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MNRO > SEC Filings for MNRO > Form 10-Q on 31-Oct-2013All Recent SEC Filings

Show all filings for MONRO MUFFLER BRAKE INC

Form 10-Q for MONRO MUFFLER BRAKE INC


31-Oct-2013

Quarterly Report


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", "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. 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 September             Six Months Ended Fiscal September
                                                    2013                  2012                2013                      2012
Sales                                                   100.0 %               100.0 %              100.0 %                   100.0 %

Cost of sales, including distribution and
occupancy costs                                          60.2                  60.4                 61.0                      60.1

Gross profit                                             39.8                  39.6                 39.0                      39.9

Operating, selling, general and
administrative expenses                                  28.2                  28.4                 27.6                      28.5

Operating income                                         11.6                  11.2                 11.4                      11.4

Interest expense - net                                    1.0                   0.8                  0.9                       0.8

Other income - net                                       (0.1 )                (0.1 )               (0.1 )                    (0.1 )

Income before provision for income taxes                 10.7                  10.5                 10.5                      10.7

Provision for income taxes                                4.1                   3.9                  3.9                       4.0

Net income                                                6.6 %                 6.5 %                6.6 %                     6.7 %

Second Quarter and Six Months Ended September 28, 2013 Compared to Second Quarter and Six Months Ended September 29, 2012

Sales were $205.3 million for the quarter ended September 28, 2013 as compared with $176.5 million in the quarter ended September 29, 2012. The sales increase of $28.8 million or 16.3%, was due to an increase of $33.9 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.) Partially offsetting this was a comparable store sales decrease of 2.1% and a decrease in sales from closed stores amounting to $1.4 million. There were 91 selling days in both the quarters ended September 28, 2013 and September 29, 2012.

Sales were $411.5 million for the six months ended September 28, 2013 as compared with $345.7 million in the six months ended September 29, 2012. The sales increase of $65.8 million or 19.0%, was due to an increase of $69.9 million related to new stores, excluding Kramer. This was partially offset by a decrease in comparable store sales of .5% and a decrease in sales from closed stores amounting to $2.4 million. There were 181 selling days in the first six months of fiscal 2014 and fiscal 2013.


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At September 28, 2013, we had 940 company-operated stores and three franchised locations as compared with 853 company-operated stores and three franchised locations at September 29, 2012. (At March 30, 2013, we had 937 company-operated stores.) During the quarter ended September 28, 2013, we added 12 stores and closed six stores. Year to date, we added 13 stores and closed ten stores.

We believe that the decline in comparable store sales resulted mainly from the continued weak economic conditions as consumers continued to defer repairs to their vehicles. Comparable store tire sales and scheduled maintenance services declined in the second quarter of fiscal 2014. However, other service categories, including exhaust, shocks, oil changes and brakes, increased on a comparable store basis as compared to the prior year, demonstrating that needed repairs cannot be deferred indefinitely.

Gross profit for the quarter ended September 28, 2013 was $81.7 million or 39.8% of sales as compared with $69.9 million or 39.6% of sales for the quarter ended September 29, 2012. The increase in gross profit for the quarter ended September 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. Labor costs decreased as a percentage of sales as compared to the prior year through focused cost control. Labor productivity, as measured by sales per man hour, improved over the prior year quarter. Additionally, tire costs decreased meaningfully in the second quarter of this year as compared to the same quarter of last year.

Partially offsetting these decreases was an increase in total material costs, including outside purchases, due to a shift in sales mix to the lower margin tire category, due primarily to the fiscal year 2013 acquisitions of 125 tire stores with high tire sales mix.

Additionally, excluding the fiscal year 2013 and 2014 acquisition stores, gross profit actually improved by approximately 150 basis points as compared to the second quarter of last year.

Gross profit for the six months ended September 28, 2013 was $160.6 million or 39.0% of sales as compared with $138.0 million or 39.9% of sales for the six months ended September 29, 2012. The year-to-date decrease in gross profit as a percent of sales is due to increased material costs as described above, partially offset by decreased distribution and occupancy costs and labor costs, due to increased leverage on higher sales and increased labor productivity, respectively.

Operating expenses for the quarter ended September 28, 2013 were $57.8 million or 28.2% of sales as compared with $50.1 million or 28.4% of sales for the quarter ended September 29, 2012. Due to increased sales from the fiscal 2013 and fiscal 2014 acquisitions and continued cost control, we gained leverage on these largely fixed costs.

Within operating expenses, over $6.9 million in expenses were directly attributable to increased expenses such as manager pay, advertising and supplies related to a full quarter of expenses for the fiscal 2013 acquisition stores and a partial quarter of expenses for the fiscal 2014 acquisition stores.

For the six months ended September 28, 2013, operating expenses increased by $15.1 million to $113.6 million from the comparable period of the prior year and were 27.6% of sales as compared to 28.5% for the six months ended September 29, 2012. Accounting for the bulk of the increase were $14.6 million of operating expenses related to the fiscal 2013 and fiscal 2014 acquisition stores, partially offset by a decrease of $.6 million of due diligence costs compared to the first six months of the prior year.

Operating income for the quarter ended September 28, 2013 of approximately $23.9 million increased by 21.2% as compared to operating income of approximately $19.7 million for the quarter ended September 29, 2012, and increased as a percentage of sales from 11.2% to 11.6% for the reasons described above.

Operating income for the six months ended September 28, 2013 of approximately $47.0 million increased by 19.3% as compared to operating income of approximately $39.4 million for the six months ended September 29, 2012, and remained consistent as a percentage of sales at 11.4% for the six months ended September 28, 2013 and for the six months ended September 29, 2012 for the reasons described above.

Net interest expense for the quarter ended September 28, 2013 increased by approximately $.7 million as compared to the same period in the prior year, and increased from .8% to 1.0% as a percentage of sales for the same periods. The weighted average debt outstanding for the quarter ended September 28, 2013 increased by approximately $81 million as compared to the quarter ended September 29, 2012. This increase is primarily related to an increase in debt outstanding under our revolving Credit Facility agreement for the purchase of our fiscal 2013 and fiscal 2014 acquisitions, as well as an increase in capital leases recorded in connection with these acquisitions. Largely offsetting this increase was a decrease in the weighted average interest rate of


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approximately 110 basis points from the prior year due to a shift to a larger percentage of debt (revolver vs. capital leases) outstanding at a lower rate. Additionally, amortization of financing fees over the higher outstanding revolving credit balance for the quarter caused a decrease in the weighted average interest rate.

Net interest expense for the six months ended September 28, 2013 increased by approximately $1.2 million as compared to the same period in the prior year, and increased from .8% to .9% 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 180 basis points as compared to the same period of the prior year.

The effective tax rate for the quarter ended September 28, 2013 and September 29, 2012 was 38.1% and 37.6%, respectively, of pre-tax income.

The effective tax rate for the six months ended September 28, 2013 and September 29, 2012 was 37.3% and 37.2%, respectively, of pre-tax income.

Net income for the quarter ended September 28, 2013 of $13.6 million increased 18.2% from net income for the quarter ended September 29, 2012. Earnings per share on a diluted basis for the quarter ended September 28, 2013 of $.42 increased 16.7%.

For the six months ended September 28, 2013, net income of $27.2 million increased 17.4% and diluted earnings per share of $.84 increased 16.7%.

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 six months ended September 28, 2013, we spent approximately $30.9 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 $7.1 million during the six months ended September 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.

On October 20, 2013, we acquired two retail tire and automotive repair stores. This acquisition was financed through our existing credit facility.

Additionally, we have signed definitive asset purchase agreements to acquire 10 retail tire and automotive repair stores through two acquisitions. These transactions are expected to close during the third quarter of fiscal year 2014. These acquisitions will be financed through our existing credit facility.

We also 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.

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 $119 million outstanding under the Credit Facility at September 28, 2013.


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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 $23 million at September 28, 2013.

The net availability under the Credit Facility at September 28, 2013 was $108 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 September 28, 2013.

We have financed certain store properties and equipment with capital leases/financing obligations, which amounted to $65 million at September 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.

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