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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 September 27, 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 October 21, 2003, 8,649,647 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
September 27, 2003 and March 29, 2003 3
Consolidated Statement of Income for the three and six months
ended September 27, 2003 and September 28, 2002 4
Consolidated Statement of Changes in Shareholders'
Equity for the six months ended September 27, 2003 5
Consolidated Statement of Cash Flows for the
six months ended September 27, 2003 and September 28, 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 4. Controls and Procedures 16
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
2
MONRO MUFFLER BRAKE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 27, MARCH 29,
2003 2003
---- ----
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and equivalents, including interest-bearing accounts of
$819 at September 27, 2003 $ 888 $ 69
Trade receivables 2,193 1,902
Inventories 52,195 51,256
Deferred income tax asset 1,661 1,661
Other current assets 9,835 8,989
----------------- --------------
Total current assets 66,772 63,877
----------------- --------------
Property, plant and equipment 255,004 222,278
Less - Accumulated depreciation and amortization (95,070) (90,130)
------------------ ----------------
Net property, plant and equipment 159,934 132,148
Intangible assets and other noncurrent assets 10,728 11,175
----------------- --------------
Total assets $237,434 $207,200
================= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 621 $ 625
Trade payables 18,548 16,955
Federal and state income taxes payable 4,094 1,593
Accrued payroll, payroll taxes and other payroll benefits 7,079 7,968
Accrued insurance 2,608 1,857
Other current liabilities 10,413 12,999
----------------- --------------
Total current liabilities 43,363 41,997
Long-term debt 51,198 36,183
Other long-term liabilities 3,802 3,500
Deferred income tax liability 1,359 1,128
----------------- --------------
Total liabilities 99,722 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;
8,865,696 shares issued at September 27, 2003; 8,785,860
shares issued at March 29, 2003 89 88
Treasury Stock, 216,800 shares at September 27, 2003 and
March 29, 2003, at cost (1,831) (1,831)
Additional paid-in capital 43,255 42,178
Note receivable from shareholder (26) (78)
Accumulated other comprehensive income (484) (859)
Retained earnings 96,612 84,797
----------------- --------------
Total shareholders' equity 137,712 124,392
----------------- --------------
Total liabilities and shareholders' equity $237,434 $207,200
================= ==============
The accompanying notes are an integral part of these financial statements.
3
MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED
FISCAL SEPTEMBER FISCAL SEPTEMBER
2003 2002 2003 2002
---- ---- ---- ----
RESTATED RESTATED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales $74,107 $68,003 $147,750 $135,912
Cost of sales, including distribution and
occupancy costs 42,653 39,392 84,061 77,406
------------- ------------- ------------- -------------
Gross profit 31,454 28,611 63,689 58,506
Operating, selling, general and
administrative expenses 21,095 20,026 43,146 42,925
------------- ------------- ------------- -------------
Operating income 10,359 8,585 20,543 15,581
Interest expense, net of interest income for
the quarter of $17 in 2003 and $28 in
2002, and year-to-date of $31 in 2003
and $43 in 2002 889 642 1,482 1,409
Other (income) expense, net (44) 31 (120)
------------- ------------- ------------- -------------
Income before provision for income taxes 9,514 7,912 19,061 14,292
Provision for income taxes 3,618 3,007 7,246 5,431
------------- ------------- ------------- -------------
Net income $5,896 $4,905 $11,815 $ 8,861
============= ============= ============= =============
Earnings per share:
Basic $ .68 $ .58 $ 1.37 $ 1.05
============= ============= ============= =============
Diluted $ .61 $ .52 $ 1.22 $ .94
============= ============= ============= =============
Weighted average number of common shares
outstanding used in computing earnings per share
Basic 8,644 8,507 8,618 8,402
============= ============= ============= =============
Diluted 9,721 9,375 9,661 9,393
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
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 11,815 11,815
Other comprehensive income:
SFAS No. 133 adjustment for the
six months ended September 27,
2003 375 375
----------
Total comprehensive income 12,190
Exercise of stock options 1 1,077 1,078
Note receivable from shareholder 52 52
--------- ------- ---------- ------------ ------------ ------------ --------- ----------
Balance at September 27, 2003 $97 $89 $(1,831) $43,255 $(26) $(484) $96,612 $137,712
========= ======= ========== ============ ============ ============ ========= ==========
The accompanying notes are an integral part of these financial statements.
5
MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
FISCAL SEPTEMBER
2003 2002
---- ----
RESTATED
(DOLLARS IN THOUSANDS)
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income $ 11,815 $ 8,861
--------------- --------------
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation and amortization 6,543 6,338
Non-qualified stock option expense 1,603
Net change in deferred income taxes (554)
Loss (gain) on disposal of property, plant and equipment 360 (168)
Change in assets and liabilities, net of effects from acquisitions:
Increase in trade receivables (291) (196)
Increase in inventories (939) (3,953)
Increase in other current assets (846) (1,436)
Decrease (increase) in intangible assets and other noncurrent assets 315 (11)
Increase in trade payables 1,593 8,236
(Decrease) increase in accrued expenses (2,149) 279
Increase in federal and state income taxes payable 2,501 2,117
Increase (decrease) in other long-term liabilities 407 (1,000)
--------------- --------------
Total adjustments 7,494 11,255
--------------- --------------
Net cash provided by operating activities 19,309 20,116
--------------- --------------
Cash flows from investing activities:
Payment for purchase of Kimmel Automotive, Inc., net
of cash acquired (5,461)
Payment for purchase of Brazos Automotive Properties, L.P. (935)
Capital expenditures (7,456) (5,230)
Proceeds from the disposal of property, plant and equipment 371 227
--------------- --------------
Net cash used for investing activities (8,020) (10,464)
--------------- --------------
Cash flows from financing activities:
Proceeds from borrowings 73,000 52,200
Principal payments on long-term debt and capital
lease obligations (84,548) (63,635)
Exercise of stock options 1,078 1,341
--------------- --------------
Net cash used for financing activities (10,470) (10,094)
--------------- --------------
Increase (decrease) in cash 819 (442)
Cash and equivalents at beginning of period 69 442
--------------- --------------
Cash and equivalents at end of period $ 888 $ 0
=============== ==============
The accompanying notes are an integral part of these financial statements.
6
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of September 27, 2003, the
consolidated statements of income for the thirteen and twenty-six week periods
ended September 27, 2003 and September 28, 2002 and the consolidated statements
of cash flows for the twenty-six week periods ended September 27, 2003 and
September 28, 2002 and the consolidated statement of changes in shareholders'
equity for the twenty-six week period ended September 27, 2003 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
September 27, 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 and twenty-six week periods ended September 27, 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 September 2003": June 29, 2003 - September 27, 2003 (13 weeks)
"Quarter Ended Fiscal September 2002": June 30, 2002 - September 28, 2002 (13 weeks)
"Six Months Ended Fiscal September 2003": March 30, 2003 - September 27, 2003 (26 weeks)
"Six Months Ended Fiscal September 2002": March 31, 2002 - September 28, 2002 (26 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 September 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 September 2002 were reduced by $64,000,
resulting in an increase in net income of $40,000 (no change to diluted earnings
per share for the quarter) from that previously reported to $4,905,000 or $.52
per diluted share, related to the recognition of barter credits utilized by the
Company during that quarter. For the six month period last year, operating,
selling, general and administrative expenses were reduced by $136,000, resulting
in an increase in net income of $85,000 related to the barter accounting.
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 September 2002, after related income taxes of
$.5 million. There was no impact on the Company's reported net income for the
three and six month periods ended September 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
September 2002 reflect adjustments to the following items in connection with the
accounting revisions discussed above.
QUARTER ENDED FISCAL SEPTEMBER SIX MONTHS ENDED FISCAL SEPTEMBER
-------------------------------- -----------------------------------
2002 2002 2002 2002
---- ---- ---- ----
AS AS
PREVIOUSLY AS PREVIOUSLY AS
Financial statement caption REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF INCOME
Operating, selling, general and administrative expenses $ 20,090 $ 20,026 $ 43,061 $42,925
Operating income 8,521 8,585 15,445 15,581
Income before provision for income taxes 7,847 7,912 14,156 14,292
Provision for income taxes 2,982 3,007 5,830 5,431
Net income 4,865 4,905 8,776 8,861
Earnings per share - basic $ .57 $ .58 $ 1.04 $ 1.05
Earnings per share - diluted $ .52 $ .52 $ .93 $ .94
CONSOLIDATED BALANCE SHEET
Other current assets $ 9,111 $ 8,582
Total current assets 62,281 61,786
Property, plant and equipment 214,821 213,885
Accumulated depreciation and amortization (86,991) (86,483)
Net property, plant and equipment 127,830 127,402
Intangible assets and other non-current assets 12,872 10,270
Total assets 202,983 199,458
Other current liabilities 9,979 11,149
Total current liabilities 51,448 52,618
Other long-term liabilities 2,785 3,328
Deferred income tax liability 2,083
Total liabilities 81,408 81,038
Retained earnings 83,085 79,930
Total shareholders' equity 121,575 118,420
Total liabilities and shareholders' equity 202,983 199,458
CONSOLIDATED STATEMENT OF CASH FLOWS
Net change in deferred income taxes $ (605) $ (554)
Increase in other current assets (1,422) (1,436)
Increase in other noncurrent assets (80) (11)
Decrease in other long-term liabilities (809) (1,001)
Total adjustments 11,340 11,254
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 acquistion 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 since the date of its acquisition. 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 commenced 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 an interest rate swap used to minimize the risk and/or costs
associated with changes in interest rates, was approximately $1.8 million at
September 27, 2003. This swap matures in October 2005. This swap contract
requires the Company to pay a fixed-rate of interest of 7.15% plus a spread of
80 basis points, and receive variable-rates of interest based on the 30 day
LIBOR rate.
At September 27, 2003, the fair value of this contract, 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 September 27,
2003 include interest bearing accounts of $819,000 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 computation of diluted earnings per share for the three and six
months ended fiscal September 2003 excludes the effect of assumed exercise of
21,000 and 25,000 outstanding stock options, respectively, as the exercise
prices of these options exceeded the average market price of the Company's
common stock for those periods. The stock options outstanding excluded from the
computation of diluted earnings per share for the three and six months ended
fiscal September 2002 amounted to 105,000 and 84,000, respectively.
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:
SIX MONTHS ENDED
QUARTER ENDED FISCAL SEPTEMBER FISCAL SEPTEMBER
2003 2002 2003 2002
---- ---- ---- ----
RESTATED RESTATED
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net income, as reported $5,896 $4,905 $11,815 $8,861
Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for all awards, net of related tax effects (176) (108) (326) (223)
----- ----- ------- ------
Pro forma net income $5,720 $4,797 $11,489 $8,638
====== ====== ======= ======
Earnings per share:
Basic-as reported $ .68 $ .58 $ 1.37 $ 1.05
====== ====== ======= ======
Basic-pro forma $ .66 $ .56 $ 1.33 $ 1.03
====== ====== ======= ======
Diluted-as reported $ .61 $ .52 $ 1.22 $ .94
====== ====== ======= ======
Diluted-pro forma $ .60 $ .52 $ 1.21 $ .93
====== ====== ======= ======
The fair values of the options granted were estimated on the date of
their grant using the Black-Scholes option-pricing model.
Stock options which vested in the first six months 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 three and six months ended September 27, 2003
and for the prior year comparable periods 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:
SIX MONTHS ENDED SEPTEMBER 27, 2003:
In connection with the sale or disposal of assets, the Company reduced
fixed assets by $421,000 and decreased other current liabilities by $421,000.
In connection with recording the value of the Company's swap
contracts, other comprehensive income increased by $375,000, other current
liabilities decreased by $575,000, other long-term liabilities decreased by
$30,000 and the deferred income tax liability was increased by $230,000.
In connection with the acquisition of Brazos Automotive Properties,
L.P., the Company paid $935,000 (Note 2), as follows:
Fair value of assets acquired $ 27,494,000
Cash paid, net of cash acquired 935,000
-------------
Liabilities assumed $ 26,559,000
=============
SIX MONTHS ENDED SEPTEMBER 28, 2002:
In connection with the sale or disposal of assets, the Company reduced
fixed assets by $15,000 and decreased other current liabilities by $15,000.
In connection with recording 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 $189,000, other current
liabilities increased by $1,033,000, other long-term liabilities decreased by
$760,000 and the deferred income tax liability was reduced by $84,000.
In connection with the acquisition of Kimmel Automotive, Inc. (Note
9), 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
============
11
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
CASH PAID DURING THE PERIOD:
2003 2002
---- ----
Interest, net $1,063 $1,409
Income taxes 4,741 3,868
Note 11 - Stock Split (Unaudited)
On September 16, 2003, the Company's Board of Directors declared a
three-for-two stock split to be effected in the form of a 50% stock dividend.
The stock split will be paid on or about October 31, 2003 to shareholders of
record as of October 21, 2003. Pro-forma earnings per share information for the
periods presented in these financial statements, as adjusted for the stock
split, is as follows:
QUARTER ENDED SIX MONTHS ENDED
FISCAL SEPTEMBER FISCAL SEPTEMBER
2003 2002 2003 2002
---- ---- ---- ----
RESTATED RESTATED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income $5,896 $4,905 $11,815 $8,861
====== ====== ======= ======
Pro-forma earnings per share
Basic $ .46 $ .38 $ .91 $ .70
====== ====== ======= ======
Diluted $ .40 $ .35 $ .82 $ .63
====== ====== ======= ======
Pro-forma weighted average number of common
shares used in computing earnings per share
Basic 12,966 12,760 12,928 12,604
====== ====== ======= ======
Diluted 14,581 14,063 14,491 14,089
====== ====== ======= ======
12
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 and six months ended September 2002 was to
decrease operating, selling, general and administrative expenses by $64,000 and
$136,000 and increase the previously reported net income by $40,000 and $85,000,
respectively, (no impact on diluted earnings per share). See footnote 1 to the
condensed consolidated financial statements in Item 1 of this filing for futher
description of the accounting revisions and the financial statement lines that
were restated for the quarter and six months ended fiscal September 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 SIX MONTHS ENDED
FISCAL SEPTEMBER FISCAL SEPTEMBER
---------------- ----------------
2003 2002 2003 2002
---- ---- ---- ----
RESTATED RESTATED
Sales.................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales, including distribution
and occupancy costs..................... 57.6 57.9 56.9 57.0
----- ----- ----- -----
Gross profit............................. 42.4 42.1 43.1 43.0
Operating, selling, general and
administrative expenses................. 28.4 29.5 29.2 31.5
----- ----- ----- -----
Operating income......................... 14.0 12.6 13.9 11.5
Interest expense - net................... 1.2 .9 1.0 1.1
Other (income) expense - net............. (.1) - - (.1)
----- ----- ----- -----
Income before provision for income taxes 12.9 11.7 12.9 10.5
Provision for income taxes............... 4.9 4.5 4.9 4.0
----- ----- ----- -----
Net income................................ 8.0% 7.2% 8.0% 6.5%
===== ===== ===== =====
13
SECOND QUARTER ENDED SEPTEMBER 27, 2003 COMPARED TO SECOND QUARTER ENDED
SEPTEMBER 28, 2002
Sales were $74.1 million for the quarter ended September 27, 2003 as
compared with $68.0 million in the quarter ended September 28, 2002. The sales
increase of $6.1 million, or 9.0%, was due to an increase of $2.0 million
related to new stores and a comparable store sales increase of 6.6%. Kimmel
stores are included in the comparable store sales numbers because they have been
open one full fiscal year.
Sales for the six months ended September 27, 2003 were $147.7 million
as compared to $135.9 million for the comparable period in the prior year. The
sales increase of $11.8 million is due to a comparable store sales increase of
6.3%, as well as an increase of $3.8 million from new stores.
At September 27, 2003 the Company had 562 company-operated stores
compared with 550 stores at September 28, 2002. During the quarter ended
September 28, 2003, the Company opened three stores and closed two.
Gross profit for the quarter ended September 27, 2003 was $31.4
million or 42.4% of sales as compared with $28.6 million or 42.1% of sales for
the quarter ended September 28, 2002. The increase in gross profit for the
quarter ended September 27, 2003, as a percentage of sales, is due primarily to
the buyout of the synthetic lease properties which occurred on June 27, 2003
(See Note 2). As a result of this transaction, approximately $.4 million of
expense, which formerly was recorded as rent expense and included in cost of
sales, was recorded as interest expense in the quarter ended September 27, 2003.
This reduction was partially offset by approximately $.1 million of additional
depreciation recognized in the quarter ended September 2003, now that the
related properties are recorded on the Company's balance sheet.
Partially offsetting this increase in gross profit was an increase in
total material costs caused by vendor price increases as well as an increase in
outside purchases. Technician labor, as a percent of sales, was relatively
consistent between the two quarters. However, productivity, as measured by sales
per man-hour, improved 3.6% 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 35%.
Gross profit for the six months ended September 27, 2003 was $63.7
million, or 43.1% of sales, as compared to $58.5 million or 43.0% of sales.
Operating, selling, general and administrative ("SG&A") expenses for
the quarter ended September 27, 2003 increased by $1.1 million to $21.1 million
from the quarter ended September 28, 2002, and were 28.4% of sales as compared
to 29.5% in the prior year quarter. The decrease in SG&A expense as a percentage
of sales is due primarily to a decrease in advertising expense due to reduced
expenditures, as well as a decrease in field expense related primarily to
restructuring of the Kimmel field organization.
For the six months ended September 27, 2003, these expenses increased
by $.2 million to $43.1 million from the comparable period of the prior year,
and were 29.2% of sales as compared to 31.5%. Year-to-date, SG&A expenses
declined primarily due to decreased store advertising and decreased field
support expense. Additionally, in fiscal 2003, the Company recorded a $1.6
million charge to recognize the vesting of the Chief Executive Officer's
performance-based stock options. This charge did not recur in fiscal 2004.
Operating income for the quarter ended September 27, 2003 of
approximately $10.4 million increased 20.7% as compared to operating income for
the quarter ended September 28, 2002, and increased as a percentage of sales
from 12.6% to 14.0% for the same periods.
Net interest expense for the quarter ended September 27, 2003
increased by approximately $.2 million as compared to the same period in the
prior year, and increased from .9% to 1.2% as a percentage of sales for the same
periods. Net interest expense for the six months ended September 27, 2003
increased by $.1 million to $1.5 million and decreased with the prior year as a
percentage of sales by .1%. The weighted average debt outstanding for the
quarter ended September 27, 2003 increased by approximately $14.7 million due to
the buyout of the synthetic lease, partially offset by a reduction in revolver
debt. (See Note 2). Additionally, there was a decrease in the weighted average
interest rate for the current year quarter of approximately 40 basis points as
compared to the prior year.
Due to its performance for the 12 months ended June 2003, 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 fiscal 2004. This equates to
an annualized interest rate savings of approximately $115,000.
14
The effective tax rate for the quarters ended September 27, 2003 and
September 28, 2002 was 38% of pre-tax income.
Net income for the quarter ended September 27, 2003 of $5.9 million
increased 20.2% from net income for the quarter ended September 28, 2002.
Earnings per share on a diluted basis for the quarter ended September 27, 2003
increased 17.3%.
For the six months ended September 27, 2003, net income of $11.8
million increased 33.3% and diluted earnings per share increased 29.8%.
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 acquistions of existing store
chains. For the six months ended September 27, 2003, the Company spent $7.4
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 $19.5 million was outstanding at September 27,
2003), and a non-amortizing credit loan (formerly synthetic lease financing)
totaling $26.5 million (all of which was outstanding at September 27, 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 facility and credit loan 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 September 27, 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
credit 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
maturing in fiscal 2006, as well as 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 $3.2 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. At September 27, 2003, the Company is in compliance with the
applicable debt covenants.
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 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
15
effective for hedging relationships designated after June 30, 2003. The Company
has not entered into any new hedging relationships since June 30, 2003.
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.
16
MONRO MUFFLER BRAKE, INC.
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2003 Annual Meeting of Shareholders of the Company (the "2003
Meeting") was held on August 19, 2003. At the 2003 Meeting, the Company's common
shareholders elected the Company's nominees Frederick M. Danziger, Robert G.
Gross, Peter J. Solomon and Francis R. Strawbridge to Class 2 of the Board of
Directors, to serve until the election and qualification of their respective
successors at the 2005 Annual Meeting of Shareholders. The common shareholders
also elected the Company's nominees, Richard A. Berenson and Robert E. Mellor,
to Class 1 of the Board of Directors, to serve until the election and
qualification of their respective successors at the 2004 Annual Meeting of
Shareholders. Such nominees for director received the following votes:
NAME VOTES FOR VOTES WITHHELD
---- --------- --------------
Frederick M. Danziger 7,206,225 919,239
Robert G. Gross 7,069,813 1,055,651
Peter J. Solomon 7,094,813 1,030,651
Francis R. Strawbridge 7,674,116 451,348
Richard A. Berenson 7,094,813 1,030,651
Robert E. Mellor 7,785,528 339,936
In addition, Robert W. August, Donald Glickman and Lionel B. Spiro
will continue as Class 1 directors until the election and qualification of their
respective successors at the 2004 Annual Meeting of Shareholders.
Also approved by the following votes were:
(I) a proposal to ratify the adoption of the Monro Muffler
Brake, Inc. 2003 Non-Employee Directors' Stock Option Plan
(5,363,591 shares in favor, 978,954 shares against, 49,778
shares abstaining and zero broker non-votes).
(II) a proposal to ratify the amendment to the Monro Muffler
Brake, Inc. 1998 Employee Stock Option Plan (4,874,697
shares in favor, 1,467,909 shares against, 49,717 shares
abstaining and zero broker non-votes).
(III) a proposal to ratify the reevaluation of the selection of
independent public accountants (6,831,769 shares in favor,
1,292,346 shares against, 1,349 shares abstaining and zero
broker non-votes).
As required under the Company's Certificate of Incorporation, such
election of directors and other matters were confirmed by the holders of all
65,000 outstanding shares of the Company's Class C Convertible Preferred Stock,
par value $1.50 per share, by written consent dated as of August 19, 2003.
17
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 July 14, 2003 to disclose its
purchase, on June 27, 2003, of the general and limited
partnership interests in Brazos Automotive Properties, L.P.
("BAP") for approximately $950,000 in cash and $26,600,000 in
assumed liabilities.
The Company filed a Form 8-K on July 25, 2003 to furnish its
press release announcing the Company's unaudited operating
results for the quarter ended June 28, 2003. An exhibit
containing the Company's press release was attached.
On August 12, 2003, the Company filed an amendment on Form 8-K/A
to its previously filed Form 8-K, filed July 14, 2003, to provide
additional information about its purchase of the general and
limited partnership interests in Brazos Automotive Properties,
L.P. and to furnish the related purchase agreements.
The Company filed a Form 8-K on September 19, 2003 to furnish its
press release announcing that the Company's Board of Directors
declared a three-for-two stock split of its common stock in the
form of a 50% stock dividend. An exhibit containing the Company's
press release was attached.
18
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: October 30, 2003 By /s/ Robert G. Gross
--------------------------------------
Robert G. Gross
President and Chief Executive
Officer
DATE: October 30, 2003 By /s/ Catherine D'Amico
--------------------------------------
Catherine D'Amico
Executive Vice President-Finance,
Treasurer and Chief Financial
Officer
19
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
11 Statement of computation of per share earnings 21
31.1 Certification of Robert G. Gross pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 22
31.2 Certification of Catherine D'Amico pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 23
32.1 Certification Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 24
20