Sally Beauty Supply 2011 Annual Report Download - page 85

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2011 exchange rate) at the contractual exchange rate of 1.3610, a foreign currency forward which enabled
us to buy approximately $18.3 million Canadian dollars ($17.5 million, at the September 30, 2011 exchange
rate) at the contractual exchange rate of 1.01855 and a foreign currency forward which enabled us to buy
approximately £5.6 million ($8.7 million, at the September 30, 2011 exchange rate) at the contractual
exchange rate of 1.5630. All the foreign currency forwards held by the Company at September 30, 2011
expired in October 2011.
The Company’s foreign currency option and forward agreements are not designated as hedges and do not
currently meet the requirements for hedge accounting. Accordingly, the changes in the fair value
(i.e., marked-to-market adjustments) of these derivative instruments (which are adjusted quarterly) are
recorded in selling, general and administrative expenses in our consolidated statements of earnings. During
the fiscal year ended September 30, 2011, these derivative instruments did not have a material impact in
our consolidated results of operations or consolidated cash flows.
Interest rate risk
As a result of the debt financing incurred in connection with the Separation Transactions, we are subject to
interest rate market risk in connection with our long-term debt. The principal interest rate exposure relates
to amounts borrowed under the term loan B and the ABL facilities. Based on the approximately
$696.9 million of borrowings under the term loan B facility and the ABL credit facility as of September 30,
2011, a change in the estimated applicable interest rate up or down by 1⁄8% will increase or decrease
earnings, before provision for income taxes, by approximately $0.9 million on an annual basis, without
considering the effect of any interest rate swap agreements we may have from time to time.
We and certain of our subsidiaries are sensitive to interest rate fluctuations. In order to enhance our ability
to manage risk relating to cash flow and interest rate exposure, we and/or our other subsidiaries who are
borrowers under the ABL credit facility may from time to time enter into and maintain derivative
instruments, such as interest rate swap agreements, for periods consistent with the related underlying
exposures. In addition, pursuant to the agreement underlying our term loan facilities we and/or certain of
our other subsidiaries hedge a portion of our floating interest rate exposure for a specified period as more
fully described below. We do not purchase or hold any derivative instruments for speculative or trading
purposes.
In November 2006, Sally Holdings entered into certain interest rate swap agreements with an aggregate
notional amount of $500 million. These interest rate swap agreements expired on or before November
2009 and were not designated as hedges and, accordingly, the changes in fair value of these interest rate
swap agreements (which were adjusted quarterly) were recorded in interest expense in our consolidated
statements of earnings.
In the fiscal year 2008, the Company entered into interest rate swap agreements with an aggregate notional
amount of $300.0 million. These agreements expire in May 2012 and enable the Company to convert a
portion of its variable-interest rate obligations to fixed-interest rate obligations in connection with the term
loan facilities, with interest ranging from 5.818% to 6.090%. Interest payments related to our term loans
are impacted by changes in LIBOR. These agreements are designated as effective cash flow hedges.
Accordingly, the changes in the fair value of these derivative instruments are recorded quarterly, net of
income tax, in accumulated other comprehensive (loss) income (‘‘OCI’’) until the hedged obligation is
settled or the swap agreements expire, whichever is earlier. Any hedge ineffectiveness is recognized in
interest expense in our consolidated statements of earnings.
Credit risk
We are exposed to credit risk on certain assets, primarily cash equivalents, short-term investments and
accounts receivable. We believe that the credit risk associated with cash equivalents and short-term
investments, if any, is largely mitigated by our policy of investing in a diversified portfolio of securities with
high credit ratings.
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