Sally Beauty Holdings, Inc. - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For The Quarterly Period Ended JUNE 30, 2019

-OR-

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

Commission File No. 1-33145

SALLY BEAUTY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware		36-2257936
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3001 Colorado Boulevard
Denton, Texas		76210
(Address of principal executive offices)		(Zip Code)

(940) 898-7500

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report): N/A

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading SymbolName of each exchange on which registered

Common Stock, $0.01 par valueSBHThe New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer	☒		Accelerated filer	☐	Non-accelerated filer	☐
Smaller reporting company	☐		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒

As of July 26, 2019, there were 120,543,133 shares of the issuer’s common stock outstanding.

TABLE OF CONTENTS

	Page
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements	4
Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations	28
Item 3. Quantitative And Qualitative Disclosures About Market Risk	33
Item 4. Controls And Procedures	34

PART II — OTHER INFORMATION

Item 1. Legal Proceedings	35
Item 1A. Risk Factors	35
Item 6. Exhibits	36

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

cautionary notice regarding forward-looking statements

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

Readers are cautioned not to place undue reliance on forward-looking statements, as such statements speak only as of the date they were made and involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements. The most important risks, uncertainties and other factors which could cause our actual results to differ from our forward-looking statements are set forth in our description of risk factors in Item 1A contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, which should be read in conjunction with the forward-looking statements in this report. Additional risks and uncertainties may also be discussed in this quarterly report and the other reports we file with the SEC. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement.

The events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. As a result, our actual results may differ materially from the results contemplated by these forward-looking statements.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

The following condensed consolidated balance sheets as of June 30, 2019 and September 30, 2018, the condensed consolidated statements of earnings, condensed consolidated statements of comprehensive income, and the condensed statements of stockholders’ deficit for the three and nine months ended June 30, 2019 and 2018, and the condensed consolidated statements of cash flows for the nine months ended June 30, 2019 and 2018 are those of Sally Beauty Holdings, Inc. and its subsidiaries.

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value data)

(Unaudited)

	June 30, 2019			September 30, 2018

Assets
Current assets:
Cash and cash equivalents	$	57,855		$	77,295
Trade accounts receivable, net		44,680			48,417
Accounts receivable, other		52,316			42,073
Inventory		967,744			944,338
Other current assets		37,853			42,960
Total current assets		1,160,448			1,155,083
Property and equipment, net of accumulated depreciation of $652,839 at June 30, 2019 and $611,021 at September 30, 2018		292,371			308,357
Goodwill		533,963			535,925
Intangible assets, excluding goodwill, net of accumulated amortization of $140,739 at June 30, 2019 and $132,724 at September 30, 2018		65,442			72,698
Other assets		20,047			25,351
Total assets	$	2,072,271		$	2,097,414
Liabilities and Stockholders’ Deficit
Current liabilities:
Current maturities of long-term debt	$	21,002		$	5,501
Accounts payable		272,629			303,241
Accrued liabilities		146,209			180,287
Income taxes payable		1,214			2,144
Total current liabilities		441,054			491,173
Long-term debt		1,589,663			1,768,808
Other liabilities		25,709			30,022
Deferred income tax liabilities, net		86,310			75,967
Total liabilities		2,142,736			2,365,970
Stockholders’ deficit:
Common stock, $0.01 par value. Authorized 500,000 shares; 120,565 and 120,145 shares issued and 120,130 and 119,926 shares outstanding at June 30, 2019 and September 30, 2018, respectively		1,201			1,199
Preferred stock, $0.01 par value. Authorized 50,000 shares; none issued		—			—
Additional paid-in capital		9,513			—
Accumulated earnings (deficit)		22,852			(179,764	)
Accumulated other comprehensive loss, net of tax		(104,031	)		(89,991	)
Total stockholders’ deficit		(70,465	)		(268,556	)
Total liabilities and stockholders’ deficit	$	2,072,271		$	2,097,414

The accompanying notes are an integral part of these condensed consolidated financial statements.

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)

	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Net sales	$	975,169	$	996,283	$	2,910,474	$	2,966,568
Cost of goods sold		492,947		502,913		1,479,222		1,500,247
Gross profit		482,222		493,370		1,431,252		1,466,321
Selling, general and administrative expenses		360,183		378,598		1,088,797		1,118,345
Restructuring		1,908		12,544		74		24,513
Operating earnings		120,131		102,228		342,381		323,463
Interest expense		25,781		24,501		74,092		73,779
Earnings before provision for income taxes		94,350		77,727		268,289		249,684
Provision for income taxes		23,186		19,501		65,673		46,823
Net earnings	$	71,164	$	58,226	$	202,616	$	202,861
Earnings per share:
Basic	$	0.59	$	0.48	$	1.69	$	1.63
Diluted	$	0.59	$	0.48	$	1.68	$	1.62
Weighted average shares:
Basic		120,119		120,901		120,062		124,331
Diluted		120,977		121,673		120,928		125,111

The accompanying notes are an integral part of these condensed consolidated financial statements.

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

	Three Months Ended					Nine Months Ended
	June 30,					June 30,
	2019		2018			2019			2018
Net earnings	$	71,164	$	58,226		$	202,616		$	202,861
Other comprehensive income (loss):
Foreign currency translation adjustments		834		(22,168	)		(9,591	)		(11,986	)
Interest rate caps, net of tax		586		308			(4,384	)		1,815
Foreign exchange contracts, net of tax		103		—			(65	)		—
Other comprehensive income (loss), net of tax		1,523		(21,860	)		(14,040	)		(10,171	)
Total comprehensive income	$	72,687	$	36,366		$	188,576		$	192,690

The accompanying notes are an integral part of these condensed consolidated financial statements.

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended June 30,
	2019			2018
Cash Flows from Operating Activities:
Net earnings	$	202,616		$	202,861
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		80,425			81,428
Share-based compensation expense		7,728			8,237
Amortization of deferred financing costs		2,894			2,842
Loss on extinguishment of debt		951			876
Gain on disposal of equipment and other property		(6,557	)		—
Deferred income taxes		12,095			(25,132	)
Changes in (exclusive of effects of acquisitions):
Trade accounts receivable		3,361			(2,171	)
Accounts receivable, other		(10,641	)		(914	)
Inventory		(28,283	)		(24,119	)
Other current assets		4,687			12,973
Other assets		(1,195	)		341
Accounts payable and accrued liabilities		(59,105	)		10,180
Income taxes payable		(926	)		801
Other liabilities		(4,227	)		13,727
Net cash provided by operating activities		203,823			281,930
Cash Flows from Investing Activities:
Payments for property and equipment		(66,763	)		(62,190	)
Proceeds from sale of property and equipment		12,021			19
Acquisitions, net of cash acquired		(2,763	)		(9,175	)
Net cash used by investing activities		(57,505	)		(71,346	)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		394,004			369,319
Repayments of long-term debt		(561,162	)		(401,222	)
Debt issuance costs		—			(1,151	)
Payments for common stock repurchased		—			(164,838	)
Proceeds from exercises of stock options		1,787			1,317
Net cash used by financing activities		(165,371	)		(196,575	)
Effect of foreign exchange rate changes on cash and cash equivalents		(387	)		(913	)
Net (decrease) increase in cash and cash equivalents		(19,440	)		13,096
Cash and cash equivalents, beginning of period		77,295			63,759
Cash and cash equivalents, end of period	$	57,855		$	76,855
Supplemental Cash Flow Information:
Interest paid	$	82,903		$	83,344
Income taxes paid		62,852			53,559
Capital expenditures incurred but not paid	$	3,116		$	3,264

The accompanying notes are an integral part of these condensed consolidated financial statements.

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Deficit

(In thousands)

(Unaudited)

												Accumulated
					Additional		Accumulated					Other			Total
	Common Stock				Paid-in		Earnings			Treasury		Comprehensive			Stockholders’
	Shares		Amount		Capital		(Deficit)			Stock		Loss			Deficit
Balance at September 30, 2018		119,926	$	1,199	$	—	$	(179,764	)	$	—	$	(89,991	)	$	(268,556	)
Net earnings		—		—		—		65,727			—		—			65,727
Other comprehensive loss		—		—		—		—			—		(16,705	)		(16,705	)
Share-based compensation		—		—		3,354		—			—		—			3,354
Stock issued for stock options		115		1		1,448		—			—		—			1,449
Balance at December 31, 2018		120,041	$	1,200	$	4,802	$	(114,037	)	$	—	$	(106,696	)	$	(214,731	)
Net earnings		—		—		—		65,725			—		—			65,725
Other comprehensive income		—		—		—		—			—		1,142			1,142
Share-based compensation		—		—		2,517		—			—		—			2,517
Stock issued for stock options		66		1		271		—			—		—			272
Balance at March 31, 2019		120,107	$	1,201	$	7,590	$	(48,312	)	$	—	$	(105,554	)	$	(145,075	)
Net earnings		—		—		—		71,164			—		—			71,164
Other comprehensive income		—		—		—		—			—		1,523			1,523
Share-based compensation		—		—		1,857		—			—		—			1,857
Stock issued for stock options		23		—		66		—			—		—			66
Balance at June 30, 2019		120,130	$	1,201	$	9,513	$	22,852		$	—	$	(104,031	)	$	(70,465	)

															Accumulated
							Additional								Other			Total
	Common Stock						Paid-in			Accumulated			Treasury		Comprehensive			Stockholders’
	Shares			Amount			Capital			Deficit			Stock		Loss			Deficit
Balance at September 30, 2017		129,585		$	1,296		$	—		$	(283,076	)	$	—	$	(81,836	)	$	(363,616	)
Net earnings		—			—			—			83,264			—		—			83,264
Other comprehensive loss		—			—			—			—			—		(1,058	)		(1,058	)
Repurchases and cancellations of common stock		(3,848	)		(39	)		(3,386	)		(61,187	)		—		—			(64,612	)
Share-based compensation		—			—			3,111			—			—		—			3,111
Stock issued for stock options		62			1			275			—			—		—			276
Balance at December 31, 2017		125,799		$	1,258		$	—		$	(260,999	)	$	—	$	(82,894	)	$	(342,635	)
Net earnings		—			—			—			61,371			—		—			61,371
Other comprehensive income		—			—			—			—			—		12,747			12,747
Repurchases and cancellations of common stock		(2,899	)		(29	)		(3,573	)		(46,484	)		—		—			(50,086	)
Share-based compensation		—			—			2,738			—			—		—			2,738
Stock issued for stock options		102			1			835			—			—		—			836
Balance at March 31, 2018		123,002		$	1,230		$	—		$	(246,112	)	$	—	$	(70,147	)	$	(315,029	)
Net earnings		—			—			—			58,226			—		—			58,226
Other comprehensive loss		—			—			—			—			—		(21,860	)		(21,860	)
Repurchases and cancellations of common stock		(3,157	)		(32	)		(2,593	)		(47,515	)		—		—			(50,140	)
Share-based compensation		—			—			2,387			—			—		—			2,387
Stock issued for stock options		37			1			206			—			—		—			207
Balance at June 30, 2018		119,882		$	1,199		$	—		$	(235,401	)	$	—	$	(92,007	)	$	(326,209	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Sally Beauty Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

The condensed consolidated interim financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC, although we believe that the disclosures are adequate to make the information not misleading. These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. In the opinion of management, these condensed consolidated interim financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly our consolidated financial position as of June 30, 2019 and September 30, 2018, our consolidated results of operations, consolidated comprehensive income and consolidated statements of stockholders’ deficit for the three and nine months ended June 30, 2019 and 2018, and our consolidated cash flows for nine months ended June 30, 2019 and 2018.

Certain amounts for the prior year have been conformed to the current year’s presentation.

2. Significant Accounting Policies

We adhere to the same accounting policies in the preparation of our condensed consolidated interim financial statements as we do in the preparation of our full-year consolidated financial statements. As permitted under GAAP, interim accounting for certain expenses, including income taxes, is based on full-year assumptions. For interim financial reporting purposes, income taxes are recorded based upon estimated annual effective income tax rates.

3. Accounting Changes and Recent Accounting Pronouncements

Accounting Changes

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU No. 2014-09”), which introduced new guidance that established how an entity should measure revenue in connection with its sale of goods and services to a customer based on the consideration to which the entity expects to be entitled in exchange for each of those goods and services. On October 1, 2018, we adopted ASU No. 2014-09 using the modified retrospective transition method. Additionally, in connection with the adoption, we designed changes to our internal control procedures and updated processes to ensure appropriate recognition and presentation of financial information. This adoption did not have a material effect on our consolidated financial statements or on our internal controls over financial reporting. We do not believe that the adoption will have a material effect on our consolidated financial statements on an ongoing basis. The comparative periods continue to be presented under the accounting standards in effect during those periods.

In connection with the adoption of ASU No. 2014-09, we now present our sales returns allowance on a gross basis rather than a net liability basis. As such, we recognize a return asset from the right to recover merchandise from customers (included in other current assets) and a return liability from the amount to be returned to the customer (included in accrued liabilities) within our consolidated balance sheets. Additionally, we now recognize revenue for our gift cards not expected to be redeemed (“gift card breakage”) within revenue in our consolidated statements of earnings.

The following tables set forth the impact of adopting this standard on our condensed consolidated balance sheets as of June 30, 2019 and our condensed consolidated statements of earnings for the three and nine months ended June 30, 2019 (in thousands):

Effect of ASU No. 2014-09 Adoption on Condensed Consolidated Balance Sheet

			Excluding
			ASU No. 2014-09		ASU No. 2014-09
	As reported		Effect		Effect
Other current assets	$	37,853	$	35,214	$	2,639
Accrued liabilities	$	146,209	$	143,570	$	2,639

Effect of ASU No. 2014-09 Adoption on Condensed Consolidated Statement of Earnings

For the three months ended June 30, 2019
			Excluding
			ASU No. 2014-09		ASU No. 2014-09
	As reported		Effect		Effect
Net Sales	$	975,169	$	975,099	$	70
Gross Profit		482,222		482,152		70
Selling, general and administrative expenses	$	360,183	$	360,113	$	70

For the nine months ended June 30, 2019
			Excluding
			ASU No. 2014-09		ASU No. 2014-09
	As reported		Effect		Effect
Net Sales	$	2,910,474	$	2,910,229	$	245
Gross Profit		1,431,252		1,431,007		245
Selling, general and administrative expenses	$	1,088,797	$	1,088,552	$	245

See note 4, Revenue Recognition, for additional information related to ASU No. 2014-09.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases, which will require most leases to be reported on the balance sheet as a right-of-use asset and a lease liability. Under the new guidance, the lease liability must be measured initially based on the present value of future lease payments, subject to certain conditions. The right-of-use asset must be measured initially based on the amount of the liability, plus certain initial direct costs. The new guidance further requires that leases be classified at inception as either (a) operating leases or (b) finance leases. For operating leases, periodic expense will generally be flat (straight-line) throughout the life of the lease. For finance leases, periodic expense will decline (similar to capital leases under prior rules) over the life of the lease. The new standard must be adopted using a modified retrospective transition method, but companies can adopt using the effective date method or the comparative method. For public companies, this standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We will adopt this pronouncement on October 1, 2019 using the effective date method.

We have completed a preliminary assessment of the potential impact of adopting ASU No. 2016-02 on our consolidated financial statements. At June 30, 2019, adoption of ASU No. 2016-02 would have resulted in recognition of a right-of-use asset in the estimated amount of approximately $525.0 million and a lease liability for a similar amount on our consolidated balance sheet. We are currently in the final stages of implementing changes to our processes, controls and systems and expect to be compliant upon required adoption of the new standard. We do not believe adoption of ASU No. 2016-02 will have a material impact on our consolidated results of operations or consolidated cash flows. The amount of the right-of-use asset and the lease liability we ultimately recognize may materially differ from this preliminary estimate, including as a result of future organic growth in our business, changes in interest rates, and potential acquisitions.

4. Revenue Recognition

Substantially all of our revenue is derived through the sale of merchandise. Revenue is recognized net of estimated sales returns and sales taxes. We estimate sales returns based on historical data. Additionally, we have assessed all revenue streams for principal versus agent considerations and have concluded we are the principal for all transactions.

See Note 13, Business Segments, for additional information regarding the disaggregation of our sales revenue.

Merchandise Revenues

The majority of our revenue comes from the sale of products in our company-operated stores. These sales generally have one single performance obligation and the revenue is recognized at the point of sale. However, discounts and incentives issued at the point of sale to entice a customer to a future purchase are treated as a separate performance obligation. As such, we allocate a portion of the revenue generated from the point of sale to each of the additional performance obligations separately using explicitly stated amounts or our best estimate using historical data.

We also sell merchandise on our online platforms, to our franchisees and by using distributor sales consultants. These sales generally have one single performance obligation and revenue is recognized upon the shipment of the merchandise. Any shipping and handling

fees charged to the customer are recognized as revenue, while any shipping and handling costs to get the merchandise shipped is recognized in cost of goods sold.

We extend credit to certain customers, primarily salon professionals, which generally have 30 day payment terms. Based on the nature of theses receivables, no significant financing component exists.

Gift Cards

The revenue from the sale of our gift cards is recognized at the time the gift card is used to purchase merchandise, which is generally within one year from the date of purchase. Our gift cards do not carry expiration dates or impose post-sale fees. Based on historical experience, a certain amount of our gift cards will not be redeemed, also referred to as “gift card breakage.” We recognize revenue related to gift card breakage within revenue in our consolidated statements of earnings over time proportionately to historical redemption patterns. The gift cards are issued and represent liabilities of either of our operating entities, Sally Beauty Supply LLC or Beauty Systems Group LLC, which are both limited liability companies formed in the state of Virginia.

Customer Loyalty Rewards

We launched our new Sally Beauty Rewards Loyalty Program nationwide during the first quarter of fiscal year 2019 to the U.S. and Canada, which enables customers to earn points based on their status for every dollar spent on merchandise purchased in our Sally Beauty Supply (“SBS”) stores and through our sallybeauty.com website, including on our new SBS mobile commerce-based app. When a specific tier has been reached, a customer will receive a certificate which can be used at any of our U.S. and Canadian SBS stores or through our sallybeauty.com website on their next purchase. Based on the rewards loyalty program policies, points expire after twelve months of inactivity and certificates will expire after a specific time period from the date of issuance. Certificates generated from our rewards loyalty program provide a material right to customers and represent a separate performance obligation. Rewards loyalty points are accrued at the standalone value per point, net of estimated breakage, and are included within accrued liabilities on our consolidated balance sheets. We recognize the revenue when the customer redeems the certificate. Points and certificates are issued by and represent liabilities of Sally Beauty Supply LLC.

The following table shows the amount of our gift card and rewards loyalty program liabilities included in accrued liabilities on our condensed consolidated balance sheets as of June 30, 2019 and September 30, 2018 (in thousands):

	June 30, 2019		September 30, 2018
Gift cards	$	4,354	$	4,144
Rewards loyalty program		8,646		1,165
Total liability	$	13,000	$	5,309

5. Fair Value Measurements

Fair value on recurring basis

Consistent with the three-level hierarchy defined in ASC Topic 820, Fair Value Measurement, as amended, we categorize our financial assets and liabilities as follows (in thousands):

		As of June 30, 2019		As of September 30, 2018
Financial assets
Interest rate caps	Level 2	$	697	$	8,367
Foreign exchange contracts	Level 2		423		—
Total financial assets		$	1,120	$	8,367

Financial liabilities
Foreign exchange contracts	Level 2	$	121	$	—

Other fair value disclosures

		As of June 30, 2019				As of September 30, 2018
		Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt
Senior notes	Level 1	$	885,296	$	873,513	$	950,000	$	911,490
Other long-term debt	Level 2		741,741		713,353		845,383		824,951
Total debt		$	1,627,037	$	1,586,866	$	1,795,383	$	1,736,441

6. Accumulated Other Comprehensive Loss

The change in accumulated other comprehensive loss (“AOCL”) was as follows (in thousands):

	Foreign Currency Translation Adjustments			Interest Rate Caps			Foreign Exchange Contracts			Total
Balance at September 30, 2018	$	(91,356	)	$	1,365		$	—		$	(89,991	)
Other comprehensive loss before reclassification, net of tax		(9,591	)		(5,904	)		(478	)		(15,973	)
Reclassification to net earnings, net of tax		—			1,520			413			1,933
Balance at June 30, 2019	$	(100,947	)	$	(3,019	)	$	(65	)	$	(104,031	)

The tax impact for the changes in other comprehensive loss and the reclassifications to net earnings were not material.

7. Weighted-Average Shares

The following table sets forth the computations of basic and diluted weighted-average shares (in thousands):

	Three Months Ended June 30,				Nine Months Ended June 30,
	2019		2018		2019		2018
Weighted-average basic shares		120,119		120,901		120,062		124,331
Dilutive securities:
Stock option and stock award programs		858		772		866		780
Weighted-average diluted shares		120,977		121,673		120,928		125,111

For the three and nine months ended June 30, 2019, options to purchase 5.0 million shares of our common stock were outstanding but not included in our computations of diluted earnings per share, since these options were anti-dilutive. For the three and nine months ended June 30, 2018, options to purchase 5.2 million shares of our common stock were outstanding but not included in the computations of diluted earnings per share, since these options were anti-dilutive.

8. Share-Based Payments

Performance-Based Awards

The following table presents a summary of the activity for our performance unit awards assuming 100% payout:

Performance Unit Awards	Number of Shares (in Thousands)			Weighted Average Fair Value Per Share		Weighted Average Remaining Vesting Term (in Years)
Unvested at September 30, 2018		349		$	20.88		1.3
Granted		230			17.22
Vested		(23	)		23.45
Forfeited		(113	)		21.29
Unvested at June 30, 2019		443		$	18.75		1.6

Service-Based Awards

The following table presents a summary of the activity for our stock option awards:

	Number of Outstanding Options (in Thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value (in Thousands)
Outstanding at September 30, 2018		5,405		$	23.04		5.4	$	3,161
Granted		948			18.14
Exercised		(137	)		15.02
Forfeited or expired		(989	)		24.77
Outstanding at June 30, 2019		5,227		$	22.03		6.0	$	486
Exercisable at June 30, 2019		3,402		$	23.62		4.6	$	486

The following table presents a summary of the activity for our Restricted Stock Awards:

Restricted Stock Awards	Number of Shares (in Thousands)			Weighted Average Fair Value Per Share		Weighted Average Remaining Vesting Term (in Years)
Unvested at September 30, 2018		219		$	16.98		2.1
Granted		287			18.14
Vested		(28	)		16.85
Forfeited		(43	)		17.73
Unvested at June 30, 2019		435		$	17.71		1.9

The following table presents a summary of the activity for our Restricted Stock Units:

Restricted Stock Units	Number of Shares (in Thousands)			Weighted Average Fair Value Per Share		Weighted Average Remaining Vesting Term (in Years)
Unvested at September 30, 2018		—		$	—		—
Granted		88			18.14
Vested		—			—
Forfeited		(8	)		18.14
Unvested at June 30, 2019		80		$	18.14		0.3

9. Goodwill and Intangible Assets

During the three months ended March 31, 2019 we completed our annual assessment for impairment of goodwill and other intangible assets. No material impairment losses were recognized in the current or prior periods presented in connection with our goodwill and other intangible assets.

For the three months ended June 30, 2019 and 2018, amortization expense related to other intangible assets was $2.8 million and $3.2 million, respectively, and, for the nine months ended June 30, 2019 and 2018, amortization expense was $8.5 million and $8.8 million, respectively.

During the nine months ended June 30, 2019, we recorded approximately $1.9 million in other intangible assets related to immaterial asset acquisitions. Additionally, goodwill and other intangible assets were negatively impacted from changes in foreign currency exchange rates of approximately $2.2 million and $0.7 million, respectively.

10. Short-term Borrowings and Long-term Debt

At June 30, 2019, we had $[466.5] million available for borrowing under our asset-based senior secured loan facility (the “ABL facility”), including the Canadian sub-facility. At June 30, 2019, we were in compliance with the agreements and instruments governing our debt, including our financial covenants.

During the three months ended June 30, 2019, we paid down $115.0 million aggregate principal amount of our term loan B. Additionally, we repurchased approximately $4.7 million aggregate principal amount of our 5.625% Senior Notes due 2025 (the “2025 Notes”) at a weighted-average price of 99.3% of face value, excluding accrued interest. In connection with debt repayment, we recognized a $1.4 million loss on the extinguishment of debt from the write-off of unamortized deferred financing costs.

During the three months ended March 31, 2019, we commenced a tender offer for up to $100.0 million in aggregate purchase price of our 2025 Notes with a sublimit of $25.0 million for purchase of our 5.500% Senior Notes due 2023 (the “2023 Notes”), in each case issued by our indirect wholly-owned subsidiaries Sally Holdings LLC and Sally Capital Inc. (“Tender Offer”). As a result of the Tender Offer, we repurchased approximately $57.5 million aggregate principal amount of the 2025 Notes and approximately $2.6 million aggregate principal amount of the 2023 Notes at a total tender offer price of 98.0% and 100.0%, respectively, excluding accrued interest. In connection with the Tender Offer, we recognized a $0.5 million gain on the extinguishment of debt, including a gain of approximately $1.2 million from the discount paid under the face value of the accepted 2025 Notes and the write-off of $0.7 million in unamortized deferred financing costs.

11. Derivative Instruments and Hedging Activities

During the nine months ended June 30, 2019, we did not purchase or hold any derivative instruments for trading or speculative purposes.

Designated Cash Flow Hedges

Foreign Currency Forwards

In December 2018, we entered into foreign currency forwards to mitigate the exposure to exchange rate changes on inventory purchases in USD by our foreign subsidiaries. At June 30, 2019, the notional amount we held through these forwards, based upon exchange rates at June 30, 2019, was as follows (in thousands):

Notional Currency	Notional Amount
MXP	$	7,337
EUR		5,561
CAD		3,824
GBP		2,086
Total	$	18,808

We record quarterly, net of income tax, the changes in fair value related to the foreign currency forwards into AOCL. As the forwards are exercised, the realized value will be recognized into cost of goods sold based on inventory turns. Based on June 30, 2019 valuations and exchange rates, we expect to reclassify approximately $0.7 million into cost of goods sold over the next 12 months.

Interest Rate Caps

In July 2017, we purchased two interest rate caps with an initial aggregate notional amount of $550 million (the “interest rate caps”) to mitigate the exposure to increasing interest rates in connection with our term loan B variable tranche. The interest rate caps are comprised of individual caplets that expire ratably through June 30, 2023 and are designated as cash flow hedges.

During the three months ended June 30, 2019, concurrent with the repayment of $115.0 million of the term loan B variable tranche, we dedesignated one interest rate cap and terminated $115.0 million in notional amount. Subsequently, we redesignated the remaining notional amounts of the interest rate cap. Once we determined the hedge transaction related to $115.0 million of the term loan B variable tranche principal would not occur, we reclassified a loss of $1.2 million from AOCL into interest expense. Furthermore, changes in fair value of the remaining hedged interest rate caps are recorded quarterly, net of income tax, and are included in AOCL. Over the next 12 months, we expect to reclassify approximately $0.5 million into interest expense, which represents the original value of the expiring caplets.

The table below presents the fair value of our derivative financial instruments (in thousands):

	Asset Derivatives					Liability Derivatives
	Classification	June 30, 2019		September 30, 2018		Classification	June 30, 2019		September 30, 2018
Derivatives designated as hedging instruments:
Interest rate caps	Other assets	$	697	$	8,367	N/A	$	—	$	—
Foreign exchange contracts	Other current assets		423		—	Accrued liabilities		121		—
		$	1,120	$	8,367		$	121	$	—

The effects of our derivative financial instruments on our condensed consolidated statements of earnings were not material for the three and nine months ended June 30, 2019 and 2018, except for the loss recorded related to the interest rate cap as a described above.

12. Income Taxes

Our effective tax rate for the three months ended June 30, 2019 and 2018 was 24.6% and 25.1%, respectively. For the three months ended June 30, 2019, our effective tax rate was favorably impacted by a lower federal statutory rate when compared to the prior year as a result of the Tax Cut and Jobs Act (“U.S. Tax Reform”), as well as improving operations in companies for which a valuation allowance is recorded. For the fiscal year 2019, our U.S. federal statutory rate will be 21.0% compared to 24.5% for the prior fiscal year.

Our effective tax rate for the nine months ended June 30, 2019 and 2018 was 24.5% and 18.8%, respectively. For the nine months ended June 30, 2018, our effective tax rate was favorably impacted by a net income tax benefit of $22.0 million related to U.S. Tax Reform when compared to the current period. This benefit was partially offset by the lower federal statutory rates recorded in the current period as compared to the prior period.

In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provided guidance allowing registrants to record provisional amounts, during a specified measurement period, when the necessary information is not available, prepared or analyzed in reasonable detail to account for the impact of U.S. Tax Reform. As of December 31, 2018, we have completed our analysis on our provisional calculations within the measurement period provided by SAB 118. As a result, during the nine months ended June 30, 2019, we identified certain immaterial adjustments to our provisional calculations, including a benefit of $3.0 million related to the transition tax on unremitted earnings of our foreign operations.

The U.S. Treasury Department has issued final regulations covering the one-time transition tax on unrepatriated foreign earnings, which was enacted as part of U.S Tax Reform. Certain guidance included in these final regulations is inconsistent with our interpretation of the enacted tax law that led to the recognition of a $2.5 million benefit in the first quarter of the current fiscal year. Notwithstanding this inconsistency, we remain confident in our interpretation of the Internal Revenue Code and intend to defend this position through litigation, if necessary. However, if we are ultimately unsuccessful in defending our position, we may be required to reverse the benefit.

Beginning in our first quarter of fiscal year 2019, we are subject to taxation on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. We have made the policy election to record this tax as a period cost at the time it is incurred. The impact from GILTI was immaterial for the nine months ended June 30, 2019 and is expected to be immaterial for the full fiscal year 2019.

13. Business Segments

Segment data for the three and nine months ended June 30, 2019 and 2018 is as follows (in thousands):

	Three Months Ended June 30,						Nine Months Ended June 30,
	2019			2018			2019			2018
Net sales:
SBS	$	575,025		$	591,583		$	1,721,238		$	1,757,272
Beauty Systems Group ("BSG")		400,144			404,700			1,189,236			1,209,296
Total	$	975,169		$	996,283		$	2,910,474		$	2,966,568
Earnings before provision for income taxes:
Segment operating earnings:
SBS	$	95,763		$	94,912		$	272,470		$	271,834
BSG		61,552			62,039			180,401			186,553
Segment operating earnings		157,315			156,951			452,871			458,387
Unallocated expenses		(35,276	)		(42,179	)		(110,416	)		(110,411	)
Restructuring		(1,908	)		(12,544	)		(74	)		(24,513	)
Consolidated operating earnings		120,131			102,228			342,381			323,463
Interest expense		(25,781	)		(24,501	)		(74,092	)		(73,779	)
Earnings before provision for income taxes	$	94,350		$	77,727		$	268,289		$	249,684

Sales between segments, which are eliminated in consolidation, were not material during the three and nine months ended June 30, 2019 and 2018.

Disaggregation of net sales by segment


SBS	Three Months Ended June 30,						Nine Months Ended June 30,
	2019			2018			2019			2018
Hair color		30.2	%		27.3	%		28.9	%		26.8	%
Hair care		20.3	%		21.7	%		20.5	%		21.4	%
Skin and nail care		15.5	%		16.3	%		14.9	%		15.2	%
Styling tools		12.4	%		12.9	%		13.9	%		14.1	%
Salon supplies and accessories		7.1	%		7.3	%		7.2	%		7.3	%
Multicultural products		6.6	%		6.7	%		6.5	%		6.8	%
Other Beauty items		7.9	%		7.8	%		8.1	%		8.4	%
Total		100.0	%		100.0	%		100.0	%		100.0	%


BSG	Three Months Ended June 30,						Nine Months Ended June 30,
	2019			2018			2019			2018
Hair color		40.5	%		39.2	%		39.5	%		38.2	%
Hair care		36.1	%		34.9	%		34.6	%		34.2	%
Skin and nail care		8.1	%		8.5	%		8.2	%		8.7	%
Styling tools		3.4	%		3.5	%		3.5	%		4.0	%
Other beauty items		6.6	%		6.4	%		6.3	%		6.2	%
Promotional items		5.3	%		7.5	%		7.9	%		8.7	%
Total		100.0	%		100.0	%		100.0	%		100.0	%

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

Condensed Consolidating Balance Sheet

June 30, 2019

(In thousands)

	Parent			Sally Holdings LLC and Sally Capital Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Eliminations			Sally Beauty Holdings, Inc. and Subsidiaries
Assets
Cash and cash equivalents	$	—		$	10		$	31,254		$	26,591		$	—		$	57,855
Trade and other accounts receivable, net		—			—			60,003			36,993			—			96,996
Due from affiliates		—			—			2,818,602			—			(2,818,602	)		—
Inventory		—			—			721,063			246,681			—			967,744
Other current assets		2,755			88			21,034			13,976			—			37,853
Property and equipment, net		6			—			227,845			64,520			—			292,371
Investment in subsidiaries		1,563,789			4,299,448			390,061			—			(6,253,298	)		—
Goodwill and other intangible assets, net		—			—			454,443			144,962			—			599,405
Other assets		1,325			2,258			(1,654	)		18,118			—			20,047
Total assets	$	1,567,875		$	4,301,804		$	4,722,651		$	551,841		$	(9,071,900	)	$	2,072,271
Liabilities and Stockholders’ (Deficit) Equity
Accounts payable	$	20		$	—		$	219,508		$	53,101		$	—		$	272,629
Due to affiliates		1,631,574			1,118,896			—			68,132			(2,818,602	)		—
Accrued liabilities		190			9,027			105,554			31,438			—			146,209
Income taxes payable		97			1,519			—			(402	)		—			1,214
Long-term debt		—			1,609,799			2			864			—			1,610,665
Other liabilities		6,729			—			15,096			3,884			—			25,709
Deferred income tax liabilities, net		(270	)		(1,226	)		83,043			4,763			—			86,310
Total liabilities		1,638,340			2,738,015			423,203			161,780			(2,818,602	)		2,142,736
Total stockholders’ (deficit) equity		(70,465	)		1,563,789			4,299,448			390,061			(6,253,298	)		(70,465	)
Total liabilities and stockholders’ (deficit) equity	$	1,567,875		$	4,301,804		$	4,722,651		$	551,841		$	(9,071,900	)	$	2,072,271

Condensed Consolidating Balance Sheet

September 30, 2018

(In thousands)

	Parent			Sally Holdings LLC and Sally Capital Inc.		Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Consolidating Eliminations			Sally Beauty Holdings, Inc. and Subsidiaries
Assets
Cash and cash equivalents	$	—		$	10	$	29,050		$	48,235	$	—		$	77,295
Trade and other accounts receivable, net		4			—		53,295			37,191		—			90,490
Due from affiliates		—			—		2,598,681			—		(2,598,681	)		—
Inventory		—			—		714,000			230,338		—			944,338
Other current assets		2,010			111		27,422			13,417		—			42,960
Property and equipment, net		8			—		232,941			75,408		—			308,357
Investment in subsidiaries		1,368,927			4,044,669		380,166			—		(5,793,762	)		—
Goodwill and other intangible assets, net		—			—		459,348			149,275		—			608,623
Other assets		1,325			10,242		(4,797	)		18,581		—			25,351
Total assets	$	1,372,274		$	4,055,032	$	4,490,106		$	572,445	$	(8,392,443	)	$	2,097,414
Liabilities and Stockholders’ (Deficit) Equity
Accounts payable	$	38		$	-	$	233,936		$	69,267	$	—		$	303,241
Due to affiliates		1,629,411			888,141		—			81,129		(2,598,681	)		—
Accrued liabilities		234			23,019		125,179			31,855		—			180,287
Income taxes payable		585			1,519		—			40		—			2,144
Long-term debt		—			1,773,426		1			882		—			1,774,309
Other liabilities		10,562			—		15,250			4,210		—			30,022
Deferred income tax liabilities, net		—			—		71,071			4,896		—			75,967
Total liabilities		1,640,830			2,686,105		445,437			192,279		(2,598,681	)		2,365,970
Total stockholders’ (deficit) equity		(268,556	)		1,368,927		4,044,669			380,166		(5,793,762	)		(268,556	)
Total liabilities and stockholders’ (deficit) equity	$	1,372,274		$	4,055,032	$	4,490,106		$	572,445	$	(8,392,443	)	$	2,097,414

Condensed Consolidating Statement of Earnings and Comprehensive Income

Three Months Ended June 30, 2019

(In thousands)

	Parent			Sally Holdings LLC and Sally Capital Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Eliminations			Sally Beauty Holdings, Inc. and Subsidiaries
Net sales	$	—		$	—		$	789,534		$	185,635		$	—		$	975,169
Related party sales		—			—			545			—			(545	)		—
Cost of products sold and distribution expenses		—			—			393,875			99,617			(545	)		492,947
Gross profit		—			—			396,204			86,018			—			482,222
Selling, general and administrative expenses		2,564			123			281,520			75,976			—			360,183
Restructuring		—			—			1,908			—			—			1,908
Operating earnings (loss)		(2,564	)		(123	)		112,776			10,042			—			120,131
Interest expense (income)		—			25,824			(3	)		(40	)		—			25,781
Earnings (loss) before provision for income taxes		(2,564	)		(25,947	)		112,779			10,082			—			94,350
Provision (benefit) for income taxes		(659	)		(6,659	)		28,193			2,311			—			23,186
Equity in earnings of subsidiaries, net of tax		73,069			92,357			7,771			—			(173,197	)		—
Net earnings		71,164			73,069			92,357			7,771			(173,197	)		71,164
Other comprehensive income, net of tax		—			586			—			937			—			1,523
Total comprehensive income	$	71,164		$	73,655		$	92,357		$	8,708		$	(173,197	)	$	72,687

Condensed Consolidating Statement of Earnings and Comprehensive Income

Three Months Ended June 30, 2018

(In thousands)

	Parent			Sally Holdings LLC and Sally Capital Inc.			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Consolidating Eliminations			Sally Beauty Holdings, Inc. and Subsidiaries
Net sales	$	—		$	—		$	798,185	$	198,098		$	—		$	996,283
Related party sales		—			—			639		—			(639	)		—
Cost of products sold and distribution expenses		—			—			399,482		104,070			(639	)		502,913
Gross profit		—			—			399,342		94,028			—			493,370
Selling, general and administrative expenses		2,777			367			292,178		83,276			—			378,598
Restructuring		—			—			12,544		—			—			12,544
Operating earnings (loss)		(2,777	)		(367	)		94,620		10,752			—			102,228
Interest expense (income)		—			24,510			2		(11	)		—			24,501
Earnings (loss) before provision for income taxes		(2,777	)		(24,877	)		94,618		10,763			—			77,727
Provision (benefit) for income taxes		(804	)		(7,206	)		23,823		3,688			—			19,501
Equity in earnings of subsidiaries, net of tax		60,199			77,870			7,075		—			(145,144	)		—
Net earnings		58,226			60,199			77,870		7,075			(145,144	)		58,226
Other comprehensive income (loss), net of tax		—			308			—		(22,168	)		—			(21,860	)
Total comprehensive income (loss)	$	58,226		$	60,507		$	77,870	$	(15,093	)	$	(145,144	)	$	36,366

Condensed Consolidating Statement of Earnings and Comprehensive Income

Nine Months Ended June 30, 2019

(In thousands)

	Parent			Sally Holdings LLC and Sally Capital Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Eliminations			Sally Beauty Holdings, Inc. and Subsidiaries
Net sales	$	—		$	—		$	2,352,348		$	558,126		$	—		$	2,910,474
Related party sales		—			—			1,694			—			(1,694	)		—
Cost of products sold and distribution expenses		—			—			1,181,062			299,854			(1,694	)		1,479,222
Gross profit		—			—			1,172,980			258,272			—			1,431,252
Selling, general and administrative expenses		8,457			489			849,140			230,711			—			1,088,797
Restructuring		—			—			74			—			—			74
Operating earnings (loss)		(8,457	)		(489	)		323,766			27,561			—			342,381
Interest expense (income)		—			74,248			(5	)		(151	)		—			74,092
Earnings (loss) before provision for income taxes		(8,457	)		(74,737	)		323,771			27,712			—			268,289
Provision (benefit) for income taxes		(2,171	)		(19,184	)		82,671			4,357			—			65,673
Equity in earnings of subsidiaries, net of tax		208,902			264,455			23,355			—			(496,712	)		—
Net earnings		202,616			208,902			264,455			23,355			(496,712	)		202,616
Other comprehensive loss, net of tax		—			(4,384	)		—			(9,656	)		—			(14,040	)
Total comprehensive income	$	202,616		$	204,518		$	264,455		$	13,699		$	(496,712	)	$	188,576

Condensed Consolidating Statement of Earnings and Comprehensive Income

Nine Months Ended June 30, 2018

(In thousands)

	Parent			Sally Holdings LLC and Sally Capital Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Eliminations			Sally Beauty Holdings, Inc. and Subsidiaries
Net sales	$	—		$	—		$	2,381,460		$	585,108		$	—		$	2,966,568
Related party sales		—			—			1,716			—			(1,716	)		—
Cost of products sold and distribution expenses		—			—			1,194,183			307,780			(1,716	)		1,500,247
Gross profit		—			—			1,188,993			277,328			—			1,466,321
Selling, general and administrative expenses		8,242			1,148			856,080			252,875			—			1,118,345
Restructuring		—			—			24,513			—			—			24,513
Operating earnings (loss)		(8,242	)		(1,148	)		308,400			24,453			—			323,463
Interest expense (income)		—			73,817			(1	)		(37	)		—			73,779
Earnings (loss) before provision for income taxes		(8,242	)		(74,965	)		308,401			24,490			—			249,684
Provision (benefit) for income taxes		(1,883	)		(21,630	)		46,666			23,670			—			46,823
Equity in earnings of subsidiaries, net of tax		209,220			262,555			820			—			(472,595	)		—
Net earnings		202,861			209,220			262,555			820			(472,595	)		202,861
Other comprehensive income (loss), net of tax		—			1,815			—			(11,986	)		—			(10,171	)
Total comprehensive income (loss)	$	202,861		$	211,035		$	262,555		$	(11,166	)	$	(472,595	)	$	192,690

Condensed Consolidating Statement of Cash Flows

Nine Months Ended June 30, 2019

(In thousands)

	Parent			Sally Holdings LLC and Sally Capital Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Eliminations			Sally Beauty Holdings, Inc. and Subsidiaries
Net cash provided (used) by operating activities	$	(3,949	)	$	(63,597	)	$	270,637		$	732		$	—		$	203,823
Cash Flows from Investing Activities:
Payments for property and equipment		(1	)		—			(58,607	)		(8,155	)		—			(66,763	)
Proceeds from sale of property and equipment		—			—			12,017			4			—			12,021
Acquisitions, net of cash acquired		—			—			(1,923	)		(840	)		—			(2,763	)
Due from affiliates		—			—			(219,921	)		—			219,921			—
Net cash used by investing activities		(1	)		—			(268,434	)		(8,991	)		219,921			(57,505	)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		—			394,000			4			—			—			394,004
Repayments of long-term debt		—			(561,158	)		(3	)		(1	)		—			(561,162	)
Repurchases of common stock		—			—			—			—			—			—
Proceeds from exercises of stock options		1,787			—			—			—			—			1,787
Due to affiliates		2,163			230,755			—			(12,997	)		(219,921	)		—
Net cash provided (used) by financing activities		3,950			63,597			1			(12,998	)		(219,921	)		(165,371	)
Effect of foreign exchange rate changes on cash and cash equivalents		—			—			—			(387	)		—			(387	)
Net increase (decrease) in cash and cash equivalents		—			—			2,204			(21,644	)		—			(19,440	)
Cash and cash equivalents, beginning of period		—			10			29,050			48,235			—			77,295
Cash and cash equivalents, end of period	$	—		$	10		$	31,254		$	26,591		$	—		$	57,855

Condensed Consolidating Statement of Cash Flows

Nine Months Ended June 30, 2018

(In thousands)

	Parent			Sally Holdings LLC and Sally Capital Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Eliminations			Sally Beauty Holdings, Inc. and Subsidiaries
Net cash provided (used) by operating activities	$	23,213		$	(62,729	)	$	309,242		$	12,204		$	—		$	281,930
Cash Flows from Investing Activities:
Payments for property and equipment		—			—			(51,138	)		(11,052	)		—			(62,190	)
Proceeds from sale of property and equipment		—			—			—			19			—			19
Acquisitions, net of cash acquired		—			—			—			(9,175	)		—			(9,175	)
Due from affiliates		—			—			(252,809	)		—			252,809			—
Net cash used by investing activities		—			—			(303,947	)		(20,208	)		252,809			(71,346	)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		—			369,314			5			—			—			369,319
Repayments of long-term debt		—			(400,624	)		(4	)		(594	)		—			(401,222	)
Debt issuance costs		—			(1,151	)		—			—			—			(1,151	)
Repurchases of common stock		(164,838	)		—			—			—			—			(164,838	)
Proceeds from exercises of stock options		1,317			—			—			—			—			1,317
Due to affiliates		140,308			95,190			—			17,311			(252,809	)		—
Net cash provided (used) by financing activities		(23,213	)		62,729			1			16,717			(252,809	)		(196,575	)
Effect of foreign exchange rate changes on cash and cash equivalents		—			—			—			(913	)		—			(913	)
Net increase (decrease) in cash and cash equivalents		—			—			5,296			7,800			—			13,096
Cash and cash equivalents, beginning of period		—			10			22,090			41,659			—			63,759
Cash and cash equivalents, end of period	$	—		$	10		$	27,386		$	49,459		$	—		$	76,855

15. Restructuring

Restructuring expense and gain for the three and nine months ended June 30, 2019 and 2018, are as follows (in thousands):

	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019			2018
Supply Chain Modernization	$	1,908	$	—	$	(3,906	)	$	—
2018 Restructuring Plan		—		12,544		3,980			24,513
Total expense (gain)	$	1,908	$	12,544	$	74		$	24,513

Supply Chain Modernization

In February 2019, we announced that we were assessing our supply chain in an effort to minimize out-of-stocks, optimize inventory levels, reduce costs and explore new replenishment and fulfillment options. As part of our supply chain modernization plans, we sold our secondary headquarters and fulfillment center in Denton, Texas, and will be closing select distribution centers, including our Marinette, Wisconsin facility, and upgrading our e-commerce capabilities. Additionally, we will be opening a new automated and concentrated distribution center which will service Sally Beauty Supply stores and e-commerce sales, as well as Beauty Systems Group stores, full service sales and e-commerce sales.

The liability related to the supply chain modernization, which is included in accrued liabilities on our condensed consolidated balance sheets, is as follows (in thousands):

Supply Chain Modernization	Liability at September 30, 2018		Expenses		Cash Payments		Adjustments		Liability at June 30, 2019
Workforce reductions	$	—	$	1,743	$	661	$	—	$	1,082
Facility closures		—		884		551		—		333
Other		—		114		114		—		—
Total	$	—	$	2,741	$	1,326	$	—	$	1,415

Expenses incurred in the nine months ended June 30, 2019, represent costs incurred by SBS of $1.1 million, BSG of $1.0 million and corporate of $0.6 million. The above table does not include a gain from selling our secondary headquarters and fulfillment center in Denton, Texas of $6.6 million.

2018 Restructuring Plan

In November 2017, our Board of Directors approved a restructuring plan (the “2018 Restructuring Plan”) focused primarily on significantly improving the profitability of our international businesses, with particular focus on our European operations.

In April 2018, we announced an expansion of the 2018 Restructuring Plan that contained cost reduction initiatives designed to help fund important long-term growth initiatives. The expansion to the 2018 Restructuring Plan included headcount reductions primarily at our corporate headquarters in Denton, Texas. As of December 31, 2018, the 2018 Restructuring Plan was substantially complete and we do not anticipate any additional material costs for the 2018 Restructuring Plan.

The liability related to the 2018 Restructuring Plan, which is included in accrued liabilities on our condensed consolidated balance sheets, is as follows (in thousands):

2018 Restructuring Plan	Liability at September 30, 2018		Expenses		Cash Payments		Adjustments		Liability at June 30, 2019
Workforce reductions	$	3,444	$	643	$	4,087	$	—	$	—
Consulting		3,087		2,502		5,589		—		—
Other		2,266		835		2,977		—		124
Total	$	8,797	$	3,980	$	12,653	$	—	$	124

Expenses incurred in the nine months ended June 30, 2019, represent costs incurred by SBS of $1.1 million and corporate of $2.8 million.

16. Commitments and Contingencies

circumstances and that may or may not cover any or all of our liabilities in respect of these matters. We do not believe that the ultimate resolution of these matters will have a material adverse impact on our consolidated financial position, cash flows or results of operations.

Data Security Incidents

As previously disclosed, we experienced data security incidents during the fiscal years 2014 and 2015 (together, the “data security incidents”). The data security incidents involved the unauthorized installation of malicious software (“malware”) on our information technology systems, including our point-of-sale systems that may have placed at risk certain payment card data for some transactions. The costs that we have incurred to date in connection with the data security incidents include assessments by payment card networks, professional advisory fees and legal fees relating to investigating and remediating the data security incidents.

During the fiscal year ended September 30, 2018, we received an assessment from a payment card network in connection with the data security incidents. The assessment is based on the network’s claims against the Company’s acquiring banks for costs that it asserts its issuing banks incurred in connection with the data security incidents, including incremental counterfeit fraud losses and non-ordinary course operating expenses, such as card reissuance costs. In the second quarter of fiscal year 2019, we paid the full amount of the assessment and have no remaining liability related to the data security incidents at June 30, 2019.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section discusses management’s view of the financial condition, results of operations and cash flows of Sally Beauty. This section should be read in conjunction with the information contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, including the Risk Factors section, and information contained elsewhere in this Quarterly Report, including the condensed consolidated financial statements and notes to those financial statements. The results of operations for any interim period may not necessarily be indicative of the results that may be expected for any future interim period or the entire fiscal year.

Highlights for the Three Months Ended June 30, 2019:

•

Consolidated net sales for the three months ended June 30, 2019, decreased $21.1 million, or 2.1%, to $975.2 million, compared to the three months ended June 30, 2018;

•

Our global e-commerce sales increased 25.9% compared to the three months ended June 30, 2018;

•

Consolidated same store sales increased 0.1% for the three months ended June 30, 2019. SBS same store sales decreased 0.6% and BSG same store sales increased 1.4%;

•

Consolidated gross profit for the three months ended June 30, 2019, decreased $11.1 million, or 2.3%, to $482.2 million, compared to the three months ended June 30, 2018. Consolidated gross margin was unchanged at 49.5%;

•

Consolidated operating earnings for the three months ended June 30, 2019, increased $17.9 million, or 17.5%, to $120.1 million, compared to the three months ended June 30, 2018. Consolidated operating margin increased 200 basis points to 12.3% for the three months ended June 30, 2019, compared to the three months ended June 30, 2018;

•

Consolidated net earnings increased $12.9 million, or 22.2%, to $71.2 million for the three months ended June 30, 2019, compared to the three months ended June 30, 2018. As a percentage of net sales, net earnings increased 150 basis points to 7.3% for the three months ended June 30, 2019, compared to the three months ended June 30, 2018;

•

Diluted earnings per share for the three months ended June 30, 2019, were $0.59, compared to $0.48 for the three months ended June 30, 2018;

•

Cash provided by operations was $93.7 million for the three months ended June 30, 2019, compared to $102.5 million for the three months ended June 30, 2018;

•

During the three months ended June 30, 2019, we paid down $115.0 million aggregate principle of our term loan B and repurchased approximately $4.7 million aggregate principal amount of our 2025 Notes and recognized a net loss of approximately $1.4 million.

Business Strategy Update

We continue to make solid progress against our transformation as we (a) play to win by focusing on hair color and hair care, (b) reintroduce retail fundamentals into our business, (c) advance our digital commerce capabilities, and (d) drive cost out of the business. As part of this effort, we made progress on our supply chain modernization effort, reduced our debt levels, and rolled out new e-commerce tools such as the Sally Beauty Supply app.

During the quarter, we continued to roll-out nationwide a new point-of-sale system in both SBS and BSG, which will allow our store associates to better serve our customers.

In February 2019, we announced our supply chain modernization plans to gain efficiencies and cost savings. During the three months ended June 30, 2019, we identified a location in Texas for the construction of a new 500,000 square foot automated and concentrated distribution center. We continue to explore locations within Europe for a new distribution center that will service operations in Ghent, Belgium.

Overview

Key Operating Metrics

The following table sets forth, for the periods indicated, information concerning key measures we rely on to evaluate our operating performance (dollars in thousands):

	Three Months Ended June 30,												Nine Months Ended June 30,
	2019			2018			Increase (Decrease)						2019			2018			Increase (Decrease)
Net sales:
SBS	$	575,025		$	591,583		$	(16,558	)		(2.8	)%	$	1,721,238		$	1,757,272		$	(36,034	)		(2.1	)%
BSG		400,144			404,700			(4,556	)		(1.1	)%		1,189,236			1,209,296			(20,060	)		(1.7	)%
Consolidated	$	975,169		$	996,283		$	(21,114	)		(2.1	)%	$	2,910,474		$	2,966,568		$	(56,094	)		(1.9	)%

Gross profit:
SBS	$	320,998		$	328,014		$	(7,016	)		(2.1	)%	$	952,958		$	970,365		$	(17,407	)		(1.8	)%
BSG		161,224			165,356			(4,132	)		(2.5	)%		478,294			495,956			(17,662	)		(3.6	)%
Consolidated	$	482,222		$	493,370		$	(11,148	)		(2.3	)%	$	1,431,252		$	1,466,321		$	(35,069	)		(2.4	)%

Segment gross margin:
SBS		55.8	%		55.4	%	40			bps				55.4	%		55.2	%	20			bps
BSG		40.3	%		40.9	%	(60)			bps				40.2	%		41.0	%	(80)			bps
Consolidated		49.5	%		49.5	%	—			bps				49.2	%		49.4	%	(20)			bps

Selling, general and administrative expenses	$	360,183		$	378,598		$	(18,415	)		(4.9	)%	$	1,088,797		$	1,118,345		$	(29,548	)		(2.6	)%
Restructuring	$	1,908		$	12,544		$	(10,636	)		(84.8	)%	$	74		$	24,513		$	(24,439	)		(99.7	)%

Net earnings:
Segment operating earnings:
SBS	$	95,763		$	94,912		$	851			0.9	%	$	272,470		$	271,834		$	636			0.2	%
BSG		61,552			62,039			(487	)		(0.8	)%		180,401			186,553			(6,152	)		(3.3	)%
Segment operating earnings		157,315			156,951			364			0.2	%		452,871			458,387			(5,516	)		(1.2	)%
Unallocated expenses and restructuring (a)		(37,184	)		(54,723	)		(17,539	)		(32.1	)%		(110,490	)		(134,924	)		(24,434	)		(18.1	)%
Consolidated operating earnings		120,131			102,228			17,903			17.5	%		342,381			323,463			18,918			5.8	%
Interest expense		25,781			24,501			1,280			5.2	%		74,092			73,779			313			0.4	%
Earnings before provision for income taxes		94,350			77,727			16,623			21.4	%		268,289			249,684			18,605			7.5	%
Provision for income taxes		23,186			19,501			3,685			18.9	%		65,673			46,823			18,850			40.3	%
Net earnings	$	71,164		$	58,226		$	12,938			22.2	%	$	202,616		$	202,861		$	(245	)		(0.1	)%
	.
Number of stores at end-of-period (including franchises):
SBS														3,705			3,775			(70	)		(1.9	)%
BSG														1,384			1,395			(11	)		(0.8	)%
Consolidated														5,089			5,170			(81	)		(1.6	)%
Same store sales growth (decline) (b)
SBS		(0.6	)%		(1.6	)%	100			bps				(0.1	)%		(1.9	)%	180			bps
BSG		1.4	%		(2.9	)%	430			bps				—			(1.8	)%	180			bps
Consolidated		0.1	%		(2.0	)%	210			bps				(0.1	)%		(1.9	)%	180			bps

(a)	Unallocated expenses consist of corporate and shared costs and are included in selling, general and administrative expenses in our consolidated statements of earnings. Restructuring charges relate to the supply chain modernization plan and the 2018 Restructuring Plan.

(b)

For the purpose of calculating our same store sales metrics, we compare the current period sales for stores open for 14 months or longer as of the last day of a month with the sales for these stores for the comparable period in the prior fiscal year. Our same store sales are calculated in constant dollars and include e-commerce sales, but do not generally include the sales from stores that have been relocated until 14 months after the relocation. The sales from stores acquired are excluded from our same store sales calculation until 14 months after the acquisition.

Results of Operations

The Three Months Ended June 30, 2019 compared to the Three Months Ended June 30, 2018

Net Sales

Consolidated. Consolidated net sales include a negative impact from changes in foreign currency exchange rates of $8.1 million, or 0.8% of consolidated net sales.

SBS. The decrease in net sales for SBS for the three months ended June 30, 2019 was primarily driven by the negative impact from changes in foreign currency exchange rates of approximately $6.9 million, lower sales from the net decline in the number of company-operated stores of $5.2 million and lower same store sales of approximately $3.2 million. Same store sales for SBS decreased by 0.6% for the three months ended June 30, 2019. Same store sales in the US and Canada were down 0.2%.

SBS experienced lower unit volume resulting from lower customer traffic and the reduction in the number of company-operated stores during the last 12 months. This was partially offset by an increase in average unit prices, resulting from price increases and a promotional efficiency effort (which reduced promotions that provided ‘free’ units, such as Buy One, Get One offers).

BSG. The decrease in BSG’s net sales for the three months ended June 30, 2019 was primarily driven by lower sales by our distributor sales consultants of $6.5 million, the negative impact from changes in foreign currency exchange rates of approximately $1.2 million and lower sales from the net decline in the number of company-operated stores of $0.5 million, partially offset by an increase in same store sales of $3.7 million.

BSG experienced a decrease in unit volume, notwithstanding the impact of incremental sales from the number of company-operated stores opened. This was partially offset by an increase in average unit prices resulting primarily from the introduction of certain third-party brands with higher average unit prices in the preceding 12 months.

Gross Profit

Consolidated. Consolidated gross profit decreased due to lower net sales in both reportable segments and a lower gross margin in BSG, offset by a higher gross margin in SBS. Consolidated gross profit margin was unchanged for the three months ended June 30, 2019.

SBS. SBS’s gross profit decreased for the three months ended June 30, 2019, primarily as a result of lower net sales and a negative impact from changes in foreign currency exchange rates. SBS’s gross margin improved as a result of significantly higher gross margins in our U.S. and Canadian operations of 80 bps, partially offset by weaker gross margins in our European operations.

BSG. BSG’s gross profit decreased for the three months ended June 30, 2019, primarily as a result of lower net sales and lower gross margin. BSG’s gross margin decreased primarily as a result of continued challenges related to the ongoing merchandising transformation.

Selling, General and Administrative Expenses

Consolidated. Consolidated selling, general and administrative expenses, as a percentage of net sales, decreased 110 basis points to 36.9% for the three months ended June 30, 2019. Consolidated selling, general and administrative expenses decreased primarily as a result of no comparable expenses related to the data security incidents in the current year, lower compensation and compensation-related expenses and a positive impact from changes in foreign currency exchange rates.

SBS. SBS’s selling, general and administrative expenses decreased $7.9 million, or 3.4%, for the three months ended June 30, 2019. This decrease reflects the impact of the 2018 Restructuring Plan, our recently implemented field structure realignment and store labor hour optimization initiatives, a positive impact from changes in foreign currency exchange rate of approximately $2.8 million and a decrease in professional fees of $0.9 million.

BSG. BSG’s selling, general and administrative expenses decreased $3.6 million, or 3.5%, for the three months ended June 30, 2019, primarily as a result of the impact of the 2018 Restructuring Plan and our recently implemented field structure realignment, lower sales commission of $1.0 million, lower advertising expenses of $0.4 million and a positive impact from changes in foreign currency exchange rate of approximately $0.4 million.

Unallocated. Unallocated selling, general and administrative expenses, which represent certain corporate costs that have not been charged to our reporting segments, decreased $6.9 million, or 16.4%, for the three months ended June 30, 2019. This decrease is primarily a result of no comparable expenses related to the data security incidents in the current year compared to $7.9 million for the three months ended June 30, 2018.

Restructuring

For the three months ended June 30, 2019, we incurred restructuring charges of $1.9 million in connection with the supply chain modernization plan. For the three months ended June 30, 2018, we incurred restructuring charges of $12.5 million in connection with

the 2018 Restructuring Plan. See Note 15 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report for more information about our restructuring plans.

Interest Expense

The increase in interest expense is primarily from a loss on extinguishment of debt of $1.4 million in connection with the partial repayment on our term loan B and repurchase of our 2025 Notes during the three months ended June 30, 2019. In addition, we realized a loss relating to an interest rate cap derivative of $1.2 million in connection with the partial repayment of our term loan B during the three months ended June 30, 2019. See Note 11 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report for more information about our derivative instruments and hedging activities. See “Liquidity and Capital Resources” below for additional information.

Provision for Income Taxes

The provision for income taxes was $23.2 million and $19.5 million, resulting in an effective tax rate of 24.6% and 25.1% for the three months ended June 30, 2019 and 2018, respectively.

The Nine Months Ended June 30, 2019 compared to the Nine Months Ended June 30, 2018

Net Sales

Consolidated. Consolidated net sales include a negative impact from changes in foreign currency exchange rates of $25.5 million, or 0.9% of consolidated net sales.

SBS. The decrease in net sales for SBS for the nine months ended June 30, 2019 was driven primarily by the negative impact from changes in foreign currency exchange rates of approximately $21.3 million, lower net sales from the net decline in the number of company-operated stores of approximately $12.3 million and lower same store sales of approximately $1.1 million. Same store sales for SBS decreased by 0.1% for the nine months ended June 30, 2019. Same store sales in the US and Canada were up 0.4%.

BSG. The decrease in BSG’s net sales for the nine months ended June 30, 2019 was primarily driven by lower sales by our distributor sales consultants of $16.1 million, the negative impact from changes in foreign currency exchange rates of approximately $4.2 million and lower sales to our franchisees of $2.2 million. This decrease was partially offset by the positive impact from net new company-operated stores of $2.7 million.

Gross Profit

Consolidated. Consolidated gross profit decreased for the nine months ended June 30, 2019, primarily due to lower net sales in both reportable segments and a lower gross margin in BSG, partially offset by a higher gross margin in SBS.

SBS. SBS’s gross profit decreased for the nine months ended June 30, 2019, primarily as a result of lower net sales and a negative impact from changes in foreign currency exchange rates. SBS’s gross margin increased due to significantly higher gross margins in our U.S. and Canadian operations of 50 bps, offset by weaker gross margins in our European operations.

BSG. BSG’s gross profit decreased for the nine months ended June 30, 2019, primarily as a result of lower net sales and a lower gross margin. BSG’s gross margin decreased primarily as a result of continued challenges related to the ongoing merchandising transformation.

Selling, General and Administrative Expenses

Consolidated. Consolidated selling, general and administrative expenses, as a percentage of net sales, decreased 30 basis points to 37.4% for the nine months ended June 30, 2019. Consolidated selling, general and administrative expenses decreased primarily as a result of lower compensation and compensation-related expenses, lower advertising expenses and a positive impact from changes in foreign currency exchange rates. This decrease was partially offset by increases in facility expenses and recent upgrades to our information technology systems.

SBS. SBS’s selling, general and administrative expenses decreased $18.0 million, or 2.6%, for the nine months ended June 30, 2019. This decrease reflects the impact of the 2018 Restructuring Plan, our recently implemented field structure realignment and store labor hour optimization initiatives, lower advertising expenses of $2.4 million and a positive impact from changes in foreign currency

exchange rate of approximately $8.9 million. This decrease was partially offset by higher facility expenses of $2.9 million and the impact of the reduction of an estimated casualty loss related to hurricanes of $2.4 million during the nine months ended June 30, 2018.

BSG. BSG’s selling, general and administrative expenses decreased $11.5 million, or 3.7%, for the nine months ended June 30, 2019, primarily as a result of the impact of the 2018 Restructuring Plan, lower sales commissions of $3.4 million, lower advertising expenses of $2.2 million and a positive impact from changes in foreign currency exchange rate of approximately $1.3 million.

Restructuring

For the nine months ended June 30, 2019, we recognized charges of $6.7 million in connection with the supply chain modernization plan and the 2018 Restructuring Plan, partially offset by a $6.6 million gain from selling our secondary headquarters and fulfillment center in Denton, Texas in connection with the supply chain modernization plan. For the nine months ended June 30, 2018, we incurred restructuring charges of $24.5 million in connection with the 2018 Restructuring Plan. See Note 15 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report for more information about our restructuring plans.

Interest Expense

The increase in interest expense is primarily from a loss on extinguishment of debt of $1.0 million in connection with the debt tender offer, the repayment of a portion of our term loan B and the partial repurchase of our 2025 Notes during the nine months ended June 30, 2019, compared to a loss on extinguishment of debt of $0.9 million in connection with the repricing of the term loan B variable-rate tranche during the nine months ended June 30, 2018. In addition, we realized a loss relating to an interest rate cap derivative of $1.2 million in connection with the partial repayment of our term loan B during the three months ended June 30, 2019. Interest expense also increased to higher interest rates on our term loan B variable tranche. See Note 11 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report for more information about our derivative instruments and hedging activities. See “Liquidity and Capital Resources” below for additional information.

Provision for Income Taxes

The provision for income taxes was $65.7 million and $46.8 million resulting in an effective tax rate of 24.5% and 18.8%, for the nine months ended June 30, 2019 and 2018, respectively. The increase in our effective tax rate was due primarily to the impact of the U.S. Tax Reform during the nine months ended June 30, 2018. See Note 12 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report for more information about the impact of U.S. Tax Reform on our condensed consolidated financial statements.

Liquidity and Capital Resources

We are highly leveraged and a substantial portion of our liquidity needs will arise from debt service on our outstanding indebtedness and from funding the costs of operations, working capital, capital expenditures, debt repayment and share repurchases. Working capital (current assets minus current liabilities) increased $55.5 million, to $719.4 million at June 30, 2019, compared to $663.9 million at September 30, 2018, resulting primarily from decreases in accounts payable and accrued liabilities and an increase in inventory, partially offset by a decrease in cash and cash equivalents and an increase in the outstanding principal on our ABL facility.

At June 30, 2019, cash and cash equivalents were $57.9 million. Based upon the current level of operations and anticipated growth, we anticipate that existing cash balances (excluding certain amounts permanently invested in connection with foreign operations), funds expected to be generated by operations and funds available under the ABL facility will be sufficient to meet working capital requirements, potential acquisitions, finance anticipated capital expenditures, including information technology upgrades and store remodels, debt repayments and opportunistic share repurchases over the next 12 months. For the foreseeable future, we will prioritize needed investments in our business that we believe will deliver value for stockholders, and will consider measured debt repayment within our ratings guidance as well as opportunistic share repurchases.

We utilize our ABL facility for the issuance of letters of credit, for certain working capital and liquidity needs and to manage normal fluctuations in our operational cash flow. In that regard, we may from time to time draw funds under the ABL facility for general corporate purposes including funding of capital expenditures, acquisitions, interest payments due on our indebtedness, paying down other debt and opportunistic share repurchases. During the nine months ended June 30, 2019, the weighted average interest rate on our borrowings under the ABL facility was 4.68%. The amounts drawn are generally paid down with cash provided by our operating activities. As of June 30, 2019, Sally Holdings had $466.5 million available for borrowings under the ABL facility, subject to borrowing base limitations, as reduced by outstanding letters of credit.

Share Repurchase Programs

We did not repurchase any shares of our common stock during the nine months ended June 30, 2019. As of June 30, 2019, we had authorization of approximately $834.1 million of additional potential share repurchases remaining under the 2017 Share Repurchase

Program. During the nine months ended June 30, 2018, we repurchased and subsequently retired approximately 9.9 million shares of our common stock under Board approved share repurchase programs at an aggregate cost of $164.6 million. We funded these share repurchases with existing cash balances, cash from operations and borrowings under the ABL facility.

Historical Cash Flows

Historically, our primary source of cash has been net funds provided by operating activities and, when necessary, borrowings under our ABL facility. The primary uses of cash have been for share repurchases, capital expenditures, repayments and servicing of long-term debt and acquisitions.

Net Cash Provided by Operating Activities

Net cash provided by operating activities during the nine months ended June 30, 2019, decreased $78.1 million to $203.8 million, compared to the nine months ended June 30, 2018, mainly due to a focused reduction of accounts payable and an increase in inventory as a result of the launch of new product lines.

Net Cash Used by Investing Activities

Net cash used by investing activities during the nine months ended June 30, 2019, decreased $13.8 million to $57.5 million, compared to the nine months ended June 30, 2018. This change was primarily driven by cash proceeds received from selling our secondary headquarters and fulfillment center in Denton, Texas, and as a result of not having any significant acquisitions in the nine months ended June 30, 2019, partially offset by the additional capital expenditures primarily from investments in our information technology systems.

Net Cash Used by Financing Activities

Net cash used by financing activities during the nine months ended June 30, 2019, decreased $31.2 million to $165.4 million, compared to the nine months ended June 30, 2018. This decrease was driven by a focus on debt reduction rather than share repurchases.

Long-Term Debt

At June 30, 2019, we had $1,626.2 million in debt, not including capital leases, unamortized debt issuance costs or debt discounts, in the aggregate, of $15.5 million. Our debt consisted of outstanding senior notes of $885.3 million and a term loan B with an outstanding principal balance of $725.4 million. There was $15.5 million in borrowings outstanding under our ABL facility as of June 30, 2019.

During the nine months ended June 30, 2019, we repurchased approximately $63.5 million aggregate principal amount of our 2025 Notes and our 2023 Notes. In addition, we repaid $115.0 million aggregate principal of our term loan B above our normal quarterly payments.

We are currently in compliance with the agreements and instruments governing our debt, including our financial covenants.

Contractual Obligations

Other than the debt repayments described above, there have been no material changes outside the ordinary course of our business in any of our contractual obligations since September 30, 2018.

Off-Balance Sheet Financing Arrangements

At June 30, 2019 and September 30, 2018, we had no off-balance sheet financing arrangements other than operating leases incurred in the ordinary course of our business, and outstanding letters of credit related to inventory purchases and self-insurance programs.

Critical Accounting Estimates

There have been no material changes to our critical accounting estimates or assumptions since September 30, 2018.

Accounting Changes and Recent Accounting Pronouncements

See Note 3 of the Notes to Condensed Consolidated Financial Statements in Item 1 – “Financial Statements” in Part I – Financial Information.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a multinational corporation, we are subject to certain market risks including foreign currency fluctuations, interest rates and government actions. There have been no material changes to our market risks from September 30, 2018. See our disclosures about

market risks contained in Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in Part II of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.

Item 4. Controls and Procedures

Controls Evaluation and Related CEO and CFO Certifications. Our management, with the participation of our principal executive officer (“CEO”) and principal financial officer (“CFO”), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2019. The controls evaluation was conducted by our Disclosure Committee, comprised of senior representatives from our finance, accounting, internal audit, and legal departments under the supervision of our CEO and CFO.

Certifications of our CEO and our CFO, which are required in accordance with Rule 13a-14 of the Exchange Act, are attached as exhibits to this Quarterly Report. This “Controls and Procedures” section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Limitations on the Effectiveness of Controls. We do not expect that our disclosure controls and procedures will prevent all errors and all fraud. A system of controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Because of the limitations in all such systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Furthermore, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how unlikely. Because of these inherent limitations in a cost-effective system of controls and procedures, misstatements or omissions due to error or fraud may occur and not be detected.

Scope of the Controls Evaluation. The evaluation of our disclosure controls and procedures included a review of their objectives and design, our implementation of the controls and procedures and the effect of the controls and procedures on the information generated for use in this Quarterly Report. In the course of the evaluation, we sought to identify whether we had any data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, was being undertaken if needed. This type of evaluation is performed on a quarterly basis so that conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K. Many of the components of our disclosure controls and procedures are also evaluated by our internal audit department, by our legal department and by personnel in our finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures on an ongoing basis and to maintain them as dynamic systems that change as conditions warrant.

Conclusions regarding Disclosure Controls. Based on the required evaluation of our disclosure controls and procedures, our CEO and CFO have concluded that, as of June 30, 2019, we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We are involved, from time to time, in various claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect of these matters. We do not believe that the ultimate resolution of these matters will have a material adverse impact on our consolidated financial position, cash flows or results of operations.

We are subject to a number of U.S., federal, state and local laws and regulations, as well as the laws and regulations applicable in each foreign country or jurisdiction in which we do business. These laws and regulations govern, among other things, the composition, packaging, labeling and safety of the products we sell, the methods we use to sell these products and the methods we use to import these products. We believe that we are in material compliance with such laws and regulations, although no assurance can be provided that this will remain true going forward.

See also Note 16 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors contained in Item 1A. “Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors disclosed in such Annual Report. The risks described in such Annual Report and herein are not the only risks facing our company.

Item 6. Exhibits

Exhibit No.		Description

3.1		Third Restated Certificate of Incorporation of Sally Beauty Holdings, Inc., dated January 30, 2014, which is incorporated herein by reference from Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on January 30, 2014

3.2		Amended and Restated Bylaws of Sally Beauty Holdings, Inc., dated April 26, 2017, which is incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 28, 2017

31.1		Rule 13a-14(a)/15d-14(a) Certification of Christian A. Brickman*

31.2		Rule 13a-14(a)/15d-14(a) Certification of Aaron E. Alt*

32.1		Section 1350 Certification of Christian A. Brickman*

32.2		Section 1350 Certification of Aaron E. Alt*

101		The following financial information from our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2019, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Earnings; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Cash Flows; (v) the Condensed Consolidated Statements of Stockholders’ Deficits; and (vi) the Notes to Condensed Consolidated Financial Statements.

* Included herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		SALLY BEAUTY HOLDINGS, INC.
		(Registrant)

Date: July 31, 2019

	By:	/s/ Aaron E. Alt
		Aaron E. Alt
		Senior Vice President, Chief Financial Officer and President – Sally Beauty Supply
		For the Registrant and as its Principal Financial Officer