The following section discusses management's view ofSally Beauty's financial condition and results of operations for fiscal year 2022 compared to fiscal year 2021. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 , for a discussion of the financial condition and results of operations for fiscal year 2021 compared to fiscal year 2020. This section should be read in conjunction with the audited consolidated financial statements ofSally Beauty and the related notes included elsewhere in this Annual Report. This Management's Discussion and Analysis of Financial Condition and Results of Operations section may contain forward-looking statements. See "Cautionary Notice Regarding Forward-Looking Statements" and "Risk Factors" for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements that could cause results to differ materially from those reflected in such forward-looking statements.
Executive Summary
Fiscal 2022 was a successful year, delivering strong gross margins and positive net earnings amidst a highly dynamic and challenging macro environment. Our Company navigated inflationary pressures and supply chain headwinds, while remaining focused on serving our customers.
For fiscal 2023, we will be leveraging and building upon the modern retail infrastructure we've built in recent years and focusing on three key strategic initiatives to drive growth and profitability:
• Enhancing our customer centricity; • Growing high margin owned brands atSally Beauty and amplifying innovation; and
• Increasing the efficiency of our operations and optimizing our capabilities.
We believe focusing in these areas will position our company for future growth and further enhance our ability to meet our customers where they are.
Financial Results Summary of the Fiscal Year Ended
• Consolidated net sales for the fiscal year decreased
1.5%, to$3,815.6 million and included a negative impact from
changes
in foreign currency exchange rates of$34.3 million , or 3.5% of consolidated net sales; • Consolidated comparable sales for the fiscal year increased 0.6%, compared to the prior fiscal year; • Consolidated gross profit decreased by$34.2 million , or 1.7%, to$1,919.2 million . Gross margin decreased 10 basis points to 50.3% compared to the prior fiscal year; • Consolidated operating earnings for the fiscal year decreased$80.8 million , or 19.3%, to$337.6 million . Operating margin decreased 200 basis points to 8.8% compared to the prior fiscal year;
• Consolidated net earnings for the fiscal year decreased
or 23.5%, to$183.6 million ;
• Diluted earnings per share for the fiscal year were
$2.10 for the prior fiscal year; • Cash provided by operations was$156.5 million for the fiscal year compared to$381.9 million for the prior fiscal year; • Reduction of$231.0 million in debt resulting mostly from the early redemption of our 8.75% senior notes due 2025 ("2025 Senior Notes"); and • In the fourth quarter of the fiscal year, our Board approved the planned closure of 330 SBS and 35 BSG stores mostly over the next fiscal year and two BSG distribution centers inClackamas ,
Pottsville, Pennsylvania during the first fiscal quarter of
fiscal year
2023, as part of our Distribution Center Consolidation and Store Optimization Plan. - 26 -
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Distribution Center Consolidation and Store Optimization Plan
The Distribution Center Consolidation and Store Optimization Plan's core strategy is accelerating store closures in various markets where we believe we can successfully recapture sales and improve profitability. By optimizing our large store portfolio, we can further focus on our customers' shopping experience and our product offerings, while returning value to our shareholders. In addition, the Company will also be optimizing its supply chain by closing two small distribution centers inOregon andPennsylvania and transferring the volumes to larger distribution centers, effective inDecember 2022 .
Trends Impacting Our Business
Inflationary pressures started to impact consumer spending behavior in fiscal 2022 as cautious shoppers stalled discretionary spending due to the higher cost for products and services. Moreover, there was still volatility in the global supply chain, as freight carriers passed higher fuel prices to customers. During the fiscal year, these headwinds resulted in lower traffic and conversion in our business and increases in certain operating costs, including inbound freight and delivery expenses. Additionally, due to general labor shortages in theU.S. during the year, especially among retail and hourly employees, we experienced an increase in our compensation costs in order to attract and retain associates. We continue to monitor these challenges and implement measures to help mitigate their impacts, including managing our inventory levels to reduce out-of-stock items, adjusting our promotional activities, optimizing our store base through our Distribution Center Consolidation and Store Optimization Plan (see Note 16, Restructuring) and expanding our partnerships with delivery service providers. Although these initiatives have helped mitigate ongoing macro-headwinds we cannot reasonably predict the long-term effects of inflation and supply chain disruptions. Furthermore, in a measure to curb inflation, theU.S. Federal Reserve has continued to increase the federal funds effective rate. In turn, these increases have raised the cost of debt borrowings. We currently have approximately$476.0 million in variable rate debt, with$407.5 million hedged with interest rate caps to help mitigate the impact of rising rates. Future increases in the federal funds effective rate could have a material adverse impact to our cost of debt, including any future changes in our debt structure.
Impact of COVID-19 on Our Business
During the fiscal year, we experienced disruptions to our business as a result of the COVID-19 pandemic and we took certain actions in order to protect our customers and associates. In particular, our store operations faced challenges and disruptions related to COVID-19 surges and variants. While we have seen signs of stabilization, we cannot reasonably predict the effects of new variants or expect improving trends to continue. Therefore, our future performance may partially depend on impacts of COVID-19 such as decreased customer in-store traffic, temporary store closures, and continued labor and supply chain disruptions.
Refer to Item 1A. "Risk Factors," for further discussion on the risks and uncertainties created by COVID-19.
Comparable Sales
The Company's initiative to invest in our digital platforms support our omni-channel strategy to provide customers an enhanced shopping experience. As such, we believe that comparable sales is an appropriate performance indicator to measure our sales growth compared to the prior period. Our comparable sales include sales from stores that have been operating for 14 months or longer as of the last day of a month and e-commerce revenue. Additionally, comparable sales include sales to franchisees and full service sales. Our comparable sales excludes the effect of changes in foreign exchange rates and sales from stores relocated until 14 months after the relocation. Revenue from acquisitions are excluded from our comparable sales calculation until 14 months after the acquisition. Our calculation of comparable sales might not be the same as other retailers as the calculation varies across the retail industry. - 27 - --------------------------------------------------------------------------------
Results of Operations Key Operating Metrics The following table sets forth, for the periods indicated, information concerning key measures we rely on to assess our operating performance (dollars in thousands): 2022 vs. 2021 Fiscal Year Ended September 30, Amount % 2022 2021 Change Change Net sales: SBS$ 2,193,044 $ 2,278,382 $ (85,338 ) (3.7 )% BSG 1,622,521 1,596,615 25,906 1.6 % Consolidated$ 3,815,565 $ 3,874,997 $ (59,432 ) (1.5 )% Gross profit: SBS$ 1,273,882 $ 1,318,473 $ (44,591 ) (3.4 )% BSG 645,283 634,861 10,422 1.6 % Consolidated$ 1,919,165 $ 1,953,334 $ (34,169 ) (1.7 )% Segment gross margin: SBS 58.1 % 57.9 % 20 bps BSG 39.8 % 39.8 % - bps Consolidated 50.3 % 50.4 % (10 ) bps Net earnings: Segment operating earnings: SBS$ 350,884 $ 417,658 $ (66,774 ) (16.0 )% BSG 193,407 205,078 (11,671 ) (5.7 )% Segment operating earnings 544,291 622,736 (78,445 ) (12.6 )% Unallocated expenses and restructuring (a) (b) 206,651 204,293 2,358 1.2 % Consolidated operating earnings 337,640 418,443 (80,803 ) (19.3 )% Interest expense 93,543 93,509 34 0.0 % Earnings before provision for income taxes 244,097 324,934 (80,837 ) (24.9 )% Provision for income taxes 60,544 85,076 (24,532 ) (28.8 )% Net earnings$ 183,553 $ 239,858 $ (56,305 ) (23.5 )% Number of stores at end-of-period (including franchises): SBS 3,439 3,653 (214 ) (5.9 )% BSG 1,355 1,385 (30 ) (2.2 )% Consolidated 4,794 5,038 (244 ) (4.8 )% Comparable sales growth (decline) SBS (0.6 )% 9.1 % (970 ) bps BSG 2.3 % 10.3 % (800 ) bps Consolidated 0.6 % 9.6 % (900 ) bps
(a) Unallocated expenses represent certain corporate costs (such as payroll,
share-based compensation, employee benefits and travel expense for corporate
staff, certain professional fees and corporate governance expenses) that have
not been charged to our segments and are included in SG&A expenses in our
consolidated statements of earnings.
(b) Restructuring primarily relates to our Distribution Center Consolidation and
Store Optimization and Transformation Plans.
- 28 - --------------------------------------------------------------------------------
The Fiscal Year Ended
SBS. The decrease in net sales for SBS was primarily driven by the following (in thousands):
Comparable sales$ (14,013 ) Sales outside comparable sales (a) (38,334 ) Foreign currency exchange (32,991 ) Total$ (85,338 )
(a) Includes stores opened for less than 14 months, net of stores closures.
The decrease in SBS's net sales was driven by the impact of store closures, the unfavorable impact of foreign exchange rates and lower comparable sales. SBS's comparable sales were lower due to fewer transactions, impacted by lower traffic, partially offset by a higher average ticket. The average ticket increase resulted from higher average unit retail prices, led by our hair color and care categories, partially offset by lower average unit volume.
BSG. The increase in net sales for BSG was driven by the following (in thousands):
Comparable sales$ 35,564 Sales outside comparable sales (a) (8,330 ) Foreign currency exchange (1,328 ) Total$ 25,906
(a) Includes stores opened for less than 14 months, net of stores closures.
The increase in BSG's net sales was driven by higher comparable sales, partially offset by the impact of closed stores and the unfavorable impact of foreign exchange rates. BSG's comparable sales increase was driven by a higher average ticket, partially offset by lower traffic. The higher average ticket resulted a from higher average unit retail prices, led by color, care and styling tools categories, partially offset by lower average unit volume.
Gross Profit
SBS. SBS's gross profit decrease was driven by a decrease in sales, partially offset by a higher gross margin. SBS's gross margin increase was driven by improvement of pricing leverage and the impact of fewer write-downs of obsolete personal-protective equipment. This improvement to margins was partially offset by the impact of inventory write-downs resulting from our Distribution Center Consolidation and Store Optimization Plan, higher distribution and freight costs and an unfavorable sales mix shift between theU.S. and international markets, resulting from the temporary closing of certain international operations in the prior year due to COVID-19. BSG. BSG's gross profit increased due to the increase in sales in the current fiscal year. BSG's gross margin was flat when compared to the prior year, however, BSG's gross margin includes improvements from pricing leverage and fewer write-downs of personal-protective equipment, offset by the impact of inventory write-downs resulting from our Distribution Center Consolidation and Store Optimization Plan and higher distribution and freight costs.
Selling, General and Administrative Expenses
SBS. SBS's SG&A expenses increased$22.1 million , or 2.5%, to$923.0 million for fiscal year 2022, which includes the unfavorable impact from foreign exchange rates of$13.2 million due to the strengthening of theU.S. Dollar compared to currencies in our foreign operations. As a percentage of SBS net sales, SG&A for fiscal year 2022 was 42.1% compared to 39.5% for fiscal year 2021. The increase as a percentage of sales was driven by higher wage expenses, as a result of higher wages within general labor markets and store re-openings in certain international markets. BSG. BSG's SG&A expenses increased$22.1 million , or 5.1%, to$451.9 million for fiscal year 2022. As a percentage of BSG net sales, SG&A for fiscal year 2022 was 27.9% compared to 26.9% for fiscal year 2021. The increase as a percentage of sales was driven primarily by higher delivery expense, advertising expense and depreciation expenses. - 29 - -------------------------------------------------------------------------------- Unallocated. Unallocated SG&A expenses, which represent certain corporate costs that have not been charged to our reporting segments, decreased$20.6 million , or 10.3%, to$179.1 million . This decrease was as a result of lower COVID-19 expenses of$26.3 million , including the impact of$31.2 million in donation expense in the prior year, partially offset by higher information technology expense of$6.7 million . Restructuring For fiscal year 2022, we incurred$27.6 million in restructuring charges, which includes$24.8 million in asset impairments related to our Distribution Center Consolidation and Store Optimization Plan and other expenses in connection to our Transformation Plan. For fiscal year 2021, we incurred$4.6 million in restructuring charges related to our Transformation Plan and Project Surge. See Note 16, Restructuring, for more information on our restructuring plans.
Interest Expense
Interest expense was flat due to the interest savings from the repayment of our 2025 Senior Notes in fiscal year 2022 offset by the impact of debt extinguishment cost, including a redemption premium of$13.1 million in connection with repayment of the 2025 Senior Notes, higher interest rates on our variable debt and increased borrowings on our ABL facility during the current fiscal year. Provision for Income Taxes For fiscal year 2022 and 2021, our effective tax rate was 24.8% and 26.2%, respectively. The decrease in the effective tax rate was primarily due to the release of$19.9 million of valuation allowance against foreign subsidiary net operating losses, offset by$7 million in expense arising from uncertain tax positions. See Note 14 for more information on our effective tax rate. Our effective tax rate may fluctuate on a quarterly and/or annual basis due to various factors including, but not limited to, total earnings and the mix of earnings by jurisdiction, new tax laws, as well as changes in valuation allowances and uncertain tax positions.
Liquidity and Capital Resources
AtSeptember 30, 2022 , we had$483.5 million in our liquidity pool, which includes amounts available for borrowings under our ABL facility and cash and cash equivalents of$70.6 million . Based upon the current level of operations and anticipated growth, we anticipate existing cash balances (excluding certain amounts permanently invested in connection with foreign operations) as well as cash expected to be generated by operations and funds available under the ABL facility will be sufficient to fund working capital requirements, potential acquisitions, anticipated capital expenditures (including information technology investments and store projects) and debt repayments over the next 12 months. Working capital (current assets less current liabilities) decreased$254.2 million to$464.5 million atSeptember 30, 2022 , compared to$718.7 million atSeptember 30, 2021 . This decrease was driven by the repayment of our 8.75% Senior Notes through the use of excess cash and additional borrowing on our ABL facility. Additionally, cash was further reduced by stock repurchases during the fiscal year. The decrease to working capital was partially offset by higher inventory as a result of inflationary cost increases and additional inventory purchases related to BSG's growth through distribution partnerships, partially offset by the inventory mark-downs in connection with our Distribution Center Consolidation and Store Optimization Plan. The ratio of current assets to current liabilities was 1.70 to 1.00 atSeptember 30, 2022 , compared to 2.08 to 1.00 atSeptember 30, 2021 . We utilize our ABL facility for the issuance of letters of credit, for certain working capital and liquidity needs and to manage normal fluctuations in our operational cash flow. In that regard, we may from time to time draw funds under the ABL facility for general corporate purposes including funding of capital expenditures, acquisitions, interest payments due on our indebtedness, paying down other debt and opportunistic share repurchases. The amounts drawn are generally paid down with cash provided by our operating activities. As ofSeptember 30, 2022 , we had$68.5 million outstanding and$412.9 million available for borrowings under the ABL facility, subject to borrowing base limitations and outstanding letters of credit of$18.6 million . During the fiscal year endedSeptember 30, 2022 , the weighted average interest rate on our borrowings under the ABL facility was 3.5%. - 30 - --------------------------------------------------------------------------------
Share Repurchase Programs
During fiscal year 2022, we repurchased and subsequently retired approximately 6.8 million shares of our common stock under a share repurchase program a cost of$130.3 million . During fiscal year 2021, we did not repurchase any of our common stock. We funded these share repurchases with cash from operations and borrowings under the ABL facility. As ofSeptember 30, 2022 , we had approximately$595.8 million of additional share repurchase authorization remaining under our Share Repurchase Program. In fiscal year 2021, the Board approved a term extension of the program throughSeptember 30, 2025 .
Historical Cash Flows
For the fiscal years 2022 and 2021, our primary sources of cash have been funds provided by operating activities and when necessary, borrowings under our ABL facility, as appropriate. The primary non-operating uses of cash during the past two years were for share repurchases, debt repayments and capital expenditures. The following table shows our sources and uses of cash for the periods presented (in thousands): Fiscal Year Ended September 30, 2022 2021 Change
Net cash provided by operating activities
$ (225,360 ) Net cash used by investing activities (102,419 ) (76,019 ) (26,400 ) Net cash used by financing activities (373,679 ) (419,968 )
46,289
Effect of foreign currency exchange rate changes on cash and cash equivalents (10,803 ) 935 (11,738 ) Net decrease in cash and cash equivalents$ (330,401 ) $ (113,192 )
Net Cash Provided by Operating Activities
Net cash provided by operating activities decreased for fiscal year 2022, compared to fiscal year 2021, primarily due to the reduction in our accounts payable and accrued liabilities, which was mostly attributable to the timing of payments for inventory, personal-protective equipment donations in the prior year and the impact of a lower bonus accrual for the current year. Additionally, the decrease in our operating activities was driven by lower net earnings and the increase in our inventory balance for fiscal year 2022.
Net cash used by investing activities was higher for fiscal year 2022, compared to fiscal year 2021, primarily due to investments in technology and store leasehold improvements.
Net cash used by financing activities decreased as a result of fewer debt repayments during the fiscal year, compared to prior fiscal year, partially offset by share repurchases.
Debt and Guarantor Financial Information
AtSeptember 30, 2022 , we had$1,087.5 million in outstanding principal under a term loan B and senior notes, not including finance leases, unamortized debt issuance costs or debt discounts, in the aggregate, of$4.3 million . Additionally, there was an outstanding balance of$68.5 million under our ABL facility atSeptember 30, 2022 . See Note 11 of the Notes to Consolidated Financial Statements in Item 8 contained in this Annual Report for additional information about our debt.
We are currently in compliance with the agreements and instruments governing our debt, including our financial covenants.
Guarantor Financial Information
We are providing the following information in compliance with Rule 13-01 of Regulation S-X for guaranteed issued securities that have been registered under such regulation. Currently, our issued securities consist of the 5.625% Senior Notes due 2025. This debt instrument was issued by our wholly-owned subsidiaries,Sally Holdings LLC andSally Capital Inc. (the "Issuers"), under a shelf registration statement. - 31 - -------------------------------------------------------------------------------- The notes are unsecured debt instruments guaranteed by us and certain of our wholly-owned domestic subsidiaries (together, the "Guarantors") and have certain restrictions on the ability to pay restrictive payments toSally Beauty . The guarantees are joint and several, and full and unconditional. Certain other subsidiaries, including our foreign subsidiaries, do not serve as guarantors. The following summarized consolidating financial information represents financial information for the Issuers and the Guarantors on a combined basis. All transactions and intercompany balances between these combined entities has been eliminated. The following table presents the summarized balance sheets information for the Issuers and the Guarantors as ofSeptember 30, 2022 and 2021 (in thousands): September 30, 2022 September 30, 2021 Inventory $ 714,477 $ 662,802 Intercompany receivable $ - $ 67,337 Current assets $ 827,155 $ 1,069,266 Total assets $ 1,982,982 $ 2,198,990 Current liabilities $ 549,415 $ 422,137 Intercompany payable $ 4,431 $ - Total liabilities $ 2,085,169 $ 2,343,946
The following table presents the summarized statement of earnings information for fiscal year 2022 (in thousands):
Net sales$ 3,105,851 Gross profit$ 1,572,752 Earnings before provision for income taxes$ 203,895 Net Earnings$ 149,486 Capital Requirements During the fiscal year ended 2022, we had total capital expenditures of approximately$95.1 million , excluding amounts paid in connection with the prior year, primarily in connection with our information technology projects and store improvements. Contractual Obligations The following table summarizes our contractual obligations atSeptember 30, 2022 (in thousands): Payments Due by Period Less than More than 1 year 1-3 years 3-5 years 5 years Total Long-term debt obligations, including interest(a)$ 128,926 $ 506,129 $ 986,336 $ -$ 1,621,391 Obligations under operating 174,464 245,161 133,267 103,144 leases(b) 656,036 Obligations under finance leases 167 282 - - 449 Purchase obligations(c) 17,831 25,692 - - 43,523 Other long-term 17,010 7,815 3,137 2,122 obligations(d)(e) 30,084 Total$ 338,398 $ 785,079 $ 1,122,740 $ 105,266 $ 2,351,483
(a) Long-term debt obligations include future interest payments on our debt
outstanding as of
include deferred debt issuance costs reflected in our consolidated balance
sheets, nor do they include the impact of any interest received from the
impact of our interest rate caps.
(b) The amounts reported for operating leases do not include common area
maintenance (CAM), property taxes or other executory costs. The amounts
shown above do not include immaterial contingent liabilities for operating
leases for which we are liable in the event of default by a franchisee.
(c) Purchase obligations reflect legally binding agreements that are entered
into by us to purchase goods or services, that specify minimum quantities
to be purchased and with fixed or variable price provisions. Amounts shown
do not reflect open purchase orders, mainly for merchandise, to be
fulfilled within one year, which are generally cancellable or contracts
that tend to be reoccurring in nature and similar in amount year over year. - 32 -
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(d) Other long-term obligations, including current portion, principally
represent obligations under insurance and self-insurance programs and
deferral of social security taxes in connection with the Coronavirus Aid,
Relief, and Economic Security Act. These obligations are included in accrued liabilities and other liabilities, as appropriate, in our consolidated balance sheets.
(e) The table above does not include above does not include an estimated
million of unrecognized tax benefits due to uncertainty regarding the realization and timing of the related future cash flows, if any. The information contained in the table above with regards to our long-term debt obligations is based on the current terms of such debt obligations and does not reflect any assumptions about our ability or intent to refinance any of our debt either on or before their maturity. In the event we refinance some or all of debt either on or before their maturity, actual payments for some of the periods shown may differ materially from the amounts reported herein. In addition, other future events, including potential increases in interest rates, could cause actual payments to differ materially from these amounts.
Off-Balance Sheet Financing Arrangements
At
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with generally accepted accounting principles inthe United States ("GAAP") requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure. Actual results could differ from the estimates and assumptions used, which could have a material impact to financial statements. We believe the following are our most critical accounting estimates that require subjective judgments, estimates and assumptions:
Valuation of Inventory
Our inventory is stated at the lower of weighted average cost or net realizable value. In assessing the net realizable value of inventory, we will adjust the carrying value of inventory for estimated shrinkage, damage and obsolescence using several key factors including estimates of the future demand for our products, historical turn-over rates, the age and sales history of the inventory, and historic as well as anticipated changes in SKUs. During fiscal year 2022, we estimated$19.4 million in obsolete inventory reserves in connection with our Distribution Center Consolidation and Store Optimization Plan. We estimate inventory shrinkage between physical counts and product damage based upon our historical experience. Actual results differing from these estimates could significantly affect our carrying value of inventory and cost of goods sold. Inventory shrinkage, in the aggregate, has remained less than 1.0% of consolidated net sales over the past two fiscal years. A 10% change in our estimate of inventory shrinkage and obsolescence reserves atSeptember 30, 2022 , would impact net earnings by approximately$4.1 million .
Vendor Rebates and Concessions
We deem cash consideration received from a vendor to be a reduction of the cost of goods sold unless it is in exchange for an asset or service or a reimbursement of a specific, incremental, identifiable cost incurred by us in selling the vendor's products. The majority of cash consideration we receive is considered to be a reduction of inventory and a subsequent reduction in cost of goods sold as the related products are sold. We consider the facts and circumstances of the various contractual agreements with vendors in order to determine the appropriate classification of amounts received in our consolidated statements of earnings. We record cash consideration expected to be received from vendors in accounts receivables, other when earned and at the amount we believe will be collected. These receivables could be significantly affected if the actual amounts subsequently collected differ from our expectations. Historically, adjustments between the amount recorded and the amount collected have not had a material impact to our results of operations.
Insurance
We retain a substantial portion of the risk related to employee health (primarily in theU.S. ), workers' compensation and general liability. However, we maintain stop-loss coverage to limit the exposure related to certain insurance risks. We base our health insurance liability estimate on trends in claim payment history, historical trends in claims - 33 - -------------------------------------------------------------------------------- incurred but not yet reported and other components such as expected increases in medical costs, projected premium costs and the number of plan participants. Additionally, we base our estimates for workers' compensation, general and product liability on an actuarial analysis performed by an independent third-party actuary. We review our insurance liability on a regular basis and adjust our accruals accordingly. Changes in facts and circumstances may lead to a change in the estimated liability due to revisions of the estimated ultimate costs that affect our liability insurance coverage. Our liabilities could be significantly affected if actual results differ from our expectations or prior actuarial analyses. A 10% adjustment in our insurance liabilities atSeptember 30, 2022 , would impact net earnings by approximately$1.5 million .
The changes in our insurance liabilities were as follows (in thousands):
Fiscal Year Ended September
30,
2022 2021 Balance at beginning of period $ 20,596 $
21,436
Self-insurance expense 68,695
61,388
Payments, net of employee contributions (68,736 ) (62,228 ) Balance at end of period $ 20,555 $ 20,596 Income Taxes We record income tax provisions in our consolidated financial statements based on an estimate of current income tax liabilities. The development of these provisions requires judgments about tax positions, potential outcomes and timing. If we prevail in tax matters for which provisions have been established or are required to settle matters in excess of established provisions, our effective tax rate for a particular period could be significantly affected. Additionally, deferred income taxes are recognized for the future tax consequences attributable to differences between our financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are estimated to be recovered or settled. We believe it is more-likely-than-not that our results of operations in the future will generate sufficient taxable income to realize our deferred tax assets, net of the valuation allowance currently recorded. We have recorded a valuation allowance to account for uncertainties regarding the recoverability of certain deferred tax assets, primarily foreign loss carryforwards and tax credit carryforwards. In the future, if we determine certain deferred tax assets will not be realizable, the related adjustments could significantly affect our effective tax rate at that time. An estimated tax benefit related to an uncertain tax position is recorded in our consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax position will withstand challenge, if any, from applicable taxing authorities.
Assessment of Long-Lived Assets for Impairment and Restructuring
We review long-lived assets, including operating lease assets, for impairment whenever events or circumstances indicate the carrying amount of an asset may not be fully recoverable based on estimated undiscounted future cash flows. Long-lived assets are reviewed at the lowest level of identifiable cash flows, which typically is at the store level. In assessing for impairment, we determine the fair value of each individual store by discounting projected future cash flows. There are certain estimates and assumptions used to arrive at estimated future cash flows, including projected earnings and growth rates. The carrying amount of a long-lived asset or asset group is considered impaired when the carrying value of the asset or asset group exceeds the expected future cash flows from the asset or asset group. The impairment loss recognized is the excess of the carrying value of the asset or asset group over its fair value. When we commit to an exit plan of scale that we believe will result in the disposal of long-lived assets prior to the end their useful lives, the approval of such plan may be considered a triggering event and therefore require a reassessment of asset carrying values for recoverability, based on projected cash flows. If the carrying values are not recoverable, write-downs or impairment charges may be required to bring carrying values of certain long-lived assets, including operating lease asset, to fair value. In connection with facility and store closures, we typically will also incur charges for employee severance, disposal costs and other expenses incurred with closures. These charges are accrued and estimated based on facts and circumstances at the time. Actual cash flows and expected payments could be significantly different from our estimates. - 34 - --------------------------------------------------------------------------------
For fiscal year 2022, we recognized an impairment loss of
Assessment of
We review goodwill and intangible assets for impairment annually, or when events or circumstances indicate it is more-likely-than-not that the value of the asset may be impaired. In assessing these types of assets for impairment, there are significant estimates and assumptions used to determine the fair value, including relevant market and economic conditions, anticipated future revenues and cash flows, royalty rates and discount rates. When assessing goodwill for impairment, we may perform a qualitative assessment which evaluates macro-economic conditions, current and projected cash flows, and other events or changes in circumstances to determine if a quantitative assessment is necessary. During quantitative assessment, we use a discounted cash flow model to determine an estimated fair value. If it is determined that the fair value of a reporting unit is less than its carrying value, an impairment charge will be recorded to bring the carrying value down to its fair value. As of the date of our last quantitative impairment test, a 10% decrease in either reporting unit's fair value would not have resulted in an impairment. For fiscal year 2022, we completed a qualitative assessment and determined that there were no material impacts to the reporting units to require a quantitative assessment. Like goodwill, our indefinite-lived intangible assets are tested for impairment by comparing the fair value of each asset to its carrying value. As ofSeptember 30, 2022 , our indefinite-lived assets were comprised of only trade names. To determine the fair value of each trade name, we use the relief-from-royalty method, which estimates what a third-party would be willing to pay in royalties to receive a benefit from the use of the asset. If it is determined the asset's fair value is less than its carrying value, then an impairment charge is recorded to reduce the carrying value down to its fair value. No impairment losses were recognized in fiscal years 2022, 2021 or 2020.
Recent Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements in Item 8 contained in this Annual Report for information about recent accounting pronouncements.
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