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.
In October 2017, the Company sold substantially all of its mall-based salon business in North America, representing 858 company-owned salons, and substantially all of its International segment, representing approximately 250 company-owned salons, to TBG. In the second quarter of fiscal year 2020, TBG who operates these locations as franchise locations.transferred 207 of its North American salons to the Company. See Note 23 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K, as the results of operations for the mall-based business and International segment are accounted for as a discontinued operationoperations for all periods presented. Discontinued operations are discussed atThe overall goal of the end of this section.
Fluctuations in major revenue categories, operating expenses and other income and expense were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Years |
| 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| (Dollars in millions) | | (Decrease) Increase |
Total revenue | $ | 1,104.0 |
| | $ | 1,189.5 |
| | $ | 1,213.0 |
| | $ | (85.5 | ) | | $ | (23.5 | ) | | $ | (2.9 | ) |
Same-store sales | 0.5 | % | | (0.5 | )% | | 1.8 | % | | 100 bps |
| | (230 bps) |
| | 150 bps |
|
| | | | | | | | | | | |
Operating income | $ | 50.1 |
| | $ | 78.3 |
| | $ | 87.8 |
| | $ | (28.2 | ) | | $ | (9.4 | ) | | $ | 7.2 |
|
Company-owned Salon Revenues
Decreases in Company-owned salon revenues were driven by the following:
|
| | | | | | | | | |
| | Fiscal Years |
Factor | | 2018 | | 2017 | | 2016 |
Same-store sales | | 0.5 | % | | (0.5 | )% | | 1.8 | % |
Closed salons | | (7.9 | ) | | (2.1 | ) | | (2.3 | ) |
New stores | | 0.2 |
| | 0.5 |
| | 0.7 |
|
Foreign currency | | 0.3 |
| | (0.1 | ) | | (0.8 | ) |
Other | | (0.3 | ) | | 0.3 |
| | 0.4 |
|
| | (7.2 | )% | | (1.9 | )% | | (0.2 | )% |
Fiscal Year Ended June 30, 20182021 Compared with Fiscal Year Ended June 30, 2017
Company-owned Salons Revenues
Company-owned salon revenues decreased $85.5 million in fiscal year 2018 primarily due to the 2018 Net Salon Count Changes, partly offset by same-store sales increase of 0.5%. The same-store sales increase was due to a 3.4% increase in average ticket price, partly offset by a 2.9% decrease in same-store guest visits.
Company-owned Salon Operating Income
Company-owned salon operating income decreased $28.2 million during fiscal year 2018 primarily due to the January 2018 SmartStyle portfolio restructure consisting of lease termination and other related closure costs and costs associated with returning the salons to pre-occupancy condition. Also contributing to the decrease were state minimum wage increases, costs associated with the SmartStyle marketing campaign, the hurricanes in the southern United States and higher health insurance costs, partly offset by improved stylist productivity, the 2018 Net Salon Count Changes and prior year inventory expense related to salon tools.
Fiscal Year Ended June 30, 2017 Compared with Fiscal Year Ended June 30, 2016
Company-owned Salons Revenues
Company-owned salon revenues decreased $23.5 million in fiscal year 2017 primarily due to the 2017 Net Salon Count Changes and same-store sales decrease of 0.5%. The same-store sales decrease was due to a 4.6% decrease in same-store guest visits, partly offset by a 4.1% increase in average ticket price.
Company-owned Salon Operating Income
Company-owned salon operating income decreased $9.4 million during fiscal year 2017 primarily due to minimum wage increases, unfavorable stylist productivity, same-store sales declines and a one-time inventory write-off related to salon tools, partly offset by the closure of underperforming salons.
Franchise Salons
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Years |
| 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| (Dollars in millions) | | Increase (Decrease) |
Revenue | | | | | | | | | | | |
Product | $ | 34.6 |
| | $ | 30.6 |
| | $ | 31.4 |
| | $ | 4.0 |
| | $ | (0.8 | ) | | $ | 1.7 |
|
Product sold to TBG | 19.1 |
| | — |
| | — |
| | 19.1 |
| | — |
| | — |
|
Total Product | $ | 53.7 |
| | $ | 30.6 |
| | $ | 31.4 |
| | $ | 23.1 |
| | $ | (0.8 | ) | | $ | 1.7 |
|
Royalties and fees (1) | 56.4 |
| | 48.3 |
| | 47.5 |
| | 8.1 |
| | 0.8 |
| | 2.9 |
|
Total franchise salons revenue (2) | $ | 110.1 |
| | $ | 78.9 |
| | $ | 78.9 |
| | $ | 31.1 |
| | $ | — |
| | $ | 4.5 |
|
| | | | | | | | | | | |
Operating income | $ | 39.8 |
| | $ | 34.5 |
| | $ | 33.8 |
| | $ | 5.4 |
| | $ | 0.7 |
| | $ | 3.5 |
|
Operating income from TBG | 1.6 |
| | — |
| | — |
| | 1.6 |
| | — |
| | — |
|
Total operating income (2) | $ | 41.4 |
| | $ | 34.5 |
| | $ | 33.8 |
| | $ | 6.9 |
| | $ | 0.7 |
| | $ | 3.5 |
|
| |
(1) | Total includes $1.2 million of royalties related to TBG during the fiscal year 2018, respectively. |
| |
(2) | Total is a recalculation; line items calculated individually may not sum to total due to rounding. |
Fiscal Year Ended June 30, 2018 Compared with Fiscal Year Ended June 30, 20172020
Franchise Salon Revenues
Franchise salon revenues increased $31.1$19.1 million during fiscal year 2018 due to a $23.1 million2021. The increase in franchise product sales primarily due to product sold to TBG and a $8.1 million increase in royalties and fees. The increase in royalties and feessalon revenue was primarily due to increased franchised locations and ancooperative fund contributions due to the refunding of $14.9 million of previously collected contributions to the cooperative advertising funds. Product revenue increased primarily due to the increase in the number of new salons open duringfranchise salons. During fiscal year 2018. Our franchisees closed 194 salons, constructed (net of relocations) 79 salons and2021, Franchisees purchased (net of Company buybacks) 1,581747 salons from the Company including 1,132and constructed (net of relocations) and closed 32 and 425 franchise-owned salons, previously included in the Company's mall-based business and International segment during fiscal year 2018.respectively.
Franchise Salon Operating Income
During fiscal year 2021, Franchise salon operations generated operating income increased $6.9of $40.7 million, during fiscal year 2018an increase of $7.8 million compared to the prior comparable period. The increase was primarily due to the increased number of new franchised locations and increased franchise product sales.increase in royalties per salon due to the net 747 salons purchased from the Company.
Cash Generated from Refranchised Salons Sold to Franchisees
During fiscal year 2018,years 2021 and 2020, the Company generated $11.6$8.4 million and $91.6 million of cash, respectively, from refranchising salons (thethe sale of company-owned salons to franchisees).franchisees. The decrease is due to lower proceeds per salon sold due to diminished salon performance due to COVID-19 pandemic as well as the mix of salons sold.
Company-owned Salons
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| | | | | | | | | | |
| | (Dollars in millions) | | Increase (Decrease) |
| | | | | | | | | | |
Total revenue | | $ | 143.0 | | | $ | 416.7 | | | $ | 915.4 | | | $ | (273.7) | | | $ | (498.7) | |
| | | | | | | | | | |
| | | | | | | | | | |
Operating (loss) income | | $ | (70.0) | | | $ | (96.1) | | | $ | 58.3 | | | $ | 26.1 | | | $ | (154.4) | |
Total company-owned salons | | 276 | | | 1,632 | | | 3,108 | | | | | |
Fiscal Year Ended June 30, 20172021 Compared with Fiscal Year Ended June 30, 20162020
FranchiseCompany-owned Salon Revenues
FranchiseCompany-owned salon revenues remained flat duringdecreased $273.7 million in fiscal year 20172021, primarily due to the closure of a $0.8 million increasenet 613 salons and the sale of 747 company-owned salons (net of buybacks) to franchisees during the year and a decline in royalties and fees, offset by a $0.8 million decrease in franchise product sales. The increase in royalties and fees was primarily due higher royalties from the increased franchised locations, partly offset by lower feessales as a result more franchise openings shifting to existing franchisees, who payof lower fees for opening additional salons, and franchise termination revenues in the prior year. Our franchisees closed 93 salons, constructed (net of relocations) 146 salons and purchased (net of Company buybacks) 99 salons from the Company during fiscal year 2017.traffic.
FranchiseCompany-owned Salon Operating Income
Franchise salon operating income increased $0.7 million during fiscal year 2017 primarily due to lower bad debt expense and higher margins on product sales due to mix, partly offset by higher incentive costs.
Cash Generated from Refranchised SalonsLoss
During fiscal year 2017,2021, company-owned salon operating loss decreased $26.1 million to a loss of $70.0 million. The decrease in the Company generated $2.3loss was primarily due to the goodwill impairment of $40.2 million recorded in the third quarter of cash from refranchising salons (the sale of company-owned salons to franchisees).fiscal year 2020, partially offset by an $12.1 million inventory reserve charge recorded in fiscal year 2021.
Corporate
Fiscal Year Ended June 30, 20182021 Compared with Fiscal Year Ended June 30, 20172020
Corporate Operating Loss (1)
Corporate operating loss of $91.3$74.8 million decreased $7.5$7.3 million during fiscal year 20182021, primarily driven by lower general and administrative salaries due to lower headcount and the priorcancellation of the traditional in-person franchise convention in fiscal year including severance related to the termination of former executive officers including the Company's Chief Executive Officer, a current year gain of $8.0 million associated with life insurance proceeds in connection with the passing of a former executive officer and savings realized from Company initiatives, partly offset by higher incentive compensation and severance associated with terminations of former executives and professional fees in the current year.2021.
Fiscal Year Ended June 30, 2017 Compared with Fiscal Year Ended June 30, 2016
Corporate Operating Loss (1)
The Corporate operating loss consists primarily of $98.7 million increased $0.9 million during fiscal year 2017 primarily due to severanceunallocated general and administrative expenses, including expenses associated with salon support, depreciation and amortization related to the termination of former executive officersour corporate headquarters and unallocated insurance, benefit and compensation programs, including the Company's Chief Executive Officer, expense associated with legal settlements, higher professional fees and the planned investments in technical education, offset by lower incentive compensation and cost savings.stock-based compensation.
| |
(1) | The Corporate operating loss consists primarily of unallocated general and administrative expenses, including expenses associated with salon support, depreciation and amortization related to our corporate headquarters and unallocated insurance, benefit and compensation programs, including stock-based compensation. |
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements.Statements in Part II, Item 8, of this Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, proceeds from sale of salons sold to franchisees, and our borrowing agreements are our most significant sources of liquidity. Additionally, on February 3, 2021, the Company filed a $150 million shelf registration and $50 million prospectus supplement with the Securities and Exchange Commission under which it may offer and sell, from time to time, up to $50 million worth of its of its Class A common stock in “at-the-market offerings.” Net proceeds from sales of shares under the “at-the-market” program, if any, may be used to, among other things, fund working capital requirements, repay debt and support of our brands and franhisees. The timing and amount of sales of shares, if any, will depend on a variety of factors, including prevailing market conditions, the trading price of shares, and other factors as determined by the Company. To date we have not issued any shares under the agreement.
As of June 30, 2018,2021, cash and cash equivalents were $110.4$19.2 million, with $92.1, $17.9$16.8, $2.0 and $0.4 million within the United States, Canada and Europe, respectively.
The Company has a credit agreement which providesas of June 30, 2021 provided for a $295.0$294.4 million five-year unsecured revolving credit facility that expires in March 2023, of which $203.5$88.8 million was available as of June 30, 2018.2021. The credit facility includes a minimum liquidity covenant of not less than $75.0 million. See additional discussion under Financing Arrangements.
Arrangements and Note 8 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
Uses of Cash
The Company closely manages its liquidity and capital resources. The Company's liquidity requirements depend on key variables, including the performance of the business, the level of investment needed to support its business strategies, the performance of the business, capital expenditures, credit facilities and borrowing arrangements and working capital management. Capital expenditures are a component of the Company's cash flow and capital management strategy, which can be adjusted in response to economic and other changes toin the Company's business environment. The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities to support the Company's multi-yearresponse to the COVID-19 pandemic, as well as its strategic plan as discussed within Part I, Item 1. To the best of our knowledge and based on our current liquidity position and forecast, we believe we have adequate liquidity to run our business and support our growth initiatives.
Cash Flows
Cash Flows fromUsed In Operating Activities
During fiscal year 2018,2021, cash provided byused in operating activities of $2.3was $99.9 million. Cash used in operations increased year-over-year by $13.5 million a decrease of $57.7 million compared to the previous fiscal year, was primarily due to the paymentlower revenues, margins and same-store sales, CEO transition expense of $0.7 million, CEO sign-on bonus of $2.5 million and an increase in lease termination payments of $8.3 million. The increase in cash use was partially offset by lower salaries due to lower headcount and other related closure costs associated with the Company's January 2018 SmartStyle portfolio restructurea decline in general and lower cash volumes generated from salon operations.administrative expense.
During fiscal year 2017,2020, cash provided byused in operating activities of $60.1 million, an increase of $4.3 million compared to the previous fiscal year, was primarily$86.4 million. Cash from operations declined due to lower inventory levels in fiscal year 2017, partlyrevenues and margins and the refunding of the cooperative advertising funds to franchisees as a direct result of the COVID-19 pandemic, as well as lower same-store sales, partially offset by lower earnings.the elimination of certain general and administrative costs.
During fiscal year 2016,2019, cash provided byused in operating activities was $17.5 million, primarily as a result of $55.8 million, a decreasedecline in Company-owned operating margin, strategic investment in new retail product lines and planned strategic general and administrative investments to enhance the Company's franchisor capabilities and support the increase in volume and cadence of $39.0 million compared totransactions and conversions into the previous fiscal year, was primarily due to higher inventory levels in fiscal year 2016, enhanced incentive payouts in fiscal year 2016Franchise portfolio, partially offset by the elimination of certain general and lower income tax refunds.administrative costs.
Cash Flows from Investing Activities
During fiscal year 2018,2021, cash used in investing activities of $1.6$2.1 million was primarily fromrelated to capital expenditures of $30.7 million and a $0.5 million use of restricted cash, partly offset by proceeds from company-owned life insurance policies of $18.1 million and cash proceeds from sale of salon assets of $11.6 million.
During fiscal year 2017, cash used in investing activities of $29.1 million, was primarily from capital expenditures of $33.8 million, partlyinvestments, partially offset by cash proceeds from the sale of salon assets of $2.3 million, a reduction in restricted cash of $1.1 million, cash proceeds from company-owned life insurance policies of $0.9 million and cash proceeds from the sale of the Company's ownership interest in MyStyle of $0.5$8.4 million.
During fiscal year 2016,2020, cash used inprovided by investing activities of $17.4$61.0 million was primarily from $31.1 million for capital expenditures, partly offset by a reduction in restricted cash of $9.0 million, cash proceeds from company-owned life insurance policies of $2.9 million and cash proceeds from sale of salon assets of $1.7$91.6 million and the sale of the Company's headquarters of $9.0 million, partially offset by capital expenditures of $37.5 million.
During fiscal year 2019, cash provided by investing activities of $87.8 million was primarily from cash proceeds from sale of salon assets of $94.8 million and proceeds from company-owned life insurance policies of $24.6 million, partially offset by capital expenditures of $31.6 million.
Cash Flows from Financing Activities
During fiscal year 2018,2021, cash provided by financing activities of $7.8 million was primarily due to a net $9.4 million draw on the Company's line of credit.
During fiscal year 2020, cash provided by financing activities of $56.2 million was primarily due to the net $87.5 million draw on the Company's line of credit and for the repurchase of common stock of $28.2 million
During fiscal year 2019, cash used in financing activities of $62.2$126.7 million was primarily for repayments of long-term debt relating to the 5.5% senior term notes of $124.2 million, repurchase of common stock of $24.8 million, employee taxes paid for shares withheld of $2.4 million and settlement of equity awards of $0.8 million, partly offset by borrowings on the revolving credit facility of $90.0 million.
During fiscal year 2017, cash used in financing activities of $6.8 million was primarily for employee taxes paid for shares withheld of $3.7 million and settlement of equity awards of $3.2 million.
During fiscal year 2016, cash used in financing activities of $102.6 million was primarily for repurchases of common stock of $101.0 million, the purchase of an additional 24% ownership interest in Roosters, MGC International, LLC for $0.8$152.7 million and employee taxes paid for shares withheld of $0.8$2.5 million, partially offset by proceeds from the sale and leaseback of the Company's distribution centers of $28.8 million.
Financing Arrangements
Financing activities are discussed in Note 78 to the Consolidated Financial Statements.Statements in Part II, Item 8, of this Form 10-K. Derivative activities are discussed in Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."
The Company's financing arrangements consists of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, |
| | Maturity Dates | | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | | | |
| | (Fiscal year) | | (Interest rate %) | | (Dollars in thousands) |
| | | | | | | | | | |
Revolving credit facility | | 2023 | | 5.00% | | 5.50% | | $ | 186,911 | | | $ | 177,500 | |
Long-term financing lease liability | | 2034 | | N/A | | 3.30% | | — | | | 16,773 | |
Long-term financing lease liability | | 2034 | | N/A | | 3.70% | | — | | | 11,208 | |
| | | | | | | | $ | 186,911 | | | $ | 205,481 | |
|
| | | | | | | | | | | | | | |
| | | | Interest rate % | | | | |
| | | | Fiscal Years | | June 30, |
| | Maturity Dates | | 2018 | | 2017 | | 2018 | | 2017 |
| | (fiscal year) | | | | | | (Dollars in thousands) |
Revolving credit facility, new | | 2023 | | 3.3% | | —% | | $ | 90,000 |
| | $ | — |
|
Revolving credit facility, old | | N/A | | —% | | —% | | — |
| | — |
|
Senior term notes | | N/A | | 5.5% | | 5.5% | | — |
| | 120,599 |
|
| | | | | | | | $ | 90,000 |
| | $ | 120,599 |
|
In March 2018,As of June 30, 2021 and 2020, the Company entered into a Credit Agreement (Credit Agreement), which provided for a $260.0had $186.9 and $177.5 million, unsecuredrespectively, of outstanding borrowings under its revolving credit facility. The five-year revolving credit facility (Revolving Credit Facility) that expires in March 2023 and includes among other things, a maximum consolidated net leverage ratio covenant, a minimum fixed charge coverage ratioliquidity covenant of not less than $75.0 million, provides the Company's lenders security in substantially all of the Company's assets, adds additional guarantors, and certain restrictions on liens, investmentsgrants a first priority lien and other indebtedness. In April 2018, the Company amended and restated the Credit Agreement which increases the Revolving Credit Facility under the Credit Agreement by $35.0 million. After giving effectsecurity interest to the amendment,lenders in substantially all of the Company's and the guarantors' existing and future property. Total liquidity per the agreement was $128.9 million as of June 30, 2021.See Note 8 to the Consolidated Financial Statements. The revolving commitment under the Credit Facility is $295.0 million. The Revolving Credit Facilitycredit facility includes a $30.0 million subfacilitysub-facility for the issuance of letters of credit and a $30.0 million sublimit for swingline loans. The Company may request an increase in revolving credit commitments under the facility of up to $150.0$115.0 million under certain circumstances. The revolving credit facility has variableapplicable margin for loans bearing interest rates tied toat LIBOR plus 1.25% to 1.85% and includes a facility fee of 0.25% to 0.40%. Bothranges from 3.75%-4.25%, the LIBOR credit spreadapplicable margin for loans bearing interest at the base rate ranges from 2.75%-3.25%, and the facility fee are basedranges from 0.5%-0.75%, each depending on average utilization of the Company's consolidated net leverage ratio.revolving line of credit.
In connection with entering into the Credit Agreement,fiscal year 2021, the Company terminated its previous $200.0 million revolving credit facility.
In March 2018,determined it would no longer lease the distribution centers for the majority of the assets' useful lives, which resulted in the transactions being considered sale and leaseback transactions. As a result, the Company redeemed allderecognized the financing lease liability and the carrying value of its 5.5% senior term notes that were due December 2019 (Senior Term Notes) for $124.2 million, which included a $1.2 million premium. The Company utilized $90.0 million under the Revolving Credit Facility and cash on hand of $34.2 millionrelated assets. See Note 8 to repay the Senior Term Notes.Consolidated Financial Statements.
Our debt to capitalization ratio, calculated as the principal amount of debt as a percentage of the principal amount of debt and shareholders' equity at fiscal year-end, was as follows:
|
| | | | | | |
As of June 30, | | Debt to Capitalization | | Basis Point (Decrease) Increase(1) |
2018 | | 15.2 | % | | (430 | ) |
2017 | | 19.5 |
| | 40 |
|
2016 | | 19.1 |
| | 300 |
|
| |
(1) | Represents the basis point change in debt to capitalization as compared to prior fiscal year-end (June 30). |
The basis point decrease in the debt to capitalization ratio as of June 30, 2018 compared to June 30, 2017 was primarily due to the net decrease in the principal amount of debt from the redemption of the 5.5% senior term notes, partly offset by utilizing $90.0 million of the revolving credit facility and the repurchase of 1.5 million shares of common stock for $24.8 million. | | | | | | | | | | | | |
As of June 30, | | Debt to Capitalization | | | | |
| | | | | | |
2021 | | 91.6 | % | | | | |
2020 | | 62.0 | % | | | | |
2019 | | 26.8 | % | | | | |
The basis point increase in the debt to capitalization ratio as of June 30, 20172021 compared to June 30, 20162020 was primarily due to net reductions to shareholders' equity resulting from net lossesthe loss incurred in fiscal year 2021 and foreign currency translation adjustments.the increase in debt.
The basis point increase in the debt to capitalization ratio as of June 30, 20162020 compared to June 30, 20152019 was primarily due to the repurchaseincrease in the Company's borrowings.
Contractual Obligations and Commercial Commitments
The following table reflects a summary of obligations and commitments outstanding by payment date as of June 30, 2018:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Payments due by period |
Contractual Obligations | | Total | | Within 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years |
| | | | (Dollars in thousands) |
On-balance sheet: | | | | | | | | | | |
Debt obligations | | $ | 90,000 |
| | $ | — |
| | $ | — |
| | $ | 90,000 |
| | $ | — |
|
Other long-term liabilities | | 9,570 |
| | 1,630 |
| | 2,009 |
| | 1,519 |
| | 4,412 |
|
Total on-balance sheet | | 99,570 |
| | 1,630 |
| | 2,009 |
| | 91,519 |
| | 4,412 |
|
Off-balance sheet(a): | | | | | | | | | | |
Operating lease obligations | | 688,477 |
| | 232,210 |
| | 309,579 |
| | 116,336 |
| | 30,352 |
|
Interest on long-term debt | | — |
| | — |
| | — |
| | — |
| | — |
|
Total off-balance sheet | | 688,477 |
| | 232,210 |
| | 309,579 |
| | 116,336 |
| | 30,352 |
|
Total | | $ | 788,047 |
| | $ | 233,840 |
| | $ | 311,588 |
| | $ | 207,855 |
| | $ | 34,764 |
|
| |
(a) | In accordance with accounting principles generally accepted in the United States of America, these obligations are not reflected in the Consolidated Balance Sheet. |
On-Balance Sheet Obligations
Our long-termdebt obligations are primarily composed primarily of our revolving credit facility at June 30, 2018. In March 2018, the Company redeemed all2021.
Non-current deferred benefits of its 5.5% senior term notes that were due December 2019.
Other long-term liabilities of $9.6$10.0 million include $6.7includes $5.0 million related to a NonqualifiedNon-qualified Deferred Salary Plan and a salary deferral program of $2.9$2.5 million related to established contractual payment obligations under retirement and severance agreements for a small number of employees. See Note 4 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K
This table excludes short-term liabilities disclosed on our balance sheetOperating leases primarily represent long-term obligations for the rental of salons, including leases for company-owned locations, as well as salon franchisee lease obligations, which are reimbursed to the amounts recorded for these items will be paidCompany by franchisees. Regarding franchisee subleases, we generally retain the right to the related salon assets, net of any outstanding obligations, in the next year. We have no unconditional purchase obligations. Also excluded fromevent of a default by a franchise owner. The loss of revenue related to the contractual obligations table are payment estimates associated with employee health and workers' compensation claims forCOVID-19 pandemic has increased the risk of default by franchisees, 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 tomay be filed or settled.material.
The Company has unfunded deferred compensation contracts covering certain management and executive personnel. Because we cannot predict the timing or amount of future payments related to these contracts, such amounts were not included in the table above. See Note 1011 to the Consolidated Financial Statements.Statements in Part II, Item 8, of this Form 10-K.
As of June 30, 2018,2021, 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 910 to the Consolidated Financial Statements.Statements in Part II, Item 8, of this Form 10-K.
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 salon franchisee lease obligations of approximately $316.4 million, which are reimbursed to the Company by franchisees. 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.
Interest payments on long-term debt are calculated based on the revolving credit facility's rates tied to arates. The applicable margin for loans bearing interest at LIBOR credit spread and a quarterly facility fee onranges from 3.75%-4.25%, the average daily amount ofapplicable margin for loans bearing interest at the facility (whether used or unused). Both the LIBOR credit spreadbase rate ranges from 2.75%-3.25% and the facility fee are basedranges from 0.5%-0.75%, each depending on average utilization of the Company's debt to EBITDA ratio at the endrevolving line of each fiscal quarter.credit.
We are a party to a variety of contractual agreements under whichthat 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 towill result in a material liability.
We do not have other unconditional purchase obligations or significant other commercial commitments such as standby repurchase obligations or other commercial commitments.
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, 2018.2021. 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
In December 2013, the Board of Directors elected to discontinue declaring regular quarterly dividends.
Share Repurchase Program
In May 2000, the Company's Board of Directors (Board) approved a stock repurchase program with no stated expiration date. Since that time and through June 30, 2018,2021, the Board has authorized $450.0$650.0 million to be expended for the repurchase of the Company's stock under this program. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depends on many factors, including the market price of the common stock and overall market conditions. During fiscal year 2021, the Company did not repurchase any shares. As of June 30, 2018, 19.92021, 30.0 million shares have been cumulatively repurchased for $414.7$595.4 million, and $35.3$54.6 million remained outstanding under the approved stock repurchase program.
In August 2018, the Company's Board
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 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 in Note 1 to the Consolidated Financial Statements.Statements 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.
Goodwill
As of June 30, 20182021 and 2017,2020, the Company-ownedFranchise reporting unit had $184.8$229.6 and $188.9$227.5 million of goodwill, respectively, and the Franchise reporting unitCompany-owned segment had $227.9 and $228.1 million ofno goodwill respectively.at either period. See Note 45 to the Consolidated Financial Statements. The Company assesses goodwill impairment on an annual basis during the Company’sCompany's fourth fiscal quarter, and between annual assessments if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Goodwill impairment assessments are performed at the reporting unit level, which is the same as the Company’sCompany's operating segments. As part of the new simplification guidance issued by the Financial Accounting Standards Board (FASB), theThe goodwill assessment involves a one-step comparison of the reporting unit’sunit's fair value to its carrying value, including goodwill ("Step 1")(Step 1). The prior guidance required a hypothetical purchase price allocation as the second step of the goodwill impairment assessment, but this step has been eliminated. If the reporting unit’sunit's fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit’sunit's fair value is less than the carrying value, an impairment charge is recorded for the difference between the fair value and carrying value of the reporting unit. The Company early adopted this guidance when completing the annual fiscal year 2017 impairment assessment and therefore only completed Step 1 of the goodwill impairment assessment.
In applying the goodwill impairment assessment, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than its carrying value (“Step 0”)(Step 0). Qualitative factors may include, but are not limited to, economic, market and industry conditions, cost factors, and overall financial performance of the
reporting unit. If after assessing these qualitative factors, the Company determines it is “more-likely-than-not”"more-likely-than-not" that the carrying value is less than the fair value, then performing Step 1 of the goodwill impairment assessment is unnecessary.
The carrying value of eachthe 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 or expenses of the reporting unit as a percentage of total company expenses.
The Company calculates estimated fair values of the reporting units based on discounted future cash flows utilizing estimates in annual revenue, service and product margins, fixed expense rates, allocated corporate overhead, corporate-owned and franchise salon counts, 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 periodically engages third-party valuation consultants to assist in evaluating the Company's estimated fair value calculations. See Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K
Following
Long-Lived Assets, Excluding Goodwill
A lessee's Right of Use (ROU) asset is a descriptionsubject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment. The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the goodwill impairment assessments for eachcash flows of theother groups of assets and liabilities. Poor salon performance in fiscal years:
Fiscal Year 2018
During the first quarter of fiscal year 2018, the Company experienced a triggering eventyears 2020 and 2021, primarily due to the redefining of its operating segments asCOVID-19 pandemic, resulted in ASC 360-10-35-21 triggering events. As a result, management assessed underperforming salon asset groups, which included the Company's mall-based business and International segment metrelated ROU assets, for impairment in accordance with ASC 360.
The first step in the criteria to be classified as held for sale and as a discontinued operation as of September 30, 2017. The Company's reporting now consist of two reporting units: Company-owned and Franchise. Prior to this change the Company had four reporting units: North American Value, North American Premium, North American Franchise and International.
Pursuant to the change in operating segments, the Company performed a goodwill impairment assessment on its North American Value reporting unit. The Company assessed qualitative factorstest under ASC 360 is to determine whether itthe long-lived assets are recoverable, which is more likely than notdetermined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases.
Step two of the long-lived asset impairment test requires the fair value of the reporting unitasset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was less thanmeasured as the amount by which the carrying amount of the asset group exceeds its carrying value (“Step 0”).fair value. The Company determined it is “more-likely-than-not” thatapplied the carryingfair value guidance within ASC 820-10 to determine the fair value of the reporting unit was less than the fair value. Accordingly, the Company did not perform a quantitative analysis. Based on the changes to the operating segment structure, there was no goodwill reallocatedasset group from the North American Value reporting unit related toperspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the mall-based business that was subsequently sold asmost advantageous market, and assumptions about the mall-based business previously included inhighest and best use of the North American Value reporting unit was projected to incur future losses. The Company did not perform a goodwill impairment assessment forasset group. To determine the North American Franchise reporting unit during the first quarter of fiscal year 2018 as this reporting unit was not impacted by the triggering event. The North American Premium and International reporting units did not have any goodwill.
The Company performs its annual impairment assessment as of April 30. For the fiscal year 2018 annual impairment assessment, due to the transformational efforts completed during the year, the Company elected to forgo the optional Step 0 assessment and performed the quantitative impairment analysis on the Company-owned and Franchise reporting units. The Company compared the carryingfair value of the reporting units, including goodwill,salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to their estimated fair value.use the asset group. The results of these assessments indicated thatsignificant judgments and assumptions utilized to determine the estimated fair value of our reporting units exceeded their carrying value. The Franchise reporting unit had substantial headroomthe salon asset groups include; the market rent of comparable properties, the asset group's projected sales for properties with no recently negotiated leases, and the Company-owned reporting unit had headroom of approximately 24%. a discount rate.
The fair value of the Company-owned reporting unit was determinedsalon long-lived asset group is estimated using market participant methods based on a discounted cash flow analysis and comparable market multiples.the best information available. The assumptions used in determining fair value were the number and pace of salons sold to franchisees, proceeds for salon sales, weighted average cost of capital, general and administrative expenses and utilization of net operating loss benefits. We selected the assumptions by considering our historical financial performance and trends, historical salon sale proceeds and estimated salon sale activities. The preparation of our fair value estimate includes uncertain factors and requires significant judgments and estimates which are subjectassumptions utilized to change. A 100 basis point increase in our weighted average cost of capital within the Company-owned reporting unit would result in a reduction in headroom to approximately 17%.
Other uncertain factors or events exist which may result in a future triggering event and require us to perform an interim impairment analysis with respect to the carrying value of goodwill for the Company-owned reporting unit prior to our annual assessment. These internal and external factors include but are not limited to the following:
Changes in the company-owned and franchise expansion strategy,
Future market earnings multiples deterioration,
Our financial performance falls short of our projections due to internal operating factors,
Economic recession,
Reduced salon traffic,
Deterioration of industry trends,
Increased competition,
Inability to reduce general and administrative expenses as company-owned salon count potentially decreases,
Other factors causing our cash flow to deteriorate.
If the triggering event analysis indicatesdetermine the fair value of the Company-owned reporting unit has potentially fallen below more thansalon asset groups include: the 24% headroom, we may be requiredmarket rent of comparable properties, the asset group's projected sales, and a discount rate. In fiscal year 2020, the Company engaged a third-party valuation specialist to perform an updatedassist with the research related to inputs used in their determination of the fair value of the ROU asset, which included providing information related to significant inputs and assumptions utilized in the measurement of the impairment assessment which may result inloss.
For fiscal year 2021, the Company recognized a non-cashlong-lived impairment charge of $13.0 million, which included $9.5 million related to ROU assets on the Consolidated Statement of Operations. The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on a pro-rata basis using their relative carrying amounts. Additionally, the impairment losses did not reduce the carrying valueamount of goodwill.
As of June 30, 2018, the Company's estimatedan individual asset below its fair value, as determined byincluding for the sum of our reporting units' fair value, reconciled within a reasonable range of our market capitalization, whichROU assets included an assumed control premium of 20.0%.
in the salon asset groups. Assessing goodwillthe long-lived assets for impairment requires management to make assumptions and to apply judgment including forecasting future sales and expenses, and selecting appropriate discount rates, whichthat can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses for its long-lived assets, including its ROU assets. However, the ultimate severity and longevity of goodwill. However,the COVID-19 pandemic is unknown, therefore, if actual results are not consistentinconsistent with the estimates and assumptions used in the calculations, or if there are significant changes to our planned strategy for company-owned salons. the Company may be exposed to future impairment losses that could be material.
During the fourth quarter of fiscal year 2017, the Company experienced a triggering event due to the redefining of its operating segments. In connection with the change in operating segment structure, the Company changed its North American reporting units from two reporting units: North American Value and North American Premium, to three reporting units: North American Value, North American Franchise and North American Premium.
Pursuant to the change in operating segments, the Company performed a goodwill impairment assessment on its North American Value reporting unit. The North American Premium and International units did not have any goodwill. The Company compared the carrying value of the North American Value reporting unit, including goodwill, to its estimated fair value. The fair value of the reporting unit exceeded its carrying value by a substantial margin, resulting in no goodwill impairment.
Based on the changes to the Company's operating segment structure, goodwill had been reallocated based on relative fair value to the previous North American Value and North American Franchise reporting units at June 30, 2017 and 2016.
Fiscal Years 2016
During the Company’s annual impairment assessment, the Company assessed qualitative factors to determine whether it is more likely than not that the fair value of the reporting units were less than their carrying values (“Step 0”). The Company determined it is “more-likely-than-not” that the carrying values of the reporting units were less than the fair values. Accordingly, the Company did not perform a quantitative analysis.
Long-Lived Assets, Excluding Goodwill
The Company assesses impairment of long-lived assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable. 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 long-lived assets. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the estimated fair value of the assets. The fair value of the long-lived assets is estimated using a discounted cash flow model based on the best information available, including salon level revenues and expenses. Long-lived asset impairment charges of $11.1 million for fiscal year 2018, have been recorded within depreciation and amortization in the Consolidated Statement of Operations.
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 the Company to realize material impairment charges.
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 income 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. A valuation allowance is established for any portion of
We recognize deferred tax assets to the extent that we believe these assets are not considered more likely than not to be realized. The Company evaluates all
evidence, including recent financial performance, the existence of cumulative year losses and our forecast of future taxable income, to assess the need for a valuation allowance against our deferred tax assets. While the determination of whether or not to record a valuation allowance is not fully governed by a specific objective test, accounting guidance places significant weight on recent financial performance.
The Company has a partial valuation allowance on its deferred tax assets amounting to $67.9$192.5 and $119.1$122.4 million at June 30, 20182021 and 2017,2020, respectively. The Company assesses the realizability of itsIf we determine that we would be able to realize our deferred tax assets on a quarterly basis and will reversein the future in excess of their net recorded amount, we would make necessary adjustments to the deferred tax asset valuation, which would reduce the provision for income taxes.
Significant components of the valuation allowance and recordwhich occurred during fiscal year 2021 are as follows:
•The Company recognized a tax benefit when the Company generates sufficient sustainable pretax earnings to make the realizabilityloss on its investment in Luxembourg and established a corresponding valuation allowance of $34.4 million.
Significant components of the deferred tax assets more likely than not. valuation allowance which occurred during fiscal year 2020 are as follows:
•In connection with the Tax CutsCoronavirus Aid, Relief and JobsEconomic Security Act enacted in(CARES Act), Net Operating Losses (NOLs) resulting from accounting periods which straddled December 31, 2017 are now considered definite-lived NOLs. Therefore, the Company remeasuredestablished a valuation allowance against the deferred tax accounts for the federal rate reductionU.S. NOLs generated during its fiscal year 2018 and recorded a partialnet tax expense of $14.7 million.
•The Company determined that it no longer had sufficient U.S. indefinite-lived taxable temporary differences to support realization of its U.S. indefinite-lived NOLs and its existing U.S. deferred tax assets that upon reversal are expected to generate indefinite-lived NOLs. As a result, the Company recorded an additional $17.0 million valuation allowance releaseon its U.S. federal indefinite-lived deferred tax assets.
•The Company recognized a capital loss and established a corresponding valuation allowance of $14.9 million on investment outside basis previously impaired for a total benefit of $68.1 million during the twelve months ended June 30, 2018. See Note 9 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
financial accounting purposes.
The Company reserves for unrecognized tax benefits, interest and penalties related to anticipated tax audit positions in the U.S. and other tax jurisdictions based on an estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of these liabilities would result in tax benefits being recognized in the period in which it is determined that the liabilities are no longer necessary. If the estimate of unrecognized tax benefits, interest and penalties proves to be less than the ultimate assessment, additional expenses 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.
See Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
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, specifically 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 changes in the Canadian dollar and to a lesser extent the British pound. 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 earnings implications associated with volatility in short-term interest rates. On occasion,In the past, the Company useshas used 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 adjustmentsadjusts in accordance with market conditions and the Company's shortshort- and long-term borrowing needs. As of June 30, 2018,2021, the Company had an outstanding variable rate debt of $90.0 million. The Company had an outstanding fixed rate debt balance of $123.0$186.9 million at June 30, 2017. As of June 30, 2018 and 2017, the Company did not have any outstanding interest rate swaps.
Foreign Currency Exchange Risk:
Over 90%92% of the Company's operations related to Company-owned locations 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 to a lesser extent, the British 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 (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, 2018 and 2017,2021, the Company did not have any derivative instruments to manage its foreign currency risk.
During fiscal years 2018, 20172021, 2020 and 2016,2019, the foreign currency gain (loss) included in income (loss)loss from continuing operations was $0.3, $(0.1), $0.1 and $0.1 million, respectively. During fiscal year 2018, the Company recognized within discontinued operations a $6.2 million foreign currency translation loss in connection with the Company's liquidation
Item 8. Financial Statements and Supplementary Data
|
| | | | | | | |
| | |
Index to Consolidated Financial Statements: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Regis Corporation
OpinionsOpinion on the Financial Statements and Internal Control over Financial Reportingfinancial statements
We have audited the accompanying consolidated balance sheetssheet of Regis Corporation (a Minnesota Corporation) and its subsidiaries (the "Company") as of June 30, 2018 and 2017, and2021, the related consolidated statements of operations, comprehensive income (loss),loss, shareholders' equity, and cash flows for each of the three years in the periodyear then ended, June 30, 2018, includingand the related notes (collectively referred to as the "consolidated financial"financial statements"). We also have audited the Company's internal control over financial reporting as of June 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Companyas of June 30, 2018 and 2017,2021, and the results of their itsoperations and their itscash flows for each of the three years in the periodyear then ended, June 30, 2018 in conformity with accounting principles generally accepted in the United States of America. Also
We also have audited, in our opinion,accordance with the standards of the Public Company maintained, in all material respects, effectiveAccounting Oversight Board (United States) ("PCAOB"), the Company’s internal control over financial reporting as of June 30, 2018,2021 based on criteria established in the 2013 Internal Control - Control—Integrated Framework (2013) issued by the COSO.Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), and our report dated August 26, 2021 expressed an unqualified opinion.
Basis for Opinionsopinion
The Company's management is responsible for these consolidatedThese financial statements for maintaining effective internal control over financial reporting, and for its assessmentare the responsibility of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A.Company's management. Our responsibility is to express opinionsan opinion on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
fraud. Our audits of the consolidatedfinancial statementsaudit included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. OurWe believe that our audit provides a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing aseparate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Right of Use Asset Impairment Assessment for the Company-Owned Salon Asset Groups
As described in Notes 1 and 15 to the consolidated financial statements, the Company operates in two reportable segments, Company-owned salons and Franchise salons. Note 6 describes the Company’s Right of Use Assets ("ROU asset"), a portion of which relates to Company-owned salons. Management determined that triggering events had occurred related to Company-owned salons and was required to perform quantitative impairment assessments during fiscal year 2021. The Company first assessed its Company-owned salon asset groups at the individual salon level, which included the ROU assets, to determine if the carrying value was recoverable. Recoverability is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. For the Company-owned salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the ROU asset within the asset group exceeded its fair value, which was determined using a discounted cash flow methodology. As described by management, the results of this assessment indicated that the estimated fair value of certain Company-owned salon asset groups did not exceed the carrying value and an impairment expense was recorded to the ROU asset balance.
We identified the evaluation of the impairment of ROU asset balances at the Company-owned salon asset group level as a critical audit matter. Subjective auditor judgment was required to evaluate, for each Company-owned salon asset group: (i) the assumptions used by management to calculate the undiscounted future cash flow, (ii) management's method to determine the fair value and, (iii) significant judgments and assumptions related to the fair value determination, including the discount rate, the market rent of comparable properties based on recently negotiated leases, as applicable, the projected sales for fiscal years 2022 through 2023 and market capitalization rate for properties with no recently negotiated leases.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. We performed the following procedures:
a.evaluated the design and tested the operating effectiveness of relevant controls relating to management’s impairment assessment of the ROU asset balances related to Company-owned salons, including controls over the valuation of the Company-owned salon asset groups
b.tested the Company-owned salon impairment analyses as follows:
i.evaluated the completeness of the population of Company-owned salon locations determined to be impaired,
ii.evaluated and tested management's models and processes for developing the undiscounted and discounted cash flows,
iii.selected a sample of Company-owned salons to test the appropriateness of management's methodology and significant assumptions noted above, and the accuracy of the computations and data used for both the undiscounted and discounted cash flow analyses
c.assessed the reasonableness of management’s ability to forecast future sales by comparing past projections to actual financial statement results
d.performed sensitivity analyses of the significant assumptions to evaluate the impact on the fair value of each of the Company-owned salons resulting from changes in the underlying assumptions.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2021.
Minneapolis, Minnesota
August 26, 2021
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Regis Corporation
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Regis Corporation (a Minnesota corporation) and subsidiaries (the "Company") as of June 30, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company as of and for the year ended June 30, 2021, and our report dated August 26, 2021 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company's management is responsible 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 Report on Internal Control Over Financial Reporting ("Management's Report"). Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit 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 includedrisk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinions.
opinion.
Definition and Limitationslimitations of Internal Controlsinternal control over Financial Reportingfinancial reporting
A company’scompany'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)(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii)(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
August 26, 2021
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Regis Corporation
Opinion on the Financial Statements
We have audited the consolidatedbalance sheet of Regis Corporation and its subsidiaries (the "Company") as of June 30, 2020, and the related consolidated statements of operations, of comprehensive loss, of shareholders' equity and of cash flows for each of the two years in the period ended June 30, 2020, including the related notes (collectively referred to as the "consolidatedfinancial statements").In our opinion, theconsolidatedfinancial statements present fairly, in all material respects, the financial position ofthe Company as of June 30, 2020, and the results of its operations and itscash flows for each of the two years in the period ended June 30, 2020 in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of July 1, 2019.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidatedfinancial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 23, 201831, 2020
We have served as the Company's auditor sincefrom at least 1990.1990to 2020. We have not determinedbeen able to determine the specific year we began serving as auditor of the Company.
REGIS CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share data) | | | | | | | | | | | | | | |
| | June 30, |
| | 2021 | | 2020 |
| | | | |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 19,191 | | | $ | 113,667 | |
Receivables, net | | 27,372 | | | 31,030 | |
Inventories | | 22,993 | | | 62,597 | |
Other current assets | | 17,103 | | | 19,138 | |
| | | | |
Total current assets | | 86,659 | | | 226,432 | |
| | | | |
Property and equipment, net | | 23,113 | | | 57,176 | |
Goodwill (Note 5) | | 229,582 | | | 227,457 | |
Other intangibles, net | | 3,761 | | | 4,579 | |
Right of use asset (Note 6) | | 611,880 | | | 786,216 | |
Other assets | | 41,388 | | | 40,934 | |
| | | | |
Total assets | | $ | 996,383 | | | $ | 1,342,794 | |
| | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 27,157 | | | $ | 50,918 | |
Accrued expenses | | 54,857 | | | 48,825 | |
Short-term lease liability (Note 6) | | 116,471 | | | 137,271 | |
| | | | |
Total current liabilities | | 198,485 | | | 237,014 | |
| | | | |
Long-term debt, net (Note 8) | | 186,911 | | | 177,500 | |
Long-term lease liability (Note 6) | | 518,866 | | | 680,454 | |
Long-term financing liabilities (Note 8) | | — | | | 27,981 | |
Other non-current liabilities | | 75,075 | | | 94,142 | |
| | | | |
Total liabilities | | 979,337 | | | 1,217,091 | |
Commitments and contingencies (Note 9) | | 0 | | 0 |
Shareholders' equity: | | | | |
Common stock, $0.05 par value; issued and outstanding, 35,795,844 and 35,625,716 common shares at June 30, 2021 and 2020, respectively | | 1,790 | | | 1,781 | |
Additional paid-in capital | | 25,102 | | | 22,011 | |
Accumulated other comprehensive income | | 9,543 | | | 7,449 | |
Retained (deficit) earnings | | (19,389) | | | 94,462 | |
Total shareholders' equity | | 17,046 | | | 125,703 | |
Total liabilities and shareholders' equity | | $ | 996,383 | | | $ | 1,342,794 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
|
| | | | | | | | |
| | June 30, |
| | 2018 | | 2017 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 110,399 |
| | $ | 171,044 |
|
Receivables, net | | 52,430 |
| | 19,683 |
|
Inventories | | 79,363 |
| | 98,392 |
|
Other current assets | | 47,867 |
| | 48,114 |
|
Current assets held for sale (Note 2) | | — |
| | 32,914 |
|
Total current assets | | 290,059 |
| | 370,147 |
|
| | | | |
Property and equipment, net | | 105,860 |
| | 123,281 |
|
Goodwill | | 412,643 |
| | 416,987 |
|
Other intangibles, net | | 10,557 |
| | 11,965 |
|
Other assets | | 37,616 |
| | 61,756 |
|
Long-term assets held for sale (Note 2) | | — |
| | 27,352 |
|
Total assets | | $ | 856,735 |
| | $ | 1,011,488 |
|
| | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 57,738 |
| | $ | 54,501 |
|
Accrued expenses | | 97,630 |
| | 110,435 |
|
Current liabilities related to assets held for sale (Note 2) | | — |
| | 13,126 |
|
Total current liabilities | | 155,368 |
| | 178,062 |
|
| | | | |
Long-term debt, net | | 90,000 |
| | 120,599 |
|
Other noncurrent liabilities | | 107,875 |
| | 197,374 |
|
Noncurrent liabilities related to assets held for sale (Note 2) | | — |
| | 7,232 |
|
Total liabilities | | 353,243 |
| | 503,267 |
|
| | | | |
Commitments and contingencies (Note 8) | |
| |
|
Shareholders' equity: | | | | |
Common stock, $0.05 par value; issued and outstanding, 45,258,571 and 46,400,367 common shares at June 30, 2018 and 2017, respectively | | 2,263 |
| | 2,320 |
|
Additional paid-in capital | | 194,436 |
| | 214,109 |
|
Accumulated other comprehensive income | | 9,568 |
| | 3,336 |
|
Retained earnings | | 297,225 |
| | 288,456 |
|
| | | | |
Total shareholders' equity | | 503,492 |
| | 508,221 |
|
| | | | |
Total liabilities and shareholders' equity | | $ | 856,735 |
| | $ | 1,011,488 |
|
REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars and shares in thousands, except per share data) | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
Revenues: | | | | | | |
Service | | $ | 108,120 | | | $ | 331,538 | | | $ | 749,660 | |
Product | | 91,544 | | | 137,586 | | | 225,618 | |
Royalties and fees | | 88,057 | | | 73,402 | | | 93,761 | |
Franchise rental income (Note 6) | | 127,392 | | | 127,203 | | | — | |
Total revenue | | 415,113 | | | 669,729 | | | 1,069,039 | |
Operating expenses: | | | | | | |
Cost of service | | 79,144 | | | 222,279 | | | 452,827 | |
Cost of product | | 79,167 | | | 84,698 | | | 128,816 | |
Site operating expenses | | 51,463 | | | 71,543 | | | 141,031 | |
General and administrative | | 105,433 | | | 130,953 | | | 177,004 | |
Rent (Note 6) | | 40,930 | | | 76,382 | | | 131,816 | |
Franchise rent expense (Note 6) | | 127,392 | | | 127,203 | | | — | |
Depreciation and amortization | | 22,713 | | | 36,952 | | | 37,848 | |
Long-lived asset impairment (Note 1) | | 13,023 | | | 22,560 | | | — | |
TBG mall location restructuring (Note 3) | | — | | | 2,333 | | | 21,816 | |
Goodwill impairment (Note 1) | | — | | | 40,164 | | | — | |
Total operating expenses | | 519,265 | | | 815,067 | | | 1,091,158 | |
| | | | | | |
Operating loss | | (104,152) | | | (145,338) | | | (22,119) | |
| | | | | | |
Other (expense) income: | | | | | | |
Interest expense | | (13,813) | | | (7,522) | | | (4,795) | |
(Loss) gain from sale of salon assets to franchisees, net | | (16,696) | | | (27,306) | | | 2,918 | |
Interest income and other, net | | 15,902 | | | 3,353 | | | 1,729 | |
| | | | | | |
Loss from continuing operations before income taxes | | (118,759) | | | (176,813) | | | (22,267) | |
| | | | | | |
Income tax benefit | | 5,428 | | | 4,619 | | | 2,145 | |
| | | | | | |
Loss from continuing operations | | (113,331) | | | (172,194) | | | (20,122) | |
| | | | | | |
Income from discontinued operations, net of income taxes (Note 3) | | — | | | 832 | | | 5,896 | |
| | | | | | |
Net loss | | $ | (113,331) | | | $ | (171,362) | | | $ | (14,226) | |
| | | | | | |
Net loss per share: | | | | | | |
Basic and diluted: | | | | | | |
Loss from continuing operations | | $ | (3.15) | | | $ | (4.79) | | | $ | (0.48) | |
Income from discontinued operations | | — | | | 0.02 | | | 0.14 | |
Net loss per share, basic and diluted (1) | | $ | (3.15) | | | $ | (4.77) | | | $ | (0.34) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Weighted average common and common equivalent shares outstanding: | | | | | | |
Basic and diluted | | 35,956 | | | 35,936 | | | 41,829 | |
| | | | | | |
(1)Total is a recalculation; line items calculated individually may not sum to total due to rounding.
The accompanying notes are an integral part of the Consolidated Financial Statements.
REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONSCOMPREHENSIVE LOSS
(Dollars in thousands, except per share data)
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2018 | | 2017 | | 2016 |
Revenues: | | | | | | |
Service | | $ | 899,051 |
| | $ | 960,347 |
| | $ | 978,614 |
|
Product | | 258,666 |
| | 259,822 |
| | 265,796 |
|
Royalties and fees | | 56,357 |
| | 48,291 |
| | 47,523 |
|
| | 1,214,074 |
| | 1,268,460 |
| | 1,291,933 |
|
Operating expenses: | | | | | | |
Cost of service | | 530,582 |
| | 610,384 |
| | 608,965 |
|
Cost of product | | 140,623 |
| | 126,297 |
| | 130,015 |
|
Site operating expenses | | 127,249 |
| | 127,797 |
| | 135,139 |
|
General and administrative | | 174,045 |
| | 157,335 |
| | 157,012 |
|
Rent | | 183,096 |
| | 180,478 |
| | 184,150 |
|
Depreciation and amortization | | 58,205 |
| | 52,088 |
| | 52,888 |
|
Total operating expenses | | 1,213,800 |
| | 1,254,379 |
| | 1,268,169 |
|
| | | | | | |
Operating income | | 274 |
| | 14,081 |
| | 23,764 |
|
| | | | | | |
Other (expense) income: | | | | | | |
Interest expense | | (10,492 | ) | | (8,584 | ) | | (9,229 | ) |
Interest income and other, net | | 6,670 |
| | 2,831 |
| | 3,713 |
|
| | | | | | |
(Loss) income from continuing operations before income taxes and equity in loss of affiliated companies | | (3,548 | ) | | 8,328 |
| | 18,248 |
|
| | | | | | |
Income tax benefit (expense) | | 65,434 |
| | (9,224 | ) | | (9,049 | ) |
| | | | | | |
Equity in loss of affiliated companies, net of income taxes | | — |
| | — |
| | (14,786 | ) |
Income (loss) from continuing operations | | 61,886 |
| | (896 | ) | | (5,587 | ) |
Loss from discontinued operations, net of income taxes (Note 2) | | (53,185 | ) | | (15,244 | ) | | (5,729 | ) |
Net income (loss) | | $ | 8,701 |
| | $ | (16,140 | ) | | $ | (11,316 | ) |
| | | | | | |
Net income (loss) per share: | | | | | | |
Basic: | | | | | | |
Income (loss) from continuing operations | | $ | 1.33 |
| | $ | (0.02 | ) | | $ | (0.12 | ) |
Loss from discontinued operations | | (1.14 | ) | | (0.33 | ) | | (0.12 | ) |
Net income (loss) per share, basic (1) | | $ | 0.19 |
| | $ | (0.35 | ) | | $ | (0.23 | ) |
Diluted: | | | | | | |
Income (loss) from continuing operations | | $ | 1.32 |
| | $ | (0.02 | ) | | $ | (0.12 | ) |
Loss from discontinued operations | | (1.13 | ) | | (0.33 | ) | | (0.12 | ) |
Net income (loss) per share, diluted (1) | | $ | 0.18 |
| | $ | (0.35 | ) | | $ | (0.23 | ) |
Weighted average common and common equivalent shares outstanding: | | | | | | |
Basic | | 46,517 |
| | 46,359 |
| | 48,542 |
|
Diluted | | 47,035 |
| | 46,359 |
| | 48,542 |
|
thousands) | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
Net loss | | $ | (113,331) | | | $ | (171,362) | | | $ | (14,226) | |
Other comprehensive income (loss), net of tax: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Net current period foreign currency translation adjustments | | 1,888 | | | (1,462) | | | 185 | |
Recognition of deferred compensation | | 206 | | | (431) | | | (499) | |
Other comprehensive income (loss) | | 2,094 | | | (1,893) | | | (314) | |
Comprehensive loss | | $ | (111,237) | | | $ | (173,255) | | | $ | (14,540) | |
| |
(1) | Total is a recalculation; line items calculated individually may not sum to total due to rounding. |
The accompanying notes are an integral part of the Consolidated Financial Statements.
REGIS CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)SHAREHOLDERS' EQUITY
(Dollars in thousands, except share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Retained Earnings (Deficit) | | Total |
| | Shares | | Amount | | | | |
| | | | | | | | | | | | |
Balance, June 30, 2018 | | 45,258,571 | | | $ | 2,263 | | | $ | 194,436 | | | $ | 9,656 | | | $ | 280,083 | | | $ | 486,438 | |
Net loss | | — | | | — | | | — | | | — | | | (14,226) | | | (14,226) | |
Foreign currency translation | | — | | | — | | | — | | | 185 | | | — | | | 185 | |
Stock repurchase program | | (8,605,430) | | | (431) | | | (154,114) | | | — | | | — | | | (154,545) | |
Exercise of SARs | | 22,263 | | | 1 | | | (222) | | | — | | | — | | | (221) | |
Stock-based compensation | | — | | | — | | | 9,003 | | | — | | | — | | | 9,003 | |
| | | | | | | | | | | | |
Recognition of deferred compensation (Note 11) | | — | | | — | | | — | | | (499) | | | — | | | (499) | |
Net restricted stock activity | | 193,845 | | | 10 | | | (1,951) | | | — | | | — | | | (1,941) | |
Minority interest (Note 1) | | — | | | — | | | — | | | — | | | 51 | | | 51 | |
Balance, June 30, 2019 | | 36,869,249 | | | 1,843 | | | 47,152 | | | 9,342 | | | 265,908 | | | 324,245 | |
Net loss | | — | | | — | | | — | | | — | | | (171,362) | | | (171,362) | |
Foreign currency translation | | — | | | — | | | — | | | (1,462) | | | — | | | (1,462) | |
Stock repurchase program | | (1,504,000) | | | (75) | | | (26,281) | | | — | | | — | | | (26,356) | |
Exercise of SARs | | 1,776 | | | — | | | 28 | | | — | | | — | | | 28 | |
Stock-based compensation | | — | | | — | | | 3,275 | | | — | | | — | | | 3,275 | |
Recognition of deferred compensation (Note 11) | | — | | | — | | | — | | | (431) | | | — | | | (431) | |
Net restricted stock activity | | 258,691 | | | 13 | | | (2,163) | | | — | | | — | | | (2,150) | |
Minority interest (Note 1) | | — | | | — | | | — | | | — | | | (84) | | | (84) | |
Balance, June 30, 2020 | | 35,625,716 | | | 1,781 | | | 22,011 | | | 7,449 | | | 94,462 | | | 125,703 | |
Net loss | | — | | | — | | | — | | | — | | | (113,331) | | | (113,331) | |
Foreign currency translation (Note 1) | | — | | | — | | | — | | | 1,888 | | | — | | | 1,888 | |
| | | | | | | | | | | | |
Exercise of SARs | | 3,775 | | | — | | | (24) | | | — | | | — | | | (24) | |
Stock-based compensation | | — | | | — | | | 3,254 | | | — | | | — | | | 3,254 | |
Recognition of deferred compensation (Note 11) | | — | | | — | | | — | | | 206 | | | — | | | 206 | |
Net restricted stock activity | | 166,353 | | | 9 | | | (139) | | | — | | | — | | | (130) | |
Minority interest (Note 1) | | — | | | — | | | — | | | — | | | (520) | | | (520) | |
Balance, June 30, 2021 | | 35,795,844 | | | $ | 1,790 | | | $ | 25,102 | | | $ | 9,543 | | | $ | (19,389) | | | $ | 17,046 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands) | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (113,331) | | | $ | (171,362) | | | $ | (14,226) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | |
Non-cash adjustments related to discontinued operations | | — | | | (1,098) | | | 306 | |
Depreciation and amortization (Note 1) | | 17,871 | | | 33,101 | | | 33,261 | |
| | | | | | |
| | | | | | |
Salon asset impairment | | — | | | 3,851 | | | 4,587 | |
Long-lived asset impairment | | 13,023 | | | 22,560 | | | — | |
Deferred income taxes | | (3,388) | | | (3,934) | | | (9,812) | |
Inventory reserve | | 12,068 | | | — | | | — | |
| | | | | | |
Gain from disposal of distribution center assets | | (14,997) | | | — | | | — | |
Gain from sale of company headquarters, net | | — | | | (2,513) | | | — | |
Loss (gain) from sale of salon assets to franchisees, net | | 16,696 | | | 27,306 | | | (2,918) | |
Non-cash TBG mall location restructuring charge (Note 3) | | — | | | — | | | 21,008 | |
Goodwill impairment | | — | | | 40,164 | | | — | |
| | | | | | |
Stock-based compensation | | 3,254 | | | 3,275 | | | 9,003 | |
Amortization of debt discount and financing costs | | 1,839 | | | 398 | | | 275 | |
Other non-cash items affecting earnings | | (351) | | | (539) | | | (903) | |
Changes in operating assets and liabilities (1): | | | | | | |
Receivables | | (279) | | | (3,902) | | | (17,304) | |
Inventories | | 17,879 | | | (2,255) | | | (8,492) | |
Income tax receivable | | 1,295 | | | (1,804) | | | (703) | |
Other current assets | | 1,658 | | | 2,827 | | | (783) | |
Other assets | | (2,896) | | | (10,094) | | | (5,546) | |
Accounts payable | | (21,669) | | | 4,588 | | | (5,836) | |
Accrued expenses | | 5,296 | | | (27,622) | | | (20,158) | |
Net lease liabilities | | (19,248) | | | 276 | | | — | |
Other non-current liabilities | | (14,603) | | | 368 | | | 717 | |
Net cash used in operating activities: | | (99,883) | | | (86,409) | | | (17,524) | |
Cash flows from investing activities: | | | | | | |
Capital expenditures | | (11,475) | | | (37,494) | | | (31,616) | |
| | | | | | |
Proceeds from sale of company headquarters | | — | | | 8,996 | | | — | |
Proceeds from sale of assets to franchisees | | 8,437 | | | 91,616 | | | 94,787 | |
Costs associated with sale of assets to franchisees | | (261) | | | (2,089) | | | — | |
Proceeds from company-owned life insurance policies | | 1,200 | | | — | | | 24,617 | |
Net cash (used in) provided by investing activities: | | (2,099) | | | 61,029 | | | 87,788 | |
Cash flows from financing activities: | | | | | | |
Borrowings on revolving credit facility | | 10,000 | | | 213,000 | | | — | |
Repayments of revolving credit facility | | (589) | | | (125,500) | | | — | |
Repurchase of common stock | | — | | | (28,246) | | | (152,661) | |
Proceeds from sale and leaseback transactions | | — | | | — | | | 28,821 | |
Minority interest buyout | | (562) | | | — | | | — | |
Distribution center lease payments | | (724) | | | (769) | | | (378) | |
Taxes paid for shares withheld | | (348) | | | (2,320) | | | (2,477) | |
| | | | | | |
Net cash provided by (used in) financing activities: | | 7,777 | | | 56,165 | | | (126,695) | |
Effect of exchange rate changes on cash and cash equivalents | | 477 | | | (284) | | | 35 | |
(Decrease) increase in cash, cash equivalents and restricted cash | | (93,728) | | | 30,501 | | | (56,396) | |
Cash, cash equivalents and restricted cash: | | | | | | |
Beginning of year | | 122,880 | | | 92,379 | | | 148,775 | |
| | | | | | |
| | | | | | |
End of year | | $ | 29,152 | | | $ | 122,880 | | | $ | 92,379 | |
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2018 | | 2017 | | 2016 |
Net income (loss) | | $ | 8,701 |
| | $ | (16,140 | ) | | $ | (11,316 | ) |
Other comprehensive income (loss), net of tax: | | | | | | |
Foreign currency translation adjustments during the period: | | | | | | |
Foreign currency translation adjustments | | (256 | ) | | (1,889 | ) | | (4,276 | ) |
Reclassification adjustments for losses included in net income (loss) (Note 2) | | 6,152 |
| | — |
| | — |
|
Net current period foreign currency translation adjustments | | 5,896 |
| | (1,889 | ) | | (4,276 | ) |
Recognition of deferred compensation | | 336 |
| | 157 |
| | (162 | ) |
Other comprehensive income (loss) | | 6,232 |
| | (1,732 | ) | | (4,438 | ) |
Comprehensive income (loss) | | $ | 14,933 |
| | $ | (17,872 | ) | | $ | (15,754 | ) |
(1)Changes in operating assets and liabilities exclude assets and liabilities sold or acquired.
The accompanying notes are an integral part of the Consolidated Financial Statements.
REGIS CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total |
| | Shares | | Amount | | | | |
Balance, June 30, 2015 | | 53,664,366 |
| | $ | 2,683 |
| | $ | 298,396 |
| | $ | 9,506 |
| | $ | 316,859 |
| | $ | 627,444 |
|
Net loss | | |
| | |
| | |
| | |
| | (11,316 | ) | | (11,316 | ) |
Foreign currency translation adjustments | | |
| | |
| | |
| | (4,276 | ) | | |
| | (4,276 | ) |
Stock repurchase program | | (7,647,819 | ) | | (382 | ) | | (100,653 | ) | | | | | | (101,035 | ) |
Exercise of SARs & stock options | | 107 |
| | — |
| | — |
| | |
| | |
| | — |
|
Stock-based compensation | | |
| | |
| | 9,797 |
| | |
| | |
| | 9,797 |
|
Shares issued through franchise stock incentive program | | 22,084 |
| | 1 |
| | 330 |
| | |
| | |
| | 331 |
|
Recognition of deferred compensation (Note 10) | | |
| | |
| | |
| | (162 | ) | | |
| | (162 | ) |
Net restricted stock activity | | 115,672 |
| | 6 |
| | (734 | ) | | |
| | |
| | (728 | ) |
Minority interest (Note 1) | | | | | | 339 |
| | | | (993 | ) | | (654 | ) |
Balance, June 30, 2016 | | 46,154,410 |
| | 2,308 |
| | 207,475 |
| | 5,068 |
| | 304,550 |
| | 519,401 |
|
Net loss | | |
| | |
| | |
| | |
| | (16,140 | ) | | (16,140 | ) |
Foreign currency translation adjustments | | |
| | |
| | |
| | (1,889 | ) | | |
| | (1,889 | ) |
Exercise of SARs & stock options | | 4,370 |
| | — |
| | (42 | ) | | |
| | |
| | (42 | ) |
Stock-based compensation | | |
| | |
| | 9,991 |
| | |
| | |
| | 9,991 |
|
Shares issued through franchise stock incentive program | | 27,819 |
| | 1 |
| | 352 |
| | |
| | |
| | 353 |
|
Recognition of deferred compensation (Note 10) | | |
| | |
| | |
| | 157 |
| | |
| | 157 |
|
Net restricted stock activity | | 213,768 |
| | 11 |
| | (3,667 | ) | | |
| | |
| | (3,656 | ) |
Minority interest (Note 1) | | |
| | |
| |
|
| | |
| | 46 |
| | 46 |
|
Balance, June 30, 2017 | | 46,400,367 |
| | 2,320 |
| | 214,109 |
| | 3,336 |
| | 288,456 |
| | 508,221 |
|
Net income | | |
| | |
| | |
| | |
| | 8,701 |
| | 8,701 |
|
Foreign currency translation adjustments (Note 1) | | |
| | |
| | |
| | 5,896 |
| | |
| | 5,896 |
|
Stock repurchase program | | (1,469,057 | ) | | (74 | ) | | (24,724 | ) | | | | | | (24,798 | ) |
Exercise of SARs & stock options | | 33,342 |
| | 2 |
| | (332 | ) | | | | | | (330 | ) |
Stock-based compensation | | | | | | 7,475 |
| | | | | | 7,475 |
|
Shares issued through franchise stock incentive program | | 522 |
| | — |
| | 7 |
| | | | | | 7 |
|
Recognition of deferred compensation (Note 10) | | | | | | | | 336 |
| | | | 336 |
|
Net restricted stock activity | | 293,397 |
| | 15 |
| | (2,099 | ) | | |
| | |
| | (2,084 | ) |
Minority interest (Note 1) | | |
| | |
| | | | |
| | 68 |
| | 68 |
|
Balance, June 30, 2018 | | 45,258,571 |
| | $ | 2,263 |
| | $ | 194,436 |
| | $ | 9,568 |
| | $ | 297,225 |
| | $ | 503,492 |
|
REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2018 | | 2017 | | 2016 |
Cash flows from operating activities: | | | | | | |
Net income (loss) | | $ | 8,701 |
| | $ | (16,140 | ) | | $ | (11,316 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
Non-cash impairment related to discontinued operations | | 38,826 |
| | — |
| | — |
|
Depreciation and amortization | | 39,433 |
| | 40,722 |
| | 42,411 |
|
Depreciation related to discontinued operations | | 3,738 |
| | 14,239 |
| | 14,581 |
|
Equity in loss of affiliated companies | | — |
| | 81 |
| | 14,783 |
|
Deferred income taxes | | (75,863 | ) | | 7,962 |
| | 7,023 |
|
Gain on life insurance proceeds | | (7,986 | ) | | — |
| | — |
|
Gain from sale of salon assets to franchisees, net(2) | | (241 | ) | | (492 | ) | | (1,000 | ) |
Loss on write down of inventories | | — |
| | 5,905 |
| | — |
|
Salon asset impairments | | 11,092 |
| | 11,366 |
| | 10,478 |
|
Accumulated other comprehensive income reclassification adjustments (Note 2) | | 6,152 |
| | — |
| | — |
|
Stock-based compensation | | 8,269 |
| | 13,142 |
| | 9,797 |
|
Amortization of debt discount and financing costs | | 4,080 |
| | 1,403 |
| | 1,514 |
|
Other non-cash items affecting earnings | | (294 | ) | | 935 |
| | 310 |
|
Changes in operating assets and liabilities(1): | | | | | | |
Receivables | | (12,081 | ) | | 724 |
| | (577 | ) |
Inventories | | 13,940 |
| | 4,010 |
| | (7,109 | ) |
Income tax receivable | | 527 |
| | (535 | ) | | 501 |
|
Other current assets | | (23 | ) | | 820 |
| | (460 | ) |
Other assets | | (11,229 | ) | | (2,586 | ) | | (1,133 | ) |
Accounts payable | | (1,103 | ) | | (684 | ) | | (4,624 | ) |
Accrued expenses | | (12,526 | ) | | (13,667 | ) | | (14,280 | ) |
Other noncurrent liabilities | | (11,084 | ) | | (7,150 | ) | | (5,113 | ) |
Net cash provided by operating activities | | 2,328 |
| | 60,055 |
| | 55,786 |
|
Cash flows from investing activities: | | | | | | |
Capital expenditures | | (29,571 | ) | | (26,572 | ) | | (23,151 | ) |
Capital expenditures related to discontinued operations | | (1,171 | ) | | (7,271 | ) | | (7,966 | ) |
Proceeds from sale of salon assets to franchisees(2) | | 11,582 |
| | 2,253 |
| | 1,740 |
|
Change in restricted cash | | (524 | ) | | 1,123 |
| | 9,042 |
|
Proceeds from company-owned life insurance policies | | 18,108 |
| | 876 |
| | 2,948 |
|
Proceeds from sale of investment | | — |
| | 500 |
| | — |
|
Net cash used in investing activities | | (1,576 | ) | | (29,091 | ) | | (17,387 | ) |
Cash flows from financing activities: | | | | | | |
Borrowings on revolving credit facilities | | 90,000 |
| | — |
| | — |
|
Repayments of long-term debt and capital lease obligations | | (124,230 | ) | | — |
| | (2 | ) |
Repurchase of common stock | | (24,798 | ) | | — |
| | (101,035 | ) |
Purchase of noncontrolling interest | | — |
| | — |
| | (760 | ) |
Employee taxes paid for shares withheld | | (2,413 | ) | | (3,698 | ) | | (754 | ) |
Settlement of equity awards | | (794 | ) | | (3,151 | ) | | — |
|
Net cash used in financing activities | | (62,235 | ) | | (6,849 | ) | | (102,551 | ) |
Effect of exchange rate changes on cash and cash equivalents | | (514 | ) | | 935 |
| | (781 | ) |
(Decrease) increase in cash and cash equivalents | | (61,997 | ) | | 25,050 |
| | (64,933 | ) |
Cash and cash equivalents: | | | | | | |
Beginning of year | | 171,044 |
| | 147,346 |
| | 212,279 |
|
Cash and cash equivalents included in current assets held for sale | | 1,352 |
| | — |
| | — |
|
Beginning of year, total cash and cash equivalents | | 172,396 |
| | 147,346 |
| | 212,279 |
|
End of year | | $ | 110,399 |
| | $ | 172,396 |
| | $ | 147,346 |
|
| |
(1) | Changes in operating assets and liabilities exclude assets and liabilities sold or acquired. |
(2) Excludes transaction with The Beautiful Group.
The accompanying notes are an integral part of the Consolidated Financial Statements.
Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description:
Regis Corporation (the "Company") owns, operates andCompany) franchises technology-enabled hairstyling and hair care salons throughout the United States (U.S.), Canada, Puerto Rico and the United Kingdom (U.K.), Canada. The business is evaluated in 2 segments, Franchise salons and Puerto Rico. Substantially all ofCompany-owned salons. See Note 15 to the hairstyling and hair care salons owned and operated by the Company in the U.S., Canada and Puerto RicoConsolidated Financial Statements. Salons are located in leased space in enclosed mall shopping centers, strip shopping centers, malls or Walmart Supercenters. Franchised salons throughoutWalmart.
COVID-19 Impact:
During fiscal years 2021 and 2020, the U.S. are primarily located in strip shopping centers, Walmart Supercenters and mall-based locations. All salonsglobal coronavirus pandemic (COVID-19) had an adverse impact on operations, including government-mandated salon closures in the U.K. are Franchised locations and operate in malls, leading department stores, mass merchants and high-street locations.
During the firstfourth quarter of fiscal year 2018, the Company redefined its operating segments2020 and other prolonged closures, particularly in California and Ontario, in fiscal year 2021. The COVID-19 pandemic continues to reflect how the chief operating decision maker evaluates the business asimpact salon guest visits resulting in a significant reduction in revenue and traffic. As a result, selling substantially all of its mall-based salon business in North America, representing 858 salons,COVID-19 has and substantially all of its previous International segment, representing 250 salons in the UK,may continue to The Beautiful Group ("TBG"), an affiliate of Regent, a private equity firm based in Los Angeles, California, who operates these locations as franchise locations. See additional discussion on these discontinued operations in Note 2 to the Consolidated Financial Statements. Based on the way the chief operating decision maker evaluates the business, the Company has two reportable segments: Company-owned salonsnegatively affect revenue and Franchise salons. Prior to this change, the Company had four operating segments: North American Value, North American Premium, North American Franchise and International. See Note 14 to the Consolidated Financial Statements.
Smartstyle Restructuring:
In January 2018, the Company closed 597 non-performing Company owned SmartStyle salons. The action delivers on the Company's commitment to restructure its salon portfolio to improve shareholder value and position the Company for long-term growth. The Company anticipates this action will allow the Company to reallocate capital and human resources to strategically grow its remaining SmartStyle salons with creative new offerings. A summary of costs associated with the SmartStyle salon restructuring for fiscal year 2018 is as follows:
|
| | | | | |
| Financial Line Item | | Fiscal Year 2018 |
| | | (Dollars in thousands) |
Inventory reserves | Cost of Service | | $ | 656 |
|
Inventory reserves | Cost of Product | | 586 |
|
Severance | General and administrative | | 897 |
|
Long-lived fixed asset impairment | Depreciation and amortization | | 5,460 |
|
Asset retirement obligation | Depreciation and amortization | | 7,680 |
|
Lease termination and other related closure costs | Rent | | 27,290 |
|
Deferred rent | Rent | | (3,291 | ) |
Total | | | $ | 39,278 |
|
In addition, the Company recorded approximately $1.9 million of other related costs to the SmartStyle restructuring, primarily warehouse related costs. Substantially all related costs associated with the SmartStyle salon restructuring requiring cash outflow were complete as of June 30, 2018.profitability.
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 consolidates variable interest entities where it has determined it is the primary beneficiary of those entities' operations.
Variable Interest Entities:
The Company has interests in certain privately heldprivately-held entities through arrangements that do not involve voting interests. Such entities, known as a variable interest entityentities (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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of June 30, 2018,2021, the Company has one VIE, Roosters MGC International LLC (Roosters),no VIE's where the Company is the primary beneficiary. The Company owns an 84.0% ownership interest in Roosters. As of June 30, 2018, total assets, total liabilities and total shareholders' equity of Roosters were $8.3, $0.6 and $7.7 million, respectively. Net income attributable to the non-controlling interest in Roosters was immaterial for fiscal years 2018, 2017 and 2016. Shareholders' equity attributable to the non-controlling interest in Roosters was $1.0 and $0.9 million as of June 30, 2018 and 2017, respectively and recorded within retained earnings on the Consolidated Balance Sheet.
The Company accounts for itshas an investment in Empire EductionEducation Group, Inc. ("EEG")(EEG). During fiscal year 2020, the Company signed an agreement to sell its interest in EEG to the other shareholder. The transaction is expected to close in fiscal year 2022, at which time the Company expects to record an immaterial non-operating gain. Until the transaction closes, the Company continues to account for EEG as an equity investment under the voting interest model, as themodel. The Company has granted the other shareholder of EEG an irrevocable proxy to vote a certain number of the Company’sCompany's shares such that the other shareholder of EEG has voting control of 51.0% of EEG’sEEG's common stock, as well as the right to appoint four4 of the five5 members of EEG’sEEG's Board of Directors. See Note 5 to the Consolidated Financial Statements.
The Company utilized the consolidationwrote off its investment balance in EEG in fiscal year 2016.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Use of Estimates:
The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the 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. Due to the economic disruption caused by the COVID-19 pandemic, the Company faces a greater degree of uncertainty than normal in making judgments and estimates needed to apply the Company's significant accounting policies. Actual results couldand outcomes may differ from those estimates.management's estimates and assumptions.
Cash, Cash Equivalents and Cash Equivalents:Restricted Cash:
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 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, 20182021 and 2017.2020.
The Company has restrictedRestricted cash within other current assets primarily relatedrelates to consolidated advertising cooperatives funds, which can only be used to settle obligations of the respective cooperatives and contractual obligations to collateralize itsthe Company's self-insurance programs. The self-insurance restricted cash arrangement can be canceled by the Company at any time if substituted with letters of credit. The table below reconciles the cash and cash equivalents balances and restricted cash balance is classifiedbalances, recorded within other current assets on the Consolidated Balance Sheet.Sheet to the amount of cash, cash equivalents and restricted cash reported on the Consolidated Statement of Cash Flows: | | | | | | | | | | | | | | |
| | June 30, |
| | 2021 | | 2020 |
| | | | |
| | (Dollars in thousands) |
Cash and cash equivalents | | $ | 19,191 | | | $ | 113,667 | |
Restricted cash, included in other current assets | | 9,961 | | | 9,213 | |
Total cash, cash equivalents and restricted cash | | $ | 29,152 | | | $ | 122,880 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. At June 30, 2018, the receivable balance also included $24.6 millionfranchisees, credit card receivables and receivables related to the cash surrender value of company-owned life insurance policies surrendered priorsalons sold to June 30, 2018. The Company received these proceeds in July 2018.franchisees. The balance is presented net of an allowance for expected losses (i.e., doubtful accounts), primarily related to 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 franchisees are unable to make their required payments based on factors such as delinquencies and aging trends.
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. As of June 30, 2018, 20172021, 2020 and 2016,2019, the allowance for doubtful accounts was $1.2, $0.8$7.8, $6.9 and $1.3$2.0 million, respectively. Activity in theThe allowance for doubtful accounts duringincreased in fiscal years 2018, 2017 and 2016 was not significant.year 2021 due to lower franchisees sales increasing the risk of default. See Note 2 to the Consolidated Financial Statements.
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 relaxers. Inventories are stated at the lower of cost or market, with cost determined on a weighted average cost basis.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Physical inventory counts are performed annuallyprimarily in the fourth quarter of the fiscal year for salons.salons and throughout the year at the distribution centers. Product and service inventories are adjusted based on the physical inventory counts. During the fiscal year, 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. The cost of product used in salon services is determined by applying an estimated percentage of total cost of service to service revenues. These estimates are updated quarterly based on cycle count results for the distribution centers, and salons, service sales mix, discounting, special promotions and other factors.
The Company has inventory valuation reserves for excess and obsolete inventories, or other factors that may render inventories unmarketable at their historical costs. EstimatesIn fiscal year 2021, the Company announced it would transition away from its wholesale product distribution model in favor of a third-party distribution model. As a result, the future demand forCompany plans to exit its 2 distribution centers in fiscal year 2022. To facilitate the exit, the Company is selling inventory at discounts and disposing of hard to sell products. Additionally, the reduction in company-owned salons decreases the Company's ability to re-distribute inventory from closed locations to other salons to be sold or used. These two factors resulted in a significant increase in inventory write-offs and anticipated changesan overall increase in formulasthe inventory valuation reserve during fiscal year 2021. The fiscal year 2021 non-cash inventory write-off charge of $12.1 million was recorded to Cost of product in the Consolidated Statement of Operations. The inventory valuation reserve as of June 30, 2021 and packaging are some of the other factors used by management in assessing the net realizable value of inventories.2020 was $11.8 million and $1.2 million, respectively.
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over their estimated useful asset lives (30(i.e., 30 to 39 years for buildings, 10 years or lease life for improvements and three to ten years or lease life for equipment, furniture and software). Depreciation expense was $38.1, $42.7$17.1, $31.8 and $44.4$31.9 million in fiscal years 2018, 20172021, 2020 and 2016,2019, respectively. Depreciation expense for fiscal year 2021 includes $4.7 million of asset retirement obligations, which is a cash expense. Fiscal years 2020 and 2019 had no asset retirement obligations.
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. Estimated useful lives range from fivethree to seven years.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Right of Use Asset, Lease Liabilities and Rent Expense:
At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 1 to 20 years with many leases renewable for an additional 5 to 10 year term at the option of the Company. In addition to the obligation to make fixed rental payments for the use of the salons, the Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses.
The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease costs are passed through to franchisees. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the Consolidated Statement of Operations.
For salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date, including one lease term option when the lease is expected to be renewed. The right of use asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any. The Company's consolidated ROU asset balance was $611.9 and $786.2 million as of June 30, 2021 and 2020, respectively. For leases classified as operating leases, expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. Generally, the non-lease components, such as real estate taxes and other occupancy expenses, are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable.
The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on the original lease term.
Certain leases provide for contingent rents that 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Salon Long-Lived Asset and Right of Use Asset Impairment Assessments, Excluding Goodwill:Assessments:
A lessee's ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment. The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Poor salon performance in fiscal year 2020 and 2021, primarily due to the COVID-19 pandemic, resulted in ASC 360-10-35-21 triggering events. As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360.
The Company assesses impairment of long-lived salon assets and right of use assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable. 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. ImpairmentThe first step is evaluated based onto assess recoverability, and in doing that, the sum of undiscounted estimated future cash flows expectedare compared to result from use of the long-lived assets.carrying value. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the estimated fairdifference between the carrying value of the assets.asset group and its fair value. The fair value of the salon long-lived assetsasset group is estimated using a discounted cash flow modelmarket participant methods based on the best information available, includingavailable. The fair value of the right of use asset is estimated by determining what a market participant would pay over the life of the primary asset in the group, discounted back to June 30, 2021. See Note 6 for further discussion related to right of use asset impairment.
The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon level revenuesasset group to the undiscounted net cash flows to be generated from the use and expenses. Long-livedeventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases.
Step two of the long-lived asset impairment charges are recordedtest requires that the fair value of the asset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within depreciationASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and amortizationassumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include: the market rent of comparable properties, the asset group's projected sales for properties and a discount rate.
The fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include: the market rent of comparable properties, the asset group's projected sales for fiscal years 2021 through 2023, and a discount rate. The Company engaged a third-party valuation specialist to assist with the research related to inputs used in their determination of the fair value of the ROU asset, which included providing information related to significant inputs and assumptions utilized in the measurement of the impairment loss.
For fiscal year 2021, the Company recognized a long-lived asset impairment charge of $13.0 million, which included $9.5 million related to ROU assets on the Consolidated Statement of Operations.
Judgments made by management related to For fiscal year 2020, the expected useful livesCompany recognized a long-lived asset impairment charge of $22.6 million, which included a right of use asset impairment of $17.4 million. A long-lived asset impairment charge was not recognized in fiscal year 2019. The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets and the ability to realize undiscounted cash flows in excess of the group on a pro-rata basis using their relative carrying amountsamounts. Additionally, the impairment losses did not reduce the carrying amount of suchan individual asset below its fair value, including for the ROU assets areincluded in the salon asset groups. Assessing the long-lived assets for impairment requires management to make assumptions and to apply judgment which can be affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changesother factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in operating performance. As the ongoing expected cash flowsestimates or assumptions it uses to calculate impairment losses for its long-lived asset, including its ROU assets. However, the ultimate severity and carrying amountslongevity of long-lived assetsthe COVID-19 pandemic is unknown; therefore, if actual results are assessed, these factors could causenot consistent with the estimates and assumptions used in the calculations, the Company may be exposed to realize materialfuture impairment charges.losses that could be material. Our projections of future operating performance do not anticipate future salon closures due to the COVID-19 pandemic. See Note 6 to the Consolidated Financial Statements.
Long-lived asset impairment charges
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill:
As of June 30, 20182021 and 2017,2020, the Franchise reporting unit had $229.6 and $227.5 million of goodwill and the Company-owned reporting unit had $184.8 and $188.9 million ofno goodwill respectively, and the Franchise salons reporting unit had $227.9 and $228.1 million of goodwill, respectively.for both periods. See Note 45 to the Consolidated Financial Statements. The Company assesses goodwill impairment on an annual basis during the Company’s fourth fiscal quarter,as of April 30, and between annual assessments if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill impairment assessments are performed at the reporting unit level, which is the same as the Company’sCompany's operating segments. As partIn fiscal year 2020, the Company adopted ASU 2017-04, which simplified the test for goodwill impairment. Under this accounting standard, the Company performed its interim impairment test and annual impairment tests by comparing the fair value of a reporting unit to its carrying amount. The Company then records an impairment charge for the new simplification guidance issued byamount that the Financial Accounting Standards Board (FASB),carrying amount exceeds the fair value. This eliminates Step 2 from the goodwill impairment test to simplify the subsequent measure of goodwill. Prior to the adoption, the goodwill assessment involvesinvolved a one-step comparison of the reporting unit’sunit's fair value to its carrying value, including goodwill ("Step 1")(Step 1). The prior guidance required a hypothetical purchase price allocation as the second step of the goodwill impairment assessment, but this step has been eliminated. If the reporting unit’sunit's fair value exceedsexceeded its carrying value, no further procedures arewere required. However, if the reporting unit’sunit's fair value iswas less than the carrying value, an impairment charge iswas recorded for the difference between the fair value and carrying value of the reporting unit. The Company early adopted this guidance when completing the annual fiscal year 2017 impairment assessment and therefore only completed Step 1 of the goodwill impairment assessment.
In applying the goodwill impairment assessment, the Company maycould assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units iswas less than its carrying value (“Step 0”)(Step 0). Qualitative factors maycould include, but arewere not limited to, economic, market and industry conditions, cost factors and overall financial performance of the reporting unit. If after assessing these qualitative factors, the Company determinesdetermined it is “more-likely-than-not”"more-likely-than-not" that the carrying value iswas less than the fair value, then performing Step 1 of the goodwill impairment assessment iswas unnecessary.
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 or expenses of the reporting unit as a percent of total company expenses.
The Company calculates estimated fair values of the reporting units based on discounted future cash flows utilizing estimates in annual revenue, service and product margins, fixed expense rates, allocated corporate overhead, corporate-ownedfranchise and franchisecompany-owned salon counts, proceeds from the sale of company-owned salons to franchisees 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 periodically engages third-party valuation consultants to assist in evaluating the Company's estimated fair value calculations.
Following is a description of the goodwill impairment assessments for each of the fiscal years:
Fiscal Year 20182021
During the first quarter of fiscal year 2018, the Company experienced a triggering event due to the redefining of its operating segments as the Company's mall-based business and International segment met the criteria to be classified as held for sale and as a discontinued operation as of September 30, 2017. The Company's reporting now consist of two reporting units: Company-owned and Franchise. Prior to this change the Company had four reporting units: North American Value, North American Premium, North American Franchise and International.
Pursuant to the change in operating segments, the Company performed a goodwill impairment assessment on its North American Value reporting unit. The Company assessed qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit was less than their carrying values (“Step 0”). The Company determined it is “more-likely-than-not” that the carrying value of the reporting unit was less than the fair value. Accordingly,2021, the Company did not perform a quantitativeexperience any triggering events that required an interim goodwill analysis. Based on the changes to the operating segment structure, there was no goodwill reallocated from the North American Value reporting unit related to the mall-based business that was subsequently sold as the mall-based business previously included in the North American Value reporting unit was projected to incur future losses. The Company did not perform a goodwill impairment assessment for the North American Franchise reporting unit during the first quarter of fiscal year 2018 as this reporting unit was not impacted by the triggering event. The North American Premium and International units did not have any goodwill.
The Company performsperformed its annual impairment assessment as of April 30. For the fiscal year 20182021 annual impairment assessment, due to the transformational efforts completed during the year, the Company elected to forgoperformed a Step 1 impairment test for the optional Step 0 assessment and performed the quantitative impairment analysis on the Company-owned and Franchise reporting units.unit. The Company compared the carrying value of the Franchise reporting units,unit, including goodwill, to theirthe estimated fair value. The results of thesethis assessments indicated that the estimated fair value of our reporting units exceeded their carrying value. Thethe Company's Franchise reporting unit had substantial headroom andsignificantly exceeded the Company-owned reporting unit had headroom of approximately 24%. The fair value of the Company-owned reporting unit was determined based on a discounted cash flow analysis and comparable market multiples. The assumptions used in determining fair value were the number and pace of salons sold to franchisees, proceeds for salon sales, weighted average cost of capital, general and administrative expenses and utilization of net operating loss benefits. We selected the assumptions by considering our historical financial performance and trends, historical salon sale proceeds and estimated salon sale activities. The preparation of our fair value estimate includes uncertain factors and requires significant judgments and estimates which are subject to change. A 100 basis point increase in our weighted average cost of capital within the Company-owned reporting unit would result in a reduction in headroom to approximately 17%.carrying value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other uncertain factors
Fiscal 2020
During the third quarter of fiscal year 2020, the Company determined a triggering event occurred, resulting in quantitative impairment tests performed over the goodwill. This determination was made considering the reduced sales and profitability projections for the reporting units, driven by the COVID-19 pandemic and related economic disruption.
The triggering event experienced in the third quarter impacted both reporting units of the business, Franchise and Company-owned. The Company engaged a third-party valuation specialist to perform an impairment analysis on the Franchise reporting unit of the business. The Company-owned reporting unit is comprised of a portfolio of salons that the Company intends to sell to franchisees or events existclose in the short-term as part of the transition to a fully-franchised model. As a result, the Company-owned reporting unit has a limited life which mayallows the Company to perform its own impairment analysis on the Company-owned reporting unit.
For the goodwill impairment analysis, management utilized a combination of both a discounted cash flows approach and market approach to evaluate the Franchise reporting unit, and the discounted cash flows approach to evaluate the Company-owned reporting unit. The discounted cash flow models reflect management's assumptions regarding revenue growth rates, economic and market trends including deterioration from the current COVID-19 pandemic, cost structure, and other expectations about the anticipated short-term and long-term operating results of the reporting units. For the Franchise reporting unit, the number of salons to be sold to franchisees and the discount rate of 13 percent were significant assumptions utilized in the discounted cash flow. For the Company-owned reporting unit, proceeds from the sale of salons to franchisees and number of salon venditions were the significant assumptions utilized in its discounted cash flow.
As a result of the impairment testing, the Franchise reporting unit was determined to have a fair value that exceeded carrying value by approximately 50 percent. The Company-owned reporting unit was determined to have a carrying value in excess of its fair value, resulting in a goodwill impairment charge of $40.2 million. Prior to the COVID-19 pandemic, the Company had been derecognizing Company-owned goodwill as part of the calculation of gain or loss on the sale of salons to franchisees. The Company-owned reporting unit has no remaining goodwill, so there will be no further derecognition of Company-owned goodwill. The Company performed its annual impairment assessment as of April 30, 2020 and noted no significant changes to the carrying value or the fair value of the Franchise reporting unit, which would indicate that the headroom dropped below the 50 percent determined as of March 31, 2020.
If a future triggering event and require us to perform an interimanalysis or the Company's annual impairment analysis with respect to the carrying value of goodwill for the Company-owned reporting unit prior to our annual assessment. These internal and external factors include but are not limited to the following:
Changes in the company-owned and franchise expansion strategy,
Future market earnings multiples deterioration,
Our financial performance falls short of our projections due to internal operating factors,
Economic recession,
Reduced salon traffic,
Deterioration of industry trends,
Increased competition,
Inability to reduce general and administrative expenses as company-owned salon count potentially decreases,
Other factors causing our cash flow to deteriorate.
If the triggering event analysisassessment indicates the fair value of the Company-ownedFranchise reporting unit has potentially fallen below more than the 24%50 percent headroom, we may be required to perform an updated impairment assessment whichthat may result in a non-cash impairment charge to reduce the carrying value of goodwill.
As of June 30, 2018, the Company's estimated fair value, as determined by the sum of our reporting units' fair value, reconciled within a reasonable range of our market capitalization, which included an assumed control premium of 20.0%.
Assessing goodwill for impairment requires management to make assumptions and to apply judgment, including forecasting future sales, and expenses,future salon sales to franchisees and selecting appropriate discount rates, which can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses of goodwill. However, if actual results are not consistent with the estimates and assumptions used in the calculations, or if there are significant changesmanagement is unable to the Company's planned strategy for company-owned salons,expand its franchise base, the Company may be exposed to future impairment losses that could be material.
Fiscal Year 20172019
During the fourth quarter of fiscal year 2017,2019, the Company experienced adid not experience any triggering eventevents that required an interim goodwill analysis. The Company performed its annual impairment assessment as of April 30. For the fiscal year 2019 annual impairment assessment, due to the redefining of its operating segments, which also coincided withtransformational efforts completed during the annual assessment date. See Note 14 to the Consolidated Financial Statements. In connection with the change in operating segment structure,year, the Company changed its North American reporting units from two reporting units: North American Valueelected to forgo the optional Step 0 assessment and North American Premium, to three reporting units: North American Value, North Americanperformed the quantitative impairment analysis on the Franchise and North American Premium.
Pursuant to the change in operating segments, the Company performed a goodwill impairment assessment on its North American ValueCompany-owned reporting unit. The North American Premium and International units do not have any goodwill.units. The Company compared the carrying value of the North American Value reporting unit,units, including goodwill, to itstheir estimated fair value. The results of these assessments indicated that the estimated fair value of the Company's reporting units exceeded their carrying value. The Franchise reporting unit exceeded its carrying value by ahad substantial margin, resulting in no goodwill impairment.
Assessing goodwill for impairment requires management to make assumptionsheadroom and to apply judgment, including forecasting future sales and expenses, and selecting appropriate discount rates, which can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment lossesCompany-owned reporting unit had headroom of goodwill. However, if actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material.
Based on the changes to the Company's operating segment structure, goodwill has been reallocated based on relative fair value to the North American Value and North American Franchise reporting units at June 30, 2017 and 2016.
Fiscal Years 2016
During the Company’s annual goodwill impairment assessment, the Company assessed qualitative factors to determine whether it is more likely than not that the fair value of the reporting units were less than their carrying value (“Step 0”). The Company determined it is “more-likely-than-not” that the carrying values of the reporting units were less than the fair values. Accordingly, the Company did not perform a two-step quantitative analysis.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
approximately 20 percent.
Investments In Affiliates:
The Company has equity investments in securities of certain privately held entities. The Company accounts for these investments under the equity or cost method of accounting. Investments accounted for under the equity method are recorded at the amountThe Company's investments have no value as of the Company's investmentJune 30, 2021 and adjusted each period for the Company's share2020.
During fiscal year 2016, the Company recorded its portion of equity losses from investments in affiliate of $1.8 million and an other than temporary impairment charge of $13.0 million. The other than temporary impairment charge resulted from one investment's significantly lower financial projections in fiscal years 2016 due to continued declines in enrollment, revenue and profitability. The full impairment of this investment followed previous non-cash impairment charges, the investment's impairment of goodwill and its establishment of a deferred tax valuation allowance in prior quarters. The Company did not record any equity income or losses related to its investments during fiscal years 2017 and 2018. The Company will record equity income related to the Company's investment once its cumulative income exceeds its cumulative losses, measured from the date of impairment.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Self-Insurance Accruals:
The Company uses a combination of third partythird-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 sheetConsolidated 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 2018, 20172021, 2020 and 2016,2019, the Company recorded decreases (increases) in expense for changes in estimates related to prior year open policy periods of $1.2, $1.6$3.6, $3.1 and $1.0$(1.3) million, respectively. The Company updates loss projections quarterly and adjusts its liability to reflect updated 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 of June 30, 2018,2021, the Company had $10.3$6.8 and $25.8$12.7 million recorded in current liabilities and noncurrentnon-current liabilities, respectively, related to the Company's workers' compensation and general liability self-insurance accruals. As of June 30, 2017,2020, the Company had $12.4$8.5 and $26.1$20.3 million recorded in current liabilities and noncurrentnon-current liabilities, respectively, related to the Company's workers' compensation and general liability self-insurance accruals.
Deferred Rent and Rent Expense:
The Company leases most salon 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 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 and the straight-line basis is recorded as deferred rent within accrued expenses and other noncurrent liabilities in the Consolidated Balance Sheet.
For purposes of recognizing incentives and minimum rental expenses on a straight-line basis, the Company uses the date 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 its intended use.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition and Deferred Revenue:
Company-owned salonFranchise revenues primarily include royalties, advertising fund fees and initial franchise fees. Royalties and advertising fund revenues represent sales-based royalties that are recognized atas revenue in the time whenperiod in which the services are provided. Product revenues are recognized whensales occur. The Company defers franchise fees until the guest receivessalon is open and pays forthen recognizes the merchandise. Revenues from purchases made with gift cards are also recorded whenrevenue over the guest takes possessionterm of the merchandise or services are provided. Gift cards issued byfranchise agreement. See Note 2 to the Company are recorded as a liability (deferred revenue) until they are redeemed.Consolidated Financial Statements.
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 shippeddelivered to franchise locations.
FranchiseCompany-owned salon revenues primarily include royalties, initial franchise fees and net rental income. 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 underare provided. Product revenues are recognized when the franchise agreement.guest receives and pays for the merchandise.
Classification of Expenses:
The following discussion provides the primary costs classified in each major expense category:
Beginning in the first quarter of fiscal year 2018, costs associated with field leaders that were previously recorded within Cost of Service and Site Operating expenses are now categorized within General and Administrative expense as a result of the field reorganization that took place in the first quarter of fiscal year 2018. Previously, field leaders spent most of their time on the salon floor leading and mentoring stylists and serving guests. As reorganized, field leaders now do not work on the salon floor daily. As a result, field leader labor costs are now reported within General and Administrative expenses rather than Cost of Service and their travel costs are reported within General and Administrative expenses rather than Site Operating expenses. This expense classification does not have a financial impact on the Company's reported operating income (loss), reported net (loss) income or cash flows from operations.
Cost of service— labor costs related to salon employees costs associated with our field supervision (fiscal years 2017 and 2016) 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.franchisees and reserve for excess and obsolete inventory.
Site operating— direct costs incurred by the Company's salons, such as advertising, workers' compensation, insurance, utilities travel costs associated with our field supervision (fiscal years 2017 and 2016) and janitorial costs.
General and administrative— costs incurred to support franchise operations, costs associated with field supervision, (fiscal year 2018), costs associated with salon training, distribution centers and corporate offices (such as salaries and professional fees), including cost incurred to support franchise operations..
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.
With respect to volume rebates, the Company estimates the amount of rebate it will receive and accrues it as a reduction to 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 quarterly analysis is performed in order to ensure the estimated rebate accrued is reasonable and any necessary adjustments are recorded.
Shipping and Handling
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Distribution Costs:
Shipping and handlingDistribution costs are incurred to store, move and ship product from the Company's distribution centers to company-ownedsalons and franchise locations and include an allocation of internalincludes distribution center overhead. Such shipping and handlingdistribution costs related to product shipped to company-owned locations are included in site operating expenses in the Consolidated Statement of Operations. Shipping and handlingDistribution costs, including distribution center overhead, related to shipping product to franchise locations totaled $6.1, $3.7$12.1, $8.6 and $3.6$7.7 million during fiscal years 2018, 20172021, 2020 and 2016,2019, respectively, and are included within general and administrative expenses on the Consolidated Statement of Operations. Any amounts billed to franchisees for shipping
Advertising and handling are included in product revenues within the Consolidated Statement of Operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Advertising:Advertising Funds:
Advertising costs including salon collateral material,consist of the Company's corporate funded advertising costs, the Company's advertising fund contributions and franchisee's advertising fund contributions. Corporate funded advertising costs are expensed as incurred. Advertising costs expensed and included in site operating expenses in fiscal years 2018, 2017 and 2016 was $36.6, $30.3 and $30.0 million, respectively.
Advertising Funds:
The Company has various franchising programs supporting certain of its franchise salon concepts. Most maintain advertising funds that provide comprehensive advertising and sales promotion support. The Company isAll salons are required to participate in the advertising funds for company-owned locations under the same salon concept. The Company assists inadministers the administration of the advertising funds. However, a group of individuals consisting of franchisee representatives has control over all of the expenditures and operates the funds in accordance with franchise operating and other agreements. Advertising fund contributions are expensed when the contribution is made.
The Company recordsCompany's advertising expensecosts are included in site operating expenses in the periodConsolidated Statement of Operations and consist of the company-owned salons make contributionsfollowing: | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (Dollars in thousands) |
Corporate funded advertising costs | | $ | 7,015 | | | $ | 13,210 | | | $ | 21,581 | |
Advertising fund contributions from company-owned salons | | 897 | | | 3,715 | | | 12,929 | |
Advertising fund contributions from franchisees (1) | | 22,023 | | | 13,341 | | | 34,073 | |
Total advertising costs | | $ | 29,935 | | | $ | 30,266 | | | $ | 68,583 | |
(1)Fiscal year 2020 includes the refunding of $14.9 million of previously collected cooperative fees to franchisees as a direct result of the respective advertising fund. During fiscal years 2018, 2017 and 2016, total Company contributions to the franchise advertising funds totaled $16.9, $17.2 and $17.5 million, respectively.COVID-19 pandemic.
The Company records all advertising funds as assets and liabilities within the Company's Consolidated Balance Sheet. As of June 30, 20182021 and 2017,2020, approximately $23.8$9.9 and $21.7$4.3 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 pricingfair value 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 change occurs.
Preopening Expenses:Interest Income and Other, Net:
Non-capital expenditures such as payroll, training costsIn December 2019, the Company sold the land and promotion incurred prior tobuildings associated with the openingCompany's former headquarters for proceeds of $9.0 million, resulting in a new location are expensed as incurred.net gain on sale of $2.5 million, which was recorded in Interest income and other, net on the Consolidated Statement of Operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
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. 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. A valuation allowance is established for any portion of
We recognize deferred tax assets thatto the extent we believe these assets are not considered more likely than not to be realized. The Company evaluates all evidence, including recent financial performance, the existence of cumulative year losses and our forecast of future taxable income, to assess the need for a valuation allowance against our deferred tax assets. While the determination of whether or not to record a valuation allowance is not fully governed by a specific objective test, accounting guidance places significant weight on recent financial performance.
The Company has a partial valuation allowance on its deferred tax assets amounting to $67.9of $192.5 and $119.1$122.4 million at June 30, 20182021 and 2017,2020, respectively. The Company assesses the realizability of itsIf we determine that we would be able to realize our deferred tax assets on a quarterly basis and will reversein the future in excess of their net recorded amount, we would make necessary adjustments to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
Significant components of the valuation allowance and recordwhich occurred during fiscal year 2021 are as follows:
•The Company recognized a tax benefit when the Company generates sufficient sustainable pretax earnings to make the realizabilityloss on its investment in Luxembourg and established a corresponding valuation allowance of $34.4 million.
Significant components of the deferred tax assets more likely than not. valuation allowance which occurred during fiscal year 2020 are as follows:
•In connection with the Tax CutsCoronavirus Aid, Relief and JobsEconomic Security Act enacted on(CARES Act), NOLs resulting from accounting periods which straddled December 22,31, 2017 are now considered definite-lived NOLs. Therefore, the Company remeasuredestablished a valuation allowance against the deferred tax accounts for the federal rate reductionU.S. NOLs generated during its fiscal year 2018 and recorded a partialnet tax expense of $14.7 million.
•The Company determined that it no longer had sufficient U.S. indefinite-lived taxable temporary differences to support realization of its U.S. indefinite-lived NOLs and its existing U.S. deferred tax assets that upon reversal are expected to generate indefinite-lived NOLs. As a result, the Company recorded an additional $17.0 million valuation allowance releaseon its U.S. federal indefinite-lived deferred tax assets.
•The Company recognized a capital loss and established a corresponding valuation allowance of $14.9 million on investment outside basis previously impaired for a total benefit of $68.1 million during the twelve months ended June 30, 2018. See Note 9 to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
financial accounting purposes.
The Company reserves for unrecognized tax benefits, interest and penalties related to anticipated tax audit positions in the U.S. and other tax jurisdictions based on an estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of these liabilities would result in tax benefits being recognized in the period in which it is determined that the liabilities are no longer necessary. If the estimate of unrecognized tax benefits, interest and penalties proves to be less than the ultimate assessment, additional expenses 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.
See Note 10 to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net Income (Loss)Loss Per Share:
The Company's basic earnings per share is calculated as net income (loss)loss 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) 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. Due to the Company's net loss, basic and dilutive earnings per share are equal.
Comprehensive Income (Loss):Loss:
Components of comprehensive income (loss)loss include net income (loss),loss, foreign currency translation adjustments and recognition of deferred compensation, net of tax within shareholders' equity.
Foreign Currency Translation:
The balance sheet, statementConsolidated Balance Sheet, Consolidated Statement of operationsOperations and statementConsolidated Statement of cash flowsCash Flows of the Company's international operations 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 balance sheetBalance Sheet date. 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. During fiscal years 2018, 20172021, 2020 and 2016,2019, the foreign currency gain (loss) included in income (loss)loss from continuing operations was $0.3, $(0.1), $0.1 and $0.1 million, respectively. During fiscal year 2018, the Company recognized within discontinued operations a $6.2 million foreign currency translation loss in connection with the Company's liquidation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounting Standards Recently Issued But Not Yet Adopted by the Company:
Leases
Simplifying the Test for Goodwill Impairment
In February 2016, the FASB issued updated guidance requiring organizations that lease assets to recognize the rights and obligations created by those leases on the consolidated balance sheet. The new standard is effective for the Company in the first quarter of fiscal year 2020, with early adoption permitted.the Company adopted ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)" for the interim impairment test performed due to the triggering event noted above, for the quarter ended March 31, 2020. Under this accounting standard, the Company performed its interim impairment test and annual impairment tests by comparing the fair value of a reporting unit to its carrying amount. The Company is currently evaluatingthen records an impairment charge for the effectamount that the new standard will have oncarrying amount exceeds the Company's consolidated financial statements but expects thisfair value. This eliminates Step 2 from the goodwill impairment test to simplify the subsequent measure of goodwill.
Leases
In fiscal year 2020, the Company adopted ASU 2016-02, "Leases (Topic 842)" and all subsequent ASUs that modified Topic 842 using the modified retrospective method and elected the option to not restate comparative periods in the year of adoption. The Company also elected the package of practical expedients that do not require reassessment of whether existing contracts are or contain leases, lease classification or initial direct costs. The Company has also made an accounting policy election to keep leases with an initial term of 12 months or less off of the Consolidated Balance Sheet.
Under adoption will result inof Topic 842, the Company recorded a material increase inright of use asset and lease liability of $980.8 and $993.7 million, respectively. The difference between the assets and liabilities onare attributable to the reclassification of certain existing lease-related assets and liabilities as an adjustment to the right of use assets. The decrease in the right of use asset and lease liability from July 1, 2019 to June 30, 2021 was due to lease modifications, impairment and salon closures.
The lease liability reflects a present value of the Company's consolidated balance sheet.current minimum lease payments for existing operating leases primarily relating to real estate leases, over a lease term which may include 1 option, if the options are reasonably assured of being exercised, discounted using a collateralized incremental borrowing rate. The Company uses the portfolio approach in applying the discount rate.
The accounting guidance for lessors remained largely unchanged from previous guidance with the exception of the presentation of rent payments that the Company passes through to franchisees (lessees). These costs are generally paid by the Company and reimbursed by the franchisee. Historically, the costs had been recorded on a net basis within rent expense in the Consolidated Statements of Operations, but are now presented on a gross basis upon adoption of the guidance. See Note 6 for further information about our transition to Topic 842 and the newly required disclosures.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. REVENUE RECOGNITION:
Revenue Recognition and Deferred Revenue:
Revenue recognized at point of sale
Company-owned salon revenues are recognized at the time when the services are provided. Product revenues for company-owned salons are recognized when the guest receives and pays for the merchandise. Revenues from Contractspurchases made with Customers
In May 2014,gift cards are also recorded when the FASB issued amended guidance for revenue recognition. The new guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principleguest takes possession of the guidance is that an entity should recognize revenue to depict the transfer of promised goodsmerchandise or services are provided. Gift cards issued by the Company are recorded as a liability (deferred revenue) upon sale and recognized as revenue upon redemption by the customer. Gift card breakage, the amount of gift cards which will not be redeemed, is recognized proportional to customersredemptions using estimates based on historical redemption patterns. Product sales to franchisees are included within product revenues in an amountthe Consolidated Statement of Operations and recorded at the time product is delivered to the franchisee. Payment for franchisee product revenue is generally collected within 30 to 90 days of delivery.
Revenue recognized over time
Franchise revenues primarily include royalties, advertising fund cooperatives fees, franchise fees and other fees. Royalty and advertising fund revenues represent sales-based royalties that reflectsare recognized in the consideration toperiod in which the entity expectssales occur. Generally, royalty and advertising fund revenue is billed and collected monthly in arrears. Advertising fund revenues and expenditures, which must be spent on marketing and related activities per the franchise agreements, are recorded on a gross basis within the Consolidated Statement of Operations. This treatment increases both the gross amount of reported franchise revenue and site operating expense and generally has no impact on operating income and net income. Franchise fees are billed and received upon the signing of the franchise agreement. Recognition of these fees is deferred until the salon opening and is then recognized over the term of the franchise agreement, typically ten years. Franchise rental income is a result of the Company signing leases on behalf of franchisees and entering into a sublease arrangement with the franchise. The Company recognizes franchise rental income and expense when it is due to be entitled in exchange for those goods and services. Additionally, the guidance requires improved disclosure to help userslandlord.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table disaggregates revenue by timing and uncertainty of revenue thatrecognition and is recognized. The new guidance supersedes most currentreconciled to reportable segment revenues as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended June 30, 2021 | | Year Ended June 30, 2020 | | Year Ended June 30, 2019 |
| | Franchise | | Company-owned | | Franchise | | Company-owned | | Franchise | | Company-owned |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
Revenue recognized at a point in time: | | | | | | | | | | | | |
Service | | $ | — | | | $ | 108,120 | | | $ | — | | | $ | 331,538 | | | $ | — | | | $ | 749,660 | |
Product | | 56,699 | | | 34,845 | | | 52,421 | | | 85,165 | | | 59,905 | | | 165,713 | |
Total revenue recognized at a point in time | | $ | 56,699 | | | $ | 142,965 | | | $ | 52,421 | | | $ | 416,703 | | | $ | 59,905 | | | $ | 915,373 | |
| | | | | | | | | | | | |
Revenue recognized over time: | | | | | | | | | | | | |
Royalty and other franchise fees | | $ | 66,034 | | | $ | — | | | $ | 60,061 | | | $ | — | | | $ | 59,688 | | | $ | — | |
Advertising fund fees | | 22,023 | | | — | | | 13,341 | | | — | | | 34,073 | | | — | |
Franchise rental income | | 127,392 | | | — | | | 127,203 | | | — | | | — | | | — | |
Total revenue recognized over time | | 215,449 | | | — | | | 200,605 | | | — | | | 93,761 | | | — | |
Total revenue | | $ | 272,148 | | | $ | 142,965 | | | $ | 253,026 | | | $ | 416,703 | | | $ | 153,666 | | | $ | 915,373 | |
Information about receivables, broker fees and deferred revenue subject to the revenue recognition guidance including industry-specific guidance, and is effective commencing fiscal year 2019. The guidance allows for either a full retrospective or modified retrospective transition method. The Company currently expects to apply the full retrospective method upon adoption. This guidance will not impact recognition of revenue from salon service or product sales or recognition of continuing royalty revenues from franchisees, which are based on a percentage of franchise sales. Although the Company is in the process of finalizing the impact of adoption, including disclosures and the impact of the prior year restatements, it has determined that the timing of franchise fees and gift card breakage recognition will change. Under the new guidance, initial fees from franchisees will be recognized over the life of the related franchise agreements, approximately 10 years. In fiscal years 2018, 2017 andas follows:
| | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 | | June 30, 2020 | | Balance Sheet Classification |
| | | | | | |
| | (Dollars in thousands) | | |
Receivables from contracts with customers, net | | $ | 19,112 | | | $ | 22,991 | | | Accounts receivable, net |
Broker fees | | 19,254 | | | 20,516 | | | Other assets |
| | | | | | |
Deferred revenue: | | | | | | |
Current | | | | | | |
Gift card liability | | $ | 2,240 | | | $ | 2,543 | | | Accrued expenses |
Deferred franchise fees unopened salons | | 40 | | | 77 | | | Accrued expenses |
Deferred franchise fees open salons | | 5,884 | | | 5,537 | | | Accrued expenses |
Total current deferred revenue | | $ | 8,164 | | | $ | 8,157 | | | |
Non-current | | | | | | |
Deferred franchise fees unopened salons | | $ | 6,571 | | | $ | 11,855 | | | Other non-current liabilities |
Deferred franchise fees open salons | | 32,365 | | | 33,623 | | | Other non-current liabilities |
Total non-current deferred revenue | | $ | 38,936 | | | $ | 45,478 | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, franchise product sales and sales of salon services and product paid by credit card. The receivables balance is presented net of an allowance for expected losses (i.e., doubtful accounts), related to receivables from franchisees. The following table is a rollforward of the allowance for doubtful accounts for the periods indicated (in thousands):
| | | | | | | | |
Balance as of June 30, 2020 | | $ | 6,899 | |
Provision for doubtful accounts (1) | | 509 | |
Provision for franchisee rent (2) | | 1,920 | |
Write-offs | | (1,554) | |
Balance as of June 30, 2021 | | $ | 7,774 | |
(1)The provision for doubtful accounts is recognized as General and administrative expense in the Consolidated Statement of Operations.
(2)The provision for franchisee rent is recognized as Rent in the Consolidated Statement of Operations.
Broker fees are the costs associated with using external brokers to identify new franchisees. These fees are paid upon the signing of the franchise agreement and recognized as General and administrative expense over the term of the agreement. The following table is a rollforward of the broker fee balance for the periods indicated (in thousands):
| | | | | | | | |
Balance as of June 30, 2020 | | $ | 20,516 | |
Additions | | 2,112 | |
Amortization | | (3,180) | |
Write-offs | | (194) | |
Balance as of June 30, 2021 | | $ | 19,254 | |
Deferred revenue includes the gift card liability and deferred franchise fees for unopened salons and open salons. Gift card revenue for the years ended June 30, 2021, 2020 and 2019 was $0.9, $2.4 and $5.3 million, respectively. Deferred franchise fees related to open salons are generally recognized on a straight-line basis over the term of the franchise agreement. Franchise fee revenue for the years ended June 30, 2021, 2020 and 2019 was $6.6, $5.2 and $3.6 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of June 30, 2021 is as follows (in thousands):
| | | | | | | | |
2022 | | $ | 5,884 | |
2023 | | 5,820 | |
2024 | | 5,585 | |
2025 | | 5,208 | |
2026 | | 4,734 | |
Thereafter | | 11,018 | |
Total | | $ | 38,249 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2016, the Company recognized $8.5, $4.3 and $4.5 million, respectively, of revenue related to initial fees from franchises, however under the new guidance these fees would have been deferred and recognized over approximately 10 years. Under the new standard, the Company will recognize gift card breakage proportional to redemptions in service and product revenue as opposed to the current classification as other income. The impact to net income related to gift card breakage is not expected to be material. Additionally, under current guidance, advertising fund contributions from franchisees and the related advertising expenditures are reported on a net basis in the Company's Consolidated Statement of Operations. Under the new guidance, the operations of the advertising funds will be included in the Company's Consolidated Statement of Operations. The impact will increase royalty and fee revenue and site operating expense, but is expected to have no impact on operating (loss) income.
Intra-Entity Transfers Other Than Inventory
In October 2016, the FASB issued guidance on the accounting for income tax effects of intercompany transfers of assets other than inventory. The guidance requires entities to recognize the income tax impact of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the assets have been sold to an outside party. The guidance is effective for the Company in the first quarter of fiscal year 2019, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on the Company's consolidated financial statements.
Restricted Cash
In November 2016, the FASB issued updated cash flow guidance requiring restricted cash and restricted cash equivalents to be included in the cash and cash equivalent balances in the statement of cash flows. Transfers between cash and cash equivalents and restricted cash will no longer be presented in the statement of cash flows and a reconciliation between the balance sheet and statement of cash flows must be disclosed. The guidance is effective for the Company beginning in the first quarter of fiscal year 2019, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on the Company's consolidated statement of cash flows.
Statement of Cash Flows
In August 2016, the FASB issued updated cash flow guidance clarifying cash flow classification and presentation for certain items. The guidance is effective for the Company beginning in the first quarter of fiscal year 2019, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on the Company's consolidated statement of cash flows.
2.3. TBG DISCONTINUED OPERATIONS AND RESTRUCTURING
The Beautiful Group (TBG):
In October 2017, the Company sold substantially all of its mall-based salon business in North America, representing 858 salons, andto The Beautiful Group (TBG), an affiliate of Regent, a private equity firm based in Los Angeles, California. In addition, the Company entered into a share purchase agreement for substantially all of its International segment, representing approximately 250 salons in the UK, to The Beautiful Group ("TBG"), an affiliate of Regent, a private equity firm based in Los Angeles, California, who will operatewith TBG operating these locations as franchise locations. As part of the sale of the mall-based business, TBG agreedlocations until they were transferred to pay for the value of certain inventory and assumed specific liabilities, including lease liabilities. For the International segment, the Company entered into a share purchase agreement with TBG for minimal consideration.
As of September 30, 2017, theanother franchisee in fiscal year 2020. The Company classified the results of its mall-based business and its International segment as a discontinued operationoperations for allthe periods presentedTBG owned the salons in the Condensed Consolidated Statement of Operations.
In fiscal year 2019, TBG salons were operating at a loss and TBG struggled to pay the Company for the receivables related to the original purchase agreements as well as royalty and product receivables. The operationsCompany reserved $20.7 million of receivables in fiscal year 2019.
In the second quarter of fiscal year 2020, TBG transferred 207 of its North American mall-based salons to the Company. The 207 North American mall-based salons transferred were the salons that the Company was the guarantor of the lease obligation. The transfer of the 207 mall-based business and International segment, which were previously recordedsalons occurred on December 31, 2019, so the operational results of these mall-based salons are included in the North American Value, North American Premium and Internationalreporting segments, have been eliminated from ongoing operations of the Company.
In connection with the sale of the mall-based business and the International segment as part of our held for sale assessment at September 30, 2017, the Company performed an impairment assessment of the asset groups. The Company recognized net impairment charges within discontinued operations based on the difference between the expected sale prices and the carrying value of the asset groups.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In March 2018, the Company entered into discussions with TBG regarding a waiver of working capital and prepaid rent payments associated with the original transaction and the financing of certain receivables to assist TBG with its cash flow and operational needs.
Based on the status of these discussions at March 31, 2018, the Company fully reserved the working capital and prepaid rent amount of $11.7 million, which was recorded within discontinued operations, net of taxes on the Condensed Consolidated Statement of Operations.Operations beginning in the third quarter of fiscal year 2020. The assets acquired and liabilities assumed were not material to the Consolidated Balance Sheet.
In addition,As of June 30, 2021, prior to any mitigation efforts which may be available, the Company reclassified $8.0remains liable for up to approximately $9 million of accounts receivables duerelated to its mall-based salon lease commitments on the 43 salons that remain open, a $14 million reduction from TBG to other assets as these receivablesJune 30, 2020. The commitments are expected to be collected more than twelve monthsincluded in the future. Should the Company need to record reserves against its current and future receivables from TBG, these reserves would be recorded within general and administrative expenses.our lease liabilities.
The following summarizes the results of ourTBG related charges and TBG discontinued operations for the periods presented: | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (Dollars in thousands) |
| | | | | | |
| | | | | | |
TBG mall restructuring: | | | | | | |
Accounts and notes receivable reserves | | $ | — | | | $ | — | | | $ | 20,711 | |
Other charges (1) | | — | | | 2,333 | | | 1,105 | |
Total TBG mall restructuring | | $ | — | | | $ | 2,333 | | | $ | 21,816 | |
| | | | | | |
TBG discontinued operations: | | | | | | |
| | | | | | |
| | | | | | |
(Income) loss from TBG discontinued operations, before taxes (2) | | $ | — | | | $ | (1,063) | | | $ | 1,221 | |
Income tax expense (benefit) from TBG discontinued operations (3) | | — | | | 231 | | | (7,117) | |
Income from TBG discontinued operations, net of tax | | $ | — | | | $ | (832) | | | $ | (5,896) | |
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2018 | | 2017 | | 2016 |
| | (Dollars in thousands) |
Revenues | | $ | 101,140 |
| | $ | 423,427 |
| | $ | 498,935 |
|
| | | | | | |
Loss from discontinued operations, before income taxes | | (59,545 | ) | | (15,163 | ) | | (5,732 | ) |
Income tax benefit on discontinued operations | | 6,360 |
| | — |
| | — |
|
Equity in loss of affiliated companies, net of tax | | — |
| | (81 | ) | | 3 |
|
Loss from discontinued operations, net of income taxes | | $ | (53,185 | ) | | $ | (15,244 | ) | | $ | (5,729 | ) |
Included within the $53.2 million loss from discontinued operations for(1)In fiscal year 2018 are $43.0 million of asset impairment charges, $6.2 million of cumulative foreign currency translation adjustment associated with2020, the Company's liquidation of substantially all foreign entities with British pound denominated currencies, $3.6 million of loss from operations and $6.8 million ofCompany recorded professional fees associated with the transfer of the mall salons back to the Company as TBG mall restructuring charges.
(2)In fiscal years 2020 and 2019, the Company recorded professional fees related to the transaction, partly offset by a $6.4 million income tax benefit.as well as insurance adjustments associated with the discontinued operations.
(3)Income taxes have been allocated to continuing and discontinued operations based on the methodology required by accounting for income taxes guidance.
The Company utilized the consolidation of variable interest entities guidance to determine whether or not TBG was a variable interest entity (VIE), and if so, whether the Company was the primary beneficiary of TBG. The Company concluded that TBG is a VIE based on the fact that the equity investment at risk in TBG is not sufficient. The Company determined that it is not the primary beneficiary of TBG based on its exposure to the expected losses of TBG and as it is not the variable interest holder that is most closely associated within the relationship and the significance of the activities of TBG. The exposure to loss related to the Company's involvement with TBG is the carrying value of the amounts due from TBG and the guarantee of the operating leases.
Within salon asset impairments presented in the Consolidated Statement of Cash Flows for the fiscal years ended 2017 and 2016, $3.4 million of salon asset impairments were related to discontinued operations in each year. Other than the salon asset impairments and the other items presented in the Consolidated Statement of Cash Flows, there were no other significant non-cash operating activities or any significant non-cash investing activities related to discontinued operations for the fiscal years ended 2018, 2017 and 2016.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3.4. OTHER FINANCIAL STATEMENT DATA
The following provides additional information concerning selected balance sheet accounts: | | | | | | | | | | | | | | |
| | June 30, |
| | 2021 | | 2020 |
| | | | |
| | (Dollars in thousands) |
Other current assets: | | | | |
Prepaid assets | | $ | 4,121 | | | $ | 5,165 | |
Restricted cash | | 9,961 | | | 9,213 | |
Other | | 3,021 | | | 4,760 | |
Total other current assets | | $ | 17,103 | | | $ | 19,138 | |
| | | | |
Property and equipment: | | | | |
Buildings and improvements | | $ | 8,251 | | | $ | 36,379 | |
Equipment, furniture and leasehold improvements | | 29,102 | | | 198,983 | |
Internal use software | | 41,927 | | | 71,212 | |
Total property and equipment | | 79,280 | | | 306,574 | |
Less accumulated depreciation and amortization | | (56,167) | | | (249,398) | |
Total property and equipment, net | | $ | 23,113 | | | $ | 57,176 | |
| | | | |
Accrued expenses: | | | | |
Payroll and payroll related costs | | $ | 16,176 | | | $ | 18,204 | |
Insurance | | 7,525 | | | 10,278 | |
Rent and related real estate costs | | 11,197 | | | 4,179 | |
Other | | 19,959 | | | 16,164 | |
Total accrued expenses | | $ | 54,857 | | | $ | 48,825 | |
| | | | |
Other non-current liabilities: | | | | |
Deferred income taxes | | $ | 10,650 | | | $ | 13,916 | |
Insurance | | 12,722 | | | 20,301 | |
Deferred benefits | | 10,028 | | | 11,106 | |
Deferred franchise fees | | 38,936 | | | 45,478 | |
Other | | 2,739 | | | 3,341 | |
Total other non-current liabilities | | $ | 75,075 | | | $ | 94,142 | |
|
| | | | | | | | |
| | June 30, |
| | 2018 | | 2017 |
| | (Dollars in thousands) |
Other current assets: | | | | |
Prepaids | | $ | 27,438 |
| | $ | 27,802 |
|
Restricted cash | | 19,556 |
| | 19,032 |
|
Other | | 873 |
| | 1,280 |
|
| | $ | 47,867 |
| | $ | 48,114 |
|
Property and equipment: | | | | |
Land | | $ | 3,864 |
| | $ | 3,864 |
|
Buildings and improvements | | 48,265 |
| | 47,471 |
|
Equipment, furniture and leasehold improvements | | 380,196 |
| | 420,656 |
|
Internal use software | | 66,046 |
| | 71,054 |
|
Equipment, furniture and leasehold improvements under capital leases | | 32,343 |
| | 57,561 |
|
| | 530,714 |
| | 600,606 |
|
Less accumulated depreciation and amortization | | (393,958 | ) | | (422,652 | ) |
Less amortization of equipment, furniture and leasehold improvements under capital leases | | (30,896 | ) | | (54,673 | ) |
| | $ | 105,860 |
| | $ | 123,281 |
|
Accrued expenses: | | | | |
Payroll and payroll related costs | | $ | 53,949 |
| | $ | 59,192 |
|
Insurance | | 12,891 |
| | 14,876 |
|
Other | | 30,790 |
| | 36,367 |
|
| | $ | 97,630 |
| | $ | 110,435 |
|
Other noncurrent liabilities: | | | | |
Deferred income taxes | | $ | 32,229 |
| | $ | 108,187 |
|
Deferred rent | | 20,613 |
| | 29,038 |
|
Insurance | | 25,804 |
| | 26,112 |
|
Deferred benefits | | 13,377 |
| | 17,302 |
|
Other | | 15,852 |
| | 16,735 |
|
| | $ | 107,875 |
| | $ | 197,374 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following provides additional information concerning other intangibles, net:
| | | | | | | | | | | | | | | | | | | | | June 30, |
| | June 30, | | | 2021 | | 2020 |
| | 2018 | | 2017 | | | Weighted Average Amortization Periods (1) | | Cost (2) | | Accumulated Amortization (2) | | Net | | Weighted Average Amortization Periods (1) | | Cost (2) | | Accumulated Amortization (2) | | Net |
| | Weighted Average Amortization Periods (1) | | Cost (2) | | Accumulated Amortization (2) | | Net | | Weighted Average Amortization Periods (1) | | Cost (2) | | Accumulated Amortization (2) | | Net | | | | | | | | | | | | | | | | |
| | (In years) | | (Dollars in thousands) | | (In years) | | (Dollars in thousands) | | | (In years) | | (Dollars in thousands) | | (In years) | | (Dollars in thousands) |
Brand assets and trade names | | 31 | | $ | 8,128 |
| | $ | (4,260 | ) | | $ | 3,868 |
| | 31 | | $ | 8,187 |
| | $ | (4,013 | ) | | $ | 4,174 |
| Brand assets and trade names | | 35 | | $ | 6,040 | | | $ | (3,568) | | | $ | 2,472 | | | 33 | | $ | 6,494 | | | $ | (3,609) | | | $ | 2,885 | |
Franchise agreements | | 19 | | 9,763 |
| | (7,712 | ) | | 2,051 |
| | 19 | | 9,832 |
| | (7,433 | ) | | 2,399 |
| Franchise agreements | | 19 | | 10,099 | | | (8,901) | | | 1,198 | | | 19 | | 9,558 | | | (8,194) | | | 1,364 | |
Lease intangibles | | 20 | | 13,997 |
| | (9,770 | ) | | 4,227 |
| | 20 | | 14,007 |
| | (9,077 | ) | | 4,930 |
| |
| Other | | 21 | | 1,983 |
| | (1,572 | ) | | 411 |
| | 21 | | 1,994 |
| | (1,532 | ) | | 462 |
| Other | | 20 | | 366 | | | (275) | | | 91 | | | 20 | | 874 | | | (544) | | | 330 | |
Total | | 22 | | $ | 33,871 |
| | $ | (23,314 | ) | | $ | 10,557 |
| | 22 | | $ | 34,020 |
| | $ | (22,055 | ) | | $ | 11,965 |
| Total | | 24 | | $ | 16,505 | | | $ | (12,744) | | | $ | 3,761 | | | 24 | | $ | 16,926 | | | $ | (12,347) | | | $ | 4,579 | |
| |
(1) | 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 three to 40 years). |
| |
(2) | The change in the gross carrying value and accumulated amortization of other intangible assets is impacted by foreign currency. |
(1)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 three to 40 years).
(2)The change in the gross carrying value and accumulated amortization of other intangible assets is impacted by foreign currency.
Total amortization expense related to intangible assets during fiscal years 2018, 2017 and 2016year 2021 was approximately $1.4$0.8 million and in fiscal years 2020 and 2019 was approximately $1.3 million in each year.both years. As of June 30, 2018,2021, future estimated amortization expense related to intangible assets is estimated to be:as follows (in thousands): | | | | | | | | |
2022 | | $ | 398 | |
2023 | | 386 | |
2024 | | 323 | |
2025 | | 327 | |
2026 | | 312 | |
Thereafter | | 2,015 | |
Total | | $ | 3,761 | |
|
| | | |
Fiscal Year | (Dollars in thousands) |
2019 | $ | 1,342 |
|
2020 | 1,342 |
|
2021 | 1,216 |
|
2022 | 1,169 |
|
2023 | 1,001 |
|
Thereafter | 4,487 |
|
Total | $ | 10,557 |
|
The following provides supplemental disclosures of cash flow activity: | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (Dollars in thousands) |
Cash paid (received) for: | | | | | | |
Interest | | $ | 11,940 | | | $ | 7,390 | | | $ | 4,408 | |
Taxes and penalties, net | | (2,636) | | | 2,150 | | | 2,096 | |
Non-cash investing activities: | | | | | | |
Unpaid capital expenditures | | 312 | | | 2,569 | | | 3,873 | |
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2018 | | 2017 | | 2016 |
| | (Dollars in thousands) |
Cash paid (received) for: | | | | | | |
Interest | | $ | 7,022 |
| | $ | 7,293 |
| | $ | 7,660 |
|
Income taxes, net | | 2,397 |
| | 2,314 |
| | 2,237 |
|
Noncash investing activities: | | | | | | |
Unpaid capital expenditures | | 9,209 |
| | 2,774 |
| | 6,627 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.5. GOODWILL
The table below contains details related to the Company's goodwill:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, |
| | 2018 | | 2017 |
| | Gross Carrying Value (2) | | Accumulated Impairment (1) | | Net | | Gross Carrying Value (2) | | Accumulated Impairment (1) | | Net |
| | (Dollars in thousands) |
Goodwill | | $ | 486,743 |
| | $ | (74,100 | ) | | $ | 412,643 |
| | $ | 491,087 |
| | $ | (74,100 | ) | | $ | 416,987 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, |
| | 2021 | | 2020 |
| | | | | | | | | | | | |
| | Gross Carrying Value (1) | | Accumulated Impairment (2) | | Net | | Gross Carrying Value (1) | | Accumulated Impairment (2) | | Net |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
Goodwill | | $ | 343,846 | | | $ | (114,264) | | | $ | 229,582 | | | $ | 341,721 | | | $ | (114,264) | | | $ | 227,457 | |
(1)The change in the gross carrying value of goodwill relates foreign currency translation adjustments.
| |
(1) | In fiscal year 2011 the Company realized a $74.1 million goodwill impairment loss associated with the Company-owned reporting unit (the previous North American Value reporting unit). |
| |
(2) | The change in the gross carrying value of goodwill relates to foreign currency translation adjustments. |
(2)In fiscal year 2011, the Company realized a $74.1 million goodwill impairment loss associated with the Company-owned reporting unit (the previous North American Value reporting unit). In fiscal year 2020, the Company realized a $40.2 million goodwill impairment associated with the Company-owned reporting unit. Prior to the COVID-19 pandemic, the Company had been derecognizing Company-owned goodwill as part of the calculation of gain or loss on the sale of salons to franchisees. Following the goodwill impairment in fiscal year 2020, the Company-owned reporting unit has no remaining goodwill, so there will be no further derecognition of Company-owned goodwill.
The table below contains details related to the Company's goodwill:
|
| | | | | | | | | | | | |
| | Company-owned | | Franchise | | Consolidated |
| | (Dollars in thousands) |
Goodwill, net at June 30, 2016 | | $ | 189,218 |
| | $ | 228,175 |
| | $ | 417,393 |
|
Translation rate adjustments | | (63 | ) | | (76 | ) | | (139 | ) |
Derecognition related to sale of salon assets to franchisees (1) | | (267 | ) | | — |
| | (267 | ) |
Goodwill, net at June 30, 2017 | | 188,888 |
| | 228,099 |
| | 416,987 |
|
Translation rate adjustments | | (201 | ) | | (244 | ) | | (445 | ) |
Derecognition related to sale of salon assets to franchisees (1) | | (3,899 | ) | | — |
| | (3,899 | ) |
Goodwill, net at June 30, 2018 | | $ | 184,788 |
| | $ | 227,855 |
| | $ | 412,643 |
|
goodwill (in thousands): | | | | | | | | |
(1) | | Franchise Reporting Unit |
| | |
Goodwill, is derecognized for salons sold to franchisees with positive cash flows. The amount of goodwill derecognized is determined by a fraction (the numerator of which is the trailing-twelve months EBITDA of the salon being sold and the denominator of which is the estimated annualized EBITDA of the Company-owned reporting unit) that is applied to the total goodwill balance of the Company-owned reporting unit.net at June 30, 2020 | | $ | 227,457 | |
Translation rate adjustments | | 2,125 | |
| | |
| | |
Goodwill, net at June 30, 2021 | | $ | 229,582 | |
5. INVESTMENTS IN AFFILIATES
The table below presents summarized financial information of equity method investees:
|
| | | | | | | | | | | | |
| | Greater than 50 Percent Owned |
| | Fiscal Year |
| | 2018 | | 2017 | | 2016 |
| | (Dollars in thousands) |
Summarized Balance Sheet information: | | | | | | |
Current assets | | $ | 40,990 |
| | $ | 32,649 |
| | $ | 46,733 |
|
Noncurrent assets | | 37,875 |
| | 39,211 |
| | 42,380 |
|
Current liabilities | | 21,897 |
| | 18,385 |
| | 18,160 |
|
Noncurrent liabilities | | 23,243 |
| | 12,181 |
| | 28,756 |
|
Summarized Statement of Operations information: | | | | | | |
Gross revenue | | $ | 130,082 |
| | $ | 125,486 |
| | $ | 130,302 |
|
Gross profit | | 40,194 |
| | 41,097 |
| | 34,585 |
|
Operating (loss) income | | (2,239 | ) | | (651 | ) | | (5,857 | ) |
Net (loss) income | | (2,551 | ) | | (899 | ) | | (5,551 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. LEASES
InvestmentAt contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 1 to 20 years with many leases renewable for an additional 5 to 10 year term at the option of the Company. In addition to the obligation to make fixed rental payments for the use of the salons, the Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Total Rent includes the following:
| | | | | | | | | | | | | | | | | | | | |
| | June 30, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (Dollars in thousands) |
Minimum rent | | $ | 33,596 | | | $ | 57,819 | | | $ | 108,892 | |
Percentage rent based on sales | | 8 | | | 2,043 | | | 4,754 | |
Real estate taxes and other expenses | | 8,644 | | | 12,868 | | | 16,445 | |
Lease termination expense (1) | | 13,606 | | | 191 | | | 123 | |
Lease liability benefit (2) | | (20,022) | | | — | | | — | |
Corporate segment rent | | 2,703 | | | 2,589 | | | 862 | |
Franchise segment non-reimbursable rent | | 2,395 | | | 872 | | | 740 | |
Total | | $ | 40,930 | | | $ | 76,382 | | | $ | 131,816 | |
_______________________________________________________________________________(1)During fiscal year 2021, the Company terminated the leases for 402 company-owned salons before the lease end dates. For the fiscal year ended June 30, 2021, lease termination fees include $8.3 million of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations. For the fiscal year ended June 30, 2021, lease termination fees also include $5.3 million of adjustments to accrue future lease payments for salons that are no longer operating. The early termination payments made during the fiscal year ended June 30, 2021 decreased the future minimum rent liability by $15.7 million plus saved the Company from the associated real estate taxes, other lease expenses and loss incurred operating the salons.
(2)For the fiscal year ended June 30, 2021, upon termination of previously impaired leases, the Company derecognized ROU assets of $18.3 million and lease liabilities of $31.1 million that resulted in Empire Education Group, Inc.a net gain of $12.8 million. In addition, the Company recognized a benefit of $7.1 million from lease liabilities decreasing in excess of previously impaired ROU assets for the fiscal year ended June 30, 2021.
The Company accounts forleases salon premises in which the majority of its 54.6% ownership interest in EEGfranchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease costs are passed through to franchisees. The Company records the rental payments due from franchisees as an equity method investment underfranchise rental income and the voting interest model.
Duringcorresponding amounts owed to landlords as franchise rent expense on the Consolidated Statement of Operations. In fiscal year 2016,2021, franchise rental income and franchise rent expense were $127.4 million. These leases generally have lease terms of approximately five years. The Company expects to renew SmartStyle and some franchise leases upon expiration. Other leases are expected to be renewed by the franchisee upon expiration. This represents a Board-approved change in estimate that occurred in the second quarter of fiscal year 2021 and was intended to reduce lease exposure. The change in estimate resulted in a decrease to lease liabilities and right of use assets of $72.9 million, with no impact to net income. All lease related costs are passed through to the franchisees.
In April 2020, the FASB issued a question and answer document focused on the application of lease accounting guidance to lease concessions provided as a result of COVID-19 (the Lease Modification Q&A). The Lease Modification Q&A provides entities with the option to elect to account for lease concessions as though the enforceable rights and obligations existed in the original lease when the total cash flows resulting from the modified lease are substantially similar to the cash flows in the original lease. The Company elected this FASB relief for COVID-19-related rent concessions for the Walmart rent abatement received in April and May 2020 and has elected not to remeasure the related lease liability and right of use asset for Walmart leases. The Walmart rent abatement was recognized as a reduction of variable rent expense of $2.7 million in the fourth fiscal quarter of 2020. Additionally, included in accounts payable as of June 30, 2020 is approximately $20 million of rental payments that were due, but the Company recordedhad not paid. The Company treated these deferrals as if no change to the underlying lease had been made as of June 30, 2020. If the rent was subsequently forgiven or modified, the Company accounted for the change as a lease modification upon execution of the amended terms.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date, including one lease term option when the lease is expected to be renewed. The ROU asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any. The Company's consolidated ROU asset balance was $611.9 and $786.2 million as of June 30, 2021 and 2020, respectively. For leases classified as operating leases, expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. Generally, the non-lease components, such as real estate taxes and other occupancy expenses, are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable.
The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on the original lease term. The weighted average remaining lease term was 6.44 and 6.87 years and the weighted average discount rate was 4.11% and 3.95% for all salon operating leases as of June 30, 2021 and 2020, respectively.
A lessee's ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment. The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Poor salon performance in fiscal years 2020 and 2021, primarily due to the COVID-19 pandemic, resulted in ASC 360-10-35-21 triggering events. As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360.
The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases.
Step two of the long-lived asset impairment test requires that the fair value of the asset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than temporarythe Company's own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include; the market rent of comparable properties based on recently negotiated leases as applicable, the asset group's projected sales for properties with no recently negotiated leases, and a discount rate.
The fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include; the market rent of comparable properties based on recently negotiated leases as applicable, the asset group's projected sales for fiscal years 2021 through 2023 for properties with no recently negotiated leases, and a discount rate. The Company engaged a third-party valuation specialist to assist with the research related to inputs used in their determination of the fair value of the ROU asset which included providing information related to significant inputs and assumptions utilized in the measurement of the impairment loss.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For fiscal year 2021, the Company recognized a long-lived impairment charge of $13.0 million, which resulted from EEG's significantly lower financial projections due to continued declines in enrollment, revenue and profitability. The full impairment of the investment followed previous non-cash impairment charges, EEG's impairment of goodwill and its establishment of a deferred tax valuation allowance in prior quarters. Prior to the other than temporary impairment charge, the Company recorded a $1.8included $9.5 million loss for its portion of EEG's losses. The Company has not recorded any equity income or losses related to its investment in EEG subsequent to the impairment. The Company will record equity income related to the Company's investment in EEG once EEG's cumulative income exceeds its cumulative losses, measured from the date of impairment.
While the Company could be responsible for certain liabilities associated with this venture, the Company does not currently expect them to have a material impact on the Company's financial position.
Investment in MY Style
During fiscal year 2017, the Company sold its 27.1% ownership interest in MY Style to MY Style's parent company, Yamano Holdings Corporation for $0.5 million. This ownership interest was previously accounted for as a cost method investment. Associated with the sale, foreign currency translation loss of $0.4 million previously classified within accumulated other comprehensive income was recognized in earnings. The Company also reported a $0.2 million gain associated with the sale within interest income and other, netROU assets on the Consolidated Statement of Operations. Impairment related to ROU assets for fiscal year 2020 was $17.4 million. The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on a pro-rata basis using their relative carrying amounts. Additionally, the impairment losses did not reduce the carrying amount of an individual asset below its fair value, including for the ROU assets included in the salon asset groups. Assessing the long-lived assets for impairment requires management to make assumptions and to apply judgment, which can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses for its long-lived asset, including its ROU assets. However, the ultimate severity and longevity of the COVID-19 pandemic is unknown, therefore, if actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material.
As of June 30, 2021, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal Year | | Leases For Franchise Salons | | Leases For Company-Owned Salons | | Corporate Leases | | Total Operating Lease Payments | | Sublease Income To Be Received From Franchisees | | Net Rent Commitments |
| | | | | | | | | | | | |
2022 | | $ | 127,656 | | | $ | 8,997 | | | $ | 3,566 | | | $ | 140,219 | | | $ | (127,656) | | | $ | 12,563 | |
2023 | | 112,604 | | | 7,268 | | | 3,550 | | | 123,422 | | | (112,604) | | | 10,818 | |
2024 | | 98,764 | | | 4,738 | | | 3,616 | | | 107,118 | | | (98,764) | | | 8,354 | |
2025 | | 83,259 | | | 1,881 | | | 3,683 | | | 88,823 | | | (83,259) | | | 5,564 | |
2026 | | 70,393 | | | 938 | | | 3,681 | | | 75,012 | | | (70,393) | | | 4,619 | |
Thereafter | | 168,279 | | | 780 | | | 23,657 | | | 192,716 | | | (168,279) | | | 24,437 | |
Total future obligations | | $ | 660,955 | | | $ | 24,602 | | | $ | 41,753 | | | $ | 727,310 | | | $ | (660,955) | | | $ | 66,355 | |
Less amounts representing interest | | 81,713 | | | 448 | | | 9,812 | | | 91,973 | | | | | |
Present value of lease liabilities | | $ | 579,242 | | | $ | 24,154 | | | $ | 31,941 | | | $ | 635,337 | | | | | |
Less current lease liabilities | | 105,946 | | | 8,430 | | | 2,095 | | | 116,471 | | | | | |
Long-term lease liabilities | | $ | 473,296 | | | $ | 15,724 | | | $ | 29,846 | | | $ | 518,866 | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. 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 quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of June 30, 20182021 and June 30, 2017,2020, the estimated fair value of the Company’sCompany's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets and accounts payable approximated their carrying values. As of June 30, 2018,2021, the estimated fair value of the Company's debt was $90.0$186.9 million, and thewhich approximated its carrying value was $90.0 million. As of June 30, 2017, the estimated fair value of the Company's debt was $125.9 million and the carrying value was $123.0 million, excluding the $1.8 million unamortized debt discount and $0.6 million unamortized debt issuance costs.value. The estimated fair value of the Company's debt is based on Level 2 inputs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain assets, including the Company’sCompany's equity method investments, tangible fixed and other assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of these assets are determined, when applicable, based on valuation techniques using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections.
The following impairment charges were based on fair values using Level 3 inputs: | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (Dollars in thousands) |
Goodwill impairment | | $ | — | | | $ | 40,164 | | | $ | — | |
Long-lived asset impairment (1) | | 9,494 | | | 22,560 | | | — | |
Salon asset impairment (1) | | 3,529 | | | 3,851 | | | 4,587 | |
(1)See Note 1 to the Consolidated Financial Statements.
|
| | | | | | | | | | | | |
| | Fiscal Year |
| | 2018 | | 2017 | | 2016 |
| | (Dollars in thousands) |
Long-lived assets (1) | | $ | (11,092 | ) | | $ | (7,943 | ) | | $ | (7,057 | ) |
Investment in EEG (2) | | — |
| | — |
| | (12,954 | ) |
_____________________________
| |
(1) | See Note 1 to the Consolidated Financial Statements. |
| |
(2) | See Note 5 to the Consolidated Financial Statements. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7.8. FINANCING ARRANGEMENTS
The Company's long-term debt consists of the following:
Revolving Credit Facility | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, |
| | Maturity Date | | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | | | |
| | (Fiscal year) | | (Interest rate %) | | (Dollars in thousands) |
Revolving credit facility | | 2023 | | 5.00% | | 5.50% | | $ | 186,911 | | | $ | 177,500 | |
|
| | | | | | | | | | | | | | |
| | | | Interest rate % | | | | |
| | | | Fiscal Years | | June 30, |
| | Maturity Dates | | 2018 | | 2017 | | 2018 | | 2017 |
| | (fiscal year) | | | | | | (Dollars in thousands) |
Revolving credit facility, new | | 2023 | | 3.34% | | —% | | $ | 90,000 |
| | $ | — |
|
Revolving credit facility, old | | N/A | | —% | | —% | | — |
| | — |
|
Senior term notes | | N/A | | 5.5% | | 5.5% | | — |
| | 120,599 |
|
| | | | | | | | $ | 90,000 |
| | $ | 120,599 |
|
The debt agreements contain covenants, including limitations on incurrenceAt June 30, 2021, cash and cash equivalents totaled $19.2 million. As of debt, granting of liens, investments, merger or consolidation, certain restricted payments and transactions with affiliates. In addition,June 30, 2021, the Company must adherehad $186.9 million of outstanding borrowings under a $294.4 million revolving credit facility. The credit facility decreased $0.6 million from $295.0 million as of June 30, 2020, in accordance with the bulk sale provisions in the agreement, due to specified fixed charge coveragethe sale of secured inventory related to our transition to third party vendors. At June 30, 2021, the Company had outstanding standby letters of credit under the revolving credit facility of $18.7 million, primarily related to the Company's self-insurance program. The unused available credit under the facility was $88.8 million at June 30, 2021. The Company's liquidity per the agreement includes the unused available balance under the credit facility, unrestricted cash and leverage ratios.cash equivalents and the shortfall in the gap in expected proceeds from the sale of salon assets of $20.9 million as of June 30, 2021. Total liquidity per the agreement was $128.9 million as of June 30, 2021.
In May of 2020, the Company amended its revolving credit facility that expires in March 2023. Under the new terms of the amendment, the Company is required to maintain a minimum liquidity of $75.0 million and provides the Company's lenders security in the Company's assets, adds additional guarantors and grants a first priority lien and security interest to the lenders in substantially all of the Company's and the guarantors' existing and future property. The amendment also increases the applicable interest rate margins and facility fees applicable to the loans and inserts a 1.25% LIBOR floor. The applicable margin for loans bearing interest at LIBOR ranges from 3.75%-4.25%, the applicable margin for loans bearing interest at the base rate ranges from 2.75%-3.25% and the facility fee ranges from 0.5%-0.75%, each depending on average utilization of the revolving line of credit. The Company was in compliance with all covenants and other requirements of ourthe financing arrangements as of June 30, 2018.2021 and believes it will continue to be in compliance for at least one year from the filing date.
Revolving Credit FacilitySale and Leaseback Transactions
The Company's long-term financing liabilities consists of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maturity Date | | Interest Rate | | June 30, 2021 | | June 30, 2020 |
| | | | | | | | |
| | (Fiscal year) | | | | (Dollars in thousands) |
Financial liability - Salt Lake City Distribution Center | | 2034 | | N/A | | $ | — | | | $ | 16,773 | |
Financial liability - Chattanooga Distribution Center | | 2034 | | N/A | | — | | | 11,208 | |
Long-term financing liabilities | | | | | | $ | — | | | $ | 27,981 | |
In March 2018,fiscal year 2019, the Company entered intosold its Salt Lake City and Chattanooga Distribution Centers to an unrelated party. At the time of the sale, the transactions were considered failed sale and leaseback transactions, as the Company had planned to lease the property for more than 75% of its economic life. The sale proceeds received from the buyer-lessor were recognized as a Credit Agreement (Credit Agreement),financial liability, which provides for a $260.0 million unsecured five-year revolving credit facility (Revolving Credit Facility) that expires in March 2023 and includes, among other things, a maximum consolidated net leverage ratio covenant, a minimum fixed charge coverage ratio covenant, and certain restrictions on liens, investments and other indebtedness. The Revolving Credit Facility includes a $30.0 million subfacility for the issuance of letters of credit and a $30.0 million sublimit for swingline loans. The Company may request an increase in revolving credit commitments under the facility of up to $150.0 million under certain circumstances. The revolving credit facility has variable interest rates tied to LIBOR plus 1.25% to 1.85% and includes a facility fee of 0.25% to 0.40%. Both the LIBOR credit spread and the facility fee arewas reduced based on the rental payments made under the lease that were allocated between principal and interest. In the third quarter of fiscal year 2021, as a result of the decision to exit the Company's consolidated net leverage ratio.
In April 2018,wholesale product sales business, the Company amended and restatedinformed the Credit Agreement which increasedlandlord of its intention to exit the Revolving Credit Facility under the Credit Agreement by $35.0 million. After giving effect to the amendment, the revolving commitment under the Credit Facility is $295.0 million.
As of June 30, 2018,leased spaces. Because the Company had $90.0 millionno longer plans to lease the distribution centers for the majority of outstanding borrowings under the Revolving Credit Facility. At June 30, 2018, the Company has outstanding standby letters of credit under the Revolving Credit Facility of $1.5 million primarily related to the Company's self-insurance program, therefore, unused available credit under the facility was $203.5 million.
In connection with entering into the Credit Agreement, the Company terminated its previous $200.0 million revolving credit facility.assets' useful lives, these transactions are subsequently considered sale and leaseback transactions. As a result, the Company derecognized the financial liability of terminating$28.5 million and the $200.0carrying value of the related assets of $13.5 million revolving credit facility,and recognized a gain of $15.0 million for the difference between the liability and asset. The gain on distribution centers was recorded to Interest income and other, net in the Consolidated Statement of Operations. As the leases for the 2 distribution centers meet the sale and leaseback criteria, the Company recognized $0.1 milliona right of additional interest expense related to unamortized commitment fees duringuse asset and lease liability on the fiscal year 2018. The Company previously had no outstanding borrowings under this revolving credit facility and outstanding letters of credit under the facility of $1.5 million, primarily relatedConsolidated Balance Sheet (See Note 6 to the Company's self-insurance program, therefore the unused available credit under the facility at June 30, 2017 was $198.5 million.
Consolidated Financial Statements).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Senior Term Notes
In March 2018, the Company redeemed all of its 5.5% senior term notes that were due December 2019 (Senior Term Notes) for $124.2 million, which included a $1.2 million premium. The Company utilized $90.0 million under the Revolving Credit Facility and cash on hand of $34.2 million to repay the Senior Term Notes. As a result of redeeming the Senior Term Notes, the Company recorded $1.7 million of additional interest expense related to the unamortized debt discount and debt issuance costs during the fiscal year 2018.
The following table contains details related to the Company's Senior Term Notes:
|
| | | | | | | | |
| | June 30, |
| | 2018 | | 2017 |
| | (Dollars in thousands) |
Principal amount on the Senior Term Notes | | $ | — |
| | $ | 123,000 |
|
Unamortized debt discount | | — |
| | (1,815 | ) |
Unamortized debt issuance costs | | — |
| | (586 | ) |
Senior Term Notes, net | | $ | — |
| | $ | 120,599 |
|
8.9. COMMITMENTS AND CONTINGENCIES
Operating Leases:
The Company leases most of its company-owned salons and 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 additional five to ten year terms at the option of the Company. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Rent expense for the Company's international department store salons is based primarily on a percentage of sales.
The Company also leases the premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with 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.
Sublease income was $34.0, $31.5 and $31.4 million in fiscal years 2018, 2017 and 2016, respectively. Rent expense on premises subleased was $33.6, $31.1 and $30.9 million in fiscal years 2018, 2017 and 2016, respectively. Rent expense and related rental income on 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 (loss) income. However, in limited cases, the Company charges a 10.0% mark-up in its sublease arrangements. The net rental income resulting from such arrangements totaled $0.4, $0.4, and $0.5 million for fiscal years 2018, 2017 and 2016, respectively, and was classified in the royalties and fees caption of the Consolidated Statement of Operations.
The Company has a sublease arrangement for a leased building the Company previously occupied. The aggregate amount of lease payments to be made over the remaining lease term are approximately $3.5 million. The amount of rental income approximates the amount of rent expense, thereby having no material impact on rent expense or net income (loss).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total rent expense, excluding rent expense on premises subleased to franchisees, includes the following:
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2018 | | 2017 | | 2016 |
| | (Dollars in thousands) |
Minimum rent (1) | | $ | 157,828 |
| | $ | 154,417 |
| | $ | 156,601 |
|
Percentage rent based on sales | | 4,324 |
| | 4,058 |
| | 4,337 |
|
Real estate taxes and other expenses | | 20,944 |
| | 22,003 |
| | 23,212 |
|
| | $ | 183,096 |
| | $ | 180,478 |
| | $ | 184,150 |
|
| |
(1) | Fiscal year 2018 includes lease termination and other related closure costs of $27.3 million and a deferred rent benefit of $3.3 million related to the restructuring of the company-owned SmartStyle portfolio that occurred in January 2018. |
As of June 30, 2018, future minimum lease payments (excluding percentage rents based on sales) due under existing noncancelable operating leases are as follows:
|
| | | | | | | | |
Fiscal Year | | Corporate leases | | Franchisee leases |
| | (Dollars in thousands) |
2019 | | $ | 129,804 |
| | $ | 102,406 |
|
2020 | | 103,652 |
| | 77,748 |
|
2021 | | 71,993 |
| | 56,186 |
|
2022 | | 41,196 |
| | 37,202 |
|
2023 | | 17,723 |
| | 20,215 |
|
Thereafter | | 7,735 |
| | 22,617 |
|
Total minimum lease payments | | $ | 372,103 |
| | $ | 316,374 |
|
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.
Litigation 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. 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.
In addition, our existing point-of-sale system supplier had challenged the development of certain parts of our technology systems in litigation brought in the Northern District of California, case No. 20-cv-02181-MMC. The Company and the supplier entered into an agreement, effective June 25, 2021, that provided for the dismissal of the lawsuit and set forth a commercial services agreement pursuant to which the supplier will assist in the transfer of franchise salons from its point-of-sale system to the Company's salon management system, Opensalon® Pro. Under the agreement, the Company expects to pay the supplier between $3.0 and $5.0 million over two years. The Company recorded $3.0 million in general and administrative expense on the Consolidated Statement of Operations and an accrual of $3.0 million on the Consolidated Balance Sheet, which represent the low end of the estimated cost range.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.10. INCOME TAXES
The components of loss from continuing operations (loss) income before income taxes are as follows: | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (Dollars in thousands) |
Loss before income taxes | | | | | | |
U.S. | | $ | (153,962) | | | $ | (165,260) | | | $ | (17,513) | |
International | | 35,203 | | | (11,553) | | | (4,754) | |
| | $ | (118,759) | | | $ | (176,813) | | | $ | (22,267) | |
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2018 | | 2017 | | 2016 |
| | (Dollars in thousands) |
(Loss) income before income taxes: | | | | | | |
U.S. | | $ | (10,251 | ) | | $ | 4,652 |
| | $ | 16,305 |
|
International | | 6,703 |
| | 3,676 |
| | 1,943 |
|
| | $ | (3,548 | ) | | $ | 8,328 |
| | $ | 18,248 |
|
The (benefit) provisionbenefit for income taxes consists of: | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (Dollars in thousands) |
Current: | | | | | | |
U.S. | | $ | (620) | | | $ | (925) | | | $ | (519) | |
International | | (1,421) | | | 238 | | | 1,069 | |
Deferred: | | | | | | |
U.S. | | (3,701) | | | (3,353) | | | (2,303) | |
International | | 314 | | | (579) | | | (392) | |
| | $ | (5,428) | | | $ | (4,619) | | | $ | (2,145) | |
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2018 | | 2017 | | 2016 |
| | (Dollars in thousands) |
Current: | | | | | | |
U.S. | | $ | 2,151 |
| | $ | 994 |
| | $ | 819 |
|
International | | 1,894 |
| | 268 |
| | 1,207 |
|
Deferred: | | | | | | |
U.S. | | (69,350 | ) | | 7,901 |
| | 6,997 |
|
International | | (129 | ) | | 61 |
| | 26 |
|
| | $ | (65,434 | ) |
| $ | 9,224 |
|
| $ | 9,049 |
|
The provisionbenefit for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory rate to earnings (loss)loss from continuing operations before income taxes, as a result of the following:
|
| | | | | | | | | |
| | Fiscal Years |
| | 2018 | | 2017 | | 2016 |
U.S. statutory rate | | 28.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal income tax benefit | | 37.6 |
| | 6.9 |
| | 3.9 |
|
Valuation allowance (1) | | 1,532.3 |
| | 73.4 |
| | 35.6 |
|
Foreign income taxes at other than U.S. rates | | (1.3 | ) | | (3.9 | ) | | (0.3 | ) |
Officer life insurance | | (3.2 | ) | | (5.6 | ) | | (5.2 | ) |
Work Opportunity and Welfare-to-Work Tax Credits | | 43.7 |
| | (19.1 | ) | | (16.9 | ) |
Deferred tax rate remeasurement | | 296.4 |
| | — |
| | — |
|
FIN48 - Uncertain tax positions | | (45.8 | ) | | — |
| | — |
|
Stock-based compensation | | (45.4 | ) | | 17.9 |
| | — |
|
Other, net (2) | | 2.0 |
| | 6.2 |
| | (2.5 | ) |
| | 1,844.3 | % | | 110.8 | % | | 49.6 | % |
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
U.S. statutory rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
State income taxes, net of federal income tax benefit | | 7.6 | | | 4.0 | | | 0.5 | |
Valuation allowance (1) | | (58.3) | | | (29.4) | | | (14.5) | |
Foreign income taxes at other than U.S. rates | | 8.5 | | | (0.6) | | | 0.9 | |
Work opportunity tax credits | | 0.2 | | | 0.4 | | | 7.2 | |
| | | | | | |
Uncertain tax positions | | 0.2 | | | (6.2) | | | 1.0 | |
Stock-based compensation | | (0.6) | | | 0.1 | | | 2.2 | |
Capital loss | | — | | | 15.0 | | | — | |
Loss on investment in Luxembourg | | 26.8 | | | — | | | — | |
Other, net (2) | | (0.8) | | | (1.7) | | | (8.7) | |
Effective tax rate | | 4.6 | % | | 2.6 | % | | 9.6 | % |
(1)See Note 1 to the Consolidated Financial Statements.
(2)The 2.0%(0.8)% of Other, net in fiscal year 20182021 does not include the rate impact of any items in excess of 5% of computed tax.
The 6.2% of Other, net in fiscal year 2017 includes the rate impact of meals and entertainment expense disallowance, adjustments resulting from charitable contributions and miscellaneous items of 4.5%, 7.1%, and (5.4)%, respectively. Miscellaneous items do not include any items in excess of 5% of computed tax.
The (2.5)(1.7)% of Other, net in fiscal year 2016 does not include2020 includes the rate impact of anygoodwill derecognition and impairment and miscellaneous items of (1.2)% and (0.5)%, respectively. The (8.7)% of Other, net in excessfiscal year 2019 includes the rate impact of 5%goodwill derecognition and miscellaneous items of computed tax.(5.9)% and (2.8)%, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the net deferred tax assets and liabilities are as follows: | | | | | | | | | | | | | | |
| | June 30, |
| | 2021 | | 2020 |
| | | | |
| | (Dollars in thousands) |
Deferred tax assets: | | | | |
| | | | |
Payroll and payroll related costs | | $ | 8,523 | | | $ | 9,903 | |
Net operating loss carryforwards | | 145,823 | | | 64,402 | |
Tax credit carryforwards | | 37,433 | | | 37,072 | |
Capital loss carryforwards | | 14,179 | | | 14,978 | |
Deferred franchise fees | | 10,153 | | | 9,342 | |
Operating lease liabilities | | 154,255 | | | 202,940 | |
Financing lease liabilities | | — | | | 7,157 | |
Other | | 12,608 | | | 8,214 | |
Subtotal | | 382,974 | | | 354,008 | |
Valuation allowance | | (192,522) | | | (122,447) | |
Total deferred tax assets | | $ | 190,452 | | | $ | 231,561 | |
| | | | |
Deferred tax liabilities: | | | | |
Goodwill and intangibles | | $ | (43,375) | | | $ | (40,904) | |
Operating lease assets | | (150,573) | | | (197,304) | |
Other | | (7,154) | | | (7,269) | |
Total deferred tax liabilities | | (201,102) | | | (245,477) | |
Net deferred tax liability | | $ | (10,650) | | | $ | (13,916) | |
Significant components of the valuation allowance which occurred during fiscal year 2021 are as follows: |
| | | | | | | | |
| | June 30, |
| | 2018 | | 2017 |
| | (Dollars in thousands) |
Deferred tax assets: | | | | |
Deferred rent | | $ | 5,251 |
| | $ | 13,581 |
|
Payroll and payroll related costs | | 14,083 |
| | 24,519 |
|
Net operating loss carryforwards | | 41,570 |
| | 28,378 |
|
Tax credit carryforwards | | 35,102 |
| | 32,852 |
|
Inventories | | 1,103 |
| | 1,930 |
|
Fixed assets | | 1,036 |
| | 6,419 |
|
Accrued advertising | | 2,211 |
| | 2,723 |
|
Insurance | | 1,893 |
| | 4,153 |
|
Other | | 13,185 |
| | 7,499 |
|
Subtotal | | $ | 115,434 |
|
| $ | 122,054 |
|
Valuation allowance | | (67,912 | ) | | (119,082 | ) |
Total deferred tax assets | | $ | 47,522 |
|
| $ | 2,972 |
|
Deferred tax liabilities: | | | | |
Goodwill and intangibles | | $ | (72,670 | ) | | $ | (103,761 | ) |
Other | | (7,081 | ) | | (7,398 | ) |
Total deferred tax liabilities | | $ | (79,751 | ) | | $ | (111,159 | ) |
Net deferred tax liability | | $ | (32,229 | ) | | $ | (108,187 | ) |
•The Company recognized a tax loss on its investment in Luxembourg and established a corresponding valuation allowance of $34.4 million.In December 2017,Significant components of the valuation allowance which occurred during fiscal year 2020 are as follows:
•On March 27, 2020, the U.S. government enacted comprehensivethe Coronavirus Aid, Relief and Economic Security Act (CARES Act) in response to the COVID-19 pandemic. The CARES Act included several significant business tax legislation commonly referred to asprovisions that, among other items, eliminated the taxable income limit and granted business a five-year carryback for certain net operating losses (NOLs), accelerated refunds of previously generated corporate alternative minimum tax (AMT) credits, temporarily loosened the business interest limitation under section 163(j) and corrected certain provisions under the Tax Cuts and Jobs Act (the “Tax Act”)(TCJA). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) changing rules related to net operating losses ("NOL") carryforwards and carrybacks; (3) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (4) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (5) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (6) allowing full expensing of qualified property; (7) creating a new base erosion anti-abuse minimum tax (“BEAT”) and provisions designed to tax global intangible low-taxed income (“GILTI”); (8) adding rules that limit the deductibility of interest expense; and (9) adding new provisions that further restrict the deductibility of certain executive compensation.
Due to the Company's fiscal year end, different provisions of the Tax Act will become applicable at varying dates. Nonetheless, the Company is required to recognize the effects of the rate change and enacted legislation on its deferred tax assets and liabilities in the period of enactment.
The SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification (ASC) 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
•In connection with the TaxCARES Act, NOLs resulting from accounting periods which straddled December 31, 2017 are now considered definite-lived NOLs. Therefore, the Company established a U.S. valuation allowance against the NOLs generated during its fiscal year 2018 and recorded a provisional net tax benefitexpense of $68.1$14.7 million in continuing operations for the twelve months ended June 30, 2018. operations.
•The $68.1 million net tax benefit is comprised of $30.5 million for the partial release of theCompany determined that it no longer had sufficient U.S. valuation allowance and $37.6 million associated with remeasurement of the deferred tax accounts. The benefit recognized on current losses and the partial valuation allowance release is solely attributable to tax reform and the law change that allows for the indefinite carryforward of NOLs arising in tax years ending after December 31, 2017. Prior law
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
limited the carryforward period to 20 years. As a result of the new tax rules, the Company can now consider its indefinite lived deferred tax liabilities as a source of incomeindefinite-lived taxable temporary differences to support the realization of its U.S. indefinite-lived NOLs and its existing U.S. deferred tax assets that upon reversal are expected to generate indefinite livedindefinite-lived NOLs. Consequently,As a result, the Company is able to remove the valuation allowance associated with these deferred tax assets. The Company continues to maintain arecorded an additional $17.0 million valuation allowance on the historical balance of its finite livedU.S. federal NOLs, tax credits and various state tax attributes. We are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of ourindefinite-lived deferred tax balancesassets.
•The Company further recognized a capital loss and ultimately cause us to revise our provisional estimate in future periods in accordance with SAB 118. In addition, changes in interpretations, assumptions, and guidance regarding the new tax legislation, as well as the potentialestablished a corresponding valuation allowance of $14.9 million on investment outside basis previously impaired for technical corrections to the Tax Act, could have a material impact to the Company’s effective tax rate in future periods.financial accounting purposes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At June 30, 2018,2021, the Company has tax effectedtax-effected federal, state, Canada, and U.K. net operating loss carryforwards of approximately $28.2, $12.7,$112.3, $26.9, $6.1 and $0.5 and $0.2 million, respectively. The Company's federal loss carryforward consists of $27.3 million that will expire from fiscal years 2034 to 2037.2038 and $85.0 million that has no expiration. The state loss carryforwards consist of $23.5 million that will expire from fiscal years 20192022 to 2038.2041 and $3.4 million that has no expiration. The Canada loss carryforward will expire from fiscal years 2036 to 2038.2041. The U.K. loss carryforward has no expiration.
The Company's tax credit carryforward of $35.1$37.4 million consistsprimarily consist of $33.1 millionWork Opportunity Tax Credits that will expire from fiscal years 20302031 to 2038, $0.52041.
The Company's capital loss carryforward of $14.2 million that will expire fromin fiscal years 2020year 2025.
We consider the earnings of certain non-U.S. subsidiaries to 2028be indefinitely invested outside the U.S. Accordingly, we have not recorded deferred taxes related to the U.S. federal and $1.5 million of carryforward that has no expiration date.
As of June 30, 2018, the Company has not provided deferredstate income taxes and foreign withholding taxes on approximately $14.5$11.1 million of undistributed earnings of attributable to its internationalforeign subsidiaries, thatwhich have been consideredreinvested outside the U.S. As a result of the Tax Cuts and Jobs Act of 2017, taxes payable on the remittance of such earnings is expected to be reinvested indefinitely. The Company has multiple avenues to repatriate these earnings tax efficiently and therefore it does not expect to incur significant U.S. or foreign income taxes upon repatriation.minimal.
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. The IRS examination associated with the Company’s U.S. federal income tax returns for fiscal years 2010 through 2013 was finalized during fiscal year 2018. Closure of the examination resulted in adjustments to existing tax attributes and did not result in any cash outflow. The Company is no longer subject to IRSInternal Revenue Service examinations for years before 2013.2014. With limited exceptions, the Company is no longer subject to state and international income tax examination by tax authorities for years before 2012.
A rollforward of the unrecognized tax benefits is as follows:
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2018 | | 2017 | | 2016 |
| | (Dollars in thousands) |
Balance at beginning of period | | $ | 1,388 |
| | $ | 1,357 |
| | $ | 1,496 |
|
Additions based on tax positions related to the current year | | 553 |
| | 259 |
| | 138 |
|
Additions based on tax positions of prior years | | 1,608 |
| | 80 |
| | 170 |
|
Reductions on tax positions related to the expiration of the statute of limitations | | (177 | ) | | (179 | ) | | (207 | ) |
Settlements | | (345 | ) | | (129 | ) | | (240 | ) |
Balance at end of period | | $ | 3,027 |
| | $ | 1,388 |
| | $ | 1,357 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (Dollars in thousands) |
Balance at beginning of period | | $ | 14,045 | | | $ | 2,763 | | | $ | 3,027 | |
Additions based on tax positions related to the current year, primarily salon vendition activity and tax positions related to a capital loss | | 292 | | | 11,985 | | | 287 | |
Additions/(reductions) based on tax positions of prior years | | 50 | | | (223) | | | (154) | |
Reductions on tax positions related to the expiration of the statute of limitations | | (529) | | | (480) | | | (397) | |
| | | | | | |
Balance at end of period | | $ | 13,858 | | | $ | 14,045 | | | $ | 2,763 | |
If the Company were to prevail on all unrecognized tax benefits recorded, a net benefit of approximately $2.4$0.9 million would be recorded in the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. During each of the fiscal years 2018, 20172021, 2020 and 2016, we2019, the Company recorded interest and penalties of approximately $0.1 million as additions to the accrual, net of the respective reversal of previously accrued interest and penalties. As of June 30, 2018,2021, the Company had accrued interest and penalties related to unrecognized tax benefits of $1.2$0.9 million. This amount is not included in the gross unrecognized tax benefits noted above.
It is reasonably possible the amount of the unrecognized tax benefit with respect to certain of our unrecognized tax positions will increase or decrease during the next fiscal year. However, an estimate of the amount or range of the change cannot be made at this time.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10.11. BENEFIT PLANS
Regis Retirement Savings Plan:
The Company maintains a defined contribution 401(k) plan, the Regis Retirement Savings Plan (RRSP). The RRSP is a defined contribution profit sharing plan with a 401(k) feature that is intended to qualify under Section 401(a) of the Internal Revenue Code (Code)(the Code) and is subject to the Employee Retirement Income Security Act of 1974 (ERISA).
The 401(k) portion of the RRSP is a cash 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 their eligible compensation. Employees who are 18 years of age or older and who were not highly compensated employees as defined by the Code during the preceding RRSP year are eligible to participate in the RRSP 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 RRSP 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 RRSP year, are employed by the Company on the last day of the RRSP year and are employed at Salon Support employees, distribution centers, ascenter employees, field leaders, artistic directors or consultants, and that are not highly compensated employees as defined by the Code. Participants' interest in the noncontributory defined contribution component become 20.0% vested after completing two years of service with vesting increasing 20.0% 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 and all other employees who are highly compensated as defined by the Code. The discretionary employer contribution portion of the Executive Plan is a profit sharing component in which a participant's interest becomes 20.0% vested after completing two years of service with vesting increasing 20.0% 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.
Regis Individual Secured Retirement Plan (RiSRP):
The Company maintains a Regis Individual Secured Retirement Plan (RiSRP), pursuant to which eligible employees may use post-tax dollars to purchase life insurance benefits. Salon Support employees at the director level and above as well as regional vice presidents, are eligible to participate.qualify. The Company may make discretionary contributions on behalf of participants within the RiSRP, which may be calculated as a matching contribution. The participant is the owner of the life insurance policy under the RiSRP.
Stock Purchase Plan:
The Company has an employee stock purchase plan (ESPP) available to qualifying 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% 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 $11.8 million. As of June 30, 2018,2021, the Company's cumulative contributions to the ESPP totaled $10.8$11.2 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Compensation Contracts:
The Company has unfunded deferred compensation contracts covering certain current and former key executives. Effective June 30, 2012, these contracts were amended and the benefits were frozen.
Expense associated with the deferred compensation contracts included in general and administrative expenses on the Consolidated Statement of Operations totaled $0.2 millionzero for fiscal years 2018, 20172021, 2020, and 2016.2019.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents the projected benefit obligation of these deferred compensation contracts in the Consolidated Balance Sheet: |
| | | | | | | | |
| | June 30, |
| | 2018 | | 2017 |
| | (Dollars in thousands) |
Current portion (included in accrued liabilities) | | $ | 1,960 |
| | $ | 1,658 |
|
Long-term portion (included in other noncurrent liabilities) | | 4,342 |
| | 5,163 |
|
| | $ | 6,302 |
| | $ | 6,821 |
|
| | | | | | | | | | | | | | |
| | June 30, |
| | 2021 | | 2020 |
| | | | |
| | (Dollars in thousands) |
Current portion (included in accrued liabilities) | | $ | 1,660 | | | $ | 302 | |
Long-term portion (included in other non-current liabilities) | | 3,115 | | | 4,637 | |
Total | | $ | 4,775 | | | $ | 4,939 | |
The accumulated other comprehensive income (loss)loss for the deferred compensation contracts, consisting of primarily unrecognized actuarial income, was $1.0$0.3 and $0.7$0.1 million at June 30, 20182021 and 2017,2020, respectively.
The Company had previously agreed to pay the former Vice Chairman and his spouse an annual amountbenefit for the remainder of his life. Additionally, the Company has a survivorCosts associated with this benefit plan for the former Vice Chairman's spouse. In October 2013, the former Vice Chairman passed away and the Company began paying survivor benefits to his spouse. Estimated associated costs included in general and administrative expenses on the Consolidated Statement of Operations totaled $0.3, $0.3 and $0.2$0.4 million for fiscal years 2018, 20172021, 2020 and 2016, respectively.2019. Related obligations totaled $2.6$2.3 and $2.8$2.4 million at June 30, 20182021 and 2017,2020, respectively, with $0.5 million within accrued expenses at June 30, 20182021 and 2017, respectively2020, and the remainder included in other noncurrentnon-current liabilities in the Consolidated Balance Sheet.
In connection with the passing
Table of former employees in fiscal year 2018, 2017 and 2016, the Company received $18.1, $0.9 and $2.9 million, respectively, in life insurance proceeds. The Company recorded gains of $8.0, $0.1 and $1.2 million in fiscal year 2018, 2017, and 2016, respectively, in general and administrative in the Consolidated Statement of Operations associated with the proceeds.Contents Compensation expense included in income (loss) from continuing operations before income taxes and equity in loss of affiliated companies related to the aforementioned plans, excluding amounts paid for expenses and administration of the plans included the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | |
| | Fiscal Years |
| | 2018 | | 2017 | | 2016 |
| | (Dollars in thousands) |
Executive plans | | $ | 135 |
| | $ | 249 |
| | $ | 289 |
|
ESPP | | 204 |
| | 280 |
| | 301 |
|
Deferred compensation contracts | | 578 |
| | 514 |
| | 402 |
|
11.12. EARNINGS PER SHARE
The Company’sCompany's basic earnings per share is calculated as net income (loss)loss divided by weighted average common shares outstanding, excluding unvested outstanding stock options (SOs), restricted stock awards, RSUsunits (RSUs) and PSUs.stock-settled performance units (PSUs). The Company’sCompany's diluted earnings per share is calculated as net income (loss) divided by weighted average common shares and common share equivalents outstanding, which includes shares issued under the Company’sCompany's stock-based compensation plans. Stock-based awards with exercise prices greater than the average market price of the Company’sCompany's common stock are excluded from the computation of diluted earnings per share. As the Company is in a net loss basic earnings per share is equivalent to dilutive earnings per share.
For fiscal year 2018, 518,236years 2021, 2020 and 2019, 636,310, 963,456 and 1,341,421 of common stock equivalents of dilutive common stock, respectively, were included inexcluded from the diluted earnings per share calculation due to the net income from continuing operations. For fiscal years 2017 and 2016, 728,223 and 446,992, respectively, of common stock equivalents of dilutive common stock were not included in the diluted earnings per share calculation due to the net loss from continuing operations.
The computation of weighted average shares outstanding, assuming dilution, excluded the following stock-based awards as they were not dilutive under the treasury stock method: | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
Equity-based compensation awards | | 2,322,006 | | | 315,312 | | | 118,246 | |
|
| | | | | | | | | |
| | Fiscal Year |
| | 2018 | | 2017 | | 2016 |
Equity-based compensation awards | | 634,292 |
| | 2,407,158 |
| | 2,133,675 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12.13. STOCK-BASED COMPENSATION
The Company grants long-term equity-based awards under the 20162018 Long Term Incentive Plan (the 20162018 Plan). The 20162018 Plan, which was approved by the Company's shareholders at its 20162018 Annual Meeting, provides for the granting of nonqualified stock options (SOs), equity-based stock appreciation rights (SARs), restricted stock awards (RSAs), restricted stock units (RSUs) and stock-settled performance units (PSUs), as well as cash-based performance grants, to employees and non-employee directors of the Company. Under the 20162018 Plan, a maximum of 3,500,0003,818,895 shares wereare approved for issuance. The 20162018 Plan incorporates a fungible share design, under which full value awards (such as RSUs and PSUs) count against the shares reserved for issuance at a rate 2.42.0 times higher than appreciation awards (such as SARs and stock options)SOs). As of June 30, 2018,2021, a maximum of 4,500,2783,341,011 shares were available for grant under the 20162018 Plan. All unvested awards are subject to forfeiture in event of termination of employment, unless accelerated. SAR and RSU awards granted under the 20162018 Plan generally include various acceleration terms, including upon retirement for participants aged sixty-two years or older or who are aged fifty-five or older and have fifteen15 years of continuous service.
The Company also has outstanding awards under the 2016 Long Term Incentive Plan (the 2016 Plan), although the 2016 Plan terminated in October 2018 and no additional awards have since been or will be made under the 2016 Plan. The 2016 Plan provided for the granting of SARs, RSAs, RSUs and PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company.
The Company also has outstanding awards under the Amended and Restated 2004 Long Term Incentive Plan (the "2004 Plan")2004 Plan), although the 2004 Plan terminated in October 2016 and no additional awards have since been or will be made under the 2004 Plan. The 2004 Plan provided for the granting of nonqualified stock options, equity-based stock appreciation rights (SARs), restricted stock awards (RSAs), restricted stock units (RSUs)SARs, RSAs, RSUs and stock-settled performance share units (PSUs),PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company.
Under the 2018 Plan, 2016 Plan and the 2004 Plan, stock-based awards are granted at an exercise price or initial value equal to the fair market value on the date of grant. There were no SARs granted in fiscal year 2021.
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 2018, 20172021, 2020 and 20162019 were as follows: | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
SOs (1) | | $ | 2.89 | | | $ | — | | | $ | — | |
RSUs (1) | | 7.15 | | | 16.48 | | | 21.12 | |
PSUs (1) | | 5.83 | | | 12.09 | | | 14.05 | |
|
| | | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
SARs | | $ | — |
| | $ | 3.68 |
| | $ | 3.51 |
|
RSAs & RSUs | | 13.43 |
| | 11.73 |
| | 11.18 |
|
PSUs | | 15.74 |
| | 12.28 |
| | 12.11 |
|
(1)The fair value of SARsmarket-based SOs granted are estimated on the date of grant using the Black-Scholes-Merton (BSM) optioneither a Monte Carlo valuation model or a Black-Scholes valuation model. The significant assumptions used in determining the estimated fair value of SARs granted during fiscal years 2018, 2017 and 2016 were as follows:
|
| | | | | | |
| | 2018 | | 2017 | | 2016 |
Risk-free interest rate | | N/A | | 1.99% | | 1.71% |
Expected term (in years) | | N/A | | 6.50 | | 6.00 |
Expected volatility | | N/A | | 31.50% | | 30.00% |
Expected dividend yield | | N/A | | 0% | | 0% |
The fair value of market-based RSUs and PSUs granted are estimated on the date of grant using a Monte Carlo valuation model. The significant assumptions used in determining the estimated fair value of the market-based awards granted during fiscal years 2018, 20172021, 2020 and 20162019 were as follows:
| | | | Fiscal Years |
| | | | | | | | 2021 | | 2020 | | 2019 |
| | 2018 | | 2017 | | 2016 | | | | | | |
Risk-free interest rate | | 1.66 - 2.59% | | 1.21% | | N/A | Risk-free interest rate | | 0.16 - 0.78% | | 1.43% | | 2.31 - 2.68% |
Expected volatility | | 33.4 - 37.1% | | 36.5% | | N/A | Expected volatility | | 44.9 - 66.8% | | 33.9% | | 34.2 - 34.6% |
Expected dividend yield | | 0% | | 0% | | N/A | Expected dividend yield | | — | % | | — | % | | — | % |
Expected term of share options | | Expected term of share options | | 7.0 years | | N/A | | N/A |
The risk freerisk-free interest rate is determined based on the U.S. Treasury rates approximating the expected life of the SARs and market-based SOs, RSUs and PSUs 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 awards 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.
The expected term is the mid-point between shares vesting and expiration.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-based compensation expense was as follows: | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (Dollars in thousands) |
SARs & SOs | | $ | 456 | | | $ | — | | | $ | 1,497 | |
RSUs & PSUs | | 2,798 | | | 3,275 | | | 7,506 | |
Total stock-based compensation expense (recorded in G&A) | | 3,254 | | | 3,275 | | | 9,003 | |
Less: Income tax benefit (1) | | — | | | (688) | | | (1,891) | |
Total stock-based compensation expense, net of tax | | $ | 3,254 | | | $ | 2,587 | | | $ | 7,112 | |
| | | | | | |
| | | | | | |
PSUs are grants of restricted stock units which are earned based on the achievement of performance goals established by the Compensation Committee over a performance period.
In May 2000, the Company's Board approved a stock repurchase program with no stated expiration date. Originally, the program authorized up to $50.0 million to be expended for the repurchase of the Company's stock. The Board elected to increase this maximum to $100.0 million in August 2003, to $200.0 million in May 2005, to $300.0 million in April 2007, to $350.0 million in April 2015, to $400.0 million in September 2015, and to $450.0 million in January 2016.2016, and to $650.0 million in August 2018. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depends on many factors, including the market price of the common stock and overall market conditions. As of June 30, 2018, 19.92021, 30.0 million shares have been cumulatively repurchased for $414.7$595.4 million, and $35.3$54.6 million remained outstanding under the approved stock repurchase program.
Segment information is prepared on the same basis the chief operating decision maker reviews financial information for operational decision-making purposes. During the first quarter of fiscal year 2018, the Company redefined its operating segments to reflect how the chief operating decision maker now evaluates the business as a result of the Company's Board of Directors' approval of the mall-based business and International segment sale. See Note 1 to the Consolidated Financial Statements. The Company now reports its operations in two operating segments: Company-owned salons and Franchise salons. The Company's operating segments are its reportable operating segments. Prior to this change,segment is comprised of 5,563 franchised salons located mainly in strip center locations and Walmart. Franchise salons offer high quality, convenient and value priced hair care and beauty services and retail products. This segment operates primarily in the Company had four operating segments: North American Value, North American Premium, North American Franchise,United States and International. The Company did not operate underCanada and primarily includes the realigned operating segment structure prior to the first quarter of fiscal year 2018.Supercuts, SmartStyle, Cost Cutters, First Choice Haircutters, Roosters and Magicuts concepts.