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. BUSINESS DESCRIPTIONRegis Corporation (RGS) franchises, owns and operates beauty salons. As ofJune 30, 2020 , the Company franchised, owned or held ownership interests in 6,923 worldwide locations. Our locations consisted of 6,841 system-wide North American and International salons, and in 82 locations we maintain a non-controlling ownership interest less than 100 percent. Each of the Company's salon concepts generally offer similar salon products and services. As ofJune 30, 2020 , we had approximately 9,000 corporate employees worldwide. See discussion within Part I, Item 1. InOctober 2017 , the Company sold substantially all of its mall-based salon business inNorth America , representing 858 company-owned salons, and substantially all of its International segment, representing approximately 250 company-owned salons, to TBG. In the second quarter of fiscal year 2020, TBG transferred 207 of its North American salons to the Company. See Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K, as the results of operations for the mall-based business and International segment are accounted for as a discontinued operation for all periods presented. InJanuary 2018 , the Company closed 597 non-performing company-owned SmartStyle salons. The 597 non-performing salons generated negative cash flow of approximately$15 million during the twelve months endedSeptember 30, 2017 . The action delivers on the Company's commitment to restructure its salon portfolio to improve shareholder value and position the Company for long-term growth. A summary of costs associated with the SmartStyle salon restructuring for fiscal year 2018 is as follows: Financial Line Item Fiscal Year 2018 (Dollars in thousands) Inventory reserves Cost of Service $ 656 Inventory reserves Cost of Product 586 Severance General and administrative 897 Long-lived fixed asset impairment Depreciation and amortization 5,460 Asset retirement obligation Depreciation and amortization 7,680 Lease termination and other related closure costs Rent 27,290 Deferred rent Rent (3,291) Total$ 39,278 30
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In addition, the Company recorded approximately$1.9 million of other related costs to the SmartStyle restructuring, primarily warehouse related costs. Substantially all related costs associated with the SmartStyle salon restructuring requiring cash outflow were complete as ofJune 30, 2018 . As part of the Company's strategic transition to a fully-franchised model, the Company is selling salons to franchisees. The impact of these transactions are as follows: Fiscal Years Increase (Decrease) 2020 2019 2018 2020 2019 (Dollars in thousands) Salons sold to franchisees (1) 1,475 767 1,582 708 (815) Cash proceeds received$ 91,616 $
94,787
Gain on sale of venditions, excluding goodwill derecognition$ 49,660 $
69,973
(76,966) (67,055) (3,899) (9,911) (63,156) (Loss) gain from sale of salon assets to franchisees, net$ (27,306) $
2,918
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(1) Fiscal year 2018 includes the mall salons transferred to
RESULTS OF OPERATIONS The Company reports its operations in two operating segments: Franchise salons and Company-owned salons, effectiveOctober 2017 . The Company's operating segments are its reportable operating segments. Prior to this change, the Company had four operating segments: North American Value, North American Premium, North American Franchise and International. Beginning with the period endedSeptember 30, 2017 , the mall-based business and International segment were accounted for as discontinued operations for all periods presented. Discontinued operations are discussed at the end of this section. See Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K for further discussion on this transaction. The Company realigned its field leadership team beginning in the first quarter of fiscal year 2018. An outcome of this reorganization is that the costs associated with senior district leaders were moved out of cost of goods sold and site operating expense and into G&A. This change affected one month of comparability during the fiscal year endedJune 30, 2018 . The estimated impact of the field reorganization (decreased) increased Cost of Service, Site Operating expense and General and Administrative expense by$(2.4) ,$(0.4) and$2.8 million , respectively, for fiscal year 2018. This expense classification does not have a financial impact on the Company's reported operating loss, reported net (loss) income or cash flows from operations. COVID-19 Impact: During the second half of fiscal year 2020, the global coronavirus pandemic (COVID-19) had an adverse impact on our operations, including the closure of all company-owned salons and almost all franchise locations fromMarch 2020 due to government mandates. Salons continued to be closed untilApril 23, 2020 when franchise salons began re-opening slowly, as government, state and local restrictions eased. As ofJune 30, 2020 , approximately 87% of franchise salons were open. Company-owned salons were closed throughMay 21, 2020 and are gradually re-opening. As ofJune 30, 2020 , approximately 54% of company-owned salons were open. As salons re-open, the Company is taking additional measures across its portfolio of franchise and company-owned salons to facilitate customer and employee safety. As a result, COVID-19 has and will continue to negatively affect revenue and profitability. To offset the loss of revenue, inApril 2020 , we implemented a furlough program for a majority of the workforce across the corporate office, field support, and distribution centers; and reductions in the pay for executives and other working employees. The furlough program was in effect for the majority of the fiscal fourth quarter. Despite actions taken to resume business operations, COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, as well as reactions to future pandemics or resurgences of COVID-19, could potentially prolong and intensify the impact of the global crisis on our business. The economic disruption due to COVID-19 was determined to be a triggering event and as a result, management assessed its long-term assets, including long-lived salon assets, right of use assets, goodwill and other intangibles for impairment. See Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K for further discussion on the pandemic. 31
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System-wide results As we transition to an asset-light franchise platform, our results will be more impacted by our system-wide sales, which include sales by all points of distribution, whether owned by the Company or our franchisees. While we do not record sales by franchisees as revenue, and such sales are not included in our Consolidated Financial Statements, we believe that this operating measure is important in obtaining an understanding of our financial performance. We believe system-wide sales information aids in understanding how we derive royalty revenue and in evaluating performance. System-wide same-store sales (1) by concept are detailed in the table below: Fiscal Years 2020 2019 2018 SmartStyle (5.5) % 1.0 % (0.2) % Supercuts (4.2) (0.2) 1.9 Signature Style (3.7) (0.8) 0.5 Total, excluding TBG mall-locations N/A (0.1) N/A TBG mall-locations N/A (4.5) N/A Total (4.4) % (0.5) % 0.9 %
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(1)System-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations for more than one year (including TBG mall locations in 2019) that were open on a specific day of the week during the current period and the corresponding prior period. TBG salons were not a franchise locations in 2018 or 2020 so they are by definition excluded from same-store sales in 2018 and 2020. Year-to-date system-wide same-store sales are the sum of the system-wide same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. 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. System-wide same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation. 32
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Consolidated Results of Operations The following table sets forth, for the periods indicated, certain information derived from our Consolidated Statement of Operations. The percentages are computed as a percent of total revenues, except as otherwise indicated. Fiscal Years 2020 2019 2018 2020 2019 2018 2020 2019 (Dollars in millions) % of Total Revenues (1)Basis Point (Decrease) Increase Service revenues$ 331.5 $ 749.7 $ 899.3 49.5 % 70.1 % 72.8 % (2,060) (270) Product revenues 137.6 225.6 258.7 20.5 21.1 20.9 (60) 20 Franchise royalties and fees 73.4 93.8 77.4 11.0 8.8 6.3 220 250 Franchise rental income 127.2 - - 19.0 - - N/A N/A Cost of service (2) 222.3 452.8 530.6 67.1 60.4 59.0 670 140 Cost of product (2) 84.7 128.8 140.6 61.6 57.1 54.3 450 280 Site operating expenses 71.5 141.0 154.1 10.7 13.2 12.5 (250) 70 General and administrative 131.0 177.0 174.0 19.6 16.6 14.1 300 250 Rent 76.4 131.8 183.1 11.4 12.3 14.8 (90) (250) Franchise rent expense 127.2 - - 19.0 - - N/A N/A Depreciation and amortization 37.0 37.8 58.2 5.5 3.5 4.7 200 (120) Long-lived asset impairment 22.6 - - 3.4 - - N/A N/A TBG restructuring 2.3 21.8 - 0.3 2.0 - (170) 200 Goodwill impairment 40.2 - - 6.0 - - N/A N/A Operating loss (145.3) (22.1) (5.1) (21.7) (2.1) (0.4) (1,960) (170) Interest expense (7.5) (4.8) (10.5) (1.1) (0.4) (0.8) (70) 40 (Loss) gain from sale of salon assets to franchisees, net (27.3) 2.9 0.2 (4.1) 0.3 - (440) 30 Interest income and other, net 3.4 1.7 5.2 0.5 0.2 0.4 30 (20) Income tax benefit (3) 4.6 2.1 69.8 2.6 9.6 685.0 N/A N/A Income (loss) from discontinued operations, net of taxes 0.8 5.9 (53.2) 0.1 0.6 (4.3) (50) 490
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(1)Cost of service is computed as a percent of service revenues. Cost of product is computed as a percent of product revenues. (2)Excludes depreciation and amortization expense. (3)Computed as a percent of loss from continuing operations before income taxes. The income taxes basis point change is noted as not applicable (N/A) as the discussion below is related to the effective income tax rate. 33
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Fluctuations in major revenue categories, operating expenses and other income and expense were as follows: Consolidated Revenues Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees franchise royalties and fees and franchise rental income. The following tables summarize revenues and same-store sales by concept, as well as the reasons for the percentage change: Fiscal Years 2020 2019 2018 (Dollars in thousands) Franchise salons: Product excluding TBG$ 50,411 $ 42,915 $ 34,638 TBG product 2,010 16,990 19,065 Total franchise product 52,421 59,905 53,703 Royalties and fees 73,402 93,761 77,394 Franchise rental income 127,203 - - Total, Franchise salons 253,026 153,666 131,097 Franchise same-store sales (decrease) increase (1) (4.4) % 0.3 % 2.1 % Company-owned salons: SmartStyle$ 203,361 $ 208,531 $ 283,942 Supercuts 54,121 383,380 463,644 Signature Style 159,221 323,462 356,796 Total, Company-owned salons 416,703 915,373 1,104,382 Company-owned salon same-store sales (decrease) increase (2) (4.4) % (0.4) % 0.4 % Consolidated revenues$ 669,729 $ 1,069,039 $ 1,235,479 Percent change from prior year (37.4) % (13.5) % (4.4) % _______________________________________________________________________________ (1)Franchise same-store sales are calculated as the total change in sales for salons that have been a franchise location for more than one year that were open on a specific day of the week during the current period and the corresponding prior period. Fiscal year franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. 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. Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation. TBG salons were not a franchise location in fiscal years 2018 or 2020 so by definition they are not included in franchise same-store sales in 2018 or 2020. TBG same-store sales are excluded from fiscal year 2019 same-store sales to be comparative to fiscal years 2018 and 2020. (2)Company-owned same-store sales are calculated as the total change in sales for company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period. Fiscal year company-owned same-store sales are the sum of company-owned 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. Company-owned same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation. 34
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Fiscal Year EndedJune 30, 2020 Compared with Fiscal Year EndedJune 30, 2019 Consolidated Revenues Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees, advertising fees and rental income. Consolidated revenue decreased$399.3 million , or 37.4%. Service revenue and product revenue decreased$418.1 million and$88.0 million , respectively. The decline in service and product revenue is primarily the result of the Company's sale of salons to franchisees and the government-mandated salon closures in the fourth quarter. During fiscal year 2020, 1,448 salons were sold to franchisees, net of buy backs and 487 and 62 system-wide salons were closed and constructed, respectively (2020 Net Salon Count Changes). The impact to consolidated revenue due to the sale of salons to franchisees and closure of salons was$412.4 million . Additionally, the decline in revenue was a result of the temporary closure of all franchise and company-owned salons in the fourth quarter due to the COVID-19 pandemic. Royalties and fees decreased$20.4 million due to the refunding of$14.9 million of previously collected contributions to the cooperative advertising funds. Additionally, as a result of the Company's adoption of Topic 842, the Company now records revenue related to franchise leases and this adoption resulted in$127.2 million increase in franchise rental income for the year. Service Revenues The decrease of$418.1 million , or 55.8%, in service revenues during fiscal year 2020 was primarily due to 2020 Net Salon Count Changes. The impact to service revenue due to the sale of salons to franchisees and closure of salons was$350.8 million . Additionally, the temporary closure of salons in the fourth quarter and company-owned same-store service sales decreases also contributed to the decrease in service revenue. The company-owned same-store service sales decrease of 3.3% during fiscal year 2020 was primarily due to a 7.4% decrease in same-store guest transactions, partially offset by an increase of 4.1% in average ticket price. Product Revenues The decrease of$88.0 million , or 39.0%, in product revenues during fiscal year 2020 was primarily due to 2020 Net Salon Count Changes. The impact to product revenue due to the sale of salons to franchisees and closure of salons was$61.6 million . Company-owned same-store product sales decrease of 8.7% and the temporary closure of salons in the fourth quarter also contributed to the decrease in product sales. For fiscal year 2020, the decrease in company-owned same-store product sales was the result of a decrease in company-owned same-store transactions of 12.8%, partially offset by an increase in average ticket price of 4.1%. Royalties and Fees The decrease of$20.4 million , or 21.7%, in royalties and fees for fiscal year 2020 was primarily due to the refunding of$14.9 million of previously collected contributions to the cooperative advertising funds to provide temporary relief to our franchisees and the decline in royalties in the fourth quarter is due to government-mandated salon closures. Total franchised locations open atJune 30, 2020 were 5,209 as compared to 3,951 atJune 30, 2019 . Franchise Rental Income The increase of$127.2 million in franchise rental income is due to the adoption of Topic 842 in fiscal year 2020. Prior to the adoption, the Company recorded franchise rental income and expense on a net basis. Cost of Service The 670 basis point increase in cost of service as a percent of service revenues during fiscal year 2020 was due to higher minimum wage and commissions and inefficient stylist hours. Cost of Product The 450 basis point increase in cost of product as a percent of product revenue during fiscal year 2020 was primarily due to the shift into lower margin wholesale product sales. Margins on retail product sales were 47.6% and 50.8% for fiscal years 2020 and 2019, respectively. Margins on wholesale product sales were 23.6% and 21.2% for fiscal years 2020 and 2019, respectively. The increase in wholesale product margins in fiscal year 2020 were primarily driven by lower sales to TBG. 35
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Site Operating Expenses The decrease of$69.5 million , or 49.3%, in site operating expenses during fiscal year 2020 was due to a net reduction in company-owned salon counts, a decrease in cooperative advertising expense and a decrease in marketing spend. Salons sold to franchisees and closed salons accounted for$37.8 million of the decline. The Company records advertising expense as the contributions are received as it has an obligation to spend the funds to support the brands. In fiscal year 2020, the Company refunded$14.9 million in advertising fees that were previously collected to provide temporary relief to our franchisees. Marketing expense declined as part of our strategic shift to a full-franchised business model. General and Administrative The decrease of$46.1 million , or 26.0%, in general and administrative during fiscal year 2020 was primarily due to lower administrative and field management salaries due in part to the Company's furlough program in response to the COVID-19 pandemic and reductions in headcount as we align our cost structure with our transition to an asset-light franchise model. Stock compensation benefits associated with a change in performance awards assumptions also contributed to the decrease year over year. Rent The decrease of$55.4 million , or 42.1%, in rent expense during fiscal year 2020 was primarily due to the net reduction in salon counts associated with the Company's franchise strategy. Additionally, two months of rent abatement from Walmart and a decline in percentage rent, both due to COVID-19 salon closures, also contributed to the decline, but were partially offset by rent inflation. Franchise Rent Expense The increase in franchise rent expense is due to the adoption of Topic 842 in fiscal year 2020. Prior to the adoption, the Company recorded franchise rental income and expense on a net basis. Depreciation and Amortization The decrease of$0.9 million , or 2.4%, in depreciation and amortization during fiscal year 2020 was primarily due to the net reduction in company-owned salon counts, partially offset by an intangible asset impairment of$2.5 million . Long-Lived Asset Impairment In fiscal year 2020, the Company recorded a long-lived asset impairment charge of$22.6 million which included a right of use asset impairment of$17.4 million . Prior to the Adoption of ASC 842 in fiscal year 2020, we did not record a right of use asset so there was no impairment consideration. Additionally, salon asset impairment increased in fiscal year 2020. TBG Mall Restructuring In fiscal year 2020, the Company incurred professional fees associated with acquiring salons from TBG. In fiscal year 2019, the Company recorded a reserve against a note receivable of$8.0 million and accounts receivables of$12.7 million due from TBG primarily for inventory shipments. Goodwill Impairment In fiscal year2020, Company recorded$40.2 million of goodwill impairment related to the Company-owned reporting unit. The Company's forecasted cash flows for company-owned salons decreased significantly due to the impact of the COVID-19 pandemic. As a result, the carrying value of the Company-owned reporting unit exceeded its fair value resulting in a full impairment of goodwill. Interest Expense The increase of$2.7 million in interest expense for fiscal year 2020 was primarily due to interest charges associated with the Company's long-term financing liabilities and the interest associated with the additional borrowing in fiscal year 2020. 36
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(Loss)/Gain from sale of salon assets to franchisees, net In fiscal year 2020, the loss from sale of salon assets to franchisees was$27.3 million , including non-cash goodwill derecognition of$77.0 million . In fiscal year 2019, the gain from sale of salon assets to franchisees was$2.9 million , including non-cash goodwill derecognition of$67.1 million . The decrease year over year is due to lower proceeds per salon sold in fiscal year 2020 compared to fiscal year 2019 as the Company sold more Supercuts salons in fiscal year 2019, which typically vendition for greater proceeds than other concepts. In fiscal year 2020, average proceeds per salon were$62.1 thousand compared to$123.6 thousand in fiscal year 2019. Interest Income and Other, net The increase of$1.6 million , or 93.9%, in interest income and other, net during fiscal year 2020 was primarily due to the gain on the sale of the Company's headquarters of$2.5 million , partially offset by a decline in interest income. Income Taxes During fiscal year 2020, the Company recognized a tax benefit of$4.6 million , with a corresponding effective tax rate of 2.6% as compared to recognizing tax benefit of$2.1 million , with a corresponding effective tax rates of 9.6% during fiscal year 2019. See Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. Income from Discontinued Operations Income from discontinued operations decreased$5.1 million , or 85.9%, during fiscal year 2020, due to the lapping of income tax benefits associated with the wind-down and transfer of legal entities related to discontinued operations recognized in the second quarter of fiscal year 2019, partially offset by beneficial actuarial adjustments recognized in the current year. Fiscal Year EndedJune 30, 2019 Compared with Fiscal Year EndedJune 30, 2018 Consolidated Revenues Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees. Service revenue decreased$149.7 million , or 16.6%, primarily due to the sale of salons to franchisees and a decline in company-owned same-store service sales of 0.3%. The Company closed 133 company-owned salons, constructed (net of relocations) 10 company-owned salons and sold (net of buybacks) 735 company-owned salons during fiscal year 2019 (2019 Net Salon Count Changes). Product revenue decreased$33.1 million or 12.8% due to lower sales to TBG and a system-wide decline of retail sales of 2.4% excluding TBG. Partially offsetting these decreases was an increase in royalty and fee revenue of$16.4 million , or 21.1%, due to the net addition of 644 non-TBG franchisees during the year. Service Revenues The$149.7 million decrease in service revenues during fiscal year 2019 was primarily due to the 2019 Net Salon Count Changes and a decrease in company-owned same-store service sales of 0.3%, which was primarily a result of a 4.7% decrease in same-store guest visits, partially offset by a 4.4% increase in average ticket price. Service revenues were also unfavorably impacted by a cumulative adjustment in the prior year related to discontinuing a piloted loyalty program that occurred in the prior year. Product Revenues The$33.1 million decrease in product revenues during fiscal year 2019 was primarily due to 2019 Net Salon Count Changes, a decline in product sold to TBG, the lapping of a one-time benefit related to discounted close-out product sales as part of the SmartStyle operational restructuring in the prior year and a decline in system-wide same-store product sales excluding TBG of 2.4%. The decrease in system-wide same-store product sales excluding TBG was primarily a result of a 6.0% decrease in transactions, partially offset by an increase in average ticket price of 3.6%. Royalties and Fees The increase of$16.4 million in royalties and fees during fiscal year 2019 was primarily due to higher royalties and advertising fund revenue due to an increase of 644 non-TBG franchisees in fiscal year 2019 and an increase of 0.3% in same-store sales at franchised locations excluding TBG. 37
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Cost of Service The 140 basis point increase in cost of service as a percent of service revenues during fiscal year 2019 was primarily due to state minimum wage increases, a favorable shrink adjustment in the prior year and a one-time benefit from a settlement in fiscal year 2018. Cost of Product The 280 basis point increase in cost of product as a percent of product revenues during fiscal year 2019 was primarily due to higher discounting, the shift to lower margin wholesale product sales, favorable shrink adjustment in the prior year and a one-time benefit from a settlement in the prior year, partially offset by inventory reserves in the prior year related to theJanuary 2018 SmartStyle portfolio restructure and lower franchise product sold to TBG. Margins on retail product sales were 50.8% and 52.0% in fiscal years 2019 and 2018, respectively. Margins on wholesale product sales were 21.2% and 21.6% in fiscal years 2019 and 2018, respectively. Site Operating Expenses Site operating expenses decreased$13.0 million during fiscal year 2019 due primarily to the 2019 Net Salon Count Changes, partially offset by higher advertising fund expense due to the increase in franchise salon counts, higher employment litigation reserves and higher contract maintenance, repairs and services costs related to open salons. General and Administrative General and administrative expense increased by$3.0 million during fiscal year 2019 primarily due to an$8.0 million gain in the prior year associated with life insurance proceeds, increased stock compensation and professional fees, partially offset by lower administrative, corporate and field salaries and bonuses.Rent Rent expense decreased by$51.3 million during fiscal year 2019 primarily due to lease termination fees and other related closure costs associated with theJanuary 2018 SmartStyle portfolio restructure and the 2019 Net Salon Count Changes, partially offset by rent inflation. Depreciation and Amortization Depreciation and amortization expense decreased$20.4 million during fiscal year 2019, primarily due to costs in the prior year associated with returning certain SmartStyle locations to their pre-occupancy condition in connection with theJanuary 2018 SmartStyle restructuring and lower depreciation due to a reduced salon base and lower salon asset impairments. TBG Mall Restructuring In fiscal year 2019, the Company recorded a reserve against a note receivable of$8.0 million and accounts receivables of$12.7 million due from TBG based on TBG's inability to meet the requirements of the promissory notes, including non-payment of amounts due to the Company. The$8.0 million note relates to prior year inventory shipments and the$12.7 million of receivables primarily relates to current year inventory shipments. The remaining charge relates to reserves in connection with the settlement agreement with TBG inJune 2019 . There were no related TBG mall restructuring charges in fiscal year 2018. Interest Expense Interest expense decreased by$5.7 million during fiscal year 2019 primarily due to a lower outstanding principal and lower interest rates associated with the revolving credit facility compared to the retired senior term note and the lapping of the premium and unamortized debt discount expense associated with retirement of the senior term note inMarch 2018 . Gain from sale of salon assets to franchisees, net In fiscal year 2019, the gain from sale of salon assets to franchisees was$2.9 million , including non-cash goodwill derecognition of 67.1 million. In fiscal year 2018, the gain from the sale of salons assets to franchisees was$0.2 million , including$3.9 million of non-cash goodwill derecognition. Interest Income and Other, net The$3.5 million decrease in interest income and other, net during fiscal year 2019 was primarily due to prior year income from transition services related to TBG and the lapping of interest income associated with life insurance contracts settled inJune 2018 . 38
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Income Taxes During fiscal year 2019, the Company recognized an income tax benefit of$2.1 million on$22.3 million of loss from continuing operations before income taxes as compared to recognizing income tax benefit of$69.8 million on$10.2 million of loss from continuing operations before income taxes during fiscal year 2018. The recorded tax provision and effective tax rate for the twelve months endedJune 30, 2019 were different than what would normally be expected primarily due to the deferred tax valuation allowance. Additionally, the Company is currently paying taxes inCanada and certain states in which it has profitable entities. See Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. Income (Loss) from Discontinued Operations Income from TBG discontinued operations was$5.9 million during fiscal year 2019 primarily due to tax benefits associated with the wind-down and transfer of legal entities. During fiscal year 2018, the Company recognized$53.2 million of loss, net of taxes from TBG discontinued operations, primarily due to asset impairment charges based on the sale prices and the carrying values of the mall-based salon business and the International segment, the recognition of net loss of amounts previously classified within accumulated other comprehensive income, professional fees associated with the transactions and losses from operations. See Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. 39
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Results of Operations by Segment Based on our internal management structure, we report two segments: Franchise salons and Company-owned salons. See Note 15 to the Consolidated Financial Statements in in Part II, Item 8, of this Form 10-K. Significant results of operations are discussed below with respect to each of these segments. Franchise Salons Fiscal Years 2020 2019 2018 2020 2019 (Dollars in millions) Increase (Decrease) Revenue Product$ 50.4 $ 42.9 $ 34.6 $ 7.5 $ 8.3 Product sold to TBG 2.0 17.0 19.1 (15.0) (2.1) Total Product$ 52.4 $ 59.9 $ 53.7 $ (7.5) $ 6.2 Royalties and fees (1) 73.4 93.8 77.4 (20.4) 16.4 Franchise rental income 127.2 - - 127.2 -
Total franchise salons revenue (2)
Franchise same-store sales (3) (4.4) % 0.3 %
2.1 %
Operating income$ 35.2 $ 36.4 $ 34.0 $ (1.2) $ 2.4 Operating (loss) income from TBG (2.3) (20.2) 1.6 17.9 (21.9) Total operating income (2)$ 32.9 $ 16.1 $ 35.6 $ 16.7 $ (19.5)
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(1)Includes$1.6 million and$1.2 million of royalties related to TBG during the fiscal years 2019 and 2018, respectively. (2)Total is a recalculation; line items calculated individually may not sum to total due to rounding. (3)Franchise same-store sales are calculated as the total change in sales for salons that have been a franchise location for more than one year that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. 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. Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation. TBG salons were not a franchise location in fiscal years 2018 or 2020 so by definition they are not included in franchise same-store sales in 2018 or 2020. TBG same-store sales are excluded from fiscal year 2019 same-store sales to be comparative to fiscal years 2018 and 2020.
Franchise same-store sales by concept are detailed in the table below:
Fiscal Years 2020 2019 2018 SmartStyle (9.7) % (5.6) % (3.0) % Supercuts (4.0) % 0.8 % 2.1 % Signature Style (3.5) % 0.1 % 2.1 % Total (4.4) % 0.3 % 2.1 % 40
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Fiscal Year EndedJune 30, 2020 Compared with Fiscal Year EndedJune 30, 2019 Franchise Salon Revenues Franchise salon revenues increased$99.4 million during fiscal year 2020, excluding franchise rental income recorded as a result of the adoption of Topic 842, franchise salon revenues decreased$27.8 million compared to the prior comparable period. The decrease was due to the refund of previously collected contributions to the cooperative advertising funds, a waiver of fourth quarter advertising fees, as well as franchise product sales to TBG. Royalties were flat year over year despite the increase in franchise salon count, due to the fourth quarter government-mandated salon closures. Franchisees purchased (net of Company buybacks) 1,448 salons from the Company and constructed (net of relocations) and closed 47 and 237 franchise-owned salons, respectively. Franchise Salon Operating Income During fiscal year 2020, Franchise salon operations generated operating income of$32.9 million , an increase of$16.7 million compared to the prior comparable period. The increase was primarily due to the decrease in TBG mall restructuring costs. Cash Generated from Salons Sold to Franchisees During fiscal years 2020 and 2019, the Company generated$91.6 million and$94.8 million of cash respectively, from the sale of company-owned salons to franchisees. The decrease is due to lower proceeds per salon sold partially offset by an increase in the number of salons sold. Fiscal Year EndedJune 30, 2019 Compared with Fiscal Year EndedJune 30, 2018 Franchise Salon Revenues Franchise salon revenues increased$22.6 million during fiscal year 2019 due to a$8.3 million increase in franchise product sales and a$16.4 million increase in royalties and fees as a result of higher franchise salons counts, partially offset by lower product sales to TBG. Our franchisees constructed (net of relocations) 65 salons, purchased (net of Company buybacks) 735 salons from the Company and closed 156 salons (excluding TBG mall locations). Franchise Salon Operating Income Franchise salon operating income excluding TBG increased$2.4 million due to higher product and royalty revenue as a result of the increase in franchise salon count. Franchise salon operating income including TBG, decreased$19.5 million during fiscal year 2019 due to the TBG restructuring charge of$21.8 million related primarily to notes and accounts receivable reserves. Cash Generated from Salons Sold to Franchisees During fiscal years 2019 and 2018, the Company generated$94.8 million and$11.6 million of cash respectively, from the sale of company-owned salons to franchisees. 41
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Table of Contents Company-owned Salons Fiscal Years 2020 2019 2018 2020 2019 (Dollars in millions) Increase (Decrease) Total revenue$ 416.7 $ 915.4 $ 1,104.4 $ (498.7) $ (189.0) Company-owned same-store sales (4.4) % (0.4) %
0.4 % (400 bps) (80 bps)
Operating (loss) income$ (96.1) $ 58.3 $ 50.5 $ (154.4) $ 7.8 Salon counts 1,632 3,108 3,966 Fiscal Years 2020 2019 2018 SmartStyle (4.4) % 1.5 % 0.3 % Supercuts (5.3) % (2.3) % 1.7 % Signature Style (4.0) % (1.3) % (0.2) % Total (4.4) % (0.4) % 0.4 % Fiscal Year EndedJune 30, 2020 Compared with Fiscal Year EndedJune 30, 2019 Company-owned Salon Revenues Company-owned salon revenues decreased$498.7 million in fiscal year 2020, primarily due to the closure of a net 250 salons and the sale of 1,448 company-owned salons (net of buybacks) to franchisees during the year and the government-mandated temporary closure of our salons in third and fourth quarters due to the COVID-19 pandemic. The decreases were also due to company-owned same-store sale decrease of 4.4%. The company-owned same-store sales decrease was due to a decrease of 7.7% in same-store guest transactions, which were negatively impacted by the COVID-19 pandemic. This decrease was partially offset by an increase of 3.3% in average ticket prices. Company-owned Salon Operating (Loss) Income During fiscal year 2020, the company-owned salon operations incurred an operating loss of$96.1 million , compared to operating income of$58.3 million in the prior comparable period. The decrease was primarily due to the$71.9 million reduction in operating income due to the reduction in company-owned salons, the recording of a$40.2 million goodwill impairment charge due to the economic disruption of COVID-19, the closure of company-owned salons due to the COVID-19 pandemic, same-store sales decline and the right of use asset impairment. These declines were partially offset by an overall decline in general and administrative expense and marketing spend. Fiscal Year EndedJune 30, 2019 Compared with Fiscal Year EndedJune 30, 2018 Company-owned Salons Revenues Company-owned salon revenues decreased$189.0 million in fiscal year 2019, primarily due to the 2019 Net Salon Count Changes and same-store sales decrease of 0.4%. The same-store sales decrease was due to a 4.7% decrease in same-store guest visits, partially offset by a 4.3% increase in average ticket price. Company-owned Salon Operating Income Company-owned salon operating income increased$7.8 million during fiscal year 2019, primarily due to theJanuary 2018 SmartStyle portfolio restructure consisting of lease termination and other related closure costs and costs associated with returning the salons to pre-occupancy condition, and field general and administrative savings primarily due to lower headcount. These increases were partially offset by the 2019 Net Salon Count Changes, state minimum wage increases, rent inflation and marketing investments. 42
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Corporate
Fiscal Year EndedJune 30, 2020 Compared with Fiscal Year EndedJune 30, 2019 Corporate Operating Loss (1) Corporate operating loss of$82.1 million decreased$14.5 million during fiscal year 2020, primarily driven by lower general and administrative salaries and stock compensation benefits associated with a change in performance awards assumptions during the year, partially offset by the prior year's franchise convention cost, which was recorded as Corporate expenses in fiscal year 2020 compared to Franchise expense in fiscal year 2019. Fiscal Year EndedJune 30, 2019 Compared with Fiscal Year EndedJune 30, 2018 Corporate Operating Loss (1) Corporate operating loss of$96.6 million increased$5.3 million during fiscal year 2019 primarily driven by a prior year gain of$8.0 million associated with life insurance proceeds, partially offset by savings realized from Company initiatives, including lowering headcount and lower incentive compensation. _______________________________________________________________________________ (1) The Corporate operating loss consists primarily of unallocated general and administrative expenses, including expenses associated with salon support, depreciation and amortization related to our corporate headquarters and unallocated insurance, benefit and compensation programs, including stock-based compensation. Recent Accounting Pronouncements Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. LIQUIDITY AND CAPITAL RESOURCES Sources of Liquidity Funds generated by operating activities, available cash and cash equivalents, proceeds from sale of salons sold to franchisees, and our borrowing agreements are our most significant sources of liquidity. As ofJune 30, 2020 , cash and cash equivalents were$113.7 million , with$110.9 ,$2.6 and$0.2 million withinthe United States ,Canada andEurope , respectively. The Company has a credit agreement which provides for a$295.0 million five-year unsecured revolving credit facility that expires inMarch 2023 , of which$96.5 million was available as ofJune 30, 2020 . See additional discussion under Financing Arrangements and Note 8 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. Uses of Cash The Company closely manages its liquidity and capital resources. The Company's liquidity requirements depend on key variables, including the performance of the business, the level of investment needed to support its business strategies, capital expenditures, credit facilities and borrowing arrangements and working capital management. Capital expenditures are a component of the Company's cash flow and capital management strategy, which can be adjusted in response to economic and other changes to the Company's business environment. The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities to support the Company's response to the COVID-19 pandemic, as well as its multi-year strategic plan as discussed within Part I, Item 1. 43
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Cash Flows Cash Flows (Used In) Provided by Operating Activities During fiscal year 2020, cash used in operating activities was$86.4 million . Cash from operations declined due to lower revenues and margins and the refunding of the cooperative advertising funds to Franchisees as a direct result of the COVID-19 pandemic, as well as lower same-store sales, partially offset by the elimination of certain general and administrative costs. During fiscal year 2019, cash used in operating activities was$17.5 million , primarily as a result of a decline in Company-owned operating margin, strategic investment in new retail product lines and planned strategic G&A investments to enhance the Company's franchisor capabilities and support the increase in volume and cadence of transactions and conversions into the Franchise portfolio, partially offset by the elimination of certain general and administrative costs. During fiscal year 2018, cash provided by operating activities was$2.6 million , primarily due to operating margin, partially offset by the payment of lease termination and other related closure costs associated with the Company'sJanuary 2018 SmartStyle portfolio restructures. Cash Flows from Investing Activities During fiscal year 2020, cash provided by investing activities of$61.0 million was primarily from cash proceeds from sale of salon assets of$91.6 million and the sale of the Company's headquarters of$9.0 million , partially offset by capital expenditures of$37.5 million . During fiscal year 2019, cash provided by investing activities of$87.8 million was primarily from cash proceeds from sale of salon assets of$94.8 million and proceeds from company-owned life insurance policies of$24.6 million , partially offset by capital expenditures of$31.6 million . During fiscal year 2018, cash used in investing activities of$1.1 million was primarily from capital expenditures of$30.7 million , partially offset by cash proceeds from company-owned life insurance policies of$18.1 million and cash proceeds from sale of salon assets of$11.6 million . Cash Flows from Financing Activities During fiscal year 2020, cash provided by financing activities of$56.2 million was primarily due to the net$87.5 million draw on the Company's line of credit and the repurchase of common stock of$28.2 million . During fiscal year 2019, cash used in financing activities of$126.7 million was primarily for repurchase of common stock of$152.7 million and employee taxes paid for shares withheld of$2.5 million , partially offset by proceeds from the sale and leaseback of the Company's distribution centers of$28.8 million . During fiscal year 2018, cash used in financing activities of$62.2 million was primarily for repayments of long-term debt relating to the 5.5% senior term notes of$124.2 million , repurchase of common stock of$24.8 million , employee taxes paid for shares withheld of$2.4 million and settlement of equity awards of$0.8 million , partially offset by borrowings on the revolving credit facility of$90.0 million . Financing Arrangements Financing activities are discussed in Note 8 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. Derivative activities are discussed in Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk." The Company's financing arrangements consists of the following: June 30, Maturity Dates 2020 2019 2020 2019 (Dollars in (Fiscal year) (Interest rate %) thousands) Revolving credit facility 2023 5.50% 3.65%$ 177,500 $ 90,000 Long-term financing lease liability 2034 3.30% 3.30% 16,773 17,354 Long-term financing lease liability 2034 3.70% 3.70% 11,208 11,556$ 205,481 $ 118,910 44
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As ofJune 30, 2020 and 2019, the Company had$177.5 and$90 million , respectively, of outstanding borrowings under a$295.0 million revolving credit facility. The five-year revolving credit facility expires inMarch 2023 and includes a minimum liquidity covenant of not less than$75.0 million , provides the Company's lenders security in substantially all of the Company's assets, adds additional guarantors and grants a first priority lien and security interest to the lenders in substantially all of the Company's and the guarantors' existing and future property. The revolving credit facility includes a$30.0 million sub-facility for the issuance of letters of credit and a$30.0 million sublimit for swingline loans. The Company may request an increase in revolving credit commitments under the facility of up to$115.0 million under certain circumstances. The applicable margin for loans bearing interest at LIBOR ranges from 3.75%-4.25%, the applicable margin for loans bearing interest at the base rate ranges from 2.75%-3.25% and the facility fee ranges from 0.5%-0.75%, each depending on average utilization of the revolving line of credit. In fiscal year 2019, the Company sold itsSalt Lake City andChattanooga Distribution Centers to an unrelated party. The Company is leasing the properties back for 15 years with the option to renew. As the Company plans to lease the property for more than 75% of its economic life, the sales proceeds received from the buyer-lessor are recognized as a financial liability. This financial liability is reduced based on the rental payments made under the lease that are allocated between principal and interest. Our debt to capitalization ratio, calculated as the principal amount of debt as a percentage of the principal amount of debt and shareholders' equity at fiscal year-end, was as follows: Debt to Basis Point As of June 30, Capitalization Increase (Decrease)(1) 2020 62.0 % 3,520 2019 26.8 % 1,120 2018 15.6 % (400)
_______________________________________________________________________________ (1)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, 2020 compared toJune 30, 2019 was primarily due to the increase in the Company's borrowings. The basis point increase in the debt to capitalization ratio as ofJune 30, 2019 compared toJune 30, 2018 was primarily due to the repurchase of$8.6 million shares of common stock for$152.7 million . Contractual Obligations and Commercial Commitments The following table reflects a summary of obligations and commitments outstanding by payment date as ofJune 30, 2020 : Payments due by period Within More than Contractual Obligations Total 1 year 1 - 3 years 3 - 5 years 5 years (Dollars in thousands) On-balance sheet: Debt obligations$ 177,500 $
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Finance lease liabilities (1) 29,235 1,974 4,028 4,136 19,097 Other long-term liabilities 7,014 1,114 1,707 1,329 2,864 Operating lease obligations (1)(2) 933,115 166,635 283,019 224,856 258,605 Total$ 1,146,864 $ 169,723 $ 466,254 $ 230,321 $ 280,566
_______________________________________________________________________________
(1)The total lease liability does not include interest. Payments due by period are the payments due per the lease agreement and include embedded interest. Therefore, the total payments do not equal the liability. (2)Upon adoption of ASC 842 in fiscal year 2020, the operating leases were recorded on the balance sheet so there are no off-balance sheet liabilities. On-Balance Sheet Obligations Our debt obligations are primarily composed of our revolving credit facility atJune 30, 2020 . 45
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Finance lease liabilities are related to sale and leaseback transactions for two distribution centers atJune 30, 2020 . Other long-term liabilities of$7.0 million include$4.4 million related to a Non-qualified Deferred Salary Plan and a salary deferral program of$2.6 million related to established contractual payment obligations under retirement and severance agreements for a small number of employees. Operating leases primarily represent long-term obligations for the rental of salons, including leases for company-owned locations, as well as salon franchisee lease obligations, which are reimbursed to the Company by franchisees. Regarding franchisee subleases, we generally retain the right to the related salon assets, net of any outstanding obligations, in the event of a default by a franchise owner. The Company has not experienced any material losses as a result from these arrangements; however, the COVID-19 pandemic may result in an increase in defaults which may be material. This table excludes short-term liabilities disclosed on our balance sheet as the amounts recorded for these items will be paid in the next year. We have no unconditional purchase obligations. Also excluded from the contractual obligations table are payment estimates associated with employee health and workers' compensation claims for which we are self-insured. The majority of our recorded liability for self-insured employee health and workers' compensation losses represents estimated reserves for incurred claims that have yet to be filed or settled. The Company has unfunded deferred compensation contracts covering certain management and executive personnel. Because we cannot predict the timing or amount of future payments related to these contracts, such amounts were not included in the table above. See Note 11 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. As ofJune 30, 2020 , we have liabilities for uncertain tax positions. We are not able to reasonably estimate the amount by which the liabilities will increase or decrease over time; however, at this time, we do not expect a significant payment related to these obligations within the next fiscal year. See Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. Off-Balance Sheet Arrangements Interest payments on long-term debt are calculated based on the revolving credit facility's rates. The applicable margin for loans bearing interest at LIBOR ranges from 3.75%-4.25%, the applicable margin for loans bearing interest at the base rate ranges from 2.75%-3.25% and the facility fee ranges from 0.5%-0.75%, each depending on average utilization of the revolving line of credit. We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business. These contracts primarily relate to our commercial contracts, operating leases and other real estate contracts, financial agreements, agreements to provide services and agreements to indemnify officers, directors and employees in the performance of their work. While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that we expect will result in a material liability. We do not have other unconditional purchase obligations or significant other commercial commitments such as standby repurchase obligations or other commercial commitments. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes atJune 30, 2020 . As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. Dividends InDecember 2013 , the Board of Directors elected to discontinue declaring regular quarterly dividends. Share Repurchase Program InMay 2000 , the Company's Board of Directors (Board) approved a stock repurchase program with no stated expiration date. Since that time and throughJune 30, 2020 , the Board has authorized$650.0 million to be expended for the repurchase of the Company's stock under this program. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depends on many factors, including the market price of the common stock and overall market conditions. During fiscal year 2020, the Company repurchased 1.5 million shares for$26.4 million . As ofJune 30, 2020 , 30.0 million shares have been cumulatively repurchased for$595.4 million , and$54.6 million remained outstanding under the approved stock repurchase program. 46
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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 in Part II, Item 8, of this Form 10-K. We believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.Goodwill As ofJune 30, 2020 and 2019, the Company-owned reporting unit had$0.0 and$117.8 million of goodwill, respectively, and the Franchise reporting unit had$227.5 and$227.9 million of goodwill, respectively. See Note 5 to the Consolidated Financial Statements. The Company assesses goodwill impairment on an annual basis, during the Company's fourth fiscal quarter, and between annual assessments if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount.Goodwill impairment assessments are performed at the reporting unit level, which is the same as the Company's operating segments. The goodwill assessment involves a one-step comparison of the reporting unit's fair value to its carrying value, including goodwill (Step 1). If the reporting unit's fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit's fair value is less than the carrying value, an impairment charge is recorded for the difference between the fair value and carrying value of the reporting unit. In applying the goodwill impairment assessment, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than its carrying value (Step 0). Qualitative factors may include, but are not limited to, economic, market and industry conditions, cost factors, and overall financial performance of the reporting unit. If after assessing these qualitative factors, the Company determines it is "more-likely-than-not" that the carrying value is less than the fair value, then performing Step 1 of the goodwill impairment assessment is unnecessary. The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units. Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons or expenses of the reporting unit as a percentage of total company expenses. The Company calculates estimated fair values of the reporting units based on discounted cash flows utilizing estimates in annual revenue, service and product margins, fixed expense rates, allocated corporate overhead, corporate-owned and franchise salon counts, proceeds from the sale of company-owned salons to franchisees and long-term growth rates for determining terminal value. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company engages third-party valuation consultants to assist in evaluating the Company's estimated fair value calculations. See Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K 47
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Long-Lived Assets, Excluding Goodwill The Company assesses impairment of long-lived salon and right of use assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets. The first step is to assess recoverability and in doing that the undiscounted cash flows are compared to the carrying value. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the difference between the carrying value of the asset group and its fair value. The fair value of the salon long-lived asset group are estimated using a market participant model based on the best information available, including salon level revenues and expenses. The fair value of the right of use asset is estimated by determining what a market participant would pay over the life of the primary asset in the group, discounted back toJune 30, 2020 . The impairment is allocated to long-lived assets based on relative carrying value, but not impaired below fair value. Long-lived property and equipment asset impairment charges related to continuing operations of$3.9 ,$4.6 and$11.1 million were recorded during fiscal years 2020, 2019 and 2018, respectively in Depreciation and Amortization in the Consolidated Statement of Operations. A long-lived asset, including right of use and salon property and equipment, impairment charge of$22.6 million was recorded during fiscal year 2020 and is separately stated on Consolidated Statement of Operations. Of the total$22.6 million long-lived asset impairment charge,$17.4 million was allocated to the right of use asset and$5.2 million was allocated to salon property and equipment. Judgments made by management related to the expected useful lives of salon 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. Right of use asset values are impacted by market rent rates. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize material impairment charges. Income Taxes Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. The Company evaluates all evidence, including recent financial performance, the existence of cumulative year losses and our forecast of future taxable income, to assess the need for a valuation allowance against our deferred tax assets. While the determination of whether or not to record a valuation allowance is not fully governed by a specific objective test, accounting guidance places significant weight on recent financial performance. The Company has a valuation allowance on its deferred tax assets amounting to$122.4 and$70.7 million atJune 30, 2020 and 2019, respectively. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make necessary adjustments to the deferred tax asset valuation, which would reduce the provision for income taxes. Significant components of the valuation allowance which occurred during fiscal year 2020 are as follows: •In connection with the Coronavirus Aid, Relief and Economic Security Act (CARES Act), Net Operating Losses (NOLs) resulting from accounting periods which straddledDecember 31, 2017 are now considered definite-lived NOLs. Therefore, the Company established a valuation allowance against theU.S. NOLs generated during its fiscal year 2018 and recorded a net tax expense of$14.7 million . •The Company determined that it no longer had sufficientU.S. indefinite-lived taxable temporary differences to support realization of itsU.S. indefinite-lived NOLs and its existingU.S. deferred tax assets that upon reversal are expected to generate indefinite-lived NOLs. As a result, the Company recorded an additional$17.0 million valuation allowance on itsU.S. federal indefinite-lived deferred tax assets. •The Company recognized a capital loss and established a corresponding valuation allowance of$14.9 million on investment outside basis previously impaired for financial accounting purposes. 48
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The Company reserves for unrecognized tax benefits, interest and penalties related to anticipated tax audit positions in theU.S. and other tax jurisdictions based on an estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of these liabilities would result in tax benefits being recognized in the period in which it is determined that the liabilities are no longer necessary. If the estimate of unrecognized tax benefits, interest and penalties proves to be less than the ultimate assessment, additional expenses would result. Inherent in the measurement of deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to the Company's operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities. See Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
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