REGIS CORP – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in five sections: º • º Management's Overview º • º Critical Accounting Policies º • º Overview of Fiscal Year 2012 Results º • º Results of Operations º • º Liquidity and Capital Resources
MANAGEMENT'S OVERVIEW
Regis Corporation (RGS) owns or franchises beauty salons and hair restoration centers. As ofJune 30, 2012 , we owned, franchised or held ownership interests in approximately 12,600 worldwide locations. Our locations consisted of 9,738 system wide North American and international salons, 98 hair restoration centers, and 2,811 locations in which we maintain a non-controlling ownership interest less than 100 percent. Our salon concepts offer generally similar products and services and serve mass market consumers. Our salon operations are organized to be managed based on geographical location. Our North American salon operations include 9,340 salons, including 2,016 franchise salons, operating inthe United States ,Canada andPuerto Rico primarily under the trade names of Regis Salons,MasterCuts , SmartStyle,Supercuts and Cost Cutters. Our international salon operations include 398 salons located inEurope , primarily in theUnited Kingdom .Hair Club for Men andWomen includes 98 North American locations, including 29 franchise locations. During fiscal year 2012, we had approximately 52,000 corporate employees worldwide.
Our fiscal year 2013 growth strategy is focused on improving the guest experience. We plan to execute our strategy by putting guests and stylists first, leveraging the power of our salon brands, focusing on technology and connectivity, and reviewing our non-core assets. Initiatives include:
º •
º Putting guests and stylists first by improving both the experience for
the person in the chair and behind the chair. The Company continues to
work on attracting, developing and retaining the best stylists through
orientation programs, training and development and rewards and recognition through a performance driven culture. º • º Leveraging the power of our salon brands through focusing on the best brands within the best markets. º •
º Using technology and connectivity, including internet in the salons,
to enhance effectiveness of field management and improve guest satisfaction and retention. º • º Reviewing non-core assets. 32
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Salon Business
The strength of our salon business is in the fundamental similarity and broad appeal of our salon concepts. Each concept generally targets the middle market guest, however, each attracts a different demographic.
We execute our salon growth strategy by focusing on real estate. Our salon real estate strategy is to add new units in convenient locations with good visibility and guest traffic, as well as appropriate trade demographics. Our various salon and product concepts operate in a wide range of retailing environments, including regional shopping malls, strip centers and Walmart Supercenters. We believe that the availability of real estate will augment our ability to achieve the aforementioned long-term growth objectives. Organic salon revenue is achieved through the combination of new salon construction and salon same-store sales results. Older, unprofitable salons will be closed or relocated. Although we have generally been experiencing negative same-store sales we believe our strategy of focusing on the in-salon guest experience will improve same-store sales. Historically, our salon acquisitions have varied in size from as small as one salon to over one thousand salons. The median acquisition size is approximately ten salons. From fiscal year 1994 to fiscal year 2012, we acquired 8,052 salons, net of franchise buybacks.
Hair Restoration Business
InDecember 2004 , we acquiredHair Club for Men andWomen .Hair Club for Men andWomen is a provider of hair loss solutions with an estimated five percent share of the$4 billion domestic market. This industry is comprised of numerous locations domestically and is highly fragmented. In an effort to provide confidentiality for guests, the hair restoration centers operate primarily in professional or medical office buildings. Further, the hair restoration business is more marketing intensive. As a result, organic growth at hair restoration centers is dependant on successfully generating new leads and converting them into hair restoration guests. During the fiscal year endedJune 30, 2012 , the Company began reviewing alternatives for non-core assets. OnJuly 13, 2012 , the Company entered into a definitive agreement to sell itsHair Club for Men andWomen business (Hair Club ), a provider of hair restoration services. The transaction is expected to close during the first half of fiscal year 2013.
CRITICAL ACCOUNTING POLICIES
The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted inthe United States of America . In preparing the Consolidated Financial Statements, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Changes in these estimates could have a material effect on our Consolidated Financial Statements.
Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements contained in Part II, Item 8 of this Form 10-K. We believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.
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Investment In and Loans to Affiliates
The Company has equity investments in securities of certain privately held entities. The Company accounts for these investments under the equity method of accounting. The Company also has loan receivables from certain of these entities. Investments accounted for under the equity method are recorded at the amount of the Company's investment and adjusted each period for the Company's share of the investee's income or loss. Investments are reviewed for changes in circumstance or the occurrence of events that suggest the Company's investment may not be recoverable. During fiscal year 2012, we recorded an impairment of$19.4 million related to our investment in EEG. In addition, during fiscal year 2012 we recorded a net$17.2 million other than temporary net impairment charge associated with the Share Purchase Agreement to sell the Company's 46.7 percent equity interest inProvalliance to the Provost Family for a purchase price of €80 million. During fiscal year 2011, we recorded an impairment of$9.2 million related to our investment in MY Style. </pre>Note Receivables, Net
The note receivable balances within the Company's Consolidated Balance Sheet primarily include note receivables related to the Company's investments in EEG and MY Style, a note receivable with the purchaser of Trade Secret and note receivables with our franchisees. The balances are presented net of a valuation reserve for estimated losses. The Company monitors the financial condition of its counterparties with an outstanding note receivable and records provisions for estimated losses on receivables when it believes the counterparties are unable to make their required payments. The valuation reserve is the Company's best estimate of the amount of probable credit losses related to existing notes receivable. During the third quarter of fiscal year 2011, the Company did not receive a scheduled interest payment related to the outstanding note receivable with the purchaser of Trade Secret, the fair value of the collateral decreased to a level below the carrying value of the outstanding note receivable, and the purchaser of Trade Secret provided the Company with a new five year business plan that was well below their original projections. Due to these factors that occurred during the third quarter of fiscal year 2011, the Company evaluated the note receivable for impairment based on a probability weighted expected future cash flow analysis. During the third quarter of fiscal year 2011, the Company recorded a$9.0 million valuation reserve for the excess of the carrying value of the note receivable over the present value of expected future cash flows. During the fourth quarter of fiscal year 2011, the Company did not receive a scheduled interest payment related to the outstanding note receivable with the purchaser of Trade Secret and the fair value of the collateral continued to decrease and was at a level significantly below the carrying value of the outstanding note receivable. In addition, the Company received updated financial projections that were below the projections received during the third quarter of fiscal year 2011. Due to these negative financial events in the fourth quarter of fiscal year 2011, the Company performed an extensive evaluation on the Company's option to realize the collateral under the note receivable and recorded an additional$22.2 million valuation reserve that fully reserved the carrying value of the note receivable as ofJune 30, 2011 . The carrying value of the note receivable continues to be fully reserved atJune 30, 2012 .Goodwill
Goodwill is tested for impairment annually or at the time of a triggering event. In evaluating whether goodwill is impaired, the Company compares the carrying value of each reporting unit, including goodwill, to the estimated fair value of the reporting unit. The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, 34--------------------------------------------------------------------------------
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including allocation of shared or corporate balances among reporting units. Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons.
The Company calculates the estimated fair value of the reporting units based on discounted future cash flows that utilize estimates in annual revenue, gross margins, fixed expense rates, allocated corporate overhead, and long-term growth rates for determining terminal value. The Company's estimated future cash flows also take into consideration acquisition integration and maturation. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company considers its various concepts to be reporting units when testing for goodwill impairment because that is where the goodwill resides. The Company periodically engages third-party valuation consultants to assist in evaluation of the Company's estimated fair value calculations. In the situations where a reporting unit's carrying value exceeds its estimated fair value, the amount of the impairment loss must be measured. The measurement of impairment is calculated by determining the implied fair value of a reporting unit's goodwill. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all other assets and liabilities of that unit based on the relative fair values under the assumption of a taxable transaction. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities is the implied fair value of goodwill. The goodwill impairment is measured as the excess of the carrying value of goodwill over its implied fair value. As previously disclosed, the Company concluded that it was reasonably likely that goodwill for the Regis and Hair Restoration Centers reporting units might become impaired in future periods. As a result of the Company's annual impairment testing of goodwill during the fourth quarter of fiscal year 2012, a$67.7 million impairment charge was recorded within continuing operations for the excess of the carrying value of goodwill over the implied fair value of the goodwill for the Regis salon concept. The Regis salon concept reported same-store sales of negative 4.0 percent for the ten months endedApril 30, 2012 , which was unfavorable compared to the Company's budgeted same-store sales. Visitation patterns did not rebound as quickly as the Company originally projected. Accordingly, the Company reduced the budgeted financial projections for future years. After the impairment charge the Regis salon concept reporting unit had$35.1 million of goodwill. The impairment was only partially deductible for tax purposes resulting in a tax benefit of$12.5 million . During the three months endedDecember 31, 2011 the Company updated the projections for the Hair Restoration Centers reporting unit used in the fiscal 2011 annual impairment test to reflect the impact of recent industry developments, including a slow down in revenue growth and increasing supply costs. The Company determined there was a triggering event as it was more likely than not that the fair value of the Hair Restoration Centers was below carrying value and performed an interim impairment test of goodwill during the three months endedDecember 31, 2011 . As a result of the Company's interim impairment test of goodwill related to the Hair Restoration Centers reporting unit during the second quarter of fiscal year 2012, a$78.4 million impairment charge was recorded within continuing operations for the excess of the carrying value of goodwill over the implied fair value of the goodwill for the Hair Restorations Centers reporting unit. After the impairment charge the Hair Restoration Centers reporting unit had$74.4 million of goodwill. The impairment was only partially deductible for tax purposes resulting in a tax benefit of$5.9 million . See further discussion on the effective tax rate for the twelve months endedJune 30, 2012 within Note 12 to the Consolidated Financial Statements. 35--------------------------------------------------------------------------------
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A summary of the critical assumptions utilized during the fiscal year 2012 annual impairment test of the Regis salon concept are outlined below:
Annual revenue growth. Annual revenue growth is primarily driven by
assumed same-store sales rates of approximately negative 2.0 to positive
3.0 percent. Other considerations include anticipated economic conditions
and moderate acquisition growth. Gross margin. Adjusted for anticipated salon closures, new salon construction and acquisitions estimated future gross margins were held constant.Fixed expense rates. Fixed expense rate increases of approximately
1.0 to 2.0 percent based on anticipated inflation. Fixed expenses consisted
of rent, site operating, and allocated general and administrative corporate
overhead.
Allocated corporate overhead. Corporate overhead incurred by the home
office based on the number of Regis salons as a percent of total
company-owned salons.
Long-term growth. A long-term growth rate of 2.5 percent was applied
to terminal cash flow based on anticipated economic conditions.
Discount rate. A discount rate of 11.0 percent based on the weighted
average cost of capital that equals the rate of return on debt capital and
equity capital weighted in proportion to the capital structure common to
the industry.
The following table summarizes the approximate impact that a change in certain critical assumptions would have on the estimated fair value of our Regis salon concept reporting unit (the approximate impact of the change in the critical assumptions assumes all other assumptions and factors remain constant): Approximate Increase Decrease in Critical Assumptions (Decrease) Fair Value (In thousands) Discount Rate 1.0 % $ 7,000 Same-Store Sales (1.0 ) 500 As of our fiscal year 2012 annual impairment test, the estimated fair value of the Hair Restoration Centers reporting unit exceeded its respective carrying value by approximately 18.0 percent. As previously disclosed, the Company has agreed to sell the Hair Restoration Centers reporting unit in the first half of fiscal year 2013; however, until this reporting unit is sold it is reasonably likely that there could be impairment of the Hair Restoration Centers reporting unit's goodwill in future periods. The sensitivity of the Company's critical assumptions in estimating fair value of this reporting unit, the Company has provided additional information related to this reporting unit.A summary of the critical assumptions utilized during the fiscal year 2012 interim impairment test of the Hair Restoration Centers reporting unit are outlined below:
Annual revenue growth. Annual revenue growth is primarily driven by
assumed same-store sales rates of approximately positive 1.0 to positive
3.0 percent. Other considerations include anticipated economic conditions
and moderate acquisition growth.
Gross margin. Adjusted for anticipated center closures, new center
construction and acquisitions. In addition, estimated future gross margins
were adjusted for increasing supply costs.
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Fixed expense rates. Fixed expense rate increases of approximately
1.0 to 2.0 percent based on anticipated inflation. Fixed expenses consisted
of rent, site operating, and allocated general and administrative corporate
overhead.
Allocated corporate overhead. Corporate overhead incurred by the home
office is not allocated as the Hair Restoration Centers reporting unit
incurs its own overhead.
Long-term growth. A long-term growth rate of 2.5 percent was applied
to terminal cash flow based on anticipated economic conditions.
Discount rate. A discount rate of 12.0 percent based on the weighted
average cost of capital that equals the rate of return on debt capital and equity capital weighted in proportion to the capital structure common to the industry.Structure. A nontaxable structure based on the highest economic value
and feasibility of the assumed structure.
The following table summarizes the approximate impact that a change in certain critical assumptions would have on the estimated fair value of our Hair Restoration Centers reporting unit goodwill balance (the approximate impact of the change in the critical assumptions assumes all other assumptions and factors remain constant): Approximate Increase Decrease in Critical Assumptions (Decrease) Fair Value (In thousands) Discount Rate 1.0 % $ 12,000 Same-Store Sales (1.0 ) 3,000 As of our fiscal year 2012 annual impairment test, the estimated fair value of the Promenade salon concept exceeded its respective carrying value by approximately 14.0 percent. As it is reasonably likely that there could be impairment of the Promenade salon concept's goodwill in future periods along with the sensitivity of the Company's critical assumptions in estimating fair value of this reporting unit, the Company has provided additional information related to this reporting unit.A summary of the critical assumptions utilized during the fiscal year 2012 annual impairment test of the Promenade salon concept are outlined below:
Annual revenue growth. Annual revenue growth is primarily driven by
assumed same-store sales rates of approximately negative 2.0 to positive
6.0 percent. Other considerations include anticipated economic conditions
and moderate acquisition growth. Gross margin. Adjusted for anticipated salon closures, new salon construction and acquisitions estimated future gross margins were held constant.Fixed expense rates. Fixed expense rate increases of approximately
1.0 to 2.0 percent based on anticipated inflation. Fixed expenses consisted
of rent, site operating, and allocated general and administrative corporate
overhead.
Allocated corporate overhead. Corporate overhead incurred by the home
office based on the number of Promenade company-owned salons as a percent
of total company-owned salons.
Long-term growth. A long-term growth rate of 3.0 percent was applied
to terminal cash flow based on anticipated economic conditions.
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Discount rate. A discount rate of 11.0 percent based on the weighted
average cost of capital that equals the rate of return on debt capital and
equity capital weighted in proportion to the capital structure common to
the industry.
The following table summarizes the approximate impact that a change in certain critical assumptions would have on the estimated fair value of our Promenade salon concept goodwill balance (the approximate impact of the change in the critical assumptions assumes all other assumptions and factors remain constant): Approximate Increase Decrease in Critical Assumptions (Decrease) Fair Value (In thousands) Discount Rate 1.0 % $ 29,000 Same-Store Sales (1.0 ) 2,000 The respective fair values of the Company's remaining reporting units exceeded fair value by greater than 20.0 percent atJune 30, 2012 . While the Company has determined the estimated fair values of Promenade to be appropriate based on the historical level of revenue growth, operating income and cash flows, it is reasonably likely that Promenade may experience additional impairment in future periods. As previously disclosed, the Company has agreed to sell the Hair Restoration Centers reporting unit in the first half of fiscal year 2013; however, until this reporting unit is sold it is reasonably likely there could be impairment of the Hair Restoration Centers reporting unit's goodwill in future periods. The term "reasonably likely" refers to an occurrence that is more than remote but less than probable in the judgment of the Company. Because some of the inherent assumptions and estimates used in determining the fair value of the reportable segment are outside the control of management, changes in these underlying assumptions can adversely impact fair value. Potential impairment of a portion or all of the carrying value of goodwill for the Promenade salon concept and Hair Restoration Centers reporting units is dependent on many factors and cannot be predicted with certainty. As ofJune 30, 2012 , the Company's estimated fair value, as determined by the sum of our reporting units' fair value reconciled to within a reasonable range of our market capitalization which included an assumed control premium.A summary of the Company's goodwill balance as of
June 30, 2012 and 2011 by reporting unit is as follows:As of June 30, As of June 30, Reporting Unit 2012 2011 (Dollars in thousands) Regis $ 34,992 $ 103,761 MasterCuts 4,652 4,652 SmartStyle 49,476 48,916 Supercuts 129,621 129,477 Promenade 243,538 240,910 Total North America Salons 462,279 527,716 Hair Restoration Centers 74,376 152,796 Consolidated Goodwill $ 536,655 $ 680,512 We impaired$74.1 million of goodwill associated with our Promenade salon concept during fiscal year 2011 and$35.3 million of goodwill associated with our Regis salon concept during fiscal year 2010. 38--------------------------------------------------------------------------------
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Long-Lived Assets, Excluding Goodwill
We assess the impairment of long-lived assets annually or when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Our impairment analysis on salon property and equipment is performed on a salon by salon basis. The Company's test for impairment is performed at a salon level as this is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the related salon assets that does not recover the carrying value of the salon assets. When the sum of a salon's undiscounted estimated future cash flow is zero or negative, impairment is measured as the full carrying value of the related salon's equipment and leasehold improvements. When the sum of a salon's undiscounted cash flows is greater than zero but less than the carrying value of the related salon's equipment and leasehold improvements, a discounted cash flow analysis is performed to estimate the fair value of the salon assets and impairment is measured as the difference between the carrying value of the salon assets and the estimated fair value. The fair value estimate is based on the best information available, including market data. Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause us to realize material impairment charges.During fiscal years 2012, 2011, and 2010,
$6.6 ,$6.7 , and$6.4 million , respectively, of impairments were recorded within depreciation and amortization in the Consolidated Statement of Operations.Purchase Price Allocation
The acquisition purchase prices are allocated to assets acquired, including identifiable intangible assets, and liabilities assumed based on their estimated fair values at the dates of acquisition. Fair value is estimated based on the amount for which the asset or liability could be bought or sold in a current transaction between willing parties. For our acquisitions, the majority of the purchase price that is not allocated to identifiable assets, or liabilities assumed, is accounted for as residual goodwill rather than identifiable intangible assets. This stems from the value associated with the walk-in guest base of the acquired salons, the value of which is not recorded as an identifiable intangible asset under current accounting guidance and the limited value of the acquired leased site and guest preference associated with the acquired hair salon brand. Residual goodwill further represents our opportunity to strategically combine the acquired business with our existing structure to serve a greater number of guests through our expansion strategies. Identifiable intangible assets purchased in fiscal year 2012, 2011, and 2010 acquisitions totaled$0.6 ,$2.0 , and$0.1 million , respectively. The residual goodwill generated by fiscal year 2012, 2011, and 2010 acquisitions totaled$5.0 ,$12.5 , and$2.6 million , respectively. See Note 4 to the Consolidated Financial Statements for further information.Self-Insurance Accruals
The Company uses a combination of third party insurance and self-insurance for a number of risks including workers' compensation, health insurance, employment practice liability and general liability claims. The liability represents the Company's estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date. 39--------------------------------------------------------------------------------
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The workers' compensation, general liability and employment practice liability analysis includes applying loss development factors to the Company's historical claims data (total paid and incurred amounts per claim) for all policy years where the Company has not reached its aggregate limits to project the future development of incurred claims. The workers' compensation analysis is performed for three models;California ,Texas and all other states. A variety of accepted actuarial methodologies are followed to determine these liabilities, including several methods to predict the loss development factors for each policy period. These liabilities are determined by modeling the frequency (number of claims) and severity (cost of claims), fitting statistical distributions to the experience, and then running simulations. A similar analysis is performed for both general liability and employment practices liability; however, it is a single model for all liability claims rather than the three separate models used for workers' compensation. The health insurance analysis utilizes trailing twelve months of paid and 24 months of incurred medical and prescription claims to project the amount of incurred but not yet reported claims liability amount. The lag factors are developed based on the Company's specific claim data utilizing a completion factor methodology. The developed factor, expressed as a percentage of paid claims, is applied to the trailing twelve months of paid claims to calculate the estimated liability amount. The calculated liability amount is reviewed for reasonableness based on reserve adequacy ranges for historical periods by testing prior reserve levels against actual expenses to date. Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, self-insurance accruals could be affected if future claims experience differs significantly from the historical trends and actuarial assumptions. For fiscal years 2012 and 2011, the Company recorded increases in expense from changes in estimates related to prior year open policy periods of$0.7 and$1.4 million , respectively. For fiscal year 2010, the Company recorded a decrease in expense from changes in estimates related to prior year open policy periods of$1.7 million . A 10.0 percent change in the self-insurance reserve would affect income from continuing operations before income taxes and equity in (loss) income of affiliated companies by$4.8 ,$4.6 , and$4.5 million for the three years endedJune 30, 2012 , 2011 and 2010, respectively. The Company updates loss projections twice each year and adjusts its recorded liability to reflect the current projections. The updated loss projections consider new claims and developments associated with existing claims for each open policy period. As certain claims can take years to settle, the Company has multiple policy periods open at any point in time.Income Taxes
In determining income for financial statement purposes, management must make certain estimates and judgments. These estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred tax assets which arise from temporary differences between the tax and financial statement recognition of revenue and expense. Management must assess the likelihood that deferred tax assets will be recovered. If recovery is not likely, we must increase our provision for taxes by recording a reserve, in the form of a valuation allowance, for the deferred tax assets that will not ultimately be recoverable. Should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which it is determined that the recovery is not likely. In addition, the calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. Management recognizes a reserve for potential liabilities for anticipated tax audit issues inthe United States and other tax jurisdictions based on our estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. Inthe United States , fiscal years 2009 40--------------------------------------------------------------------------------
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and after remain open for federal tax audit. For state tax audits, the statute of limitations generally spans three to four years, resulting in a number of states remaining open for tax audits dating back to fiscal year 2008. However, the Company is under audit in a number of states in which the statute of limitations has been extended for fiscal years 2006 and forward. Internationally, includingCanada , the statute of limitations for tax audits varies by jurisdiction, but generally ranges from three to five years. As ofJune 30, 2012 the Company's liability for uncertain tax positions was$4.4 million . See Note 12 to the Consolidated Financial Statements for further information. Contingencies We are involved in various lawsuits and claims that arise from time to time in the ordinary course of our business. Accruals are recorded for such contingencies based on our assessment that the occurrence is probable, and where determinable, an estimate of the liability amount. Management considers many factors in making these assessments including past history and the specifics of each case. However, litigation is inherently unpredictable and excessive verdicts do occur, which could have a material impact on our Consolidated Financial Statements.During fiscal year 2012, the Company was awarded
$1.1 million in conjunction with a class-action lawsuit.During fiscal year 2011, the Company settled a legal claim with the former owner of
Hair Club for$1.7 million .During fiscal year 2010, the Company settled two legal claims regarding certain guest and employee matters for an aggregate charge of
$5.2 million plus a commitment to provide discount coupons. During the twelve months endedJune 30, 2011 , the final payments aggregating$4.3 million were made.OVERVIEW OF FISCAL YEAR 2012 RESULTS
The following summarizes key aspects of our fiscal year 2012 results:
º •
º Revenues decreased 2.2 percent during fiscal year 2012. The Company experienced a decline in guest visitation and average ticket price, resulting in a decrease in consolidated same-store sales of 3.1 percent. Partially offsetting the decrease in revenues was the benefit of the additional day fromleap year . º • º The Company recorded goodwill impairment charges of$67.7 and$78.4 million associated with our Regis salon concept and HairRestoration reporting units, respectively, during fiscal year 2012.
º •
º Long-lived asset impairment charges of
$6.6 million were recordedduring fiscal year 2012.
º •
º The Company recorded a
$17.2 million net impairment charge associatedwith the Agreement entered into during fiscal year 2012 to sell the Company's 46.7 percent equity interest inProvalliance to the Provost Family for a purchase price of €80 million. The transaction is expected to close no later thanSeptember 30, 2012 and is subject to the Provost Family securing financing for the purchase price. The$17.2 million net impairment charge recorded within equity in (loss) income of affiliated companies in the Consolidated Statement of Operations consists of a$37.4 million impairment charge related to the difference between the purchase price and carrying value of the Company's investment inProvalliance , partially offset by a$20.2 million decrease in the fair value of the Equity Put. º •º The Company recorded a
$19.4 million other than temporary impairmenton its investment in EEG.
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º •
º The Company recorded incremental depreciation expense of$16.2 million ($10.2 million net of tax or$0.18 per diluted share) associated with the adjustment to the useful life of the Company's POS system. º •º During fiscal year 2012, the Company reduced the home office workforce
by approximately 120 employees. The Company recorded$9.8 million in senior management restructuring and other severance charges. In addition the Company recorded$2.8 million in other restructuringcharges associated with one-time costs with implementing the Company's
new strategy.
º •
º The Company recorded
$1.8 million in deferred compensation expenseassociated with amending the deferred compensation contracts such that
the benefits are based on years of service and employees' compensation
as ofJune 30, 2012 . º • º The Company recorded charges of$4.9 million associated with professional fees incurred in connection with the contested proxy and the exploration of alternatives for non-core assets. º • º The Company recorded a$1.1 million favorable legal settlement during fiscal year 2012. º • º During fiscal year 2012, the Company recorded a$1.1 million tax benefit in discontinued operations related to the release of tax reserves associated with the disposition of the Trade Secret salon concept. º •º The annual effective income tax rate of 5.8 percent was negatively
impacted by the goodwill impairment charges which are partially non-deductible for tax purposes. This resulted in the Company recording less of a tax benefit on the pre-tax loss than what would normally be expected utilizing the Company's historical range of tax rates. RESULTS OF OPERATIONS The following discussion of results of operations will reflect results from continuing operations. Discontinued operations will be discussed at the end of this section.Consolidated Results of Operations
The following table sets forth, for the periods indicated, certain information derived from our Consolidated Statement of Operations in Item 8, expressed as a percent of revenues. The percentages are computed as a percent of total revenues, except as noted. 42--------------------------------------------------------------------------------
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Results of Operations as a Percent of Revenues
For the Years Ended June 30, 2012 2011 2010 Service revenues 75.3 % 75.8 % 75.6 % Product revenues 22.9 22.5 22.7 Royalties and fees 1.8 1.7 1.7 Operating expenses: Cost of service(1) 57.5 57.5 56.9 Cost of product(2) 48.0 47.8 49.4 Site operating expenses 8.7 8.5 8.5 General and administrative 13.3 14.6 12.4 Rent 15.0 14.7 14.6 Depreciation and amortization 5.2 4.5 4.6 Goodwill impairment 6.4 3.2 1.5 Lease termination costs - - 0.1 Operating (loss) income (3.0 ) 0.2 4.1 (Loss) income from continuing operations before income taxes and equity in (loss) income of affiliated companies (4.0 ) (1.1 ) 2.3 (Loss) income from continuing operations (5.1 ) (0.4 ) 1.7 Income from discontinued operations 0.1 - 0.1 Net (loss) income (5.0 ) (0.4 ) 1.8--------------------------------------------------------------------------------
º (1) º Computed as a percent of service revenues and excludes depreciation expense. º (2) º Computed as a percent of product revenues and excludes depreciation expense.Consolidated Revenues
Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees, hair restoration center revenues, and franchise royalties and fees. As compared to the prior fiscal year, consolidated revenues decreased 2.2 percent during fiscal year 2012 and decreased 1.4 percent during fiscal year 2011. The following table details our consolidated revenues by concept. All service revenues, product revenues (which include product and equipment sales to 43--------------------------------------------------------------------------------
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franchisees), and franchise royalties and fees are included within their respective concept within the table.
For the Years Ended June 30, 2012 2011 2010 (Dollars in thousands) North American salons: Regis $ 414,752 $ 434,249 $ 437,990 MasterCuts 159,627 165,729 166,821 SmartStyle 514,050 531,090 533,094 Supercuts 343,764 321,881 314,698 Promenade(2) 548,912 576,995 607,960 Total North American Salons 1,981,105 2,029,9442,060,563
International salons 141,122 150,237156,085
Hair restoration centers 151,552 145,688 141,786 Consolidated revenues $ 2,273,779 $ 2,325,869 $ 2,358,434 Percent change from prior year (2.2 )% (1.4 )% (2.9 )% Salon same-store sales decrease(1) (3.1 )% (1.7 )% (3.2 )%--------------------------------------------------------------------------------
º (1)
º Same-store sales are calculated on a daily basis as the total change in sales for company-owned locations which were open on a specific day of the week during the current period and the corresponding prior period.Quarterly and year-to-date same-store sales are the sum of the same-store
sales computed on a daily basis. Locations relocated within a one mile
radius are included in same-store sales as they are considered to have been
open in the prior period. International same-store sales are calculated in
local currencies to remove foreign currency fluctuations from the calculation. º (2)º
Trade Secret, Inc. was sold byRegis Corporation onFebruary 16, 2009 . Theagreement included a provision that the Company would supply product to the
purchaser of Trade Secret and provide certain administrative services for a
transition period. For the fiscal year ended
June 30, 2010 , the Companygenerated revenue of
$20.0 million in product revenues, which represented0.8 percent of consolidated revenues. The agreement was substantially
complete as of
September 30, 2009 .The decreases of 2.2, 1.4, and 2.9 percent in consolidated revenues during fiscal years 2012, 2011, and 2010, respectively, were driven by the following: Percentage Increase (Decrease) in Revenues For the Years Ended June 30, Factor 2012 2011 2010 Acquisitions 0.7 % 1.1 % 0.8 % Same-store sales (3.1 ) (1.7 ) (3.2 ) New stores 1.2 0.6 0.7 Foreign currency 0.0 0.4 0.2 Franchise revenues 0.1 0.0 0.0 Closed salons (2.2 ) (1.5 ) (0.9 ) Other 1.1 (0.3 ) (0.5 ) (2.2 )% (1.4 )% (2.9 )% 44--------------------------------------------------------------------------------
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We acquired 13 company-owned salons (including 11 franchise buybacks), and did not acquire or buy back hair restoration centers from franchisees during fiscal year 2012 compared to 105 company-owned salons (including 78 franchise buybacks), and bought back four hair restoration centers from franchisees during fiscal year 2011. The same-store sales decrease of 3.1 percent was due to a decrease in same-store guest visits and marginal declines in average ticket. The Company constructed 209 company-owned salons and six hair restoration centers. We closed 384 and 305 salons (including 51 and 60 franchise salons) during the twelve months endedJune 30, 2012 and 2011, respectively. We acquired 105 company-owned salons (including 78 franchise buybacks), and bought back four hair restoration centers from franchisees during fiscal year 2011 compared to 26 company-owned salons (including 23 franchise buybacks), and bought back zero hair restoration centers from franchisees during fiscal year 2010. The same-store sales decrease of 1.7 percent was due to a decline in same-store guest visits, partially offset by an increase in average ticket. The Company constructed 146 company-owned salons during the twelve months endedJune 30, 2011 . We closed 305 and 269 salons (including 60 and 65 franchise salons) during the twelve months endedJune 30, 2011 and 2010, respectively. During fiscal year 2012, there was no foreign currency impact on revenues as the weakening ofthe United States dollar against the Canadian dollar was offset by the strengthening of the United Stated dollar against the British pound and Euro as compared to the prior fiscal year's exchange rates. During fiscal year 2011, the foreign currency impact was driven by the weakening ofthe United States dollar against the Canadian dollar and British pound, as compared to the prior fiscal year's exchange rates. During fiscal year 2010, the foreign currency impact was driven by the weakening ofthe United States dollar against the Canadian dollar, partially offset by the strengthening of the United Stated dollar against the British pound and Euro as compared to the prior fiscal year's exchange rates. Consolidated revenues are primarily composed of service and product revenues, as well as franchise royalties and fees. Fluctuations in these three major revenue categories were as follows:Service Revenues. Service revenues include revenues generated from company-owned salons and service revenues generated by hair restoration centers. Consolidated service revenues were as follows:
Decrease Over Prior Fiscal Year Years Ended June 30, Revenues Dollar Percentage (Dollars in thousands) 2012 $ 1,712,703 $ (50,271 ) (2.9 )% 2011 1,762,974 (21,163 ) (1.2 ) 2010 1,784,137 (49,821 ) (2.7 ) The decrease in service revenues during fiscal year 2012 was due the closure of 333 company-owned salons and same-store service sales decreasing 3.5 percent. The decrease in same-store services sales was primarily a result of a decline in same-store guest visits and a decline in average ticket due to promotional programs designed to generate additional guest visits in the salons with the promotional programs. Partially offsetting the decrease was growth due to new and acquired salons during the twelve months endedJune 30, 2012 and the additional day fromleap year . The decrease in service revenues during fiscal year 2011 was due to same-store service sales decreasing 2.3 percent, as a result of a decline in same-store guest visits. Partially offsetting the decrease was growth due to new and acquired salons during the twelve months endedJune 30, 2011 , price increases, sales mix as the company continues to increase hair color and waxing services, and the weakening ofthe United States dollar against the Canadian dollar during the twelve months endedJune 30, 2011 .The decrease in service revenues during fiscal year 2010 was due to same-store service sales decreasing 3.4 percent, as many guests have continued to lengthen their visitation pattern due to the
45--------------------------------------------------------------------------------
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economy. In addition, service revenues decreased due to the strengthening ofthe United States dollar against the British pound. Partially offsetting the decrease was growth due to acquisitions during the twelve months and the weakening ofthe United States dollar against the Canadian dollar during the twelve months endedJune 30, 2010 .Product Revenues. Product revenues are primarily sales at company-owned salons and hair restoration centers, and sales of product and equipment to franchisees. Consolidated product revenues were as follows:
Decrease Over Prior Fiscal Year Years Ended June 30, Revenues Dollar Percentage (Dollars in thousands) 2012 $ 520,467 $ (2,727 ) (0.5 )% 2011 523,194 (11,399 ) (2.1 ) 2010 534,593 (21,612 ) (3.9 ) The decrease in product revenues during fiscal year 2012 was primarily due to same-store product sales decreasing 1.7 percent, and the closure of 333 company-owned locations, partially offset by the additional day fromleap year and an increase in product sales to franchisees as a result of an increase in franchise locations. The decrease in product revenues during fiscal year 2011 was primarily due to the decrease in product sales to the purchaser of Trade Secret from$20.0 million in fiscal year 2010 to zero in fiscal year 2011. Partially offsetting the decrease was same-store product sales increasing 0.4 percent, product sales from new and acquired salons, and the weakening ofthe United States dollar against the Canadian dollar during the twelve months endedJune 30, 2011 . The decrease in product revenues during fiscal year 2010 was primarily due to the decrease in product sales to the purchaser of Trade Secret from$32.2 in fiscal year 2009 to$20.0 in fiscal year 2010, as well as due to same-store product sales decreasing 2.3 percent and the strengthening ofthe United States dollar against the British pound. Partially offsetting the decrease was the weakening ofthe United States dollar against the Canadian dollar during the twelve months endedJune 30, 2010 .Royalties and Fees. Consolidated franchise revenues, which include royalties and franchise fees, were as follows:
Increase (Decrease) Over Prior Fiscal Year Years Ended June 30, Revenues Dollar Percentage (Dollars in thousands) 2012 $ 40,609 $ 908 2.3 % 2011 39,701 (3 ) (0.0 ) 2010 39,704 80 0.2 Total franchise locations open atJune 30, 2012 and 2011 were 2,045 (including 29 franchise hair restoration centers) and 1,965 (including 29 franchise hair restoration centers), respectively. During fiscal year 2012, we purchased a 60.0 percent ownership interest in a franchise network, consisting of 31 franchise locations. In addition, we purchased 11 of our franchise salons during the twelve months endedJune 30, 2012 . The increase in royalties and fees was also due to same-store sales increases at franchise locations.Total franchise locations open at
June 30, 2011 and 2010 were 1,965 (including 29 franchise hair restoration centers) and 2,053 (including 33 franchise hair restoration centers), respectively. The46--------------------------------------------------------------------------------
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decrease in franchise locations was offset by the impact of the weakening of
the United States dollar against the Canadian dollar.Total franchise locations open atJune 30, 2010 and 2009 were 2,053 (including 33 franchise hair restoration centers) and 2,078 (including 33 franchise hair restoration centers), respectively. The increase in consolidated franchise revenues during fiscal year 2010 was primarily due to the weakening ofthe United States dollar against the Canadian dollar during the twelve months endedJune 30, 2010 .Gross Margin (Excluding Depreciation)
Our cost of revenues primarily includes labor costs related to salon employees and hair restoration center employees, the cost of product used in providing services and the cost of products sold to guests and franchisees. The resulting gross margin was as follows: (Decrease) Increase Over Prior Fiscal Year Margin as % of Service and Gross Product Years Ended June 30, Margin Revenues Dollar Percentage Basis Point(1) (Dollars in thousands) 2012 $ 998,361 44.7 % $ (24,960 ) (2.4 )% (10 ) 2011 1,023,321 44.8 (15,806 ) (1.5 ) - 2010 1,039,127 44.8 (23,279 ) (2.2 ) 40--------------------------------------------------------------------------------
º (1)
º Represents the basis point change in gross margin as a percent of service
and product revenues as compared to the corresponding period of the prior
fiscal year.
Service Margin (Excluding Depreciation). Service margin was as follows: (Decrease) Increase Over Prior Fiscal Year Margin as % of Service Service Years Ended June 30, Margin Revenues Dollar Percentage Basis Point(1) (Dollars in thousands) 2012 $ 727,549 42.5 % $ (22,557 ) (3.0 )% - 2011 750,106 42.5 (18,311 ) (2.4 ) (60 ) 2010 768,417 43.1 (20,822 ) (2.6 ) 10--------------------------------------------------------------------------------
º (1)
º Represents the basis point change in service margin as a percent of service
revenues as compared to the corresponding period of the prior fiscal year.
Service margin as a percent of service revenues during fiscal year 2012 was consistent with fiscal year 2011. Lower commissions as a result of leveraged pay plans for new stylists and a decrease in salon health insurance costs due to lower claims were offset by decreased productivity in our North American segment and an increase in the cost of labor within our Hair Restoration Centers segment. The basis point decrease in service margins as a percent of service revenues during fiscal year 2011 was primarily due to an unexpected increase in salon health insurance costs due to several unusually large claims and an increase in payroll taxes as a result of states increasing unemployment taxes. The basis point improvement in service margins as a percent of service revenues during fiscal year 2010 was primarily due to the benefit of the new leveraged salon pay plans implemented in the 2009 calendar year. Increases in salon health insurance and payroll taxes partially offset the basis point improvement. 47--------------------------------------------------------------------------------
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Product Margin (Excluding Depreciation). Product margin was as follows: (Decrease) Increase Over Prior Fiscal Year Margin as % of Product Product Years Ended June 30, Margin Revenues Dollar Percentage Basis Point(1) (Dollars in thousands) 2012 $ 270,812 52.0 % $ (2,403 ) (0.9 )% (20 ) 2011 273,215 52.2 2,505 0.9 160 2010 270,710 50.6 (2,457 ) (0.9 ) 150--------------------------------------------------------------------------------
º (1)
º Represents the basis point change in product margin as a percent of product
revenues as compared to the corresponding period of the prior fiscal year.
Trade Secret, Inc. was sold byRegis Corporation onFebruary 16, 2009 . The agreement included a provision thatRegis Corporation would supply product to the purchaser at cost for a transition period. The agreement was substantially completed as ofSeptember 30, 2009 . The following tables breakout product revenues, cost of product and product margin as a percent of product revenues between product and product sold to the purchaser of Trade Secret. For the Years EndedJune 30 ,Breakout of Product Revenues 2012 20112010
Product $ 520,467 $ 523,194 $514,631
Product sold to purchaser of Trade Secret - -19,962 Total product revenues $ 520,467 $ 523,194 $ 534,593 For the Years Ended June 30, Breakout of Cost of Product 2012 2011 2010 Cost of product $ 249,655 $ 249,979 $ 243,921 Cost of product sold to purchaser of Trade Secret - - 19,962 Total cost of product $ 249,655 $ 249,979 $ 263,883 For the Years Ended June 30, Product Margin as % of Product Revenues 20122011 2010 Margin on product other than sold to purchaser of Trade Secret
52.0 % 52.2 % 52.6 % Margin on product sold to purchaser of Trade Secret - - - Total product margin 52.0 % 52.2 % 50.6 % The basis point decrease in product margin as a percentage of product revenues during fiscal year 2012 was primarily due to an increase in the cost of hair systems in our Hair Restoration Centers segment and increases in freight costs due to higher fuel prices. Partially offsetting the basis point decrease was a reduction in commissions paid to new employees on retail product sales in our North American segment. The basis point decrease in product margin other than sold to purchaser of Trade Secret as a percentage of product revenues during fiscal year 2011 was primarily due to an increase in sales of slightly lower-profit margin appliances in our International segment and an increase in the cost of hair systems in our Hair Restoration Centers segment, partially offset by reduced commissions paid to new employees on retail product sales in our North American segment. 48--------------------------------------------------------------------------------
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The basis point improvement in product margin other than sold to purchaser of Trade Secret as a percentage of product revenues during fiscal year 2010 was due to a planned reduction in retail commissions paid to new employees on retail product sales. Site Operating Expenses This expense category includes direct costs incurred by our salons and hair restoration centers, such as on-site advertising, workers' compensation, insurance, utilities and janitorial costs. Site operating expenses were as follows: Increase (Decrease) Over Prior Fiscal Year Expense as % of Site Consolidated Years Ended June 30, Operating Revenues Dollar Percentage Basis Point(1) (Dollars in thousands) 2012 $ 198,725 8.7 % $ 1,003 0.5 % 20 2011 197,722 8.5 (1,616 ) (0.8 ) - 2010 199,338 8.5 8,882 4.7 70--------------------------------------------------------------------------------
º (1)
º Represents the basis point change in site operating expenses as a percent
of consolidated revenues as compared to the corresponding period of the
prior fiscal year.
The basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage from the decrease in same-store sales.
Site operating expenses as a percent of consolidated revenues during fiscal year 2011 was consistent with fiscal year 2010. A reduction in legal claims expense and a favorable sales tax audit adjustment were offset by a planned increase in advertising expense within the Company's Promenade concept and an increase in self-insurance accruals. The basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2010 was primarily due to higher self-insurance expense. The Company recorded a reduction in self-insurance accruals of$1.7 million in fiscal year 2010 compared to a$9.9 million reduction in fiscal year 2009. In addition the Company settled two legal claims related to guest and employee matters resulting in a$5.2 million charge during fiscal year 2010. General and Administrative General and administrative (G&A) includes costs associated with our field supervision, salon training and promotions, product distribution centers and corporate offices (such as salaries and professional fees), including costs incurred to support franchise and hair restoration center operations. G&A expenses were as follows: (Decrease) Increase Over Prior Fiscal Year Expense as % of Consolidated Years Ended June 30, G&A Revenues Dollar Percentage Basis Point(1) (Dollars in thousands) 2012 $ 302,572 13.3 % $ (37,285 ) (11.0 )% (130 ) 2011 339,857 14.6 47,866 16.4 220 2010 291,991 12.4 330 0.1 40--------------------------------------------------------------------------------
º (1)
º Represents the basis point change in G&A as a percent of consolidated
revenues as compared to the corresponding period of the prior fiscal year.
The basis point improvement in G&A costs as a percentage of consolidated revenues during fiscal year 2012 was primarily due to the comparable prior period including a
$31.2 million valuation reserve49--------------------------------------------------------------------------------
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on the note receivable with the purchaser of Trade Secret. Also contributing to the improvement during fiscal year 2012 was a reduction in salaries and other employee benefits as a result of the reduction in home office workforce that occurred inJanuary 2012 . Partially offsetting the basis point improvement were incremental costs associated with the Company's senior management restructuring, severance charges, and professional fees incurred in connection with the contested proxy and the exploration of alternatives for non-core assets. The basis point increase in G&A costs as a percentage of consolidated revenues during fiscal year 2011 was primarily due to the$31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret, incremental costs associated with the Company's senior management restructure, expenditures associated with the Regis salon concept re-imaging project, professional fees incurred related to the exploration of strategic alternatives and information technology projects, legal claims expense and negative leverage on fixed costs within this category due to negative same-store sales.The basis point increase in G&A costs as a percentage of consolidated revenues during fiscal year 2010 was primarily due to negative leverage from the decrease in same-store sales, partially offset by the continuation of cost savings initiatives implemented by the Company.
Rent
Rent expense, which includes base and percentage rent, common area maintenance and real estate taxes, was as follows:
(Decrease) Increase Over Prior Fiscal Year Expense as % of Consolidated Years Ended June 30, Rent Revenues Dollar Percentage Basis Point(1) (Dollars in thousands) 2012 $ 340,805 15.0 % $ (1,481 ) (0.4 )% 30 2011 342,286 14.7 (1,812 ) (0.5 ) 10 2010 344,098 14.6 (3,694 ) (1.1 ) 30--------------------------------------------------------------------------------
º (1)
º Represents the basis point change in rent expense as a percent of
consolidated revenues as compared to the corresponding period of the prior
fiscal year.
The basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partially offset by favorable common area maintenance adjustments from landlords and salon closures.
The basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2011 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partially offset by a favorable reduction to our common area maintenance expenses.
The basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2010 was primarily due to negative leverage in this fixed cost category, partially offset by a reduction in our percentage rent payments, both due to negative same-store sales.
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Depreciation and Amortization
Depreciation and amortization expense (D&A) was as follows:
Increase (Decrease) Over Prior Fiscal Year Expense as % of Consolidated Years Ended June 30, D&A Revenues Dollar Percentage Basis Point(1) (Dollars in thousands) 2012 $ 118,071 5.2 % $ 12,962 12.3 % 70 2011 105,109 4.5 (3,655 ) (3.4 ) (10 ) 2010 108,764 4.6 (6,891 ) (6.0 ) (20 )--------------------------------------------------------------------------------
º (1)
º Represents the basis point change in depreciation and amortization as a
percent of consolidated revenues as compared to the corresponding period of
the prior fiscal year.
The basis point increase in D&A as a percent of consolidated revenues during fiscal year 2012 was primarily due to$16.2 million of accelerated depreciation expense in the current year resulting from the useful life adjustment of the Company's internally developed point-of-sale system and negative leverage from the decrease in same-store sales. Partially offsetting the basis point increase was the continuation of a decrease in depreciation expense from the reduction in salon construction beginning in fiscal year 2009 as compared to historical levels prior to fiscal year 2009. The basis point decrease in D&A as a percent of consolidated revenues during fiscal year 2011 was primarily due to a decrease in depreciation expense from a reduction in salon construction beginning in fiscal year 2009 as compared to historical levels prior to fiscal year 2009. The basis point decrease was partially offset by negative leverage from the decrease in same-store sales. The basis point improvement in D&A as a percent of consolidated revenues during fiscal year 2010 was primarily due to a reduction in the impairment of property and equipment at underperforming locations as compared to fiscal year 2009. The Company recorded impairment charges of$6.4 and$10.2 million during fiscal years 2010 and 2009, respectively. Partially offsetting the improvements was a decline due to negative leverage from the decrease in same-store sales.Goodwill Impairment
Goodwill impairment was as follows:
Increase (Decrease) Over Prior Fiscal Year Expense as % of Goodwill Consolidated Years Ended June 30, Impairment Revenues Dollar Percentage Basis Point(1) (Dollars in thousands) 2012 $ 146,110 6.4 % $ 72,010 97.2 % 320 2011 74,100 3.2 38,823 110.1 170 2010 35,277 1.5 (6,384 ) (15.3 ) (20 )--------------------------------------------------------------------------------
º (1)
º Represents the basis point change in goodwill impairment as a percent of
consolidated revenues as compared to the corresponding period of the prior
fiscal year.
The Company recorded goodwill impairment charges totaling$67.7 and$78.4 million related to the Regis salon concept and Hair Restoration Centers reporting units, respectively, during fiscal year 2012. Due to the continuation of a decrease in same-store sales, the estimated fair value of the Regis salon operations was less than the carrying value of this concept's net assets, including goodwill. The$67.7 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Regis salon operations. Due to the impact of recent industry developments, including a slow down in revenue growth and increasing supply costs, the estimated fair value of the 51--------------------------------------------------------------------------------
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Hair Restoration Centers operations was less than the carrying value of this reporting unit's net assets, including goodwill. The$78.4 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Hair Restoration Centers reporting unit. The Company recorded a$74.1 million goodwill impairment charge related to the Promenade salon concept during fiscal year 2011. Due to lower than expected earnings and same-store sales, the estimated fair value of the Promenade salon operations was less than the carrying value of this concept's net assets, including goodwill. The$74.1 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Promenade salon operations. The Company recorded a$35.3 million goodwill impairment charge related to the Regis salon concept during fiscal year 2010. Due to the current economic conditions, the estimated fair value of the Regis salon operations was less than the carrying value of this concept's net assets, including goodwill. The$35.3 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Regis salon operations.Lease Termination Costs
Lease termination costs were as follows:
Decrease Over Prior Fiscal Year
Lease Expense as % of Termination Consolidated Years Ended June 30, Costs Revenues DollarPercentage
Basis Point (1)(Dollars in thousands) 2012 $ - - % $ - N/A - 2011 - - (2,145 ) (100.0 ) (10 ) 2010 2,145 0.1 (3,587 ) (62.6 ) (10 )--------------------------------------------------------------------------------
º (1)
º Represents the basis point change in lease termination costs as a percent
of consolidated revenues as compared to the corresponding periods of the
prior fiscal year.
As the Company's
June 2009 plans to close underperforming company-owned salons were substantially complete as ofJune 30, 2010 , the Company did not incur lease termination costs during the twelve months endedJune 30, 2012 and 2011.The fiscal year 2010 lease termination costs are associated with the Company'sJune 2009 plan to close underperformingUnited Kingdom company-owned salons in fiscal year 2010. During fiscal year 2010 we closed 29 salons under theJune 2009 plan. Interest ExpenseInterest expense was as follows:
(Decrease) Increase Over Prior Fiscal Year Expense as % of Consolidated Years Ended June 30, Interest Revenues Dollar Percentage Basis Point(1) (Dollars in thousands) 2012 $ 28,245 1.2 % $ (6,143 ) (17.9 )% (30 ) 2011 34,388 1.5 (20,026 ) (36.8 ) (80 ) 2010 54,414 2.3 14,646 36.8 70--------------------------------------------------------------------------------
º (1)
º Represents the basis point change in interest expense as a percent of
consolidated revenues as compared to the corresponding period of the prior fiscal year. 52
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The basis point improvement in interest as a percent of consolidated revenues during the twelve months ended
The basis point improvement in interest as a percent of consolidated revenues during the twelve months endedJune 30, 2011 was primarily due to a reduction in interest expense due to the twelve months endedJune 30, 2010 including$18.0 million of make-whole payments and other fees associated with the repayment of private placement debt, and decreased debt levels during fiscal year 2011. The basis point increase in interest as a percent of consolidated revenues during the twelve months endedJune 30, 2010 was primarily due to$18.0 million of make-whole payments and other fees associated with the repayment of private placement debt. The increase due to the make-whole payments and other fees was partially offset by a reduction in interest expense due to decreased debt levels.
Interest Income and Other, net
Interest income and other, net was as follows:
Increase (Decrease) Over Prior Fiscal Year Income as % of Consolidated Years Ended June 30, Interest Revenues Dollar Percentage Basis Point(1) (Dollars in thousands) 2012 $ 5,130 0.2 % $ 319 6.6 % - 2011 4,811 0.2 (5,599 ) (53.8 ) (20 ) 2010 10,410 0.4 949 10.0 -
--------------------------------------------------------------------------------
º (1)
º Represents the basis point change in interest income and other, net as a
percent of consolidated revenues as compared to the corresponding period of
the prior fiscal year.
Interest income and other, net as a percent of consolidated revenues during the twelve months endedJune 30, 2012 , was consistent with the comparable prior period as there was a favorable foreign currency impact related to the Company's investment in MY Style and a favorable legal settlement during fiscal year 2012 that were offset by the prior year comparable period including higher fees received for warehousing services provided to the purchaser of Trade Secret. The basis point decrease in the interest income and other, net as a percent of consolidated revenues during the twelve months endedJune 30, 2011 was primarily due to the foreign currency impact of the Company's investment in MY Style,$1.9 million received from the purchaser of Trade Secret in the comparable prior period for administrative services, and$1.9 million in interest income recorded in the comparable prior period on the outstanding note receivable due from the purchaser of Trade Secret.
Interest income and other, net as a percent of consolidated revenues during the twelve months ended
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Income Taxes
Our reported effective tax rate was as follows: Effective Basis Point Years Ended June 30, Rate Increase (Decrease)(1) 2012 (5.8 )% 3,130 2011 (37.1 ) N/A 2010 48.1 (520 )
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º (1)
º Represents the basis point change in income tax (benefit) expense as a
percent of (loss) income from continuing operations before income taxes and
equity in (loss) income of affiliated companies as compared to the
corresponding periods of the prior fiscal year. The basis point change for
fiscal year 2011 is not applicable due to the income tax benefit in fiscal
year 2011 compared to income tax expense in fiscal year 2010.
The basis point increase in our overall effective income tax rate for fiscal year 2012 was primarily due to the impact of the goodwill impairment charges recorded during fiscal year 2012 as compared to the impact of the goodwill impairment charge recorded during fiscal year 2011. The majority of the goodwill impairment charges recorded during fiscal year 2012 were non-deductible for tax purposes. This adversely impacted the annual effective tax rate by 37.9% as compared to the prior year impact of 10.4%. Additionally, the impact of employment credits related to the Small Business and Work Opportunity Act of 2007 resulted in less of a tax benefit to the annual effective tax rate when compared to the prior year. This was due to the prior year employment credits having a larger favorable impact to the prior year effective tax rate because of the lower book loss recorded during fiscal year 2011. Absent new legislation being enacted, these credits expired onDecember 31, 2011 . For fiscal year 2011, the Company reported a$25.6 million loss from continuing operations before income taxes as compared to income from continuing operations before income taxes of$53.2 and$78.8 million in fiscal years 2010 and 2009, respectively. The rate reconciliation items have a greater impact on the annual effective income tax rate in fiscal year 2011 as the magnitude of the loss from continuing operations before income taxes is less than the magnitude of income from continuing operations before income taxes in fiscal year 2010. The annual effective tax rate was favorably impacted by the employment credits related to the Small Business and Work Opportunity Tax Act of 2007. Partially offsetting the favorable impact of the employment credits was the adverse impact of the pre-tax non-cash goodwill impairment charge of$74.1 million recorded during the third quarter of fiscal year 2011, which is only partially deductible for tax purposes. Additionally, the foreign income taxes at other than U.S. rates adversely impacted the annual effective tax rate due to a decrease in foreign income from continuing operations before income taxes and other foreign non-deductible items. The basis point improvement in our overall effective income tax rate for the fiscal year endedJune 30, 2010 was primarily due to a decrease in the impact of the non-cash goodwill impairment charge recorded during the year endedJune 30, 2010 compared to the impact of the non-cash goodwill impairment charge recorded during the year endedJune 30, 2009 and an increase in the employment credits received. In addition, a 0.9 percent decrease in the tax rate was due to adjustments to the income tax balances, which had a smaller impact than the charge recorded in the prior year related to the adjustment of prior year deferred income taxes. 54
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Equity in (Loss) Income of Affiliated Companies, Net of Income Taxes
Equity in (loss) income of affiliates, representing the income or loss generated by our equity investment in
(Decrease) Increase Equity Over Prior Fiscal Year Years Ended June 30, (Loss) Income Dollar Percentage (Dollars in thousands) 2012 $ (30,043 ) $ (37,271 ) (515.6 )% 2011 7,228 (4,714 ) (39.5 ) 2010 11,942 41,788 140.0 The loss in affiliated companies, net of taxes for the year endedJune 30, 2012 was primarily due to the impairment losses of$17.2 and$19.4 million recorded on our investments inProvalliance and EEG, respectively. OnApril 9, 2012 , the Company entered into the Agreement to sell the Company's 46.7 percent equity interest inProvalliance to the Provost Family for a purchase price of €80 million. In conjunction, the Company recorded a$37.4 million other than temporary impairment charge on its investment inProvalliance and$20.2 million reduction in the fair value of the Equity Put, resulting in a net impairment charge of$17.2 million . The Company recorded a$19.4 million other than temporary impairment charge for the excess of the carrying value of its investment in EEG over the fair value. The Company also recorded its$8.7 million share of an intangible asset impairment recorded directly by EEG. These impairments recorded during fiscal year 2012 were partially offset by our share of earnings of$9.7 ,$4.7 and$0.8 million recorded for our investments inProvalliance ,EEG andHair Club for Men, Ltd. , respectively. See Note 6 to the Consolidated Financial Statements for further discussion of each respective affiliated company. Equity in income of affiliated companies, net of taxes for the year endedJune 30, 2011 was due to equity in income of$7.8 ,$5.5 and$0.6 million recorded for our investments inProvalliance ,EEG andHair Club for Men, Ltd. , respectively. In addition, the Company recorded a$9.0 million impairment loss related to the Company's investment in MY Style. The impairment charge was based on the decline in equity value of MY Style as a result of changes in projected revenue growth after the natural disasters that occurred inJapan duringMarch 2011 . The Company also recorded a$2.4 million net gain related to the settlement of a portion of the Company's equity put liability and additional ownership of theFrank Provost Group inProvalliance . Equity in income of affiliated companies, net of taxes for the year endedJune 30, 2010 was due to equity in income of$4.1 ,$6.4 and$0.9 million recorded for our investments inProvalliance ,EEG andHair Club for Men, Ltd. , respectively.
Income from Discontinued Operations, net of Taxes
Income from discontinued operations was as follows: Income from Increase (Decrease) Discontinued Over Prior Fiscal Year Operations, Years Ended June 30, Net of Taxes Dollar Percentage (Dollars in thousands) 2012 $ 1,099 $ 1,099 N/A 2011 - (3,161 ) (100.0 ) 2010 3,161 134,597 102.4 55
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During fiscal year 2012, the Company recorded a$1.1 million tax benefit in discontinued operations related to the release of tax reserves associated with the disposition of the Trade Secret salon concept. During fiscal year 2010, the Company recorded a$3.0 million tax benefit in discontinued operations to correct the prior year calculation of the income tax benefit related to the disposition of theTrade Secret Salon concept.
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements.
Effects of Inflation We compensate some of our salon employees with percentage commissions based on sales they generate, thereby enabling salon payroll expense as a percent of company-owned salon revenues to remain relatively constant. Accordingly, this provides us certain protection against inflationary increases, as payroll expense and related benefits (our major expense components) are variable costs of sales. In addition, we may increase pricing in our salons to offset any significant increases in wages. Therefore, we do not believe inflation has had a significant impact on the results of our operations.
Constant Currency Presentation
The presentation below demonstrates the effect of foreign currency exchange rate fluctuations from year to year. To present this information, current period results for entities reporting in currencies other thanUnited States dollars are converted intoUnited States dollars at the average exchange rates in effect during the corresponding period of the prior fiscal year, rather than the actual average exchange rates in effect during the current fiscal year. Therefore, the foreign currency impact is equal to current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year. During the fiscal year endedJune 30, 2012 , foreign currency translation had a minimal net impact on consolidated revenues as the weakening of the British Pound and Euro againstthe United States dollar was offset by the strengthening of the Canadian dollar againstthe United States dollar.
During the fiscal year ended
During the fiscal year ended
Favorable (Unfavorable) Impact of Foreign Currency
Exchange Rate Fluctuations
Impact
on (Loss) Income Before
Impact on Revenues
Income Taxes
Fiscal Fiscal Currency Fiscal 2012 2011 2010 Fiscal 2012 Fiscal 2011 Fiscal 2010 (Dollars in thousands) Canadian dollar $ 364 $ 9,736 $ 10,422 $ 47 $ 937 $ 1,761 British pound (263 ) 653 (4,928 ) (2 ) 15 (184 ) Euro (114 ) (137 ) (34 ) (8 ) 39 (5 ) Total $ (13 ) $ 10,252 $ 5,460 $ 37 $ 991 $ 1,572 56
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Results of Operations by Segment
Based on our internal management structure, we report three segments: North American salons, International salons and Hair Restoration Centers. Significant results of operations are discussed below with respect to each of these segments.
North American Salons
North American Salon Revenues. Total North American salon revenues were as follows: Decrease Over Prior Fiscal Year Same-Store Years Ended June 30, Revenues Dollar Percentage Sales Decrease (Dollars in thousands) 2012 $ 1,981,105 $ (48,839 ) (2.4 )% (3.2 )% 2011 2,029,944 (30,619 ) (1.5 ) (1.8 ) 2010 2,060,563 (57,135 ) (2.7 ) (3.3 )
The percentage decreases during the years ended
Percentage Increase (Decrease) in Revenues For the Years Ended June 30, Factor 2012 2011 2010 Acquisitions 0.7 % 1.2 % 0.8 % Same-store sales (3.2 ) (1.8 ) (3.3 ) New stores 1.3 0.6 0.8 Foreign currency 0.0 0.5 0.5 Franchise revenues 0.0 0.0 0.0 Closed salons (2.3 ) (1.4 ) (0.4 ) Other 1.1 (0.6 ) (1.1 ) (2.4 )% (1.5 )% (2.7 )% We acquired 12 North American salons during the twelve months endedJune 30, 2012 , including 11 franchise buybacks. The same-store sales decrease of 3.2 percent for fiscal year 2012 was the result of a decline in guest visitations and a decrease in average ticket. The Company constructed and closed 191 and 317 company-owned salons, respectively during the twelve months endedJune 30, 2012 . We acquired 105 North American salons during the twelve months endedJune 30, 2011 , including 78 franchise buybacks. The same-store sales decrease of 1.8 percent was the result of a decline in same-store guest visits, partially offset by an increase in average ticket. The foreign currency impact during fiscal year 2011 resulted primarily from the weakening ofthe United States dollar against the Canadian dollar. The Company constructed and closed 133 and 230 company-owned salons, respectively during the twelve months endedJune 30, 2011 . We acquired 26 North American salons during the twelve months endedJune 30, 2010 , including 23 franchise buybacks. The same-store sales decrease of 3.3 percent was the result of a decline in same-store guest visits, partially offset by an increase in average ticket. The foreign currency impact during fiscal year 2010 resulted from the weakening ofthe United States dollar against the Canadian dollar as compared to the exchange rate for fiscal year 2009. The Company constructed and closed 137 and 162 company-owned salons, respectively during the twelve months endedJune 30, 2010 . 57
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North American Salon Operating Income. Operating income for the North American salons was as follows:
Operating (Decrease) Increase Over Prior Fiscal Year Income as % of Operating Total Basis
Years Ended
Point(1)
(Dollars in thousands) 2012 $ 165,368 8.3 % $ (1,315 ) (0.8 )% 10 2011 166,683 8.2 (53,172 ) (24.2 ) (250 ) 2010 219,855 10.7 (55,773 ) (20.2 ) (230 )
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º (1)
º Represents the basis point change in North American salon operating income
as a percent of total North American salon revenues as compared to the
corresponding period of the prior fiscal year.
The basis point increase in North American salon operating income as a percent of North American salon revenues during fiscal year 2012 was primarily due to the$67.7 million goodwill impairment of the Company's Regis salon concept was less than the$74.1 million goodwill impairment of the Company's Promenade salon concept in fiscal year 2011. The basis point increase was also due to improved service margins, partially offset by negative leverage in fixed cost categories due to negative same-store sales. The basis point decrease in North American salon operating income as a percent of North American salon revenues during fiscal year 2011 was primarily due to the$74.1 million goodwill impairment of the Company's Promenade salon concept and negative leverage in fixed cost categories due to negative same-store sales. Partially offsetting the basis point decrease was lower depreciation expense due to a reduction in salon construction. The basis point decrease in North American salon operating income as a percent of North American salon revenues during fiscal year 2010 was primarily due to the$35.3 million goodwill impairment of the Company's Regis salon concept and negative leverage in fixed cost categories due to negative same-store sales. In addition, the basis point decrease was due to the settlement of two legal claims regarding guest and employee matters totaling$5.2 million , higher self-insurance expense (the Company recorded reduction in self-insurance accruals of$1.7 million in the twelve months endedJune 30, 2010 compared to a$9.9 million reduction in the twelve months endedJune 30, 2009 ), partially offset by the Company's cost saving initiatives and gross margin improvement.
International Salons
International Salon Revenues.Total International salon revenues were as follows: Decrease Over Prior Fiscal Year Same-Store Years Ended June 30, Revenues Dollar Percentage Sales Decrease (Dollars in thousands) 2012 $ 141,122 $ (9,115 ) (6.1 )% (9.1 )% 2011 150,237 (5,848 ) (3.7 ) (3.1 )% 2010 156,085 (15,484 ) (9.0 ) (3.8 ) 58
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The percentage decreases during the years ended
Percentage (Decrease) Increase in Revenues For the Years Ended June 30, 2012 2011 2010 Acquisitions - % - % - % Same-store sales (9.1 ) (3.1 ) (3.8 ) New stores 1.9 1.0 0.1 Foreign currency (0.3 ) 0.3 (2.9 ) Franchise revenues - - - Closed salons (2.3 ) (3.7 ) (7.6 ) Other 3.7 1.8 5.2 (6.1 )% (3.7 )% (9.0 )% We acquired one International salon during the twelve months endedJune 30, 2012 . Same-store sales decreased 9.1 percent due to a decline in guest visits. The Company constructed 13 company-owned salons (net of relocations) during the twelve months endedJune 30, 2012 . The foreign currency impact during fiscal year 2012 resulted from the strengthening ofthe United States dollar against the British Pound. We closed 16 company-owned salons during the twelve months endedJune 30, 2012 . We did not acquire any International salons during the twelve months endedJune 30, 2011 . Same-store sales decreased 3.1 percent due to a decline in guest visits. The Company constructed 11 company-owned salons (net of relocations) during the twelve months endedJune 30, 2011 . The foreign currency impact during fiscal year 2011 resulted from the weakening ofthe United States dollar against the British Pound. We closed 15 company-owned salons during the twelve months endedJune 30, 2011 . We did not acquire any International salons during the twelve months endedJune 30, 2010 . Same-store sales decreased 3.8 percent due to a decline in guest visits. The Company constructed 2 company-owned salons during the twelve months endedJune 30, 2010 . The foreign currency impact during fiscal year 2010 resulted from the strengthening ofthe United States dollar against the British Pound and Euro as compared to the exchange rates for fiscal year 2009. We closed 42 company-owned salons during the twelve months endedJune 30, 2010 , of which 29 related to theJune 2009 plan to close underperforming salons in theUnited Kingdom .
International Salon Operating Income. Operating income for the International salons was as follows:
(Decrease) Increase Over Prior Operating Fiscal Year Income as % of Operating Total Basis Years Ended June 30, Income Revenues Dollar Percentage Point(1) (Dollars in thousands) 2012 $ 2,505 1.8 % $ (4,233 ) (62.8 )% (270 ) 2011 6,738 4.5 (41 ) (0.6 ) 20 2010 6,779 4.3 52,260 114.9 3,080
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º (1)
º Represents the basis point change in International salon operating income
as a percent of total International salon revenues as compared to the corresponding period of the prior fiscal year. 59
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The basis point decrease in International salon operating income as a percent of International salon revenues during fiscal year 2012 was primarily due to negative leverage on fixed costs due to a decrease in same-store sales.
The basis point improvement in International salon operating income as a percent of International salon revenues during fiscal year 2011 was primarily due to$2.1 million of lease termination costs recognized during fiscal year 2010 associated with the Company's planned closure of underperforming salons. Partially offsetting the basis point improvement was a decline on product margins from mix play, as a larger than expected percentage of our product sales came from lower-margin products. The basis point improvement in International salon operating income as a percent of International salon revenues during fiscal year 2010 was primarily due to the comparable prior period including a$41.7 million goodwill impairment of theUnited Kingdom reporting unit and higher impairment charges related to the impairment of property and equipment at underperforming locations. In addition the Company's planned closure of underperformingUnited Kingdom salons and the continuation of the Company's expense control and payroll management contributed to the basis point improvement during fiscal year 2010.
Hair Restoration Centers
Hair Restoration Center Revenues. Total Hair Restoration Centers revenues were as follows: Increase Over Prior Fiscal Year Same-Store Years Ended June 30, Revenues Dollar Percentage Sales Increase (Dollars in thousands) 2012 $ 151,552 $ 5,864 4.0 % 2.9 % 2011 145,688 3,902 2.8 1.2 2010 141,786 1,266 0.9 0.4
The percentage increases during the years ended
Percentage Increase (Decrease) in Revenues For the Years Ended June 30, 2012 2011 2010 Acquisitions 1.3 % 1.1 % 0.2 % Same-store sales 2.9 1.2 0.4 New centers 0.4 0.3 0.0 Franchise revenues 0.1 0.7 (0.2 ) Closed centers (0.2 ) (0.3 ) 0.0 Other (0.5 ) (0.2 ) 0.5 4.0 % 2.8 % 0.9 The increase in Hair Restoration Centers revenues during fiscal year 2012 was due to the increase in same-store sales of 2.9 percent, the construction of six hair restoration centers and the four acquired hair restoration centers during fiscal year 2011. The increase in Hair Restoration Centers revenues during fiscal year 2011 was due to the increase in same-store sales of 1.2 percent, the acquisition of four hair restoration centers, all of which were franchise buybacks, and the construction of three hair restoration centers. The increase in Hair Restoration Centers revenues during fiscal year 2010 was due to the increase in same-store sales of 0.4 percent and the construction of four hair restoration centers. 60
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Hair Restoration Center Operating (Loss) Income. Operating (loss) income for our Hair Restoration Centers was as follows:
Operating (Loss) Income Decrease Over Prior Fiscal Year Operating as % of (Loss) Total Basis Years Ended June 30, Income Revenues Dollar Percentage Point(1) (Dollars in thousands) 2012 $ (62,639 ) (41.3 )% $ (80,869 ) (443.6 )% (5,380 ) 2011 18,230 12.5 (2,107 ) (10.4 ) (180 ) 2010 20,337 14.3 (3,534 ) (14.8 ) (270 )
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º (1)
º Represents the basis point change in Hair Restoration Centers operating
(loss) income as a percent of total Hair Restoration Centers revenues as compared to the corresponding period of the prior fiscal year. The basis point decrease in Hair Restoration Centers operating loss as a percent of Hair Restoration Centers revenues during the twelve months endedJune 30, 2012 was primarily due to the$78.4 million goodwill impairment of the Hair Restoration Centers, lower margins due primarily to increased labor costs and an increase in the cost hair systems. The basis point decrease in Hair Restoration Centers operating income as a percent of Hair Restoration Centers revenues during the twelve months endedJune 30, 2011 was primarily due to an increase in the cost of hair systems and expenses associated with a legal claim. Partially offsetting the basis point decrease was a benefit related to a favorable ruling on a state sales tax issue.
The basis point decrease in Hair Restoration Centers operating income as a percent of Hair Restoration Centers revenues during the twelve months ended
Unallocated Corporate
Unallocated Corporate Operating Loss. Unallocated corporate operating expenses include salaries, stock-based compensation, professional fees, rent, depreciation and other expenses that are not allocated. Unallocated corporate operating losses were as follows: (Decrease) Increase Over Operating Prior Fiscal Year Years Ended June 30, Loss Dollar Percentage (Dollars in thousands) 2012 $ 172,547 $ (15,156 ) (8.1 )% 2011 187,703 37,950 25.3 2010 149,753 4,808 3.3 The improvement in unallocated corporate operating loss during the twelve months endedJune 30, 2012 as compared to the twelve months endedJune 30, 2011 was primarily due to the comparable prior period including$31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret, partially offset by$16.2 million of accelerated depreciation expense recorded during fiscal year 2012 as a result of an adjustment to the useful life of the Company's internally developed POS system, and incremental costs associated with the Company's senior management restructuring and contested proxy.
The increase in unallocated corporate operating loss during the twelve months ended
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valuation reserve on the note receivable with the purchaser of Trade Secret, incremental costs associated with the Company's senior management restructure, professional fees incurred related to the exploration of strategic alternatives and information technology projects and legal claims expense. The increase in unallocated corporate operating loss during the twelve months endedJune 30, 2010 as compared to the twelve months endedJune 30, 2009 was primarily due to an increase in professional fees and distribution costs from an agreement with the purchaser of Trade Secret.
LIQUIDITY AND CAPITAL RESOURCES
Overview
We continue to maintain a strong balance sheet to support system growth and financial flexibility. Our debt to capitalization ratio, calculated as total debt as a percentage of total debt and shareholders' equity at fiscal year end, was as follows: Basis Point Debt to Increase As of June 30, Capitalization (Decrease)(1) 2012 24.4 % 110 2011 23.3 (700 ) 2010 30.3 (1,380 )
--------------------------------------------------------------------------------
º (1)
º Represents the basis point change in debt to capitalization as compared to
prior fiscal year end (
The basis point increase in the debt to capitalization ratio as ofJune 30, 2012 compared toJune 30, 2011 was primarily due to the decrease in shareholders' equity as a result of the non-cash goodwill impairment charges related to the Regis salon concept and Hair Restoration Centers reporting unit, a$17.2 million net impairment charge associated with the Agreement to sell the Company's 46.7 percent equity interest inProvalliance to the Provost family, and a$19.4 million impairment charge associated with our investment in EEG. Partially offsetting the impact of the decrease in shareholders' equity was a decrease in debt levels. The basis point improvement in the debt to capitalization ratio as ofJune 30, 2011 compared toJune 30, 2010 was primarily due to the repayment of an$85.0 million term loan during fiscal year 2011 and foreign currency translation adjustments due to the weakening ofthe United States dollar against the Canadian dollar and British Pound. The basis point improvement in the debt to capitalization ratio as ofJune 30, 2010 compared toJune 30, 2009 was primarily due to theJuly 2009 common stock offering and decreased debt levels stemming from the repayment of private placement debt during fiscal year 2010. Our principal on-going cash requirements are to finance construction of new stores, remodel certain existing stores, acquire salons and purchase inventory. Guests pay for salon services and merchandise in cash at the time of sale, which reduces our working capital requirements. Total assets atJune 30, 2012 , 2011, and 2010 were as follows: (Decrease) Increase Over Total Prior Fiscal Year As of June 30, Assets Dollar Percentage (Dollars in thousands) 2012 $ 1,571,846 $ (233,907 ) (13.0 )% 2011 1,805,753 (113,819 ) (5.9 ) 2010 1,919,572 27,086 1.4 62
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The primary factors for the decrease in total assets as ofJune 30, 2012 compared toJune 30, 2011 were the goodwill impairment charges related to the Regis salon concept and Hair Restoration Centers reporting unit, a$17.2 million net impairment charge associated with the Agreement to sell the Company's 46.7 percent equity interest inProvalliance to the Provost family, and a$19.4 million impairment charge associated with our investment in EEG. Additionally, total assets decreased as a result of the accelerated depreciation expense associated with the adjustment to the useful life of the Company's internally developed POS. Partially offsetting the decrease in total assets were cash flows from operations. The$74.1 million goodwill impairment charge related to the Promenade salon concept, a$31.2 million valuation reserve on the note receivable due from the purchaser of Trade Secret, and a$9.2 million impairment on the Company's investment in MY Style, partially offset by cash flows from operations, were the primary factors for the decrease in total assets as ofJune 30, 2011 compared toJune 30, 2010 . Cash flows from operations, partially offset by the$35.3 million goodwill impairment charge related to the Regis salon concept were the primary factors for the increase in total assets as ofJune 30, 2010 compared toJune 30, 2009 . Total shareholders' equity atJune 30, 2012 , 2011, and 2010 was as follows: (Decrease) Increase Over Shareholders' Prior Fiscal Year As of June 30, Equity Dollar Percentage (Dollars in thousands) 2012 $ 889,157 $ (143,462 ) (13.9 )% 2011 1,032,619 19,326 1.9 2010 1,013,293 210,433 26.2 During the twelve months endedJune 30, 2012 , equity decreased primarily as a as a result of the non-cash goodwill impairment charges related to the Regis salon concept and Hair Restoration Centers reporting unit, a$17.2 million net impairment charge associated with the Agreement to sell the Company's 46.7 percent equity interest inProvalliance to the Provost family, a$19.4 million impairment charge associated with our investment in EEG, and$24.3 million of foreign currency translation. During the twelve months endedJune 30, 2011 , equity increased primarily as a result of$30.4 million of foreign currency translation and$9.6 million of stock based compensation, partially offset by$11.5 million of dividends and$8.9 million of net loss. During the twelve months endedJune 30, 2010 , equity increased primarily as a result of the issuance of the$163.6 million in common stock, the$24.7 million ($15.2 million net of tax) equity component of the convertible debt, stock based compensation of$9.3 million and the$42.7 million of earnings during fiscal year 2010. Partially offsetting the increase was a non-cash goodwill impairment charge of$35.3 million related to our Regis salon concept,$9.1 million of dividends,$8.2 million in equity issuance costs and$5.4 million of foreign currency translation adjustments. 63
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Table of Contents Cash Flows Operating Activities
Net cash provided by operating activities during the twelve months ended
Operating Cash Flows For the Years Ended June 30, 2012 2011 2010 (Dollars in thousands) Net (loss) income $ (114,093 ) $ (8,905 ) $ 42,740 Depreciation and amortization 111,435 98,428 102,336 Equity in loss (income) of affiliated companies 30,043 (7,228 ) (11,942 ) Dividends received from affiliated companies 4,047 10,023
2,404
Deferred income taxes (14,171 ) (14,711 ) 5,115 Impairment on discontinued operations - - (154 ) Goodwill and asset impairments 152,746 80,781
41,705
Note receivable bad debt (recovery) expense (805 ) 31,227 - Receivables (4,502 ) (2,358 ) 1,192 Inventories 2,644 4,629 4,823 Income tax receivable 2,809 23,855 957 Other current assets (5,272 ) 4,725 2,657 Other assets (841 ) (11,050 ) (14,951 ) Accounts payable and accrued expenses (13,513 ) 368 1,040 Other noncurrent liabilities (11,151 ) 1,818 1,954 Other 14,324 17,576 12,347 $ 153,700 $ 229,178 $ 192,223 Fiscal year 2012 cash provided by operating activities was lower than fiscal year 2011 cash provided by operating activities due to a$51.8 million decrease in cash provided by operating assets and liabilities primarily due to the timing of accruals and a reduction in the amount received for income taxes, as fiscal year 2011 included a tax refund related to the fiscal year 2009 loss on discontinued operations. Cash provided by operating activities was also lower due to a decrease of$6.0 million in dividends received from affiliated companies. Fiscal year 2011 cash provided by operating activities was greater than fiscal year 2010 cash provided by operating activities due to an increase of$7.6 million in dividends received from affiliated companies and a$23.9 million reduction in income tax receivables.
Fiscal year 2010 cash provided by operating activities was consistent with fiscal year 2009 cash provided by operating activities.
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Investing Activities
Net cash used in investing activities during the twelve months ended
Investing Cash Flows For the Years Ended June 30, 2012 2011 2010 (Dollars in thousands) Business and salon acquisitions $ (2,587 ) $ (17,990 ) $ (3,664 ) Capital expenditures for remodels or other additions (36,128 ) (44,855 ) (40,561 ) Capital expenditures for the corporate office (including all technology-related expenditures) (27,072 ) (13,826 ) (7,828 ) Capital expenditures for new salon construction (22,569 ) (12,788 ) (9,432 ) Proceeds from loans and investments 11,995 16,804 16,099 Disbursements for loans and investments (15,000 ) (72,301 ) - Freestanding derivative settlement - - 736 Proceeds from sale of assets 502 626 70 $ (90,859 ) $ (144,330 ) $ (44,580 ) Cash used by investing activities was less during fiscal year 2012 compared to fiscal year 2011 due to the comparable prior period including the acquisition of approximately 17 percent additional equity interest inProvalliance for$57.3 million (€40.4 million), a decrease in the amount of cash paid for acquisitions during fiscal year 2012, partially offset by an increase in capital expenditures for a new POS system and new salon construction. The Company completed 235 major remodeling projects during fiscal year 2012, compared to 271 and 333 during fiscal years 2011 and 2010, respectively. During fiscal year 2012, we constructed 209 company-owned salons and six hair restoration centers, and acquired 13 company-owned salons (11 of which were franchise buybacks). Cash used by investing activities was greater during fiscal year 2011 compared to fiscal year 2010 due to the acquisition of approximately 17 percent additional equity interest inProvalliance for$57.3 million (€ 40.4 million), a disbursement of$15.0 million on the revolving credit facility with EEG and the planned increase in acquisitions and capital expenditures. The Company completed 271 major remodeling projects during fiscal year 2011, compared to 333 and 280 during fiscal years 2010 and 2009, respectively. During fiscal year 2011, we constructed 146 company-owned salons and three hair restoration centers, and acquired 105 company-owned salons (78 of which were franchise buybacks) and four hair restoration centers (all of which were franchise buybacks). Cash used by investing activities was lower during fiscal year 2010 compared to fiscal year 2009 due to the planned reduction in acquisitions and capital expenditures and the receipt of$15.0 million on the revolving credit facility with EEG of which there was$0.0 and$15.0 million outstanding as ofJune 30, 2010 and 2009, respectively. The Company completed 333 major remodeling projects during fiscal year 2010, compared to 280 and 186 during fiscal years 2009 and 2008, respectively. We constructed 139 company-owned salons, four hair restoration centers and acquired 26 company-owned salons (23 of which were franchise buybacks) and zero hair restoration centers. 65
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The company-owned constructed and acquired locations (excluding franchise buybacks) consisted of the following number of locations in each concept:
Years Ended June 30, 2012 2011 2010 Constructed Acquired Constructed Acquired Constructed Acquired Regis 12 - 12 9 14 3 MasterCuts 11 - 6 - 15 - SmartStyle 50 - 65 - 80 - Supercuts 65 1 24 - 10 - Promenade 53 - 26 18 18 - International 18 1 13 - 2 - Hair restoration centers 6 - 3 - 4 - 215 2 149 27 143 3 Financing Activities
Net cash used in financing activities during the twelve months ended
Financing Cash Flows For the Years Ended June 30, 2012 2011 2010 (Dollars in thousands)
Net repayments on revolving credit facilities $ - $ -
$ (5,000 ) Net repayments of long-term debt (29,693 ) (137,671 ) (181,850 ) Proceeds from the issuance of common stock - 682
159,498
Excess tax benefit from stock-based compensation plans - 67 243 Dividend payments (13,855 ) (11,509 ) (9,146 ) Other - - (2,878 ) $ (43,548 ) $ (148,431 ) $ (39,133 )
During fiscal year 2012 and 2011, the primary use of cash within financing activities was for repayments of long-term debt and dividends.
During fiscal year 2010, the primary use of cash within financing activities was for net repayments of long-term debt, partially offset by the issuance of common stock. 66
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Financing Arrangements
The Company's financing arrangements as ofJune 30, 2012 and 2011 consists of the following: Interest rate % Amounts outstanding Maturity Dates 2012 2011 2012 2011 (fiscal year) (Dollars in thousands) Senior term notes 2013 - 2018 6.69 - 8.50% 6.69 - 8.50% $
111,429 $ 133,571 Convertible senior notes 2015 5.00 5.00 161,134 156,248 Revolving credit facility 2016 - - - - Equipment and leasehold notes payable 2015 - 2016 4.90 - 8.75 8.80 - 9.14 14,780 22,273 Other notes payable 2013 5.75 - 8.00 5.75 - 8.00 331 1,319 287,674 313,411 Less current portion (28,937 ) (32,252 ) Long-term portion $ 258,737 $ 281,159 Fiscal Year 2012 InApril 2012 , the Company amended the Restated Private Shelf Agreement. The amendments included increasing the Company's minimum net worth covenant from$800.0 million to $850.0 million and amending or adding certain definitions, including EBITDA and Rental Expense. Under the new agreement, indebtedness related to Capital Leases is limited to$50.0 million . We were in compliance with all covenants and other requirements of our credit agreement and senior notes as ofJune 30, 2012 . Fiscal Year 2011
OnJune 30, 2011 , the Company entered into a Fifth Amended and Restated Credit Agreement, which amended and restated in its entirety, the Company's existing Fourth Amended and Restated Credit Agreement. The Fifth Amended and Restated Credit Agreement provides for a$400.0 million senior unsecured five-year revolving credit facility. The amendments included increasing the Company's minimum net worth covenant from$800.0 to $850.0 million , and amending or adding certain definitions, including Change in Law, Defaulting Lender, EBITDA, Fronting Exposure, Replacement Lender, and Accounting Principles. In addition, under the Fifth Amended and Restated Credit Agreement, the Company may request an increase in revolving credit commitments under the facility of up to$200.0 million under certain circumstances. Under the new agreement, indebtedness related to Capital Leases is limited to$50.0 million , and Restricted Payments, as defined in the agreement, are tiered based on Debt to EBITDA. Events of default under the Credit Agreement include change of control of the Company and the Company's default of other debt exceeding$10.0 million .
Fiscal Year 2010
InJuly 2009 , the Company issued$172.5 million of 5.0 percent convertible senior notes due 2014, and 13,225,000 shares of its common stock at$12.37 per share. The notes are unsecured, senior obligations of the Company and interest payable semi-annually at a rate of 5.0 percent per year. The notes mature onJuly 15, 2014 . The notes are convertible subject to certain conditions at an initial conversion rate of 64.6726 shares of the Company's common stock per$1,000 principal amount of notes (representing an initial conversion price of approximately$15.46 per share of the Company's common stock), subject to adjustment in certain circumstances. As ofJune 30, 2012 , the conversion rate was 65.1432 shares of the Company's common stock per$1,000 principal amount of notes 67
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(representing a conversion price of approximately
The net proceeds to the Company from the offerings of convertible senior notes and common stock were approximately$323.8 million after deducting underwriting discounts and before estimated offering expenses. The Company utilized the proceeds to repay$267.0 million of private placement senior term notes of varying maturities and$30.0 million of senior term notes under the Private Shelf Agreement. As a result of the repayment of a portion of the senior term notes during the twelve months endedJune 30, 2010 , the Company incurred$12.8 million in make-whole payments and other fees along with$5.2 million in interest rate swap settlements, as discussed in Note 9 to the Consolidated Financial Statements, totaling$18.0 million that was recorded as interest expense within the Consolidated Statement of Operations. The remaining proceeds were used for general corporate purposes including the repayment of bank debt. In connection with the offering above, the Company amended the Fourth Amended and Restated Credit Agreement, the Term Loan Agreement and the Amended and Restated Private Shelf Agreement. The amendments included increasing the Company's minimum net worth covenant from$675 to $800 million , lowering the fixed charge coverage ratio requirement from 1.5x to 1.3x, amending certain definitions, including EBITDA and Fixed Charges, and limiting the Company's Restricted Payments to$20 million if the Company's Leverage Ratio is greater than 2.0x. In addition, the amendments to the Fourth Amended and Restated Credit Agreement reduced the borrowing capacity of the revolving credit facility from$350.0 to$300.0 million and the amendments to the Restated Private Shelf Agreement incorporated a risk based capital fee calculated on the daily average outstanding principal amount equal to an annual rate of 1.0 percent which commences one year after the effective date of the amendment.
Other Financing Arrangements
Private Shelf Agreement
AtJune 30, 2012 and 2011, we had$111.4 and$133.6 million , respectively, in unsecured, fixed rate, senior term notes outstanding under a Private Shelf Agreement. The notes require quarterly payments, and final maturity dates range fromJune 2013 throughDecember 2017 . The interest rates on the notes range from 6.69 to 8.50 percent as ofJune 30, 2012 , and ranged from 6.69 to 8.50 percent as ofJune 30, 2011 . The Private Shelf Agreement includes financial covenants including debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratios, fixed charge coverage ratios and minimum net equity tests (as defined within the Private Shelf Agreement), as well as other customary terms and conditions. The maturity date for the debt may be accelerated upon the occurrence of various Events of Default, including breaches of the agreement, certain cross-default situations, certain bankruptcy related situations, and other customary events of default.
Equipment and Leasehold Notes Payable
The equipment and leasehold notes payable are primarily comprised of capital lease obligations. InSeptember 2011 , the Company entered into an agreement to refinance existing capital leases to a three year term with a contract rate of 4.9 percent. Capital leases of$20.5 million are amortized at the historical rate of 9.2 percent. There was no gain or loss recorded on the refinance. The Company entered into the refinancing to reduce cash interest payments. 68
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Other Notes Payable
The Company had
Acquisitions
Acquisitions are discussed throughout Management's Discussion and Analysis in this Item 7, as well as in Note 4 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K. The acquisitions were funded primarily from operating cash flow, debt and the issuance of common stock.
Contractual Obligations and Commercial Commitments
The following table reflects a summary of obligations and commitments outstanding by payment date as of
Payments due by period Within More than Contractual Obligations 1 years 1 - 3 years 3 - 5 years 5 years Total (Dollars in thousands) On-balance sheet: Long-term debt obligations $ 22,474 $ 196,848 $ 35,715 $ 17,857 $ 272,894 Capital lease obligations 6,463 8,315 2 - 14,780 Other long-term liabilities 5,883 4,711 3,206 14,161 27,961 Total on-balance sheet 34,820 209,874 38,923 32,018 315,635 Off-balance sheet(a): Operating lease obligations 306,468 433,978 200,432 85,627 1,026,505 Interest on long-term debt and capital lease obligations 18,772 22,758 7,589 1,518 50,637 Total off-balance sheet 325,240 456,736 208,021 87,145 1,077,142 Total(b) $ 360,060 $ 666,610 $ 246,944 $ 119,163 $ 1,392,777
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º (a)
º In accordance with accounting principles generally accepted in the United
States of America, these obligations are not reflected in the Consolidated
Balance Sheet.
º (b)
º As of
are not able to reasonably estimate the amount by which the liabilities
will increase or decrease over time; however, at this time, we do not
expect a significant payment related to these obligations within the next
fiscal year. See Note 12 to the Consolidated Financial Statements for more
information on our uncertain tax positions.
On-Balance Sheet Obligations
Our long-term obligations are composed primarily of senior term notes and convertible debt. There were no outstanding borrowings under our revolving credit facility atJune 30, 2012 . Interest payments on long-term debt and capital lease obligations were estimated based on each debt obligation's agreed upon rate as ofJune 30, 2012 and scheduled contractual repayments. Other long-term liabilities include a total of$21.2 million related to the Executive Profit Sharing Plan and a salary deferral program,$6.8 million (including$0.2 million in interest) related to established contractual payment obligations under retirement and severance payment agreements for a small number of retired employees. 69
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This table excludes the short-term liabilities, other than the current portion of long-term debt, disclosed on our balance sheet as the amounts recorded for these items will be paid in the next year. We have no unconditional purchase obligations, as defined by long-term obligations guidance. Also excluded from the contractual obligations table are payment estimates associated with employee health and workers' compensation claims for which we are self-insured. The majority of our recorded liability for self-insured employee health and workers' compensation losses represents estimated reserves for incurred claims that have yet to be filed or settled. The Company has unfunded deferred compensation contracts covering certain management and executive personnel. The deferred compensation contracts are offered to key executives based on their performance within the Company. Because we cannot predict the timing or amount of our future payments related to these contracts, such amounts were not included in the table above. Related obligations totaled$24.6 and$11.8 million and are included in accrued liabilities and other noncurrent liabilities, respectively, in the Consolidated Balance Sheet atJune 30, 2012 . Refer to Note 13 to the Consolidated Financial Statements for additional information. The Company intends to fund its future obligations under these arrangements through Company-owned life insurance policies on the participants.
Off-Balance Sheet Arrangements
Operating leases primarily represent long-term obligations for the rental of salon and hair restoration center premises, including leases for company-owned locations, as well as future salon franchisee lease payments of approximately$152.5 million , which are reimbursed to the Company by franchisees, and the guarantee of approximately 20 salons operated by the purchaser of Trade Secret. Regarding the franchisee subleases, we generally retain the right to the related salon assets net of any outstanding obligations in the event of a default by a franchise owner. Management has not experienced and does not expect any material loss to result from these arrangements. We have forward foreign currency contracts.See Part II , Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," for a detailed discussion of our derivative instruments. Future net settlements under these agreements are not included in the table above. We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business. These contracts primarily relate to our commercial contracts, operating leases and other real estate contracts, financial agreements, definitive agreement entered into duringJuly 2012 to sellHair Club , credit facility of EEG that matures onDecember 31, 2012 with a maximum exposure of$9 million , agreements to provide services, and agreements to indemnify officers, directors and employees in the performance of their work. While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that we expect to result in a material liability. We do not have other unconditional purchase obligations or significant other commercial commitments such as commitments under lines of credit and standby repurchase obligations or other commercial commitments. As a part of our salon development program, we continue to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations, and continue to enter into transactions to acquire established hair care salons and businesses. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other 70
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contractually narrow or limited purposes atJune 30, 2012 . As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, and our revolving credit facility are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to sustain operations and to finance anticipated growth opportunities and strategic initiatives. We also anticipate access to long-term financing. However, in the event our liquidity is insufficient and we are not able to access long-term financing, we may be required to limit our growth opportunities. There can be no assurance that we will continue to generate cash flows at or above current levels. In the first half of fiscal year 2013 the Company is expecting to receive approximately$260 million upon completion of the sale ofProvalliance andHair Club . We are currently evaluating the Company's capital structure and the future use of these proceeds. As ofJune 30, 2012 , cash and cash equivalents were$47.9 ,$32.8 and$31.2 million withinthe United States ,Canada , andEurope , respectively. We have a$400.0 million five-year senior unsecured revolving credit facility with a syndicate of banks that expires inJune 2016 . As ofJune 30, 2012 , the Company had no outstanding borrowings under the facility. Additionally, the Company had outstanding standby letters of credit under the facility of$26.1 million atJune 30, 2012 , primarily related to its self-insurance program. Unused available credit under the facility atJune 30, 2012 was$373.9 million . Our ability to access our revolving credit facility is subject to our compliance with the terms and conditions of such facility, including minimum net worth and other covenants and requirements. AtJune 30, 2012 , we were in compliance with all covenants and other requirements of our credit agreement and senior notes. Financing
Financing activities are discussed under "Liquidity and Capital Resources" in this Item 7 and in Note 8 to the Consolidated Financial Statements in Part II, Item 8. Derivative activities are discussed in Note 9 to the Consolidated Financial Statements in Part II, Item 8 and Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."
Management believes that cash generated from operations and amounts available under existing debt facilities will be sufficient to fund its anticipated capital expenditures, acquisitions and required debt repayments for the foreseeable future. As ofJune 30, 2012 , we have available an unused committed line of credit amount of$373.9 million under our existing revolving credit facility. Dividends
We paid dividends of$0.24 per share during fiscal year 2012,$0.20 per share during fiscal year 2011, and$0.16 per share during fiscal year 2010. OnAugust 22, 2012 , the Board of Directors of the Company declared a$0.06 per share quarterly dividend payableSeptember 19, 2012 to shareholders of record onSeptember 5, 2012 . Share Repurchase Program InMay 2000 , the Company's Board of Directors (BOD) approved a stock repurchase program. Originally, the program authorized up to$50.0 million to be expended for the repurchase of the Company's stock. The BOD elected to increase this maximum to$100.0 million inAugust 2003 , to$200.0 million onMay 3, 2005 , and to$300.0 million onApril 26, 2007 . The timing and amounts of any repurchases will depend on many factors, including the market price of the common stock and overall market conditions. Historically, the repurchases to date have been made primarily to eliminate the 71
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dilutive effect of shares issued in conjunction with acquisitions, restricted stock grants and stock option exercises. All repurchased shares become authorized but unissued shares of the Company. This repurchase program has no stated expiration date. The Company did not repurchase any shares during fiscal year 2012 or 2011. As ofJune 30, 2012 , 2011, and 2010, a total accumulated 6.8 million shares have been repurchased for$226.5 million . As ofJune 30, 2012 ,$73.5 million remains to be spent on share repurchases under this program.
SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This annual report, as well as information included in, or incorporated by reference from, future filings by the Company with theSecurities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company contains or may contain "forward-looking statements" within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document reflect management's best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. Such forward-looking statements are often identified herein by use of words including, but not limited to, "may," "believe," "project," "forecast," "expect," "estimate," "anticipate," and "plan." In addition, the following factors could affect the Company's actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include, the impact of management and organizational changes; competition within the personal hair care industry, which remains strong, both domestically and internationally; price sensitivity; changes in economic conditions; changes in consumer tastes and fashion trends; the ability of the Company to implement its planned spending and cost reduction plan and to continue to maintain compliance with financial covenants in its credit agreements; labor and benefit costs; legal claims; risk inherent to international development (including currency fluctuations); the continued ability of the Company and its franchisees to obtain suitable locations and financing for new salon development and to maintain satisfactory relationships with landlords and other licensors with respect to existing locations; the impact on the Company of healthcare reform legislation; governmental initiatives such as minimum wage rates, taxes and possible franchise legislation; the ability of the Company to successfully identify, acquire and integrate salons that support its growth objectives; the ability of the Company to maintain satisfactory relationships with suppliers; or other factors not listed above. The ability of the Company to meet its expected revenue target is dependent on salon acquisitions, new salon construction and same-store sales increases, all of which are affected by many of the aforementioned risks. Additional information concerning potential factors that could affect future financial results is set forth under Item 1A of this Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made in our subsequent annual and periodic reports filed or furnished with theSEC on Forms 10-Q and 8-K and Proxy Statements on Schedule 14A.
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Fidelity National Financial, Inc. to Present at the 2012 KBW Insurance Conference
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