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BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: | 6 Months Ended
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Dec. 31, 2011
BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: |
BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: |
1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the Company) as of December 31, 2011 and for the three and six months ended December 31, 2011 and 2010, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of December 31, 2011 and the consolidated results of its operations and its cash flows for the interim periods. Adjustments consist only of normal recurring items, except for any discussed in the notes below. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year. The Consolidated Balance Sheet data for June 30, 2011 was derived from audited Consolidated Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2011 and other documents filed or furnished with the Securities and Exchange Commission (SEC) during the current fiscal year. The unaudited condensed consolidated financial statements of the Company as of December 31, 2011 and for the three and six month periods ended December 31, 2011 and 2010 included in this Form 10-Q have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their separate report dated February 6, 2012 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a “report” or a “part” of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act. Consolidation: The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries after the elimination of intercompany accounts and transactions. All material subsidiaries are wholly owned. The Company consolidated variable interest entities where it has determined it is the primary beneficiary of those entities’ operations. Stock-Based Employee Compensation: Stock-based awards are granted under the terms of the 2004 Long Term Incentive Plan (2004 Plan). Additionally, the Company has outstanding stock options under its 2000 Stock Option Plan (2000 Plan), although the Plan terminated in 2010. Under these plans, four types of stock-based compensation awards are granted: stock options, equity-based stock appreciation rights (SARs), restricted stock awards (RSAs) and restricted stock units (RSUs). The stock options and SARs have a maximum term of ten years. The stock-based awards, other than the RSUs, generally vest at a rate of 20.0 percent annually on each of the first five anniversaries of the date of grant. The RSUs cliff vest after five years, and payment of the RSUs is deferred until January 31 of the year following vesting. Unvested awards are subject to forfeiture in the event of termination of employment. The Company utilizes an option-pricing model to estimate the fair value of options and SARs at their grant date. Stock options and SARs are granted at not less than fair market value on the date of grant. The Company generally recognizes compensation expense for its stock-based compensation awards on a straight-line basis over a five-year vesting period. Awards granted do not contain acceleration of vesting terms for retirement of eligible recipients. The Company’s primary employee stock-based compensation grant occurs during the fourth fiscal quarter. Total compensation cost for stock-based payment arrangements totaled $2.2 and $2.6 million for the three months ended December 31, 2011 and 2010, respectively, and $4.6 and $5.0 million for the six months ended December 31, 2011 and 2010, respectively. Stock options outstanding, weighted average exercise price and weighted average fair values as of December 31, 2011 were as follows:
Options |  | Shares |  | Weighted Average Exercise Price |
|  | (in thousands) |  |  |
Outstanding at June 30, 2011 |  | 838 |  | $ | 31.48 |
Granted |  | — |  | — |
Exercised |  | — |  | — |
Forfeited or expired |  | (12 | ) | 26.86 |
Outstanding at September 30, 2011 |  | 826 |  | $ | 31.54 |
Granted |  | — |  | — |
Exercised |  | — |  | — |
Forfeited or expired |  | (16 | ) | 32.42 |
Outstanding at December 31, 2011 |  | 810 |  | $ | 31.53 |
Exercisable at December 31, 2011 |  | 649 |  | $ | 33.29 |
Outstanding options of 810,388 at December 31, 2011 had an intrinsic value (the amount by which the stock price exceeded the exercise or grant date price) of zero and a weighted average remaining contractual term of 4.2 years. Exercisable options of 648,628 at December 31, 2011 had an intrinsic value of zero and a weighted average remaining contractual term of 3.4 years. Of the outstanding and unvested options and due to estimated forfeitures, 140,007 are expected to vest with a $25.23 per share weighted average grant price, a weighted average remaining contractual life of 7.0 years and a total intrinsic value of zero. All options granted relate to stock option plans that have been approved by the shareholders of the Company. The table below contains a rollforward of RSAs, RSUs and SARs outstanding, as well as other relevant terms of the awards:
|  | Nonvested |  | SARs Outstanding |
|  | Restricted Stock Outstanding Shares/Units |  | Weighted Average Grant Date Fair Value |  | Shares |  | Weighted Average Exercise Price |
|  | (in thousands) |  |  |  | (in thousands) |  |  |
Balance, June 30, 2011 |  | 1,077 |  | $ | 23.48 |  | 1,087 |  | $ | 25.54 |
Granted |  | 20 |  | 13.59 |  | — |  | — |
Vested/Exercised |  | 2 |  | 22.32 |  | — |  | — |
Forfeited or expired |  | (26 | ) | 19.39 |  | (57 | ) | 27.45 |
Balance, September 30, 2011 |  | 1,073 |  | $ | 23.39 |  | 1,030 |  | $ | 25.43 |
Granted |  | — |  | — |  | — |  | — |
Vested/Exercised |  | 3 |  | 19.07 |  | — |  | — |
Forfeited or expired |  | (70 | ) | 18.88 |  | (31 | ) | 25.41 |
Balance, December 31, 2011 |  | 1,006 |  | $ | 23.69 |  | 999 |  | $ | 25.44 |
Outstanding and unvested RSAs of 791,248 at December 31, 2011 had an intrinsic value of $13.1 million and a weighted average remaining vesting term of 1.6 years. Due to estimated forfeitures, 745,796 are expected to vest with a total intrinsic value of $12.3 million. Outstanding and unvested RSUs of 215,000 at December 31, 2011 had an intrinsic value of $3.6 million and a weighted average remaining vesting term of 0.2 years. All unvested RSUs are expected to vest in fiscal year 2012. Outstanding SARs of 998,700 at December 31, 2011 had a total intrinsic value of zero and a weighted average remaining contractual term of 6.3 years. Exercisable SARs of 546,850 at December 31, 2011 had a total intrinsic value of zero and a weighted average remaining contractual term of 5.2 years. Of the outstanding and unvested rights and due to estimated forfeitures, 389,228 are expected to vest with a $20.32 per share weighted average grant price, a weighted average remaining contractual life of 7.1 years and a total intrinsic value of zero. During fiscal year 2011, the Company accelerated the vesting of 68,390 unvested RSAs held by the Company’s Chief Executive Officer and the Company’s Executive Vice President, Fashion and Education. Under the terms of the modifications, any unvested RSAs granted to the Chief Executive Officer and the Executive Vice President, Fashion and Education fully vest on their last days of employment, which is expected to be February 8, 2012 and June 30, 2012, respectively. As a result of the modifications, the Company recognized an incremental compensation cost of $0.1 million during the three and six months ended December 31, 2011. During the three and six months ended December 31, 2011 total cash received from the exercise of share-based instruments was zero. During the three and six months ended December 31, 2010 total cash received from the exercise of share-based instruments was $0.6 and $0.7 million, respectively. As of December 31, 2011, the total unrecognized compensation cost related to all unvested stock-based compensation arrangements was $14.1 million. The related weighted average period over which such cost is expected to be recognized was approximately 2.9 years as of December 31, 2011. The total intrinsic value of all stock-based compensation that was exercised or vested during the three and six months ended December 31, 2011 was zero and less than $0.1 million, respectively. The total intrinsic value of all stock-based compensation that was exercised or vested during each of the three and six month periods ended December 31, 2010 was $0.5 million. Goodwill: Goodwill is tested for impairment annually or at the time of a triggering event. In evaluating whether goodwill is impaired, the Company compares the carrying value of each reporting unit, including goodwill, to the estimated fair value of the reporting unit. The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units. Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons. The Company calculates the estimated fair value of the reporting units based on discounted future cash flows that utilize estimates in annual revenue, gross margins, fixed expense rates, allocated corporate overhead, and long-term growth for determining terminal value. The Company’s estimated future cash flows also take into consideration acquisition integration and maturation. Where available and as appropriate, comparative market multiples are used to corroborate the results of the discounted cash flow. The Company considers its various concepts to be reporting units when testing for goodwill impairment because that is where the Company believes the goodwill resides. The Company periodically engages third-party valuation consultants to assist in evaluation of the Company’s estimated fair value calculations. In the situations where a reporting unit’s carrying value exceeds its estimated fair value, the amount of the impairment loss must be measured. The measurement of impairment is calculated by determining the implied fair value of a reporting unit’s goodwill. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all other assets and liabilities of that unit based on the relative fair values under the assumption of a taxable transaction. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities is the implied fair value of goodwill. The goodwill impairment is measured as the excess of the carrying value of goodwill over its implied fair value. As previously disclosed, the Company concluded that it was reasonably likely that goodwill for the Hair Restoration Centers reporting unit might become impaired in future periods. During the three months ended December 31, 2011 the Company updated the projections used in the fiscal 2011 annual impairment test to reflect the impact of recent industry developments, including a slow down in revenue growth and increasing supply costs. The Company determined there was a triggering event as it was more likely than not that the fair value of the Hair Restoration Centers was below carrying value and performed an interim impairment test of goodwill during the three months ended December 31, 2011. There were no triggering events relative to the Company’s other reporting units. As a result of the Company’s interim impairment test of goodwill related to the Hair Restoration Centers reporting unit during the second quarter of fiscal year 2012, a $78.4 million impairment charge was recorded within continuing operations for the excess of the carrying value of goodwill over the implied fair value of the goodwill for the Hair Restorations Centers reporting unit. After the impairment charge the Hair Restoration Centers reporting unit had $74.4 million of goodwill as of December 31, 2011. The impairment was only partially deductible for tax purposes resulting in a tax benefit of $5.9 million. See further discussion on the effective tax rate for the three and six months ended December 31, 2011 within Note 10 to the Condensed Consolidated Financial Statements. As of June 30, 2011, the estimated fair value of the Regis salon concept reporting unit exceeded the carrying value by approximately 18.0 percent. Excluding Regis, Hair Restoration Centers for which the Company performed an interim impairment test of goodwill during the three months ended December 31, 2011 and Promenade for which the Company recorded a $74.1 million impairment charge as a result of the Company’s impairment testing of goodwill during the third quarter of fiscal year 2011, the respective fair values of the Company’s remaining reporting units exceeded fair value by greater than 20.0 percent at June 30, 2011. While the Company has determined the estimated fair values of Promenade, Hair Restoration Centers, and Regis to be appropriate based on the historical level of revenue growth, operating income and cash flows, it is reasonably likely that Promenade, Hair Restoration Centers, and Regis may experience additional impairment in future periods. The term “reasonably likely” refers to an occurrence that is more than remote but less than probable in the judgment of the Company. Because some of the inherent assumptions and estimates used in determining the fair value of the reportable segment are outside the control of management, changes in these underlying assumptions can adversely impact fair value. Potential impairment of a portion or all of the carrying value of the Promenade and Regis salon concepts and Hair Restoration Centers goodwill is dependent on many factors and cannot be predicted with certainty. As of December 31, 2011, the Company’s estimated fair value, as determined by the sum of our reporting units’ fair value, reconciled to within a reasonable range of our market capitalization which included an assumed control premium. A summary of the Company’s goodwill balance as of December 31, 2011 and June 30, 2011 by reporting unit is as follows:
Reporting Unit |  | As of December 31, 2011 |  | As of June 30, 2011 |
|  | (Dollars in thousands) |
Regis |  | $ | 103,581 |  | $ | 103,761 |
MasterCuts |  | 4,652 |  | 4,652 |
SmartStyle |  | 48,529 |  | 48,916 |
Supercuts |  | 129,540 |  | 129,477 |
Promenade |  | 243,428 |  | 240,910 |
Total North America Salons |  | 529,730 |  | 527,716 |
Hair Restoration Centers |  | 74,367 |  | 152,796 |
Total |  | $ | 604,097 |  | $ | 680,512 |
See Note 4 to the Condensed Consolidated Financial Statements for further details on the Company’s goodwill balance. Property and Equipment: Historically, because of the Company’s large size and scale requirements it has been necessary for the Company to internally develop and support its own proprietary point-of-sale (POS) information system. During the fourth quarter of fiscal year 2011, the Company identified a third party POS alternative that has a system that meets current and enhanced functionality requirements and will cost less to implement and support. At June 30, 2011, the Company reassessed and adjusted the remaining useful life of the Company’s capitalized POS software to six months as locations using the Company’s existing POS information system move to a third party POS alternative by December 31, 2011. Based on the results of the implementation of the third party POS alternative during the three months ended December 31, 2011, the Company reassessed and extended the useful life of the Company’s capitalized POS software by three months. Depreciation expense related to the existing POS information system totaled $7.0 and $16.3 million during the three and six months ended December 31, 2011, respectively, including $6.3 million ($4.0 million net of tax or $0.07 per diluted share) and $15.0 million ($9.5 million net of tax or $0.17 per diluted share), respectively, of accelerated depreciation related to the change in useful life. The Company expects to fully depreciate the net balance of the existing POS information system, approximately $2.0 million at December 31, 2011, during the three months ended March 31, 2012. Due to the Company’s plan to replace the POS information system, the Company reviewed the capitalized software carrying value for impairment at December 31, 2011. As a result of the Company’s long-lived asset impairment testing at December 31, 2011 for this applicable grouping of assets, no impairment charges were recorded. Recent Accounting Standards Adopted by the Company: Disclosures about Fair Value of Financial Instruments In January 2010, the Financial Accounting Standards Board (FASB) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires a roll forward of activities, presented separately on a gross basis, on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The Company adopted the new disclosure guidance related to Level 3 fair value measurements, including the disclosure on the roll forward activities, on July 1, 2011. Accounting Standards Recently Issued But Not Yet Adopted by the Company: Testing Goodwill for Impairment In September 2011, the FASB issued guidance to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not required. This new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will adopt the guidance on July 1, 2012 but does not expect it to have a material impact on the Company’s financial position, results of operations or cash flows. Comprehensive Income In June 2011, the FASB issued guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2011. The Company will adopt the guidance on a retrospective basis on July 1, 2012. The guidance will not have a material impact on the Company’s financial position, results of operations or cash flows. However, it will require changing the Company’s presentation and disclosure of comprehensive income. Fair Value Measurement In May 2011, the FASB issued guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The Company will adopt the guidance on January 1, 2012 but does not expect it to have a material impact on the Company’s consolidated financial position, results of operations, cash flows or disclosures.

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