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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, 2012
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, 2012 and for the three and six months ended December 31, 2012 and 2011, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of December 31, 2012 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, 2012 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, 2012 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, 2012 and for the three and six month periods ended December 31, 2012 and 2011 included in this Form 10-Q have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their separate report dated February 4, 2013 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. Reclassifications: Beginning in the first quarter of fiscal year 2013, salon marketing and advertising expenses that were presented within cost of service and general and administrative operating expense line items in prior filings were reclassified to site operating expenses within the Condensed Consolidated Statement of Operations. The reclassifications were made to better present how management of the Company views the respective salon marketing and advertising expenses. The prior period amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on operating income or net income. The table below presents the impact of the reclassification to the three and six months ended December 31, 2011:
|  | For the Three Months Ended, December 31, 2011 |
|  | Prior Presentation(1) |  | Reclassification |  | As Presented |
|  |  |  | (Dollars in thousands) |  |  |
Cost of service |  | $ | 231,669 |  | $ | (277 | ) | $ | 231,392 |
Site operating expenses |  | 46,825 |  | 4,641 |  | 51,466 |
General and administrative |  | 67,006 |  | (4,364 | ) | 62,642 |
|  | For the Six Months Ended, December 31, 2011 |
|  | Prior Presentation(1) |  | Reclassification |  | As Presented |
|  |  |  | (Dollars in thousands) |  |  |
Cost of service |  | $ | 467,638 |  | $ | (581 | ) | $ | 467,057 |
Site operating expenses |  | 97,796 |  | 8,481 |  | 106,277 |
General and administrative |  | 136,412 |  | (7,900 | ) | 128,512 |
(1) Prior presentation amounts exclude amounts related to discontinued operations. See Note 2 to the Condensed Consolidated Statement of Operations. In addition, expenses associated with our distribution centers were reclassified from Corporate to our North America reportable segment. The reclassifications were made to better present how management of the Company views the respective distribution centers expenses. This reclassification had no impact on our Condensed Consolidated Statement of Operations. The prior period amounts have been reclassified to conform to the current year presentation. The table below presents the impact of the reclassification of general and administrative, rent, and depreciation and amortization expenses between the Company’s Corporate and North America reportable segments:
|  | For the Three Months Ended, December 31, 2011 |
|  | North America |  | Corporate |
|  | Prior Presentation |  | Reclassification |  | As Presented(2) |  | Prior Presentation |  | Reclassification |  | As Presented(2) |
|  | (Dollars in thousands) |  | (Dollars in thousands) |
General and administrative (1) |  | $ | 28,584 |  | $ | 1,501 |  | $ | 30,085 |  | $ | 35,466 |  | $ | (5,516 | ) | $ | 29,950 |
Rent |  | 73,686 |  | 147 |  | 73,833 |  | 503 |  | (147 | ) | 356 |
Depreciation and amortization |  | 17,692 |  | 591 |  | 18,283 |  | 9,642 |  | (591 | ) | 9,051 |
(1) The North America general and administrative reclassification consists of a $5,516 increase for the offset to the Corporate reclassification within this line item, partially offset by a decrease applicable to North America of $4,015 for the marketing and advertising expense reclassifications. (2) See Note 10 to the Condensed Consolidated Statement of Operations for presentation of segment information.
|  | For the Six Months Ended, December 31, 2011 |
|  | North America |  | Corporate |
|  | Prior Presentation |  | Reclassification |  | As Presented(2) |  | Prior Presentation |  | Reclassification |  | As Presented(2) |
|  | (Dollars in thousands) |  | (Dollars in thousands) |
General and administrative (1) |  | $ | 58,290 |  | $ | 4,440 |  | $ | 62,730 |  | $ | 72,241 |  | $ | (11,707 | ) | $ | 60,534 |
Rent |  | 146,901 |  | 312 |  | 147,213 |  | 700 |  | (312 | ) | 388 |
Depreciation and amortization |  | 35,662 |  | 1,162 |  | 36,824 |  | 21,163 |  | (1,162 | ) | 20,001 |
(1) The North America general and administrative reclassification consists of a $11,707 increase for the offset to the Corporate reclassification within this line item, partially offset by a decrease of $7,267 applicable to North America for the marketing and advertising expense reclassification above. (2) See Note 10 to the Condensed Consolidated Statement of Operations for presentation of segment information. Stock-Based Employee Compensation: During the six months ended December 31, 2012, the Company granted 118,062 restricted stock awards (RSAs), 195,663 restricted stock units (RSUs), 596,157 equity-based stock appreciation rights (SARs), and 199,041 performance share units (PSUs). The Company did not have significant grants for the three months ended December 31, 2012. All options granted relate to stock option plans that have been approved by the shareholders of the Company. Total compensation cost for stock-based payment arrangements totaled $1.5 and $2.2 million for the three months ended December 31, 2012 and 2011, respectively, and $3.3 and $4.6 million for the six months ended December 31, 2012 and 2011, respectively. Goodwill: As of the fiscal year 2012 annual impairment testing of goodwill, the estimated fair value of the Promenade salon concept and Hair Restoration Centers reporting units exceeded the carrying value by approximately 14.0 and 12.0 percent, respectively. The respective fair values of the Company’s remaining reporting units exceeded their carrying values by greater than 20.0 percent. While the Company has determined that the estimated fair value of Promenade is appropriate based on the historical level of revenue growth, operating income and cash flows, it is reasonably likely that Promenade may experience additional impairment in future periods. As previously disclosed, the Company has agreed to sell the Hair Restoration Centers reporting unit in fiscal year 2013; however, until this reporting unit is sold, it is reasonably likely that there could be impairment of the Hair Restoration Centers reporting unit’s goodwill in future periods. See Note 2 to the Condensed Consolidated Financial Statements for details of Hair Restoration Centers reporting unit’s goodwill balance. 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 each reporting unit 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 goodwill for the Promenade salon concept and Hair Restoration Centers reporting units is dependent on many factors and cannot be predicted with certainty. As of December 31, 2012, 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. The Company concluded that there were no triggering events requiring the Company to perform an interim goodwill impairment test between the annual impairment testing and December 31, 2012. A summary of the Company’s goodwill balance as of December 31, 2012 and June 30, 2012 by reporting unit is as follows:
Reporting Unit |  | As of December 31, 2012 |  | As of June 30, 2012 |
|  | (Dollars in thousands) |
Regis |  | $ | 35,944 |  | $ | 35,910 |
MasterCuts |  | 4,652 |  | 4,652 |
SmartStyle |  | 48,719 |  | 48,558 |
Supercuts |  | 129,630 |  | 129,621 |
Promenade |  | 244,525 |  | 243,538 |
Total |  | $ | 463,470 |  | $ | 462,279 |
See Note 5 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 had 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. At June 30, 2011 and throughout fiscal year 2012, the Company reassessed and adjusted the remaining useful life of the Company’s internally developed POS software. As of June 30, 2012, the internally developed POS information system was fully depreciated. Depreciation expense related to the internally developed POS information system totaled $7.0 million and $16.3 million during the three and six months ended December 31, 2011, respectively. During the first quarter of fiscal year 2013, the Company decided the previously identified third party POS alternative would only be utilized in United Kingdom. The Company reviewed the previously identified third party POS alternative capitalized software carrying value for impairment at September 30, 2012 and December 31, 2012. As a result of the Company’s long-lived asset impairment testing for this asset grouping in the United Kingdom, no impairment charges were recorded. There was no adjustment to the useful life as the Company expects to fully utilize the previously identified third party POS alternative in the United Kingdom salons. The Company is currently implementing another third party POS solution for salons in North America. Recent Accounting Standards Adopted by the Company: Testing Goodwill for Impairment In September 2011, the Financial Accounting Standards Board (FASB) updated the accounting guidance related to annual and interim goodwill impairment testing. The updated accounting guidance allows entities to first assess qualitative factors before performing a quantitative assessment of the fair value of a reporting unit. If it is determined on the basis of qualitative factors that the fair value of the reporting unit is more likely than not less than the carrying amount, the existing quantitative impairment test is required. Otherwise, no further impairment testing is required. The Company adopted this guidance in the first quarter of fiscal year 2013. Comprehensive Income In June 2011, and as subsequently amended in December 2011, the FASB issued final guidance on the presentation of comprehensive income. Under the newly issued guidance, net income and comprehensive income may only be presented either as one continuous statement or in two separate, but consecutive statements. The Company retrospectively adopted this guidance in the first quarter of fiscal year 2013, with comprehensive income shown as a separate statement immediately following the Condensed Consolidated Statements of Operations. Accounting Standards Recently Issued But Not Yet Adopted by the Company: Disclosures about Offsetting Assets and Liabilities In December 2011, the FASB issued new accounting guidance related to disclosures on offsetting assets and liabilities on the balance sheet. This newly issued accounting standard requires an entity to disclose both gross and net information about instruments and transactions eligible for offset in the balance sheet as well as instruments and transactions executed under a master netting or similar arrangement and was issued to enable users of financial statements to understand the effects or potential effects of those arrangements on its financial position. This accounting guidance is required to be applied retrospectively and is effective for the Company beginning in the first quarter of fiscal year 2014. Since the accounting guidance only impacts disclosure requirements, its adoption will not have a material impact on the Company’s consolidated financial statements. Testing Indefinite-Lived Intangible Assets for Impairment In July 2012, the FASB updated the accounting guidance related to annual and interim indefinite-lived intangible asset impairment testing. The updated accounting guidance allows entities to first assess qualitative factors before performing a quantitative assessment of the fair value of indefinite-lived intangible assets. If it is determined on the basis of qualitative factors that the fair value of indefinite-lived intangible assets is more likely than not less than the carrying amount, the existing quantitative impairment test is required. Otherwise, no further impairment testing is required. The updated guidance is effective for the Company beginning in the first quarter of fiscal year 2014 with early adoption permitted under certain circumstances. The Company does not expect it to have a material impact on the Company’s consolidated financial statements.

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