Sally Beauty Supply 2011 Annual Report Download - page 67

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Beauty Systems Group. BSG’s segment operating earnings increased by $52.2 million, or 46.4%, to
$164.7 million for the fiscal year ended September 30, 2011, compared to the fiscal year ended
September 30, 2010. The increase in BSG’s operating earnings was primarily a result of improved gross
margins, the incremental operating earnings of businesses acquired and stores opened during the past
12 months (BSG had an additional 127 company-operated stores at the end of the fiscal year 2011,
including 82 stores resulting from the October 2010 acquisition of Aerial), and to ongoing cost reduction
initiatives. In addition, for the fiscal year ended September 30, 2011, BSG’s operating earnings reflect a
credit resulting from a litigation settlement (approximately $24.7 million), partially offset by certain
non-recurring charges ($5.7 million) that include costs related to the closure of a warehouse. Segment
operating earnings, as a percentage of net sales, increased to 13.1% for the fiscal year ended September 30,
2011, compared to 10.4% for the fiscal year ended September 30, 2010. In addition to the impact of the
credit from the litigation settlement, this increase reflects the growth in the segment’s gross margin
described above, as well as a lower growth rate in the segment’s operating expenses compared to the
growth rate in the segment’s gross profit.
Unallocated expenses. Unallocated expenses, which represent corporate costs (such as payroll, employee
benefits and travel expenses for corporate staff, certain professional fees and corporate governance
expenses) that have not been charged to our operating segments, increased by $2.4 million, or 3.0%, to
$81.6 million for the fiscal year ended September 30, 2011, compared to the fiscal year ended
September 30, 2010. This increase was due to higher corporate expenses related primarily to on-going
upgrades to our information technology systems ($2.7 million). During the fiscal year ended September 30,
2011, $2.3 million of the benefit from a litigation settlement offset corporate expenses incurred in
connection with the litigation.
Share-based Compensation Expense. Total compensation cost charged against income for share-based
compensation arrangements increased by $2.7 million to $15.6 million for the fiscal year ended
September 30, 2011, compared to the fiscal year ended September 30, 2010. This increase was due to the
incremental expenses related to, as well as the higher fair value at the grant date of, share-based awards
during the fiscal year ended September 30, 2011, compared to share-based awards during the fiscal year
ended September 30, 2010, partially offset by the impact of share-based awards that became fully vested
during the fiscal year ended September 30, 2011.
Interest Expense
Interest expense decreased by $0.5 million, to $112.5 million for the fiscal year ended September 30, 2011,
compared to the fiscal year ended September 30, 2010. Interest expense is net of interest income of
$0.3 million and $0.2 million for the fiscal year ended September 30, 2011 and 2010, respectively. The
decrease in interest expense was primarily attributable to lower outstanding principal balances on our
senior term loans ($3.0 million) and to lower interest-rate differential charges incurred in connection with
interest rate swaps ($2.3 million), partially offset by unamortized deferred financing costs expensed in the
fiscal year 2011 ($2.8 million) in connection with: (a) prepayments of long-term debt and (b) our
November 2010 termination of our prior ABL credit facility. The decrease also reflects non-cash income
($2.4 million) in the fiscal year 2010 of marked-to-market adjustments for certain interest rate swaps which
expired in November 2009 with no comparable amount in the fiscal year 2011 (please see Note 16 of the
Notes to Consolidated Financial Statements in Item 8—‘‘Financial Statements and Supplementary Data’’
contained elsewhere in this Annual Report for additional information about the Company’s interest rate
swaps and ‘‘Liquidity and Capital Resources’’ below for additional information about our credit facilities).
Provision for Income Taxes
Provision for income taxes was $122.2 million during the fiscal year ended September 30, 2011, compared
to $84.1 million for the fiscal year ended September 30, 2010. The effective tax rate is 36.4% for fiscal year
2011, compared to 36.9% for fiscal year 2010. The decrease in the annual effective tax rate was primarily
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