Sally Beauty Supply 2011 Annual Report Download - page 140

Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2011, 2010 and 2009
sheet date. Management does not expect the outcome of tax audits to have a material adverse effect on the
Company’s financial condition, results of operations or cash flow.
At September 30, 2011, undistributed earnings of the Company’s foreign operations are intended to
remain permanently invested to finance anticipated future growth and expansion. Accordingly, federal and
state income taxes have not been provided on accumulated but undistributed earnings of $110.6 million
and $76.5 million as of September 30, 2011 and 2010, respectively, as such earnings have been permanently
reinvested in the business. The determination of the amount of the unrecognized deferred tax liability
related to the undistributed earnings is not practicable.
At September 30, 2011 and 2010, the Company had total operating loss carry-forwards of $62.5 million and
$53.3 million, respectively, of which $50.1 million and $46.1 million, respectively, are subject to a valuation
allowance. At September 30, 2011, operating loss carry-forwards of $23.6 million expire between 2013 and
2026 and operating loss carry-forwards of $38.9 million have no expiration date. At September 30, 2011
and 2010, the Company had tax credit carryforwards of $1.1 million and $0.8 million, respectively, which
have no expiration date and of which $0.5 million and $0.4 million, respectively, are subject to a valuation
allowance.
The transactions separating us from Alberto-Culver were intended to qualify as a reorganization under
Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’) and a distribution
eligible for non-recognition under Sections 355(a) and 361(c) of the Code. In connection with the share
distribution of Alberto-Culver common stock in the Separation Transactions, we received: (i) a private
letter ruling from the IRS; and (ii) an opinion of Sidley Austin LLP, counsel to Alberto-Culver, in each
case, to the effect that the transactions qualify as a reorganization under Section 368(a)(1)(D) of the Code
and a distribution eligible for non-recognition under Sections 355(a) and 361(c) of the Code.
Certain internal restructurings also occurred at or immediately prior to the Separation Transactions. As a
result of the internal restructurings and Separation Transactions, the Company inherited the federal tax
identification number of the old Alberto-Culver parent for U.S. federal income tax purposes. In addition,
as the successor entity to Alberto-Culver after the Separation Transactions, the Company relies upon the
prior year federal income tax returns of Alberto-Culver, and accounting methods established therein, for
certain calculations that affect our current U.S. federal income tax liability.
The Company and Alberto-Culver entered into a tax allocation agreement as part of the Separation
Transactions. The agreement provides generally that the Company is responsible for its pre-separation
income tax liabilities, calculated on a stand-alone basis, and Alberto-Culver is responsible for the
remainder. In the event additional U.S federal income tax liability related to the period prior to the
Separation Transactions was determined, the Company will be jointly and severally liable for these taxes,
and there can be no assurance that Alberto-Culver would be able to fulfill its indemnification obligations
to the Company under the tax allocation agreement if Alberto-Culver was determined to be responsible for
these taxes thereunder.
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