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, 2016
-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 |
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36-2257936 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
3001 Colorado Boulevard |
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Denton, Texas |
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76210 |
(Address of principal executive
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(Zip Code) |
Registrants 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 |
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(Do not check if a smaller
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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 29, 2016, there were 146,314,383 shares of the issuers common stock outstanding.
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:
· anticipating and effectively responding to changes in consumer and professional stylist preferences and buying trends in a timely manner;
· the success of our strategic initiatives, including our store refresh program and increased marketing efforts, to enhance the customer experience, attract new customers, drive brand awareness and improve customer loyalty;
· the highly competitive nature of, and the increasing consolidation of, the beauty products distribution industry;
· the timing and acceptance of new product introductions;
· shifts in product mix sold during any period;
· 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;
· our dependence upon manufacturers who have developed or could develop their own distribution businesses which compete directly with ours;
· the possibility of material interruptions in the supply of products by our third-party manufacturers or distributors or increases in the prices of the products we purchase from our third-party manufacturers or distributors;
· products sold by us being found to be defective in labeling or content;
· compliance with current 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. franchise-based business, which we refer to as Armstrong McCall;
· successfully identifying acquisition candidates and successfully completing desirable acquisitions;
· integrating acquired businesses;
· the success of our existing stores, and our ability to increase sales at existing stores;
· opening and operating new stores profitably;
· the volume of traffic to our stores;
· the impact of the health of the economy upon our business;
· the success of our cost control plans;
· rising labor and rental costs;
· protecting our intellectual property rights, particularly our trademarks;
· the risk that our products may infringe on the intellectual property rights of others or that we may be required to defend our intellectual property rights;
· conducting business outside the United States;
· successfully updating and integrating our information technology systems;
· disruption in our information technology systems;
· a significant data security breach, including misappropriation of our customers, employees or suppliers 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 managements attention required to investigate and remediate a data security breach and to continuously upgrade our information technology security systems to address evolving cyber security threats;
· the ultimate determination of the extent or scope of the potential liabilities relating to our past data security incidents;
· our ability to attract and retain highly skilled management and other personnel;
· 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 ability to execute and implement our share repurchase program;
· 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; 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 I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, as filed with the Securities and Exchange Commission, or SEC, and the other periodic reports that we file with the SEC. 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.
WHERE YOU CAN FIND MORE INFORMATION
Sally Beautys 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 SEC.
PART I FINANCIAL INFORMATION
The following consolidated balance sheets as of March 31, 2016 and September 30, 2015, and the consolidated statements of earnings and consolidated statements of comprehensive income for the three and six months ended March 31, 2016 and 2015, and consolidated statements of cash flows for the six months ended March 31, 2016 and 2015 are those of Sally Beauty Holdings, Inc. and its consolidated subsidiaries.
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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March 31, |
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March 31, |
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2016 |
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2015 |
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2016 |
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2015 |
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Net sales |
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$ |
980,067 |
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$ |
937,755 |
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$ |
1,978,099 |
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$ |
1,902,222 |
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Cost of products sold and distribution expenses |
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492,593 |
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470,303 |
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996,576 |
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961,001 |
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Gross profit |
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487,474 |
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467,452 |
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981,523 |
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941,221 |
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Selling, general and administrative expenses |
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341,311 |
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317,456 |
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681,039 |
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654,410 |
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Depreciation and amortization |
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23,705 |
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20,989 |
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47,091 |
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41,567 |
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Operating earnings |
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122,458 |
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129,007 |
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253,393 |
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245,244 |
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Interest expense |
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26,971 |
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29,228 |
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90,914 |
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58,469 |
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Earnings before provision for income taxes |
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95,487 |
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99,779 |
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162,479 |
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186,775 |
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Provision for income taxes |
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35,328 |
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38,244 |
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60,077 |
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70,331 |
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Net earnings |
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$ |
60,159 |
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$ |
61,535 |
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$ |
102,402 |
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$ |
116,444 |
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Earnings per share: |
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Basic |
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$ |
0.41 |
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$ |
0.39 |
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$ |
0.69 |
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$ |
0.74 |
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Diluted |
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$ |
0.41 |
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$ |
0.39 |
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$ |
0.68 |
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$ |
0.73 |
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Weighted average shares: |
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Basic |
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146,447 |
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157,504 |
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148,628 |
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156,797 |
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Diluted |
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148,360 |
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159,620 |
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150,353 |
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158,845 |
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The accompanying condensed notes, together with the Notes to Consolidated Financial Statements contained in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2015, are an integral part of these financial statements.
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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March 31, |
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March 31, |
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2016 |
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2015 |
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2016 |
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2015 |
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Net earnings |
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$ |
60,159 |
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$ |
61,535 |
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$ |
102,402 |
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$ |
116,444 |
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Other comprehensive income (loss): |
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Foreign currency translation adjustments |
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8,149 |
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(29,858 |
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(2,072 |
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(47,159 |
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Total other comprehensive income (loss), before tax |
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8,149 |
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(29,858 |
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(2,072 |
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(47,159 |
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Income taxes related to other comprehensive income |
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Other comprehensive income (loss), net of tax |
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8,149 |
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(29,858 |
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(2,072 |
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(47,159 |
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Total comprehensive income |
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$ |
68,308 |
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$ |
31,677 |
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$ |
100,330 |
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$ |
69,285 |
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The accompanying condensed notes, together with the Notes to Consolidated Financial Statements contained in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2015, are an integral part of these financial statements.
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except par value data)
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March 31
,
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September 30,
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
88,548 |
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$ |
140,038 |
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Trade accounts receivable, less allowance for doubtful accounts of $1,274 at March 31, 2016 and $1,162 at September 30, 2015 |
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46,409 |
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48,602 |
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Accounts receivable, other |
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34,530 |
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42,490 |
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Inventory |
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901,249 |
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885,214 |
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Other current assets |
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39,885 |
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37,049 |
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Deferred income tax assets, net |
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33,772 |
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33,709 |
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Total current assets |
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1,144,393 |
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1,187,102 |
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Property and equipment, net of accumulated depreciation of $454,170 at March 31, 2016 and $428,501 at September 30, 2015 |
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293,445 |
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270,847 |
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Goodwill |
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523,486 |
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524,369 |
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Intangible assets, excluding goodwill, net of accumulated amortization of $104,803 at March 31, 2016 and $97,897 at September 30, 2015 |
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93,777 |
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98,848 |
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Other assets |
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14,249 |
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13,185 |
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Total assets |
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$ |
2,069,350 |
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$ |
2,094,351 |
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Liabilities and Stockholders Deficit |
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Current liabilities: |
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Current maturities of long-term debt |
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$ |
749 |
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$ |
755 |
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Accounts payable |
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287,040 |
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275,917 |
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Accrued liabilities |
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208,598 |
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208,717 |
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Income taxes payable |
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4,622 |
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6,310 |
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Total current liabilities |
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501,009 |
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491,699 |
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Long-term debt |
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1,782,530 |
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1,786,839 |
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Other liabilities |
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25,472 |
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27,734 |
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Deferred income tax liabilities, net |
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101,771 |
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85,900 |
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Total liabilities |
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2,410,782 |
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2,392,172 |
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Stockholders deficit: |
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Common stock, $0.01 par value. Authorized 500,000 shares; 146,275 and 151,898 shares issued and 145,854 and 151,452 shares outstanding at March 31, 2016 and September 30, 2015, respectively |
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1,458 |
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1,515 |
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Preferred stock, $0.01 par value. Authorized 50,000 shares; none issued |
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Additional paid-in capital |
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Accumulated deficit |
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(263,113 |
) |
(218,670 |
) |
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Treasury stock, 121 shares, at cost |
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(2,961 |
) |
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Accumulated other comprehensive loss, net of tax |
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(79,777 |
) |
(77,705 |
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Total stockholders deficit |
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(341,432 |
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(297,821 |
) |
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Total liabilities and stockholders deficit |
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$ |
2,069,350 |
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$ |
2,094,351 |
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The accompanying condensed notes, together with the Notes to Consolidated Financial Statements contained in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2015, are an integral part of these financial statements.
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
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Six Months Ended
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2016 |
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2015 |
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Cash Flows from Operating Activities: |
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Net earnings |
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$ |
102,402 |
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$ |
116,444 |
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Adjustments to reconcile net earnings to net cash provided by operating activities: |
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Depreciation and amortization |
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47,091 |
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41,567 |
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Share-based compensation expense |
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7,173 |
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10,600 |
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Amortization of deferred financing costs |
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1,679 |
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1,897 |
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Excess tax benefit from share-based compensation |
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(1,029 |
) |
(22,567 |
) |
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Loss on extinguishment of debt |
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33,296 |
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Deferred income taxes |
|
14,441 |
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9,081 |
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Changes in (exclusive of effects of acquisitions): |
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Trade accounts receivable |
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2,172 |
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3,165 |
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Accounts receivable, other |
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7,769 |
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10,578 |
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Inventory |
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(17,048 |
) |
(31,541 |
) |
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Other current assets |
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(2,856 |
) |
16,494 |
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Other assets |
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(176 |
) |
(208 |
) |
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Accounts payable and accrued liabilities |
|
19,812 |
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19,164 |
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Income taxes payable |
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(352 |
) |
(615 |
) |
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Other liabilities |
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(2,166 |
) |
393 |
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Net cash provided by operating activities |
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212,208 |
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174,452 |
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Cash Flows from Investing Activities: |
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Capital expenditures |
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(73,650 |
) |
(37,337 |
) |
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Proceeds from disposal of property and equipment |
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1,740 |
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Acquisitions, net of cash acquired |
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(2,250 |
) |
(2,028 |
) |
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Net cash used by investing activities |
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(74,160 |
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(39,365 |
) |
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Cash Flows from Financing Activities: |
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Proceeds from issuance of long-term debt |
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912,000 |
|
983 |
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Repayments of long-term debt |
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(938,154 |
) |
(1,396 |
) |
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Repurchases of common stock |
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(162,367 |
) |
(67,524 |
) |
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Debt issuance costs |
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(12,748 |
) |
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Proceeds from exercises of stock options |
|
10,731 |
|
51,765 |
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Excess tax benefit from share-based compensation |
|
1,029 |
|
22,567 |
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Net cash (used) provided by financing activities |
|
(189,509 |
) |
6,395 |
|
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Effect of foreign exchange rate changes on cash and cash equivalents |
|
(29 |
) |
(2,030 |
) |
||
Net (decrease) increase in cash and cash equivalents |
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(51,490 |
) |
139,452 |
|
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Cash and cash equivalents, beginning of period |
|
140,038 |
|
106,575 |
|
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Cash and cash equivalents, end of period |
|
$ |
88,548 |
|
$ |
246,027 |
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|
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Supplemental Cash Flow Information: |
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Interest paid (a) |
|
$ |
87,201 |
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$ |
56,339 |
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Income taxes paid |
|
$ |
47,776 |
|
$ |
46,824 |
|
(a) For the six months ended March 31, 2016, interest paid includes $25.8 million in call premiums paid in connection with the Companys December 2015 redemption in full of its senior notes due 2019.
The accompanying condensed notes, together with the Notes to Consolidated Financial Statements contained in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2015, are an integral part of these financial statements.
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 located in the U.S., Puerto Rico, Canada, Mexico, Chile, Colombia, 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., 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. A significant number of the Companys products are also available through a number of Sally Beauty Supply and BSG-operated websites. 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 Companys consolidated financial position as of March 31, 2016 and September 30, 2015, its consolidated results of operations for the three and six months ended March 31, 2016 and 2015, and consolidated cash flows for the six months ended March 31, 2016 and 2015.
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 Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2015. 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 the interim periods reported upon herein 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
The Company has not yet adopted and is currently assessing the potential effect of the following pronouncements on its consolidated financial statements:
In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16) which will eliminate the current requirement to recognize measurement-period adjustments to provisional amounts retrospectively. Instead, ASU 2015-16 requires the acquirer to recognize measurement-period adjustments, as well as the impact on earnings of changes in depreciation, amortization and similar items (if any) resulting from the change to the provisional amounts, in the period when the amount of each measurement-period adjustment is determined. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Income Taxes (ASU 2015-17) which aims to simplify the classification of deferred taxes on the balance sheet. More specifically, ASU 2015-17 will require that all deferred tax assets and liabilities, and any related valuation allowance, be reported as noncurrent in a classified balance sheet. The new guidance will replace the existing practice of reporting deferred taxes for each tax jurisdiction (or taxing component of a jurisdiction) as (a) a net current asset or liability and (b) a net
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
noncurrent asset or liability. The new guidance does not change the existing requirement that only permits offsetting assets and liabilities within the same jurisdiction. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.
In February 2016, the FASB issued ASU No. 2016-02, Leases , which will require lessees to report on their balance sheets a right-of-use asset and a lease liability in connection with most lease agreements classified as operating leases under the current guidance. The lease liability will be measured based on the present value of future lease payments, subject to certain conditions. The right-of-use asset will be measured based on the initial amount of the liability, plus certain initial direct costs. The new guidance will further require that leases be classified at inception as either (a) operating leases or (b) finance leases. For operating leases, periodic expense will generally be flat (straight-line) throughout the life of the lease. For finance leases, periodic expense will decline (similar to capital leases under current rules) over the life of the lease. The new standard must be adopted using a modified retrospective transition method. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting , intended to simplify various aspects of how share-based payments are recorded and presented on the financial statements. For example, the new guidance will require that all the income tax effect related to share-based payments be recorded in income tax expense. The new guidance further removes the current requirement to delay recognition of a windfall tax benefit until it reduces current taxes payable. In addition, the new standard will require that excess tax benefits and shortfalls from share-based compensation awards be reported as operating activities in the statement of cash flows. For public companies, these amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.
In addition, the Company has not yet adopted the following recent accounting pronouncements and does not believe their adoption will have a material effect on its consolidated financial statements:
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers which will supersede Accounting Standards Codification (ASC) Topic 605, Revenue Recognition . In August 2015, the FASB deferred the effective date of this new standard by one year. A core principle of the new guidance is that an entity should measure revenue in connection with its sale of goods and services to a customer based on an amount that depicts the consideration to which the entity expects to be entitled in exchange for each of those goods and services. For a contract that involves more than one performance obligation, the entity must (a) determine or, if necessary, estimate the standalone selling price at inception of the contract for the distinct goods or services underlying each performance obligation and (b) allocate the transaction price to each performance obligation on the basis of the relative standalone selling prices. In addition, under the new guidance, an entity should recognize revenue when (or as) it satisfies each performance obligation under the contract by transferring the promised good or service to the customer. A good or service is deemed transferred when (or as) the customer obtains control of that good or service. The new standard permits the use of either the retrospective or cumulative effect transition method. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early application is permitted, but no earlier than December 16, 2016. The Company has not yet selected a transition method.
In April 2015, the FASB issued ASU No. 2015-05, Customers Accounting for Fees Paid in Cloud Computing Arrangement . This pronouncement provides guidance to determine whether a cloud-based computing arrangement includes a software license. If a cloud-based computing arrangement includes a software license, the customer must account for the software element of the arrangement consistent with the acquisition of other software licenses. Otherwise, the customer must account for the arrangement as a service contract. The new standard permits the use of either the prospective or retrospective transition method. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.
4. Fair Value Measurements
The Companys 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
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels of that hierarchy are defined as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 - Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data; and
Level 3 - Unobservable inputs for the asset or liability.
Consistent with this hierarchy, the Company categorized certain of its financial assets and liabilities as follows at March 31, 2016 and September 30, 2015 (in thousands):
|
|
As of March 31, 2016 |
|
|||||||||
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|||
Assets |
|
|
|
|
|
|
|
|
|
|||
Foreign exchange contracts (b) |
|
$ |
39 |
|
$ |
|
|
$ |
39 |
|
|
|
Total assets |
|
$ |
39 |
|
$ |
|
|
$ |
39 |
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|||
Long-term debt (c) |
|
$ |
1,899,604 |
|
$ |
1,897,063 |
|
$ |
2,541 |
|
|
|
Foreign exchange contracts (b) |
|
276 |
|
|
|
276 |
|
|
|
|||
Total liabilities |
|
$ |
1,899,880 |
|
$ |
1,897,063 |
|
$ |
2,817 |
|
|
|
|
|
As of September 30, 2015 |
|
|||||||||
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|||
Assets |
|
|
|
|
|
|
|
|
|
|||
Cash equivalents (a) |
|
$ |
46,003 |
|
$ |
46,003 |
|
$ |
|
|
|
|
Foreign exchange contracts (b) |
|
322 |
|
|
|
322 |
|
|
|
|||
Total assets |
|
$ |
46,325 |
|
$ |
46,003 |
|
$ |
322 |
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|||
Long-term debt (c) |
|
$ |
1,873,620 |
|
$ |
1,870,750 |
|
$ |
2,870 |
|
|
|
Foreign exchange contracts (b) |
|
58 |
|
|
|
58 |
|
|
|
|||
Total liabilities |
|
$ |
1,873,678 |
|
$ |
1,870,750 |
|
$ |
2,928 |
|
|
|
(a) Cash equivalents 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 and 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 observable inputs, such as market foreign currency exchange rates. Please see Note 11 for more information about the Companys foreign exchange contracts.
(c) Long-term debt (including current maturities and borrowings under the ABL facility, if any) is carried in the Companys consolidated financial statements at amortized cost of $1,808.6 million at March 31, 2016 and $1,809.4 million at September 30, 2015, less unamortized debt issuance costs of $25.3 million and $21.8 million at March 31, 2016 and September 30, 2015, respectively. The Companys 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 Companys debt.
5. Accumulated Stockholders Equity (Deficit)
In August 2014, we announced that our Board of Directors approved a share repurchase program authorizing us to repurchase up to $1.0 billion of our common stock over a period of approximately three years (the 2014 Share Repurchase Program). The 2014 Share Repurchase Program expires on September 30, 2017.
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
During the six months ended March 31, 2016 and 2015, the Company repurchased and subsequently retired approximately 6.2 million and 2.1 million shares, respectively, of its common stock under the 2014 Share Repurchase Program at an aggregate cost of $162.4 million and $67.5 million, respectively. We funded these share repurchases with existing cash balances, cash from operations and borrowings under the ABL facility. The Company reduced common stock and additional paid-in capital, in the aggregate, by these amounts. However, as required by GAAP, to the extent that share repurchase amounts exceeded the balance of additional paid-in capital prior to us recording such repurchases, we recorded the excess in accumulated deficit.
At March 31, 2016 and September 30, 2015, accumulated other comprehensive loss consists of cumulative foreign currency translation adjustments of $79.8 million and $77.7 million, respectively, net of income taxes of $2.3 million at both dates. Comprehensive income (loss) 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 Companys 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
|
|
Six Months Ended
|
|
||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
|
||||
Net earnings |
|
$ |
60,159 |
|
$ |
61,535 |
|
$ |
102,402 |
|
$ |
116,444 |
|
Total weighted average basic shares |
|
146,447 |
|
157,504 |
|
148,628 |
|
156,797 |
|
||||
Dilutive securities: |
|
|
|
|
|
|
|
|
|
||||
Stock options and stock award programs |
|
1,913 |
|
2,116 |
|
1,725 |
|
2,048 |
|
||||
Total weighted average diluted shares |
|
148,360 |
|
159,620 |
|
150,353 |
|
158,845 |
|
||||
Earnings per share: |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
0.41 |
|
$ |
0.39 |
|
$ |
0.69 |
|
$ |
0.74 |
|
Diluted |
|
$ |
0.41 |
|
$ |
0.39 |
|
$ |
0.68 |
|
$ |
0.73 |
|
At March 31, 2016 and 2015, options to purchase 66,573 shares and 33,592 shares, respectively, of the Companys common stock were outstanding but not included in the computations of diluted earnings per share for the three months ended March 31, 2016 and 2015, respectively, since these options were anti-dilutive. At March 31, 2016 and 2015, options to purchase 1,240,603 shares and 1,096,594 shares, respectively, of the Companys common stock were outstanding but not included in the computations of diluted earnings per share for the six months ended March 31, 2016 and 2015, respectively, 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 Companys 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 Companys 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.
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
7. Share-Based Payments
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
|
|
Six Months Ended
|
|
||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
|
||||
Share-based compensation expense |
|
$ |
2,985 |
|
$ |
2,840 |
|
$ |
7,173 |
|
$ |
10,600 |
|
Income tax benefit related to share-based compensation expense |
|
$ |
1,118 |
|
$ |
1,077 |
|
$ |
2,707 |
|
$ |
3,995 |
|
Performance-Based Unit Awards
The Company from time to time grants Performance-Based Unit (Performance Units) awards subject to three-year cliff-vesting provisions, pursuant to the Sally Beauty Holdings, Inc. Amended and Restated 2010 Omnibus Incentive Plan (the 2010 Plan). The Companys Performance Units represent unsecured obligations of the Company to issue shares of its common stock. The number of shares, if any, which will be issued in connection with these awards, is contingent upon both (a) employee service conditions and (b) the achievement of specified Company performance targets. The Company measures the cost of services received from officers and employees in exchange for an award of Performance Units based on the fair value of the award on the date of grant and it recognizes expense over the requisite service period (generally three years). The fair value of a Performance Unit is determined based on the closing market price of the Companys common stock on the date of grant.
During the six months ended March 31, 2016, the Company granted approximately 152,000 Performance Units (target shares) to its officers and employees. Under the terms of these awards, a grantee may earn from 0% to 200% of his or her target shares, with the ultimate settlement (and expense recognized) dependent on the Company achieving certain specified cumulative performance targets during the three-year period ending on September 30, 2018 (the Performance Period) and satisfaction of the employee service condition. Periodic expense for Performance Unit awards, which is estimated quarterly, is based on the Companys projected performance during the Performance Period compared to the performance targets contained in the award. As such, for the six months ended March 31, 2016, the Company has estimated and recognized compensation expense at 100% of the performance targets as it believes achievement of the performance targets is probable. To date, the Company has only granted Performance Units subject to the Companys achievement of two performance targets: consolidated sales growth (as defined in the award documents) and return on invested capital (as defined in the award documents), in addition to service conditions. For the awards issued during the six months ended March 31, 2016, 40% of the award is contingent on achieving the consolidated sales growth target and 60% is contingent on achieving the return on invested capital target.
The following table presents a summary of the activity for the Companys Performance Unit awards for the six months ended March 31, 2016:
Performance Unit Awards |
|
Number of Shares
|
|
Weighted Average
|
|
Weighted Average
|
|
|
Unvested at September 30, 2015 |
|
|
|
$ |
|
|
|
|
Granted |
|
152 |
|
23.45 |
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
(4 |
) |
23.45 |
|
|
|
|
Unvested at March 31, 2016 |
|
148 |
|
$ |
23.45 |
|
2.5 |
|
At March 31, 2016, unrecognized compensation costs related to unvested performance unit awards are approximately $2.8 million and are expected to be recognized over the weighted average period of 2.5 years.
Service-Based Awards
The Company measures the cost of services received from employees, directors and consultants, if any, in exchange for a service-based 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.
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
The Company granted approximately 1.5 million and 1.2 million service-based stock options and approximately 40,000 and 219,000 service-based restricted share awards to its employees during the six months ended March 31, 2016 and 2015, respectively. Upon issuance of such grants, the Company recognized accelerated share-based compensation expense of $1.3 million and $4.8 million in the six months ended March 31, 2016 and 2015, respectively, in connection with certain retirement eligible employees who are eligible to continue vesting awards upon retirement under the provisions of the 2010 Plan. In addition, the Company granted approximately 27,000 and 20,000 service-based restricted stock units to its non-employee directors during the six months ended March 31, 2016 and 2015, respectively.
Stock Option Awards
Each option has an exercise price equal to the closing market price of the Companys common stock on the date of grant and generally has a maximum term of 10 years. Options generally vest ratably over a three or 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 Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan.
The following table presents a summary of the activity for the Companys service-based stock option awards for the six months ended March 31, 2016:
|
|
Number of
|
|
Weighted
|
|
Weighted
|
|
Aggregate
|
|
||
Outstanding at September 30, 2015 |
|
5,316 |
|
$ |
21.89 |
|
6.8 |
|
$ |
19,255 |
|
Granted |
|
1,486 |
|
23.65 |
|
|
|
|
|
||
Exercised |
|
(634 |
) |
16.93 |
|
|
|
|
|
||
Forfeited or expired |
|
(75 |
) |
26.68 |
|
|
|
|
|
||
Outstanding at March 31, 2016 |
|
6,093 |
|
$ |
22.78 |
|
6.6 |
|
$ |
58,499 |
|
|
|
|
|
|
|
|
|
|
|
||
Exercisable at March 31, 2016 |
|
2,792 |
|
$ |
19.55 |
|
5.1 |
|
$ |
35,830 |
|
The following table summarizes additional information about service-based stock options outstanding at March 31, 2016 under the Companys share-based compensation plans:
|
|
Options Outstanding |
|
Options Exercisable |
|
||||||||
Range of
|
|
Number of
|
|
Weighted
|
|
Weighted
|
|
Number of
|
|
Weighted
|
|
||
$5.24 19.99 |
|
1,404 |
|
4.1 |
|
$ |
13.38 |
|
1,404 |
|
$ |
13.38 |
|
$20.0031.58 |
|
4,689 |
|
7.3 |
|
25.59 |
|
1,388 |
|
25.79 |
|
||
Total |
|
6,093 |
|
6.6 |
|
$ |
22.78 |
|
2,792 |
|
$ |
19.55 |
|
The Company uses the Black-Scholes option pricing model to value the Companys 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 Companys stock option awards is expensed on a straight-line basis over the vesting period (generally three or four years) of the stock options or to the date a participant becomes eligible for retirement, if earlier.
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
The weighted average assumptions relating to the valuation of the Companys stock options are as follows:
|
|
Six months ended
|
|
||
|
|
2016 |
|
2015 |
|
Expected life (in years) |
|
5.0 |
|
5.0 |
|
Expected volatility for the Companys common stock |
|
27.2 |
% |
30.9 |
% |
Risk-free interest rate |
|
1.5 |
% |
1.6 |
% |
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 at the date of grant of the stock options issued by the Company in the six months ended March 31, 2016 and 2015 was $6.32 and $8.78 per option, respectively. The total intrinsic value of options exercised during the six months ended March 31, 2016 was $13.0 million. The cash proceeds from these option exercises were $10.7 million and the tax benefit realized from these option exercises was $2.7 million.
At March 31, 2016, unrecognized compensation costs related to unvested stock option awards are approximately $13.7 million and are expected to be recognized over the weighted average period of 2.1 years.
Restricted Stock Awards
The Company from time to time grants service-based restricted stock awards to employees and consultants, if any, under the 2010 Plan. A restricted stock award is an award of shares of the Companys 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 three to 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.
The fair value of the Companys restricted stock awards is expensed on a straight-line basis over the period (generally three to 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. The fair value of a service-based restricted stock award is determined based on the closing market price of the Companys common stock on the date of grant.
The following table presents a summary of the activity for the Companys service-based restricted stock awards for the six months ended March 31, 2016:
Restricted Stock Awards |
|
Number of Shares
|
|
Weighted Average
|
|
Weighted Average
|
|
|
Unvested at September 30, 2015 |
|
446 |
|
$ |
25.82 |
|
2.8 |
|
Granted |
|
40 |
|
25.35 |
|
|
|
|
Vested |
|
(61 |
) |
16.96 |
|
|
|
|
Forfeited |
|
(4 |
) |
29.58 |
|
|
|
|
Unvested at March 31, 2016 |
|
421 |
|
$ |
27.03 |
|
2.3 |
|
At March 31, 2016, unrecognized compensation costs related to unvested restricted stock awards are approximately $4.4 million and are expected to be recognized over the weighted average period of 2.3 years.
Restricted Stock Units
The Company also grants service-based RSU awards, which generally vest within one year from the date of grant, pursuant to the 2010 Plan. To date, the Company has only granted service-based RSU awards to its non-employee directors. RSUs represent an unsecured promise of the Company to issue shares of the Companys common stock. Unless forfeited prior to the vesting date, RSUs are converted into shares of the Companys common stock generally on the vesting date. An 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 the fiscal year 2012 are generally retained by the Company as deferred stock units that are not distributed until six months after the
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
independent directors 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 Companys common stock or in cash.
The Company expenses the cost of a service-based RSU, which is determined to be the fair value of the RSU 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 Companys common stock on the date of grant.
The following table presents a summary of the activity for the Companys service-based RSUs for the six months ended March 31, 2016:
Restricted Stock Units |
|
Number of Shares
|
|
Weighted Average
|
|
Weighted Average
|
|
|
Unvested at September 30, 2015 |
|
|
|
$ |
|
|
|
|
Granted |
|
27 |
|
23.99 |
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
Unvested at March 31, 2016 |
|
27 |
|
$ |
23.99 |
|
0.5 |
|
At March 31, 2016, unrecognized compensation costs related to unvested RSUs are approximately $0.4 million and 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, 2016, 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 Companys goodwill.
During the three months ended March 31, 2016, 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 Companys intangible assets.
For the three months ended March 31, 2016 and 2015, amortization expense was $3.4 million and $3.6 million, respectively, and for the six months ended March 31, 2016 and 2015, amortization expense was $6.8 million and $7.1 million, respectively.
9. Commitments and Contingencies
In the fiscal year ended September 30, 2014, the Company disclosed that it had experienced a data security incident (the 2014 data security incident). In May 2015, the Company disclosed that it had experienced a second data security incident (the 2015 data security incident and, together with the 2014 data security incident, the data security incidents). The data security incidents involved the unauthorized installation of malicious software (malware) on our information technology systems, including our point-of-sale systems that, we believe, may have placed at risk certain payment card data for some transactions. The costs that the Company has incurred to date in connection with the data security incidents primarily include professional advisory fees and legal costs and expenses relating to investigating and remediating the data security incidents.
The Company expects to incur additional costs and expenses related to the data security incidents in the future. These costs may result from liabilities related to claims by payment card networks, governmental or third party investigations, proceedings or litigation and legal and other fees necessary to defend against any potential liabilities or claims, and further investigatory and remediation costs. For the six months ended March 31, 2016 and 2015, selling, general and administrative expenses reflect expenses of $1.2 million and $1.8 million, respectively, relating to the data security incidents. In addition, at March 31, 2016 the Company had an accrued liability of approximately $2.9 million related to loss contingencies associated with the 2014 data security incident. As of March 31, 2016, the scope of these additional costs, or a range thereof, cannot be reasonably estimated. While we do not anticipate these additional costs or liabilities would have a material adverse impact on our business, financial condition and operating results, these additional costs could be significant.
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, 2016 and September 30, 2015 are as follows (dollars in thousands):
|
|
March 31,
|
|
September 30,
|
|
Interest Rates(a) |
|
||
ABL facility(b) |
|
$ |
|
|
$ |
|
|
(i) Prime plus (0.50% to 0.75)% or; |
|
|
|
|
|
|
|
(ii) LIBOR(b) plus (1.50% to 1.75)% |
|
||
Senior notes due Nov. 2019 |
|
|
|
750,000 |
|
6.875% |
|
||
Senior notes due Jun. 2022 |
|
850,000 |
|
850,000 |
|
5.750% |
|
||
Senior notes due Nov. 2023 |
|
200,000 |
|
200,000 |
|
5.500% |
|
||
Senior notes due Dec. 2025 |
|
750,000 |
|
|
|
5.625% |
|
||
Total |
|
$ |
1,800,000 |
|
$ |
1,800,000 |
|
|
|
Plus: capital lease obligations |
|
2,541 |
|
2,870 |
|
|
|
||
Less: unamortized debt issuance costs and premium, net(c) |
|
19,262 |
|
15,276 |
|
|
|
||
Total debt |
|
$ |
1,783,279 |
|
$ |
1,787,594 |
|
|
|
Less: current maturities |
|
749 |
|
755 |
|
|
|
||
Total long-term debt |
|
$ |
1,782,530 |
|
$ |
1,786,839 |
|
|
|
(a) Interest rates shown represent the coupon or contractual rate or rates related to each debt instrument listed.
(b) When used in this Quarterly Report, LIBOR means the London Interbank Offered Rate. At March 31, 2016 and September 30, 2015, unamortized debt issuance costs of $2.0 million and $2.4 million, respectively, related to the ABL facility are reported in other assets in the Companys consolidated balance sheets.
(c) Amounts are net of unamortized premium of $6.0 million and $6.5 million as of March 31, 2016 and September 30, 2015, respectively, related to certain notes with an aggregate principal amount of $150.0 million.
In 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 Companys separation from its former parent, The Alberto-Culver Company, which we refer to as Alberto-Culver.
In the fiscal year 2011, Sally Holdings entered into a five-year asset-based senior secured loan facility (the ABL facility). The availability of funds under the ABL facility 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. In the fiscal year 2013, the Company, Sally Holdings and other parties to the ABL facility entered into an 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 2018 and improved certain other covenant terms.
At March 31, 2016, there were no borrowings outstanding under the ABL facility and the Company had $478.4 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 2012, Sally Holdings and Sally Capital Inc. (collectively, the Issuers), both indirectly 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 $150.0 million of the aggregate principal amount of the senior notes due 2022 issued at par plus a
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
premium. Such premium is being amortized over the term of the notes using the effective interest method. The net proceeds from these debt issuances were used to retire outstanding indebtedness in the aggregate principal amount of approximately $1,391.9 million (substantially all of which was incurred in 2006 in connection with our separation from Alberto-Culver) and for general corporate purposes. As further discussed below, in December 2015, the Company redeemed in full the senior notes due 2019 at a redemption premium equal to 103.438% primarily with the net proceeds from the issuance of the 5.625% Senior Notes due 2025 (the senior notes due 2025), as discussed below.
In the fiscal year 2014, the Issuers issued $200.0 million aggregate principal amount of their 5.5% Senior Notes due 2023 (the senior notes due 2023) 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 (which borrowings were primarily used to fund share repurchases) and for general corporate purposes, including share repurchases.
On December 3, 2015, the Issuers issued $750.0 million aggregate principal amount of their senior notes due 2025 at par. The Company used the net proceeds from this debt issuance (approximately $737.3 million) as well as cash from operations and borrowings under the ABL facility, to redeem in full the senior notes due 2019 at a total redemption cost of $775.8 million, including the redemption premium but excluding accrued interest paid upon redemption of such notes. In connection with our redemption of the senior notes due 2019, we recorded a loss on extinguishment of debt in the amount of approximately $33.3 million, including a redemption premium in the amount of approximately $25.8 million and unamortized deferred financing costs of approximately $7.5 million. In connection with the issuance of the senior notes due 2025, the Company incurred and capitalized financing costs of approximately $12.7 million. This amount is reported as a deduction from the senior notes due 2025 on the Companys consolidated balance sheets and is being amortized over the term of the senior notes due 2025 using the effective interest method.
The senior notes due 2022, the senior notes due 2023 and the senior notes due 2025, which we refer to collectively as the Senior Notes or the senior notes due 2022, 2023 and 2025, 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 2022, 2023 and 2025 is payable semi-annually, during the Companys first and third fiscal quarters. Please see Note 13 for certain condensed financial statement data pertaining to Sally Beauty, the Issuers, the guarantor subsidiaries and the non-guarantor subsidiaries.
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.
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.
The senior notes due 2025 carry optional redemption features whereby the Company has the option to redeem the notes, in whole or in part, on or after December 1, 2023 at par, plus accrued and unpaid interest, if any, and on or after December 1, 2020 at par plus a premium declining ratably to par, plus accrued and unpaid interest, if any. Prior to December 1, 2020, 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 December 1, 2018, 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.
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
Maturities of the Companys long-term debt are as follows as of March 31, 2016 (in thousands):
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.
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 Companys Secured Leverage Ratio exceeds 4.0 to 1.0. At March 31, 2016, the Companys 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) for the most recently completed twelve fiscal months.
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.
T he indentures governing the senior notes due 2022, 2023 and 2025 contain terms which restrict the ability of Sally Beautys 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, 2016, the Companys Consolidated Coverage Ratio was approximately 6.1 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 2022, 2023 and 2025 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 (for the senior notes due 2022 the senior notes due and 2023) or since October 1, 2015 (for the senior notes due 2025), 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 plus (v) $350 million (for the senior notes due 2025). 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 Companys Consolidated Total Leverage Ratio (as defined in the indentures) is less than 3.25 to 1.00. At March 31, 2016, the Companys Consolidated Total Leverage Ratio was approximately 2.7 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
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
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, 2016, the Consolidated Fixed Charge Coverage Ratio was approximately 3.1 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 2022, 2023 and 2025, 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 2022, 2023 and 2025 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, 2016, all the net assets of our consolidated subsidiaries were unrestricted from transfer under our credit arrangements.
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 Companys 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, 2016, our exposure to interest rate fluctuations relates to interest payments under the ABL facility, if any, and the Company held no derivative instruments in connection therewith.
As of March 31, 2016, 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, 2016.
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
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 to manage the exposure to the U.S. dollar resulting from certain of its Sinelco Group subsidiaries purchases of merchandise from third-party suppliers. Sinelcos functional currency is the Euro. As such, at March 31, 2016, we hold foreign currency forwards which enable us to sell approximately 6.4 million ($7.3 million, at the March 31, 2016 exchange rate) at the weighted average contractual exchange rate of 1.1274. The foreign currency forwards discussed in this paragraph are with a single counterparty and expire ratably through September 15, 2016.
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, 2016, we hold: (a) a foreign currency forward which enables us to sell approximately 22.6 million ($25.8 million, at the March 31, 2016 exchange rate) at the contractual exchange rate of 1.1330, (b) a foreign currency forward which enables us to sell approximately $6.8 million Canadian dollars ($5.2 million, at the March 31, 2016 exchange rate) at the contractual exchange rate of 1.2978, (c) foreign currency forwards which enable us to buy approximately $8.3 million Canadian dollars ($6.4 million, at the March 31, 2016 exchange rate) at the weighted average contractual exchange rate of 1.3053, (d) a foreign currency forward which enables us to sell approximately 19.2 million Mexican pesos ($1.1 million, at the March 31, 2016 exchange rate) at the contractual exchange rate of 17.2905, (e) a foreign currency forward which enables us to buy approximately £9.7 million ($13.9 million, at the March 31, 2016 exchange rate) at the contractual exchange rate of 1.4391 and (f) a foreign currency forward which enables us to sell approximately £1.0 million ($1.4 million, at the March 31, 2016 exchange rate) at the contractual exchange rate of 1.4393. All the foreign currency forwards discussed in this paragraph are with a single counterparty (not the same counterparty as that on the forwards discussed in the preceding paragraph) and expire on or before June 30, 2016.
The Companys 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 a net loss of $1.6 million and a net gain of $3.4 million for the three months ended March 31, 2016 and 2015, respectively, and, for the six months ended March 31, 2016 and 2015, a net loss of $0.6 million and a net gain of $5.0 million, respectively, in connection with all of the Companys foreign currency derivative instruments, including marked-to-market adjustments.
The table below presents the fair value of the Companys derivative financial instruments as well as their classification on the Companys consolidated balance sheets as of March 31, 2016 and September 30, 2015 (in thousands):
|
|
Asset Derivatives |
|
Liability Derivatives |
|
||||||||||||
|
|
Classification |
|
March 31,
|
|
September 30,
|
|
Classification |
|
March 31,
|
|
September 30,
|
|
||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign exchange contracts |
|
Other current assets |
|
$ |
39 |
|
$ |
322 |
|
Accrued liabilities |
|
$ |
276 |
|
$ |
58 |
|
|
|
|
|
$ |
39 |
|
$ |
322 |
|
|
|
$ |
276 |
|
$ |
58 |
|
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
The table below presents the effect of the Companys derivative financial instruments on the Companys consolidated statements of earnings for the three months ended March 31, 2016 and 2015 (in thousands):
Derivatives
|
|
Amount of Gain or (Loss) Recognized in OCI
|
|
Amount of Gain or (Loss) Reclassified from
|
|
None |
|
|
|
|
|
Derivatives Not Designated as
|
|
Classification of Gain or
|
|
Amount of Gain or (Loss) Recognized in Income on
|
|
||||
|
|
|
|
Three Months Ended March 31, |
|
||||
|
|
|
|
2016 |
|
2015 |
|
||
Foreign exchange contracts |
|
Selling, general and administrative expenses |
|
$ |
(1,640 |
) |
$ |
3,447 |
|
The table below presents the effect of the Companys derivative financial instruments on the Companys consolidated statements of earnings for the six months ended March 31, 2016 and 2015 (in thousands):
Derivatives
|
|
Amount of Gain or (Loss) Recognized in OCI
|
|
Amount of Gain or (Loss) Reclassified from
|
|
None |
|
|
|
|
|
Derivatives Not Designated as
|
|
Classification of Gain or
|
|
Amount of Gain or (Loss) Recognized in Income on
|
|
||||
|
|
|
|
Six Months Ended March 31, |
|
||||
|
|
|
|
2016 |
|
2015 |
|
||
Foreign exchange contracts |
|
Selling, general and administrative expenses |
|
$ |
(599 |
) |
$ |
4,952 |
|
Credit-risk-related Contingent Features
At March 31, 2016, the aggregate fair value of all foreign exchange contracts held which consisted of derivative instruments in a liability position was $0.3 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 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. Business Segments
The Companys 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 Europe and South America 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 and parts of Europe.
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
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, 2015. Sales between segments, which were eliminated in consolidation, were not material during the three and six months ended March 31, 2016 and 2015.
Segment data for the three and six months ended March 31, 2016 and 2015 is as follows (in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
|
||||
Net sales: |
|
|
|
|
|
|
|
|
|
||||
Sally Beauty Supply |
|
$ |
587,622 |
|
$ |
572,110 |
|
$ |
1,183,588 |
|
$ |
1,158,629 |
|
BSG |
|
392,445 |
|
365,645 |
|
794,511 |
|
743,593 |
|
||||
Total |
|
$ |
980,067 |
|
$ |
937,755 |
|
$ |
1,978,099 |
|
$ |
1,902,222 |
|
Earnings before provision for income taxes: |
|
|
|
|
|
|
|
|
|
||||
Segment operating profit: |
|
|
|
|
|
|
|
|
|
||||
Sally Beauty Supply |
|
$ |
101,975 |
|
$ |
106,089 |
|
$ |
208,052 |
|
$ |
207,268 |
|
BSG |
|
61,404 |
|
55,607 |
|
127,284 |
|
112,197 |
|
||||
Segment operating profit |
|
163,379 |
|
161,696 |
|
335,336 |
|
319,465 |
|
||||
Unallocated expenses (a) |
|
(37,936 |
) |
(29,849 |
) |
(74,770 |
) |
(63,621 |
) |
||||
Share-based compensation expense |
|
(2,985 |
) |
(2,840 |
) |
(7,173 |
) |
(10,600 |
) |
||||
Interest expense (b) |
|
(26,971 |
) |
(29,228 |
) |
(90,914 |
) |
(58,469 |
) |
||||
Earnings before provision for income taxes |
|
$ |
95,487 |
|
$ |
99,779 |
|
$ |
162,479 |
|
$ |
186,775 |
|
(a) Unallocated expenses consist of corporate and shared costs.
(b) For the six months ended March 31, 2016, interest expense includes a loss on extinguishment of debt of $33.3 million in connection with the Companys December 2015 redemption of its senior notes due 2019.
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
13. 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, 2016 and September 30, 2015, and the related condensed consolidating statements of earnings and condensed consolidating statements of comprehensive income for the three and six months ended March 31, 2016 and 2015, and condensed consolidating statements of cash flows for the six months ended March 31, 2016 and 2015: (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 .
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
Condensed Consolidating Balance Sheet
March 31, 2016
(In thousands)
|
|
Parent |
|
Sally
|
|
Guarantor
|
|
Non-
|
|
Consolidating
|
|
Sally Beauty
|
|
||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
|
$ |
55,215 |
|
$ |
33,333 |
|
$ |
|
|
$ |
88,548 |
|
Trade and other accounts receivable, less allowance for doubtful accounts |
|
5 |
|
|
|
53,439 |
|
27,495 |
|
|
|
80,939 |
|
||||||
Due from affiliates |
|
|
|
|
|
1,861,024 |
|
22 |
|
(1,861,046 |
) |
|
|
||||||
Inventory |
|
|
|
|
|
693,603 |
|
207,646 |
|
|
|
901,249 |
|
||||||
Other current assets |
|
2,877 |
|
165 |
|
18,016 |
|
18,827 |
|
|
|
39,885 |
|
||||||
Deferred income tax assets |
|
|
|
11 |
|
30,565 |
|
3,196 |
|
|
|
33,772 |
|
||||||
Property and equipment, net |
|
3 |
|
|
|
217,973 |
|
75,469 |
|
|
|
293,445 |
|
||||||
Investment in subsidiaries |
|
766,785 |
|
3,258,559 |
|
364,153 |
|
|
|
(4,389,497 |
) |
|
|
||||||
Goodwill and other intangible assets, net |
|
|
|
|
|
464,679 |
|
152,584 |
|
|
|
617,263 |
|
||||||
Other assets |
|
1,463 |
|
2,516 |
|
(6,701 |
) |
16,971 |
|
|
|
14,249 |
|
||||||
Total assets |
|
$ |
771,133 |
|
$ |
3,261,251 |
|
$ |
3,751,966 |
|
$ |
535,543 |
|
$ |
(6,250,543 |
) |
$ |
2,069,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Liabilities and Stockholders (Deficit) Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Accounts payable |
|
$ |
|
|
$ |
|
|
$ |
229,080 |
|
$ |
57,960 |
|
$ |
|
|
$ |
287,040 |
|
Due to affiliates |
|
1,108,798 |
|
676,804 |
|
22 |
|
75,422 |
|
(1,861,046 |
) |
|
|
||||||
Accrued liabilities |
|
769 |
|
35,249 |
|
144,302 |
|
28,278 |
|
|
|
208,598 |
|
||||||
Income taxes payable |
|
2,998 |
|
1,476 |
|
|
|
148 |
|
|
|
4,622 |
|
||||||
Long-term debt |
|
|
|
1,780,738 |
|
63 |
|
2,478 |
|
|
|
1,783,279 |
|
||||||
Other liabilities |
|
|
|
|
|
22,539 |
|
2,933 |
|
|
|
25,472 |
|
||||||
Deferred income tax liabilities |
|
|
|
199 |
|
97,401 |
|
4,171 |
|
|
|
101,771 |
|
||||||
Total liabilities |
|
1,112,565 |
|
2,494,466 |
|
493,407 |
|
171,390 |
|
(1,861,046 |
) |
2,410,782 |
|
||||||
Total stockholders (deficit) equity |
|
(341,432 |
) |
766,785 |
|
3,258,559 |
|
364,153 |
|
(4,389,497 |
) |
(341,432 |
) |
||||||
Total liabilities and stockholders (deficit) equity |
|
$ |
771,133 |
|
$ |
3,261,251 |
|
$ |
3,751,966 |
|
$ |
535,543 |
|
$ |
(6,250,543 |
) |
$ |
2,069,350 |
|
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
Condensed Consolidating Balance Sheet
September 30, 2015
(In thousands)
|
|
Parent |
|
Sally
|
|
Guarantor
|
|
Non-
|
|
Consolidating
|
|
Sally Beauty
|
|
||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Cash and cash equivalents |
|
$ |
|
|
$ |
46,003 |
|
$ |
58,851 |
|
$ |
35,184 |
|
$ |
|
|
$ |
140,038 |
|
Trade and other accounts receivable, less allowance for doubtful accounts |
|
|
|
|
|
60,744 |
|
30,348 |
|
|
|
91,092 |
|
||||||
Due from affiliates |
|
|
|
|
|
1,687,325 |
|
35 |
|
(1,687,360 |
) |
|
|
||||||
Inventory |
|
|
|
|
|
687,884 |
|
197,330 |
|
|
|
885,214 |
|
||||||
Other current assets |
|
2,308 |
|
27 |
|
17,803 |
|
16,911 |
|
|
|
37,049 |
|
||||||
Deferred income tax assets |
|
|
|
11 |
|
30,565 |
|
3,133 |
|
|
|
33,709 |
|
||||||
Property and equipment, net |
|
2 |
|
|
|
195,271 |
|
75,574 |
|
|
|
270,847 |
|
||||||
Investment in subsidiaries |
|
663,045 |
|
3,099,141 |
|
360,416 |
|
|
|
(4,122,602 |
) |
|
|
||||||
Goodwill and other intangible assets, net |
|
|
|
|
|
468,342 |
|
154,875 |
|
|
|
623,217 |
|
||||||
Other assets |
|
1,384 |
|
2,894 |
|
(6,949 |
) |
15,856 |
|
|
|
13,185 |
|
||||||
Total assets |
|
$ |
666,739 |
|
$ |
3,148,076 |
|
$ |
3,560,252 |
|
$ |
529,246 |
|
$ |
(5,809,962 |
) |
$ |
2,094,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Liabilities and Stockholders (Deficit) Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Accounts payable |
|
$ |
|
|
$ |
|
|
$ |
217,964 |
|
$ |
57,953 |
|
$ |
|
|
$ |
275,917 |
|
Due to affiliates |
|
962,264 |
|
658,106 |
|
35 |
|
66,955 |
|
(1,687,360 |
) |
|
|
||||||
Accrued liabilities |
|
771 |
|
40,768 |
|
136,688 |
|
30,490 |
|
|
|
208,717 |
|
||||||
Income taxes payable |
|
1,525 |
|
1,337 |
|
|
|
3,448 |
|
|
|
6,310 |
|
||||||
Long-term debt |
|
|
|
1,784,724 |
|
109 |
|
2,761 |
|
|
|
1,787,594 |
|
||||||
Other liabilities |
|
|
|
|
|
24,686 |
|
3,048 |
|
|
|
27,734 |
|
||||||
Deferred income tax liabilities |
|
|
|
96 |
|
81,629 |
|
4,175 |
|
|
|
85,900 |
|
||||||
Total liabilities |
|
964,560 |
|
2,485,031 |
|
461,111 |
|
168,830 |
|
(1,687,360 |
) |
2,392,172 |
|
||||||
Total stockholders (deficit) equity |
|
(297,821 |
) |
663,045 |
|
3,099,141 |
|
360,416 |
|
(4,122,602 |
) |
(297,821 |
) |
||||||
Total liabilities and stockholders (deficit) equity |
|
$ |
666,739 |
|
$ |
3,148,076 |
|
$ |
3,560,252 |
|
$ |
529,246 |
|
$ |
(5,809,962 |
) |
$ |
2,094,351 |
|
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, 2016
(In thousands)
|
|
Parent |
|
Sally Holdings
|
|
Guarantor
|
|
Non-
|
|
Consolidating
|
|
Sally Beauty
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net sales |
|
$ |
|
|
$ |
|
|
$ |
809,735 |
|
$ |
170,332 |
|
$ |
|
|
$ |
980,067 |
|
Related party sales |
|
|
|
|
|
615 |
|
|
|
(615 |
) |
|
|
||||||
Cost of products sold and distribution expenses |
|
|
|
|
|
401,517 |
|
91,691 |
|
(615 |
) |
492,593 |
|
||||||
Gross profit |
|
|
|
|
|
408,833 |
|
78,641 |
|
|
|
487,474 |
|
||||||
Selling, general and administrative expenses |
|
2,849 |
|
103 |
|
268,880 |
|
69,479 |
|
|
|
341,311 |
|
||||||
Depreciation and amortization |
|
1 |
|
|
|
18,003 |
|
5,701 |
|
|
|
23,705 |
|
||||||
Operating earnings (loss) |
|
(2,850 |
) |
(103 |
) |
121,950 |
|
3,461 |
|
|
|
122,458 |
|
||||||
Interest expense |
|
|
|
26,947 |
|
2 |
|
22 |
|
|
|
26,971 |
|
||||||
Earnings (loss) before provision for income taxes |
|
(2,850 |
) |
(27,050 |
) |
121,948 |
|
3,439 |
|
|
|
95,487 |
|
||||||
Provision (benefit) for income taxes |
|
(1,107 |
) |
(10,506 |
) |
45,059 |
|
1,882 |
|
|
|
35,328 |
|
||||||
Equity in earnings of subsidiaries, net of tax |
|
61,902 |
|
78,446 |
|
1,557 |
|
|
|
(141,905 |
) |
|
|
||||||
Net earnings |
|
60,159 |
|
61,902 |
|
78,446 |
|
1,557 |
|
(141,905 |
) |
60,159 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
8,149 |
|
|
|
8,149 |
|
||||||
Total comprehensive income (loss) |
|
$ |
60,159 |
|
$ |
61,902 |
|
$ |
78,446 |
|
$ |
9,706 |
|
$ |
(141,905 |
) |
$ |
68,308 |
|
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, 2015
(In thousands)
|
|
Parent |
|
Sally Holdings
|
|
Guarantor
|
|
Non-
|
|
Consolidating
|
|
Sally Beauty
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net sales |
|
$ |
|
|
$ |
|
|
$ |
772,833 |
|
$ |
164,922 |
|
$ |
|
|
$ |
937,755 |
|
Related party sales |
|
|
|
|
|
634 |
|
|
|
(634 |
) |
|
|
||||||
Cost of products sold and distribution expenses |
|
|
|
|
|
383,916 |
|
87,021 |
|
(634 |
) |
470,303 |
|
||||||
Gross profit |
|
|
|
|
|
389,551 |
|
77,901 |
|
|
|
467,452 |
|
||||||
Selling, general and administrative expenses |
|
2,344 |
|
89 |
|
246,441 |
|
68,582 |
|
|
|
317,456 |
|
||||||
Depreciation and amortization |
|
|
|
|
|
15,300 |
|
5,689 |
|
|
|
20,989 |
|
||||||
Operating earnings (loss) |
|
(2,344 |
) |
(89 |
) |
127,810 |
|
3,630 |
|
|
|
129,007 |
|
||||||
Interest expense |
|
|
|
29,185 |
|
1 |
|
42 |
|
|
|
29,228 |
|
||||||
Earnings (loss) before provision for income taxes |
|
(2,344 |
) |
(29,274 |
) |
127,809 |
|
3,588 |
|
|
|
99,779 |
|
||||||
Provision (benefit) for income taxes |
|
(1,109 |
) |
(11,321 |
) |
48,592 |
|
2,082 |
|
|
|
38,244 |
|
||||||
Equity in earnings of subsidiaries, net of tax |
|
62,770 |
|
80,723 |
|
1,506 |
|
|
|
(144,999 |
) |
|
|
||||||
Net earnings |
|
61,535 |
|
62,770 |
|
80,723 |
|
1,506 |
|
(144,999 |
) |
61,535 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
(29,858 |
) |
|
|
(29,858 |
) |
||||||
Total comprehensive income (loss) |
|
$ |
61,535 |
|
$ |
62,770 |
|
$ |
80,723 |
|
$ |
(28,352 |
) |
$ |
(144,999 |
) |
$ |
31,677 |
|
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, 2016
(In thousands)
|
|
Parent |
|
Sally Holdings
|
|
Guarantor
|
|
Non-
|
|
Consolidating
|
|
Sally Beauty
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net sales |
|
$ |
|
|
$ |
|
|
$ |
1,615,928 |
|
$ |
362,171 |
|
$ |
|
|
$ |
1,978,099 |
|
Related party sales |
|
|
|
|
|
1,382 |
|
|
|
(1,382 |
) |
|
|
||||||
Cost of products sold and distribution expenses |
|
|
|
|
|
801,959 |
|
195,999 |
|
(1,382 |
) |
996,576 |
|
||||||
Gross profit |
|
|
|
|
|
815,351 |
|
166,172 |
|
|
|
981,523 |
|
||||||
Selling, general and administrative expenses |
|
5,576 |
|
170 |
|
536,067 |
|
139,226 |
|
|
|
681,039 |
|
||||||
Depreciation and amortization |
|
1 |
|
|
|
35,651 |
|
11,439 |
|
|
|
47,091 |
|
||||||
Operating earnings (loss) |
|
(5,577 |
) |
(170 |
) |
243,633 |
|
15,507 |
|
|
|
253,393 |
|
||||||
Interest expense |
|
|
|
90,866 |
|
4 |
|
44 |
|
|
|
90,914 |
|
||||||
Earnings (loss) before provision for income taxes |
|
(5,577 |
) |
(91,036 |
) |
243,629 |
|
15,463 |
|
|
|
162,479 |
|
||||||
Provision (benefit) for income taxes |
|
(2,166 |
) |
(35,359 |
) |
91,823 |
|
5,779 |
|
|
|
60,077 |
|
||||||
Equity in earnings of subsidiaries, net of tax |
|
105,813 |
|
161,490 |
|
9,684 |
|
|
|
(276,987 |
) |
|
|
||||||
Net earnings |
|
102,402 |
|
105,813 |
|
161,490 |
|
9,684 |
|
(276,987 |
) |
102,402 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
(2,072 |
) |
|
|
(2,072 |
) |
||||||
Total comprehensive income (loss) |
|
$ |
102,402 |
|
$ |
105,813 |
|
$ |
161,490 |
|
$ |
7,612 |
|
$ |
(276,987 |
) |
$ |
100,330 |
|
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, 2015
(In thousands)
|
|
Parent |
|
Sally Holdings
|
|
Guarantor
|
|
Non-
|
|
Consolidating
|
|
Sally Beauty
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net sales |
|
$ |
|
|
$ |
|
|
$ |
1,540,756 |
|
$ |
361,466 |
|
$ |
|
|
$ |
1,902,222 |
|
Related party sales |
|
|
|
|
|
1,401 |
|
|
|
(1,401 |
) |
|
|
||||||
Cost of products sold and distribution expenses |
|
|
|
|
|
770,732 |
|
191,670 |
|
(1,401 |
) |
961,001 |
|
||||||
Gross profit |
|
|
|
|
|
771,425 |
|
169,796 |
|
|
|
941,221 |
|
||||||
Selling, general and administrative expenses |
|
4,720 |
|
193 |
|
504,227 |
|
145,270 |
|
|
|
654,410 |
|
||||||
Depreciation and amortization |
|
|
|
|
|
30,153 |
|
11,414 |
|
|
|
41,567 |
|
||||||
Operating earnings (loss) |
|
(4,720 |
) |
(193 |
) |
237,045 |
|
13,112 |
|
|
|
245,244 |
|
||||||
Interest expense |
|
|
|
58,378 |
|
3 |
|
88 |
|
|
|
58,469 |
|
||||||
Earnings (loss) before provision for income taxes |
|
(4,720 |
) |
(58,571 |
) |
237,042 |
|
13,024 |
|
|
|
186,775 |
|
||||||
Provision (benefit) for income taxes |
|
(1,833 |
) |
(22,700 |
) |
89,465 |
|
5,399 |
|
|
|
70,331 |
|
||||||
Equity in earnings of subsidiaries, net of tax |
|
119,331 |
|
155,202 |
|
7,625 |
|
|
|
(282,158 |
) |
|
|
||||||
Net earnings |
|
116,444 |
|
119,331 |
|
155,202 |
|
7,625 |
|
(282,158 |
) |
116,444 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
(47,159 |
) |
|
|
(47,159 |
) |
||||||
Total comprehensive income (loss) |
|
$ |
116,444 |
|
$ |
119,331 |
|
$ |
155,202 |
|
$ |
(39,534 |
) |
$ |
(282,158 |
) |
$ |
69,285 |
|
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
Condensed Consolidating Statement of Cash Flows
Six months ended March 31, 2016
(In thousands)
|
|
Parent |
|
Sally Holdings
|
|
Guarantor
|
|
Non-
|
|
Consolidating
|
|
Sally Beauty
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net cash provided (used) by operating activities |
|
$ |
150,609 |
|
$ |
(7,470 |
) |
$ |
59,202 |
|
$ |
9,867 |
|
$ |
|
|
$ |
212,208 |
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Capital expenditures, net of proceeds from sale of property and equipment |
|
(2 |
) |
|
|
(60,542 |
) |
(11,366 |
) |
|
|
(71,910 |
) |
||||||
Acquisitions, net of cash acquired |
|
|
|
|
|
(2,250 |
) |
|
|
|
|
(2,250 |
) |
||||||
Net cash used by investing activities |
|
(2 |
) |
|
|
(62,792 |
) |
(11,366 |
) |
|
|
(74,160 |
) |
||||||
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Proceeds from issuance of long-term debt |
|
|
|
912,000 |
|
|
|
|
|
|
|
912,000 |
|
||||||
Repayments of long-term debt |
|
|
|
(937,785 |
) |
(46 |
) |
(323 |
) |
|
|
(938,154 |
) |
||||||
Repurchases of common stock |
|
(162,367 |
) |
|
|
|
|
|
|
|
|
(162,367 |
) |
||||||
Debt issuance costs |
|
|
|
(12,748 |
) |
|
|
|
|
|
|
(12,748 |
) |
||||||
Proceeds from exercises of stock options |
|
10,731 |
|
|
|
|
|
|
|
|
|
10,731 |
|
||||||
Excess tax benefit from share-based compensation |
|
1,029 |
|
|
|
|
|
|
|
|
|
1,029 |
|
||||||
Net cash used by financing activities |
|
(150,607 |
) |
(38,533 |
) |
(46 |
) |
(323 |
) |
|
|
(189,509 |
) |
||||||
Effect of foreign exchange rate changes on cash and cash equivalents |
|
|
|
|
|
|
|
(29 |
) |
|
|
(29 |
) |
||||||
Net (decrease) increase in cash and cash equivalents |
|
|
|
(46,003 |
) |
(3,636 |
) |
(1,851 |
) |
|
|
(51,490 |
) |
||||||
Cash and cash equivalents, beginning of period |
|
|
|
46,003 |
|
58,851 |
|
35,184 |
|
|
|
140,038 |
|
||||||
Cash and cash equivalents, end of period |
|
$ |
|
|
$ |
|
|
$ |
55,215 |
|
$ |
33,333 |
|
$ |
|
|
$ |
88,548 |
|
Sally Beauty Holdings, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements
(Unaudited)
Condensed Consolidating Statement of Cash Flows
Six months ended March 31, 2015
(In thousands)
|
|
Parent |
|
Sally Holdings
|
|
Guarantor
|
|
Non-
|
|
Consolidating
|
|
Sally Beauty
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net cash (used) provided by operating activities |
|
$ |
(6,807 |
) |
$ |
121,503 |
|
$ |
54,036 |
|
$ |
5,720 |
|
$ |
|
|
$ |
174,452 |
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Capital expenditures, net of proceeds from sale of property and equipment |
|
(1 |
) |
|
|
(25,027 |
) |
(12,309 |
) |
|
|
(37,337 |
) |
||||||
Acquisitions, net of cash acquired |
|
|
|
|
|
(2,028 |
) |
|
|
|
|
(2,028 |
) |
||||||
Net cash used by investing activities |
|
(1 |
) |
|
|
(27,055 |
) |
(12,309 |
) |
|
|
(39,365 |
) |
||||||
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Proceeds from issuance of long-term debt |
|
|
|
|
|
14 |
|
969 |
|
|
|
983 |
|
||||||
Repayments of long-term debt |
|
|
|
|
|
(89 |
) |
(1,307 |
) |
|
|
(1,396 |
) |
||||||
Repurchases of common stock |
|
(67,524 |
) |
|
|
|
|
|
|
|
|
( 67,524 |
) |
||||||
Proceeds from exercises of stock options |
|
51,765 |
|
|
|
|
|
|
|
|
|
51,765 |
|
||||||
Excess tax benefit from share-based compensation |
|
22,567 |
|
|
|
|
|
|
|
|
|
22,567 |
|
||||||
Net cash provided (used) by financing activities |
|
6,808 |
|
|
|
(75 |
) |
(338 |
) |
|
|
6,395 |
|
||||||
Effect of foreign exchange rate changes on cash and cash equivalents |
|
|
|
|
|
|
|
(2,030 |
) |
|
|
(2,030 |
) |
||||||
Net increase (decrease) in cash and cash equivalents |
|
|
|
121,503 |
|
26,906 |
|
(8,957 |
) |
|
|
139,452 |
|
||||||
Cash and cash equivalents, beginning of period |
|
|
|
27,000 |
|
40,042 |
|
39,533 |
|
|
|
106,575 |
|
||||||
Cash and cash equivalents, end of period |
|
$ |
|
|
$ |
148,503 |
|
$ |
66,948 |
|
$ |
30,576 |
|
$ |
|
|
$ |
246,027 |
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
This section discusses managements view of the financial condition, results of operations and cash flows of Sally Beauty and its consolidated subsidiaries. This section should be read in conjunction with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, as well as the Risk Factors section contained in that Annual Report and information contained elsewhere in this Quarterly Report, including the consolidated interim financial statements and condensed notes to those financial statements. This Managements Discussion and Analysis of Financial Condition and Results of Operations section may contain forward-looking statements. Please see Cautionary Notice Regarding Forward-Looking Statements, included at the beginning of this Quarterly Report for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements that could cause results to differ materially from those reflected in such forward-looking statements.
Highlights of the Six Months ended March 31, 2016:
· Our consolidated net sales from company-operated stores that have been open for 14 months or longer, which we refer to as same store sales, increased 3.9% for the six months ended March 31, 2016, compared to 2.5% for the six months ended March 31, 2015;
· Our consolidated net sales for the six months ended March 31, 2016, increased by $75.9 million, or 4.0%, to $1,978.1 million compared to $1,902.2 million for the six months ended March 31, 2015;
· Our consolidated gross profit for the six months ended March 31, 2016, increased by $40.3 million, or 4.3%, to $981.5 million compared to $941.2 million for the six months ended March 31, 2015. As a percentage of net sales, gross profit was 49.6% for the six months ended March 31, 2016, compared to 49.5% for the six months ended March 31, 2015;
· Our consolidated operating earnings for the six months ended March 31, 2016, increased by $8.1 million, or 3.3%, to $253.4 million compared to $245.2 million for the six months ended March 31, 2015. As a percentage of net sales, operating earnings decreased by 10 basis points to 12.8% for the six months ended March 31, 2016, compared to 12.9% for the six months ended March 31, 2015;
· Our consolidated net earnings decreased by $14.0 million, or 12.1%, to $102.4 million for the six months ended March 31, 2016, compared to $116.4 million for the six months ended March 31, 2015. As a percentage of net sales, net earnings decreased by 90 basis points to 5.2% for the six months ended March 31, 2016, compared to 6.1% for the six months ended March 31, 2015;
· Cash provided by operations was $212.2 million for the six months ended March 31, 2016, compared to $174.5 million for the six months ended March 31, 2015;
· During the six months ended March 31, 2016, the Company redeemed in full its 6.875% senior notes due 2019 primarily with the net proceeds from its December 2015 issuance of $750.0 principal amount of its 5.625% senior notes due 2025. For the six months ended March 31, 2016, the Company recorded a loss on extinguishment of debt of $33.3 million in connection therewith; and
· During the six months ended March 31, 2016, we repurchased and subsequently retired approximately 6.2 million shares of our common stock under the share repurchase program approved by our Board of Directors in August 2014, at an aggregate cost of approximately $162.4 million.
Overview
Description of Business
At March 31, 2016, we operated primarily through two business units, Sally Beauty Supply and Beauty Systems Group, or BSG. We believe the Company is the largest open-line distributor of professional beauty supplies in the U.S. based on store count. As of March 31, 2016, through Sally Beauty Supply and BSG, we had a multi-channel platform of 4,862 company-operated stores and supplied 182 franchised stores primarily in North America and selected South American and European countries. Within BSG, we also have one of the largest networks of professional distributor sales consultants in North America. We provide our customers with a wide variety of leading third-party branded and exclusive-label professional beauty supplies, including hair color products, hair care products, styling appliances, skin and nail care products and other beauty items. Sally Beauty Supply stores target retail consumers and salon professionals, while BSG exclusively targets salons and salon professionals. For the six months ended March 31, 2016, our consolidated net sales and operating earnings were $1,978.1 million and $253.4 million, respectively.
As of March 31, 2016, Sally Beauty Supply operated 3,714 company-operated retail stores, 2,897 of which are located in the U.S., with the remaining 817 company-operated stores located in Canada, Mexico, Chile, Colombia, Peru, the United Kingdom, Ireland, Belgium, France, Germany, the Netherlands and Spain. Sally Beauty Supply also supplied 18 franchised stores located in the United Kingdom, Belgium and certain other European countries. In the U.S. and Canada, our Sally Beauty Supply stores average approximately 1,700 square feet in size and are located primarily in strip shopping centers. Our Sally Beauty Supply stores carry an extensive selection of professional beauty supplies for both retail customers and salon professionals, featuring an
average of 8,000 SKUs of beauty products across product categories including hair color, hair care, skin and nail care, beauty sundries and electrical appliances. Sally Beauty Supply stores carry leading third-party brands, such as Clairol ® , CHI ® , China Glaze ® , OPI ® and Conair ® , as well as an extensive selection of exclusive-label merchandise. Store formats, including average size and product selection, for Sally Beauty Supply outside the U.S. and Canada vary by marketplace. For the six months ended March 31, 2016, Sally Beauty Supplys net sales and segment operating profit were $1,183.6 million and $208.1 million, respectively, representing 60% and 62% of our consolidated net sales and consolidated operating profit before unallocated corporate expenses and share-based compensation expenses.
We believe BSG is the largest full-service distributor of professional beauty supplies in North America, exclusively targeting salons and salon professionals. As of March 31, 2016, BSG had 1,148 company-operated stores, supplied 164 franchised stores and had a sales force of approximately 944 professional distributor sales consultants selling exclusively to salons and salon professionals in the U.S., and in Canada, Mexico and certain European countries. Company-operated BSG stores, which primarily operate under the CosmoProf banner, average approximately 2,600 square feet in size and are primarily located in secondary strip shopping centers. BSG stores provide a comprehensive selection of beauty products featuring an average of 9,000 SKUs that include hair color and care, skin and nail care, beauty sundries and electrical appliances. Through BSGs large store base and sales force, BSG is able to access a significant portion of the highly fragmented U.S. salon industry. BSG stores carry leading third-party brands such as Paul Mitchell ® , Wella ® , Sebastian ® , Goldwell ® , Joico ® and Aquage ® , intended for use in salons and for resale by the salons to consumers. BSG is also the exclusive source for certain well-known third-party branded products pursuant to exclusive distribution agreements with certain suppliers within specified geographic territories. For the six months ended March 31, 2016, BSGs net sales and segment operating profit were $794.5 million and $127.3 million, respectively, representing 40% and 38% of our consolidated net sales and consolidated operating profit before unallocated corporate expenses and share-based compensation expenses.
Key Industry and Business Trends
We operate primarily within the large and growing U.S. beauty supply industry. We believe that a number of key industry and business trends and characteristics will influence our business and our financial results going forward. These key trends and characteristics are discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015. Please see Key Industry and Business Trends in Item 1 of such Annual Report.
Share Repurchase Program
In August 2014, we announced that our Board of Directors approved a share repurchase program authorizing us to repurchase up to $1.0 billion of our common stock over a period of approximately three years (the 2014 Share Repurchase Program). The 2014 Share Repurchase Program expires on September 30, 2017.
During the six months ended March 31, 2016 and 2015, the Company repurchased and subsequently retired approximately 6.2 million and 2.1 million shares, respectively, of its common stock under the 2014 Share Repurchase Program at an aggregate cost of $162.4 million and $67.5 million, respectively. We funded these share repurchases with existing cash balances, cash from operations and borrowings under the ABL facility. The Company reduced common stock and additional paid-in capital, in the aggregate, by these amounts. However, as required by GAAP, to the extent that share repurchase amounts exceeded the balance of additional paid-in capital prior to us recording such repurchases, we recorded the excess in accumulated deficit.
As of March 31, 2016, we had approximately $610.1 million of additional share repurchase authorization remaining under the 2014 Share Repurchase Program. Please see Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers in Part II Other Information, of this Quarterly Report for additional information about the Companys share repurchases.
Data Security Incidents
In the fiscal year ended September 30, 2014, we disclosed that we had experienced a data security incident (the 2014 data security incident). In May 2015, we disclosed that we had experienced a second data security incident (the 2015 data security incident and, together with the 2014 data security incident, the data security incidents). The data security incidents involved the unauthorized installation of malicious software (malware) on our information technology systems, including our point-of-sale systems that, we believe, may have placed at risk certain payment card data for some transactions. The costs that the Company has incurred to date in connection with the data security incidents primarily include professional advisory fees and legal costs and expenses relating to investigating and remediating the data security incidents. For the six months ended March 31, 2016 and 2015, selling, general and administrative expenses reflect expenses of $1.2 million and $1.8 million, respectively, relating to the data security incidents.
We expect to incur additional costs and expenses related to the data security incidents in future periods. These costs may result from liabilities related to claims by payment card networks, governmental or third party investigations, proceedings or litigation
and legal and other fees necessary to defend against any potential liabilities or claims, and further investigatory and remediation costs. As of March 31, 2016, the scope of these additional costs, or a range thereof, cannot be reasonably estimated and, while we do not anticipate these additional costs or liabilities would have a material adverse impact on our business, financial condition and operating results, these additional costs could be significant. Please see Risk Factors We may be adversely affected by any disruption in our information technology systems, Unauthorized access to confidential information and data on our information technology systems and security and data breaches could materially adversely affect our business, financial condition and operating results and We have experienced data security incidents and are not yet able to determine the full extent or scope of the potential liabilities relating to these data security incidents in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2015.
Other Significant Items
Derivative Instruments
As a multinational corporation, we are subject to certain market risks including changes in market interest rates and foreign currency fluctuations. We may consider a variety of practices in the ordinary course of business to manage these market risks, including, when deemed appropriate, the use of derivative instruments such as interest rate swaps, and foreign currency options, collars and forwards, hereafter, foreign exchange contracts. Currently, we do not purchase or hold any derivative instruments for speculative or trading purposes.
Foreign Currency Derivative Instruments
We are exposed to potential gains or losses from foreign currency fluctuations affecting net investments in subsidiaries (including intercompany balances not permanently invested) and earnings denominated in foreign currencies, as well as exposure resulting from the purchase of merchandise by certain of our subsidiaries in a currency other than their functional currency and from the sale of products and services among the parent company and subsidiaries with a functional currency different from the parent or among subsidiaries with different functional currencies. Our primary exposures are to changes in exchange rates for the U.S. dollar versus the Euro, the British pound sterling, the Canadian dollar, the Chilean peso, and the Mexican peso. In addition, from time to time we may have exposure to changes in the exchange rate for the British pound sterling versus the Euro in connection with the sale of products and services among certain European subsidiaries of the Company. Our various foreign currency exposures at times offset each other, sometimes providing a natural hedge against foreign currency risk. In connection with the remaining foreign currency risk, the Company from time to time 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 resulting from foreign currency market movements.
The Company uses foreign exchange contracts to manage the exposure to the U.S. dollar resulting from certain of its Sinelco Group subsidiaries purchases of merchandise from third-party suppliers. Sinelcos functional currency is the Euro. As such, at March 31, 2016, we hold foreign currency forwards which enable us to sell approximately 6.4 million ($7.3 million, at the March 31, 2016 exchange rate) at the weighted average contractual exchange rate of 1.1274. The foreign currency forwards discussed in this paragraph are with a single counterparty and expire ratably through September 15, 2016.
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, 2016, we hold: (a) a foreign currency forward which enables us to sell approximately 22.6 million ($25.8 million, at the March 31, 2016 exchange rate) at the contractual exchange rate of 1.1330, (b) a foreign currency forward which enables us to sell approximately $6.8 million Canadian dollars ($5.2 million, at the March 31, 2016 exchange rate) at the contractual exchange rate of 1.2978, (c) foreign currency forwards which enable us to buy approximately $8.3 million Canadian dollars ($6.4 million, at the March 31, 2016 exchange rate) at the weighted average contractual exchange rate of 1.3053, (d) a foreign currency forward which enables us to sell approximately 19.2 million Mexican pesos ($1.1 million, at the March 31, 2016 exchange rate) at the contractual exchange rate of 17.2905, (e) a foreign currency forward which enables us to buy approximately £9.7 million ($13.9 million, at the March 31, 2016 exchange rate) at the contractual exchange rate of 1.4391 and (f) a foreign currency forward which enables us to sell approximately £1.0 million ($1.4 million, at the March 31, 2016 exchange rate) at the contractual exchange rate of 1.4393. All the foreign currency forwards discussed in this paragraph are with a single counterparty (not the same counterparty as that on the forwards discussed in the preceding paragraph) and expire on or before June 30, 2016.
The Companys 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. During the six months ended March 31, 2016 and 2015, selling, general and administrative expenses include a net loss of $0.6 million and a net gain of $5.0 million, respectively, in connection with all of the Companys foreign currency derivative instruments, including marked-to-market adjustments. Please see Item 3 Quantitative and Qualitative Disclosures about
Market RiskForeign currency exchange rate risk contained in this Quarterly Report on Form 10-Q and Note 14 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, 2015 for additional information about the Companys foreign currency derivative instruments.
Share-Based Compensation Awards
The Company granted approximately 1.5 million and 1.2 million service-based stock options and approximately 40,000 and 219,000 service-based restricted share awards to its employees during the six months ended March 31, 2016 and 2015, respectively. Upon issuance of such grants, the Company recognized accelerated share-based compensation expense of $1.3 million and $4.8 million in the six months ended March 31, 2016 and 2015, 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. Amended and Restated 2010 Omnibus Incentive Plan (the 2010 Plan). The Company also granted approximately 27,000 and 20,000 service-based restricted stock units to its non-employee directors during the six months ended March 31, 2016 and 2015, respectively.
In addition, during the six months ended March 31, 2016 the Company granted approximately 152,000 Performance-Based Units (Performance Unit or Performance Units) to its officers and employees under the 2010 Plan. Under the terms of the Performance Unit award, a grantee may earn from 0% to 200% of his or her target shares, with the ultimate settlement (and the expense recognized) dependent on the Company achieving certain specified cumulative performance targets during the three-year period ending on September 30, 2018 (the Performance Period) and satisfaction of the employee service condition. Periodic expense for Performance Unit awards, which is estimated quarterly, is based on the Companys projected performance during the Performance Period compared to the performance targets contained in the award. Please see Note 7 of the Condensed Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report for more information about the Companys Performance Unit awards.
For the six months ended March 31, 2016 and 2015, share-based compensation costs charged against earnings and included in selling, general and administrative expenses for all share-based compensation arrangements were $7.2 million and $10.6 million, respectively.
Non-recurring Items
During the six months ended March 31, 2016, the Company redeemed in full its 6.875% senior notes due 2019 primarily with the net proceeds from its December 2015 issuance of $750.0 principal amount of its 5.625% senior notes due 2025. For the six months ended March 31, 2016, the Company recorded a loss on extinguishment of debt of $33.3 million, including a call premium of $25.8 million and unamortized debt issuance costs of $7.5 million expensed, in connection therewith.
Results of Operations
The following table shows the condensed results of operations of our business for the three and six months ended March 31, 2016 and 2015 (dollars in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
|
||||
Net sales |
|
$ |
980,067 |
|
$ |
937,755 |
|
$ |
1,978,099 |
|
$ |
1,902,222 |
|
Cost of products sold and distribution expenses |
|
492,593 |
|
470,303 |
|
996,576 |
|
961,001 |
|
||||
Gross profit |
|
487,474 |
|
467,452 |
|
981,523 |
|
941,221 |
|
||||
Total other operating costs and expenses |
|
365,016 |
|
338,445 |
|
728,130 |
|
695,977 |
|
||||
Operating earnings |
|
122,458 |
|
129,007 |
|
253,393 |
|
245,244 |
|
||||
Interest expense |
|
26,971 |
|
29,228 |
|
90,914 |
|
58,469 |
|
||||
Earnings before provision for income taxes |
|
95,487 |
|
99,779 |
|
162,479 |
|
186,775 |
|
||||
Provision for income taxes |
|
35,328 |
|
38,244 |
|
60,077 |
|
70,331 |
|
||||
Net earnings |
|
$ |
60,159 |
|
$ |
61,535 |
|
$ |
102,402 |
|
$ |
116,444 |
|
The following table shows the condensed results of operations of our business for the three and six months ended March 31, 2016 and 2015, expressed as a percentage of net sales for each respective period shown:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
|
Net sales |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
Cost of products sold and distribution expenses |
|
50.3 |
% |
50.2 |
% |
50.4 |
% |
50.5 |
% |
Gross profit |
|
49.7 |
% |
49.8 |
% |
49.6 |
% |
49.5 |
% |
Total other operating costs and expenses |
|
37.2 |
% |
36.0 |
% |
36.8 |
% |
36.6 |
% |
Operating earnings |
|
12.5 |
% |
13.8 |
% |
12.8 |
% |
12.9 |
% |
Interest expense |
|
2.8 |
% |
3.2 |
% |
4.6 |
% |
3.1 |
% |
Earnings before provision for income taxes |
|
9.7 |
% |
10.6 |
% |
8.2 |
% |
9.8 |
% |
Provision for income taxes |
|
3.6 |
% |
4.0 |
% |
3.0 |
% |
3.7 |
% |
Net earnings |
|
6.1 |
% |
6.6 |
% |
5.2 |
% |
6.1 |
% |
Key Operating Metrics
The following table sets forth, for the periods indicated, information concerning key measures we rely on to gauge our operating performance (dollars in thousands):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
|
||||
Net sales: |
|
|
|
|
|
|
|
|
|
||||
Sally Beauty Supply |
|
$ |
587,622 |
|
$ |
572,110 |
|
$ |
1,183,588 |
|
$ |
1,158,629 |
|
BSG |
|
392,445 |
|
365,645 |
|
794,511 |
|
743,593 |
|
||||
Consolidated |
|
$ |
980,067 |
|
$ |
937,755 |
|
$ |
1,978,099 |
|
$ |
1,902,222 |
|
Gross profit |
|
$ |
487,474 |
|
$ |
467,452 |
|
$ |
981,523 |
|
$ |
941,221 |
|
Gross profit margin |
|
49.7 |
% |
49.8 |
% |
49.6 |
% |
49.5 |
% |
||||
Selling, general and administrative expenses |
|
$ |
341,311 |
|
$ |
317,456 |
|
$ |
681,039 |
|
$ |
654,410 |
|
Depreciation and amortization |
|
$ |
23,705 |
|
$ |
20,989 |
|
$ |
47,091 |
|
$ |
41,567 |
|
Earnings before provision for income taxes: |
|
|
|
|
|
|
|
|
|
||||
Segment operating profit: |
|
|
|
|
|
|
|
|
|
||||
Sally Beauty Supply |
|
$ |
101,975 |
|
$ |
106,089 |
|
$ |
208,052 |
|
$ |
207,268 |
|
BSG |
|
61,404 |
|
55,607 |
|
127,284 |
|
112,197 |
|
||||
Segment operating profit |
|
163,379 |
|
161,696 |
|
335,336 |
|
319,465 |
|
||||
Unallocated expenses (a) |
|
(37,936 |
) |
(29,849 |
) |
(74,770 |
) |
(63,621 |
) |
||||
Share-based compensation expense |
|
(2,985 |
) |
(2,840 |
) |
(7,173 |
) |
(10,600 |
) |
||||
Operating earnings |
|
122,458 |
|
129,007 |
|
253,393 |
|
245,244 |
|
||||
Interest expense (b) |
|
(26,971 |
) |
(29,228 |
) |
(90,914 |
) |
(58,469 |
) |
||||
Earnings before provision for income taxes |
|
$ |
95,487 |
|
$ |
99,779 |
|
$ |
162,479 |
|
$ |
186,775 |
|
Segment operating profit margin: |
|
|
|
|
|
|
|
|
|
||||
Sally Beauty Supply |
|
17.4 |
% |
18.5 |
% |
17.6 |
% |
17.9 |
% |
||||
BSG |
|
15.6 |
% |
15.2 |
% |
16.0 |
% |
15.1 |
% |
||||
Consolidated operating profit margin |
|
12.5 |
% |
13.8 |
% |
12.8 |
% |
12.9 |
% |
||||
Number of stores at end-of-period (including franchises): |
|
|
|
|
|
|
|
|
|
||||
Sally Beauty Supply |
|
|
|
|
|
3,732 |
|
3,631 |
|
||||
BSG |
|
|
|
|
|
1,312 |
|
1,278 |
|
||||
Consolidated |
|
|
|
|
|
5,044 |
|
4,909 |
|
||||
Same store sales growth (c) |
|
|
|
|
|
|
|
|
|
||||
Sally Beauty Supply |
|
2.3 |
% |
1.4 |
% |
2.4 |
% |
1.5 |
% |
||||
BSG |
|
7.7 |
% |
5.9 |
% |
7.4 |
% |
4.9 |
% |
||||
Consolidated |
|
4.0 |
% |
2.8 |
% |
3.9 |
% |
2.5 |
% |
(a) Unallocated expenses consist of corporate and shared costs and are included in selling, general and administrative expenses in our consolidated statements of earnings.
(b) For the six months ended March 31, 2016, interest expense includes a loss on extinguishment of debt of $33.3 million in connection with the Companys December 2015 redemption of its senior notes due 2019.
(c) For the purpose of calculating our same store sales metrics, we compare the current period sales for stores open for 14 months or longer as of the last day of a month with the sales for these stores for the comparable period in the prior fiscal year. Our same store sales are calculated in constant dollars and include internet-based sales (which are not separately material for each of the periods presented herein) and the effect of store expansions, if applicable, but do not generally include the sales from stores relocated until 14 months after the relocation. The sales from stores acquired are excluded from our same store sales calculation until 14 months after the acquisition.
The Three Months Ended March 31, 2016 compared to the Three Months Ended March 31, 2015
The table below presents net sales, gross profit and gross profit margin data for each reportable segment (dollars in thousands):
|
|
Three Months Ended March 31, |
|
|||||||||
|
|
2016 |
|
2015 |
|
Increase (Decrease) |
|
|||||
Net sales: |
|
|
|
|
|
|
|
|
|
|||
Sally Beauty Supply |
|
$ |
587,622 |
|
$ |
572,110 |
|
$ |
15,512 |
|
2.7 |
% |
BSG |
|
392,445 |
|
365,645 |
|
26,800 |
|
7.3 |
% |
|||
Consolidated net sales |
|
$ |
980,067 |
|
$ |
937,755 |
|
$ |
42,312 |
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
|||
Gross profit: |
|
|
|
|
|
|
|
|
|
|||
Sally Beauty Supply |
|
$ |
325,104 |
|
$ |
316,501 |
|
$ |
8,603 |
|
2.7 |
% |
BSG |
|
162,370 |
|
150,951 |
|
11,419 |
|
7.6 |
% |
|||
Consolidated gross profit |
|
$ |
487,474 |
|
$ |
467,452 |
|
$ |
20,022 |
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|||
Gross profit margin: |
|
|
|
|
|
|
|
|
|
|||
Sally Beauty Supply |
|
55.3 |
% |
55.3 |
% |
0.0 |
% |
|
|
|||
BSG |
|
41.4 |
% |
41.3 |
% |
0.1 |
% |
|
|
|||
Consolidated gross profit margin |
|
49.7 |
% |
49.8 |
% |
(0.1 |
)% |
|
|
Net Sales
Consolidated net sales increased by $42.3 million, or 4.5%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. Company-operated Sally Beauty Supply and BSG stores that have been open for 14 months or longer contributed an increase in consolidated net sales of approximately $38.6 million, or 4.1%, and sales through our BSG distributor sales consultants contributed an increase in segment net sales of approximately $6.0 million, or 0.6% compared to the three months ended March 31, 2015. Other sales channels (including sales from stores that have been open for less than 14 months, sales through our BSG franchise-based businesses, incremental sales from businesses acquired in the preceding 12 months and sales from our Sally Beauty Supply non-store sales channels) in the aggregate experienced a net decrease in sales of approximately $2.3 million, or 0.2%, compared to the three months ended March 31, 2015. Consolidated net sales for the three months ended March 31, 2016, are inclusive of a net negative impact from changes in foreign currency exchange rates of $12.3 million, including the impact of a stronger U.S. dollar in the three months ended March 31, 2016.
For the three months ended March 31, 2016, consolidated net sales reflect a 4.0% same store sales growth rate compared to 2.8% for the three months ended March 31, 2015. For the three months ended March 31, 2016, our consolidated same store sales growth rate was positively impacted by increases in average unit prices in both operating segments, as well as improved customer traffic in our BSG segment in the U.S., as more fully discussed below.
The $42.3 million increase in consolidated net sales reflects, in our Sally Beauty Supply segment, increases in average unit prices resulting primarily from selective price increases in certain geographical areas of the U.S. and, in our BSG segment, increases in unit volume (including increases in sales at existing stores and the incremental sales from 36 BSG company-operated stores opened or acquired during the last twelve months) and increases in average unit prices (resulting from changes in product mix), as more fully discussed below.
Sally Beauty Supply . Net sales for Sally Beauty Supply increased by $15.5 million, or 2.7%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. In the Sally Beauty Supply segment, company-operated stores that have been open for 14 months or longer contributed an increase in segment net sales of approximately $20.5 million, or 3.6%. Other sales channels (including sales from stores that have been open for less than 14 months and sales from our non-store sales channels, which include the catalog and internet sales of our Sinelco Group subsidiaries) in the aggregate experienced a net decrease in sales of approximately $5.0 million, or 0.9%, compared to the three months ended March 31, 2015. Net sales for Sally Beauty Supply for the three months ended March 31, 2016, are inclusive of a net negative impact from changes in foreign currency exchange rates of approximately $9.5 million.
For the three months ended March 31, 2016, the Sally Beauty Supply segments net sales reflect a 2.3% same store sales growth rate compared to 1.4% for the three months ended March 31, 2015. For the three months ended March 31, 2016, the Sally Beauty Supply segments same store sales growth rate was positively impacted by selective price increases in certain geographical areas of the U.S. and by changes in product mix resulting from a shift in customer preferences.
The $15.5 million increase in the Sally Beauty Supply segments net sales reflects increases in average unit prices resulting from selective price increases in certain geographical areas of the U.S. and a change in product mix primarily resulting from the introduction of certain products with higher average unit prices in the preceding 12 months.
Beauty Systems Group . Net sales for BSG increased by $26.8 million, or 7.3%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. In the BSG segment, company-operated stores that have been open for 14 months or longer contributed an increase in segment net sales of approximately $18.1 million, or 5.0%, and sales through our distributor sales consultants contributed an increase in segment net sales of approximately $6.0 million, or 1.6% compared to the three months ended March 31, 2015. Other sales channels (including sales from stores that have been open for less than 14 months, sales through our franchise-based businesses and incremental sales from businesses acquired in the preceding 12 months) in the aggregate contributed a net increase in sales of approximately $2.7 million, or 0.7%, compared to the three months ended March 31, 2015. Net sales for BSG for the three months ended March 31, 2016, are inclusive of a net negative impact from changes in foreign currency exchange rates of approximately $2.9 million.
For the three months ended March 31, 2016, the BSG segments net sales reflect a 7.7% same store sales growth rate compared to 5.9% for the three months ended March 31, 2015. BSGs segments same store sales growth rate was positively impacted by improved customer traffic in the U.S., compared to the three months ended March 31, 2015.
The $26.8 million increase in the BSG segments net sales is primarily the result of an increase in both unit volume (including increases in sales at existing stores and the incremental sales from 36 company-operated stores opened or acquired during the last twelve months) and average unit prices (resulting from changes in product mix, including as a result of the introduction of certain third-party brands with higher average unit prices in the preceding 12 months).
Gross Profit
Consolidated gross profit increased by $20.0 million, or 4.3%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015, principally due to higher sales volume in both business segments and improved gross profit margins in our BSG segment, as more fully described below. Consolidated gross profit as a percentage of net sales, or consolidated gross profit margin, was 49.7% for the three months ended March 31, 2016, compared to 49.8% for the three months ended March 31, 2015.
Sally Beauty Supply . Sally Beauty Supplys gross profit increased by $8.6 million, or 2.7%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015, principally as a result of higher sales volume. Sally Beauty Supplys gross profit as a percentage of net sales was 55.3% for both the three months ended March 31, 2016 and 2015.
Beauty Systems Group . BSGs gross profit increased by $11.4 million, or 7.6%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015, principally as a result of higher sales volume and improved gross profit margin. BSGs gross profit as a percentage of net sales increased to 41.4% for the three months ended March 31, 2016, compared to 41.3% for the three months ended March 31, 2015 primarily as a result of a shift in product mix (to higher margin product) resulting from a shift in customer preferences and in sales channel mix (to higher margin store-based product sales).
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses increased by $23.9 million, or 7.5%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. This increase was attributable in part to incremental expenses (including employee compensation, rent and other occupancy-related expenses) resulting from stores opened or acquired in the preceding 12 months (approximately 138 net additional company-operated stores added since March 31, 2015, which represents a 2.9% increase in the number of stores). In addition, the increase reflects higher expenses related to on-going upgrades to our information technology systems (approximately $4.6 million), higher recruitment and compensation-related expenses primarily in connection with our ongoing management transition plans (approximately $0.4 million) and higher credit card fees (approximately $0.9 million). Selling, general and administrative expenses, as a percentage of net sales, increased to 34.8% for the three months ended March 31, 2016, compared to 33.9% for the three months ended March 31, 2015.
Depreciation and Amortization
Consolidated depreciation and amortization was $23.7 million for the three months ended March 31, 2016, compared to $21.0 million for the three months ended March 31, 2015. This increase reflects the incremental depreciation and amortization expenses associated with capital expenditures made in the preceding 12 months (mainly in connection with store openings in both operating segments and with ongoing information technology upgrades), partially offset by the impact of assets that became fully depreciated in the preceding 12 months.
Operating Earnings
The following table sets forth, for the periods indicated, information concerning our operating earnings for each reportable segment (dollars in thousands):
|
|
Three Months Ended March 31, |
|
|||||||||
|
|
2016 |
|
2015 |
|
Increase (Decrease) |
|
|||||
Operating Earnings: |
|
|
|
|
|
|
|
|
|
|||
Segment operating profit: |
|
|
|
|
|
|
|
|
|
|||
Sally Beauty Supply |
|
$ |
101,975 |
|
$ |
106,089 |
|
$ |
(4,114 |
) |
(3.9 |
)% |
BSG |
|
61,404 |
|
55,607 |
|
5,797 |
|
10.4 |
% |
|||
Segment operating profit |
|
163,379 |
|
161,696 |
|
1,683 |
|
1.0 |
% |
|||
Unallocated expenses |
|
(37,936 |
) |
(29,849 |
) |
8,087 |
|
27.1 |
% |
|||
Share-based compensation expense |
|
(2,985 |
) |
(2,840 |
) |
145 |
|
5.1 |
% |
|||
Operating earnings |
|
$ |
122,458 |
|
$ |
129,007 |
|
$ |
(6,549 |
) |
(5.1 |
)% |
Consolidated operating earnings decreased by $6.5 million, or 5.1%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015, primarily as a result of higher unallocated expenses and a decrease in our Sally Beauty Supply segments operating profit, partially offset by an increase in our BSG segments operating profit, as more fully discussed below. Operating earnings, as a percentage of net sales, decreased to 12.5% for the three months ended March 31, 2016, compared to 13.8% for the three months ended March 31, 2015. This decrease reflects higher consolidated operating expenses as a percentage of consolidated net sales, as more fully discussed below, as well as the slight decrease in consolidated gross profit margin described above.
Sally Beauty Supply . Sally Beauty Supplys segment operating earnings decreased by $4.1 million, or 3.9%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015, primarily a result of higher operating expenses, partially offset by the increase in the segments net sales described above. This decrease reflects the incremental costs related to 102 net additional company-operated stores (stores opened during the past twelve months, which represents a 2.8% increase in the number of stores) operating during the three months ended March 31, 2016, compared to the three months ended March 31, 2015, higher depreciation expense principally associated with recent store openings and remodels (approximately $2.2 million) and higher expenses related to on-going upgrades to our information technology systems (approximately $1.7 million). Segment operating earnings, as a percentage of net sales, decreased by 110 basis points to 17.4% for the three months ended March 31, 2016, compared to 18.5% for the three months ended March 31, 2015. This decrease reflects higher segment operating expenses as a percentage of the segments net sales, including the expense increases discussed in this paragraph.
Beauty Systems Group . BSGs segment operating earnings increased by $5.8 million, or 10.4%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015, primarily a result of the increase in the segments net sales and the improved gross profit margin described above. This increase was partially offset by the incremental costs related to 36 net additional company-operated stores (stores opened or acquired during the past twelve months, which represents a 3.2% increase in the number of stores) operating during the three months ended March 31, 2016, compared to the three months ended March 31, 2015. Segment operating earnings, as a percentage of net sales, increased by 40 basis points to 15.6% for the three months ended March 31, 2016, compared to 15.2% for the three months ended March 31, 2015. This increase reflects the slight increase in the segments gross profit margin described above, as well as a decrease in segment operating expenses as a percentage of the segments net sales.
Unallocated Expenses. Unallocated expenses, which represent certain corporate costs (such as payroll, employee benefits and travel expenses for corporate staff, certain professional fees, certain new business development expenses and corporate governance expenses) that have not been charged to our operating segments, increased by $8.1 million, or 27.1%, for the three months ended March 31, 2016, compared to the three months ended March 31, 2015. This increase was due primarily to higher corporate expenses related to on-going upgrades to our information technology systems (approximately $2.6 million), higher employee recruitment and compensation-related expenses (approximately $2.6 million), higher employee compensation-related expenses in connection with our ongoing management transition plans (approximately $0.4 million), professional fees mainly in connection with certain corporate initiatives (approximately $1.4 million) and a loss associated with impairment of an intangible asset (approximately $0.6 million).
Share-based Compensation Expense. Total compensation costs charged against income for share-based compensation arrangements increased by $0.1 million to $3.0 million for the three months ended March 31, 2016, compared to $2.8 million for the three months ended March 31, 2015. This increase was mainly due to the impact of awards during the six months ended March 31, 2016, partially offset by the impact of awards that became fully vested after March 31, 2015.
Interest Expense
Interest expense decreased to $27.0 million for the three months ended March 31, 2016, compared to $29.2 million for the three months ended March 31, 2015 principally due to the impact of our debt refinancing in December 2015. Please see Liquidity and Capital Resources below for additional information about the Companys debt and recent debt refinancing activities.
Provision for Income Taxes
The provision for income taxes was $35.3 million and $38.2 million, and the effective income tax rate was 37.0% and 38.3%, for the three months ended March 31, 2016 and 2015, respectively. The lower effective income tax rate for the three months ended March 31, 2016, compared to the three months ended March 31, 2015, was primarily due to an adjustment to non-deductible expenses in the current interim period.
The annual effective tax rate for the full fiscal year 2016 is currently expected to be in the range of 37.5% to 38.5%, versus a comparable actual tax rate for the full fiscal year 2015 of 37.9%.
Net Earnings
As a result of the foregoing, consolidated net earnings decreased by $1.4 million, or 2.2%, to $60.2 million for the three months ended March 31, 2016, compared to $61.5 million for the three months ended March 31, 2015. Net earnings, as a percentage of net sales, were 6.1% for the three months ended March 31, 2016, compared to 6.6% for the three months ended March 31, 2015.
The Six Months Ended March 31, 2016 compared to the Six Months Ended March 31, 2015
The table below presents net sales, gross profit and gross profit margin data for each reportable segment (dollars in thousands):
|
|
Six Months Ended March 31, |
|
|||||||||
|
|
2016 |
|
2015 |
|
Increase |
|
|||||
Net sales: |
|
|
|
|
|
|
|
|
|
|||
Sally Beauty Supply |
|
$ |
1,183,588 |
|
$ |
1,158,629 |
|
$ |
24,959 |
|
2.2 |
% |
BSG |
|
794,511 |
|
743,593 |
|
50,918 |
|
6.8 |
% |
|||
Consolidated net sales |
|
$ |
1,978,099 |
|
$ |
1,902,222 |
|
$ |
75,877 |
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|||
Gross profit: |
|
|
|
|
|
|
|
|
|
|||
Sally Beauty Supply |
|
$ |
653,007 |
|
$ |
635,510 |
|
$ |
17,497 |
|
2.8 |
% |
BSG |
|
328,516 |
|
305,711 |
|
22,805 |
|
7.5 |
% |
|||
Consolidated gross profit |
|
$ |
981,523 |
|
$ |
941,221 |
|
$ |
40,302 |
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|||
Gross profit margin: |
|
|
|
|
|
|
|
|
|
|||
Sally Beauty Supply |
|
55.2 |
% |
54.9 |
% |
0.3 |
% |
|
|
|||
BSG |
|
41.3 |
% |
41.1 |
% |
0.2 |
% |
|
|
|||
Consolidated gross profit margin |
|
49.6 |
% |
49.5 |
% |
0.1 |
% |
|
|
Net Sales
Consolidated net sales increased by $75.9 million, or 4.0%, for the six months ended March 31, 2016, compared to the six months ended March 31, 2015. Company-operated Sally Beauty Supply and BSG stores that have been open for 14 months or longer contributed an increase in consolidated net sales of approximately $70.9 million, or 3.7%, and sales through our BSG distributor sales consultants contributed an increase in segment net sales of approximately $11.9 million, or 0.6% compared to the six months ended March 31, 2015. Other sales channels (including sales from stores that have been open for less than 14 months, sales through our BSG franchise-based businesses, incremental sales from businesses acquired in the preceding 12 months and sales from our Sally Beauty Supply non-store sales channels) in the aggregate experienced a net decrease in sales of approximately $7.0 million, or 0.4%, compared to the six months ended March 31, 2015. Consolidated net sales for the six months ended March 31, 2016, are inclusive of a net negative impact from changes in foreign currency exchange rates of $34.5 million, including the impact of a stronger U.S. dollar in the six months ended March 31, 2016.
For the six months ended March 31, 2016, consolidated net sales reflect a 3.9% same store sales growth rate compared to 2.5% for the six months ended March 31, 2015. For the six months ended March 31, 2016, our consolidated same store sales growth rate was positively impacted by increases in average unit prices in both operating segments, as well as improved customer traffic in our BSG segment in the U.S., as more fully discussed below.
The $75.9 million increase in consolidated net sales reflects, in our Sally Beauty Supply segment, increases in average unit prices resulting primarily from selective price increases in certain geographical areas of the U.S. and, in our BSG segment, increases in unit volume (including increases in sales at existing stores and the incremental sales from 36 BSG company-operated stores opened or acquired during the last twelve months) and increases in average unit prices (resulting from changes in product mix), as more fully discussed below.
Sally Beauty Supply . Net sales for Sally Beauty Supply increased by $25.0 million, or 2.2%, for the six months ended March 31, 2016, compared to the six months ended March 31, 2015. In the Sally Beauty Supply segment, company-operated stores that have been open for 14 months or longer contributed an increase in segment net sales of approximately $36.0 million, or 3.1%. Other sales channels (including sales from stores that have been open for less than 14 months and sales from our non-store sales channels, which include the catalog and internet sales of our Sinelco Group subsidiaries) in the aggregate experienced a net decrease in sales of approximately $11.0 million, or 1.0%, compared to the six months ended March 31, 2015. Net sales for Sally Beauty Supply for the six months ended March 31, 2016, are inclusive of a net negative impact from changes in foreign currency exchange rates of approximately $26.5 million.
For the six months ended March 31, 2016, the Sally Beauty Supply segments net sales reflect a 2.4% same store sales growth rate compared to 1.5% for the six months ended March 31, 2015. For the six months ended March 31, 2016, the Sally Beauty Supply segments same store sales growth rate was positively impacted by selective price increases in certain geographical areas of the U.S. and by changes in product mix resulting from a shift in customer preferences.
The $25.0 million increase in the Sally Beauty Supply segments net sales reflects increases in average unit prices resulting from selective price increases in certain geographical areas of the U.S. and a change in product mix primarily resulting from the introduction of certain products with higher average unit prices in the preceding 12 months.
Beauty Systems Group . Net sales for BSG increased by $50.9 million, or 6.8%, for the six months ended March 31, 2016, compared to the six months ended March 31, 2015. In the BSG segment, company-operated stores that have been open for 14 months or longer contributed an increase in segment net sales of approximately $35.0 million, or 4.7%, and sales through our distributor sales consultants contributed an increase in segment net sales of approximately $11.9 million, or 1.6% compared to the six months ended March 31, 2015. Other sales channels (including sales from stores that have been open for less than 14 months, sales through our franchise-based businesses and incremental sales from businesses acquired in the preceding 12 months) in the aggregate contributed a net increase in sales of approximately $4.0 million, or 0.5%, compared to the six months ended March 31, 2015. Net sales for BSG for the six months ended March 31, 2016, are inclusive of a net negative impact from changes in foreign currency exchange rates of approximately $8.0 million.
For the six months ended March 31, 2016, the BSG segments net sales reflect a 7.4% same store sales growth rate compared to 4.9% for the six months ended March 31, 2015. BSGs segments same store sales growth rate was positively impacted by improved customer traffic in the U.S., compared to the six months ended March 31, 2015.
The $50.9 million increase in the BSG segments net sales is primarily the result of an increase in both unit volume (including increases in sales at existing stores and the incremental sales from 36 company-operated stores opened or acquired during the last twelve months) and increases in average unit prices (resulting from changes in product mix, including as a result of the introduction of certain third-party brands with higher average unit prices in the preceding 12 months).
Gross Profit
Consolidated gross profit increased by $40.3 million, or 4.3%, for the six months ended March 31, 2016, compared to the six months ended March 31, 2015, principally due to higher sales volume and improved gross profit margins in both business segments, as more fully described below. Consolidated gross profit as a percentage of net sales, or consolidated gross profit margin, was 49.6% for the six months ended March 31, 2016, compared to 49.5% for the six months ended March 31, 2015.
Sally Beauty Supply . Sally Beauty Supplys gross profit increased by $17.5 million, or 2.8%, for the six months ended March 31, 2016, compared to the six months ended March 31, 2015, principally as a result of higher sales volume and improved gross profit margin. Sally Beauty Supplys gross profit as a percentage of net sales increased to 55.2% for the six months ended March 31, 2016, compared to 54.9% for the six months ended March 31, 2015. This increase was primarily the result of selective price increases in certain geographical areas of the U.S., fewer promotions and a shift in product mix (to higher margin product) resulting from a shift in customer preferences.
Beauty Systems Group . BSGs gross profit increased by $22.8 million, or 7.5%, for the six months ended March 31, 2016, compared to the six months ended March 31, 2015, principally as a result of higher sales volume and improved gross profit margin. BSGs gross profit as a percentage of net sales increased to 41.3% for the six months ended March 31, 2016, compared to 41.1% for the six months ended March 31, 2015 primarily as a result of a shift in product mix (to higher margin product) resulting from a shift in customer preferences and sales channel mix (to higher margin store-based product sales).
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses increased by $26.6 million, or 4.1%, for the six months ended March 31, 2016, compared to the six months ended March 31, 2015. This increase was attributable in part to incremental expenses (including employee compensation, rent and other occupancy-related expenses) resulting from stores opened or acquired in the preceding 12 months (approximately 138 net additional company-operated stores added since March 31, 2015, which represents a 2.9% increase in the number of stores). In addition, the increase reflects higher expenses related to on-going upgrades to our information technology systems (approximately $7.5 million), higher recruitment and compensation-related expenses primarily in connection with our ongoing management transition plans (approximately $1.3 million) and higher credit card fees (approximately $1.7 million). The increase in selling, general and administrative expenses was partially offset by a decrease in share-based compensation expense of $3.4 million, as discussed below. Selling, general and administrative expenses, as a percentage of net sales, were 34.4% for both the six months ended March 31, 2016 and 2015.
Depreciation and Amortization
Consolidated depreciation and amortization was $47.1 million for the six months ended March 31, 2016, compared to $41.6 million for the six months ended March 31, 2015. This increase reflects the incremental depreciation and amortization expenses associated with capital expenditures made in the preceding 12 months (mainly in connection with store openings in both operating segments and with ongoing information technology upgrades), partially offset by the impact of assets that became fully depreciated in the preceding 12 months.
Operating Earnings
The following table sets forth, for the periods indicated, information concerning our operating earnings for each reportable segment (dollars in thousands):
|
|
Six Months Ended March 31, |
|
|||||||||
|
|
2016 |
|
2015 |
|
Increase (Decrease) |
|
|||||
Operating Earnings: |
|
|
|
|
|
|
|
|
|
|||
Segment operating profit: |
|
|
|
|
|
|
|
|
|
|||
Sally Beauty Supply |
|
$ |
208,052 |
|
$ |
207,268 |
|
$ |
784 |
|
0.4 |
% |
BSG |
|
127,284 |
|
112,197 |
|
15,087 |
|
13.4 |
% |
|||
Segment operating profit |
|
335,336 |
|
319,465 |
|
15,871 |
|
5.0 |
% |
|||
Unallocated expenses |
|
(74,770 |
) |
(63,621 |
) |
11,149 |
|
17.5 |
% |
|||
Share-based compensation expense |
|
(7,173 |
) |
(10,600 |
) |
(3,427 |
) |
(32.3 |
)% |
|||
Operating earnings |
|
$ |
253,393 |
|
$ |
245,244 |
|
$ |
8,149 |
|
3.3 |
% |
Consolidated operating earnings increased by $8.1 million, or 3.3%, for the six months ended March 31, 2016, compared to the six months ended March 31, 2015, primarily as a result of increased net sales and improved gross profit margin in both operating segments, and lower share-based compensation expense, partially offset by higher unallocated expenses, as more fully discussed below. Operating earnings, as a percentage of net sales, decreased to 12.8% for the six months ended March 31, 2016, compared to 12.9% for the six months ended March 31, 2015. This decrease reflects higher consolidated operating expenses as a percentage of consolidated net sales, as more fully discussed below, partially offset by the slight improvement in consolidated gross profit margin described above.
Sally Beauty Supply . Sally Beauty Supplys segment operating earnings increased by $0.8 million, or 0.4%, for the six months ended March 31, 2016, compared to the six months ended March 31, 2015, primarily a result of the increase in the segments net sales and the improved gross profit margin described above. This increase was partially offset by the incremental costs related to 102 net additional company-operated stores (stores opened during the past twelve months, which represents a 2.8% increase in the number of stores) operating during the six months ended March 31, 2016, compared to the six months ended March 31, 2015, and higher depreciation expense principally associated with recent store openings and remodels (approximately $4.3 million) and higher expenses related to on-going upgrades to our information technology systems (approximately $2.8 million). Segment operating earnings, as a percentage of net sales, decreased by 30 basis points to 17.6% for the six months ended March 31, 2016, compared to 17.9% for the six months ended March 31, 2015. This decrease reflects higher segment operating expenses as a percentage of the segments net sales, including the expense increases discussed in this paragraph, partially offset by the improvement in the segments gross profit margin described above.
Beauty Systems Group . BSGs segment operating earnings increased by $15.1 million, or 13.4%, for the six months ended March 31, 2016, compared to the six months ended March 31, 2015, primarily a result of the increase in the segments net sales and the improved gross profit margin described above. This increase was partially offset by the incremental costs related to 36 net additional company-operated stores (stores opened or acquired during the past twelve months, which represents a 3.2% increase in the number of stores) operating during the six months ended March 31, 2016, compared to the six months ended
March 31, 2015. Segment operating earnings, as a percentage of net sales, increased to 16.0% for the six months ended March 31, 2016, compared to 15.1% for the six months ended March 31, 2015. This increase reflects the increase in the segments gross profit margin described above, as well as a decrease in segment operating expenses as a percentage of the segments net sales.
Unallocated Expenses. Unallocated expenses, which represent certain corporate costs (such as payroll, employee benefits and travel expenses for corporate staff, certain professional fees, certain new business development expenses and corporate governance expenses) that have not been charged to our operating segments, increased by $11.1 million, or 17.5%, for the six months ended March 31, 2016, compared to the six months ended March 31, 2015. This increase was due primarily to higher corporate expenses related to on-going upgrades to our information technology systems (approximately $4.1 million), higher employee recruitment and compensation-related expenses (approximately $2.2 million), higher employee compensation-related expenses in connection with our ongoing management transition plans (approximately $1.3 million), professional fees mainly in connection with certain corporate initiatives (approximately $1.9 million) and a loss associated with impairment of an intangible asset (approximately $0.6 million).
Share-based Compensation Expense. Total compensation costs charged against income for share-based compensation arrangements decreased by $3.4 million to $7.2 million for the six months ended March 31, 2016, compared to $10.6 million for the six months ended March 31, 2015. This decrease was mainly due to the timing of expense recognition in connection with retirement-eligible grantees during the six months ended March 31, 2016 and the impact of awards that became fully vested after March 31, 2015.
Interest Expense
Interest expense increased by $32.4 million to $90.9 million for the six months ended March 31, 2016, compared to $58.5 million for the six months ended March 31, 2015 principally due to the impact of our debt refinancing in December 2015, including a loss on extinguishment of debt of $33.3 million recognized in connection with such debt refinancing. Please see Liquidity and Capital Resources below for additional information about the Companys debt and recent debt refinancing activities.
Provision for Income Taxes
The provision for income taxes was $60.1 million and $70.3 million, and the effective income tax rate was 37.0% and 37.7%, for the six months ended March 31, 2016 and 2015, respectively. The lower effective income tax rate for the six months ended March 31, 2016, compared to the six months ended March 31, 2015, was primarily due to an adjustment to non-deductible expenses in the current interim period.
Net Earnings
As a result of the foregoing, consolidated net earnings decreased by $14.0 million, or 12.1%, to $102.4 million for the six months ended March 31, 2016, compared to $116.4 million for the six months ended March 31, 2015. Net earnings, as a percentage of net sales, decreased by 90 basis points to 5.2% for the six months ended March 31, 2016, compared to 6.1% for the six months ended March 31, 2015.
Financial Condition
March 31, 2016 Compared to September 30, 2015
Working capital (current assets less current liabilities) decreased by $52.0 million to $643.4 million at March 31, 2016, compared to $695.4 million at September 30, 2015. The ratio of current assets to current liabilities was 2.28 to 1.00 at March 31, 2016, compared to 2.41 to 1.00 at September 30, 2015. The decrease in working capital reflects a decrease of $42.7 million in current assets and an increase of $9.3 million in current liabilities. The decrease in current assets as of March 31, 2016, is principally due to a decrease in cash and cash equivalents of $51.5 million (please see Liquidity and Capital Resources below for a description of our sources and uses of cash) and a decrease in trade accounts receivable and accounts receivable, other, in the aggregate, of $10.2 million, partially offset by an increase of $16.0 million in inventory and an increase in other current assets of $2.8 million. The increase in current liabilities is principally due to an increase of $11.1 million in accounts payable, partially offset by a decrease in income taxes payable of $1.7 million, as discussed below.
Trade accounts receivable and accounts receivable, other, in the aggregate, decreased by $10.2 million to $80.9 million at March 31, 2016, compared to $91.1 million at September 30, 2015 due primarily to the timing of collections from customers and vendors of balances outstanding and the impact of foreign currency translation adjustments. Inventory increased by $16.0 million to $901.2 million at March 31, 2016, compared to $885.2 million at September 30, 2015 due primarily to an increase in company-operated stores (approximately 70 net additional company-operated stores added since September 30, 2015), partially
offset by the impact of foreign currency translation adjustments. Other current assets increased by $2.8 million to $39.9 million at March 31, 2016, compared to $37.0 million at September 30, 2015 due primarily to an increase in income tax receivable in the ordinary course of our business. Accounts payable increased by $11.1 million to $287.0 million at March 31, 2016, compared to $275.9 million at September 30, 2015 due primarily to the timing of payments to suppliers mainly in connection with purchases of merchandise inventory and capital expenditures in the ordinary course of our business. Income taxes payable decreased by $1.7 million to $4.6 million at March 31, 2016, compared to $6.3 million at September 30, 2015 due primarily to the timing of estimated income tax payments.
Total stockholders deficit, for the six months ended March 31, 2016, increased by $43.6 million primarily as a result of our repurchase and subsequent retirement of approximately 6.2 million shares of our common stock for approximately $162.4 million and foreign currency translation adjustments, net of tax, of $2.1 million, partially offset by net earnings of $102.4 million, and share-based compensation expense, the impact of exercises of stock options and other share-based compensation activity, in the aggregate, of approximately $18.5 million.
Liquidity and Capital Resources
We broadly define liquidity as our ability to generate sufficient cash flow from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate debt and equity financing and to convert into cash those assets that are no longer required to meet existing strategic and financial objectives. Therefore, liquidity cannot be considered separately from capital resources that consist of current or potentially available funds for use in achieving long-range business objectives and meeting debt service commitments. Please see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 for additional information on our liquidity and capital resources.
We are highly leveraged and a substantial portion of our liquidity needs will arise from debt service on our outstanding indebtedness and from funding the costs of operations, working capital, capital expenditures and share repurchases. As a holding company, we depend on our subsidiaries, including Sally Holdings LLC (which we refer to as Sally Holdings), to distribute funds to us so that we may pay our obligations and expenses. The ability of our subsidiaries to make such distributions will be subject to their operating results, cash requirements and financial condition and their compliance with relevant laws, and covenants and financial ratios related to their existing or future indebtedness, including covenants restricting Sally Holdings ability to pay dividends to us. If, as a consequence of these limitations, we cannot receive sufficient distributions from our subsidiaries, we may not be able to meet our obligations to fund general corporate expenses. Please see Risk Factors Risks Relating to Our Business , and Risks Relating to Our Substantial Indebtedness in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2015.
We may from time to time repurchase or otherwise retire or refinance our debt (through our subsidiaries or otherwise) and take other steps to reduce or refinance our debt. These actions may include open market repurchases of our notes or other retirements of outstanding debt. The amount of debt that may be repurchased, or refinanced or otherwise retired, if any, will be determined in the sole discretion of our Board of Directors and will depend on market conditions, trading levels of the Companys debt from time to time, the Companys cash position and other considerations.
At March 31, 2016, cash and cash equivalents were $88.5 million. Based upon the current level of operations and anticipated growth, we anticipate that existing cash balances (excluding amounts permanently invested in connection with foreign operations), funds expected to be generated by operations and funds available under the ABL facility will be sufficient to meet our working capital requirements, fund share repurchases and potential acquisitions and finance anticipated capital expenditures, including information technology upgrades, over the next twelve months.
However, there can be no assurance that our business will generate sufficient cash flows from operations, that anticipated net sales and operating improvements will be realized, or that future borrowings will be available under our ABL facility in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. In addition, our ability to meet our debt service obligations and liquidity needs are subject to certain risks, which include, but are not limited to, increases in competitive activity, the loss of key suppliers, rising interest rates, the loss of key personnel, the ability to execute our business strategy and general economic conditions. Please see Risk Factors in Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2015.
We utilize our ABL facility for the issuance of letters of credit, for certain working capital and liquidity needs and to manage normal fluctuations in our operational cash flow. In that regard, we may from time to time draw funds under the ABL facility for general corporate purposes including funding of capital expenditures, acquisitions, interest payments due on our indebtedness and share repurchases. The funds drawn on an individual occasion during the six months ended March 31, 2016 have varied in amounts up to $20.0 million, total amounts outstanding have ranged from zero up to $90.0 million and the average daily balance outstanding was $24.6 million. During the six months ended March 31, 2016, the weighted average interest rate on our
borrowings under the ABL facility was 3.0%. The amounts drawn are generally paid down with cash provided by our operating activities. As of March 31, 2016, there were no borrowings outstanding under the ABL facility and Sally Holdings had $478.4 million available for borrowings under the ABL facility, subject to borrowing base limitations, as reduced by outstanding letters of credit.
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. Please see Long-Term Debt Covenants below.
Share Repurchase Programs
In August 2014, we announced that our Board of Directors approved a share repurchase program authorizing us to repurchase up to $1.0 billion of our common stock over a period of approximately three years (the 2014 Share Repurchase Program). The 2014 Share Repurchase Program expires on September 30, 2017.
During the six months ended March 31, 2016 and 2015, the Company repurchased and subsequently retired approximately 6.2 million and 2.1 million shares, respectively, of its common stock under the 2014 Share Repurchase Program at an aggregate cost of $162.4 million and $67.5 million, respectively. We funded these share repurchases with existing cash balances, cash from operations and borrowings under the ABL facility. The Company reduced common stock and additional paid-in capital, in the aggregate, by these amounts. However, as required by GAAP, to the extent that share repurchase amounts exceeded the balance of additional paid-in capital prior to us recording such repurchases, we recorded the excess in accumulated deficit.
As of March 31, 2016, we had approximately $610.1 million of additional share repurchase authorization remaining under the 2014 Share Repurchase Program. Future repurchases of shares of our common stock are expected to be funded with existing cash balances, funds expected to be generated by operations and funds available under the ABL facility.
Historical Cash Flows
Historically, our primary source of cash has been funds provided by operating activities and, when necessary, borrowings under our ABL facility. The primary uses of cash have been for acquisitions, capital expenditures, repayments and servicing of long-term debt and share repurchases. The following table shows our sources and uses of funds for the six months ended March 31, 2016 and 2015 (in thousands):
|
|
Six months ended March 31, |
|
||||
|
|
2016 |
|
2015 |
|
||
Net cash provided by operating activities |
|
$ |
212,208 |
|
$ |
174,452 |
|
Net cash used by investing activities |
|
(74,160 |
) |
(39,365 |
) |
||
Net cash (used) provided by financing activities |
|
(189,509 |
) |
6,395 |
|
||
Effect of foreign currency exchange rate changes on cash and cash equivalents |
|
(29 |
) |
(2,030 |
) |
||
Net (decrease) increase in cash and cash equivalents |
|
$ |
(51,490 |
) |
$ |
139,452 |
|
Net Cash Provided by Operating Activities
Net cash provided by operating activities during the six months ended March 31, 2016 increased by $37.8 million to $212.2 million, compared to $174.5 million during the six months ended March 31, 2015 mainly due to an increase in net earnings before loss on extinguishment of debt, share-based compensation, depreciation and amortization expenses, deferred income taxes and excess tax benefits resulting from share-based compensation activity (in the aggregate, $48.2 million), partially offset by changes in the components of working capital.
Net Cash Used by Investing Activities
Net cash used by investing activities during the six months ended March 31, 2016 increased by $34.8 million to $74.2 million, compared to $39.4 million during the six months ended March 31, 2015. This increase reflects incremental capital expenditures primarily related to store openings and ongoing information technology upgrades in both business segments, and store remodels in the Sally Beauty Supply segment (primarily in the U.S.) in the six months ended March 31, 2016, compared to the six months ended March 31, 2015 ($36.3 million), partially offset by incremental proceeds from sale of property and equipment ($1.7 million).
Net Cash (Used) Provided by Financing Activities
Net cash (used) provided by financing activities changed by $195.9 million to cash used of $189.5 million during the six months ended March 31, 2016, compared to cash provided of $6.4 million during the six months ended March 31, 2015, primarily due to an increase in share repurchases under the 2014 Share Repurchase Program ($94.8 million), incremental net repayments of debt and the payment of debt issuance costs, in the aggregate, of $38.5 million in connection with our redemption of the senior notes due 2019 and issuance of the senior notes due 2025 in December 2015, and a decrease in proceeds from exercises of stock options and excess tax benefits resulting from share-based compensation activity, in the aggregate, of $62.6 million.
Long-Term Debt
Outstanding Long-Term Debt
In November 2006, the Company, through its subsidiaries (Sally Investment Holdings LLC and Sally Holdings) incurred $1,850.0 million of indebtedness in connection with the Companys separation from its former parent, Alberto-Culver.
In the fiscal year 2011, Sally Holdings entered into a five-year asset-based senior secured loan facility (the ABL facility). The availability of funds under the ABL facility 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. In the fiscal year 2013, the Company, Sally Holdings and other parties to the ABL facility entered into an 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 2018 and improved certain other covenant terms.
In the fiscal year 2012, Sally Holdings and Sally Capital Inc. (collectively, the Issuers), both indirectly 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 $150.0 million of the aggregate principal amount of the senior notes due 2022 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 from these debt issuances were used to retire outstanding indebtedness in the aggregate principal amount of approximately $1,391.9 million (substantially all of which was incurred in 2006 in connection with our separation from Alberto-Culver) and for general corporate purposes. As further discussed below, in December 2015, the Company redeemed in full the senior notes due 2019 at a redemption premium equal to 103.438% primarily with the net proceeds from the issuance of the 5.625% Senior Notes due 2025 (the senior notes due 2025).
In the fiscal year 2014, the Issuers issued $200.0 million aggregate principal amount of their 5.5% Senior Notes due 2023 (the senior notes due 2023) 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 (which borrowings were primarily used to fund share repurchases) and for general corporate purposes, including share repurchases.
On December 3, 2015, the Issuers issued $750.0 million aggregate principal amount of their senior notes due 2025 at par. The Company used the net proceeds from this debt issuance (approximately $737.3 million), as well as existing cash balances, to redeem in full the senior notes due 2019, at a total redemption cost of $775.8 million, excluding accrued interest. In connection with our redemption of the senior notes due 2019, we recorded a loss on extinguishment of debt in the amount of approximately $33.3 million, including a redemption premium in the amount of approximately $25.8 million and unamortized deferred financing costs of approximately $7.5 million.
The principal amount of long-term debt (excluding capitalized leases) as of March 31, 2016 is as follows (dollars in thousands):
|
|
Principal
|
|
Maturity
|
|
Interest Rates (b) |
|
|
ABL facility |
|
$ |
|
|
July 2018 |
|
(i) Prime plus (0.50% to 0.75%) or; |
|
|
|
|
|
|
|
(ii) LIBOR (c) plus (1.50% to 1.75%) |
|
|
Senior notes due 2022 |
|
850,000 |
|
June 2022 |
|
5.750% |
|
|
Senior notes due 2023 |
|
200,000 |
|
Nov. 2023 |
|
5.500% |
|
|
Senior notes due 2025 |
|
750,000 |
|
Dec. 2025 |
|
5.625% |
|
|
Total |
|
$ |
1,800,000 |
|
|
|
|
|
(a) Amounts reported above do not reflect unamortized premium of $6.0 million related to notes with an aggregate principal amount of $150.0 million or unamortized debt issuance costs in the aggregate amount of $25.3 million, at March 31, 2016.
(b) Interest rates shown represent the coupon or contractual rate or rates related to each debt instrument listed.
(c) When used in this Quarterly Report, LIBOR means the London Interbank Offered Rate.
Long-Term Debt Covenants
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.
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. The senior notes due 2022, the senior notes due 2023 and the senior notes due 2025 (which we refer to collectively as the Senior Notes or the senior notes due 2022, 2023 and 2025) 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 2022, 2023 and 2025 is payable semi-annually, during the Companys first and third fiscal quarters.
The ABL facility and the indentures governing the senior notes due 2022, 2023 and 2025 contain other covenants regarding restrictions on assets dispositions, granting of liens and security interests, 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, 2016, all the net assets of our consolidated subsidiaries were unrestricted from transfer under our credit arrangements.
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.
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.
The senior notes due 2025 carry optional redemption features whereby the Company has the option to redeem the notes, in whole or in part, on or after December 1, 2023 at par, plus accrued and unpaid interest, if any, and on or after December 1, 2020 at par plus a premium declining ratably to par, plus accrued and unpaid interest, if any. Prior to December 1, 2020, 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 December 1, 2018, 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 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 Companys Secured Leverage Ratio exceeds 4.0 to 1.0. At March 31, 2016, the Companys 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) for the most recently completed twelve fiscal months.
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.
T he indentures governing the Senior Notes contain terms which restrict the ability of Sally Beautys 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, 2016, the Companys Consolidated Coverage Ratio was approximately 6.1 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 also 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 (for the senior notes due 2022 and the senior notes due 2023) or since October 1, 2015 (for the senior notes due 2025), 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 plus (v) $350 million (for the senior notes due 2025). 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 Companys Consolidated Total Leverage Ratio (as defined in the indentures) is less than 3.25 to 1.00. At March 31, 2016, the Companys Consolidated Total Leverage Ratio was approximately 2.7 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, 2016, the Consolidated Fixed Charge Coverage Ratio was approximately 3.1 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 2022, 2023 and 2025, as appropriate. EBITDA is not a recognized measurement under accounting principles generally accepted in the United States of America (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.
We are currently in compliance with the agreements and instruments governing our debt, including our financial covenants. Our ability to comply with these covenants in future periods will depend on our ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, market and competitive factors, many of which are beyond our control. Further, our ability to comply with these covenants in future periods will also depend substantially on the pricing of our products, our success at implementing cost reduction initiatives and our ability to successfully implement our overall business strategy. Please see Risk FactorsRisks Relating to Our Substantial Indebtedness in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2015.
Capital Requirements
During the six months ended March 31, 2016, capital expenditures were approximately $65.6 million, including amounts incurred but not paid at March 31, 2016. For fiscal year 2016, we anticipate total capital expenditures to be in the range of approximately $125.0 million to $135.0 million, excluding acquisitions. These capital expenditures will primarily fund (a) the addition of new stores, (b) the remodel, expansion or relocation of existing stores, (c) upgrades to our distribution centers in the U.S., as well as (d) certain corporate projects in the ordinary course of our business, including ongoing technology upgrades.
Contractual Obligations
There have been no material changes outside the ordinary course of our business in any of our contractual obligations since September 30, 2015, except for our December 2015 refinancing of a portion of our debt. In December 2015, we redeemed in full the Companys 6.875% Senior Notes due 2019, with an aggregate principal amount of $750.0 million, primarily with the net proceeds from our December 2015 issuance of $750.0 million aggregate principal amount of the Companys 5.625% Senior Notes due 2025.
Off-Balance Sheet Financing Arrangements
At March 31, 2016 and September 30, 2015, we had no off-balance sheet financing arrangements other than operating leases incurred in the ordinary course of business, as well as outstanding letters of credit related to inventory purchases and self-insurance programs. Such letters of credit totaled $21.6 million and $23.1 million at March 31, 2016 and September 30, 2015, respectively.
Inflation
We believe inflation has not had a material effect on our results of operations.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities in the financial statements. Actual results may differ from these estimates. We believe these estimates and assumptions are reasonable. We consider accounting policies to be critical when they require us to make assumptions about matters that are highly uncertain at the time the accounting estimate is made and when different estimates that our management reasonably could have used have a material effect on the presentation of our financial condition, changes in financial condition or results of operations.
Our critical accounting estimates, as described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, include the valuation of inventory, vendor rebates and concessions, retention of risk, income taxes, assessment of long-lived assets and intangible assets for impairment and share-based payments. There have been no material changes to our critical accounting estimates or assumptions since September 30, 2015.
Recent Accounting Pronouncements
The Company has not yet adopted and is currently assessing the potential effect of the following pronouncements on its consolidated financial statements:
In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16) which will eliminate the current requirement to recognize measurement-period adjustments to provisional amounts retrospectively. Instead, ASU 2015-16 requires the acquirer to recognize measurement-period adjustments, as well as the impact on earnings of changes in depreciation, amortization and similar items (if any) resulting from the change to the provisional amounts, in the period when the amount of each measurement-period adjustment is determined. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Income Taxes (ASU 2015-17) which aims to simplify the classification of deferred taxes on the balance sheet. More
specifically, ASU 2015-17 will require that all deferred tax assets and liabilities, and any related valuation allowance, be reported as noncurrent in a classified balance sheet. The new guidance will replace the existing practice of reporting deferred taxes for each tax jurisdiction (or taxing component of a jurisdiction) as (a) a net current asset or liability and (b) a net noncurrent asset or liability. The new guidance does not change the existing requirement that only permits offsetting assets and liabilities within the same jurisdiction. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.
In February 2016, the FASB issued ASU No. 2016-02, Leases , which will require lessees to report on their balance sheets a right-of-use asset and a lease liability in connection with most lease agreements classified as operating leases under the current guidance. The lease liability will be measured based on the present value of future lease payments, subject to certain conditions. The right-of-use asset will be measured based on the initial amount of the liability, plus certain initial direct costs. The new guidance will further require that leases be classified at inception as either (a) operating leases or (b) finance leases. For operating leases, periodic expense will generally be flat (straight-line) throughout the life of the lease. For finance leases, periodic expense will decline (similar to capital leases under current rules) over the life of the lease. The new standard must be adopted using a modified retrospective transition method. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting , intended to simplify various aspects of how share-based payments are recorded and presented on the financial statements. For example, the new guidance will require that all the income tax effect related to share-based payments be recorded in income tax expense. The new guidance further removes the current requirement to delay recognition of a windfall tax benefit until it reduces current taxes payable. In addition, the new standard will require that excess tax benefits and shortfalls from share-based compensation awards be reported as operating activities in the statement of cash flows. For public companies, these amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.
In addition, the Company has not yet adopted the following recent accounting pronouncements and does not believe their adoption will have a material effect on its consolidated financial statements:
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09) which will supersede Accounting Standards Codification Topic 605, Revenue Recognition . In August 2015, the FASB deferred the effective date of this new standard by one year. A core principle of the new guidance is that an entity should measure revenue in connection with its sale of goods and services to a customer based on an amount that depicts the consideration to which the entity expects to be entitled in exchange for each of those goods and services. For a contract that involves more than one performance obligation, the entity must (a) determine or, if necessary, estimate the standalone selling price at inception of the contract for the distinct goods or services underlying each performance obligation and (b) allocate the transaction price to each performance obligation on the basis of the relative standalone selling prices. In addition, under the new guidance, an entity should recognize revenue when (or as) it satisfies each performance obligation under the contract by transferring the promised good or service to the customer. A good or service is deemed transferred when (or as) the customer obtains control of that good or service. The new standard permits the use of either the retrospective or cumulative effect transition method. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early application is permitted, but no earlier than December 16, 2016. The Company has not yet selected a transition method.
In April 2015, the FASB issued ASU No. 2015-05, Customers Accounting for Fees Paid in Cloud Computing Arrangement . This pronouncement provides guidance to determine whether a cloud-based computing arrangement includes a software license. If a cloud-based computing arrangement includes a software license, the customer must account for the software element of the arrangement consistent with the acquisition of other software licenses. Otherwise, the customer must account for the arrangement as a service contract. The new standard permits the use of either the prospective or retrospective transition method. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a multinational corporation, we are subject to certain market risks including foreign currency fluctuations, interest rates and government actions. We consider a variety of practices to manage these market risks, including, when deemed appropriate, the occasional use of derivative financial instruments. Currently, we do not purchase or hold any derivative instruments for speculative or trading purposes.
Foreign currency exchange rate risk
We are exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. Our primary exposures are to changes in exchange rates for the U.S. dollar versus the Euro, the British pound sterling, the Canadian dollar, the Chilean peso, and the Mexican peso. In addition, we currently have exposure to the currencies of several other countries located in South America. For each of the fiscal years 2015, 2014 and 2013, approximately 19% of our consolidated net sales were made in currencies other than the U.S. dollar. For the six months ended March 31, 2016, consolidated net sales are inclusive of an approximately $34.5 million net negative impact from changes in foreign currency exchange rates and other comprehensive income (loss) reflects approximately $2.1 million in foreign currency translation adjustments, net of tax. For the six months ended March 31, 2016, fluctuations in the U.S. dollar exchange rates did not otherwise have a material effect on our consolidated financial condition and consolidated results of operations.
A 10% increase or decrease in the exchange rates for the U.S. dollar versus the foreign currencies to which we have exposure would have impacted our consolidated net sales by approximately 1.7% in the six months ended March 31, 2016 and would have impacted our consolidated total assets by approximately 2.4% at March 31, 2016.
Our various foreign currency exposures at times offset each other, sometimes providing a natural hedge against foreign currency risk. As more fully disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, the Company uses from time to time foreign exchange contracts to mitigate its remaining exposure to changes in foreign currency exchange rates. There have been no material changes to the aggregate notional amount of foreign exchange contracts held by the Company since September 30, 2015. At March 31, 2016, the aggregate net fair value of all foreign exchange contracts was $0.3 million, consisting of contracts in an asset position of less than $0.1 million and contracts in a liability position of approximately $0.3 million.
The Companys foreign currency derivatives are not designated as hedges and do not currently meet the requirements for hedge accounting. Accordingly, the changes in fair value of these derivative instruments, which are adjusted quarterly, are recorded in our consolidated statements of earnings. Selling, general and administrative expenses reflect a net loss of $0.6 million and a net gain of $5.0 million for the six months ended March 31, 2016 and 2015, respectively, in connection with all of the Companys foreign currency derivatives instruments, including marked-to-market adjustments.
Interest rate risk
We and certain of our subsidiaries are sensitive to interest rate fluctuations primarily as a result of borrowings under our ABL facility from time to time. In order to enhance our ability to manage risk relating to cash flow and interest rate exposure, we and/or our other subsidiaries who are borrowers under our ABL facility may from time to time enter into and maintain derivative instruments, such as interest rate swap agreements, for periods consistent with the related underlying exposures. There were no borrowing under the ABL facility outstanding at March 31, 2016 and the Company held no interest rate swaps or similar derivative instruments.
We have no exposure to interest rate fluctuations in connection with our senior notes due 2022, 2023 and 2025, as the interest rates on such debt instruments are fixed.
Credit risk
We are exposed to credit risk on certain assets, primarily cash equivalents, short-term investments and accounts receivable. We believe that the credit risk associated with cash equivalents and short-term investments, if any, is largely mitigated by our policy of investing in a diversified portfolio of securities with high credit ratings.
We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. We believe that our exposure to concentrations of credit risk with respect to trade receivables is largely mitigated by our broad customer base and that our allowance for doubtful accounts is sufficient to cover customer credit risks at March 31, 2016.
Item 4. Controls and Procedures.
Controls Evaluation and Related CEO and CFO Certifications. Our management, with the participation of our principal executive officer (CEO) and principal financial officer (CFO), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2016. 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 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 that 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 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 that appropriate corrective action, including process improvements, was being undertaken if needed. This type of evaluation is performed on a quarterly basis so that 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 March 31, 2016, 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 SECs rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. During our last fiscal quarter, there have been no changes in our internal control over financial reporting identified in connection with the evaluation described above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are involved, from time to time, in various claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect of these matters. We do not believe that the ultimate resolution of these matters will have a material adverse impact on our consolidated financial position, cash flows or results of operations.
We are subject to a number of U.S., federal, state and local laws and regulations, as well as the laws and regulations applicable in each foreign country or jurisdiction in which we do business. These laws and regulations govern, among other things, the composition, packaging, labeling and safety of the products we sell, the methods we use to sell these products and the methods we use to import these products. We believe that we are in material compliance with such laws and regulations, although no assurance can be provided that this will remain true going forward.
In addition to the other information set forth in this report, you should carefully consider the factors contained in Item 1A. Risk Factors in Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors disclosed in such Annual Report. The risks described in such Annual Report and herein are not the only risks facing our company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Not applicable
(b) Not applicable
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information about the Companys repurchases of shares of its common stock during the three months ended March 31, 2016:
Fiscal Period |
|
Total
|
|
Average
|
|
Total Number of Shares
|
|
Approximate Dollar
|
|
||
January 1 through January 31, 2016 |
|
3,398,932 |
|
$ |
26.46 |
|
3,398,932 |
|
$ |
620,144,121 |
|
February 1 through February 29, 2016 |
|
377,134 |
|
26.70 |
|
377,134 |
|
610,074,000 |
|
||
March 1 through March 31, 2016 |
|
|
|
|
|
|
|
610,074,000 |
|
||
Total this quarter |
|
3,776,066 |
|
$ |
26.48 |
|
3,776,066 |
|
$ |
610,074,000 |
|
(1) The table above does not include 408 shares of the Companys common stock surrendered by grantees during the three months ended March 31, 2016 to satisfy tax withholding obligations due upon the vesting of equity-based awards under the Companys share-based compensation plans.
(2) In August 2014, the Companys Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $1.0 billion of its common stock over a period of approximately three years (the 2014 Share Repurchase Program). The 2014 Share Repurchase Program expires on September 30, 2017.
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Mine Safety Disclosures.
Not applicable
(a) Not applicable
(b) Not applicable
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 Companys Current Report on Form 8-K filed on January 30, 2014 |
|
|
|
3.2 |
|
Sixth Amended and Restated Bylaws of Sally Beauty Holdings, Inc., dated July 30, 2015, which is incorporated herein by reference from Exhibit 3.1 to the Companys Current Report on Form 8-K filed on August 6, 2015 |
|
|
|
10.1 |
|
Sally Beauty Holdings, Inc. Second Amended and Restated Independent Director Compensation Policy* |
|
|
|
10.2 |
|
Separation and Release Agreement by and between Gary Winterhalter and the Corporation, dated as of February 18, 2016* |
|
|
|
10.3 |
|
Option Exercise Period Extension Agreement by and between the Corporation and Gary Winterhalter, dated as of February 18, 2016* |
|
|
|
10.4 |
|
Separation Agreement by and between Brian Walker and Sally Beauty Supply LLC, dated as of February 15, 2016* |
|
|
|
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Christian A. Brickman* |
|
|
|
31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Mark J. Flaherty* |
|
|
|
32.1 |
|
Section 1350 Certification of Christian A. Brickman* |
|
|
|
32.2 |
|
Section 1350 Certification of Mark J. Flaherty* |
|
|
|
101 |
|
The following financial information from our Quarterly Report on Form 10-Q for the fiscal quarter ended March31, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Earnings; (ii) the Consolidated Statements of Comprehensive Income; (iii) the Consolidated Balance Sheets; (iv) the Consolidated Statements of Cash Flows; and (v) the Condensed Notes to Consolidated Financial Statements. |
* Included herewith
SIGNATURES
Pursuant to the requirements 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.
|
SALLY BEAUTY HOLDINGS, INC. |
|
|
(Registrant) |
|
|
|
|
|
Date: May 5, 2016 |
|
|
|
|
|
By: |
/s/ Mark J. Flaherty |
|
|
Mark J. Flaherty |
|
|
Senior Vice President and Chief Financial Officer |
|
|
For the Registrant and as its Principal Financial Officer |
Exhibit 10.1
SALLY BEAUTY HOLDINGS, INC.
SECOND AMENDED AND RESTATED
INDEPENDENT DIRECTOR COMPENSATION POLICY
The Board of Directors (the Board ) of Sally Beauty Holdings, Inc. (the Company ) has adopted the following compensation policy, effective as of February 1, 2016 (the Effective Date ), for independent directors of the Company. The compensation policy has been developed to compensate certain independent directors of the Company for their time, commitment and contributions to the Board. This policy shall apply to directors of the Company who are not Company employees (each an Independent Director ).
CASH COMPENSATION
Retainers for Serving on the Board
Independent Directors shall be paid an annual cash retainer of $55,000, payable in advance in quarterly installments, for each calendar year of service on the Board. Cash retainers for partial years of service shall be pro-rated to reflect the number of days served by an Independent Director during any such quarter.
Retainers for Serving as Chairpersons
An additional annual cash retainer shall be paid to an Independent Director who serves as the Non-Executive Chairman of the Board (the Non-Executive Chairman) or chairperson of the Audit Committee, Compensation Committee, or Nominating and Corporate Governance Committee. Such additional retainer shall be payable in advance in quarterly installments, in the following annualized amounts:
Non-Executive Chairman |
|
$ |
100,000 |
|
Audit Committee |
|
$ |
20,000 |
|
Compensation Committee |
|
$ |
16,000 |
|
Nominating & Corporate Governance Committee |
|
$ |
16,000 |
|
Additional retainers paid to the Non-Executive Chairman or committee chairpersons for partial years of service shall be pro-rated to reflect the number of days served by an Independent Director during any such quarter.
Meeting Fees
For in-person Board or commit tee meetings, each Independent Director in attendance shall receive $2,000. For telephonic Board or committee meetings for which minutes are kept, each independent director in attendance shall receive $1,000.
EQUITY-BASED COMPENSATION
Annual Grants
Each Independent Director shall be granted an annual equity-based retainer award with a value at the time of issuance of approximately $100,000. Such award shall normally be made at the first Board meeting each Company fiscal year in the form of grants of restricted stock units ( RSUs ), in accordance with the Companys Omnibus Incentive Plan then in effect ( Omnibus Plan ), and shall vest on the last day of such fiscal year. Independent Directors whose Board service begins after the start of a Company fiscal year shall receive a grant pro-rated to reflect the number of days remaining in such fiscal year.
RSUs Granted Prior to October 1, 2012
Upon vesting of RSUs granted prior to October 1, 2012, Independent Director RSUs shall be deferred into deferred stock units that shall be distributed six months after such Independent Directors Board service terminates.
In the event an Independent Directors Board service terminates because of death, disability or involuntary termination without Cause (as defined in the Omnibus Plan), a pro rata portion of such Independent Directors unvested RSUs shall vest upon such termination. If an Independent Directors Board service is terminated for any other reason than the foregoing RSUs shall be canceled upon such termination.
RSUs Granted Following October 1, 2012
With respect to RSUs granted following October 1, 2012, Independent Directors may elect, by the deadline imposed by the Compensation Committee of the Board in compliance with Section 409A of the Code, to defer delivery of the shares of common stock of the Company ( Common Stock ) that would otherwise be due on the vesting date until a later date as specified in such Independent Directors deferral election form. The Company shall establish the rules and procedures for such payment deferrals in compliance with Section 409A of the Code and Treasury regulations and guidance with respect to such law. If an Independent Director does not make such election, he or she will receive shares of Common Stock in settlement of the RSU on the vesting date.
In the event an Independent Directors Board service terminates because of death or disability, a pro rata portion of such Independent Directors unvested RSUs shall vest upon such termination. If an Independent Directors Board service is terminated for any other reason than the foregoing RSUs shall be canceled upon such termination.
TRAVEL EXPENSE REIMBURSEMENT
Each of the Independent Directors shall be entitled to receive reimbursement for reasonable travel expenses which they properly incur in connection with their functions and duties as a director. With respect to air travel, reimbursements shall be limited to the cost of first-class commercial airline tickets for the trip and date in question.
MINIMUM STOCK OWNERSHIP GUIDELINES
Each Independent Director must own shares of Common Stock in an amount equal to 5x his or her base annual cash retainer (excluding additional annual cash retainers for the Non-Executive Chairman and committee chairpersons and meeting fees). Independent Directors are required to achieve the applicable level of ownership within five years of becoming subject to the requirements. Until such time as the Independent Director reaches his or her equity ownership guideline, the Independent Director will be required to retain 100% of the shares of Common Stock received upon settlement of his or her restricted stock units.
Equity that Counts Toward Meeting the Guidelines:
· Shares owned directly ( e.g., shares purchased in the open market, etc.)
· Shares owned indirectly ( e.g. , by a spouse, trust or limited partnership or any other entity)
· Shares underlying vested restricted stock units
· Shares the receipt of which have been deferred
Equity that Does Not Count Toward Meeting the Guidelines:
· Unexercised options (whether vested or unvested)
· Unvested restricted stock units
Compliance with the Guidelines:
Equity ownership guidelines for Independent Directors are determined as a multiple of his or her base annual cash retainer and then converted to a fixed number of shares based on an average of the prior fiscal years quarter-end closing stock prices. Independent Directors serving on the Board as of October 1, 2012 first became subject to the guidelines as of such date, which was the initial date of determination for such Independent Directors. Independent Directors becoming subject to the guidelines following October 1, 2012 will have their individual guidelines established based upon the base annual cash retainer at the time they become subject to the guidelines, which shall be the date of determination for such Independent Director. The guideline establishing the
required ownership level based on a multiple of the base annual cash retainer will be re-determined each December 1st thereafter based on the then-current annual cash retainer and an average of the prior fiscal years quarter-end closing stock prices. Once established each year, an Independent Directors guideline does not change as a result of fluctuations in the market price of the Common Stock. Once achieved, ownership of the guideline amount must be maintained for as long as the Independent Director is subject to the guidelines.
The Nominating and Corporate Governance Committee of the Board will be responsible for monitoring compliance with these stock ownership guidelines.
EFFECTIVE DATE, AMENDMENT, REVISION AND TERMINATION
This policy may be amended, revised or terminated by the Compensation Committee of the Board at any time and from time-to-time.
Exhibit 10.2
SEPARATION AND RELEASE AGREEMENT
This Separation Agreement ( Agreement ) is entered into by and between Gary Winterhalter ( Employee ) and Sally Beauty Holdings, Inc. ( Employer ).
1. Separation of Employment . Employee separated from employment with Employer on February 2, 2016 (the Separation Date ).
2. Consideration . In consideration of the release of all claims by Employee as provided for in this Agreement, and for the other agreements by Employee herein, Employer will provide Employee with the following consideration (the Release Consideration):
a. Despite Employee electing to retire, Employer will provide the consideration and benefits outlined in Section 5(c) and (d) of the Transition Agreement between Employer and Employee, payable and provided at the times specified therein, which specifically requires that Employee sign a Release Agreement;
b. Rule of 75 eligibility for Employers stock option plans, which will allow Employee to continue to vest and exercise stock options for three (3) years after the Separation Date. In order to be eligible, Employee must sign the Option Exercise Period Extension Agreement attached to this Agreement as Exhibit A-1 ; and
c. Vacation and Benefits. Executive will be paid his accrued but unused vacation determined as of December 31, 2014. Executive will also be able to retain his mobile phone and Ipad, and will be able to transfer his current mobile phone number to his personal account.
d. Reimbursement of up to a maximum of $30,000 for reasonable legal fees and related expenses incurred by him solely in connection with the review of his retirement arrangement with Employer.
Employee agrees that this Release Consideration is in addition to anything of value to which Employee already is entitled.
3. Release . In consideration of the Release Consideration, Employee hereby fully, finally, and completely releases Employer and its predecessors, successors, parents, subsidiaries, affiliates, shareholders, partners, current and former officers, directors, employees, agents, attorneys and representatives (collectively, the Released Parties ), from any and all claims, actions, demands, and/or causes of action, of whatever kind or character, whether now known or unknown, arising from, relating to, or in any way connected with, facts or events occurring on or before the date on which Employee executes this Agreement. Employee agrees that this Agreement includes a release of any and all negligence claims, contractual claims, wrongful discharge claims, and claims of discrimination or retaliation of every possible kind , including but not limited to, claims on the basis of race, color, sex, national origin, religion, disability, age, whistleblower status under state or federal law, including, but not limited to the Americans with Disabilities Act, the Age Discrimination in Employment Act (ADEA), the National Labor Relations Act (NLRA), Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1866, claims under Chapters 21 and 451 of the Texas Labor Code, and other federal, state or local laws relating to employment or termination of employment, any personal injury claims, and any related attorneys fees and costs claims, if any, that Employee may have against Employer or any of the Released Parties. Employee waives and releases Employer and the Released Parties from any claims that this Agreement was procured by fraud or signed under duress or coercion so as to make any of the terms or provisions of this Agreement not binding.
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/s/ GW |
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Employee understands that nothing in this Agreement is intended to interfere with or deter Employees right to challenge the waiver of an ADEA claim or state law age discrimination claim or the filing of an ADEA charge or ADEA complaint or state law age discrimination complaint or charge with the Equal Employment Opportunity Commission or any state discrimination agency or commission or to participate in any investigation or proceeding conducted by those agencies. Further, Employee understands that nothing in this Agreement would require Employee to tender back the money received under this Agreement if Employee seeks to challenge the validity of the ADEA or state law age discrimination waiver, nor does the Employee agree to ratify any ADEA or state law age discrimination waiver that fails to comply with the Older Workers Benefit Protection Act by retaining the money received under the Agreement. Further, nothing in this Agreement is intended to require the payment of damages, attorneys fees or costs to Employer should Employee challenge the waiver of an ADEA or state law age discrimination claim or file an ADEA or state law age discrimination suit except as authorized by federal or state law. Notwithstanding this paragraph, Employee agrees to waive any right to recover monetary damages in any charge, complaint, or lawsuit against Employer filed by Employee or by anyone else on Employees behalf.
Employee also acknowledges (i) receipt of all compensation and benefits due through the date Employee signs this Agreement as a result of services performed for Employer with the receipt of a final paycheck except as provided in this Agreement and the Transition Agreement between the Parties; (ii) Employee has reported to Employer any and all work-related injuries incurred during employment; (iii) Employer properly provided any leave of absence because of Employees or a family members health condition and Employee has not been subjected to any improper treatment, conduct or actions due to a request for or taking such leave; and (iv) Employee has provided Employer with written notice of any and all concerns regarding suspected ethical and compliance issues or violations on the part of Employer or any released person or entity.
4. Confidentiality and Non-disparagement . Employee agrees to keep the terms and conditions of this Agreement confidential to the extent allowed by law, except Employee may supply a copy to Employees accountant or other financial advisor solely in connection with preparing Employees income tax return, and Employee may disclose this Agreement to members of Employees immediate family and to Employees attorney on a confidential basis. Employee also agrees to keep confidential any and all discussions, communications and documents relating to the issues and negotiations that led to this Agreement and the underlying facts, allegations, documents and communications related to any claims of discrimination Employee made during Employees employment with Employer. Employee further agrees not to talk about or otherwise communicate to any third parties in a malicious, disparaging, or defamatory manner regarding Employer or any of the Released Parties. Employee also agrees that Employee shall not make or authorize to be made any written or oral statement that may disparage or damage the reputation of Employer. Employer acknowledges and agrees that it will instruct its executive officers and directors that, except as required by law or compelled through valid legal process, they should not make any derogatory or disparaging statements about Employee, regardless of the truth or falsity of such statements.
Nothing in this paragraph or Agreement is to be construed to preclude Employee or any individual from communicating with any government agency, including the Equal Employment Opportunity Commission, National Labor Relations Board and/or Securities and Exchange Commission, or otherwise participating in any investigation or proceeding that may be conducted by any government agencies in connection with any charge or complaint, whether filed by Employee, on Employees behalf, or by any other individual.
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5 . Taxes . Employee acknowledges and agrees that Employer has not made any representations to Employee regarding the tax consequences of any amounts received by Employee pursuant to this Agreement. The parties further agree that if any local, state or federal authority determines that the tax treatment for payments made under this Agreement is improper or impermissible, Employee shall be solely responsible for payment of all such taxes due, including interest and penalties, and Employee shall indemnify Employer for all such tax payments, including interest and penalties.
6. Employees Attorneys Fees and Costs . Employee acknowledges and represents that, except as otherwise provided in Section 2(c) hereof, all claims for attorneys fees, costs, or other recoverable expenses that Employees attorneys may hold against Employer as Employees attorneys will be satisfied solely by Employee.
7. No Eligibility for Re-Employment . The parties intend that this Agreement shall finally resolve all matters pertaining to Employees employment relationship with Employer and the end of that relationship. Accordingly, Employee is not eligible for reinstatement, rehire, future employment, or any employment relationship with Employer or any of the Released Parties. Employee will neither seek nor accept any such employment relationship with Employer or any of the Released Parties in the future, and they are entitled to reject without cause any application for employment made by Employee.
8. Employment Reference and Verification . Employee agrees that for employment verification or reference purposes, Employee will only refer prospective employers to the third party service entitled The Work Number 1-800-367-5690 or www.theworknumber.com. This online employment verification service can provide confirmation of employment and dates of employment. The relevant employer code to use is 11140. Should this service change, Employee agrees to use the third party service then used by Employer. Employee agrees not to contact, or direct others to contact, any active employee or representative of Employer for a reference or information relating to Employees employment with Employer.
9. Cooperation . Employee agrees to be reasonably available to Employer to respond to requests by Employer for information pertaining to or relating to Company and/or its subsidiaries, affiliates, agents, officers, directors, employees, programs, or business partners which may be within Employees knowledge. Employee agrees to provide reasonable cooperation to Employer in connection with any and all existing or future litigation or investigations brought by or against Employer or any of its subsidiaries, affiliates, agents, officers, directors or employees, whether administrative, civil, or criminal in nature, to the extent that Employer reasonably deems Employees cooperation necessary. Such consultation may consist of telephone calls, meetings and/or testimony. Employer agrees to make good faith efforts to schedule any such consultation so as to avoid any inconvenience to Employee or interference with Employees business activities. Employer agrees to reimburse Employee for reasonable out-of-pocket expenses (excluding lost or foregone wages or compensation) incurred as a result of such cooperation.
10. Advice of Counsel, Consideration and Revocation Periods, Other Information . Employer advises Employee to consult with an attorney prior to signing this Agreement. Employee has 45 days to consider whether to sign this Agreement from the Separation Date (Consideration Period). Employee must return this signed Agreement to Employers representative set forth below within the Consideration Period. If Employee signs and returns this Agreement before the end of the Consideration Period, it is because Employee freely chose to do so after carefully considering its terms. Additionally, Employee shall have seven days from the date of the Employee signs this Agreement to revoke this Agreement by delivering a written notice of revocation within the seven-day revocation period to the same person as Employee returned this Agreement. If the revocation period expires on a weekend or holiday, Employee will have until the end of the next business day to revoke. Employee agrees with Employer that changes, whether material or immaterial, do not restart the running of the Consideration Period.
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11. Exceptions . Nothing in this Agreement is intended to waive claims (i) for unemployment or workers compensation benefits, (ii) for vested rights under ERISA-covered employee benefit plans as applicable on the date Employee signs this Agreement, (iii) for claims under the Amended and Restated Director Indemnification Agreement, dated October 22, 2009, which remains in full force and effect pursuant to its terms, (iv) that may arise after Employee signs this Agreement, or (v) which cannot be released by private agreement. In addition, nothing in this Agreement including but not limited to the acknowledgements, release, confidentiality, non-disparagement, employees attorneys fees and costs, eligibility for re-employment, and employment verification provisions, prevent Employee from filing a charge or complaint with or from participating in an investigation or proceeding conducted by the EEOC, NLRB, or any other any federal, state or local agency charged with the enforcement of any laws, or from exercising rights under Section 7 of the NLRA to engage in joint activity with other employees, although by signing this release Employee is waiving rights to individual relief based on claims asserted in such a charge or complaint, or asserted by any third-party on Employees behalf, except where such a waiver of individual relief is prohibited.
11 . Miscellaneous .
a. The Effective Date of this Agreement is the eighth (8 th ) day after Employee signs this Agreement, provided Employee does not revoke the Agreement.
b. Entire Agreement/No Assignment . This instrument sets forth the entire agreement between the parties and no representation, promise, or condition not contained herein will modify these terms except any prior agreements related to inventions, business ideas, confidentiality of corporate information, and non-competition remain intact. The rights under this Agreement may not be assigned by Employee, unless Employer consents in writing to said assignment. Employee represents that Employee has not assigned any of the claims related to the matters set forth herein.
c. No Admission of Liability . Nothing in this Agreement constitutes the admission of any liability by Employer or the Released Parties.
d. Read Agreement/Advice of Attorney . Employee acknowledges that Employee has read and understood this Agreement, has been advised to and has had the opportunity to discuss it with an attorney of Employees own choice, agrees to its terms, acknowledges receipt of a copy of same and the sufficiency of the payment recited herein, and signs this Agreement voluntarily.
e. Applicable Law and Severability . The parties agree that the terms of this Agreement are contractual in nature and not merely recitals and will be governed and construed in accordance with the laws of the State of Texas. The parties further agree that should any part of this Agreement be declared or determined by a court of competent jurisdiction to be illegal, invalid, or unenforceable, the parties intend the legality, validity and enforceability of the remaining parts will not be affected thereby, and said illegal, invalid, or unenforceable part will be deemed not to be a part of the Agreement.
f. Notice. Any notice to be given to Employer hereunder will be deemed sufficient if addressed to Employer in writing and hand-delivered or mailed by certified mail to General Counsel, Sally Beauty Holdings, Inc., 3001 Colorado Boulevard, Denton, Texas 76210. Any notice to be given to Employee hereunder will be deemed sufficient if addressed to Employee in writing and hand-delivered or mailed by certified mail to Employee at Employees last known address as shown on Employers records. Either party may designate a different address or addresses by giving notice according to this Section.
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/s/ GW |
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The parties have signed this Agreement on the dates written by the signatures below. Notwithstanding any other provision in this Agreement, if Employee does not sign and deliver this Agreement to Employer at the address shown in the subsection under Miscellaneous entitled Notice prior to the end of the Consideration Period or if Employee revokes this Agreement, then this Agreement will be null and void and Employee will not be entitled to the Consideration described above.
EMPLOYEE : |
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EMPLOYER : |
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/s/ Gary Winterhalter |
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/s/ Matthew Haltom |
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GARY WINTERHALTER |
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TITLE: |
SVP, General Counsel & Sec. |
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SALLY BEAUTY HOLDINGS, INC. |
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Date: 2-18, 2016 |
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Date: Feb. 18, 2016 |
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/s/ GW |
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Exhibit 10.3
OPTION EXERCISE PERIOD EXTENSION AGREEMENT
This Option Exercise Period Extension Agreement (Agreement) is entered into by and between Sally Beauty Holdings, Inc. (Employer) and Gary Winterhalter (Employee) (collectively, the Parties).
WHEREAS, Employee is a participant in the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan (the 2007 Plan) and the Sally Beauty Holdings, Inc. 2010 Omnibus Incentive Plan (the 2010 Plan), as well as the Sally Beautys Founders Grant of December 2006, as amended as of the date of this Agreement (collectively, Plans), and has been awarded certain stock options under the terms of the Plans (the Stock Options); and,
WHEREAS, Employee is separating from Employer and wishes to agree to the terms of this Agreement in order to extend the period under which the Stock Options continue to vest (and correspondingly, the period he has to exercise the Stock Options) under the Plans; and,
WHEREAS, the sum of Employees age and years of service exceeds 75, and Employee has attained at least the age of 55, and thus Employees separation is deemed to be a retirement under the terms of the Plans, and Employee is otherwise eligible to enter into this Agreement;
NOW THEREFORE, the parties agree as follows:
1. Separation Agreement Necessary . Employee can only sign and receive the consideration/benefits provided for in this Agreement if Employee has also signed, and not revoked, the Separation Agreement provided to Employee on or after his Separation Date. If that Separation Agreement is not effective, this Agreement is null and void.
2. Extension Of Exercise Period . In return for executing and thereafter abiding by the terms of this Agreement, including specifically the covenants in Sections 2 and 3 hereof, as well as the terms of the relevant stock option agreements and the Plans, Employee is eligible for the option exercise period extension benefits as set forth in Paragraph 5.3(b)(ii) of the 2007 Plan and Paragraph 10.2(a)(i) of the 2010 Plan. The Plans and the relevant stock option agreements are incorporated herein by reference. Specifically, and without limiting the terms of the Plans or such agreements, during the three-year period following Employees retirement, all of his unvested Stock Options shall continue to become exercisable in accordance with their respective terms during such three-year period as if Employees employment had not terminated, and all of Employees exercisable Stock Options (including those that become exercisable pursuant to the immediately preceding clause) may be exercised by Employee (or his beneficiary or legal representative) until the earlier of (A) (i) the third anniversary of Employees retirement or (ii) if Employee dies prior to such third anniversary of his retirement, the twelve-month anniversary of his death, or (B) the expiration of the term of such Stock Options. Upon the expiration of such period, all Stock Options not previously exercised by Employee shall be forfeited and canceled.
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3. Employer Confidential Information .
i. Employee agrees that Employee received and had access to materials and information regarding Employers technologies, know-how, products, services and sales that are proprietary and confidential to Employer, and that would give Employee an unfair competitive advantage in competing with Employer if Employees activities are not restricted as provided for in this Agreement. Employee recognizes that these materials and information are an important and valuable asset to Employer and that Employer has a legitimate interest in protecting the confidential and proprietary nature of these materials and information.
ii. Employee agrees that the information, observations and data obtained by Employee during the course of Employees employment with Employer and relevant Employer Affiliate(1) are the sole property of the Employer. Employee agrees that from the date of this Agreement and thereafter, without the express written consent of the Employers President, Employee will not disclose to any person or entity (collectively, Entity) or use for Employees own account or for the benefit of any third party any Confidential Information(2), unless and only to the extent that such Confidential Information becomes generally known to and available for use by the public or in the trade other than as a result of the Employees acts or inaction or the wrongful act of any third party. The parties agree that Confidential Information and all elements of it are important, material, confidential and gravely affect the successful conduct of the Employer and any relevant Employer Affiliate.
iii. Employee states that, except as expressly permitted by Employer in writing to retain such items, Employee has delivered to Employer all memoranda, notes, plans, records, reports, computer disks and memory, and other documentation and copies thereof (however stored or recorded) relating to the business of Employer and any relevant Employer Affiliate, and/or which contain Confidential Information, which Employee possesses or has custody or control of. Employee has not retained copies. Employee has also returned all of Employers and any relevant Employer Affiliates property within Employees custody or control. Employee and Employer acknowledge that Employee may continue to have access to Confidential Information pursuant to the separate Consulting Agreement between the Parties.
(1) Employer Affiliate for purposes of this agreement shall mean any division, affiliate, subsidiary or other entity which has Sally Beauty Holdings, Inc. (or its predecessor or successor) as the ultimate parent company. The list of Employer Affiliates currently includes, but is not limited to: Sally Beauty Supply LLC, Beauty Systems Group LLC and Armstrong-McCall L.P.
(2) Confidential Information for purposes of this Agreement shall mean information (whether gained before or after his separation from Employer) relating to the Employer or any Employer Affiliate that is generally not disclosed outside of the company, and shall include but not be limited to: Employers or any Employer Affiliates business plans and future product or market developments, all financial information, information regarding suppliers and costs of products and other supplies, financing programs, and any other information regarding personnel, operations, overhead, distribution; present or future plans related to real estate and leaseholds (including site selection); and information regarding computer and communication systems, software operating systems, source codes, lawsuits, legal documents, legal strategies and the like.
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4. Unfair Competition .
i. Beginning on the day after Employees final date of employment with Employer and any relevant Employer Affiliate if earlier (the Separation Date), and ending on the day one (1) year thereafter, Employee agrees he shall remain loyal to Employer and shall not, directly or indirectly, engage in Unfair Competition. Employee agrees that it shall be considered Unfair Competition for him to:
a. be employed in, participate in, provide, supervise, or manage (as an employee, consultant, contractor, officer, owner, director, or otherwise) any activities or services for an entity that competes with Employer or any Employer affiliate in any geographic area where Employer does business (the Territory) where the position or activity would (a) involve services that are the same as or similar in function or purpose to those Employee performed, supervised, or managed for Employer or any Employer affiliate in the two (2) year period preceding Employees separation from Employer or (b) would be likely to involve the use Confidential Information.
b. either directly or indirectly, solicit for employment or otherwise interfere with the relationship of Employer or any Employer Affiliate with any natural person who is then-currently employed by or otherwise engaged to perform services for Employer or any Employer Affiliate within the Territory; or,
c. interfere with the business relationship between any Employer Affiliate and one of its customers, suppliers or vendors operating within the Territory by soliciting, inducing, or otherwise encouraging a customer, supplier or vendor to reduce or stop doing business with any Employer Affiliate, or engaging any such Employer Affiliate customer or supplier to do business with or on Employees (or Employees employers) behalf for the purpose of selling to such customer beauty supply business products or services; or,
d. disparage the business or interests of Employer or any Employer Affiliate (provided however, it shall not be deemed disparagement for Employee to comply with his obligations in any written agreement with Employer or any Employer Affiliate); or,
e. supervise of any of the foregoing activities.
ii. Employee will give Employer written notice of any offer that he receives from a competing business before accepting it. Employee will also provide Employer at least thirty (30) days notice before performing any personal services for a competing business (such as a retail, professional or online seller or distributor of beauty products) doing business within the Territory and meet with an Employer representative to discuss the nature of his new position if Employer requests such a meeting to help avoid unnecessary disputes. Employee understands that Employer is not required to request such a meeting and that a failure to resolve disputes through such a meeting will not be considered a waiver of any rights by either Party.
iii. Employer may notify any future or prospective employer or third party of the existence of this Agreement. Employee stipulates that the harm caused by a violation of this Agreement by him would be irreparable, cannot be readily and fully remedied through monetary
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damages, and shall warrant injunctive relief in addition to, and not in place of, any other legal remedies available for any breach, including reasonable attorneys fees and costs. Employee acknowledges and agrees that his violation of any of the restrictive covenants in Section 2 or 3 above would constitute a failure of consideration, as those covenants are consideration for Employers agreements herein, including, without limitation, the extension of the Stock Option Exercise Period set forth in Section 1 above. Employee agrees that, in addition to all other remedies or rights, in the event Employee violates any of the restrictive covenants in Section 2 or 3, as determined by Employer in its sole discretion, then (i) all Stock Options granted to Employee, whether or not then exercisable, shall be immediately forfeited and canceled as of the date of such violation, and (ii) Employee shall, within 30 days after such determination of a violation, pay an amount to Employer equal to the sum of any gain received by Employee that is attributable to the exercise after the date of his retirement of Stock Options the terms of which have been extended pursuant to this Agreement. Employee understands and agrees that if he is found to have violated one of the time-limited, post-employment-termination restrictions on his conduct created by this Agreement, the time period for that restriction will be extended by one day for each day that he is found to have been in violation of the restriction up to a maximum period of nine (9) months. If there is a dispute over this Agreement, Employee agrees that if Employer prevails, Employer shall be entitled to recover from Employee all reasonable costs and expenses including reasonable attorneys fees and costs; provided, however, that Employer need not get all relief that it requests in order to be considered a prevailing party.
5. Governing Law . This Agreement shall be construed in accordance with and governed by the laws of the State of Texas, without reference to principles of conflict of laws which would require application of the law of another jurisdiction, except to the extent that the corporate law of the State of Delaware specifically and mandatorily applies.
6. Notice . Any notice to be given to Employer hereunder will be deemed sufficient if addressed to Employer in writing and hand-delivered or mailed by certified mail to General Counsel, Sally Beauty Holdings, Inc., 3001 Colorado Boulevard, Denton, Texas 76210. Any notice to be given to Employee hereunder will be deemed sufficient if addressed to Employee in writing and hand-delivered or mailed by certified mail to Employee at Employees last known address as shown on Employers records. Either party may designate a different address or addresses by giving notice according to this Section.
7. Severability; Reformation; Right To Revoke/Terminate. In the event that any one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. If, in the opinion of any court of competent jurisdiction such covenants are not reasonable in any respect, such court shall have the right, power and authority to delete, reform or modify such provision or provisions of these covenants as to the court shall appear not reasonable and enforce these covenants as so amended. Any Employer remedies set forth in this Agreement are in addition to the rights as set forth in the Plans, such as for revocation, termination, forfeiture and/or cancellation. Provided however, that: (i) as a result of the provisions of this Agreement being declared illegal or unenforceable or their being substantially modified; or, (ii) if Employee claims, through a lawsuit or otherwise that provisions of this Agreement are illegal, unenforceable or subject to substantial modification; and as a result
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of such declaration, or if in the event of such claim of Employee being enforced, Employer loses the benefit of its bargain (such as, without limitation, a compromise of Employers rights of confidentiality or protection against Employee engaging in Unfair Competition), Employer shall have no further obligation under this Agreement and the Agreement shall at the option of Employer be declared void, whereupon (i) all Stock Options granted to Employee, whether or not then exercisable, shall be immediately forfeited and canceled, and (ii) Employee shall pay an amount to Employer equal to the sum of any gain received by Employee that is attributable to the exercise after the date of his retirement of Stock Options the terms of which have been extended pursuant to this Agreement.
8. Headings and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of this Agreement, and shall not be employed in the construction of this Agreement.
9. Entire Agreement . This Agreement contains all the terms and conditions agreed upon by the parties with respect to the subject matter hereof and no provision expressed in this Agreement may be altered, modified and/or cancelled except upon the express written consent of the parties. The terms and conditions contained in this Agreement supersede any previous agreement or arrangement between the parties other than sections of any agreement addressing Unfair Competition or Employees use/treatment of Confidential Information, which are supplemented by this Agreement. This Agreement and all rights and benefits are personal to Employee, and neither this Agreement, nor any Employee right or interest arising in this Agreement, shall be voluntarily sold, transferred or assigned by Employee, except as expressly set forth in the Plans and any related documents.
The parties have signed this Agreement on the dates written by the signatures below, to be effective on the day Employee signs the Agreement. Notwithstanding any other provision in this Agreement, if Employee does not sign and deliver this Agreement to Employer at the address shown in the subsection under Miscellaneous entitled Notice on or before 45 days following Employees receipt of this Agreement from Employer, then this Agreement will be null and void and Employee will not be entitled to the consideration described above.
WHEREFORE, the parties have agreed as hereinbefore set forth.
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SALLY BEAUTY HOLDINGS, INC. |
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By: |
/s/ Matthew Haltom |
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/s/ Gary Winterhalter |
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Gary Winterhalter |
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Title: |
SVP, General Counsel & Sec. |
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Date: |
Feb. 18, 2016 |
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Date: |
2-18-16 |
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Employee |
/s/ GW |
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Exhibit 10.4
SEPARATION AGREEMENT
This Separation Agreement ( Agreement ) is entered into by and between Brian Walker ( Employee ) and Sally Beauty Supply LLC ( Employer ).
1. Separation of Employment . Employee separated from employment with Employer on February 10, 2016 (the Separation Date ).
2. Consideration . In consideration of the release of all claims by Employee as provided for in this Agreement, and for the other agreements by Employee herein, Employer will provide Employee with the following consideration (the Release Consideration):
a. Payment of the gross amount of Four Hundred Sixty-One Thousand Two Hundred Fifty Dollars ( $461,250.00 ) (less any withholdings required by law or deductions authorized by the parties previous agreement or as otherwise agreed to in this Agreement) (the Severance Payment), which amount represents fifteen (15) months of Employees base salary.
b. Payment of the net amount of Thirty-One Thousand Five Hundred Ten Dollars and Eighty Cents ($31,510.80 ) (with the gross amount paid being subject to withholdings required by law or deductions authorized by the parties previous agreement or as otherwise agreed to in this Agreement), with the after-tax amount representing the cost to Employee for health insurance continuation under the Consolidated Omnibus Budget Reconciliation Act (COBRA) (the COBRA Payment) for fifteen (15) months.
c. Payment of a prorated annual bonus for fiscal year 2016, equal to (1) the bonus, if any, that would have been earned by Employee for fiscal year 2016 if he had remained employed on the normal payment date for such bonus under Employers Annual Incentive Plan, based on actual performance under applicable financial metrics, (2) multiplied by a fraction, the numerator of which is the number of days worked by Employee during fiscal year 2016 and the denominator of which is 365 (the Prorated Final Year Bonus).
Employee agrees that this Release Consideration is in addition to anything of value to which Employee already is entitled. The Severance Payment is payable in approximately equal installments, consistent with Employers normal payroll practices, over a fifteen (15) month period starting on the first regular payroll date that occurs after the sixtieth (60 th ) day following the Separation Date. The COBRA Payment is payable in a lump sum on the first regular payroll date that occurs after the sixtieth (60 th ) day following the Separation Date. The Prorated Fiscal Year 2016 Bonus will be paid at the same time that the fiscal year 2016 annual bonuses are paid under Employers Annual Incentive Plan to active participants.
3. Release . In consideration of the Release Consideration, Employee hereby fully, finally, and completely releases Employer and its predecessors, successors, parents, subsidiaries, affiliates, shareholders, partners, current and former officers, directors, employees, agents, attorneys and representatives (collectively, the Released Parties ), from any and all claims, actions, demands, and/or causes of action, of whatever kind or character, whether now known or unknown, arising from, relating to, or in any way connected with, facts or events occurring on or before the date on which Employee executes this Agreement. Employee agrees that this Agreement includes a release of any and all negligence claims, contractual claims,
wrongful discharge claims, and claims of discrimination or retaliation of every possible kind , including but not limited to, claims on the basis of race, color, sex, sexual orientation, national origin, religion, disability, age, whistleblower status under state or federal law, including, but not limited to the Americans with Disabilities Act, the Age Discrimination in Employment Act (ADEA), the National Labor Relations Act (NLRA), Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1866, claims under Chapters 21 and 451 of the Texas Labor Code, and other federal, state or local laws relating to employment or termination of employment, any personal injury claims, and any related attorneys fees and costs claims, if any, that Employee may have against Employer or any of the Released Parties. Employee waives and releases Employer and the Released Parties from any claims that this Agreement was procured by fraud or signed under duress or coercion so as to make any of the terms or provisions of this Agreement not binding. Employee further releases Employer and the Released Parties from any and all claims, allegations, assertions or defenses that the restrictions contained within Section 5 of this Agreement are overly broad, unreasonable, unenforceable, or supported by insufficient consideration.
Employee understands that nothing in this Agreement is intended to interfere with or deter Employees right to challenge the waiver of an ADEA claim or state law age discrimination claim or the filing of an ADEA charge or ADEA complaint or state law age discrimination complaint or charge with the Equal Employment Opportunity Commission or any state discrimination agency or commission or to participate in any investigation or proceeding conducted by those agencies. Further, Employee understands that nothing in this Agreement would require Employee to tender back the money received under this Agreement if Employee seeks to challenge the validity of the ADEA or state law age discrimination waiver, nor does the Employee agree to ratify any ADEA or state law age discrimination waiver that fails to comply with the Older Workers Benefit Protection Act by retaining the money received under the Agreement. Further, nothing in this Agreement is intended to require the payment of damages, attorneys fees or costs to Employer should Employee challenge the waiver of an ADEA or state law age discrimination claim or file an ADEA or state law age discrimination suit except as authorized by federal or state law. Notwithstanding this paragraph, Employee agrees to waive any right to recover monetary damages in any charge, complaint, or lawsuit against Employer filed by Employee or by anyone else on Employees behalf.
Employee also acknowledges (i) receipt of all compensation and benefits due through the date Employee signs this Agreement as a result of services performed for Employer with the receipt of a final paycheck except as provided in this Agreement; (ii) Employee has reported to Employer any and all work-related injuries incurred during employment; and (iii) Employer properly provided any leave of absence because of Employees or a family members health condition and Employee has not been subjected to any improper treatment, conduct or actions due to a request for or taking such leave.
4. Equity Awards . As of the Separation Date, Employee holds (A) vested options to purchase 8,398 shares of Employers common stock (the Vested Options) and unvested options to purchase 54,426 shares of Employers common stock (the Unvested Options), and (B) 7,650 restricted shares of Employers common stock (the Restricted Shares). The parties agree that (i) Employee shall have until 5:00 p.m. Central Time on April 10, 2016 to exercise the Vested Options, following which time any Vested Options remaining outstanding and unexercised shall lapse and terminate immediately, and Employee shall cease to have any rights with respect to such terminated Vested Options as of such time, (ii) the Unvested Options lapsed and terminated immediately as of the Separation Date, and Employee ceased to have any rights with respect to such terminated Unvested Options as of the Separation Date, and (iii) the Restricted Shares were forfeited automatically as of the Separation Date, and Employee ceased to have any rights with respect to such forfeited Restricted Shares as of the Separation Date.
5. Agreement Not to Solicit or Hire Employees . For a period of 15 months after the Effective Date of this Agreement, Employee shall not, nor will Employee assist any third party to, directly or indirectly: (i) recruit, raid, solicit, or attempt to persuade any employee of Company or any person who is a current employee of Employer; (ii) interfere with the performance by any such persons of their duties for Employer; or (iii) communicate with any such persons for the purposes described in items (i) and (ii) in this paragraph.
6. Confidentiality and Non-disparagement . Employee agrees to keep the terms and conditions of this Agreement confidential to the extent allowed by law, except Employee may supply a copy to Employees accountant or other financial advisor solely in connection with preparing Employees income tax return, and Employee may disclose this Agreement to members of Employees immediate family and to Employees attorney on a confidential basis. Employee also agrees to keep confidential any and all discussions, communications and documents relating to the issues and negotiations that led to this Agreement and the underlying facts, allegations, documents and communications related to any claims of discrimination Employee made during Employees employment with Employer. Employee further agrees not to talk about or otherwise communicate to any third parties in a malicious, disparaging, or defamatory manner regarding Employer or any of the Released Parties. Employee also agrees that Employee shall not make or authorize to be made any written or oral statement that may disparage or damage the reputation of Employer.
Nothing in this section or Agreement is to be construed to preclude Employee or any individual from communicating with any government agency, including the Equal Employment Opportunity Commission, National Labor Relations Board and/or Securities and Exchange Commission, or otherwise participating in any investigation or proceeding that may be conducted by any government agencies in connection with any charge or complaint, whether filed by Employee, on Employees behalf, or by any other individual.
7 . Confidential Information and Trade Secrets . Employee acknowledges Employees ongoing legal and fiduciary obligations to maintain the confidentiality of Employers confidential business-related information and trade secrets, including, but not limited to, Employers strategy, future plans, merchandising, marketing and sales initiatives, proprietary business methods and processes.
8. Tax Indemnification . Employee acknowledges and agrees that Employer has not made any representations to Employee regarding the tax consequences of any amounts received by Employee pursuant to this Agreement. The parties further agree that if any local, state or federal authority determines that the tax treatment for payments made under this Agreement is improper or impermissible, Employee shall be solely responsible for payment of all such taxes due, including interest and penalties, and Employee shall indemnify Employer for all such tax payments, including interest and penalties. To the extent Employer is penalized for any failure to withhold or pay taxes, Employee agrees that Employee will indemnify Employer for its costs, expenses, fees (including reasonable and necessary attorneys fees) and/or penalties with respect to taxes or the failure to withhold.
9. Employees Attorneys Fees and Costs . Employee acknowledges and represents that all claims for attorneys fees, costs, or other recoverable expenses that Employees attorneys may hold against Employer as Employees attorneys will be satisfied solely by Employee.
10. Employment Reference and Verification . Employee agrees that for employment verification or reference purposes, Employee will only refer prospective employers to the third party service entitled The Work Number 1-800-367-5690 or www.theworknumber.com. This online employment verification service can provide confirmation of employment and dates of employment. The relevant employer code to use is 11140. Should this service change, Employee agrees to use the third party service then used by Employer. Employee agrees not to contact, or direct others to contact, any active employee or representative of Employer for a reference or information relating to Employees employment with Employer.
11. Advice of Counsel, Consideration and Revocation Periods, Other Information . Employer advises Employee to consult with an attorney prior to signing this Agreement. Employee has 21 days to consider whether to sign this Agreement from the date Employee receives this Agreement (Consideration Period). Employee must return this signed Agreement to Employers representative set forth below within the Consideration Period. If Employee signs and returns this Agreement before the end of the Consideration Period, it is because Employee freely chose to do so after carefully considering its terms. Additionally, Employee shall have seven days from the date of the Employee signs this Agreement to revoke this Agreement by delivering a written notice of revocation within the seven-day revocation period to the same person as Employee returned this Agreement. If the revocation period expires on a weekend or holiday, Employee will have until the end of the next business day to revoke. Employee agrees with Employer that changes, whether material or immaterial, do not restart the running of the Consideration Period.
12. Exceptions . Nothing in this Agreement is intended to waive claims (i) for unemployment or workers compensation benefits, (ii) for vested rights under ERISA-covered employee benefit plans as applicable on the date Employee signs this Agreement, (iii) that may arise after Employee signs this Agreement, or (iv) which cannot be released by private agreement. In addition, nothing in this Agreement including but not limited to the acknowledgements, release, confidentiality, non-disparagement, tax indemnification, employees attorneys fees and costs, eligibility for re-employment, and employment verification provisions, prevent Employee from filing a charge or complaint with or from participating in an investigation or proceeding conducted by the EEOC, NLRB, SEC or any other any federal, state or local agency charged with the enforcement of any laws, or from exercising rights under Section 7 of the NLRA to engage in joint activity with other employees, although by signing this release Employee is waiving rights to individual relief based on claims asserted in such a charge or complaint, or asserted by any third-party on Employees behalf, except where such a waiver of individual relief is prohibited.
13 . Miscellaneous .
a. The Effective Date of this Agreement is the eighth (8 th ) day after Employee signs this Agreement, provided Employee does not revoke the Agreement.
b. Entire Agreement/No Assignment . This instrument sets forth the entire agreement between the parties and no representation, promise, or condition not contained herein will modify these terms except any prior agreements related to inventions, business ideas, confidentiality of corporate information, and non-competition remain intact. The rights under this Agreement may not be assigned by Employee, unless Employer consents in writing to said assignment. Employee represents that Employee has not assigned any of the claims related to the matters set forth herein.
c. No Admission of Liability . Nothing in this Agreement constitutes the admission of any liability by Employer, the Released Parties or Employee.
d. Read Agreement/Advice of Attorney . Employee acknowledges that Employee has read and understood this Agreement, has been advised to and has had the opportunity to discuss it with an attorney of Employees own choice, agrees to its terms, acknowledges receipt of a copy of same and the sufficiency of the payment recited herein, and signs this Agreement voluntarily.
e. Applicable Law and Severability . The parties agree that the terms of this Agreement are contractual in nature and not merely recitals and will be governed and construed in accordance with the laws of the State of Texas. The parties further agree that should any part of this Agreement be declared or determined by a court of competent jurisdiction to be illegal, invalid, or unenforceable, the parties intend the legality, validity and enforceability of the remaining parts will not be affected thereby, and said illegal, invalid, or unenforceable part will be deemed not to be a part of the Agreement.
f. Notice. Any notice to be given to Employer hereunder will be deemed sufficient if addressed to Employer in writing and hand-delivered or mailed by certified mail to General Counsel, Sally Beauty Holdings, Inc., 3001 Colorado Boulevard, Denton, Texas 76210. Any notice to be given to Employee hereunder will be deemed sufficient if addressed to Employee in writing and hand-delivered or mailed by certified mail to Employee at Employees last known address as shown on Employers records. Either party may designate a different address or addresses by giving notice according to this Section.
14 . Code Section 409A . This Agreement shall be interpreted and administered in a manner so that any amount or benefit payable hereunder shall be paid or provided in a manner that is either exempt from or compliant with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the Code) and applicable Internal Revenue Service guidance and Treasury Regulations issued thereunder. Nevertheless, the tax treatment of the benefits provided under the Agreement is not warranted or guaranteed to Employee, who is responsible for all taxes assessed on any payments made pursuant to this Agreement, whether under Section 409A of the Code or otherwise. Neither Employer nor its directors, officers, employees or advisers shall be held liable for any taxes, interest, penalties or other monetary amounts owed by Employee as a result of the application of Section 409A of the Code. Each installment payment under Section 2 of this Agreement shall be deemed to be a separate payment, as described in Treas. Reg. Section 1.409A-2(b)(2), for purposes of Section 409A of the Code.
The parties have signed this Agreement on the dates written by the signatures below. Notwithstanding any other provision in this Agreement, if Employee does not sign and deliver this Agreement to Employer at the address shown in the subsection under Miscellaneous entitled Notice prior to the end of the Consideration Period or if Employee revokes this Agreement, then this Agreement will be null and void and Employee will not be entitled to the Consideration described above.
EMPLOYEE : |
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EMPLOYER : |
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/s/ Brian Walker |
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/s/ Matthew Haltom |
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BRIAN WALKER |
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TITLE: |
SVP & General Counsel |
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SALLY BEAUTY SUPPLY LLC |
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Date: 15 February, 2016 |
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Date: 15 February, 2016 |
Exhibit 31.1
CERTIFICATION
PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Christian A. Brickman, certify that:
(1) I have reviewed this quarterly report on Form 10-Q for the quarterly period ended March 31, 2016 of Sally Beauty Holdings, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c. Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
(5) The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 5, 2016 |
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By: |
/s/ Christian A. Brickman |
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Christian A. Brickman |
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Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark J. Flaherty, certify that:
(1) I have reviewed this quarterly report on Form 10-Q for the quarterly period ended March 31, 2016 of Sally Beauty Holdings, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c. Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
(5) The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 5, 2016 |
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By: |
/s/ Mark J. Flaherty |
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Mark J. Flaherty |
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Senior Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Sally Beauty Holdings, Inc. (the Company) on Form 10-Q for the quarterly period ended March 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Christian A. Brickman, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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By: |
/s/ Christian A. Brickman |
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Christian A. Brickman |
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Chief Executive Officer |
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Date: May 5, 2016 |
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Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Sally Beauty Holdings, Inc. (the Company) on Form 10-Q for the quarterly period ended March 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Mark J. Flaherty, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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By: |
/s/ Mark J. Flaherty |
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Mark J. Flaherty |
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Senior Vice President and Chief Financial Officer |
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Date: May 5, 2016 |
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