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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________ to _________
Commission File No. 0-19357
MONRO MUFFLER BRAKE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 16-0838627
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification #)
200 Holleder Parkway, Rochester, New York 14615
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 585-647-6400
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------------- ------------
As of January 25, 2003, 8,731,432 shares of the Registrant's Common Stock, par
value $ .01 per share, were outstanding.
MONRO MUFFLER BRAKE, INC.
INDEX
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheet at
December 28, 2002 and March 30, 2002 3
Consolidated Statement of Income for the quarter
and nine months ended December 28, 2002 and
December 29, 2001 4
Consolidated Statement of Changes in Shareholders'
Equity for the nine months ended December 28, 2002 5
Consolidated Statement of Cash Flows for the
nine months ended December 28, 2002 and
December 29, 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 4. Controls and Procedures 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Section 302 Certification 18
Exhibit Index 20
2
MONRO MUFFLER BRAKE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
DECEMBER 28, MARCH 30,
2002 2002
---- ----
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and equivalents, including interest-bearing accounts of
$442 at March 30, 2002 $ 0 $ 442
Trade receivables 1,656 1,226
Inventories 49,735 44,821
Deferred income tax asset 664 664
Other current assets 7,450 6,626
-------------- ------------
Total current assets 59,505 53,779
-------------- ------------
Property, plant and equipment 216,216 208,768
Less - Accumulated depreciation and amortization (89,300) (81,557)
-------------- -------------
Net property, plant and equipment 126,916 127,211
Other noncurrent assets 13,176 8,309
-------------- ------------
Total assets $199,597 $189,299
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,510 $ 10,813
Trade payables 13,079 12,739
Federal and state income taxes payable 2,354 608
Accrued interest 135 219
Accrued payroll, payroll taxes and other payroll benefits 6,214 5,326
Accrued insurance 2,687 986
Other current liabilities 10,802 8,952
-------------- ------------
Total current liabilities 39,781 39,643
Long-term debt 30,563 34,123
Other long-term liabilities 2,834 3,078
Deferred income tax liability 2,197 2,671
-------------- ------------
Total liabilities 75,375 79,515
-------------- ------------
Commitments
Shareholders' equity:
Class C Convertible Preferred Stock, $1.50 par value, $.216 conversion value;
150,000 shares authorized; 65,000 shares and 91,727 shares issued and
outstanding at December 28, 2002 and March 30, 2002, respectively 97 138
Common Stock, $.01 par value, 15,000,000 shares authorized; 8,727,351 shares
issued at December 28, 2002; 8,435,324 shares issued at March 30, 2002 87 84
Treasury Stock, 216,800 shares at December 28, 2002 and March 30, 2002, at cost (1,831) (1,831)
Additional paid-in capital 41,143 37,933
Note receivable from shareholder (105) (183)
Other comprehensive income (667) (666)
Retained earnings 85,498 74,309
-------------- ------------
Total shareholders' equity 124,222 109,784
-------------- ------------
Total liabilities and shareholders' equity $199,597 $189,299
============== ============
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Annual Report on Form 10-K (File
No. 0-19357), filed by the Company with the Securities and Exchange Commission
on June 28, 2002.
3
MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
------------- -----------------
FISCAL DECEMBER FISCAL DECEMBER
--------------- ---------------
2002 2001 2002 2001
---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales $ 60,716 $52,443 $196,628 $174,313
Cost of sales, including distribution and
occupancy costs 37,787 32,589 115,192 101,735
---------- ----------- ----------- -----------
Gross profit 22,929 19,854 81,436 72,578
Operating, selling, general and
administrative expenses 18,418 16,068 61,480 54,793
---------- ----------- ----------- -----------
Operating income 4,511 3,786 19,956 17,785
Interest expense, net of interest
income for the quarter of $14 in 2002 and $8 in
2001, and year-to-date of $37 in 2002
and $22 in 2001 623 835 2,032 2,953
Other (income) expense, net (2) 78 (122) 378
---------- ----------- ----------- -----------
Income before provision for income taxes 3,890 2,873 18,046 14,454
Provision for income taxes 1,477 1,092 6,857 5,127
---------- ----------- ----------- -----------
Net income $ 2,413 $ 1,781 $ 11,189 $ 9,327
========== =========== =========== ===========
Earnings per share:
Basic $ .28 $ .22 $ 1.33 $ 1.14
========== =========== =========== ===========
Diluted $ .26 $ .20 $ 1.19 $ 1.03
========== =========== =========== ===========
Weighted average number of shares of
common stock and common stock
equivalents used in computing earnings
per share:
Basic 8,509 8,209 8,437 8,188
========== =========== =========== ===========
Diluted 9,358 9,043 9,387 9,020
========== =========== =========== ===========
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Annual Report on Form 10-K (File
No. 0-19357), filed by the Company with the Securities and Exchange Commission
on June 28, 2002.
4
MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE ACCUMULATED
ADDITIONAL RECEIVABLE OTHER
PREFERRED COMMON TREASURY PAID-IN FROM COMPREHENSIVE RETAINED
STOCK STOCK STOCK CAPITAL SHAREHOLDER INCOME EARNINGS TOTAL
----- ----- ----- ------- ----------- ------ -------- -----
Balance at March 30, 2002 $138 $84 $(1,831) $37,933 $(183) $(666) $74,309 $109,784
Net income 11,189 11,189
Other comprehensive income:
SFAS No. 133 adjustment for the
nine months ended December
28, 2002 (1) (1)
----------
Total comprehensive income 11,188
Conversion of Class C convertible
preferred stock into common stock (41) 2 39 -
Exercise of stock options 1 1,360 1,361
Vesting of non-qualified stock
options 1,811 1,811
Note receivable from shareholder 78 78
--------- ------ -------- ---------- ----------- ----------- --------- ----------
Balance at December 28, 2002 $ 97 $87 $(1,831) $41,143 $(105) $(667) $85,498 $124,222
========= ====== ======== ========== =========== =========== ========= ==========
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Annual Report on Form 10-K (File
No. 0-19357), filed by the Company with the Securities and Exchange Commission
on June 28, 2002.
5
MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS
ENDED FISCAL DECEMBER
2002 2001
---- ----
(DOLLARS IN THOUSANDS)
INCREASE (DECREASE) IN
CASH
Cash flows from operating activities:
Net income $ 11,189 $ 9,327
------------ ------------
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation and amortization 9,303 9,503
Non-qualified stock option expense 1,603 727
Net change in deferred income taxes (606) (291)
Gain on disposal of property, plant and equipment (253) (59)
Change in assets and liabilities net of effects from
purchase of Kimmel Automotive, Inc. in fiscal 2003:
Increase in trade receivables (135) (235)
Increase in inventories (2,900) (3,143)
Decrease (increase) in other current assets 239 (2,854)
(Increase) decrease in other noncurrent assets (257) 304
(Decrease) increase in trade payables (694) 2,173
Increase in accrued expenses 2,156 2,396
Increase in federal and state income taxes payable 1,704 1,334
Decrease in other long-term liabilities (659) (357)
------------ ------------
Total adjustments 9,501 9,498
------------ ------------
Net cash provided by operating activities 20,690 18,825
------------ ------------
Cash flows from investing activities:
Payment for purchase of Kimmel Automotive, Inc., net
of cash acquired (5,460)
Capital expenditures (7,457) (6,205)
Proceeds from the disposal of property, plant and equipment 250 74
------------ ------------
Net cash used for investing activities (12,667) (6,131)
------------ ------------
Cash flows from financing activities:
Proceeds from borrowings 76,300 75,773
Principal payments on long-term debt and capital
lease obligations (86,205) (89,873)
Exercise of stock options 1,440 655
------------ ------------
Net cash used for financing activities (8,465) (13,445)
------------ ------------
Decrease in cash (442) (751)
Cash at beginning of period 442 751
------------ ------------
Cash at end of period $ 0 $ 0
============ ============
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Annual Report on Form 10-K (File
No. 0-19357), filed by the Company with the Securities and Exchange Commission
on June 28, 2002.
6
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Acquisition of Kimmel Automotive, Inc.
Effective April 1, 2002, the Company purchased all of the outstanding
common stock, as well as a portion of the preferred stock, of Kimmel Automotive,
Inc. ("Kimmel"), based in Baltimore, Maryland. Kimmel Automotive operated 34
tire and automotive repair stores in Maryland and Virginia, as well as Wholesale
and Truck Tire Divisions (including two commercial stores). The purchase price
for the assets of Kimmel was approximately $6 million in cash, plus the
assumption of approximately $5 million of liabilities. The acquisition was
financed through the Company's existing bank credit facility.
Although the 15 Kimmel Tire and Automotive Centers in Baltimore and 19
Tread Quarters stores in Virginia are in the same general markets in which Monro
competes, Monro and Kimmel are mainly situated in non-overlapping areas. There
are no plans to close any of the Kimmel stores, which will continue to operate
under the current brand names.
In June 2002, the Company purchased the remaining preferred stock of
Kimmel, with a face value of $1.6 million, for approximately $.7 million. The
$.7 million is included in the liabilities assumed in the purchase of Kimmel.
Additionally, effective June 29, 2002, the Company sold Kimmel's Truck Tire
division, including its retread plant and two commercial stores, for
approximately $.4 million in cash and $.5 million in notes receivable. The sale
of these assets effectively reduced the net purchase price of the retail store
operations.
Note 2 - Change in Fiscal Year
During the fiscal year ended March 31, 2001, the Board of Directors of
the Company elected to change the Company's fiscal year end from March 31 to the
last Saturday in March. This change was effective with fiscal year 2002 which
began on April 1, 2001.
The following are the dates represented by each fiscal period:
"Quarter Ended Fiscal December 2002": September 29, 2002 - December 28, 2002 (13 weeks)
"Quarter Ended Fiscal December 2001": September 30, 2001 - December 29, 2001 (13 weeks)
"Nine Months Ended Fiscal December 2002": March 31, 2002 - December 28, 2002 (39 weeks)
"Nine Months Ended Fiscal December 2001": April 1, 2001 - December 29, 2001 (39 weeks)
Note 3 - Intangible Assets
For acquisitions completed on or before June 30, 2001, the excess of the
cost over the fair value of net assets of purchased businesses is recorded as
goodwill and until March 30, 2002, was amortized on a straight-line basis over
periods of 20 years or less. The cost of other acquired intangibles is amortized
on a straight-line basis over their estimated useful lives.
The Company has adopted Statement of Financial Accounting Standards No.
141 ("SFAS No. 141"), "Business Combinations". All business combinations
consummated on or after July 1, 2001 are accounted for in accordance with the
new pronouncement. In addition, in accordance with Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets", effective March 31, 2002, the Company no longer amortizes goodwill.
SFAS No. 142 requires a transitional goodwill impairment assessment and annual
impairment tests thereafter. The Company performed the transitional impairment
test as of the date of adoption of SFAS No. 142 and the first required annual
impairment test of goodwill during the third quarter of fiscal 2003. No
impairment loss resulted from the transitional goodwill impairment test or from
the annual impairment test for fiscal 2003. Transitional disclosures regarding
the effect of goodwill amortization on net income during fiscal 2002 are as
follows (amounts in thousands, except for per share amounts):
7
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED NINE MONTHS ENDED
FISCAL DECEMBER FISCAL DECEMBER
2002 2001 2002 2001
---------------- ----------------- ---------------- ----------------
Reported net income $ 2,413 $ 1,781 $ 11,189 $ 9,327
Goodwill amortization (net of tax effect) - 82 - 247
---------------- ----------------- ---------------- ----------------
Adjusted net income $ 2,413 $ 1,863 $ 11,189 $ 9,574
================ ================= ================ ================
BASIC NET INCOME PER SHARE:
Reported net income $ 0.28 $ 0.22 $ 1.33 $ 1.14
Goodwill amortization (net of tax effect) - 0.01 - 0.03
---------------- ----------------- ---------------- ----------------
Adjusted net income $ 0.28 $ 0.23 $ 1.33 $ 1.17
================ ================= ================ ================
DILUTED EARNINGS PER SHARE
Reported net income $ 0.26 $ 0.20 $ 1.19 $ 1.03
Goodwill amortization (net of tax effect) - 0.01 - 0.03
---------------- ----------------- ---------------- ----------------
Adjusted net income $ 0.26 $ 0.21 $ 1.19 $ 1.06
================ ================= ================ ================
Note 4 - Derivative Financial Instruments
Effective April 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities", as amended by Statement of Financial
Accounting Standards No. 138 ("SFAS 138"),"Accounting for Certain Derivative
Instruments and Certain Hedging Activities". SFAS 133/138 requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether the derivative is designated as
part of a hedge transaction, and if it is, depending on the type of hedge
transaction.
The notional amount of derivative financial instruments, which consisted
solely of interest rate swaps used to minimize the risk and/or costs associated
with changes in interest rates, was approximately $36 million at December 28,
2002. At that date, swap maturities ranged from August 2003 through October
2005. These swap contracts require the Company to pay fixed-rates of interest
ranging from 5.21% to 7.15%, and receive variable-rates of interest based on the
30 day LIBOR rate (plus a spread of 80 basis points in the case of the 7.15%
fixed rate contract).
At December 28, 2002, the fair value of the contracts, net of tax, is
recorded as a component of other comprehensive income in the Statement of
Changes in Shareholders' Equity.
Note 5 - Cash and Equivalents
The Company's policy is to invest cash in excess of operating
requirements in income producing investments. Cash equivalents of $442,000 at
March 30, 2002 include money market accounts which have maturities of three
months or less.
Note 6 - Inventories
The Company's inventories consist of automotive parts and tires.
8
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Earnings Per Share
The computation of diluted earnings per common share for the fiscal
quarters ended December 2002 and 2001 excludes the effect of assumed exercise of
approximately 208,000 and 400,000 stock options as the exercise price of these
options was greater than their average market value, resulting in an
anti-dilutive effect on diluted earnings per share.
Note 8 - Guarantees
In November 2002, the FASB published Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". The Interpretation elaborates on
the existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. It also clarifies that at the time
a company issues a guarantee, the company must recognize an initial liability
for the fair value, or market value, of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual financial
statements. The initial recognition and initial measurement provisions apply on
a prospective basis to guarantees issued or modified after December 31, 2002,
regardless of the guarantor's fiscal year-end. The interpretation's disclosure
requirements in the Interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002.
In that regard, the Company provides an accrual for estimated future
warranty costs based upon the historical relationship of warranty costs to
sales. Warranty expense for the quarter and nine fiscal months ended December
28, 2002 was approximately $595,000 and $695,000, respectively. Expense for the
prior year comparable periods was not material. Warranty reserves are not
material to the Company's financial position.
Additionally, the Company is the lessee under a synthetic lease
arrangement structured to finance most of the owned real estate in the
acquisition of Speedy stores from SMK Speedy International in September 1998.
Should the Company or the lessor choose not to renew the lease at the end of its
initial five-year term in September 2003, the Company may buy all of the
properties for their original acquisition cost of $32.4 million. Alternatively,
the properties will be sold, and the Company has guaranteed a residual value of
81.5% of the acquisition cost, or $26.4 million. This represents the minimum
principal amount (i.e. the guaranteed residual) due on September 15, 2003,
should the synthetic lease not be renewed. There is no liability on the
Company's books for this obligation.
Note 9 - Supplemental Disclosure of Cash Flow Information
The following transactions represent noncash investing and financing
activities during the periods indicated:
NINE MONTHS ENDED DECEMBER 28, 2002:
In connection with the sale or disposal of assets, the Company reduced
fixed assets by $267,000, decreased other current liabilities by $15,000 and
increased other non-current assets by $252,000.
In connection with performance-based executive compensation, the Company
recognized compensation expense of $1,603,000, decreased other long term
liabilities by $208,000 and increased additional paid-in-capital by $1,811,000.
In connection with recording the value of the Company's swap contracts,
other comprehensive income decreased by $1,000, other current liabilities
increased by $730,000, other long-term liabilities decreased by $759,000 and the
deferred income tax liability increased by $30,000.
In connection with the acquisition of Kimmel Automotive, Inc. (Note 1),
liabilities were assumed as follows:
Fair value of assets acquired $10,500,000
Cash paid, net of cash acquired 5,500,000
-----------
Liabilities assumed $ 5,000,000
===========
The fair value of assets acquired and cash paid has been reduced by the
Kimmel Truck Tire sale proceeds of $400,000 that were received in the second
quarter of fiscal 2003 and will be further reduced upon the collection of the
$500,000 notes receivable related to this sale.
9
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 29, 2001:
In connection with the sale or disposal of assets, the Company reduced
fixed assets and other current liabilities by $161,000.
In connection with performance-based executive compensation, the Company
recognized compensation expense of $727,000, increased other long-term
liabilities by $208,000 and increased additional paid-in capital by $519,000.
In connection with recording the value of the Company's swap contracts,
other comprehensive income decreased by $964,000, other long-term liabilities
increased by $1,602,000 and the deferred income tax liability was reduced by
$638,000.
CASH PAID DURING THE PERIOD:
2002 2001
---- ----
Interest, net $ 1,857,000 $2,915,000
Income taxes 5,757,000 4,084,000
Note 10 - Reclassifications
Certain amounts in the Consolidated Statement of Cash Flows have been
reclassified to improve reporting and maintain comparability among the periods
presented.
Note 11 - Other
These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Annual Report on Form
10-K (File No. 0-19357), filed by the Company with the Securities and Exchange
Commission on June 28, 2002.
10
MONRO MUFFLER BRAKE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The statements contained in this 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. 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 the Company's stores are located, the need for and
costs associated with store renovations and other capital expenditures, the
effect of economic conditions, the impact of competitive services and pricing,
product development, parts supply restraints or difficulties, industry
regulation, risks relating to leverage and debt service (including sensitivity
to fluctuations in interest rates), continued availability of capital resources
and financing, risks relating to integration of acquired businesses and other
factors set forth or incorporated elsewhere herein and in the Company's other
Securities and Exchange Commission filings.
The following table sets forth income statement data of Monro Muffler
Brake, Inc. ("Monro" or the "Company") expressed as a percentage of sales for
the fiscal periods indicated.
QUARTER ENDED NINE MONTHS ENDED
FISCAL DECEMBER FISCAL DECEMBER
2002 2001 2002 2001
---- ---- ---- ----
Sales................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales, including distribution
and occupancy costs.................... 62.2 62.1 58.6 58.4
------ ------ ------ -----
Gross profit............................ 37.8 37.9 41.4 41.6
Operating, selling, general and
administrative expenses................ 30.4 30.7 31.3 31.4
------ ------ ------ -----
Operating income........................ 7.4 7.2 10.1 10.2
Interest expense - net.................. 1.0 1.6 1.0 1.7
Other expenses - net.................... - .1 (.1) .2
------ ------ ------ ------
Income before provision for income taxes 6.4 5.5 9.2 8.3
Provision for income taxes.............. 2.4 2.1 3.5 2.9
------ ------ ------ ------
Net income.............................. 4.0% 3.4% 5.7% 5.4%
====== ====== ====== ======
11
THIRD QUARTER AND NINE MONTHS ENDED DECEMBER 28, 2002 COMPARED TO
THIRD QUARTER AND NINE MONTHS ENDED DECEMBER 29, 2001
Effective April 1, 2002, the Company purchased all of the outstanding
common stock, as well as a portion of the preferred stock, of Kimmel Automotive,
Inc. ("Kimmel") based in Baltimore, Maryland. In June 2002, the Company
purchased the remaining preferred stock. Kimmel Automotive operated 34 tire and
automotive repair stores in Maryland and Virginia, as well as Wholesale and
Truck Tire Divisions (including two commercial stores). Effective June 29, 2002,
the Company sold the Truck Tire division. The results of operations of Kimmel
since its acquisition are included in the consolidated results of the Company
for the quarter and nine months ended December 28, 2002. The acquired operations
were accretive to earnings for the nine months ended December 28, 2002, and are
expected to be accretive for the entire fiscal year 2003.
Sales were $60.7 million for the quarter ended December 28, 2002 as
compared with $52.4 million in the quarter ended December 29, 2001. The sales
increase of $8.3 million, or 15.8%, was due to an increase of $6.3 million
related to new stores, including $6.0 million from the acquired Kimmel stores.
Comparable store sales increased 3.8%.
Sales for the nine months ended December 28, 2002 were $196.6 million as
compared to $174.3 million for the comparable period in the prior year. The
sales increase of $22.3 million, or 12.8%, was due to an increase in sales from
new stores of $19.7 million. The acquired Kimmel stores accounted for $18.6
million of the new store sales increase year-to-date, net of sales from the
divested Truck Tire division. Comparable store sales increased 1.6%.
At December 28, 2002 the Company had 550 company-operated stores
compared with 513 stores at December 29, 2001. During the quarter ended December
28, 2002, the Company did not open or close any stores.
Gross profit for the quarter ended December 28, 2002 was $22.9 million
or 37.8% of sales as compared with $19.9 million or 37.9% of sales for the
quarter ended December 29, 2001. Gross profit for the nine months ended December
28, 2002 was $81.4 million, or 41.4% of sales, compared to $72.6 million or
41.6% of sales for the nine months ended December 29, 2001. The decrease in
gross profit for the quarter and nine months ended December 28, 2002, as a
percentage of sales, is due to the inclusion of Kimmel in the cost of sales
numbers. Due to Kimmel's product mix, which includes a greater percentage of
tires, its material costs including outside purchases, are approximately 110 to
130 basis points higher than historical Monro's. Separately, Kimmel's gross
profit was 31.2% and 33.6% of sales for the quarter and nine months ended
December 28, 2002, respectively. Gross profit for the Monro and Speedy stores
for the quarter ended December 28, 2002 was 38.5% of sales as compared to 37.9%
last year, and 42.2% of sales as compared to 41.6% for the nine months ended
fiscal December 2002 versus 2001.
On a stand-alone basis, Monro's gross margin improved by 60 basis points
over the prior year third quarter primarily due to a reduction in material usage
and technician labor costs. The decrease in material usage as a percent of sales
is primarily due to reduction in costs related to improved pricing with vendors,
largely offset by a shift in mix to the scheduled maintenance and tire
categories. Productivity, as measured by sales per man-hour, improved 1.3% over
the same quarter of last year. Since the Company formally began tracking this
statistic over the last six years, productivity has increased every year, and
since the third quarter of fiscal 1998, is up 24%.
Operating, selling, general and administrative ("SG&A") expenses for the
quarter ended December 28, 2002 increased by $2.4 million to $18.4 million from
the quarter ended December 29, 2001, and were 30.4% of sales as compared to
30.6% in the prior year quarter. For the nine months ended December 28, 2002,
these expenses increased by $6.7 million to $61.5 million from the comparable
period of the prior year, and were 31.3% of sales as compared to 31.4%.
The decrease in SG&A expense as a percentage of sales is due primarily
to a decrease in insurance expense in the quarter as compared to the prior year,
primarily related to a difference in the timing of the recognition of expense.
The Company is realizing also additional cooperative advertising credits in
connection with new and/or renegotiated vendor agreements as a result of its
increased buying power.
Operating income for the quarter ended December 28, 2002 of
approximately $4.5 million increased 19.1% as compared to operating income for
the quarter ended December 29, 2001, and increased as a percentage of sales from
7.2% to 7.4% for the same periods. On a year-to-date basis, operating income
increased approximately $2.2 million or 12.2% from the same prior year period,
but decreased as a percentage of sales from 10.2% to 10.1%.
12
Net interest expense for the quarter ended December 28, 2002 decreased
by approximately $.2 million compared to the comparable period in the prior
year, and decreased from 1.6% to 1.0% as a percentage of sales for the same
period. Net interest expense for the nine months ended December 28, 2002
decreased by approximately $.9 million compared to the same period in the prior
year, and decreased from 1.7% to 1.0% as a percentage of sales for the same
period. The weighted average interest rate for the quarter ended December 28,
2002 was approximately 20 basis points lower than the rate for the quarter ended
December 29, 2001. Additionally, the weighted average debt outstanding decreased
by approximately $11.6 million, resulting in a decrease in expense between the
two quarters.
Due to its performance for the year ended March 2002, the Company
qualified for a 25 basis point reduction in its interest rate spread over LIBOR
which should remain in effect for the remainder of FY03. This equates to an
annualized interest rate savings of approximately $68,000 at the Company's
current debt levels.
The effective tax rate for the quarters ended December 28, 2002 and
December 29, 2001 was 38% of pre-tax income. For the nine months ended fiscal
December 2002 and 2001, the effective tax rates were 38% and 35%, respectively.
The Company recorded a one-time tax benefit of $.4 million in fiscal 2002, due
to a reduction in the Company's effective tax rate. There has been a reduction
in the Company's overall effective state income tax rate because of the
Company's growth in lower-taxing states, especially in connection with the
fiscal year 1999 Speedy acquisition. This one-time adjustment reduced the
accrual for amounts provided in prior fiscal years.
Other income increased by approximately $.5 million for the nine months
ended December 28, 2002 as compared to the prior year comparable period. The
reason for the increase is primarily due to a gain on the sale of fixed assets
on Monro's books of approximately $.1 million as compared to a loss of $.1
million last year, and a net decrease in amortization expense of approximately
$.2 million. In addition, the Kimmel Truck Tire Division earned approximately
$.1 million on a pre-tax basis in the first quarter of fiscal 2003, and under
Statement of Financial Accounting Standards No. 144, its results are reported on
the other income line on the income statement.
Net income for the quarter ended December 28, 2002 of $2.4 million
increased 35.5% from net income for the quarter ended December 29, 2001. For the
nine months ended December 28, 2002, net income of $11.2 million increased
20.0%, due to the factors discussed above. Earnings per share on a diluted basis
for the quarter and nine months ended December 28, 2002 increased 30.0% and
15.5%, respectively.
Interim Period Reporting
The data included in this report are unaudited and are subject to
year-end adjustments; however, in the opinion of management, all known
adjustments (which consist only of normal recurring adjustments) have been made
to present fairly the Company's operating results and financial position for the
unaudited periods. The results for interim periods are not necessarily
indicative of results to be expected for the fiscal year.
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
In addition to the funding of the Kimmel acquisition, the Company's
primary capital requirements in fiscal 2003 have been the upgrading of
facilities and systems in existing stores and the funding of the new store
expansion program. For the nine months ended December 28, 2002, the Company
spent $7.5 million principally for equipment and also new store construction.
Funds were provided primarily by cash flow from operations. Management believes
that the Company has sufficient resources available (including cash and
equivalents, net cash flow from operations and bank financing) to expand its
business as currently planned for the next several years.
Liquidity
Concurrent with the closing of the Speedy acquisition in September 1998,
the Company obtained a $135 million secured credit facility from a syndication
of lenders led by The Chase Manhattan Bank. Approximately $55 million was
borrowed under this Facility to pay the all-cash purchase price, including
transaction expenses of approximately $4 million. In addition, the Company
refinanced approximately $35 million of indebtedness through the Credit
Facility, with the balance of the Facility available for future working capital
needs. More specifically, the financing structure consists of a $25 million term
loan (of which approximately $3.8 million was outstanding at December 28, 2002),
a $75 million Revolving credit facility (of which approximately $25.0 million
was outstanding at December 28, 2002), and synthetic lease (off-balance sheet)
financing for a significant portion of the Speedy real estate, totaling $35
million (of which approximately $32.4 million was outstanding at December 28,
2002). The loans bear interest at the
13
prime rate or LIBOR-based rate options tied to the Company's financial
performance. The Company must also pay a facility fee on the unused portion of
the commitment.
The Credit Facility has a five-year term and expires in September 2003.
The Company has received a commitment from its syndication of lenders to extend
the Revolving credit facility through September 2006, and to renew its synthetic
lease for a five-year term expiring in September 2008, for a total Credit
Facility of $110,000,000. The Company expects to close on the renewal of its
Credit Facility during the fourth quarter of fiscal 2003.
Interest only is payable monthly on the Revolving credit and synthetic
lease borrowings throughout the term. In addition to monthly interest payments,
the $25 million term loan requires quarterly principal payments. Principal
payments totaling $21.2 million have been paid from the inception of the term
loan through December 28, 2002.
The term loan and Revolving credit facility are secured by all accounts
receivable, inventory and other personal property. The Company has also entered
into a negative pledge agreement not to encumber any real property, with certain
permissible exceptions. The synthetic lease is secured by the real property to
which it relates.
The Company has financed its office/warehouse facility via a 10 year
mortgage with a current balance of $1.9 million, amortizable over 20 years, and
an eight year term loan with a balance of $.1 million.
Certain of the Company's long-term debt agreements require, among other
things, the maintenance of specified interest and rent coverage ratios and
amounts of tangible net worth. They also contain restrictions on cash dividend
payments.
The Company enters into interest rate hedge agreements which involve the
exchange of fixed and floating rate interest payments periodically over the life
of the agreement without the exchange of the underlying principal amounts. The
differential to be paid or received is accrued as interest rates change and is
recognized over the life of the agreements as an adjustment to interest expense.
FINANCIAL ACCOUNTING STANDARDS
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This standard harmonizes the accounting for impaired assets and resolves some of
the implementation issues of Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". It retains the fundamental provisions of
SFAS 121 for (a) recognition and measurement of the impairment of long-lived
assets to be held and used and (b) measurement of long-lived assets to be
disposed of by sale. It also retains the basic provisions for presenting
discontinued operations in the income statement but broadens the scope to
include a component of an entity rather than a segment of a business. The
Company adopted this standard effective March 31, 2002. This pronouncement did
not have a material impact on the Company's financial position, results of
operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses
the financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS 146 requires that a
liability for the cost associated with an exit or disposal activity be
recognized when it is incurred and measured initially at its fair value. The new
guidance will impact the timing of recognition and the initial measurement of
the amount of liabilities the Company recognizes in connection with exit or
disposal activities initiated after December 31, 2002, the effective date of
SFAS 146.
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on EITF 02-16 "Accounting by a Reseller for Cash Consideration
Received from a Vendor." This pronouncement addresses the accounting issues
pertaining to cash consideration received by a reseller from a vendor. This
consensus must be applied in financial statements for periods beginning after
December 15, 2002. The Company is in the process of analyzing the impact of the
adoption of this consensus on its consolidated financial statements.
14
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123". This Statement amends SFAS No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS 123 to require disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
requirements of SFAS 148 are applicable to annual financial statements for
periods ending after December 15, 2002 and interim disclosure requirements are
applicable for periods beginning after December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities", an interpretation of Accounting Research
Bulletin No. 51. This pronouncement addresses consolidation and disclosure by
business enterprises of variable interest entities. This interpretation applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period after June 15, 2003,
to variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. The Company is involved with a
variable interest entity through its synthetic lease arrangement with Brazos
Automotive Properties, L.P. ("Brazos"). The Company leases automotive repair
stores valued at approximately $32 million from Brazos. The Company believes
that its exposure to loss as a result of its involvement with this variable
interest entity would be deminimus, if any. The Company is in the process of
analyzing the impact of the adoption of this interpretation on its consolidated
financial statements.
Item 4. Controls and Procedures
Disclosure controls and procedures
The Company has established and currently maintains controls and other
procedures designed to ensure that material information required to be disclosed
in its reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified by the
Securities and Exchange Commission.
In conjunction with the close of each fiscal quarter, the Company
conducts an update and a review and evaluation of the effectiveness of the
Company's disclosure controls and procedures. It is the opinion of the Company's
principal executive officer and principal financial officer, based upon an
evaluation completed within 90 days prior to the filing of this report, that the
Company's disclosure controls and procedures are sufficiently effective to
ensure that any material information relating to the Company is recorded,
processed, summarized and reported to its principal officers to allow timely
decisions regarding required disclosures.
Changes in internal controls
There were no significant changes in the Company's internal accounting
processes and control procedures during the quarter.
15
MONRO MUFFLER BRAKE, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.06 - Second Amended and Restated Employment Agreement, dated November 14, 2002, by
and between the Company and Robert G. Gross
10.79 - Supply Agreement between Monro Muffler Brake, Inc. and The Valvoline Company,
dated September 3, 2002. ***
10.80 - Automotive Filter Sales Agreement between Monro Muffler Brake, Inc. and The
Valvoline Company, dated October 1, 2002. ***
11 - Statement of Computation of Per Share Earnings.
99.1 - Certification Pursuant to 18 U.S.C. Section 1350
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 28, 2002.
*** Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONRO MUFFLER BRAKE, INC.
DATE: February 11, 2003 By /s/ Robert G. Gross
-----------------------------------
Robert G. Gross
President and Chief Executive Officer
DATE: February 11, 2003 By /s/ Catherine D'Amico
------------------------------------------
Catherine D'Amico
Executive Vice President-Finance, Treasurer
and Chief Financial Officer
17
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Robert G. Gross, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Monro Muffler
Brake, Inc. (the "Company");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit committee of
the Company's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial data and have identified for the Company's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 11, 2003
/s/ Robert G. Gross
-------------------------------------
Robert G. Gross
President and Chief Executive Officer
18
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Catherine D'Amico, Executive Vice President - Finance and Chief
Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Monro Muffler
Brake, Inc. (the "Company");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit committee of
the Company's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial data and have identified for the Company's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 11, 2003
/s/ Catherine D'Amico
--------------------------------------
Catherine D'Amico
Executive Vice President - Finance and
Chief Financial Officer
19
EXHIBIT INDEX
Exhibit No. Description Page No.
----------- ----------- --------
10.06 Second Amended and Restated Employment Agreement, dated
November 14, 2002, by and between the Company and Robert G. Gross. 21
10.79 Supply Agreement between Monro Muffler Brake, Inc.
and The Valvoline Company, dated September 3, 2002. *** 28
10.80 Automotive Filter Sales Agreement between Monro Muffler Brake, Inc.
and The Valvoline Company, dated October 1, 2002. *** 35
11 Statement of computation of per share earnings 38
99.1 Certification Pursuant to 18 U.S.C. Section 1350 39
*** Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
20