Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 28, 2013.

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 0-19357

 

 

MONRO MUFFLER BRAKE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

New York   16-0838627

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification #)

200 Holleder Parkway, Rochester, New York   14615
(Address of principal executive offices)   (Zip code)

585-647-6400

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

As of January 24, 2014, 31,449,326 shares of the registrant’s common stock, par value $ .01 per share, were outstanding.

 

 

 


Table of Contents

MONRO MUFFLER BRAKE, INC.

INDEX

 

      Page No.  

Part I. Financial Information

  

Item 1. Financial Statements (Unaudited)

  

Consolidated Balance Sheets at December 28, 2013 and March 30, 2013

     3   

Consolidated Statements of Comprehensive Income for the quarters and nine months ended December  28, 2013 and December 29, 2012

     4   

Consolidated Statement of Changes in Shareholders’ Equity for the nine months ended December  28, 2013

     5   

Consolidated Statements of Cash Flows for the nine months ended December 28, 2013 and December  29, 2012

     6   

Notes to Consolidated Financial Statements

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     12   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     15   

Item 4. Controls and Procedures

     16   

Part II. Other Information

  

Item 1. Legal Proceedings

     17   

Item 6. Exhibits

     17   

Signatures

     18   

Exhibit Index

     19   

 

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Table of Contents

MONRO MUFFLER BRAKE, INC.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

MONRO MUFFLER BRAKE, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

     December 28,
2013
    March 30,
2013
 
     (Dollars in thousands)  

Assets

    

Current assets:

    

Cash and equivalents

   $ 4,905     $ 1,463  

Trade receivables

     3,158       2,835  

Federal and state income taxes receivable

     —         2,336  

Inventories

     124,067       118,210  

Deferred income tax asset

     14,994       13,154  

Other current assets

     25,919       28,412  
  

 

 

   

 

 

 

Total current assets

     173,043       166,410  
  

 

 

   

 

 

 

Property, plant and equipment

     523,708       504,080  

Less - Accumulated depreciation and amortization

     (245,051     (229,034
  

 

 

   

 

 

 

Net property, plant and equipment

     278,657       275,046  

Goodwill

     266,497       249,803  

Intangible assets

     31,414       32,396  

Other non-current assets

     9,567       10,458  

Long-term deferred income tax asset

     2,221       5,320  
  

 

 

   

 

 

 

Total assets

   $ 761,399     $ 739,433  
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities:

    

Current portion of long-term debt, capital leases and financing obligations

   $ 7,489     $ 6,833  

Trade payables

     60,144       61,006  

Federal and state income taxes payable

     642       —    

Accrued payroll, payroll taxes and other payroll benefits

     17,243       18,302  

Accrued insurance

     33,140       29,498  

Warranty reserves

     9,779       9,060  

Other current liabilities

     14,105       13,431  
  

 

 

   

 

 

 

Total current liabilities

     142,542       138,130  

Long-term capital leases and financing obligations

     80,649       86,962  

Long-term debt

     112,483       127,847  

Accrued rent expense

     5,597       6,057  

Other long-term liabilities

     13,052       11,965  

Long-term income taxes payable

     2,667       3,430  
  

 

 

   

 

 

 

Total liabilities

     356,990       374,391  
  

 

 

   

 

 

 

Commitments

    

Shareholders’ equity:

    

Class C Convertible Preferred Stock, $1.50 par value, $.064 conversion value, 150,000 shares authorized; 32,500 shares issued and outstanding

     49       49  

Common Stock, $.01 par value, 65,000,000 shares authorized; 37,509,042 and 37,327,967 shares issued at December 28, 2013 and March 30, 2013, respectively

     375       373  

Treasury Stock, 6,073,836 shares at cost

     (90,064     (90,064

Additional paid-in capital

     139,149       131,460  

Accumulated other comprehensive loss

     (4,309     (4,043

Retained earnings

     359,209       327,267  
  

 

 

   

 

 

 

Total shareholders’ equity

     404,409       365,042  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 761,399     $ 739,433  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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MONRO MUFFLER BRAKE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

      Quarter Ended Fiscal     Nine Months Ended Fiscal  
     December     December  
     2013     2012     2013     2012  
    

(Dollars in thousands,

except per share data)

 

Sales

   $ 216,695     $ 190,437     $ 628,188     $ 536,088  

Cost of sales, including distribution and occupancy costs

     134,371       120,827       385,238       328,515  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     82,324       69,610       242,950       207,573  

Operating, selling, general and administrative expenses

     55,398       50,782       169,005       149,331  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     26,926       18,828       73,945       58,242  

Interest expense, net of interest income

     3,216       1,473       7,074       4,141  

Other income, net

     (352     (59     (583     (250
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     24,062       17,414       67,454       54,351  

Provision for income taxes

     8,733       6,159       24,904       19,911  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     15,329       11,255       42,550       34,440  

Other comprehensive loss, net of tax:

        

Changes in pension, net of tax benefit of $54 and $163 for the quarter and nine months ended fiscal December 2013, respectively

     (89     —         (266     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 15,240     $ 11,255     $ 42,284     $ 34,440  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ .49     $ .36     $ 1.35     $ 1.10  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ .47     $ .35     $ 1.31     $ 1.07  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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MONRO MUFFLER BRAKE, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

(Dollars in thousands)

 

     Preferred
Stock
     Common
Stock
     Treasury
Stock
    Additional
Paid-in
Capital
     Accumulated
Other
Comprehensive
Loss(2)
    Retained
Earnings
    Total  

Balance at March 30, 2013

   $ 49      $ 373      $ (90,064   $ 131,460      $ (4,043   $ 327,267     $ 365,042  

Net income

                  42,550       42,550  

Other comprehensive loss:

                 

Pension liability adjustment (($429) pre-tax)

                (266       (266

Cash dividends (1): Preferred

                  (250     (250

  Common

                  (10,358     (10,358

Tax benefit from exercise of stock options

             1,297            1,297  

Exercise of stock options

        2          3,464            3,466  

Stock-based compensation

             2,928            2,928  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 28, 2013

   $ 49      $ 375      $ (90,064   $ 139,149      $ (4,309   $ 359,209     $ 404,409  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Represents first, second and third quarter fiscal year 2014 dividend payment of $.11 per common share or common share equivalent paid each quarter on June 11, 2013, August 29, 2013 and December 26, 2013, respectively.
(2) The balance relates to the pension liability.

The accompanying notes are an integral part of these financial statements.

 

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MONRO MUFFLER BRAKE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Nine Months Ended  
     Fiscal December  
     2013     2012  
     (Dollars in thousands)
Increase (Decrease) in Cash
 

Cash flows from operating activities:

    

Net income

   $ 42,550     $ 34,440  
  

 

 

   

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities -

    

Depreciation and amortization

     23,755       19,422  

Gain on bargain purchase

     (261     —    

Loss on disposal of assets

     79       320  

Stock-based compensation expense

     2,928       2,412  

Excess tax benefits from share-based payment arrangements

     (133     (270

Net change in deferred income taxes

     1,513       (280

Change in operating assets and liabilities:

    

Trade receivables

     (323     (252

Inventories

     (4,300     (1,354

Other current assets

     2,604       (1,383

Other non-current assets

     2,034       596  

Trade payables

     (862     8,002  

Accrued expenses

     1,948       (742

Federal and state income taxes payable

     4,275       2,813  

Other long-term liabilities

     (11     (352

Long-term income taxes payable

     (763     (200
  

 

 

   

 

 

 

Total adjustments

     32,483       28,732  
  

 

 

   

 

 

 

Net cash provided by operating activities

     75,033       63,172  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (21,686     (21,066

Acquisitions, net of cash acquired

     (26,334     (145,967

Proceeds from the disposal of assets

     3,898       2,997  
  

 

 

   

 

 

 

Net cash used for investing activities

     (44,122     (164,036
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from borrowings

     234,980       284,675  

Principal payments on long-term debt, capital leases and financing obligations

     (255,440     (169,112

Exercise of stock options

     3,466       2,075  

Excess tax benefits from share-based payment arrangements

     133       270  

Dividends to shareholders

     (10,608     (12,739
  

 

 

   

 

 

 

Net cash (used for) provided by financing activities

     (27,469     105,169  
  

 

 

   

 

 

 

Increase in cash

     3,442       4,305  

Cash at beginning of period

     1,463       3,257  
  

 

 

   

 

 

 

Cash at end of period

   $ 4,905     $ 7,562  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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MONRO MUFFLER BRAKE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Condensed Consolidated Financial Statements

The consolidated balance sheets as of December 28, 2013 and March 30, 2013, the consolidated statements of comprehensive income for the quarters and nine months ended December 28, 2013 and December 29, 2012, the consolidated statements of cash flows for the nine months ended December 28, 2013 and December 29, 2012, and the consolidated statement of changes in shareholders’ equity for the nine months ended December 28, 2013, include financial information for Monro Muffler Brake, Inc. and its wholly-owned subsidiary, Monro Service Corporation (collectively, “Monro”, “we”, “us”, “our”). These unaudited, condensed consolidated financial statements have been prepared by Monro. We believe all known adjustments (consisting of normal recurring accruals or adjustments) have been made to fairly state the financial position, results of operations and cash flows for the unaudited periods presented.

Interim results are not necessarily indicative of results for a full year. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The information included in this Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended March 30, 2013.

We report our results on a 52/53 week fiscal year with the fiscal year ending on the last Saturday in March of each year. The following are the dates represented by each fiscal period reported in these condensed financial statements:

 

“Quarter Ended Fiscal December 2013”

  September 29, 2013 – December 28, 2013 (13 weeks)

“Quarter Ended Fiscal December 2012”

  September 30, 2012 – December 29, 2012 (13 weeks)

“Nine Months Ended Fiscal December 2013”

  March 31, 2013 – December 28, 2013 (39 weeks)

“Nine Months Ended Fiscal December 2012”

  April 1, 2012 – December 29, 2012 (39 weeks)

Fiscal year 2014, ending March 29, 2014, is a 52 week year.

Retrospective Adjustments – Purchase Accounting

During the quarter ended December 2013, we finalized the purchase accounting for several acquisitions that occurred in fiscal year 2013. We retrospectively adjusted the provisional amounts recognized at the acquisition dates to reflect fair value and made adjustments to the March 30, 2013 consolidated balance sheet. See Note 2 – “Acquisitions” for details.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board issued new accounting guidance for the reporting of amounts reclassified out of accumulated other comprehensive income. This guidance requires companies to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income when applicable, or to cross-reference the reclassifications with other disclosures that provide additional detail about the reclassification made when the reclassifications are not made to net income. This guidance is effective for fiscal years and interim periods beginning after December 15, 2012. The adoption of this guidance in the first quarter of fiscal 2014 did not have an impact on Monro’s Consolidated Financial Statements.

In July 2013, the Financial Accounting Standards Board issued new accounting guidance for income tax presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. This guidance requires an entity to net its unrecognized tax benefits against the deferred tax assets for all same jurisdiction net operating loss or similar tax loss carryforwards, or tax credit carryforwards. The guidance is to be applied prospectively (with an option to apply retrospectively) and will apply to all unrecognized tax benefits that exist at the effective date. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2013, with early adoption permitted. As we already net our unrecognized tax benefits against the deferred tax assets for all same jurisdiction net operating loss carryforwards, this guidance had no impact on Monro’s Consolidated Financial Statements.

Other recent authoritative guidance issued by the FASB (including technical corrections to the Accounting Standards Codification) and the Securities and Exchange Commission did not, or are not expected to have a material effect on Monro’s Consolidated Financial Statements.

 

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MONRO MUFFLER BRAKE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 2 – Acquisitions

Acquisitions are strategic moves in our plan to fill in and expand our presence in existing and contiguous markets, and leverage fixed operating costs such as distribution and advertising.

Fiscal 2014

On November 17, 2013, we acquired six retail tire and automotive repair stores located in Delaware and Maryland and four retail tire and automotive repair stores located in Kentucky from two separate sellers.

On August 18, 2013, we acquired 10 retail automotive repair stores located in the Washington D.C. metropolitan area from Curry’s Automotive Group. These retail automotive repair stores operate under the Curry’s/Mr. Tire name.

The fiscal 2014 acquisitions are not material to the Consolidated Financial Statements and supplemental pro forma information for the current or prior reporting periods has not been presented due to the impracticability of obtaining detailed, accurate or reliable data for the periods the acquired entities were not owned by Monro. These acquisitions were financed through our existing credit facility.

Fiscal 2013

On April 1, 2012, we acquired 20 retail tire and automotive repair stores located in Virginia from Kramer Tire Co. (“Kramer”). We finalized the purchase accounting for this acquisition in the fourth quarter of fiscal 2013.

As part of the acquisition process, the purchase accounting was finalized during fiscal 2014 for the following fiscal 2013 acquisitions.

On June 3, 2012, we acquired 18 retail tire and automotive repair stores located in North Carolina from Colony Tire Corporation (“Colony”). We finalized the purchase accounting for this acquisition during the first quarter of fiscal 2014.

On August 12, 2012, we acquired 17 retail automotive repair and tire stores located in Wisconsin and South Carolina from Tuffy Associates Corp. (“Tuffy”). We finalized the purchase accounting for this acquisition during the second quarter of fiscal 2014.

On October 7, 2012, we acquired five retail tire and automotive repair stores located in New York from Chesley Co. Inc., a former Midas franchise. We finalized the purchase accounting for this acquisition during the third quarter of fiscal 2014.

On October 14, 2012, we acquired one retail tire and automotive repair store located in Massachusetts from Brothers Tire, Inc. We finalized the purchase accounting for this acquisition during the third quarter of fiscal 2014.

On November 18, 2012, we acquired 31 retail tire stores located in Indiana, Tennessee and Illinois from Everybody’s Oil Corporation. We finalized the purchase accounting for this acquisition during the third quarter of fiscal 2014.

On December 16, 2012, we acquired 27 retail tire and automotive repair stores located in Indiana and Kentucky and a wholesale operation and warehouse in Kentucky from Ken Towery’s Auto Care of Kentucky, Inc. and Ken Towery’s Auto Care of Indiana, Inc. We finalized the purchase accounting for this acquisition during the third quarter of fiscal 2014.

As a result of the final purchase price allocations, certain of the fair value amounts previously estimated were adjusted during the measurement period. These measurement period adjustments related to updated valuation reports and appraisals received from our external valuation specialists, as well as revisions to internal estimates. The changes in estimates include an increase in property, plant and equipment of $4.2 million; an increase in intangible assets of $3.9 million; an increase in the long-term deferred income tax asset of $7.4 million; an increase in the current portion of long-term debt, capital leases and financing obligations of $1.9 million; a decrease in warranty reserves of $.2 million; an increase in long-term capital leases and financing obligations of $28.1 million; and an increase in other long-term liabilities of $.2 million. The measurement period adjustments resulted in an increase to goodwill of $14.5 million.

The purchase price allocation (shown below) and the March 30, 2013 consolidated balance sheet have been retrospectively adjusted to reflect the purchase accounting measurement period adjustments described above. Additionally, the adjustments did not have a material impact on the current period or any prior period consolidated statements of comprehensive income, and, therefore, prior period consolidated statements of comprehensive income have not been retrospectively adjusted.

 

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MONRO MUFFLER BRAKE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The acquisitions resulted in goodwill related to, among other things, growth opportunities and unidentifiable intangible assets. All of the goodwill is expected to be deductible for tax purposes. We have recorded finite-lived intangible assets at their estimated fair value related to customer relationships, trade names and favorable leases.

In accordance with accounting guidance on business combinations, we expensed all costs related to the acquisitions in the nine months ended December 29, 2012. The total costs related to the acquisitions were $.6 million and $1.3 million for the three and nine months ended December 29, 2012, respectively. These costs are included in the consolidated statements of comprehensive income primarily under operating, selling, general and administrative expenses.

The purchase price of the acquisitions has been allocated to the net tangible and intangible assets acquired, with the remainder recorded as goodwill on the basis of estimated fair values, as follows:

 

     (Dollars in thousands)  

Inventories

   $ 16,645  

Other current assets

     1,214  

Property, plant and equipment

     38,531  

Intangible assets

     19,920  

Long-term deferred income tax asset

     13,030  
  

 

 

 

Total assets acquired

     89,340  

Warranty reserves

     3,166  

Other current liabilities

     4,338  

Long-term capital leases and financing obligations

     43,218  

Other long-term liabilities

     4,096  
  

 

 

 

Total liabilities assumed

     54,818  
  

 

 

 

Total net identifiable assets acquired

   $ 34,522  
  

 

 

 

Total consideration transferred

   $ 144,715  

Less: total net identifiable assets acquired

     34,522  
  

 

 

 

Goodwill

   $ 110,193  
  

 

 

 

Intangible assets consist of customer relationships ($8.3 million), trade names ($6.6 million) and favorable leases ($5.0 million). Customer relationships, trade names and favorable leases are being amortized over their estimated useful lives. The weighted average useful lives are approximately six, 17 and 12 years, respectively. The weighted average useful life of all intangible assets is 11 years.

Sales for the fiscal 2013 acquired entities for the three and nine months ended December 29, 2012 totaled $21.7 million and $42.8 million, respectively for the period from acquisition date through December 29, 2012.

Supplemental pro forma information for the current or prior reporting periods has not been presented due to the impracticability of obtaining detailed, accurate or reliable data for the periods the acquired entities were not owned by Monro.

We continue to refine the valuation data and estimates related to road hazard warranty, intangible assets, real estate and real property leases for all other fiscal 2013 acquisitions and the fiscal 2014 acquisitions, and expect to complete the valuations no later than the first anniversary date of the respective acquisition. We anticipate that adjustments will continue to be made to the fair values of identifiable assets acquired and liabilities assumed and those adjustments may or may not be material.

 

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MONRO MUFFLER BRAKE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 3 – Earnings Per Share

Basic earnings per common share (EPS) amounts are computed by dividing income available to common shareholders, after deducting preferred stock dividends, by the average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive equivalent securities outstanding.

The following is a reconciliation of basic and diluted EPS for the respective periods:

 

     Quarter Ended
Fiscal December
    Nine Months Ended
Fiscal December
 
     2013     2012     2013     2012  
    

(Dollars in thousands,

except per share data)

 

Numerator for earnings per common share calculation:

        

Net Income

   $ 15,329     $ 11,255     $ 42,550     $ 34,440  

Preferred stock dividends

     (83     (152     (250     (304
  

 

 

   

 

 

   

 

 

   

 

 

 

Income available to common stockholders

   $ 15,246     $ 11,103     $ 42,300     $ 34,136  
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator for earnings per common share calculation:

        

Weighted average common shares, basic

     31,417       31,116       31,369       31,020  

Effect of dilutive securities:

        

Preferred stock

     760       760       760       760  

Stock options

     456       364       438       507  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares, diluted

     32,633       32,240       32,567       32,287  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic Earnings per common share:

   $ .49     $ .36     $ 1.35     $ 1.10  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted Earnings per common share:

   $ .47     $ .35     $ 1.31     $ 1.07  
  

 

 

   

 

 

   

 

 

   

 

 

 

The computation of diluted EPS excludes the effect of the assumed exercise of approximately 86,000 and 98,000 stock options for the three and nine months ended fiscal December 28, 2013, respectively, and 1,034,000 and 967,000 stock options for the three and nine months ended December 29, 2012, respectively. Such amounts were excluded as the exercise prices of these stock options were greater than the average market value of our Common Stock for those periods, resulting in an anti-dilutive effect on diluted EPS.

Note 4 – Income Taxes

In the normal course of business, we provide for uncertain tax positions and the related interest and penalties, and adjust our unrecognized tax benefits and accrued interest and penalties accordingly. The total amounts of unrecognized tax benefits were $5.3 million and $5.7 million at December 28, 2013 and March 30, 2013, respectively, the majority of which, if recognized, would affect the effective tax rate. As of December 28, 2013, we had approximately $.3 million of interest and penalties accrued related to unrecognized tax benefits.

We file U.S. federal income tax returns and income tax returns in various state jurisdictions. Our fiscal 2011 through fiscal 2013 U.S. federal tax years and various state tax years remain subject to income tax examinations by tax authorities.

Note 5 – Fair Value

Long-term debt had a carrying amount and a fair value of $112.5 million as of December 28, 2013, as compared to a carrying amount and a fair value of $127.8 million as of March 30, 2013. The fair value of long-term debt was estimated based on discounted cash flow analyses using either quoted market prices for the same or similar issues, or the current interest rates offered to Monro for debt with similar maturities.

 

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MONRO MUFFLER BRAKE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6 – Supplemental Disclosure of Cash Flow Information

The following represents non-cash investing and financing activities during the periods indicated:

Nine Months Ended December 28, 2013:

In connection with the fiscal 2014 acquisitions, liabilities were assumed as follows:

 

Fair value of assets acquired

   $ 12,184,000  

Goodwill acquired

     16,714,000  

Gain on bargain purchase

     (261,000

Cash paid, net of cash acquired

     (26,334,000
  

 

 

 

Liabilities assumed

   $ 2,303,000   
  

 

 

 

Nine Months Ended December 29, 2012:

In connection with the fiscal 2013 acquisitions, liabilities were assumed as follows:

 

Fair value of assets acquired

   $ 89,340,000  

Goodwill acquired

     110,193,000  

Cash paid, net of cash acquired

     (144,715,000
  

 

 

 

Liabilities assumed

   $ 54,818,000  
  

 

 

 

These amounts reflect final purchase accounting adjustments for the fiscal 2013 acquisitions. (See Note 2).

Note 7 – Cash Dividend

In May 2013, our Board of Directors declared its intention to pay a regular quarterly cash dividend during fiscal 2014 of $.11 per common share or common share equivalent to be paid beginning with the first quarter of fiscal 2014. However, the declaration of and any determination as to the payment of future dividends will be at the discretion of the Board of Directors and will depend on our financial condition, results of operations, capital requirements, compliance with charter and credit facility restrictions, and such other factors as the Board of Directors deems relevant.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including (without limitation) statements made in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, may contain statements of future expectations and other forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this Quarterly Report on Form 10-Q, the words “anticipates”, “believes”, “contemplates”, “see”, “could”, “estimate”, “appear”, “intend”, “plans” and variations thereof and similar expressions, are intended to identify forward-looking statements. Forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed. These factors include, but are not necessarily limited to, product demand, dependence on and competition within the primary markets in which Monro’s stores are located, the need for and costs associated with store renovations and other capital expenditures, the effect of economic conditions, seasonality, the impact of competitive services and pricing, parts supply restraints or difficulties, advances in automotive technologies, industry regulation, risks relating to leverage and debt service (including sensitivity to fluctuations in interest rates), continued availability of capital resources and financing, disruption or unauthorized access to our computer systems, risks relating to protection of customer and employee personal data, risks relating to litigation, risks relating to integration of acquired businesses, including goodwill impairment and the risks set forth in our Annual Report on Form 10-K for the fiscal year ended March 30, 2013 and subsequently filed quarterly reports on Form 10-Q. Except as required by law, we do not undertake to update any forward-looking statement that may be made from time to time by us or on our behalf.

Results of Operations

The following table sets forth income statement data of Monro Muffler Brake, Inc. expressed as a percentage of sales for the fiscal periods indicated:

 

     Quarter Ended
Fiscal December
    Nine Months Ended
Fiscal December
 
     2013     2012     2013     2012  

Sales

     100.0 %     100.0 %     100.0 %     100.0 %

Cost of sales, including distribution and occupancy costs

     62.0       63.4       61.3       61.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     38.0       36.6       38.7       38.7  

Operating, selling, general and administrative expenses

     25.6       26.7       26.9       27.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     12.4       9.9       11.8       10.9  

Interest expense - net

     1.5       0.8       1.1       0.8  

Other income - net

     (0.2     0.0        (0.1     0.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     11.1       9.1       10.7       10.1  

Provision for income taxes

     4.0       3.2       4.0       3.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     7.1 %     5.9 %     6.8 %     6.4 %
  

 

 

   

 

 

   

 

 

   

 

 

 

Third Quarter and Nine Months Ended December 28, 2013 Compared to Third Quarter and Nine Months Ended December 29, 2012

Sales were $216.7 million for the quarter ended December 28, 2013 as compared with $190.4 million in the quarter ended December 29, 2012. The sales increase of $26.3 million or 13.8%, was due primarily to an increase of $29.6 million related to new stores, excluding the former Kramer Tire stores. (The Kramer stores are considered comparable stores in fiscal 2014 as they were acquired on April 1, 2012 and in operation for a full fiscal year.) Comparable store sales also increased by .3%. Partially offsetting this was a decrease in sales from closed stores amounting to $1.5 million. There were 89 selling days in both the quarters ended December 28, 2013 and December 29, 2012.

 

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Additionally, during the quarter ended December 29, 2012, we completed the bulk sale of approximately $2.4 million of slower moving inventory to a barter company in exchange for barter credits. There was no similar transaction in the third quarter of fiscal 2014. The barter transactions for the quarter ended December 29, 2012 decreased gross profit and operating expenses by .2% and .3%, of sales, respectively.

Sales were $628.2 million for the nine months ended December 28, 2013 as compared with $536.1 million in the nine months ended December 29, 2012. The sales increase of $92.1 million or 17.2%, was due to an increase of $99.5 million related to new stores, excluding Kramer. This was partially offset by a decrease in comparable store sales of .2% and a decrease in sales from closed stores amounting to $3.9 million. There were 270 selling days in the first nine months of fiscal 2014 and fiscal 2013.

For the nine months ended December 29, 2012, we sold a total of $2.4 million of slow moving inventory in exchange for barter credits.

At December 28, 2013, we had 951 company-operated stores and three franchised locations as compared with 918 company-operated stores and three franchised locations at December 29, 2012. (At March 30, 2013, we had 937 company-operated stores.) During the quarter ended December 28, 2013, we added 13 stores and closed two stores. Year-to-date, we have added 26 stores and closed 12 stores.

We believe that the increase in comparable store sales for the quarter ended December 28, 2013 resulted primarily from increased comparable store tire and brake sales related to harsher winter weather conditions than in the quarter ended December 29, 2012. Consumer purchasing decisions appear to have been based on safety concerns due to the harsher winter weather. However, due to continued weak economic conditions, we believe that consumers continue to defer service repairs, as evidenced by comparable store sales declines in other service categories.

Gross profit for the quarter ended December 28, 2013 was $82.3 million or 38.0% of sales as compared with $69.6 million or 36.6% of sales for the quarter ended December 29, 2012. The increase in gross profit for the quarter ended December 28, 2013, as a percentage of sales, is due to several factors, as discussed below.

Distribution and occupancy costs decreased as a percentage of sales from the prior year as we gained leverage on these largely fixed costs with higher overall sales. Additionally, occupancy costs decreased this quarter due in part to opening balance sheet lease accounting adjustments related to recent acquisitions. Labor costs decreased as a percentage of sales as compared to the prior year through focused payroll control. Labor productivity, as measured by sales per man hour, improved over the prior year quarter.

Total material costs, including outside purchases, were relatively flat with the prior year. We saw a meaningful decline in product costs, which were offset by a shift in sales mix to the lower margin tire category, due primarily to the fiscal year 2013 and 2014 acquisitions of tire stores with high tire sales mix. Additionally, excluding the fiscal year 2013 and 2014 acquisition stores, total material costs declined almost a full percentage point as compared to the third quarter of last year.

Gross profit for the nine months ended December 28, 2013 was $242.9 million as compared with $207.6 million for the nine months ended December 29, 2012, and remained flat at 38.7% of sales.

Operating expenses for the quarter ended December 28, 2013 were $55.4 million or 25.6% of sales as compared with $50.8 million or 26.7% of sales for the quarter ended December 29, 2012. Due to increased sales from the fiscal 2013 and fiscal 2014 acquisitions and the increase in comparable store sales, as well as continued cost control, we gained leverage on these largely fixed costs.

Within operating expenses, approximately $5 million in expenses were directly attributable to increased expenses such as manager pay, advertising and supplies related to the fiscal 2013 and fiscal 2014 acquisition stores. On a comparable store basis, operating expenses decreased, demonstrating some leverage in this line through focused cost control.

For the nine months ended December 28, 2013, operating expenses increased by $19.7 million to $169.0 million from the comparable period of the prior year and were 26.9% of sales as compared to 27.9% for the nine months ended December 29, 2012.

Operating income for the quarter ended December 28, 2013 of approximately $26.9 million increased by 43.0% as compared to operating income of approximately $18.8 million for the quarter ended December 29, 2012, and increased as a percentage of sales from 9.9% to 12.4% for the reasons described above.

Operating income for the nine months ended December 28, 2013 of approximately $73.9 million increased by 27.0% as compared to operating income of approximately $58.2 million for the nine months ended December 29, 2012, and increased as a percentage of sales from 10.9% to 11.8% for the reasons described above.

 

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Net interest expense for the quarter ended December 28, 2013 increased by approximately $1.7 million as compared to the same period in the prior year, and increased from .8% to 1.5% as a percentage of sales for the same periods, due primarily to the true up of opening balance sheet lease accounting related to recent acquisitions. There was a corresponding decrease in occupancy costs (primarily rent) included in cost of sales during the quarter. There was an increase in the weighted average interest rate of approximately 180 basis points from the prior year related entirely to these opening balance sheet adjustments. The weighted average debt outstanding for the quarter ended December 28, 2013 increased by approximately $72 million as compared to the quarter ended December 29, 2012. This increase is primarily related to an increase in capital leases recorded in connection with the purchase of our fiscal 2013 acquisitions. This increase was partially offset by repayments made on our Revolving Credit Facility agreement (long-term debt).

Net interest expense for the nine months ended December 28, 2013 increased by approximately $2.9 million as compared to the same period in the prior year, and increased from .8% to 1.1% as a percentage of sales for the same periods. Weighted average debt increased by approximately $92 million and the weighted average interest rate decreased by approximately 35 basis points as compared to the same period of the prior year.

Other income, net, for the quarter ended December 28, 2013 of $.4 million increased $.3 million from $.1 million for the quarter ended December 29, 2012. The increase is primarily related to a gain on a bargain purchase from a store acquisition during fiscal 2014.

Other income, net, for the nine months ended December 28, 2013 was $.6 million as compared with $.3 million for the same period of the prior year.

The effective tax rate for the quarter ended December 28, 2013 and December 29, 2012 was 36.3% and 35.4%, respectively, of pre-tax income.

The effective tax rate for the nine months ended December 28, 2013 and December 29, 2012 was 36.9% and 36.6%, respectively, of pre-tax income.

Net income for the quarter ended December 28, 2013 of $15.3 million increased 36.2% from net income for the quarter ended December 29, 2012. Earnings per share on a diluted basis for the quarter ended December 28, 2013 of $.47 increased 34.3%.

For the nine months ended December 28, 2013, net income of $42.6 million increased 23.5% and diluted earnings per share of $1.31 increased 22.4%.

Capital Resources and Liquidity

Capital Resources

Our primary capital requirements in fiscal 2014 are the upgrading of facilities and systems and the funding of our store expansion program, including potential acquisitions of existing store chains. For the nine months ended December 28, 2013, we spent approximately $48.0 million on these items. Capital requirements were met primarily by cash flow from operations and from our revolving credit facility.

In May 2013, our Board of Directors declared its intention to pay a regular quarterly cash dividend of $.11 per common share or common share equivalent beginning with the first quarter of fiscal year 2014. We paid dividends of $10.6 million during the nine months ended December 28, 2013. However, the declaration of and any determination as to the payment of future dividends will be at the discretion of the Board of Directors and will depend on Monro’s financial condition, results of operations, capital requirements, compliance with charter and credit facility restrictions, and such other factors as the Board of Directors deems relevant.

We plan to continue to seek suitable acquisition candidates. We believe we have sufficient resources available (including cash flow from operations and bank financing) to expand our business as currently planned for the next twelve months.

Liquidity

In June 2011, we entered into a five-year, $175 million Revolving Credit Facility agreement with seven banks (the “Credit Facility”). The Credit Facility amended and restated, in its entirety, the Credit Facility previously entered into by Monro as of July 2005 and amended from time to time. The Credit Facility also provided an accordion feature permitting us to request an increase in availability of up to an additional $75 million.

 

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In December 2012, the Credit Facility was amended to include the following: the committed sum was increased by $75 million to $250 million; the term was extended for another one and a half years, such that the Facility now expires in December 2017; and the $75 million accordion feature was maintained. There were no other changes in terms including those related to covenants or interest rates. There are now six banks participating in the syndication. There was $112.5 million outstanding under the Credit Facility at December 28, 2013.

Within the Credit Facility, we have a sub-facility of $40 million available for the purpose of issuing standby letters of credit. There was an outstanding letter of credit for $22.7 million at December 28, 2013.

The net availability under the Credit Facility at December 28, 2013 was $114.8 million.

Specific terms of the Credit Facility permit the payment of cash dividends not to exceed 50% of the prior year’s net income, and permit mortgages and specific lease financing arrangements with other parties with certain limitations. Additionally, the Credit Facility is not secured by our real property, although we have agreed not to encumber our real property, with certain permissible exceptions. The agreement also requires the maintenance of specified interest and rent coverage ratios. We were in compliance with all debt covenants at December 28, 2013.

We have financed certain store properties and equipment with capital leases/financing obligations, which amounted to $87.5 million at December 28, 2013 and are due in installments through 2042.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board issued new accounting guidance for the reporting of amounts reclassified out of accumulated other comprehensive income. This guidance requires companies to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income when applicable, or to cross-reference the reclassifications with other disclosures that provide additional detail about the reclassification made when the reclassifications are not made to net income. This guidance is effective for fiscal years and interim periods beginning after December 15, 2012. The adoption of this guidance in the first quarter of fiscal 2014 did not have an impact on Monro’s Consolidated Financial Statements.

In July 2013, the Financial Accounting Standards Board issued new accounting guidance for income tax presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. This guidance requires an entity to net its unrecognized tax benefits against the deferred tax assets for all same jurisdiction net operating loss or similar tax loss carryforwards, or tax credit carryforwards. The guidance is to be applied prospectively (with an option to apply retrospectively) and will apply to all unrecognized tax benefits that exist at the effective date. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2013, with early adoption permitted. As we already net our unrecognized tax benefits against the deferred tax assets for all same jurisdiction net operating loss carryforwards, this guidance had no impact on Monro’s Consolidated Financial Statements.

Other recent authoritative guidance issued by the FASB (including technical corrections to the Accounting Standards Codification) and the Securities and Exchange Commission did not, or are not expected to have a material effect on Monro’s Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from potential changes in interest rates. At December 28, 2013 and March 30, 2013, approximately .6% and .5%, respectively, of our debt financing, excluding capital leases and financing obligations, was at fixed interest rates and therefore, the fair value is affected by changes in market interest rates. Our cash flow exposure on floating rate debt would result in annual interest expense fluctuations of approximately $1.1 million based upon our debt position at December 28, 2013 and $1.3 million for the fiscal year ended March 30, 2013, given a 1% change in LIBOR.

Long-term debt had a carrying amount and a fair value of $112.5 million as of December 28, 2013, as compared to a carrying amount and a fair value of $127.8 million as of March 30, 2013.

 

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Item 4. Controls and Procedures

Disclosure controls and procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that we file or submit to the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In conjunction with the close of each fiscal quarter and under the supervision of our Chief Executive Officer and Chief Financial Officer, we conduct an update, a review and an evaluation of the effectiveness of our disclosure controls and procedures. It is the conclusion of our Chief Executive Officer and Chief Financial Officer, based upon an evaluation completed as of the end of the most recent fiscal quarter reported on herein, that our disclosure controls and procedures were effective.

Changes in internal controls over financial reporting

There were no changes in our internal control over financial reporting during the quarter ended December 28, 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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MONRO MUFFLER BRAKE, INC.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are not a party or subject to any legal proceedings other than certain claims and lawsuits that arise in the normal course of our business. We do not believe that such claims or lawsuits, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.

Item 6. Exhibits

Exhibits

31.1 – Certification of John W. Van Heel pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

31.2 – Certification of Catherine D’Amico pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

32.1 – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002

101.CAL - XBRL Taxonomy Extension Calculation Linkbase

101.INS - XBRL Instance Document

101.LAB - XBRL Taxonomy Extension Label Linkbase

101.PRE - XBRL Taxonomy Extension Presentation Linkbase

101.SCH - XBRL Taxonomy Extension Schema Linkbase

101.DEF - XBRL Taxonomy Extension Definition Linkbase

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    MONRO MUFFLER BRAKE, INC.

DATE: February 4, 2014

  By:  

/s/ John W. Van Heel

    John W. Van Heel
    Chief Executive Officer and President

DATE: February 4, 2014

  By:  

/s/ Catherine D’Amico

    Catherine D’Amico
    Executive Vice President-Finance, Treasurer,
    Chief Financial Officer (Principal Financial Officer
    and Principal Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit No.

  

Description

   Page No.  
31.1    Certification of John W. Van Heel pursuant to Section 302 of the Sarbanes-Oxley Act of 2002      20   
31.2    Certification of Catherine D’Amico pursuant to Section 302 of the Sarbanes-Oxley Act of 2002      21   
32.1    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002      22   
101.CAL    XBRL Taxonomy Extension Calculation Linkbase   
101.INS    XBRL Instance Document   
101.LAB    XBRL Taxonomy Extension Label Linkbase   
101.PRE    XBRL Taxonomy Extension Presentation Linkbase   
101.SCH    XBRL Taxonomy Extension Schema Linkbase   
101.DEF    XBRL Taxonomy Extension Definition Linkbase   

 

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