Use these links to rapidly review the document
TABLE OF CONTENTS
Item 1. BusinessTABLE OF CONTENTS18. Financial Statements and Supplementary Data
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) | ||
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended June 30, | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission file number 1-12725
Regis Corporation
(Exact name of registrant as specified in its charter)
Minnesota State or other jurisdiction of incorporation or organization | 41-0749934 (I.R.S. Employer Identification No.) | |
7201 Metro Boulevard, Edina, Minnesota (Address of principal executive offices) | 55439 (Zip Code) |
(952) 947-7777
(registrant'sRegistrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
---|---|---|
Common Stock, par value $0.05 per share | New York Stock Exchange | |
Preferred Share Purchase Rights | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 ý 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
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 ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which common equity was last sold as of the last business day of the registrant's most recently completed second fiscal quarter, December 31, 2011,2012, was approximately $902,940,461.$737,540,488. The registrant has no non-voting common equity.
As of August 13, 2012,9, 2013, the registrant had 57,407,87656,627,334 shares of Common Stock, par value $0.05 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the annual meeting of shareholders to be held on October 25, 201222, 2013 (the "2012"2013 Proxy Statement") (to be filed pursuant to Regulation 14A within 120 days after the registrant's fiscal year-end of June 30, 2012)2013) are incorporated by reference into Part III.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report, as well as information included in, or incorporated by reference from, future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company contains or may contain "forward-looking statements" within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document reflect management's best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. Such forward-looking statements are often identified herein by use of words including, but not limited to, "may," "believe," "project," "forecast," "expect," "estimate," "anticipate," and "plan." In addition, the following factors could affect the Company's actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include the impact of significant initiatives and changes in our management and organizational structure; negative same-store sales; the success of our stylists and our ability to attract and retain talented stylists; the effect of changes to healthcare laws; changes in regulatory and statutory laws; the Company's reliance on management information systems; competition within the personal hair care industry, which remains strong, both domestically and internationally; changes in economic conditions; the continued ability of the Company to implement cost reduction initiatives; certain of the terms and provisions of the outstanding convertible notes; failure to optimize our brand portfolio; the ability of the Company to maintain satisfactory relationships with certain companies and suppliers; financial performance of our joint ventures; changes in interest rates and foreign currency exchange rates; changes in consumer tastes and fashion trends; our ability to protect the security of personal information about our guests; or other factors not listed above. Additional information concerning potential factors that could affect future financial results is set forth under Item 1A of this Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made in our subsequent annual and periodic reports filed or furnished with the SEC on Forms 10-Q and 8-K and Proxy Statements on Schedule 14A.
REGIS CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 20122013
INDEX
| | | Page(s) | |||||
---|---|---|---|---|---|---|---|---|
Part I. | ||||||||
Item 1. | Business | |||||||
Executive Officers of the Registrant | ||||||||
Item 1A. | Risk Factors | |||||||
Item 1B. | Unresolved Staff Comments | |||||||
Item 2. | Properties | |||||||
Item 3. | Legal Proceedings | |||||||
Item 4. | Mine Safety Disclosures | |||||||
Part II. | ||||||||
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Repurchase or Purchases of Equity Securities | |||||||
Item 6. | Selected Financial Data | |||||||
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||||||
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | |||||||
Item 8. | Financial Statements and Supplementary Data | |||||||
Management's Statement of Responsibility for Financial Statements and Report on Internal Control over Financial Reporting | ||||||||
Report of Independent Registered Public Accounting Firm | ||||||||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |||||||
Item 9A. | Controls and Procedures | |||||||
Item 9B. | Other Information | |||||||
Part III. | ||||||||
Item 10. | Directors, Executive Officers and Corporate Governance | |||||||
Item 11. | Executive Compensation | |||||||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |||||||
Item 13. | Certain Relationships and Related Transactions, and Director Independence | |||||||
Item 14. | Principal Accounting Fees and Services | |||||||
Part IV. | ||||||||
Item 15. | Exhibits and Financial Statement Schedules | |||||||
Signatures |
General:
Regis Corporation owns, franchises and operates beauty salons. The Company is listed on the NYSE under the ticker symbol "RGS." Unless the context otherwise provides, when we refer to the "Company," "we," "our," or "us," we are referring to Regis Corporation, the Registrant, together with its subsidiaries.
In 1922, Paul and Florence Kunin opened Kunin Beauty Salon, which quickly expanded into a chain of value priced salons located in department stores. In 1958, the chain was purchased by their son and renamed Regis Corporation. On August 1, 2007, the Company contributed its 51 wholly-owned accredited cosmetology schools to Empire Education Group, Inc (EEG). On January 31, 2008, the Company merged its continental European franchise salon operations with the operations of the Franck Provost Salon Group in the newly formed entity, Provalliance. The Company acquired an additional equity interest in Provalliance in March 2011. On February 20, 2008, the Company acquired the capital stock of Cameron Capital I, Inc. (CCI), a wholly-owned subsidiary of Cameron Capital Investments, Inc. CCI owned and operated PureBeauty and BeautyFirst salons. On February 16, 2009, the Company sold its Trade Secret salon concept (Trade Secret), which included CCI.
During the fiscal year ended June 30, 2012, the Company began reviewing alternatives for non-core assets to focus on our core salon business. In April 2012, the Company entered into a Share Purchase Agreement (Agreement) to sell the Company's 46.7 percent equity interest in Provalliance to the Provost Family for a purchase price of €80 million. The transaction is expected to close no later than September 30, 2012 and is subject to the Provost Family securing financing for the purchase price. On July 13, 2012, the Company entered into a definitive agreement to sell its Hair Club for Men and Women business (Hair Club) for $163.5 million, a provider of hair restoration services. The transaction is expected to close during the first half of fiscal year 2013.
Regis Corporation is listed on the NYSE under the ticker symbol "RGS." Discussions of the general development of the business take place throughout this Annual Report on Form 10-K.
Segment data for the years ended June 30, 2012, 2011 and 2010 are included in Note 15 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
The following topical areas are discussed below in order to aid in understanding the Company and its operations:
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
|
Based in Minneapolis, Minnesota, the Company's primary business is owning, operating and franchising hair and retail product salons. In addition to the primary hair and retail product salons, during fiscal years 2012 and 2011 the Company owned Hair Club. As of June 30, 2012,2013, the Company owned, franchised or held ownership interests in approximately 12,600 worldwide locations.9,763 locations worldwide. The Company's locations consistedconsist of 9,7389,517 company-owned and franchisefranchised salons 98 hair restoration centers, and 2,811246 locations in which the Company maintainswe maintain a non-controlling ownership interest of less than 100 percent. Each of the Company's salon concepts generally offer similar salon products and services and serve the mass market consumer marketplace. The Company's hair restoration centers offer three hair restoration solutions; hair systems, hair transplants and hair therapy, which are targeted at the mass market consumer.
The Company is organized to manage its operations based on significant lines of business—salons and hair restoration centers. Salon operations are managed based on geographical location—North America and International. The Company's North American salon operations are comprised of 7,324 company-owned salons and 2,016 franchise salons operating in the United States, Canada and Puerto Rico. The Company's International operations are comprised of 398 company-owned salons in the United Kingdom. The Company's worldwide salon locations operate primarily under the trade names of Regis Salons, MasterCuts, SmartStyle, Supercuts, Cost Cutters, and Sassoon. The Company's hair restoration centers are located in the United States and Canada. During fiscal years 2012 and 2011, the number of guest visits at the Company's company-owned salons approximated 90 and 91 million, respectively. The Company had approximately 52,000 corporate employees worldwide during fiscal year 2012.
On August 1, 2007, the Company contributed 51 of its wholly-owned accredited cosmetology schools to EEG in exchange for a 49.0 percent equity interest in EEG. EEG is the largest beauty school operator in North America with 105 accredited cosmetology schools with revenues of approximately $180 million annually and is overseen by the Empire Beauty School management team.
In January 2008, the Company's effective ownership interest increased to 55.1 percent related to the buyout of EEG's minority interest shareholder. The Company accounts for the investment in EEG under the equity method of accounting as Empire Beauty School retains majority voting interest and has full responsibility for managing EEG. The Company recorded a $19.4 million other than temporary impairment charge in its fourth quarter ended June 30, 2012 on its investment in EEG. Refer to Note 6 to the Consolidated Financial Statements for additional information.
On January 31, 2008, the Company merged its continental European franchise salon operations with the operations of the Franck Provost Salon Group in exchange for a 30.0 percent equity interest in the newly formed entity, Provalliance. The merger agreement contains a right (Equity Put) to require the Company to purchase additional ownership interest in Provalliance between specified dates in 2010 to 2018. The merger with the operations of the Franck Provost Salon Group, which are also located in continental Europe, created Europe's largest salon operator with approximately 2,600 company-owned and franchise salons as of June 30, 2012.
The Company contributed to Provalliance the shares of each of its European operating subsidiaries, other than the Company's operating subsidiaries in the United Kingdom and Germany. The contributed subsidiaries operate retail hair salons in France, Spain, Switzerland and several other European countries primarily under the Jean Louis David™ and Saint Algue™ brands.
On February 16, 2009, the Company sold its Trade Secret concept. The Company concluded, after a comprehensive review of its strategic and financial options, to divest Trade Secret. The sale of Trade Secret included 655 company-owned salons and 57 franchise salons, all of which had historically been reported within the Company's North America reportable segment.
In March of 2011, the Company elected to honor and settle a portion of the Equity Put and acquired approximately 17 percent additional equity interest in Provalliance for $57.3 million (approximately € 40.4 million), bringing the Company's total equity interest to 46.7 percent.
On April 9, 2012, the Company entered into the Agreement to sell the Company's 46.7 percent equity interest in Provalliance to the Franck Provost family (Provost Family) for a purchase price of €80 million. The transaction is expected to close no later than September 30, 2012 and is subject to the Provost Family securing financing for the purchase price. The purchase price was negotiated independently of the Equity Put and the Equity Put will automatically terminate upon completion of the Agreement. If the completion of the Agreement does not occur by September 30, 2012, the Provost Family will not be entitled to exercise their Equity Put rights until September 30, 2014. During fiscal year 2012, the Company recorded a $37.4 million other than temporary impairment charge on its investment in Provalliance and $20.2 million reduction in the fair value of the Equity Put in conjunction with the Agreement, resulting in a net impairment charge of $17.2 million recorded within the equity in (loss) income of affiliated companies in the Consolidated Statement of Operations.
During the fiscal year ended June 30, 2012, the Company began reviewing alternatives for non-core assets to focus on our core salon business. On July 13, 2012, the Company entered into a definitive agreement to sell Hair Club for $163.5 million, a provider of hair restoration services. The transaction is expected to close during the first half of fiscal year 2013.
Management estimates that annual revenues of the hair care industry are approximately $50 to $60 billion in the United States and approximately $160 billion worldwide. The Company estimates that it holds approximately two percent of the worldwide market. The hair salon and hair restoration markets are each highly fragmented, with the vast majority of locations independently owned and operated. However, the influence of salon chains on these markets, both franchise and company-owned, has increased substantially. Management believes that salon chains will continue to have a significant
influence on these markets and will continue to increase their presence. As the Company is the principal consolidator of these chains in the hair care industry, it prevails as an established exit strategy for independent salon owners and operators, which affords the Company numerous opportunities for continued selective acquisitions.
The Company's long-term goal is to provide high quality, affordable hair care services and products to a wide range of mass market consumers, which enables the Company to expand in a controlled manner. The key elements of the Company's strategy to achieve these goals are taking advantage of (1) salon growth opportunities, (2) economies of scale and (3) centralized control over salon operations in order to ensure (i) consistent, quality services and (ii) a superior selection of high quality, professional products. Each of these elements is discussed below.
Salon Growth Opportunities. The Company's salon expansion strategy focuses on organic (new salon construction and same-store sales growth of existing salons) and salon acquisition growth.
Organic Growth. The Company executes its organic growth strategy through a combination of new construction of company-owned and franchise salons, as well as same-store sales. The square footage requirements related to opening new salons allow the Company great flexibility in securing real estate for new salons as the Company has small or flexible square footage requirements for its salons. The Company's long-term outlook for organic expansion remains strong. The Company has at least one salon in all major cities in the U.S. and has penetrated every viable U.S. market with at least one concept. However, because the Company has a variety of concepts, it can place several of its salons within any given market.
A key component to successful North American organic growth relates to site selection, as discussed in the following paragraphs.
Salon Site Selection. The Company's salons are located in high-traffic locations such as regional shopping malls, strip centers, lifestyle centers, Walmart Supercenters, high-street locations and department stores. The Company is an attractive tenant to landlords due to its financial strength, successful salon operations and international recognition. In evaluating specific locations for both company-owned and franchise salons, the Company seeks conveniently located, visible sites which allow guests adequate parking and quick and easy location access. Various other factors are considered in evaluating sites, including area demographics, availability and cost of space, the strength of the major retailers within the area, location and strength of competitors, proximity of other company-owned and franchise salons, traffic volume, signage and other leasehold factors in a given center or area.
Pricing is a factor in same-store sales growth. The Company actively monitors the prices charged by its competitors in each market and makes every effort to maintain prices which remain competitive with prices of other salons offering similar services. Price increases are considered on a market-by-market basis and are established based on local market conditions.
Salon Acquisition Growth. In addition to organic growth, another key component of the Company's growth strategy is the acquisition of salons. With an estimated two percent worldwide market share, management believes the opportunity to continue to make selective acquisitions exists.
Over the past 18 years, the Company has acquired 8,052 salons, expanding both in North America and internationally. When contemplating an acquisition, the Company evaluates the existing salon or salon group with respect to the same characteristics as discussed above in conjunction with site selection for constructed salons (conveniently located, visible, strong retailers
within the area, etc.). The Company generally acquires mature strip center locations, which are systematically integrated within the salon concept that it most clearly emulates.
In addition to adding new salon locations each year, the Company has an ongoing program of remodeling its existing salons, ranging from redecoration to substantial reconstruction. This program is implemented as management determines that a particular location will benefit from remodeling, or as required by lease renewals. A total of 235 and 271 salons had major remodels in fiscal years 2012 and 2011, respectively.
Recent Salon Additions. During fiscal year 2012, the Company constructed 319 new salons (209 company-owned and 110 franchise). Additionally, the Company acquired 13 company-owned salons, including 11 franchise salon buybacks, and purchased a 60.0 percent ownership interest in a franchise network consisting of 31 locations.
During fiscal year 2011, the Company constructed 213 new salons (146 company-owned and 67 franchise). Additionally, the Company acquired 105 company-owned salons, including 78 franchise salon buybacks.
Salon Closures. The Company evaluates its salon performance on a regular basis. Upon evaluation, the Company may close a salon for operational performance or real estate issues. In either case, the closures generally occur at the end of a lease term and typically do not require significant lease buyouts.
During fiscal year 2012, 384 salons were closed, including 333 company-owned salons and 51 franchise salons (excluding 11 franchise buybacks).
During fiscal year 2011, 305 salons were closed, including 245 company-owned salons and 60 franchise salons (excluding 78 franchise buybacks).
Economies of Scale. Management believes that due to its size and number of locations, the Company has certain advantages which are not available to single location salons or small chains. Economies of scale are realized through the centralized support system offered by the home office. Additionally, due to its size, the Company has numerous financing and capital expenditure alternatives, as well as the benefits of buying retail products, supplies and salon fixtures directly from manufacturers. Furthermore, the Company can offer employee benefit programs, training and career path opportunities that are often superior to its smaller competitors.
Centralized Control Over Salon Operations. During fiscal year 2012 the Company implemented a new field structure to support our long-term strategy. The Company manages its expansive salon base through a combination of district leaders, regional directors, vice presidents and chief operating officers. Each district leader is responsible for the management of approximately 12 to 15 salons. Regional directors oversee the performance of six to nine district leaders or approximately 80 to 130 salons. Vice presidents manage approximately 700 to 1,000 salons while chief operating officers are responsible for the oversight of an entire consumer concept. During fiscal year 2012 the Company also created Field Human Resources and Corporate Operations departments to support salon operations. The operational hierarchy is key to the Company's ability to expand successfully.
The Company also has an extensive training program, including the production of training DVDs for use in the salons, to ensure its stylists are knowledgeable in the latest haircutting and fashion trends and provide consistent quality hair care services. Finally, the Company tracks salon activity for all of its company-owned salons through the utilization of daily sales detail delivered from the salons' point of sale system. This information is used to reconcile cash on a daily basis.
Consistent, Quality Service. The Company is committed to meeting its guests' hair care needs by providing competitively priced services and products with professional and knowledgeable stylists. The
Company's operations and marketing emphasize high quality services to create guest loyalty, to encourage referrals and to distinguish the Company's salons from its competitors. To promote quality and consistency of services provided throughout the Company's salons, the Company employs full and part-time artistic directors whose duties are to train salon stylists in current styling trends. The major services supplied by the Company's salons are haircutting and styling (including shampooing and conditioning), hair coloring and waving. During fiscal years 2012, 2011, and 2010, theThe percentage of company-owned service revenues attributable to each of these services was as follows:
| 2012 | 2011 | 2010 | Fiscal Years | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Haircutting and styling (including shampooing & conditioning) | 72 | % | 72 | % | 72 | % | ||||||||||||||
| 2013 | 2012 | 2011 | |||||||||||||||||
Haircutting and styling | 72 | % | 72 | % | 72 | % | ||||||||||||||
Hair coloring | 19 | 18 | 18 | 19 | 19 | 18 | ||||||||||||||
Hair waving | 3 | 3 | 4 | 3 | 3 | 3 | ||||||||||||||
Other | 6 | 7 | 6 | 6 | 6 | 7 | ||||||||||||||
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||
Salon operations are managed geographically—North America and International. The Company's North American salon operations are comprised of 7,084 company-owned salons and 2,082 franchised salons operating in the United States, Canada and Puerto Rico. The Company's International operations are comprised of 351 company-owned salons in the United Kingdom. The Company's salons operate primarily under the trade names of SmartStyle, Supercuts, MasterCuts, Regis Salons, and Cost Cutters, and they generally serve two categories within the industry. SmartStyle, Supercuts, MasterCuts, Cost Cutters, and other regional trade names are generally within the affordable category, offering high quality, convenience and value priced hair care and beauty services and retail products. Regis Salons, among other trade names, are in the mass premium category offering upscale hair care and beauty services and retail products. The Company's North American business is comprised of 6,222 company-owned salons operating in the affordable category, located mainly in strip center locations and Walmart Supercenters, and 862 company-owned salons operating in the premium category, primarily in mall based locations. During fiscal years 2013 and 2012, the number of guest visits at the Company's company-owned salons approximated 85 and 89 million, respectively.
Financial information about our segment and geographic areas for fiscal years 2013, 2012 and 2011 are included in Note 14 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
Since fiscal year 2012, the Company has been evaluating its portfolio of assets, investments and businesses, with the strategic objective of simplifying our business model, focusing on our core business of operating beauty salons, improving our long-term profitability and maximizing shareholder value. This evaluation has led to several disposals during fiscal year 2013. In April 2013, the Company sold Hair Club for Men and Women (Hair Club) for approximately $165 million. See Note 2 to the Consolidated Financial Statements for further discussion on Hair Club. In September 2012, the Company sold its 46.7 percent equity interest in Provalliance for $103.4 million. See Note 5 to the
Consolidated Financial Statements for further discussion on Provalliance. As the Company continues this strategic evaluation, future sales of non-core assets could impact our operations by decreasing total revenues, operating expenses and income or loss from equity method investments.
Industry Overview:
The hair salon market is highly fragmented, with the vast majority of locations independently owned and operated. However, the influence of salon chains, both franchised and company-owned, continues to grow within this market. Management believes that salon chains will continue to have significant influences on this market and will continue to increase their presence.
In every area in which the Company has a salon, there are competitors offering similar hair care services and products at similar prices. The Company faces competition from smaller chains of salons such as Great Clips, Fantastic Sams and Sport Clips and within malls from companies that operate salons within department stores, independently owned salons and, to a lesser extent, salons which, although independently owned, are operating under franchises from a franchising company that may assist such salons in areas of training, marketing and advertising.
At the individual salon level, barriers to entry are low; however, barriers exist for chains to expand nationally due to the need to establish systems and infrastructure, to recruit experienced field and salon management and stylists, and to lease quality sites. The principal factors of competition in the hair care category are quality, consistency and convenience. The Company continually strives to improve its performance in each of these areas and to create additional points of differentiation versus the competition.
Mission and Strategies:
The Company's long-term mission is to create guests for life. Strategies underlying our mission are focused in two main areas, as follows:
High Quality, Professional Products. Guest Experience:
Salon Support:
Guest Experience
Our stylists' ability to serve our guests in a professional, courteous and friendly manner is the most critical element of our service model in cultivating strong guest relationships. Great stylists, coupled with high quality service, convenience, affordability, an inviting salon appearance and atmosphere, and comprehensive retail assortments create guests for life. We are committed to providing an outstanding guest experience that drives guest loyalty and repeat business. To that end, we are investing in a number of areas focused on delivering that promise and helping our stylists to develop professionally.
Guests
Convenience. Our different salon concepts enable our guests to select different service scheduling options based upon their preference. In the affordable category, the ability to serve walk-in appointments and minimize guest wait times is an essential element in delivering upon convenience. We have made investments in staffing by increasing stylists hours and have begun to leverage scheduling optimization techniques and recently installed point-of-sale systems to help us manage guest wait times. In the mass premium category, our salons generally schedule appointments in advance of service. Our salons are located in high-traffic strip centers, Walmart Supercenters and shopping malls, with guest parking and easy access, and are generally open seven days per week, offering guests a variety of convenient ways to fulfill their beauty needs.
Affordability. The Company strives to offer an exceptional value for its services. In the affordable category, our guests expect outstanding service at value prices. These expectations are met with average service transactions ranging from $15 to $20. In the mass premium category, our guests expect upscale, full service beauty services at reasonable prices. Average service transactions approximate $44 in this category. The Company is conducting price elasticity research that will ultimately serve to guide the Company's ongoing pricing decisions.
Technology. In North America, the Company recently installed new point-of-sale (POS) systems in over 95% of its salons. Increasing our ability to collect guest and transactional data will enable the Company to invest in Guest Relationship Management, gaining insights into guest behavior, communicating with guests and incenting return visits. Leveraging this technology will also allow us to monitor guest retention and to survey our guests for feedback on improving the guest experience, and will allow guests to use mobile apps to schedule appointments, view wait times and interact in other ways with salons.
Marketing. The Company is repurposing its marketing resources and investments to become more localized and guest facing, by shifting emphasis from marketing within the salon to traffic-generating marketing programs.
Salon Appearance and Atmosphere. The Company's salons range from 500 to 5,000 square feet, with the typical salon approximating 1,200 square feet. Our salon repairs and maintenance program is designed to ensure that we invest annually in salon cleanliness and safety, as well as in maintaining the normal operation of our salons. Our annual capital expenditures include funds to refresh the appeal and comfort of our salons.
Retail Assortments.The Company's salons sell nationally recognized hair care and beauty products, as well as a complete line of private label products sold under the Regis, MasterCuts and Cost Cutters labels. The retailproducts. Retail products offered by the Company are intended to be sold only through professional salons. The top selling brands include Paul Mitchell, Biolage, Redken, It's a 10, Nioxin, Regis designLINE, Sexy Hair Concepts, Kenra, Tigi Bedhead, Moroccanoil,salons, and the Company's various private label brands.
The Company has the most comprehensive assortment of retail products in the industry. Although the Company constantly strives to carry an optimal level of inventory in relation to consumer demand, it is more economical for the Company to have a higher amount of inventory on hand than to run the risk of being under stocked should demand prove higher than expected. The extended shelf life and lack of seasonality related to the beauty products allows the cost of carrying inventory to be relatively low and lessens the importance of inventory turnover ratios. The Company's primary goal is to maximize revenues rather than inventory turns.
The retail portion of the Company's business complementscomplement its salon services business. The Company's stylists and beauty consultants are compensated and regularly trained to sell hair care and beauty products to their guests. Additionally, guests are enticedencouraged to purchase products after a stylist demonstrates its effectstylists demonstrate their efficacy by using itthem in the styling of our guests' hair. The top selling brands within the guest's hair.Company's retail assortment include Biolage, Paul Mitchell, Regis designLINE, Redken, Nioxin, Tigi, It's a 10, Sexy Hair Concepts, Kenra and Moroccanoil.
We are standardizing plan-o-grams and eliminating products in order to make it easier for guests to shop and stylists to sell retail products, to engage key vendors to provide product training to our stylists and to improve salon appearance.
Stylists
Training. We strive to offer stylist training programs that educate both technically and experientially. We employ full and part-time artistic directors whose duties are to train salon stylists in current styling trends. We utilize training materials to help all levels of field employees navigate the running of a salon. Our guests' experiential training program provides stylists with essential elements of guest service training. We supplement these training programs and lead by example with field leaders who are present in salons providing coaching and mentoring.
Organization. We recently reorganized our field organization, excluding salons within the mass premium category, to enable localized mentoring and decision making, improve geographic proximity and increase local market efficiency. Incentives have been redesigned to align field interests with those of the Company's shareholders by rewarding ownership behaviors focused on profitable revenue growth. This new organization structure provides a career path for our people who desire to ascend within the Company.
Technology. The recent installation of POS systems and salon workstations throughout North America enables communication with salons and stylists, delivery of online and digital training to stylists, real-time salon level analytics on guest retention, wait times, stylist productivity and salon performance.
Salon Support
Our corporate headquarters is referred to as Salon Support. This acknowledges that creating guests for life mandates a service-oriented, guest-focused mentality in supporting our field organization to grow our business profitably.
Organization. In addition to investments made by the Company to reorganize the field organization and to help our stylists develop professionally, we are aligning Salon Support and associated objectives and priorities around our field structure to enhance the effectiveness and efficiency of the service provided to our field organization.
Simplification. Since fiscal year 2012, the Company has been evaluating its portfolio of assets, investments and businesses, with the strategic objective of simplifying our business model, focusing on our core business of operating beauty salons and improving our long-term profitability and maximizing shareholder value. This evaluation has led to the sale of our Hair Club and Provalliance businesses during fiscal year 2013.
We are standardizing plan-o-grams and eliminating products in an effort to simplify and manage our ongoing retail inventory assortment. Simplification and standardization will reduce inventory management time in our salons and throughout our supply chain and enable distribution efficiencies.
Operating Margins. We continue to learn from and view our franchise business as a means to strengthening our brand leverage and growing our revenues and profitability. We have dedicated resources selling new franchises, as well as converting underperforming salons to franchisees. As a result we will generate additional royalties and fees which we can reinvest in our core salon business.
Our organization also remains focused on identifying and driving cost saving and profit enhancing initiatives.
Salon Concepts:
The Company's salon concepts focus is on providing high quality hair care services and professional products, primarily to the middle consumermass market. The Company's North American salon operations consist of 9,340 salons (including 2,016 franchise salons), operating under several concepts, each offering attractive and affordable hair care products and services in the United States, Canada and Puerto Rico. The Company's international salon operations consist of 398 hair care salons located in Europe, primarily in the United Kingdom. The number of new salons expected to be opened within the upcoming fiscal year is discussed within Management's Discussion and Analysis of Financial Condition and Results of Operations. In addition to these openings, the Company typically acquires salons each year. The number of acquired salons, and the concept under which the acquisitions will fall, vary based on the acquisition opportunities which develop throughout the year.
Salon Development
The table on the following pages sets forth the number of system wide salons (company-owned and franchise) opened at the beginning and end of eachA description of the last five fiscal years, as well as the number of salons opened, closed, relocated, converted and acquired during each of these periods.
COMPANY-OWNED AND FRANCHISE SALON SUMMARY
NORTH AMERICAN SALONS: | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
REGIS SALONS | �� | |||||||||||||||
Open at beginning of period | 1,023 | 1,049 | 1,071 | 1,078 | 1,099 | |||||||||||
Salons constructed | 12 | 12 | 14 | 20 | 14 | |||||||||||
Acquired | — | 9 | 3 | 23 | 4 | |||||||||||
Less relocations | (9 | ) | (10 | ) | (11 | ) | (14 | ) | (11 | ) | ||||||
Salon openings | 3 | 11 | 6 | 29 | 7 | |||||||||||
Conversions | — | (1 | ) | — | — | 1 | ||||||||||
Salons closed | (73 | ) | (36 | ) | (28 | ) | (36 | ) | (29 | ) | ||||||
Total, Regis Salons | 953 | 1,023 | 1,049 | 1,071 | 1,078 | |||||||||||
MASTERCUTS | ||||||||||||||||
Open at beginning of period | 588 | 600 | 602 | 615 | 629 | |||||||||||
Salons constructed | 11 | 6 | 15 | 14 | 7 | |||||||||||
Acquired | — | — | — | — | — | |||||||||||
Less relocations | (9 | ) | (5 | ) | (7 | ) | (10 | ) | (6 | ) | ||||||
Salon openings | 2 | 1 | 8 | 4 | 1 | |||||||||||
Conversions | — | 1 | — | — | — | |||||||||||
Salons closed | (21 | ) | (14 | ) | (10 | ) | (17 | ) | (15 | ) | ||||||
Total, MasterCuts | 569 | 588 | 600 | 602 | 615 | |||||||||||
TRADE SECRET | ||||||||||||||||
Company-owned salons: | ||||||||||||||||
Open at beginning of period | — | — | — | 674 | 613 | |||||||||||
Salons constructed | — | — | — | 10 | 16 | |||||||||||
Acquired | — | — | — | — | 65 | |||||||||||
Franchise buybacks | — | — | — | — | 5 | |||||||||||
Less relocations | — | — | — | (4 | ) | (11 | ) | |||||||||
Salon openings | — | — | — | 6 | 75 | |||||||||||
Conversions | — | — | — | — | 5 | |||||||||||
Salons sold | — | — | — | (655 | ) | — | ||||||||||
Salons closed | — | — | — | (25 | ) | (19 | ) | |||||||||
Total company-owned salons | — | — | — | — | 674 | |||||||||||
Franchise salons: | ||||||||||||||||
Open at beginning of period | — | — | — | 106 | 19 | |||||||||||
Salons constructed | — | — | — | 1 | 2 | |||||||||||
Acquired(2) | — | — | — | — | 93 | |||||||||||
Less relocations | — | — | — | — | (1 | ) | ||||||||||
Salon openings | — | — | — | 1 | 94 | |||||||||||
Franchise buybacks | — | — | — | — | (5 | ) | ||||||||||
Interdivisional reclassification(4) | — | — | — | (43 | ) | — | ||||||||||
Salons sold | — | — | — | (57 | ) | — | ||||||||||
Salons closed | — | — | — | (7 | ) | (2 | ) | |||||||||
Total franchise salons | — | — | — | — | 106 | |||||||||||
Total, Trade Secret | — | — | — | — | 780 | |||||||||||
NORTH AMERICAN SALONS: | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
SMARTSTYLE/COST CUTTERS IN WALMART | ||||||||||||||||
Company-owned salons: | ||||||||||||||||
Open at beginning of period | 2,393 | 2,374 | 2,300 | 2,212 | 2,000 | |||||||||||
Salons constructed | 50 | 65 | 80 | 71 | 207 | |||||||||||
Acquired | — | — | — | — | — | |||||||||||
Franchise buybacks | — | — | 5 | 24 | 12 | |||||||||||
Less relocations | (1 | ) | (1 | ) | (3 | ) | (2 | ) | (3 | ) | ||||||
Salon openings | 49 | 64 | 82 | 93 | 216 | |||||||||||
Conversions | — | — | — | — | — | |||||||||||
Salons closed | (1 | ) | (45 | ) | (8 | ) | (5 | ) | (4 | ) | ||||||
Total company-owned salons | 2,441 | 2,393 | 2,374 | 2,300 | 2,212 | |||||||||||
Franchise salons: | ||||||||||||||||
Open at beginning of period | 120 | 119 | 122 | 146 | 151 | |||||||||||
Salons constructed | 2 | 3 | 2 | 1 | 7 | |||||||||||
Salon openings | 2 | 3 | 2 | 1 | 7 | |||||||||||
Franchise buybacks | — | — | (5 | ) | (24 | ) | (12 | ) | ||||||||
Salons closed | — | (2 | ) | — | (1 | ) | — | |||||||||
Total franchise salons | 122 | 120 | 119 | 122 | 146 | |||||||||||
Total, SmartStyle/Cost Cutters in Walmart | 2,563 | 2,513 | 2,493 | 2,422 | 2,358 | |||||||||||
SUPERCUTS | ||||||||||||||||
Company-owned salons: | ||||||||||||||||
Open at beginning of period | 1,158 | 1,100 | 1,114 | 1,132 | 1,094 | |||||||||||
Salons constructed | 65 | 24 | 10 | 27 | 33 | |||||||||||
Acquired | 1 | — | — | — | 3 | |||||||||||
Franchise buybacks | 5 | 73 | 12 | 6 | 38 | |||||||||||
Less relocations | (9 | ) | (3 | ) | (2 | ) | (2 | ) | (6 | ) | ||||||
Salon openings | 62 | 94 | 20 | 31 | 68 | |||||||||||
Conversions | 56 | 13 | — | (2 | ) | — | ||||||||||
Salons closed | (48 | ) | (49 | ) | (34 | ) | (47 | ) | (30 | ) | ||||||
Total company-owned salons | 1,228 | 1,158 | 1,100 | 1,114 | 1,132 | |||||||||||
Franchise salons: | ||||||||||||||||
Open at beginning of period | 987 | 1,034 | 1,022 | 997 | 990 | |||||||||||
Salons constructed | 68 | 43 | 42 | 51 | 71 | |||||||||||
Acquired | — | — | — | — | — | |||||||||||
Less relocations | (3 | ) | (7 | ) | (6 | ) | (7 | ) | (6 | ) | ||||||
Salon openings | 65 | 36 | 36 | 44 | 65 | |||||||||||
Conversions | 5 | 10 | 9 | 1 | — | |||||||||||
Franchise buybacks | (5 | ) | (73 | ) | (12 | ) | (6 | ) | (38 | ) | ||||||
Salons closed | (12 | ) | (20 | ) | (21 | ) | (14 | ) | (20 | ) | ||||||
Total franchise salons | 1,040 | 987 | 1,034 | 1,022 | 997 | |||||||||||
Total, Supercuts | 2,268 | 2,145 | 2,134 | 2,136 | 2,129 | |||||||||||
NORTH AMERICAN SALONS: | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
PROMENADE | ||||||||||||||||
Company-owned salons: | ||||||||||||||||
Open at beginning of period | 2,321 | 2,382 | 2,450 | 2,399 | 2,223 | |||||||||||
Salons constructed | 53 | 26 | 18 | 36 | 33 | |||||||||||
Acquired | — | 18 | — | 71 | 135 | |||||||||||
Franchise buybacks | 6 | 5 | 6 | 53 | 95 | |||||||||||
Less relocations | (10 | ) | (10 | ) | (10 | ) | (16 | ) | (8 | ) | ||||||
Salon openings | 49 | 39 | 14 | 144 | 255 | |||||||||||
Conversions | (56 | ) | (14 | ) | — | 1 | (5 | ) | ||||||||
Salons sold to franchisees | (7 | ) | — | — | — | — | ||||||||||
Salons closed | (174 | ) | (86 | ) | (82 | ) | (94 | ) | (74 | ) | ||||||
Total company-owned salons | 2,133 | 2,321 | 2,382 | 2,450 | 2,399 | |||||||||||
Franchise salons: | ||||||||||||||||
Open at beginning of period | 829 | 867 | 901 | 914 | 1,008 | |||||||||||
Salons constructed | 40 | 21 | 34 | 40 | 49 | |||||||||||
Acquired(2) | 31 | — | — | — | — | |||||||||||
Salons purchased from the Company | 7 | — | — | — | — | |||||||||||
Less relocations | (3 | ) | (7 | ) | (9 | ) | (7 | ) | (5 | ) | ||||||
Salon openings | 75 | 14 | 25 | 33 | 44 | |||||||||||
Conversions | (5 | ) | (9 | ) | (9 | ) | — | — | ||||||||
Franchise buybacks | (6 | ) | (5 | ) | (6 | ) | (53 | ) | (95 | ) | ||||||
Interdivisional reclassification(4) | — | — | — | 43 | — | |||||||||||
Salons closed | (39 | ) | (38 | ) | (44 | ) | (36 | ) | (43 | ) | ||||||
Total franchise salons | 854 | 829 | 867 | 901 | 914 | |||||||||||
Total, Promenade | 2,987 | 3,150 | 3,249 | 3,351 | 3,313 | |||||||||||
INTERNATIONAL SALONS(1): | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Company-owned salons: | ||||||||||||||||
Open at beginning of period | 400 | 404 | 444 | 472 | 481 | |||||||||||
Salons constructed | 18 | 13 | 2 | 4 | 15 | |||||||||||
Acquired | 1 | — | — | — | 25 | |||||||||||
Franchise buybacks | — | — | — | — | — | |||||||||||
Less relocations | (5 | ) | (2 | ) | — | (1 | ) | (1 | ) | |||||||
Salon openings | 14 | 11 | 2 | 3 | 39 | |||||||||||
Conversions | — | — | — | — | 1 | |||||||||||
Affiliated joint ventures | — | — | — | — | (40 | ) | ||||||||||
Salons closed | (16 | ) | (15 | ) | (42 | ) | (31 | ) | (9 | ) | ||||||
Total company-owned salons | 398 | 400 | 404 | 444 | 472 | |||||||||||
Franchise salons: | ||||||||||||||||
Open at beginning of period | — | — | — | — | 1,574 | |||||||||||
Salons constructed | — | — | — | — | 50 | |||||||||||
Acquired(2) | — | — | — | — | — | |||||||||||
Less relocations | — | — | — | — | — | |||||||||||
Salon openings | — | — | — | — | 50 | |||||||||||
Conversions | — | — | — | — | 3 | |||||||||||
Franchise buybacks | — | — | — | — | — |
INTERNATIONAL SALONS(1): | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Affiliated joint ventures(3) | — | — | — | — | (1,587 | ) | ||||||||||
Salons closed | — | — | — | — | (40 | ) | ||||||||||
Total franchise salons | — | — | — | — | — | |||||||||||
Total, International Salons | 398 | 400 | 404 | 444 | 472 | |||||||||||
TOTAL SYSTEM WIDE SALONS | ||||||||||||||||
Company-owned salons: | ||||||||||||||||
Open at beginning of period | 7,883 | 7,909 | 7,981 | 8,582 | 8,139 | |||||||||||
Salons constructed | 209 | 146 | 139 | 182 | 325 | |||||||||||
Acquired | 2 | 27 | 3 | 94 | 232 | |||||||||||
Franchise buybacks | 11 | 78 | 23 | 83 | 150 | |||||||||||
Less relocations | (43 | ) | (31 | ) | (33 | ) | (49 | ) | (46 | ) | ||||||
Salon openings | 179 | 220 | 132 | 310 | 661 | |||||||||||
Conversions | — | (1 | ) | — | (1 | ) | 2 | |||||||||
Affiliated joint ventures | — | — | — | — | (40 | ) | ||||||||||
Salons sold | — | — | — | (655 | ) | — | ||||||||||
Salons sold to franchisees | (7 | ) | — | — | — | — | ||||||||||
Salons closed | (333 | ) | (245 | ) | (204 | ) | (255 | ) | (180 | ) | ||||||
Total company-owned salons | 7,722 | 7,883 | 7,909 | 7,981 | 8,582 | |||||||||||
Franchise salons: | ||||||||||||||||
Open at beginning of period | 1,936 | 2,020 | 2,045 | 2,163 | 3,742 | |||||||||||
Salons constructed | 110 | 67 | 78 | 93 | 179 | |||||||||||
Acquired(2) | 31 | — | — | — | 93 | |||||||||||
Salons purchased from the Company | 7 | — | — | — | — | |||||||||||
Less relocations | (6 | ) | (14 | ) | (15 | ) | (14 | ) | (12 | ) | ||||||
Salon openings | 142 | 53 | 63 | 79 | 260 | |||||||||||
Conversions | — | 1 | — | 1 | 3 | |||||||||||
Franchise buybacks | (11 | ) | (78 | ) | (23 | ) | (83 | ) | (150 | ) | ||||||
Affiliated joint ventures(3) | — | — | — | — | (1,587 | ) | ||||||||||
Salons sold | — | — | — | (57 | ) | — | ||||||||||
Salons closed | (51 | ) | (60 | ) | (65 | ) | (58 | ) | (105 | ) | ||||||
Total franchise salons | 2,016 | 1,936 | 2,020 | 2,045 | 2,163 | |||||||||||
Total Salons | 9,738 | 9,819 | 9,929 | 10,026 | 10,745 | |||||||||||
In the preceding table, relocations represent a transfer of location by the same salon concept and conversions represent the transfer of one concept to another concept.
Table of Contentslisted below:
Regis Salons.SmartStyle. Regis Salons are primarily mall based, full service salons providing complete hair care and beauty services aimed at moderate to upscale, fashion conscious consumers. In recent years, the Company has expanded its Regis Salons into strip centers. As of June 30, 2012, of the 953 total Regis Salons, 156 Regis Salons were located in strip centers. The guest mix at Regis Salons is approximately 79 percent women, and both appointments and walk-in guests are common. TheseSmartStyle salons offer a full range of custom styling, cutting, hair coloring and waving services, as well as professional hair care products.products and are located exclusively in Walmart Supercenters. SmartStyle has a walk-in guest base, pricing is promotional and services are focused on the family. Professional retail product sales contribute considerably to overall revenues at approximately 33 percent. Additionally, the Company has 123 franchised Cost Cutters salons located in Walmart Supercenters.
Supercuts. Supercuts salons provide consistent, high quality hair care services and professional products to its guests at convenient times and locations and at value prices. This concept appeals to men, women and children, although male guests account for approximately 64 percent of the guest mix. Service revenues represent approximately 8289 percent of the concept's total company-owned Supercuts revenues. The average ticket was approximately $43 and $42 for fiscal years 2012 and 2011, respectively. Regis Salons compete in their existing markets primarily by emphasizing the high quality of the services provided. Included within the Regis Salon concept are various other trade names, including Carlton Hair, Sassoon, Hair by Stewarts, Hair Excitement, and Renee Beauty.
The average initial capital investment required for a new Regis Salon is approximately $190,000 to $240,000, excluding average opening inventory costs of approximately $22,000. Average annual salon revenues in a Regis Salon which has been open five years or more are approximately $400,000.
MasterCuts. MasterCuts issalons are a full service, mall based salon group which focuses on the walk-in consumer (no appointment necessary) thatwho demands moderately priced hair care services. MasterCuts salons emphasize quality hair care services, affordable prices and time saving services for the entire family. These salons offer a full range of custom styling, cutting, hair coloring and waving services as well as professional hair care products. The guest mix at MasterCuts is approximately 58 percent women. Service revenues composecomprise approximately 80 percent of the concept's total revenues.
Regis Salons. Regis Salons are primarily mall based, full service salons providing complete hair care and beauty services aimed at moderate to upscale, fashion conscious consumers. The average ticket was approximately $22 for fiscal years 2012 and 2011.
The average initial capital investment required for a new MasterCuts salonguest mix at Regis Salons is approximately $150,000 to $200,000, excluding average opening inventory costs of approximately $14,300. Average annual salon revenues in a MasterCuts salon which has been open five years or more80 percent women, and both appointments and walk-in guests are approximately $280,000.
SmartStyle. The SmartStyle salons share many operating characteristics of the Company's other salon concepts; however, they are located exclusively in Walmart Supercenters. SmartStyle has a walk-in guest base, pricing is promotional and services are focused on the family.common. These salons offer a full range of custom styling, cutting, hair coloring and waving services, as well as professional hair care products. The guest mix at SmartStyle Salons is approximately 75 percent women. Professional retail product sales contribute considerably to overall revenues at approximately 34 percent. Additionally, the Company has 122 franchise salons located in Walmart Supercenters. The average ticket was approximately $21 for fiscal years 2012 and 2011.
The average initial capital investment required for a new SmartStyle salon is approximately $35,000 to $45,000, excluding average opening inventory costs of approximately $13,100. Average annual salon revenues in a SmartStyle salon which has been open five years or more are approximately $230,000.
Strip Center Salons. The Company's Strip Center Salons are comprised of company-owned and franchise salons operating in strip centers across North America under the following concepts:
Supercuts. The Supercuts concept provides consistent, high quality hair care services and professional products to its guests at convenient times and locations and at a reasonable price. This concept appeals to men, women and children, although male guests account for approximately 66 percent of the guest mix. Service revenues represent approximately 89 percent of total company-owned Supercuts revenues. The average ticket was approximately $17 for fiscal years 2012 and 2011.
The average initial capital investment required for a new Supercuts salon is approximately $80,000 to $130,000, excluding average opening inventory costs of approximately $8,800. Average annual salon revenues in a company-owned Supercuts salon which has been open five years or more are approximately $270,000.
The Supercuts franchise salons provide consistent, high quality hair care services and professional products to guests at convenient times and locations and at a reasonable price. These Supercuts franchise salons appeal to men, women and children, although male guests account for approximately 7181 percent of the guest mix. Service revenues represent approximately 92 percent of the Supercuts franchiseconcept's total revenues. Average annual revenuesRegis Salons compete in a Supercuts franchise salon which has been open five years or moretheir existing markets primarily by providing high quality services. Included within the Regis Salon concept are approximately $340,000.various other trade names, including Carlton Hair, Sassoon, Hair by Stewarts, Hair Excitement, and Renee Beauty.
Cost Cutters (franchise salons). The Cost Cutters concept is a full service salon concept providing value priced hair care services for men, women and children. These full service salons also sell a complete line of professional hair care products. The guest mix at Cost Cutters is split relatively evenly between men and women. Average annual salon revenues in a franchised Cost Cutters salon which has been open five years or more are approximately $280,000.
In addition to the franchise salons, the Company operates company-owned Cost Cutters salons, as discussed below under Promenade Salons.
Promenade Salons. Promenade. Promenade Salons are made up of successfulacquired regional company-owned salon groups acquired over the past several years operating under the primary concepts of Hair Masters, Cool Cuts for Kids, Style America, First Choice Haircutters, Famous Hair, Cost Cutters, BoRics, Magicuts, Holiday Hair, Head Start, Fiesta Salons and TGF, as well as other concept names. Most concepts offer a full range of custom hairstyling, cutting, coloring and waving, as well as hair care products. Hair Masters offers moderately-priced services to a predominately female demographic, while the other concepts primarily cater to time-pressed, value-oriented families. The guest mix is split relatively evenly between men and women at most concepts. Service revenues represent approximately 89 percent of total company-owned Promenade revenues. The average ticket was approximately $19 and $20 for fiscal years 2012 and 2011, respectively.
The average initial capital investment required for a new Promenade Salon is approximately $75,000 to $125,000, excluding average opening inventory costs of approximately $9,300. Average annual salon revenues in a Promenade Salon which has been open five years or more are approximately $245,000.
Other Franchise Concepts. This group of franchise salons includes primarily First Choice Haircutters, Magicuts, Beauty Supply Outlets, and Pro-Cuts. These concepts function primarily in the high volume, value priced hair care market segment, with key selling features of value, convenience, quality and friendliness, as well as a complete line of professional hair care products. In addition to these franchise salons, the Company operates company-owned First Choice Haircutters and Magicuts salons, as previously discussed above under "Strip Center Salons".
During fiscal year 2012, the Company acquired a 60.0 percent ownership interest in Roosters MGC International LLC, a franchise concept that combines modern grooming techniques with classic barbershop elements. This ownership interest along with the Company's other men's franchise concepts will allow the Company to expand its focus on the male demographic.
International Salons. The Company's International salons are comprised of company-owned salons operating in the United Kingdom primarily under the Supercuts, Regis and Sassoon concepts. These salons offer similar levels of service as theour North American salons previously mentioned. However, the initial capital investment required is typically between £110,000 and £130,000 for a Regis salon, and between £60,000 and £80,000 for a Supercuts salon. Average annual salon revenues for a
salon which has been open five years or more are approximately £210,000 in a Regis salon and £165,000 in a Supercuts salon.salons. Sassoon is one of the world's most recognized names in hair fashion and appeals to women and men looking for a prestigious full service hair salon. Salons are usually located onin prominent high-streethigh-traffic locations and offer a full range of custom hairstyling, cutting, coloring and waving, as well as professional hair care products.
The initial capital investment required is approximately £500,000. Average annualtables on the following pages set forth the number of system wide locations (company-owned and franchised) and activity within the various salon revenues forconcepts.
System-wide location counts(5)
| June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
Company-owned salons: | ||||||||||
SmartStyle/Cost Cutters in Walmart Stores | 2,490 | 2,441 | 2,393 | |||||||
Supercuts | 1,210 | 1,228 | 1,158 | |||||||
MasterCuts | 532 | 569 | 588 | |||||||
Regis salons | 862 | 953 | 1,023 | |||||||
Promenade | 1,990 | 2,133 | 2,321 | |||||||
Total North American Salons | 7,084 | 7,324 | 7,483 | |||||||
Total International Salons(1) | 351 | 398 | 400 | |||||||
Total, Company-owned salons | 7,435 | 7,722 | 7,883 | |||||||
Franchised salons: | ||||||||||
SmartStyle/Cost Cutters in Walmart Stores | 123 | 122 | 120 | |||||||
Supercuts | 1,116 | 1,040 | 987 | |||||||
Promenade | 843 | 854 | 829 | |||||||
Total North American Salons | 2,082 | 2,016 | 1,936 | |||||||
Total International Salons(1) | — | — | — | |||||||
Total, Franchised salons | 2,082 | 2,016 | 1,936 | |||||||
Ownership interest locations: | ||||||||||
Equity ownership interest locations(4) | 246 | 2,811 | 2,786 | |||||||
Grand Total, System-wide | 9,763 | 12,549 | 12,605 | |||||||
Constructed Locations (net relocations)
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
Company-owned salons: | ||||||||||
SmartStyle/Cost Cutters in Walmart Stores | 51 | 49 | 64 | |||||||
Supercuts | 45 | 56 | 21 | |||||||
MasterCuts | 3 | 2 | 1 | |||||||
Regis salons | 3 | 3 | 2 | |||||||
Promenade | 39 | 43 | 16 | |||||||
Total North American Salons | 141 | 153 | 104 | |||||||
Total International Salons(1) | 12 | 13 | 11 | |||||||
Total, Company-owned salons | 153 | 166 | 115 | |||||||
Franchised salons: | ||||||||||
SmartStyle/Cost Cutters in Walmart Stores | 1 | 2 | 3 | |||||||
Supercuts | 70 | 65 | 36 | |||||||
Promenade | 47 | 37 | 14 | |||||||
Total North American Salons | 118 | 104 | 53 | |||||||
Total International Salons(1) | — | — | — | |||||||
Total, Franchised salons | 118 | 104 | 53 | |||||||
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
Company-owned salons: | ||||||||||
SmartStyle/Cost Cutters in Walmart Stores | (2 | ) | (1 | ) | (45 | ) | ||||
Supercuts | (49 | ) | (48 | ) | (49 | ) | ||||
MasterCuts | (40 | ) | (21 | ) | (14 | ) | ||||
Regis salons | (94 | ) | (73 | ) | (36 | ) | ||||
Promenade | (179 | ) | (174 | ) | (86 | ) | ||||
Total North American Salons | (364 | ) | (317 | ) | (230 | ) | ||||
Total International Salons(1) | (59 | ) | (16 | ) | (15 | ) | ||||
Total, Company-owned salons | (423 | ) | (333 | ) | (245 | ) | ||||
Franchised salons: | ||||||||||
SmartStyle/Cost Cutters in Walmart Stores | — | — | (2 | ) | ||||||
Supercuts | (11 | ) | (12 | ) | (20 | ) | ||||
Promenade | (58 | ) | (39 | ) | (38 | ) | ||||
Total North American Salons | (69 | ) | (51 | ) | (60 | ) | ||||
Total International Salons(1) | — | — | — | |||||||
Total, Franchised salons | (69 | ) | (51 | ) | (60 | ) | ||||
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
Company-owned salons: | ||||||||||
SmartStyle/Cost Cutters in Walmart Stores | — | — | — | |||||||
Supercuts | — | 1 | — | |||||||
MasterCuts | — | — | — | |||||||
Regis salons | — | — | 9 | |||||||
Promenade | — | — | 18 | |||||||
Total North American Salons | — | 1 | 27 | |||||||
Total International Salons(1) | — | 1 | — | |||||||
Total, Company-owned salons | — | 2 | 27 | |||||||
Franchised salons(2): | ||||||||||
SmartStyle/Cost Cutters in Walmart Stores | — | — | — | |||||||
Supercuts | — | — | — | |||||||
Promenade | — | 31 | — | |||||||
Total North American Salons | — | 31 | — | |||||||
Total International Salons(1) | — | — | — | |||||||
Total, Franchised salons | — | 31 | — | |||||||
Conversions (including net franchisee transactions)(3)
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
Company-owned salons: | ||||||||||
SmartStyle/Cost Cutters in Walmart Stores | — | — | — | |||||||
Supercuts | (14 | ) | 61 | 86 | ||||||
MasterCuts | — | — | 1 | |||||||
Regis salons | — | — | (1 | ) | ||||||
Promenade | (3 | ) | (57 | ) | (9 | ) | ||||
Total North American Salons | (17 | ) | 4 | 77 | ||||||
Total International Salons(1) | — | — | — | |||||||
Total, Company-owned salons | (17 | ) | 4 | 77 | ||||||
Franchised salons: | ||||||||||
SmartStyle/Cost Cutters in Walmart Stores | — | — | — | |||||||
Supercuts | 17 | — | (63 | ) | ||||||
Promenade | — | (4 | ) | (14 | ) | |||||
Total North American Salons | 17 | (4 | ) | (77 | ) | |||||
Total International Salons(1) | — | — | — | |||||||
Total, Franchised salons | 17 | (4 | ) | (77 | ) | |||||
General. The Company has various franchising programs supporting its 2,016 franchise2,082 franchised salons as of June 30, 2012,2013, consisting mainly of Supercuts, Cost Cutters, First Choice Haircutters, Magicuts, Pro-Cuts, and Roosters.Magicuts. These salons have been included in the discussions regarding salon counts and concepts on the preceding pages.concepts.
The Company provides its franchisees with a comprehensive system of business training, stylist education, site approval and lease negotiation, professional marketing, promotion and advertising programs, and other forms of support designed to help the franchisee build a successful business.
Standards of Operations. The Company does not control the day to day operations of its franchisees, including hiring and firing, establishing prices to charge for products and services, business hours, personnel management and capital expenditure decisions. However, the franchise agreements afford certain rights to the Company, such as the right to approve location,locations, suppliers and the sale of a franchise. Additionally, franchisees are required to conform to the Company's established operational policies and procedures relating to quality of service, training, salon design and decor, of stores, and trademark
usage. The Company's field personnel make periodic visits to franchise storesfranchised salons to ensure that the storesthey are operating in conformity with the standards for each franchising program. All of the rights afforded to the Company with regard to the franchisefranchised operations allow the Company to protect its brands, but do not allow the Company to control the franchise operations or make decisions that have a significant impact on the success of the franchisefranchised salons.
To further ensure conformity, the Company may enter into the lease for the store site directly with the landlord, and subsequently sublease the site to the franchisee. The franchise agreement and sublease provide the Company with the right to terminate the sublease and gain possession of the store if the franchisee fails to comply with the Company's operational policies and procedures. See Note 10 to the Consolidated Financial Statements for further information about the Company's commitments and contingencies, including leases.
Franchise Terms. Pursuant to their franchise agreement with the Company, each franchisee pays an initial fee for each store and ongoing royalties to the Company. In addition, for most franchise concepts, the Company collects advertising funds from franchisees and administers the funds on behalf of the concept. Franchisees are responsible for the costs of leasehold improvements, furniture, fixtures, equipment, supplies, inventory, payroll costs and certain other items, including initial working capital. The majority of franchise agreements provide the Company a right of first refusal if the store is to be sold and the franchisee must obtain the Company's approval in all instances where there is a sale of a franchise location.
Additional information regarding each of the major franchisee brands is listed below:
The majority of existing Supercuts franchise agreements have a perpetual term, subject to termination of the underlying lease agreement or termination of the franchise agreement by either the Company or the franchisee. TheAll new franchisees enter into development agreements, also providewhich give them the Companyright to enter into a rightdefined number of first refusal if the store is to be sold. The franchisee must obtain the Company's approval in all instances where there is a sale of the franchise. The current franchise agreement is site specific and does not provide any territorial protection to a franchisee, although some olderagreements. These franchise agreements do
includeare site specific. The development agreement provides limited territorial protection. Development agreements for new markets include limited territory protection for the Supercuts concept.stores developed under those franchise agreements. Older franchisees have grandfathered expansion rights which allow them to develop stores outside of development agreements and provide them with greater territorial protections in their markets. The Company has a comprehensive impact policy that resolves potential conflicts among Supercuts franchisees and/or the Company's Supercuts locations regarding proposed salonstore sites.
Cost Cutters, First Choice Haircutters and Magicuts (North America)
The majority of existing Cost Cutters franchise agreements have a 15 year term with a 15 year option to renew (at the option of the franchisee), while the majority of First Choice Haircutters franchise agreements have a ten year term with a five year option to renew. The majority of Magicuts franchise agreements have a term equal to the greater of five years or the current initial term of the lease agreement with an option to renew for two additional five year periods. All of the agreements also provide the Company a right of first refusal if the store is to be sold. The franchisee must obtain the Company's approval in all instances where there is a sale of the franchise. The current franchise agreement is site specific. Franchisees may enter into development agreements with the Company which provide limited territorial protection.
The majority of existing Pro-Cuts franchise agreements have a ten year term with a ten year option to renew. The agreements also provide the Company a right of first refusal if the store is to be sold or transferred. The current franchise agreement is site specific. Franchisees may enter into development agreements with the Company which provide limited territorial protection.
The majority of existing Roosters franchise agreements have a ten year term with a ten year renewal option. The agreements also provide the Company a right of first refusal if the store is to be sold. The franchisee must obtain the Company's approval in all instances where there is a sale of the franchisee. Upon the signing of a single store franchise agreement, franchisees may also enter into a multi-unit option agreement which provides the right to open three additional stores in a non-exclusive territory.
Franchisee Training. The Company provides new franchisees with training, focusing on the various aspects of store management, including operations, personnel management, marketing fundamentals and financial controls. Existing franchisees receive training, counseling and information from the Company on a continuous basis. The Company provides store managers and stylists with extensive technical training for Supercuts franchises. For further description of the Company's education and training programs, see the "Salon Education and Training Programs" section of this document.
The Company maintainsutilizes various advertising, sales and promotion programsmarketing vehicles for its salons, budgeting aincluding traditional advertising, guest relationship management, digital channels, and promotional/pricing based programs. A predetermined percentallocation of revenuesrevenue is used for such programs. The Company has developed promotional tactics and institutional sales messages for each of its concepts targeting certain guest types and positioning each concept in the marketplace. Print,Most marketing vehicles including radio, television,print, online, and billboardtelevision advertising are developed and supervised at the Company's headquarters, but mostSalon Support headquarters; however, the majority of advertising is done increated for our salon local markets. In the immediate marketpast year, the Company completed significant research to enhance our understanding of guest expectations and needs so we are well positioned to create affinity for our salons. Utilizing this
research, the particular salon.Company will be reviewing its brand strategy with the intent to create more clear communication platforms, identities and differentiation points for our brands to drive consumer preference.
Franchise Brands
Most franchise concepts maintain separate advertising funds (the Funds) that provide comprehensive advertisingmarketing and sales promotion support for each system. The Supercuts advertising fund is the Company's largest advertising fund and is administered by a council consisting of primarily franchisee representatives. The council has overall control of all of the advertising fund's expenditures and operates in accordance with terms of the franchise operating and other agreements. All stores,
company-owned and franchised, contribute to the Funds,advertising funds, the majority of which are allocated to the contributing market for media placement and local marketing activities. The remainder is allocated for the creation of national advertising campaigns and system wide activities. This intensive advertising program creates significant consumer awareness, a strong concept image and high loyalty.
Salon Education and Training Programs:
The Company has an extensive hands-on training program for their stylists which emphasizes technical training in hairstyling and cutting, hair coloring, texturizing services and hair treatment regimes, as well as guest service skills and product sales. The objective of the training programs is to ensure that guests receive professional and quality services, which the Company believes will result in additional repeat guests, referrals and product sales. The Company is currently evaluating expanding the training program based on the strategy of improving the guest experience.
The Company has over 130 full and part-time artistic directors who train stylists on the techniques to provide salon services and instruct stylists in current styling trends. Stylist training is achieved through seminars, workshops and DVD-based programs. The Company was the first in its industry to develop a DVD-based training system in its salons and currently has over 200 DVD titles designed to enhance the technical skills of stylists.
The Company has guest service training programs designed to improve the interaction between employees and guests. Employees are trained in the proper techniques in greeting the guest, telephone courtesy and professional behavior through a series of professionally designed DVDs, along with instructional seminars.
The Company also provides regulatory compliance training for all its field employees. This training is designed to help supervisors and stylists understand employee regulatory requirements and compliance with these standards.
Salon Staff Recruiting and Retention:
Recruiting quality managers and stylists is essential to the establishment and operation of successful salons. In search of salon managers, the Company's supervisory team recruits or develops and promotes from within those stylists that display initiative and commitment. The Company has been and believes it will continue to be successful in recruiting capable managers and stylists. Stylists benefit from the Company's high-traffic locations and receive a steady source of new business from walk-in guests. In addition, the Company offers a career path with the opportunity to move into managerial and training positions within the Company.
The Company's salons are designed, built and operated in accordance with uniform standards and practices developed by the Company based on its experience. Salon fixtures and equipment are generally uniform, allowing the Company to place large orders for these items with cost savings due to the economies of scale.
The size of the Company's salons ranges from 500 to 5,000 square feet, with the typical salon having about 1,200 square feet. At present, the cost to the Company of normal tenant improvements and furnishing of a new salon, including inventories, ranges from approximately $25,000 to $225,000, depending on the size of the salon and the concept. Less than ten percent of all new salons will have costs greater than normal with a cost between $225,000 and $500,000 to furnish. International Sassoon salons costs could be even greater than the ranges above. Of the total leasehold costs, approximately 70 percent of the cost is for leasehold improvements and the balance is for salon fixtures, equipment and inventories.
The Company maintains its own design, construction and real estate department, which designs and supervises the leasehold installations, furnishing and fixturing of all new company-owned salons and certain franchise locations. The Company has developed considerable expertise in designing salons. The design and real estate staff focus on visual appeal, efficient use of space, cost and rapid completion times.
Salon Management Information Systems:
At all of its company-owned salons, the Company utilizes a point-of-sale (POS) information system to collect daily sales information and guest demographics. Salon employees deposit cash receipts into a local bank account on a daily basis. The POS system sends the amount expected to be deposited to the corporate office, where the amount is reconciled daily with local deposits transferred into a centralized corporate bank account. The guest information is then used to determine effectiveness of promotions and the loyalty base of each salon that feed into salon operational decisions. The information is also used to generate payroll information, monitor salon performance, manage salon staffing and payroll costs, and anticipate industry pricing and staffing trends. The corporate information systems deliver information on product sales to improve its inventory control system, including recommendations for each salon of monthly product replenishments. Recent innovations to increase inventory cycle counts and install high speed connections at each salon are expected to improve stylist productivity and improve guest satisfaction with the checkout process.
The goal of information systems is to maximize the overall value to the business while improving the output per dollar spent by implementing cost-effective solutions and services. Management believes that its information systems provide the Company with operational efficiencies as well as advantages in planning and analysis which are generally not available to competitors. The Company continually reviews and improves its information systems to ensure systems and processes are kept up to date and that they will meet the growing needs of the Company.
Historically, because of the Company's large size and scale requirements it has been necessary for the Company to internally develop and support its own proprietary POS information system. During fiscal year 2011, the Company identified a third party POS software alternative that has a system that meets our current and future functionality requirements including enhanced guest demographics. The Company began implementing this new technology in our salons in fiscal year 2012 and will continue to implement as technology will allow, which will allow the Company to stay current and meet guests' expectations.
The hair care industry is highly fragmented and competitive. In every area in which the Company has a salon, there are competitors offering similar hair care services and products at similar prices. The Company faces competition from smaller chains of salons such as Great Clips, Fantastic Sams and Sport Clips and within malls from companies which operate salons within department stores, independently owned salons and, to a lesser extent, salons which, although independently owned, are operating under franchises from a franchising company that may assist such salons in areas of training, marketing and advertising.
At the individual salon level the barriers to enter the market are not considerable; however, barriers exist for chains to expand nationally due to the need to establish systems and infrastructure, recruitment of experienced hair care management and adequate store staff, and leasing of quality sites. The principal factors of competition in the affordable hair care category are quality, consistency and convenience. The Company continually strives to improve its performance in each of these areas and to create additional points of differentiation versus the competition. In order to obtain locations in shopping malls, the Company must be competitive as to rentals and other customary tenant obligations.
Hair Restoration Business Strategy:
On July 13, 2012, the Company entered into a definitive agreement to sell Hair Club to Aderans, Co., Ltd. for cash of $163.5 million excluding closing adjustments and transaction fees. Subsequent to fiscal year 2012, the net assets of Hair Club to be sold met the accounting criteria to be classified as held for sale and will be aggregated and reported in accordance with authoritative guidance in the Company's fiscal year 2013 first quarter Form 10-Q. The Company is currently anticipating recognizing an after-tax gain in the range of $8 to $12 million upon closing of the deal. The transaction is expected to close in the first or second fiscal quarter of 2013, and is subject to customary closing conditions.
Hair Club is the largest U.S. provider of hair loss solutions and the only company offering a comprehensive menu of proven hair loss products and services. Hair Club leverages its strong brand, best-in-class service model and comprehensive menu of hair restoration alternatives to build an increasing base of repeat guests that generate recurring cash flow for the Company. From its traditional non-surgical hair replacement systems, to hair transplants, hair therapies and hair care products and services, Hair Club offers a solution for anyone experiencing or anticipating hair loss. Hair Club's operations, presented under the Hair Restoration Centers reporting unit, consist of 98 locations (29 franchise locations) in the United States and Canada. The domestic hair restoration market is estimated to generate over $4 billion annually. The competitive landscape is highly fragmented and comprised of approximately 4,000 locations. Hair Club and its franchisees have the largest market share, with approximately five percent based on guest count. In an effort to provide privacy to its guests, Hair Club offices are located primarily in office and professional buildings within larger metropolitan areas.
The following table sets forth the number of company-owned and franchise hair restoration centers opened at the beginning and end of each of the last five fiscal years, as well as the number of centers opened, closed, relocated and acquired during each of these periods:
| 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Company-owned hair restoration centers: | ||||||||||||||||
Open at beginning of period | 67 | 62 | 62 | 57 | 49 | |||||||||||
Constructed | 6 | 3 | 4 | 8 | 3 | |||||||||||
Acquired | — | — | — | — | — | |||||||||||
Franchise buybacks | — | 4 | — | 2 | 6 | |||||||||||
Less relocations | (3 | ) | (1 | ) | (4 | ) | (5 | ) | (1 | ) | ||||||
Site openings | 3 | 6 | — | 5 | 8 | |||||||||||
Sites closed | (1 | ) | (1 | ) | — | — | — | |||||||||
Total company-owned hair restoration centers | 69 | 67 | 62 | 62 | 57 | |||||||||||
Franchise hair restoration centers: | ||||||||||||||||
Open at beginning of period | 29 | 33 | 33 | 35 | 41 | |||||||||||
Acquired | — | — | — | — | 2 | |||||||||||
Franchise buybacks | — | (4 | ) | — | (2 | ) | (6 | ) | ||||||||
Less Relocations | — | — | — | — | (2 | ) | ||||||||||
�� | ||||||||||||||||
Site openings | — | (4 | ) | — | (2 | ) | (6 | ) | ||||||||
Sites closed | — | — | — | — | — | |||||||||||
Total franchise hair restoration centers | 29 | 29 | 33 | 33 | 35 | |||||||||||
Total hair restoration centers | 98 | 96 | 95 | 95 | 92 | |||||||||||
Affiliated Ownership Interests:
The Company maintains ownership interests in salons, beauty schools and hair restoration centers.salons. The primary ownership interests areinterest is a 55.1 percent interest in Provalliance, EEG and Hair Club for Men, Ltd.Empire Education Group, Inc. (EEG), which areis accounted for as an equity method investments.
The Company maintains a 46.7 percent ownership interest in Provalliance. The fiscal year 2008 merger of the operations of the European operating subsidiaries with the Franck Provost Salon Group created a newly formed entity, Provalliance. The Franck Provost Salon Group management structure has a proven platform to build and acquire company-owned stores as well as a strong franchise operating group that is positioned for expansion. In March of 2011, the Company acquired approximately 17 percent additional equity interest in Provalliance. In April 2012, the Company entered into a Share Purchase Agreement (Agreement) to sell the Company's 46.7 percent equity interest in Provalliance to the Provost Family for a purchase price of €80 million. The transaction is expected to close no later than September 30, 2012 and is subject to the Provost Family securing financing for the purchase price.
The Company maintains a 55.1 percent ownership interest in EEG.investment. Contributing the Company's beauty schools in fiscal year 2008 to EEG leveragesleveraged EEG's management expertise, while enabling the Company to maintain a vested interest in the beauty school industry.
The Company's 50.0 percent ownership in Hair Club for Men, Ltd., which operates Hair Club centers in Illinois and Wisconsin, is included in the definitive agreement entered into on July 13, 2012 to divest Hair Club. The transaction is expected to close during the first half of fiscal year 2013.
The Company holds numerous trademarks, both in the United States and in many foreign countries. The most recognized trademarks are "Regis Salons,"SmartStyle," "Supercuts," "MasterCuts," "SmartStyle,"Regis Salons," "Cost Cutters," "Hair Masters," "First Choice Haircutters," "Magicuts"Haircutters" and "Hair Club for Men and Women."Magicuts."
"Sassoon" is a registered trademark of Procter & Gamble. The Company has a license agreement to use the Sassoon name for existing salons and academies, and new salon development.
Although the Company believes the use of these trademarks is an element in establishing and maintaining its reputation as a national operator of high quality hairstyling salons, and is committed to protecting these trademarks by vigorously challenging any unauthorized use, the Company's success and continuing growth are the result of the quality of its salon location selections and real estate strategies.
During fiscal year 2012,2013, the Company had approximately 52,000 full-50,000 full and part-time employees worldwide, of which approximately 46,00044,000 employees were located in the United States. None of the Company's employees is subject to a collective bargaining agreement and the Company believes that its employee relations are amicable.
On July 11, 2012, the Company announced that Daniel Hanrahan was named President and CEO, effective August 6, 2012, and also became a member of the Regis Board of Directors on that date. In January 2012, Eric Bakken, Executive Vice President, General Counsel and Business Development, was appointed to assume the role of Interim Corporate Chief Operating Officer. Randy Pearce retired as President effective June 30, 2012. Paul Finkelstein retired as Chief Executive Officer effective February 2012.
Information relating to Executive Officers of the Company follows:
Name | Age | Position | |||
---|---|---|---|---|---|
Daniel Hanrahan | President and Chief Executive Officer | ||||
Eric Bakken | Executive Vice President, Chief Administrative Officer and General Counsel | ||||
Norma Knudsen | Executive Vice President, Merchandising | ||||
| Executive Vice President and Chief Financial Officer | ||||
Heather Passe | 42 | Senior Vice President and Chief | |||
Doug Reynolds | 57 | Senior Vice President and Chief Information Officer |
Daniel Hanrahan was appointed tohas served as President and Chief Executive Officer insince August 2012. He most recently served as President of Celebrity Cruises, ata subsidiary of Royal Caribbean Cruises Ltd., from February 2005 to July 2012, and as its President and Chief Executive Officer since September 2007. Mr. Hanrahan has served on the board of directors of Cedar Fair, L.P., an amusement-resort operator, since 2012, and is a member of its Audit Committee.
Eric Bakken has served as Executive Vice President, Chief Administrative Officer and General Counsel since 2010.April 2013. He was appointed toserved as Executive Vice President, General Counsel and Business Development and Interim Corporate Chief Operating Officer in January 2012. Hefrom 2012 to April 2013, and performed the function of principal executive officer between July 2012 and August 2012. He served as2012, Executive Vice President from 2010 to 2012, Senior Vice President from 2006 to 2009, General Counsel from 2004 to 2006, as Vice President, Law from 1998 to 2004 and as a lawyer to the Company from 1994 to 1998.
Norma Knudsen has served as Executive Vice President, Merchandising since July 2006. She served as Chief Operating Officer, Trade Secret from February 1999 through 2009 and as Vice President, Trade Secret Operations from 1995 to 1999.
Brent Moen was appointed to SeniorSteven Spiegel has served as Executive Vice President and Chief Financial Officer in 2011. Hesince December 2012.
Heather Passe has served as Senior Vice President and Corporate Controller from 2006 to 2011,Chief Marketing Officer since July 2012.
Doug Reynolds has served as Senior Vice President of Finance from 2002 to 2006, and as Director of Finance from 2000 to 2002.Chief Information Officer since May 2012.
The Company is subject to various federal, state, local and provincial laws affecting its business as well as a variety of regulatory provisions relating to the conduct of its beauty related business, including health and safety.
In the United States, the Company's franchise operations are subject to the Federal Trade Commission's Trade Regulation Rule on Franchising (the FTC Rule) and by state laws and administrative regulations that regulate various aspects of franchise operations and sales. The Company's franchises are offered to franchisees by means of an offering circular/disclosure document containing specified disclosures in accordance with the FTC Rule and the laws and regulations of certain states. The Company has registered its offering of franchises with the regulatory authorities of those states in which it offers franchises and in which such registration is required. State laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states and, in certain cases, apply substantive standards to this relationship. Such laws may, for example, require that the franchisor deal with the franchisee in good faith, may prohibit interference with the right of free association among franchisees, and may limit termination of franchisees without payment of reasonable compensation. The Company believes that the current trend is for government regulation of franchising to increase over time. However, such laws have not had, and the Company does not expect such laws to have, a significant effect on the Company's operations.
In Canada, the Company's franchise operations are subject to bothfranchise laws and regulations in the provinces of Ontario, Alberta, Franchise ActManitoba, New Brunswick, and the Ontario Franchise Act.Prince Edward Island. The offering of franchises in Canada occurs by way of a disclosure document, which contains certain disclosures required by the Ontarioapplicable provincial laws. The provincial franchise laws and Alberta Franchise Acts. Both the Ontario and Alberta Franchise Actsregulations primarily focus on disclosure requirements, although each requires certain relationship requirements such as a duty of fair dealing and the right of franchisees to associate and organize with other franchisees.
Governmental regulations surrounding franchise operations in Europe are similar to those in the United States. The Company believes it is operating in substantial compliance with applicable laws and regulations governing all of its operations.
The Company maintains an ownership interest in EEG. Beauty schools derive a significant portion of their revenue from student financial assistance originating from the U.S Department of Education's Title IV Higher Education Act of 1965. For the students to receive financial assistance at the school, the beauty schools must maintain eligibility requirements established by the U.S Department of Education.
In June 2012, the United States Supreme Court upheld the Patient Protection and Affordable Care Act (Act). We expect the Act will increase our annual employee healthcare costs, with significant increases commencing in fiscal year 2014.Table of Contents
Financial Information about Foreign and North American Operations
Financial information about foreign and North American markets is incorporated herein by reference to Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 and segment information in Note 1514 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
Available Information
The Company is subject to the informational requirements of the Securities and Exchange Act of 1934 (Exchange Act). The Company therefore files periodic reports, proxy statements and other information with the Securities and Exchange Commission (SEC). Such reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street NE, Washington, DC 20549, or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.
Financial and other information can be accessed in the Investor Information section of the Company's website atwww.regiscorp.com. The Company makes available, free of charge, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.
ChangesSignificant initiatives implemented and changes in the general economic environmentour management and organizational structure may continue to adversely impact our business and results of operations.operating results.
ChangesMr. Daniel J. Hanrahan was appointed President and Chief Executive Officer of the Company, effective August 6, 2012. During fiscal year 2013, the Company began executing upon a number of significant strategic initiatives to support and focus on its business strategies to return the United States, Canadian, United Kingdom, AsianCompany to sustainable long-term growth and other European economies have an impactprofitability. The Company rolled out a new point-of-sale system and salon workstations in over 95% of its North American salons, restructured the Company's North American field organization and is standardizing plan-o-grams and eliminating retail products. In addition, the Company's management is engaged in a strategic review of non-core assets to focus on our business. General economic factors that are beyondcore business of operating beauty salons, improving long-term profitability and maximizing shareholder value.
Initiatives and changes of this magnitude and scope, both individually and collectively, may continue to affect our control, such as interest rates, recession, inflation, deflation, tax rates and policy, energy costs, unemployment trends, and other matters that influence consumer confidence and spending, may impact our business. In particular, visitation patterns to our salons and hair restoration centers can be adversely impacted by increases in unemployment rates and decreases in discretionary income levels.operating results.
If we continue to have negative same-store sales our business and results of operations may be affected.
Our success depends, in part, upon our ability to improve sales, as well as both gross marginscost of service and product and operating margins. Comparable same-store sales are affected by average ticket and same-store guest visits. A variety of factors affect same-store guest visits, including the guest experience, fashion trends, competition, current economic conditions, changes in our product assortment, the successeffectiveness of marketing
programs and weather conditions. These factors may cause our comparable same-store sales results to differ materially from prior periods and from our expectations. Our comparable same-store sales results for the twelve months ended June 30, 2012fiscal year 2013 declined 3.12.4 percent compared to the twelve months ended June 30, 2011. During fiscal year 2012, we impaired $67.7 and $78.4 million of goodwill associated with our Regis salon concept and Hair Restoration Centers reporting units, respectively. We impaired $74.1 million of goodwill associated with our Promenade salon concept during fiscal year 2011 and $35.3 million of goodwill associated with our Regis salon concept during fiscal year 2010. We also impaired $41.7 million of goodwill associated with our salon concepts in the United Kingdom during fiscal year 2009.2012. If negative same-store sales continue and we are unable to offset the impact with operational savings, our financial results may be further affected. Weaffected and we may be required to take additional impairment charges and to impair certain long-lived assets and goodwill and suchcharges. Such impairments could be material to our consolidated balance sheet and results of operations. During
fiscal year 2013 we did not record any goodwill impairment charges. During fiscal years 2012 and 2011, we recorded goodwill impairment charges of $67.7 and $74.1 million associated with our Regis and Promenade salon concepts, respectively. During fiscal years 2013, 2012 and 2011, we recorded fixed asset impairment charges of $8.2, $6.6 and $6.5 million, respectively. The concept that has the highest likelihood of impairment is Promenade. As previously disclosed, the Company has agreed to sell the Hair Restoration Centers reporting unit in the first half of fiscal year 2013; however, until this reporting unit is sold it is reasonably likely there could be impairment of goodwill in future periods.
If we are unable to improve our comparable same-store sales on a long-term basis or offset the impact with operational savings, our financial results may be affected.Regis. Furthermore, continued declines in same-store sales performance may cause us to be in default of certain covenants in our financing arrangements.
The BoardOur business is based on the success of Directorsour salons which is engageddriven by the success of our stylists. It is important for us to attract and retain talented stylists.
Guest loyalty is highly dependent upon the stylist who is providing services to our guests. Our main objective is to have our guests leave feeling satisfied and wanting to return. To ensure our guests are receiving the best possible care, we need to focus on retaining and attracting highly qualified stylists. To continue to be successful in the future we will need to continue to offer competitive wages, benefits and education and training programs to attract and retain talented stylists. Any shortcomings by stylists or the training and guidance they receive, particularly an issue affecting the quality of the guest service experience or compliance with safety and health regulations, may be attributed to the Company as a strategic review of non-core assets that may impactwhole, thus damaging our businessreputation and brand equity and potentially affecting our results of operations.
Our strategic review of non-core assets may adversely affect our financial condition and operating results or impose other risk, such as the following:
On July 13, 2012, the Company entered into a definitive agreement to sell its Hair Club for Men and Women business (Hair Club), a provider of hair restoration services. The transaction is expected to close during the first half of fiscal year 2013.
ChangesThe effect of changes to healthcare laws in the United States may increase the number of employees who participate in our managementhealthcare plans, which may significantly increase our healthcare costs and organizational structure may affect our operating results.
On July 11, 2012, the Company announced that Mr. Daniel J. Hanrahan was appointed President and Chief Executive Officer of the Company, effective August 6, 2012. The changes to our management and organizational structure may adversely affect our financial condition and operating results or impose other risk, such as the following:
Failure to control cost may adversely affectnegatively impact our operating results.
We must continueoffer comprehensive healthcare coverage to controleligible full-time and part-time employees in the United States. While we have relatively low minimum work hour requirements for United States employees to be eligible for healthcare coverage under our expense structure. Failurehealthcare plans, for various reasons a majority of our eligible employees do not participate in our plans. However, many eligible employees who do not participate in our healthcare plans may find it more advantageous to managedo so when recent changes to healthcare laws in the United States become effective. Such changes include potential fees to individuals for not obtaining healthcare coverage and being denied certain healthcare subsidies if an eligible employee declines healthcare coverage under an employer's plan. The possibility of increased enrollment when or after the law becomes effective and clarification around uncertainties with respect to this pending legislation may significantly increase our cost of product, laborhealthcare coverage costs and benefit rates, advertising and marketing expenses, operating lease costs, other store expenses or indirect spending could delay or prevent us from achieving increased profitability or otherwise adversely affectnegatively impact our operating results.
Changes in our key relationships may adversely affect our operating results.
We maintain key relationships with certain companies, including Walmart. Termination or modification of any of these relationships, including Walmart, could significantly reduce our revenues and have a material and adverse impact on our business, our operating results and our ability to grow.
Changes in fashion trends may impact our revenue.
Changes in consumer tastes and fashion trends can have an impact on our financial performance. For example, trends in wearing longer hair may reduce the number of visits to, and therefore, sales at our salons.
The health care reform legislation may adversely affect our operating results.
In March 2010, the United States government enacted comprehensive health care reform legislation, which, among other things, includes guaranteed coverage requirements, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded and imposes new and significant taxes on health insurers and health care benefits. The current legislation imposed implementation dates beginning in 2010 and extending through 2020, with many of the reform components requiring additional guidance from government agencies or federal regulators. Due to the lack of interpretative guidance and the phased-in nature of the reform, it is difficult to determine at this time what the impact of the health care reform legislation will be on our future financial results. Possible adverse impacts of the health care reform legislation include, but are not limited to, increased costs, exposure to expanded liability and requirements for us to revise the way we provide health care and other benefits to our employees. As a result, the impact of the health care reform legislation could have a material and adverse impact on our results of operations.
Changes in regulatory and statutory laws may result in increased costs to our business.
With approximately 12,6009,763 locations and 52,00050,000 employees worldwide, our financial results can be adversely impacted by regulatory or statutory changes in laws. Due to the number of people we employ, laws that increase minimum wage rates, employment taxes or increase costs to provide employee benefits may result in additional costs to our company. None of our employees are currently subject to collective bargaining arrangements. If we become subject to one or more collective bargaining agreements in the future, it could adversely impact our labor costs. Compliance with new, complex and changing laws may cause our expenses to increase. In addition, any non-compliance with these laws could result in fines, product recalls and enforcement actions or otherwise restrict our ability to market certain products, which could adversely affect our business, financial condition and results of operations. We are also subject to laws that affect the franchisor-franchisee relationship.
If we are not able to successfully compete in our business segments, our financial results may be affected.
Competition on a market by market basis remains strong as many smaller chain competitors are franchise systems with local operating strength in certain markets. Therefore, our ability to raise prices in certain markets can be adversely impacted by this competition. If we are not able to raise prices, our ability to grow same-store sales and increase our revenue and earnings may be impaired.
If our joint ventures are unsuccessful our financial results may be affected.
We have entered into joint venture arrangements with other companies in the hair salon and beauty school businesses in order to maintain and expand our operations in the United States, Asia and continental Europe. If our joint venture partners are unwilling or unable to devote their financial resources or marketing and operational capabilities to our joint venture businesses, or if any of our joint ventures are terminated, we may not be able to realize anticipated revenues and profits in the countries where our joint ventures operate and our business could be materially adversely affected. If our joint venture arrangements are not successful, we may have a limited ability to terminate or modify these arrangements. If any of our joint ventures are terminated, there can be no assurance that we will be able to attract new joint venture partners to continue the activities of the terminated joint venture or to operate independently in the countries in which the terminated joint venture conducted business.
On April 9, 2012, the Company entered into the Agreement to sell the Company's 46.7 percent equity interest in Provalliance to the Provost family for a purchase price of €80 million. The transaction is expected to close no later than September 30, 2012 and is subject to the Provost family securing financing for the purchase price. The purchase price was negotiated independently of the equity put and the equity put and equity call will automatically terminate upon closing. If the closing does not occur by September 30, 2012, the Provost family will not be entitled to exercise their equity put rights until September 30, 2014.
In connection with executing the Agreement, the Company recorded a $37.4 million other than temporary impairment charge during the twelve months ended June 30, 2012 related to the difference between the purchase price and carrying value of its investment in Provalliance.
During fiscal year 2012, we recorded an impairment of $19.4 million related to our investment in EEG. During fiscal year 2011, we recorded an impairment of $9.2 million related to our investment in MY Style. During fiscal year 2009, we recorded impairments of $25.7 million and $7.8 million ($4.8 million net of tax) related to our investment in Provalliance and investment in and loans to Intelligent Nutrients, LLC, respectively. Due to economic and other factors, we may be required to take additional impairment charges related to our investments and such impairments could be material to our consolidated balance sheet and results of operations. In addition, our joint venture partners may be required to take impairment charges related to long-lived assets and goodwill, and our share of such impairment charges could be material to our consolidated balance sheet and results of operations. Specific to EEG, the for-profit post secondary educational market has experienced further and substantial declines in late July and August of 2012. Should this continue or not reverse, an additional impairment would be more likely than not during fiscal year 2013. For example, during fiscal year 2012 we recorded $8.7 million for our share of an intangible asset impairment recorded by EEG. Our share of our investment's goodwill balances as of June 30, 2012 is approximately $95 million. Upon completion of the sale of Provalliance our share of our investment's goodwill balances will decrease to approximately $16 million.
We are subject to default risk on our accounts and notes receivable.
We have outstanding accounts and notes receivable subject to collectability. If the counterparties are unable to repay the amounts due or if payment becomes unlikely our results of operations would be adversely affected. For example, in fiscal year 2011 the Company recorded a $31.2 million valuation reserve on the note receivable from the purchaser of Trade Secret to reflect the net realizable value.
Changes in manufacturers' choice of distribution channels may negatively affect our revenues.
The retail products that we sell are licensed to be carried exclusively by professional salons. The products we purchase for sale in our salons are purchased pursuant to purchase orders, as opposed to long-term contracts and generally can be terminated by the producer without much advance notice.
Should the various product manufacturers decide to utilize other distribution channels, such as large discount retailers, it could negatively impact the revenue earned from product sales.
Changes to interest rates and foreign currency exchange rates may impact our results from operations.
Changes in interest rates will have an impact on our expected results from operations. Currently, we manage the risk related to fluctuations in interest rates through the use of fixed rate debt instruments and other financial instruments.
We rely heavily on our management information systems. If our systems fail to perform adequately or if we experience an interruption in their operation, our results of operations may be affected.
The efficient operation of our business is dependent on our management information systems. We rely heavily on our management information systems to collect daily sales information and guest demographics, generate payroll information, monitor salon performance, manage salon staffing and payroll costs, inventory control and other functions. The failure of our management information systems to perform as we anticipate, or to meet the continuously evolving needs of our business, could disrupt our business and may adversely affect our operating results.
In fiscal year 2012 the Company began the process of implementing a new point-of-sale systemIf we are not able to successfully compete in our business markets, our financial results may be affected.
Competition on a market by market basis remains strong as many smaller chain competitors are franchise systems with local operating strength in certain markets. Therefore, our ability to raise prices in certain markets can be adversely impacted by this competition. If we are not able to raise or maintain prices, our ability to grow same-store sales and increase our revenue and earnings may be impaired.
Changes in the general economic environment may impact our business and results of operations.
Changes to the United States, Canadian and United Kingdom economies have an impact on our business. General economic factors that are beyond our control, such as interest rates, exchange rates, recession, inflation, deflation, tax rates and policy, energy costs, unemployment trends, and other matters that influence consumer confidence and spending, may impact our business. In particular, visitation patterns to our salons can be adversely impacted by increases in unemployment rates and will continue to implement as technology will allow. decreases in discretionary income levels.
Failure to effectively implement the point-of-sale systemcontrol costs may adversely affect our operating results.
If we fail to protect the security of personal information about our guests, we could be subject to costly government enforcement actions or private litigation and our reputation could suffer.
The natureWe must continue to control our expense structure. Failure to manage our cost of our business involves processing, transmissionproduct, labor and storage of personal information about our guests. If we experience a data security breach, webenefit rates, advertising and marketing expenses, operating lease costs, other store expenses or indirect spending could be exposed to government enforcement actions and private litigation. In addition, our guests could lose confidence in our ability to protect their personal information, which could cause them to stop visiting our salons altogether. Such events could lead to lost future sales anddelay or prevent us from achieving increased profitability or otherwise adversely affect our results of operations.operating results.
Certain of the terms and provisions of the convertible notes we issued in July 2009 may adversely affect our financial condition and operating results and impose other risks.
In July 2009, we issued $172.5 million aggregate principal amount of our 5.0 percent convertible senior notes due 2014 in a public offering. Certain terms of the notes we issued may adversely affect our financial condition and operating results or impose other risks, such as the following:
Failure to optimize our brand portfolio could have a negative impact on our financial results.
To be successful in the notes may delay or prevent a takeover attemptfuture, we must focus on optimizing our brands to increase their value and growth. Optimization of the Company that might otherwise be beneficial to our investors,
could adversely impact our ability to obtain additional financing, require us to dedicategrow revenue and realize further efficiencies within our results of operations.
Changes in our key relationships may adversely affect our operating results.
We maintain key relationships with certain companies, including Walmart. Termination or modification of any of these relationships could significantly reduce our revenues and have a substantial portion ofmaterial and adverse impact on our cash flow from operations to paybusiness, our debt, limitoperating results and our ability to adjust rapidlygrow.
Changes in manufacturers' choice of distribution channels may negatively affect our revenues.
The retail products we sell are licensed to changing market conditions and increase our vulnerability to downtowns in general economic conditionsbe carried exclusively by professional salons. The products we purchase for sale in our salons are purchased pursuant to purchase orders, as opposed to long-term contracts and generally can be terminated by the producer without much advance notice. Should our product manufacturers decide to utilize other distribution channels, such as large discount retailers, it could negatively impact the revenue earned from product sales.
If our joint ventures are unsuccessful our financial results may be affected.
We have entered into joint venture arrangements with other companies in the hair salon and beauty school businesses. If our joint venture partners are unwilling or unable to devote their financial resources or marketing and operational capabilities to our joint venture businesses, or if any of our joint ventures are terminated, we may not be able to realize anticipated profits in the countries where our joint ventures operate and our business could be materially adversely affected. If our joint venture arrangements are not successful, we may have a limited ability to terminate or modify these arrangements. If any of our joint ventures are terminated, there can be no assurance that we will be able to attract new joint venture partners to continue the activities of the terminated joint venture or to operate independently in the countries in which the terminated joint venture conducted business.
During fiscal years 2013 and 2012, we recorded noncash impairments of $17.9 and $19.4 million related to our investment in EEG. Due to economic, regulatory and other factors, we may be required to take additional noncash impairment charges related to our investments and such noncash impairments could be material to our consolidated balance sheet and results of operations. In addition, our joint venture partners may be required to take noncash impairment charges related to long-lived assets and goodwill, and our share of such noncash impairment charges could be material to our consolidated balance sheet and results of operations. Our share of EEG's goodwill balances as of June 30, 2013 is approximately $16 million.
Changes to interest rates and foreign currency exchange rates may impact our results from operations.
Changes in interest rates and foreign currency exchange rates will have an impact on our expected results from operations. Historically, we have managed the risk related to fluctuations in these rates through the use of fixed rate debt instruments and other financial instruments.
Changes in fashion trends may impact our revenue.
Changes in consumer tastes and fashion trends can have an impact on our financial performance.
If we fail to protect the security of personal information about our guests, we could be subject to costly government enforcement actions or private litigation and our reputation could suffer.
The nature of our business involves processing, transmission and storage of personal information about our guests. If we experience a data security breach, we could be exposed to government enforcement actions and private litigation. In addition, our guests could lose confidence in our ability
to protect their personal information, which could cause them to stop visiting our salons altogether. Such events could lead to lost future sales and adversely affect our results of operations.
Item 1B. Unresolved Staff Comments
None.
The Company's corporate offices are headquartered in a 270,000 square foot, four building complex in Edina, Minnesota owned or leased by the Company.
The Company also operates small offices in New York, New York; Toronto, Canada; Coventry and London, England; Boca Raton, Florida; and Chattanooga, Tennessee. These offices are occupied under long-term leases.
The Company owns distribution centers located in Chattanooga, Tennessee and Salt Lake City, Utah. The Chattanooga facility currently utilizes 230,000 square feet while the Salt Lake City facility utilizes 210,000 square feet. The Salt Lake City facility maycan be expanded to 290,000 square feet to accommodate future growth.
The Company operates all of its salon locations and hair restoration centers under leases or license agreements. Substantially all of its North American locations in regional malls are operating under leases with an original term of at least ten years. Salons operating within strip centers and Walmart Supercenters have leases with original terms of at least five years, generally with the ability to renew, at the Company's option, for one or more additional five year periods. Salons operating within department stores in Canada and Europe operate under license agreements, while freestanding or shopping center locations in those countries have real property leases comparable to the Company's domesticNorth American locations.
The Company also leases the premises in which certainapproximately 80 percent of our franchisees operate and has entered into corresponding sublease arrangements with the franchisees. These leases have a five year initial term and one or more five year renewal options. All lease costs are passed through to the franchisees. Remaining franchisees who do not enter into sublease arrangements with the Company negotiate and enter into leases on their own behalf.
None of the Company's salon leases are individually material to the operations of the Company, and the Company expects that it will be able to renew its leases on satisfactory terms as they expire. See Note 108 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. In addition, the Company is a nominal defendant, and nine current and former directors and officers of the Company are named defendants, in a shareholder derivative action in Minnesota state court. The derivative shareholder action alleges that the individual defendants breached their fiduciary duties to the Company in connection with their approval of certain executive compensation arrangements and certain related party transactions. AThe Board of Directors appointed a Special Litigation Committee to investigate the claims and allegations made in the derivative action, and to decide on behalf of the Company whether the claims and allegations should be pursued. The derivative action has been formed perstayed by the directioncourt pending the decision of the judge inSpecial Litigation Committee. We do not know when the matter. The Company is working with outside counsel to formulateSpecial Litigation Committee will complete its next steps in keeping with the court.work, or what it will decide. Litigation is inherently unpredictable and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.
During fiscal year 2012, the Company was awarded $1.1 million in conjunction with a class-action lawsuit.
During fiscal year 2011, the Company settled a legal claim with the former owner of Hair Club for $1.7 million.
During fiscal year 2010, the Company settled two legal claims regarding certain guest and employee matters for an aggregate charge of $5.2 million plus a commitment to provide discount coupons. During the twelve months ended June 30, 2011 and 2010, payments aggregating $4.3 million and $0.9 million, respectively, were made.
Item 4. Mine Safety Disclosures
None.Not applicable.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchase of Equity Securities
Regis common stock is listed and traded on the New York Stock Exchange under the symbol "RGS."
The accompanying table sets forth the high and low closing bid quotations for each quarter during fiscal years 20122013 and 20112012 as reported by the New York Stock Exchange (under the symbol "RGS"). The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
As of August 13, 2012,9, 2013, Regis shares were owned by approximately 22,00019,000 shareholders based on the number of record holders and an estimate of individual participants in security position listings. The common stock price was $17.14$17.76 per share on August 13, 2012.9, 2013.
Fiscal Years | ||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2013 | 2012 | ||||||||||||||||||||||
Fiscal Quarter | High | Low | High | Low | High | Low | High | Low | ||||||||||||||||||
1st Quarter | $ | 15.90 | $ | 12.46 | $ | 19.53 | $ | 12.84 | $ | 19.54 | $ | 16.26 | $ | 15.90 | $ | 12.46 | ||||||||||
2nd Quarter | 17.36 | 13.79 | 21.69 | 15.58 | 19.59 | 15.79 | 17.36 | 13.79 | ||||||||||||||||||
3rd Quarter | 18.65 | 15.02 | 18.47 | 16.25 | 18.69 | 16.34 | 18.65 | 15.02 | ||||||||||||||||||
4th Quarter | 18.91 | 17.04 | 19.20 | 13.83 | 19.14 | 16.04 | 18.91 | 17.04 |
The Company paid quarterly dividends of $0.06 per share during fiscal year 20122013 and during each of the three month periods ended March 31, 2011 and June 30, 2011. The Company paid quarterly dividends of $0.04 per share during each of the three month periods ended September 30, 2010 and December 31, 2010.2012. The Company expects to continue paying regular quarterly dividends in the foreseeable future.
Notwithstanding anything to the contrary set forth in any of our previous filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 that might incorporate future filings or this Annual Report, the following performance graph and accompanying data shall not be deemed to be incorporated by reference into any such filings. In addition, they shall not be deemed to be "soliciting material" or "filed" with the SEC.
The following graph compares the cumulative total shareholder return on the Company's stock for the last five years with the cumulative total return of the Standard and Poor's 500 Stock Index and the
cumulative total return of a peer group index (the Peer Group) constructed by the Company. In addition, the Company has included the Standard and Poor's 400 Midcap Index and the Dow Jones Consumer Services Index in this analysis because the Company believes these two indices provide a comparative correlation to the cumulative total return of an investment in shares of Regis Corporation.
The Peer Group consists of the following companies: Advance Auto Parts, Inc., Boyd Gaming Corp., Brinker International, Inc., Outerwall, Inc. (formerly Coinstar, Inc.), Cracker Barrel Old Country Store, DineEquity, Inc., Fossil Group, Inc., Fred's, Inc., Green Mountain Coffee Roasters, H&R Block, Inc., Jack in the Box, Inc., Panera Bread Co., Penn National Gaming, Inc., Revlon, Inc., Sally Beauty Holdings, Inc., Service Corporation International, The Cheesecake Factory, Inc., and Ulta Salon, Inc. The Peer Group is a self-constructed peer group of companies that have comparable annual revenues, the guest service element is a critical component to the business, and a target of moderate guests in terms of income and style, excluding apparel companies.
The comparison assumes the initial investment of $100 in the Company's Common Stock, the S&P 500 Index, the Peer Group, the S&P 400 Midcap Index and the Dow Jones Consumer Services Index on June 30, 20072008, and thosethat dividends, if any, were reinvested.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
June 20122013
June 30, | ||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||||||||||||
Regis | $ | 100.00 | $ | 69.27 | $ | 46.26 | $ | 41.77 | $ | 41.59 | $ | 49.48 | $ | 100.00 | $ | 66.78 | $ | 60.31 | $ | 60.04 | $ | 71.43 | $ | 66.19 | ||||||||||||||
S & P 500 | 100.00 | 86.88 | 64.10 | 73.35 | 95.87 | 101.07 | 100.00 | 73.78 | 84.43 | 110.34 | 116.33 | 140.29 | ||||||||||||||||||||||||||
S & P 400 Midcap | 100.00 | 92.66 | 66.70 | 83.32 | 116.14 | 113.42 | 100.00 | 71.98 | 89.92 | 125.33 | 122.40 | 153.23 | ||||||||||||||||||||||||||
Dow Jones Consumer Service Index | 100.00 | 78.98 | 65.19 | 80.13 | 110.33 | 125.00 | 100.00 | 82.53 | 101.45 | 139.69 | 158.27 | 203.28 | ||||||||||||||||||||||||||
Peer Group | 100.00 | 74.45 | 69.66 | 81.55 | 146.95 | 131.79 | 100.00 | 93.56 | 109.53 | 197.37 | 177.00 | 257.49 |
In May 2000, the Company's Board of Directors (BOD) approved a stock repurchase program. Originally, the program authorized up to $50.0 million to be expended for the repurchase of the Company's stock. The BOD elected to increase this maximum to $100.0 million in August 2003, to $200.0 million on May 3, 2005, and to $300.0 million on April 26, 2007. The timing and amounts of any repurchases will depend on many factors, including the market price of the common stock and overall
market conditions. Historically, the repurchases to date have been made primarily to eliminate the dilutive effect of shares issued in conjunction with acquisitions, restricted stock grants and stock option exercises. All repurchased shares become authorized but unissued shares of the Company. This repurchase program has no stated expiration date. As of June 30, 2012, 2011, and 2010,2013, a total accumulated 6.87.7 million shares have been repurchased for $226.5$241.3 million. As of June 30, 2012, $73.52013, $58.7 million remains to be spent on share repurchasesoutstanding under thisthe approved stock repurchase program.
The Company did not repurchase any of its common stock through its share repurchase program during the twelvethree months ended June 30, 2013. The Company repurchased 909,175 shares of common stock at an average price of $16.32 per share, ranging from $15.99 to $16.84 per share, through its share repurchase program during fiscal year 2013 for a total of $14.9 million. The Company did not repurchase any of its common stock through its share repurchase program during fiscal years 2012 and 2011.
CEO and CFO CertificationsTable of Contents
The certifications by our chief executive officer (CEO) and chief financial officer required under Section 302 of the Sarbanes-Oxley Act of 2002, have been filed as exhibits to this Annual Report on Form 10-K. Our CEO's annual certification pursuant to NYSE Corporate Governance Standards Section 303A.12(a) that our CEO was not aware of any violation by the Company of the NYSE's Corporate Governance listing standards was submitted to the NYSE on November 23, 2011.
Item 6. Selected Financial Data
Beginning with the period ended December 31, 2008, the operations of the Trade Secret concept within the North American reportable segment were accounted for as discontinued operations. Beginning with the period ended September 30, 2012 the Hair Restoration Centers operations were accounted for as discontinued operations. All periods presented will reflect Trade Secret and Hair Restoration Centers as a discontinued operation. The following discussion of results of operations will reflect results from continuing operations. Discontinued operations will be discussed at the end of this section.
The following table sets forth in thousands (except per share data), for the periods indicated, selected financial data derived from the Company's Consolidated Financial Statements in Part II, Item 8. The table should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Item 8, "Financial Statements and Supplementary Data", of this Report on Form 10-K.
| 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Revenues(a) | $ | 2,273,779 | $ | 2,325,869 | $ | 2,358,434 | $ | 2,429,787 | $ | 2,481,391 | ||||||
Operating (loss) income(b) | (67,313 | ) | 3,948 | 97,218 | 109,073 | 173,340 | ||||||||||
(Loss) income from continuing operations(c) | (115,192 | ) | (8,905 | ) | 39,579 | 6,970 | 83,901 | |||||||||
(Loss) income from continuing operations per diluted share(c) | (2.02 | ) | (0.16 | ) | 0.71 | 0.16 | 1.92 | |||||||||
Total assets | 1,571,846 | 1,805,753 | 1,919,572 | 1,892,486 | 2,235,871 | |||||||||||
Long-term debt and capital lease obligations, including current portion | 287,674 | 313,411 | 440,029 | 634,307 | 764,747 | |||||||||||
Dividends declared | $ | 0.24 | $ | 0.20 | $ | 0.16 | $ | 0.16 | $ | 0.16 |
| Fiscal Years | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||
| (Dollars in thousands, except per share data) | |||||||||||||||
Revenues | $ | 2,018,713 | $ | 2,122,227 | $ | 2,180,181 | $ | 2,216,648 | $ | 2,289,267 | ||||||
Operating income (loss)(a) | 12,326 | (2,167 | ) | (14,282 | ) | 76,881 | 85,202 | |||||||||
Income (loss) from continuing operations(a) | 4,166 | (51,743 | ) | (20,939 | ) | 25,728 | (6,819 | ) | ||||||||
Income (loss) from continuing operations per diluted share | 0.07 | (0.91 | ) | (0.37 | ) | 0.46 | (0.16 | ) | ||||||||
Dividends declared, per share | 0.24 | 0.24 | 0.20 | 0.16 | 0.16 |
| June 30, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||
| (Dollars in thousands) | |||||||||||||||
Total assets, including discontinued operations | $ | 1,390,492 | $ | 1,571,846 | $ | 1,805,753 | $ | 1,919,572 | $ | 1,892,486 | ||||||
Long-term debt and capital lease obligations, including current portion | 174,770 | 287,674 | 313,411 | 440,029 | 634,307 |
Empire Education Group and $36.6 million of other than temporary impairment charges associated with the Company's investments in affiliated companies.
Company's Regis salon concept, was recorded in$18.0 million for make-whole and other fees associated with the repayment of private placement debt and $5.2 million of expense related to the settlement of two legal claims regarding certain guest and employee matters.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in five sections:
MANAGEMENT'S OVERVIEWBUSINESS DESCRIPTION
Regis Corporation (RGS) owns, or franchises and operates beauty salons and hair restoration centers.salons. As of June 30, 2012, we2013, the Company owned, franchised or held ownership interests in approximately 12,600 worldwide locations. Our9,763 locations consistedworldwide. The Company's locations consist of 9,738 system wide North American9,517 company-owned and internationalfranchised salons 98 hair restoration centers, and 2,811246 locations in which we maintain a non-controlling ownership interest of less than 100 percent. OurEach of the Company's salon concepts generally offer generally similar salon products and services and serve the mass market consumers. Our salonmarket. See discussion within Part I, Item 1.
RESULTS OF OPERATIONS
The following discussion of results of operations reflects results from continuing operations and reclassifications of fiscal years 2012 and 2011 cost of service, site operating expenses and general and administrative expenses to conform to current year presentation, see further discussion within Note 1 to the Consolidated Financial Statements. Hair Club has been accounted for as a discontinued operation for all periods presented, see discussion within Note 2 to the Consolidated Financial Statements. All periods reflect the reclassification of Hair Club's results from continuing operations. Explanations are primarily for North American salons, unless otherwise noted. Discontinued operations are organizeddiscussed at the end of this section.
Consolidated Results of Operations
The following table sets forth, for the periods indicated, certain information derived from our Consolidated Statement of Operations in Item 8. The percentages are computed as a percent of total revenues, except as otherwise indicated.
| Fiscal Years | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||
| (Dollars in millions) | % of Total Revenues | Basis Point (Decrease) Increase | |||||||||||||||||||||||||
Service revenues | $ | 1,563.9 | $ | 1,643.9 | $ | 1,695.4 | 77.5 | % | 77.5 | % | 77.8 | % | — | (30 | ) | 30 | ||||||||||||
Product revenues | 415.7 | 440.0 | 447.5 | 20.6 | 20.7 | 20.5 | (10 | ) | 20 | (30 | ) | |||||||||||||||||
Franchise royalties and fees | 39.1 | 38.3 | 37.3 | 1.9 | 1.8 | 1.7 | 10 | 10 | — | |||||||||||||||||||
Cost of service(1) | 930.7 | 941.7 | 972.9 | 59.5 | 57.3 | 57.4 | 220 | (10 | ) | 50 | ||||||||||||||||||
Cost of product(2) | 228.6 | 221.6 | 225.2 | 55.0 | 50.4 | 50.3 | 460 | 10 | (220 | ) | ||||||||||||||||||
Site operating expenses | 203.9 | 207.0 | 211.2 | 10.1 | 9.8 | 9.7 | 30 | 10 | 30 | |||||||||||||||||||
General and administrative | 226.7 | 249.6 | 285.8 | 11.2 | 11.8 | 13.1 | (60 | ) | (130 | ) | 210 | |||||||||||||||||
Rent | 324.7 | 331.8 | 333.1 | 16.1 | 15.6 | 15.3 | 50 | 30 | 20 | |||||||||||||||||||
Depreciation and amortization | 91.8 | 105.0 | 92.2 | 4.5 | 4.9 | 4.2 | (40 | ) | 70 | (20 | ) | |||||||||||||||||
Goodwill impairment | — | 67.7 | 74.1 | — | 3.2 | 3.4 | (320 | ) | (20 | ) | 180 | |||||||||||||||||
Interest expense | 37.6 | 28.2 | 34.4 | 1.9 | 1.3 | 1.6 | 60 | (30 | ) | (90 | ) | |||||||||||||||||
Interest income and other, net | 35.4 | 5.1 | 4.7 | 1.8 | 0.2 | 0.2 | 160 | — | (30 | ) | ||||||||||||||||||
Income taxes(3) | 10.0 | 4.4 | 16.3 | 99.3 | 17.5 | 37.2 | N/A | N/A | N/A | |||||||||||||||||||
Equity in (loss) income of affiliated companies, net of income taxes | (16.0 | ) | (30.9 | ) | 6.7 | (0.8 | ) | (1.5 | ) | 0.3 | 70 | (180 | ) | (20 | ) | |||||||||||||
Income (loss) from discontinued operations, net of taxes | 25.0 | (62.4 | ) | 12.0 | 1.2 | (2.9 | ) | 0.6 | 410 | (350 | ) | (20 | ) |
Consolidated Revenues
Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees, and franchise royalties and fees. As compared to the prior fiscal year, consolidated revenues decreased 4.9% during fiscal year 2013 and decreased 2.7% during fiscal year
2012. The following tables summarize revenues and same-store sales by concept, as well as the reasons for the percentage change:
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
| (Dollars in thousands) | |||||||||
North American salons: | ||||||||||
SmartStyle | $ | 509,537 | $ | 514,050 | $ | 531,090 | ||||
Supercuts | 343,464 | 343,764 | 321,881 | |||||||
MasterCuts | 146,506 | 159,627 | 165,729 | |||||||
Regis | 377,635 | 414,752 | 434,249 | |||||||
Promenade | 512,259 | 548,912 | 576,995 | |||||||
Total North American Salons | 1,889,401 | 1,981,105 | 2,029,944 | |||||||
International salons | 129,312 | 141,122 | 150,237 | |||||||
Consolidated revenues | $ | 2,018,713 | $ | 2,122,227 | $ | 2,180,181 | ||||
Percent change from prior year | (4.9 | )% | (2.7 | )% | (1.6 | )% | ||||
Salon same-store sales decrease(1) | (2.4 | )% | (3.5 | )% | (1.9 | )% |
Decreases of 4.9%, 2.7% and 1.6% in consolidated revenues during fiscal years 2013, 2012, and 2011, respectively, were driven by the following:
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Factor | 2013 | 2012 | 2011 | |||||||
Same-store sales | (2.4 | )% | (3.5 | )% | (1.9 | )% | ||||
Closed salons | (3.3 | ) | (2.3 | ) | (1.6 | ) | ||||
New stores and conversions | 1.3 | 1.3 | 0.6 | |||||||
Acquisitions | — | 0.7 | 1.1 | |||||||
Other | (0.5 | ) | 1.1 | 0.2 | ||||||
(4.9 | ) | (2.7 | )% | (1.6 | )% | |||||
Same-store sales by concept by fiscal year are detailed in the table below:
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
SmartStyle | (1.1 | )% | (4.3 | )% | (1.9 | )% | ||||
Supercuts | (0.7 | ) | (0.3 | ) | 0.1 | |||||
MasterCuts | (5.1 | ) | (3.3 | ) | (0.7 | ) | ||||
Regis | (3.1 | ) | (4.2 | ) | (2.5 | ) | ||||
Promenade | (2.8 | ) | (2.7 | ) | (2.6 | ) | ||||
Total North American Salons | (2.3 | ) | (3.2 | ) | (1.8 | ) | ||||
International salons | (4.3 | ) | (9.1 | ) | (3.1 | ) | ||||
Consolidated same-store sales | (2.4 | )% | (3.5 | )% | (1.9 | )% | ||||
The same-store sales decrease of 2.4% during fiscal year 2013 was due to a 3.0% decrease in guest visits, partially offset by a 0.6% increase in average ticket. We closed 492 and 384 salons (including 69 and 51 franchise salons) during fiscal years 2013 and 2012, respectively. The Company constructed (net of relocations) 153 company-owned salons during fiscal year 2013. We did not acquire any company-owned salons during fiscal year 2013 compared to 13 company-owned salons (including 11 franchise buybacks) during fiscal year 2012.
The same-store sales decrease of 3.5% during fiscal year 2012 was due to a 3.4% decrease in guest visits and 0.1% decrease in average ticket. We acquired 13 company-owned salons (including 11 franchise buybacks) during fiscal year 2012 compared to 105 company-owned salons (including 78 franchise buybacks) during fiscal year 2011. The Company constructed (net of relocations) 166 company-owned salons during fiscal year 2012. We closed 384 and 305 salons (including 51 and 60 franchise salons) during fiscal years 2012 and 2011, respectively.
The same-store sales decrease of 1.9% during fiscal year 2011 was due to a 3.8% decrease in guest visits partially offset by a 1.9% increase in average ticket. We acquired 105 company-owned salons (including 78 franchise buybacks) during fiscal year 2011 compared to 26 company-owned salons (including 23 franchise buybacks) during fiscal year 2010. The Company constructed (net of relocations) 115 company-owned salons during fiscal year 2011. We closed 305 and 269 salons (including 60 and 65 franchise salons) during fiscal years 2011 and 2010, respectively.
Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees. Fluctuations in these three major revenue categories, operating expenses and other income and expense were as follows:
Service Revenues
The $80.0 million decrease in service revenues during fiscal year 2013 was due to the closure of 423 company-owned salons, same-store service sales decreasing 2.0% and the comparable prior period including 2,016 franchisean additional day from leap year. The decrease in same-store services sales was primarily a result of a 2.3% decrease in same-store guest visits, offset by a 0.3% increase in average ticket. Partially offsetting the decrease was growth due to newly constructed salons operatingduring fiscal year 2013.
The $51.5 million decrease in service revenues during fiscal year 2012 was due the closure of 333 company-owned salons and same-store service sales decreasing 3.7%. The decrease in same-store services sales was primarily a result of a 3.1% decrease in same-store guest visits and a 0.6% decrease in average ticket due to promotional programs designed to generate additional guest visits. Partially offsetting the decrease was growth due to new and acquired salons during fiscal year 2012 and the additional day from leap year.
The $22.4 million decrease in service revenues during fiscal year 2011 was due to same-store service sales decreasing 2.4%, as a result of a decline in same-store guest visits. Partially offsetting the decrease was growth due to new and acquired salons during fiscal year 2011, price increases, sales mix as the company increased hair color and waxing services, and the weakening of the United States Canadadollar against the Canadian dollar.
Product Revenues
The $24.3 million decrease in product revenues during fiscal year 2013 was primarily due to same-store product sales decreasing 3.9%, the closure of 423 company-owned salons and Puerto Ricothe comparable prior period including an additional day from leap year, partially offset by an increase in product sales to franchisees as a result of an increase in franchise locations.
The $7.4 million decrease in product revenues during fiscal year 2012 was primarily underdue to same-store product sales decreasing 2.7%, and the trade namesclosure of Regis Salons, MasterCuts, SmartStyle, Supercuts333 company-owned salons, partially offset by the additional day from leap year and Cost Cutters. Our international salon operations include 398an increase in product sales to franchisees as a result of an increase in franchise locations.
The $14.2 million decrease in product revenues during fiscal year 2011 was primarily due to the decrease in product sales to the purchaser of Trade Secret from $20.0 million in fiscal year 2010 to zero in fiscal year 2011. Partially offsetting the decrease was same-store product sales increasing 0.2 percent, product sales from new and acquired salons, located in Europe, primarily inand the weakening of the United Kingdom. Hair Club for MenStates dollar against the Canadian dollar during fiscal year 2011.
Royalties and Women includes 98 North AmericanFees
Total franchised locations including 29open at June 30, 2013 and 2012 were 2,082 and 2,016, respectively. The $0.8 million increase in royalties and fees was due to the increase in franchised locations during fiscal year 2013 and same-store sales increases at franchise locations.
Total franchised locations open at June 30, 2012 and 2011 were 2,016 and 1,936, respectively. During fiscal year 2012, we had approximately 52,000 corporate employees worldwide.purchased a 60.0 percent ownership interest in a franchise network, consisting of 31 franchised locations. The $1.0 million increase in royalties and fees was also due to same-store sales increases at franchise locations, partially offset by the Company purchasing 11 of our franchised salons during fiscal year 2012.
OurTotal franchised locations open at June 30, 2011 and 2010 were 1,936 and 2,020, respectively. The 84 salon decrease in franchised locations was offset by the impact of the weakening of the United States dollar against the Canadian dollar.
Cost of Service
The 220 basis point increase in cost of service as a percent of service revenues during fiscal year 2013 growthwas primarily due to increased labor costs in our North American salons, a result of the Company's strategy isto increase stylist hours in order to reduce guest wait times and improve the overall guest experience, and the negative leverage this created with same-store service sales declines. The Company made slight improvement during the year in optimizing salon schedules to align with guest traffic. Also contributing to the basis point increase was the Company's decision earlier in the year to compensate stylists on the gross sales amount during certain coupon events and an increase in health insurance expense due to higher claims.
The 10 basis point decrease in cost of service as a percent of service revenues during fiscal year 2012 was due to lower commissions as a result of leveraged pay plans for new stylists and a decrease in salon health insurance costs due to lower claims, partially offset by decreased productivity in our North American segment.
The 50 basis point increase in cost of service as a percent of service revenues during fiscal year 2011 was due to an increase in salon health insurance costs due to several unusually large claims and an increase in payroll taxes as a result of states increasing unemployment taxes.
Cost of Product
The 460 basis point increase in cost of product as a percent of product revenues was mainly attributed to our inventory simplification program, which standardizes retail plan-o-grams, eliminates retail products and consolidates from four to one private label brand. Historically, the Company has been able to recover its cost on discontinued retail inventory through in-store promotional discounts, and during the fourth quarter of fiscal 2013, the Company clearanced approximately $8 million of product. However, given the change in the Company's strategic direction to standardize plan-o-grams, the scope and size of this simplification program and the negative impact continued clearance sales would have on future product sales and cost of product as a percent of product revenues, the Company immediately liquidated any remaining inventory into non Regis distribution channels within the parameters of existing supply agreements. This resulted in a noncash inventory charge of $12.6 million in the fourth quarter. While negatively impacting cost of product as a percent of product revenues, clearance sales and liquidation of inventories generated higher cash returns than past practices of repackaging and returning products to distribution centers for restocking, disposal or return to vendors. Further impacting cost of product as a percent of product sales were Hurricane Sandy product donations, partially offset by reductions to commissions paid on retail sales.
The 10 basis point increase in cost of product as a percentage of product revenues during fiscal year 2012 was primarily due to increases in freight costs due to higher fuel prices partially offset by a reduction in commissions paid to new employees on retail product sales in our North American segment.
The 220 basis point decrease in cost of product as a percentage of product revenues during fiscal year 2011 was primarily due to previous fiscal year including $20.0 million of product sold at cost to the purchaser of Trade Secret. Partially offsetting the basis point decrease was an increase in sales of appliances that have a higher cost as a percent of revenues in our International segment.
Site Operating Expenses
The 30 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2013 was primarily due to negative leverage from the decrease in same-store sales. Site operating expenses declined $3.1 million primarily within our North American segment due to a decrease in advertising costs, utilities and janitorial expense, partially offset by increases in salon connectivity costs to support the Company's new POS system and salon workstations and higher salon repairs and maintenance expense.
The 10 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage from the decrease in same-store sales.
The 30 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2011 was primarily due to an increase in advertising expense within the Company's Promenade concept and an increase in self-insurance accruals, partially offset by a reduction in legal claims expense.
General and Administrative
General and administrative (G&A) declined $22.9 million, or 60 basis points as a percentage of consolidated revenues, during fiscal year 2013. This improvement was primarily due to reductions in salaries and benefits from our corporate reorganization executed last year, certain cost savings
initiatives in the current year and reduced levels of incentive pay in the current year, partly offset by costs associated with rolling out our new POS system. The Company remains focused on improvingsimplification to drive further costs efficiencies.
The 130 basis point improvement in G&A costs as a percentage of consolidated revenues during fiscal year 2012 was the guest experience. We planresult of lapping a $31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret in fiscal year 2011. Also contributing to executethe improvement during fiscal year 2012 was a reduction in salaries and other employee benefits as a result of the reduction in salon support workforce that occurred in January 2012. Partially offsetting these improvements were incremental costs associated with the Company's senior management restructuring, severance charges, and professional fees incurred in connection with the contested proxy and the exploration of alternatives for non-core assets.
The 210 basis point increase in G&A costs as a percentage of consolidated revenues during fiscal year 2011 was primarily due to the $31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret, incremental costs associated with the Company's senior management restructure, expenditures associated with the Regis salon concept re-imaging project, professional fees incurred related to the exploration of strategic alternatives and information technology projects, legal claims and negative leverage on fixed costs within this category due to negative same-store sales.
Rent
Rent expense decreased by $7.1 million during fiscal year 2013 due to salon closures, primarily within our strategyNorth American segment. The 50 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2013 was primarily due to negative leverage associated with this fixed cost category.
The 30 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partially offset by putting guestsfavorable common area maintenance adjustments from landlords and stylists first, leveragingsalon closures.
The 20 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2011 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partially offset by a favorable reduction to our common area maintenance expenses.
Depreciation and Amortization
The 40 basis point decrease in depreciation and amortization (D&A) as a percent of consolidated revenues during fiscal year 2013 was primarily due to our lapping $16.2 million of accelerated amortization associated with the poweradjustment to the useful life of ourthe Company's previously internally developed POS system. Partially offsetting the 40 basis point improvement was $1.9 million of accelerated depreciation expense in the current year associated with a leased building in conjunction with consolidating the Company's headquarters and negative leverage from the decrease in same-store sales.
The 70 basis point increase in D&A as a percent of consolidated revenues during fiscal year 2012 was primarily due to $16.2 million ($10.2 million net of tax or $0.18 per diluted share) of accelerated amortization expense in the current year resulting from the useful life adjustment of the Company's internally developed POS system and negative leverage from the decrease in same-store sales. Partially offsetting the basis point increase was the continuation of a decrease in depreciation expense from the reduction in salon brands, focusing on technology and connectivity, and reviewing our non-core assets. Initiatives include:construction beginning in fiscal year 2009 as compared to historical levels prior to fiscal year 2009.
Putting guests and stylists firstTable of Contents
The 20 basis point decrease in D&A as a percent of consolidated revenues during fiscal year 2011 was primarily due to a decrease in depreciation expense from a reduction in salon construction beginning in fiscal year 2009 as compared to historical levels prior to fiscal year 2009. The basis point decrease was partially offset by improving bothnegative leverage from the experiencedecrease in same-store sales.
Goodwill Impairment
The Company did not record a goodwill impairment charge in 2013.
The Company recorded a goodwill impairment charge of $67.7 million related to the Regis salon concept during fiscal year 2012. Due to the continuation of decreased same-store sales, the estimated fair value of the Regis salon operations was less than the carrying value of this concept's net assets, including goodwill. The $67.7 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the personRegis salon concept.
The Company recorded a $74.1 million goodwill impairment charge related to the Promenade salon concept during fiscal year 2011. Due to lower than expected earnings and same-store sales, the estimated fair value of the Promenade salon operations was less than the carrying value of this concept's net assets, including goodwill. The $74.1 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Promenade salon concept.
Interest Expense
Interest expense increased by $9.3 million during fiscal year 2013 primarily due to a $10.6 million make-whole payment associated with the prepayment of private placement debt in June 2013, partially offset by decreased debt levels as compared to fiscal year 2012.
The 30 basis point improvement in interest as a percent of consolidated revenues during fiscal year 2012 was primarily due to decreased debt levels as compared to fiscal year 2011.
The 90 basis point improvement in interest as a percent of consolidated revenues during fiscal year 2011 was primarily due to a reduction in interest expense due to fiscal year 2010 including $18.0 million of make-whole payments and other fees associated with the repayment of private placement debt, and decreased debt levels during fiscal year 2011.
Interest Income and Other, net
The 160 basis point increase in interest income and other, net as a percent of consolidated revenues during fiscal year 2013 was primarily due to the recognition of a $33.8 million foreign currency translation gain in connection with the sale of Provalliance, partially offset by fiscal year 2012 including a favorable legal settlement and the foreign currency impact on the Company's investment in MY Style.
Interest income and other, net as a percent of consolidated revenues during fiscal year 2012, was consistent with the comparable prior period as there was a favorable foreign currency impact related to the Company's investment in MY Style and a favorable legal settlement during fiscal year 2012 that were offset by the prior year comparable period including higher fees received for warehousing services provided to the purchaser of Trade Secret.
The 30 basis point decrease in the chairinterest income and behindother, net as a percent of consolidated revenues during fiscal year 2011 was primarily due to the chair. The Company continues to work on attracting, developingforeign currency impact of the Company's investment in MY Style, $1.9 million received from the purchaser of Trade Secret in the comparable prior period for administrative services, and retaining$1.9 million in interest income recorded in the best stylists through orientation programs, training and development and rewards and recognition through a performance driven culture.
Salon BusinessIncome Taxes
During fiscal year 2013, the Company recognized an income tax benefit of $10.0 million on $10.1 million of income from continuing operations before income taxes and equity in loss of affiliated companies, for an effective tax rate of (99.3)%. The larger than expected effective tax rate benefit was because the $33.8 million foreign currency translation gain recognized at the time of the sale of Provalliance was primarily non-taxable, and the Company benefitted from Work Opportunity Tax Credits.
During fiscal year 2012, the Company recognized an income tax benefit of $4.4 million on $25.3 million of losses from continuing operations before income taxes and equity in loss of affiliated companies, for an effective tax rate of 17.5%. The smaller than expected effective tax rate was primarily because the $67.7 million Regis salon concept impairment charge was partially nondeductible for tax purposes.
During fiscal year 2011, the Company recognized an income tax benefit of $16.3 million on $43.9 million of loss from continuing operations before income taxes and equity in income of affiliated companies, for an effective tax rate of 37.2%. Significant items impacting the effective tax rate were the $74.1 million Promenade salon concept impairment charge which was partially nondeductible for tax purposes and the Company benefited from Work Opportunity Tax Credits.
Equity in (Loss) Income of Affiliated Companies, Net of Income Taxes
The strengthloss in affiliated companies, net of taxes for fiscal year 2013 was primarily due to the Company's $17.9 million other than temporary impairment charge recorded on its investment in EEG, partially offset by the Company's share of EEG's net income and a $0.6 million gain on the Provalliance equity put that automatically terminated as a result of the sale of the Company's investment in Provalliance. See Note 5 to the Consolidated Financial Statements for further discussion of each respective affiliated company.
The loss in affiliated companies, net of taxes for fiscal year 2012 was primarily due to the impairment losses of $17.2 and $19.4 million recorded on our investments in Provalliance and EEG, respectively. In conjunction with entering into a purchase agreement to sell Provalliance, the Company recorded a $37.4 million other than temporary impairment charge on its investment in Provalliance and $20.2 million reduction in the fair value of the Equity Put, resulting in a net impairment charge of $17.2 million. The Company recorded a $19.4 million other than temporary impairment charge for the excess of the carrying value of its investment in EEG over the fair value. The Company also recorded its $8.7 million share of an intangible asset impairment recorded directly by EEG. These impairments recorded during fiscal year 2012 were partially offset by our share of earnings of $9.7 and $4.7 million recorded for our investments in Provalliance and EEG, respectively.
Equity in income of affiliated companies, net of taxes for fiscal year 2011 was due to equity in income of $7.8 and $5.5 million recorded for our investments in Provalliance and EEG, respectively. In addition, the Company recorded a $9.0 million impairment loss related to the Company's investment in MY Style. The impairment charge was based on the decline in equity value of MY Style as a result of changes in projected revenue growth after the natural disasters that occurred in Japan during March 2011. The Company also recorded a $2.4 million net gain related to the settlement of a portion of the Company's equity put liability and additional ownership of the Frank Provost Group in Provalliance.
Income from Discontinued Operations, net of Taxes
During fiscal year 2013, the Company recognized $25.0 million of income, net of taxes from discontinued operations, primarily from an after-tax gain of $17.8 million realized upon the sale of Hair Club and $12.6 million of income from Hair Club operations, net of taxes, partially offset by
$5.4 million of expense, net of taxes associated with professional and transaction fees. See Note 2 to the Consolidated Financial Statements for further discussion on discontinued operations.
During fiscal year 2012, the Company recognized $62.4 million of loss, net of taxes from discontinued operations, primarily from a $61.9 million loss, net of taxes from Hair Club operations, as a result of the $78.4 million goodwill impairment charge, and $1.6 million of expense, net of taxes associated with professional and transaction fees, partially offset by $1.1 million tax benefit related to the release of tax reserves associated with the disposition of our Trade Secret salon business isconcept.
During fiscal year 2011, the Company recognized $12.0 of income, net of taxes, from Hair Club operations.
Recent Developments
First Quarter-to-Date Fiscal 2014 Sales Trends
As of August 25, 2013, first quarter-to-date same store service sales and product sales were down 3.4% and 14.9%, respectively. The Company believes these declines are short-term in nature, and we have seen improvement in August same-store service sales which are down 2.4%, a 180 basis point improvement since July. We expect these trends to further improve as our new field teams transition from reorganizing and hiring activities to focusing on their salons, and as we become more comfortable with and optimize our use of the new POS system. The Company has taken a number of steps to reverse this short-term trend, including providing an incentive for stylists to gain traction on our first quarter promotion and accelerating by two weeks the delivery of items within our new product assortment so that salon shelves could be reset sooner. Since salon resets were just completed several weeks ago, product sales trends have yet to show improvement.
Field Reorganization—Financial Statement Expense Classification
Beginning in the fundamental similarityfirst quarter of fiscal year 2014, the field reorganization, excluding salons within the mass premium category, will result in a change in expense classifications on our Statement of Operations. Previously, field leaders did not work on the salon floor daily. As reorganized, field leaders will spend most of their time on the salon floor leading, mentoring and broad appealserving guests. Accordingly, field leader costs, including their labor and travel costs, will directly arise from the management of salon operations. As a result, district and senior district leader labor costs will be reported within Cost of Service rather than General and Administrative expenses, and their travel costs will be reported within Site Operating expenses rather than General and Administrative expenses. This expense classification will have no financial impact on the Company's reported operating income (loss), reported net income (loss) or cash flows from operations.
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, and our revolving credit facility are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to sustain operations and to finance strategic initiatives. We also anticipate having access to long-term financing. However, in the event our liquidity is insufficient and we are not able to access long-term financing, we may be required to limit or delay our strategic initiatives. There can be no assurance that we will continue to generate cash flows at or above current levels.
As of June 30, 2013, cash and cash equivalents were $200.5 million, with $176.4, $11.7 and $12.4 million in the United States, Canada, and Europe, respectively. As of June 30, 2013, the Company has a $33.3 million income tax receivable of which approximately $11 million is expected to be collected during the first quarter of fiscal year 2014.
We have a $400.0 million five-year senior unsecured revolving credit facility with a syndicate of banks that expires in June 2018. As of June 30, 2013, the Company had no outstanding borrowings under the facility, and had outstanding standby letters of credit under the facility of $2.2 million, primarily related to its self-insurance program. Accordingly, unused available credit under the facility at June 30, 2013 was $397.8 million. The credit under this facility could be used to fund the convertible senior term notes should the Company choose to settle these notes in cash. Refer to additional discussion under financing arrangements.
Our ability to access our revolving credit facility is subject to our compliance with the terms and conditions of such facility, including a maximum leverage ratio, a minimum fixed charge ratio and other covenants and requirements. At June 30, 2013, we were in compliance with all covenants and other requirements of our salon concepts. Each concept generally targetscredit agreement and senior notes.
Cash Flows
Cash Flows from Operating Activities
Fiscal year 2013 cash provided by operating activities of $69.1 million declined by $84.6 million compared to the middle market guest, however, each attracts a different demographic.
We execute our salon growth strategy by focusing on real estate. Our salon real estate strategyprevious fiscal year. Despite higher earnings in the current year, the decrease is attributable to add new unitsdecreases in convenient locations with good visibilityrevenues and guest traffic, as well as appropriate trade demographics. Our various salonincreased cost of service and product concepts operateresulting in a wide rangechanges in working capital. Cash payments of retailing environments, including regional shopping malls, strip centersdeferred compensation and Walmart Supercenters. We believe that the availability of real estate will augment our abilityincome taxes also contributed to achieve the aforementioned long-term growth objectives.declines in cash provided by operating activities.
Organic salon revenue is achieved throughFiscal year 2012 cash provided by operating activities of $153.7 million declined by $75.5 million compared to the combinationprevious fiscal year, $51.8 million of this decrease related to the timing of accruals and a reduction in the amount received for income taxes, as fiscal year 2011 included a tax refund related to the fiscal year 2009 loss on discontinued operations. Cash provided by operating activities was also lower due to a decrease of $6.0 million in dividends received from affiliated companies.
Fiscal year 2011 cash provided by operating activities of $229.2 million increased by $37.0 million mainly due to an increase of $7.6 million in dividends received from affiliated companies and a $23.9 million reduction in income tax receivables.
Cash Flows from Investing Activities
Cash provided by investing activities during fiscal year 2013 of $165.1 million was greater than the $90.9 million use of cash in fiscal year 2012. In fiscal year 2013, we received $266.2 million from the sales of Hair Club and Provalliance and $26.4 million from EEG related to principal payments on the outstanding note receivable and revolving line of credit. These were partially offset by the Company placing $24.5 million into restricted cash to collateralize its self-insurance program, enabling the Company to reduce fees associated with previously utilized standby letters of credit, and increased capital expenditures primarily related to the Company's POS system implementation.
Cash used by investing activities of $90.9 million during fiscal year 2012 was less than fiscal year 2011 of $144.3 million due to the comparable prior period including the acquisition of approximately 17 percent additional equity interest in Provalliance for $57.3 million, a decrease in the amount of cash paid for acquisitions during fiscal year 2012, partially offset by an increase in capital expenditures during fiscal year 2012 for a POS system and new salon construction and salon same-store sales results. Older, unprofitable salons will be closed or relocated. Although we have generally been experiencing negative same-store sales we believe our strategyconstruction.
Table of focusing on the in-salon guest experience will improve same-store sales.Contents
Historically, our salon acquisitions have varied in size from as small as one salon to over one thousand salons. The median acquisition size is approximately ten salons. FromCash used by investing activities of $144.3 million during fiscal year 19942011 was greater compared to fiscal year 2012, we acquired 8,052 salons, net2010 of franchise buybacks.$44.6 million due to the acquisition of approximately 17 percent additional equity interest in Provalliance for $57.3 million, a disbursement of $15.0 million on the revolving credit facility with EEG and planned increases in acquisitions and capital expenditures.
Hair Restoration BusinessCash Flows from Financing Activities
In December 2004,During fiscal years 2013, 2012 and 2011, the primary use of cash within financing activities was for repayments of long-term debt of $118.2, $29.7 and $137.7 million, respectively and dividends of $13.7, $13.9 and $11.5 million, respectively. During fiscal year 2013 the Company used $14.9 million to repurchase common stock under its share repurchase program and prepaid $89.3 million in private placement debt.
Financing Arrangements
Financing activities are discussed in Note 7 to the Consolidated Financial Statements in Part II, Item 8. Derivative activities are discussed in Note 1 to the Consolidated Financial Statements in Part II, Item 8 and Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."
Management believes that cash generated from operations and amounts available under existing debt facilities will be sufficient to fund its anticipated capital expenditures and required debt repayments for the foreseeable future. As of June 30, 2013, we acquired Hair Club for Men and Women. Hair Club for Men and Women is a provider of hair loss solutions with an estimated five percent sharehave $397.8 million available under our existing revolving credit facility.
The Company's financing arrangements consists of the $4 billion domestic market. This industry is comprisedfollowing:
| | Interest rate % | | | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Fiscal Years | June 30, | ||||||||||
| Maturity Dates | 2013 | 2012 | 2013 | 2012 | ||||||||
| (fiscal year) | | | (Dollars in thousands) | |||||||||
Senior term notes | 2013 | 6.69 - 8.50% | 6.69 - 8.50% | $ | — | $ | 111,429 | ||||||
Convertible senior notes(1) | 2015 | 5.00 | 5.00 | 166,454 | 161,134 | ||||||||
Revolving credit facility | 2018 | — | — | — | — | ||||||||
Equipment and leasehold notes payable | 2015 - 2016 | 4.90 - 8.75 | 4.90 - 8.75 | 8,316 | 14,780 | ||||||||
Other notes payable | 2013 | 5.75 - 8.00 | 5.75 - 8.00 | — | 331 | ||||||||
174,770 | 287,674 | ||||||||||||
Less current portion(1) | (173,515 | ) | (28,937 | ) | |||||||||
Long-term portion | $ | 1,255 | $ | 258,737 | |||||||||
During the fiscal year ended June 30, 2012, the Company began reviewing alternatives for non-core assets. On July 13, 2012,has included the convertible senior notes within long-term debt, current portion on the Consolidated Balance Sheet.
In June 2013, the Company entered into a definitive agreement to sellSixth Amended and Restated Credit Agreement (Credit Agreement), which amended and restated in its Hair Club for Menentirety, the Company's existing Fifth Amended and Women business (Hair Club), a provider of hair restoration services. The transaction is expected to closeRestated Credit Agreement that was entered into during the first half of fiscal year 2011. The Credit Agreement provides for a $400.0 million unsecured five-year revolving credit facility that expires in June 2018 and includes, among other things, a maximum leverage ratio covenant, a minimum fixed charge coverage ratio covenant, and certain restrictions on liens, liquidity and other indebtedness. The Company may request an increase in revolving credit commitments under the facility of up to $200.0 million under
certain circumstances. Events of default under the Credit Agreement include a change of control of the Company. We were in compliance with all covenants and other requirements of our credit agreement and senior notes as of June 30, 2013.
During June 2013, the Company prepaid $89.3 million of unsecured, fixed rate, senior term notes outstanding under a private shelf agreement.
Beginning in April 2014, the holders of our convertible senior term notes may convert their notes at their option. The Company has the choice of net-cash settlement, settlement in its own shares or a combination of both. As of June 30, 2013, the notes are convertible at a conversion rate of 65.4357 shares of the Company's common stock per $1,000 principal amount of notes, representing a conversion price of approximately $15.28 per share of the Company's common stock.
Our debt to capitalization ratio, calculated as total debt as a percentage of total debt and shareholders' equity at fiscal year-end, was as follows:
As of June 30, | Debt to Capitalization | Basis Point (Decrease) Increase(1) | |||||
---|---|---|---|---|---|---|---|
2013 | 16.9 | % | (750 | ) | |||
2012 | 24.4 | 110 | |||||
2011 | 23.3 | (700 | ) |
The basis point improvement in the debt to capitalization ratio as of June 30, 2013 compared to June 30, 2012 was primarily due to the prepayment of $89.3 million in private placement debt.
The basis point increase in the debt to capitalization ratio as of June 30, 2012 compared to June 30, 2011 was primarily due to the decrease in shareholders' equity as a result of the non-cash goodwill impairment charges related to the Regis salon concept and Hair Restoration Centers reporting unit and a $36.6 million net impairment charge associated with our investments in Provalliance and EEG. Partially offsetting the impact of the decrease in shareholders' equity was a decrease in debt levels.
The basis point improvement in the debt to capitalization ratio as of June 30, 2011 compared to June 30, 2010 was primarily due to the repayment of an $85.0 million term loan during fiscal year 2011 and foreign currency translation adjustments due to the weakening of the United States dollar against the Canadian dollar and British Pound.
Contractual Obligations and Commercial Commitments
The following table reflects a summary of obligations and commitments outstanding by payment date as of June 30, 2013:
| Payments due by period | | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations | Within 1 years | 1 - 3 years | 3 - 5 years | More than 5 years | Total | |||||||||||
| (Dollars in thousands) | |||||||||||||||
On-balance sheet: | ||||||||||||||||
Debt obligations | $ | 166,454 | $ | — | $ | — | $ | — | $ | 166,454 | ||||||
Capital lease obligations | 7,061 | 1,255 | — | — | 8,316 | |||||||||||
Other long-term liabilities | 4,651 | 4,958 | 3,266 | 7,870 | 20,745 | |||||||||||
Total on-balance sheet | 178,166 | 6,213 | 3,266 | 7,870 | 195,515 | |||||||||||
Off-balance sheet(a): | ||||||||||||||||
Operating lease obligations | 297,328 | 412,332 | 181,277 | 65,992 | 956,929 | |||||||||||
Interest on long-term debt and capital lease obligations | 9,035 | 422 | — | — | 9,457 | |||||||||||
Total off-balance sheet | 306,363 | 412,754 | 181,277 | 65,992 | 966,386 | |||||||||||
Total | $ | 484,529 | $ | 418,967 | $ | 184,543 | $ | 73,862 | $ | 1,161,901 | ||||||
On-Balance Sheet Obligations
Our long-term obligations are composed primarily of convertible debt. There were no outstanding borrowings under our revolving credit facility at June 30, 2013. Interest payments on long-term debt and capital lease obligations are estimated based on each debt obligation's agreed upon rate as of June 30, 2013 and scheduled contractual repayments.
Other long-term liabilities of $20.8 million include $14.5 million related to the Executive Profit Sharing Plan and a salary deferral program $6.3 million (including $0.1 million in interest) related to established contractual payment obligations under retirement and severance payment agreements for a small number of retired employees.
This table excludes short-term liabilities, other than the current portion of long-term debt, disclosed on our balance sheet as the amounts recorded for these items will be paid in the next year. We have no unconditional purchase obligations. Also excluded from the contractual obligations table are payment estimates associated with employee health and workers' compensation claims for which we are self-insured. The majority of our recorded liability for self-insured employee health and workers' compensation losses represents estimated reserves for incurred claims that have yet to be filed or settled.
The Company has unfunded deferred compensation contracts covering certain management and executive personnel. The deferred compensation contracts are offered to key executives based on their performance within the Company. Because we cannot predict the timing or amount of our future payments related to these contracts, such amounts were not included in the table above. Related obligations totaled $3.5 and $9.5 million and are included in accrued liabilities and other noncurrent liabilities, respectively, in the Consolidated Balance Sheet at June 30, 2013. Refer to Note 10 to the Consolidated Financial Statements for additional information.
As of June 30, 2013, we have liabilities for uncertain tax positions. We are not able to reasonably estimate the amount by which the liabilities will increase or decrease over time; however, at this time, we do not expect a significant payment related to these obligations within the next fiscal year. See Note 9 to the Consolidated Financial Statements for more information on our uncertain tax positions.
Off-Balance Sheet Arrangements
Operating leases primarily represent long-term obligations for the rental of salons, including leases for company-owned locations, as well as future salon franchisee lease payments of approximately $160.2 million, which are reimbursed to the Company by franchisees, and the guarantee of operating leases of salons operated by the purchaser of Trade Secret with future minimum lease payments of less than $3.0 million. Regarding franchisee subleases, we generally retain the right to the related salon assets, net of any outstanding obligations, in the event of a default by a franchise owner. Management has not experienced and does not expect any material loss to result from these arrangements.
We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business. These contracts primarily relate to our commercial contracts, operating leases and other real estate contracts, financial agreements, agreements to provide services, and agreements to indemnify officers, directors and employees in the performance of their work. While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that we expect to result in a material liability.
We do not have other unconditional purchase obligations or significant other commercial commitments such as commitments under lines of credit and standby repurchase obligations or other commercial commitments.
We continue to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations.
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes at June 30, 2013. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Dividends
We paid dividends of $0.24 per share during fiscal years 2013 and 2012 and $0.20 per share during fiscal year 2011. On August 20, 2013, the Board of Directors of the Company declared a $0.06 per share quarterly dividend payable September 17, 2013 to shareholders of record on September 3, 2013.
Share Repurchase Program
In May 2000, the Company's Board of Directors (BOD) approved a stock repurchase program. Originally, the program authorized up to $50.0 million to be expended for the repurchase of the Company's stock. The BOD elected to increase this maximum to $100.0 million in August 2003, to $200.0 million on May 3, 2005, and to $300.0 million on April 26, 2007. The timing and amounts of any repurchases will depend on many factors, including the market price of the common stock and overall market conditions. Historically, the repurchases to date have been made primarily to eliminate the dilutive effect of shares issued in conjunction with acquisitions, restricted stock grants and stock option exercises. All repurchased shares become authorized but unissued shares of the Company. This repurchase program has no stated expiration date. The Company repurchased 909,175 shares of common stock through its share repurchase program during fiscal year 2013 for $14.9 million. The Company did not repurchase any shares during fiscal year 2012 or 2011. As of June 30, 2013 a total accumulated 7.7 million shares have been repurchased for $241.3 million. As of June 30, 2013, $58.7 million remains outstanding under the approved stock repurchase program.
CRITICAL ACCOUNTING POLICIESRESULTS OF OPERATIONS
The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United Statesfollowing discussion of America. In preparing the Consolidated Financial Statements, we are requiredresults of operations reflects results from continuing operations and reclassifications of fiscal years 2012 and 2011 cost of service, site operating expenses and general and administrative expenses to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believedconform to be reasonable under the circumstances. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Changes in these estimates could have a material effect on our Consolidated Financial Statements.
Our significant accounting policies can be found incurrent year presentation, see further discussion within Note 1 to the Consolidated Financial Statements contained in Part II, Item 8 of this Form 10-K. We believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.
Investment In and Loans to Affiliates
The CompanyStatements. Hair Club has equity investments in securities of certain privately held entities. The Company accounts for these investments under the equity method of accounting. The Company also has loan receivables from certain of these entities. Investmentsbeen accounted for under the equity method are recorded at the amount of the Company's investment and adjusted each period for the Company's share of the investee's income or loss. Investments are reviewed for changes in circumstance or the occurrence of events that suggest the Company's investment may not be recoverable. During fiscal year 2012, we recorded an impairment of $19.4 million related to our investment in EEG. In addition, during fiscal year 2012 we recorded a net $17.2 million other than temporary net impairment charge associated with the Share Purchase Agreement to sell the Company's 46.7 percent equity interest in Provalliance to the Provost Family for a purchase price of €80 million. During fiscal year 2011, we recorded an impairment of $9.2 million related to our investment in MY Style.
Note Receivables, Net
The note receivable balances within the Company's Consolidated Balance Sheet primarily include note receivables related to the Company's investments in EEG and MY Style, a note receivable with the purchaser of Trade Secret and note receivables with our franchisees. The balances are presented net of a valuation reserve for estimated losses. The Company monitors the financial condition of its counterparties with an outstanding note receivable and records provisions for estimated losses on receivables when it believes the counterparties are unable to make their required payments. The valuation reserve is the Company's best estimate of the amount of probable credit losses related to existing notes receivable.
During the third quarter of fiscal year 2011, the Company did not receive a scheduled interest payment related to the outstanding note receivable with the purchaser of Trade Secret, the fair value of the collateral decreased to a level below the carrying value of the outstanding note receivable, and the purchaser of Trade Secret provided the Company with a new five year business plan that was well below their original projections. Due to these factors that occurred during the third quarter of fiscal year 2011, the Company evaluated the note receivable for impairment based on a probability weighted expected future cash flow analysis. During the third quarter of fiscal year 2011, the Company recorded a $9.0 million valuation reserve for the excess of the carrying value of the note receivable over the present value of expected future cash flows.
During the fourth quarter of fiscal year 2011, the Company did not receive a scheduled interest payment related to the outstanding note receivable with the purchaser of Trade Secret and the fair value of the collateral continued to decrease and was at a level significantly below the carrying value of the outstanding note receivable. In addition, the Company received updated financial projections that were below the projections received during the third quarter of fiscal year 2011. Due to these negative financial events in the fourth quarter of fiscal year 2011, the Company performed an extensive evaluation on the Company's option to realize the collateral under the note receivable and recorded an additional $22.2 million valuation reserve that fully reserved the carrying value of the note receivable as of June 30, 2011. The carrying value of the note receivable continues to be fully reserved at June 30, 2012.
Goodwill
Goodwill is tested for impairment annually or at the time of a triggering event. In evaluating whether goodwill is impaired, the Company compares the carrying value of each reporting unit, including goodwill, to the estimated fair value of the reporting unit. The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit,
including allocation of shared or corporate balances among reporting units. Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons.
The Company calculates the estimated fair value of the reporting units based on discounted future cash flows that utilize estimates in annual revenue, gross margins, fixed expense rates, allocated corporate overhead, and long-term growth ratesdiscontinued operation for determining terminal value. The Company's estimated future cash flows also take into consideration acquisition integration and maturation. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company considers its various concepts to be reporting units when testing for goodwill impairment because that is where the goodwill resides. The Company periodically engages third-party valuation consultants to assist in evaluation of the Company's estimated fair value calculations.
In the situations where a reporting unit's carrying value exceeds its estimated fair value, the amount of the impairment loss must be measured. The measurement of impairment is calculated by determining the implied fair value of a reporting unit's goodwill. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all other assets and liabilities of that unit based on the relative fair values under the assumption of a taxable transaction. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities is the implied fair value of goodwill. The goodwill impairment is measured as the excess of the carrying value of goodwill over its implied fair value.
As previously disclosed, the Company concluded that it was reasonably likely that goodwill for the Regis and Hair Restoration Centers reporting units might become impaired in future periods.
As a result of the Company's annual impairment testing of goodwill during the fourth quarter of fiscal year 2012, a $67.7 million impairment charge was recorded within continuing operations for the excess of the carrying value of goodwill over the implied fair value of the goodwill for the Regis salon concept. The Regis salon concept reported same-store sales of negative 4.0 percent for the ten months ended April 30, 2012, which was unfavorable compared to the Company's budgeted same-store sales. Visitation patterns did not rebound as quickly as the Company originally projected. Accordingly, the Company reduced the budgeted financial projections for future years. After the impairment charge the Regis salon concept reporting unit had $35.1 million of goodwill. The impairment was only partially deductible for tax purposes resulting in a tax benefit of $12.5 million.
During the three months ended December 31, 2011 the Company updated the projections for the Hair Restoration Centers reporting unit used in the fiscal 2011 annual impairment test to reflect the impact of recent industry developments, including a slow down in revenue growth and increasing supply costs. The Company determined there was a triggering event as it was more likely than not that the fair value of the Hair Restoration Centers was below carrying value and performed an interim impairment test of goodwill during the three months ended December 31, 2011.
As a result of the Company's interim impairment test of goodwill related to the Hair Restoration Centers reporting unit during the second quarter of fiscal year 2012, a $78.4 million impairment charge was recorded within continuing operations for the excess of the carrying value of goodwill over the implied fair value of the goodwill for the Hair Restorations Centers reporting unit. After the impairment charge the Hair Restoration Centers reporting unit had $74.4 million of goodwill. The impairment was only partially deductible for tax purposes resulting in a tax benefit of $5.9 million. See furtherperiods presented, see discussion on the effective tax rate for the twelve months ended June 30, 2012 within Note 122 to the Consolidated Financial Statements. All periods reflect the reclassification of Hair Club's results from continuing operations. Explanations are primarily for North American salons, unless otherwise noted. Discontinued operations are discussed at the end of this section.
A summaryConsolidated Results of the critical assumptions utilized during the fiscal year 2012 annual impairment test of the Regis salon concept are outlined below:
Annual revenue growth. OperationsAnnual revenue growth is primarily driven by assumed same-store sales rates of approximately negative 2.0 to positive 3.0 percent. Other considerations include anticipated economic conditions and moderate acquisition growth.
Gross margin. Adjusted The following table sets forth, for anticipated salon closures, new salon construction and acquisitions estimated future gross margins were held constant.
Fixed expense rates. Fixed expense rate increasesthe periods indicated, certain information derived from our Consolidated Statement of approximately 1.0 to 2.0 percent based on anticipated inflation. Fixed expenses consisted of rent, site operating, and allocated general and administrative corporate overhead.
Allocated corporate overhead. Corporate overhead incurred by the home office based on the number of Regis salonsOperations in Item 8. The percentages are computed as a percent of total company-owned salons.
Long-term growth. A long-term growth rate of 2.5 percent was applied to terminal cash flow based on anticipated economic conditions.
Discount rate. A discount rate of 11.0 percent based on the weighted average cost of capital that equals the rate of return on debt capital and equity capital weighted in proportion to the capital structure common to the industry.
The following table summarizes the approximate impact that a change in certain critical assumptions would have on the estimated fair value of our Regis salon concept reporting unit (the approximate impact of the change in the critical assumptions assumes all other assumptions and factors remain constant):revenues, except as otherwise indicated.
| Fiscal Years | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||
| (Dollars in millions) | % of Total Revenues | Basis Point (Decrease) Increase | |||||||||||||||||||||||||
Service revenues | $ | 1,563.9 | $ | 1,643.9 | $ | 1,695.4 | 77.5 | % | 77.5 | % | 77.8 | % | — | (30 | ) | 30 | ||||||||||||
Product revenues | 415.7 | 440.0 | 447.5 | 20.6 | 20.7 | 20.5 | (10 | ) | 20 | (30 | ) | |||||||||||||||||
Franchise royalties and fees | 39.1 | 38.3 | 37.3 | 1.9 | 1.8 | 1.7 | 10 | 10 | — | |||||||||||||||||||
Cost of service(1) | 930.7 | 941.7 | 972.9 | 59.5 | 57.3 | 57.4 | 220 | (10 | ) | 50 | ||||||||||||||||||
Cost of product(2) | 228.6 | 221.6 | 225.2 | 55.0 | 50.4 | 50.3 | 460 | 10 | (220 | ) | ||||||||||||||||||
Site operating expenses | 203.9 | 207.0 | 211.2 | 10.1 | 9.8 | 9.7 | 30 | 10 | 30 | |||||||||||||||||||
General and administrative | 226.7 | 249.6 | 285.8 | 11.2 | 11.8 | 13.1 | (60 | ) | (130 | ) | 210 | |||||||||||||||||
Rent | 324.7 | 331.8 | 333.1 | 16.1 | 15.6 | 15.3 | 50 | 30 | 20 | |||||||||||||||||||
Depreciation and amortization | 91.8 | 105.0 | 92.2 | 4.5 | 4.9 | 4.2 | (40 | ) | 70 | (20 | ) | |||||||||||||||||
Goodwill impairment | — | 67.7 | 74.1 | — | 3.2 | 3.4 | (320 | ) | (20 | ) | 180 | |||||||||||||||||
Interest expense | 37.6 | 28.2 | 34.4 | 1.9 | 1.3 | 1.6 | 60 | (30 | ) | (90 | ) | |||||||||||||||||
Interest income and other, net | 35.4 | 5.1 | 4.7 | 1.8 | 0.2 | 0.2 | 160 | — | (30 | ) | ||||||||||||||||||
Income taxes(3) | 10.0 | 4.4 | 16.3 | 99.3 | 17.5 | 37.2 | N/A | N/A | N/A | |||||||||||||||||||
Equity in (loss) income of affiliated companies, net of income taxes | (16.0 | ) | (30.9 | ) | 6.7 | (0.8 | ) | (1.5 | ) | 0.3 | 70 | (180 | ) | (20 | ) | |||||||||||||
Income (loss) from discontinued operations, net of taxes | 25.0 | (62.4 | ) | 12.0 | 1.2 | (2.9 | ) | 0.6 | 410 | (350 | ) | (20 | ) |
Critical Assumptions | Increase (Decrease) | Approximate Decrease in Fair Value | |||||
---|---|---|---|---|---|---|---|
| | (In thousands) | |||||
Discount Rate | 1.0 | % | $ | 7,000 | |||
Same-Store Sales | (1.0 | ) | 500 |
As of our fiscal year 2012 annual impairment test, the estimated fair value of the Hair Restoration Centers reporting unit exceeded its respective carrying value by approximately 18.0 percent. As previously disclosed, the Company has agreed to sell the Hair Restoration Centers reporting unit in the first half of fiscal year 2013; however, until this reporting unit is sold it is reasonably likely that there could be impairment of the Hair Restoration Centers reporting unit's goodwill in future periods. The sensitivity of the Company's critical assumptions in estimating fair value of this reporting unit, the Company has provided additional information related to this reporting unit.
A summary of the critical assumptions utilized during the fiscal year 2012 interim impairment test of the Hair Restoration Centers reporting unit are outlined below:
Annual revenue growth. Annual revenue growth is primarily driven by assumed same-store sales rates of approximately positive 1.0 to positive 3.0 percent. Other considerations include anticipated economic conditions and moderate acquisition growth.
Gross margin. Adjusted for anticipated center closures, new center construction and acquisitions. In addition, estimated future gross margins were adjusted for increasing supply costs.
Fixed expense rates. Fixed expense rate increases of approximately 1.0 to 2.0 percent based on anticipated inflation. Fixed expenses consisted of rent, site operating, and allocated general and administrative corporate overhead.
Allocated corporate overhead. Corporate overhead incurred by the home office is not allocated as the Hair Restoration Centers reporting unit incurs its own overhead.
Long-term growth. A long-term growth rate of 2.5 percent was applied to terminal cash flow based on anticipated economic conditions.
Discount rate. A discount rate of 12.0 percent based on the weighted average cost of capital that equals the rate of return on debt capital and equity capital weighted in proportion to the capital structure common to the industry.
Structure. A nontaxable structure based on the highest economic value and feasibility of the assumed structure.
The following table summarizes the approximate impact that a change in certain critical assumptions would have on the estimated fair value of our Hair Restoration Centers reporting unit goodwill balance (the approximate impact of the change in the critical assumptions assumes all other assumptions and factors remain constant):
Critical Assumptions | Increase (Decrease) | Approximate Decrease in Fair Value | |||||
---|---|---|---|---|---|---|---|
| | (In thousands) | |||||
Discount Rate | 1.0 | % | $ | 12,000 | |||
Same-Store Sales | (1.0 | ) | 3,000 |
As of our fiscal year 2012 annual impairment test, the estimated fair value of the Promenade salon concept exceeded its respective carrying value by approximately 14.0 percent. As it is reasonably likely that there could be impairment of the Promenade salon concept's goodwill in future periods along with the sensitivity of the Company's critical assumptions in estimating fair value of this reporting unit, the Company has provided additional information related to this reporting unit.
A summary of the critical assumptions utilized during the fiscal year 2012 annual impairment test of the Promenade salon concept are outlined below:
Annual revenue growth. Annual revenue growth is primarily driven by assumed same-store sales rates of approximately negative 2.0 to positive 6.0 percent. Other considerations include anticipated economic conditions and moderate acquisition growth.
Gross margin. Adjusted for anticipated salon closures, new salon construction and acquisitions estimated future gross margins were held constant.
Fixed expense rates. Fixed expense rate increases of approximately 1.0 to 2.0 percent based on anticipated inflation. Fixed expenses consisted of rent, site operating, and allocated general and administrative corporate overhead.
Allocated corporate overhead. Corporate overhead incurred by the home office based on the number of Promenade company-owned salonstotal company-owned salons.
Long-term growth. A long-term growth rate of 3.0 percent was applied to terminal cash flow based on anticipated economic conditions.
Discount rate. A discount rate of 11.0 percent based on the weighted average cost of capital that equals the rate of return on debt capitalservice revenues and equity capital weighted in proportion to the capital structure common to the industry.
The following table summarizes the approximate impact that a change in certain critical assumptions would have on the estimated fair value of our Promenade salon concept goodwill balance (the approximate impact of the change in the critical assumptions assumes all other assumptions and factors remain constant):
Critical Assumptions | Increase (Decrease) | Approximate Decrease in Fair Value | |||||
---|---|---|---|---|---|---|---|
| | (In thousands) | |||||
Discount Rate | 1.0 | % | $ | 29,000 | |||
Same-Store Sales | (1.0 | ) | 2,000 |
The respective fair values of the Company's remaining reporting units exceeded fair value by greater than 20.0 percent at June 30, 2012. While the Company has determined the estimated fair values of Promenade to be appropriate based on the historical level of revenue growth, operating income and cash flows, it is reasonably likely that Promenade may experience additional impairment in future periods. As previously disclosed, the Company has agreed to sell the Hair Restoration Centers reporting unit in the first half of fiscal year 2013; however, until this reporting unit is sold it is reasonably likely there could be impairment of the Hair Restoration Centers reporting unit's goodwill in future periods. The term "reasonably likely" refers to an occurrence that is more than remote but less than probable in the judgment of the Company. Because some of the inherent assumptions and estimates used in determining the fair value of the reportable segment are outside the control of management, changes in these underlying assumptions can adversely impact fair value. Potential impairment of a portion or all of the carrying value of goodwill for the Promenade salon concept and Hair Restoration Centers reporting units is dependent on many factors and cannot be predicted with certainty.
As of June 30, 2012, the Company's estimated fair value, as determined by the sum of our reporting units' fair value reconciled to within a reasonable range of our market capitalization which included an assumed control premium.
A summary of the Company's goodwill balance as of June 30, 2012 and 2011 by reporting unit is as follows:
Reporting Unit | As of June 30, 2012 | As of June 30, 2011 | |||||
---|---|---|---|---|---|---|---|
| (Dollars in thousands) | ||||||
Regis | $ | 34,992 | $ | 103,761 | |||
MasterCuts | 4,652 | 4,652 | |||||
SmartStyle | 49,476 | 48,916 | |||||
Supercuts | 129,621 | 129,477 | |||||
Promenade | 243,538 | 240,910 | |||||
Total North America Salons | 462,279 | 527,716 | |||||
Hair Restoration Centers | 74,376 | 152,796 | |||||
Consolidated Goodwill | $ | 536,655 | $ | 680,512 | |||
We impaired $74.1 million of goodwill associated with our Promenade salon concept during fiscal year 2011 and $35.3 million of goodwill associated with our Regis salon concept during fiscal year 2010.
Long-Lived Assets, Excluding Goodwill
We assess the impairment of long-lived assets annually or when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Our impairment analysis on salon property and equipment is performed on a salon by salon basis. The Company's test for impairment is performed at a salon level as this is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the related salon assets that does not recover the carrying value of the salon assets. When the sum of a salon's undiscounted estimated future cash flow is zero or negative, impairment is measured as the full carrying value of the related salon's equipment and leasehold improvements. When the sum of a salon's undiscounted cash flows is greater than zero but less than the carrying value of the related salon's equipment and leasehold improvements, a discounted cash flow analysis is performed to estimate the fair value of the salon assets and impairment is measured as the difference between the carrying value of the salon assets and the estimated fair value. The fair value estimate is based on the best information available, including market data.
Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause us to realize material impairment charges.
During fiscal years 2012, 2011, and 2010, $6.6, $6.7, and $6.4 million, respectively, of impairments were recorded withinexcludes depreciation and amortization in the Consolidated Statement of Operations.
Purchase Price Allocation
The acquisition purchase prices are allocated to assets acquired, including identifiable intangible assets, and liabilities assumed based on their estimated fair values at the dates of acquisition. Fair value is estimated based on the amount for which the asset or liability could be bought or sold in a current transaction between willing parties. For our acquisitions, the majority of the purchase price that is not allocated to identifiable assets, or liabilities assumed, is accounted for as residual goodwill rather than identifiable intangible assets. This stems from the value associated with the walk-in guest base of the acquired salons, the value of which is not recorded as an identifiable intangible asset under current accounting guidance and the limited value of the acquired leased site and guest preference associated with the acquired hair salon brand. Residual goodwill further represents our opportunity to strategically combine the acquired business with our existing structure to serve a greater number of guests through our expansion strategies. Identifiable intangible assets purchased in fiscal year 2012, 2011, and 2010 acquisitions totaled $0.6, $2.0, and $0.1 million, respectively. The residual goodwill generated by fiscal year 2012, 2011, and 2010 acquisitions totaled $5.0, $12.5, and $2.6 million, respectively. See Note 4 to the Consolidated Financial Statements for further information.
Self-Insurance Accruals
The Company uses a combination of third party insurance and self-insurance for a number of risks including workers' compensation, health insurance, employment practice liability and general liability claims. The liability represents the Company's estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date.
The workers' compensation, general liability and employment practice liability analysis includes applying loss development factors to the Company's historical claims data (total paid and incurred amounts per claim) for all policy years where the Company has not reached its aggregate limits to project the future development of incurred claims. The workers' compensation analysis is performed for three models; California, Texas and all other states. A variety of accepted actuarial methodologies are followed to determine these liabilities, including several methods to predict the loss development factors for each policy period. These liabilities are determined by modeling the frequency (number of claims) and severity (cost of claims), fitting statistical distributions to the experience, and then running simulations. A similar analysis is performed for both general liability and employment practices liability; however, it is a single model for all liability claims rather than the three separate models used for workers' compensation.
The health insurance analysis utilizes trailing twelve months of paid and 24 months of incurred medical and prescription claims to project the amount of incurred but not yet reported claims liability amount. The lag factors are developed based on the Company's specific claim data utilizing a completion factor methodology. The developed factor, expressed
Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, self-insurance accruals could be affected if future claims experience differs significantly from the historical trends and actuarial assumptions. For fiscal years 2012 and 2011, the Company recorded increases in expense from changes in estimates related to prior year open policy periods of $0.7 and $1.4 million, respectively. For fiscal year 2010, the Company recorded a decrease in expense from changes in estimates related to prior year open policy periods of $1.7 million. A 10.0 percent change in the self-insurance reserve would affect income (loss) from continuing operations before income taxes and equity in (loss) income of affiliated companies by $4.8, $4.6, and $4.5 million forcompanies. The income tax benefit basis point change is noted as not applicable (N/A) as the three years ended June 30, 2012, 2011 and 2010, respectively. The Company updates loss projections twice each year and adjusts its recorded liabilitydiscussion below is related to reflect the current projections. The updated loss projections consider new claims and developments associated with existing claims for each open policy period. As certain claims can take years to settle, the Company has multiple policy periods open at any point in time.
Income TaxesConsolidated Revenues
In determining income for financial statement purposes, management must make certain estimatesConsolidated revenues primarily include revenues of company-owned salons, product and judgments. These estimatesequipment sales to franchisees, and judgments occur infranchise royalties and fees. As compared to the calculation of certain tax liabilitiesprior fiscal year, consolidated revenues decreased 4.9% during fiscal year 2013 and in the determination of the recoverability of certain deferred tax assets which arise from temporary differences between the tax and financial statement recognition of revenue and expense.
Management must assess the likelihood that deferred tax assets will be recovered. If recovery is not likely, we must increase our provision for taxes by recording a reserve, in the form of a valuation allowance, for the deferred tax assets that will not ultimately be recoverable. Should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which it is determined that the recovery is not likely.
In addition, the calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. Management recognizes a reserve for potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. In the United States,decreased 2.7% during fiscal years 2009year
2012. The following tables summarize revenues and after remainsame-store sales by concept, as well as the reasons for the percentage change:
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
| (Dollars in thousands) | |||||||||
North American salons: | ||||||||||
SmartStyle | $ | 509,537 | $ | 514,050 | $ | 531,090 | ||||
Supercuts | 343,464 | 343,764 | 321,881 | |||||||
MasterCuts | 146,506 | 159,627 | 165,729 | |||||||
Regis | 377,635 | 414,752 | 434,249 | |||||||
Promenade | 512,259 | 548,912 | 576,995 | |||||||
Total North American Salons | 1,889,401 | 1,981,105 | 2,029,944 | |||||||
International salons | 129,312 | 141,122 | 150,237 | |||||||
Consolidated revenues | $ | 2,018,713 | $ | 2,122,227 | $ | 2,180,181 | ||||
Percent change from prior year | (4.9 | )% | (2.7 | )% | (1.6 | )% | ||||
Salon same-store sales decrease(1) | (2.4 | )% | (3.5 | )% | (1.9 | )% |
Decreases of states remaining open for tax audits dating back to fiscal year 2008. However, the Company is under audit4.9%, 2.7% and 1.6% in a number of states in which the statute of limitations has been extended forconsolidated revenues during fiscal years 2006 and forward. Internationally, including Canada, the statute of limitations for tax audits varies by jurisdiction, but generally ranges from three to five years.
As of June 30, 2012 the Company's liability for uncertain tax positions was $4.4 million. See Note 12 to the Consolidated Financial Statements for further information.
Contingencies
We are involved in various lawsuits and claims that arise from time to time in the ordinary course of our business. Accruals are recorded for such contingencies based on our assessment that the occurrence is probable, and where determinable, an estimate of the liability amount. Management considers many factors in making these assessments including past history and the specifics of each case. However, litigation is inherently unpredictable and excessive verdicts do occur, which could have a material impact on our Consolidated Financial Statements.
During fiscal year 2012, the Company was awarded $1.1 million in conjunction with a class-action lawsuit.
During fiscal year 2011, the Company settled a legal claim with the former owner of Hair Club for $1.7 million.
During fiscal year 2010, the Company settled two legal claims regarding certain guest and employee matters for an aggregate charge of $5.2 million plus a commitment to provide discount coupons. During the twelve months ended June 30, 2011, the final payments aggregating $4.3 million were made.
OVERVIEW OF FISCAL YEAR 2012 RESULTS
The following summarizes key aspects of our fiscal year 2012 results:
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Factor | 2013 | 2012 | 2011 | |||||||
Same-store sales | (2.4 | )% | (3.5 | )% | (1.9 | )% | ||||
Closed salons | (3.3 | ) | (2.3 | ) | (1.6 | ) | ||||
New stores and conversions | 1.3 | 1.3 | 0.6 | |||||||
Acquisitions | — | 0.7 | 1.1 | |||||||
Other | (0.5 | ) | 1.1 | 0.2 | ||||||
(4.9 | ) | (2.7 | )% | (1.6 | )% | |||||
Same-store sales by concept by fiscal year are detailed in the table below:
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
SmartStyle | (1.1 | )% | (4.3 | )% | (1.9 | )% | ||||
Supercuts | (0.7 | ) | (0.3 | ) | 0.1 | |||||
MasterCuts | (5.1 | ) | (3.3 | ) | (0.7 | ) | ||||
Regis | (3.1 | ) | (4.2 | ) | (2.5 | ) | ||||
Promenade | (2.8 | ) | (2.7 | ) | (2.6 | ) | ||||
Total North American Salons | (2.3 | ) | (3.2 | ) | (1.8 | ) | ||||
International salons | (4.3 | ) | (9.1 | ) | (3.1 | ) | ||||
Consolidated same-store sales | (2.4 | )% | (3.5 | )% | (1.9 | )% | ||||
The same-store sales decrease of 2.4% during fiscal year 2013 was due to a 3.0% decrease in guest visits, partially offset by a 0.6% increase in average ticket. We closed 492 and 384 salons (including 69 and 51 franchise salons) during fiscal years 2013 and 2012, respectively. The Company recorded incremental depreciationconstructed (net of relocations) 153 company-owned salons during fiscal year 2013. We did not acquire any company-owned salons during fiscal year 2013 compared to 13 company-owned salons (including 11 franchise buybacks) during fiscal year 2012.
The same-store sales decrease of 3.5% during fiscal year 2012 was due to a 3.4% decrease in guest visits and 0.1% decrease in average ticket. We acquired 13 company-owned salons (including 11 franchise buybacks) during fiscal year 2012 compared to 105 company-owned salons (including 78 franchise buybacks) during fiscal year 2011. The Company constructed (net of relocations) 166 company-owned salons during fiscal year 2012. We closed 384 and 305 salons (including 51 and 60 franchise salons) during fiscal years 2012 and 2011, respectively.
The same-store sales decrease of 1.9% during fiscal year 2011 was due to a 3.8% decrease in guest visits partially offset by a 1.9% increase in average ticket. We acquired 105 company-owned salons (including 78 franchise buybacks) during fiscal year 2011 compared to 26 company-owned salons (including 23 franchise buybacks) during fiscal year 2010. The Company constructed (net of relocations) 115 company-owned salons during fiscal year 2011. We closed 305 and 269 salons (including 60 and 65 franchise salons) during fiscal years 2011 and 2010, respectively.
Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees. Fluctuations in these three major revenue categories, operating expenses and other income and expense of $16.2were as follows:
Service Revenues
The $80.0 million ($10.2 million net of tax or $0.18 per diluted share) associated with the adjustmentdecrease in service revenues during fiscal year 2013 was due to the useful lifeclosure of 423 company-owned salons, same-store service sales decreasing 2.0% and the comparable prior period including an additional day from leap year. The decrease in same-store services sales was primarily a result of a 2.3% decrease in same-store guest visits, offset by a 0.3% increase in average ticket. Partially offsetting the decrease was growth due to newly constructed salons during fiscal year 2013.
The $51.5 million decrease in service revenues during fiscal year 2012 was due the closure of 333 company-owned salons and same-store service sales decreasing 3.7%. The decrease in same-store services sales was primarily a result of a 3.1% decrease in same-store guest visits and a 0.6% decrease in average ticket due to promotional programs designed to generate additional guest visits. Partially offsetting the decrease was growth due to new and acquired salons during fiscal year 2012 and the additional day from leap year.
The $22.4 million decrease in service revenues during fiscal year 2011 was due to same-store service sales decreasing 2.4%, as a result of a decline in same-store guest visits. Partially offsetting the decrease was growth due to new and acquired salons during fiscal year 2011, price increases, sales mix as the company increased hair color and waxing services, and the weakening of the Company's POS system.United States dollar against the Canadian dollar.
Product Revenues
The $24.3 million decrease in product revenues during fiscal year 2013 was primarily due to same-store product sales decreasing 3.9%, the closure of 423 company-owned salons and the comparable prior period including an additional day from leap year, partially offset by an increase in product sales to franchisees as a result of an increase in franchise locations.
The $7.4 million decrease in product revenues during fiscal year 2012 was primarily due to same-store product sales decreasing 2.7%, and the closure of 333 company-owned salons, partially offset by the additional day from leap year and an increase in product sales to franchisees as a result of an increase in franchise locations.
The $14.2 million decrease in product revenues during fiscal year 2011 was primarily due to the decrease in product sales to the purchaser of Trade Secret from $20.0 million in fiscal year 2010 to zero in fiscal year 2011. Partially offsetting the decrease was same-store product sales increasing 0.2 percent, product sales from new and acquired salons, and the weakening of the United States dollar against the Canadian dollar during fiscal year 2011.
Royalties and Fees
Total franchised locations open at June 30, 2013 and 2012 were 2,082 and 2,016, respectively. The $0.8 million increase in royalties and fees was due to the increase in franchised locations during fiscal year 2013 and same-store sales increases at franchise locations.
Total franchised locations open at June 30, 2012 and 2011 were 2,016 and 1,936, respectively. During fiscal year 2012, we purchased a 60.0 percent ownership interest in a franchise network, consisting of 31 franchised locations. The $1.0 million increase in royalties and fees was also due to same-store sales increases at franchise locations, partially offset by the Company reducedpurchasing 11 of our franchised salons during fiscal year 2012.
Total franchised locations open at June 30, 2011 and 2010 were 1,936 and 2,020, respectively. The 84 salon decrease in franchised locations was offset by the home office workforce by approximately 120 employees.impact of the weakening of the United States dollar against the Canadian dollar.
Cost of Service
The 220 basis point increase in cost of service as a percent of service revenues during fiscal year 2013 was primarily due to increased labor costs in our North American salons, a result of the Company's strategy to increase stylist hours in order to reduce guest wait times and improve the overall guest experience, and the negative leverage this created with same-store service sales declines. The Company recorded $9.8made slight improvement during the year in optimizing salon schedules to align with guest traffic. Also contributing to the basis point increase was the Company's decision earlier in the year to compensate stylists on the gross sales amount during certain coupon events and an increase in health insurance expense due to higher claims.
The 10 basis point decrease in cost of service as a percent of service revenues during fiscal year 2012 was due to lower commissions as a result of leveraged pay plans for new stylists and a decrease in salon health insurance costs due to lower claims, partially offset by decreased productivity in our North American segment.
The 50 basis point increase in cost of service as a percent of service revenues during fiscal year 2011 was due to an increase in salon health insurance costs due to several unusually large claims and an increase in payroll taxes as a result of states increasing unemployment taxes.
Cost of Product
The 460 basis point increase in cost of product as a percent of product revenues was mainly attributed to our inventory simplification program, which standardizes retail plan-o-grams, eliminates retail products and consolidates from four to one private label brand. Historically, the Company has been able to recover its cost on discontinued retail inventory through in-store promotional discounts, and during the fourth quarter of fiscal 2013, the Company clearanced approximately $8 million of product. However, given the change in the Company's strategic direction to standardize plan-o-grams, the scope and size of this simplification program and the negative impact continued clearance sales would have on future product sales and cost of product as a percent of product revenues, the Company immediately liquidated any remaining inventory into non Regis distribution channels within the parameters of existing supply agreements. This resulted in a noncash inventory charge of $12.6 million in the fourth quarter. While negatively impacting cost of product as a percent of product revenues, clearance sales and liquidation of inventories generated higher cash returns than past practices of repackaging and returning products to distribution centers for restocking, disposal or return to vendors. Further impacting cost of product as a percent of product sales were Hurricane Sandy product donations, partially offset by reductions to commissions paid on retail sales.
The 10 basis point increase in cost of product as a percentage of product revenues during fiscal year 2012 was primarily due to increases in freight costs due to higher fuel prices partially offset by a reduction in commissions paid to new employees on retail product sales in our North American segment.
The 220 basis point decrease in cost of product as a percentage of product revenues during fiscal year 2011 was primarily due to previous fiscal year including $20.0 million of product sold at cost to the purchaser of Trade Secret. Partially offsetting the basis point decrease was an increase in sales of appliances that have a higher cost as a percent of revenues in our International segment.
Site Operating Expenses
The 30 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2013 was primarily due to negative leverage from the decrease in same-store sales. Site operating expenses declined $3.1 million primarily within our North American segment due to a decrease in advertising costs, utilities and janitorial expense, partially offset by increases in salon connectivity costs to support the Company's new POS system and salon workstations and higher salon repairs and maintenance expense.
The 10 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage from the decrease in same-store sales.
The 30 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2011 was primarily due to an increase in advertising expense within the Company's Promenade concept and an increase in self-insurance accruals, partially offset by a reduction in legal claims expense.
General and Administrative
General and administrative (G&A) declined $22.9 million, or 60 basis points as a percentage of consolidated revenues, during fiscal year 2013. This improvement was primarily due to reductions in salaries and benefits from our corporate reorganization executed last year, certain cost savings
initiatives in the current year and reduced levels of incentive pay in the current year, partly offset by costs associated with rolling out our new POS system. The Company remains focused on simplification to drive further costs efficiencies.
The 130 basis point improvement in G&A costs as a percentage of consolidated revenues during fiscal year 2012 was the result of lapping a $31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret in fiscal year 2011. Also contributing to the improvement during fiscal year 2012 was a reduction in salaries and other employee benefits as a result of the reduction in salon support workforce that occurred in January 2012. Partially offsetting these improvements were incremental costs associated with the Company's senior management restructuring, and other severance charges. In addition the Company recorded $2.8 million in other restructuring charges, associated with one-time costs with implementing the Company's new strategy.
The 210 basis point increase in G&A costs as a percentage of consolidated revenues during fiscal year 2011 was primarily due to the $31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret, incremental costs associated with the Company's senior management restructure, expenditures associated with the Regis salon concept re-imaging project, professional fees incurred related to the exploration of strategic alternatives and information technology projects, legal claims and negative leverage on fixed costs within this category due to negative same-store sales.
Rent
Rent expense decreased by $7.1 million during fiscal year 2013 due to salon closures, primarily within our North American segment. The 50 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2013 was primarily due to negative leverage associated with this fixed cost category.
The 30 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partially offset by favorable common area maintenance adjustments from landlords and salon closures.
The 20 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2011 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partially offset by a favorable reduction to our common area maintenance expenses.
Depreciation and Amortization
The 40 basis point decrease in depreciation and amortization (D&A) as a percent of consolidated revenues during fiscal year 2013 was primarily due to our lapping $16.2 million of accelerated amortization associated with the adjustment to the useful life of the Company's previously internally developed POS system. Partially offsetting the 40 basis point improvement was $1.9 million of accelerated depreciation expense in the current year associated with a leased building in conjunction with consolidating the Company's headquarters and negative leverage from the decrease in same-store sales.
The 70 basis point increase in D&A as a percent of consolidated revenues during fiscal year 2012 was primarily due to $16.2 million ($10.2 million net of tax or $0.18 per diluted share) of accelerated amortization expense in the current year resulting from the useful life adjustment of the Company's internally developed POS system and negative leverage from the decrease in same-store sales. Partially offsetting the basis point increase was the continuation of a decrease in depreciation expense from the reduction in salon construction beginning in fiscal year 2009 as compared to historical levels prior to fiscal year 2009.
The 20 basis point decrease in D&A as a percent of consolidated revenues during fiscal year 2011 was primarily due to a decrease in depreciation expense from a reduction in salon construction beginning in fiscal year 2009 as compared to historical levels prior to fiscal year 2009. The basis point decrease was partially offset by negative leverage from the decrease in same-store sales.
Goodwill Impairment
The Company did not record a goodwill impairment charge in 2013.
The Company recorded a $1.1goodwill impairment charge of $67.7 million related to the Regis salon concept during fiscal year 2012. Due to the continuation of decreased same-store sales, the estimated fair value of the Regis salon operations was less than the carrying value of this concept's net assets, including goodwill. The $67.7 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Regis salon concept.
The Company recorded a $74.1 million goodwill impairment charge related to the Promenade salon concept during fiscal year 2011. Due to lower than expected earnings and same-store sales, the estimated fair value of the Promenade salon operations was less than the carrying value of this concept's net assets, including goodwill. The $74.1 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Promenade salon concept.
Interest Expense
Interest expense increased by $9.3 million during fiscal year 2013 primarily due to a $10.6 million make-whole payment associated with the prepayment of private placement debt in June 2013, partially offset by decreased debt levels as compared to fiscal year 2012.
The 30 basis point improvement in interest as a percent of consolidated revenues during fiscal year 2012 was primarily due to decreased debt levels as compared to fiscal year 2011.
The 90 basis point improvement in interest as a percent of consolidated revenues during fiscal year 2011 was primarily due to a reduction in interest expense due to fiscal year 2010 including $18.0 million of make-whole payments and other fees associated with the repayment of private placement debt, and decreased debt levels during fiscal year 2011.
Interest Income and Other, net
The 160 basis point increase in interest income and other, net as a percent of consolidated revenues during fiscal year 2013 was primarily due to the recognition of a $33.8 million foreign currency translation gain in connection with the sale of Provalliance, partially offset by fiscal year 2012 including a favorable legal settlement and the foreign currency impact on the Company's investment in MY Style.
Interest income and other, net as a percent of consolidated revenues during fiscal year 2012, was consistent with the comparable prior period as there was a favorable foreign currency impact related to the Company's investment in MY Style and a favorable legal settlement during fiscal year 2012.2012 that were offset by the prior year comparable period including higher fees received for warehousing services provided to the purchaser of Trade Secret.
The 30 basis point decrease in the interest income and other, net as a percent of consolidated revenues during fiscal year 2011 was primarily due to the foreign currency impact of the Company's investment in MY Style, $1.9 million received from the purchaser of Trade Secret in the comparable prior period for administrative services, and $1.9 million in interest income recorded in the comparable prior period on the outstanding note receivable due from the purchaser of Trade Secret.
Income Taxes
During fiscal year 2013, the Company recognized an income tax benefit of $10.0 million on $10.1 million of income from continuing operations before income taxes and equity in loss of affiliated companies, for an effective tax rate of (99.3)%. The larger than expected effective tax rate benefit was because the $33.8 million foreign currency translation gain recognized at the time of the sale of Provalliance was primarily non-taxable, and the Company benefitted from Work Opportunity Tax Credits.
During fiscal year 2012, the Company recognized an income tax benefit of $4.4 million on $25.3 million of losses from continuing operations before income taxes and equity in loss of affiliated companies, for an effective tax rate of 17.5%. The smaller than expected effective tax rate was primarily because the $67.7 million Regis salon concept impairment charge was partially nondeductible for tax purposes.
During fiscal year 2011, the Company recognized an income tax benefit of $16.3 million on $43.9 million of loss from continuing operations before income taxes and equity in income of affiliated companies, for an effective tax rate of 37.2%. Significant items impacting the effective tax rate were the $74.1 million Promenade salon concept impairment charge which was partially nondeductible for tax purposes and the Company benefited from Work Opportunity Tax Credits.
Equity in (Loss) Income of Affiliated Companies, Net of Income Taxes
The loss in affiliated companies, net of taxes for fiscal year 2013 was primarily due to the Company's $17.9 million other than temporary impairment charge recorded on its investment in EEG, partially offset by the Company's share of EEG's net income and a $0.6 million gain on the Provalliance equity put that automatically terminated as a result of the sale of the Company's investment in Provalliance. See Note 5 to the Consolidated Financial Statements for further discussion of each respective affiliated company.
The loss in affiliated companies, net of taxes for fiscal year 2012 was primarily due to the impairment losses of $17.2 and $19.4 million recorded on our investments in Provalliance and EEG, respectively. In conjunction with entering into a purchase agreement to sell Provalliance, the Company recorded a $37.4 million other than temporary impairment charge on its investment in Provalliance and $20.2 million reduction in the fair value of the Equity Put, resulting in a net impairment charge of $17.2 million. The Company recorded a $19.4 million other than temporary impairment charge for the excess of the carrying value of its investment in EEG over the fair value. The Company also recorded its $8.7 million share of an intangible asset impairment recorded directly by EEG. These impairments recorded during fiscal year 2012 were partially offset by our share of earnings of $9.7 and $4.7 million recorded for our investments in Provalliance and EEG, respectively.
Equity in income of affiliated companies, net of taxes for fiscal year 2011 was due to equity in income of $7.8 and $5.5 million recorded for our investments in Provalliance and EEG, respectively. In addition, the Company recorded a $9.0 million impairment loss related to the Company's investment in MY Style. The impairment charge was based on the decline in equity value of MY Style as a result of changes in projected revenue growth after the natural disasters that occurred in Japan during March 2011. The Company also recorded a $2.4 million net gain related to the settlement of a portion of the Company's equity put liability and additional ownership of the Frank Provost Group in Provalliance.
Income from Discontinued Operations, net of Taxes
During fiscal year 2013, the Company recognized $25.0 million of income, net of taxes from discontinued operations, primarily from an after-tax gain of $17.8 million realized upon the sale of Hair Club and $12.6 million of income from Hair Club operations, net of taxes, partially offset by
$5.4 million of expense, net of taxes associated with professional and transaction fees. See Note 2 to the Consolidated Financial Statements for further discussion on discontinued operations.
During fiscal year 2012, the Company recognized $62.4 million of loss, net of taxes from discontinued operations, primarily from a $61.9 million loss, net of taxes from Hair Club operations, as a result of the $78.4 million goodwill impairment charge, and $1.6 million of expense, net of taxes associated with professional and transaction fees, partially offset by $1.1 million tax benefit in discontinued operations related to the release of tax reserves associated with the disposition of theour Trade Secret salon concept.
During fiscal year 2011, the Company recognized $12.0 of income, net of taxes, from Hair Club operations.
Recent Developments
First Quarter-to-Date Fiscal 2014 Sales Trends
As of August 25, 2013, first quarter-to-date same store service sales and product sales were down 3.4% and 14.9%, respectively. The annual effectiveCompany believes these declines are short-term in nature, and we have seen improvement in August same-store service sales which are down 2.4%, a 180 basis point improvement since July. We expect these trends to further improve as our new field teams transition from reorganizing and hiring activities to focusing on their salons, and as we become more comfortable with and optimize our use of the new POS system. The Company has taken a number of steps to reverse this short-term trend, including providing an incentive for stylists to gain traction on our first quarter promotion and accelerating by two weeks the delivery of items within our new product assortment so that salon shelves could be reset sooner. Since salon resets were just completed several weeks ago, product sales trends have yet to show improvement.
Field Reorganization—Financial Statement Expense Classification
Beginning in the first quarter of fiscal year 2014, the field reorganization, excluding salons within the mass premium category, will result in a change in expense classifications on our Statement of Operations. Previously, field leaders did not work on the salon floor daily. As reorganized, field leaders will spend most of their time on the salon floor leading, mentoring and serving guests. Accordingly, field leader costs, including their labor and travel costs, will directly arise from the management of salon operations. As a result, district and senior district leader labor costs will be reported within Cost of Service rather than General and Administrative expenses, and their travel costs will be reported within Site Operating expenses rather than General and Administrative expenses. This expense classification will have no financial impact on the Company's reported operating income (loss), reported net income (loss) or cash flows from operations.
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, and our revolving credit facility are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to sustain operations and to finance strategic initiatives. We also anticipate having access to long-term financing. However, in the event our liquidity is insufficient and we are not able to access long-term financing, we may be required to limit or delay our strategic initiatives. There can be no assurance that we will continue to generate cash flows at or above current levels.
As of June 30, 2013, cash and cash equivalents were $200.5 million, with $176.4, $11.7 and $12.4 million in the United States, Canada, and Europe, respectively. As of June 30, 2013, the Company has a $33.3 million income tax receivable of which approximately $11 million is expected to be collected during the first quarter of fiscal year 2014.
We have a $400.0 million five-year senior unsecured revolving credit facility with a syndicate of banks that expires in June 2018. As of June 30, 2013, the Company had no outstanding borrowings under the facility, and had outstanding standby letters of credit under the facility of $2.2 million, primarily related to its self-insurance program. Accordingly, unused available credit under the facility at June 30, 2013 was $397.8 million. The credit under this facility could be used to fund the convertible senior term notes should the Company choose to settle these notes in cash. Refer to additional discussion under financing arrangements.
Our ability to access our revolving credit facility is subject to our compliance with the terms and conditions of such facility, including a maximum leverage ratio, a minimum fixed charge ratio and other covenants and requirements. At June 30, 2013, we were in compliance with all covenants and other requirements of our credit agreement and senior notes.
Cash Flows
Cash Flows from Operating Activities
Fiscal year 2013 cash provided by operating activities of $69.1 million declined by $84.6 million compared to the previous fiscal year. Despite higher earnings in the current year, the decrease is attributable to decreases in revenues and increased cost of service and product resulting in changes in working capital. Cash payments of deferred compensation and income taxes also contributed to declines in cash provided by operating activities.
Fiscal year 2012 cash provided by operating activities of $153.7 million declined by $75.5 million compared to the previous fiscal year, $51.8 million of this decrease related to the timing of accruals and a reduction in the amount received for income taxes, as fiscal year 2011 included a tax refund related to the fiscal year 2009 loss on discontinued operations. Cash provided by operating activities was also lower due to a decrease of $6.0 million in dividends received from affiliated companies.
Fiscal year 2011 cash provided by operating activities of $229.2 million increased by $37.0 million mainly due to an increase of $7.6 million in dividends received from affiliated companies and a $23.9 million reduction in income tax receivables.
Cash Flows from Investing Activities
Cash provided by investing activities during fiscal year 2013 of $165.1 million was greater than the $90.9 million use of cash in fiscal year 2012. In fiscal year 2013, we received $266.2 million from the sales of Hair Club and Provalliance and $26.4 million from EEG related to principal payments on the outstanding note receivable and revolving line of credit. These were partially offset by the Company placing $24.5 million into restricted cash to collateralize its self-insurance program, enabling the Company to reduce fees associated with previously utilized standby letters of credit, and increased capital expenditures primarily related to the Company's POS system implementation.
Cash used by investing activities of $90.9 million during fiscal year 2012 was less than fiscal year 2011 of $144.3 million due to the comparable prior period including the acquisition of approximately 17 percent additional equity interest in Provalliance for $57.3 million, a decrease in the amount of cash paid for acquisitions during fiscal year 2012, partially offset by an increase in capital expenditures during fiscal year 2012 for a POS system and new salon construction.
Cash used by investing activities of $144.3 million during fiscal year 2011 was greater compared to fiscal year 2010 of $44.6 million due to the acquisition of approximately 17 percent additional equity interest in Provalliance for $57.3 million, a disbursement of $15.0 million on the revolving credit facility with EEG and planned increases in acquisitions and capital expenditures.
Cash Flows from Financing Activities
During fiscal years 2013, 2012 and 2011, the primary use of cash within financing activities was for repayments of long-term debt of $118.2, $29.7 and $137.7 million, respectively and dividends of $13.7, $13.9 and $11.5 million, respectively. During fiscal year 2013 the Company used $14.9 million to repurchase common stock under its share repurchase program and prepaid $89.3 million in private placement debt.
Financing Arrangements
Financing activities are discussed in Note 7 to the Consolidated Financial Statements in Part II, Item 8. Derivative activities are discussed in Note 1 to the Consolidated Financial Statements in Part II, Item 8 and Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."
Management believes that cash generated from operations and amounts available under existing debt facilities will be sufficient to fund its anticipated capital expenditures and required debt repayments for the foreseeable future. As of June 30, 2013, we have $397.8 million available under our existing revolving credit facility.
The Company's financing arrangements consists of the following:
| | Interest rate % | | | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Fiscal Years | June 30, | ||||||||||
| Maturity Dates | 2013 | 2012 | 2013 | 2012 | ||||||||
| (fiscal year) | | | (Dollars in thousands) | |||||||||
Senior term notes | 2013 | 6.69 - 8.50% | 6.69 - 8.50% | $ | — | $ | 111,429 | ||||||
Convertible senior notes(1) | 2015 | 5.00 | 5.00 | 166,454 | 161,134 | ||||||||
Revolving credit facility | 2018 | — | — | — | — | ||||||||
Equipment and leasehold notes payable | 2015 - 2016 | 4.90 - 8.75 | 4.90 - 8.75 | 8,316 | 14,780 | ||||||||
Other notes payable | 2013 | 5.75 - 8.00 | 5.75 - 8.00 | — | 331 | ||||||||
174,770 | 287,674 | ||||||||||||
Less current portion(1) | (173,515 | ) | (28,937 | ) | |||||||||
Long-term portion | $ | 1,255 | $ | 258,737 | |||||||||
In June 2013, the Company entered into a Sixth Amended and Restated Credit Agreement (Credit Agreement), which amended and restated in its entirety, the Company's existing Fifth Amended and Restated Credit Agreement that was entered into during fiscal year 2011. The Credit Agreement provides for a $400.0 million unsecured five-year revolving credit facility that expires in June 2018 and includes, among other things, a maximum leverage ratio covenant, a minimum fixed charge coverage ratio covenant, and certain restrictions on liens, liquidity and other indebtedness. The Company may request an increase in revolving credit commitments under the facility of up to $200.0 million under
certain circumstances. Events of default under the Credit Agreement include a change of control of the Company. We were in compliance with all covenants and other requirements of our credit agreement and senior notes as of June 30, 2013.
During June 2013, the Company prepaid $89.3 million of unsecured, fixed rate, senior term notes outstanding under a private shelf agreement.
Beginning in April 2014, the holders of our convertible senior term notes may convert their notes at their option. The Company has the choice of net-cash settlement, settlement in its own shares or a combination of both. As of June 30, 2013, the notes are convertible at a conversion rate of 5.8 percent65.4357 shares of the Company's common stock per $1,000 principal amount of notes, representing a conversion price of approximately $15.28 per share of the Company's common stock.
Our debt to capitalization ratio, calculated as total debt as a percentage of total debt and shareholders' equity at fiscal year-end, was negatively impacted byas follows:
As of June 30, | Debt to Capitalization | Basis Point (Decrease) Increase(1) | |||||
---|---|---|---|---|---|---|---|
2013 | 16.9 | % | (750 | ) | |||
2012 | 24.4 | 110 | |||||
2011 | 23.3 | (700 | ) |
The basis point improvement in the debt to capitalization ratio as of June 30, 2013 compared to June 30, 2012 was primarily due to the prepayment of $89.3 million in private placement debt.
The basis point increase in the debt to capitalization ratio as of June 30, 2012 compared to June 30, 2011 was primarily due to the decrease in shareholders' equity as a result of the non-cash goodwill impairment charges related to the Regis salon concept and Hair Restoration Centers reporting unit and a $36.6 million net impairment charge associated with our investments in Provalliance and EEG. Partially offsetting the impact of the decrease in shareholders' equity was a decrease in debt levels.
The basis point improvement in the debt to capitalization ratio as of June 30, 2011 compared to June 30, 2010 was primarily due to the repayment of an $85.0 million term loan during fiscal year 2011 and foreign currency translation adjustments due to the weakening of the United States dollar against the Canadian dollar and British Pound.
Contractual Obligations and Commercial Commitments
The following table reflects a summary of obligations and commitments outstanding by payment date as of June 30, 2013:
| Payments due by period | | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations | Within 1 years | 1 - 3 years | 3 - 5 years | More than 5 years | Total | |||||||||||
| (Dollars in thousands) | |||||||||||||||
On-balance sheet: | ||||||||||||||||
Debt obligations | $ | 166,454 | $ | — | $ | — | $ | — | $ | 166,454 | ||||||
Capital lease obligations | 7,061 | 1,255 | — | — | 8,316 | |||||||||||
Other long-term liabilities | 4,651 | 4,958 | 3,266 | 7,870 | 20,745 | |||||||||||
Total on-balance sheet | 178,166 | 6,213 | 3,266 | 7,870 | 195,515 | |||||||||||
Off-balance sheet(a): | ||||||||||||||||
Operating lease obligations | 297,328 | 412,332 | 181,277 | 65,992 | 956,929 | |||||||||||
Interest on long-term debt and capital lease obligations | 9,035 | 422 | — | — | 9,457 | |||||||||||
Total off-balance sheet | 306,363 | 412,754 | 181,277 | 65,992 | 966,386 | |||||||||||
Total | $ | 484,529 | $ | 418,967 | $ | 184,543 | $ | 73,862 | $ | 1,161,901 | ||||||
On-Balance Sheet Obligations
Our long-term obligations are composed primarily of convertible debt. There were no outstanding borrowings under our revolving credit facility at June 30, 2013. Interest payments on long-term debt and capital lease obligations are estimated based on each debt obligation's agreed upon rate as of June 30, 2013 and scheduled contractual repayments.
Other long-term liabilities of $20.8 million include $14.5 million related to the Executive Profit Sharing Plan and a salary deferral program $6.3 million (including $0.1 million in interest) related to established contractual payment obligations under retirement and severance payment agreements for a small number of retired employees.
This table excludes short-term liabilities, other than the current portion of long-term debt, disclosed on our balance sheet as the amounts recorded for these items will be paid in the next year. We have no unconditional purchase obligations. Also excluded from the contractual obligations table are payment estimates associated with employee health and workers' compensation claims for which we are self-insured. The majority of our recorded liability for self-insured employee health and workers' compensation losses represents estimated reserves for incurred claims that have yet to be filed or settled.
The Company has unfunded deferred compensation contracts covering certain management and executive personnel. The deferred compensation contracts are offered to key executives based on their performance within the Company. Because we cannot predict the timing or amount of our future payments related to these contracts, such amounts were not included in the table above. Related obligations totaled $3.5 and $9.5 million and are included in accrued liabilities and other noncurrent liabilities, respectively, in the Consolidated Balance Sheet at June 30, 2013. Refer to Note 10 to the Consolidated Financial Statements for additional information.
As of June 30, 2013, we have liabilities for uncertain tax positions. We are not able to reasonably estimate the amount by which the liabilities will increase or decrease over time; however, at this time, we do not expect a significant payment related to these obligations within the next fiscal year. See Note 9 to the Consolidated Financial Statements for more information on our uncertain tax positions.
Off-Balance Sheet Arrangements
Operating leases primarily represent long-term obligations for the rental of salons, including leases for company-owned locations, as well as future salon franchisee lease payments of approximately $160.2 million, which are partially non-deductible for tax purposes. This resultedreimbursed to the Company by franchisees, and the guarantee of operating leases of salons operated by the purchaser of Trade Secret with future minimum lease payments of less than $3.0 million. Regarding franchisee subleases, we generally retain the right to the related salon assets, net of any outstanding obligations, in the Company recording lessevent of a tax benefitdefault by a franchise owner. Management has not experienced and does not expect any material loss to result from these arrangements.
We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business. These contracts primarily relate to our commercial contracts, operating leases and other real estate contracts, financial agreements, agreements to provide services, and agreements to indemnify officers, directors and employees in the performance of their work. While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that we expect to result in a material liability.
We do not have other unconditional purchase obligations or significant other commercial commitments such as commitments under lines of credit and standby repurchase obligations or other commercial commitments.
We continue to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations.
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes at June 30, 2013. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Dividends
We paid dividends of $0.24 per share during fiscal years 2013 and 2012 and $0.20 per share during fiscal year 2011. On August 20, 2013, the Board of Directors of the Company declared a $0.06 per share quarterly dividend payable September 17, 2013 to shareholders of record on the pre-tax loss than what would normally be expected utilizingSeptember 3, 2013.
Share Repurchase Program
In May 2000, the Company's historical rangeBoard of tax rates.
RESULTS OF OPERATIONS
The following discussion of results of operations willreflects results from continuing operations and reclassifications of fiscal years 2012 and 2011 cost of service, site operating expenses and general and administrative expenses to conform to current year presentation, see further discussion within Note 1 to the Consolidated Financial Statements. Hair Club has been accounted for as a discontinued operation for all periods presented, see discussion within Note 2 to the Consolidated Financial Statements. All periods reflect the reclassification of Hair Club's results from continuing operations. Explanations are primarily for North American salons, unless otherwise noted. Discontinued operations will beare discussed at the end of this section.
Consolidated Results of Operations
The following table sets forth, for the periods indicated, certain information derived from our Consolidated Statement of Operations in Item 8, expressed as a percent of revenues.8. The percentages are computed as a percent of total revenues, except as noted.
Results of Operations as a Percent of Revenuesotherwise indicated.
Fiscal Years | ||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| For the Years Ended June 30, | 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | ||||||||||||||||||||||||||||
| 2012 | 2011 | 2010 | (Dollars in millions) | % of Total Revenues | Basis Point (Decrease) Increase | ||||||||||||||||||||||||||||||||
Service revenues | 75.3 | % | 75.8 | % | 75.6 | % | $ | 1,563.9 | $ | 1,643.9 | $ | 1,695.4 | 77.5 | % | 77.5 | % | 77.8 | % | — | (30 | ) | 30 | ||||||||||||||||
Product revenues | 22.9 | 22.5 | 22.7 | 415.7 | 440.0 | 447.5 | 20.6 | 20.7 | 20.5 | (10 | ) | 20 | (30 | ) | ||||||||||||||||||||||||
Royalties and fees | 1.8 | 1.7 | 1.7 | |||||||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||
Franchise royalties and fees | 39.1 | 38.3 | 37.3 | 1.9 | 1.8 | 1.7 | 10 | 10 | — | |||||||||||||||||||||||||||||
Cost of service(1) | 57.5 | 57.5 | 56.9 | 930.7 | 941.7 | 972.9 | 59.5 | 57.3 | 57.4 | 220 | (10 | ) | 50 | |||||||||||||||||||||||||
Cost of product(2) | 48.0 | 47.8 | 49.4 | 228.6 | 221.6 | 225.2 | 55.0 | 50.4 | 50.3 | 460 | 10 | (220 | ) | |||||||||||||||||||||||||
Site operating expenses | 8.7 | 8.5 | 8.5 | 203.9 | 207.0 | 211.2 | 10.1 | 9.8 | 9.7 | 30 | 10 | 30 | ||||||||||||||||||||||||||
General and administrative | 13.3 | 14.6 | 12.4 | 226.7 | 249.6 | 285.8 | 11.2 | 11.8 | 13.1 | (60 | ) | (130 | ) | 210 | ||||||||||||||||||||||||
Rent | 15.0 | 14.7 | 14.6 | 324.7 | 331.8 | 333.1 | 16.1 | 15.6 | 15.3 | 50 | 30 | 20 | ||||||||||||||||||||||||||
Depreciation and amortization | 5.2 | 4.5 | 4.6 | 91.8 | 105.0 | 92.2 | 4.5 | 4.9 | 4.2 | (40 | ) | 70 | (20 | ) | ||||||||||||||||||||||||
Goodwill impairment | 6.4 | 3.2 | 1.5 | — | 67.7 | 74.1 | — | 3.2 | 3.4 | (320 | ) | (20 | ) | 180 | ||||||||||||||||||||||||
Lease termination costs | — | — | 0.1 | |||||||||||||||||||||||||||||||||||
Operating (loss) income | (3.0 | ) | 0.2 | 4.1 | ||||||||||||||||||||||||||||||||||
(Loss) income from continuing operations before income taxes and equity in (loss) income of affiliated companies | (4.0 | ) | (1.1 | ) | 2.3 | |||||||||||||||||||||||||||||||||
(Loss) income from continuing operations | (5.1 | ) | (0.4 | ) | 1.7 | |||||||||||||||||||||||||||||||||
Income from discontinued operations | 0.1 | — | 0.1 | |||||||||||||||||||||||||||||||||||
Net (loss) income | (5.0 | ) | (0.4 | ) | 1.8 | |||||||||||||||||||||||||||||||||
Interest expense | 37.6 | 28.2 | 34.4 | 1.9 | 1.3 | 1.6 | 60 | (30 | ) | (90 | ) | |||||||||||||||||||||||||||
Interest income and other, net | 35.4 | 5.1 | 4.7 | 1.8 | 0.2 | 0.2 | 160 | — | (30 | ) | ||||||||||||||||||||||||||||
Income taxes(3) | 10.0 | 4.4 | 16.3 | 99.3 | 17.5 | 37.2 | N/A | N/A | N/A | |||||||||||||||||||||||||||||
Equity in (loss) income of affiliated companies, net of income taxes | (16.0 | ) | (30.9 | ) | 6.7 | (0.8 | ) | (1.5 | ) | 0.3 | 70 | (180 | ) | (20 | ) | |||||||||||||||||||||||
Income (loss) from discontinued operations, net of taxes | 25.0 | (62.4 | ) | 12.0 | 1.2 | (2.9 | ) | 0.6 | 410 | (350 | ) | (20 | ) |
Consolidated Revenues
Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees, hair restoration center revenues, and franchise royalties and fees. As compared to the prior fiscal year, consolidated revenues decreased 2.2 percent4.9% during fiscal year 20122013 and decreased 1.4 percent2.7% during fiscal year 2011. The following table details our consolidated revenues by concept. All service revenues, product revenues (which include product and equipment sales to
franchisees),2012. The following tables summarize revenues and franchise royalties and fees are included within their respectivesame-store sales by concept, withinas well as the table.reasons for the percentage change:
| For the Years Ended June 30, | Fiscal Years | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | 2013 | 2012 | 2011 | ||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||
North American salons: | ||||||||||||||||||||
Regis | $ | 414,752 | $ | 434,249 | $ | 437,990 | ||||||||||||||
MasterCuts | 159,627 | 165,729 | 166,821 | |||||||||||||||||
SmartStyle | 514,050 | 531,090 | 533,094 | $ | 509,537 | $ | 514,050 | $ | 531,090 | |||||||||||
Supercuts | 343,764 | 321,881 | 314,698 | 343,464 | 343,764 | 321,881 | ||||||||||||||
MasterCuts | 146,506 | 159,627 | 165,729 | |||||||||||||||||
Regis | 377,635 | 414,752 | 434,249 | |||||||||||||||||
Promenade | 548,912 | 576,995 | 607,960 | 512,259 | 548,912 | 576,995 | ||||||||||||||
Total North American Salons | 1,981,105 | 2,029,944 | 2,060,563 | 1,889,401 | 1,981,105 | 2,029,944 | ||||||||||||||
International salons | 141,122 | 150,237 | 156,085 | 129,312 | 141,122 | 150,237 | ||||||||||||||
Hair restoration centers | 151,552 | 145,688 | 141,786 | |||||||||||||||||
Consolidated revenues | $ | 2,273,779 | $ | 2,325,869 | $ | 2,358,434 | $ | 2,018,713 | $ | 2,122,227 | $ | 2,180,181 | ||||||||
Percent change from prior year | (2.2 | )% | (1.4 | )% | (2.9 | )% | (4.9 | )% | (2.7 | )% | (1.6 | )% | ||||||||
Salon same-store sales decrease(1) | (3.1 | )% | (1.7 | )% | (3.2 | )% | (2.4 | )% | (3.5 | )% | (1.9 | )% |
The decreasesDecreases of 2.2, 1.4,4.9%, 2.7% and 2.9 percent1.6% in consolidated revenues during fiscal years 2013, 2012, 2011, and 2010,2011, respectively, were driven by the following:
| Percentage Increase (Decrease) in Revenues For the Years Ended June 30, | Fiscal Years | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Factor | 2012 | 2011 | 2010 | 2013 | 2012 | 2011 | ||||||||||||||
Same-store sales | (2.4 | )% | (3.5 | )% | (1.9 | )% | ||||||||||||||
Closed salons | (3.3 | ) | (2.3 | ) | (1.6 | ) | ||||||||||||||
New stores and conversions | 1.3 | 1.3 | 0.6 | |||||||||||||||||
Acquisitions | 0.7 | % | 1.1 | % | 0.8 | % | — | 0.7 | 1.1 | |||||||||||
Same-store sales | (3.1 | ) | (1.7 | ) | (3.2 | ) | ||||||||||||||
New stores | 1.2 | 0.6 | 0.7 | |||||||||||||||||
Foreign currency | 0.0 | 0.4 | 0.2 | |||||||||||||||||
Franchise revenues | 0.1 | 0.0 | 0.0 | |||||||||||||||||
Closed salons | (2.2 | ) | (1.5 | ) | (0.9 | ) | ||||||||||||||
Other | 1.1 | (0.3 | ) | (0.5 | ) | (0.5 | ) | 1.1 | 0.2 | |||||||||||
(2.2 | )% | (1.4 | )% | (2.9 | )% | (4.9 | ) | (2.7 | )% | (1.6 | )% | |||||||||
Same-store sales by concept by fiscal year are detailed in the table below:
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
SmartStyle | (1.1 | )% | (4.3 | )% | (1.9 | )% | ||||
Supercuts | (0.7 | ) | (0.3 | ) | 0.1 | |||||
MasterCuts | (5.1 | ) | (3.3 | ) | (0.7 | ) | ||||
Regis | (3.1 | ) | (4.2 | ) | (2.5 | ) | ||||
Promenade | (2.8 | ) | (2.7 | ) | (2.6 | ) | ||||
Total North American Salons | (2.3 | ) | (3.2 | ) | (1.8 | ) | ||||
International salons | (4.3 | ) | (9.1 | ) | (3.1 | ) | ||||
Consolidated same-store sales | (2.4 | )% | (3.5 | )% | (1.9 | )% | ||||
The same-store sales decrease of 2.4% during fiscal year 2013 was due to a 3.0% decrease in guest visits, partially offset by a 0.6% increase in average ticket. We closed 492 and 384 salons (including 69 and 51 franchise salons) during fiscal years 2013 and 2012, respectively. The Company constructed (net of relocations) 153 company-owned salons during fiscal year 2013. We did not acquire any company-owned salons during fiscal year 2013 compared to 13 company-owned salons (including 11 franchise buybacks) during fiscal year 2012.
The same-store sales decrease of 3.5% during fiscal year 2012 was due to a 3.4% decrease in guest visits and 0.1% decrease in average ticket. We acquired 13 company-owned salons (including 11 franchise buybacks), and did not acquire or buy back hair restoration centers from franchisees during fiscal year 2012 compared to 105 company-owned salons (including 78 franchise buybacks), and bought back four hair restoration centers from franchisees during fiscal year 2011. The same-store sales decrease of 3.1 percent was due to a decrease in same-store guest visits and marginal declines in average ticket. The Company constructed 209(net of relocations) 166 company-owned salons and six hair restoration centers.during fiscal year 2012. We closed 384 and 305 salons (including 51 and 60 franchise salons) during the twelve months ended June 30,fiscal years 2012 and 2011, respectively.
The same-store sales decrease of 1.9% during fiscal year 2011 was due to a 3.8% decrease in guest visits partially offset by a 1.9% increase in average ticket. We acquired 105 company-owned salons (including 78 franchise buybacks), and bought back four hair restoration centers from franchisees during fiscal year 2011 compared to 26 company-owned salons (including 23 franchise buybacks), and bought back zero hair restoration centers from franchisees during fiscal year 2010. The same-store sales decrease of 1.7 percent was due to a decline in same-store guest visits, partially offset by an increase in average ticket. The Company constructed 146(net of relocations) 115 company-owned salons during the twelve months ended June 30,fiscal year 2011. We closed 305 and 269 salons (including 60 and 65 franchise salons) during the twelve months ended June 30,fiscal years 2011 and 2010, respectively.
During fiscal year 2012, there was no foreign currency impact on revenues as the weakening of the United States dollar against the Canadian dollar was offset by the strengthening of the United Stated dollar against the British pound and Euro as compared to the prior fiscal year's exchange rates. During fiscal year 2011, the foreign currency impact was driven by the weakening of the United States dollar against the Canadian dollar and British pound, as compared to the prior fiscal year's exchange rates. During fiscal year 2010, the foreign currency impact was driven by the weakening of the United States dollar against the Canadian dollar, partially offset by the strengthening of the United Stated dollar against the British pound and Euro as compared to the prior fiscal year's exchange rates. Consolidated revenues are primarily composedcomprised of service and product revenues, as well as franchise royalties and fees. Fluctuations in these three major revenue categories, operating expenses and other income and expense were as follows:
Service Revenues.Revenues Service
The $80.0 million decrease in service revenues include revenues generated fromduring fiscal year 2013 was due to the closure of 423 company-owned salons, same-store service sales decreasing 2.0% and service revenues generatedthe comparable prior period including an additional day from leap year. The decrease in same-store services sales was primarily a result of a 2.3% decrease in same-store guest visits, offset by hair restoration centers. Consolidated service revenues were as follows:a 0.3% increase in average ticket. Partially offsetting the decrease was growth due to newly constructed salons during fiscal year 2013.
| | Decrease Over Prior Fiscal Year | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Years Ended June 30, | Revenues | Dollar | Percentage | |||||||
| (Dollars in thousands) | |||||||||
2012 | $ | 1,712,703 | $ | (50,271 | ) | (2.9 | )% | |||
2011 | 1,762,974 | (21,163 | ) | (1.2 | ) | |||||
2010 | 1,784,137 | (49,821 | ) | (2.7 | ) |
The $51.5 million decrease in service revenues during fiscal year 2012 was due the closure of 333 company-owned salons and same-store service sales decreasing 3.5 percent.3.7%. The decrease in same-store services sales was primarily a result of a decline3.1% decrease in same-store guest visits and a decline0.6% decrease in average ticket due to promotional programs designed to generate additional guest visits in the salons with the promotional programs.visits. Partially offsetting the decrease was growth due to new and acquired salons during the twelve months ended June 30,fiscal year 2012 and the additional day from leap year.
The $22.4 million decrease in service revenues during fiscal year 2011 was due to same-store service sales decreasing 2.3 percent,2.4%, as a result of a decline in same-store guest visits. Partially offsetting the decrease was growth due to new and acquired salons during the twelve months ended June 30,fiscal year 2011, price increases, sales mix as the company continues to increaseincreased hair color and waxing services, and the weakening of the United States dollar against the Canadian dollar during the twelve months ended June 30, 2011.dollar.
Product Revenues
The $24.3 million decrease in serviceproduct revenues during fiscal year 20102013 was primarily due to same-store serviceproduct sales decreasing 3.4 percent, as many guests have continued to lengthen their visitation pattern due to3.9%, the
economy. In addition, service revenues decreased due to the strengthening of the United States dollar against the British pound. Partially offsetting the decrease was growth due to acquisitions during the twelve months and the weakening of the United States dollar against the Canadian dollar during the twelve months ended June 30, 2010.
Product Revenues. Product revenues are primarily sales at423 company-owned salons and hair restoration centers, andthe comparable prior period including an additional day from leap year, partially offset by an increase in product sales to franchisees as a result of product and equipment to franchisees. Consolidated product revenues were as follows:an increase in franchise locations.
| | Decrease Over Prior Fiscal Year | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Years Ended June 30, | Revenues | Dollar | Percentage | |||||||
| (Dollars in thousands) | |||||||||
2012 | $ | 520,467 | $ | (2,727 | ) | (0.5 | )% | |||
2011 | 523,194 | (11,399 | ) | (2.1 | ) | |||||
2010 | 534,593 | (21,612 | ) | (3.9 | ) |
The $7.4 million decrease in product revenues during fiscal year 2012 was primarily due to same-store product sales decreasing 1.7 percent,2.7%, and the closure of 333 company-owned locations,salons, partially offset by the additional day from leap year and an increase in product sales to franchisees as a result of an increase in franchise locations.
The $14.2 million decrease in product revenues during fiscal year 2011 was primarily due to the decrease in product sales to the purchaser of Trade Secret from $20.0 million in fiscal year 2010 to zero in fiscal year 2011. Partially offsetting the decrease was same-store product sales increasing 0.40.2 percent, product sales from new and acquired salons, and the weakening of the United States dollar against the Canadian dollar during the twelve months endedfiscal year 2011.
Royalties and Fees
Total franchised locations open at June 30, 2011.
2013 and 2012 were 2,082 and 2,016, respectively. The decrease$0.8 million increase in product revenuesroyalties and fees was due to the increase in franchised locations during fiscal year 2010 was primarily due to the decrease in product2013 and same-store sales to the purchaser of Trade Secret from $32.2 in fiscal year 2009 to $20.0 in fiscal year 2010, as well as due to same-store product sales decreasing 2.3 percent and the strengthening of the United States dollar against the British pound. Partially offsetting the decrease was the weakening of the United States dollar against the Canadian dollar during the twelve months ended June 30, 2010.
Royalties and Fees. Consolidatedincreases at franchise revenues, which include royalties and franchise fees, were as follows:locations.
| | Increase (Decrease) Over Prior Fiscal Year | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Years Ended June 30, | Revenues | Dollar | Percentage | |||||||
| (Dollars in thousands) | |||||||||
2012 | $ | 40,609 | $ | 908 | 2.3 | % | ||||
2011 | 39,701 | (3 | ) | (0.0 | ) | |||||
2010 | 39,704 | 80 | 0.2 |
Total franchisefranchised locations open at June 30, 2012 and 2011 were 2,045 (including 29 franchise hair restoration centers)2,016 and 1,965 (including 29 franchise hair restoration centers),1,936, respectively. During fiscal year 2012, we purchased a 60.0 percent ownership interest in a franchise network, consisting of 31 franchisefranchised locations. In addition, we purchased 11 of our franchise salons during the twelve months ended June 30, 2012. The $1.0 million increase in royalties and fees was also due to same-store sales increases at franchise locations.locations, partially offset by the Company purchasing 11 of our franchised salons during fiscal year 2012.
Total franchisefranchised locations open at June 30, 2011 and 2010 were 1,965 (including 29 franchise hair restoration centers)1,936 and 2,053 (including 33 franchise hair restoration centers),2,020, respectively. The
84 salon decrease in franchisefranchised locations was offset by the impact of the weakening of the United States dollar against the Canadian dollar.
Total franchise locations open at June 30, 2010 and 2009 were 2,053 (including 33 franchise hair restoration centers) and 2,078 (including 33 franchise hair restoration centers), respectively.Cost of Service
The 220 basis point increase in consolidated franchise revenues during fiscal year 2010 was primarily due to the weakening of the United States dollar against the Canadian dollar during the twelve months ended June 30, 2010.
Gross Margin (Excluding Depreciation)
Our cost of revenues primarily includes labor costs related to salon employees and hair restoration center employees, the cost of product used in providing services and the cost of products sold to guests and franchisees. The resulting gross margin was as follows:
| | | (Decrease) Increase Over Prior Fiscal Year | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Years Ended June 30, | Gross Margin | Margin as % of Service and Product Revenues | Dollar | Percentage | Basis Point(1) | |||||||||||
| (Dollars in thousands) | |||||||||||||||
2012 | $ | 998,361 | 44.7 | % | $ | (24,960 | ) | (2.4 | )% | (10 | ) | |||||
2011 | 1,023,321 | 44.8 | (15,806 | ) | (1.5 | ) | — | |||||||||
2010 | 1,039,127 | 44.8 | (23,279 | ) | (2.2 | ) | 40 |
Service Margin (Excluding Depreciation). Service margin was as follows:
| | | (Decrease) Increase Over Prior Fiscal Year | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Years Ended June 30, | Service Margin | Margin as % of Service Revenues | Dollar | Percentage | Basis Point(1) | |||||||||||
| (Dollars in thousands) | |||||||||||||||
2012 | $ | 727,549 | 42.5 | % | $ | (22,557 | ) | (3.0 | )% | — | ||||||
2011 | 750,106 | 42.5 | (18,311 | ) | (2.4 | ) | (60 | ) | ||||||||
2010 | 768,417 | 43.1 | (20,822 | ) | (2.6 | ) | 10 |
The 10 basis point decrease in cost of the prior fiscal year.
Service marginservice as a percent of service revenues during fiscal year 2012 was consistent with fiscal year 2011. Lowerdue to lower commissions as a result of leveraged pay plans for new stylists and a decrease in salon health insurance costs due to lower claims, werepartially offset by decreased productivity in our North American segment and ansegment.
The 50 basis point increase in the cost of labor within our Hair Restoration Centers segment.
The basis point decrease in service margins as a percent of service revenues during fiscal year 2011 was primarily due to an unexpected increase in salon health insurance costs due to several unusually large claims and an increase in payroll taxes as a result of states increasing unemployment taxes.
Cost of Product
The 460 basis point improvementincrease in service margins as a percentcost of service revenues during fiscal year 2010 was primarily due to the benefit of the new leveraged salon pay plans implemented in the 2009 calendar year. Increases in salon health insurance and payroll taxes partially offset the basis point improvement.
Product Margin (Excluding Depreciation). Product margin was as follows:
| | | (Decrease) Increase Over Prior Fiscal Year | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Years Ended June 30, | Product Margin | Margin as % of Product Revenues | Dollar | Percentage | Basis Point(1) | |||||||||||
| (Dollars in thousands) | |||||||||||||||
2012 | $ | 270,812 | 52.0 | % | $ | (2,403 | ) | (0.9 | )% | (20 | ) | |||||
2011 | 273,215 | 52.2 | 2,505 | 0.9 | 160 | |||||||||||
2010 | 270,710 | 50.6 | (2,457 | ) | (0.9 | ) | 150 |
Trade Secret, Inc. was sold by Regis CorporationCompany clearanced approximately $8 million of product. However, given the change in the Company's strategic direction to standardize plan-o-grams, the scope and size of this simplification program and the negative impact continued clearance sales would have on February 16, 2009. The agreement included a provision that Regis Corporation would supplyfuture product to the purchaser at cost for a transition period. The agreement was substantially completed as of September 30, 2009.
The following tables breakout product revenues,sales and cost of product and product margin as a percent of product revenues, betweenthe Company immediately liquidated any remaining inventory into non Regis distribution channels within the parameters of existing supply agreements. This resulted in a noncash inventory charge of $12.6 million in the fourth quarter. While negatively impacting cost of product as a percent of product revenues, clearance sales and liquidation of inventories generated higher cash returns than past practices of repackaging and returning products to distribution centers for restocking, disposal or return to vendors. Further impacting cost of product soldas a percent of product sales were Hurricane Sandy product donations, partially offset by reductions to the purchaser of Trade Secret.commissions paid on retail sales.
| For the Years Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Breakout of Product Revenues | 2012 | 2011 | 2010 | |||||||
Product | $ | 520,467 | $ | 523,194 | $ | 514,631 | ||||
Product sold to purchaser of Trade Secret | — | — | 19,962 | |||||||
Total product revenues | $ | 520,467 | $ | 523,194 | $ | 534,593 | ||||
| For the Years Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Breakout of Cost of Product | 2012 | 2011 | 2010 | |||||||
Cost of product | $ | 249,655 | $ | 249,979 | $ | 243,921 | ||||
Cost of product sold to purchaser of Trade Secret | — | — | 19,962 | |||||||
Total cost of product | $ | 249,655 | $ | 249,979 | $ | 263,883 | ||||
| For the Years Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Product Margin as % of Product Revenues | 2012 | 2011 | 2010 | |||||||
Margin on product other than sold to purchaser of Trade Secret | 52.0 | % | 52.2 | % | 52.6 | % | ||||
Margin on product sold to purchaser of Trade Secret | — | — | — | |||||||
Total product margin | 52.0 | % | 52.2 | % | 50.6 | % |
The 10 basis point decreaseincrease in cost of product margin as a percentage of product revenues during fiscal year 2012 was primarily due to an increase in the cost of hair systems in our Hair Restoration Centers segment and increases in freight costs due to higher fuel prices. Partially offsetting the basis point decrease wasprices partially offset by a reduction in commissions paid to new employees on retail product sales in our North American segment.
The 220 basis point decrease in product margin other than sold to purchasercost of Trade Secretproduct as a percentage of product revenues during fiscal year 2011 was primarily due to previous fiscal year including $20.0 million of product sold at cost to the purchaser of Trade Secret. Partially offsetting the basis point decrease was an increase in sales of slightly lower-profit margin appliances that have a higher cost as a percent of revenues in our International segment and an increase in the cost of hair systems in our Hair Restoration Centers segment, partially offset by reduced commissions paid to new employees on retail product sales in our North American segment.
Table of ContentsSite Operating Expenses
The 30 basis point improvement in product margin other than sold to purchaser of Trade Secret as a percentage of product revenues during fiscal year 2010 was due to a planned reduction in retail commissions paid to new employees on retail product sales.
Site Operating Expenses
This expense category includes direct costs incurred by our salons and hair restoration centers, such as on-site advertising, workers' compensation, insurance, utilities and janitorial costs. Site operating expenses were as follows:
| | | Increase (Decrease) Over Prior Fiscal Year | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Years Ended June 30, | Site Operating | Expense as % of Consolidated Revenues | Dollar | Percentage | Basis Point(1) | |||||||||||
| (Dollars in thousands) | |||||||||||||||
2012 | $ | 198,725 | 8.7 | % | $ | 1,003 | 0.5 | % | 20 | |||||||
2011 | 197,722 | 8.5 | (1,616 | ) | (0.8 | ) | — | |||||||||
2010 | 199,338 | 8.5 | 8,882 | 4.7 | 70 |
The 10 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage from the decrease in same-store sales.
Site operating expenses as a percent of consolidated revenues during fiscal year 2011 was consistent with fiscal year 2010. A reduction in legal claims expense and a favorable sales tax audit adjustment were offset by a planned increase in advertising expense within the Company's Promenade concept and an increase in self-insurance accruals.
The 30 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 20102011 was primarily due to higheran increase in advertising expense within the Company's Promenade concept and an increase in self-insurance expense. The Company recordedaccruals, partially offset by a reduction in self-insurance accruals of $1.7 million in fiscal year 2010 compared to a $9.9 million reduction in fiscal year 2009. In addition the Company settled two legal claims related to guest and employee matters resulting in a $5.2 million charge during fiscal year 2010.expense.
General and Administrative
General and administrative (G&A) includesdeclined $22.9 million, or 60 basis points as a percentage of consolidated revenues, during fiscal year 2013. This improvement was primarily due to reductions in salaries and benefits from our corporate reorganization executed last year, certain cost savings
initiatives in the current year and reduced levels of incentive pay in the current year, partly offset by costs associated with rolling out our field supervision, salon training and promotions, product distribution centers and corporate offices (such as salaries and professional fees), includingnew POS system. The Company remains focused on simplification to drive further costs incurred to support franchise and hair restoration center operations. G&A expenses were as follows:efficiencies.
| | | (Decrease) Increase Over Prior Fiscal Year | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Years Ended June 30, | G&A | Expense as % of Consolidated Revenues | Dollar | Percentage | Basis Point(1) | |||||||||||
| (Dollars in thousands) | |||||||||||||||
2012 | $ | 302,572 | 13.3 | % | $ | (37,285 | ) | (11.0 | )% | (130 | ) | |||||
2011 | 339,857 | 14.6 | 47,866 | 16.4 | 220 | |||||||||||
2010 | 291,991 | 12.4 | 330 | 0.1 | 40 |
The 130 basis point improvement in G&A costs as a percentage of consolidated revenues during fiscal year 2012 was primarily due to the comparable prior period includingresult of lapping a $31.2 million valuation reserve
on the note receivable with the purchaser of Trade Secret.Secret in fiscal year 2011. Also contributing to the improvement during fiscal year 2012 was a reduction in salaries and other employee benefits as a result of the reduction in home officesalon support workforce that occurred in January 2012. Partially offsetting the basis point improvementthese improvements were incremental costs associated with the Company's senior management restructuring, severance charges, and professional fees incurred in connection with the contested proxy and the exploration of alternatives for non-core assets.
The 210 basis point increase in G&A costs as a percentage of consolidated revenues during fiscal year 2011 was primarily due to the $31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret, incremental costs associated with the Company's senior management restructure, expenditures associated with the Regis salon concept re-imaging project, professional fees incurred related to the exploration of strategic alternatives and information technology projects, legal claims expense and negative leverage on fixed costs within this category due to negative same-store sales.
The basis point increase in G&A costs as a percentage of consolidated revenues during fiscal year 2010 was primarily due to negative leverage from the decrease in same-store sales, partially offset by the continuation of cost savings initiatives implemented by the Company.
Rent
Rent expense which includes base and percentage rent, common area maintenance and real estate taxes, was as follows:
| | | (Decrease) Increase Over Prior Fiscal Year | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Years Ended June 30, | Rent | Expense as % of Consolidated Revenues | Dollar | Percentage | Basis Point(1) | |||||||||||
| (Dollars in thousands) | |||||||||||||||
2012 | $ | 340,805 | 15.0 | % | $ | (1,481 | ) | (0.4 | )% | 30 | ||||||
2011 | 342,286 | 14.7 | (1,812 | ) | (0.5 | ) | 10 | |||||||||
2010 | 344,098 | 14.6 | (3,694 | ) | (1.1 | ) | 30 |
The 30 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partially offset by favorable common area maintenance adjustments from landlords and salon closures.
The 20 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2011 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partially offset by a favorable reduction to our common area maintenance expenses.
Depreciation and Amortization
The 40 basis point increasedecrease in rent expensedepreciation and amortization (D&A) as a percent of consolidated revenues during fiscal year 20102013 was primarily due to our lapping $16.2 million of accelerated amortization associated with the adjustment to the useful life of the Company's previously internally developed POS system. Partially offsetting the 40 basis point improvement was $1.9 million of accelerated depreciation expense in the current year associated with a leased building in conjunction with consolidating the Company's headquarters and negative leverage from the decrease in this fixed cost category, partially offset by a reduction in our percentage rent payments, both due to negative same-store sales.
Depreciation and Amortization
Depreciation and amortization expense (D&A) was as follows:
| | | Increase (Decrease) Over Prior Fiscal Year | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Years Ended June 30, | D&A | Expense as % of Consolidated Revenues | Dollar | Percentage | Basis Point(1) | |||||||||||
| (Dollars in thousands) | |||||||||||||||
2012 | $ | 118,071 | 5.2 | % | $ | 12,962 | 12.3 | % | 70 | |||||||
2011 | 105,109 | 4.5 | (3,655 | ) | (3.4 | ) | (10 | ) | ||||||||
2010 | 108,764 | 4.6 | (6,891 | ) | (6.0 | ) | (20 | ) |
The 70 basis point increase in D&A as a percent of consolidated revenues during fiscal year 2012 was primarily due to $16.2 million ($10.2 million net of tax or $0.18 per diluted share) of accelerated depreciationamortization expense in the current year resulting from the useful life adjustment of the Company's internally developed point-of-salePOS system and negative leverage from the decrease in same-store sales. Partially offsetting the basis point increase was the continuation of a decrease in depreciation expense from the reduction in salon construction beginning in fiscal year 2009 as compared to historical levels prior to fiscal year 2009.
The 20 basis point decrease in D&A as a percent of consolidated revenues during fiscal year 2011 was primarily due to a decrease in depreciation expense from a reduction in salon construction beginning in fiscal year 2009 as compared to historical levels prior to fiscal year 2009. The basis point decrease was partially offset by negative leverage from the decrease in same-store sales.
The basis point improvement in D&A as a percent of consolidated revenues during fiscal year 2010 was primarily due to a reduction in the impairment of property and equipment at underperforming locations as compared to fiscal year 2009.Goodwill Impairment
The Company recorded impairment charges of $6.4 and $10.2 million during fiscal years 2010 and 2009, respectively. Partially offsetting the improvements wasdid not record a decline due to negative leverage from the decrease in same-store sales.
Goodwill Impairment
Goodwill impairment was as follows:
| | | Increase (Decrease) Over Prior Fiscal Year | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Years Ended June 30, | Goodwill Impairment | Expense as % of Consolidated Revenues | Dollar | Percentage | Basis Point(1) | |||||||||||
| (Dollars in thousands) | |||||||||||||||
2012 | $ | 146,110 | 6.4 | % | $ | 72,010 | 97.2 | % | 320 | |||||||
2011 | 74,100 | 3.2 | 38,823 | 110.1 | 170 | |||||||||||
2010 | 35,277 | 1.5 | (6,384 | ) | (15.3 | ) | (20 | ) |
The Company recorded a goodwill impairment charges totalingcharge of $67.7 and $78.4 million related to the Regis salon concept and Hair Restoration Centers reporting units, respectively, during fiscal year 2012. Due to the continuation of a decrease indecreased same-store sales, the estimated fair value of the Regis salon operations was less than the carrying value of this concept's net assets, including goodwill. The $67.7 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Regis salon operations. Due to the impact of recent industry developments, including a slow down in revenue growth and increasing supply costs, the estimated fair value of the
Hair Restoration Centers operations was less than the carrying value of this reporting unit's net assets, including goodwill. The $78.4 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Hair Restoration Centers reporting unit.concept.
The Company recorded a $74.1 million goodwill impairment charge related to the Promenade salon concept during fiscal year 2011. Due to lower than expected earnings and same-store sales, the estimated fair value of the Promenade salon operations was less than the carrying value of this concept's net assets, including goodwill. The $74.1 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Promenade salon operations.
The Company recorded a $35.3 million goodwill impairment charge related to the Regis salon concept during fiscal year 2010. Due to the current economic conditions, the estimated fair value of the Regis salon operations was less than the carrying value of this concept's net assets, including goodwill. The $35.3 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Regis salon operations.concept.
Lease Termination Costs
Lease termination costs were as follows:
| | | Decrease Over Prior Fiscal Year | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Years Ended June 30, | Lease Termination Costs | Expense as % of Consolidated Revenues | Dollar | Percentage | Basis Point(1) | |||||||||||
| (Dollars in thousands) | |||||||||||||||
2012 | $ | — | — | % | $ | — | N/A | — | ||||||||
2011 | — | — | (2,145 | ) | (100.0 | ) | (10 | ) | ||||||||
2010 | 2,145 | 0.1 | (3,587 | ) | (62.6 | ) | (10 | ) |
As the Company's June 2009 plans to close underperforming company-owned salons were substantially complete as of June 30, 2010, the Company did not incur lease termination costs during the twelve months ended June 30, 2012 and 2011.
The fiscal year 2010 lease termination costs are associated with the Company's June 2009 plan to close underperforming United Kingdom company-owned salons in fiscal year 2010. During fiscal year 2010 we closed 29 salons under the June 2009 plan.
Interest Expense
Interest expense was as follows:
| | | (Decrease) Increase Over Prior Fiscal Year | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Years Ended June 30, | Interest | Expense as % of Consolidated Revenues | Dollar | Percentage | Basis Point(1) | |||||||||||
| (Dollars in thousands) | |||||||||||||||
2012 | $ | 28,245 | 1.2 | % | $ | (6,143 | ) | (17.9 | )% | (30 | ) | |||||
2011 | 34,388 | 1.5 | (20,026 | ) | (36.8 | ) | (80 | ) | ||||||||
2010 | 54,414 | 2.3 | 14,646 | 36.8 | 70 |
Table of Contentsyear 2012.
The 30 basis point improvement in interest as a percent of consolidated revenues during the twelve months ended June 30,fiscal year 2012 was primarily due to decreased debt levels as compared to fiscal year 2011.
The 90 basis point improvement in interest as a percent of consolidated revenues during the twelve months ended June 30,fiscal year 2011 was primarily due to a reduction in interest expense due to the twelve months ended June 30,fiscal year 2010 including $18.0 million of make-whole payments and other fees associated with the repayment of private placement debt, and decreased debt levels during fiscal year 2011.
The basis point increase in interest as a percent of consolidated revenues during the twelve months ended June 30, 2010 was primarily due to $18.0 million of make-whole payments and other fees associated with the repayment of private placement debt. The increase due to the make-whole payments and other fees was partially offset by a reduction in interest expense due to decreased debt levels.
Interest Income and Other, net
Interest income and other, net was as follows:
| | | Increase (Decrease) Over Prior Fiscal Year | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Years Ended June 30, | Interest | Income as % of Consolidated Revenues | Dollar | Percentage | Basis Point(1) | |||||||||||
| (Dollars in thousands) | |||||||||||||||
2012 | $ | 5,130 | 0.2 | % | $ | 319 | 6.6 | % | — | |||||||
2011 | 4,811 | 0.2 | (5,599 | ) | (53.8 | ) | (20 | ) | ||||||||
2010 | 10,410 | 0.4 | 949 | 10.0 | — |
Interest income and other, net as a percent of consolidated revenues during the twelve months ended June 30,fiscal year 2012, was consistent with the comparable prior period as there was a favorable foreign currency impact related to the Company's investment in MY Style and a favorable legal settlement during fiscal year 2012 that were offset by the prior year comparable period including higher fees received for warehousing services provided to the purchaser of Trade Secret.
The 30 basis point decrease in the interest income and other, net as a percent of consolidated revenues during the twelve months ended June 30,fiscal year 2011 was primarily due to the foreign currency impact of the Company's investment in MY Style, $1.9 million received from the purchaser of Trade Secret in the comparable prior period for administrative services, and $1.9 million in interest income recorded in the comparable prior period on the outstanding note receivable due from the purchaser of Trade Secret.
Interest income and other, net as a percent of consolidated revenues during the twelve months ended June 30, 2010 was consistent with the twelve months ended June 30, 2009. Interest income increased as a result of higher cash balances available to earn interest, partially offset by a decline in rates.
Income Taxes
Our reported effective tax rate was as follows:
Years Ended June 30, | Effective Rate | Basis Point Increase (Decrease)(1) | |||||
---|---|---|---|---|---|---|---|
2012 | (5.8 | )% | 3,130 | ||||
2011 | (37.1 | ) | N/A | ||||
2010 | 48.1 | (520 | ) |
During fiscal year 2011 is not applicable due to2012, the Company recognized an income tax benefit of $4.4 million on $25.3 million of losses from continuing operations before income taxes and equity in fiscal year 2011 compared to income tax expense in fiscal year 2010.
The basis point increase in our overall effective income tax rateloss of affiliated companies, for fiscal year 2012 was primarily due to the impact of the goodwill impairment charges recorded during fiscal year 2012 as compared to the impact of the goodwill impairment charge recorded during fiscal year 2011. The majority of the goodwill impairment charges recorded during fiscal year 2012 were non-deductible for tax purposes. This adversely impacted the annualan effective tax rate by 37.9% as compared to the prior year impact of 10.4%17.5%. Additionally, the impact of employment credits related to the Small Business and Work Opportunity Act of 2007 resulted in less of a tax benefit to the annualThe smaller than expected effective tax rate when compared towas primarily because the prior year. This$67.7 million Regis salon concept impairment charge was due to the prior year employment credits having a larger favorable impact to the prior year effectivepartially nondeductible for tax rate because of the lower book loss recorded during fiscal year 2011. Absent new legislation being enacted, these credits expired on December 31, 2011.purposes.
ForDuring fiscal year 2011, the Company reported a $25.6recognized an income tax benefit of $16.3 million on $43.9 million of loss from continuing operations before income taxes as compared toand equity in income from continuing operations before income taxes of $53.2 and $78.8 million in fiscal years 2010 and 2009, respectively. The rate reconciliation items have a greater impact on the annual effective income tax rate in fiscal year 2011 as the magnitude of the loss from continuing operations before income taxes is less than the magnitude of income from continuing operations before income taxes in fiscal year 2010. The annualaffiliated companies, for an effective tax rate of 37.2%. Significant items impacting the effective tax rate were the $74.1 million Promenade salon concept impairment charge which was favorably impacted bypartially nondeductible for tax purposes and the employment credits related to the Small Business andCompany benefited from Work Opportunity Tax Act of 2007. Partially offsetting the favorable impact of the employment credits was the adverse impact of the pre-tax non-cash goodwill impairment charge of $74.1 million recorded during the third quarter of fiscal year 2011, which is only partially deductible for tax purposes. Additionally, the foreign income taxes at other than U.S. rates adversely impacted the annual effective tax rate due to a decrease in foreign income from continuing operations before income taxes and other foreign non-deductible items.
The basis point improvement in our overall effective income tax rate for the fiscal year ended June 30, 2010 was primarily due to a decrease in the impact of the non-cash goodwill impairment charge recorded during the year ended June 30, 2010 compared to the impact of the non-cash goodwill impairment charge recorded during the year ended June 30, 2009 and an increase in the employment credits received. In addition, a 0.9 percent decrease in the tax rate was due to adjustments to the income tax balances, which had a smaller impact than the charge recorded in the prior year related to the adjustment of prior year deferred income taxes.
Table of ContentsCredits.
Equity in (Loss) Income of Affiliated Companies, Net of Income Taxes
Equity in (loss) income of affiliates, representing the income or loss generated by our equity investment in Empire Education Group, Inc., Provalliance, and other equity method investments was as follows:
| | (Decrease) Increase Over Prior Fiscal Year | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Equity (Loss) Income | |||||||||
Years Ended June 30, | Dollar | Percentage | ||||||||
| (Dollars in thousands) | |||||||||
2012 | $ | (30,043 | ) | $ | (37,271 | ) | (515.6 | )% | ||
2011 | 7,228 | (4,714 | ) | (39.5 | ) | |||||
2010 | 11,942 | 41,788 | 140.0 |
The loss in affiliated companies, net of taxes for fiscal year 2013 was primarily due to the Company's $17.9 million other than temporary impairment charge recorded on its investment in EEG, partially offset by the Company's share of EEG's net income and a $0.6 million gain on the Provalliance equity put that automatically terminated as a result of the sale of the Company's investment in Provalliance. See Note 5 to the Consolidated Financial Statements for further discussion of each respective affiliated company.
The loss in affiliated companies, net of taxes for fiscal year ended June 30, 2012 was primarily due to the impairment losses of $17.2 and $19.4 million recorded on our investments in Provalliance and EEG, respectively. On April 9, 2012, the Company enteredIn conjunction with entering into the Agreementa purchase agreement to sell the Company's 46.7 percent equity interest in Provalliance, to the Provost Family for a purchase price of €80 million. In conjunction, the Company recorded a $37.4 million other than temporary impairment charge on its investment in Provalliance and $20.2 million reduction in the fair value of the Equity Put, resulting in a net impairment charge of $17.2 million. The Company recorded a $19.4 million other than temporary impairment charge for the excess of the carrying value of its investment in EEG over the fair value. The Company also recorded its $8.7 million share of an intangible asset impairment recorded directly by EEG. These impairments recorded during fiscal year 2012 were partially offset by our share of earnings of $9.7 $4.7 and $0.8$4.7 million recorded for our investments in Provalliance and EEG, and Hair Club for Men, Ltd., respectively. See Note 6 to the Consolidated Financial Statements for further discussion of each respective affiliated company.
Equity in income of affiliated companies, net of taxes for thefiscal year ended June 30, 2011 was due to equity in income of $7.8 $5.5 and $0.6$5.5 million recorded for our investments in Provalliance EEG and Hair Club for Men, Ltd.,EEG, respectively. In addition, the Company recorded a $9.0 million impairment loss related to the Company's investment in MY Style. The impairment charge was based on the decline in equity value of MY Style as a result of changes in projected revenue growth after the natural disasters that occurred in Japan during March 2011. The Company also recorded a $2.4 million net gain related to the settlement of a portion of the Company's equity put liability and additional ownership of the Frank Provost Group in Provalliance.
Equity in income of affiliated companies, net of taxes for the year ended June 30, 2010 was due to equity in income of $4.1, $6.4 and $0.9 million recorded for our investments in Provalliance, EEG and Hair Club for Men, Ltd., respectively.
Income from Discontinued Operations, net of Taxes
IncomeDuring fiscal year 2013, the Company recognized $25.0 million of income, net of taxes from discontinued operations, was as follows:primarily from an after-tax gain of $17.8 million realized upon the sale of Hair Club and $12.6 million of income from Hair Club operations, net of taxes, partially offset by
| | Increase (Decrease) Over Prior Fiscal Year | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Income from Discontinued Operations, Net of Taxes | |||||||||
Years Ended June 30, | Dollar | Percentage | ||||||||
| (Dollars in thousands) | |||||||||
2012 | $ | 1,099 | $ | 1,099 | N/A | |||||
2011 | — | (3,161 | ) | (100.0 | ) | |||||
2010 | 3,161 | 134,597 | 102.4 |
$5.4 million of expense, net of taxes associated with professional and transaction fees. See Note 2 to the Consolidated Financial Statements for further discussion on discontinued operations.
During fiscal year 2012, the Company recordedrecognized $62.4 million of loss, net of taxes from discontinued operations, primarily from a $61.9 million loss, net of taxes from Hair Club operations, as a result of the $78.4 million goodwill impairment charge, and $1.6 million of expense, net of taxes associated with professional and transaction fees, partially offset by $1.1 million tax benefit in discontinued operations related to the release of tax reserves associated with the disposition of theour Trade Secret salon concept.
During fiscal year 2010,2011, the Company recordedrecognized $12.0 of income, net of taxes, from Hair Club operations.
Recent Developments
First Quarter-to-Date Fiscal 2014 Sales Trends
As of August 25, 2013, first quarter-to-date same store service sales and product sales were down 3.4% and 14.9%, respectively. The Company believes these declines are short-term in nature, and we have seen improvement in August same-store service sales which are down 2.4%, a $3.0 million tax benefit in discontinued operations180 basis point improvement since July. We expect these trends to correct the prior year calculationfurther improve as our new field teams transition from reorganizing and hiring activities to focusing on their salons, and as we become more comfortable with and optimize our use of the new POS system. The Company has taken a number of steps to reverse this short-term trend, including providing an incentive for stylists to gain traction on our first quarter promotion and accelerating by two weeks the delivery of items within our new product assortment so that salon shelves could be reset sooner. Since salon resets were just completed several weeks ago, product sales trends have yet to show improvement.
Field Reorganization—Financial Statement Expense Classification
Beginning in the first quarter of fiscal year 2014, the field reorganization, excluding salons within the mass premium category, will result in a change in expense classifications on our Statement of Operations. Previously, field leaders did not work on the salon floor daily. As reorganized, field leaders will spend most of their time on the salon floor leading, mentoring and serving guests. Accordingly, field leader costs, including their labor and travel costs, will directly arise from the management of salon operations. As a result, district and senior district leader labor costs will be reported within Cost of Service rather than General and Administrative expenses, and their travel costs will be reported within Site Operating expenses rather than General and Administrative expenses. This expense classification will have no financial impact on the Company's reported operating income tax benefit related to the disposition of the Trade Secret Salon concept.(loss), reported net income (loss) or cash flows from operations.
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements.
Effects of Inflation
We compensate some of our salon employees with percentage commissions based on sales they generate, thereby enabling salon payroll expense as a percent of company-owned salon revenues to remain relatively constant. Accordingly, this provides us certain protection against inflationary increases, as payroll expense and related benefits (our major expense components) are variable costs of sales. In addition, we may increase pricing in our salons to offset any significant increases in wages. Therefore, we do not believe inflation has had a significant impact on the results of our operations.
Constant Currency Presentation
The presentation below demonstrates the effect of foreign currency exchange rate fluctuations from year to year. To present this information, current period results for entities reporting in currencies other than United States dollars are converted into United States dollars at the average exchange rates in effect during the corresponding period of the prior fiscal year, rather than the actual average exchange rates in effect during the current fiscal year. Therefore, the foreign currency impact is equal to current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year.
During the fiscal year ended June 30, 2012, foreign currency translation had a minimal net impact on consolidated revenues as the weakening of the British Pound and Euro against the United States dollar was offset by the strengthening of the Canadian dollar against the United States dollar.
During the fiscal year ended June 30, 2011, foreign currency translation had a favorable impact on consolidated revenues due to the strengthening of the Canadian dollar and British Pound against the United States dollar.
During the fiscal year ended June 30, 2010, foreign currency translation had a favorable impact on consolidated revenues due to the strengthening of the Canadian dollar against the United States dollar, partially offset by the weakening of the British pound and Euro against the United States dollar.
| Favorable (Unfavorable) Impact of Foreign Currency Exchange Rate Fluctuations | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Impact on Revenues | Impact on (Loss) Income Before Income Taxes | |||||||||||||||||
Currency | Fiscal 2012 | Fiscal 2011 | Fiscal 2010 | Fiscal 2012 | Fiscal 2011 | Fiscal 2010 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
Canadian dollar | $ | 364 | $ | 9,736 | $ | 10,422 | $ | 47 | $ | 937 | $ | 1,761 | |||||||
British pound | (263 | ) | 653 | (4,928 | ) | (2 | ) | 15 | (184 | ) | |||||||||
Euro | (114 | ) | (137 | ) | (34 | ) | (8 | ) | 39 | (5 | ) | ||||||||
Total | $ | (13 | ) | $ | 10,252 | $ | 5,460 | $ | 37 | $ | 991 | $ | 1,572 | ||||||
Results of Operations by Segment
Based on our internal management structure, we report three segments: North American salons, International salons and Hair Restoration Centers. Significant results of operations are discussed below with respect to each of these segments.
North American Salons
North American Salon Revenues. Total North American salon revenues were as follows:
| | Decrease Over Prior Fiscal Year | | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Same-Store Sales Decrease | |||||||||||
Years Ended June 30, | Revenues | Dollar | Percentage | ||||||||||
| (Dollars in thousands) | ||||||||||||
2012 | $ | 1,981,105 | $ | (48,839 | ) | (2.4 | )% | (3.2 | )% | ||||
2011 | 2,029,944 | (30,619 | ) | (1.5 | ) | (1.8 | ) | ||||||
2010 | 2,060,563 | (57,135 | ) | (2.7 | ) | (3.3 | ) |
The percentage decreases during the years ended June 30, 2012, 2011, and 2010 were due to the following factors:
| Percentage Increase (Decrease) in Revenues For the Years Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Factor | 2012 | 2011 | 2010 | |||||||
Acquisitions | 0.7 | % | 1.2 | % | 0.8 | % | ||||
Same-store sales | (3.2 | ) | (1.8 | ) | (3.3 | ) | ||||
New stores | 1.3 | 0.6 | 0.8 | |||||||
Foreign currency | 0.0 | 0.5 | 0.5 | |||||||
Franchise revenues | 0.0 | 0.0 | 0.0 | |||||||
Closed salons | (2.3 | ) | (1.4 | ) | (0.4 | ) | ||||
Other | 1.1 | (0.6 | ) | (1.1 | ) | |||||
(2.4 | )% | (1.5 | )% | (2.7 | )% | |||||
We acquired 12 North American salons during the twelve months ended June 30, 2012, including 11 franchise buybacks. The same-store sales decrease of 3.2 percent for fiscal year 2012 was the result of a decline in guest visitations and a decrease in average ticket. The Company constructed and closed 191 and 317 company-owned salons, respectively during the twelve months ended June 30, 2012.
We acquired 105 North American salons during the twelve months ended June 30, 2011, including 78 franchise buybacks. The same-store sales decrease of 1.8 percent was the result of a decline in same-store guest visits, partially offset by an increase in average ticket. The foreign currency impact during fiscal year 2011 resulted primarily from the weakening of the United States dollar against the Canadian dollar. The Company constructed and closed 133 and 230 company-owned salons, respectively during the twelve months ended June 30, 2011.
We acquired 26 North American salons during the twelve months ended June 30, 2010, including 23 franchise buybacks. The same-store sales decrease of 3.3 percent was the result of a decline in same-store guest visits, partially offset by an increase in average ticket. The foreign currency impact during fiscal year 2010 resulted from the weakening of the United States dollar against the Canadian dollar as compared to the exchange rate for fiscal year 2009. The Company constructed and closed 137 and 162 company-owned salons, respectively during the twelve months ended June 30, 2010.
North American Salon Operating Income. Operating income for the North American salons was as follows:
| | | (Decrease) Increase Over Prior Fiscal Year | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Income as % of Total Revenues | |||||||||||||||
Years Ended June 30, | Operating Income | Dollar | Percentage | Basis Point(1) | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
2012 | $ | 165,368 | 8.3 | % | $ | (1,315 | ) | (0.8 | )% | 10 | ||||||
2011 | 166,683 | 8.2 | (53,172 | ) | (24.2 | ) | (250 | ) | ||||||||
2010 | 219,855 | 10.7 | (55,773 | ) | (20.2 | ) | (230 | ) |
The basis point increase in North American salon operating income as a percent of North American salon revenues during fiscal year 2012 was primarily due to the $67.7 million goodwill impairment of the Company's Regis salon concept was less than the $74.1 million goodwill impairment of the Company's Promenade salon concept in fiscal year 2011. The basis point increase was also due to improved service margins, partially offset by negative leverage in fixed cost categories due to negative same-store sales.
The basis point decrease in North American salon operating income as a percent of North American salon revenues during fiscal year 2011 was primarily due to the $74.1 million goodwill impairment of the Company's Promenade salon concept and negative leverage in fixed cost categories due to negative same-store sales. Partially offsetting the basis point decrease was lower depreciation expense due to a reduction in salon construction.
The basis point decrease in North American salon operating income as a percent of North American salon revenues during fiscal year 2010 was primarily due to the $35.3 million goodwill impairment of the Company's Regis salon concept and negative leverage in fixed cost categories due to negative same-store sales. In addition, the basis point decrease was due to the settlement of two legal claims regarding guest and employee matters totaling $5.2 million, higher self-insurance expense (the Company recorded reduction in self-insurance accruals of $1.7 million in the twelve months ended June 30, 2010 compared to a $9.9 million reduction in the twelve months ended June 30, 2009), partially offset by the Company's cost saving initiatives and gross margin improvement.
International Salons
International Salon Revenues. Total International salon revenues were as follows:
| | Decrease Over Prior Fiscal Year | | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Same-Store Sales Decrease | |||||||||||
Years Ended June 30, | Revenues | Dollar | Percentage | ||||||||||
| (Dollars in thousands) | ||||||||||||
2012 | $ | 141,122 | $ | (9,115 | ) | (6.1 | )% | (9.1 | )% | ||||
2011 | 150,237 | (5,848 | ) | (3.7 | ) | (3.1 | )% | ||||||
2010 | 156,085 | (15,484 | ) | (9.0 | ) | (3.8 | ) |
The percentage decreases during the years ended June 30, 2012, 2011, and 2010 were due to the following factors:
| Percentage (Decrease) Increase in Revenues For the Years Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
Acquisitions | — | % | — | % | — | % | ||||
Same-store sales | (9.1 | ) | (3.1 | ) | (3.8 | ) | ||||
New stores | 1.9 | 1.0 | 0.1 | |||||||
Foreign currency | (0.3 | ) | 0.3 | (2.9 | ) | |||||
Franchise revenues | — | — | — | |||||||
Closed salons | (2.3 | ) | (3.7 | ) | (7.6 | ) | ||||
Other | 3.7 | 1.8 | 5.2 | |||||||
(6.1 | )% | (3.7 | )% | (9.0 | )% | |||||
We acquired one International salon during the twelve months ended June 30, 2012. Same-store sales decreased 9.1 percent due to a decline in guest visits. The Company constructed 13 company-owned salons (net of relocations) during the twelve months ended June 30, 2012. The foreign currency impact during fiscal year 2012 resulted from the strengthening of the United States dollar against the British Pound. We closed 16 company-owned salons during the twelve months ended June 30, 2012.
We did not acquire any International salons during the twelve months ended June 30, 2011. Same-store sales decreased 3.1 percent due to a decline in guest visits. The Company constructed 11 company-owned salons (net of relocations) during the twelve months ended June 30, 2011. The foreign currency impact during fiscal year 2011 resulted from the weakening of the United States dollar against the British Pound. We closed 15 company-owned salons during the twelve months ended June 30, 2011.
We did not acquire any International salons during the twelve months ended June 30, 2010. Same-store sales decreased 3.8 percent due to a decline in guest visits. The Company constructed 2 company-owned salons during the twelve months ended June 30, 2010. The foreign currency impact during fiscal year 2010 resulted from the strengthening of the United States dollar against the British Pound and Euro as compared to the exchange rates for fiscal year 2009. We closed 42 company-owned salons during the twelve months ended June 30, 2010, of which 29 related to the June 2009 plan to close underperforming salons in the United Kingdom.
International Salon Operating Income. Operating income for the International salons was as follows:
| | | (Decrease) Increase Over Prior Fiscal Year | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Income as % of Total Revenues | |||||||||||||||
Years Ended June 30, | Operating Income | Dollar | Percentage | Basis Point(1) | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
2012 | $ | 2,505 | 1.8 | % | $ | (4,233 | ) | (62.8 | )% | (270 | ) | |||||
2011 | 6,738 | 4.5 | (41 | ) | (0.6 | ) | 20 | |||||||||
2010 | 6,779 | 4.3 | 52,260 | 114.9 | 3,080 |
The basis point decrease in International salon operating income as a percent of International salon revenues during fiscal year 2012 was primarily due to negative leverage on fixed costs due to a decrease in same-store sales.
The basis point improvement in International salon operating income as a percent of International salon revenues during fiscal year 2011 was primarily due to $2.1 million of lease termination costs recognized during fiscal year 2010 associated with the Company's planned closure of underperforming salons. Partially offsetting the basis point improvement was a decline on product margins from mix play, as a larger than expected percentage of our product sales came from lower-margin products.
The basis point improvement in International salon operating income as a percent of International salon revenues during fiscal year 2010 was primarily due to the comparable prior period including a $41.7 million goodwill impairment of the United Kingdom reporting unit and higher impairment charges related to the impairment of property and equipment at underperforming locations. In addition the Company's planned closure of underperforming United Kingdom salons and the continuation of the Company's expense control and payroll management contributed to the basis point improvement during fiscal year 2010.
Hair Restoration Centers
Hair Restoration Center Revenues. Total Hair Restoration Centers revenues were as follows:
| | Increase Over Prior Fiscal Year | | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Same-Store Sales Increase | |||||||||||
Years Ended June 30, | Revenues | Dollar | Percentage | ||||||||||
| (Dollars in thousands) | ||||||||||||
2012 | $ | 151,552 | $ | 5,864 | 4.0 | % | 2.9 | % | |||||
2011 | 145,688 | 3,902 | 2.8 | 1.2 | |||||||||
2010 | 141,786 | 1,266 | 0.9 | 0.4 |
The percentage increases during the years ended June 30, 2012, 2011, and 2010 were due to the following factors:
| Percentage Increase (Decrease) in Revenues For the Years Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
Acquisitions | 1.3 | % | 1.1 | % | 0.2 | % | ||||
Same-store sales | 2.9 | 1.2 | 0.4 | |||||||
New centers | 0.4 | 0.3 | 0.0 | |||||||
Franchise revenues | 0.1 | 0.7 | (0.2 | ) | ||||||
Closed centers | (0.2 | ) | (0.3 | ) | 0.0 | |||||
Other | (0.5 | ) | (0.2 | ) | 0.5 | |||||
4.0 | % | 2.8 | % | 0.9 | ||||||
The increase in Hair Restoration Centers revenues during fiscal year 2012 was due to the increase in same-store sales of 2.9 percent, the construction of six hair restoration centers and the four acquired hair restoration centers during fiscal year 2011.
The increase in Hair Restoration Centers revenues during fiscal year 2011 was due to the increase in same-store sales of 1.2 percent, the acquisition of four hair restoration centers, all of which were franchise buybacks, and the construction of three hair restoration centers.
The increase in Hair Restoration Centers revenues during fiscal year 2010 was due to the increase in same-store sales of 0.4 percent and the construction of four hair restoration centers.
Hair Restoration Center Operating (Loss) Income. Operating (loss) income for our Hair Restoration Centers was as follows:
| | Operating (Loss) Income as % of Total Revenues | Decrease Over Prior Fiscal Year | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ||||||||||||||||
Years Ended June 30, | Operating (Loss) Income | Dollar | Percentage | Basis Point(1) | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
2012 | $ | (62,639 | ) | (41.3 | )% | $ | (80,869 | ) | (443.6 | )% | (5,380 | ) | ||||
2011 | 18,230 | 12.5 | (2,107 | ) | (10.4 | ) | (180 | ) | ||||||||
2010 | 20,337 | 14.3 | (3,534 | ) | (14.8 | ) | (270 | ) |
The basis point decrease in Hair Restoration Centers operating loss as a percent of Hair Restoration Centers revenues during the twelve months ended June 30, 2012 was primarily due to the $78.4 million goodwill impairment of the Hair Restoration Centers, lower margins due primarily to increased labor costs and an increase in the cost hair systems.
The basis point decrease in Hair Restoration Centers operating income as a percent of Hair Restoration Centers revenues during the twelve months ended June 30, 2011 was primarily due to an increase in the cost of hair systems and expenses associated with a legal claim. Partially offsetting the basis point decrease was a benefit related to a favorable ruling on a state sales tax issue.
The basis point decrease in Hair Restoration Centers operating income as a percent of Hair Restoration Centers revenues during the twelve months ended June 30, 2010 was primarily due to an increase in advertising spend and the settlement of a vendor dispute totaling $0.6 million.
Unallocated Corporate
Unallocated Corporate Operating Loss. Unallocated corporate operating expenses include salaries, stock-based compensation, professional fees, rent, depreciation and other expenses that are not allocated. Unallocated corporate operating losses were as follows:
| | (Decrease) Increase Over Prior Fiscal Year | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Operating Loss | |||||||||
Years Ended June 30, | Dollar | Percentage | ||||||||
| (Dollars in thousands) | |||||||||
2012 | $ | 172,547 | $ | (15,156 | ) | (8.1 | )% | |||
2011 | 187,703 | 37,950 | 25.3 | |||||||
2010 | 149,753 | 4,808 | 3.3 |
The improvement in unallocated corporate operating loss during the twelve months ended June 30, 2012 as compared to the twelve months ended June 30, 2011 was primarily due to the comparable prior period including $31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret, partially offset by $16.2 million of accelerated depreciation expense recorded during fiscal year 2012 as a result of an adjustment to the useful life of the Company's internally developed POS system, and incremental costs associated with the Company's senior management restructuring and contested proxy.
The increase in unallocated corporate operating loss during the twelve months ended June 30, 2011 as compared to the twelve months ended June 30, 2010 was primarily due to the $31.2 million
valuation reserve on the note receivable with the purchaser of Trade Secret, incremental costs associated with the Company's senior management restructure, professional fees incurred related to the exploration of strategic alternatives and information technology projects and legal claims expense.
The increase in unallocated corporate operating loss during the twelve months ended June 30, 2010 as compared to the twelve months ended June 30, 2009 was primarily due to an increase in professional fees and distribution costs from an agreement with the purchaser of Trade Secret.
LIQUIDITY AND CAPITAL RESOURCES
OverviewSources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, and our revolving credit facility are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to sustain operations and to finance strategic initiatives. We also anticipate having access to long-term financing. However, in the event our liquidity is insufficient and we are not able to access long-term financing, we may be required to limit or delay our strategic initiatives. There can be no assurance that we will continue to maintain a strong balance sheet to support system growth and financial flexibility. Our debt to capitalization ratio, calculated as total debt as a percentage of total debt and shareholders' equitygenerate cash flows at fiscal year end, was as follows:
As of June 30, | Debt to Capitalization | Basis Point Increase (Decrease)(1) | |||||
---|---|---|---|---|---|---|---|
2012 | 24.4 | % | 110 | ||||
2011 | 23.3 | (700 | ) | ||||
2010 | 30.3 | (1,380 | ) |
The basis point increase in the debt to capitalization ratio as of June 30, 2012 compared to June 30, 2011 was primarily due to the decrease in shareholders' equity as a result of the non-cash goodwill impairment charges related to the Regis salon concept and Hair Restoration Centers reporting unit, a $17.2 million net impairment charge associated with the Agreement to sell the Company's 46.7 percent equity interest in Provalliance to the Provost family, and a $19.4 million impairment charge associated with our investment in EEG. Partially offsetting the impact of the decrease in shareholders' equity was a decrease in debtor above current levels.
The basis point improvement in the debt to capitalization ratio as of June 30, 2011 compared to June 30, 2010 was primarily due to the repayment of an $85.0 million term loan during fiscal year 2011 and foreign currency translation adjustments due to the weakening of the United States dollar against the Canadian dollar and British Pound.
The basis point improvement in the debt to capitalization ratio as of June 30, 2010 compared to June 30, 2009 was primarily due to the July 2009 common stock offering and decreased debt levels stemming from the repayment of private placement debt during fiscal year 2010. Our principal on-going cash requirements are to finance construction of new stores, remodel certain existing stores, acquire salons and purchase inventory. Guests pay for salon services and merchandise in cash at the time of sale, which reduces our working capital requirements.
Total assets at June 30, 2012, 2011, and 2010 were as follows:
| | (Decrease) Increase Over Prior Fiscal Year | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Total Assets | |||||||||
As of June 30, | Dollar | Percentage | ||||||||
| (Dollars in thousands) | |||||||||
2012 | $ | 1,571,846 | $ | (233,907 | ) | (13.0 | )% | |||
2011 | 1,805,753 | (113,819 | ) | (5.9 | ) | |||||
2010 | 1,919,572 | 27,086 | 1.4 |
The primary factors for the decrease in total assets asAs of June 30, 2012 compared to June 30, 20112013, cash and cash equivalents were $200.5 million, with $176.4, $11.7 and $12.4 million in the goodwill impairment charges related to the Regis salon conceptUnited States, Canada, and Hair Restoration Centers reporting unit, a $17.2 million net impairment charge associated with the Agreement to sell the Company's 46.7 percent equity interest in Provalliance to the Provost family, and a $19.4 million impairment charge associated with our investment in EEG. Additionally, total assets decreased as a result of the accelerated depreciation expense associated with the adjustment to the useful life of the Company's internally developed POS. Partially offsetting the decrease in total assets were cash flows from operations.
The $74.1 million goodwill impairment charge related to the Promenade salon concept, a $31.2 million valuation reserve on the note receivable due from the purchaser of Trade Secret, and a $9.2 million impairment on the Company's investment in MY Style, partially offset by cash flows from operations, were the primary factors for the decrease in total assets asEurope, respectively. As of June 30, 2011 compared2013, the Company has a $33.3 million income tax receivable of which approximately $11 million is expected to June 30, 2010.be collected during the first quarter of fiscal year 2014.
Cash flows from operations, partially offset by the $35.3We have a $400.0 million goodwill impairment charge related to the Regis salon concept were the primary factors for the increasefive-year senior unsecured revolving credit facility with a syndicate of banks that expires in total assets asJune 2018. As of June 30, 2010 compared2013, the Company had no outstanding borrowings under the facility, and had outstanding standby letters of credit under the facility of $2.2 million, primarily related to June 30, 2009.
Total shareholders' equityits self-insurance program. Accordingly, unused available credit under the facility at June 30, 2012, 2011,2013 was $397.8 million. The credit under this facility could be used to fund the convertible senior term notes should the Company choose to settle these notes in cash. Refer to additional discussion under financing arrangements.
Our ability to access our revolving credit facility is subject to our compliance with the terms and 2010 was as follows:
| | (Decrease) Increase Over Prior Fiscal Year | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Shareholders' Equity | |||||||||
As of June 30, | Dollar | Percentage | ||||||||
| (Dollars in thousands) | |||||||||
2012 | $ | 889,157 | $ | (143,462 | ) | (13.9 | )% | |||
2011 | 1,032,619 | 19,326 | 1.9 | |||||||
2010 | 1,013,293 | 210,433 | 26.2 |
During the twelve months endedconditions of such facility, including a maximum leverage ratio, a minimum fixed charge ratio and other covenants and requirements. At June 30, 2012, equity decreased primarily as a as a result2013, we were in compliance with all covenants and other requirements of the non-cash goodwill impairment charges related to the Regis salon conceptour credit agreement and Hair Restoration Centers reporting unit, a $17.2 million net impairment charge associated with the Agreement to sell the Company's 46.7 percent equity interest in Provalliance to the Provost family, a $19.4 million impairment charge associated with our investment in EEG, and $24.3 million of foreign currency translation.senior notes.
During the twelve months ended June 30, 2011, equity increased primarily as a result of $30.4 million of foreign currency translation and $9.6 million of stock based compensation, partially offset by $11.5 million of dividends and $8.9 million of net loss.
During the twelve months ended June 30, 2010, equity increased primarily as a result of the issuance of the $163.6 million in common stock, the $24.7 million ($15.2 million net of tax) equity component of the convertible debt, stock based compensation of $9.3 million and the $42.7 million of earnings during fiscal year 2010. Partially offsetting the increase was a non-cash goodwill impairment charge of $35.3 million related to our Regis salon concept, $9.1 million of dividends, $8.2 million in equity issuance costs and $5.4 million of foreign currency translation adjustments.
Cash Flows
Cash Flows from Operating Activities
NetFiscal year 2013 cash provided by operating activities duringof $69.1 million declined by $84.6 million compared to the twelve months ended June 30, 2012, 2011previous fiscal year. Despite higher earnings in the current year, the decrease is attributable to decreases in revenues and 2010 were a resultincreased cost of the following:service and product resulting in changes in working capital. Cash payments of deferred compensation and income taxes also contributed to declines in cash provided by operating activities.
| Operating Cash Flows For the Years Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
| (Dollars in thousands) | |||||||||
Net (loss) income | $ | (114,093 | ) | $ | (8,905 | ) | $ | 42,740 | ||
Depreciation and amortization | 111,435 | 98,428 | 102,336 | |||||||
Equity in loss (income) of affiliated companies | 30,043 | (7,228 | ) | (11,942 | ) | |||||
Dividends received from affiliated companies | 4,047 | 10,023 | 2,404 | |||||||
Deferred income taxes | (14,171 | ) | (14,711 | ) | 5,115 | |||||
Impairment on discontinued operations | — | — | (154 | ) | ||||||
Goodwill and asset impairments | 152,746 | 80,781 | 41,705 | |||||||
Note receivable bad debt (recovery) expense | (805 | ) | 31,227 | — | ||||||
Receivables | (4,502 | ) | (2,358 | ) | 1,192 | |||||
Inventories | 2,644 | 4,629 | 4,823 | |||||||
Income tax receivable | 2,809 | 23,855 | 957 | |||||||
Other current assets | (5,272 | ) | 4,725 | 2,657 | ||||||
Other assets | (841 | ) | (11,050 | ) | (14,951 | ) | ||||
Accounts payable and accrued expenses | (13,513 | ) | 368 | 1,040 | ||||||
Other noncurrent liabilities | (11,151 | ) | 1,818 | 1,954 | ||||||
Other | 14,324 | 17,576 | 12,347 | |||||||
$ | 153,700 | $ | 229,178 | $ | 192,223 | |||||
Fiscal year 2012 cash provided by operating activities was lower thanof $153.7 million declined by $75.5 million compared to the previous fiscal year, 2011 cash provided by operating activities due to a $51.8 million of this decrease in cash provided by operating assets and liabilities primarily duerelated to the timing of accruals and a reduction in the amount received for income taxes, as fiscal year 2011 included a tax refund related to the fiscal year 2009 loss on discontinued operations. Cash provided by operating activities was also lower due to a decrease of $6.0 million in dividends received from affiliated companies.
Fiscal year 2011 cash provided by operating activities was greater than fiscal year 2010 cash providedof $229.2 million increased by operating activities$37.0 million mainly due to an increase of $7.6 million in dividends received from affiliated companies and a $23.9 million reduction in income tax receivables.
Fiscal year 2010 cash provided by operating activities was consistent with fiscal year 2009 cash provided by operating activities.
Cash Flows from Investing Activities
Net cash used inCash provided by investing activities during fiscal year 2013 of $165.1 million was greater than the twelve months ended June 30, 2012, 2011$90.9 million use of cash in fiscal year 2012. In fiscal year 2013, we received $266.2 million from the sales of Hair Club and 2010 wasProvalliance and $26.4 million from EEG related to principal payments on the resultoutstanding note receivable and revolving line of credit. These were partially offset by the following:Company placing $24.5 million into restricted cash to collateralize its self-insurance program, enabling the Company to reduce fees associated with previously utilized standby letters of credit, and increased capital expenditures primarily related to the Company's POS system implementation.
| Investing Cash Flows For the Years Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
| (Dollars in thousands) | |||||||||
Business and salon acquisitions | $ | (2,587 | ) | $ | (17,990 | ) | $ | (3,664 | ) | |
Capital expenditures for remodels or other additions | (36,128 | ) | (44,855 | ) | (40,561 | ) | ||||
Capital expenditures for the corporate office (including all technology-related expenditures) | (27,072 | ) | (13,826 | ) | (7,828 | ) | ||||
Capital expenditures for new salon construction | (22,569 | ) | (12,788 | ) | (9,432 | ) | ||||
Proceeds from loans and investments | 11,995 | 16,804 | 16,099 | |||||||
Disbursements for loans and investments | (15,000 | ) | (72,301 | ) | — | |||||
Freestanding derivative settlement | — | — | 736 | |||||||
Proceeds from sale of assets | 502 | 626 | 70 | |||||||
$ | (90,859 | ) | $ | (144,330 | ) | $ | (44,580 | ) | ||
Cash used by investing activities was lessof $90.9 million during fiscal year 2012 compared towas less than fiscal year 2011 of $144.3 million due to the comparable prior period including the acquisition of approximately 17 percent additional equity interest in Provalliance for $57.3 million, (€40.4 million), a decrease in the amount of cash paid for acquisitions during fiscal year 2012, partially offset by an increase in capital expenditures during fiscal year 2012 for a new POS system and new salon construction. The Company completed 235 major remodeling projects during fiscal year 2012, compared to 271 and 333 during fiscal years 2011 and 2010, respectively. During fiscal year 2012, we constructed 209 company-owned salons and six hair restoration centers, and acquired 13 company-owned salons (11
Table of which were franchise buybacks).Contents
Cash used by investing activities was greaterof $144.3 million during fiscal year 2011 was greater compared to fiscal year 2010 of $44.6 million due to the acquisition of approximately 17 percent additional equity interest in Provalliance for $57.3 million, (€ 40.4 million), a disbursement of $15.0 million on the revolving credit facility with EEG and the planned increaseincreases in acquisitions and capital expenditures. The Company completed 271 major remodeling projects during fiscal year 2011, compared to 333 and 280 during fiscal years 2010 and 2009, respectively. During fiscal year 2011, we constructed 146 company-owned salons and three hair restoration centers, and acquired 105 company-owned salons (78 of which were franchise buybacks) and four hair restoration centers (all of which were franchise buybacks).
Cash used by investing activities was lower during fiscal year 2010 compared to fiscal year 2009 due to the planned reduction in acquisitions and capital expenditures and the receipt of $15.0 million on the revolving credit facility with EEG of which there was $0.0 and $15.0 million outstanding as of June 30, 2010 and 2009, respectively. The Company completed 333 major remodeling projects during fiscal year 2010, compared to 280 and 186 during fiscal years 2009 and 2008, respectively. We constructed 139 company-owned salons, four hair restoration centers and acquired 26 company-owned salons (23 of which were franchise buybacks) and zero hair restoration centers.
The company-owned constructed and acquired locations (excluding franchise buybacks) consisted of the following number of locations in each concept:
| Years Ended June 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | ||||||||||||||||
| Constructed | Acquired | Constructed | Acquired | Constructed | Acquired | |||||||||||||
Regis | 12 | — | 12 | 9 | 14 | 3 | |||||||||||||
MasterCuts | 11 | — | 6 | — | 15 | — | |||||||||||||
SmartStyle | 50 | — | 65 | — | 80 | — | |||||||||||||
Supercuts | 65 | 1 | 24 | — | 10 | — | |||||||||||||
Promenade | 53 | — | 26 | 18 | 18 | — | |||||||||||||
International | 18 | 1 | 13 | — | 2 | — | |||||||||||||
Hair restoration centers | 6 | — | 3 | — | 4 | — | |||||||||||||
215 | 2 | 149 | 27 | 143 | 3 | ||||||||||||||
Cash Flows from Financing Activities
Net cash used in financing activities during the twelve months ended June 30, 2012, 2011 and 2010 was the result of the following:
| Financing Cash Flows For the Years Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
| (Dollars in thousands) | |||||||||
Net repayments on revolving credit facilities | $ | — | $ | — | $ | (5,000 | ) | |||
Net repayments of long-term debt | (29,693 | ) | (137,671 | ) | (181,850 | ) | ||||
Proceeds from the issuance of common stock | — | 682 | 159,498 | |||||||
Excess tax benefit from stock-based compensation plans | — | 67 | 243 | |||||||
Dividend payments | (13,855 | ) | (11,509 | ) | (9,146 | ) | ||||
Other | — | — | (2,878 | ) | ||||||
$ | (43,548 | ) | $ | (148,431 | ) | $ | (39,133 | ) | ||
During fiscal yearyears 2013, 2012 and 2011, the primary use of cash within financing activities was for repayments of long-term debt of $118.2, $29.7 and dividends.
$137.7 million, respectively and dividends of $13.7, $13.9 and $11.5 million, respectively. During fiscal year 2010,2013 the primary use of cash within financing activities was for net repayments of long-term debt, partially offset by the issuance ofCompany used $14.9 million to repurchase common stock.stock under its share repurchase program and prepaid $89.3 million in private placement debt.
Financing Arrangements
Financing activities are discussed in Note 7 to the Consolidated Financial Statements in Part II, Item 8. Derivative activities are discussed in Note 1 to the Consolidated Financial Statements in Part II, Item 8 and Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."
Management believes that cash generated from operations and amounts available under existing debt facilities will be sufficient to fund its anticipated capital expenditures and required debt repayments for the foreseeable future. As of June 30, 2013, we have $397.8 million available under our existing revolving credit facility.
The Company's financing arrangements as of June 30, 2012 and 2011 consists of the following:
| | Interest rate % | | | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Fiscal Years | June 30, | ||||||||||
| Maturity Dates | 2013 | 2012 | 2013 | 2012 | ||||||||
| (fiscal year) | | | (Dollars in thousands) | |||||||||
Senior term notes | 2013 | 6.69 - 8.50% | 6.69 - 8.50% | $ | — | $ | 111,429 | ||||||
Convertible senior notes(1) | 2015 | 5.00 | 5.00 | 166,454 | 161,134 | ||||||||
Revolving credit facility | 2018 | — | — | — | — | ||||||||
Equipment and leasehold notes payable | 2015 - 2016 | 4.90 - 8.75 | 4.90 - 8.75 | 8,316 | 14,780 | ||||||||
Other notes payable | 2013 | 5.75 - 8.00 | 5.75 - 8.00 | — | 331 | ||||||||
174,770 | 287,674 | ||||||||||||
Less current portion(1) | (173,515 | ) | (28,937 | ) | |||||||||
Long-term portion | $ | 1,255 | $ | 258,737 | |||||||||
| | Interest rate % | Amounts outstanding | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Maturity Dates | 2012 | 2011 | 2012 | 2011 | ||||||||
| (fiscal year) | | | (Dollars in thousands) | |||||||||
Senior term notes | 2013 - 2018 | 6.69 - 8.50% | 6.69 - 8.50% | $ | 111,429 | $ | 133,571 | ||||||
Convertible senior notes | 2015 | 5.00 | 5.00 | 161,134 | 156,248 | ||||||||
Revolving credit facility | 2016 | — | — | — | — | ||||||||
Equipment and leasehold notes payable | 2015 - 2016 | 4.90 - 8.75 | 8.80 - 9.14 | 14,780 | 22,273 | ||||||||
Other notes payable | 2013 | 5.75 - 8.00 | 5.75 - 8.00 | 331 | 1,319 | ||||||||
287,674 | 313,411 | ||||||||||||
Less current portion | (28,937 | ) | (32,252 | ) | |||||||||
Long-term portion | $ | 258,737 | $ | 281,159 | |||||||||
Fiscal Year 2012
In April 2012,June 2013, the Company entered into a Sixth Amended and Restated Credit Agreement (Credit Agreement), which amended the Restated Private Shelf Agreement. The amendments included increasingand restated in its entirety, the Company's existing Fifth Amended and Restated Credit Agreement that was entered into during fiscal year 2011. The Credit Agreement provides for a $400.0 million unsecured five-year revolving credit facility that expires in June 2018 and includes, among other things, a maximum leverage ratio covenant, a minimum net worthfixed charge coverage ratio covenant, from $800.0and certain restrictions on liens, liquidity and other indebtedness. The Company may request an increase in revolving credit commitments under the facility of up to $200.0 million to $850.0 million and amending or adding under
certain definitions, including EBITDA and Rental Expense. Undercircumstances. Events of default under the new agreement, indebtedness related to Capital Leases is limited to $50.0 million.Credit Agreement include a change of control of the Company. We were in compliance with all covenants and other requirements of our credit agreement and senior notes as of June 30, 2012.
Fiscal Year 20112013.
OnDuring June 2013, the Company prepaid $89.3 million of unsecured, fixed rate, senior term notes outstanding under a private shelf agreement.
Beginning in April 2014, the holders of our convertible senior term notes may convert their notes at their option. The Company has the choice of net-cash settlement, settlement in its own shares or a combination of both. As of June 30, 2011,2013, the Company entered into a Fifth Amended and Restated Credit Agreement, which amended and restated in its entirety, the Company's existing Fourth Amended and Restated Credit Agreement. The Fifth Amended and Restated Credit Agreement provides for a $400.0 million senior unsecured five-year revolving credit facility. The amendments included increasing the Company's minimum net worth covenant from $800.0 to $850.0 million, and amending or adding certain definitions, including Change in Law, Defaulting Lender, EBITDA, Fronting Exposure, Replacement Lender, and Accounting Principles. In addition, under the Fifth Amended and Restated Credit Agreement, the Company may request an increase in revolving credit commitments under the facility of up to $200.0 million under certain circumstances. Under the new agreement, indebtedness related to Capital Leases is limited to $50.0 million, and Restricted Payments, as defined in the agreement, are tiered based on Debt to EBITDA. Events of default under the Credit Agreement include change of control of the Company and the Company's default of other debt exceeding $10.0 million.
Fiscal Year 2010
In July 2009, the Company issued $172.5 million of 5.0 percent convertible senior notes due 2014, and 13,225,000 shares of its common stock at $12.37 per share. The notes are unsecured, senior obligations of the Company and interest payable semi-annually at a rate of 5.0 percent per year. The notes mature on July 15, 2014. The notes are convertible subject to certain conditions at an initiala conversion rate of 64.672665.4357 shares of the Company's common stock per $1,000 principal amount of notes, (representing an initialrepresenting a conversion price of approximately $15.46$15.28 per share of the Company's common stock), subjectstock.
Our debt to adjustmentcapitalization ratio, calculated as total debt as a percentage of total debt and shareholders' equity at fiscal year-end, was as follows:
As of June 30, | Debt to Capitalization | Basis Point (Decrease) Increase(1) | |||||
---|---|---|---|---|---|---|---|
2013 | 16.9 | % | (750 | ) | |||
2012 | 24.4 | 110 | |||||
2011 | 23.3 | (700 | ) |
The basis point improvement in the debt to capitalization ratio as of June 30, 2013 compared to June 30, 2012 was primarily due to the prepayment of $89.3 million in private placement debt.
The basis point increase in the debt to capitalization ratio as of June 30, 2012 compared to June 30, 2011 was primarily due to the conversion rate was 65.1432 sharesdecrease in shareholders' equity as a result of the Company's common stock per $1,000 principal amountnon-cash goodwill impairment charges related to the Regis salon concept and Hair Restoration Centers reporting unit and a $36.6 million net impairment charge associated with our investments in Provalliance and EEG. Partially offsetting the impact of notesthe decrease in shareholders' equity was a decrease in debt levels.
The basis point improvement in the debt to capitalization ratio as of June 30, 2011 compared to June 30, 2010 was primarily due to the repayment of an $85.0 million term loan during fiscal year 2011 and foreign currency translation adjustments due to the weakening of the United States dollar against the Canadian dollar and British Pound.
(representing a conversion price of approximately $15.35 per share of the Company's common stock). See further discussion within Note 8 to the Consolidated Financial Statements.
The net proceeds to the Company from the offerings of convertible senior notes and common stock were approximately $323.8 million after deducting underwriting discounts and before estimated offering expenses. The Company utilized the proceeds to repay $267.0 million of private placement senior term notes of varying maturities and $30.0 million of senior term notes under the Private Shelf Agreement. As a result of the repayment of a portion of the senior term notes during the twelve months ended June 30, 2010, the Company incurred $12.8 million in make-whole payments and other fees along with $5.2 million in interest rate swap settlements, as discussed in Note 9 to the Consolidated Financial Statements, totaling $18.0 million that was recorded as interest expense within the Consolidated Statement of Operations. The remaining proceeds were used for general corporate purposes including the repayment of bank debt.
In connection with the offering above, the Company amended the Fourth Amended and Restated Credit Agreement, the Term Loan Agreement and the Amended and Restated Private Shelf Agreement. The amendments included increasing the Company's minimum net worth covenant from $675 to $800 million, lowering the fixed charge coverage ratio requirement from 1.5x to 1.3x, amending certain definitions, including EBITDA and Fixed Charges, and limiting the Company's Restricted Payments to $20 million if the Company's Leverage Ratio is greater than 2.0x. In addition, the amendments to the Fourth Amended and Restated Credit Agreement reduced the borrowing capacity of the revolving credit facility from $350.0 to $300.0 million and the amendments to the Restated Private Shelf Agreement incorporated a risk based capital fee calculated on the daily average outstanding principal amount equal to an annual rate of 1.0 percent which commences one year after the effective date of the amendment.
Other Financing Arrangements
Private Shelf Agreement
At June 30, 2012 and 2011, we had $111.4 and $133.6 million, respectively, in unsecured, fixed rate, senior term notes outstanding under a Private Shelf Agreement. The notes require quarterly payments, and final maturity dates range from June 2013 through December 2017. The interest rates on the notes range from 6.69 to 8.50 percent as of June 30, 2012, and ranged from 6.69 to 8.50 percent as of June 30, 2011.
The Private Shelf Agreement includes financial covenants including debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratios, fixed charge coverage ratios and minimum net equity tests (as defined within the Private Shelf Agreement), as well as other customary terms and conditions. The maturity date for the debt may be accelerated upon the occurrence of various Events of Default, including breaches of the agreement, certain cross-default situations, certain bankruptcy related situations, and other customary events of default.
Equipment and Leasehold Notes Payable
The equipment and leasehold notes payable are primarily comprised of capital lease obligations. In September 2011, the Company entered into an agreement to refinance existing capital leases to a three year term with a contract rate of 4.9 percent. Capital leases of $20.5 million are amortized at the historical rate of 9.2 percent. There was no gain or loss recorded on the refinance. The Company entered into the refinancing to reduce cash interest payments.
Other Notes Payable
The Company had $0.3 and $1.3 million in unsecured outstanding notes at June 30, 2012 and 2011, respectively, related to debt assumed in acquisitions.
Acquisitions
Acquisitions are discussed throughout Management's Discussion and Analysis in this Item 7, as well as in Note 4 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K. The acquisitions were funded primarily from operating cash flow, debt and the issuance of common stock.
Contractual Obligations and Commercial Commitments
The following table reflects a summary of obligations and commitments outstanding by payment date as of June 30, 2012:2013:
| Payments due by period | | Payments due by period | | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations | Within 1 years | 1 - 3 years | 3 - 5 years | More than 5 years | Total | Within 1 years | 1 - 3 years | 3 - 5 years | More than 5 years | Total | ||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||||||
On-balance sheet: | ||||||||||||||||||||||||||||||||
Long-term debt obligations | $ | 22,474 | $ | 196,848 | $ | 35,715 | $ | 17,857 | $ | 272,894 | ||||||||||||||||||||||
Debt obligations | $ | 166,454 | $ | — | $ | — | $ | — | $ | 166,454 | ||||||||||||||||||||||
Capital lease obligations | 6,463 | 8,315 | 2 | — | 14,780 | 7,061 | 1,255 | — | — | 8,316 | ||||||||||||||||||||||
Other long-term liabilities | 5,883 | 4,711 | 3,206 | 14,161 | 27,961 | 4,651 | 4,958 | 3,266 | 7,870 | 20,745 | ||||||||||||||||||||||
Total on-balance sheet | 34,820 | 209,874 | 38,923 | 32,018 | 315,635 | 178,166 | 6,213 | 3,266 | 7,870 | 195,515 | ||||||||||||||||||||||
Off-balance sheet(a): | ||||||||||||||||||||||||||||||||
Operating lease obligations | 306,468 | 433,978 | 200,432 | 85,627 | 1,026,505 | 297,328 | 412,332 | 181,277 | 65,992 | 956,929 | ||||||||||||||||||||||
Interest on long-term debt and capital lease obligations | 18,772 | 22,758 | 7,589 | 1,518 | 50,637 | 9,035 | 422 | — | — | 9,457 | ||||||||||||||||||||||
Total off-balance sheet | 325,240 | 456,736 | 208,021 | 87,145 | 1,077,142 | 306,363 | 412,754 | 181,277 | 65,992 | 966,386 | ||||||||||||||||||||||
Total | $ | 360,060 | $ | 666,610 | $ | 246,944 | $ | 119,163 | $ | 1,392,777 | $ | 484,529 | $ | 418,967 | $ | 184,543 | $ | 73,862 | $ | 1,161,901 | ||||||||||||
On-Balance Sheet Obligations
Our long-term obligations are composed primarily of senior term notes and convertible debt. There were no outstanding borrowings under our revolving credit facility at June 30, 2012.2013. Interest payments on long-term debt and capital lease obligations wereare estimated based on each debt obligation's agreed upon rate as of June 30, 20122013 and scheduled contractual repayments.
Other long-term liabilities of $20.8 million include a total of $21.2$14.5 million related to the Executive Profit Sharing Plan and a salary deferral program $6.8$6.3 million (including $0.2$0.1 million in interest) related to established contractual payment obligations under retirement and severance payment agreements for a small number of retired employees.
This table excludes the short-term liabilities, other than the current portion of long-term debt, disclosed on our balance sheet as the amounts recorded for these items will be paid in the next year. We have no unconditional purchase obligations, as defined by long-term obligations guidance.obligations. Also excluded from the contractual obligations table are payment estimates associated with employee health and workers' compensation claims for which we are self-insured. The majority of our recorded liability for self-insured employee health and workers' compensation losses represents estimated reserves for incurred claims that have yet to be filed or settled.
The Company has unfunded deferred compensation contracts covering certain management and executive personnel. The deferred compensation contracts are offered to key executives based on their performance within the Company. Because we cannot predict the timing or amount of our future payments related to these contracts, such amounts were not included in the table above. Related obligations totaled $24.6$3.5 and $11.8$9.5 million and are included in accrued liabilities and other noncurrent liabilities, respectively, in the Consolidated Balance Sheet at June 30, 2012.2013. Refer to Note 1310 to the Consolidated Financial Statements for additional information. The Company intends
As of June 30, 2013, we have liabilities for uncertain tax positions. We are not able to fund its futurereasonably estimate the amount by which the liabilities will increase or decrease over time; however, at this time, we do not expect a significant payment related to these obligations under these arrangements through Company-owned life insurance policieswithin the next fiscal year. See Note 9 to the Consolidated Financial Statements for more information on the participants.our uncertain tax positions.
Off-Balance Sheet Arrangements
Operating leases primarily represent long-term obligations for the rental of salon and hair restoration center premises,salons, including leases for company-owned locations, as well as future salon franchisee lease payments of approximately $152.5$160.2 million, which are reimbursed to the Company by franchisees, and the guarantee of approximately 20operating leases of salons operated by the purchaser of Trade Secret.Secret with future minimum lease payments of less than $3.0 million. Regarding the franchisee subleases, we generally retain the right to the related salon assets, net of any outstanding obligations, in the event of a default by a franchise owner. Management has not experienced and does not expect any material loss to result from these arrangements.
We have forward foreign currency contracts. See Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," for a detailed discussion of our derivative instruments. Future net settlements under these agreements are not included in the table above.
We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business. These contracts primarily relate to our commercial contracts, operating leases and other real estate contracts, financial agreements, definitive agreement entered into during July 2012 to sell Hair Club, credit facility of EEG that matures on December 31, 2012 with a maximum exposure of $9 million, agreements to provide services, and agreements to indemnify officers, directors and employees in the performance of their work. While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that we expect to result in a material liability.
We do not have other unconditional purchase obligations or significant other commercial commitments such as commitments under lines of credit and standby repurchase obligations or other commercial commitments.
As a part of our salon development program, weWe continue to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations, and continue to enter into transactions to acquire established hair care salons and businesses.locations.
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other
contractually narrow or limited purposes at June 30, 2012.2013. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, and our revolving credit facility are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to sustain operations and to finance anticipated growth opportunities and strategic initiatives. We also anticipate access to long-term financing. However, in the event our liquidity is insufficient and we are not able to access long-term financing, we may be required to limit our growth opportunities. There can be no assurance that we will continue to generate cash flows at or above current levels.
In the first half of fiscal year 2013 the Company is expecting to receive approximately $260 million upon completion of the sale of Provalliance and Hair Club. We are currently evaluating the Company's capital structure and the future use of these proceeds. As of June 30, 2012, cash and cash equivalents were $47.9, $32.8 and $31.2 million within the United States, Canada, and Europe, respectively.
We have a $400.0 million five-year senior unsecured revolving credit facility with a syndicate of banks that expires in June 2016. As of June 30, 2012, the Company had no outstanding borrowings under the facility. Additionally, the Company had outstanding standby letters of credit under the facility of $26.1 million at June 30, 2012, primarily related to its self-insurance program. Unused available credit under the facility at June 30, 2012 was $373.9 million.
Our ability to access our revolving credit facility is subject to our compliance with the terms and conditions of such facility, including minimum net worth and other covenants and requirements. At June 30, 2012, we were in compliance with all covenants and other requirements of our credit agreement and senior notes.
Financing
Financing activities are discussed under "Liquidity and Capital Resources" in this Item 7 and in Note 8 to the Consolidated Financial Statements in Part II, Item 8. Derivative activities are discussed in Note 9 to the Consolidated Financial Statements in Part II, Item 8 and Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."
Management believes that cash generated from operations and amounts available under existing debt facilities will be sufficient to fund its anticipated capital expenditures, acquisitions and required debt repayments for the foreseeable future. As of June 30, 2012, we have available an unused committed line of credit amount of $373.9 million under our existing revolving credit facility.
Dividends
We paid dividends of $0.24 per share during fiscal yearyears 2013 and 2012 and $0.20 per share during fiscal year 2011, and $0.16 per share during fiscal year 2010.2011. On August 22, 2012,20, 2013, the Board of Directors of the Company declared a $0.06 per share quarterly dividend payable September 19, 201217, 2013 to shareholders of record on September 5, 2012.3, 2013.
Share Repurchase Program
In May 2000, the Company's Board of Directors (BOD) approved a stock repurchase program. Originally, the program authorized up to $50.0 million to be expended for the repurchase of the Company's stock. The BOD elected to increase this maximum to $100.0 million in August 2003, to $200.0 million on May 3, 2005, and to $300.0 million on April 26, 2007. The timing and amounts of any repurchases will depend on many factors, including the market price of the common stock and overall market conditions. Historically, the repurchases to date have been made primarily to eliminate the
dilutive effect of shares issued in conjunction with acquisitions, restricted stock grants and stock option exercises. All repurchased shares become authorized but unissued shares of the Company. This repurchase program has no stated expiration date. The Company repurchased 909,175 shares of common stock through its share repurchase program during fiscal year 2013 for $14.9 million. The Company did not repurchase any shares during fiscal year 2012 or 2011. As of June 30, 2012, 2011, and 2010,2013 a total accumulated 6.87.7 million shares have been repurchased for $226.5$241.3 million. As of June 30, 2012, $73.52013, $58.7 million remains outstanding under the approved stock repurchase program.
CRITICAL ACCOUNTING POLICIES
The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the Consolidated Financial Statements, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believed to be spent on share repurchasesreasonable under this program.
SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This annual report, as well as information included in, or incorporated by reference from, future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalfcircumstances. Estimates are considered to be critical if they meet both of the Company contains or may contain "forward-looking statements" withinfollowing criteria: (1) the meaning of the federal securities laws, including statements concerning anticipated future events and expectationsestimate requires assumptions about material matters that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document reflect management's best judgmentuncertain at the time theythe accounting estimates are made, but all such statements are subject to numerous risks and uncertainties, which(2) other materially different estimates could cause actual results to differ materially from those expressed inhave been reasonably made or implied by the statements herein. Such forward-looking statements are often identified herein by use of words including, but not limited to, "may," "believe," "project," "forecast," "expect," "estimate," "anticipate," and "plan." In addition, the following factors could affect the Company's actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include, the impact of management and organizational changes; competition within the personal hair care industry, which remains strong, both domestically and internationally; price sensitivity;material changes in economic conditions; changesthe estimates are reasonably likely to occur from period to period. Changes in consumer tastes and fashion trends;these estimates could have a material effect on our Consolidated Financial Statements.
Our significant accounting policies can be found in Note 1 to the ability of the Company to implement its planned spending and cost reduction plan and to continue to maintain compliance with financial covenantsConsolidated Financial Statements contained in its credit agreements; labor and benefit costs; legal claims; risk inherent to international development (including currency fluctuations); the continued ability of the Company and its franchisees to obtain suitable locations and financing for new salon development and to maintain satisfactory relationships with landlords and other licensors with respect to existing locations; the impact on the Company of healthcare reform legislation; governmental initiatives such as minimum wage rates, taxes and possible franchise legislation; the ability of the Company to successfully identify, acquire and integrate salons that support its growth objectives; the ability of the Company to maintain satisfactory relationships with suppliers; or other factors not listed above. The ability of the Company to meet its expected revenue target is dependent on salon acquisitions, new salon construction and same-store sales increases, all of which are affected by many of the aforementioned risks. Additional information concerning potential factors that could affect future financial results is set forth underPart II, Item 1A8 of this Form 10-K. We undertake no obligationbelieve the following accounting policies are most critical to publicly updateaid in fully understanding and evaluating our reported financial condition and results of operations.
Investment In and Loans to Affiliates
The Company has equity investments in securities of certain privately held entities. The Company accounts for these investments under the equity or revise any forward-looking statements,cost method of accounting. Investments accounted for under the equity method are recorded at the amount of the Company's investment and adjusted each period for the Company's share of the investee's income or loss. Investments are reviewed for changes in circumstance or the occurrence of events that suggest the Company's investment may not be recoverable.
During fiscal years 2013 and 2012, we recorded noncash impairments of $17.9 and $19.4 million related to our investment in EEG. Due to economic, regulatory and other factors, we may be required to take additional noncash impairment charges related to our investments and such noncash impairments could be material to our consolidated balance sheet and results of operations. In addition, our joint venture partners may be required to take noncash impairment charges related to long-lived assets and goodwill, and our share of such noncash impairment charges could be material to our consolidated balance sheet and results of operations. Our share of EEG's goodwill balances as of June 30, 2013 is approximately $16 million.
Goodwill
Goodwill is tested for impairment annually or at the time of a triggering event. In evaluating whether goodwill is impaired, the Company compares the carrying value of each reporting unit, including goodwill, to the estimated fair value of the reporting unit. The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units. Allocations are generally based on the number of salons in each reporting unit as a resultpercent of total company-owned salons.
The Company calculates the estimated fair value of the reporting units based on discounted future cash flows that utilize estimates in annual revenue, gross margins, fixed expense rates, allocated corporate overhead, and long-term growth rates for determining terminal value. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company considers its various concepts to be reporting units when testing for goodwill impairment because that is where the goodwill resides. The Company periodically engages third-party valuation consultants to assist in evaluation of the Company's estimated fair value calculations.
In situations where a reporting unit's carrying value exceeds its estimated fair value, the amount of the impairment loss must be measured. The measurement of impairment is calculated by determining the implied fair value of a reporting unit's goodwill. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all other assets and liabilities of that unit based on the relative fair values under the assumption of a taxable transaction. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities is the implied fair value of goodwill. The goodwill impairment is measured as the excess of the carrying value of goodwill over its implied fair value.
No goodwill impairment charges were recorded during fiscal year 2013. We impaired $67.7 and $74.1 million of goodwill associated with our Regis and Promenade salon concepts during fiscal year 2012 and 2011, respectively.
For the fiscal year 2013 annual impairment testing of goodwill, the estimated fair value of the Regis salon concept exceeded its respective carrying value by approximately 9.0 percent. As it is reasonably likely that there could be impairment of the Regis salon concept's goodwill in future periods along with the sensitivity of the Company's critical assumptions in estimating fair value of this reporting unit, the Company has provided additional information related to this reporting unit.
A summary of the critical assumptions utilized during the fiscal year 2013 annual impairment test of the Regis salon concept are outlined below:
Annual revenue growth. Annual revenue growth is primarily driven by assumed same-store sales rates of approximately negative 2.0 to positive 3.0 percent. Other considerations include anticipated economic conditions and moderate new information,salon growth.
Gross margin. Adjusted for anticipated salon closures, new salon construction estimated future gross margins were held constant.
Fixed expense rates. Fixed expense rate increases of approximately 1.0 to 2.0 percent based on anticipated inflation. Fixed expenses consisted of rent, site operating, and allocated general and administrative corporate overhead.
Allocated corporate overhead. Corporate overhead incurred by the home office based on the number of Regis company-owned salons as a percent of total company-owned salons.
Long-term growth. A long-term growth rate of 2.5 percent was applied to terminal cash flow based on anticipated economic conditions and business plans.
Discount rate. A discount rate of 13.5 percent based on the weighted average cost of capital that equals the rate of return on debt capital and equity capital weighted in proportion to the capital structure common to the industry, risk adjusted for the Regis salon concept.
The following table summarizes the approximate impact that a change in certain critical assumptions would have on the estimated fair value of our Regis salon concept goodwill balance (the approximate impact of the change in the critical assumptions assumes all other assumptions and factors remain constant):
Critical Assumptions | Increase (Decrease) | Approximate Decrease in Fair Value | |||||
---|---|---|---|---|---|---|---|
| | (In thousands) | |||||
Discount Rate | 1.0 | % | $ | 4,500 | |||
Same-Store Sales | (1.0 | ) | 500 |
The respective fair values of the Company's remaining reporting units exceeded fair value by greater than 20.0 percent at June 30, 2013. While the Company has determined the estimated fair values of Regis to be appropriate based on the historical level of revenue growth, operating income and cash flows, it is reasonably likely that Regis may experience additional impairment in future periods. The term "reasonably likely" refers to an occurrence that is more than remote but less than probable in the judgment of the Company. Because some of the inherent assumptions and estimates used in determining the fair value of the reportable segment are outside the control of management, changes in these underlying assumptions can adversely impact fair value. Potential impairment of a portion or all of the carrying value of goodwill for the Regis reporting unit is dependent on many factors and cannot be predicted with certainty.
As of June 30, 2013, the Company's estimated fair value, as determined by the sum of our reporting units' fair value reconciled to within a reasonable range of our market capitalization which included an assumed control premium.
A summary of the Company's goodwill balance by reporting unit is as follows:
| June 30, | ||||||
---|---|---|---|---|---|---|---|
Reporting Unit | 2013 | 2012 | |||||
| (Dollars in thousands) | ||||||
Regis | $ | 34,953 | $ | 34,992 | |||
MasterCuts | 4,652 | 4,652 | |||||
SmartStyle | 49,286 | 49,476 | |||||
Supercuts | 129,610 | 129,621 | |||||
Promenade | 242,384 | 243,538 | |||||
Total | $ | 460,885 | $ | 462,279 | |||
Long-Lived Assets, Excluding Goodwill
We assess the impairment of long-lived assets when events or otherwise. However, your attentionchanges in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Our impairment analysis on salon property and equipment is directedperformed on a salon by salon basis. The Company's test for impairment is performed at a salon level as this is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Factors considered in deciding when to any further disclosures madeperform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our subsequent annualuse of the assets. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the related salon assets that does not recover the carrying value of the salon assets. The fair value estimate is based on the best information available, including market data.
Judgments made by management related to the expected useful lives of long-lived assets and periodic reports filedthe ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause us to realize material impairment charges.
During fiscal years 2013, 2012 and 2011, $8.2, $6.6 and $6.5 million, respectively, of impairments were recorded within depreciation and amortization in the Consolidated Statement of Operations.
Income Taxes
Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or furnishedincome tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. In the United States, after excluding certain deferred tax liabilities related to assets with indefinite lives, the Company has net deferred tax assets of approximately $56.3 million. Realization of deferred tax assets is ultimately dependent upon future taxable income. We assess the likelihood that deferred tax assets will be recovered. If recovery is not likely, we must increase our provision for income taxes by recording a reserve, in the form of a valuation allowance, for the deferred tax assets that will not ultimately be recoverable. Should the Company's present financial trends continue, it is reasonably possible that the Company could determine that a valuation allowance against the United States deferred tax assets will be required. We recognize a reserve for potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. Inherent in the measurement of deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to the Company's operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities.
Contingencies
We are involved in various lawsuits and claims that arise from time to time in the ordinary course of our business. Accruals are recorded for such contingencies based on our assessment that the occurrence is probable and can be reasonably estimated. Management considers many factors in making these assessments including past history and the specifics of each case. However, litigation is inherently unpredictable and excessive verdicts do occur, which could have a material impact on our Consolidated Financial Statements.
During fiscal year 2013, the Company incurred $1.2 million of expense in conjunction with the SEC on Forms 10-Q and 8-K and Proxy Statements on Schedule 14A.derivative shareholder action. During fiscal year 2012, the Company was awarded $1.1 million in conjunction with a class-action lawsuit. During fiscal year 2011, the Company settled a legal claim with the former owner of Hair Club for $1.7 million.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The primary market risk exposure of the Company relates to changes in interest rates in connection with its debt, some ofspecifically the revolving credit facility which bears interest at variable rates based on LIBOR plus an applicable borrowing margin. Additionally, the Company is exposed to foreign currency translation risk related to its net investments in its foreign subsidiaries and, notes receivable with certain affiliated companies and, to a lesser extent, changes in the Canadian dollar and British Pound exchange rate.rates. The Company has established policies and procedures that govern the management of these exposures through the use of derivative financial instrument contracts. By policy, the Company does not enter into such contracts for
the purpose of speculation. The following details the Company's policies and use of financial instruments.
Interest Rate Risk:
The Company has established an interest rate management policy that attempts to minimize its overall cost of debt, while taking into consideration the earnings implications associated with the volatility in
short-term interest rates. On occasion, the Company uses interest rate swaps to further mitigate the risk associated with changing interest rates and to maintain its desired balances of fixed and floating rate debt. In addition, access to variable rate debt is available through the Company's revolving credit facility. The Company reviews its policy and interest rate risk management quarterly and makes adjustments in accordance with market conditions and the Company's short and long-term borrowing needs. As of June 30, 2013, the Company did not have any outstanding variable rate debt as there were no amounts outstanding on the revolving credit facility. The Company had outstanding fixed rate debt balances of $287.7$174.8 and $313.4$287.7 million at June 30, 20122013 and June 30, 2011,2012, respectively.
Interest Rate Swap Contracts:
In the past, the Company used interest rate swaps to maintain its variable to fixed rate debt ratio in accordance with its established policy to further mitigate the risk associated with changing interest rates and to maintain its desired balances of fixed and variable rate debt. Generally, the terms of the interest rate swap agreements contain monthly and quarterly settlement dates based on the notional amounts of the swap contracts.
Pay fixed rates, receive variable rates
During the three months ended December 31, 2008, the Company entered into two interest rate swap contracts that pay fixed rates of interest and receive variable rates of interest (based on the one-month LIBOR) on notional amounts of indebtedness of $20.0 million each, that had maturation dates in July 2011, respectively. These swaps were designated and were effective as cash flow hedges. These cash flow hedges were recorded at fair value within other noncurrent liabilities in the Consolidated Balance Sheet, with a corresponding offset in deferred income taxes and other comprehensive income within shareholders' equity. These contracts were terminated during fiscal year 2011 in conjunction with the repayment of the $85.0 million term loan. The contracts were settled for an aggregate loss of $0.1 million recorded within interest expense in the Consolidated Statement of Operations during fiscal year 2011. Prior to the termination of the contracts, the Company paid fixed rates of interest of approximately 3.0 percent and 3.4 percent on their respective $20.0 million.
During the three months ended December 31, 2005, the Company entered into interest rate swap contracts that pay fixed rates of interest and receive variable rates of interest (based on the three-month LIBOR) on notional amounts of indebtedness of $35.0 and $15.0 million, and mature in March 2013 and March 2015, respectively. These swaps were designated and were effective as cash flow hedges. These cash flow hedges were recorded at fair value within other noncurrent liabilities in the Consolidated Balance Sheet, with a corresponding offset in other comprehensive income within shareholders' equity. These contracts were terminated during fiscal year 2010 in conjunction with the repayment of the private placement senior term notes as discussed in Note 9 to the Consolidated Financial Statements. The contracts were settled for an aggregate loss of $5.2 million recorded within interest expense in the Consolidated Statement of Operations during fiscal year 2010.
Tabular Presentation:
The following table presents information about the Company's debt obligations. As the Company did not have variable rate obligations or derivative financial instruments sensitive to changes in interest
rates or as of June 30, 2012, the table presents principal amounts and related weighted-average interest rates by fiscal year of maturity for fixed rate debt obligations.
| | | | | | | June 30, 2012 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Expected maturity date as of June 30, 2012 | ||||||||||||||||||||||||
| | Fair Value | |||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | Total | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||
Long-term debt: | |||||||||||||||||||||||||
Fixed rate | $ | 28,937 | $ | 24,918 | $ | 180,245 | $ | 17,860 | $ | 17,857 | $ | 17,857 | $ | 287,674 | $ | 307,478 | |||||||||
Average interest rate | 7.4 | % | 7.5 | % | 5.4 | % | 8.5 | % | 8.5 | % | 8.5 | % | 6.3 | % | |||||||||||
Total liabilities | $ | 28,937 | $ | 24,918 | $ | 180,245 | $ | 17,860 | $ | 17,857 | $ | 17,857 | $ | 287,674 | $ | 307,478 | |||||||||
Foreign Currency Exchange Risk:
The majorityOver 85% of the Company's revenue, expense and capital purchasing activities are transacted in United States dollars. However, because a portion of the Company's operations consists of activities outside of the United States, the Company has transactions in other currencies, primarily the Canadian dollar and British pound and Euro.pound. In preparing the Consolidated Financial Statements, the Company is required to translate the financial statements of its foreign subsidiaries from the currency in which they keep their accounting records, generally the local currency, into United States dollars. Different exchange rates from period to period impact the amounts of reported income and the amount of foreign currency translation recorded in accumulated other comprehensive income.income (AOCI). As part of its risk management strategy, the Company frequently evaluates its foreign currency exchange risk by monitoring market data and external factors that may influence exchange rate fluctuations. As a result, the Company may engage in transactions involving various derivative instruments to hedge assets, liabilities and purchases denominated in foreign currencies. As of June 30, 2012,2013, the Company has entered into the following financialdid not have any derivative instruments to manage its foreign currency exchange risk:
Hedge of the Net Investment in Foreign Subsidiaries:risk.
The Company has numerous investments in foreign subsidiaries,During fiscal years 2013, 2012, and 2011 the net assets of these subsidiaries are exposed to exchange rate volatility. The Company frequently evaluates its foreign currency exchange risk by monitoring market datagain (loss) included in net income was $33.4, $0.4, and external factors that may influence exchange rate fluctuations. As a result, the Company may engage in transactions involving various derivative instruments to hedge assets, liabilities and purchases denominated in foreign currencies.
($1.5) million, respectively. During September 2006, the Company's cross-currency swap (which had a notional amount of $21.3 million and hedged a portion of the Company's net investment in its foreign operations) was settled, resulting in a cash outlay of $8.9 million. This cash outlay was recorded within investing activities within the Consolidated Statement of Cash Flows. The related cumulative tax-effected net loss of $7.9 million was recorded in accumulated other comprehensive income (AOCI) in fiscal year 2007. This amount will remain deferred within AOCI indefinitely, as the event which would trigger its release from AOCI and recognition2013, Company recognized a $33.8 million foreign currency translation gain in earnings is the sale or liquidation of the Company's international operations that the cross-currency swap hedged.
In connection with the sale of Provalliance the Company is considering alternatives which may trigger release of certain material cumulative foreign currency translation balances and the cumulative tax-effected net loss related to the fiscal year 2007 settlement of the cross-currency swap from AOCI to earnings. The Company is currently estimating a net gain of approximately $30 to $40 million to be released from AOCI to earnings uponsubsequent liquidation of certainall foreign subsidiaries.
Forward Foreign Currency Contracts:
The Company's exposure to foreign exchange risk includes risks related to fluctuations in the Canadian dollar relative to the U.S. dollar. The exposure to Canadian dollar exchange rates on the Company's fiscal year 2012 cash flows is primarily associatedentities with certain forecasted intercompany transactions.
The Company seeks to manage exposure to changes in the value of the Canadian dollar. In order to do so, the Company has entered into forward currency contracts from fiscal year 2007 to the first quarter of fiscal year 2013 in order to reduce the risk of significant negative impact on its U.S. dollar cash flows or income. The Company does not hedge foreign currency exposure in a manner that would entirely eliminate the effect of changes in foreign currency exchange rates on net income and cash flows. During fiscal year 2011, the Company entered into several forward foreign currency contracts to sell Canadian dollars and buy an aggregate of $8.7 million U.S. dollars, respectively, with maturation dates between July 2011 and September 2012. As of June 30, 2012, the remaining aggregate amount of forward foreign currency contracts related to the Canadian dollar was $1.8 million U.S. dollars .The purpose of the forward contracts is to protect against adverse movements in the Canadian dollar exchange rate. The contracts were designated and were effective as cash flow hedges as of June 30, 2012. They were recorded at fair value within other noncurrent liabilities or other current assets in the Consolidated Balance Sheet, with corresponding offsets primarily recorded in other comprehensive income (loss), net of tax. See Note 9 to the Consolidated Financial Statements for further discussion.
The Company uses freestanding derivative forward contracts to offset the Company's exposure to the change in fair value of certain foreign currencyEuro denominated intercompany assets and liabilities. These derivatives are not designated as hedges and therefore, changes in the fair value of these forward contracts are recognized currently in earnings thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities.operations.
In June 2012, the Company entered into a freestanding derivative forward contract to sell an aggregate $9.0 million U.S. dollars and buy Canadian dollars, with a maturation date in July 2012.
The table below provides information about the Company's forecasted transactions in U.S. dollar equivalents. (The information is presented in U.S. dollars because that is the Company's reporting currency.) The table summarizes information on transactions that are sensitive to foreign currency exchange rates and the related foreign currency forward exchange agreements. For the foreign currency forward exchange agreements, the table presents the notional amounts and weighted average exchange rates by expected (contractual) maturity dates. These notional amounts are used to calculate the contractual payments to be exchanged under the contract.
| Expected Transaction date June 30, | | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| June 30, 2012 Fair Value | ||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | Total | ||||||||||||||
Forecasted Transactions | |||||||||||||||||||
(U.S.$ equivalent in thousands) | |||||||||||||||||||
Intercompany transactions with Canadian salons (U.S.$) | $ | 1,804 | $ | — | $ | — | $ | — | $ | 1,804 | $ | 37 | |||||||
Foreign currency denominated intercompany assets and liabilities (U.S.$) | 9,000 | — | — | — | 9,000 | 108 | |||||||||||||
Total contracts | $ | 10,804 | $ | — | $ | — | $ | — | $ | 10,804 | $ | 145 | |||||||
Average contractual exchange rate | 1.0243 | 1.0243 |
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements: | ||||
Management's Statement of Responsibility for Financial Statements and Report on Internal Control over Financial Reporting | ||||
Report of Independent Registered Public Accounting Firm | ||||
Consolidated Balance Sheet as of June 30, | ||||
Consolidated Statement of Operations for each of the three years in the period ended June 30, | ||||
Consolidated Statements of | 48 | |||
Consolidated Statements of Shareholders' Equity for each of the three years in the period ended June 30, 2013 | ||||
Consolidated Statement of Cash Flows for each of the three years in the period ended June 30, | ||||
Notes to Consolidated Financial Statements |
Management's Statement of Responsibility for Financial Statements and
Report on Internal Control over Financial Reporting
Financial Statements
Management is responsible for preparation of the consolidated financial statements and other related financial information included in this annual report on Form 10-K. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, incorporating management's reasonable estimates and judgments, where applicable.
Management's Report on Internal Control over Financial Reporting
This report is provided by management pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the SEC rules promulgated thereunder. Management, including the chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting and for assessing effectiveness of internal control over financial reporting.
The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the Company's internal control over financial reporting as of June 30, 2012,2013, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment of the Company's internal control over financial reporting, management has concluded that, as of June 30, 2012,2013, the Company's internal control over financial reporting was effective.
The Company's independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company's internal control over financial reporting as of June 30, 2012,2013, as stated in their report which follows in Item 8 of this Form 10-K.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Regis Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes incomprehensive income, shareholders' equity and comprehensive income and of cash flows present fairly, in all material respects, the financial position of Regis Corporation and its subsidiaries at June 30, 20122013 and June 30, 2011,2012, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 20122013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2012,2013, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Statement of Responsibility for Financial Statements and Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 29, 201227, 2013
REGIS CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share data)
| June 30, | June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2013 | 2012 | ||||||||||
ASSETS | ||||||||||||||
Current assets: | ||||||||||||||
Cash and cash equivalents | $ | 111,943 | $ | 96,263 | $ | 200,488 | $ | 111,943 | ||||||
Receivables, net | 31,578 | 27,149 | 33,062 | 28,954 | ||||||||||
Inventories | 148,441 | 150,804 | 139,607 | 142,276 | ||||||||||
Deferred income taxes | 17,395 | 17,887 | 24,145 | 14,503 | ||||||||||
Income tax receivable | 14,098 | 22,341 | 33,346 | 14,098 | ||||||||||
Other current assets | 61,222 | 32,118 | 57,898 | 55,903 | ||||||||||
Current assets held for sale (Note 2) | — | 17,000 | ||||||||||||
Total current assets | 384,677 | 346,562 | 488,546 | 384,677 | ||||||||||
Property and equipment, net | 323,060 | 347,811 | 313,460 | 305,799 | ||||||||||
Goodwill | 536,655 | 680,512 | 460,885 | 462,279 | ||||||||||
Other intangibles, net | 101,790 | 111,328 | 21,496 | 23,395 | ||||||||||
Investment in and loans to affiliates | 166,176 | 261,140 | 43,319 | 160,987 | ||||||||||
Other assets | 59,488 | 58,400 | 62,786 | 59,488 | ||||||||||
Long-term assets held for sale (Note 2) | — | 175,221 | ||||||||||||
Total assets | $ | 1,571,846 | $ | 1,805,753 | $ | 1,390,492 | $ | 1,571,846 | ||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||
Current liabilities: | ||||||||||||||
Long-term debt, current portion | $ | 28,937 | $ | 32,252 | $ | 173,515 | $ | 28,937 | ||||||
Accounts payable | 50,454 | 55,107 | 66,071 | 47,890 | ||||||||||
Accrued expenses | 172,582 | 167,321 | 137,226 | 157,026 | ||||||||||
Current liabilities related to assets held for sale (Note 2) | — | 18,120 | ||||||||||||
Total current liabilities | 251,973 | 254,680 | 376,812 | 251,973 | ||||||||||
Long-term debt and capital lease obligations | 258,737 | 281,159 | 1,255 | 258,737 | ||||||||||
Other noncurrent liabilities | 171,979 | 237,295 | 155,011 | 143,972 | ||||||||||
Long-term liabilities related to assets held for sale (Note 2) | — | 28,007 | ||||||||||||
Total liabilities | 682,689 | 773,134 | 533,078 | 682,689 | ||||||||||
Commitments and contingencies (Note 10) | ||||||||||||||
Commitments and contingencies (Note 8) | ||||||||||||||
Shareholders' equity: | ||||||||||||||
Common stock, $0.05 par value; issued and outstanding, 57,415,241 and 57,710,811 common shares at June 30, 2012 and 2011, respectively | 2,871 | 2,886 | ||||||||||||
Common stock, $0.05 par value; issued and outstanding, 56,630,926 and 57,415,241 common shares at June 30, 2013 and 2012, respectively | 2,832 | 2,871 | ||||||||||||
Additional paid-in capital | 346,943 | 341,190 | 334,266 | 346,943 | ||||||||||
Accumulated other comprehensive income | 55,114 | 77,946 | 20,556 | 55,114 | ||||||||||
Retained earnings | 484,229 | 610,597 | 499,760 | 484,229 | ||||||||||
Total shareholders' equity | 889,157 | 1,032,619 | 857,414 | 889,157 | ||||||||||
Total liabilities and shareholders' equity | $ | 1,571,846 | $ | 1,805,753 | $ | 1,390,492 | $ | 1,571,846 | ||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars inIn thousands, except per share data)
| Years Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
Revenues: | ||||||||||
Service | $ | 1,712,703 | $ | 1,762,974 | $ | 1,784,137 | ||||
Product | 520,467 | 523,194 | 534,593 | |||||||
Royalties and fees | 40,609 | 39,701 | 39,704 | |||||||
2,273,779 | 2,325,869 | 2,358,434 | ||||||||
Operating expenses: | ||||||||||
Cost of service | 985,154 | 1,012,868 | 1,015,720 | |||||||
Cost of product | 249,655 | 249,979 | 263,883 | |||||||
Site operating expenses | 198,725 | 197,722 | 199,338 | |||||||
General and administrative | 302,572 | 339,857 | 291,991 | |||||||
Rent | 340,805 | 342,286 | 344,098 | |||||||
Depreciation and amortization | 118,071 | 105,109 | 108,764 | |||||||
Goodwill impairment | 146,110 | 74,100 | 35,277 | |||||||
Lease termination costs | — | — | 2,145 | |||||||
Total operating expenses | 2,341,092 | 2,321,921 | 2,261,216 | |||||||
Operating (loss) income | (67,313 | ) | 3,948 | 97,218 | ||||||
Other income (expense): | ||||||||||
Interest expense | (28,245 | ) | (34,388 | ) | (54,414 | ) | ||||
Interest income and other, net | 5,130 | 4,811 | 10,410 | |||||||
(Loss) income from continuing operations before income taxes and equity in (loss) income of affiliated companies | (90,428 | ) | (25,629 | ) | 53,214 | |||||
Income taxes | 5,279 | 9,496 | (25,577 | ) | ||||||
Equity in (loss) income of affiliated companies, net of income taxes | (30,043 | ) | 7,228 | 11,942 | ||||||
(Loss) income from continuing operations | (115,192 | ) | (8,905 | ) | 39,579 | |||||
Income from discontinued operations, net of taxes (Note 2) | 1,099 | — | 3,161 | |||||||
Net (loss) income | $ | (114,093 | ) | $ | (8,905 | ) | $ | 42,740 | ||
Net (loss) income per share: | ||||||||||
Basic: | ||||||||||
(Loss) income from continuing operations | (2.02 | ) | (0.16 | ) | 0.71 | |||||
Income from discontinued operations | 0.02 | — | 0.06 | |||||||
Net (loss) income per share, basic(1) | $ | (2.00 | ) | $ | (0.16 | ) | $ | 0.77 | ||
Diluted: | ||||||||||
(Loss) income from continuing operations | (2.02 | ) | (0.16 | ) | 0.71 | |||||
Income from discontinued operations | 0.02 | — | 0.05 | |||||||
Net (loss) income per share, diluted(1) | $ | (2.00 | ) | $ | (0.16 | ) | $ | 0.75 | ||
Weighted average common and common equivalent shares outstanding: | ||||||||||
Basic | 57,137 | 56,704 | 55,806 | |||||||
Diluted | 57,137 | 56,704 | 66,753 | |||||||
Cash dividends declared per common share | $ | 0.24 | $ | 0.20 | $ | 0.16 | ||||
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
Revenues: | ||||||||||
Service | $ | 1,563,890 | $ | 1,643,891 | $ | 1,695,424 | ||||
Product | 415,707 | 440,048 | 447,465 | |||||||
Royalties and fees | 39,116 | 38,288 | 37,292 | |||||||
2,018,713 | 2,122,227 | 2,180,181 | ||||||||
Operating expenses: | ||||||||||
Cost of service | 930,687 | 941,671 | 972,894 | |||||||
Cost of product | 228,577 | 221,635 | 225,191 | |||||||
Site operating expenses | 203,912 | 207,031 | 211,223 | |||||||
General and administrative | 226,740 | 249,634 | 285,845 | |||||||
Rent | 324,716 | 331,769 | 333,059 | |||||||
Depreciation and amortization | 91,755 | 104,970 | 92,151 | |||||||
Goodwill impairment | — | 67,684 | 74,100 | |||||||
Total operating expenses | 2,006,387 | 2,124,394 | 2,194,463 | |||||||
Operating income (loss) | 12,326 | (2,167 | ) | (14,282 | ) | |||||
Other income (expense): | ||||||||||
Interest expense | (37,594 | ) | (28,245 | ) | (34,374 | ) | ||||
Interest income and other, net | 35,366 | 5,098 | 4,723 | |||||||
Income (loss) from continuing operations before income taxes and equity in (loss) income of affiliated companies | 10,098 | (25,314 | ) | (43,933 | ) | |||||
Income taxes | 10,024 | 4,430 | 16,333 | |||||||
Equity in (loss) income of affiliated companies, net of income taxes | (15,956 | ) | (30,859 | ) | 6,661 | |||||
Income (loss) from continuing operations | 4,166 | (51,743 | ) | (20,939 | ) | |||||
Income (loss) from discontinued operations, net of taxes (Note 2) | 25,028 | (62,350 | ) | 12,034 | ||||||
Net income (loss) | $ | 29,194 | $ | (114,093 | ) | $ | (8,905 | ) | ||
Net income (loss) income per share: | ||||||||||
Basic: | ||||||||||
Income (loss) from continuing operations | 0.07 | (0.91 | ) | (0.37 | ) | |||||
Income (loss) from discontinued operations | 0.44 | (1.09 | ) | 0.21 | ||||||
Net income (loss) per share, basic | $ | 0.51 | $ | (2.00 | ) | $ | (0.16 | ) | ||
Diluted: | ||||||||||
Income (loss) from continuing operations | 0.07 | (0.91 | ) | (0.37 | ) | |||||
Income (loss) from discontinued operations | 0.44 | (1.09 | ) | 0.21 | ||||||
Net income (loss) per share, diluted | $ | 0.51 | $ | (2.00 | ) | $ | (0.16 | ) | ||
Weighted average common and common equivalent shares outstanding: | ||||||||||
Basic | 56,704 | 57,137 | 56,704 | |||||||
Diluted | 56,846 | 57,137 | 56,704 | |||||||
Cash dividends declared per common share | $ | 0.24 | $ | 0.24 | $ | 0.20 | ||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
REGIS CORPORATION
CONSOLIDATED STATEMENT OF CHANGESCOMPREHENSIVE (LOSS) INCOMEIN(Dollars in thousands)
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
Net income (loss) | $ | 29,194 | $ | (114,093 | ) | $ | (8,905 | ) | ||
Other comprehensive loss: | ||||||||||
Foreign currency translation adjustments: | ||||||||||
Foreign currency translation adjustments during the period | (1,349 | ) | (24,254 | ) | 30,405 | |||||
Reclassification adjustments for gains included in net income (loss) | (33,842 | ) | — | — | ||||||
Net current period foreign currency translation adjustments | (35,191 | ) | (24,254 | ) | 30,405 | |||||
Recognition of deferred compensation and other, net of tax expense of $411, $644, and $232, respectively | 656 | 1,029 | 377 | |||||||
Change in fair market value of financial instruments designated as cash flow hedges, net of tax (benefit) expense of $(12), $210 and $86, respectively | (23 | ) | 393 | 132 | ||||||
Other comprehensive (loss) income | (34,558 | ) | (22,832 | ) | 30,914 | |||||
Comprehensive (loss) income | $ | (5,364 | ) | $ | (136,925 | ) | $ | 22,009 | ||
The accompanying notes are an integral part of the Consolidated Financial Statements.
REGIS CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
| Common Stock | | | | | | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Accumulated Other Comprehensive Income | | | | |||||||||||||||||
| Additional Paid-In Capital | Retained Earnings | Comprehensive Income | |||||||||||||||||||
| Shares | Amount | Total | |||||||||||||||||||
Balance, June 30, 2009 | 43,881,364 | $ | 2,194 | $ | 151,394 | $ | 51,855 | $ | 597,417 | $ | 802,860 | $ | (174,584 | ) | ||||||||
Net income | 42,740 | 42,740 | 42,740 | |||||||||||||||||||
Foreign currency translation adjustments | (5,416 | ) | (5,416 | ) | (5,416 | ) | ||||||||||||||||
Changes in fair market value of financial instruments designated as cash flow hedges, net of taxes | 2,467 | 2,467 | 2,467 | |||||||||||||||||||
Issuance of common stock | 13,225,000 | 661 | 162,932 | 163,593 | ||||||||||||||||||
Equity component of convertible debt, net of taxes | 15,245 | 15,245 | ||||||||||||||||||||
Proceeds from exercise of stock options | 202,700 | 10 | 3,055 | 3,065 | ||||||||||||||||||
Stock-based compensation | 9,337 | 9,337 | ||||||||||||||||||||
Shares issued through franchise stock incentive program | 16,053 | 1 | 290 | 291 | ||||||||||||||||||
Recognition of deferred compensation and other, net of taxes (Note 13) | (1,874 | ) | (1,874 | ) | (1,874 | ) | ||||||||||||||||
Tax benefit realized upon exercise of stock options | 262 | 262 | ||||||||||||||||||||
Issuance of restricted stock | 304,200 | 15 | (15 | ) | — | |||||||||||||||||
Restricted stock forfeitures | (1,976 | ) | — | — | — | |||||||||||||||||
Taxes related to restricted stock | (66,161 | ) | (3 | ) | (1,710 | ) | (1,713 | ) | ||||||||||||||
Dividends | (9,146 | ) | (9,146 | ) | ||||||||||||||||||
Equity issuance costs | (8,154 | ) | (8,154 | ) | ||||||||||||||||||
Adjustment to stock option tax benefit | (264 | ) | (264 | ) | ||||||||||||||||||
Balance, June 30, 2010 | 57,561,180 | 2,878 | 332,372 | 47,032 | 631,011 | 1,013,293 | 37,917 | |||||||||||||||
Net loss | (8,905 | ) | (8,905 | ) | (8,905 | ) | ||||||||||||||||
Foreign currency translation adjustments | 30,405 | 30,405 | 30,405 | |||||||||||||||||||
Changes in fair market value of financial instruments designated as cash flow hedges, net of taxes | 132 | 132 | 132 | |||||||||||||||||||
Proceeds from exercise of stock options | 45,933 | 2 | 680 | 682 | ||||||||||||||||||
Stock-based compensation | 9,596 | 9,596 | ||||||||||||||||||||
Shares issued through franchise stock incentive program | 24,472 | 1 | 397 | 398 | ||||||||||||||||||
Recognition of deferred compensation and other, net of taxes (Note 13) | 377 | 377 | 377 | |||||||||||||||||||
Tax benefit realized upon exercise of stock options | 67 | 67 | ||||||||||||||||||||
Issuance of restricted stock | 277,300 | 14 | (14 | ) | — | |||||||||||||||||
Restricted stock forfeitures | (121,343 | ) | (6 | ) | 6 | — | ||||||||||||||||
Taxes related to restricted stock | (76,731 | ) | (3 | ) | (1,787 | ) | (1,790 | ) | ||||||||||||||
Vested stock option expirations | (127 | ) | (127 | ) | ||||||||||||||||||
Dividends | (11,509 | ) | (11,509 | ) | ||||||||||||||||||
Balance, June 30, 2011 | 57,710,811 | 2,886 | 341,190 | 77,946 | 610,597 | 1,032,619 | 22,009 | |||||||||||||||
Net loss | (114,093 | ) | (114,093 | ) | (114,093 | ) | ||||||||||||||||
Foreign currency translation adjustments | (24,254 | ) | (24,254 | ) | (24,254 | ) | ||||||||||||||||
Changes in fair market value of financial instruments designated as cash flow hedges, net of taxes | 393 | 393 | 393 | |||||||||||||||||||
Proceeds from exercise of stock options | 60 | — | — | — | ||||||||||||||||||
Stock-based compensation | 7,597 | 7,597 | ||||||||||||||||||||
Shares issued through franchise stock incentive program | 18,844 | 1 | 305 | 306 | ||||||||||||||||||
Recognition of deferred compensation and other, net of taxes (Note 13) | 1,029 | 1,029 | 1,029 | |||||||||||||||||||
Issuance of restricted stock | 55,000 | 3 | (3 | ) | — | |||||||||||||||||
Restricted stock forfeitures | (290,087 | ) | (15 | ) | 15 | — | ||||||||||||||||
Taxes related to restricted stock | (79,387 | ) | (4 | ) | (1,438 | ) | (1,442 | ) | ||||||||||||||
Vested stock option expirations | (723 | ) | (723 | ) | ||||||||||||||||||
Cumulative minority interest (Note 4) | 1,580 | 1,580 | ||||||||||||||||||||
Dividends | (13,855 | ) | (13,855 | ) | ||||||||||||||||||
Balance, June 30, 2012 | 57,415,241 | $ | 2,871 | $ | 346,943 | $ | 55,114 | $ | 484,229 | $ | 889,157 | $ | (136,925 | ) | ||||||||
| Common Stock | | Accumulated Other Comprehensive Income | | | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Additional Paid-In Capital | Retained Earnings | | ||||||||||||||||
| Shares | Amount | Total | ||||||||||||||||
Balance, June 30, 2010 | 57,561,180 | $ | 2,878 | $ | 332,372 | $ | 47,032 | $ | 631,011 | $ | 1,013,293 | ||||||||
Net loss | (8,905 | ) | (8,905 | ) | |||||||||||||||
Foreign currency translation adjustments | 30,405 | 30,405 | |||||||||||||||||
Proceeds from exercise of SARs & stock options | 45,933 | 2 | 680 | 682 | |||||||||||||||
Stock-based compensation | 9,596 | 9,596 | |||||||||||||||||
Shares issued through franchise stock incentive program | 24,472 | 1 | 397 | 398 | |||||||||||||||
Recognition of deferred compensation and other, net of taxes (Note 10) | 509 | 509 | |||||||||||||||||
Tax benefit realized upon exercise of stock options | 67 | 67 | |||||||||||||||||
Net restricted stock activity | 79,226 | 5 | (1,795 | ) | (1,790 | ) | |||||||||||||
Vested stock option expirations | (127 | ) | (127 | ) | |||||||||||||||
Dividends | (11,509 | ) | (11,509 | ) | |||||||||||||||
Balance, June 30, 2011 | 57,710,811 | 2,886 | 341,190 | 77,946 | 610,597 | 1,032,619 | |||||||||||||
Net loss | (114,093 | ) | (114,093 | ) | |||||||||||||||
Foreign currency translation adjustments | (24,254 | ) | (24,254 | ) | |||||||||||||||
Proceeds from exercise of SARs& stock options | 60 | — | — | — | |||||||||||||||
Stock-based compensation | 7,597 | 7,597 | |||||||||||||||||
Shares issued through franchise stock incentive program | 18,844 | 1 | 305 | 306 | |||||||||||||||
Recognition of deferred compensation and other, net of taxes (Note 10) | 1,422 | 1,422 | |||||||||||||||||
Net restricted stock activity | (314,474 | ) | (16 | ) | (1,426 | ) | (1,442 | ) | |||||||||||
Vested stock option expirations | (723 | ) | (723 | ) | |||||||||||||||
Cumulative minority interest (Note 1) | 1,580 | 1,580 | |||||||||||||||||
Dividends | (13,855 | ) | (13,855 | ) | |||||||||||||||
Balance, June 30, 2012 | 57,415,241 | 2,871 | 346,943 | 55,114 | 484,229 | 889,157 | |||||||||||||
Net income | 29,194 | 29,194 | |||||||||||||||||
Foreign currency translation adjustments | (35,191 | ) | (35,191 | ) | |||||||||||||||
Stock repurchase plan | (909,175 | ) | (45 | ) | (14,823 | ) | (14,868 | ) | |||||||||||
Proceeds from exercise of SARs & stock options | 3,051 | — | 41 | 41 | |||||||||||||||
Stock-based compensation | 5,881 | 5,881 | |||||||||||||||||
Shares issued through franchise stock incentive program | 19,583 | 1 | 356 | 357 | |||||||||||||||
Recognition of deferred compensation and other, net of taxes (Note 10) | 633 | 633 | |||||||||||||||||
Net restricted stock activity | 102,226 | 5 | (2,728 | ) | (2,723 | ) | |||||||||||||
Vested stock option expirations | (1,404 | ) | (1,404 | ) | |||||||||||||||
Minority interest (Note 1) | 45 | 45 | |||||||||||||||||
Dividends | (13,708 | ) | (13,708 | ) | |||||||||||||||
Balance, June 30, 2013 | 56,630,926 | $ | 2,832 | $ | 334,266 | $ | 20,556 | $ | 499,760 | $ | 857,414 | ||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
| Years Ended June 30, | Fiscal Years | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | 2013 | 2012 | 2011 | ||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net (loss) income | $ | (114,093 | ) | $ | (8,905 | ) | $ | 42,740 | ||||||||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||||||||||||||
Depreciation | 101,701 | 88,602 | 92,466 | |||||||||||||||||
Amortization | 9,734 | 9,826 | 9,870 | |||||||||||||||||
Net income (loss) | $ | 29,194 | $ | (114,093 | ) | $ | (8,905 | ) | ||||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||||||
Depreciation and amortization | 84,018 | 111,435 | 98,428 | |||||||||||||||||
Equity in loss (income) of affiliated companies | 30,043 | (7,228 | ) | (11,942 | ) | 15,328 | 30,043 | (7,228 | ) | |||||||||||
Dividends received from affiliated companies | 4,047 | 10,023 | 2,404 | 1,095 | 4,047 | 10,023 | ||||||||||||||
Deferred income taxes | (14,171 | ) | (14,711 | ) | 5,115 | 10,322 | (14,171 | ) | (14,711 | ) | ||||||||||
Impairment on discontinued operations | — | — | (154 | ) | ||||||||||||||||
Accumulated other comprehensive income reclassification adjustments (Note 5) | (33,842 | ) | — | — | ||||||||||||||||
Gain on from sale of discontinued operations | (17,827 | ) | — | — | ||||||||||||||||
Loss on write down of inventories | 12,557 | — | — | |||||||||||||||||
Goodwill impairment | 146,110 | 74,100 | 35,277 | — | 146,110 | 74,100 | ||||||||||||||
Salon asset impairments | 6,636 | 6,681 | 6,428 | 8,224 | 6,636 | 6,681 | ||||||||||||||
Note receivable bad debt (recovery) expense | (805 | ) | 31,227 | — | (333 | ) | (805 | ) | 31,227 | |||||||||||
Excess tax benefits from stock-based compensation plans | — | (67 | ) | (243 | ) | |||||||||||||||
Stock-based compensation | 7,597 | 9,596 | 9,337 | 5,881 | 7,597 | 9,596 | ||||||||||||||
Amortization of debt discount and financing costs | 6,696 | 6,469 | 6,406 | 7,346 | 6,696 | 6,469 | ||||||||||||||
Other noncash items affecting earnings | 31 | 1,578 | (3,153 | ) | 394 | 31 | 1,511 | |||||||||||||
Changes in operating assets and liabilities(1): | ||||||||||||||||||||
Receivables | (4,502 | ) | (2,358 | ) | 1,192 | (4,332 | ) | (4,502 | ) | (2,358 | ) | |||||||||
Inventories | 2,644 | 4,629 | 4,823 | (10,745 | ) | 2,644 | 4,629 | |||||||||||||
Income tax receivable | 2,809 | 23,855 | 957 | (23,421 | ) | 2,809 | 23,855 | |||||||||||||
Other current assets | (5,272 | ) | 4,725 | 2,657 | (8,064 | ) | (5,272 | ) | 4,725 | |||||||||||
Other assets | (841 | ) | (11,050 | ) | (14,951 | ) | 239 | (841 | ) | (11,050 | ) | |||||||||
Accounts payable | (4,856 | ) | (2,973 | ) | (4,966 | ) | 19,086 | (4,856 | ) | (2,973 | ) | |||||||||
Accrued expenses | (8,657 | ) | 3,341 | 6,006 | (26,431 | ) | (8,657 | ) | 3,341 | |||||||||||
Other noncurrent liabilities | (11,151 | ) | 1,818 | 1,954 | 459 | (11,151 | ) | 1,818 | ||||||||||||
Net cash provided by operating activities | 153,700 | 229,178 | 192,223 | 69,148 | 153,700 | 229,178 | ||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Capital expenditures | (85,769 | ) | (71,469 | ) | (57,821 | ) | (105,857 | ) | (85,769 | ) | (71,469 | ) | ||||||||
Proceeds from sale of assets | 502 | 626 | 70 | 163,916 | 502 | 626 | ||||||||||||||
Asset acquisitions, net of cash acquired and certain obligations assumed | (2,587 | ) | (17,990 | ) | (3,664 | ) | ||||||||||||||
Asset acquisitions, net of cash acquired | — | (2,587 | ) | (17,990 | ) | |||||||||||||||
Proceeds from loans and investments | 11,995 | 16,804 | 16,099 | 131,581 | 11,995 | 16,804 | ||||||||||||||
Disbursements for loans and investments | (15,000 | ) | (72,301 | ) | — | — | (15,000 | ) | (72,301 | ) | ||||||||||
Freestanding derivative settlement | — | — | 736 | |||||||||||||||||
Change in restricted cash | (24,500 | ) | — | — | ||||||||||||||||
Net cash used in investing activities | (90,859 | ) | (144,330 | ) | (44,580 | ) | ||||||||||||||
Net cash provided by (used in) investing activities | 165,140 | (90,859 | ) | (144,330 | ) | |||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Borrowings on revolving credit facilities | 471,500 | — | 337,000 | 5,200 | 471,500 | — | ||||||||||||||
Payments on revolving credit facilities | (471,500 | ) | — | (342,000 | ) | (5,200 | ) | (471,500 | ) | — | ||||||||||
Proceeds from issuance of long-term debt | — | — | 167,325 | |||||||||||||||||
Repayments of long-term debt and capital lease obligations | (29,693 | ) | (137,671 | ) | (349,175 | ) | (118,223 | ) | (29,693 | ) | (137,671 | ) | ||||||||
Excess tax benefits from stock-based compensation plans | — | 67 | 243 | |||||||||||||||||
Repurchase of common stock | (14,868 | ) | — | — | ||||||||||||||||
Proceeds from issuance of common stock | — | 682 | 159,498 | — | — | 749 | ||||||||||||||
Dividends paid | (13,855 | ) | (11,509 | ) | (9,146 | ) | (13,708 | ) | (13,855 | ) | (11,509 | ) | ||||||||
Other | — | — | (2,878 | ) | ||||||||||||||||
Net cash used in financing activities | (43,548 | ) | (148,431 | ) | (39,133 | ) | (146,799 | ) | (43,548 | ) | (148,431 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (3,613 | ) | 7,975 | 823 | 1,056 | (3,613 | ) | 7,975 | ||||||||||||
Increase (decrease) in cash and cash equivalents | 15,680 | (55,608 | ) | 109,333 | 88,545 | 15,680 | (55,608 | ) | ||||||||||||
Cash and cash equivalents: | ||||||||||||||||||||
Beginning of year | 96,263 | 151,871 | 42,538 | 111,943 | 96,263 | 151,871 | ||||||||||||||
End of year | $ | 111,943 | $ | 96,263 | $ | 151,871 | $ | 200,488 | $ | 111,943 | $ | 96,263 | ||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description:
Regis Corporation (the Company) owns, operates and franchises hairstyling and hair care salons throughout the United States (U.S.), the United Kingdom (U.K.), Canada and Puerto Rico and several other countries.Rico. Substantially all of the hairstyling and hair care salons owned and operated by the Company in the U.S., Canada and Puerto Rico are located in leased space in enclosed mall shopping centers, strip shopping centers or Walmart Supercenters. FranchiseFranchised salons throughout the U.S. are primarily located in strip shopping centers. The company-ownedCompany-owned salons in the U.K. are owned and operated in malls, leading department stores, mass merchants and high-street locations. In addition,
Based on the way the Company ownsmanages its business, it has two reportable segments: North American and operates hair restoration centers in the U.S. and Canada. On July 13, 2012, the Company entered into a definitive agreement to sell its Hair Club for Men and Women business (Hair Club) for $163.5 million, a provider of hair restoration services. The transaction is expected to close during the first half of fiscal year 2013. See discussion of the agreement to sell Hair Club within Note 17 to the Consolidated Financial Statements. The hair restoration centers are typically located in leased space within office buildings. The Company also maintains ownership interest in salons, beauty schools and hair restoration centers through equity-method investments. On April 9, 2012, the Company entered into a Share Purchase Agreement (Agreement) to sell the Company's 46.7 percent equity interest in Provalliance to the Provost Family for a purchase price of €80 million.international salons.
Consolidation:
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries after the elimination of intercompany accounts and transactions. All material subsidiaries are wholly owned. The Company consolidated variable interest entities where it has determined it is the primary beneficiary of those entities' operations.
Variable Interest Entities:
The Company has or has had interests in certain privately held entities through arrangements that do not involve voting interests. Such entities, known as a variable interest entity (VIE), are required to be consolidated by its primary beneficiary. The Company evaluates whether or not it is the primary beneficiary for each VIE using a qualitative assessment that considers the VIE's purpose and design, the involvement of each of the interest holders, and the risk and benefits of the VIE.
As of June 30, 2013, the Company has one VIE, Roosters, where the Company is the primary beneficiary. The Company owns a 60.0% ownership interest in Roosters. As of June 30, 2013, total assets, total liabilities, and total shareholders' equity of Roosters were $6.2, $2.1, and $4.1 million, respectively. Net income attributable to the non-controlling interest in Roosters was immaterial for fiscal years 2013 and 2012. Shareholders' equity attributable to the non-controlling interest in Roosters was $1.6 million as of June 30, 2013 and 2012, and recorded within retained earnings on the Consolidated Balance Sheet.
Reclassifications:
Beginning in the first quarter of fiscal year 2013, salon marketing and advertising expenses that were presented within cost of service and general and administrative operating expense line items in prior filings were reclassified to site operating expenses within the Consolidated Statement of Operations. Reclassifications were made to better present how management of the Company views the respective salon marketing and advertising expenses. Prior period amounts have been reclassified to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
conform to the current year presentation. These reclassifications had no impact on operating income, net income or cash flows from operations. The tables below presents the impact of the reclassification:
| Fiscal Year 2012 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Prior Presentation(1) | Reclassification | As Presented | |||||||
| (Dollars in thousands) | |||||||||
Cost of service | $ | 942,461 | $ | (790 | ) | $ | 941,671 | |||
Site operating expenses | 192,246 | 14,785 | 207,031 | |||||||
General and administrative | 263,629 | (13,995 | ) | 249,634 |
| Fiscal Year 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Prior Presentation(1) | Reclassification | As Presented | |||||||
| (Dollars in thousands) | |||||||||
Cost of service | $ | 973,739 | $ | (845 | ) | $ | 972,894 | |||
Site operating expenses | 193,404 | 17,819 | 211,223 | |||||||
General and administrative | 302,819 | (16,974 | ) | 285,845 |
In addition, expenses associated with our distribution centers were reclassified from Corporate to North America reportable segment. Reclassifications were made to better present how management of the Company views the respective distribution centers expenses. This reclassification had no impact on our Consolidated Statement of Operations and Consolidated Statement of Cash Flows. Prior period amounts have been reclassified to conform to the current year presentation. The table below presents the impact of the reclassification of depreciation and amortization expenses and operating income (loss) between the Company's Corporate and North America reportable segments:
| Fiscal Year 2012 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| North America | Unallocated Corporate | |||||||||||||||||
| Prior Presentation | Reclassification | As Presented(2) | Prior Presentation(1) | Reclassification | As Presented(2) | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
Depreciation and amortization | $ | 68,983 | $ | 2,270 | $ | 71,253 | $ | 30,690 | $ | (2,270 | ) | $ | 28,420 | ||||||
Operating income (loss) | 165,368 | (25,394 | ) | 139,974 | (170,040 | ) | 25,394 | (144,646 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
| Fiscal Year 2011 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| North America | Unallocated Corporate | |||||||||||||||||
| Prior Presentation | Reclassification | As Presented(2) | Prior Presentation | Reclassification | As Presented(2) | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
Depreciation and amortization | $ | 69,763 | $ | 2,444 | $ | 72,207 | $ | 17,638 | $ | (2,444 | ) | $ | 15,194 | ||||||
Operating income (loss) | 166,683 | (26,726 | ) | 139,957 | (187,703 | ) | 26,726 | (160,977 | ) |
Use of Estimates:
The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the U.S.United States of America (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation:
Financial position, results of operations and cash flows of the Company's international subsidiaries are measured using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates in effect at each fiscal year end. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive income within shareholders' equity. Statement of Operations accounts are translated at the average rates of exchange prevailing during the year. The different exchange rates from period to period impact the amount of reported income from the Company's international operations.
Cash and Cash Equivalents:
Cash equivalents consist of investments in short-term, highly liquid securities having original maturities of three months or less, which are made as a part of the Company's cash management activity. The carrying values of these assets approximate their fair market values. The Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
primarily utilizes a cash management system with a series of separate accounts consisting of lockbox accounts for receiving cash, concentration accounts that funds are moved to, and several "zero balance" disbursement accounts for funding of payroll and accounts payable. As a result of the Company's cash management system, checks issued, but not presented to the banks for payment, may create negative book cash balances. There were no checks outstanding in excess of related book cash balances at June 30, 20122013 and 2011.2012.
The Company has restricted cash primarily related to contractual obligations to collateralize its self-insurance program. The restricted cash arrangement can be cancelled by the Company at any time if substituted with letters of credit. The restricted cash balance is classified within other current assets on the Consolidated Balance Sheet.
Receivables and Allowance for Doubtful Accounts:
The receivable balance on the Company's Consolidated Balance Sheet primarily includes credit card receivables and accounts and notes receivable from franchisees and credit card receivables.franchisees. The balance is presented net of an allowance for expected losses (i.e., doubtful accounts), primarily related to the receivables from the Company's franchisees. The Company monitors the financial condition of its franchisees and records provisions for estimated losses on receivables when it believes its franchisees are unable to make their required payments based on factors such as delinquencies and aging trends.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses related to existing accounts and notes receivables.
The following table summarizes the activity in As of June 30, 2013, and 2012 the allowance for doubtful accounts:
| For the Years Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
| (Dollars in thousands) | |||||||||
Beginning balance | $ | 1,482 | $ | 3,170 | $ | 2,382 | ||||
Bad debt expense | 454 | 853 | 1,040 | |||||||
Write-offs | (714 | ) | (2,549 | ) | (252 | ) | ||||
Other (primarily the impact of foreign currency fluctuations) | 10 | 8 | — | |||||||
Ending balance | $ | 1,232 | $ | 1,482 | $ | 3,170 | ||||
Note Receivables, Net:
The note receivable balances within the Company's Consolidated Balance Sheet primarily include note receivables related to the Company's investments in EEGaccounts was $0.6 and MY Style, a note receivable with the purchaser of Trade Secret and note receivables with our franchisees. The Company monitors the financial condition of its counterparties with an outstanding note receivable and records provisions for estimated losses on receivables when it believes the counterparties are unable to make their required payments. As of June 30, 2012, the outstanding note receivable balances with EEG and MY Style were in good standing with no associated valuation allowance. See discussion of the note receivables related to the purchaser of Trade Secret and Company's investments in EEG and MY Style within Notes 2 and 6, respectively, to the Consolidated Financial Statements.$0.7 million, respectively.
Inventories:
Inventories of finished goods consist principally of hair care products for retail product sales. A portion of inventories are also used for salon services consisting of hair color, hair care products including shampoo and conditioner and hair care treatments including permanents, neutralizers and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
relaxers. Inventories are stated at the lower of cost or market, with cost determined on a weighted average cost basis.
Physical inventory counts are performed annually. Product and service inventories are adjusted based on the results of the physical inventory counts. Between the physical inventory counts, cost of retail product sold to salon guests is determined based on the weighted average cost of product sold, adjusted for an estimated shrinkage factor, and the cost of product used in salon services is determined by applying estimated gross profit marginspercentage of total cost of service and product to service revenues. The estimated gross profit marginspercentage related to service inventories are updated semi-annuallyquarterly based on the results of the physical inventorycycle counts and other factors that could impact the Company's margin rate estimates such as mix of service sales, discounting and special promotions. Actual results for the estimated gross margin percentage as compared to the semi-annualquarterly estimates have not historically resulted in material adjustments to our Statement of Operations.
The Company has inventory valuation reserves for excess, obsolescence or other factors that may render inventories unmarketable at their historical costs. Estimates of the future demand for the Company's inventory and anticipated changes in formulas and packaging are some of the other factors used by management in assessing the net realizable value of inventories. During fiscal year 2013, the Company recorded an inventory reserve of $12.6 million associated with standardizing plan-o-grams and eliminating retail products and consolidating its four private label brands to one.
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization of property and equipment areis computed onusing the straight-line method over their estimated useful asset lives (30 to 39 years for buildings, 10 years for improvements and three to ten years for equipment, furniture and software). Depreciation expense was $101.7, $88.6,$81.8, $96.4, and $92.5$83.5 million in fiscal years 2013, 2012, and 2011, and 2010, respectively. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term, generally ten years. For leases with renewal periods at the Company's option, management may determine at the inception of the lease that renewal is reasonably assured if failure to exercise a renewal option imposes an economic penalty to the Company. In such cases, the Company will include the renewal option period along with the original lease term in the determination of appropriate estimated useful lives.
The Company capitalizes both internal and external costs of developing or obtaining computer software for internal use. Costs incurred to develop internal-use software during the application development stage are capitalized, while data conversion, training and maintenance costs associated with internal-use software are expensed as incurred. At June 30, 2012 and 2011, the net book value of capitalized software costs was $26.7 and $34.1 million, respectively. DepreciationAmortization expense related to capitalized software was $6.8, $22.3, $8.4, and $8.5$8.4 million in fiscal years 2013, 2012, 2011, and 2010,2011, respectively, which has been determined based on an estimated useful life oflives ranging from five orto seven years.
Historically, because of the Company's large size and scale requirements it has been necessary for theThe Company to internally develop and support its own proprietaryimplemented a third party point-of-sale (POS) information system. During the fourth quarter ofsystem in fiscal year 2011, the2013. The Company identifiedrecorded $16.2 million of accelerated amortization expense in fiscal year 2012 associated with a third partypreviously developed POS alternative that has a system that meets current and future functionality requirements including enhanced guest demographics. Atbecame fully depreciated as of June 30, 2011, the Company reassessed and adjusted the remaining useful life of the Company's capitalized POS software to six months as locations using the Company's existing POS information system move to a third party POS alternative by December 31, 2011. Based on the results of the implementation of the third party POS alternative during each of the three month periods ended March 31, 2012 and December 31, 2011, the Company reassessed and extended the useful life of the Company's capitalized POS software by three months. Depreciation expense related to the existing POS information system during the twelve months ended June 30, 2012, included $16.2 million ($10.2 million net of tax or $0.18 per diluted share) of accelerated depreciation related to the2012.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
change in useful life. As of June 30, 2012, the previously internally developed POS was fully depreciated.
Expenditures for maintenance and repairs and minor renewals and betterments, which do not improve or extend the life of the respective assets are expensed. All other expenditures for renewals and betterments are capitalized. The assets and related depreciation and amortization accounts are adjusted for property retirements and disposals with the resulting gain or loss included in operating income. Fully depreciated or amortized assets remain in the accounts until retired from service.
Investment In and Loans to Affiliates:Long-Lived Asset Impairment Assessments, Excluding Goodwill:
The Company has equity investmentsassessed the impairment of long-lived assets when events or changes in securities of certain privately held entities. The Company accounts for these investments undercircumstances indicate that the equity method of accounting. The Company also has loans receivable from certain of these entities. Investments accounted for under the equity method are recorded at the amountcarrying value of the Company's investment and adjusted each period for the Company's share of the investee's income or loss. Investments are reviewed for changes in circumstanceassets or the occurrence of events that suggest the Company's investmentasset grouping may not be recoverable. During fiscal year 2012, we entered intoThe Company's impairment analysis on salon property and equipment is performed on a Share Purchase Agreementsalon by salon basis. The Company's test for impairment is performed at a salon level as this is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Factors considered in deciding when to sell the Company's 46.7 percent equity interest in Provalliance for a purchase price of €80 million. As such, we recorded a net impairment of $17.2 million related to our investment in Provalliance. In addition, during fiscal year 2012, we recordedperform an impairment review include significant under-performance of $19.4 million relatedan individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our investment in EEG. During fiscal year 2011, we recorded an impairment of $9.2 million related to our investment in MY Style. See further discussion within Note 6 to the Consolidated Financial Statements.
Self-Insurance Accruals:
The Company uses a combination of third party insurance and self-insurance for a number of risks including workers' compensation, health insurance, employment practice liability and general liability claims. The liability represents the Company's estimateuse of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date.
The workers' compensation, general liability and employment practice liability analysis includes applying loss development factors to the Company's historical claims data (total paid and incurred amounts per claim) for all policy years where the Company has not reached its aggregate limits to project the future development of incurred claims. The workers' compensation analysisassets. Impairment is performed for three models; California, Texas and all other states. A variety of accepted actuarial methodologies are followed to determine these liabilities, including several methods to predict the loss development factors for each policy period. These liabilities are determined by modeling the frequency (number of claims) and severity (cost of claims), fitting statistical distributions to the experience, and then running simulations. A similar analysis is performed for both general liability and employment practices liability; however, it is a single model for all liability claims rather than the three separate models used for workers' compensation.
The health insurance analysis utilizes trailing twelve months of paid and 24 months of incurred medical and prescription claims to project the amount of incurred but not yet reported claims liability amount. The lag factors are developedevaluated based on the Company's specific claim data utilizing a completion factor methodology.sum of undiscounted estimated future cash flows expected to result from use of the related salon assets that does not recover the carrying value of the salon assets. The developed factor, expressed as a percentage of paid claims,fair value estimate is applied to the trailing twelve months of paid claims to calculate the estimated liability amount. The
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
calculated liability amount is reviewed for reasonableness based on reserve adequacy ranges for historical periodsthe best information available, including market data.
Judgments made by testing prior reserve levels against actual expenses to date.
Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, self-insurance accruals could be affected if future claims experience differs significantly from the historical trends and actuarial assumptions. For fiscal year 2012, the Company recorded an increase in expense from changes in estimates related to prior year open policy periods related to continuing operations of $0.7 million. For fiscal year 2011, the Company recorded an increase in expense from changes in estimates related to prior year open policy periods related to continuing operations of $1.4 million. For fiscal year 2010, the Company recorded a decrease in expense from changes in estimates related to prior year open policy periods related to continuing operations of $1.7 million. A 10.0 percent change in the self-insurance reserve would affect (loss) income from continuing operations before income taxes and equity in (loss) income of affiliated companies by $4.8, $4.6, and $4.5 million for the three years ended June 30, 2012, 2011 and 2010, respectively. The Company updates loss projections twice each year and adjusts its recorded liability to reflect the current projections. The updated loss projections consider new claims and developments associated with existing claims for each open policy period. As certain claims can take years to settle, the Company has multiple policy periods open at any point in time.
As the workers' compensation accrual is the majority of the self-insurance accrual, below is a rollforward of the activity within the Company's workers' compensation self-insurance accrual:
| For the Years Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
| (Dollars in thousands) | |||||||||
Beginning balance | $ | 32,994 | $ | 30,082 | $ | 31,505 | ||||
Provision for incurred losses | 14,133 | 13,993 | 14,739 | |||||||
Prior year actuarial loss development | 1,221 | 2,231 | 35 | |||||||
Claim payments | (14,140 | ) | (12,584 | ) | (14,867 | ) | ||||
Other, net | 415 | (728 | ) | (1,330 | ) | |||||
Ending balance | $ | 34,623 | $ | 32,994 | $ | 30,082 | ||||
As of June 30, 2012, the Company had $15.5 and $32.5 million recorded in current liabilities and noncurrent liabilities, respectively,management related to the Company's self-insurance accruals, which includesexpected useful lives of long-lived assets and the workers' compensation self-insurance accrual.ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of June 30,long-lived assets are assessed, these factors could cause us to realize material impairment charges.
During fiscal years 2013, 2012 and 2011, $8.2, $6.6 and $6.5 million, respectively, of impairments were recorded within depreciation and amortization in the Company had $14.7 and $30.9 million recorded in current liabilities and noncurrent liabilities, respectively, related to the Company's self-insurance accruals, which includes the workers' compensation self-insurance accrual.Consolidated Statement of Operations.
Goodwill:
Goodwill is tested for impairment annually or at the time of a triggering event. In evaluating whether goodwill is impaired, the Company compares the carrying value of each reporting unit, including goodwill, to the estimated fair value of the reporting unit. The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units. Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company calculates the estimated fair value of the reporting units based on discounted future cash flows that utilize estimates in annual revenue, gross margins, fixed expense rates, allocated corporate overhead, and long-term growth rates for determining terminal value. The Company's estimated future cash flows also take into consideration acquisition integrationvalue, and maturation.a discount rate based on the weighted average cost of capital. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company considers its various concepts to be reporting units when testing for goodwill impairment because that is where the goodwill resides. The Company periodically engages third-party valuation consultants to assist in evaluation of the Company's estimated fair value calculations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In the situations where a reporting unit's carrying value exceeds its estimated fair value, the amount of the impairment loss must be measured. The measurement of impairment is calculated by determining the implied fair value of a reporting unit's goodwill. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all other assets and liabilities of that unit based on the relative fair values under the assumption of a taxable transaction. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities is the implied fair value of goodwill. The goodwill impairment is measured as the excess of the carrying value of goodwill over its implied fair value.
As previously disclosed, the Company concluded that it was reasonably likely that goodwill for the Regis and Hair Restoration Centers reporting units might become impaired in future periods. During the three months ended December 31, 2011 the Company updated the projections for the Hair Restoration Centers reporting unit used inFor the fiscal 2011 annual impairment test to reflect the impact of recent industry developments, including a slow down in revenue growth and increasing supply costs. The Company determined there was a triggering event as it was more likely than not that the fair value of the Hair Restoration Centers was below carrying value and performed an interim impairment test of goodwill during the three months ended December 31, 2011. There were no triggering events relative to the Company's other reporting units.
As a result of the Company's interim impairment test of goodwill related to the Hair Restoration Centers reporting unit during the second quarter of fiscal year 2012, a $78.4 million impairment charge was recorded within continuing operations for the excess of the carrying value of goodwill over the implied fair value of the goodwill for the Hair Restorations Centers reporting unit. After the impairment charge the Hair Restoration Centers reporting unit had $74.4 million of goodwill. The impairment was only partially deductible for tax purposes resulting in a tax benefit of $5.9 million. See further discussion on the effective tax rate for the twelve months ended June 30, 2012 within Note 12 to the Consolidated Financial Statements.
As a result of the Company's2013 annual impairment testing of goodwill, during the fourth quarter of fiscal year 2012, a $67.7 million impairment charge was recorded within continuing operations for the excess of the carrying value of goodwill over the impliedestimated fair value of the goodwill for the Regis salon concept. The Regis salon concept reported same-store sales of negative 4.0 percent for the ten months ended April 30, 2012, which was unfavorable compared to the Company's budgeted same-store sales. Visitation patterns did not rebound as quickly as the Company originally projected. Accordingly, the Company reduced the budgeted financial projections for future years. After the impairment charge the Regis salon concept reporting unit had $35.1 million of goodwill. The impairment was only partially deductible for tax purposes resulting in a tax benefit of $12.5 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
As of June 30, 2012, the estimated fair value of the Promenade salon concept and Hair Restoration Centers reporting units exceeded the carrying value by approximately 14.0 and 12.0 percent, respectively.9.0 percent. The respective fair values of the Company's remaining reporting units exceeded carrying value by greater than 20.0 percent at June 30, 2012.2013. While the Company has determined the estimated fair value of PromenadeRegis to be appropriate based on the historical level of revenue growth, operating income and cash flows, it is reasonably likely that PromenadeRegis may experience additional impairment in future periods. As previously disclosed, the Company has agreed to sell the Hair Restoration Centers reporting unit in the first half of fiscal year 2013; however, until this reporting unit is sold it is reasonably likely that there could be impairment of the Hair Restoration Centers reporting unit's goodwill in future periods. The term "reasonably likely" refers to an occurrence that is more than remote but less than probable in the judgment of the Company. Because some of the inherent assumptions and estimates used in determining the fair value of the reportable segment are outside the control of management, changes in these underlying assumptions can adversely impact fair value. Potential impairment of a portion or all of the carrying value of goodwill for the PromenadeRegis salon concept and Hair Restoration Centers reporting unitsunit is dependent on many factors and cannot be predicted with certainty.
As of June 30, 2012,2013, the Company's estimated fair value, as determined by the sum of our reporting units' fair value reconciled to within a reasonable range of our market capitalization which included an assumed control premium.
A summary of the Company's goodwill balance as of June 30, 2012 and 2011 by reporting unit is as follows:
June 30, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Reporting Unit | June 30, 2012 | June 30, 2011 | 2013 | 2012 | ||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||
Regis | $ | 34,992 | $ | 103,761 | $ | 34,953 | $ | 34,992 | ||||||
MasterCuts | 4,652 | 4,652 | 4,652 | 4,652 | ||||||||||
SmartStyle | 49,476 | 48,916 | 49,286 | 49,476 | ||||||||||
Supercuts | 129,621 | 129,477 | 129,610 | 129,621 | ||||||||||
Promenade | 243,538 | 240,910 | 242,384 | 243,538 | ||||||||||
Total North America Salons | 462,279 | 527,716 | ||||||||||||
Hair Restoration Centers | 74,376 | 152,796 | ||||||||||||
Total | $ | 460,885 | $ | 462,279 | ||||||||||
Consolidated Goodwill | $ | 536,655 | $ | 680,512 | ||||||||||
No goodwill impairment charges were recorded during fiscal year 2013. As a result of the goodwill impairment analyses performed in fiscal years 20112012 and 2010,2011, the Company recorded $74.1$67.7 and $35.3$74.1 million, respectively, of impairment charges within continuing operations for the excess of the carrying value of goodwill over the implied fair value of goodwill for the Regis salon concept in fiscal year 2012 and the Promenade salon concept in fiscal year 2011 and the Regis salon concept in fiscal year 2010.2011.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-Lived Asset Impairment Assessments, Excluding Goodwill:Investment In and Loans to Affiliates:
The Company reviews long-lived assetshas equity investments in securities of certain privately held entities. The Company accounts for impairmentthese investments under the equity or cost method of accounting. Investments accounted for under the equity method are recorded at the salon level annuallyamount of the Company's investment and adjusted each period for the Company's share of the investee's income or ifloss. Investments are reviewed for changes in circumstance or the occurrence of events or circumstances indicate that suggest the carrying value of such assetsCompany's investment may not be recoverable. The Company's test for impairment of property and equipment is performed at a salon level, as this is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the assets that does not recover the carrying value of the related salon assets. When the sum of a salon's undiscounted estimated future cash flow is zero or negative, impairment is measured as the full carrying value of the related salon's equipment and leasehold improvements. When the sum of a salon's undiscounted cash flows is greater than zero but less than the carrying value of the related salon's equipment and leasehold improvements, a discounted cash flow analysis is performed to estimate the fair value of the salon assets and impairment is measured as the difference between the carrying value of the salon assets and the estimated fair value. The fair value estimate is based on the best information available, including market data.
As a result of the Company's annual impairment analysis of long-lived assets, the following impairment charges were recognized during fiscal years 2012, 2011, and 2010, respectively, related primarilySee further discussion within Note 5 to the carrying value of certain salons' property and equipment within our North American, International, and Hair Restoration Centers segments:Consolidated Financial Statements.
Self-Insurance Accruals:
| For the Years Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
| (Dollars in thousands) | |||||||||
North American salons | $ | 6,066 | $ | 6,115 | $ | 6,253 | ||||
International salons | 570 | 394 | 175 | |||||||
Hair restoration centers | — | 172 | — | |||||||
Total | $ | 6,636 | $ | 6,681 | $ | 6,428 | ||||
The Company also evaluateduses a combination of third party insurance and self-insurance for a number of risks including workers' compensation, health insurance, employment practice liability and general liability claims. The liability represents the appropriatenessCompany's estimate of the remaining useful livesundiscounted ultimate cost of uninsured claims incurred as of the balance sheet date.
The Company estimates self-insurance liabilities using a number of factors, primarily based on independent third-party actuarially-determined amounts, historical claims experience, estimates of incurred but not reported claims, demographic factors, and severity factors.
Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, self-insurance accruals could be affected if future claims experience differs significantly from historical trends and actuarial assumptions. For fiscal years 2013, 2012 and 2011, the Company recorded (decreases) increases in expense from changes in estimates related to prior year open policy periods of ($1.1), $0.9 and $1.4 million, respectively. A 10.0% change in the self-insurance reserve would affect income (loss) from continuing operations before income taxes and equity in (loss) income of affiliated companies by $4.7, $4.8 and $4.6 million for fiscal years 2013, 2012 and 2011, respectively. The Company updates loss projections twice each year and adjusts its non-impaired propertyrecorded liability to reflect the current projections. The updated loss projections consider new claims and equipmentdevelopments associated with existing claims for each open policy period. As certain claims can take years to settle, the Company has multiple policy periods open at any point in time.
As of June 30, 2013, the Company had $14.8 and whether a change$32.4 million recorded in current liabilities and noncurrent liabilities, respectively, related to the depreciation charge was warranted. Impairment charges for continuing operations are includedCompany's self-insurance accruals. As of June 30, 2012, the Company had $15.5 and $32.5 million recorded in depreciationcurrent liabilities and noncurrent liabilities, respectively, related to company-owned salons in the Consolidated Statement of Operations.Company's self-insurance accruals.
Deferred Rent and Rent Expense:
The Company leases most salon and hair restoration center locations under operating leases. Rent expense is recognized on a straight-line basis over the lease term. Tenant improvement allowances funded by landlord incentives, rent holidays, and rent escalation clauses which provide for scheduled rent increases during the lease term or for rental payments commencing at a date other than the date of initial occupancy are recorded in the Consolidated Statements of Operations on a straight-line basis over the lease term (including one renewal option period if renewal is reasonably assured based on the imposition of an economic penalty for failure to exercise the renewal option). The difference between the rent due under the stated periods of the lease compared to that of the straight-line basis is recorded as deferred rent within accrued expenses and other noncurrent liabilities in the Consolidated Balance Sheet.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
For purposes of recognizing incentives and minimum rental expenses on a straight-line basis over the lease terms, of the leases, the Company uses the date that it obtains the legal right to use and control the leased space to begin amortization, which is generally when the Company enters the space and begins to make improvements in preparation of intended use of the leased space.
Certain leases provide for contingent rents, which are determined as a percentage of revenues in excess of specified levels. The Company records a contingent rent liability in accrued expenses on the Consolidated Balance Sheet, along with the corresponding rent expense in the Consolidated Statement of Operations, when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.
Revenue Recognition and Deferred Revenue:
Company-owned salon revenues and related cost of sales are recognized at the time of sale, as this is when the services have been provided or, inprovided. Product revenues are recognized when the case of product revenues, delivery has occurred,guest receives and pays for the salon receives the guest's payment.merchandise. Revenues from purchases made with gift cards are also recorded when the guest takes possession of the merchandise or services are provided. Gift cards issued by the Company are recorded as a liability (deferred revenue) until they are redeemed.
Product sales by the Company to its franchisees are included within product revenues on the Consolidated Statement of Operations and recorded at the time product is shipped to franchise locations. The related cost of product sold to franchisees is included within cost of product in the Consolidated Statement of Operations.
Company-owned hair restoration center revenues stem primarily from servicing hair systems and surgical procedures, as well as through product and hair system sales. The Company records deferred revenue for contracts related to the servicing of hair systems and recognizes the revenue ratably over the term of the service contract. Revenues are recognized related to surgical procedures when the procedure is performed. Product revenues, including sales of hair systems, are recognized at the time of application, as this is when delivery occurs and payment is probable.
Franchise revenues primarily include royalties, initial franchise fees and net rental income (see Note 10)8). Royalties are recognized as revenue in the month in which franchisee services are rendered. The Company recognizes revenue from initial franchise fees at the time franchise locations are opened, as this is generally when the Company has performed all initial services required under the franchise agreement.
Classification of Expenses:
The following discussion provides the primary costs classified in each major expense category:
Cost of service—labor costs related to salon employees and the cost of product used in providing service.
Cost of product—cost of product sold to guests, labor costs related to selling retail product and the cost of product sold to franchisees.
Site Operating—direct costs incurred by the Company's salons, such as advertising, workers' compensation, insurance, utilities, and janitorial costs.
General and administrative—costs associated with our field supervision, salon training and promotions, distribution centers and corporate offices (such as salaries and professional fees), including cost incurred to support franchise operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Consideration Received from Vendors:
The Company receives consideration for a variety of vendor-sponsored programs. These programs primarily include volume rebates and promotion and advertising reimbursements. Promotion and advertising reimbursements are discussed under Advertising within this note.Note 1 to the Consolidated Financial Statements.
With respect to volume rebates, the Company estimates the amount of rebate it will receive and accrues it as a reduction ofto the cost of inventory over the period in which the rebate is earned based upon historical purchasing patterns and the terms of the volume rebate program. A periodicquarterly analysis is performed at least quarterly, in order to ensure that the estimated rebate accrued is reasonable, and any necessary adjustments are recorded.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Shipping and Handling Costs:
Shipping and handling costs are incurred to store, move and ship product from the Company's distribution centers to company-owned and franchise locations, and include an allocation of internal overhead. Such shipping and handling costs related to product shipped to company-owned locations are included in site operating expenses in the Consolidated Statement of Operations. Shipping and handling costs related to shipping product to franchise locations totaled $3.6, $3.8, $3.5, and $2.9$3.5 million during fiscal years 2013, 2012, 2011, and 2010,2011, respectively, and are included within general and administrative expenses on the Consolidated Statement of Operations. Any amounts billed to the franchiseefranchisees for shipping and handling are included in product revenues within the Consolidated Statement of Operations.
Advertising:
Advertising costs, including salon collateral material, are expensed as incurred. Advertising costs expensed and included in continuing operations in fiscal years 2013, 2012 and 2011 was $39.2, $42.1, and 2010 was $58.7, $63.3, and $54.9$45.1 million, respectively.
The Company participates in cooperative advertising programs under which the vendor reimbursesvendors reimburse the Company for costs related to advertising for its products. The Company records such reimbursements as a reduction of advertising expense when the expense is incurred. During fiscal years 2013, 2012, 2011, and 2010,2011, no amounts were received in excess of the Company's related expense.
Advertising Funds:
The Company has various franchising programs supporting certain of its franchise salon concepts consisting of Supercuts, Cost Cutters, First Choice Haircutters, Magicuts, Pro-Cuts, Beauty Supply Outlet and Hair Club.concepts. Most of the concepts maintain advertising funds that provide comprehensive advertising and sales promotion support.
The SupercutsCompany is required to participate in the advertising fund isfunds for company-owned locations under the Company's largestsame salon concept. The Company assists in the administration of the advertising fund. The Supercuts advertising fund is administered byfunds. However, a councilgroup of individuals consisting primarily of franchisee representatives. The councilrepresentatives has overall control ofover all of the fund's expenditures and operates the funds in accordance with terms of the franchise operating and other agreements.
Each Supercuts salon contributes 5.0 percent of service revenues to the fund (contributions for other concepts range between 1.5 and 5.0 percent). The majority of the advertising funds are spent to support media placement and local marketing activities. The remainder is allocated for the creation of national advertising campaigns and system wide activities. None of the Supercuts advertising funds collected may be used by the Company as reimbursement for the cost of administering the advertising fund. Advertising funds can only be used as directed by the fund's council and are considered to be restricted.
The Company records all advertising funds as assets and liabilities withinexpense in the Company's Consolidated Balance Sheet. As of June 30,period the company-owned salon makes contributions to the respective advertising fund. During fiscal years 2013, 2012, and 2011, approximately $14.8total contributions to the franchise advertising funds totaled $19.0, $19.2, and $16.7$18.3, million, respectively, of the advertising funds' assets and liabilities were recorded within total assets and total liabilities in the Company's Consolidated Balance Sheet.respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company records all advertising funds as assets and liabilities within the Company's Consolidated Balance Sheet. As of June 30, 2013 and 2012, approximately $20.8 and $15.3 million, respectively, representing the advertising funds' assets and liabilities were recorded within total assets and total liabilities in the Company's Consolidated Balance Sheet.
Stock-Based Employee Compensation Plans:
The Company recognizes stock-based compensation expense based on the fair value of the awards at the grant date. Compensation expense is recognized on a straight-line basis over the requisite service period of the award (or to the date a participant becomes eligible for retirement, if earlier). The Company uses option pricing methods that require the input of subjective assumptions, including the expected term, expected volatility, dividend yield, and risk-free interest rate.
The Company estimates the likelihood and the rate of achievement for performance sensitive stock-based awards at the end of each reporting period. Changes in the estimated rate of achievement can have a significant effect on the recorded stock-based compensation expense as the effect of a change in the estimated achievement level is recognized in the period the company-owned salon makes contributions to the respective advertising fund. During fiscal years 2012, 2011, and 2010, total contributions to the franchise brand advertising funds totaled $42.0, $41.9, and $39.8 million, respectively.
The Company acts as an agent for the franchisees with regard to these contributions to the advertising funds. Thus, in accordance with guidance for accounting for franchise fee revenue, the Company does not reflect contributions to these advertising funds by its franchisees in its Consolidated Statement of Operations or Consolidated Statement of Cash Flows but reflects the related assets and liabilities in its Consolidated Balance Sheet.change occurs.
Preopening Expenses:
Non-capital expenditures such as payroll, training costs and promotion incurred prior to the opening of a new location are expensed as incurred.
Sales Taxes:
Sales taxes are recorded on a net basis (rather than as both revenue and an expense) within the Company's Consolidated Statement of Operations.
Income Taxes:
In determining income for financial statement purposes, management must make certain estimates and judgments. These estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred tax assets which arise from temporary differences between the tax and financial statement recognition of revenue and expense.
Management must assess the likelihood that deferred tax assets will be recovered. If recovery is not likely, we must increase our provision for income taxes by recording a reserve, in the form of a valuation allowance, for the deferred tax assets that will not ultimately be recoverable.
In addition, the calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. Management recognizes a reserve for potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. Realization of deferred tax assets is ultimately dependent upon future taxable income. Inherent in the measurement of deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to the Company's operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities.
Net Income (Loss) Income Per Share:
The Company's basic earnings per share is calculated as net income (loss) income divided by weighted average common shares outstanding, excluding unvested outstanding restricted stock awards and restricted stock units. The Company's dilutive earnings per share is calculated as net income (loss) income divided by weighted average common shares and common share equivalents outstanding, which includes shares issuable under the Company's stock option plan and long-term incentive plan, and dilutive securities. Stock-based awards with exercise prices greater than the average market value of the Company's common stock are excluded from the computation of diluted earnings per share. The Company's diluted earnings per share will also reflect the assumed conversion under the Company's convertible debt if the impact is dilutive, along with the exclusion of related interest expense, net of taxes. The impact of the convertible debt is excluded from the computation of diluted earnings per share when interest expense per common share obtainable upon conversion is greater than basic earnings per share.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive (Loss) Income:
Components of comprehensive (loss) income for the Company include net income (loss) income,, foreign currency translation adjustments, changes in fair value of financialderivative instruments, designated as hedges of interest rate or foreign currency exposure, recognition of deferred compensation, and foreign currency translation charged or credited to the cumulative translation accountreclassification adjustments, net of tax within shareholders' equity. These amounts are presented in the Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income.
| 2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | |||||||||
Accumulated Other Comprehensive Income, balance at July 1 | $ | 77,946 | $ | 47,032 | $ | 51,855 | ||||
Cumulative translation adjustment: | ||||||||||
Balance at July 1 | 87,814 | 57,409 | 62,825 | |||||||
Pre-tax amount | (24,254 | ) | 30,405 | (5,416 | ) | |||||
Tax effect | — | — | — | |||||||
Net of tax amount | (24,254 | ) | 30,405 | (5,416 | ) | |||||
Balance at June 30 | 63,560 | 87,814 | 57,409 | |||||||
Unrecognized loss on net investment hedge: | ||||||||||
Balance at July 1 | (7,932 | ) | (7,932 | ) | (7,932 | ) | ||||
Pre-tax amount | — | — | — | |||||||
Tax effect | — | — | — | |||||||
Net of tax amount | — | — | — | |||||||
Balance at June 30 | (7,932 | ) | (7,932 | ) | (7,932 | ) | ||||
Changes in fair market value of financial instruments designated as cash flow hedges: | ||||||||||
Balance at July 1 | (372 | ) | (504 | ) | (2,971 | ) | ||||
Pre-tax amount | 603 | 218 | 3,949 | |||||||
Tax effect | (210 | ) | (86 | ) | (1,482 | ) | ||||
Net of tax amount | 393 | 132 | 2,467 | |||||||
Balance at June 30 | 21 | (372 | ) | (504 | ) | |||||
Recognition of deferred compensation: | ||||||||||
Balance at July 1 | (1,564 | ) | (1,941 | ) | (67 | ) | ||||
Pre-tax amount | 1,673 | 609 | (3,184 | ) | ||||||
Tax effect | (644 | ) | (232 | ) | 1,310 | |||||
Net of tax amount | 1,029 | 377 | (1,874 | ) | ||||||
Balance at June 30 | (535 | ) | (1,564 | ) | (1,941 | ) | ||||
Accumulated Other Comprehensive Income, balance at June 30 | $ | 55,114 | $ | 77,946 | $ | 47,032 | ||||
Derivative Instruments:Foreign Currency Translation:
The Company may manage its exposure to interest rateFinancial position, results of operations and foreigncash flows of the Company's international subsidiaries are measured using local currency risk withinas the Consolidated Financial Statements throughfunctional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates in effect at each fiscal year end. Translation adjustments arising from the use of derivative financial instruments, accordingdiffering exchange rates from period to its
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
hedging policy. The Company does not use derivatives with a levelOperations accounts are translated at the average rates of complexity or with a risk higher thanexchange prevailing during the exposures to be hedgedyear. During fiscal years 2013, 2012, and does not hold or issue derivatives for trading or speculative purposes. The Company currently has or has had interest rate swaps designated as both cash flow and fair value hedges, treasury locks designated as cash flow hedges, a hedge of its net investment in its European operations and forward2011, the foreign currency contracts designated as cash flow hedges of forecasted transactions denominated in a foreign currency. Refer to Note 9 to the Consolidated Financial Statements for further discussion.
The Company follows guidance for accounting for derivative instrumentsgain (loss) recorded within interest income and hedging activities, as amended and interpreted, which requires that all derivatives be recorded on the balance sheet at fair value. This guidance also requires companies to designate all derivatives that qualify as hedging instruments as fair value hedges, cash flow hedges or hedges ofother, net investments in foreign operations. This designation is based upon the exposure being hedged. Cash flow and fair value hedges are designated and documented at the inception of each hedge by matching the terms of the contract to the underlying transaction. At inception, as dictated by the facts and circumstances, all hedges are expected to be highly effective, as the critical terms of these instruments are generally the same as those of the underlying risks being hedged. All derivatives designated as hedging instruments are assessed for effectiveness on an on-going basis. For purposes of the Consolidated Statement of Cash Flows, cash flows associated with all derivatives (designated as hedges or freestanding economic hedges) are classified in the same category as the related cash flows subject to the hedging relationship.
Stock-Based Employee Compensation Plans:
Stock-based awards are granted under the terms of the 2004 Long Term Incentive Plan (2004 Plan). Additionally, the Company has outstanding stock options under its 2000 Stock Option Plan (2000 Plan), although the 2000 Plan terminated in 2010. Under these plans, four types of stock-based compensation awards are granted: stock options, equity-based stock appreciation rights (SARs), restricted stock awards (RSAs) and restricted stock units (RSUs). The stock options and SARs have a maximum term of ten years. The stock-based awards, other than the RSUs, generally vest at a rate of 20.0 percent annually on each of the first five anniversaries of the date of grant. The RSUs generally cliff vest after five years, and payment of the RSUs is deferred until January 31 of the year following vesting. Certain RSUs issued during fiscal year 2012 cliff vest two years after the grant date. Unvested awards are subject to forfeiture in the event of termination of employment. The Company utilizes an option-pricing model to estimate the fair value of options and SARs at their grant date. Stock options and SARs are granted at not less than fair market value on the date of grant. The Company generally recognizes compensation expense for its stock-based compensation awards on a straight-line basis over a five-year vesting period. Awards granted do not contain acceleration of vesting terms for retirement of eligible recipients.
Total compensation cost for stock-based payment arrangements totaled $7.6, $9.6, and $9.3 million for the fiscal years ended June 30, 2012, 2011 and 2010, respectively. Cash retained for share based payments as a result of the tax deductibility of increases in the value of stock-based arrangements are presented as a cash inflow from financing activity in the Consolidated Statement of Cash Flows. The amount presented asOperations was $33.4, $0.4, and ($1.5) million, respectively. During fiscal year 2013, Company recognized a financing activity for fiscal years 2012, 2011,$33.8 million foreign currency translation gain in connection with the sale of Provalliance and 2010 was zero, $0.1,subsequent liquidation of all foreign entities with Euro denominated operations within interest income and $0.2 million, respectively.other, net in the Consolidated Statement of Operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Employee Termination Expense:Derivative Instruments:
As of June 30, 2013, the Company did not have any outstanding derivative instruments. As of June 30, 2012, the fair value of the Company's derivative instruments designated as a cash flow hedge was less than $0.1 million.
During fiscal yearyears 2012 and 2011, the Company reducedreclassified less than $0.1 million of gain on the home office workforce by approximately 120 employees. The Company recorded $9.8 million in senior management restructuringCompany's derivative instruments designated as hedging instruments from AOCI into the respective fiscal year's earnings.
During fiscal years 2012 and other severance charges. In addition2011, the Company recorded $2.8(loss) gain of ($0.1) and $0.6 million, respectively, on derivative instruments not designated as hedging instruments within interest income and other, net in other restructuring charges associated with one-time coststhe Consolidated Statement of implementing the Company's new strategy.Operations.
Recent Accounting Standards Adopted by the Company:
Disclosures about Fair Value of Financial Instruments
In January 2010, the Financial Accounting Standards Board (FASB) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires a roll forward of activities, presented separately on a gross basis, on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The Company adopted the new disclosure guidance related to Level 3 fair value measurements, including the disclosure on the roll forward activities, on July 1, 2011.
Fair Value Measurement
In May 2011, the FASB issued guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The Company adopted the guidance on January 1, 2012.
Accounting Standards Recently Issued But Not Yet Adopted by the Company:
Testing Goodwill for Impairment
In September 2011, the FASB issued guidance to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not required. This new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will adopt the guidance on July 1, 2012 but does not expect it to have a material impact on the Company's financial position, results of operations or cash flows.
Comprehensive Income
In June 2011, and as subsequently amended in December 2011, the FASB issued final guidance on the presentation of comprehensive income. Specifically, the newUnder this guidance, allows an entity to present components of net income and other comprehensive income inmay only be presented either as one continuous statement referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The newCompany retrospectively adopted this guidance eliminatesin the current option to report otherfirst quarter of fiscal year 2013, with comprehensive income and its components inshown as a separate statement immediately following the statementConsolidated Statements of changes in equity. WhileOperations. Since the new guidance changesrelates only to presentation, its adoption did not impact the presentationCompany's balance sheet, results of operations or cash flows.
Reclassifications Out of Accumulated Other Comprehensive Income
In February 2013, the FASB issued guidance on the reporting of reclassifications out of accumulated other comprehensive income. The updated accounting guidance requires an entity to provide information about the amounts reclassified out of accumulated comprehensive income there are no changes toby component. The Company adopted this guidance in the third quarter of fiscal year 2013 by disclosing the components that are recognized in net income or otherreclassified out of accumulated comprehensive income under currenton the Consolidated Statement of Comprehensive (Loss) Income.
Accounting Standards Recently Issued But Not Yet Adopted by the Company:
Testing Indefinite-Lived Intangible Assets for Impairment
In July 2012, the FASB updated the accounting guidance related to annual and interim indefinite-lived intangible asset impairment testing. The updated accounting guidance allows entities to first assess qualitative factors before performing a quantitative assessment of the fair value of indefinite-lived intangible assets. If it is determined on the basis of qualitative factors that the fair value of indefinite-lived intangible assets is more likely than not less than the carrying amount, the existing quantitative impairment test is required. Otherwise, no further impairment testing is required. The updated guidance is effective for the Company beginning in the first quarter of fiscal year 2014. The Company does not expect the adoption of this update to have a material impact on the Company's consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting for Cumulative Translation Adjustment upon Derecognition of Foreign Entities
In March 2013, the FASB updated the accounting guidance. This newguidance related to the release of cumulative translation adjustments (CTA) recorded in AOCI associated with a foreign entity. The updated accounting guidance clarified when to release cumulative translation adjustments into net income. The updated guidance is effective for the Company beginning in the first quarter of fiscal years and interim periods within those years beginning after December 15, 2011.year 2015 with early adoption permitted. The Company will adopt the guidance on a retrospective basis on July 1, 2012. The guidance will not have a material impact on the Company's financial position, results of operations or cash flows. However, it will require changing the Company's presentation and disclosure of comprehensive income.
Disclosures about Offsetting Assets and Liabilities
In December 2011, the FASB issued new accounting disclosure requirements about the nature and exposure of offsetting arrangements related to financial and derivative instruments. The requirements are effective for fiscal years beginning after January 1, 2013. The Company will adopt the guidance on July 1, 2013. Other than requiring additional disclosures, the Company does not expect itthe adoption of this update to have a material impact on the Company's results of operations orconsolidated financial position.statements.
2. DISCONTINUED OPERATIONS
Hair Restoration Centers
On April 9, 2013, the Company sold its Hair Club for Men and Women business (Hair Club), a provider of hair restoration services. The sale included the Company's 50.0 percent interest in Hair Club for Men, Ltd., which was previously accounted for under the equity method. The Company received $162.8 million, which represented the purchase price of $163.5 million adjusted for the preliminary working capital provision. The Company has since recorded a receivable of $2.0 million as of June 30, 2013 based upon the final working capital provision that increased the purchase price to approximately $165 million. The Company recorded an after-tax gain of $17.8 million upon the sale of Hair Club and incurred $5.4 million in professional and transaction fees during fiscal year 2013 associated with the sale.
Hair Club has been presented as discontinued operations for all periods presented in the Consolidated Statement of Operations. The assets and liabilities have been aggregated and reported as current assets held for sale, long-term assets held for sale, current liabilities related to assets held for sale and long-term liabilities related to assets held for sale in the Consolidated Balance Sheet for all periods presented. Long-term assets held for sale as of June 30, 2012, included $74.4 million of goodwill related to Hair Club. In addition, there will be no significant continuing involvement by the Company in the operations of Hair Club after the disposal.
The Company also reclassified professional fees of $2.5 million in fiscal year 2012 related to the sale of Hair Club, which were previously included in unallocated corporate costs, to discontinued operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. DISCONTINUED OPERATIONS (Continued)
The following summarizes the results of operations of our discontinued Hair Club operations for the periods presented:
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
| (Dollars in thousands) | |||||||||
Revenues | $ | 115,734 | $ | 151,552 | $ | 145,688 | ||||
Income (loss) from discontinued operations, before income taxes | 28,643 | (65,114 | ) | 18,304 | ||||||
Income tax (provision) benefit on discontinued operations | (4,242 | ) | 849 | (6,837 | ) | |||||
Equity in income of affiliated companies, net of tax | 627 | 816 | 567 | |||||||
Income (loss) from discontinued operations, net of income taxes | $ | 25,028 | $ | (63,449 | ) | $ | 12,034 | |||
Income taxes have been allocated to continuing and discontinued operations based on the methodology required by accounting for income taxes guidance. Depreciation and amortization ceased during fiscal year 2013 in accordance with accounting for discontinued operations. Hair Club depreciation and amortization expense for fiscal years 2012 and 2011 was $13.1 and $12.8 million, respectively. During the three months ended December 31, 2011, the Company performed an interim impairment test of goodwill related to Hair Club and recorded a $78.4 million impairment charge for the excess of the carrying value of goodwill over the implied fair value.
Trade Secret
On February 16, 2009, the Company sold its Trade Secret salon concept (Trade Secret). The Company reported Trade Secret as a discontinued operation.
The Company has a formal note receivable agreement with the purchaser of Trade Secret. The Company recorded a valuation reserve of $31.2 million during fiscal year 2011. The carrying value of the note receivable was fully reserved as of June 30, 2011. The Company has determined the collectibility of accrued interest on the note receivable to be less than probable. The Company suspended recognition of interest income effective April 2010 and will use the cash basis method for recognizing future interest income. The Company did not receive interest payments from the purchaser of Trade Secret during the twelve months ended June 30, 2012.
The purchaser of Trade Secret emerged from bankruptcy in March 2012 and in conjunction, the Company entered into a credit and security agreement in which the principal balance of the note receivable was reduced from $35.7 to $18.0 million. Payments of $0.5 million are due quarterly beginning on May 31, 2012. Upon receipt of the quarterly payments through February 2019 the remaining principal and unpaid interest will be forgiven. Included in the agreement was a scheduled extraordinary principal payment to be made in the fourth quarter of fiscal year 2012. The purchaser of Trade Secret satisfied the extraordinary principal payment during the fourth fiscal quarter of 2012 by returning $0.8 million of inventory. The Company recorded the recovery of bad debt expense upon receipt of the inventory in June 2012. The principal payment of $0.5 million due May 31, 2012, was not received as of June 30, 2012. The carrying value of the note receivable continues to be fully reserved at June 30, 2012.
Effective in the second quarter of fiscal year 2010, the Company has an agreement in which the Company provides warehouse services to the purchaser of Trade Secret. Under the warehouse services agreement, the Company recognized $1.5, $2.7 and $3.0 million of other income related to warehouse services during the twelve months ended June 30, 2012, 2011 and 2010, respectively. The carrying value of the receivable related to warehouse services was $0.2 and $0.3 million as of June 30, 2012 and 2011, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. DISCONTINUED OPERATIONS (Continued)
The Company utilized the consolidation of variable interest entities guidance to determine whether or not Trade Secret was a VIE, and if so, whether the Company was the primary beneficiary of Trade Secret. The Company concluded that Trade Secret is a VIE based on the fact that the equity investment at risk in Trade Secret is insufficient. The Company determined that the purchaser of Trade Secret has met the power criterion due to the purchaser of Trade Secret having the authority to direct the activities that most significantly impact Trade Secret's economic performance. The Company concluded based on the consideration above that the primary beneficiary of Trade Secret is the purchaser of Trade Secret. The exposure to loss related to the Company's involvement with Trade Secret is the guarantee of approximately 20 operating leases. The Company has determined the exposure to the risk of loss on the guarantee of the operating leases to be immaterial to the financial statements. See Note 10 to the Consolidated Financial Statements for further information on the guaranteed leases.
The income from discontinued operations is summarized below:
| For the Years Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
| (Dollars in thousands) | |||||||||
Revenues | $ | — | $ | — | $ | — | ||||
Income from discontinued operations, before income taxes | — | — | 154 | |||||||
Income tax benefit on discontinued operations | 1,099 | — | 3,007 | |||||||
Income from discontinued operations, net of income taxes | $ | 1,099 | $ | — | $ | 3,161 | ||||
During the twelve months ended June 30,fiscal year 2012, the Company recorded a $1.1 million tax benefit in discontinued operations related to the release of tax reserves associated with the disposition of the Trade Secret salon concept.Secret.
DuringThe Company has a note receivable agreement with the first quarterpurchaser of fiscal year 2010, theTrade Secret. The Company recorded a $3.0valuation reserve of $31.2 million tax benefit in discontinued operations to correctduring fiscal year 2011. As of June 30, 2013 the prior year calculationcarrying value of the income tax benefit relatednote receivable continues to the disposition of the Trade Secret salon concept. The Company does not believe the adjustment is material to its results of operations for the twelve months ended June 30, 2010 or its financial position or results of operations of any prior periods.be fully reserved.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. OTHER FINANCIAL STATEMENT DATA
The following provides additional information concerning selected balance sheet accounts as of June 30, 2012 and 2011:accounts:
| 2012 | 2011 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | |||||||||||||
Accounts receivable | $ | 32,810 | $ | 28,631 | ||||||||||
Less allowance for doubtful accounts | (1,232 | ) | (1,482 | ) | ||||||||||
June 30, | ||||||||||||||
$ | 31,578 | $ | 27,149 | 2013 | 2012 | |||||||||
(Dollars in thousands) | ||||||||||||||
Other current assets: | ||||||||||||||
Prepaids | $ | 32,179 | $ | 29,705 | $ | 29,629 | $ | 22,360 | ||||||
Notes receivable, primarily affiliates | 29,043 | 2,413 | ||||||||||||
Restricted cash | 27,500 | 4,500 | ||||||||||||
Notes receivable | 769 | 29,043 | ||||||||||||
$ | 61,222 | $ | 32,118 | $ | 57,898 | $ | 55,903 | |||||||
Property and equipment: | ||||||||||||||
Land | $ | 3,864 | $ | 3,864 | $ | 3,864 | $ | 3,864 | ||||||
Buildings and improvements | 48,017 | 47,907 | 47,842 | 48,017 | ||||||||||
Equipment, furniture and leasehold improvements | 794,353 | 775,527 | 789,737 | 756,051 | ||||||||||
Internal use software | 106,264 | 94,507 | 118,093 | 106,264 | ||||||||||
Equipment, furniture and leasehold improvements under capital leases | 84,757 | 88,297 | 81,489 | 84,757 | ||||||||||
1,037,255 | 1,010,102 | 1,041,025 | 998,953 | |||||||||||
Less accumulated depreciation and amortization | (656,512 | ) | (611,669 | ) | (665,924 | ) | (635,471 | ) | ||||||
Less amortization of equipment, furniture and leasehold improvements under capital leases | (57,683 | ) | (50,622 | ) | (61,641 | ) | (57,683 | ) | ||||||
$ | 323,060 | $ | 347,811 | $ | 313,460 | $ | 305,799 | |||||||
Investment in and loans to affiliates: | ||||||||||||||
Equity-method investments | $ | 166,176 | $ | 258,930 | $ | 43,098 | $ | 160,987 | ||||||
Noncurrent loans to affiliates | — | 2,210 | ||||||||||||
Cost method investment | 221 | — | ||||||||||||
$ | 166,176 | $ | 261,140 | $ | 43,319 | $ | 160,987 | |||||||
Other assets: | ||||||||||||||
Notes receivable, net | $ | 1,584 | $ | 1,072 | $ | 2,107 | $ | 1,584 | ||||||
Other noncurrent assets | 57,904 | 57,328 | 60,679 | 57,904 | ||||||||||
$ | 59,488 | $ | 58,400 | $ | 62,786 | $ | 59,488 | |||||||
Accrued expenses: | ||||||||||||||
Payroll and payroll related costs | $ | 80,649 | $ | 89,788 | $ | 74,940 | $ | 75,615 | ||||||
Insurance | 19,410 | 19,127 | 19,035 | 19,410 | ||||||||||
Deferred compensation | 26,055 | 6,180 | 4,881 | 26,055 | ||||||||||
Deferred revenues | 9,054 | 8,313 | 2,147 | 2,503 | ||||||||||
Taxes payable | 5,673 | 8,113 | 4,895 | 5,406 | ||||||||||
Other | 31,741 | 35,800 | 31,328 | 28,037 | ||||||||||
$ | 172,582 | $ | 167,321 | $ | 137,226 | $ | 157,026 | |||||||
Other noncurrent liabilities: | ||||||||||||||
Deferred income taxes | $ | 38,266 | $ | 55,208 | $ | 36,399 | $ | 13,497 | ||||||
Deferred rent | 52,773 | 53,102 | 39,389 | 49,537 | ||||||||||
Deferred benefits | 39,178 | 58,150 | 29,378 | 39,064 | ||||||||||
Insurance | 32,459 | 30,925 | 32,435 | 32,459 | ||||||||||
Equity put options | 794 | 22,700 | ||||||||||||
Other | 8,509 | 17,210 | 17,410 | 9,415 | ||||||||||
$ | 171,979 | $ | 237,295 | $ | 155,011 | $ | 143,972 | |||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. OTHER FINANCIAL STATEMENT DATA (Continued)
The following provides additional information concerning the other intangibles, net, balance sheet account as of June 30, 2012 and 2011:net:
June 30, | ||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| June 30, 2012 | June 30, 2011 | 2013 | 2012 | ||||||||||||||||||||||||||||||||||
| Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | ||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Amortized intangible assets: | ||||||||||||||||||||||||||||||||||||||
Brand assets and trade names | $ | 79,995 | $ | (16,325 | ) | $ | 63,670 | $ | 80,310 | $ | (14,329 | ) | $ | 65,981 | $ | 9,310 | $ | (3,226 | ) | $ | 6,084 | $ | 9,494 | $ | (2,960 | ) | $ | 6,534 | ||||||||||
Guest lists | 53,189 | (39,676 | ) | 13,513 | 53,188 | (34,096 | ) | 19,092 | ||||||||||||||||||||||||||||||
Franchise agreements | 22,335 | (9,768 | ) | 12,567 | 22,221 | (8,909 | ) | 13,312 | 11,187 | (6,839 | ) | 4,348 | 11,398 | (6,494 | ) | 4,904 | ||||||||||||||||||||||
Lease intangibles | 14,896 | (5,885 | ) | 9,011 | 14,948 | (5,168 | ) | 9,780 | 14,754 | (6,582 | ) | 8,172 | 14,796 | (5,862 | ) | 8,934 | ||||||||||||||||||||||
Non-compete agreements | 207 | (117 | ) | 90 | 353 | (232 | ) | 121 | 201 | (147 | ) | 54 | 207 | (117 | ) | 90 | ||||||||||||||||||||||
Other | 4,539 | (1,600 | ) | 2,939 | 4,429 | (1,387 | ) | 3,042 | 4,614 | (1,776 | ) | 2,838 | 4,533 | (1,600 | ) | 2,933 | ||||||||||||||||||||||
$ | 175,161 | $ | (73,371 | ) | $ | 101,790 | $ | 175,449 | $ | (64,121 | ) | $ | 111,328 | $ | 40,066 | $ | (18,570 | ) | $ | 21,496 | $ | 40,428 | $ | (17,033 | ) | $ | 23,395 | |||||||||||
All intangible assets have been assigned an estimated finite useful life, and are amortized on a straight-line basis over the number of years that approximate their expected period of benefit (ranging from one to 40 years). The cost of intangible assets is amortized to earnings in proportion to the amount of economic benefits obtained by the Company in that reporting period. The weighted average amortization periods, in total and by major intangible asset class, are as follows:
| Weighted Average Amortization Period June 30, | June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2013 | 2012 | ||||||||||
| (In years) | (In years) | ||||||||||||
Amortized intangible assets: | ||||||||||||||
Brand assets and trade names | 39 | 39 | 32 | 33 | ||||||||||
Guest lists | 10 | 10 | ||||||||||||
Franchise agreements | 22 | 22 | 19 | 19 | ||||||||||
Lease intangibles | 20 | 20 | 20 | 20 | ||||||||||
Non-compete agreements | 6 | 5 | 6 | 6 | ||||||||||
Other | 21 | 25 | 20 | 21 | ||||||||||
Total | 26 | 26 | 22 | 23 | ||||||||||
Total amortization expense related to amortizable intangible assets during thefiscal years ended June 30,2013, 2012, 2011, and 20102011 was approximately $9.7, $9.8,$1.8, $1.9, and $9.9$2.1 million, respectively. As of June 30, 2012,2013, future estimated amortization expense related to amortizable intangible assets is estimated to be:
Fiscal Year | (Dollars in thousands) | (Dollars in thousands) | ||||||
---|---|---|---|---|---|---|---|---|
2013 | $ | 9,413 | ||||||
2014 | 9,199 | $ | 1,714 | |||||
2015 | 6,157 | 1,703 | ||||||
2016 | 3,999 | 1,640 | ||||||
2017 | 3,996 | 1,589 | ||||||
2018 | 1,577 | |||||||
Thereafter | 13,273 | |||||||
Total | $ | 21,496 | ||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. OTHER FINANCIAL STATEMENT DATA (Continued)
The following provides supplemental disclosures of cash flow activity:
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
| (Dollars in thousands) | |||||||||
Cash paid (received) during the year for: | ||||||||||
Interest | $ | 38,990 | (1) | $ | 28,448 | $ | 33,493 | |||
Income taxes, net | 1,088 | 14,754 | (15,083 | ) |
| For the Years Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
| (Dollars in thousands) | |||||||||
Cash paid (received) during the year for: | ||||||||||
Interest | $ | 28,448 | $ | 33,493 | $ | 53,547 | ||||
Income taxes, net of refunds | 14,754 | (15,083 | ) | 17,058 |
Significant non-cash investing and financing activities include the following:
The Company did not finance capital expenditures through capital leases during fiscal yearyears 2013 and 2012. In fiscal yearsyear 2011, and 2010, the Company financed capital expenditures totaling $6.0 and $7.9 million respectively, through capital leases.
4. ACQUISITIONSGOODWILL
During fiscal years 2012, 2011, and 2010, the Company made acquisitions and the purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. These acquisitions individually and in the aggregate are not materialThe table below contains details related to the Company's operations. Operations ofrecorded goodwill:
| June 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | |||||||||||||||||
| Gross Carrying Value | Accumulated Impairment(1) | Net | Gross Carrying Value | Accumulated Impairment(1) | Net | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
Goodwill | $ | 679,607 | $ | (218,722 | ) | $ | 460,885 | $ | 681,001 | $ | (218,722 | ) | $ | 462,279 |
Based upon purchase price allocations, the components of the aggregate purchase prices of the acquisitions made during fiscal years 2012, 2011, and 2010 and the allocation of the purchase prices were as follows:
| For the Years Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | |||||||
| (Dollars in thousands) | |||||||||
Components of aggregate purchase prices: | ||||||||||
Cash (net of cash acquired) | $ | 2,587 | $ | 17,990 | $ | 3,664 | ||||
Liabilities assumed or payable | — | 561 | — | |||||||
$ | 2,587 | $ | 18,551 | $ | 3,664 | |||||
Allocation of the purchase prices: | ||||||||||
Current assets | $ | 344 | $ | 641 | $ | 178 | ||||
Property and equipment | 534 | 4,232 | 873 | |||||||
Goodwill | 4,978 | 12,489 | 2,581 | |||||||
Identifiable intangible assets | 594 | 1,964 | 134 | |||||||
Accounts payable and accrued expenses | (1,117 | ) | (534 | ) | (102 | ) | ||||
Other noncurrent liabilities | (1,246 | ) | (241 | ) | — | |||||
Noncontrolling interest | (1,500 | ) | — | — | ||||||
$ | 2,587 | $ | 18,551 | $ | 3,664 | |||||
Fiscal Year | Impairment Charge | Reporting Unit | |||
---|---|---|---|---|---|
| (Dollars in thousands) | | |||
2009 | $ | 41,661 | International | ||
2010 | 35,277 | Regis | |||
2011 | 74,100 | Promenade | |||
2012 | 67,684 | Regis | |||
2013 | — | N/A | |||
Total | $ | 218,722 | |||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. ACQUISITIONSGOODWILL (Continued)
The value and related weighted average amortization periods for the intangibles acquired during fiscal years 2012 and 2011 business acquisitions, in total and by major intangible asset class, are as follows:
| Purchase Price Allocation | Weighted Average Amortization Period | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| For the Years Ended June 30, | ||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||
| (Dollars in thousands) | (in years) | |||||||||||
Amortized intangible assets: | |||||||||||||
Brand assets and trade names | $ | 31 | $ | 159 | 20 | 10 | |||||||
Guest lists | — | 1,207 | — | 7 | |||||||||
Franchise agreements | 513 | 269 | 30 | 40 | |||||||||
Lease intangibles | 13 | 151 | 20 | 20 | |||||||||
Non-compete agreements | 10 | — | 5 | — | |||||||||
Other | 27 | 178 | 20 | 20 | |||||||||
Total value and weighted average amortization period | $ | 594 | $ | 1,964 | 28 | 14 | |||||||
The majority of the purchase price in salon acquisitions is accounted for as residual goodwill rather than identifiable intangible assets. This stems from the value associated with the walk-in guest base of the acquired salons, which is not recorded as an identifiable intangible asset under current accounting guidance, as well as the limited value and guest preference associated with the acquired hair salon brand. Key factors considered by guests of hair salon services include personal relationships with individual stylists, service quality and price point competitiveness. These attributes represent the "going concern" value of the salon.
Residual goodwill further represents the Company's opportunity to strategically combine the acquired business with the Company's existing structure to serve a greater number of guests through its expansion strategies. In the acquisitions of international salons and hair restoration centers, the residual goodwill primarily represents the growth prospects that are not captured as part of acquired tangible or identified intangible assets. Generally, the goodwill recognized in the North American salon transactions is expected to be fully deductible for tax purposes and the goodwill recognized in the international salon transactions is not deductible for tax purposes. Goodwill generated in certain acquisitions, such as the acquisition of hair restoration centers, is not deductible for tax purposes due to the acquisition structure of the transaction.
During fiscal years 2012, 2011, and 2010, the Company purchased salon operations from its franchisees. The Company evaluated the effective settlement of the pre-existing franchise contracts and associated rights afforded by those contracts. The Company determined that the effective settlement of the pre-existing franchise contracts at the date of the acquisition did not result in a gain or loss, as the agreements were neither favorable nor unfavorable when compared to similar current market transactions, and no settlement provisions exist in the pre-existing contracts. Therefore, no settlement gain or loss was recognized with respect to the Company's franchise buybacks.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. ACQUISITIONS (Continued)
On July 1, 2011, the Company acquired 31 franchise salon locations through its acquisition of a 60.0 percent ownership interest in Roosters for $2.3 million. The purchase agreement contains a right, Roosters Equity Put, to require the Company to purchase additional ownership interest in Roosters between specified dates in 2012 to 2015, and an option, Roosters Equity Call, whereby the Company can acquire additional ownership interest in Roosters beginning in 2015. The acquisition price is determined based on a multiple of the earnings before interest, taxes, depreciation and amortization of Roosters for a trailing twelve month period adjusted for certain items as defined in the agreement which is intended to approximate fair value. The initial estimated fair values as of July 1, 2011 of the Roosters Equity Put and Roosters Equity Call were $0.2 and $0.1 million, respectively. Any changes in the estimated fair value of the Roosters Equity Put and Roosters Equity Call are recorded in the Company's Consolidated Statement of Operations.
The Company utilized the consolidation of variable interest entities guidance to determine whether or not its investment in Roosters was a VIE, and if so, whether the Company was the primary beneficiary of the VIE. The Company concluded that Roosters is a VIE based on the fact that the holders of the equity investment at risk, as a group, lack the obligation to absorb the expected losses of the entity. The Roosters Equity Put is based on a formula that may or may not be at market when exercised, therefore, it could prevent the minority interest owners from absorbing its share of expected losses by transferring such obligation to the Company. Under certain circumstances, including a decline in the fair value of Roosters, the Roosters Equity Put could be exercised and the minority interest owners could be protected from absorbing the downside of the equity interest. As the Roosters Equity Put absorbs a large amount of variability this characteristic results in Roosters being a VIE.
Regis determined that the Company has met the power criterion due to the Company having the authority to direct the activities that most significantly impact Roosters' economic performance. The Company concluded based on the considerations above that it is the primary beneficiary of Roosters and therefore the financial positions, results of operations, and cash flows of Roosters are consolidated in the Company's financial statements from the acquisition date. Total assets, total liabilities and total shareholders' equity of Roosters as of June 30, 2012 were $5.9, $2.0 and $3.9 million, respectively. Net income attributable to the noncontrolling interest in Roosters was $0.1 million for the twelve months ended June 30, 2012, and was recorded within interest income and other, net in the Consolidated Statement of Operations. Shareholders' equity attributable to the noncontrolling interest in Roosters was $1.6 million as of June 30, 2012 and was recorded within retained earnings on the Consolidated Balance Sheet.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. GOODWILL
The table below contains details related to the Company's recorded goodwill for the years ended June 30, 2012 and 2011:goodwill:
| Salons | | | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Hair Restoration Centers | ||||||||||||
| North America | International | Consolidated | ||||||||||
| (Dollars in thousands) | ||||||||||||
Gross goodwill at June 30, 2010 | $ | 700,012 | $ | 41,661 | $ | 150,380 | $ | 892,053 | |||||
Accumulated impairment losses | (113,403 | ) | (41,661 | ) | — | (155,064 | ) | ||||||
Net goodwill at June 30, 2010 | 586,609 | — | 150,380 | 736,989 | |||||||||
Goodwill acquired(1) | 10,070 | — | 2,419 | 12,489 | |||||||||
Translation rate adjustments | 5,137 | — | (3 | ) | 5,134 | ||||||||
Goodwill impairment(2) | (74,100 | ) | — | — | (74,100 | ) | |||||||
Gross goodwill at June 30, 2011 | 715,219 | 41,661 | 152,796 | 909,676 | |||||||||
Accumulated impairment losses | (187,503 | ) | (41,661 | ) | — | (229,164 | ) | ||||||
Net goodwill at June 30, 2011 | 527,716 | — | 152,796 | 680,512 | |||||||||
Goodwill acquired(1) | 4,978 | — | — | 4,978 | |||||||||
Translation rate adjustments | (2,731 | ) | — | 6 | (2,725 | ) | |||||||
Goodwill impairment(3)(4) | (67,684 | ) | — | (78,426 | ) | (146,110 | ) | ||||||
Gross goodwill at June 30, 2012 | 717,466 | 41,661 | 152,802 | 911,929 | |||||||||
Accumulated impairment losses | (255,187 | ) | (41,661 | ) | (78,426 | ) | (375,274 | ) | |||||
Net goodwill at June 30, 2012 | $ | 462,279 | $ | — | $ | 74,376 | $ | 536,655 | |||||
| Consolidated(1) | |||
---|---|---|---|---|
| (Dollars in thousands) | |||
Goodwill, net at June 30, 2011 | $ | 527,716 | ||
Goodwill acquired | 4,978 | |||
Translation rate adjustments | (2,731 | ) | ||
Goodwill impairment | (67,684 | ) | ||
Goodwill, net at June 30, 2012 | 462,279 | |||
Translation rate adjustments | (1,394 | ) | ||
Goodwill, net at June 30, 2013 | $ | 460,885 | ||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6.5. INVESTMENTS IN AND LOANS TO AFFILIATES
The table below presents the carrying amount of investments in and loans to affiliates as of June 30, 2012 and 2011:affiliates:
| Provalliance | Empire Education Group, Inc. | MY Style | Hair Club for Men, Ltd. | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | |||||||||||||||
Balance at June 30, 2010 | $ | 75,481 | $ | 102,882 | $ | 12,116 | $ | 5,307 | $ | 195,786 | ||||||
Acquisition of additional interest(1) | 57,301 | — | — | — | 57,301 | |||||||||||
Payment of loans by affiliates | — | (15,000 | ) | — | — | (15,000 | ) | |||||||||
Loans to affiliates | — | 15,000 | — | — | 15,000 | |||||||||||
Equity in income of affiliated companies, net of income taxes(2) | 7,752 | 5,463 | — | 567 | 13,782 | |||||||||||
Other than temporary impairment(3) | — | — | (9,173 | ) | — | (9,173 | ) | |||||||||
Cash dividends received | (4,814 | ) | (4,129 | ) | — | (1,080 | ) | (10,023 | ) | |||||||
Other, primarily translation adjustments | 13,525 | 324 | (733 | ) | 351 | 13,467 | ||||||||||
Balance at June 30, 2011 | $ | 149,245 | $ | 104,540 | $ | 2,210 | $ | 5,145 | $ | 261,140 | ||||||
Payment of loans by affiliates | — | (1,025 | ) | — | — | (1,025 | ) | |||||||||
Equity in income of affiliated companies, net of income taxes(7) | 9,759 | (4,031 | ) | — | 816 | 6,544 | ||||||||||
Other than temporary impairment(4)(5) | (37,383 | ) | (19,426 | ) | — | — | (56,809 | ) | ||||||||
Cash dividends received | (2,769 | ) | — | — | (1,278 | ) | (4,047 | ) | ||||||||
Transfer to current notes receivable(6) | — | (20,375 | ) | (2,278 | ) | — | (22,653 | ) | ||||||||
Other, primarily translation adjustments | (17,548 | ) | — | 68 | 506 | (16,974 | ) | |||||||||
Balance at June 30, 2012 | $ | 101,304 | $ | 59,683 | $ | — | $ | 5,189 | $ | 166,176 | ||||||
Percentage ownership at June 30, 2012 | 46.7 | % | 55.1 | % | — | 50.0 | % |
| June 30, | ||||||
---|---|---|---|---|---|---|---|
| 2013 | 2012 | |||||
| (Dollars in thousands) | ||||||
Empire Education Group, Inc. | $ | 43,098 | $ | 59,683 | |||
Provalliance | — | 101,304 | |||||
MY Style | 221 | — | |||||
$ | 43,319 | $ | 160,987 | ||||
The table below presents the Company elected to honor and settle a portion of the equity put option and acquired approximately 17 percent additional equity interest in Provalliance for $57.3 million (€ 40.4 million), bringing the Company's total equity interest to approximately 47 percent.
| June 30, | ||||||
---|---|---|---|---|---|---|---|
| 2013 | 2012 | |||||
| (Dollars in thousands) | ||||||
Empire Education Group, Inc. | $ | — | $ | 26,412 | |||
MY Style | — | 2,251 | |||||
$ | — | $ | 28,663 | ||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6.5. INVESTMENTS IN AND LOANS TO AFFILIATES (Continued)
companies in the Consolidated Statement of Operations, which consisted of a $37.4 million impairment charge related to the difference between the purchase price and carrying value of the Company's investment in Provalliance, partially offset by a $20.2 million decrease in the fair value of the Equity Put.
The table below presents the summarized financial information of the equity method investees based on audited results.
| Greater Than 50 Percent Owned | Less Than 50 Percent Owned | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
Summarized Balance Sheet Information: | |||||||||||||||||||
Current assets | $ | 35,900 | $ | 56,516 | $ | 34,715 | $ | — | $ | 84,700 | $ | 93,072 | |||||||
Noncurrent assets | 91,847 | 96,639 | 113,249 | — | 316,282 | 313,508 | |||||||||||||
Current liabilities | 25,317 | 61,074 | 29,340 | — | 106,995 | 108,708 | |||||||||||||
Noncurrent liabilities | 21,560 | 13,947 | 33,658 | — | 78,815 | 98,269 | |||||||||||||
Summarized Statement of Operations Information: | |||||||||||||||||||
Gross revenue | $ | 170,964 | $ | 182,326 | $ | 192,864 | $ | — | $ | 305,515 | $ | 271,747 | |||||||
Gross profit | 58,457 | 67,201 | 73,068 | — | 132,647 | 116,354 | |||||||||||||
Operating (loss) income | 4,981 | (1,335 | ) | 18,994 | — | 35,569 | 30,084 | ||||||||||||
Net (loss) income | 2,359 | (7,211 | ) | 11,023 | — | 24,067 | 21,154 |
Investment in Empire Education Group, Inc.
As of June 30, 2013 and 2012, the Company's ownership interest in Empire Education Group, Inc. (EEG) was 55.1 percent. EEG operates accredited cosmetology schools and is overseen by the Empire Beauty School management team. The Company accounts for EEG as an equity investment under the voting interest model.
During fiscal years 2013 and 2012, the company recorded other than temporary impairment charges on its investment in EEG of $17.9 and $19.4 million, respectively, to reflect the negative business impacts associated with regulatory changes including declines in enrollment, revenue and profitability in the for-profit secondary educational market. The Company did not receive a tax benefit on these impairment charges. The Company did not record an impairment charge during the fiscal year 2011. In addition, during fiscal years 2013 and 2012 the Company recorded its share, $2.1 and $8.7 million, respectively, of fixed and intangible asset impairments recorded directly by EEG.
Due to economic, regulatory and other factors, the Company may be required to record additional noncash impairment charges related to its investment in EEG and such noncash impairments could be material to the Company's consolidated balance sheet and results of operations. In addition, EEG may be required to record noncash impairment charges related to long-lived assets and goodwill, and our share of such noncash impairment charges could be material to the Company's consolidated balance sheet and results of operations. The Company's share of EEG's goodwill balances as of June 30, 2012 2011, and 2010. The financial information2013 is approximately $16 million. Based on the Company's work associated with the investment impairment recorded during the fiscal year 2013, the Company's estimate of EEG's fair value exceeds carrying value by approximately 5 percent. Any meaningful underperformance against plan or reduced outlook by EEG, changes to the carrying value of EEG or further erosion in valuations of the for-profit secondary educational market could lead to a goodwill impairment charge recorded by EEG for which the Company would record 55.1 percent of the impairment given the Company's present ownership.
During fiscal years 2013, 2012, and 2011, the Company recorded $1.3, $(4.0), and $5.5 million, respectively, of equity investeesearnings (loss) related to its investment in EEG.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. INVESTMENTS IN AND LOANS TO AFFILIATES (Continued)
The Company previously provided EEG with a $15.0 million revolving credit facility and outstanding loan, both of which matured during fiscal year 2013. At June 30, 2012, there was based$15.0 and $11.4 million outstanding on results asthe revolving credit facility and loan outstanding, respectively. The Company received $15.0 million in payments on the revolving credit facility during the fiscal year 2013. The Company received $11.4 and $10.0 million in principal payments on the loan during the fiscal years 2013 and 2012, respectively. During fiscal years 2013, 2012, and 2011, the Company recorded less than $0.1, $0.5, and $0.7 million, respectively, of interest income related to the loan and for the twelve months ended June 30.revolving credit facility.
| Equity Method Investee Greater Than 50 Percent Owned | Equity Method Investees Less Than 50 Percent Owned | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
Summarized Balance Sheet Information: | |||||||||||||||||||
Current assets | $ | 56,516 | $ | 34,715 | $ | 35,070 | $ | 84,914 | $ | 93,280 | $ | 74,040 | |||||||
Noncurrent assets | 96,639 | 113,249 | 105,469 | 316,829 | 314,127 | 263,472 | |||||||||||||
Current liabilities | 61,074 | 29,340 | 27,458 | 107,636 | 109,416 | 91,077 | |||||||||||||
Noncurrent liabilities | 13,947 | 33,658 | 32,017 | 78,815 | 98,269 | 93,055 | |||||||||||||
Summarized Statement of Operations Information: | |||||||||||||||||||
Gross revenue | $ | 182,326 | $ | 192,864 | $ | 176,535 | $ | 317,143 | $ | 283,442 | $ | 299,188 | |||||||
Gross profit | 67,201 | 73,068 | 64,661 | 137,074 | 120,992 | 123,210 | |||||||||||||
Operating (loss) income | (1,335 | ) | 18,994 | 19,752 | 35,569 | 30,084 | 21,227 | ||||||||||||
Net (loss) income | (7,211 | ) | 11,023 | 11,082 | 24,067 | 21,154 | 14,763 |
Investment in Provalliance
On January 31, 2008,September 27, 2012, the Company mergedsold its continental European franchise salon operations with the operations of the Franck Provost Salon Group in exchange for a 30.046.7 percent equity interest in the newly formed Provalliance entity (Provalliance).for $103.4 million. The merger with the operations of the Franck Provost Salon Group, which are also located in continental Europe, created Europe's largest salon operator with approximately 2,600 company-owned and franchise salons as of June 30, 2012.
The merger agreement containsCompany previously had a right (Equity(Provalliance Equity Put) to, if exercised, would require the Company to purchase an additional ownership interest in Provalliance between specified dates in 2010 to 2018. In December 2010,During fiscal year 2013, the Company recorded a portion$0.6 million decrease in the fair value of the Provalliance Equity Put was exercised.that automatically terminated upon the sale.
In Marchconnection with the sale of 2011, the Company elected to honor and settle a portion of the Equity Put and acquired approximately 17 percent additional equity interest in
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. INVESTMENTS IN AND LOANS TO AFFILIATES (Continued)
Provalliance, for $57.3 million (approximately €40.4 million), bringing the Company's total equity interest to 46.7 percent.
On April 9, 2012, the Company entered into the Agreement to sell the Company's 46.7 percent equity interest in Provalliance to the Provost Family for a purchase price of €80 million. The transaction is expected to close no later than September 30, 2012 and is subject to the Provost Family securing financing for the purchase price. The purchase price was negotiated independently of the Equity Put and the Equity Put and Equity Call will automatically terminate upon closing. If the closing does not occur by September 30, 2012, the Provost Family will not be entitled to exercise their Equity Put rights until September 30, 2014.
During the twelve months ended June 30, 2012, the Company recorded a $37.4 million other than temporary impairment charge related to the difference between the €80 million purchase price and the carrying value of its investment in Provalliance.during fiscal year 2012. In addition, the fair value of the Provalliance Equity Put decreased by $20.2 million to $0.6 million as of June 30, 2012. The remaining Equity Put liability as of June 30, 2012 is associated with the probability of the Agreement not closing and the Equity Put remaining effective. The $37.4 million other than temporary impairment charge partially offset by the $20.2 millionand reduction in the fair value of the Provalliance Equity Put resulted in a net impairment charge of $17.2 million that is recorded within the equity in (loss) income of affiliated companies during the twelve months ended June 30,fiscal year 2012. Regis did not receive a tax benefit on the net impairment charge.
In connection with the Agreement, the Company reassessed the consolidation of variable interest entities guidance to determine whether the Company will now be considered the primary beneficiary of the VIE. Consistent with the previous assessment, the Company has determined the Frank Provost Group continues to meet the power criterion and is considered the primary beneficiary of Provalliance as of June 30, 2012.
The tables below contain details related to the Company's investment in Provalliance for the twelve months ended June 30, 2012, 2011, and 2010:
Impact on Consolidated Balance Sheet
| | Carrying Value at June 30, | |||||||
---|---|---|---|---|---|---|---|---|---|
| Classification | 2012 | 2011 | ||||||
| | (Dollars in thousands) | |||||||
Investment in Provalliance | Investment in and loans to affiliates | $ | 101,304 | $ | 149,245 | ||||
Equity Put Option—Provalliance | Other noncurrent liabilities | 633 | 22,700 |
Impact on Consolidated Statement of Operations
| | For the Twelve Months Ended June 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| Classification | 2012 | 2011 | 2010 | ||||||||
| | (Dollars in thousands) | ||||||||||
Equity in (loss) income, net of income taxes | Equity in (loss) income of affiliated companies, net of income taxes | (9,759 | ) | 7,752 | 4,134 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. INVESTMENTS IN AND LOANS TO AFFILIATES (Continued)
Impact on Consolidated Statement of Cash Flows
| | For the Twelve Months Ended June 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| Classification | 2012 | 2011 | 2010 | ||||||||
| | (Dollars in thousands) | ||||||||||
Equity in loss (income), net of income taxes | Equity in loss (income) of affiliated companies | $ | 9,759 | $ | (7,752 | ) | $ | (4,134 | ) | |||
Cash dividends received | Dividends received from affiliated companies | 2,769 | 4,814 | 1,141 |
Investment in Empire Education Group, Inc.
On August 1, 2007, the Company contributed its 51 wholly-owned accredited cosmetology schools to Empire Education Group, Inc. (EEG) in exchange for a 49.0 percent equity interest in EEG. In January 2008, the Company's effective ownership interest increased to 55.1 percent related to the buyout of EEG's minority interest shareholder. EEG operates 105 accredited cosmetology schools, has revenues of approximately $180 million annually and is overseen by the Empire Beauty School management team.
At June 30,During fiscal years 2012 and 2011, the Company had an outstanding loan receivable with EEG totaling $11.4recorded $9.8, and $21.4 million, respectively. During fiscal year 2012, the outstanding loan receivable was reclassified in the Consolidated Balance Sheet as other current assets as the loan is due in January 2013. The Company has also provided EEG with a $15.0 million revolving credit facility, against which there were $15.0 million and zero outstanding borrowings as of June 30, 2012 and 2011, respectively. The Company reviews the outstanding loan with EEG for changes in circumstances or the occurrence of events that suggest the Company's loan may not be recoverable. The outstanding loan and revolving credit facility with EEG as of June 30, 2012 is in good standing with no associated valuation allowance. During fiscal year 2012, 2011, and 2010, the Company recorded $0.5, $0.7, and $0.7$7.8 million, respectively, of interest income related to the loan and revolving credit facility. In addition, the Company received $10.0 million in principal payments on the loan during the twelve months ended June 30, 2012. The Company has also guaranteed a credit facility of EEG that expires on December 31, 2012 with a maximum exposure of $9 million. The Company has determined the exposure to the risk of loss on the guaranteed credit facility to be immaterial to the financial statements.
The proprietary school industry has seen broad changes the past few years in regulations resulting in challenges in the areas of student populations, revenue and profitability. Due to the regulatory changes, EEG experienced a decline in revenue and profitability in fiscal year 2012 and is projecting further declines in fiscal year 2013. As a result, during fiscal year 2012, the Company recorded a $19.4 million other than temporary impairment charge on its investment in EEG for the excess of the carrying value of its investment in EEG over the fair value. Regis did not receive a tax benefit on the impairment charge. The Company also recorded its $8.7 million share of an intangible asset impairment recorded directly by EEG. The exposure to loss related to the Company's involvement with EEG is the carrying value of the investment, the outstanding loan and the guarantee of the credit facility. Due to economic and other factors, the Company may be required to record additional impairment charges related to our investment in EEG and such impairments could be material to our consolidated balance
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. INVESTMENTS IN AND LOANS TO AFFILIATES (Continued)
sheet and results of operations. In addition, EEG may be required to record impairment charges related to long-lived assets and goodwill, and our share of such impairment charges could be material to our consolidated balance sheet and results of operations.
The Company utilized consolidation of variable interest entities guidance to determine whether or not its investment in EEG was a variable interest entity (VIE), and if so, whether the Company was the primary beneficiary of the VIE. The Company concluded that EEG was not a VIE based on the fact that EEG had sufficient equity at risk. As the substantive voting control relates to the voting rights of the Board of Directors, the Company granted the other shareholder a proxy to vote such number of the Company's shares such that the other shareholder would have voting control of 51.0 percent of the common stock of EEG. The Company accounts for EEG as an equity investment under the voting interest model. During fiscal years ended June 30, 2012, 2011, and 2010, the Company recorded $(4.0), $5.5, and $6.4 million of equity (loss) earnings related to its investment in EEG.Provalliance. During the twelve months ended June 30,fiscal years 2012 and 2011, EEG declared and distributed a dividend in which the Company received $4.1$2.8 and $4.8 million, of cash dividends.
Due to the sale of the Company's investment in Provalliance, the Company liquidated its foreign entities with Euro denominated operations. Amounts previously classified within accumulated other comprehensive income that were recognized in earnings were foreign currency translation rate gain adjustments of $43.4 million, a cumulative tax-effected net loss of $7.9 million associated with a cross-currency swap that was settled in fiscal year 2007 that hedged the Company's European operations, and a $1.7 million net loss associated with cash repatriation, which netted to $33.8 million for fiscal year 2013, recorded within interest income and recorded tax expenseother, net on the Consolidated Statement of $0.3 million.Operations.
Investment in MY Style
In April 2007,The Company accounts for the Company purchased exchangeable notes issued by Yamano Holding Corporation (Exchangeable Note) and a loan obligation of a Yamano Holdings subsidiary,27.1 percent ownership interest in MY Style formally known as Beauty Plaza Co. Ltd., (MY Style Note) for an aggregate amount of $11.3 million (1.3 billion Yen as of April 2007). The Exchangeable Note contains an option for the Company to exchange a portion of the Exchangeable Note for 27.1 percent of the 800 outstanding shares of common stock of MY Style. This exchange feature is akin to a deep-in-the-money option permitting the Company to purchase shares of common stock of MY Style. The option is embedded in the Exchangeable Note and does not meet the criteria for separate accounting under accounting for derivative instruments and hedging activities. In connection with the issuance of the Exchangeable Note, the Company paid a premium of approximately $5.5 million (573,000,000 Yen as of April 2007).
In March 2010 the Company amended the agreement with Yamano for which the Company purchased one share of Yamano Class A Preferred Stock with a subscription amount of $1.1 million (100,000,000 Yen) and one share of Yamano Class B Preferred Stock with a subscription amount of $2.3 million (211,131,284 Yen), collectively the "Preferred Shares". Portions of the Exchangeable Note that became due as a result of the March 2010 amendments were contributed in-kind as payment for the Preferred Shares.cost method investment. The Preferred Shares have the same terms and rights, yield a 5.0 percent dividend that accrues if not paid and have no voting rights. The preferred shares are accounted for asCompany previously had an available for sale debt security.
Due to the natural disasters in Japan that occurred in March 2011, the Company was required to assess the preferred shares and premium for other than temporary impairment. The fair value of the collateral which is the equity value ofoutstanding note with MY Style, declined due to changes in projected revenue growth rates afterwhich matured during the natural disasters. As MY Style is highly leveraged, any change in growth rates has a significant impact on fair value. The estimated fair value was negligible.fiscal year 2013. The Company recorded anless than $0.1 million in interest income related to the note during fiscal years 2013, 2012, and 2011, respectively.
6. FAIR VALUE MEASUREMENTS
Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than temporary impairment during the third quarter of fiscal year 2011 for the carrying value of the preferred sharesquoted prices included in Level 1); and premium of $3.9 million (326,700,000 Yen) and $5.3 million (435,000,000 Yen), respectively.
Exchangeable Note. As of June 30, 2012, the principal amount outstanding under the Exchangeable Note is $1.3 million (100,000,000 Yen) and is due September 30, 2012. The CompanyLevel 3 (unobservable inputs that cannot be corroborated by observable market data).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. INVESTMENTS IN AND LOANS TO AFFILIATES (Continued)
reviews the Exchangeable Note with Yamano for changes in circumstances or the occurrence of events that suggest the Company's note may not be recoverable. The $1.3 million outstanding Exchangeable Note with Yamano as of June 30, 2012 is in good standing with no associated valuation allowance. The Company has determined the future cash flows of Yamano support the ability to make payments on the Exchangeable Note. The Exchangeable Note accrues interest at 1.845 percent and interest is payable on September 30, 2012 with the final principal payment. The Company recorded approximately $0.1 million in interest income related to the Exchangeable Note during fiscal years 2012, 2011, and 2010.
MY Style Note. As of June 30, 2012, the principal amount outstanding under the MY Style Note is $0.7 million (52,164,000 Yen). Principal payments of 52,164,000 Yen along with accrued interest are due annually on May 31 through May 31, 2013. The Company reviews the outstanding note with MY Style for changes in circumstances or the occurrence of events that suggest the Company's note may not be recoverable. The $0.7 million outstanding note with MY Style as of June 30, 2012 is in good standing with no associated valuation allowance. The Company has determined the future cash flows of MY Style support the ability to make payments on the outstanding note. The MY Style Note accrues interest at 3.0 percent. The Company recorded less than $0.1 million in interest income related to the MY Style Note during fiscal years 2012, 2011, and 2010.
As of June 30, 2012, $2.3 million is recorded in the Consolidated Balance Sheet as current assets representing the Company's Exchangeable Note and outstanding note with MY Style. The exposure to loss related to the Company's involvement with MY Style is the carrying value of the outstanding notes.
All foreign currency transaction gains and losses on the Exchangeable Note and MY Style Note are recorded through other income within the Consolidated Statement of Operations. The foreign currency transaction gain (loss) was $0.5, $(1.1), and $3.1 million during fiscal years 2012, 2011, and 2010, respectively.
Investment in Hair Club for Men, Ltd.
The Company acquired a 50.0 percent interest in Hair Club for Men, Ltd. through its acquisition of Hair Club in fiscal year 2005. The Company accounts for its investment in Hair Club for Men, Ltd. under the equity method of accounting. Hair Club for Men, Ltd. operates Hair Club centers in Illinois and Wisconsin. During fiscal years 2012, 2011, and 2010, the Company recorded income and received dividends of $0.8 and $1.3 million, $0.6 and $1.1 million, and $0.9 and $1.3 million, respectively. The exposure to loss related to the Company's involvement with Hair Club for Men, Ltd. is the carrying value of the investment. See Note 17 for discussion of the purchase agreement subsequent to June 30, 2012 that includes Hair Club for Men, Ltd.
7. FAIR VALUE MEASUREMENTS
The fair value measurement guidance for financial and nonfinancial assets and liabilities defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by this guidance contains three levels as follows:
Level 1—Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. FAIR VALUE MEASUREMENTS (Continued)
Level 2—Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
Level 3—Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management's estimates of market participant assumptions.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. The following tables sets forth by level within the fair value hierarchy, the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis at June 30, 2012 and June 30, 2011, according to the valuation techniques the Company used to determine their fair values.
| | Fair Value Measurements Using Inputs Considered as | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fair Value at June 30, 2012 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| | (Dollars in thousands) | |||||||||||
ASSETS | |||||||||||||
Current assets | |||||||||||||
Derivative instruments | $ | 145 | $ | — | $ | 145 | $ | — | |||||
Noncurrent assets | |||||||||||||
Equity call option—Roosters | 117 | — | — | 117 | |||||||||
LIABILITIES | |||||||||||||
Noncurrent liabilities | |||||||||||||
Equity put option—Provalliance | $ | 633 | $ | — | $ | — | $ | 633 | |||||
Equity put option—Roosters | 161 | — | — | 161 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. FAIR VALUE MEASUREMENTS (Continued)
| | Fair Value Measurements Using Inputs Considered as | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fair Value at June 30, 2011 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| | (Dollars in thousands) | |||||||||||
ASSETS | |||||||||||||
Current assets | |||||||||||||
Derivative instruments | $ | 212 | $ | — | $ | 212 | $ | — | |||||
LIABILITIES | |||||||||||||
Current liabilities | |||||||||||||
Derivative instruments | $ | 599 | $ | — | $ | 599 | $ | — | |||||
Noncurrent liabilities | |||||||||||||
Equity put option—Provalliance | $ | 22,700 | $ | — | $ | — | $ | 22,700 |
Changes in Financial Instruments Measured at Level 3 Fair Value on a Recurring Basis
The following tables present the changes during the twelve ended June 30, 2012 and 2011 in our Level 3 financial instruments that are measured at fair value on a recurring basis.
| Changes in Financial Instruments Measured at Level 3 Fair Value Classified as | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Roosters Equity Call Option | Roosters Equity Put Option | Provalliance Equity Put Option | |||||||
| (Dollars in thousands) | |||||||||
Balance at July 1, 2011 | $ | — | $ | — | $ | 22,700 | ||||
Total realized and unrealized gains (losses): | ||||||||||
Included in other comprehensive (loss) income | — | — | (1,845 | ) | ||||||
Issuances | — | 161 | — | |||||||
Purchases | 117 | — | — | |||||||
Included in equity in (loss) income of affiliated companies | — | — | (20,222 | ) | ||||||
Balance at June 30, 2012 | $ | 117 | $ | 161 | $ | 633 | ||||
| Changes in Financial Instruments Measured at Level 3 Fair Value Classified as | ||||||
---|---|---|---|---|---|---|---|
| Preferred Shares | Provalliance Equity Put Option | |||||
| (Dollars in thousands) | ||||||
Balance at July 1, 2010 | $ | 3,502 | $ | 22,009 | |||
Total realized and unrealized gains (losses): | |||||||
Included in other comprehensive income (loss) | 433 | 3,847 | |||||
Included in equity in (loss) income of affiliated companies | — | (2,442 | ) | ||||
Transfer out of Level 3 | — | (714 | ) | ||||
Other than temporary impairment | (3,935 | ) | — | ||||
Balance at June 30, 2011 | $ | — | $ | 22,700 | |||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. FAIR VALUE MEASUREMENTS (Continued)
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Derivative instruments. The Company's derivative instrument assets and liabilities consist of cash flow hedges represented by forward foreign currency contracts. The instruments are classified as Level 2 as the fair value is obtained using observable inputs available for similar liabilities in active markets at the measurement date that are reviewed by the Company. See breakout by type of contract and reconciliation to the balance sheet line item that each contract is classified within Note 9 of the Consolidated Financial Statements.
Equity put option—Provalliance.The Company's merger of the European franchise salon operations with the operations of the Franck Provost Salon Group on January 31, 2008 contained an equity put (Provalliance Equity Put) and an equity call. The Provalliance Equity Put is valued using binomial lattice models that incorporate assumptions including the business enterprise value at that date and future estimates of volatility and earnings before interest, taxes, and depreciation and amortization multiples. During fiscal year 2011, a portion of the$0.6 million Provalliance Equity Put was settled. During the twelve months ended June 30, 2012,classified as Level 3 as the fair value of the Provalliance Equity Put decreasedwas determined based on unobservable inputs that could not be corroborated by $20.2 million to $0.6 million and is classified within other noncurrent liabilities on the Consolidated Balance Sheet. The remaining Provalliance Equity Put liability as of June 30,observable market data. On September 27, 2012 is associated with the probability of the share purchase agreement in which the Company will sell the 46.7 percent equitysold its interest in Provalliance not closing and the Provalliance Equity Put remaining effective. The sensitivityautomatically terminated upon closing of the underlying assumptions to the Provalliance Equity Put is not material to the Consolidated Financial Statements. See Note 6 to the Consolidated Financial Statements for discussion of the share purchase agreement.
Equity put and call options—Roosters. The purchase agreement for the Company's acquisition of a 60.0 percent ownership interest in Roosters MGC International LLC (Roosters) on July 1, 2011 contained an equity put (Roosters Equity Put) and an equity call (Roosters Equity Call). See further discussion within Note 4 to the Consolidated Financial Statements. The Roosters Equity Put and Roosters Equity Call are valued using binomial lattice models that incorporate assumptions including the business enterprise value at that date and future estimates of volatility and earnings before interest, taxes, and depreciation and amortization multiples. The sensitivity of the underlying assumptions to the Roosters Equity put and Roosters Equity Call is not material to the Consolidated financial statements. At June 30, 2012, the fair value of the Roosters Equity Put and Roosters Equity Call were $0.2 and $0.1 million, respectively, and are classified within noncurrent liabilities and other assets, respectively, on the Consolidated Balance Sheet.
Preferred Shares. The Company has preferred shares in Yamano Holding Corporation. The preferred shares are classified as Level 3 as there are no quoted market prices and minimal market participant data for preferred shares of similar rating. The fair value of the preferred shares is based on the financial health of Yamano Holding Corporation and terms within the preferred share agreement which allow the Company to convert the subscription amount of the preferred shares into equity of MY Style, a wholly owned subsidiary of Yamano Holding Corporation. The Company recorded an other than temporary impairment for the full carrying value of the preferred shares during the twelve months ended June 30, 2011. See further discussion within Note 6 to the Consolidated Financial Statements.sale.
Financial Instruments.In addition to the financial instruments listed above, the Company's financial instruments also include cash, cash equivalents, receivables, accounts payable and debt.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. FAIR VALUE MEASUREMENTS (Continued)
The fair value of cash and cash equivalents, receivables, and accounts payable, and debt approximated the carrying values as of June 30, 2012 and 2011. At June 30, 2012, the estimated fair values and carrying amounts of debt were $307.5 and $287.7 million, respectively. At June 30, 2011, the estimated fair values and carrying amounts of debt were $335.4 and $313.4 million, respectively. The estimated fair value of debt was determined based on internal valuation models, which utilize quoted market prices and interest rates for the same or similar instruments (Level 2).2013.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain assets, including the Company's equity method investments, tangible fixed assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of our investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.
The following tables present the fair value invalues of our assets measured at fair value on a nonrecurring basis during the twelve months ended June 30, 2012 and 2011, respectively:basis:
| June 30, 2012 | Level 1 | Level 2 | Level 3 | Total Losses | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | |||||||||||||||
Assets | ||||||||||||||||
Goodwill—Regis(1) | $ | 35,083 | $ | — | $ | — | $ | 35,083 | $ | (67,684 | ) | |||||
Goodwill—Hair Restoration Centers(2) | 74,376 | — | — | 74,376 | (78,426 | ) | ||||||||||
Investment in affiliates—EEG(3) | 59,683 | — | — | 59,683 | (19,426 | ) | ||||||||||
Investment in affiliates—Provalliance(4) | 101,304 | — | — | 101,304 | (37,383 | ) | ||||||||||
Total | $ | 270,446 | $ | — | $ | — | $ | 270,446 | $ | (202,919 | ) | |||||
| Fiscal Year 2013 | Level 1 | Level 2 | Level 3 | Total Losses | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | |||||||||||||||
Assets | ||||||||||||||||
Investment in affiliates—EEG(1) | $ | 41,997 | $ | — | $ | — | $ | 41,997 | $ | (17,899 | ) | |||||
Total | $ | 41,997 | $ | — | $ | — | $ | 41,997 | $ | (17,899 | ) | |||||
| Fiscal Year 2012 | Level 1 | Level 2 | Level 3 | Total Losses | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | |||||||||||||||
Assets | ||||||||||||||||
Goodwill—Regis(1) | $ | 35,083 | $ | — | $ | — | $ | 35,083 | $ | (67,684 | ) | |||||
Investment in affiliates—EEG(2) | 59,683 | — | — | 59,683 | (19,426 | ) | ||||||||||
Investment in affiliates—Provalliance(3) | 101,304 | — | — | 101,304 | (37,383 | ) | ||||||||||
Total | $ | 196,070 | $ | — | $ | — | $ | 196,070 | $ | (124,493 | ) | |||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. FAIR VALUE MEASUREMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. FAIR VALUE MEASUREMENTS (Continued)
| June 30, 2011 | Level 1 | Level 2 | Level 3 | Total Losses | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | |||||||||||||||
Assets | ||||||||||||||||
Goodwill—Promenade(1) | $ | 240,910 | $ | — | $ | — | $ | 240,910 | $ | (74,100 | ) | |||||
Total | $ | 240,910 | $ | — | $ | — | $ | 240,910 | $ | (74,100 | ) | |||||
8.7. FINANCING ARRANGEMENTS
The Company's long-term debt as of June 30, 2012 and 2011 consists of the following:
| | Interest rate % | | | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Fiscal Years | June 30, | ||||||||||
| Maturity Dates | 2013 | 2012 | 2013 | 2012 | ||||||||
| (fiscal year) | | | (Dollars in thousands) | |||||||||
Senior term notes | 2013 | 6.69 - 8.50% | 6.69 - 8.50% | $ | — | $ | 111,429 | ||||||
Convertible senior notes(1) | 2015 | 5.00 | 5.00 | 166,454 | 161,134 | ||||||||
Revolving credit facility | 2018 | — | — | — | — | ||||||||
Equipment and leasehold notes payable | 2015 - 2016 | 4.90 - 8.75 | 4.90 - 8.75 | 8,316 | 14,780 | ||||||||
Other notes payable | 2013 | 5.75 - 8.00 | 5.75 - 8.00 | — | 331 | ||||||||
174,770 | 287,674 | ||||||||||||
Less current portion(1) | (173,515 | ) | (28,937 | ) | |||||||||
Long-term portion | $ | 1,255 | $ | 258,737 | |||||||||
| | Interest rate % | Amounts outstanding | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Maturity Dates | 2012 | 2011 | 2012 | 2011 | ||||||||
| (fiscal year) | | | (Dollars in thousands) | |||||||||
Senior term notes | 2013 - 2018 | 6.69 - 8.50% | 6.69 - 8.50% | $ | 111,429 | $ | 133,571 | ||||||
Convertible senior notes | 2015 | 5.00 | 5.00 | 161,134 | 156,248 | ||||||||
Revolving credit facility | 2016 | — | — | — | — | ||||||||
Equipment and leasehold notes payable | 2015 - 2016 | 4.90 - 8.75 | 8.80 - 9.14 | 14,780 | 22,273 | ||||||||
Other notes payable | 2013 | 5.75 - 8.00 | 5.75 - 8.00 | 331 | 1,319 | ||||||||
287,674 | 313,411 | ||||||||||||
Less current portion | (28,937 | ) | (32,252 | ) | |||||||||
Long-term portion | $ | 258,737 | $ | 281,159 | |||||||||
The debt agreements contain covenants, including limitations on incurrence of debt, granting of liens, investments, merger or consolidation, and transactions with affiliates. In addition, the Company must adhere to specified fixed charge coverage and leverage ratios, as well as minimum net worth levels.ratios. The Company was in compliance with all covenants and other requirements of our financing arrangements as of June 30, 2012. Additional details2013.
Aggregate maturities of long-term debt, including associated capital lease obligations of $8.3 million at June 30, 2013, are included below with the discussion of the specific categories of debt.as follows:
Fiscal year | (Dollars in thousands) | |||
---|---|---|---|---|
2014 | $ | 173,515 | ||
2015 | 1,253 | |||
2016 | 2 | |||
2017 | — | |||
2018 | — | |||
Thereafter | — | |||
$ | 174,770 | |||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8.7. FINANCING ARRANGEMENTS (Continued)
Aggregate maturities of long-term debt, including associated capital lease obligations of $14.8 million at June 30, 2012, are as follows:
Fiscal year | (Dollars in thousands) | |||
---|---|---|---|---|
2013 | $ | 28,937 | ||
2014 | 24,918 | |||
2015 | 180,245 | |||
2016 | 17,860 | |||
2017 | 17,857 | |||
Thereafter | 17,857 | |||
$ | 287,674 | |||
Senior Term Notes
Private Shelf Agreement
At June 30, 2012 and 2011,During fiscal year 2013, the Company had $111.4 and $133.6prepaid $89.3 million respectively, inof unsecured, fixed rate, senior term notes outstanding under a Private Shelf Agreement, of which $22.1 million were classified as partprivate shelf agreement. As a result of the current portionprepayment, the Company incurred a make-whole payment of the Company's long-term debt at June 30, 2012 and 2011. The notes require quarterly payments, and final maturity dates range from June 2013 through December 2017.
The Private Shelf Agreement includes financial covenants including debt to EBITDA ratios, fixed charge coverage ratios and minimum net equity tests (as defined$10.6 million that was recorded in interest expense within the Private Shelf Agreement), as well as other customary terms and conditions. The maturity date for the debt may be accelerated upon the occurrenceConsolidated Statement of various events of default, including breaches of the agreement, certain cross-default situations, certain bankruptcy related situations, and other customary events of default.
In April 2012, the Company amended the Restated Private Shelf Agreement. The amendments included increasing the Company's minimum net worth covenant from $800.0 to $850.0 million and amending certain definitions, including EBITDA and Rental Expenses. Under the new agreement, indebtedness related to Capital Leases is limited to $50.0 million.Operations.
Convertible Senior Notes
In July 2009, the Company issued $172.5 million aggregate principal amount of 5.0 percent convertible senior notes due July 2014. The notes are unsecured, senior obligations of the Company and interest is payable semi-annually in arrears on January 15 and July 15 of each year at a rate of 5.0 percent per year. Upon the July 2009 issuanceAs of June 30, 2013, the notes wereare convertible subject to certain conditions further described below at an initiala conversion rate of 64.672665.4357 shares of the Company's common stock per $1,000 principal amount of notes, (representing an initialrepresenting a conversion price of approximately $15.46$15.28 per share of the Company's common stock). As of June 30, 2012, the conversion rate was 65.1432 shares of the Company's common stock per $1,000 principal amount of notes (representing a conversion price of approximately $15.35 per share of the Company's common stock).stock.
Holders may convert their notes at their option prior to April 15, 2014 if the Company's stock price meets certain price triggers or upon the occurrence of specified corporate events as defined in the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. FINANCING ARRANGEMENTS (Continued)
convertible senior note agreement. On or after April 15, 2014, holders may convert each of their notes at their option at any time prior to the maturity date forof the notes.
The Company has the choice of net-cash settlement, settlement in its own shares or a combination thereof and concluded the conversion option is indexed to its own stock. As a result, the Company allocated $24.7 million of the $172.5 million principal amount of the convertible senior notes to equity, which resulted in a $24.7 million debt discount. The allocation was based on measuring the fair value of the convertible senior notes using a discounted cash flow analysis. The discount rate was based on an estimated credit rating for the Company. The estimated fair value of the convertible senior notes was $147.8 million, and the resulting $24.7 million debt discount will beis being amortized over the period the convertible senior notes are expected to be outstanding, which is five years, as additional non-cash interest expense. The combined debt discount amortization and the contractual interest coupon resulted in an effective interest rate on the convertible debt of 8.9 percent.
The following table provides equity and debt information for the convertible senior notes:
| Convertible Senior Notes Due July 2014 at | June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | June 30, 2012 | June 30, 2011 | ||||||||||||
| 2013 | 2012 | ||||||||||||
| (Dollars in thousands) | |||||||||||||
Principal amount on the convertible senior notes | $ | 172,500 | $ | 172,500 | $ | 172,500 | $ | 172,500 | ||||||
Unamortized debt discount | (11,366 | ) | (16,252 | ) | (6,046 | ) | (11,366 | ) | ||||||
Net carrying amount of convertible debt | $ | 161,134 | $ | 156,248 | $ | 166,454 | $ | 161,134 | ||||||
The following table provides interest rate and interest expense amounts related to the convertible senior notes:
| Convertible Senior Notes Due July 2014 For the Years Ended June 30, | Fiscal Years | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2012 | 2011 | ||||||||||||
| 2013 | 2012 | ||||||||||||
| (Dollars in thousands) | |||||||||||||
Interest cost related to contractual interest coupon—5.0% | $ | 8,625 | $ | 8,625 | $ | 8,625 | $ | 8,625 | ||||||
Interest cost related to amortization of the discount | 4,886 | 4,488 | 5,320 | 4,886 | ||||||||||
Total interest cost | $ | 13,511 | $ | 13,113 | $ | 13,945 | $ | 13,511 | ||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. FINANCING ARRANGEMENTS (Continued)
Revolving Credit Facility
On June 30, 2011,11, 2013, the Company amended its $400.0 million unsecured revolving credit facility agreement, which now provides for a $400.0 million senior unsecured five-year revolving credit facility.expires in June 2018. The revolving credit facility has rates tied to a LIBOR credit spread and a quarterly facility fee on the average daily amount of the facility (whether used or unused). Both the LIBOR credit spread and the facility fee are based on the Company's debt to EBITDA ratio at the end of each fiscal quarter. The amendments included increasing the Company's minimum net worth covenant from $800.0 to $850.0 million, and amending or adding certain definitions, including Change in Law, Defaulting Lender, EBITDA, Fronting Exposure, Replacement Lender, and Accounting Principles. In addition, the Company may request an increase in revolving credit commitments under the facility of up to $200.0 million under certain circumstances. Under the new agreement, indebtedness related to Capital Leases is limited to $50.0 million, and Restricted Payments are tiered based on Debt to EBITDA. Events of default under the Credit
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. FINANCING ARRANGEMENTS (Continued)
Agreement include change of control of the Company and the Company's default ofwith respect to other debt exceeding $10.0 million. The facility expires in July 2016. We were in compliance with all covenants and other requirements of our credit agreement and senior notes as of June 30, 2012.
As of June 30, 20122013 and 2011,2012, the Company had no outstanding borrowings under this revolving credit facility. Additionally, the Company had outstanding standby letters of credit under the revolving credit facility of $26.1$2.2 and $26.0$26.1 million at June 30, 20122013 and 2011,2012, respectively, primarily related to its self-insurance program. Unused available credit under the facility at June 30, 2013 and 2012 was $397.8 and 2011 was $373.9 and $374.0 million, respectively. The decrease in the outstanding standby letters of credit was due to the Company using $24.5 million of restricted cash to collateralize its self-insurance program during the fiscal year 2013, enabling the Company to reduce fees associated with the standby letters of credit.
Equipment and Leasehold Notes Payable
The equipment and leasehold notes payable are primarily comprised of capital lease obligations. In September 2011, the Company entered into an agreement to refinance existing capital leases to a three year term with a contract rate of 4.9 percent. Capital leasesAs of $20.5June 30, 2013 the capital lease balance was $8.3 million areand will be amortized at the historical rate of 9.2 percent. There was no gain or loss recorded on the refinance. The Company entered into the refinancing to reduce cash interest payments.
Other Notes Payable
The Company had $0.3 and $1.3 million in unsecured outstanding notes at June 30, 2012, and 2011, respectively, related to debt assumed in acquisitions.
9. DERIVATIVE FINANCIAL INSTRUMENTS
The Company's primary market risk exposures in the normal course of business are changes in interest rates and foreign currency exchange rates. The Company has established policies and procedures that govern the management of these exposures through the use of a variety of strategies, including the use of derivative financial instrument contracts. By policy, the Company does not enter into such contracts for the purpose of speculation or trading. Hedging transactions are limited to an underlying exposure. The Company has established an interest rate management policy that manages the interest rate mix of its total debt portfolio and related overall cost of borrowing. The Company's foreign currency exchange rate risk management policy includes frequently monitoring market data and external factors that may influence exchange rate fluctuations in order to minimize fluctuation in earnings due to changes in exchange rates. The Company enters into arrangements with counterparties that the Company believes are creditworthy. Generally, derivative contract arrangements settle on a net basis. The Company assesses the effectiveness of its hedges on a quarterly basis using the critical terms method in accordance with guidance for accounting for derivative instruments and hedging activities.
The Company has primarily utilized derivatives, which are designated as either cash flow or fair value hedges and qualify for hedge accounting treatment. For cash flow hedges and fair value hedges, changes in fair value are deferred in accumulated other comprehensive income (loss) within shareholders' equity until the underlying hedged item is recognized in earnings. Any hedge ineffectiveness is recognized immediately in current earnings. To the extent the changes offset, the hedge is effective. Any hedge ineffectiveness the Company has historically experienced has not been material. By policy, the Company designs its derivative instruments to be effective as hedges and aims to minimize fluctuations in earnings due to market risk exposures. If a derivative instrument is terminated prior to its contract date, the Company continues to defer the related gain or loss and recognizes it in current earnings over the remaining life of the related hedged item.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
The Company also utilizes freestanding derivative contracts, which do not qualify for hedge accounting treatment. The Company marks to market such derivatives with the resulting gains and losses recorded within current earnings in the Consolidated Statement of Operations. For purposes of the Consolidated Statement of Cash Flows, cash flows associated with all derivatives (designated as hedges or freestanding economic hedges) are classified in the same category as the related cash flows subject to the hedging relationship.
Cash Flow Hedges
As of June 30, 2012, the Company's cash flow hedges consist of forward foreign currency contracts.
In the past, the Company used interest rate swaps to maintain its variable to fixed rate debt ratio in accordance with its established policy. The Company repaid variable and fixed rate debt during the twelve months ended June 30, 2011. Prior to the repayments, the Company had two outstanding interest rate swaps totaling $40.0 million on $85.0 million aggregate variable rate debt with maturity dates in fiscal year 2012. The interest rate swaps were terminated prior to the maturity dates in conjunction with the repayments of debt and were settled for an aggregate loss of $0.1 million. The $0.1 million loss was recorded during the fourth quarter of fiscal year 2011 on the termination of the interest rate swaps and was recorded within interest expense in the Consolidated Statement of Operations.
The Company uses forward foreign currency contracts to manage foreign currency rate fluctuations associated with certain forecasted intercompany transactions. The Company's primary forward foreign currency contracts hedge approximately $0.6 million of monthly payments in Canadian dollars for intercompany transactions. The Company's forward foreign currency contracts hedge transactions through September 2012.
These cash flow hedges were designed and are effective as cash flow hedges. They were recorded at fair value within other noncurrent liabilities or other current assets in the Consolidated Balance Sheet, with corresponding offsets primarily recorded in other comprehensive income (loss), net of tax.
Net Investment Hedges
The Company has numerous investments in foreign subsidiaries, and the net assets of these subsidiaries are exposed to exchange rate volatility. The Company frequently evaluates its foreign currency exchange risk by monitoring market data and external factors that may influence exchange rate fluctuations. As a result, the Company may engage in transactions involving various derivative instruments to hedge assets, liabilities and purchases denominated in foreign currencies.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
During September 2006, the Company's cross-currency swap (which had a notional amount of $21.3 million and hedged a portion of the Company's net investment in its foreign operations) was settled, resulting in a cash outlay of $8.9 million. This cash outlay was recorded within investing activities within the Consolidated Statement of Cash Flows. The related cumulative tax-effected net loss of $7.9 million was recorded in accumulated other comprehensive income (AOCI) in fiscal year 2007. The amount will remain deferred within AOCI until an event which would trigger its release from AOCI and recognition in earnings being the sale or liquidation of the Company's international operations that the cross-currency swap hedged.
Freestanding Derivative Forward Contracts
The Company uses freestanding derivative forward contracts to offset the Company's exposure to the change in fair value of certain foreign currency denominated investments and intercompany assets and liabilities. These derivatives are not designated as hedges and therefore, changes in the fair value of these forward contracts are recognized currently in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities.
The Company had the following derivative instruments in its Consolidated Balance Sheet as of June 30, 2012 and 2011:
| Asset | Liability | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Fair Value | | Fair Value | |||||||||||||
Type | Classification | June 30, 2012 | June 30, 2011 | Classification | June 30, 2012 | June 30, 2011 | |||||||||||
| | (Dollars in thousands) | | (Dollars in thousands) | |||||||||||||
Designated as hedging instruments—Cash Flow Hedges: | |||||||||||||||||
Forward foreign currency contracts | Other current assets | $ | 37 | $ | — | Other current liabilities | $ | — | $ | (599 | ) | ||||||
Freestanding derivative contracts—not designated as hedging instruments: | |||||||||||||||||
Forward foreign currency contracts | Other current assets | $ | 108 | $ | 212 | Other current liabilities | $ | — | $ | — | |||||||
Total | $ | 145 | $ | 212 | $ | — | $ | (599 | ) | ||||||||
The table below sets forth the gain (loss) on the Company's derivative instruments recorded within AOCI in the Consolidated Balance Sheet for the twelve months ended June 30, 2012 and 2011. The table also sets forth the gain (loss) on the Company's derivative instruments that has been reclassified
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
from AOCI into current earnings during the twelve months ended June 30, 2012 and 2011 within the following line items in the Consolidated Statement of Operations.
| Gain (Loss) Recognized in Other Comprehensive (Loss) Income For the Years Ended June 30, | Gain (Loss) Reclassified from Accumulated OCI into (Loss) Income at June 30, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Type | 2012 | 2011 | 2010 | Classification | 2012 | 2011 | 2010 | ||||||||||||||
| (Dollars in thousands) | | (Dollars in thousands) | ||||||||||||||||||
Designated as hedging instruments—Cash Flow Hedges: | |||||||||||||||||||||
Interest rate swaps | $ | — | $ | (636 | ) | $ | (2,967 | ) | $ | — | $ | — | $ | — | |||||||
Forward foreign currency contracts | 393 | 456 | 519 | Cost of sales | — | 48 | (261 | ) | |||||||||||||
Treasury lock contracts | — | — | (146 | ) | Interest income | — | — | 388 | |||||||||||||
Total | $ | 393 | $ | (180 | ) | $ | (2,594 | ) | $ | — | $ | 48 | $ | 127 | |||||||
As of June 30, 2012 the Company estimates that it will reclassify into earnings during the next 12 months a gain of less than $0.1 million from the pretax amount recorded in AOCI as the anticipated cash flows occur.
The table below sets forth the (loss) gain on the Company's derivative instruments for the years ended June 30, 2012, 2011 and 2010 recorded within interest income and other, net in the Consolidated Statement of Operations.
| Derivatives Impact on (Loss) Income at June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Type | Classification | 2012 | 2011 | 2010 | ||||||||
| | (Dollars in thousands) | ||||||||||
Freestanding derivative contracts—not designated as hedging instruments: | ||||||||||||
Forward foreign currency contracts | Interest income and other, net | $ | (105 | ) | $ | 613 | $ | (811 | ) |
10.8. COMMITMENTS AND CONTINGENCIES:
Operating Leases:
The Company is committed under long-term operating leases for the rental of most of its company-owned salonsalons and hair restoration center locations.some of its corporate facilities and distribution centers under operating leases. The original terms of the salon leases range from one to 20 years, with many leases renewable for an additional five to ten year term at the option of the Company, and certain leases include escalation provisions.Company. For certainmost leases, the Company is required to pay additional rent based on a percent of sales in excess of a predetermined amount and, in most cases, real estate taxes and other occupancy expenses. Rent expense for the Company's international department store salons is based primarily on a percentpercentage of sales.
The Company also leases the premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with the franchisees. These leases, generally with terms of approximately five years, are expected to be renewed on expiration. All additional lease costs are passed through to the franchisees.
During fiscal year 2005, the Company entered into a lease agreement for a 102,448 square foot building, located in Edina, Minnesota. The Company began to recognize rent expense related to this property during the three months ended September 30, 2005, which was the date that it obtained the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. COMMITMENTS AND CONTINGENCIES: (Continued)
legal right to use and control the property. The original lease term ends in May 2016 and the aggregate amount of lease payments to be made over the remaining original lease term are approximately $4.5$3.4 million. The lease agreement includes an option to purchase the property or extend the original term for two successive periodsIn
In addition,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. COMMITMENTS AND CONTINGENCIES: (Continued)
fiscal year 2013, the Company began consolidating its corporate headquarters and expects to exit this building during fiscal year 2014.
The Company also has guarantees associated with approximately 20 operating leases an 89,900 square foot building nearassociated with the company-owned distribution center located in Chattanooga, Tennessee. The original lease term ends in August 2013Company's former Trade Secret concept. As the Company has not experienced and does not expect any material loss to result from these arrangements, the aggregate amountCompany has determined the exposure to the risk of lease paymentsloss on the guarantee of the operating leases to be made overimmaterial to the remaining original lease term are approximately $0.6 millionfinancial statements.
Sublease income was $29.1, $28.3, $28.4, and $29.2$28.4 million in fiscal years 2013, 2012 2011 and 2010,2011, respectively. Rent expense on premises subleased was $27.9,$28.7, $27.9, and $28.8$27.9 million in fiscal years 2013, 2012 2011 and 2010,2011, respectively. Rent expense and the related rental income on the sublease arrangements with franchisees is netted within the rent expense line item on the Consolidated Statement of Operations. In most cases, the amount of rental income related to sublease arrangements with franchisees approximates the amount of rent expense from the primary lease, thereby having no net impact on rent expense or net income (loss) income.. However, in limited cases, the Company charges a ten percent mark-up in its sublease arrangements. The net rental income resulting from such arrangements totaled $0.4, $0.5,$0.4, and $0.4$0.5 million for fiscal year 2013, 2012 2011 and 2010,2011, respectively, and was classified in the royalties and fees caption of the Consolidated Statement of Operations.
Total rent expense, excluding rent expense on premises subleased to franchisees, includes the following:
Fiscal Years | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | 2013 | 2012 | 2011 | ||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||
Minimum rent | $ | 259,522 | $ | 260,644 | $ | 259,984 | $ | 246,787 | $ | 250,487 | $ | 251,417 | ||||||||
Percentage rent based on sales | 8,938 | 9,225 | 10,138 | 7,566 | 8,938 | 9,225 | ||||||||||||||
Real estate taxes and other expenses | 72,345 | 72,417 | 73,976 | 70,363 | 72,344 | 72,417 | ||||||||||||||
$ | 340,805 | $ | 342,286 | $ | 344,098 | $ | 324,716 | $ | 331,769 | $ | 333,059 | |||||||||
As of June 30, 2012,2013, future minimum lease payments (excluding percentage rents based on sales) due under existing noncancelable operating leases with remaining terms of greater than one year are as follows:
Fiscal year | Corporate leases | Franchisee leases | Guaranteed leases | Corporate leases | Franchisee leases | Guaranteed leases | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||
2013 | $ | 259,975 | $ | 45,677 | $ | 816 | ||||||||||||||
2014 | 208,992 | 37,898 | 553 | $ | 248,458 | $ | 47,958 | $ | 912 | |||||||||||
2015 | 157,154 | 29,038 | 343 | 197,170 | 39,751 | 729 | ||||||||||||||
2016 | 106,887 | 20,250 | 225 | 143,330 | 30,798 | 554 | ||||||||||||||
2017 | 62,016 | 10,861 | 193 | 94,772 | 20,989 | 422 | ||||||||||||||
2018 | 53,569 | 11,304 | 221 | |||||||||||||||||
Thereafter | 76,675 | 8,754 | 198 | 56,431 | 9,436 | 125 | ||||||||||||||
Total minimum lease payments | $ | 871,699 | $ | 152,478 | $ | 2,328 | $ | 793,730 | $ | 160,236 | $ | 2,963 | ||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. COMMITMENTS AND CONTINGENCIES: (Continued)
Salon Development Program:
As a part of its salon development program, theThe Company continues to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations, and continues to enter into transactions to acquire established hair care salons.locations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. COMMITMENTS AND CONTINGENCIES: (Continued)
Contingencies:
The Company is self-insured for most workers' compensation, employment practice liability, and general liability. Workers' compensation and general liability losses are subject to per occurrence and aggregate annual liability limitations. The Company is insured for losses in excess of these limitations. The Company is also self-insured for health care claims for eligible participating employees subject to certain deductibles and limitations. The Company determines its liability for claims incurred but not reported on an actuarial basis.
11. LITIGATIONLitigation and Settlements:
The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. In addition, the Company is a nominal defendant, and nine current and former directors and officers of the Company are named defendants, in a shareholder derivative action in Minnesota state court. The derivative shareholder action alleges that the individual defendants breached their fiduciary duties to the Company in connection with their approval of certain executive compensation arrangements and certain related party transactions. AThe Board of Directors appointed a Special Litigation Committee to investigate the claims and allegations made in the derivative action, and to decide on behalf of the Company whether the claims and allegations should be pursued. The derivative action has been formed perstayed by the directioncourt pending the decision of the judge inSpecial Litigation Committee. We do not know when the matter. The Company is working with outside counsel to formulateSpecial Litigation Committee will complete its next steps in keeping with the courts.work, or what it will decide. Litigation is inherently unpredictable and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.
During fiscal year 2013, the Company incurred $1.2 million of expense in conjunction with the derivative shareholder action.
During fiscal year 2012, the Company was awarded $1.1 million in conjunction with a class-action lawsuit.
During fiscal year 2011, the Company settled a legal claim with the former owner of Hair Club for $1.7 million.
During fiscal year 2010, the Company settled two legal claims regarding certain guest and employee matters for an aggregate charge9. INCOME TAXES
The components of $5.2 million plus a commitment to provide discount coupons. Payments aggregating $4.3 and $0.9 million were made during fiscal years 2011 and 2010, respectively.income (loss) before income taxes are as follows:
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
| (Dollars in thousands) | |||||||||
Income (loss) before income taxes: | ||||||||||
U.S. | $ | (25,177 | ) | $ | (35,430 | ) | $ | (49,669 | ) | |
International | 35,275 | 10,116 | 5,736 | |||||||
$ | 10,098 | $ | (25,314 | ) | $ | (43,933 | ) | |||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12.9. INCOME TAXES (Continued)
The components of (loss) income before income taxes are as follows:
| 2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | |||||||||
(Loss) income before income taxes: | ||||||||||
U.S. | $ | (100,792 | ) | $ | (31,963 | ) | $ | 35,289 | ||
International | 10,364 | 6,334 | 17,925 | |||||||
$ | (90,428 | ) | $ | (25,629 | ) | $ | 53,214 | |||
The (benefit) provision for income taxes consists of:
Fiscal Years | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | 2013 | 2012 | 2011 | ||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||
Current: | ||||||||||||||||||||
U.S. | $ | 6,493 | $ | 3,658 | $ | 5,580 | $ | (21,053 | ) | $ | (1,095 | ) | $ | (4,409 | ) | |||||
International | 2,399 | 1,557 | 14,882 | 707 | 2,261 | 1,106 | ||||||||||||||
Deferred: | ||||||||||||||||||||
U.S. | (13,984 | ) | (17,882 | ) | 4,007 | 10,405 | (5,519 | ) | (16,283 | ) | ||||||||||
International | (187 | ) | 3,171 | 1,108 | (83 | ) | (77 | ) | 3,253 | |||||||||||
$ | (5,279 | ) | $ | (9,496 | ) | $ | 25,577 | $ | (10,024 | ) | $ | (4,430 | ) | $ | (16,333 | ) | ||||
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory rate to earnings (loss) earnings before income taxes, as a result of the following:
Fiscal Years | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | 2013 | 2012 | 2011 | ||||||||||||||
U.S. statutory rate (benefit) | (35.0 | )% | (35.0 | )% | 35.0 | % | 35.0 | % | (35.0 | )% | (35.0 | )% | ||||||||
State income taxes, net of federal income tax benefit | 0.8 | 0.7 | 5.9 | 3.6 | 3.5 | (1.7 | ) | |||||||||||||
Tax effect of goodwill impairment | 37.9 | 10.4 | 12.1 | — | 47.7 | 6.5 | ||||||||||||||
Foreign income taxes at other than U.S. rates | (0.2 | ) | 7.9 | (0.8 | ) | 4.1 | (0.5 | ) | 4.7 | |||||||||||
Tax effect of foreign currency translation gain | (107.0 | ) | — | — | ||||||||||||||||
Work Opportunity and Welfare-to-Work Tax Credits | (5.4 | ) | (15.7 | ) | (7.0 | ) | (42.8 | ) | (19.4 | ) | (8.8 | ) | ||||||||
Adjustment of prior year income tax balances | — | — | 3.9 | |||||||||||||||||
Other, net | (3.9 | ) | (5.4 | ) | (1.0 | ) | 7.8 | (13.8 | ) | (2.9 | ) | |||||||||
(5.8 | )% | (37.1 | )% | 48.1 | % | (99.3 | )% | (17.5 | )% | (37.2 | )% | |||||||||
During the twelve months ended June 30, 2012, the Company recognized a tax benefit of $5.3 million with a corresponding effective tax rate of 5.8 percent. The effective income tax rate for the twelve months ended June 30, 2012 was negatively impacted by the goodwill impairment charges totaling $146.1 million which are primarily non-deductible for tax purposes. This resulted in the Company recording less of a tax benefit on the pre-tax loss than what would normally be expected utilizing the Company's historical range of tax rates.
The (3.9)7.8 percent of other,Other, net in fiscal year 2012 includes the rate impact of unrecognized tax benefits and miscellaneous items of (2.8) and (1.1) percent, respectively.
For fiscal year 2011, the Company reported a $25.6 million loss from continuing operations before income taxes as compared to income from continuing operations before income taxes of $53.2 million in fiscal year 2010. The rate reconciliation items have a greater impact on the annual effective income tax rate in fiscal year 2011 because the magnitude of the loss from continuing operations before income
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. INCOME TAXES (Continued)
taxes is less than the magnitude of income from continuing operations before income taxes in fiscal year 2010. The annual effective tax rate was favorably impacted by employment credits in both years. Partially offsetting the favorable impact of the employment credits was the adverse impact of the pre-tax non-cash goodwill impairment charge of $74.1 million recorded during the third quarter of fiscal year 2011, which is only partially deductible for tax purposes. Additionally, the foreign income taxes at other than U.S. rates adversely impacted the annual effective tax rate due to a decrease in foreign income from continuing operations before income taxes and other foreign non-deductible items.
The (5.4) percent of other, net in fiscal year 20112013 includes the rate impact of meals and entertainment expense disallowance, donated inventory, unrecognized tax benefits, and miscellaneous items of 2.7, (2.9)4.9, (3.4), (3.7)5.5, and 0.8 percent, respectively.
The (13.8) percent of Other, net in fiscal year 2012 includes the rate impact of meals and entertainment expense disallowance, unrecognized tax benefits, and miscellaneous items of 2.1, (9.1), and (1.5)(6.8) percent, respectively.
The (2.9) percent of Other, net in fiscal year 2011 includes the rate impact of unrecognized tax benefits and miscellaneous items of (1.8) and (1.1) percent, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. INCOME TAXES (Continued)
The components of the net deferred tax assets and liabilities are as follows:
June 30, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2013 | 2012 | ||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||
Deferred tax assets: | ||||||||||||||
Deferred rent | $ | 15,226 | $ | 15,233 | $ | 12,953 | $ | 14,725 | ||||||
Payroll and payroll related costs | 44,454 | 37,852 | 34,073 | 43,717 | ||||||||||
Net operating loss carryforwards | 797 | 1,210 | 2,484 | 759 | ||||||||||
Tax credit carryforwards | 4,366 | — | ||||||||||||
Salon asset impairment | 5,038 | 5,176 | 720 | 5,038 | ||||||||||
Inventories | 3,027 | 2,968 | 7,920 | 2,118 | ||||||||||
Deferred gift card revenue | 745 | 1,536 | ||||||||||||
Federal and state benefit on uncertain tax positions | 2,113 | 8,549 | 1,888 | 2,113 | ||||||||||
Allowance for doubtful accounts/notes | 5,180 | 9,855 | 7,004 | 5,144 | ||||||||||
Insurance | 6,439 | 5,669 | 6,106 | 6,439 | ||||||||||
Other | 6,963 | 6,396 | 11,745 | 6,362 | ||||||||||
Total deferred tax assets | $ | 89,982 | $ | 94,444 | $ | 89,259 | $ | 86,415 | ||||||
Deferred tax liabilities: | ||||||||||||||
Depreciation | $ | (17,984 | ) | $ | (29,348 | ) | $ | (20,684 | ) | $ | (17,831 | ) | ||
Amortization of intangibles | (86,431 | ) | (94,257 | ) | (72,635 | ) | (61,139 | ) | ||||||
Accrued property taxes | (2,079 | ) | (1,942 | ) | ||||||||||
Deferred debt issuance costs | (4,336 | ) | (6,215 | ) | (2,303 | ) | (4,336 | ) | ||||||
Other | (23 | ) | (3 | ) | (4,903 | ) | (2,102 | ) | ||||||
Total deferred tax liabilities | $ | (110,853 | ) | $ | (131,765 | ) | $ | (100,525 | ) | $ | (85,408 | ) | ||
Net deferred tax liabilities | $ | (20,871 | ) | $ | (37,321 | ) | ||||||||
Net deferred tax (liability) asset | $ | (11,266 | ) | $ | 1,007 | |||||||||
At June 30, 2012,2013, the Company hadhas tax effected state and foreignU.K. net operating loss carryforwards of approximately $14.8$1.8 million (net of $0.1 million of valuation allowance) and $3.7 million, respectively. These losses related to various states, the U.K. and Luxembourg. The Company had recorded a valuation allowance related to losses in various states and Luxembourg of $2.6 million and $3.1$0.7 million, respectively. The Company expects to fully utilize all of thestate loss carryforwards for which a valuation allowanceexpire from 2016 to 2033. The U.K. loss carryforward has not been established.no expiration.
The Company's tax credit carryforward of $4.4 million will expire in 2033.
As of June 30, 2012,2013, undistributed earnings of international subsidiaries of approximately $60.4$25.2 million were considered to have been reinvested indefinitely and, accordingly, the Company has not provided for U.S. income taxes on such earnings. It is not practicable for the Company to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12.9. INCOME TAXES (Continued)
Deferred taxes would be recorded for earnings of our foreign operations if we determine that such earnings are no longer indefinitely reinvested and cannot be remitted in a tax-neutral transaction.
The Company files tax returns and pays tax primarily in the U.S., Canada, the U.K., and Luxembourg as well as states, cities, and provinces within these jurisdictions. In the U.S., fiscal years 20092010 and afterbeyond remain open for federal tax audit. The Company's U.S. federal income tax returns for the fiscal years 2010 and 2011 are currently under examination by the Internal Revenue Service. For state tax audits, the statute of limitations generally spans three to four years, resulting in a number of states remaining open for tax audits dating back to fiscal year 2008.2009. However, the Company is under audit in a number of states in which the statute of limitations has been extended for fiscal years 20062007 and forward. Internationally, including Canada, the statute of limitations for tax audits varies by jurisdiction, but generally ranges from three to five years. A rollforward of the unrecognized tax benefits is as follows:
| Fiscal Years | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2013 | 2012 | 2011 | ||||||||||||||||||
| 2012 | 2011 | 2010 | (Dollars in thousands) | ||||||||||||||||
Balance at beginning of period | $ | 13,493 | $ | 16,856 | $ | 14,787 | $ | 4,381 | $ | 13,493 | $ | 16,856 | ||||||||
Additions based on tax positions related to the current year | 482 | 796 | 5,549 | 44 | 482 | 796 | ||||||||||||||
(Reductions)/additions based on tax positions of prior years | (7 | ) | (759 | ) | (185 | ) | 7,132 | (7 | ) | (759 | ) | |||||||||
Reductions on tax positions related to the expiration of the statute of limitations | (1,571 | ) | (2,718 | ) | (2,993 | ) | (1,403 | ) | (1,571 | ) | (2,718 | ) | ||||||||
Settlements | (8,016 | ) | (682 | ) | (302 | ) | (139 | ) | (8,016 | ) | (682 | ) | ||||||||
Balance at end of period | $ | 4,381 | $ | 13,493 | $ | 16,856 | $ | 10,015 | $ | 4,381 | $ | 13,493 | ||||||||
If the Company were to prevail on all unrecognized tax benefits recorded, a benefit of approximately $2.8 million would be recorded in the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. During the fiscal years ended June 30,2013, 2012, 2011, and 20102011 we recorded income tax (benefit)/expenseinterest and penalties of approximately $0.7, $(1.2), $(0.6), and $(1.1)$(0.6) million, respectively, for the fiscal years additions to the accrual net of the respective reversal of previously accrued interest and penalties net of the respective fiscal years additions to the accrual.penalties. As of June 30, 2012,2013, the Company had accrued interest and penalties related to unrecognized tax benefits of $1.5$2.2 million. This amount is not included in the gross unrecognized tax benefits noted above.
It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of our unrecognized tax positions will increase or decrease during the next twelve months.fiscal year. However, we do not expectan estimate of the amount or range of the change to have a significant effect on our results of operations or our financial position.cannot be made at this time.
13.10. BENEFIT PLANS
Regis Retirement Savings PlanPlan:
The Company maintains a defined contribution 401(k) plan, the Regis Retirement Savings Plan (RRSP Plan)(RRSP). The RRSP Plan is a defined contribution profit sharing plan with a 401(k) feature that is intended to qualify withunder Section 401(a) of the Internal Revenue Code (Code) and is subject to the Employee Retirement Income Security Act of 1974.1974 ("ERISA").
The 401(k) portion of the PlanRRSP is a contributory defined contribution plancash or deferred arrangement intended to qualify under section 401(k) of the Code and under which eligible employees may elect to contribute a percentage of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. BENEFIT PLANS (Continued)
their eligible compensation. Employees who are 18 years of age or older and who were not highly compensated employees as defined by the Code
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. BENEFIT PLANS (Continued)
during the preceding PlanRRSP year are eligible to participate in the PlanRRSP commencing with the first day of the month following their completion of one month of service.
The discretionary employer contribution profit sharing portion of the PlanRRSP is a noncontributory defined contribution component covering full-time and part-time employees of the Company who have at least one year of eligible service, defined as 1,000 hours of service during the PlanRRSP year, are employed by the Employer on the last day of the PlanRRSP year and are employed at the home office or distribution centers, or as area or regional supervisors, artistic directors or educators, and that are not highly compensated employees as defined by the Code. Participants' interest in the noncontributory defined contribution component become 20.0 percent vested after completing two years of service with vesting increasing 20.0 percent for each additional year of service, and with participants becoming fully vested after six full years of service.
Nonqualified Deferred Salary Plan:
The Company maintains a Nonqualified Deferred Salary Plan (Executive Plan), which covers Company officers, field supervisors, warehouse and corporate office employees who are highly compensated. The discretionary employer contribution profit sharing portion of the Executive Plan is a noncontributory defined contributionprofit sharing component in which a participants interest becomebecomes 20.0 percent vested after completing two years of service with vesting increasing 20.0 percent for each additional year of service, and with participants becoming fully vested after six full years of service. Certain participants within the Executive Plan also receive a matching contribution from the Company.
Stock Purchase Plan:
The Company has an employee stock purchase plan (ESPP) available to substantially allqualifying employees. Under the terms of the ESPP, eligible employees may purchase the Company's common stock through payroll deductions. The Company contributes an amount equal to 15.0 percent of the purchase price of the stock to be purchased on the open market and pays all expenses of the ESPP and its administration, not to exceed an aggregate contribution of $10.0$11.8 million. As of June 30, 2012,2013, the Company's cumulative contributions to the ESPP totaled $8.9$9.3 million.
Franchise Stock Purchase Plan:
The Company has a franchise stock purchase plan (FSPP) available to substantially all franchisee employees. Under the terms of the plan, eligible franchisees and their employees may purchase the Company's common stock. The Company contributes an amount equal to five percent of the purchase price of the stock to be purchased on the open market and pays all expenses of the plan and its administration, not to exceed an aggregate contribution of $0.7 million. As of June 30, 2012,2013, the Company's cumulative contributions to the FSPP totaled $0.2 million.
Deferred Compensation Contracts:
The Company has agreedunfunded deferred compensation contracts covering certain current and former key executives. Prior to pay its former Chief Executive Officer, a lump sum amount equal to 60.0 percent of his salary for the remainder of his life. Compensation associated with this agreement was charged to expense as services were provided. Associated costs included in general and administrative expenses on the Consolidated Statement of Operations totaled $3.7, $1.8 and $3.0 million for fiscal years 2012, 2011, and 2010, respectively. As of June 30, 2012, deferred compensation benefits were based on the executive's years of service and 2011, zero and $11.4 million is included in other noncurrent liabilities, respectively. As of June 30, 2012 and 2011, $15.1 million and zero ofcompensation for the balance is included in accrued liabilities, respectively60 months preceding the executive's termination date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13.10. BENEFIT PLANS (Continued)
In addition, the Company has other unfunded deferred compensation contracts covering key executives within the Company. The key executives' benefits are based on years of service and the employee's compensation prior to departure. Effective June 30, 2012, the Companythese contracts were amended the deferred compensation contracts such thatand the benefits are based on years of service and employee's compensationwere frozen as of June 30, 2012. The Company utilizes a June 30 measurement date for these
Expense associated with the deferred compensation contracts a discount rate based on the Aa Bond index rate (4.0 and 5.5 percent at June 30, 2012 and 2011, respectively) and projected salary increases of 4.0 percent at June 30, 2011 to estimate the obligations associated with these deferred compensation contracts.
Compensation associated with these agreements is charged to expense as services are provided. Associated costs included in general and administrative expenses on the Consolidated Statement of Operations totaled $1.6, $5.9 $2.5 and $2.2$2.5 million for fiscal years 2013, 2012, 2011, and 2010,2011, respectively. The projected benefit obligation of these deferred compensation contracts totaled $21.3$13.0 and $22.2$21.3 million at June 30, 20122013 and 2011,2012, respectively, in the Consolidated Balance Sheet. As of June 30, 2013 and 2012, $9.5 and 2011, $11.8 and $17.2 million is included in other noncurrent liabilities, respectively. As of June 30, 2013 and 2012, $3.5 and 2011, $9.5 and $5.0 million of the balance is included in accrued liabilities, respectively. The tax-affected accumulated other comprehensive lossincome (loss) for the deferred compensation contracts, consisting of primarily unrecognized actuarial loss,income (loss), was $0.5$0.1 and $1.6$(0.5) million at June 30, 2013 and 2012, respectively.
In connection with the former Chief Executive Officer's deferred compensation contract, the Company paid the former Chief Executive Officer $15.1 million in fiscal year 2013. Associated compensation expense included in general and administrative expenses on the Consolidated Statement of Operations totaled $3.7 and $1.8 million for fiscal years 2012 and 2011, respectively. The Company intends to fund its future obligations under these arrangements through company-owned life insurance policies on the participants. Cash valuesAs of these policies totaled $24.4 and $22.3 million at June 30, 2012, and 2011, respectively, and are$15.1 million of the balance is included in other assets in the Consolidated Balance Sheet.accrued liabilities.
The Company has agreed to pay the former Vice Chairman an annual amount of $0.6 million, adjusted for inflation to $0.9 million in fiscal years 20122013 and 2011,2012, for the remainder of his life. The former Vice Chairman has agreed that during the period in which payments are made, as provided in the agreement, he will not engage in any business competitive with the business conducted by the Company. Additionally, the Company has a survivor benefit plan for the former Vice Chairman's spouse, payable upon his death, at a rate of one half of his deferred compensation benefit, adjusted for inflation, for the remaining life of his spouse. Estimated associated costs included in general and administrative expenses on the Consolidated Statement of Operations totaled $0.7, $0.8 $0.7 and $0.6$0.7 million for fiscal years 2013, 2012, 2011, and 2010,2011, respectively. Related obligations totaled $4.9$5.7 and $5.9$5.8 million at June 30, 2013 and 2012, respectively, $0.9 million within accrued expenses and 2011, respectively, and arethe remainder included in other noncurrent liabilities in the Consolidated Balance Sheet. The Company intends to fund all future obligations under this agreement through company-owned life insurance policies on the former Vice Chairman. Cash values of these policies totaled $4.5$4.9 and $4.2$4.5 million at June 30, 20122013 and 2011,2012, respectively, and are included in other assets in the Consolidated Balance Sheet. The policy death benefits exceed the obligations under this agreement.
Compensation expense included in (loss) income before income taxes and equity in (loss) income of affiliated companies related to the aforementioned plans, excluding amounts paid for expenses and administration of the plans included the following:
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
| (Dollars in thousands) | |||||||||
RRSP Plan profit sharing | $ | — | $ | — | $ | 1,907 | ||||
Executive Plan (including profit sharing) | 311 | 394 | 933 | |||||||
ESPP | 441 | 449 | 494 | |||||||
FSPP | 7 | 9 | 8 | |||||||
Deferred compensation contracts | 2,370 | 10,452 | 4,977 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. BENEFIT PLANS (Continued)
administration of the plans, for the fiscal years ended June 30, 2012, 2011, and 2010, included the following:
| 2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | |||||||||
RRSP Plan profit sharing | $ | — | $ | 1,907 | $ | 3,206 | ||||
Executive Plan profit sharing | — | 477 | 654 | |||||||
ESPP | 449 | 494 | 484 | |||||||
FSPP | 9 | 8 | 8 | |||||||
Deferred compensation contracts | 10,452 | 4,977 | 5,814 |
14. SHAREHOLDERS' EQUITY
Net (Loss) Income Per Share:11. EARNINGS PER SHARE
The Company's basic earnings per share is calculated as net (loss) income divided by weighted average common shares outstanding, excluding unvested outstanding RSAs and RSUs. The Company's dilutive earnings per share is calculated as net (loss) income divided by weighted average common shares and common share equivalents outstanding, which includes shares issuable under the Company's stock option plan and long-term incentive plan, and dilutive securities. Stock-based awards with exercise prices greater than the average market valuefollowing table sets forth a reconciliation of the Company'sincome (loss) from continuing operations available to common stock are excludedshareholders and the income (loss) from the computation of diluted earnings per share. The Company's dilutive earnings per share will also reflect the assumed conversion under the Company's convertible debt if the impact is dilutive, along with the exclusion of interest expense, net of taxes. The impact of the convertible debt is excluded from the computation ofcontinuing operations for diluted earnings per share when interest expense per common share obtainable upon conversion is greater than basicunder the if-converted method:
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
| (Dollars in thousands) | |||||||||
Income (loss) from continuing operations available to common shareholders | $ | 4,166 | $ | (51,743 | ) | $ | (20,939 | ) | ||
Effect of dilutive securities: | ||||||||||
Interest on convertible debt(1) | — | — | — | |||||||
Income (loss) from continuing operations for diluted earnings per share | $ | 4,166 | $ | (51,743 | ) | $ | (20,939 | ) | ||
The following table sets forth a reconciliation of shares used in the computation of basic and diluted earnings per share:
Fiscal Years | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | 2013 | 2012 | 2011 | ||||||||||||||
| (Shares in thousands) | (Shares in thousands) | ||||||||||||||||||
Weighted average shares for basic earnings per share | 57,137 | 56,704 | 55,806 | 56,704 | 57,137 | 56,704 | ||||||||||||||
Effect of dilutive securities: | ||||||||||||||||||||
Dilutive effect of convertible debt | — | — | 10,730 | — | — | — | ||||||||||||||
Dilutive effect of stock-based compensation(1) | — | — | 217 | 142 | — | — | ||||||||||||||
Weighted average shares for diluted earnings per share | 57,137 | 56,704 | 66,753 | 56,846 | 57,137 | 56,704 | ||||||||||||||
Table The computation of Contentsweighted average shares outstanding, assuming dilution, excluded 1,593,228, 1,987,784 and 2,553,642 of equity-based compensation awards during the fiscal years 2013, 2012, and 2011, respectively. These amounts were excluded because they were not dilutive under the treasury stock method. The computation of weighted average shares outstanding, assuming dilution also excluded 11,260,261, 11,208,552, and 11,163,056 of shares from convertible debt for fiscal years 2013, 2012, and 2011, respectively. These amounts were excluded as they were not dilutive.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. SHAREHOLDERS' EQUITY (Continued)12. STOCK-BASED COMPENSATION
The following table sets forth theCompany grants long-term equity-based awards which are excluded from the various earnings per share calculations:
| 2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| (Shares in thousands) | |||||||||
Basic earnings per share: | ||||||||||
RSAs(1) | 403 | 862 | 931 | |||||||
RSUs(1) | 17 | 215 | 215 | |||||||
420 | 1,077 | 1,146 | ||||||||
Diluted earnings per share: | ||||||||||
Stock options(2) | 789 | 890 | 960 | |||||||
SARs(2) | 957 | 1,084 | 1,110 | |||||||
RSAs(2) | 242 | 580 | 677 | |||||||
Shares issuable upon conversion of debt(2) | 11,209 | 11,163 | — | |||||||
13,197 | 13,717 | 2,747 | ||||||||
The following table sets forth a reconciliation of the net (loss) income from continuing operations available to common shareholders and the net (loss) income from continuing operations for diluted earnings per share under the if-converted method:
| 2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | |||||||||
Net (loss) income from continuing operations available to common shareholders | $ | (115,192 | ) | $ | (8,905 | ) | $ | 39,579 | ||
Effect of dilutive securities: | ||||||||||
Interest on convertible debt | — | — | 7,520 | |||||||
Net (loss) income from continuing operations for diluted earnings per share | $ | (115,192 | ) | $ | (8,905 | ) | $ | 47,099 | ||
Stock-based Compensation Award Plans:
In May of 2004, the Company's Board of Directors approved the 2004 Long Term Incentive Plan (2004 Plan)(the "2004 Plan"). The 2004 Plan received shareholder approval at the annual shareholders' meeting held on October 28, 2004. The 2004 Plan provides for the granting of nonqualified stock options, equity-based stock appreciation rights (SARs), restricted stock awards (RSAs), restricted stock units (RSUs), and restricted stock,stock-settled performance share units (PSUs), as well as cash-based performance grants, to employees and non-employee directors of the Company. On March 8, 2007, the Company's BoardA maximum of Directors approved an amendment to the 2004 Plan to permit the granting and issuance of restricted stock units (RSUs). On October 28, 2010, the shareholders of Regis Corporation approved an amendment to the 2004 Plan to increase the maximum number of6,750,000 shares of the Company's common stock authorizedare available for issuance pursuant to grants and awards from 2,500,000 to 6,750,000. The 2004 Plan expires on May 26, 2014. Stock options, SARs and restricted stock granted prior to fiscal year 2012 under the 2004 Plan generally vest at a rate of 20.0 percent annually on each of the first five anniversaries of the date of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. SHAREHOLDERS' EQUITY12. STOCK-BASED COMPENSATION (Continued)
grant. The stock options and SARs have a maximum term of ten years. The RSUsunder the 2004 Plan. All unvested awards granted prior to fiscal yearJuly 1, 2012 cliff vest after five years and payment of the RSUs is deferred until January 31 of the year following vesting.
During the fiscal year ended 2012, the Company granted 55,000 shares of restricted stock awards and 42,316 restricted stock units. Of the 55,000 restricted stock awards, 20,000 shares vest at a rate of 20.0 percent annually on the first five anniversaries of the date of grant with the remaining 35,000 shares cliff vest two years after the grant date. The grant of the 42,316 restricted stock units occurred in the last month of the fiscal year, with retroactive vesting on a monthly basis, generally from the Company's 2011 annual shareholder meeting date. As such, at the date of grant there were 25,704 vested restricted stock units. The distribution of the vested restricted stock units is deferred until separation of service from the Company.
Unvested awards are subject to forfeiture in the event of termination of employment. For awards granted subsequent to July 1, 2012, SAR and RSU awards generally include various acceleration terms for participants aged sixty-two years or older and employees aged fifty-five or older and have fifteen years of continuous service.
The Company also has outstanding stock options under the 2000 Stock Option Plan (2000(the "2000 Plan), although the plan terminated in 2010 whichand no additional awards have since been or will be made under the 2000 Plan. The 2000 Plan allowed the Company to grant both incentive and nonqualified stock options and replaced the Company's 1991 Stock Option Plan.
Under the 2004 Plan (1991 Plan). Total options covering 3,500,000 shares of common stock were available for grant underand the 2000 Plan, to employees of the Company for a term not to exceed ten years from the date of grant. The term may not exceed five years for incentive stock optionsstock-based awards are granted to employees of the Company possessing more than ten percent of the total combined voting power of all classes of stock of the Companyat an exercise price or any subsidiary of the Company. Options may also be grantedinitial value equal to the Company's outside directors for a term not to exceed ten years from the grant date. The 2000 Plan contains restrictions on transferability, time of exercise, exercise price and on disposition of any shares acquired through exercise of the options. Stock options were granted at not less than fair market value on the date of grant. The Board of Directors determines the 2000 Plan participants and establishes the terms and conditions of each option.
The terms and conditions of the shares granted under the 1991 Plan are similar to the 2000 Plan. The 1991 Plan terminated in 2001. All shares granted under the 1991 Plan have been exercised, forfeited, or cancelled as of June 30, 2011.
Common shares available for grant under the following plans as of June 30 were:
| 2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| (Shares in thousands) | |||||||||
2000 Plan | — | — | 4 | |||||||
2004 Plan | 4,838 | 4,209 | 12 | |||||||
4,838 | 4,209 | 16 | ||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. SHAREHOLDERS' EQUITY (Continued)
Stock options outstanding and weighted average exercise prices were as follows:
| Options Outstanding | ||||||
---|---|---|---|---|---|---|---|
| Shares | Weighted Average Exercise Price | |||||
| (in thousands) | | |||||
Balance, June 30, 2009 | 1,385 | $ | 25.55 | ||||
Granted | 135 | 18.90 | |||||
Cancelled | (337 | ) | 17.74 | ||||
Exercised | (203 | ) | 15.12 | ||||
Balance, June 30, 2010 | 980 | 29.48 | |||||
Granted | — | — | |||||
Cancelled | (96 | ) | 18.89 | ||||
Exercised | (46 | ) | 15.04 | ||||
Balance, June 30, 2011 | 838 | 31.48 | |||||
Granted | — | — | |||||
Cancelled | (186 | ) | 27.80 | ||||
Exercised | — | — | |||||
Balance, June 30, 2012 | 652 | $ | 32.53 | ||||
Exercisable June 30, 2012 | 593 | $ | 33.50 | ||||
Outstanding options of 651,578 at June 30, 2012 had an intrinsic value (the amount by which the stock price exceeded the exercise or grant date price) of zero and a weighted average remaining contractual term of 3.4 years. Exercisable options of 593,288 at June 30, 2012 had an intrinsic value of zero and a weighted average remaining contractual term of 3.0 years. Of the outstanding and unvested options and due to estimated forfeitures, 54,458 options are expected to vest with a $22.82 per share weighted average grant price and a weighted average remaining contractual life of 6.5 years that have a total intrinsic value of zero.
All options granted relate to stock option plans that have been approved by the shareholders of the Company. Stock options granted in fiscal year 2010 were granted under the 2000 and 2004 plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. SHAREHOLDERS' EQUITY (Continued)
A rollforward of RSAs, RSUs and SARs outstanding, as well as other relevant terms of the awards, were as follows:
| Restricted Stock Outstanding | SARs Outstanding | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Shares/Units | Weighted Average Grant Date Fair Value | Shares | Weighted Average Exercise Price | |||||||||
| (in thousands) | | (in thousands) | | |||||||||
Balance, June 30, 2009 | 1,032 | 26.33 | 1,114 | 26.30 | |||||||||
Granted | 304 | 19.12 | 2 | 28.57 | |||||||||
Cancelled | (2 | ) | 20.02 | (6 | ) | 38.63 | |||||||
Vested/Exercised | (188 | ) | 24.74 | — | — | ||||||||
Balance, June 30, 2010 | 1,146 | 24.70 | 1,110 | 26.24 | |||||||||
Granted | 277 | 16.60 | 103 | 16.60 | |||||||||
Cancelled | (118 | ) | 20.42 | (126 | ) | 24.35 | |||||||
Vested/Exercised | (228 | ) | 22.69 | — | — | ||||||||
Balance, June 30, 2011 | 1,077 | 23.48 | 1,087 | 25.54 | |||||||||
Granted | 97 | 16.94 | — | — | |||||||||
Forfeited or expired | (290 | ) | 19.07 | (352 | ) | 24.57 | |||||||
Vested/Exercised | (224 | ) | 20.58 | (1 | ) | 16.60 | |||||||
Balance, June 30, 2012 | 660 | $ | 25.44 | 734 | $ | 26.02 | |||||||
Outstanding and unvested RSAs of 403,120 at June 30, 2012 had an intrinsic value of $7.2 million and a weighted average remaining vesting term of 1.7 years. Due to estimated forfeitures, 366,864 awards are expected to vest with a total intrinsic value of $6.6 million.
Outstanding RSUs of 257,316 at June 30, 2012 had an intrinsic value of $4.6 million and a weighted average remaining vesting term of less than 0.1 years. Vested RSUs of 240,704 at June 30, 2012 had an intrinsic value of $4.3 million. Unvested RSUs of 16,612 at June 30, 2012 had an intrinsic value of $0.3 million and a weighted average remaining vesting term of 0.5 years. The payment of 215,000 vested RSUs is deferred until January 31, 2013. The payment of the remaining 25,704 vested RSUs is deferred six months after the respective award recipient is no longer an employee of the Company or serves on the Board of Directors.
Outstanding SARs of 733,800 at June 30, 2012 had a total intrinsic value of $0.1 million and a weighted average remaining contractual term of 3.8 years. Exercisable SARs of 579,790 at June 30, 2012 had a total intrinsic value of less than $0.1 million and a weighted average contractual term of 2.9 years. Of the outstanding and unvested rights and due to estimated forfeitures, 147,035 SARs are expected to vest with a $18.99 per share weighted average grant price, a weighted average remaining contractual life of 6.9 years and a total intrinsic value of $0.1 million.
During fiscal year 2011, the Company accelerated the vesting of 68,390 unvested RSAs held by the Company's former Chief Executive Officer and former Executive Vice President, Fashion and Education. Under the terms of the modifications, any unvested RSAs granted to the former Chief Executive Officer and former Executive Vice President, Fashion and Education fully vested on their last days of employment, which was February 8, 2012 and June 30, 2012, respectively. As a result of the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. SHAREHOLDERS' EQUITY (Continued)
modifications, the Company recognized an incremental compensation cost of $0.2 and less than $0.1 million during fiscal years 2012 and 2011, respectively.
Total cash received from the exercise of share-based instruments in fiscal years 2012, 2011 and 2010 was less than $0.1, $0.7, and $3.1 million, respectively.
As of June 30, 2012, the total unrecognized compensation cost related to all unvested stock-based compensation arrangements was $7.8 million. The related weighted average period over which such cost is expected to be recognized was approximately 2.6 years as of June 30, 2012.
The total intrinsic value of all stock-based compensation that was exercised during fiscal years 2012, 2011, and 2010 was less than $0.1, $0.2, and $0.7 million, respectively.
The total fair value of stock awards that vested and were distributed during fiscal years 2012, 2011, and 2010 was $4.8, $5.4, and $4.9 million, respectively.
Using the fair value of each grant on the date of grant, the weighted average fair values per stock-based compensation award granted during fiscal years 2013, 2012 2011 and 20102011 were as follows:
| 2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Stock options | $ | — | $ | — | $ | 7.36 | ||||
SARs | — | 6.26 | 8.60 | |||||||
Restricted stock awards | 16.15 | 16.60 | 19.12 | |||||||
Restricted stock units | 17.96 | — | — |
| 2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Stock options & SARs | 6.63 | N/A | 6.26 | |||||||
RSAs & RSUs | 17.40 | 16.94 | 16.60 | |||||||
PSUs | 18.33 | N/A | N/A |
The expense associated with the RSAfair value of stock options and RSU grantsSARs granted is basedestimated on the market price of the Company's stock at the date of grant.grant using a lattice option valuation model. The fair value of market-based RSUs is estimated on the date of grant using a Monte Carlo simulation model. The significant assumptions used in determining the underlyingestimated fair value on the date of grant of each stock optionoptions, SARs, and SAR grant issuedmarket-based RSUs granted during the fiscal years 2013, 2012, and 2011 and 2010 is presented below:were as follows:
| 2012 | 2011 | 2010 | 2013 | 2012 | 2011 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Risk-free interest rate | N/A | 2.29 | % | 2.79 | % | 0.66 - 0.87 | % | N/A | 2.29 | % | |||||||||
Expected term (in years) | N/A | 5.50 | 5.50 | 6.00 | N/A | 5.50 | |||||||||||||
Expected volatility | N/A | 44.00 | % | 42.00 | % | 44.00 - 47.00 | % | N/A | 44.00 | % | |||||||||
Expected dividend yield | N/A | 1.45 | % | 0.85 | % | 1.33 - 1.46 | % | N/A | 1.45 | % |
The risk free rate of return is determined based on the U.S. Treasury rates approximating the expected life of the stock options and SARs granted. Expected volatility is established based on historical volatility of the Company's stock price. Estimated expected life was based on an analysis of historical stock options granted data which included analyzing grant activity including grants exercised, expired, and canceled. The expected dividend yield is determined based on the Company's annual dividend amount as a percentage of the strike price at the time of the grant. The Company uses historical data to estimate pre-vesting forfeiture rates.
CompensationEffective July 1, 2013, the Company changed from the lattice option valuation model to the Black-Scholes-Merton (BSM) option valuation model for valuing SARs. The Company elected to make the change in valuation methodology because the Company's historical grants of SARs lacked any complex vesting conditions or maximum payout limitations on the value of the awards. The Company does not expect a material difference in future valuations as a result of the change in models.
Shares issued under the 2004 Plan and 2000 Plan are issued from new shares. As of June 30, 2013 there were 4,620,934 shares available for grant under the 2004 Plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. STOCK-BASED COMPENSATION (Continued)
Stock-based compensation expense, includedrecorded within General and Administrative expense in the Consolidated Statement of Operations, was as follows:
| 2013 | 2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
SARs & stock options | $ | 1,986 | $ | 1,447 | $ | 2,283 | ||||
RSAs, RSUs, & PSUs | 3,895 | 6,150 | 7,313 | |||||||
Total stock-based compensation expense | 5,881 | 7,597 | 9,596 | |||||||
Less: Income tax benefit | (2,235 | ) | (2,898 | ) | (3,670 | ) | ||||
Total stock-based compensation expense, net of tax | $ | 3,646 | $ | 4,699 | $ | 5,926 | ||||
Stock Appreciation Rights & Stock Options:
SARs and stock options granted under the 2004 Plan and 2000 Plan generally vest ratably over a three to five year period on each of the annual grant date anniversaries and expire ten years from the grant date. SARs granted subsequent to fiscal year 2012 vest ratably over a three year period.
Activity for all of our outstanding SARs and stock options is as follows:
| Shares (in thousands) | | | | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Weighted- Average Remaining Contractual Life | | |||||||||||||
| SARs | Stock Options | Weighted Average Exercise Price | Aggregate Intrinsic Value (in thousands) | ||||||||||||
Outstanding balance at June 30, 2012 | 734 | 652 | $ | 29.08 | ||||||||||||
Granted | 596 | — | 17.97 | |||||||||||||
Forfeited/Expired | (456 | ) | (220 | ) | 26.84 | |||||||||||
Exercised | (14 | ) | (3 | ) | 17.69 | |||||||||||
Outstanding balance at June 30, 2013 | 860 | 429 | $ | 25.26 | 5.6 | — | ||||||||||
Exercisable at June 30, 2013 | 325 | 413 | $ | 30.68 | 3.2 | — | ||||||||||
Unvested options, net of estimated forfeitures | 494 | 15 | $ | 18.01 | 8.8 | — | ||||||||||
The total intrinsic value, cash proceeds and income before income taxestax benefit associated with the exercise of SARs and stock options during fiscal years 2013, 2012 and 2011 were immaterial. As of June 30, 2013, there was $2.3 million of unrecognized expense related to stock- based compensation was $7.6, $9.6,SARs and $9.3 millionstock options that is to be recognized over a weighted-average period of 2.1 years.
Restricted Stock Awards & Restricted Stock Units:
RSAs and RSUs granted to employees under the 2004 Plan generally vest ratably over a three to five year period on each of the annual grant date anniversaries or vest entirely after a five year period. In addition, the Company has an outstanding RSU grant to its Chief Executive Officer that vests upon the achievement of a specified value for the three years endedCompany's stock over a specified period of time. RSUs granted to non-employee directors under the 2004 Plan generally vest in equal monthly amounts over a one year period from the Company's previous annual shareholder meeting date. Distributions on vested RSUs granted to non-employee directors are deferred until the director's board service ends.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. STOCK-BASED COMPENSATION (Continued)
Activity for all of our RSAs and RSUs is as follows:
| Shares/Units (in thousands) | | | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Weighted Average Grant Date Fair Value | | |||||||||||
| Aggregate Intrinsic Value (in thousands) | ||||||||||||
| RSAs | RSUs | |||||||||||
Outstanding balance at June 30, 2012 | 403 | 257 | $ | 25.44 | |||||||||
Granted | 118 | 232 | 17.40 | ||||||||||
Forfeited | (84 | ) | (23 | ) | 18.24 | ||||||||
Vested | (122 | ) | (216 | ) | 32.77 | ||||||||
Outstanding balance at June 30, 2013 | 315 | 250 | $ | 17.46 | $ | 9,276 | |||||||
Vested at June 30, 2013 | — | 70 | $ | 17.70 | $ | 1,142 | |||||||
Unvested awards, net of estimated forfeitures | 300 | 160 | $ | 17.43 | $ | 7,554 | |||||||
As of June 30, 2012, 2011,2013, there was $6.5 million of unrecognized expense related to RSAs and 2010, respectively.RSUs that is expected to be recognized over a weighted-average period of 2.6 years.
Performance Share Units:
PSUs represent shares potentially issuable in the future. Issuance is based upon the relative achievement of the Company's performance goals. PSUs granted to employees under the 2004 Plan generally cliff vest after two years following a one year performance period.
For PSUs granted in the fiscal year 2013, the Company's performance goals related to achieving specified levels of same-store sales and earnings before interest, taxes, depreciation and amortization, as adjusted, for fiscal year 2013. As the Company did not achieve thresholds related to performance goals for fiscal year 2013, no PSUs were earned during fiscal year 2013. As of June 30, 2013 there was no unrecognized expense related to PSUs.
13. SHAREHOLDERS' EQUITY
Authorized Shares and Designation of Preferred Class:
�� The Company has 100 million shares of capital stock authorized, par value $0.05, of which all outstanding shares, and shares available under the Stock Option Plans, have been designated as common.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. SHAREHOLDERS' EQUITY (Continued)
In addition, 250,000 shares of authorized capital stock have been designated as Series A Junior Participating Preferred Stock (preferred stock). None of the preferred stock has been issued.
Shareholders' Rights Plan:
The Company has a shareholders' rights plan pursuant to which one preferred share purchase right is held by shareholders for each outstanding share of common stock. The rights become exercisable only following the acquisition by a person or group, without the prior consent of the Board of Directors, of 15.020.0 percent or more of the Company's voting stock, or following the announcement of a tender offer or exchange offer to acquire an interest of 15.020.0 percent or more. If the rights become exercisable, they entitle all holders, except the takeover bidder, to purchase one one-thousandth of a share of preferred stock at an exercise price of $140, subject to adjustment, or in lieu of purchasing the preferred stock, to purchase for the same exercise price common stock of the Company (or in certain cases common stock of an acquiring company) having a market value of twice the exercise price of a right.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. SHAREHOLDERS' EQUITY (Continued)
Share Repurchase Program:
In May 2000, the Company's Board of Directors (BOD) approved a stock repurchase program. Originally, the program authorized up to $50.0 million to be expended for the repurchase of the Company's stock. The BOD elected to increase this maximum to $100.0 million in August 2003, to $200.0 million on May 3, 2005, and to $300.0 million on April 26, 2007. The timing and amounts of any repurchases will depend on many factors, including the market price of the common stock and overall market conditions. Historically, the repurchases to date have been made primarily to eliminate the dilutive effect of shares issued in conjunction with acquisitions, restricted stock grants and stock option exercises. All repurchased shares become authorized but unissued shares of the Company. This repurchase program has no stated expiration date. As of June 30, 2012, 2011, and 2010,2013, a total accumulated 6.87.7 million shares have been repurchased for $226.5$241.3 million. As of June 30, 2012, $73.52013, $58.7 million remains to be spent on share repurchasesoutstanding under thisthe approved stock repurchase program.
15.Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income are as follows:
| June 30, | ||||||
---|---|---|---|---|---|---|---|
| 2013 | 2012 | |||||
| (Dollars in thousands) | ||||||
Foreign currency translation | $ | 20,434 | $ | 55,628 | |||
Unrealized gains (losses) on derivatives | — | 21 | |||||
Unrealized gain (loss) on deferred compensation contracts | 122 | (535 | ) | ||||
Accumulated other comprehensive income | $ | 20,556 | $ | 55,114 | |||
14. SEGMENT INFORMATION
As of June 30, 2012,2013, the Company owned, franchised, or held ownership interests in approximately 12,600 worldwide locations.9,763 locations worldwide. The Company's locations consisted of 9,3409,166 North American salons, including 2,082 franchised salons (located in the U.S.,United States, Canada and Puerto Rico), 398351 international salons 98 hair restoration centers,(located primarily in the United Kingdom), and 2,811approximately 246 locations in which the Company maintains a non-controllingan ownership interest through its investmentsthe Company's investment in affiliates. See Note 5 to the Consolidated Financial Statements for discussion of the Company's investment in affiliates.
Based on the way the Company manages its business, it has reported its North American salons and international salons as two separate reportable segments. The accounting policies of the reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements.
The Company operates its North American salon operations through five primary concepts: SmartStyle, Supercuts, MasterCuts, Regis Salons, MasterCuts, SmartStyle, Supercuts and Promenade salons. The concepts offer similar products and services, concentrate on the mass market consumer marketplace and have consistent distribution channels. All of the company-owned and franchise salons within the North American salon concepts are located in high traffic, retail shopping locations that attract mass market consumers, and the individual salons display similar long-term economic characteristics. The salons share interdependencies and a common support base.
The Company operates its International salon operations, primarily in the United Kingdom, through three primary concepts: Regis, Supercuts, and Sassoon salons. Consistent with the North American concepts, the international concepts offer similar products and services, concentrate on the mass market and have consistent distribution channels. All of the international salon concepts are
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15.14. SEGMENT INFORMATION (Continued)
mass market consumer marketplace and have consistent distribution channels. All of the international salon concepts are company-owned and are located in malls, leading department stores, and high-streethigh-traffic locations. Individual salons display similar long-term economic characteristics. The salons share interdependencies and a common support base.
The Company's company-owned and franchise hair restoration centers are located in the U.S. and Canada. The Company's hair restoration centers offer three hair restoration solutions; hair systems, hair transplants, and hair therapy, which are targeted at the mass market consumer. Hair restoration centers are located primarily in office and professional buildings within larger metropolitan areas.
Based on the way the Company manages its business, it has reported its North American salons, International salons, and Hair Restoration Centers as three separate reportable segments.
The accounting policies of the reportable operating segments are the same as those described in Note 1 to the Consolidated Financial Statements. Intersegment sales and transfers are not significant. Summarized financial information concerning the Company's reportable operating segments is shown in the following tabletable:
| Fiscal Years | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | |||||||
| (Dollars in thousands) | |||||||||
Revenues(1): | ||||||||||
North American Salons | $ | 1,889,401 | $ | 1,981,105 | $ | 2,029,944 | ||||
International Salons | 129,312 | 141,122 | 150,237 | |||||||
$ | 2,018,713 | $ | 2,122,227 | $ | 2,180,181 | |||||
Depreciation and amortization expense(1): | ||||||||||
North American Salons | $ | 72,257 | $ | 71,253 | $ | 72,207 | ||||
International Salons | 5,222 | 5,297 | 4,750 | |||||||
Total segment depreciation and amortization expense | 77,479 | 76,550 | 76,957 | |||||||
Unallocated Corporate | 14,276 | 28,420 | 15,194 | |||||||
$ | 91,755 | $ | 104,970 | $ | 92,151 | |||||
Operating income (loss)(1): | ||||||||||
North American Salons(2) | $ | 127,253 | $ | 139,974 | $ | 139,957 | ||||
International Salons | (1,380 | ) | 2,505 | 6,738 | ||||||
Total segment operating income | 125,873 | 142,479 | 146,695 | |||||||
Unallocated Corporate | (113,547 | ) | (144,646 | ) | (160,977 | ) | ||||
Operating income (loss)(1) | $ | 12,326 | $ | (2,167 | ) | $ | (14,282 | ) | ||
Interest expense | (37,594 | ) | (28,245 | ) | (34,374 | ) | ||||
Interest income and other, net | 35,366 | 5,098 | 4,723 | |||||||
Income (loss) from continuing operations before income taxes and equity in income (loss) of affiliated companies | $ | 10,098 | $ | (25,314 | ) | $ | (43,933 | ) | ||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. SEGMENT INFORMATION (Continued)
Total revenues and property and equipment, net associated with business operations in the U.S. and all other countries in aggregate were as follows:
| For the Year Ended June 30, 2012 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Salons | | | | ||||||||||||
| Hair Restoration Centers | Unallocated Corporate | | |||||||||||||
| North America | International | Consolidated | |||||||||||||
| (Dollars in thousands) | |||||||||||||||
Revenues: | ||||||||||||||||
Service | $ | 1,541,491 | $ | 102,400 | $ | 68,812 | $ | — | $ | 1,712,703 | ||||||
Product | 401,326 | 38,722 | 80,419 | — | 520,467 | |||||||||||
Royalties and fees | 38,288 | — | 2,321 | — | 40,609 | |||||||||||
1,981,105 | 141,122 | 151,552 | — | 2,273,779 | ||||||||||||
Operating expenses: | ||||||||||||||||
Cost of service | 888,777 | 53,684 | 42,693 | — | 985,154 | |||||||||||
Cost of product | 201,625 | 20,010 | 28,020 | — | 249,655 | |||||||||||
Site operating expenses | 182,524 | 9,722 | 6,479 | — | 198,725 | |||||||||||
General and administrative | 113,952 | 12,024 | 36,436 | 140,160 | 302,572 | |||||||||||
Rent | 292,192 | 37,880 | 9,036 | 1,697 | 340,805 | |||||||||||
Depreciation and amortization | 68,983 | 5,297 | 13,101 | 30,690 | 118,071 | |||||||||||
Goodwill impairment | 67,684 | — | 78,426 | — | 146,110 | |||||||||||
Total operating expenses | 1,815,737 | 138,617 | 214,191 | 172,547 | 2,341,092 | |||||||||||
Operating income (loss) | 165,368 | 2,505 | (62,639 | ) | (172,547 | ) | (67,313 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest expense | — | — | — | (28,245 | ) | (28,245 | ) | |||||||||
Interest income and other, net | — | — | — | 5,130 | 5,130 | |||||||||||
Income (loss) from continuing operations before income taxes and equity in (loss) income of affiliated companies | $ | 165,368 | $ | 2,505 | $ | (62,639 | ) | $ | (195,662 | ) | $ | (90,428 | ) | |||
| June 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2012 | 2011 | ||||||||||||||||
| Total Revenues | Property and Equipment, Net | Total Revenues | Property and Equipment, Net | Total Revenues | Property and Equipment, Net | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
U.S. | $ | 1,737,517 | $ | 285,111 | $ | 1,815,797 | $ | 274,711 | $ | 1,861,354 | $ | 296,622 | |||||||
Other countries | 281,196 | 28,349 | 306,430 | 31,088 | 318,827 | 33,405 | |||||||||||||
Total | $ | 2,018,713 | $ | 313,460 | $ | 2,122,227 | $ | 305,799 | $ | 2,180,181 | $ | 330,027 | |||||||
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data for fiscal years 2013 and 2012 follows:
| Quarter Ended | | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30(e) | December 31 | March 31 | June 30(f) | Year Ended | |||||||||||
| (Dollars in thousands, except per share amounts) | |||||||||||||||
2013 | ||||||||||||||||
Revenues | $ | 505,360 | $ | 506,165 | $ | 504,937 | $ | 502,251 | $ | 2,018,713 | ||||||
Cost of service and product revenues, excluding depreciation and amortization | 285,660 | 289,329 | 287,597 | 296,678 | 1,159,264 | |||||||||||
Operating income (loss)(a) | 9,273 | 8,723 | 3,308 | (8,978 | ) | 12,326 | ||||||||||
Income (loss) from continuing operations(a)(b) | 34,647 | (16,119 | ) | 896 | (15,258 | ) | 4,166 | |||||||||
Income from discontinued operations(c) | 3,777 | 3,853 | 1,465 | 15,933 | 25,028 | |||||||||||
Net income (loss)(a)(b)(c) | 38,424 | (12,266 | ) | 2,361 | 675 | 29,194 | ||||||||||
Income (loss) from continuing operations per share, basic | 0.60 | (0.28 | ) | 0.02 | (0.27 | ) | 0.07 | |||||||||
Income from discontinued operations per share, basic(d) | 0.07 | 0.07 | 0.03 | 0.28 | 0.44 | |||||||||||
Net income (loss) per basic share(d) | 0.67 | (0.22 | ) | 0.04 | 0.01 | 0.51 | ||||||||||
Income (loss) from continuing operations per share, diluted(d) | 0.54 | (0.28 | ) | 0.02 | (0.27 | ) | 0.07 | |||||||||
Income from discontinued operations per share, diluted | 0.06 | 0.07 | 0.03 | 0.28 | 0.44 | |||||||||||
Net income (loss) per diluted share(d) | 0.59 | (0.22 | ) | 0.04 | 0.01 | 0.51 | ||||||||||
Dividends declared per share | 0.06 | 0.06 | 0.06 | 0.06 | 0.24 |
Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 in this Form 10-K for explanations of items, which impacted fiscal year 2013 revenues, operating and net income (loss).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. SEGMENT INFORMATION (Continued)
| For the Year Ended June 30, 2011 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Salons | | | | ||||||||||||
| Hair Restoration Centers | Unallocated Corporate | | |||||||||||||
| North America | International | Consolidated | |||||||||||||
| (Dollars in thousands) | |||||||||||||||
Revenues: | ||||||||||||||||
Service | $ | 1,588,690 | $ | 106,734 | $ | 67,550 | $ | — | $ | 1,762,974 | ||||||
Product | 403,962 | 43,503 | 75,729 | — | 523,194 | |||||||||||
Royalties and fees | 37,292 | — | 2,409 | — | 39,701 | |||||||||||
2,029,944 | 150,237 | 145,688 | — | 2,325,869 | ||||||||||||
Operating expenses: | ||||||||||||||||
Cost of service | 919,526 | 54,213 | 39,129 | — | 1,012,868 | |||||||||||
Cost of product | 201,560 | 23,631 | 24,788 | — | 249,979 | |||||||||||
Site operating expenses | 183,552 | 9,852 | 4,318 | — | 197,722 | |||||||||||
General and administrative | 122,281 | 12,630 | 37,038 | 167,908 | 339,857 | |||||||||||
Rent | 292,479 | 38,423 | 9,227 | 2,157 | 342,286 | |||||||||||
Depreciation and amortization | 69,763 | 4,750 | 12,958 | 17,638 | 105,109 | |||||||||||
Goodwill impairment | 74,100 | — | — | — | 74,100 | |||||||||||
Lease termination costs | — | — | — | — | — | |||||||||||
Total operating expenses | 1,863,261 | 143,499 | 127,458 | 187,703 | 2,321,921 | |||||||||||
Operating income (loss) | 166,683 | 6,738 | 18,230 | (187,703 | ) | 3,948 | ||||||||||
Other income (expense): | ||||||||||||||||
Interest expense | — | — | — | (34,388 | ) | (34,388 | ) | |||||||||
Interest income and other, net | — | — | — | 4,811 | 4,811 | |||||||||||
Income (loss) from continuing operations before income taxes and equity in (loss) income of affiliated companies | $ | 166,683 | $ | 6,738 | $ | 18,230 | $ | (217,280 | ) | $ | (25,629 | ) | ||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. SEGMENT INFORMATION (Continued)
| For the Year Ended June 30, 2010 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Salons | | | | ||||||||||||
| Hair Restoration Centers | Unallocated Corporate | | |||||||||||||
| North America | International | Consolidated | |||||||||||||
| (Dollars in thousands) | |||||||||||||||
Revenues: | ||||||||||||||||
Service | $ | 1,605,979 | $ | 111,833 | $ | 66,325 | $ | — | $ | 1,784,137 | ||||||
Product | 417,363 | 44,252 | 72,978 | — | 534,593 | |||||||||||
Royalties and fees | 37,221 | — | 2,483 | — | 39,704 | |||||||||||
2,060,563 | 156,085 | 141,786 | — | 2,358,434 | ||||||||||||
Operating expenses: | ||||||||||||||||
Cost of service | 920,905 | 57,657 | 37,158 | — | 1,015,720 | |||||||||||
Cost of product | 219,745 | 22,570 | 21,568 | — | 263,883 | |||||||||||
Site operating expenses | 183,881 | 10,152 | 5,305 | — | 199,338 | |||||||||||
General and administrative | 113,956 | 13,115 | 36,207 | 128,713 | 291,991 | |||||||||||
Rent | 294,263 | 38,681 | 9,013 | 2,141 | 344,098 | |||||||||||
Depreciation and amortization | 72,681 | 4,986 | 12,198 | 18,899 | 108,764 | |||||||||||
Goodwill impairment | 35,277 | — | — | — | 35,277 | |||||||||||
Lease termination costs | — | 2,145 | — | — | 2,145 | |||||||||||
Total operating expenses | 1,840,708 | 149,306 | 121,449 | 149,753 | 2,261,216 | |||||||||||
Operating income (loss) | 219,855 | 6,779 | 20,337 | (149,753 | ) | 97,218 | ||||||||||
Other income (expense): | ||||||||||||||||
Interest expense | — | — | — | (54,414 | ) | (54,414 | ) | |||||||||
Interest income and other, net | — | — | — | 10,410 | 10,410 | |||||||||||
Income (loss) from continuing operations before income taxes and equity in (loss) income of affiliated companies | $ | 219,855 | $ | 6,779 | $ | 20,337 | $ | (193,757 | ) | $ | 53,214 | |||||
Total revenues and long-lived assets associated with business operations in the U.S. and all other countries in aggregate were as follows:
| Year Ended June 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2011 | 2010 | ||||||||||||||||
| Total Revenues | Long-lived Assets | Total Revenues | Long-lived Assets | Total Revenues | Long-lived Assets | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
U.S. | $ | 1,967,349 | $ | 291,972 | $ | 2,007,042 | $ | 314,406 | $ | 2,055,059 | $ | 327,753 | |||||||
Other countries | 306,430 | 31,088 | 318,827 | 33,405 | 303,375 | 31,497 | |||||||||||||
Total | $ | 2,273,779 | $ | 323,060 | $ | 2,325,869 | $ | 347,811 | $ | 2,358,434 | $ | 359,250 | |||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
Summarized quarterly data for fiscal years 2012 and 2011 follows:
| Quarter Ended | | Quarter Ended | | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30 | December 31 | March 31 | June 30 | Year Ended | September 30 | December 31 | March 31 | June 30 | Year Ended | ||||||||||||||||||||||
| (Dollars in thousands, except per share amounts) | (Dollars in thousands, except per share amounts) | ||||||||||||||||||||||||||||||
2012 | ||||||||||||||||||||||||||||||||
Revenues | $ | 568,749 | $ | 563,278 | $ | 573,584 | $ | 568,168 | $ | 2,273,779 | $ | 531,346 | $ | 526,138 | $ | 535,901 | $ | 528,842 | $ | 2,122,227 | ||||||||||||
Gross margin, excluding royalties and depreciation | 252,627 | 247,697 | 249,010 | 249,027 | 998,361 | |||||||||||||||||||||||||||
Cost of service and product revenues, excluding depreciation and amortization | 288,688 | 288,399 | 296,277 | 289,942 | 1,163,306 | |||||||||||||||||||||||||||
Operating income (loss)(a) | 13,072 | (61,617 | ) | 25,200 | (43,968 | ) | (67,313 | ) | 9,004 | 11,936 | 22,950 | (46,057 | ) | (2,167 | ) | |||||||||||||||||
Income (loss) from continuing operations(a)(b) | 8,337 | (57,427 | ) | (2,468 | ) | (63,634 | ) | (115,192 | ) | 5,622 | 11,900 | (3,878 | ) | (65,387 | ) | (51,743 | ) | |||||||||||||||
Income (loss) from discontinued operations(c) | — | — | 1,099 | — | 1,099 | 2,715 | (69,327 | ) | 2,509 | 1,753 | (62,350 | ) | ||||||||||||||||||||
Net income (loss) | 8,337 | (57,427 | ) | (1,369 | ) | (63,634 | ) | (114,093 | ) | 8,337 | (57,427 | ) | (1,369 | ) | (63,634 | ) | (114,093 | ) | ||||||||||||||
Income (loss) from continuing operations per share, basic | 0.15 | (1.01 | ) | (0.04 | ) | (1.11 | ) | (2.02 | ) | 0.10 | 0.21 | (0.07 | ) | (1.14 | ) | (0.91 | ) | |||||||||||||||
Income from discontinued operations per share, basic | — | — | 0.02 | — | 0.02 | |||||||||||||||||||||||||||
Income (loss) from discontinued operations per share, basic | 0.05 | (1.22 | ) | 0.04 | 0.03 | (1.09 | ) | |||||||||||||||||||||||||
Net income (loss) per basic share | 0.15 | (1.01 | ) | (0.02 | ) | (1.11 | ) | (2.00 | ) | 0.15 | (1.01 | ) | (0.02 | ) | (1.11 | ) | (2.00 | ) | ||||||||||||||
Income (loss) from continuing operations per share, diluted | 0.15 | (1.01 | ) | (0.04 | ) | (1.11 | ) | (2.02 | ) | 0.10 | 0.20 | (0.07 | ) | (1.14 | ) | (0.91 | ) | |||||||||||||||
Income (loss) from discontinued operations per share, diluted | — | — | 0.02 | — | 0.02 | 0.05 | (1.01 | ) | 0.04 | 0.03 | (1.09 | ) | ||||||||||||||||||||
Net income (loss) per diluted share | 0.15 | (1.01 | ) | (0.02 | ) | (1.11 | ) | (2.00 | ) | 0.15 | (0.81 | ) | (0.02 | ) | (1.11 | ) | (2.00 | ) | ||||||||||||||
Dividends declared per share | 0.06 | 0.06 | 0.06 | 0.06 | 0.24 | 0.06 | 0.06 | 0.06 | 0.06 | 0.24 |
Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 67 in this Form 10-K for explanations of items, which impacted fiscal year 2012 revenues, operating and net income (loss).
| Quarter Ended | | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30 | December 31 | March 31 | June 30 | Year Ended | |||||||||||
| (Dollars in thousands, except per share amounts) | |||||||||||||||
2011 | ||||||||||||||||
Revenues | $ | 578,245 | $ | 574,372 | $ | 581,267 | $ | 591,985 | $ | 2,325,869 | ||||||
Gross margin, excluding royalties and depreciation | 257,558 | 251,132 | 253,017 | 261,614 | 1,023,321 | |||||||||||
Operating income (loss)(a)(d) | 33,434 | 22,864 | (59,504 | ) | 7,154 | 3,948 | ||||||||||
Income (loss) from continuing operations(a)(d)(e) | 18,320 | 14,505 | (25,335 | ) | (16,395 | ) | (8,905 | ) | ||||||||
Net income (loss)(a)(d)(e) | 18,320 | 14,505 | (25,335 | ) | (16,395 | ) | (8,905 | ) | ||||||||
Income (loss) from continuing operations per share, basic | 0.32 | 0.26 | (0.45 | ) | (0.29 | ) | (0.16 | ) | ||||||||
Net income (loss) per basic share | 0.32 | 0.26 | (0.45 | ) | (0.29 | ) | (0.16 | ) | ||||||||
Income (loss) from continuing operations per share, diluted | 0.30 | 0.24 | (0.45 | ) | (0.29 | ) | (0.16 | ) | ||||||||
Net income (loss) per diluted share | 0.30 | 0.24 | (0.45 | ) | (0.29 | ) | (0.16 | ) | ||||||||
Dividends declared per share | 0.04 | 0.04 | 0.06 | 0.06 | 0.20 |
Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 6 in this Form 10-K for explanations of items, which impacted fiscal year 2011 revenues, operating and net income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
17. SUBSEQUENT EVENTS
On July 11, 2012,
On July 13, 2012, the Company entered into a definitive agreement to sell Hair Club to Aderans, Co., Ltd. for cash of $163.5 million excluding closing adjustments and transaction fees. Subsequent to fiscal year 2012, the net assets of Hair Club to be sold met the accounting criteria to be classified as held for sale and will be aggregated and reported in accordance with authoritative guidance in the Company's fiscal year 2013, firstthe Company identified certain errors that related to prior periods. The errors related to an understatement of interest expense and certain uncertain tax positions in prior periods. Because these errors are not material to the Company's consolidated financial statements for any prior periods, the current year fourth quarter, Form 10-Q. Theor fiscal 2013, the Company is currently anticipating recognizingrecorded a gain upon closing ofcumulative adjustment to correct the deal. The transaction is expected to close inerrors during the first or second fiscalfourth quarter of 2013,fiscal 2013. The impact of these items on the Company's Consolidated Statement of Operations increased interest expense by $0.4 million, increased income tax expense by $0.3 million and is subject to customary closing conditions.
On July 17, 2012, Mr. Daniel G. Beltzman was appointed to the Board of Directors of the Company, effective August 1, 2012.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our Disclosure Committee, consisting of certain members of management, assists in this evaluation. The Disclosure Committee meets on a quarterly basis and more often if necessary.
With the participation of management, the Company's chief executive officer and chief financial officer evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-5(e) and 15d-15(e) promulgated under the Exchange Act) at the conclusion of the period ended June 30, 2012.2013. Based upon this evaluation, the chief executive officer and chief financial officer concluded that the Company's disclosure controls and procedures were effective.
Management's Report on Internal Control over Financial Reporting
In Part II, Item 8 above, management provided a report on internal control over financial reporting, in which management concluded that the Company's internal control over financial reporting was effective as of June 30, 2012.2013. In addition, PricewaterhouseCoopers LLP, the Company's independent registered public accounting firm, provided a report on the Company's effectiveness of internal control over financial reporting. The full text of management's report and PricewaterhouseCoopers' report appears on pages 7744 and 7845 herein.
Changes in Internal Controls
Based on management's most recent evaluationDuring the fourth quarter of fiscal year 2013, the Company made substantial progress with the implementation of a new POS system for our salon operations. The Company expects to complete this implementation over the course of the Company'snext fiscal year. Management has taken the necessary steps to monitor and maintain appropriate internal control over financial reporting, management determined thatcontrols during this period of change and will continue to evaluate the operating effectiveness of related key controls during subsequent periods. With the exception of the implementation of the system described above, there were no other changes in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter.
None.
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding the Directors of the Company and Exchange Act Section 16(a) filings will be set forth in the sections titled "Item 1—Election of Directors", "Corporate Governance" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's 20122013 Proxy, and is incorporated herein by reference. The information required by Item 401 of Regulation S-K regarding the Company's executive officers is included under "Executive Officers" in Item 1 of this Annual Report on Form 10-K. Additionally, information regarding the Company's audit committee and audit committee financial expert, as well nominating committee functions, will be set forth in the section titled "Committees of the Board" and shareholder communications with directors will be set forth in the section titled "Communications with the Board" of the Company's 20122013 Proxy Statement, and is incorporated herein by reference.
The Company has adopted a code of ethics, known as the Code of Business Conduct & Ethics that applies to all employees, including the Company's chief executive officer, chief financial officer, directors and executive officers. The Code of Business Conduct & Ethics is available on the Company's website atwww.regiscorp.com, under the heading "Corporate Governance / Guidelines" (within the "Investor Information" section). The Company intends to disclose any substantive amendments to, or waivers from, its Code of Business Conduct & Ethics on its website or in a report on Form 8-K. In addition, the charters of the Company's Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee and the Company's Corporate Governance Guidelines may be found on the Company's website. Copies of any of these documents are available upon request to any shareholder of the Company by writing to the Company's Secretary at Regis Corporation, 7201 Metro Boulevard, Edina, Minnesota 55439.
Item 11. Executive Compensation
Information about Executive and director compensation will be set forth in the section titled "Executive Compensation" of the Company's 20122013 Proxy Statement, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding the Company's equity compensation plans will be set forth in the section titled "Equity Compensation Plan Information" of the Company's 20122013 Proxy Statement, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding certain relationships and related transactions will be set forth in the section titled "Certain Relationships and Related Transactions" of the Company's 20122013 Proxy Statement, and is incorporated herein by reference. Information regarding director independence will be set forth in the section titled "Corporate Governance—Director Independence" of the Company's 20122013 Proxy Statement, and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
A description of the fees paid to the independent registered public accounting firm will be set forth in the section titled "Item 2—Ratification of Appointment of Independent Registered Public Accounting Firm" of the Company's 20122013 Proxy Statement and is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
Consolidated Financial Statements filed as part of this report are listed under Part II, Item 8 of this Form 10-K.
The exhibits listed in the accompanying index are filed as part of this report. Except where otherwise indicated below, the SEC file number for each report and registration statement from which the exhibits are incorporated by reference is 1-12725.
Exhibit Number/Description
) | Contribution Agreement, dated April 18, 2007, between the Company and Empire Beauty School Inc. (Incorporated by reference to Exhibit 2.1 of the Company's Report on Form 8-K filed on April 24, 2007.) | ||
Stock Purchase Agreement dated as of January 26, 2009 between Regis Corporation, Trade Secret, Inc. and Premier Salons Beauty Inc. (Incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K filed on January 27, 2009.) | |||
) | Share Purchase Agreement, dated as of April 9, 2012, between Regis Merger S.A.R.L. and Mr. Yvon Provost, Mrs. Olivia Provost and Mr. Fabien Provost. (Incorporated by reference to Exhibit 2.1 of the Company's Report on Form 8-K filed on April 13, 2012.) | ||
) | Stock Purchase Agreement, dated as of July 13, 2012, between Regis Corporation and Aderans Co., Ltd. (Incorporated by reference to Exhibit 10.1 of the Company's Report on Form 8-K filed on July 17, 2012). | ||
) | Election of the Company to become governed by Minnesota Statutes Chapter 302A and Restated Articles of Incorporation of the Company, dated March 11, 1983; Articles of Amendment to Restated Articles of Incorporation, dated October 29, 1984; Articles of Amendment to Restated Articles of Incorporation, dated August 14, 1987; Articles of Amendment to Restated Articles of Incorporation, dated October 21, 1987; Articles of Amendment to Restated Articles of Incorporation, dated November 20, 1996; Articles of Amendment to Restated Articles of Incorporation, dated July 25, 2000. (Incorporated by reference to Exhibit 3(a) of the Company's Report on Form 10-Q filed on February 8, 2006, for the quarter ended December 31, 2005.) | ||
) | By-Laws of the Company. (Incorporated by reference to Exhibit 3.1 of the Company's Report on Form 8-K filed on October 31, 2006.) | ||
) | Certificate of the Voting Powers, Designations, Preferences and Relative Participating, Optional and Other Special Rights and Qualifications, Limitations or Restrictions of Series A Junior Participating Preferred Stock of the Company. (Attached as Exhibit A to the Rights Agreement dated December 26, 2006, and incorporated by reference to Exhibit 2 of the Company's Registration Statement on Form 8-A12B filed on December 26, 2006.) | ||
) | Shareholder Rights Agreement, dated December 23, 1996, between the Company and Norwest Bank Minnesota, N.A. as Rights Agent. (Incorporated by reference to Exhibit 4 of the Company's Report on Form 8-A12G filed on February 4, 1997.) | ||
) | Rights Agreement, dated December 26, 2006, between the Company and Wells Fargo Bank, N.A., as Rights Agent, and Form of Right Certificate attached as Exhibit B to the Rights Agreement. (Incorporated by reference to Exhibits 1 and 3 of the Company's Registration Statement on Form 8-A12B, filed on December 26, 2006.) | ||
) | Amendment No. | ||
) | Form of Stock Certificate. (Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-1 (Reg. No. 40142).) | ||
) | Indenture dated July 14, 2009 by and between the Company and Wells Fargo Bank, N.A, as Trustee (Incorporated by reference to Exhibit 4.1 of the Company's Report on Form 8-K filed July 17, 2009.) | ||
Lease Agreement commencing October 1, 2005, between the Company and France Edina, Property, LLP. (Incorporated by reference to Exhibit 99 of the Company's Report on Form 8-K filed on May 6, 2005.) |
(*) | |||
(*) | Short Term Incentive Compensation Plan, effective August 19, 2009. (Incorporated by reference to Appendix A of the Company's Proxy Statement on Form 14A filed on September 15, 2009, for the year ended June 30, 2009.) | ||
) | Consulting Agreement, dated April 18, 2007, between the Company and Empire Beauty School Inc. (Incorporated by reference to Exhibit 10.1 of the Company's Report on Form 8-K filed on April 24, 2007.) | ||
(*) | Regis Corporation Executive Retirement Savings Plan Adoption Agreement and Trust Agreement, dated November 15, 2008 between the Company and Fidelity Management Trust Company (The CORPORATE Plan for Retirement EXECUTIVE PLAN basic plan document is incorporated by reference to Exhibit 10(c) to the Company's Report on Form 10-K filed on August 29, 2007, for the year ended June 30, 2007). (Incorporated by reference to Exhibit 10(a) of the Company's Report on Form 10-Q filed February 9, 2009.) | ||
(*) | Employment Agreement, | ||
(*) | Employment Agreement, | ||
(*) | Form of Amended and Restated Senior Officer Employment and Deferred Compensation Agreement, dated | ||
(*) | 2004 Long Term Incentive Plan as Amended and Restated, effective October 28, 2011, (Incorporated by reference to Appendix A of the Company's Report on Form DEF14A filed September 14, 2010.) |
) | |||
21 | List of Subsidiaries of Regis Corporation | ||
23 | Consent of PricewaterhouseCoopers LLP | ||
31.1 | Chief Executive Officer of the Company: Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.2 | |||
Chief Executive Officer | |||
101.INS | (**) | XBRL Instance Document | |
101.SCH | (**) | XBRL Taxonomy Extension Schema | |
101.CAL | (**) | XBRL Taxonomy Extension Calculation Linkbase | |
101.LAB | (**) | XBRL Taxonomy Extension Label Linkbase | |
101.PRE | (**) | XBRL Taxonomy Extension Presentation Linkbase | |
101.DEF | (**) | XBRL Taxonomy Extension Definition Linkbase |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REGIS CORPORATION | ||||
By | /s/ DANIEL J. HANRAHAN Daniel J. Hanrahan, President and Chief Executive Officer (Principal Executive Officer) | |||
By | /s/ Chief Financial Officer (Principal Financial and Accounting Officer) | |||
DATE: August |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Chairman of the Board of Directors | Date: August | |
/s/ DANIEL J. HANRAHAN Daniel J. Hanrahan, Director | Date: August | |
/s/ JOSEPH L. CONNER Joseph L. Conner, Director | Date: August 27, 2013 | |
/s/ DANIEL G. BELTZMAN Daniel G. Beltzman, Director | Date: August | |
/s/ JAMES P. FOGARTY James P. Fogarty, Director | Date: August | |
/s/ MICHAEL J. MERRIMAN Michael J. Merriman, Director | Date: August 27, 2013 | |
/s/ JEFFREY C. SMITH Jeffrey C. Smith, | ||
Date: August | ||
/s/ DAVID P. WILLIAMS David P. Williams, Director | Date: August |