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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 June 28, 2003.
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
---------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
---------
As of July 26, 2003, 8,641,186 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
June 28, 2003 and March 29, 2003 3
Consolidated Statement of Income for the quarters
ended June 28, 2003 and June 29, 2002 4
Consolidated Statement of Changes in Shareholders'
Equity for the quarter ended June 28, 2003 5
Consolidated Statement of Cash Flows for the
quarters ended June 28, 2003 and June 29, 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 4. Controls and Procedures 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
2
MONRO MUFFLER BRAKE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 28, MARCH 29,
2003 2003
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and equivalents, including interest-bearing accounts of
$322 at June 28, 2003 $ 391 $ 69
Trade receivables 2,220 1,902
Inventories 53,061 51,256
Deferred income tax asset 1,661 1,661
Other current assets 9,243 8,989
--------- ---------
Total current assets 66,576 63,877
--------- ---------
Property, plant and equipment 251,931 222,278
Less - Accumulated depreciation and amortization (92,535) (90,130)
--------- ---------
Net property, plant and equipment 159,396 132,148
Intangible assets and other noncurrent assets 11,000 11,175
--------- ---------
Total assets $ 236,972 $ 207,200
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 625 $ 625
Trade payables 19,402 16,955
Federal and state income taxes payable 4,633 1,593
Accrued interest 119 44
Accrued payroll, payroll taxes and other payroll benefits 7,011 7,968
Accrued insurance 2,397 1,857
Other current liabilities 11,242 12,955
--------- ---------
Total current liabilities 45,429 41,997
Long-term debt 54,663 36,183
Other long-term liabilities 4,155 3,500
Deferred income tax liability 1,258 1,128
--------- ---------
Total liabilities 105,505 82,808
--------- ---------
Commitments
Shareholders' equity:
Class C Convertible Preferred Stock, $1.50 par value, $.216 conversion value;
150,000 shares authorized; 65,000 shares issued and outstanding 97 97
Common Stock, $.01 par value, 15,000,000 shares authorized; 8,853,914
shares issued at June 28, 2003; 8,785,860 shares issued at March 29, 2003 89 88
Treasury Stock, 216,800 shares at June 28, 2003 and March 29, 2003, at cost (1,831) (1,831)
Additional paid-in capital 43,097 42,178
Note receivable from shareholder (52) (78)
Accumulated other comprehensive income (649) (859)
Retained earnings 90,716 84,797
--------- ---------
Total shareholders' equity 131,467 124,392
--------- ---------
Total liabilities and shareholders' equity $ 236,972 $ 207,200
========= =========
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 July 1, 2003.
3
MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
QUARTER ENDED FISCAL JUNE
2003 2002
-------- --------
RESTATED
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Sales $ 73,643 $ 67,908
Cost of sales, including distribution and occupancy costs 41,408 38,013
-------- --------
Gross profit 32,235 29,895
Operating, selling, general and administrative expenses 22,051 22,900
-------- --------
Operating income 10,184 6,995
Interest expense, net of interest income for the quarter of $13
in 2003 and $15 in 2002 593 766
Other expense (income), net 44 (151)
-------- --------
Income before provision for income taxes 9,547 6,380
Provision for income taxes 3,628 2,424
-------- --------
Net income $ 5,919 $ 3,956
======== ========
Earnings per share:
Basic $ .69 $ .48
======== ========
Diluted $ .62 $ .42
======== ========
Weighted average number of common shares outstanding
used in computing earnings per share
Basic 8,593 8,298
======== ========
Diluted 9,587 9,389
======== ========
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 July 1, 2003.
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 29, 2003 $97 $88 $(1,831) $42,178 $(78) $(859) $84,797 $124,392
Net income 5,919 5,919
Other comprehensive income:
SFAS No. 133 adjustment for the three
months ended June 28, 2003 210 210
---------
Total comprehensive income 6,129
Exercise of stock options 1 919 920
Note receivable from shareholder 26 26
---------- ----- -------- ----------- ------------ ------------ --------- ---------
Balance at June 28, 2003 $97 $89 $(1,831) $43,097 $(52) $(649) $90,716 $131,467
========== ===== ======== =========== ============ ============ ========= =========
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 July 1, 2003.
5
MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
QUARTER ENDED FISCAL JUNE
2003 2002
-------- --------
RESTATED
(DOLLARS IN THOUSANDS)
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income $ 5,919 $ 3,956
-------- --------
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation and amortization 3,109 3,162
Non-qualified stock option expense 1,603
Net change in deferred income taxes 1 (477)
Loss (gain) on disposal of property, plant and equipment 22 (33)
Change in assets and liabilities, net of effects from acquisitions:
Increase in trade receivables (318) (108)
Increase in inventories (1,805) (1,237)
Increase in other current assets (254) (42)
Decrease in intangible assets and other noncurrent assets 114 160
Increase in trade payables 2,447 2,151
Decrease in accrued expenses (1,722) (276)
Increase in federal and state income taxes payable 3,040 2,917
Increase (decrease) in other long-term liabilities 706 (830)
-------- --------
Total adjustments 5,340 6,990
-------- --------
Net cash provided by operating activities 11,259 10,946
-------- --------
Cash flows from investing activities:
Payment for purchase of Kimmel Automotive, Inc., net
of cash acquired (6,220)
Capital expenditures (2,987) (2,303)
Payment for purchase of Brazos Automotive Properties, L.P. (935)
Proceeds from the disposal of property, plant and equipment 144 152
-------- --------
Net cash used for investing activities (3,778) (8,371)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings 32,100 33,500
Principal payments on long-term debt and capital
lease obligations (40,179) (37,397)
Exercise of stock options 920 1,299
-------- --------
Net cash used for financing activities (7,159) (2,598)
-------- --------
Increase (decrease) in cash 322 (23)
Cash at beginning of period 69 442
-------- --------
Cash at end of period $ 391 $ 419
======== ========
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 July 1, 2003.
6
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Condensed Consolidated Financial Statements
- ----------------------------------------------------
The consolidated balance sheet as of June 28, 2003, the consolidated
statements of income for the thirteen week periods ended June 28, 2003 and June
29, 2002 and the consolidated statements of cash flows for the thirteen week
periods ended June 28, 2003 and June 29, 2002 include Monro Muffler Brake, Inc.
and its wholly owned subsidiaries (the "Company"). These financial statements
have been prepared by the Company and are unaudited. In the opinion of
management, all adjustments necessary to present fairly the financial position,
results of operations and cash flows as of and for the quarter ended June 28,
2003, and for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended March 29, 2003. The results of operations
for the thirteen week period ended June 28, 2003 are not necessarily indicative
of the operating results for the full year.
The Company reports its results on a 52/53 week fiscal year with the
fiscal year ending on the last Saturday in March of each year. The following are
the dates represented by each fiscal period reported in these condensed
financial statements:
"Quarter Ended Fiscal June 2003": March 29, 2003 - June 28, 2003 (13 weeks)
"Quarter Ended Fiscal June 2002": March 31, 2002 - June 29, 2002 (13 weeks)
Certain reclassifications have been made to the prior year's
consolidated financial statements to conform to the current year's presentation.
RESTATEMENT
During fiscal years 1999 to 2001, the Company sublet or sold a total of
14 closed store properties to Icon International, a barter company. In
connection with the preparation of the Company's consolidated financial
statements for fiscal 2003, the Company revised the original accounting for
these barter transactions and the resulting barter credits. Accordingly, the
Company's financial statements as of June 2002 reflect a cumulative $2.4 million
reduction to retained earnings, after related income taxes of $1.6 million, to
record the impairment charge related to the store closures in fiscal 1998
through 2000. Further, operating, selling, general and administrative expenses
for the fiscal quarter ended June 2002 were reduced by $72,000, resulting in an
increase in net income of $45,000 (no change to diluted earnings per share for
the quarter) from that previously reported to $3,956,000 or $.42 per diluted
share, related to the recognition of barter credits utilized by the Company
during that quarter.
In addition, in the fourth quarter of fiscal 2003 the Company revised
its original accounting for the restructuring reserve that was established in
connection with its acquisition of 189 company-operated and 14 franchised Speedy
stores in fiscal 1999. The revision recorded the operating results of 41 stores
it closed in fiscal 1999 and 2000 in connection with that acquisition, and
certain other costs, in its fiscal 1999 and 2000 income statements instead of
providing for these costs in the restructuring reserve as originally recorded.
Accordingly, the Company's financial statements reflect a cumulative $.8 million
reduction of retained earnings at June 2002, after related income taxes of $.5
million. There was no impact on the Company's reported net income for the
quarter ended June 2002 from this revision.
7
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's financial statements as of and for the quarter ended June
2002 reflect adjustments to the following items in connection with the
accounting revisions discussed above.
QUARTER ENDED FISCAL JUNE,
--------------------------
2002 2002
-------- --------
AS
PREVIOUSLY AS
FINANCIAL STATEMENT CAPTION REPORTED RESTATED
-------- --------
(Dollars in thousands,
except for per share amounts)
CONSOLIDATED STATEMENT OF INCOME
Operating, selling, general and
administrative expenses $ 22,972 $ 22,900
Operating income 6,923 6,995
Income before provision for income taxes 6,308 6,380
Provision for income taxes 2,397 2,424
Net income 3,911 3,956
Earnings per share - basic $ 0.47 $ 0.48
Earnings per share - diluted $ 0.42 $ 0.42
CONSOLIDATED BALANCE SHEET
Other current assets $ 7,677 $ 7,212
Total current assets 58,474 58,070
Property, plant and equipment 212,345 211,410
Accumulated depreciation and amortization (84,343) (83,835)
Net property, plant and equipment 128,002 127,575
Intangible assets and other non-current assets 13,422 10,783
Total assets 199,898 196,428
Other current liabilities 8,897 10,067
Total current liabilities 46,890 48,059
Other long-term liabilities 4,066 4,701
Deferred income tax liability 2,080
Total liabilities 83,261 82,986
Retained earnings 78,220 75,025
Total shareholders' equity 116,637 113,442
Total liabilities and shareholders' equity 199,898 196,428
CONSOLIDATED STATEMENT OF CASH FLOWS
Net change in deferred income taxes $ (504) $ (477)
Increase (decrease) in other current assets 36 (42)
Decrease in other noncurrent assets 54 160
Decrease in accrued expenses (276) (276)
Decrease in other long-term liabilities (730) (830)
Total adjustments 7,035 6,990
Note 2 - Buyout of Synthetic Lease Properties
- ---------------------------------------------
On June 27, 2003, the Company purchased the land and buildings under
its existing synthetic lease facility through the acquisition of the general and
limited partnership interests in Brazos Automotive Properties, L.P. ("BAP"), for
approximately $935,000 in cash (the "Lease Buyout"). The Lease Buyout was
financed through the Company's existing credit facility. BAP holds the title
8
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
related to 86 properties leased, under an operating lease, to a subsidiary of
the Company and used in the conduct of the Company's auto service business. BAP
is also the debtor on a $26.6 million loan related to these properties. BAP,
which became a wholly owned subsidiary of the Company as a result of the Lease
Buyout, was established in 1998 for the purpose of acquiring certain properties
and leasing them to the Company.
As a wholly owned subsidiary of the Company, BAP has been consolidated
into the Company's balance sheet at June 28, 2003. Accordingly, land and
buildings at fair value of approximately $27.5 million have been reflected on
the Company's balance sheet. Additionally, long-term debt of $26.6 million has
also been reflected. The debt is non-amortizing and is due in September 2006.
The Company estimates that annual depreciation expense related to the
assets acquired in the Lease Buyout will be approximately $500,000. These
depreciation charges will commence in the Company's second quarter of its fiscal
year 2004.
The purchase of the general partnership interest was completed through
the purchase of 100% of the outstanding common stock of Brazos Automotive
Properties Management, Inc., the general partner of BAP, from Brazos River
Leasing, L. P. The limited partnership interest was acquired from Heller
Financial, Inc., a subsidiary of G.E. Capital, the holder of that interest.
Note 3 - Derivative Financial Instruments
- -----------------------------------------
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" 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 June
28, 2003. 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 June 29, 2003, the fair value of the contracts, net of tax, is
recorded as a component of accumulated other comprehensive income in the
Statement of Changes in Shareholders' Equity.
Note 4 - Cash and Equivalents
- -----------------------------
The Company's policy is to invest cash in excess of operating
requirements in income producing investments. Cash equivalents at June 28, 2003
include money market accounts of $322,000 which have maturities of three months
or less.
Note 5 - Inventories
- --------------------
The Company's inventories consist of automotive parts and tires, which
are valued using the first-in, first-out method.
Note 6 - Earnings Per Share
- ---------------------------
The computations of diluted earnings per share for the quarters ended
fiscal June 2003 and 2002 include the effect of assumed exercise of all
outstanding stock options as the exercise prices of these options were less than
the average market price of the Company's common stock for those periods.
Note 7 - Stock-based compensation
- ---------------------------------
As permitted under Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation", the Company measures
stock-based compensation cost for stock options as the excess of the quoted
market price of the Company's common stock at the grant date over the amount the
employee must pay for the stock. The Company's policy generally is to grant
stock options at fair market value at the date of grant.
9
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS 123, as amended by Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123", requires disclosure of pro forma net
income and pro forma net income per share as if the fair value-based method had
been applied in measuring compensation cost for the stock-based awards granted
subsequent to fiscal year 1995.
Reported and pro forma net income and earnings per share amounts are
set forth below:
QUARTER ENDED FISCAL JUNE
2003 2002
---- ----
RESTATED
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net income, as reported $5,919 $3,956
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards, net of
related tax effects (150) (115)
----------------- --------------
Pro forma net income $5,769 $3,841
================= ==============
Earnings per share: Basic-as reported $ .69 $ .48
================= ==============
Basic-pro forma $ .67 $ .46
================= ==============
Diluted-as reported $ .62 $ .42
================= ==============
Diluted-pro forma $ .61 $ .41
================= ==============
The fair values of the options granted were estimated on the date of
their grant using the Black-Scholes option-pricing model based on the following
weighted average assumptions:
QUARTER ENDED FISCAL JUNE
2003 2002
---- ----
Risk free interest rate 3.74% 5.14%
Expected life 9 years 9 years
Expected volatility 29.7% 29.6%
Expected dividend yield 0% 0%
Forfeitures are recognized as they occur.
Stock options which vested in the first quarter of fiscal 2003 include
100,000 performance-based options, earned by the Company's CEO, in accordance
with the terms of his employment contract. The Company recorded compensation
expense of $1.6 million in its first quarter of fiscal 2003 related to the
vesting of these stock options.
Note 8 - Guarantees
- -------------------
In November 2002, the Financial Accounting Standards Board ("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.
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 ended June 28, 2003 and for the prior
year comparable period was not material. Also, warranty reserves are not
material to the Company's financial position.
10
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - 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 Kimmel was approximately $6 million in cash, plus the assumption of
approximately $4 million of liabilities. The acquisition was financed through
the Company's existing bank credit facility.
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 10 - Supplemental Disclosure of Cash Flow Information
- ----------------------------------------------------------
The following transactions represent noncash investing and financing
activities during the periods indicated:
QUARTER ENDED JUNE 28, 2003:
In connection with recording the value of the Company's swap contracts,
other comprehensive income increased by $210,000, other current liabilities
decreased by $334,000, other long-term liabilities decreased by $5,000 and the
deferred income tax liability was increased by $129,000.
In connection with the purchase of Brazos Automotive Properties, L.P.
in June 2003 (see Note 2), the Company paid $935,000 as follows:
Fair value of assets purchased $ 27,494,000
Long-term debt assumed 26,559,000
-------------
Cash paid, net of expenses $ 935,000
=============
QUARTER ENDED JUNE 29, 2002:
In connection with the sale of assets, the Company reduced fixed assets
by $15,000 and decreased other current liabilities by $15,000.
In connection with recording the value of the Company's swap contracts,
other comprehensive income decreased by $861,000, other current liabilities
increased by $111,000, other long-term liabilities increased by $1,277,000 and
the deferred income tax liability was reduced by $527,000.
In connection with the acquisition of Kimmel Automotive, Inc.,
liabilities were assumed as follows (see Note 9):
Fair value of assets acquired $ 10,200,000
Cash paid, net of cash acquired 5,900,000
------------
Liabilities assumed $ 4,300,000
============
Cash paid has not been reduced by proceeds from the sale of Kimmel
Truck Tire, as they were not received until the second quarter of fiscal 2003.
CASH PAID DURING THE PERIOD:
2003 2002
---- ----
Interest, net $374,000 $682,000
Income taxes 589,000 24,000
11
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 Company does not undertake to
update any forward-looking statement that may be made from time to time by or on
behalf of the Company.
The effect of the revisions of the accounting for barter credits and
restructuring reserve on the quarter ended June 2002 was to decrease operating,
selling, general and administrative expenses by $72,000 and increase the
previously reported net income by $45,000 (no impact on diluted earnings per
share). See footnote 1 to the condensed consolidated financial statements in
Item 1 of this filing for further description of the accounting revisions and
the financial statement lines that were restated for the quarter ended June
2002.
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 FISCAL JUNE
-------------------------
2003 2002
----- -----
RESTATED
Sales .................................. 100.0% 100.0%
Cost of sales, including distribution
and occupancy costs ................... 56.2 56.0
----- -----
Gross profit ........................... 43.8 44.0
Operating, selling, general and
administrative expenses ............... 29.9 33.7
----- -----
Operating income ....................... 13.9 10.3
Interest expense - net ................. .8 1.1
Other expense .......................... .1 (.2)
----- -----
Income before provision for income taxes 13.0 9.4
Provision for income taxes ............. 4.9 3.6
----- -----
Net income ............................. 8.1% 5.8%
===== =====
12
FIRST QUARTER ENDED JUNE 28, 2003 COMPARED TO FIRST QUARTER ENDED JUNE 29, 2002
Sales were $73.6 million for the quarter ended June 28, 2003 as
compared with $67.9 million in the quarter ended June 29, 2002. The sales
increase of $5.7 million, or 8.4%, was due to an increase of $1.9 million
related to new stores and a comparable store sales increase of 5.9%. Kimmel
stores are included in the comparable store sales numbers because they have been
open one full fiscal year.
At June 28, 2003 the Company had 561 company-operated stores compared
with 548 stores at June 29, 2002. During the quarter ended June 28, 2003, the
Company opened two stores and closed one.
Gross profit for the quarter ended June 28, 2003 was $32.2 million or
43.8% of sales as compared with $29.9 million or 44.0% of sales for the quarter
ended June 29, 2002. The decrease in gross profit for the quarter ended June 28,
2003, as a percentage of sales, is due to an increase in total material costs
caused by a shift in mix to the scheduled maintenance and tire categories which
have higher material costs than brakes and exhaust. Technician labor, as a
percent of sales, was relatively consistent between the two quarters. However,
productivity, as measured by sales per man-hour, improved 2.4% over the same
quarter of last year. Since the Company formally began tracking this statistic
over the last seven years, productivity has increased every year, and since the
first quarter of fiscal 1998, is up 38%.
Occupancy costs are also included in the Company's cost of sales line,
and as a percent of sales, they declined as compared to the same quarter of last
year. With strong positive comparable store sales, the Company was able to
leverage those costs.
Operating, selling, general and administrative ("SG&A") expenses for
the quarter ended June 28, 2003 decreased by $.8 million to $22.1 million from
the quarter ended June 29, 2002, and were 29.9% of sales as compared to 33.7% in
the prior year quarter.
The decrease in SG&A expense as a percentage of sales is due primarily
to the fact that the Company recognized approximately $1.6 million of expense in
the prior year quarter related to the vesting of performance-based stock options
awarded to the Company's Chief Executive Officer when he joined the Company in
January 1999, increasing SG&A by 240 basis points. This expense did not recur in
the quarter ended June 28, 2003. Insurance expense declined in the current year
quarter as compared to the prior year, primarily related to a difference in the
timing of the recognition of expense. Additionally, there was a decrease in
advertising expense due to reduced expenditures, as well as an increase in
cooperative advertising credits from vendors. These larger decreases were
partially offset by increases in benefits expense, as well as increased manager
pay due to raises and higher commissions and bonuses on improved store
performance.
Operating income for the quarter ended June 28, 2003 of approximately
$10.2 million increased 45.6% as compared to operating income for the quarter
ended June 29, 2002, and increased as a percentage of sales from 10.3% to 13.9%
for the same periods.
Net interest expense for the quarter ended June 28, 2003 decreased by
approximately $.2 million as compared to the same period in the prior year, and
decreased from 1.1% to .8% as a percentage of sales for the same periods. The
weighted average debt outstanding for the quarter ended June 28, 2003 decreased
by approximately $13.0 million, resulting in a decrease in expense between the
two quarters. This decrease was slightly offset by an increase in the weighted
average interest rate for the current year quarter of approximately 50 basis
points as compared to the prior year. This situation occurred due to the
Company's continuing paydown of lower rate revolver debt, while higher rate
capitalized leases remain because they are amortized over a longer term.
Other expense increased by approximately $.2 million for the three
months ended June 28, 2003 versus the prior year comparable period. The reason
for the increase is primarily due to the fact that the Kimmel Truck Tire
Division earned approximately $140,000 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. The
Kimmel Truck Tire Division was sold effective June 29, 2002.
The effective tax rate for the quarters ended June 28, 2003 and June
29, 2002 was 38% of pre-tax income.
13
Net income for the quarter ended June 28, 2003 of $5.9 million
increased 49.6% from net income for the quarter ended June 29, 2002. Earnings
per share on a diluted basis for the quarter ended June 28, 2003 increased
47.6%.
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
The Company's primary capital requirements in fiscal 2004 are the
upgrading of facilities and systems in existing stores and the funding of its
store expansion program, including potential acquisitions of existing store
chains. For the three months ended June 28, 2003, the Company spent $3.0 million
principally for equipment, as well as $.9 million for the acquisition of Brazos
Automotive Properties, L.P. (see Note 2). 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
In March 2003, the Company renewed its credit facility agreement. The
amended financing arrangement consists of an $83.5 million Revolving Credit
facility (of which approximately $22.8 million was outstanding at June 28,
2003), and synthetic lease financing totaling $26.5 million (all of which was
outstanding at June 28, 2003).
The loans bear interest at the prime rate or other LIBOR-based rate
options tied to the Company's financial performance. Interest only is payable
monthly on the Revolving Credit and synthetic lease borrowings throughout the
term. The Company must also pay a facility fee on the unused portion of the
commitment.
The Revolving Credit portion of the facility has a three-year term
expiring in September 2006. On June 27, 2003, the Company purchased the entity
holding title to the properties and debt under the synthetic lease and,
accordingly, consolidated both the assets and debt related to such lease on its
balance sheet at June 28, 2003. In accordance with the Company's credit facility
agreement, the synthetic lease was converted to a three year, non-amortizing
revolving credit loan, also expiring in September 2006. The loan bears interest
at the same rate as the Company's Revolving Credit facility.
The credit facility is secured by most of the Company's assets, with
certain permissible exceptions.
The Company has financed its office/warehouse facility via a 10 year
mortgage with a current balance of $1.8 million, amortizable over 20 years, and
a mortgage note payable of $.7 million due in a balloon payment in 2015. In
addition, the Company has financed certain store properties and equipment with
capital leases, which amount to $3.3 million and are due in installments through
2018.
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 May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity." SFAS 150 establishes
standards for how an issuer classifies and measures certain financial
instruments as liabilities because they embody obligations of the issuer.
Provisions of this standard are consistent with the current definition of
liabilities in FASB Concepts Statement No. 6, "Elements of Financial
Statements," while other provisions revise that definition to include certain
obligations that a reporting entity can or must settle through issuance of its
own equity shares. SFAS 150 is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
does not expect the adoption of this statement to have a significant impact on
its consolidated financial statements.
14
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments and hedging activities,
resulting primarily from decisions made by the FASB's Derivatives Implementation
Group following the issuance of SFAS 133. SFAS 149 is effective for contracts
entered into or modified after June 30, 2003 and is effective for hedging
relationships designated after June 30, 2003. The Company is in the process of
analyzing the impact of the adoption of this statement 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 as of the end of the fiscal quarter 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
11 - Statement of Computation of Per Share Earnings.
31.1 - Certification of Robert G. Gross pursuant to Section
302 of the Sarbanes - Oxley Act of 2002
31.2 - Certification of Catherine D'Amico pursuant to Section
302 of the Sarbanes - Oxley Act of 2002
32.1 - Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
b. Reports on Form 8-K
The Company filed a Form 8-K on April 3, 2003 to furnish its
press release announcing selected operating results estimates
for fiscal year ended March 29, 2003. An exhibit containing
the Company's press release was attached.
The Company filed a Form 8-K on May 29, 2003 to furnish its
press release announcing the Company's unaudited operating
results for fiscal year ended March 29, 2003. An exhibit
containing the Company's press release was attached.
The Company filed a Form 8-K on June 6, 2003 to furnish its
press release announcing the Company's audited operating
results for fiscal year ended March 29, 2003. An exhibit
containing the Company's press release was attached.
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: August 12, 2003 By /s/ Robert G. Gross
---------------------------------------------
Robert G. Gross
President and Chief Executive Officer
DATE: August 12, 2003 By /s/ Catherine D'Amico
---------------------------------------------
Catherine D'Amico
Executive Vice President-Finance, Treasurer
and Chief Financial Officer
17
EXHIBIT INDEX
Exhibit No. Description Page No.
----------- ----------- --------
11 Statement of computation of per share earnings 19
31.1 Certification of Robert G. Gross pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 20
31.2 Certification of Catherine D'Amico pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 21
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 22
18