MONRO MUFFLER BRAKE, INC. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended December 29, 2012 (13 weeks) and first nine months of fiscal 2013 (39 weeks). Comparatives are the fiscal periods ended December 24, 2011. Financial statements are unaudited; fiscal 2013 ends March 30, 2013.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Sales | $190.4 million, +7.8% | $536.1 million, +4.1% |
| Comparable-store sales | -5.9% (-4.9% adjusted for one fewer selling day) | -5.9% (-5.6% adjusted for one fewer selling day) |
| Gross profit / margin | $69.6 million / 36.6%, versus $67.8 million / 38.4% | $207.6 million / 38.7%, versus $209.9 million / 40.8% |
| Operating income / margin | $18.8 million / 9.9%, versus $22.6 million / 12.8% | $58.2 million / 10.9%, versus $74.0 million / 14.4% |
| Net income | $11.3 million, down 16.9% | $34.4 million, down 21.9% |
| Diluted EPS | $0.35, versus $0.42 | $1.07, versus $1.37 |
For the quarter, interest expense was $1.5 million and the effective tax rate was 35.4%. Nine-month interest expense was $4.1 million and the effective tax rate was 36.6%. The filing does not provide a separate EBITDA measure.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $63.2 million, compared with $71.0 million in the prior-year period. Capital expenditures were $21.1 million.
- Acquisitions used $146.0 million of cash, net of cash acquired; dividends paid were $12.7 million. Cash increased $4.3 million to $7.6 million.
- At December 29, 2012, total assets were $669.9 million and shareholders’ equity was $355.3 million. Current assets were $160.5 million and current liabilities $122.6 million.
- Other long-term debt was $124.2 million, up from $5.7 million at March 31, 2012. Capital lease obligations were reported as $45.4 million on the balance sheet; management described approximately $49 million of capital-lease financing.
- The revolving credit facility was expanded to $250 million and extended to December 2017; the $75 million accordion feature remained. At quarter-end, $124 million was outstanding, a $20 million letter of credit was outstanding, and net availability was $106 million. The company reported compliance with all debt covenants.
Material changes and management commentary
- Sales growth was driven by $23 million of sales from new stores in the quarter and $56.1 million in the nine-month period. Comparable-store sales declined; Monro attributed weakness mainly to the soft economy, low consumer confidence, unemployment and mild winter weather, which it said encouraged deferral of tire purchases and repairs.
- Gross margin contracted as material costs and distribution and occupancy costs rose relative to sales. Management cited mix shifts toward lower-margin service and tire categories, more outside parts purchases, and reduced fixed-cost leverage; lower oil costs partly offset the pressure.
- Operating expenses rose, including costs from acquired stores. Comparisons were also affected by a $1.7 million prior-year gain on the sale of seven stores. Management cited cost controls and comparable-store expense leverage when excluding acquisition-related items and that prior-year gain.
- Monro reported 918 company-operated stores and three franchised locations at December 29, 2012, versus 803 company-operated stores a year earlier. It added 121 stores and closed six year to date.
- Fiscal 2013 acquisitions included retail and related operations in several states. Acquired entities contributed $42.8 million of sales from acquisition dates through December 29. The preliminary allocation recorded $95.4 million of goodwill; purchase-price allocations remained subject to final valuation. Two additional acquisitions, comprising 21 stores, closed December 30, after the reporting date.
- Management said available cash, operating cash flow and bank financing were sufficient for planned business expansion for the next 12 months. No specific earnings or sales guidance was provided. Future dividends remain at the Board’s discretion; the company paid a combined $0.20-per-share dividend in December.
Risks, contingencies and unusual items
- The company identified risks including economic and demand conditions, competition and pricing, parts supply, acquisition integration, capital availability and leverage, interest-rate changes, litigation, regulation, data protection and vendor rebates.
- State tax audits cover fiscal years 2001–2004 and 2007–2010; the company could not estimate the effect of possible changes to uncertain tax positions. Unrecognized tax benefits were $5.8 million, with approximately $0.7 million of accrued interest and penalties.
- Management said ordinary-course legal claims were not expected to have a material adverse effect. A $2.4 million bulk sale of slower-moving inventory for barter credits affected both gross profit and operating expenses.
- A 1% LIBOR change was estimated to affect interest expense by approximately $1.2 million based on the nine-month debt position. The company also warned that interim results may not indicate full-year performance.
Investor verification priorities
- Track comparable-store sales and whether weaker demand persists, including the effect of weather and deferred customer spending.
- Assess whether acquired stores can be integrated profitably and whether gross and operating margins recover as acquisition costs and expansion effects evolve.
- Review debt utilization, facility availability, covenant headroom, capital-lease obligations and sensitivity to floating interest rates.
- Monitor final purchase-price allocations, goodwill and acquired-store contributions, including the post-quarter acquisitions.
- Follow the state tax audits and any changes to uncertain tax liabilities, and confirm future dividends against cash needs and credit restrictions.