10-Q 1 a14-8385_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2014

 

-OR-

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 1-33145

 


 

SALLY BEAUTY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

3001 Colorado Boulevard

Denton, Texas

(Address of principal executive
offices)

 

36-2257936

(I.R.S. Employer Identification No.)

 

 

 

76210

(Zip Code)

 

Registrant’s telephone number, including area code: (940) 898-7500

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  x    NO  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

 

Accelerated filer  o

 

Non-accelerated filer  o

 

Smaller reporting company  o

 

 

 

 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  YES  o    NO  x

 

As of April 25, 2014, there were 161,896,636 shares of the issuer’s common stock outstanding.

 

 

 




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In this Quarterly Report, references to “the Company,” “Sally Beauty,” “our company,” “we,” “our,” “ours” and “us” refer to Sally Beauty Holdings, Inc. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.

 

Cautionary Notice Regarding Forward-Looking Statements

 

Statements in this Quarterly Report on Form 10-Q and in the documents incorporated by reference herein which are not purely historical facts or which depend upon future events may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or similar expressions may also identify such forward-looking statements.

 

Readers are cautioned not to place undue reliance on forward-looking statements as such statements speak only as of the date they were made. Any forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including, but not limited to, risks and uncertainties related to:

 

·             the highly competitive nature of, and the increasing consolidation of, the beauty products distribution industry;

·             anticipating changes in consumer preferences and buying trends and managing our product lines and inventory;

·             potential fluctuation in our same store sales and quarterly financial performance;

·             our dependence upon manufacturers who may be unwilling or unable to continue to supply products to us;

·             the possibility of material interruptions in the supply of products by our manufacturers or third-party distributors;

·             products sold by us being found to be defective in labeling or content;

·             compliance with laws and regulations or becoming subject to additional or more stringent laws and regulations;

·            the success of our e-commerce businesses;

·             product diversion to mass retailers or other unauthorized resellers;

·             the operational and financial performance of our Armstrong McCall, L.P., which we refer to as Armstrong McCall, franchise-based business;

·             successfully identifying acquisition candidates and successfully completing desirable acquisitions;

·             integrating acquired businesses;

·             opening and operating new stores profitably;

·             the impact of the health of the economy upon our business;

·             the success of our cost control plans;

·             protecting our intellectual property rights, particularly our trademarks;

·             the risk that our products may infringe on the intellectual property rights of others;

·             conducting business outside the United States;

·             disruption in our information technology systems;

·             a significant data security breach, including misappropriation of our customers’ or employees’ confidential information,  and the potential costs related thereto;

·             the negative impact on our reputation and loss of confidence of our customers, suppliers and others arising from a significant data security breach;

·             the costs and diversion of management’s attention required to investigate and remediate a data security breach;

·             the ultimate determination of the extent or scope of the potential liabilities relating to our recent data security incident;

·             severe weather, natural disasters or acts of violence or terrorism;

·             the preparedness of our accounting and other management systems to meet financial reporting and other requirements and the upgrade of our existing financial reporting system;

·             being a holding company, with no operations of our own, and depending on our subsidiaries for cash;

·             our substantial indebtedness;

·             the possibility that we may incur substantial additional debt, including secured debt, in the future;

·             restrictions and limitations in the agreements and instruments governing our debt;

·             generating the significant amount of cash needed to service all of our debt and refinancing all or a portion of our indebtedness or obtaining additional financing;

·             changes in interest rates increasing the cost of servicing our debt;

 

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·             the potential impact on us if the financial institutions we deal with become impaired; and

·             the costs and effects of litigation.

 

Additional factors that could cause actual events or results to differ materially from the events or results described in the forward-looking statements can be found in Item 1A. “Risk Factors” contained in Part II of this Quarterly Report on Form 10-Q and in Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, as filed with the Securities and Exchange Commission. The events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. As a result, our actual results may differ materially from the results contemplated by these forward-looking statements. We assume no obligation to publicly update or revise any forward-looking statements.

 

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WHERE YOU CAN FIND MORE INFORMATION

 

Sally Beauty’s quarterly financial results and other important information are available by calling the Investor Relations Department at (940) 297-3877.

 

Sally Beauty maintains a website at www.sallybeautyholdings.com where investors and other interested parties may obtain, free of charge, press releases and other information as well as gain access to our periodic filings with the SEC. The information contained on this website should not be considered to be a part of this or any other report filed with or furnished to the Securities and Exchange Commission, or SEC.

 

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PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

The following consolidated balance sheets as of March 31, 2014 and September 30, 2013, the consolidated statements of earnings and consolidated statements of comprehensive income for the three and six months ended March 31, 2014 and 2013, and the consolidated statements of cash flows for the six months ended March 31, 2014 and 2013 are those of Sally Beauty Holdings, Inc. and its consolidated subsidiaries.

 

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SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net sales

 

$

919,471

 

$

898,239

 

$

1,859,935

 

$

1,803,680

 

Cost of products sold and distribution expenses

 

463,075

 

453,785

 

943,013

 

914,858

 

Gross profit 

 

456,396

 

444,454

 

916,922

 

888,822

 

Selling, general and administrative expenses

 

312,813

 

299,370

 

632,291

 

605,059

 

Depreciation and amortization

 

19,495

 

17,247

 

38,750

 

34,055

 

Operating earnings 

 

124,088

 

127,837

 

245,881

 

249,708

 

Interest expense

 

29,258

 

26,779

 

57,747

 

53,503

 

Earnings before provision for income taxes

 

94,830

 

101,058

 

188,134

 

196,205

 

Provision for income taxes

 

36,338

 

36,169

 

71,647

 

72,332

 

Net earnings

 

$

58,492

 

$

64,889

 

$

116,487

 

$

123,873

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.36

 

$

0.37

 

$

0.71

 

$

0.70

 

Diluted

 

$

0.35

 

$

0.36

 

$

0.70

 

$

0.69

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

Basic

 

162,535

 

173,461

 

163,075

 

175,930

 

Diluted

 

166,140

 

178,389

 

166,637

 

180,743

 

 

The accompanying condensed notes, together with the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013, are an integral part of these financial statements.

 

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SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net earnings

 

$

58,492

 

$

64,889

 

$

116,487

 

$

123,873

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(2,715

)

(11,794

)

(148

)

(9,136

)

Total other comprehensive income, before tax

 

(2,715

)

(11,794

)

(148

)

(9,136

)

Income taxes related to other comprehensive income

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

(2,715

)

(11,794

)

(148

)

(9,136

)

Total comprehensive income

 

$

55,777

 

$

53,095

 

$

116,339

 

$

114,737

 

 

The accompanying condensed notes, together with the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013, are an integral part of these financial statements.

 

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SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except par value data)

 

 

 

March 31,
2014

 

September 30,
2013

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

202,451

 

$

47,115

 

Trade accounts receivable, less allowance for doubtful accounts of $2,339 at March 31, 2014 and $2,556 at September 30, 2013

 

49,830

 

57,049

 

Accounts receivable, other

 

40,579

 

39,196

 

Inventory

 

819,752

 

808,313

 

Other current assets

 

32,957

 

31,658

 

Deferred income tax assets, net

 

32,460

 

32,486

 

Total current assets

 

1,178,029

 

1,015,817

 

Property and equipment, net of accumulated depreciation of $396,336 at March 31, 2014 and $375,232 at September 30, 2013

 

229,188

 

229,540

 

Goodwill

 

537,333

 

538,278

 

Intangible assets, excluding goodwill, net of accumulated amortization of $78,875 at March 31, 2014 and $71,759 at September 30, 2013

 

123,542

 

130,097

 

Other assets

 

37,933

 

36,354

 

Total assets

 

$

2,106,025

 

$

1,950,086

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt

 

$

1,610

 

$

78,018

 

Accounts payable

 

265,856

 

273,456

 

Accrued liabilities

 

187,534

 

184,762

 

Income taxes payable

 

7,215

 

6,417

 

Total current liabilities

 

462,215

 

542,653

 

Long-term debt

 

1,811,900

 

1,612,685

 

Other liabilities

 

27,146

 

24,286

 

Deferred income tax liabilities, net

 

73,591

 

73,941

 

Total liabilities

 

2,374,852

 

2,253,565

 

Stockholders’ deficit:

 

 

 

 

 

Common stock, $0.01 par value. Authorized 500,000 shares; 162,394 and 164,762 shares issued and 162,151 and 164,425 shares outstanding at March 31, 2014 and September 30, 2013, respectively

 

1,622

 

1,644

 

Preferred stock, $0.01 par value. Authorized 50,000 shares; none issued

 

 

 

Additional paid-in capital

 

8,825

 

91,022

 

Accumulated deficit

 

(268,603

)

(385,090

)

Treasury stock, 25 shares at March 31, 2014 and 47 shares at September 30, 2013, at cost

 

(705

)

(1,237

)

Accumulated other comprehensive loss, net of tax

 

(9,966

)

(9,818

)

Total stockholders’ deficit

 

(268,827

)

(303,479

)

Total liabilities and stockholders’ deficit

 

$

2,106,025

 

$

1,950,086

 

 

The accompanying condensed notes, together with the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013, are an integral part of these financial statements.

 

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SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)

(Unaudited)

 

 

 

Six Months Ended
March 31,

 

 

 

2014

 

2013

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net earnings

 

$

116,487

 

$

123,873

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

38,750

 

34,055

 

Share-based compensation expense

 

11,790

 

12,313

 

Amortization of deferred financing costs

 

1,873

 

1,810

 

Excess tax benefit from share-based compensation

 

(11,682

)

(8,294

)

Deferred income taxes

 

(825

)

6,082

 

Changes in (exclusive of effects of acquisitions):

 

 

 

 

 

Trade accounts receivable

 

7,315

 

2,489

 

Accounts receivable, other

 

(1,211

)

1,510

 

Inventory

 

(11,972

)

(22,343

)

Other current assets

 

1,022

 

10,082

 

Other assets

 

314

 

(33

)

Accounts payable and accrued liabilities

 

(6,242

)

(30,970

)

Income taxes payable

 

10,445

 

6,057

 

Other liabilities

 

2,836

 

(464

)

Net cash provided by operating activities

 

158,900

 

136,167

 

Cash Flows from Investing Activities:

 

 

 

 

 

Capital expenditures

 

(30,343

)

(43,112

)

Acquisitions, net of cash acquired

 

 

(670

)

Net cash used by investing activities

 

(30,343

)

(43,782

)

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

232,719

 

58,500

 

Repayments of long-term debt

 

(109,549

)

(36,947

)

Repurchases of common stock

 

(125,644

)

(313,349

)

Debt issuance costs

 

(3,893

)

 

Proceeds from exercises of stock options

 

21,389

 

13,256

 

Excess tax benefit from share-based compensation

 

11,682

 

8,294

 

Net cash provided (used) by financing activities

 

26,704

 

(270,246

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

75

 

(103

)

Net increase (decrease) in cash and cash equivalents

 

155,336

 

(177,964

)

Cash and cash equivalents, beginning of period

 

47,115

 

240,220

 

Cash and cash equivalents, end of period

 

$

202,451

 

$

62,256

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

51,234

 

$

53,373

 

Income taxes paid

 

$

63,379

 

$

52,998

 

 

The accompanying condensed notes, together with the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013, are an integral part of these financial statements.

 

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Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

1.              Description of Business and Basis of Presentation

 

Description of Business

 

Sally Beauty Holdings, Inc. and its consolidated subsidiaries (“Sally Beauty” or “the Company”) sell professional beauty supplies, through its Sally Beauty Supply retail stores primarily in the U.S., Puerto Rico, Canada, Mexico, Chile, Peru, the United Kingdom, Ireland, Belgium, France, Germany, the Netherlands and Spain. Additionally, the Company distributes professional beauty products to salons and salon professionals through its Beauty Systems Group (“BSG”) store operations and a commissioned direct sales force that calls on salons primarily in the U.S., Puerto Rico, Canada, the United Kingdom and certain other countries in Europe, and to franchises in the southern and southwestern regions of the U.S., and in Mexico through the operations of its subsidiary Armstrong McCall, L.P. (“Armstrong McCall”). Certain beauty products sold by BSG and Armstrong McCall are sold under exclusive territory agreements with the manufacturers of the products.

 

Basis of Presentation

 

The accompanying consolidated interim financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. In the opinion of management, these consolidated financial statements reflect all adjustments which are of a normal recurring nature and which are necessary to present fairly the Company’s consolidated financial position as of March 31, 2014 and September 30, 2013, and its consolidated results of operations for the three and six months ended March 31, 2014 and 2013 and consolidated cash flows for the six months ended March 31, 2014 and 2013.

 

Certain amounts for prior fiscal periods have been reclassified to conform to the current fiscal period’s presentation.

 

All references in these notes to “management” are to the management of Sally Beauty.

 

2.              Significant Accounting Policies

 

The consolidated interim financial statements included herein are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These consolidated interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013. The Company adheres to the same accounting policies in the preparation of its interim financial statements. As permitted under GAAP, interim accounting for certain expenses, including income taxes, is based on full year assumptions. Such amounts are expensed in full in the year incurred. For interim financial reporting purposes, income taxes are recorded based upon estimated annual effective income tax rates.

 

The results of operations for these interim periods are not necessarily indicative of the results that may be expected for any future interim period or the entire fiscal year.

 

3.              Recent Accounting Pronouncements and Accounting Changes

 

The Company made no accounting changes during the six months ended March 31, 2014.

 

4.              Fair Value Measurements

 

The Company’s financial instruments consist of cash equivalents, trade and other accounts receivable, accounts payable, foreign currency derivative instruments 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.

 

The Company measures on a recurring basis and discloses the fair value of its financial instruments under the provisions of ASC Topic 820, Fair Value Measurement, as amended (“ASC 820”). The Company defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level hierarchy for measuring fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels of that hierarchy are defined as follows:

 

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

 

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Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

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.

 

Consistent with this hierarchy, the Company categorized certain of its financial assets and liabilities as follows at March 31, 2014 and September 30, 2013 (in thousands):

 

 

 

As of March 31, 2014

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

Cash equivalents (a)

 

$

125,504

 

$

125,504

 

$

 

 

Foreign exchange contracts (b)

 

63

 

 

63

 

 

Total assets

 

$

125,567

 

$

125,504

 

$

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Long-term debt (c)

 

$

1,918,095

 

$

1,912,500

 

$

5,595

 

 

Foreign exchange contracts (b)

 

221

 

 

221

 

 

Total liabilities

 

$

1,918,316

 

$

1,912,500

 

$

5,816

 

 

 

 

 

As of September 30, 2013

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

Foreign exchange contracts (b)

 

$

152

 

 

$

152

 

 

Total assets

 

$

152

 

 

$

152

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Long-term debt (c)

 

$

1,753,822

 

$

1,671,500

 

$

82,322

 

 

Foreign exchange contracts (b)

 

36

 

 

36

 

 

Total liabilities

 

$

1,753,858

 

$

1,671,500

 

$

82,358

 

 

 


(a)         Cash equivalents, at March 31, 2014, consist of highly liquid investments which have no maturity and are valued using unadjusted quoted market prices for such securities. The Company may from time to time invest in securities with maturities of three months or less (consisting primarily of investment-grade corporate or government bonds), with the primary investment objective of minimizing the potential risk of loss of principal.

(b)         Foreign exchange contracts (including foreign currency forwards and options) are valued for purposes of this disclosure using widely accepted valuation techniques, such as discounted cash flow analyses, and reasonable estimates, such as market foreign currency exchange rates. Please see Note 11 for more information about the Company’s foreign exchange contracts.

(c)          Long-term debt (including current maturities and borrowings under the ABL facility, if any) is carried in the Company’s consolidated financial statements at amortized cost of $1,813.5 million at March 31, 2014 and $1,690.7 million at September 30, 2013. The Company’s senior notes are valued for purposes of this disclosure using unadjusted quoted market prices for such debt securities. Other long-term debt (consisting primarily of borrowings under the ABL facility, if any, and capital lease obligations), is generally valued for purposes of this disclosure using widely accepted valuation techniques, such as discounted cash flow analyses, and observable inputs such as market interest rates. Please see Note 10 for more information about the Company’s debt.

 

5.              Accumulated Stockholders’ Equity (Deficit)

 

In August 2012, the Company announced that its Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $300.0 million of its common stock (the “2012 Share Repurchase Program”). In addition, in March 2013, the Company announced that its Board of Directors approved a new share repurchase program authorizing the Company to repurchase up to $700.0 million of its common stock over the eight quarters commencing on such date (the “2013 Share Repurchase Program”). In connection with the authorization of the 2013 Share Repurchase Program, the Company’s Board of Directors terminated the 2012 Share Repurchase Program.

 

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Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

During the six months ended March 31, 2014, the Company repurchased and subsequently retired approximately 4.5 million shares of its common stock under the 2013 Share Repurchase Program at an aggregate cost of $125.6 million and, during the six months ended March 31, 2013, the Company repurchased and subsequently retired approximately 12.0 million shares of its common stock under the 2013 Share Repurchase Program or the 2012 Share Repurchase Program at an aggregate cost of $313.3 million. The Company reduced common stock and additional paid-in capital, in the aggregate, by these amounts.

 

At March 31, 2014 and September 30, 2013, accumulated other comprehensive loss consists of cumulative foreign currency translation adjustments of $10.0 million and $9.8 million, respectively, and is net of income taxes of $2.9 million at each date. Comprehensive income reflects changes in accumulated stockholders’ equity (deficit) from sources other than transactions with stockholders and, as such, includes net earnings and certain other specified components. Currently, the Company’s only component of comprehensive income, other than net earnings, is foreign currency translation adjustments, net of income tax.

 

6.              Earnings Per Share

 

Basic earnings per share, is calculated by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated similarly but includes the potential dilution from the exercise of all outstanding stock options and stock awards, except when the effect would be anti-dilutive.

 

The following table sets forth the computations of basic and diluted earnings per share (in thousands, except per share data):

 

 

 

Three Months Ended
March 31,

 

Six Months Ended
March 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net earnings

 

$

58,492

 

$

64,889

 

$

116,487

 

$

123,873

 

Total weighted average basic shares

 

162,535

 

173,461

 

163,075

 

175,930

 

Dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options and stock award programs

 

3,605

 

4,928

 

3,562

 

4,813

 

Total weighted average diluted shares

 

166,140

 

178,389

 

166,637

 

180,743

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.36

 

$

0.37

 

$

0.71

 

$

0.70

 

Diluted

 

$

0.35

 

$

0.36

 

$

0.70

 

$

0.69

 

 

At March 31, 2014 and 2013, options to purchase 1,460,803 shares and 1,577,766 shares, respectively, of the Company’s common stock were outstanding but not included in the computation of diluted earnings per share, since these options were anti-dilutive. Anti-dilutive options are: (a) out-of-the-money options (options the exercise price of which is greater than the average price per share of the Company’s common stock during the period), and (b) in-the-money options (options the exercise price of which is less than the average price per share of the Company’s common stock during the period) for which the sum of assumed proceeds, including any unrecognized compensation expense related to such options, exceeds the average price per share for the period.

 

7.              Share-Based Payments

 

The Company measures the cost of services received from employees, directors and consultants in exchange for an award of equity instruments based on the fair value of the award on the date of grant, and recognizes compensation expense on a straight-line basis over the vesting period or over the period ending on the date a participant becomes eligible for retirement, if earlier.

 

The Company granted approximately 1.5 million and 1.6 million stock options and approximately 36,000 and 128,000 restricted share awards to its employees and consultants during the six months ended March 31, 2014 and 2013, respectively. Upon issuance of such grants, the Company recognized accelerated share-based compensation expense of $5.3 million and $5.9 million in the six months ended March 31, 2014 and 2013, respectively, in connection with certain retirement eligible employees who are eligible to continue vesting awards upon retirement under the provisions of the Sally Beauty Holdings, Inc. 2010 Omnibus Incentive Plan (the “2010 Plan”) and certain predecessor share-based compensation plans such as the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan (the “2007 Plan”). In addition, the Company granted approximately 27,000 and 34,000 restricted stock units to its non-employee directors during the six months ended March 31, 2014 and 2013, respectively.

 

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Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

The following table presents the total compensation cost charged against income and included in selling, general and administrative expenses for all share-based compensation arrangements and the related tax benefits recognized in our consolidated statements of earnings (in thousands):

 

 

 

Three Months Ended
March 31,

 

Six Months Ended
March 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

Share-based compensation expense

 

$

3,268

 

$

3,262

 

$

11,790

 

$

12,313

 

Income tax benefit related to share-based compensation expense

 

$

1,166

 

$

1,168

 

$

4,347

 

$

4,570

 

 

Stock Option Awards

 

Each option has an exercise price equal to the closing market price of the Company’s common stock on the date of grant and generally has a maximum term of 10 years. Options generally vest ratably over a four year period and are generally subject to forfeiture until the vesting period is complete, subject to certain retirement provisions contained in the 2010 Plan and certain predecessor share-based compensation plans such as the 2007 Plan.

 

The following table presents a summary of the activity for the Company’s stock option awards for the six months ended March 31, 2014:

 

 

 

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, 2013

 

10,408

 

$

12.89

 

6.2

 

$

138,139

 

Granted

 

1,465

 

26.30

 

 

 

 

 

Exercised

 

(2,157

)

9.92

 

 

 

 

 

Forfeited or expired

 

(173

)

19.11

 

 

 

 

 

Outstanding at March 31, 2014

 

9,543

 

$

15.51

 

6.6

 

$

113,509

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2014

 

5,461

 

$

10.90

 

5.3

 

$

90,088

 

 

The following table summarizes additional information about stock options outstanding under the Company’s share-based compensation plans:

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of 
Exercise Prices

 

Number 
Outstanding at 
March 31, 2014 
(in Thousands)

 

Weighted 
Average 
Remaining 
Contractual 
Term (in 
Years)

 

Weighted 
Average 
Exercise 
Price

 

Number 
Exercisable at 
March 31, 
2014 (in 
Thousands)

 

Weighted 
Average 
Exercise 
Price

 

$2.00 – 9.66

 

3,173

 

4.2

 

$

7.58

 

3,173

 

$

7.58

 

$11.39–26.30

 

6,370

 

7.8

 

19.45

 

2,288

 

15.52

 

Total

 

9,543

 

6.6

 

$

15.51

 

5,461

 

$

10.90

 

 

The Company uses the Black-Scholes option pricing model to value the Company’s stock options for each stock option award. Using this option pricing model, the fair value of each stock option award is estimated on the date of grant. The fair value of the Company’s stock option awards is expensed on a straight-line basis over the vesting period (generally four years) of the stock options or to the date a participant becomes eligible for retirement, if earlier.

 

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Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

The weighted average assumptions relating to the valuation of the Company’s stock options are as follows:

 

 

 

Six Months Ended
March 31,

 

 

 

2014

 

2013

 

Expected life (in years)

 

5.0

 

5.0

 

Expected volatility for the Company’s stock

 

48.4

%

56.3

%

Risk-free interest rate

 

1.3

%

0.8

%

Dividend yield

 

0.0

%

0.0

%

 

The expected life of options represents the period of time that the options granted are expected to be outstanding and is based on historical experience of employees of the Company who have been granted stock options. The risk-free interest rate is based on the zero-coupon U.S. Treasury notes with a comparable term as of the date of the grant. Since the Company does not currently expect to pay dividends, the dividend yield used is 0%.

 

The weighted average fair value of the stock options issued by the Company at the date of grant in the six months ended March 31, 2014 and 2013 was $11.32 and $11.29 per option, respectively. The total intrinsic value of options exercised during the six months ended March 31, 2014 was $40.0 million. The cash proceeds from these option exercises were $21.4 million and the tax benefit realized from these option exercises was $14.7 million.

 

At March 31, 2014, approximately $18.9 million of total unrecognized compensation costs related to unvested stock option awards are expected to be recognized over the weighted average period of 2.5 years.

 

Stock Awards

 

Restricted Stock Awards

 

The Company from time to time grants restricted stock awards to employees and consultants under the 2010 Plan. A restricted stock award is an award of shares of the Company’s common stock (which have full voting and dividend rights but are restricted with regard to sale or transfer) the restrictions over which lapse ratably over a specified period of time (generally five years). Restricted stock awards are independent of stock option grants and are generally subject to forfeiture if employment terminates prior to these restrictions lapsing, subject to certain retirement provisions of the 2010 Plan and certain predecessor share-based compensation plans such as the 2007 Plan.

 

The fair value of the Company’s restricted stock awards is expensed on a straight-line basis over the period (generally five years) in which the restrictions on these stock awards lapse (“vesting”) or over the period ending on the date a participant becomes eligible for retirement, if earlier. For these purposes, the fair value of the restricted stock award is determined based on the closing market price of the Company’s common stock on the date of grant.

 

The following table presents a summary of the activity for the Company’s restricted stock awards for the six months ended March 31, 2014:

 

Restricted Stock Awards

 

Number of Shares 
(in Thousands)

 

Weighted Average 
Fair Value Per 
Share

 

Weighted Average 
Remaining 
Vesting Term (in 
Years)

 

Unvested at September 30, 2013

 

337

 

$

16.30

 

3.1

 

Granted

 

36

 

26.63

 

 

 

Vested

 

(108

)

12.95

 

 

 

Forfeited

 

(22

)

17.97

 

 

 

Unvested at March 31, 2014

 

243

 

$

19.18

 

3.3

 

 

At March 31, 2014, approximately $2.3 million of total unrecognized compensation costs related to unvested restricted stock awards are expected to be recognized over the weighted average period of 3.3 years.

 

Restricted Stock Units

 

The Company currently grants Restricted Stock Unit (“RSU” or “RSUs”) awards, which generally vest within one year from the date of grant, pursuant to the 2010 Plan. To date, the Company has only granted RSU awards to its non-employee directors.  RSUs represent an unsecured promise of the Company to issue shares of common stock of the Company. Unless forfeited prior to the vesting date, RSUs are converted into shares of the Company’s common stock generally on the vesting date. An

 

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Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

independent director who receives an RSU award may elect, upon receipt of such award, to defer until a later date delivery of the shares of common stock of the Company that would otherwise be issued to such director on the vesting date. RSUs granted prior to 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. RSUs are independent of stock option grants and are generally subject to forfeiture if service terminates prior to the vesting of the units. Participants have no voting rights with respect to unvested RSUs. Under the 2010 Plan, the Company may settle the vested deferred stock units with shares of the Company’s common stock or in cash.

 

The Company expenses the cost of the RSUs, which is determined to be the fair value of the RSUs at the date of grant, on a straight-line basis over the vesting period (generally one year). For these purposes, the fair value of the RSU is determined based on the closing market price of the Company’s common stock on the date of grant.

 

The following table presents a summary of the activity for the Company’s RSUs for the six months ended March 31, 2014:

 

Restricted Stock Units

 

Number of Shares 
(in Thousands)

 

Weighted Average 
Fair Value Per 
Share

 

Weighted Average 
Remaining 
Vesting Term (in 
Years)

 

Unvested at September 30, 2013

 

 

$

 

 

Granted

 

27

 

26.30

 

 

 

Vested

 

 

 

 

 

Forfeited

 

 

 

 

 

Unvested at March 31, 2014

 

27

 

$

26.30

 

0.5

 

 

At March 31, 2014, approximately $0.4 million of total unrecognized compensation costs related to unvested RSUs are expected to be recognized over the weighted average period of 0.5 years.

 

8.            Goodwill and Intangible Assets

 

During the three months ended March 31, 2014, the Company completed its annual assessment for impairment of goodwill and no impairment losses were recognized in the current or prior periods presented in connection with the Company’s goodwill.

 

During the three months ended March 31, 2014, the Company also completed its annual assessment for impairment of intangible assets, other than goodwill, including indefinite-lived intangible assets. There were no material impairment losses recognized in the current or prior periods presented in connection with the Company’s intangible assets.

 

Amortization expense was $3.6 million and $3.1 million for the three months ended March 31, 2014 and 2013; and $7.1 million and $6.4 million for the six months ended March 31, 2014 and 2013, respectively.

 

9.              Commitments and Contingencies

 

In March 2014, the Company disclosed that there had been an unauthorized intrusion into its Sally Beauty Supply segment’s network, which we refer to as the Data Security Incident. As previously disclosed, the Company is currently conducting a comprehensive investigation of the Data Security Incident with the assistance of its advisers. As of April 30, 2014, the scope of the potential liabilities relating to the Data Security Incident, or a range thereof, cannot be reasonably estimated. For the six months ended March 31, 2014, selling, general and administrative expenses reflect a charge of $1.1 million, consisting primarily of professional advisory and legal costs incurred in connection with our investigation of the Data Security Incident.

 

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Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

10.   Short-term Borrowings and Long-term Debt

 

Details of long-term debt as of March 31, 2014 and September 30, 2013 are as follows (dollars in thousands):

 

 

 

As of

 

 

 

 

 

March 31,
2014

 

September 30,
2013

 

Interest Rates

 

ABL facility

 

$

 

$

76,000

 

(i)  Prime plus (0.50% to 0.75%) or;

 

 

 

 

 

 

 

(ii)  LIBOR(a) plus (1.50% to 1.75%)

 

Senior notes due Nov. 2019

 

750,000

 

750,000

 

6.875%

 

Senior notes due Jun. 2022(b)

 

857,915

 

858,381

 

5.750%(b)

 

Senior notes due Nov. 2023

 

200,000

 

 

5.50%

 

Other, due 2014-2015(c)

 

720

 

1,310

 

4.93% to 5.79%

 

Total

 

$

1,808,635

 

$

1,685,691

 

 

 

 

 

 

 

 

 

 

 

Capital leases and other

 

4,875

 

5,012

 

 

 

Less: current portion

 

1,610

 

78,018

 

 

 

Total long-term debt

 

$

1,811,900

 

$

1,612,685

 

 

 

 


(a)         London Interbank Offered Rate (“LIBOR”).

(b)         Includes unamortized premium of $7.9 million and $8.4 million as of March 31, 2014 and September 30, 2013, respectively, related to notes issued in September 2012 with an aggregate principal amount of $150.0 million. The 5.75% interest rate relates to notes in the aggregate principal amount of $850.0 million.

(c)          Represents pre-acquisition debt of Pro-Duo NV and Sinelco Group BVBA (“Sinelco”).

 

In November 2006, the Company, through its subsidiaries (Sally Investment Holdings LLC and Sally Holdings LLC, which we refer to as “Sally Investment” and “Sally Holdings,” respectively) incurred $1,850.0 million of indebtedness in connection with the Company’s separation from its former parent, Alberto-Culver. Please see our Annual Report on Form 10-K for the fiscal year ended September 30, 2013 for additional information about the Company’s separation from Alberto-Culver.

 

In the fiscal year ended September 30, 2011, Sally Holdings entered into a $400 million, five-year asset-based senior secured loan facility (the “ABL facility”). The availability of funds under the ABL facility, as amended on June 8, 2012, is subject to a customary borrowing base comprised of: (i) a specified percentage of our eligible credit card and trade accounts receivable (as defined therein) and (ii) a specified percentage of our eligible inventory (as defined therein), and reduced by (iii) certain customary reserves and adjustments and by certain outstanding letters of credit. The ABL facility includes a $25.0 million Canadian sub-facility for our Canadian operations.

 

On July 26, 2013, the Company, Sally Holdings and other parties to the ABL facility entered into a second amendment to the ABL facility which, among other things, increased the maximum availability under the ABL facility to $500.0 million (subject to borrowing base limitations), reduced pricing, relaxed the restrictions regarding the making of Restricted Payments, extended the maturity to July 26, 2018 and improved certain other covenant terms. At March 31, 2014, the Company had $478.1 million available for borrowing under the ABL facility, including the Canadian sub-facility. Borrowings under the ABL facility are secured by the accounts, inventory and credit card receivables of our domestic subsidiaries and Canadian subsidiaries (in the case of borrowings under the Canadian sub-facility), together with general intangibles and certain other personal property of our domestic subsidiaries and Canadian subsidiaries (in the case of borrowings under the Canadian sub-facility) relating to the accounts and inventory, as well as deposit accounts of our domestic subsidiaries and Canadian subsidiaries (in the case of borrowings under the Canadian sub-facility) and, solely with respect to borrowings by SBH Finance B.V., intercompany notes owed to SBH Finance B.V. by our foreign subsidiaries. In addition, the terms of the ABL facility contain a commitment fee of 0.25% on the unused portion of the facility.

 

In the fiscal year ended September 30, 2012, Sally Holdings and Sally Capital Inc. (collectively, the “Issuers”), both indirect wholly-owned subsidiaries of the Company, issued $750.0 million aggregate principal amount of their 6.875% Senior Notes due 2019 (the “senior notes due 2019”) and $850.0 million aggregate principal amount of their 5.75% Senior Notes due 2022 (the “senior notes due 2022”), including notes in the aggregate principal amount of $150.0 million which were issued at par plus a premium. Such premium is being amortized over the term of the notes using the effective interest method. The net proceeds

 

17



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

from these debt issuances were used to retire outstanding indebtedness in the aggregate principal amount of approximately $1,391.9 million and for general corporate purposes.

 

On October 29, 2013, the Issuers issued $200.0 million aggregate principal amount of their 5.5% Senior Notes due 2023 (the “senior notes due 2023”). The senior notes due 2023 bear interest at an annual rate of 5.5% and were issued at par. The Company used the net proceeds from this debt issuance, approximately $196.3 million, to repay borrowings outstanding under the ABL facility of $88.5 million and intends to use the remaining amount for general corporate purposes.

 

The senior notes due 2019, the senior notes due 2022 and the senior notes due 2023, which we refer to collectively as “the Notes” or “the senior notes due 2019, 2022 and 2023,” are unsecured obligations of the Issuers and are jointly and severally guaranteed by the Company and Sally Investment, and by each material domestic subsidiary of the Company. Interest on the senior notes due 2019, 2022 and 2023 is payable semi-annually, during the Company’s first and third fiscal quarters. Please see Note 14 for certain condensed financial statement data pertaining to Sally Beauty, the Issuers, the guarantor subsidiaries and the non-guarantor subsidiaries.

 

The senior notes due 2019 carry optional redemption features whereby the Company has the option to redeem the notes, in whole or in part, on or after November 15, 2017 at par, plus accrued and unpaid interest, if any, and on or after November 15, 2015 at par plus a premium declining ratably to par, plus accrued and unpaid interest, if any. Prior to November 15, 2015, the notes may be redeemed, in whole or in part, at a redemption price equal to par plus a make-whole premium as provided in the indenture, plus accrued and unpaid interest, if any. In addition, on or prior to November 15, 2014, the Company has the right to redeem at par plus a specified premium, plus accrued and unpaid interest, if any, up to 35% of the aggregate principal amount of notes originally issued, subject to certain limitations, with the proceeds from certain kinds of equity offerings, as defined in the indenture.

 

The senior notes due 2022 carry optional redemption features whereby the Company has the option to redeem the notes, in whole or in part, on or after June 1, 2020 at par, plus accrued and unpaid interest, if any, and on or after June 1, 2017 at par plus a premium declining ratably to par, plus accrued and unpaid interest, if any. Prior to June 1, 2017, the notes may be redeemed, in whole or in part, at a redemption price equal to par plus a make-whole premium as provided in the indenture, plus accrued and unpaid interest, if any. In addition, on or prior to June 1, 2015, the Company has the right to redeem at par plus a specified premium, plus accrued and unpaid interest, if any, up to 35% of the aggregate principal amount of notes originally issued, subject to certain limitations, with the proceeds from certain kinds of equity offerings, as defined in the indenture.

 

The senior notes due 2023 carry optional redemption features whereby the Company has the option to redeem the notes, in whole or in part, on or after November 1, 2021 at par, plus accrued and unpaid interest, if any, and on or after November 1, 2018 at par plus a premium declining ratably to par, plus accrued and unpaid interest, if any. Prior to November 1, 2018, the notes may be redeemed, in whole or in part, at a redemption price equal to par plus a make-whole premium as provided in the indenture, plus accrued and unpaid interest, if any. In addition, on or prior to November 1, 2016, the Company has the right to redeem at par plus a specified premium, plus accrued and unpaid interest, if any, up to 35% of the aggregate principal amount of notes originally issued, subject to certain limitations, with the proceeds from certain kinds of equity offerings, as defined in the indenture.

 

Maturities of the Company’s long-term debt are as follows as of March 31, 2014 (in thousands):

 

Twelve months ending March 31:

 

 

 

2015

 

$

690

 

2016

 

30

 

2017-2019

 

 

Thereafter

 

1,807,915

 

 

 

$

1,808,635

 

Capital lease obligations

 

4,875

 

Less: current portion

 

1,610

 

Total

 

$

1,811,900

 

 

We are a holding company and do not have any material assets or operations other than ownership of equity interests of our subsidiaries. The agreements and instruments governing the debt of Sally Holdings and its subsidiaries contain material limitations on their ability to pay dividends and other restricted payments to us which, in turn, constitute material limitations on our ability to pay dividends and other payments to our stockholders.

 

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Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

The ABL facility does not contain any restriction against the incurrence of unsecured indebtedness. However, the ABL facility restricts the incurrence of secured indebtedness if, after giving effect to the incurrence of such secured indebtedness, the Company’s Secured Leverage Ratio exceeds 4.0 to 1.0. At March 31, 2014, the Company’s Secured Leverage Ratio was less than 0.1 to 1.0. Secured Leverage Ratio is defined as the ratio of (i) Secured Funded Indebtedness (as defined in the ABL facility) to (ii) Consolidated EBITDA, as defined in the ABL facility.

 

The ABL facility is pre-payable and the commitments thereunder may be terminated, in whole or in part, at any time without penalty or premium.

 

The indentures governing the senior notes due 2019, 2022 and 2023 contain terms which restrict the ability of Sally Beauty’s subsidiaries to incur additional indebtedness. However, in addition to certain other material exceptions, the Company may incur additional indebtedness under the indentures if its Consolidated Coverage Ratio, after giving pro forma effect to the incurrence of such indebtedness, exceeds 2.0 to 1.0 (“Incurrence Test”). At March 31, 2014, the Company’s Consolidated Coverage Ratio was approximately 5.8 to 1.0. Consolidated Coverage Ratio is defined as the ratio of (i) Consolidated EBITDA, as defined in the indentures, for the period containing the most recent four consecutive fiscal quarters, to (ii) Consolidated Interest Expense, as defined in the indentures, for such period.

 

The indentures governing the senior notes due 2019, 2022 and 2023 restrict Sally Holdings and its subsidiaries from making certain dividends and distributions to equity holders and certain other restricted payments (hereafter, a “Restricted Payment” or “Restricted Payments”) to us. However, the indentures permit the making of such Restricted Payments if, at the time of the making of such Restricted Payment, the Company satisfies the Incurrence Test as described above and the cumulative amount of all Restricted Payments made since the issue date of the applicable senior notes does not exceed the sum of: (i) 50% of Sally Holdings’ and its subsidiaries’ cumulative consolidated net earnings since July 1, 2006, plus (ii) the proceeds from the issuance of certain equity securities or conversions of indebtedness to equity, in each case, since the issue date of the applicable senior notes plus (iii) the net reduction in investments in unrestricted subsidiaries since the issue date of the applicable senior notes plus (iv) the return of capital with respect to any sales or dispositions of certain minority investments since the issue date of the applicable senior notes. Further, in addition to certain other baskets, the indentures permit the Company to make additional Restricted Payments in an unlimited amount if, after giving pro forma effect to the incurrence of any indebtedness to make such Restricted Payment, the Company’s Consolidated Total Leverage Ratio (as defined in the indentures) is less than 3.25 to 1.00. At March 31, 2014, the Company’s Consolidated Total Leverage Ratio was approximately 2.8 to 1.0. Consolidated Total Leverage Ratio is defined as the ratio of (i) Consolidated Total Indebtedness, as defined in the indentures, minus cash and cash equivalents on-hand up to $100.0 million, in each case, as of the end of the most recently-ended fiscal quarter to (ii) Consolidated EBITDA, as defined in the indentures, for the period containing the most recent four consecutive fiscal quarters.

 

The ABL facility also restricts the making of Restricted Payments. More specifically, under the ABL facility, Sally Holdings may make Restricted Payments if availability under the ABL facility equals or exceeds certain thresholds, and no default then exists under the facility. For Restricted Payments up to $30.0 million during each fiscal year, borrowing availability must equal or exceed the lesser of $75.0 million or 15% of the borrowing base for 45 days prior to such Restricted Payment. For Restricted Payments in excess of that amount, borrowing availability must equal or exceed the lesser of $100.0 million or 20% of the borrowing base for 45 days prior to such Restricted Payment and the Consolidated Fixed Charge Coverage Ratio (as defined below) must equal or exceed 1.1 to 1.0. Further, if borrowing availability equals or exceeds the lesser of $150.0 million or 30% of the borrowing base, Restricted Payments are not limited by the Consolidated Fixed Charge Coverage Ratio test. The Consolidated Fixed Charge Coverage Ratio is defined as the ratio of (i) Consolidated EBITDA (as defined in the ABL facility) during the trailing twelve-month period preceding such proposed Restricted Payment minus certain unfinanced capital expenditures made during such period and income tax payments paid in cash during such period to (ii) fixed charges (as defined in the ABL facility). In addition, during any period that borrowing availability under the ABL facility is less than the greater of $40.0 million or 10% of the borrowing base, the level of the Consolidated Fixed Charge Coverage Ratio that the Company must satisfy is 1.0 to 1.0. As of March 31, 2014, the Consolidated Fixed Charge Coverage Ratio was approximately 4.0 to 1.0.

 

When used in this Quarterly Report, the phrase “Consolidated EBITDA” is intended to have the meaning ascribed to such phrase in the ABL facility or the indentures governing the senior notes due 2019, 2022 and 2023, as appropriate. EBITDA is not a recognized measurement under GAAP and should not be considered a substitute for financial performance and liquidity measures determined in accordance with GAAP, such as net earnings, operating earnings and operating cash flows.

 

The ABL facility and the indentures governing the senior notes due 2019, 2022 and 2023 contain other covenants regarding restrictions on the disposition of assets, the granting of liens and security interests, the prepayment of certain indebtedness, and other matters and customary events of default, including customary cross-default and/or cross-acceleration provisions. As of March 31, 2014, all the net assets of our consolidated subsidiaries were unrestricted from transfer under our credit arrangements.

 

19



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

11.    Derivative Instruments and Hedging Activities

 

Risk Management Objectives of Using Derivative Instruments

 

The Company is exposed to a wide variety of risks, including risks arising from changing economic conditions. The Company manages its exposure to certain economic risks (including liquidity, credit risk, and changes in foreign currency exchange rates and in interest rates) primarily: (a) by closely managing its cash flows from operating and investing activities and the amounts and sources of its debt obligations; (b) by assessing periodically the creditworthiness of its business partners; and (c) through the use of derivative instruments from time to time (including, foreign exchange contracts and interest rate swaps) by Sally Holdings.

 

The Company from time to time uses foreign exchange contracts (including foreign currency forwards and options), as part of its overall economic risk management strategy, to fix the amount of certain foreign assets and obligations relative to its functional and reporting currency (the U.S. dollar) or relative to the functional currency of certain of its consolidated subsidiaries, or to add stability to cash flows resulting from its net investments (including intercompany notes not permanently invested) and earnings denominated in foreign currencies. The Company’s foreign currency exposures at times offset each other, sometimes providing a natural hedge against its foreign currency risk. In connection with the remaining foreign currency risk, the Company uses foreign exchange contracts to effectively fix the foreign currency exchange rate applicable to specific anticipated foreign currency-denominated cash flows, thus limiting the potential fluctuations in such cash flows as a result of foreign currency market movements.

 

The Company from time to time has used interest rate swaps, as part of its overall economic risk management strategy, to add stability to the interest payments due in connection with its debt obligations. At March 31, 2014, our exposure to interest rate fluctuations relates to interest payments under the ABL facility, if any, and the Company held no derivatives instruments in connection therewith.

 

As of March 31, 2014, the Company did not purchase or hold any derivative instruments for trading or speculative purposes.

 

Designated Cash Flow Hedges

 

The Company may use from time to time derivative instruments designated as hedges to manage its exposure to interest rate or foreign currency exchange rate movements, as appropriate. The Company did not purchase or hold any such derivatives at March 31, 2014.

 

Non-designated Cash Flow Hedges

 

The Company may use from time to time derivative instruments (such as foreign exchange contracts and interest rate swaps) not designated as hedges or that do not meet the requirements for hedge accounting to manage its exposure to interest rate or foreign currency exchange rate movements, as appropriate.

 

The Company uses foreign exchange contracts including, at March 31, 2014, foreign currency options with an aggregate notional amount of $6.0 million to manage the exposure to the U.S. dollar resulting from certain of our Sinelco Group subsidiaries’ purchases of merchandise from third-party suppliers. Sinelco’s functional currency is the Euro. These foreign currency options enable Sinelco to buy U.S. dollars at a contractual exchange rate of 1.32, are with a single counterparty and expire ratably through September 15, 2014.

 

The Company also uses foreign exchange contracts to mitigate its exposure to changes in foreign currency exchange rates in connection with certain intercompany balances not permanently invested. As such, at March 31, 2014, we held: (a) a foreign currency forward which enables us to sell approximately €19.7 million ($27.1 million, at the March 31, 2014 exchange rate) at the contractual exchange rate of 1.3743, (b) a foreign currency forward which enables us to sell approximately $3.8 million Canadian dollars ($3.4 million, at the March 31, 2014 exchange rate) at the contractual exchange rate of 1.1060, (c) a foreign currency forward which enables us to buy approximately $10.9 million Canadian dollars ($9.9 million, at the March 31, 2014 exchange rate) at the contractual exchange rate of 1.1053, (d) a foreign currency forward which enables us to sell approximately 20.9 million Mexican pesos ($1.6 million, at the March 31, 2014 exchange rate) at the contractual exchange rate of 13.0825 and (e) foreign currency forwards which enable us to sell approximately £7.4 million ($12.4 million, at the March 31, 2014 exchange rate) at the weighted average contractual exchange rate of 1.6484. The foreign currency forwards discussed in this paragraph are with a single counterparty (not the same party as the counterparty on the options discussed in the preceding paragraph). Of the foreign exchange contracts discussed in this paragraph, foreign currency forwards with an aggregate notional amount of £2.0

 

20



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

million ($3.4 million, at the March 31, 2014 exchange rate) expire ratably through September 10, 2014. The remaining foreign currency forwards discussed in this paragraph expire on or before June 30, 2014.

 

In addition, the Company uses foreign exchange contracts including, at March 31, 2014, foreign currency forwards with an aggregate notional amount of €1.8 million ($2.5 million, at the March 31, 2014 exchange rate) to mitigate the exposure to the British pound sterling resulting from the sale of products and services among certain European subsidiaries of the Company. The foreign currency forwards discussed in this paragraph enable the Company to buy British pound sterling in exchange for Euro currency at the weighted average contractual exchange rate of 0.8431, are with a single counterparty (the same counterparty as that on the foreign currency forwards discussed in the immediately preceding paragraph) and expire ratably through September 30, 2014.

 

The Company’s foreign exchange contracts are not designated as hedges and do not currently meet the requirements for hedge accounting. Accordingly, the changes in the fair value (i.e., marked-to-market adjustments) of these derivative instruments, which are adjusted quarterly, are recorded in selling, general and administrative expenses in our consolidated statements of earnings. Selling, general and administrative expenses reflect net losses of $0.4 million and net gains of $1.3 million for the three months ended March 31, 2014 and 2013, respectively, and, for the six months ended March 31, 2014 and 2013, net losses of $1.3 million and net gains of $0.3 million, respectively, including marked-to-market adjustments, in connection with all of the Company’s foreign currency derivatives.

 

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Company’s consolidated balance sheet as of March 31, 2014 and September 30, 2013 (in thousands):

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Classification

 

March 31,
2014

 

September 30,
2013

 

Classification

 

March 31,
2014

 

September 30,
2013

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

None

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current assets

 

$

63

 

$

152

 

Accrued liabilities

 

$

221

 

$

36

 

 

 

 

 

$

63

 

$

152

 

 

 

$

221

 

$

36

 

 

The table below presents the effect of the Company’s derivative financial instruments on the Company’s consolidated statements of earnings for the three months ended March 31, 2014 and 2013 (in thousands):

 

Derivatives
Designated as
Hedging Instruments

 

Amount of Gain or (Loss) Recognized in OCI
on Derivative (Effective Portion), net of tax

 

Amount of Gain or (Loss) Reclassified from
Accumulated OCI into Income (Effective Portion)

 

None

 

 

 

 

 

 

 

 

 

Classification of Gain or

 

Amount of Gain or (Loss) Recognized in Income on
Derivatives

 

Derivatives Not Designated as

 

(Loss) Recognized into

 

Three Months Ended March 31,

 

Hedging Instruments

 

Income

 

2014

 

2013

 

Foreign exchange contracts

 

Selling, general and administrative expenses

 

$

(438

)

$

1,305

 

 

21



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

The table below presents the effect of the Company’s derivative financial instruments on the Company’s consolidated statements of earnings for the six months ended March 31, 2014 and 2013 (in thousands):

 

Derivatives
Designated as
Hedging Instruments

 

Amount of Gain or (Loss) Recognized in OCI
on Derivative (Effective Portion), net of tax

 

Amount of Gain or (Loss) Reclassified from
Accumulated OCI into Income (Effective Portion)

 

None

 

 

 

 

 

 

 

 

Classification of Gain or

 

Amount of Gain or (Loss) Recognized in Income on
Derivatives

 

Derivatives Not Designated as

 

(Loss) Recognized into

 

Six Months Ended March 31,

 

Hedging Instruments

 

Income

 

2014

 

2013

 

Foreign exchange contracts

 

Selling, general and administrative expenses

 

$

(1,296

)

$

285

 

 

Credit-risk-related Contingent Features

 

At March 31, 2014, the aggregate fair value of all foreign exchange contracts held which consisted of derivative instruments in a liability position was $0.2 million. The Company was under no obligation to post and had not posted any collateral related to the agreements in a liability position.

 

The counterparties to all our derivative instruments are deemed by the Company to be of substantial resources and strong creditworthiness. However, these transactions result in exposure to credit risk in the event of default by a counterparty. The financial crisis that has affected the banking systems and financial markets in recent years resulted in many well-known financial institutions becoming less creditworthy or having diminished liquidity which could expose us to an increased level of counterparty credit risk. In the event that a counterparty defaults in its obligation under our derivative instruments, we could incur substantial financial losses. However, at the present time, no such losses are deemed probable.

 

12.   Income Taxes

 

In January 2012, the IRS concluded the field work associated with their examination of the Company’s consolidated federal income tax returns for the fiscal years ended September 30, 2007 and 2008 and issued their examination report. The Company is appealing certain disputed items and it does not anticipate the ultimate resolution of these items to have a material impact on the Company’s financial statements.

 

The IRS is currently conducting an examination of the Company’s consolidated federal income tax returns for the fiscal years ended September 30, 2009, 2010 and 2011. The IRS had previously audited the Company’s consolidated federal income tax returns through the tax year ended September 30, 2006, thus our statute remains open from the year ended September 30, 2007 forward. Our foreign subsidiaries are impacted by various statutes of limitations, which are generally open from 2008 forward. Generally, states’ statutes in the United States are open for tax reviews from 2007 forward.

 

22



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

13.   Business Segments

 

The Company’s business is organized into two separate segments: (i) Sally Beauty Supply, a domestic and international chain of cash and carry retail stores which offers professional beauty supplies to both salon professionals and retail customers primarily in North America, Puerto Rico, and parts of South America and Europe and (ii) BSG, including its franchise-based business Armstrong McCall, a full service beauty supply distributor which offers professional brands of beauty products directly to salons and salon professionals through its own sales force and professional-only stores (including franchise stores) in partially exclusive geographical territories in North America, Puerto Rico and parts of Europe.

 

The accounting policies of both of our business segments are the same as described in the summary of significant accounting policies contained in Note 2 of the “Notes to Consolidated Financial Statements” in “Item 8 - Financial Statements and Supplementary Data” contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013. Sales between segments, which were eliminated in consolidation, were not material during the three and six months ended March 31, 2014 and 2013.

 

Segment data for the three and six months ended March 31, 2014 and 2013 is as follows (in thousands):

 

 

 

Three Months Ended
March 31,

 

Six Months Ended
March 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net sales:

 

 

 

 

 

 

 

 

 

Sally Beauty Supply

 

$

569,618

 

$

555,977

 

$

1,142,973

 

$

1,114,793

 

BSG

 

349,853

 

342,262

 

716,962

 

688,887

 

Total

 

$

919,471

 

$

898,239

 

$

1,859,935

 

$

1,803,680

 

Earnings before provision for income taxes:

 

 

 

 

 

 

 

 

 

Segment operating profit:

 

 

 

 

 

 

 

 

 

Sally Beauty Supply

 

$

105,474

 

$

105,956

 

$

209,017

 

$

212,043

 

BSG

 

50,882

 

49,821

 

105,717

 

98,573

 

Segment operating profit

 

156,356

 

155,777

 

314,734

 

310,616

 

Unallocated expenses (a)

 

(29,000

)

(24,678

)

(57,063

)

(48,595

)

Share-based compensation expense

 

(3,268

)

(3,262

)

(11,790

)

(12,313

)

Interest expense

 

(29,258

)

(26,779

)

(57,747

)

(53,503

)

Earnings before provision for income taxes

 

$

94,830

 

$

101,058

 

$

188,134

 

$

196,205

 

 


(a)       Unallocated expenses consist of corporate and shared costs.

 

23



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

14.   Parent, Issuers, Guarantor and Non-Guarantor Condensed Consolidated Financial Statements

 

The following consolidating financial information presents the condensed consolidating balance sheets as of March 31, 2014 and September 30, 2013, and the related condensed consolidating statements of earnings and condensed consolidating statements of comprehensive income for the three and six months ended March 31, 2014 and 2013, and condensed consolidating statements of cash flows for the six months ended March 31, 2014 and 2013 of: (i) Sally Beauty Holdings, Inc., or the “Parent;” (ii) Sally Holdings LLC and Sally Capital Inc., or the “Issuers;” (iii) the guarantor subsidiaries; (iv) the non-guarantor subsidiaries; (v) elimination entries necessary for consolidation purposes; and (vi) Sally Beauty on a consolidated basis.

 

Investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. Separate financial statements and other disclosures with respect to the subsidiary guarantors have not been provided as management believes the following information is sufficient, as guarantor subsidiaries are 100% indirectly owned by the Parent and all guarantees are full and unconditional. Additionally, the accounts, inventory, credit card receivables, deposit accounts, certain intercompany notes and certain other personal property of the guarantor subsidiaries relating to the inventory and accounts are pledged under the ABL facility and consequently may not be available to satisfy the claims of general creditors.

 

24



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

Condensed Consolidating Balance Sheet

March 31, 2014

(In thousands)

 

 

 

Parent

 

Sally
Holdings
LLC and
Sally Capital
Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Consolidating
Eliminations

 

Sally Beauty
Holdings,
Inc. and
Subsidiaries

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

125,504

 

$

38,880

 

$

38,067

 

$

 

$

202,451

 

Trade and other accounts receivable, less allowance for doubtful accounts

 

 

 

55,767

 

34,642

 

 

90,409

 

Due from affiliates

 

 

 

1,349,801

 

104

 

(1,349,905

)

 

Inventory

 

 

 

609,478

 

210,274

 

 

819,752

 

Other current assets

 

4,713

 

196

 

12,609

 

15,439

 

 

32,957

 

Deferred income tax assets, net

 

(391

)

(379

)

31,504

 

1,726

 

 

32,460

 

Property and equipment, net

 

1

 

 

149,603

 

79,584

 

 

229,188

 

Investment in subsidiaries

 

357,129

 

2,685,617

 

391,038

 

 

(3,433,784

)

 

Goodwill and other intangible assets, net

 

 

 

477,745

 

183,130

 

 

660,875

 

Other assets

 

 

31,286

 

1,260

 

5,387

 

 

37,933

 

Total assets

 

$

361,452

 

$

2,842,224

 

$

3,117,685

 

$

568,353

 

$

(4,783,689

)

$

2,106,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ (Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

6

 

$

 

$

208,821

 

$

57,029

 

$

 

$

265,856

 

Due to affiliates

 

630,514

 

633,226

 

104

 

86,061

 

(1,349,905

)

 

Accrued liabilities

 

339

 

40,884

 

119,368

 

26,943

 

 

187,534

 

Income taxes payable

 

964

 

3,456

 

1

 

2,794

 

 

7,215

 

Long-term debt

 

 

1,807,915

 

322

 

5,273

 

 

1,813,510

 

Other liabilities

 

 

 

24,566

 

2,580

 

 

27,146

 

Deferred income tax liabilities, net

 

(1,544

)

(386

)

78,886

 

(3,365

)

 

73,591

 

Total liabilities

 

630,279

 

2,485,095

 

432,068

 

177,315

 

(1,349,905

)

2,374,852

 

Total stockholders’ (deficit) equity

 

(268,827

)

357,129

 

2,685,617

 

391,038

 

(3,433,784

)

(268,827

)

Total liabilities and stockholders’ (deficit) equity

 

$

361,452

 

$

2,842,224

 

$

3,117,685

 

$

568,353

 

$

(4,783,689

)

$

2,106,025

 

 

25



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

Condensed Consolidating Balance Sheet

September 30, 2013

(In thousands)

 

 

 

Parent

 

Sally
Holdings
LLC and
Sally Capital
Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Consolidating
Eliminations

 

Sally Beauty
Holdings,
Inc. and
Subsidiaries

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

 

$

16,337

 

$

30,778

 

$

 

$

47,115

 

Trade and other accounts receivable, less allowance for doubtful accounts

 

137

 

 

56,432

 

39,676

 

 

96,245

 

Due from affiliates

 

 

 

1,215,625

 

813

 

(1,216,438

)

 

Inventory

 

 

 

605,727

 

202,586

 

 

808,313

 

Other current assets

 

3,375

 

380

 

13,253

 

14,650

 

 

31,658

 

Deferred income tax assets, net

 

(391

)

(379

)

31,504

 

1,752

 

 

32,486

 

Property and equipment, net

 

2

 

 

152,982

 

76,556

 

 

229,540

 

Investment in subsidiaries

 

237,696

 

2,530,825

 

388,569

 

 

(3,157,090

)

 

Goodwill and other intangible assets, net

 

 

 

483,583

 

184,792

 

 

668,375

 

Other assets

 

 

29,725

 

1,254

 

5,375

 

 

36,354

 

Total assets

 

$

240,819

 

$

2,560,551

 

$

2,965,266

 

$

556,978

 

$

(4,373,528

)

$

1,950,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ (Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

 

$

210,661

 

$

62,795

 

$

 

$

273,456

 

Due to affiliates

 

545,658

 

599,246

 

813

 

70,721

 

(1,216,438

)

 

Accrued liabilities

 

191

 

36,341

 

121,426

 

26,804

 

 

184,762

 

Income taxes payable

 

 

3,319

 

1

 

3,097

 

 

6,417

 

Long-term debt

 

 

1,684,381

 

181

 

6,141

 

 

1,690,703

 

Other liabilities

 

 

 

22,043

 

2,243

 

 

24,286

 

Deferred income tax liabilities, net

 

(1,551

)

(432

)

79,316

 

(3,392

)

 

73,941

 

Total liabilities

 

544,298

 

2,322,855

 

434,441

 

168,409

 

(1,216,438

)

2,253,565

 

Total stockholders’ (deficit) equity

 

(303,479

)

237,696

 

2,530,825

 

388,569

 

(3,157,090

)

(303,479

)

Total liabilities and stockholders’ (deficit) equity

 

$

240,819

 

$

2,560,551

 

$

2,965,266

 

$

556,978

 

$

(4,373,528

)

$

1,950,086

 

 

26



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

Condensed Consolidating Statement of Earnings and Comprehensive Income
Three Months Ended March 31, 2014

(In thousands)

 

 

 

Parent

 

Sally Holdings
LLC and Sally
Capital Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Consolidating
Eliminations

 

Sally Beauty
Holdings, Inc.
and Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

 

$

741,271

 

$

178,200

 

$

 

$

919,471

 

Related party sales

 

 

 

656

 

 

(656

)

 

Cost of products sold and distribution expenses

 

 

 

368,230

 

95,501

 

(656

)

463,075

 

Gross profit

 

 

 

373,697

 

82,699

 

 

456,396

 

Selling, general and administrative expenses

 

2,512

 

83

 

236,085

 

74,133

 

 

312,813

 

Depreciation and amortization

 

 

 

14,028

 

5,467

 

 

19,495

 

Operating earnings (loss)

 

(2,512

)

(83

)

123,584

 

3,099

 

 

124,088

 

Interest expense

 

 

29,184

 

2

 

72

 

 

29,258

 

Earnings (loss) before provision for income taxes

 

(2,512

)

(29,267

)

123,582

 

3,027

 

 

94,830

 

Provision (benefit) for income taxes

 

(949

)

(11,365

)

46,752

 

1,900

 

 

36,338

 

Equity in earnings of subsidiaries, net of tax

 

60,055

 

77,957

 

1,127

 

 

(139,139

)

 

Net earnings

 

58,492

 

60,055

 

77,957

 

1,127

 

(139,139

)

58,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

(2,715

)

 

(2,715

)

Total comprehensive income (loss)

 

$

58,492

 

$

60,055

 

$

77,957

 

$

(1,588

)

$

(139,139

)

$

55,777

 

 

27



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

Condensed Consolidating Statement of Earnings and Comprehensive Income
Three Months Ended March 31, 2013

(In thousands)

 

 

 

Parent

 

Sally Holdings
LLC and Sally
Capital Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Consolidating
Eliminations

 

Sally Beauty
Holdings, Inc.
and Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

 

$

729,330

 

$

168,909

 

$

 

$

898,239

 

Related party sales

 

 

 

652

 

 

(652

)

 

Cost of products sold and distribution expenses

 

 

 

361,846

 

92,591

 

(652

)

453,785

 

Gross profit

 

 

 

368,136

 

76,318

 

 

444,454

 

Selling, general and administrative expenses

 

2,657

 

85

 

226,988

 

69,640

 

 

299,370

 

Depreciation and amortization

 

 

 

12,432

 

4,815

 

 

17,247

 

Operating earnings (loss)

 

(2,657

)

(85

)

128,716

 

1,863

 

 

127,837

 

Interest expense

 

 

26,659

 

12

 

108

 

 

26,779

 

Earnings (loss) before provision for income taxes

 

(2,657

)

(26,744

)

128,704

 

1,755

 

 

101,058

 

Provision (benefit) for income taxes

 

(1,096

)

(10,387

)

46,675

 

977

 

 

36,169

 

Equity in earnings of subsidiaries, net of tax

 

66,450

 

82,807

 

778

 

 

(150,035

)

 

Net earnings

 

64,889

 

66,450

 

82,807

 

778

 

(150,035

)

64,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

(11,794

)

 

(11,794

)

Total comprehensive income (loss)

 

$

64,889

 

$

66,450

 

$

82,807

 

$

(11,016

)

$

(150,035

)

$

53,095

 

 

28



Table of Contents

 

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

Condensed Consolidating Statement of Earnings and Comprehensive Income
Six Months Ended March 31, 2014

(In thousands)

 

 

 

Parent

 

Sally Holdings
LLC and Sally
Capital Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Consolidating
Eliminations

 

Sally Beauty
Holdings, Inc.
and Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

 

$

1,484,547

 

$

375,388

 

$

 

$

1,859,935

 

Related party sales

 

 

 

1,459

 

 

(1,459

)

 

Cost of products sold and distribution expenses

 

 

 

742,911

 

201,561

 

(1,459

)

943,013

 

Gross profit

 

 

 

743,095

 

173,827

 

 

916,922

 

Selling, general and administrative expenses

 

4,975

 

195

 

477,966

 

149,155

 

 

632,291

 

Depreciation and amortization

 

 

 

27,898

 

10,852

 

 

38,750

 

Operating earnings (loss)

 

(4,975

)

(195

)

237,231

 

13,820

 

 

245,881

 

Interest expense

 

 

57,609

 

3

 

135

 

 

57,747

 

Earnings (loss) before provision for income taxes

 

(4,975

)

(57,804

)

237,228

 

13,685

 

 

188,134

 

Provision (benefit) for income taxes

 

(1,881

)

(22,445

)

90,732

 

5,241

 

 

71,647

 

Equity in earnings of subsidiaries, net of tax

 

119,581

 

154,940

 

8,444

 

 

(282,965

)

 

Net earnings

 

116,487