of these documents and the committee charters are available on our website at www.sallybeautyholdings.com and are available in print to any person, without charge, upon written request to our Vice President of Investor Relations. We intend to disclose on our website at www.sallybeautyholdings.com any substantive amendment to, or waiver from, a provision of the Code of Business Conduct and Ethics that applies to these individuals or persons performing similar functions. The additional information required by Item 10 of this Annual Report on Form 10-K is incorporated herein by reference from our Proxy Statement related to the 2023 Annual Meeting of Stockholders under the headings “Proposal 1 – Election of Directors,” “Executive Officers,” “Corporate Governance, the Board, and Its Committees” and “Report of the Audit Committee.” ITEM 11. EXECUT IVE COMPENSATION The information required by Item 11 of this Annual Report on Form 10-K is incorporated herein by reference from our Proxy Statement related to the 2023 Annual Meeting of Stockholders under the headings “Directors’ Compensation and Benefits,” “Narrative Discussion of Director Compensation Table,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation” and “Compensation Committee Interlocks and Insider Participation.” ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL O WNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by Item 12 of this Annual Report on Form 10-K is incorporated herein by reference from our Proxy Statement related to the 2023 Annual Meeting of Stockholders under the heading “Beneficial Ownership of Company’s Stock.” EQUITY COMPENSATION PLAN INFORMATION The following table gives information as of September 30, 2022, about our common stock that may be issued under all of our existing equity compensation plans: Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) (a) Weighted average exercise price of outstanding options, warrants and rights (2) (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (3) (c) Equity compensation plans approved by security holders 5,110,940 $ 17.54 7,590,752 Equity compensation plans not approved by security holders N/A N/A N/A Total 5,110,940 $ 17.54 7,590,752 (a) Includes options issued and available for exercise in connection with awards under the Sally Beauty Holdings, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”) and predecessor share-based compensation plans. The Company currently grants awards only under the 2019 Plan. (b) Calculation of weighted-average exercise price of outstanding awards includes stock options, but does not include shares of restricted stock or restricted stock units that convert to shares of common stock for no consideration. (c) Represents shares that are available for issuance pursuant to the 2019 Plan, all of which are available as full value awards. - 39 - ITEM 13. CERTAIN RELATIONSHIPS AND RELATE D TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by Item 13 of this Annual Report on Form 10-K is incorporated herein by reference from our Proxy Statement related to the 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.” ITEM 14. 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.” - 40 - PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Documents filed as part of this Annual Report: (a) List of Financial Statements and Financial Statement Schedules See “Index to Financial Statements” which is located on page 47 of this Annual Report. (b) Exhibits The following exhibits are filed as part of this Annual Report or are incorporated herein by reference: Exhibit No. Description 3.1 Third Restated Certificate of Incorporation of Sally Beauty Holdings, Inc., dated January 30, 2014, which is incorporated herein by reference from Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on January 30, 2014 3.2 Amended and Restated Bylaws of Sally Beauty Holdings, Inc., dated April 26, 2017, which is incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 28, 2017 4.1 Amended and Restated Credit Agreement dated July 6, 2017, among the Borrowers, the Guarantors, the Lenders party thereto, the Administrative Agent, the Collateral Agent, the Syndication Agent and the Documentation Agent (as such terms are defined therein), which is incorporated herein by reference from Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on July 6, 2017 † 4.2 Amended and Restated Security Agreement by Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC, as the domestic borrowers and the other domestic borrowers and domestic guarantors party hereto from time to time and Bank of America, N.A. as collateral agent dated as of July 26, 2013, which is incorporated herein by reference from Exhibit 4.4 to the Company’s Annual Report on Form 10-K filed on November 14, 2013 † 4.3 Amended and Restated General Security Agreement by Beauty Systems Group (Canada), Inc., as the Canadian borrower and Bank of America, N.A., (acting through its Canada branch), as Canadian agent dated as of July 26, 2013, which is incorporated herein by reference from Exhibit 4.5 to the Company’s Annual Report on Form 10-K filed on November 14, 2013 † 4.4 Joinder to Loan Documents, dated as of December 20, 2011, by and among Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC, Beauty Systems Group (Canada), Inc., SBH Finance B.V., the Guarantors named therein, Sally Beauty Holdings, Inc., Sally Investment Holdings LLC and Bank of America, N.A., as administrative agent and as collateral agent, which is incorporated herein by reference from Exhibit 4.10 to the Company’s Quarterly Report on Form 10-Q filed on February 2, 2012 † 4.5 Joinder to Loan Documents, dated as of May 28, 2015, by and among Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC, Beauty Systems Group (Canada), Inc., SBH Finance B.V., the Guarantors named therein, Sally Beauty Military Supply LLC, Loxa Beauty LLC and Bank of America, N.A., as administrative agent and as collateral agent, which is incorporated herein by reference from Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2015 † 4.6 First Amendment to Amended and Restated Credit Agreement dated April 15, 2020 among the Borrowers, the Parent Guarantors, the Administrative Agent, the Syndication Agent, the Documentation Agent, and the Lenders party thereto (as such terms are defined therein), which is incorporated herein by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 16, 2020. 4.7 Indenture, dated as of May 18, 2012, by and among Sally Holdings LLC, Sally Capital Inc., the guarantors listed therein and Wells Fargo Bank, National Association, which is incorporated herein by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 18, 2012 - 41 - Exhibit No. Description 4.8 Third Supplemental Indenture, dated as of December 3, 2015, by and among Sally Holdings LLC, Sally Capital Inc., the guarantors listed therein and Wells Fargo Bank, National Association (including the form of Note attached as an exhibit thereto), which is incorporated herein by reference from Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on December 3, 2015 4.9 Credit Agreement dated July 6, 2017, among the Borrowers, the Parent Guarantors, the Administrative Agent, the Syndication Agent, the Documentation Agent, and the Lenders party thereto (as such terms are defined therein), which is incorporated herein by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on July 6, 2017 † 4.10 Amendment No. 1 dated March 27, 2018, to Credit Agreement dated July 6, 2017, among the Borrowers, the Parent Guarantors, the Administrative Agent, the Syndication Agent, the Documentation Agent, and the Lenders party thereto (as such terms are defined therein), which is incorporated herein by reference from Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on May 3, 2018 4.11 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 4.12 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 10.1 Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 4.4 to the Company’s Registration Statement on Form S-8 filed on May 3, 2007 10.2 2007 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 27, 2007 10.3 2009 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.24 to the Company’s Annual Report on Form 10-K filed on November 20, 2008 10.4 Tax Sharing Agreement, dated as of November 16, 2006, made and entered into by and among Sally Beauty Holdings, Inc., Sally Investment Holdings LLC and Sally Holdings LLC, which is incorporated herein by reference from Exhibit 10.14 of the Quarterly Report on Form 10-Q of Sally Holdings LLC and Sally Capital Inc. filed on August 29, 2007 10.5 2010 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan , which is incorporated herein by reference from Exhibit 10.29 to the Company’s Annual Report on Form 10-K filed on November 19, 2009 10.6 Form of Amended and Restated Indemnification Agreement with Directors , which is incorporated herein by reference from Exhibit 10.33 to the Company’s Annual Report on Form 10-K filed on November 19, 2009 10.7 Sally Beauty Holdings, Inc. Amended and Restated 2010 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.39 to the Company’s Annual Report on Form 10-K filed on November 15, 2012 10.8 2011 Form of Restricted Stock Agreement for Employees pursuant to the Sally Beauty Holdings, Inc. Amended and Restated 2010 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.33 to the Company’s Annual Report on Form 10-K filed on November 18, 2010 10.9 2011 Form of Stock Option Agreement for Employees pursuant to the Sally Beauty Holdings, Inc. Amended and Restated 2010 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.34 to the Company’s Annual Report on Form 10-K filed on November 18, 2010 - 42 - Exhibit No. Description 10.10 2011 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. Amended and Restated 2010 Omnibus Incentive Plan , which is incorporated herein by reference from Exhibit 10.25 to the Company’s Annual Report on Form 10-K filed November 15, 2012 10.11 2016 Form of Performance Unit Award Agreement pursuant to the Sally Beauty Holdings, Inc. Amended and Restated 2010 Omnibus Incentive Plan , which is incorporated herein by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on February 4, 2016 10.12 Sally Beauty Holdings, Inc. 2019 Omnibus Incentive Plan, which is incorporated herein by reference from Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed on December 19, 2018 10.13 2019 Form of Performance Unit Award Agreement pursuant to the Sally Beauty Holdings, Inc. 2019 Omnibus Incentive Plan , which is incorporated herein by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on February 5, 2019 10.14 2019 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holding, Inc. 2019 Omnibus Incentive Plan , which is incorporated herein by reference from Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on February 5, 2019 10.15 2019 Form of Stock Option Agreement pursuant to the Sally Beauty Holdings, Inc. 2019 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.20 from the Company’s Annual Report on Form 10-K filed on November 25, 2019 10.16 2019 Form of Restricted Stock Agreement pursuant to the Sally Beauty Holdings, Inc. 2019 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.21 from the Company’s Annual Report on Form 10-K filed on November 25, 2019 10.17 Form of Severance Agreement between each of Mark G. Spinks and the Company effective July 31, 2015, Scott C. Sherman and the Company effective October 1, 2017, John M. Henrich and the Company effective June 10, 2019, 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 10.18 2012 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. Amended and Restated 2010 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.37 to the Company’s Annual Report on Form 10-K filed on November 15, 2012 10.19 Sally Beauty Holdings, Inc. Fourth Amended and Restated Independent Director Compensation Policy, which is incorporated herein by reference from Exhibit 10.28 to the Company’s Annual Report on Form 10-K filed on November 14, 2018 10.20 Sally Beauty Holdings, Inc. Annual Incentive Plan, 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 10.21 2022 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holding, Inc. 2019 Omnibus Incentive Plan * 10.22 2022 Form of Restricted Stock Unit Agreement pursuant to the Sally Beauty Holding, Inc. 2019 Omnibus Incentive Plan * 10.23 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 * 10.24 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 * - 43 - Exhibit No. Description 10 .25 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 * 10.26 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 * 21.1 List of Subsidiaries of Sally Beauty Holdings, Inc.* 22 List of Subsidiary Guarantors * 23.1 Consent of KPMG* 31.1 Rule 13(a)-14(a)/15(d)-14(a) Certification of Denise Paulonis* 31.2 Rule 13(a)-14(a)/15(d)-14(a) Certification of Marlo M. Cormier* 32.1 Section 1350 Certification of Denise Paulonis* 32.2 Section 1350 Certification of Marlo M. Cormier* 101 The following financial information from our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Earnings; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows; (v) Consolidated Statements of Stockholders’ Equity (Deficit) and (vi) the Notes to Consolidated Financial Statements* 104 Cover Page Interactive Data File (formatted as Inline XBRL) and contained in Exhibit 101 * Included herewith † Certain schedules and exhibits have been omitted pursuant to Item 601(b) (2) of Regulation S-K. The Registrant agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule or exhibit upon request. (c) Financial Statement Schedules None ITEM 1 6 . FORM 10-K SUMMARY None - 44 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 17 th day of November, 2022. SALLY BEAUTY HOLDINGS, INC. By: /s/ Denise Paulonis Denise Paulonis President, Chief Executive Officer and Director By: /s/ Marlo M. Cormier Marlo M. Cormier Senior Vice President, Chief Financial Officer By: /s/ Kim McIntosh Kim McIntosh Group Vice President, Controller and Chief Accounting Officer - 45 - Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Denise Paulonis President, Chief Executive Officer and Director (Principal Executive Officer) November 17, 2022 Denise Paulonis /s/ Marlo M. Cormier Senior Vice President, Chief Financial Officer (Principal Financial Officer) November 17, 2022 Marlo M. Cormier /s/ Kim McIntosh Group Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) November 17, 2022 Kim McIntosh /s/ Robert R. McMaster Chairman of the Board of Directors November 17, 2022 Robert R. McMaster /s/ Rachel R. Bishop Director November 17, 2022 Rachel R. Bishop /s/ Jeffrey Boyer Director November 17, 2022 Jeffrey Boyer /s/ Marshall E. Eisenberg Director November 17, 2022 Marshall E. Eisenberg /s/ Diana S. Ferguson Director November 17, 2022 Diana S. Ferguson /s/ Dorlisa K. Flur Director November 17, 2022 Dorlisa K. Flur /s/ James M. Head Director November 17, 2022 James M. Head /s/ Linda Heasley Director November 17, 2022 Linda Heasley /s/ John A. Miller Director November 17, 2022 John A. Miller /s/ Lawrence P. Molloy Director November 17, 2022 Lawrence P. Molloy /s/ Erin Nealy Cox Director November 17, 2022 Erin Nealy Cox /s/ Edward W. Rabin Director November 17, 2022 Edward W. Rabin - 46 - SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Financial Statements Years ended September 30, 2022, 2021 and 2020 INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 185 ) F-1 Consolidated Financial Statements: Consolidated Balance Sheets as of September 30, 2022 and 2021 F-3 Consolidated Statements of Earnings for the years ended September 30, 2022, 2021 and 2020 F-4 Consolidated Statements of Comprehensive Income for the years ended September 30, 2022, 2021 and 2020 F-5 Consolidated Statements of Cash Flows for the years ended September 30, 2022, 2021 and 2020 F-6 Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended September 30, 2022, 2021 and 2020 F-7 Notes to Consolidated Financial Statements for the years ended September 30, 2022, 2021 and 2020 F-8 - 47 - Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Sally Beauty Holdings, Inc.: Opinions on the Consolidated Financial 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, 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. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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. and Canada at both its distribution centers and store fronts as of August 1, 2020 from lower of cost or net realizable value on a first-in first-out (“FIFO”) basis to lower of cost or net realizable value using the weighted average cost method. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. F-1 Definition and Limitations of Internal Control Over Financial 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Evaluation of vendor rebates and concessions As discussed in Note 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. 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. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to calculate vendor rebates and concessions. This included controls over the derivation of key inputs and the evaluation of the contractual terms of the agreements. For a sample of the vendor rebates and concessions, we evaluated the nature and source of the inputs used, and the terms of the contractual agreements. We recalculated the amount of the receivable based on the inputs and the terms of the agreements. We also 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. /s/ KPMG LLP We have served as the Company’s auditor since 2006. Dallas, Texas November 17, 2022 F-2 SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2022 and 2021 (In thousands, except par value data) 2022 2021 Assets Current assets: Cash and cash equivalents $ 70,558 $ 400,959 Trade accounts receivable, net 34,102 32,623 Accounts receivable, other 38,175 33,958 Inventory 936,374 871,349 Other current assets 53,192 44,686 Total current assets 1,132,401 1,383,575 Property and equipment, net 297,876 307,377 Operating lease assets 532,177 537,673 Goodwill 526,066 541,209 Intangible assets, excluding goodwill, net 50,315 55,532 Other assets 38,032 21,766 Total assets $ 2,576,867 $ 2,847,132 Liabilities and Stockholders’ Equity Current liabilities: Current maturities of long-term debt $ 68,658 $ 194 Accounts payable 275,717 291,632 Accrued liabilities 161,065 206,155 Current operating lease liabilities 157,734 156,234 Income taxes payable 4,740 10,666 Total current liabilities 667,914 664,881 Long-term debt 1,083,043 1,382,530 Long-term operating lease liabilities 424,762 404,147 Other liabilities 22,427 29,056 Deferred income tax liabilities, net 85,085 85,777 Total liabilities 2,283,231 2,566,391 Stockholders’ equity: Common stock, $ 0.01 par value. Authorized 500,000 shares; 107,024 and 113,138 shares issued and 106,970 and 112,913 shares outstanding at September 30, 2022 and 2021, respectively 1,070 1,129 Preferred stock, $ 0.01 par value. Authorized 50,000 shares; none issued — — Additional paid-in capital 4,241 17,286 Accumulated earnings 440,172 356,967 Accumulated other comprehensive loss, net of tax ( 151,847 ) ( 94,641 ) Total stockholders’ equity 293,636 280,741 Total liabilities and stockholders’ equity $ 2,576,867 $ 2,847,132 The accompanying notes are an integral part to these consolidated financial statements. F-3 SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Earnings Fiscal Years ended September 30, 2022, 2021 and 2020 (In thousands, except per share data) 2022 2021 2020 Net sales $ 3,815,565 $ 3,874,997 $ 3,514,330 Cost of goods sold 1,896,400 1,921,663 1,798,736 Gross profit 1,919,165 1,953,334 1,715,594 Selling, general and administrative expenses 1,553,948 1,530,280 1,442,809 Restructuring 27,577 4,611 14,025 Operating earnings 337,640 418,443 258,760 Interest expense 93,543 93,509 98,793 Earnings before provision for income taxes 244,097 324,934 159,967 Provision for income taxes 60,544 85,076 46,722 Net earnings $ 183,553 $ 239,858 $ 113,245 Earnings per share: Basic $ 1.69 $ 2.13 $ 0.99 Diluted $ 1.66 $ 2.10 $ 0.99 Weighted average shares: Basic 108,665 112,653 113,881 Diluted 110,293 114,212 114,680 The accompanying notes are an integral part of these consolidated financial statements. F-4 SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Fiscal Years ended September 30, 2022, 2021 and 2020 (In thousands) 2022 2021 2020 Net earnings $ 183,553 $ 239,858 $ 113,245 Other comprehensive (loss) income: Foreign currency translation adjustments ( 60,974 ) 9,957 11,821 Interest rate caps, net of tax 4,045 918 198 Foreign exchange contracts, net of tax ( 277 ) ( 813 ) 565 Other comprehensive (loss) income, net of tax ( 57,206 ) 10,062 12,584 Total comprehensive income $ 126,347 $ 249,920 $ 125,829 The accompanying notes are an integral part of these consolidated financial statements. F-5 SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Fiscal Years ended September 30, 2022, 2021 and 2020 (In thousands) 2022 2021 2020 Cash Flows from Operating Activities: Net earnings $ 183,553 $ 239,858 $ 113,245 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 99,929 102,201 106,779 Share-based compensation expense 9,944 11,656 8,426 Amortization of deferred financing costs 3,351 4,212 4,118 Impairment of long-lived assets, including operating lease assets 25,029 628 2,087 Net (gain)/loss on disposal of long-lived assets ( 53 ) ( 338 ) 1,475 Net loss on extinguishment of debt 16,439 4,260 38 Deferred income taxes ( 17,592 ) ( 7,336 ) 13,691 Changes in (exclusive of effects of acquisitions): Trade accounts receivable ( 3,184 ) 2,923 10,031 Accounts receivable, other ( 5,999 ) ( 13,972 ) 41,463 Inventory ( 96,195 ) ( 52,277 ) 149,845 Other current assets ( 9,536 ) 976 ( 15,654 ) Other assets 4,148 4,360 ( 2,007 ) Accounts payable and accrued liabilities ( 46,289 ) 79,851 ( 26,876 ) Income taxes payable ( 6,698 ) 8,041 ( 5,489 ) Operating lease assets and liabilities 6,233 730 10,339 Other liabilities ( 6,580 ) ( 3,913 ) 15,378 Net cash provided by operating activities 156,500 381,860 426,889 Cash Flows from Investing Activities: Payments for property and equipment ( 99,250 ) ( 73,904 ) ( 110,858 ) Proceeds from sales of property and equipment — 235 53 Acquisitions, net of cash acquired ( 3,169 ) ( 2,350 ) ( 12,970 ) Net cash used by investing activities ( 102,419 ) ( 76,019 ) ( 123,775 ) Cash Flows from Financing Activities: Proceeds from issuance of long-term debt 520,003 22 1,087,504 Repayments of long-term debt ( 770,286 ) ( 422,258 ) ( 882,921 ) Debt issuance costs — ( 1,300 ) ( 6,257 ) Payments for common stock repurchased ( 130,328 ) — ( 61,357 ) Proceeds from exercises of stock options 6,932 3,568 2,792 Net cash (used) provided by financing activities ( 373,679 ) ( 419,968 ) 139,761 Effect of foreign exchange rate changes on cash and cash equivalents ( 10,803 ) 935 ( 219 ) Net (decrease) increase in cash and cash equivalents ( 330,401 ) ( 113,192 ) 442,656 Cash and cash equivalents, beginning of period 400,959 514,151 71,495 Cash and cash equivalents, end of period $ 70,558 $ 400,959 $ 514,151 Supplemental Cash Flow Information: Interest paid $ 82,072 $ 88,982 $ 83,123 Income taxes paid $ 82,607 $ 79,765 $ 49,869 Capital expenditures incurred but not paid $ 15,757 $ 19,932 $ 9,772 The accompanying notes are an integral part of these consolidated financial statements. F-6 SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity (Deficit) Fiscal Years ended September 30, 2022, 2021 and 2020 (In thousands) Accumulated Total Additional Other Stockholders’ Common Stock Paid-in Accumulated Comprehensive Equity Shares Amount Capital Earnings Loss (Deficit) Balance at September 30, 2019 116,725 $ 1,167 $ — $ 55,797 $ ( 117,287 ) $ ( 60,323 ) Cumulative effect of ASC 842 adoption — — — 76 — 76 Net earnings — — — 113,245 — 113,245 Other comprehensive income, net of tax — — — — 12,584 12,584 Repurchases of common stock ( 4,702 ) ( 46 ) ( 9,302 ) ( 52,009 ) — ( 61,357 ) Share-based compensation — — 8,425 — — 8,425 Stock issued for equity awards 419 4 3,131 — — 3,135 Employee withholding taxes paid related to net share settlement ( 37 ) ( 1 ) ( 341 ) ( 342 ) Balance at September 30, 2020 112,405 1,124 1,913 117,109 ( 104,703 ) 15,443 Net earnings — — — 239,858 — 239,858 Other comprehensive income, net of tax — — — — 10,062 10,062 Share-based compensation — — 11,656 — — 11,656 Stock issued for equity awards 579 6 4,762 — — 4,768 Employee withholding taxes paid related to net share settlement ( 71 ) ( 1 ) ( 1,045 ) — — ( 1,046 ) Balance at September 30, 2021 112,913 1,129 17,286 356,967 ( 94,641 ) 280,741 Net earnings — — — 183,553 — 183,553 Other comprehensive income, net of tax — — — — ( 57,206 ) ( 57,206 ) Repurchases of common stock ( 6,833 ) ( 68 ) ( 29,912 ) ( 100,348 ) — ( 130,328 ) Share-based compensation — — 9,944 — — 9,944 Stock issued for equity awards 949 10 8,102 — — 8,112 Employee withholding taxes paid related to net share settlement ( 59 ) ( 1 ) ( 1,179 ) — — ( 1,180 ) Balance at September 30, 2022 106,970 $ 1,070 $ 4,241 $ 440,172 $ ( 151,847 ) $ 293,636 The accompanying notes are an integral part of these consolidated financial statements. F-7 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2022, 2021 and 2020 1. Basis of Presentation and Significant Accounting Policies Basis of Presentation The consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates 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 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. 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 Inventory is stated at the lower of weighted average cost or net realizable value. Inventory cost reflects actual product costs, the cost of transportation to our distribution centers and certain shipping and handling costs, such as freight from the distribution centers to the stores and handling costs incurred at the distribution centers. When assessing the net realizable value of inventory, we consider several factors including estimates of future demand for our products, historical turn-over rates, the age and sales history of the inventory, and historic and anticipated changes in stock keeping units. Physical inventory counts are performed at substantially all stores and significant distribution centers at least annually. Upon completion of physical inventory counts, our consolidated financial statements are adjusted to reflect actual quantities on hand. Between physical counts, we estimate inventory shrinkage based on our historical experience. We have policies and processes in place that are intended to minimize inventory shrinkage. Cost of goods sold includes actual product costs, the cost of transportation to our distribution centers, operating 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 F-8 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2022, 2021 and 2020 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 typically five to ten years . Some of our leases include options to extend the agreement by a certain number of years, typically five years . At the lease commencement date, an operating lease liability and related operating lease asset are recognized and typically do not assume renewals unless we are reasonably certain that we will exercise the option. The operating lease liabilities are calculated using the present value of lease payments. The discount rate used is either the rate implicit in the lease, when known, or our estimated incremental borrowing rate. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because we do not generally borrow on a collateralized basis, we derive an appropriate incremental borrowing rate using the interest rate we pay on our non-collateralized borrowings, adjusted for the amount of the lease payments, the lease term and the effect of designating specific collateral with a value equal to the unpaid lease payments for that lease. We apply the incremental borrowing rate on a portfolio basis given the impact of applying it on a lease by lease basis would be immaterial. Operating lease assets are valued based on the initial operating lease liabilities plus any prepaid rent and direct costs from executing the leases, reduced by tenant improvement allowances and any rent abatement. Operating lease assets are tested for impairment in the same manner as our long-lived assets. During fiscal year 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 over the lesser of the estimated useful lives of the assets or the term of the related lease, including renewals considered reasonably assured. Expenditures for maintenance and repairs are included in selling, general and administrative expenses when incurred, while expenditures for major renewals and improvements that substantially extend the useful life of an asset are capitalized. The following table summarizes our property and equipment balances and their estimated useful lives (dollars in thousands): Life September 30, (in years) 2022 2021 Land N/A $ 9,949 $ 10,119 Buildings and building improvements 5 – 40 56,834 57,049 Leasehold improvements 2 – 10 342,326 326,595 Furniture, fixtures and equipment 2 – 10 709,578 681,017 Total property and equipment, gross 1,118,687 1,074,780 Accumulated depreciation and amortization ( 820,811 ) ( 767,403 ) Total property and equipment, net $ 297,876 $ 307,377 F-9 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements 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, 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 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 Goodwill Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. G oodwill is tested for impairment at least annually, as of January 31 st , and whenever events or changes in circumstances indicate its carrying amount may be less than its recoverable amount, to determine whether or not it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. Furthermore, we considered potential triggering events each quarter, including fluctuations of our stock price, and determined there were no such events during the current fiscal year. Components within the same operating segment are aggregated and deemed a single reporting unit if the components have similar economic characteristics. As of September 30, 2022 and 2021, our reporting units consisted of Sally Beauty Supply (“SBS”) and Beauty Systems Group (“BSG”). We assign goodwill to the reporting unit which consolidates the acquisition. When assessing goodwill for impairment, we may perform a qualitative assessment which evaluates macro-economic conditions, current and projected cash flows, and other events or changes in circumstances to determine if a quantitative assessment is necessary. For fiscal year 2022, we completed a qualitative assessment and determined that while COVID-19 had a macro-economic impact, there were no material impacts to the reporting units to require a quantitative assessment. We have no t recorded any impairment charges related to goodwill in the current or prior fiscal years presented. Indefinite-lived Intangible Assets Our intangible assets with indefinite lives consist of trade names acquired in business combinations 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. These assets are evaluated for impairment annually, as of January 31 st , and whenever events or changes in circumstances indicate the asset’s carrying amount may be less than its recoverable amount, to determine whether or not it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. When assessing intangible assets with indefinite lives for impairment, we compare the fair value of each asset against its carrying value. Fair value is based on the relief-from-royalty method. Based on our assessments, no material impairment charges related to intangible assets were recorded in the current or prior fiscal years presented. F-10 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements 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. We estimate the ultimate cost based on an analysis of our historical data and actuarial estimates. These estimates are reviewed on a regular basis to ensure the recorded liability is adequate. The current and long-term portions of these liabilities are recorded at their present value and included in accrued liabilities and other liabilities in our consolidated balance sheets, respectively. Revenue Recognition Substantially all of our revenue is derived through the sale of merchandise. Revenue is recognized net of estimated sales returns and sales taxes. We estimate sales returns based on historical data. Additionally, we have assessed all revenue streams for principal versus agent considerations and have concluded we are the principal for 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 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. Based on the nature of theses receivables, no significant financing component exists. Gift Cards The revenue from the sale of our gift cards is recognized at the time the gift card is used to purchase merchandise, which is generally within one year from the date of purchase. Our gift cards do not carry expiration dates or impose post-sale fees. Based on historical experience, a certain amount of our gift cards will not be redeemed, also referred to as “gift card breakage.” We recognize revenue related to gift card breakage within 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 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. F-11 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2022, 2021 and 2020 Customer Loyalty Rewards 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. 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, Contracts Balance Sheet Classification 2022 2021 Gift cards Accrued liabilities $ 5,060 $ 5,299 Rewards loyalty program Accrued liabilities 8,400 11,445 Total liability $ 13,460 $ 16,744 Changes to our performance-based contract liabilities for fiscal year 2022 were as follows (in thousands): September 30, 2021 $ 16,744 Loyalty points and gift cards issued but not redeemed, net of estimated breakage 5,673 Revenue recognized from beginning liability ( 8,957 ) September 30, 2022 $ 13,460 Advertising Costs 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. Other advertising costs are expensed when incurred. Advertising costs were $ 69.8 million, $ 70.9 million and $ 72.7 million for the fiscal years 2022, 2021 and 2020, respectively, and are included in selling, general and administrative expenses in our consolidated statements of earnings. Share-based Compensation We measure the cost of services received from 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. Share-based compensation expense is included in selling, general and administrative expenses in our consolidated statements of earnings. Income Taxes We recognize deferred income taxes for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are anticipated to be recovered or settled. The effect on deferred taxes of a change in income tax rates is recognized in the consolidated statements of earnings in the period of enactment. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets to the amount expected to be realized unless it is more-likely-than-not that such assets will be realized in full. The estimated tax benefit of an uncertain tax position is recorded in our consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax position will withstand challenge, if any, from applicable taxing authorities. F-12 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2022, 2021 and 2020 Foreign Currency The functional currency of each of our foreign operations is generally the respective local currency. Balance sheet accounts are translated into U.S. dollars (our reporting currency) at the rates of exchange in effect at the balance sheet date, while the results of operations and cash flows are generally translated using average exchange rates for the periods presented. Individually material transactions, if any, are translated using the actual rate of exchange on the transaction date. The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss in our consolidated balance sheets. Foreign currency transaction gains or losses, including changes in the fair value (i.e., marked-to-market adjustments) of certain foreign exchange contracts we hold, are included in selling, general and administrative expenses in our consolidated statements of earnings when incurred and were not significant in any of the periods presented in the accompanying consolidated financial statements. 2. Accounting Changes and Recent Accounting Pronouncements Accounting Changes Effective August 1, 2020, we changed our method of accounting for inventory located in the U.S. and Canada at both our distribution centers and store fronts. Prior to August 2020, we valued inventory at the lower of cost or net realizable value on a FIFO basis. Effective August 1, 2020, all company-wide inventories have been valued at the lower of cost or net realizable value using the weighted average cost method. These changes were made in connection with the implementation of a new perpetual inventory system, which provides us with better information to manage inventory. We believe the weighted average cost method is preferable to the FIFO cost method because it results in greater precision in the determination of cost of goods sold and inventories at the SKU level and results in a consistent inventory valuation method for all of the Company’s inventories. We recorded the cumulative effect of this change in accounting principle as of August 1, 2020. The effects of this change in accounting principle as of August 1, 2020 were not material to our consolidated financial statements. Prior to implementation of the new perpetual inventory system, we were not able to determine the impact of the change to the weighted average cost method. Therefore, we did not retroactively apply the change to prior periods. Recent Accounting Pronouncements In 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. 3. Fair Value Measurements Our financial instruments consist of cash equivalents, trade and other accounts receivable, accounts payable, derivative instruments, including foreign exchange contracts and interest rate caps, and debt. The carrying amounts of cash equivalents, trade and other accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these financial instruments. We measure on a recurring basis and disclose the fair value of our financial instruments under the provisions of ASC Topic 820, Fair Value Measurement , as amended (“ASC 820”). We define “fair value” as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level hierarchy for measuring fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels of that hierarchy are defined as follows: F-13 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; Level 2 - Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data; and Level 3 - Unobservable inputs for the asset or liability. Fair value on recurring basis Consistent with the fair value hierarchy, we categorized our financial assets and liabilities as follows (in thousands): As of September 30, Classification Pricing Category 2022 2021 Financial Assets Interest rate caps Other assets Level 2 $ 3,860 $ 35 Foreign exchange contracts Other current assets Level 2 294 — Total assets $ 3,860 $ 35 Financial Liabilities Foreign exchange contracts Accrued liabilities Level 2 $ 79 $ — 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 finance lease obligations, are as follows: As of September 30, 2022 2021 Pricing Category Carrying Value Fair Value Carrying Value Fair Value Long-term debt Senior notes Level 1 $ 679,961 $ 398,331 $ 979,961 $ 1,019,635 Term loan B Level 2 407,500 639,163 413,000 411,451 Total debt $ 1,087,461 $ 1,037,494 $ 1,392,961 $ 1,431,086 The fair value of the senior notes was measured using unadjusted quoted market prices. 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. 4. Accumulated Stockholders’ Equity Share Repurchases 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): Fiscal Year Ended September 30, 2022 2021 2020 Number of shares repurchased 6,832 — 4,702 Total cost of share repurchased $ 130,328 $ — $ 61,357 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. F-14 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. However, as required by GAAP, to the extent share repurchase amounts exceeded the balance of additional paid-in capital prior to such repurchases, we recorded the excess in accumulated stockholders’ equity on our consolidated balance sheets. We funded these share repurchases with cash from operations and borrowings under the ABL facility, as appropriate. Accumulated other Comprehensive Loss The change in accumulated other comprehensive loss (“AOCL”) was as follows (in thousands): Foreign Currency Translation Adjustments Interest Rate Caps Foreign Exchange Contracts Total Balance at September 30, 2020 $ ( 102,111 ) $ ( 3,003 ) $ 411 $ ( 104,703 ) Other comprehensive income (loss) before reclassifications, net of tax 9,957 ( 282 ) ( 1,070 ) 8,605 Reclassification to net earnings, net of tax — 1,200 257 1,457 Balance at September 30, 2021 ( 92,154 ) ( 2,085 ) ( 402 ) ( 94,641 ) Other comprehensive income (loss) before reclassifications, net of tax ( 60,974 ) 2,310 ( 149 ) ( 58,813 ) Reclassification to net earnings, net of tax — 1,735 ( 128 ) 1,607 Balance at September 30, 2022 $ ( 153,128 ) $ 1,960 $ ( 679 ) $ ( 151,847 ) The tax impact for the changes in other comprehensive loss and the reclassifications to net earnings was not material. 5. Weighted Average Shares The following table sets forth the computations of basic and diluted earnings per share (in thousands): Fiscal Year Ended September 30, 2022 2021 2020 Weighted-average basic shares 108,665 112,653 113,881 Dilutive securities: Stock option and stock award programs 1,628 1,559 799 Weighted-average diluted shares 110,293 114,212 114,680 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. 6. Share-Based Payments Our Sally Beauty Holdings, Inc. 2019 Omnibus Incentive Plan (the "Omnibus Plan") allows us to grant awards to its employees up to 8.0 million shares of our common stock, plus an additional number of shares based on the number of shares outstanding as of the beginning of the current plan that have subsequently been terminated, expired unexercised, cash-settled, cancelled, forfeited or lapsed for any reason. Currently, we have awarded grants to employees and non-employee directors under the terms of the Omnibus Plan. The following table presents total compensation cost for all share-based compensation arrangements and the related income tax benefits recognized in our consolidated statement of earnings (in thousands): Fiscal Year Ended September 30, 2022 2021 2020 Share-based compensation expense $ 9,944 $ 11,656 $ 8,426 Income tax benefit related to share-based compensation expense $ 2,634 $ 2,834 $ 2,059 F-15 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: Performance-based awards: Our performance awards vest over three years upon the satisfaction of the employee service condition and our level of achievement with respect to a mix of certain specified performance targets. For fiscal 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. Fair value of our performance awards related to the achievement of financial performance targets are based on our stock price on the date of grant. During the fiscal years ended September 30, 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: In fiscal year 2022, we issued market-based awards that vest over three years and are dependent on the level of achievement of relative total shareholder return (“rTSR”) against a group of peer companies measured over a three-year period. For each rTSR, a grantee may earn from 0 % to 200 % of the original awarded amount. The fair value was determined by using the Monte Carlo simulation model due to the award being subject to a market condition. Expense is determined upon issuance and is recognized regardless of whether the market performance target is achieved. Stock options: Stock option awards are valued using the Black-Scholes option pricing model to estimate the fair value of each stock option award on the date of grant and expense ratably over the vesting period, generally three years . Stock options have a ten year life. Restricted stock: Restricted stock awards (“RSA”) and restricted stock units (“RSU”) are valued using the closing market price of our common stock on the date of grant. Expense is recognized ratably over the vesting period, generally three years for RSAs and RSUs issued to employees and one year for RSUs issued to our independent directors. An RSA award is an award of our shares that have full voting rights and dividend rights, but are restricted with regard to sale or transfer. These restrictions lapse over the vesting period. RSUs awarded to our independent directors may elect, upon receipt of such award, to defer until a later date delivery of the shares of our common stock that would otherwise be issued on the vesting date. RSUs granted to independent directors prior to the fiscal year 2012, are generally retained by the Company as deferred stock units that are not distributed until six months after the independent director’s service as a director terminates. Performance-Based Awards The following table presents a summary of the activity for our performance awards assuming 100 % payout: Performance Awards Number of Shares (in Thousands) Weighted Average Fair Value Per Share Unvested at September 30, 2021 302 $ 16.59 Granted 212 17.40 Adjustment for performance achievement 14 15.33 Vested ( 18 ) 15.33 Forfeited ( 150 ) 17.01 Unvested at September 30, 2022 360 $ 16.75 As of September 30, 2022, based on current projections, we do no t expect to recognize any expense related to unvested performance awards. F-16 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2022, 2021 and 2020 Market-Based Awards The following table presents a summary of the activity for our market awards: Market Awards Number of Shares (in Thousands) Weighted Average Fair Value Per Share Unvested at September 30, 2021 90 $ 20.96 Granted 212 23.39 Vested — — Forfeited ( 48 ) 22.41 Unvested at September 30, 2022 254 $ 22.72 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 awards issued in fiscal years 2022 and 2021 were as follows: Fiscal Year Ended September 30, 2022 2021 Expected term (in years) 2.9 2.7 Expected volatility 59.5 % 59.4 % Risk-free interest rate 0.7 % 0.2 % Dividend yield 0.0 % 0.0 % Service-Based Awards Stock Option Awards The following table presents a summary of the activity for our stock option awards: Number of Outstanding Options (in Thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in Years) Aggregate Intrinsic Value (in Thousands) Outstanding at September 30, 2021 5,165 $ 18.46 4.6 $ 9,627 Granted 304 17.27 Exercised ( 598 ) 13.56 Forfeited or expired ( 1,688 ) 21.71 Outstanding at September 30, 2022 3,183 $ 17.54 5.8 $ 2,863 Exercisable at September 30, 2022 2,097 $ 20.13 4.5 $ 736 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, 2022 2021 2020 Expected term (in years) 6.0 6.0 5.0 Expected volatility 48.7 % 44.5 % 35.8 % Risk-free interest rate 1.2 % 0.4 % 1.7 % Dividend yield 0.0 % 0.0 % 0.0 % The expected life of options awarded represents the period of time such options are expected to be outstanding and is based on our historical experience. The risk-free interest rate is based on the zero-coupon U.S. Treasury notes with a term comparable to the expected life of an award at the date of the grant. Since we do not currently expect to pay dividends, the dividend yield used for this purpose is 0 % . F-17 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. The aggregate fair value of stock options vested during the fiscal years 2022, 2021 and 2020 was $ 2.5 million, $ 3.4 million and $ 2.7 million, respectively. The aggregate intrinsic value of options exercised during the fiscal years 2022, 2021 and 2020 was $ 4.0 million, $ 0.7 million and $ 0.5 million, respectively. The total cash received during the fiscal years 2022, 2021 and 2020 from these option exercises was $ 8.1 million, $ 4.6 million and $ 3.0 million, respectively, and the tax benefit realized for the tax deductions from these option exercises was $ 0.8 million, $ 0.1 million and $ 0.1 million, respectively. At September 30, 2022, approximately $ 2.8 million of total unrecognized compensation costs related to unvested stock option awards are expected to be recognized over the weighted average period of 1.6 years. RSAs The following table presents a summary of the activity for our RSAs: Restricted Stock Awards Number of Shares (in Thousands) Weighted Average Fair Value Per Share Unvested at September 30, 2021 135 $ 15.60 Granted — — Vested ( 68 ) 15.60 Forfeited ( 14 ) 15.78 Unvested at September 30, 2022 53 $ 15.55 At September 30, 2022, approximately $ 0.1 million of total unrecognized compensation costs related to unvested RSAs are expected to be recognized over the weighted average period of 0.3 years. RSUs The following table presents a summary of the activity for our RSUs: Restricted Stock Units Number of Shares (in Thousands) Weighted Average Fair Value Per Share Unvested at September 30, 2021 568 $ 9.41 Granted 818 17.37 Vested ( 294 ) 9.30 Forfeited ( 168 ) 14.75 Unvested at September 30, 2022 924 $ 15.52 At September 30, 2022, approximately $ 8.2 million of total unrecognized compensation costs related to unvested RSUs are expected to be recognized over the weighted average period of 1.9 years. F-18 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2022, 2021 and 2020 7. Leases Our operating and finance leases consisted of the following (in thousands): September 30, Balance Sheet Classification 2022 2021 Assets: Operating lease (a) Operating lease assets $ 532,177 $ 537,673 Finance lease Property and equipment, net 1,897 2,556 Total lease assets $ 534,074 $ 540,229 Liabilities: Current: Operating lease Current operating lease liabilities $ 157,734 $ 156,234 Finance lease Current maturities of long-term debt 158 194 Long-term: Operating lease Long-term operating lease liabilities 424,762 404,147 Finance lease Long-term debt 277 485 Total lease liabilities $ 582,931 $ 561,060 (a) 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 2022 2021 Operating lease costs Cost of goods sold and selling, general and administrative expenses (a) $ 188,206 $ 193,583 Finance lease costs: Amortization of leased assets Selling, general and administrative expenses 299 328 Interest on lease liabilities Interest expense 13 14 Variable lease costs (b) Selling, general and administrative expenses 62,201 53,698 Total lease costs $ 250,719 $ 247,623 (a) Certain supply chain-related amounts are included in cost of goods sold. (b) Includes common area maintenance, real estate taxes and insurance related to leases As of September 30, 2022, the approximate future lease payments under our leases under ASC 842, Leases , are as follows (in thousands): Fiscal Year Operating leases Finance leases 2023 $ 174,464 $ 167 2024 139,368 161 2025 105,793 134 2026 79,025 — 2027 54,242 — Thereafter 103,144 — Total undiscounted lease payments 656,036 462 Less: imputed interest 73,540 27 Present value of lease liabilities $ 582,496 $ 435 F-19 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 Fiscal Year Ended September 30, 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows – operating leases $ 183,943 $ 189,012 Operating cash flows – finance leases 13 14 Financing cash flows – finance leases 161 202 Supplemental non-cash information on lease liabilities: Lease assets obtained in exchange for new operating lease liabilities $ 201,542 $ 180,945 Lease assets obtained in exchange for new finance lease liabilities 3 22 September 30, 2022 2021 Weighted-average remaining lease term (in years): Operating leases 5.2 5.1 Finance leases 2.7 3.7 Weighted-average discount rate: Operating leases 4.6 % 4.5 % Finance leases 0.3 % 0.3 % 8. Goodwill and Intangible Assets The changes in the carrying amounts of goodwill during the fiscal years 2022 and 2021 are as follows (in thousands): SBS BSG Total Balance at September 30, 2020 $ 81,186 $ 458,852 540,038 Acquisitions (a) 231 ( 1,582 ) ( 1,351 ) Foreign currency translation 743 1,779 2,522 Balance at September 30, 2021 $ 82,160 $ 459,049 $ 541,209 Acquisitions 271 — 271 Foreign currency translation ( 12,871 ) ( 2,543 ) ( 15,414 ) Balance at September 30, 2022 $ 69,560 $ 456,506 $ 526,066 (a) 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. F-20 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2022, 2021 and 2020 The following table reflects our other intangible assets, excluding goodwill, on our consolidated balance sheets. Once an intangible becomes fully amortized, the original cost and accumulated amortization is removed in the subsequent period. As of September 30, 2022 and 2021, we had the following (in thousands): September 30, 2022 September 30, 2021 Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net Definite-lived Intangible assets: Customer relationships $ 21,406 $ ( 17,406 ) $ 4,000 $ 32,621 $ ( 26,246 ) $ 6,375 Distribution rights 10,155 ( 6,770 ) 3,385 11,660 ( 9,251 ) 2,409 Other intangible assets 3,968 ( 2,618 ) 1,350 5,238 ( 3,460 ) 1,778 Total definite-lived intangible assets 35,529 ( 26,794 ) 8,735 49,519 ( 38,957 ) 10,562 Indefinite-lived Intangible assets: Trade names 41,580 — 41,580 44,970 — 44,970 Total intangible assets, excluding goodwill, net $ 77,109 $ ( 26,794 ) $ 50,315 $ 94,489 $ ( 38,957 ) $ 55,532 Our definite-lived intangible assets are amortized on a straight-line basis over the period that we expected an economic benefit, typically over periods of three to ten years . For the fiscal years ended September 30, 2022, 2021 and 2020, amortization expense related to intangible assets totaled $ 4.1 million, $ 6.6 million and $ 9.0 million, respectively. As of September 30, 2022, the expected future amortization expense related to definite-lived intangible assets is as follows (in thousands): Fiscal Year: 2023 $ 3,319 2024 2,370 2025 1,840 2026 781 2027 425 Thereafter — $ 8,735 9. Accrued Liabilities Accrued liabilities consist of the following (in thousands): September 30, 2022 2021 Compensation and benefits $ 58,693 $ 73,344 Deferred revenue 18,810 23,859 Interest payable 13,445 24,101 Rental obligations 10,701 10,501 Insurance reserves 5,742 5,934 Property and other taxes 4,161 3,853 Operating accruals and other 49,513 64,563 Total accrued liabilities $ 161,065 $ 206,155 We have reclassified certain prior year amounts out of operating accruals and other into deferred revenue to conform to current year presentation. F-21 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2022, 2021 and 2020 10. Commitments and Contingencies Commitments Letters of Credit We had $ 18.6 million and $ 18.3 million of outstanding letters of credit as of September 30, 2022 and 2021, respectively. Contingencies Legal Proceedings The Company is, from time to time, involved in various claims and lawsuits incidental to the conduct of its business in the ordinary course. We do not believe that the ultimate resolution of these matters will have a material adverse impact on our consolidated financial position, results of operations or cash flows. Liabilities for loss contingencies, arising from claims, assessments, litigation, fines, penalties, the data security incidents and other sources, are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. We have no significant liabilities for loss contingencies at September 30, 2022 and 2021. 11. Debt Short-term Debt In May 2021, we entered into a third amendment to our five-year asset-based senior secured loan facility (the "ABL facility") with a syndicate of banks, which 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 %. In addition, the terms of the ABL facility contain a commitment fee of 0.20 % on the unused portion of the facility. Borrowings under the ABL facility are secured by a first-priority lien in and upon the accounts and inventory (and the proceeds thereof) of the Company and its guarantor subsidiaries. Furthermore, the ABL facility is also secured by a second-priority lien in and upon the remaining assets of the Company and its guarantor subsidiaries. At September 30, 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 . Long-term Debt Long-term debt consists of the following (dollars in thousands): September 30, 2022 2021 Interest Rates Term loan B: Variable-rate tranche $ 407,500 $ 413,000 LIBOR plus 2.25% Senior notes due Apr. 2025 — 300,000 8.750 % Senior notes due Dec. 2025 679,961 679,961 5.625 % Total $ 1,087,461 $ 1,392,961 Plus: finance lease obligations 435 679 Less: unamortized debt issuance costs and discount, net 4,695 10,916 Total debt $ 1,083,201 $ 1,382,724 Less: current maturities 158 194 Total long-term debt $ 1,083,043 $ 1,382,530 Maturities of our debt, excluding finance leases and our ABL facility, are as follows at September 30, 2022 (in thousands): F-22 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2022, 2021 and 2020 Fiscal Year: 2023 $ — 2024 407,500 2025 — 2026 679,961 2027 — Thereafter — Total $ 1,087,461 Term Loan B In July 2017, we entered into a seven-year term loan pursuant to which we borrowed $ 850 million (the “term loan B”). Borrowings under the term loan B are secured by a first-priority lien in and upon substantially all of the assets of the Company and its domestic subsidiaries other than the accounts, inventory (and the proceeds thereof) and other assets that secure the ABL facility on a first priority basis. The term loan B matures on July 5, 2024 . Interest is payable monthly on the variable-rate tranche and quarterly on the fixed-rate tranche. In 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 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. Senior Notes 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 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. 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. Covenants The agreements governing our debt contain a customary covenant package that places restrictions on the disposition of assets, the granting of liens and security interests, the prepayment of certain indebtedness, and other matters and customary events of default, including customary cross-default and/or cross-acceleration provisions. F-23 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2022, 2021 and 2020 12. Derivative Instruments As of September 30, 2022, we did no t purchase or hold any derivative instruments for trading or speculative purposes. See Note 3 for the classification and fair value of our derivative instruments. Designated Cash Flow Hedges Foreign Currency Forwards During the fiscal year ended September 30, 2022, we entered into foreign currency forwards to mitigate the exposure to exchange rate changes on inventory purchases in USD by our foreign subsidiaries over fiscal year 2022. As of September 30, 2022, all of our foreign currency forward derivatives instruments had settled. We record, net of income tax, the changes in fair value related to the foreign currency forwards into AOCL and recognize realized gain or loss into cost of goods sold based on inventory turns. As of September 30, 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 In July 2017, we purchased two interest rate caps with an initial aggregate notional amount of $ 550 million (the “interest rate caps”). The interest rate caps are made up of individual caplets that expire monthly through June 30, 2023 and are designated as cash flow hedges. Over the next 12 months, we expect to reclassify 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 $ 19,831,921 Euro 21,910,748 British Pound 47,741,922 Mexican Peso 11,432,249 Total $ 100,916,839 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. 13. 401(k) and Profit Sharing Plan We offer 401(k) Plans to our U.S. and Puerto Rico employees who meet certain eligibility requirements. The U.S. 401(k) Plan allows employees to contribute immediately upon hire, while the Puerto Rico 401(k) Plan allows employees to contribute after one year of employment. Under the terms of each 401(k) Plan, employees may contribute a percentage of their annual compensation up to certain maximums, as defined by each 401(k) Plan and by statutory limitations. We currently match a portion of employee contributions, as defined by each 401(k) Plan. We recognized expense of $ 6.8 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. F-24 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements 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. 14. Income Taxes U.S. Tax Law Changes In response to the global pandemic related to COVID-19, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, temporary suspension of certain payment requirements for the employer portion of social security taxes and the creation of certain refundable employee retention credits. There was not a material impact on our income tax expense for the fiscal years ended September 30, 2022, 2021 and 2020, related to the CARES Act. Beginning with our first quarter of fiscal year 2019, we are subject to taxation on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. We have made the policy election to record this tax as a period cost at the time it is incurred. The impact from GILTI was immaterial for fiscal years 2022, 2021 and 2020. For the fiscal year ended September 30, 2020, the provision for income taxes also includes a benefit due to a reduction of prior year tax related to GILTI. The benefit is a result of favorable final Regulations being issued by the Department of Treasury in July 2020, which can be applied retroactively. The provision for income taxes for the fiscal years 2022, 2021 and 2020 consists of the following (in thousands): Fiscal Year Ended September 30, 2022 2021 2020 Current: Federal $ 48,888 $ 64,526 $ 22,282 Foreign 16,370 14,869 6,120 State 10,739 14,364 4,730 Total current portion 75,997 93,759 33,132 Deferred: Federal 93 ( 6,054 ) 10,177 Foreign ( 15,380 ) ( 1,195 ) 1,321 State ( 166 ) ( 1,434 ) 2,092 Total deferred portion ( 15,453 ) ( 8,683 ) 13,590 Total provision for income taxes $ 60,544 $ 85,076 $ 46,722 The difference between the U.S. statutory federal income tax rate and the effective income tax rate is summarized below: Fiscal Year Ended September 30, 2022 2021 2020 U.S. federal statutory income tax rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal tax benefit 2.6 3.0 3.4 Effect of foreign operations 2.2 0.8 ( 0.4 ) Valuation allowances ( 7.2 ) 0.6 4.6 Deferred tax impact of foreign branch conversion 2.7 — — Unrecognized tax benefit 2.9 — — Share-based payment awards 0.6 0.6 1.2 Other, net — 0.2 ( 0.6 ) Effective tax rate 24.8 % 26.2 % 29.2 % F-25 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): September 30, 2022 2021 Deferred tax assets attributable to: Foreign loss carryforwards $ 30,548 $ 34,007 Accrued liabilities 24,023 18,662 Share-based compensation expense 7,320 8,392 U.S. foreign tax credits 10,712 11,199 U.S. federal social security tax deferral — 3,089 Inventory adjustments 8,156 2,754 Other ( 391 ) 2,984 Total deferred tax assets 80,368 81,087 Valuation allowance ( 31,920 ) ( 51,810 ) Total deferred tax assets, net 48,448 29,277 Deferred tax liabilities attributable to: Depreciation and amortization 112,115 109,038 Net deferred tax liability $ 63,667 $ 79,761 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. 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 $ 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. 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. Tax Reform, the repatriation of cash to the U.S. is generally no longer taxable for federal income tax purposes, but could be subject to foreign withholding taxes and state income taxes. If undistributed earnings of our foreign operations were not considered permanently reinvested as of September 30, 2022, an immaterial amount of additional deferred taxes would have been provided. 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. At September 30, 2022, operating loss carry-forwards of $ 5.6 million expire between 2022 and 2034 and operating loss carry-forwards of $ 105.2 million have no expiration date. At September 30, 2022 and 2021, we had tax credit carry-forwards of $ 13.1 million and $ 14.1 million, respectively. This includes a U.S. foreign tax credit carry-forward of $ 10.7 million primarily as a result of the deemed repatriation tax under U.S. Tax Reform. This credit expires in 2028. We do not believe the realization of the U.S. foreign tax credit is more-likely-than-not, so a valuation allowance has been recorded against its full value. Of the remaining tax credit carry-forwards, at September 30, 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 $ 11.9 million and $ 12.6 million are subject to a valuation allowance at September 30, 2022 and 2021, respectively. F-26 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): Fiscal Year Ended September 30, 2022 2021 Balance at beginning of the fiscal year $ 2,092 $ 2,053 Increases related to prior year tax positions 7,603 5 Decreases related to prior year tax positions ( 874 ) ( 2 ) Increases related to current year tax positions 710 195 Lapse of statute ( 366 ) ( 159 ) Balance at end of fiscal year $ 9,165 $ 2,092 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. Accrued interest and penalties, in the aggregate, were $ 0.4 million and $ 0.3 million at September 30, 2022 and 2021, respectively. Because existing tax positions will continue to generate increased liabilities for unrecognized tax benefits over the next 12 months, and the fact that from time to time our tax returns are routinely under audit by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during the next 12 months. An estimate of the amount of such change, or a range thereof, cannot reasonably be made at this time. However, we do not expect the change, if any, to have a material effect on our consolidated financial condition or results of operations within the next 12 months. Our consolidated federal income tax return for the fiscal year ended September 30, 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. Our statute remains open for the fiscal year ended September 30, 2018, forward. Our U.S. state income tax returns are impacted by various statutes of limitations and are generally open for the fiscal year ended September 30, 2018 and future years. Our foreign income tax returns are impacted by various statutes of limitations, which are generally open from 2017 forward. 15. Segments and Disaggregated Revenue Our segments are defined on how our chief operating decision maker, which we consider the Chief Executive Officer and Chief Financial Officer together, regularly reviews performance and allocates resources to our operating segments. Our business is organized into two reportable segments: (i) SBS, a domestic and international chain of retail stores and a consumer-facing e-commerce website that offers professional beauty supplies to both salon professionals and retail customers primarily in North America, Puerto Rico and parts of Europe and South America and (ii) BSG, including its franchise-based business Armstrong McCall, a full service distributor of beauty products and supplies that offers professional beauty products directly to salons and salon professionals through its professional-only stores, e-commerce platforms and its own sales force in partially exclusive geographical territories in the U.S. and Canada. The accounting policies of both of our reportable segments are the same as described in the summary of significant accounting policies contained in Note 1. Sales between segments, which were eliminated in consolidation, were not material for the fiscal years ended September 30, 2022, 2021 and 2020. F-27 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2022, 2021 and 2020 Business Segments Information Segment data for the fiscal years 2022, 2021 and 2020 are as follows (in thousands): 2022 2021 2020 Net sales (for the fiscal year indicated): SBS $ 2,193,044 $ 2,278,382 $ 2,080,703 BSG 1,622,521 1,596,615 1,433,627 Total $ 3,815,565 $ 3,874,997 $ 3,514,330 Earnings before provision for income taxes: Segment operating earnings: SBS $ 350,884 $ 417,658 $ 237,588 BSG 193,407 205,078 194,206 Segment operating earnings 544,291 622,736 431,794 Unallocated expenses 179,074 199,682 159,009 Restructuring 27,577 4,611 14,025 Consolidated operating earnings 337,640 418,443 258,760 Interest expense 93,543 93,509 98,793 Earnings before provision for income taxes $ 244,097 $ 324,934 $ 159,967 Depreciation and amortization: SBS $ 57,798 $ 61,887 $ 65,207 BSG 30,098 28,597 29,324 Corporate 12,033 11,717 12,248 Total $ 99,929 $ 102,201 $ 106,779 Payments for property and equipment: SBS $ 53,788 $ 43,165 $ 73,130 BSG 34,312 24,880 27,338 Corporate 11,150 5,859 10,390 Total $ 99,250 $ 73,904 $ 110,858 Total assets (as of September 30): SBS $ 1,195,732 $ 1,235,427 $ 1,370,745 BSG 1,251,455 1,179,263 1,106,801 Sub-total 2,447,187 2,414,690 2,477,546 Corporate 129,680 432,442 417,601 Total $ 2,576,867 $ 2,847,132 $ 2,895,147 Unallocated expenses consist of corporate and shared costs and are included in selling, general and administrative expenses in our consolidated statements of earnings. In the fiscal years 2022, 2021 and 2020, no single customer accounted for 10 % or more of revenue. F-28 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2022, 2021 and 2020 Geographic Area Information Certain geographic data is as follows (in thousands): 2022 2021 2020 Net sales (for the fiscal year indicated): United States $ 3,142,898 $ 3,228,091 $ 2,914,171 Other countries 672,667 646,906 600,159 Total $ 3,815,565 $ 3,874,997 $ 3,514,330 Long-lived assets (as of September 30): United States $ 263,929 $ 267,839 $ 264,936 United Kingdom 9,147 15,089 20,183 Other countries 24,800 24,449 29,910 Total $ 297,876 $ 307,377 $ 315,029 Disaggregated Revenues 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, SBS 2022 2021 2020 Hair color 38.2 % 36.3 % 34.4 % Hair care 23.6 % 22.1 % 20.6 % Styling tools and supplies 19.1 % 21.7 % 24.8 % Nail 10.8 % 10.9 % 10.9 % Skin and cosmetics 7.6 % 8.3 % 8.2 % Other beauty items 0.7 % 0.7 % 1.1 % Total 100.0 % 100.0 % 100.0 % Fiscal Year Ended September 30, BSG 2022 2021 2020 Hair care 43.5 % 41.5 % 40.4 % Hair color 39.0 % 39.8 % 38.3 % Styling tools and supplies 10.9 % 11.5 % 12.7 % Skin and cosmetics 3.8 % 4.0 % 4.3 % Nail 2.4 % 2.7 % 3.6 % Other beauty items 0.4 % 0.5 % 0.7 % Total 100.0 % 100.0 % 100.0 % The following table disaggregates our segment revenue by sales channels: SBS BSG Fiscal Year Ended September 30, Fiscal Year Ended September 30, 2022 2021 2020 2022 2021 2020 Company-operated stores 94.0 % 94.1 % 91.8 % 66.4 % 69.1 % 68.9 % E-commerce 6.0 % 5.9 % 8.0 % 12.3 % 9.2 % 8.7 % Franchise stores — 0.0 % 0.2 % 7.4 % 7.5 % 7.1 % Distributor sales consultants — — — 13.9 % 14.2 % 15.3 % Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % F-29 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2022, 2021 and 2020 16. Restructuring 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): 2022 2021 2020 Included in COGS Distribution Center Consolidation and Store Optimization Plan $ 19,403 $ — $ — Transformation Plan ( 1,087 ) 1,444 — Total in COGS $ 18,316 $ 1,444 $ — Included in Restructuring Distribution Center Consolidation and Store Optimization Plan $ 26,110 $ — $ — Transformation Plan 1,467 3,160 12,514 Project Surge — 1,451 1,511 Total in Restructuring 27,577 4,611 14,025 Total Restructuring Expenses $ 45,893 $ 6,055 $ 14,025 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 Liability at September 30, 2021 Expenses Cash Payments Non-Cash Amounts Liability at September 30, 2022 SBS Impairment - operating lease assets (a) $ — $ 18,668 $ — $ ( 18,668 ) $ — Impairment - property and equipment (a) — 2,921 — ( 2,921 ) — Inventory adjustments (COGS) (b) — 10,548 — ( 10,548 ) — Other (c) — 918 — 918 Total SBS $ — $ 33,055 $ — $ ( 32,137 ) $ 918 BSG Impairment - operating lease assets (a) $ — $ 2,894 $ — $ ( 2,894 ) $ — Impairment - property and equipment (a) — 336 — ( 336 ) — Inventory adjustments (COGS) (b) — 8,855 — ( 8,855 ) — Other (c) — 373 — — 373 Total BSG — 12,458 — ( 12,085 ) 373 Total Distribution Center Consolidation and Store Optimization Plan $ — $ 45,513 $ — $ ( 44,222 ) $ 1,291 F-30 Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fiscal Years ended September 30, 2022, 2021 and 2020 (a) Remaining carrying value for the long-lived assets, including operating lease assets, were not material and approximate their fair value. (b) Inventory adjustments in COGS are related to obsolescence associated with planned closures. (c) Other expenses include closure-related costs. Transformation Plan We previously disclosed a plan to focus on certain core business strategies. In addition to optimizing our supply chain network with changes to our transportation model and network of nodes, we are improving our marketing and digital commerce capabilities and advancing our merchandising transformation efforts. In addition, we expanded our plan and announced a reduction in workforce within our field and headquarters. Furthermore, our Board approved the divestiture of our operations in Peru. All these together make up our Transformation Plan. The liability related to the Transformation Plan, which is included in accrued liabilities on our consolidated balance sheets, is as follows (in thousands): Transformation Plan Liability at September 30, 2021 Expenses Cash Payments Non-Cash Amounts Liability at September 30, 2022 Workforce reductions $ 718 $ 466 $ 1,947 $ ( 763 ) $ — Facility closures 422 513 935 — — Inventory adjustments (COGS) — ( 1,087 ) — ( 1,087 ) — Other — 488 488 — — Total $ 1,140 $ 380 $ 3,370 $ ( 1,850 ) $ — 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. F-31