Sally Beauty Supply 2013 Annual Report Download - page 62

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cash flow hedges. Accordingly, changes in the fair value of these derivative instruments were recorded
quarterly, net of income tax, in accumulated other comprehensive (loss) income (‘‘OCI’’) until the swap
agreements expired, in May 2012. As such for the fiscal years 2012 and 2011, other comprehensive income
included deferred gains on these swaps of $3.9 million and $5.6 million, respectively, after tax.
Share-Based Compensation Awards
For the fiscal years 2013, 2012 and 2011, total share-based compensation cost charged against earnings was
$19.2 million, $16.9 million and $15.6 million, respectively, and resulted in an increase in additional paid-in
capital by the same amounts. Share-based compensation expenses for the fiscal years 2013, 2012 and 2011
included $5.9 million, $5.3 million and $5.0 million, respectively, of accelerated expense related to certain
retirement eligible employees who are eligible to continue vesting awards upon retirement under the terms
of the Sally Beauty Holdings, Inc. 2010 Omnibus Incentive Plan (the ‘‘2010 Plan’’) and certain predecessor
plans, such as the Sally Beauty Holdings 2007 Omnibus Incentive Plan. For the fiscal years 2013, 2012 and
2011, the total income tax benefit recognized in the consolidated statements of earnings from all share-
based compensation plans in which our employees participate or participated was $7.1 million, $6.2 million
and $6.0 million, respectively, and resulted in the recognition of deferred tax assets by generally the same
amounts. Our consolidated statements of cash flows reflect, for the fiscal years 2013, 2012 and 2011, excess
tax benefits of $15.4 million, $14.4 million and $3.7 million, respectively, from employee exercises of stock
options as financing cash flows. As of September 30, 2013, we had $15.1 million of unrecognized
compensation expense related to unvested stock option awards that is expected to be charged to expense
over the weighted average period of 2.3 years, and $2.5 million of unrecognized compensation expense
related to unvested restricted stock awards that is expected to be charged to expense over the weighted
average period of 3.1 years.
Non-recurring Items
Based upon an unfavorable verdict rendered in November 2012 in certain actions brought against the
Company in March 2011, we recorded $10.2 million in legal settlement costs as of September 30, 2012,
which we believed to be our best estimate of the potential loss. During the fiscal year ended September 30,
2013, the parties continued to engage in negotiations aimed at resolving the matter and, in November
2012, entered into a settlement agreement whereby the Company agreed to pay the plaintiff the one-time
cash sum of $8.5 million and agreed to certain other terms of settlement in exchange for a full release of
claims.
In December 2011, the Company redeemed the $430.0 million aggregate principal amount outstanding of its
9.25% senior notes due 2014 and the $275.0 million aggregate principal amount outstanding of its 10.50%
senior subordinated notes due 2016, pursuant to the terms of the indentures governing the senior notes and
the senior subordinated notes. In addition, in May 2012, the Company paid in full its borrowings under the
senior term loan B (approximately $596.9 million). Accordingly, during the fiscal year ended September 30,
2012, the Company recorded charges to earnings in the aggregate amount of approximately $37.8 million
(including approximately $24.4 million in call premiums paid and approximately $13.4 million in unamortized
deferred financing costs expensed) in connection with its redemption of the senior notes and the senior
subordinated notes and its repayment of the senior term loan B. These amounts are included in interest
expense in the Company’s consolidated statements of earnings for the fiscal year ended September 30, 2012.
Please see ‘‘Liquidity and Capital Resources’’ below for more information about the Company’s debt.
In the fiscal year ended September 30, 2012, we recognized tax benefits (approximately $10.3 million)
resulting from a limited restructuring, for U.S. income tax purposes, completed in that fiscal year. As a result,
the effective income tax rate for the fiscal year 2012 (35.4%) was lower than our average historical effective
tax rate of approximately 37.0%.
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