Business context and reporting period
Monro Muffler Brake, Inc. operates tire and automotive repair stores and franchises. This Form 10-Q covers the 13-week second quarter and 26-week first half of fiscal 2016, ended September 26, 2015; comparatives ended September 27, 2014. Amounts are in U.S. dollars.
Key financial metrics
| Metric | Q2 FY2016 | Q2 FY2015 | First half FY2016 | First half FY2015 |
|---|---|---|---|---|
| Sales | $239.2m | $221.3m | $475.7m | $438.8m |
| Gross profit / margin | $100.7m / 42.1% | $89.5m / 40.4% | $200.4m / 42.1% | $179.5m / 40.9% |
| Operating income / margin | $34.1m / 14.3% | $28.9m / 13.1% | $67.7m / 14.2% | $58.3m / 13.3% |
| Net income | $18.9m | $16.3m | $37.7m | $33.3m |
| Diluted EPS | $0.57 | $0.50 | $1.14 | $1.01 |
| Net interest expense | $3.8m | $2.8m | $7.2m | $4.9m |
For the six months, operating cash flow was $45.5m (prior year $54.7m); investing cash outflow was $64.0m, including $19.5m of capital expenditures and $47.0m net acquisition spending. Financing provided $12.1m. Cash declined $6.4m to $1.3m.
At September 26, 2015, total assets were $997.8m, current assets $184.3m, and current liabilities $155.9m. Revolver borrowings were $145.0m; capital leases and financing obligations were $170.8m. The $250m credit facility had $81.3m net availability after outstanding letters of credit of $23.7m. The company reported compliance with all debt covenants.
Material changes versus prior comparable periods
- Sales increased 8.1% in Q2 and 8.4% year to date. Comparable-store sales rose 2.1% in Q2 and 0.8% for the first half; acquisitions and other new stores also contributed, while store closures partially offset growth.
- Gross margin improved 1.7 percentage points in Q2 and 1.2 points year to date. Management cited lower material costs, including lower oil and tire costs, fixed-cost leverage, and improved labor cost control.
- Q2 operating income rose 17.9% and net income 15.6%; first-half operating income rose 16.1% and net income 13.3%. Diluted EPS increased 14.0% and 12.9%, respectively.
- Operating expenses as a share of sales increased to 27.9% from 27.4% in Q2 and to 27.9% from 27.6% year to date, primarily due to due-diligence costs and higher incentive compensation.
- Net interest expense rose as borrowing levels and weighted-average rates increased, primarily associated with capital lease debt from acquisitions. Q2 weighted-average debt was approximately $43m higher and the average rate about 70 basis points higher than a year earlier.
Outlook, commentary, risks and unusual items
- Management said it expects sufficient resources from operating cash flow and bank financing to fund currently planned expansion over the next 12 months, and intends to continue seeking acquisitions. No numerical earnings or revenue guidance was provided.
- Fiscal 2016 acquisitions had aggregate purchase consideration of $49.4m, including the Car-X brand and franchise rights, and retail store acquisitions. Preliminary purchase accounting recorded $45.3m of goodwill; valuations remain subject to refinement. Acquired-entity sales included in reported results were $5.3m for Q2 and $6.0m for the first half; comparable pro forma results were not presented.
- Quarterly and first-half dividends paid totaled $9.8m. The board stated an intention to pay $0.15 per common share or equivalent quarterly in fiscal 2016, subject to future board approval, financial condition, capital needs, and restrictions.
- Interest-rate exposure: the company reported no fixed-rate debt and estimated that a 1% change in LIBOR would change annual interest expense by approximately $1.5m based on its September 26 debt position.
- Other disclosed risks include demand and economic conditions, competition and pricing, parts supply, leverage and debt service, acquisition integration and goodwill impairment, litigation, and cybersecurity and customer-data risks. Lease-payment guarantees were capped at $11m; management did not anticipate material defaults and recorded no liability. Routine legal claims were not expected to have a material adverse effect.
- Unrecognized tax benefits were $8.3m, with approximately $0.5m of accrued interest and penalties. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much reported growth and margin improvement is durable and attributable to comparable-store performance versus acquisitions, cost changes, and other factors.
- Acquisition integration, final purchase-price allocations, goodwill recoverability, and the economics of acquired franchise rights and stores.
- Cash conversion and funding needs given lower operating cash flow, low period-end cash, ongoing capital spending, dividends, and acquisition plans.
- Debt, lease obligations, covenant headroom, and sensitivity to floating interest rates.
- Future comparable-store sales, expense trends, and any subsequent changes to management’s expansion plans or dividend intentions.