Sally Beauty Supply 2013 Annual Report Download - page 61

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The Company uses foreign exchange contracts including, at September 30, 2013, foreign currency options
with an aggregate notional amount of $12.0 million to manage the exposure to the U.S. dollar resulting
from certain of our Sinelco Group subsidiaries’ purchases of merchandise from third-party suppliers.
Sinelco’s functional currency is the Euro. These foreign currency options enable Sinelco to buy U.S. dollars
at a contractual exchange rate of 1.32, are with a single counterparty and expire ratably through September
2014.
The Company also uses foreign exchange contracts to mitigate its exposure to changes in foreign currency
exchange rates in connection with certain intercompany balances not permanently invested. As such, at
September 30, 2013, we hold: (a) a foreign currency forward which enables us to sell approximately
A13.9 million ($18.9 million, at the September 30, 2013 exchange rate) at the contractual exchange rate of
1.3526, (b) a foreign currency forward which enables us to sell approximately $5.5 million Canadian dollars
($5.3 million, at the September 30, 2013 exchange rate) at the contractual exchange rate of 1.03115, (c) a
foreign currency forward which enables us to buy approximately $8.0 million Canadian dollars
($7.8 million, at the September 30, 2013 exchange rate) at the contractual exchange rate of 1.0329, (d) a
foreign currency forward which enables us to sell approximately 8.6 million Mexican pesos ($0.7 million, at
the September 30, 2013 exchange rate) at the contractual exchange rate of 13.1806 and (e) a foreign
currency forward which enables us to sell approximately £4.2 million ($6.8 million, at the September 30,
2013 exchange rate) at the contractual exchange rate of 1.6129. All the foreign currency forwards discussed
in this paragraph are with a single counterparty (not the same party as the counterparty on the options
discussed in the preceding paragraph) and expire on or before December 31, 2013.
In addition, the Company uses foreign exchange contracts including, at September 30, 2013, foreign
currency forwards with an aggregate notional amount of A3.6 million ($4.9 million, at the September 30,
2013 exchange rate) to mitigate the exposure to the British pound sterling resulting from the sale of
products and services among certain European subsidiaries of the Company. The foreign currency
forwards discussed in this paragraph enable the Company to buy British pound sterling in exchange for
Euro currency at the weighted average contractual exchange rate of 0.8425, are with a single counterparty
(the same counterparty as that on the foreign currency forwards discussed in the immediately preceding
paragraph) and expire ratably through September 2014.
The Company’s foreign exchange contracts 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, 2013, selling, general and administrative expenses included $2.8 million in net losses from
all of the Company’s foreign exchange contracts, including marked-to-market adjustments. Please see
‘‘Item 7A—Quantitative and Qualitative Disclosures about Market Risk—Foreign currency exchange rate
risk’’ and Note 14 of the ‘‘Notes to Consolidated Financial Statements’’ in Item 8—’’Financial Statements
and Supplementary Data’’ contained elsewhere in this Annual Report.
Interest Rate Swap Agreements
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 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. At
September 30, 2013, the Company held no interest rate derivative instruments.
In May 2008, we entered into certain interest rate swap agreements with an aggregate notional amount of
$300 million in connection with our variable interest rate obligation under the senior term loan B facility
(until our May 2012 repayment of such loan). These agreements enabled us to convert a portion of our
variable interest rate obligations to fixed rate obligations and were designated and qualified as effective
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