Monro Muffler Brake, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2012, the 13 weeks ended June 25, 2011. The comparable quarter ended June 26, 2010. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Sales | $164.8 | $158.2 | Up 4.2%; comparable-store sales up 2.1% |
| Gross profit / margin | $70.8 / 43.0% | $66.0 / 41.7% | Margin up 1.3 percentage points |
| Operating income / margin | $26.1 / 15.9% | $22.6 / 14.3% | Operating income up 15.6% |
| Net income | $15.4 | $13.2 | Up 16.9% |
| Diluted earnings per share | $0.48 | $0.42 | Up 14.3% |
| Net cash from operations | $28.9 | $12.8 | Up $16.2 |
| Capital expenditures | $3.7 | $3.1 |
- Cash was $4.8 at June 25, versus $2.7 at fiscal year-end. Current assets were $137.0 and current liabilities $108.9.
- Total debt on the balance sheet was $65.7, comprising $3.0 current and $62.6 long-term. The company also reported $43.0 of capital leases in MD&A. The June-quarter cash flow included $32.7 of acquisition spending and $11.2 of net debt borrowing.
- Operating cash flow included a $7.4 increase in income taxes payable; cash flow growth therefore reflects working-capital movements as well as higher earnings.
- Assets increased to $487.9 from $451.8, including goodwill rising to $125.8 from $98.5, principally in connection with the Vespia acquisition. Shareholders’ equity was $295.3.
Material changes and operating developments
- On June 5, the company acquired 24 Vespia Tire Centers stores in Pennsylvania and New Jersey for net cash consideration of $32.7. The stores generated approximately $36 million of 2010 sales, based on unaudited pre-acquisition information. Their results are included from June 5.
- At quarter-end the company had 802 company-operated stores and three franchised locations, compared with 785 and three, respectively, a year earlier. It added 24 stores, including the Vespia locations, and closed three during the quarter.
- Management attributed improved sales to higher average tickets, price increases, advertising and sales execution, and consumers keeping and repairing vehicles longer. New stores contributed $4.2 million to sales; closed stores reduced sales by $0.9 million.
- Gross-margin improvement reflected lower material costs as a percentage of sales, price increases, vendor rebates, and improved labor efficiency. These benefits were partly offset by a shift toward lower-margin tire sales and higher costs for some products. SG&A increased $1.4 million, including about $0.9 million related to acquired stores, but declined as a percentage of sales.
- Net interest expense fell by about $0.3 million year over year. Average debt outstanding was approximately $39 million lower, while the weighted average interest rate increased about 230 basis points, partly due to a greater share of higher-rate capital-lease debt and financing-fee amortization.
Outlook, financing, and risks
- No specific earnings or sales guidance was provided. Management said available cash, operating cash flow, and bank financing should support planned expansion for the next 12 months.
- Fiscal 2012 priorities include store growth and upgrades to facilities and systems; management anticipated $4–$5 million to expand the Rochester, New York office and warehouse. The fiscal year ending March 31, 2012 is a 53-week year.
- In June the company entered a five-year $175 million revolving credit facility, with an accordion feature allowing it to request up to $75 million of additional availability. It had $22.0 million outstanding and $16.8 million of letters of credit at June 25, and was compliant with debt covenants. The facility permits cash dividends subject to a limit of 50% of prior-year net income and retains specified interest- and rent-coverage requirements.
- The board declared a $0.09 quarterly dividend in July, payable September 16 to shareholders of record September 6, and stated its intention to pay $0.09 quarterly for the remainder of fiscal 2012. Future dividends remain at the board’s discretion and subject to financial and contractual conditions.
- Interest-rate exposure: a 1% change in LIBOR would change interest expense by approximately $0.2 million based on the June 25 debt position. About 3% of long-term debt excluding capital leases was fixed-rate.
- Unrecognized tax benefits were $6.2 million, with approximately $1.0 million of related interest and penalties accrued. Federal and state tax audits were ongoing; possible changes to uncertain tax positions could not be estimated.
- The company reported no material change in previously disclosed risk factors. Ordinary-course legal claims were not believed likely to have a material adverse effect. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- How much of quarterly operating cash flow is sustainable, given the $7.4 million increase in income taxes payable and other working-capital changes.
- The acquired Vespia stores’ contribution to sales, margins, integration costs, and cash generation after inclusion in reported results.
- Debt availability and covenant headroom under the new facility, including the treatment of outstanding letters of credit and capital leases.
- The outcome and potential financial impact of federal and state tax audits, which the filing says cannot currently be estimated.
- Whether the improved gross margin and comparable-store sales persist despite tire-cost pressures, lower-margin sales mix, economic conditions, and competitive pricing.