The following condensed consolidated balance sheets as of December 31, 2018 and September 30, 2018, the condensed consolidated statements of earnings, condensed consolidated statements of comprehensive income, condensed consolidated statements of cash flows and the condensed statements of shareholders’ deficit for the three months ended December 31, 2018 and 2017 are those of Sally Beauty Holdings, Inc. and its subsidiaries.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The condensed consolidated interim financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC, although we believe that the disclosures are adequate to make the information not misleading. These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. In the opinion of management, these condensed consolidated interim financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly our consolidated financial position as of December 31, 2018 and September 30, 2018, our consolidated results of operations, consolidated comprehensive income and our consolidated cash flows for the three months ended December 31, 2018 and 2017.
2. Significant Accounting Policies
We adhere to the same accounting policies in the preparation of our condensed consolidated interim financial statements as we do in the preparation of our full-year consolidated financial statements. As permitted under GAAP, interim accounting for certain expenses, including income taxes, is based on full-year assumptions. For interim financial reporting purposes, income taxes are recorded based upon estimated annual effective income tax rates.
3. Accounting Changes and Recent Accounting Pronouncements
Accounting Changes
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
, (“ASU No. 2014-09”) which introduced new guidance that established how an entity should measure revenue in connection with its sale of goods and services to a customer based on the consideration to which the entity expects to be entitled in exchange for each of those goods and services. On October 1, 2018, we adopted ASU No. 2014-09 using the modified retrospective transition method. Additionally, in connection with the adoption, we designed changes to our internal control procedures and updated processes to ensure appropriate recognition and presentation of financial information. This adoption did not have a material effect on our consolidated financial statements or on our internal controls over financial reporting. We do not believe that the adoption will have a material effect on our consolidated financial statements on an ongoing basis. The comparative periods continue to be presented under the accounting standards in effect during those periods.
In connection with the adoption of ASU No. 2014-09, we now present our sales returns allowance on a gross basis rather than a net liability basis. As such, we recognize a return asset from the right to recover merchandise from customers (included in other current assets) and a return liability from the amount to be returned to the customer (included in accrued liabilities) within our consolidated balance sheets. Additionally, we now recognize revenue for our gift cards not expected to be redeemed (“gift card breakage”) within revenue in our consolidated statements of earnings.
The following tables set forth the impact of adopting this standard on our condensed consolidated balance sheets and consolidated statements of earnings as of and for the three months ended December 31, 2018 (in thousands):
Effect of ASU No. 2014-09 Adoption on Condensed Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding
|
|
|
|
|
|
|
|
|
|
|
|
ASU No. 2014-09
|
|
|
ASU No. 2014-09
|
|
|
|
As reported
|
|
|
Effect
|
|
|
Effect
|
|
Other current assets
|
|
$
|
40,819
|
|
|
$
|
38,180
|
|
|
$
|
2,639
|
|
Accrued liabilities
|
|
$
|
157,144
|
|
|
$
|
154,505
|
|
|
$
|
2,639
|
|
11
Effect of ASU No. 2014-09 Adoption on Condensed Consolidated Statement of Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding
|
|
|
|
|
|
|
|
|
|
|
|
ASU No. 2014-09
|
|
|
ASU No. 2014-09
|
|
|
|
As reported
|
|
|
Effect
|
|
|
Effect
|
|
Net Sales
|
|
$
|
989,453
|
|
|
$
|
989,378
|
|
|
$
|
75
|
|
Gross Profit
|
|
|
480,705
|
|
|
|
480,630
|
|
|
|
75
|
|
Selling, general and administrative expenses
|
|
$
|
366,987
|
|
|
$
|
366,912
|
|
|
$
|
75
|
|
See note 4,
Revenue Recognition
, for additional information in connection with ASU No. 2014-09.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, which will require most leases to be reported on the balance sheet as a right-of-use asset and a lease liability. Under the new guidance, the lease liability must be measured initially based on the present value of future lease payments, subject to certain conditions. The right-of-use asset must be measured initially based on the amount of the liability, plus certain initial direct costs. The new guidance further requires 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 prior rules) over the life of the lease. The new standard must be adopted using a modified retrospective transition method. For public companies, this standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We will adopt this pronouncement on October 1, 2019. We have completed a preliminary assessment of the potential impact of adopting ASU No. 2016-02 on our consolidated financial statements. At December 31, 2018, adoption of ASU No. 2016-02 would have resulted in recognition of a right-of-use asset in the estimated amount of approximately $525.0 million and a lease liability for a similar amount in our consolidated balance sheet. We are currently in the process of implementing changes to our processes, controls and systems in order to be compliant upon adoption of the new standard. We do not believe adoption of ASU No. 2016-02 will have a material impact on our consolidated results of operations or consolidated cash flows. The amount of the right-of-use asset and the lease liability we ultimately recognize may materially differ from this preliminary estimate, including as a result of future organic growth in our business, changes in interest rates, and potential acquisitions.
4. Revenue Recognition
Substantially all of our revenue is derived through the sale of merchandise. Revenue is recognized net of estimated sales returns and sales taxes. We estimate sales returns based on historical data. Additionally, we have assessed all revenue streams for principal versus agent considerations and have concluded we are the principal for all transactions.
See Note 12,
Business Segments
, for additional information regarding the disaggregation of our sales revenue.
Merchandise Revenues
The majority of our revenue comes from the sale of products in our company-operated stores. These sales generally have one single performance obligation and the revenue is recognized at the point of sale. Discounts and incentives issued at the point of sale to entice a customer to a future purchase are treated as a separate performance obligation. As such, we allocate a portion of the revenue generated from the point of sale to each of the additional performance obligations separately using explicitly stated amounts or our best estimate using historical data.
We also sell merchandise on our online platforms, to our franchisees and by using distributor sales consultants. These sales generally have one single performance obligation and revenue is recognized upon the shipment of the merchandise. Any shipping and handling fees charged to the customer are recognized as revenue, while any shipping and handling costs to get the merchandise shipped is recognized in cost of goods sold.
We do extend credit to certain customers, primarily salon professionals, which generally have 30 day payment terms. Based on the nature of theses receivables, no significant financing component exists.
Gift Cards
The revenue from the sale of our gift cards is recognized at the time the gift card is used to purchase merchandise, which is generally within a year. Our gift cards do not carry expiration dates or impose post-sale fees. Based on historical experience, a certain amount of our gift cards will not be redeemed, also referred to as “gift card breakage.” We recognize revenue related to gift card breakage within revenue in our consolidated statements of earnings over time proportionately to historical redemption patterns. The gift cards are issued and represent liabilities of either of our operating entities, Sally Beauty Supply LLC or Beauty Systems Group LLC, which are both limited liability companies formed in the state of Virginia.
12
Customer Loyalty Rewards
We recently launched our new Sally Beauty Rewards Loyalty Program nationwide during the first quarter of fiscal year 2019 to the U.S. and Canada, which enables customers to earn points based on their status for every dollar spent on merchandise purchased in our Sally Beauty Supply (“SBS”) stores and through our
sallybeauty.com
website. When a specific tier has been reached, a customer will receive a certificate which can be used at any of our U.S. and Canada SBS stores or through our
sallybeauty.com
website on their next purchase. Based on the rewards loyalty program policies, points expire after twelve months of inactivity and certificates will expire after a specific time period from the date of issuance. Certificates generated from our rewards loyalty program provide a material right to customers and represent a separate performance obligation. Rewards loyalty points are accrued at the standalone value per point, net of estimated breakage, and are included within accrued liabilities on our consolidated balance sheets. We recognize the revenue when the customer redeems the certificate. Points and certificates are issued by and represent liabilities of Sally Beauty Supply LLC.
The following table shows the amount of our gift card and rewards loyalty program liabilities included in accrued liabilities within our condensed consolidated balance sheets as of December 31, 2018 and September 30, 2018 (in thousands):
|
|
December 31,
2018
|
|
|
September 30,
2018
|
|
Gift cards
|
|
$
|
5,766
|
|
|
$
|
4,144
|
|
Rewards loyalty program
|
|
|
7,246
|
|
|
|
1,165
|
|
Total liability
|
|
$
|
13,012
|
|
|
$
|
5,309
|
|
As of December 31, 2018 and 2017, we did not have any contract assets.
5. Fair Value Measurements
Fair value on recurring basis
Consistent with the three-level hierarchy defined in ASC Topic 820,
Fair Value Measurement
, as amended, we categorize our financial assets and liabilities as follows (in thousands):
|
|
|
|
As of December 31, 2018
|
|
|
As of September 30, 2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Level 2
|
|
$
|
24
|
|
|
$
|
—
|
|
Interest rate caps
|
|
Level 2
|
|
|
4,551
|
|
|
|
8,367
|
|
Total assets
|
|
|
|
$
|
4,575
|
|
|
$
|
8,367
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Level 2
|
|
$
|
583
|
|
|
$
|
—
|
|
Other fair value disclosures
|
|
|
|
As of December 31, 2018
|
|
|
As of September 30, 2018
|
|
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes
|
|
Level 1
|
|
$
|
950,000
|
|
|
$
|
882,240
|
|
|
$
|
950,000
|
|
|
$
|
911,490
|
|
Other long-term debt
|
|
Level 2
|
|
|
843,995
|
|
|
|
794,054
|
|
|
|
845,383
|
|
|
|
824,951
|
|
Total debt
|
|
|
|
$
|
1,793,995
|
|
|
$
|
1,676,294
|
|
|
$
|
1,795,383
|
|
|
$
|
1,736,441
|
|
13
6. Accumulated Other Comprehensive Loss
The change in accumulated other comprehensive loss (“AOCL”) was as follows (in thousands):
|
|
Foreign Currency Translation Adjustments
|
|
|
Interest Rate Caps
|
|
|
Foreign Exchange Contracts
|
|
|
Total
|
|
Balance at September 30, 2018
|
|
$
|
(91,356
|
)
|
|
$
|
1,365
|
|
|
$
|
—
|
|
|
$
|
(89,991
|
)
|
Other comprehensive loss before reclassification, net of tax
|
|
|
(13,463
|
)
|
|
|
(2,839
|
)
|
|
|
(412
|
)
|
|
|
(16,714
|
)
|
Reclassification to net earnings, net of tax
|
|
|
—
|
|
|
|
9
|
|
|
|
—
|
|
|
|
9
|
|
Balance at December 31, 2018
|
|
$
|
(104,819
|
)
|
|
$
|
(1,465
|
)
|
|
$
|
(412
|
)
|
|
$
|
(106,696
|
)
|
The tax impact for the changes in other comprehensive loss and the reclassifications to net earnings were not material.
7. Weighted Average Shares
The following table sets forth the computations of basic and diluted earnings per share (in thousands, except per share data):
|
|
Three Months Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Weighted average basic shares
|
|
|
119,989
|
|
|
|
127,784
|
|
Dilutive securities:
|
|
|
|
|
|
|
|
|
Stock option and stock award programs
|
|
|
990
|
|
|
|
861
|
|
Weighted average diluted shares
|
|
|
120,979
|
|
|
|
128,645
|
|
For the three months ended December 31, 2018, options to purchase 5.7 million shares of our common stock were outstanding but not included in our computations of diluted earnings per share, since these options were anti-dilutive. For the three months ended December 31, 2017, options to purchase 5.8 million shares of our common stock were outstanding but not included in the computations of diluted earnings per share, since these options were anti-dilutive.
8. Share-Based Payments
Performance-Based Awards
The following table presents a summary of the activity for our performance unit awards assuming 100% payout:
Performance Unit Awards
|
|
Number
of Shares
(in
Thousands)
|
|
|
Weighted
Average
Fair
Value Per
Share
|
|
|
Weighted
Average
Remaining
Vesting Term
(in Years)
|
|
Unvested at September 30, 2018
|
|
|
349
|
|
|
$
|
20.88
|
|
|
|
1.3
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Vested
|
|
|
(23
|
)
|
|
|
23.45
|
|
|
|
|
|
Forfeited
|
|
|
(66
|
)
|
|
|
23.10
|
|
|
|
|
|
Unvested at December 31, 2018
|
|
|
260
|
|
|
$
|
20.10
|
|
|
|
1.4
|
|
14
Service-Based Awards
The following table presents a summary of the activity for our stock option awards:
|
|
Number of
Outstanding
Options
(in
Thousands)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in Years)
|
|
|
Aggregate
Intrinsic
Value
(in Thousands)
|
|
Outstanding at September 30, 2018
|
|
|
5,405
|
|
|
$
|
23.04
|
|
|
|
5.4
|
|
|
$
|
3,161
|
|
Granted
|
|
|
948
|
|
|
|
18.14
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(98
|
)
|
|
|
15.90
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(350
|
)
|
|
|
25.24
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
5,905
|
|
|
$
|
22.24
|
|
|
|
6.3
|
|
|
$
|
1,527
|
|
Exercisable at December 31, 2018
|
|
|
3,870
|
|
|
$
|
23.93
|
|
|
|
4.8
|
|
|
$
|
1,336
|
|
The following table presents a summary of the activity for our Restricted Stock Awards:
Restricted Stock Awards
|
|
Number
of Shares
(in Thousands)
|
|
|
Weighted
Average Fair
Value Per
Share
|
|
|
Weighted
Average
Remaining
Vesting Term
(in Years)
|
|
Unvested at September 30, 2018
|
|
|
219
|
|
|
$
|
16.98
|
|
|
|
2.1
|
|
Granted
|
|
|
287
|
|
|
|
18.14
|
|
|
|
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Forfeited
|
|
|
(6
|
)
|
|
|
17.63
|
|
|
|
|
|
Unvested at December 31, 2018
|
|
|
500
|
|
|
$
|
17.66
|
|
|
|
2.3
|
|
The following table presents a summary of the activity for our Restricted Stock Units:
Restricted Stock Units
|
|
Number
of Shares
(in Thousands)
|
|
|
Weighted
Average Fair
Value Per
Share
|
|
|
Weighted
Average
Remaining
Vesting Term
(in Years)
|
|
Unvested at September 30, 2018
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Granted
|
|
|
88
|
|
|
|
18.14
|
|
|
|
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Unvested at December 31, 2018
|
|
|
88
|
|
|
$
|
18.14
|
|
|
|
0.7
|
|
9. Short-term Borrowings and Long-term Debt
At December 31, 2018, we had $481.4 million available for borrowing under the ABL facility, including the Canadian sub-facility. At December 31, 2018, we
were in compliance with the agreements and instruments governing our debt, including our financial covenants.
15
10. Derivative Instruments and Hedging Activities
During the three months ended December 31, 2018, we did not purchase or hold any derivative instruments for trading or speculative purposes.
Designated Cash Flow Hedges
Foreign Currency Forwards
In December 2018, we entered into foreign currency forwards to mitigate the exposure to exchange rate changes on inventory purchases in USD by our foreign subsidiaries. At December 31, 2018, the notional amount we held through these forwards, based upon exchange rates at December 31, 2018, was as follows (in thousands):
Notional Currency
|
|
Notional Amount
|
|
EUR
|
|
$
|
16,085
|
|
MXP
|
|
|
14,342
|
|
GBP
|
|
|
6,642
|
|
CAD
|
|
|
3,748
|
|
Total
|
|
$
|
40,817
|
|
We record quarterly, net of income tax, the changes in fair value related to the foreign currency forwards into AOCL. As the forwards are exercised, the realized value will be recognized into cost of goods sold based on inventory turns. Based on December 31, 2018 valuations and exchange rates, we expect to reclassify approximately $0.5 million into cost of goods sold over the next 12 months.
Interest Rate Caps
In July 2017, we purchased two interest rate caps with an initial aggregate notional amount of $550 million (the “interest rate caps”) to mitigate the exposure to higher interest rates in connection with our term loan B. The interest rate caps are comprised of individual caplets that expire ratably through June 30, 2023 and are designated as cash flow hedges. Accordingly, changes in fair value of the interest rate caps are recorded quarterly, net of income tax, and are included in AOCL. Over the next 12 months, we expect to reclassify approximately $0.3 million into interest expense, which represents the original value of the expiring caplets.
The table below presents the fair value of our derivative financial instruments (in thousands):
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Classification
|
|
December 31,
2018
|
|
|
September 30,
2018
|
|
|
Classification
|
|
December 31,
2018
|
|
|
September 30,
2018
|
|
Derivatives designated as hedging
instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
Other assets
|
|
$
|
4,551
|
|
|
$
|
8,367
|
|
|
N/A
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign exchange contracts
|
|
Other current
assets
|
|
|
24
|
|
|
|
—
|
|
|
Accrued
liabilities
|
|
|
583
|
|
|
|
—
|
|
|
|
|
|
$
|
4,575
|
|
|
$
|
8,367
|
|
|
|
|
$
|
583
|
|
|
$
|
—
|
|
The effects of our derivative financial instruments on our condensed consolidated statements of earnings were not material for the three months ended December 31, 2018 and 2017.
11. Income Taxes
Our effective tax rate for the three months ended December 31, 2018 and 2017 was 22.9% and 3.3%, respectively. For the three months ended December 31, 2018, our effective tax rate was favorably impacted by lower federal statutory rates when compared to the prior year and a $3.0 million adjustment to our previously recorded transition tax on unrepatriated foreign earnings recorded as a result of the Tax Cut and Jobs Act (“U.S. Tax Reform”). For the three months ended December 31, 2017, our effective tax rate was favorably impacted by a net benefit of $22.2 million recorded as a result of the U.S. Tax Reform. For the fiscal year 2019, our U.S. federal statutory tax rate will be 21.0% compared to 24.5% for the prior fiscal year.
16
In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provided guidance allowing registrants to record provisional amounts, during a specified measurement period, when the
necessary information is not available, prepared or analyzed in reasonable detail to account for the impact of U.S. Tax Reform. As of December 31, 2018, we have completed our analysis on our provisional calculations within the measurement period provided b
y SAB 118. As a result, during the three months ended December 31, 2018, we identified certain immaterial adjustments to our provisional calculations, including a benefit of $3.0 million related to the
transition tax on unremitted earnings of our foreign o
perations.
In addition, the U.S. Treasury Department has recently released proposed regulations covering the one-time transition tax on unrepatriated foreign earnings, which was enacted as part of the U.S. Tax Reform. Included within the proposed regulations, certain guidance is inconsistent with our interpretation of the enacted tax law. This proposed regulation is not authoritative and is subject to change in the regulatory review process. However, if the proposed regulation is included in the final regulations as drafted, we may be required to reverse $2.5 million of benefit in the quarter the regulations become final.
Beginning in our first quarter of fiscal year 2019, we are subject to taxation on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. We have made the policy election to record this tax as a period cost at the time it is incurred. The impact from GILTI was immaterial for the three months ended December 31, 2018 and is expected to be immaterial for the full fiscal year 2019.
12. Business Segments
Segment data for the three months ended December 31, 2018 and 2017 is as follows (in thousands):
|
|
Three Months Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net sales:
|
|
|
|
|
|
|
|
|
SBS
|
|
$
|
580,608
|
|
|
$
|
585,574
|
|
Beauty Systems Group ("BSG")
|
|
|
408,845
|
|
|
|
409,390
|
|
Total
|
|
$
|
989,453
|
|
|
$
|
994,964
|
|
Earnings before provision for income taxes:
|
|
|
|
|
|
|
|
|
Segment operating earnings:
|
|
|
|
|
|
|
|
|
SBS
|
|
$
|
89,991
|
|
|
$
|
86,594
|
|
BSG
|
|
|
62,330
|
|
|
|
64,565
|
|
Segment operating earnings
|
|
|
152,321
|
|
|
|
151,159
|
|
Unallocated expenses
|
|
|
(38,603
|
)
|
|
|
(35,816
|
)
|
Restructuring charges
|
|
|
(3,980
|
)
|
|
|
(5,210
|
)
|
Consolidated operating earnings
|
|
|
109,738
|
|
|
|
110,133
|
|
Interest expense
|
|
|
(24,489
|
)
|
|
|
(24,016
|
)
|
Earnings before provision for income taxes
|
|
$
|
85,249
|
|
|
$
|
86,117
|
|
Sales between segments, which are eliminated in consolidation, were not material during the three months ended December 31, 2018 and 2017.
Disaggregation of net sales by segment
|
|
|
|
SBS
|
|
Three Months Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Hair color
|
|
|
27.5
|
%
|
|
|
26.4
|
%
|
Hair care
|
|
|
19.9
|
%
|
|
|
20.6
|
%
|
Styling tools
|
|
|
15.7
|
%
|
|
|
15.3
|
%
|
Skin and nail care
|
|
|
15.1
|
%
|
|
|
14.9
|
%
|
Salon supplies and accessories
|
|
|
7.1
|
%
|
|
|
7.1
|
%
|
Multicultural products
|
|
|
6.5
|
%
|
|
|
6.7
|
%
|
Other Beauty items
|
|
|
8.2
|
%
|
|
|
9.0
|
%
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
17
|
|
|
|
BSG
|
|
Three Months Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Hair color
|
|
|
38.0
|
%
|
|
|
36.8
|
%
|
Hair care
|
|
|
33.4
|
%
|
|
|
33.6
|
%
|
Skin and nail care
|
|
|
8.1
|
%
|
|
|
8.9
|
%
|
Styling tools
|
|
|
3.9
|
%
|
|
|
4.7
|
%
|
Other beauty items
|
|
|
5.8
|
%
|
|
|
5.8
|
%
|
Promotional items
|
|
|
10.8
|
%
|
|
|
10.2
|
%
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
13. Parent, Issuers, Guarantor and Non-Guarantor Condensed Consolidating Financial Statements
Condensed Consolidating Balance Sheet
December 31, 2018
(In thousands)
|
|
Parent
|
|
|
Sally
Holdings
LLC
and Sally
Capital Inc.
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Consolidating
Eliminations
|
|
|
Sally
Beauty
Holdings,
Inc. and
Subsidiaries
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
51,880
|
|
|
$
|
50,881
|
|
|
$
|
—
|
|
|
$
|
102,771
|
|
Trade and other accounts receivable, net
|
|
|
—
|
|
|
|
—
|
|
|
|
60,558
|
|
|
|
31,218
|
|
|
|
—
|
|
|
|
91,776
|
|
Due from affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
2,625,695
|
|
|
|
—
|
|
|
|
(2,625,695
|
)
|
|
|
—
|
|
Inventory
|
|
|
—
|
|
|
|
—
|
|
|
|
751,010
|
|
|
|
231,487
|
|
|
|
—
|
|
|
|
982,497
|
|
Other current assets
|
|
|
699
|
|
|
|
329
|
|
|
|
27,967
|
|
|
|
11,824
|
|
|
|
—
|
|
|
|
40,819
|
|
Property and equipment, net
|
|
|
7
|
|
|
|
—
|
|
|
|
233,513
|
|
|
|
69,637
|
|
|
|
—
|
|
|
|
303,157
|
|
Investment in subsidiaries
|
|
|
1,420,037
|
|
|
|
4,117,044
|
|
|
|
374,477
|
|
|
|
—
|
|
|
|
(5,911,558
|
)
|
|
|
—
|
|
Goodwill and other intangible assets, net
|
|
|
—
|
|
|
|
—
|
|
|
|
457,236
|
|
|
|
144,966
|
|
|
|
—
|
|
|
|
602,202
|
|
Other assets
|
|
|
1,325
|
|
|
|
6,321
|
|
|
|
(4,630
|
)
|
|
|
18,376
|
|
|
|
—
|
|
|
|
21,392
|
|
Total assets
|
|
$
|
1,422,068
|
|
|
$
|
4,123,704
|
|
|
$
|
4,577,706
|
|
|
$
|
558,389
|
|
|
$
|
(8,537,253
|
)
|
|
$
|
2,144,614
|
|
Liabilities and Stockholders’ (Deficit) Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
251,245
|
|
|
$
|
56,196
|
|
|
$
|
—
|
|
|
$
|
307,487
|
|
Due to affiliates
|
|
|
1,615,667
|
|
|
|
924,250
|
|
|
|
—
|
|
|
|
85,778
|
|
|
|
(2,625,695
|
)
|
|
|
—
|
|
Accrued liabilities
|
|
|
301
|
|
|
|
6,044
|
|
|
|
118,244
|
|
|
|
32,555
|
|
|
|
—
|
|
|
|
157,144
|
|
Income taxes payable
|
|
|
13,230
|
|
|
|
1,519
|
|
|
|
—
|
|
|
|
(169
|
)
|
|
|
—
|
|
|
|
14,580
|
|
Long-term debt
|
|
|
—
|
|
|
|
1,772,936
|
|
|
|
—
|
|
|
|
870
|
|
|
|
—
|
|
|
|
1,773,806
|
|
Other liabilities
|
|
|
7,629
|
|
|
|
—
|
|
|
|
15,355
|
|
|
|
3,985
|
|
|
|
—
|
|
|
|
26,969
|
|
Deferred income tax liabilities, net
|
|
|
(74
|
)
|
|
|
(1,082
|
)
|
|
|
75,818
|
|
|
|
4,697
|
|
|
|
—
|
|
|
|
79,359
|
|
Total liabilities
|
|
|
1,636,799
|
|
|
|
2,703,667
|
|
|
|
460,662
|
|
|
|
183,912
|
|
|
|
(2,625,695
|
)
|
|
|
2,359,345
|
|
Total stockholders’ (deficit) equity
|
|
|
(214,731
|
)
|
|
|
1,420,037
|
|
|
|
4,117,044
|
|
|
|
374,477
|
|
|
|
(5,911,558
|
)
|
|
|
(214,731
|
)
|
Total liabilities and stockholders’ (deficit) equity
|
|
$
|
1,422,068
|
|
|
$
|
4,123,704
|
|
|
$
|
4,577,706
|
|
|
$
|
558,389
|
|
|
$
|
(8,537,253
|
)
|
|
$
|
2,144,614
|
|
18
Condensed Consolidating Balan
ce Sheet
September 30, 2018
(In thousands)
|
|
Parent
|
|
|
Sally
Holdings LLC
and Sally
Capital Inc.
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Consolidating
Eliminations
|
|
|
Sally Beauty
Holdings,
Inc. and
Subsidiaries
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
29,050
|
|
|
$
|
48,235
|
|
|
$
|
—
|
|
|
$
|
77,295
|
|
Trade and other accounts receivable, net
|
|
|
4
|
|
|
|
—
|
|
|
|
53,295
|
|
|
|
37,191
|
|
|
|
—
|
|
|
|
90,490
|
|
Due from affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
2,598,681
|
|
|
|
—
|
|
|
|
(2,598,681
|
)
|
|
|
—
|
|
Inventory
|
|
|
—
|
|
|
|
—
|
|
|
|
714,000
|
|
|
|
230,338
|
|
|
|
—
|
|
|
|
944,338
|
|
Other current assets
|
|
|
2,010
|
|
|
|
111
|
|
|
|
27,422
|
|
|
|
13,417
|
|
|
|
—
|
|
|
|
42,960
|
|
Property and equipment, net
|
|
|
8
|
|
|
|
—
|
|
|
|
232,941
|
|
|
|
75,408
|
|
|
|
—
|
|
|
|
308,357
|
|
Investment in subsidiaries
|
|
|
1,368,927
|
|
|
|
4,044,669
|
|
|
|
380,166
|
|
|
|
—
|
|
|
|
(5,793,762
|
)
|
|
|
—
|
|
Goodwill and other intangible assets, net
|
|
|
—
|
|
|
|
—
|
|
|
|
459,348
|
|
|
|
149,275
|
|
|
|
—
|
|
|
|
608,623
|
|
Other assets
|
|
|
1,325
|
|
|
|
10,242
|
|
|
|
(4,797
|
)
|
|
|
18,581
|
|
|
|
—
|
|
|
|
25,351
|
|
Total assets
|
|
$
|
1,372,274
|
|
|
$
|
4,055,032
|
|
|
$
|
4,490,106
|
|
|
$
|
572,445
|
|
|
$
|
(8,392,443
|
)
|
|
$
|
2,097,414
|
|
Liabilities and Stockholders’ (Deficit) Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
38
|
|
|
$
|
-
|
|
|
$
|
233,936
|
|
|
$
|
69,267
|
|
|
$
|
—
|
|
|
$
|
303,241
|
|
Due to affiliates
|
|
|
1,629,411
|
|
|
|
888,141
|
|
|
|
—
|
|
|
|
81,129
|
|
|
|
(2,598,681
|
)
|
|
|
—
|
|
Accrued liabilities
|
|
|
234
|
|
|
|
23,019
|
|
|
|
125,179
|
|
|
|
31,855
|
|
|
|
—
|
|
|
|
180,287
|
|
Income taxes payable
|
|
|
585
|
|
|
|
1,519
|
|
|
|
—
|
|
|
|
40
|
|
|
|
—
|
|
|
|
2,144
|
|
Long-term debt
|
|
|
—
|
|
|
|
1,773,426
|
|
|
|
1
|
|
|
|
882
|
|
|
|
—
|
|
|
|
1,774,309
|
|
Other liabilities
|
|
|
10,562
|
|
|
|
—
|
|
|
|
15,250
|
|
|
|
4,210
|
|
|
|
—
|
|
|
|
30,022
|
|
Deferred income tax liabilities, net
|
|
|
—
|
|
|
|
—
|
|
|
|
71,071
|
|
|
|
4,896
|
|
|
|
—
|
|
|
|
75,967
|
|
Total liabilities
|
|
|
1,640,830
|
|
|
|
2,686,105
|
|
|
|
445,437
|
|
|
|
192,279
|
|
|
|
(2,598,681
|
)
|
|
|
2,365,970
|
|
Total stockholders’ (deficit) equity
|
|
|
(268,556
|
)
|
|
|
1,368,927
|
|
|
|
4,044,669
|
|
|
|
380,166
|
|
|
|
(5,793,762
|
)
|
|
|
(268,556
|
)
|
Total liabilities and stockholders’ (deficit) equity
|
|
$
|
1,372,274
|
|
|
$
|
4,055,032
|
|
|
$
|
4,490,106
|
|
|
$
|
572,445
|
|
|
$
|
(8,392,443
|
)
|
|
$
|
2,097,414
|
|
19
Condensed Consolidating State
ment of Earnings and Comprehensive Income
Three Months Ended December 31, 2018
(In thousands)
|
|
Parent
|
|
|
Sally
Holdings LLC
and Sally
Capital Inc.
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Consolidating
Eliminations
|
|
|
Sally Beauty
Holdings, Inc.
and Subsidiaries
|
|
Net sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
793,530
|
|
|
$
|
195,923
|
|
|
$
|
—
|
|
|
$
|
989,453
|
|
Related party sales
|
|
|
—
|
|
|
|
—
|
|
|
|
669
|
|
|
|
—
|
|
|
|
(669
|
)
|
|
|
—
|
|
Cost of products sold and distribution expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
404,040
|
|
|
|
105,377
|
|
|
|
(669
|
)
|
|
|
508,748
|
|
Gross profit
|
|
|
—
|
|
|
|
—
|
|
|
|
390,159
|
|
|
|
90,546
|
|
|
|
—
|
|
|
|
480,705
|
|
Selling, general and administrative expenses
|
|
|
2,809
|
|
|
|
168
|
|
|
|
286,216
|
|
|
|
77,794
|
|
|
|
—
|
|
|
|
366,987
|
|
Restructuring charges
|
|
|
—
|
|
|
|
—
|
|
|
|
3,980
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,980
|
|
Operating earnings (loss)
|
|
|
(2,809
|
)
|
|
|
(168
|
)
|
|
|
99,963
|
|
|
|
12,752
|
|
|
|
—
|
|
|
|
109,738
|
|
Interest expense (income)
|
|
|
—
|
|
|
|
24,552
|
|
|
|
(1
|
)
|
|
|
(62
|
)
|
|
|
—
|
|
|
|
24,489
|
|
Earnings (loss) before provision for income taxes
|
|
|
(2,809
|
)
|
|
|
(24,720
|
)
|
|
|
99,964
|
|
|
|
12,814
|
|
|
|
—
|
|
|
|
85,249
|
|
Provision (benefit) for income taxes
|
|
|
(721
|
)
|
|
|
(6,345
|
)
|
|
|
25,683
|
|
|
|
905
|
|
|
|
—
|
|
|
|
19,522
|
|
Equity in earnings of subsidiaries, net of tax
|
|
|
67,815
|
|
|
|
86,190
|
|
|
|
11,909
|
|
|
|
—
|
|
|
|
(165,914
|
)
|
|
|
—
|
|
Net earnings
|
|
|
65,727
|
|
|
|
67,815
|
|
|
|
86,190
|
|
|
|
11,909
|
|
|
|
(165,914
|
)
|
|
|
65,727
|
|
Other comprehensive loss, net of tax
|
|
|
—
|
|
|
|
(2,830
|
)
|
|
|
—
|
|
|
|
(13,875
|
)
|
|
|
—
|
|
|
|
(16,705
|
)
|
Total comprehensive income (loss)
|
|
$
|
65,727
|
|
|
$
|
64,985
|
|
|
$
|
86,190
|
|
|
$
|
(1,966
|
)
|
|
$
|
(165,914
|
)
|
|
$
|
49,022
|
|
20
Condensed Consolidating
Statement of Earnings and Comprehensive Income
Three Months Ended December 31, 2017
(In thousands)
|
|
Parent
|
|
|
Sally
Holdings LLC
and Sally
Capital Inc.
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Consolidating
Eliminations
|
|
|
Sally Beauty
Holdings, Inc.
and Subsidiaries
|
|
Net sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
796,532
|
|
|
$
|
198,432
|
|
|
$
|
—
|
|
|
$
|
994,964
|
|
Related party sales
|
|
|
—
|
|
|
|
—
|
|
|
|
446
|
|
|
|
—
|
|
|
|
(446
|
)
|
|
|
—
|
|
Cost of products sold and distribution expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
403,810
|
|
|
|
104,971
|
|
|
|
(446
|
)
|
|
|
508,335
|
|
Gross profit
|
|
|
—
|
|
|
|
—
|
|
|
|
393,168
|
|
|
|
93,461
|
|
|
|
—
|
|
|
|
486,629
|
|
Selling, general and administrative expenses
|
|
|
2,606
|
|
|
|
179
|
|
|
|
284,467
|
|
|
|
84,034
|
|
|
|
—
|
|
|
|
371,286
|
|
Restructuring charges
|
|
|
—
|
|
|
|
—
|
|
|
|
5,210
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,210
|
|
Operating earnings (loss)
|
|
|
(2,606
|
)
|
|
|
(179
|
)
|
|
|
103,491
|
|
|
|
9,427
|
|
|
|
—
|
|
|
|
110,133
|
|
Interest expense (income)
|
|
|
—
|
|
|
|
24,014
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
24,016
|
|
Earnings (loss) before provision for income taxes
|
|
|
(2,606
|
)
|
|
|
(24,193
|
)
|
|
|
103,491
|
|
|
|
9,425
|
|
|
|
—
|
|
|
|
86,117
|
|
Provision (benefit) for income taxes
|
|
|
(251
|
)
|
|
|
(6,925
|
)
|
|
|
(7,915
|
)
|
|
|
17,944
|
|
|
|
|
|
|
|
2,853
|
|
Equity in earnings of subsidiaries, net of tax
|
|
|
85,619
|
|
|
|
102,887
|
|
|
|
(8,519
|
)
|
|
|
—
|
|
|
|
(179,987
|
)
|
|
|
—
|
|
Net earnings (loss)
|
|
|
83,264
|
|
|
|
85,619
|
|
|
|
102,887
|
|
|
|
(8,519
|
)
|
|
|
(179,987
|
)
|
|
|
83,264
|
|
Other comprehensive loss, net of tax
|
|
|
—
|
|
|
|
(803
|
)
|
|
|
—
|
|
|
|
(255
|
)
|
|
|
|
|
|
|
(1,058
|
)
|
Total comprehensive income (loss)
|
|
$
|
83,264
|
|
|
$
|
84,816
|
|
|
$
|
102,887
|
|
|
$
|
(8,774
|
)
|
|
$
|
(179,987
|
)
|
|
$
|
82,206
|
|
21
Condensed Consolidating
Statement of Cash Flows
Three Months Ended December 31, 2018
(In thousands)
|
|
Parent
|
|
|
Sally
Holdings LLC
and Sally
Capital Inc.
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Consolidating
Eliminations
|
|
|
Sally Beauty
Holdings, Inc.
and Subsidiaries
|
|
Net cash provided (used) by operating activities
|
|
$
|
12,295
|
|
|
$
|
(34,734
|
)
|
|
$
|
71,284
|
|
|
$
|
1,411
|
|
|
$
|
—
|
|
|
$
|
50,256
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment, net
|
|
|
—
|
|
|
|
—
|
|
|
|
(21,439
|
)
|
|
|
(2,271
|
)
|
|
|
—
|
|
|
|
(23,710
|
)
|
Acquisitions, net of cash acquired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(451
|
)
|
|
|
—
|
|
|
|
(451
|
)
|
Due from affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
(27,014
|
)
|
|
|
—
|
|
|
|
27,014
|
|
|
|
—
|
|
Net cash used by investing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
(48,453
|
)
|
|
|
(2,722
|
)
|
|
|
27,014
|
|
|
|
(24,161
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
—
|
|
|
|
126,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
126,500
|
|
Repayments of long-term debt
|
|
|
—
|
|
|
|
(127,875
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(127,876
|
)
|
Repurchases of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Proceeds from exercises of stock options
|
|
|
1,449
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,449
|
|
Due to affiliates
|
|
|
(13,744
|
)
|
|
|
36,109
|
|
|
|
—
|
|
|
|
4,649
|
|
|
|
(27,014
|
)
|
|
|
—
|
|
Net cash provided (used) by financing activities
|
|
|
(12,295
|
)
|
|
|
34,734
|
|
|
|
(1
|
)
|
|
|
4,649
|
|
|
|
(27,014
|
)
|
|
|
73
|
|
Effect of foreign exchange rate changes on cash and
cash equivalents
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(692
|
)
|
|
|
—
|
|
|
|
(692
|
)
|
Net increase in cash and cash equivalents
|
|
|
—
|
|
|
|
—
|
|
|
|
22,830
|
|
|
|
2,646
|
|
|
|
—
|
|
|
|
25,476
|
|
Cash and cash equivalents, beginning of period
|
|
|
—
|
|
|
|
10
|
|
|
|
29,050
|
|
|
|
48,235
|
|
|
|
—
|
|
|
|
77,295
|
|
Cash and cash equivalents, end of period
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
51,880
|
|
|
$
|
50,881
|
|
|
$
|
—
|
|
|
$
|
102,771
|
|
22
Condensed Consolidating Statement of Cash Flows
Three Months Ended December 31, 2017
(In thousands)
|
|
Parent
|
|
|
Sally
Holdings LLC
and Sally
Capital Inc.
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Consolidating
Eliminations
|
|
|
Sally Beauty
Holdings, Inc.
and Subsidiaries
|
|
Net cash provided (used) by operating activities
|
|
$
|
32,788
|
|
|
$
|
(30,211
|
)
|
|
$
|
100,319
|
|
|
$
|
1,308
|
|
|
$
|
—
|
|
|
$
|
104,204
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment, net
|
|
|
—
|
|
|
|
—
|
|
|
|
(19,664
|
)
|
|
|
(2,835
|
)
|
|
|
—
|
|
|
|
(22,499
|
)
|
Acquisitions, net of cash acquired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,175
|
)
|
|
|
—
|
|
|
|
(9,175
|
)
|
Due from affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
(70,909
|
)
|
|
|
—
|
|
|
|
70,909
|
|
|
|
—
|
|
Net cash used by investing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
(90,573
|
)
|
|
|
(12,010
|
)
|
|
|
70,909
|
|
|
|
(31,674
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
—
|
|
|
|
126,500
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
126,505
|
|
Repayments of long-term debt
|
|
|
—
|
|
|
|
(118,875
|
)
|
|
|
(2
|
)
|
|
|
(190
|
)
|
|
|
—
|
|
|
|
(119,067
|
)
|
Repurchases of common stock
|
|
|
(64,612
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(64,612
|
)
|
Proceeds from exercises of stock options
|
|
|
275
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
275
|
|
Due to affiliates
|
|
|
31,549
|
|
|
|
22,586
|
|
|
|
—
|
|
|
|
16,774
|
|
|
|
(70,909
|
)
|
|
|
—
|
|
Net cash provided (used) by financing activities
|
|
|
(32,788
|
)
|
|
|
30,211
|
|
|
|
3
|
|
|
|
16,584
|
|
|
|
(70,909
|
)
|
|
|
(56,899
|
)
|
Effect of foreign exchange rate changes on cash and
cash equivalents
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(78
|
)
|
|
|
—
|
|
|
|
(78
|
)
|
Net increase in cash and cash equivalents
|
|
|
—
|
|
|
|
—
|
|
|
|
9,749
|
|
|
|
5,804
|
|
|
|
—
|
|
|
|
15,553
|
|
Cash and cash equivalents, beginning of period
|
|
|
—
|
|
|
|
10
|
|
|
|
22,090
|
|
|
|
41,659
|
|
|
|
—
|
|
|
|
63,759
|
|
Cash and cash equivalents, end of period
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
31,839
|
|
|
$
|
47,463
|
|
|
$
|
—
|
|
|
$
|
79,312
|
|
23
14. Restructuring Plan
2018 Restructuring Plan
In November 2017, our Board of Directors approved a restructuring plan (the “2018 Restructuring Plan”) focused primarily on significantly improving the profitability of our international businesses, with particular focus on our European operations.
In April 2018, we announced an expansion of the 2018 Restructuring Plan that contained cost reduction initiatives designed to help fund important long-term growth initiatives. The expansion to the 2018 Restructuring Plan included headcount reductions primarily at our corporate headquarters in Denton, Texas. We estimate that we will incur total charges in connection with the expanded 2018 Restructuring Plan of approximately $28 million to $30 million related primarily to employee separation costs and third-party consulting. As of December 31, 2018, we do not anticipate any additional material costs for the 2018 Restructuring Plan.
The liability related to the 2018 Restructuring Plan, which is included in accrued liabilities in our consolidated balance sheets, is as follows (in thousands):
Restructuring Activity
|
|
Liability at
September 30,
2018
|
|
|
Expenses
|
|
|
Expenses Paid or Otherwise Settled
|
|
|
Adjustments
|
|
|
Liability at
December 31,
2018
|
|
Workforce reductions
|
|
$
|
3,444
|
|
|
$
|
643
|
|
|
$
|
4,087
|
|
|
|
|
|
|
$
|
—
|
|
Consulting
|
|
|
3,087
|
|
|
|
2,502
|
|
|
|
3,384
|
|
|
|
|
|
|
|
2,205
|
|
Other
|
|
|
2,266
|
|
|
|
835
|
|
|
|
2,917
|
|
|
|
|
|
|
|
184
|
|
Total
|
|
$
|
8,797
|
|
|
$
|
3,980
|
|
|
$
|
10,388
|
|
|
$
|
—
|
|
|
$
|
2,389
|
|
Expenses incurred in the three months ended December 31, 2018 represent costs incurred by SBS ($1.1 million) and corporate ($2.8 million).
15. Commitments and Contingencies
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.
Data Security Incidents
As previously disclosed, we experienced data security incidents during the fiscal years 2014 and 2015 (together, 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 may have placed at risk certain payment card data for some transactions. The costs that we have incurred to date in connection with the data security incidents include assessments by payment card networks, professional advisory fees and legal fees relating to investigating and remediating the data security incidents.
During the fiscal year ended September 30, 2018, we received an assessment from a payment card network in connection with the data security incidents. The assessment is based on the network’s claims against the Company’s acquiring banks for costs that it asserts its issuing banks incurred in connection with the data security incidents, including incremental counterfeit fraud losses and non-ordinary course operating expenses, such as card reissuance costs. Our estimated probable loss related to the claims made by payment card networks in connection with the data security incidents is based on currently available information.
We dispute the validity of the payment card network’s claims and intend to contest them vigorously.
We may incur additional costs and expenses related to the data security incidents in future periods. These costs and expenses may result from liabilities related to (i) claims by payment card networks, (ii) governmental or third party investigations, proceedings or litigation, (iii) legal and other fees necessary to defend against any potential liabilities or claims, and (iv) further investigation and remediation costs. As of December 31, 2018, the scope of these additional costs and expenses, or a range thereof, beyond amounts management has determined to be probable, cannot be reasonably estimated and, while we do not anticipate that these additional costs and expenses or liabilities would have a material adverse impact on our business, financial condition and operating results, these additional costs and expenses could be significant.
16. Subsequent Event
On February 5, 2019, we announced that we will be closing distribution facilities in Denton, Texas, and Anchorage, Alaska, by the end of the second quarter and will be closing the distribution center in Lincoln, Nebraska, by the end of third quarter. Simultaneously, we announced that we are searching for a 500,000 square foot location within Oklahoma, Louisiana or Texas for construction of a new
24
automated and concentrated distribut
ion center which will service SBS stores and e-commerce sales as well as BSG stores, full service sales and e-commerce sales.
Additionally, we will also be upgrading our European distribution operations in Ghent, Belgium.
25