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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 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification #)
200 Holleder Parkway, Rochester, New York 14615
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(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 January 24, 2004, 13,309,292 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 27, 2003 and March 29, 2003 3
Consolidated Statement of Income for the quarter and nine months
ended December 27, 2003 and December 28, 2002 4
Consolidated Statement of Changes in Shareholders'
Equity for the nine months ended December 27, 2003 5
Consolidated Statement of Cash Flows for the
nine months ended December 27, 2003 and December 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)
DECEMBER 27, MARCH 29,
2003 2003
---- ----
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and equivalents $ 73 $ 69
Trade receivables 2,165 1,902
Inventories 52,247 51,256
Deferred income tax asset 1,727 1,661
Other current assets 9,451 8,989
----------------- --------------
Total current assets 65,663 63,877
----------------- --------------
Property, plant and equipment 258,103 222,278
Less - Accumulated depreciation and amortization (97,515) (90,130)
----------------- ----------------
Net property, plant and equipment 160,588 132,148
Intangible assets and other non-current assets 10,864 11,175
----------------- --------------
Total assets $ 237,115 $ 207,200
================= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 621 $ 625
Trade payables 21,351 16,955
Federal and state income taxes payable 2,261 1,593
Accrued payroll, payroll taxes and other payroll benefits 6,928 7,968
Accrued insurance 2,289 1,857
Other current liabilities 10,361 12,999
----------------- --------------
Total current liabilities 43,811 41,997
Long-term debt 45,135 36,183
Other long-term liabilities 3,977 3,500
Deferred income tax liability 3,090 1,128
----------------- --------------
Total liabilities 96,013 82,808
----------------- --------------
Commitments
Shareholders' equity:
Class C Convertible Preferred Stock, $1.50 par value, $.144 and $.216
conversion value at December 27, 2003 and March 29, 2003, respectively;
150,000 shares authorized; 65,000 shares
issued and outstanding 97 97
Common Stock, $.01 par value, 20,000,000 shares authorized; 13,304,173
shares issued at December 27, 2003; 8,785,860 shares issued at
March 29, 2003 133 88
Treasury Stock, 325,200 shares at December 27, 2003 and 216,800 shares at
March 29, 2003, at cost (1,831) (1,831)
Additional paid-in capital 43,574 42,178
Note receivable from shareholder (78)
Accumulated other comprehensive income (468) (859)
Retained earnings 99,597 84,797
----------------- --------------
Total shareholders' equity 141,102 124,392
----------------- --------------
Total liabilities and shareholders' equity $ 237,115 $ 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 NINE MONTHS ENDED
FISCAL DECEMBER FISCAL DECEMBER
2003 2002 2003 2002
---- ---- ---- ----
RESTATED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales $64,549 $60,716 $212,298 $196,628
Cost of sales, including distribution and
occupancy costs 39,291 37,787 123,351 115,192
------------- ------------- ------------- -------------
Gross profit 25,258 22,929 88,947 81,436
Operating, selling, general and
administrative expenses 19,981 18,418 63,127 61,345
------------- ------------- ------------- -------------
Operating income 5,277 4,511 25,820 20,091
Interest expense, net of interest income for
the quarter of $14 in 2003 and 2002, and
year-to-date of $44 in 2003 and $37 in 2002 515 623 1,997 2,032
Other income, net (123) (2) (123) (122)
------------- ------------- ------------- -------------
Income before provision for income taxes 4,885 3,890 23,946 18,181
Provision for income taxes 1,854 1,477 9,099 6,907
------------- ------------- ------------- -------------
Net income $ 3,031 $ 2,413 $ 14,847 $ 11,274
============= ============= ============= =============
Earnings per share:
Basic $ 0.23 $ 0.19 $ 1.15 $ 0.89
============= ============= ============= =============
Diluted $ 0.21 $ 0.17 $ 1.02 $ 0.80
============= ============= ============= =============
Weighted average number of common shares
outstanding used in computing earnings per share
Basic 12,976 12,764 12,944 12,656
============= ============= ============= =============
Diluted 14,612 14,037 14,537 14,081
============= ============= ============= =============
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 14,847 14,847
Other comprehensive income:
SFAS No. 133 adjustment for the
nine months ended December 27, 2003 391 391
----------
Total comprehensive income 15,238
Tax benefit from exercise of stock 269 269
options
Shares issued in connection with
three-for-two stock split (see 44 (47) (3)
Note 10)
Exercise of stock options 1 1,127 1,128
Note receivable from shareholder 78 78
---------- --------- -------- ---------- ---------- --------- --------- ----------
Balance at December 27, 2003 $97 $133 $(1,831) $43,574 $ 0 $(468) $99,597 $141,102
========== ========= ======== ========== ========== ========= ========= ==========
The accompanying notes are an integral part of these financial statements.
5
MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
FISCAL DECEMBER
2003 2002
---- ----
RESTATED
(DOLLARS IN THOUSANDS)
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income $ 14,847 $ 11,274
--------------- --------------
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation and amortization 9,787 9,303
Non-qualified stock option expense 1,603
Net change in deferred income taxes 1,842 (554)
Loss (gain) on disposal of property, plant and equipment 326 (253)
Change in assets and liabilities, net of effects from
acquisitions:
Increase in trade receivables (263) (135)
Increase in inventories (991) (2,900)
(Increase) decrease in other current assets (448) 225
Decrease in intangible assets and other
noncurrent assets 240 188
Increase (decrease) in trade payables 4,396 (694)
(Decrease) increase in accrued expenses (2,701) 2,156
Increase in federal and state income taxes payable 748 1,704
Increase (decrease) in other long-term liabilities 657 (1,227)
--------------- --------------
Total adjustments 13,593 9,416
--------------- --------------
Net cash provided by operating activities 28,440 20,690
--------------- --------------
Cash flows from investing activities:
Payment for purchase of Kimmel Automotive, Inc., net
of cash acquired (5,460)
Payment for purchase of Brazos Automotive Properties, L.P. (935)
Capital expenditures (11,467) (7,457)
Proceeds from the disposal of property, plant and equipment 452 250
--------------- --------------
Net cash used for investing activities (11,950) (12,667)
--------------- --------------
Cash flows from financing activities:
Proceeds from borrowings 108,596 76,300
Principal payments on long-term debt and capital
lease obligations (126,207) (86,205)
Exercise of stock options 1,128 1,440
Payment of fractional shares related to stock split (see Note 10) (3)
--------------- --------------
Net cash used for financing activities (16,486) (8,465)
--------------- --------------
Increase (decrease) in cash 4 (442)
Cash and equivalents at beginning of period 69 442
--------------- --------------
Cash and equivalents at end of period $ 73 $ 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 December 27, 2003, the consolidated
statements of income for the three and nine month periods ended December 27,
2003 and December 28, 2002, the consolidated statements of cash flows for the
nine month periods ended December 27, 2003 and December 28, 2002 and the
consolidated statement of changes in shareholders' equity for the nine months
ended December 27, 2003, include Monro Muffler Brake, Inc. and its wholly owned
subsidiaries (the "Company"). These unaudited condensed consolidated financial
statements have been prepared by the Company and are subject to year-end
adjustments. In the opinion of management, all known adjustments have been made
to present fairly the financial position, results of operations and cash flows
for the unaudited periods presented.
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
three and nine month periods ended December 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 December 2003": September 28, 2003 - December 27, 2003 (13 weeks)
"Quarter Ended Fiscal December 2002": September 29, 2002 - December 28, 2002 (13 weeks)
"Nine Months Ended Fiscal December 2003": March 30, 2003 - December 27, 2003 (39 weeks)
"Nine Months Ended Fiscal December 2002": March 31, 2002 - December 28, 2002 (39 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
consolidated financial statements as of December 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 nine months ended December 2002 were reduced by $135,000,
resulting in an increase in net income of $85,000 from that previously reported
to $11,274,000 or $.80 per diluted share, related to the recognition of barter
credits utilized by the Company during that period. There was no impact on the
Company's reported net income for the quarter ended December 2002 from this
revision.
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 consolidated income statements
instead of providing for these costs in the restructuring reserve as originally
recorded. Accordingly, the Company's consolidated financial statements reflect a
cumulative $.8 million reduction of retained earnings at December 2002, after
related income taxes of $.5 million. There was no impact on the Company's
reported net income for the quarter and nine month periods ended December 2002
from this revision.
7
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's consolidated financial statements as of and for the nine
months ended December 2002 reflect adjustments to the following items in
connection with the accounting revisions discussed above.
NINE MONTHS ENDED
FISCAL DECEMBER
---------------------------
2002 2002
AS
PREVIOUSLY AS
Financial statement caption REPORTED RESTATED
-------- --------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME
Operating, selling, general and administrative expenses $ 61,480 $ 61,345
Operating income 19,956 20,091
Income before provision for income taxes 18,046 18,181
Provision for income taxes 6,857 6,907
Net income 11,189 11,274
Earnings per share - basic $ 0.88 $ 0.89
Earnings per share - diluted $ 0.79 $ 0.80
CONSOLIDATED BALANCE SHEET
Other current assets $ 7,450 $ 6,921
Total current assets 59,505 58,977
Property, plant and equipment 216,216 215,279
Accumulated depreciation and amortization (89,300) (88,792)
Net property, plant and equipment 126,916 126,487
Intangible assets and other non-current assets 13,176 10,198
Total assets 199,597 195,662
Other current liabilities 10,802 11,972
Total current liabilities 39,781 40,951
Other long-term liabilities 2,834 3,000
Deferred income tax liability 2,197 81
Total liabilities 75,375 74,595
Retained earnings 85,498 82,343
Total shareholders' equity 124,222 121,067
Total liabilities and shareholders' equity 199,597 195,662
CONSOLIDATED STATEMENT OF CASH FLOWS INCREASE (DECREASE)
IN CASH
Net change in deferred income taxes $ (606) $ (554)
Decrease in other current assets 239 225
(Increase) decrease in other noncurrent assets (257) 188
Decrease in other long-term liabilities (659) (1,227)
Total adjustments 9,501 9,416
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.
As a result of this transaction, payments on the lease, which were reported
as rent prior to the buyout, are now reported as interest expense. Rent expense
related to the synthetic lease recorded in the quarter ended December 2002 was
$0.5 million. Interest expense related to the synthetic lease properties for the
quarter ended December 2003 was $0.2 million. The reduced expense resulted
primarily from the expiration in August 2003 of an interest rate swap
arrangement that fixed the interest rate on the debt related to these
properties, as well as a reduction of $5.0 million in the principal amount
financed under the synthetic lease. Also, the Company estimates that annual
depreciation expense related to the assets acquired in the Lease Buyout will be
approximately $0.5 million. 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 $1.7 million at
December 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 December 27, 2003, the fair value of this contract, net of tax, is
recorded as a component of accumulated other comprehensive income in the
consolidated Statement of Changes in Shareholders' Equity.
Note 4 - Vendor Rebates and Cooperative Advertising Credits
In accordance with EITF 02-16, for vendor agreements entered into or
modified after December 31, 2002, the Company accounts for vendor rebates and
cooperative advertising credits as a reduction of the cost of products
purchased, except where the rebate or credit is a reimbursement of costs
incurred to sell the vendor's product, in which case it is offset against the
costs incurred. Vendor rebates and credits associated with vendor agreements
entered into prior to December 31, 2002 are recognized as cooperative
advertising income as earned and are classified as a reduction of selling,
general and administrative expenses.
9
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Earnings Per Share
The computation of diluted earnings per share for the nine months ended
fiscal December 2003 excludes the effect of assumed exercise of 41,000
outstanding stock options as the exercise prices of these options exceeded the
average market price of the Company's common stock for that period. The stock
options outstanding excluded from the computation of diluted earnings per share
for the quarter and nine months ended fiscal December 2002 amounted to 311,000
and 154,000, respectively.
Note 6 - 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.
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 NINE MONTHS ENDED
FISCAL DECEMBER FISCAL DECEMBER
--------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
RESTATED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income, as reported $3,031 $2,413 $14,847 $11,274
Add: Total stock-based employee compensation
expense recorded in accordance with APB 25, net of
tax effect 994
Deduct: Total stock-based employee compensation
expense determined under fair value-based method for
all awards, net of tax effect (110) (148) (312) (1,280)
------------- ------------ ---------- -----------
Pro forma net income $2,921 $2,265 $14,535 $10,988
============= ============ ========== ===========
Earnings per share:
Basic-as reported $ 0.23 $ 0.19 $ 1.15 $ 0.89
============= ============ ========== ===========
Basic-pro forma $ 0.23 $ 0.18 $ 1.12 $ 0.87
============= ============ ========== ===========
Diluted-as reported $ 0.21 $ 0.17 $ 1.02 $ 0.80
============= ============ ========== ===========
Diluted-pro forma $ 0.20 $ 0.16 $ 1.01 $ 0.78
============= ============ ========== ===========
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 nine 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 7 - 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.
10
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED 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 and nine months ended December 27, 2003
and for the prior year comparable periods was not material. Also, warranty
reserves are not material to the Company's financial position.
Note 8 - 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 9 - Supplemental Disclosure of Cash Flow Information
The following transactions represent noncash investing and financing
activities during the periods indicated:
NINE MONTHS ENDED DECEMBER 27, 2003:
In connection with the sale or disposal of assets, the Company reduced
fixed assets by $426,000 and decreased other current liabilities by $426,000.
In connection with recording the value of the Company's swap contracts,
other comprehensive income increased by $391,000, other current liabilities
decreased by $575,000, other long-term liabilities decreased by $54,000 and the
deferred income tax liability was increased by $238,000.
In connection with the sale of fixed assets, the Company received a note
which increased other current assets by $14,000 and other long-term assets by
$99,000.
In connection with the exercise of stock options, the Company decreased
deferred tax assets by $80,000, decreased current liabilities by $349,000 and
increased paid-in-capital by $269,000.
In connection with the three-for-two stock split that was effective on
October 31, 2003, the Company increased Common Stock by $44,000 to reflect the
par value of the additional shares issued, and reduced Retained Earnings by the
same amount.
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
===========
NINE MONTHS ENDED DECEMBER 28, 2002:
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
deferred income tax liabilities increased by $30,000.
11
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the acquisition of Kimmel Automotive, Inc. (Note 8),
liabilities were assumed as follows:
Fair value of assets acquired $10,000,000
Cash paid, net of cash acquired 5,500,000
------------
Liabilities assumed $ 4,500,000
============
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.
CASH PAID DURING THE PERIOD:
2003 2002
---- ----
Interest, net $1,537,000 $1,857,000
Income taxes 6,512,000 5,757,000
Note 10 - Stock Split
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 was distributed on October 31, 2003 to shareholders of record as
of October 21, 2003. All basic and diluted earnings per share, average shares
outstanding information and all applicable footnotes have been adjusted to
reflect the aforementioned stock split.
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.
See Note 1 to the condensed consolidated financial statements in Item 1 of
this filing for a description of accounting revisions and the related financial
statement lines that were restated for the nine months ended fiscal December
2002. The effect of the revisions of the accounting for barter credits and
restructuring reserve on operating results for the nine months ended December
2002 was to decrease operating, selling, general and administrative expenses by
$135,000 and increase the previously reported net income by $85,000 and to
increase diluted earnings per share to $0.80 per share. There was no impact on
net income for the quarter ended December 2002 from these accounting revisions.
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
2003 2002 2003 2002
---- ---- ---- ----
RESTATED
Sales.......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales, including distribution
and occupancy costs........................... 60.9 62.2 58.1 58.6
----- ----- ----- -----
Gross profit................................... 39.1 37.8 41.9 41.4
Operating, selling, general and
administrative expenses....................... 30.9 30.4 29.7 31.2
----- ----- ----- -----
Operating income............................... 8.2 7.4 12.2 10.2
Interest expense - net......................... .8 1.0 .9 1.0
Other income - net............................. ( .2) - - -
----- ----- ----- -----
Income before provision for income taxes 7.6 6.4 11.3 9.2
Provision for income taxes..................... 2.9 2.4 4.3 3.5
----- ----- ----- -----
Net income..................................... 4.7% 4.0% 7.0% 5.7%
===== ===== ===== =====
13
THIRD QUARTER ENDED DECEMBER 27, 2003 COMPARED TO THIRD QUARTER ENDED DECEMBER
28, 2002
Sales were $64.5 million for the quarter ended December 27, 2003 as
compared with $60.7 million in the quarter ended December 28, 2002. The sales
increase of $3.8 million, or 6.3%, was due to an increase of $1.5 million
related to new stores and a comparable store sales increase of 4.0%. Kimmel
stores are included in the comparable store sales numbers because they have been
open one full fiscal year.
Sales for the nine months ended December 27, 2003 were $212.3 million as
compared to $196.6 million for the comparable period in the prior year. The
sales increase of $15.7 million is due to a comparable store sales increase of
5.6%, as well as an increase of $4.8 million from new stores.
At December 27, 2003 the Company had 565 company-operated stores compared
with 550 stores at December 28, 2002. During the quarter ended December 27,
2003, the Company opened five stores and closed two.
Gross profit for the quarter ended December 27, 2003 was $25.3 million or
39.1% of sales as compared with $22.9 million or 37.8% of sales for the quarter
ended December 28, 2002. The increase in gross profit for the quarter ended
December 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 $.5 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 December 27, 2003. This
reduction was partially offset by approximately $.1 million of additional
depreciation recognized in the quarter ended December 2003, now that the related
properties are recorded on the Company's balance sheet. Additionally, with
strong comparable store sales, the Company was able to obtain some leverage in
occupancy costs which are largely fixed expenses.
Gross profit also increased due to a reduction in material costs related
primarily to the recognition of barter income in the third quarter of fiscal
2004, as well as vendor rebates in accordance with EITF 02-16. In the prior
year, these rebates were recorded as cooperative advertising income in selling
and administrative costs.
Technician labor, as a percent of sales, was relatively consistent between
the two quarters. However, productivity, as measured by sales per man-hour,
improved 5.2% 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 third quarter of fiscal 1998, is up 30.6%.
Gross profit for the nine months ended December 27, 2003 was $88.9 million,
or 41.9% of sales, as compared to $81.4 million or 41.4% of sales.
Operating, selling, general and administrative ("SG&A") expenses for the
quarter ended December 27, 2003 increased by $1.6 million to $20.0 million from
the quarter ended December 28, 2002, and were 30.9% of sales as compared to
30.4% in the prior year quarter. The increase in SG&A expense as a percentage of
sales is due primarily to a reduction in cooperative advertising credits
recorded in the quarter ended December 2003, in part due to timing as well as
the Company's implimentation of EITF 02-16. This pronouncement requires the
Company to record cooperative advertising credits and other vendor rebates
primarily in accordance with inventory turns.
For the nine months ended December 27, 2003, these expenses increased by
$1.8 million to $63.1 million from the comparable period of the prior year, and
were 29.7% of sales as compared to 31.2%. Year-to-date, SG&A expenses declined
as a percentage of sales primarily due to decreased store advertising and
decreased field support expense, partially offset by decreased cooperative
advertising income. 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 December 27, 2003 of approximately
$5.3 million increased 17.0% as compared to operating income for the quarter
ended December 28, 2002, and increased as a percentage of sales from 7.4% to
8.2% for the same periods.
Net interest expense for the quarter ended December 27, 2003 decreased by
approximately $.1 million as compared to the same period in the prior year, and
decreased from 1.0% to .8% as a percentage of sales for the same periods. Net
interest expense for the nine months ended December 27, 2003 was flat with the
prior year at $2.0 million and decreased from the prior year as a percentage of
sales by .1%. The weighted average debt outstanding for the quarter ended
December 27, 2003 increased by approximately $14.0 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 300 basis points as compared to the
prior year.
14
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 $100,000.
The effective tax rate for the quarters ended December 27, 2003 and
December 28, 2002 was 38% of pre-tax income.
Net income for the quarter ended December 27, 2003 of $3.0 million
increased 25.6% from net income for the quarter ended December 28, 2002.
Earnings per share on a diluted basis for the quarter ended December 27, 2003
increased 23.5%.
For the nine months ended December 27, 2003, net income of $14.8 million
increased 31.7% as compared to the prior year period and diluted earnings per
share increased 27.5%.
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 nine months ended December 27, 2003, the Company spent $11.5 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 December 27,
2003), and a non-amortizing credit loan (formerly synthetic lease financing)
totaling $26.5 million (all of which was outstanding at December 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 December 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 December 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 December 2003, the FASB issued Statement of Financial Accounting
Standards No. 132 (revised 2003), "Employers' Disclosures about Pensions and
Other Postretirement Benefits--an amendment of FASB Statements No. 87, 88, and
106 (Issued December 2003)". This Statement revises employers' disclosures about
pension plans and other postretirement benefit plans. It does not change the
measurement or recognition of those plans required by FASB SFAS 87, "Employers'
Accounting for Pensions", SFAS 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits", and
SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions". This Statement retains the disclosure
15
requirements contained in FASB Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS 132"), which it replaces. It requires additional disclosures to those in
the original SFAS 132 about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. The disclosure requirements in this statement are
effective for interim periods starting after December 15, 2003. The Company will
implement these changes in its Form 10-K for fiscal 2004.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, and Interpretation of ARB No. 51", which requires
all variable interest entities to be consolidated by the primary beneficiary.
The primary beneficiary is the entity that holds the majority of the beneficial
interests in the variable interest entity. In addition, the Interpretation
expands disclosure requirements for both variable interest entities that are
consolidated as well as variable interest entities from which the entity is the
holder of a significant amount of the beneficial interests, but not the
majority. The disclosure requirements of this Interpretation were effective for
all financial statements issued after January 31, 2003. The consolidation
requirements of this Interpretation are effective for the first reporting period
ending after December 15, 2003. At this time, the Company does not believe the
Interpretation will have any significant impact on the Company's future reported
results of operations and financial position apart from that described in Note 2
regarding the Company's buyout of the properties under its synthetic lease
arrangement.
Item 4. Controls and Procedures
Disclosure controls and procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Securities
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
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 conclusion of the Company's Chief
Executive Officer and Chief Financial Officer, based upon an evaluation
completed as of the end of the most recent fiscal quarter reported on herein,
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 or other factors subsequent to the date of the
evaluation referred to above that could significantly affect the Company's
disclosure controls.
16
MONRO MUFFLER BRAKE, INC.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Shareholders of the Company (the "Special Meeting")
was held on December 2, 2003. At the Special Meeting, the Company's common
shareholders approved the following:
(I) a proposal to amend the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of
Common Stock from 15,000,000 to 20,000,000 (8,445,757 shares in
favor, 221,480 shares against, 2,000 shares abstaining and zero
broker non-votes).
As required under the Company's Certificate of Incorporation, the approval
of this proposal was 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 December 2, 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
Form 8-K dated October 16, 2003 to furnish the Company's press
release announcing its unaudited operating results for the
quarter ended September 27, 2003. 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: February 9, 2004 By /s/ Robert G. Gross
----------------------------------
Robert G. Gross
President and Chief Executive
Officer
DATE: February 9, 2004 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