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Regis Corp. Reports Operating Results (10-Q)

February 06, 2012 | About:
10qk

10qk

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Regis Corp. (RGS) filed Quarterly Report for the period ended 2011-12-31.

Regis Corp. has a market cap of $1.02 billion; its shares were traded at around $17.62 with a P/E ratio of 14.68 and P/S ratio of 0.44. The dividend yield of Regis Corp. stocks is 1.36%.

Highlight of Business Operations:

Regis determined that the Company has met the power criterion due to the Company having the authority to direct the activities that most significantly impact Roosters economic performance. The Company concluded based on the considerations above that it is the primary beneficiary of Roosters and therefore the financial positions, results of operations, and cash flows of Roosters are consolidated in the Companys financial statements from the acquisition date. Total assets, total liabilities and total shareholders equity of Roosters as of December 31, 2011 were $5.7, $2.1 and $3.6 million, respectively. Net loss attributable to the noncontrolling interest in Roosters was less than $0.1 million for the three and six months ended December 31, 2011, and was recorded within interest income and other, net in the Condensed Consolidated Statement of Operations. Shareholders equity attributable to the noncontrolling interest in Roosters was $1.4 million as of December 31, 2011 and was recorded within retained earnings on the Condensed Consolidated Balance Sheet.

The Company utilized consolidation of variable interest entities guidance to determine whether or not its investment in EEG was a variable interest entity (VIE), and if so, whether the Company was the primary beneficiary of the VIE. The Company concluded that EEG was not a VIE based on the fact that EEG had sufficient equity at risk. As the substantive voting control relates to the voting rights of the Board of Directors, the Company granted the other shareholder a proxy to vote such number of the Companys shares such that the other shareholder would have voting control of 51.0 percent of the common stock of EEG. The Company accounts for EEG as an equity investment under the voting interest model. During the three months ended December 31, 2011 and 2010, the Company recorded $1.5 and $1.7 million, respectively, of equity earnings related to its investment in EEG. During the six months ended December 31, 2011 and 2010, the Company recorded $2.5 and $2.9 million, respectively, of equity earnings related to its investment in EEG. EEG declared and distributed a dividend in December 2010 for which the Company received $4.1 million in cash and recorded tax expense of $0.3 million.

The merger agreement contains a right, Provalliance Equity Put, to require the Company to purchase an additional ownership interest in Provalliance between specified dates in 2010 to 2018. The acquisition price is determined based on a multiple of the earnings before interest, taxes, depreciation and amortization of Provalliance for a trailing twelve month period adjusted for certain items as defined in the agreement which is intended to approximate fair value. The initial estimated fair value of the Provalliance Equity Put as of January 31, 2008, approximately $24.8 million, has been included as a component of the Companys investment in Provalliance. A corresponding liability for the same amount as the Provalliance Equity Put was recorded in other noncurrent liabilities. Any changes in the estimated fair value of the Provalliance Equity Put are recorded in the Companys consolidated statement of operations. There was no change in the fair value of the Provalliance Equity put during the six months ended December 31, 2011 and 2010. Any changes related to foreign currency translation are recorded in accumulated other comprehensive income. The Company recorded a $2.3 million decrease and $2.1 million increase in the Provalliance Equity Put related to foreign currency translation during the six months ended December 31, 2011 and 2010, respectively. See further discussion within Note 3 to the Condensed Consolidated Financial Statements. If the Provalliance Equity Put is exercised, and the Company fails to complete the purchase, the parties exercising the Provalliance Equity Put will be entitled to exercise various remedies against the Company, including the right to purchase the Companys interest in Provalliance for a purchase price determined based on a discounted multiple of the earnings before interest and taxes of Provalliance for a trailing twelve month period. The merger agreement also contains an option, Provalliance Equity Call, whereby the Company can acquire additional ownership interest in Provalliance between specific dates in 2018 to 2020 at an acquisition price determined consistent with the Provalliance Equity Put.

During the three months ended December 31, 2011, the Company recorded a goodwill impairment charge of $78.4 million, which is only partially deductible for tax purposes. This impairment, when included as a part of the Companys estimated annual pretax income for the year, resulted in the Company estimating near break-even results for the current fiscal year. When a company estimates nominal profits or losses and has significant non-deductible differences, minor fluctuations in the estimated annual pretax income or loss can result in significant fluctuations of a companys estimated annual effective tax rate. When calculating its income tax provision for the three months ended December 31, 2011 using the annual effective tax rate method, the Company determined that a $1.0 million increase in estimated annual pretax income would increase the tax provision by approximately $21 million, and a $1.0 million decrease in estimated annual pretax income would decrease the tax provision by approximately $16 million. Based on these significant fluctuations, the Company concluded that it could not meaningfully estimate its annual effective tax rate as projected annual pretax income may fluctuate by $1.0 million or more as part of the Companys normal earnings projection process. As a result, the Company calculated its tax rate on a year-to-date basis for the three months ended December 31, 2011 rather than utilizing its historical method of calculating an estimated annual effective tax rate. Utilizing the year-to-date method better reflects the tax effect of the events occurring during the quarter and provides more meaningful information as to the effect of income taxes on the Companys operations. The Company will also use the year-to-date method for the remainder of the year because it used the year-to-date method for the three months ended December 31, 2011.

The basis point increase in site operating expenses as a percent of consolidated revenues during the three and six months ended December 31, 2010 was primarily due to a planned increase in advertising expense within a portion of the Companys Promenade salons, higher self insurance accruals and an increase in salon level telecommunications expenses related to the Companys internet in the salon initiative. The Company recorded an increase in self insurance accruals of $0.5 million in the three months ended December 31, 2010, compared to a $1.9 million reduction in the three months ended December 31, 2009. The basis point increase for the six months ended December 31, 2010 was partially offset by the prior year comparable period included $3.6 million expense related to two legal claims on customer and employee matters.

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