Monro, Inc. (formerly Monro Muffler Brake, Inc.) — FY2013 Form 10-K
Reporting period: Fiscal year ended March 30, 2013 (52 weeks). The prior year ended March 31, 2012 and comprised 53 weeks. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
Monro operated 937 company stores, three franchised locations and 14 dealer-operated stores across 23 states, providing undercar repair, tire and maintenance services. It serviced approximately 4.7 million vehicles in FY2013. The company added 144 stores and closed 10; acquisitions accounted for 140 additions. Tires represented 42% of sales, up from 39% in FY2012.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $732.0 | $686.6 |
| Gross profit / margin | $278.1 / 38.0% | $276.4 / 40.3% |
| Operating income / margin | $73.7 / 10.1% | $91.4 / 13.3% |
| Net income | $42.6 | $54.6 |
| Diluted EPS | $1.32 | $1.69 |
| Operating cash flow | $84.4 | $82.6 |
| Capital expenditures | $34.2 | $28.6 |
Revenue rose 6.6%, primarily from acquired and new stores, despite comparable-store sales declining 7.3% (down 5.5% after adjusting for selling days). Net cash used for investing was $194.5 million, including $163.3 million for acquisitions. Cash declined to $1.5 million from $3.3 million; net working capital was $30.0 million and shareholders’ equity was $365.0 million.
At year-end, long-term debt was $127.8 million, principally under the revolving credit facility; capital leases and financing obligations totaled $63.8 million, including $4.9 million current. The $250 million revolving facility expires in December 2017; $127.2 million was drawn, $20 million of letters of credit was outstanding, and reported net availability was $103 million. The company reported covenant compliance. Operating lease commitments totaled $167.5 million.
Material changes and unusual items
- Despite revenue growth, operating income fell 19.4% and net income fell 22.1%. Gross margin contracted 2.3 percentage points, reflecting lower-margin sales mix, including more tire stores, higher material costs and reduced leverage on distribution and occupancy costs amid weak comparable sales.
- FY2013 acquisitions cost $163.6 million in aggregate; acquired entities contributed $87 million of sales and a $1.4 million net loss from acquisition dates through year-end. Goodwill increased to $235.3 million; management reported no goodwill impairment.
- A fourth-quarter lease-accounting review led to an out-of-period adjustment: occupancy costs decreased $1.0 million and interest expense increased $0.5 million, with balance-sheet adjustments also recorded. Management deemed the adjustment immaterial to current and prior-period statements.
- Fourth-quarter FY2013 revenue was $195.9 million and net income was $8.1 million. Quarterly interest expense was $3.1 million, versus $1.6 million in the prior-year quarter.
Outlook, commentary and risks
Management planned approximately four greenfield openings in FY2014 and intended to pursue suitable acquisitions. It stated it believed cash flow and bank financing were sufficient to fund planned operations and expansion for the next several years. The board declared a quarterly dividend of $0.11 per share in May 2013; future dividends are discretionary and subject to a credit-facility limit of 50% of preceding-year net income.
Management attributed weak comparable sales mainly to economic softness, high gasoline prices, low consumer confidence, unemployment and mild winters, which it believed encouraged customers to defer repairs and tire purchases. Key risks include competition and pricing pressure, consumer and seasonal demand, acquisition integration and store profitability, leverage and covenant compliance, interest-rate exposure, supplier concentration and foreign sourcing, environmental and other regulation, litigation, cybersecurity and technology disruption, skilled-labor availability, and potential impairment of acquired assets. The top ten vendors supplied about 80% of parts and tire purchases; the largest supplied about 18%. Litigation was described as incidental, with no material aggregate liability expected by management based on information available. State tax audits and $5.7 million of unrecognized tax benefits remain notable tax matters.
Important facts for investors to verify
- Whether comparable-store sales and margins recover, and how much future revenue growth depends on acquisitions rather than existing stores.
- Acquisition-store profitability, integration progress, purchase-price allocation updates and the carrying value of goodwill and intangible assets.
- Debt, facility availability, covenant headroom, interest-rate sensitivity and the company’s ability to fund acquisition and lease commitments.
- The effect of the lease-accounting adjustment and whether subsequent reporting identifies further accounting changes.
- Developments in state tax audits, unrecognized tax benefits, litigation and supplier or inventory risks.
The filing includes audited financial statements and an unqualified independent auditor opinion; the auditor also reported effective internal control over financial reporting as of March 30, 2013.