UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 23, 2017.29, 2018.
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 Number: 0-19357
MONRO, INC.
(Exact name of registrant as specified in its charter)
|
|
NewYork | 16-0838627 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification #) |
|
|
200HollederParkway,Rochester,NewYork | 14615 |
(Address of principal executive offices) | (Zip code) |
585-647-6400
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: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 ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer ☐ Non-accelerated filer ☐ |
Smaller reporting company ☐ |
| |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of January 19, 2018, 32,794,96525, 2019, 33,103,468 shares of the registrant's common stock, par value $.01$ .01 per share, were outstanding.
MONRO, INC.
2
MONRO, INC.
PART I - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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| December 23, |
| March 25, |
| December 29, |
| March 31, | ||||
|
| 2017 |
| 2017 |
| 2018 |
| 2018 | ||||
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| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||
Assets |
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Current assets: |
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Cash and equivalents |
| $ | 7,853 |
| $ | 8,995 |
| $ | 3,579 |
| $ | 1,909 |
Trade receivables |
| 12,861 |
| 11,465 |
| 15,033 |
| 11,582 | ||||
Federal and state income taxes receivable |
| 4,972 |
| 3,527 |
| 5,276 |
| 4,185 | ||||
Inventories |
| 143,099 |
| 142,604 |
| 158,846 |
| 152,367 | ||||
Other current assets |
|
| 39,111 |
|
| 32,639 |
|
| 39,579 |
|
| 37,213 |
Total current assets |
|
| 207,896 |
|
| 199,230 |
|
| 222,313 |
|
| 207,256 |
Property, plant and equipment |
|
| 756,531 |
|
| 712,999 |
|
| 807,230 |
|
| 767,864 |
Less - Accumulated depreciation and amortization |
|
| (343,955) |
|
| (318,365) |
|
| (376,587) |
|
| (351,195) |
Net property, plant and equipment |
|
| 412,576 |
|
| 394,634 |
|
| 430,643 |
|
| 416,669 |
Goodwill |
| 517,989 |
| 501,736 |
| 548,153 |
| 522,892 | ||||
Intangible assets |
| 50,027 |
| 54,288 |
| 50,810 |
| 49,143 | ||||
Other non-current assets |
| 10,575 |
| 11,331 |
| 12,756 |
| 10,997 | ||||
Long-term deferred income tax assets |
|
| 14,348 |
|
| 24,045 |
|
| 2,406 |
|
| 11,475 |
Total assets |
| $ | 1,213,411 |
| $ | 1,185,264 |
| $ | 1,267,081 |
| $ | 1,218,432 |
Liabilities and Shareholders' Equity |
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Current liabilities: |
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Current portion of long-term debt, capital leases and financing obligations |
| $ | 18,161 |
| $ | 15,298 |
| $ | 21,361 |
| $ | 18,989 |
Trade payables |
| 86,294 |
| 79,492 |
| 95,166 |
| 84,568 | ||||
Accrued payroll, payroll taxes and other payroll benefits |
| 18,289 |
| 24,979 |
| 22,570 |
| 20,197 | ||||
Accrued insurance |
| 39,324 |
| 35,325 |
| 39,848 |
| 36,739 | ||||
Warranty reserves |
| 11,966 |
| 10,843 |
| 12,555 |
| 12,381 | ||||
Other current liabilities |
|
| 21,433 |
|
| 19,956 |
|
| 21,123 |
|
| 21,131 |
Total current liabilities |
|
| 195,467 |
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| 185,893 |
|
| 212,623 |
|
| 194,005 |
Long-term debt |
| 154,551 |
| 182,337 |
| 119,884 |
| 148,068 | ||||
Long-term capital leases and financing obligations |
| 226,615 |
| 213,166 |
| 228,877 |
| 227,220 | ||||
Accrued rent expense |
| 4,577 |
| 5,037 |
| 4,116 |
| 4,530 | ||||
Other long-term liabilities |
| 14,535 |
| 15,137 |
| 12,919 |
| 14,141 | ||||
Long-term income taxes payable |
|
| 3,050 |
|
| 2,440 |
|
| 2,528 |
|
| 1,992 |
Total liabilities |
|
| 598,795 |
|
| 604,010 |
|
| 580,947 |
|
| 589,956 |
Commitments and contingencies |
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| �� |
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Shareholders' equity: |
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Class C Convertible Preferred Stock, $1.50 par value, $.064 conversion value, |
| 33 |
| 33 |
| 33 |
| 33 | ||||
Common Stock, $.01 par value, 65,000,000 shares authorized; 39,124,523 and |
| 391 |
| 390 | ||||||||
Treasury Stock, 6,330,008 and 6,322,417 shares at December 23, 2017 and |
| (106,563) |
| (106,212) | ||||||||
Common Stock, $.01 par value, 65,000,000 shares authorized; 39,459,263 and 39,166,392 shares issued at December 29, 2018 and March 31, 2018, respectively |
| 395 |
| 392 | ||||||||
Treasury Stock, 6,359,871 and 6,330,008 shares at December 29, 2018 and March 31, 2018, respectively, at cost |
| (108,729) |
| (106,563) | ||||||||
Additional paid-in capital |
| 196,948 |
| 191,553 |
| 216,809 |
| 199,576 | ||||
Accumulated other comprehensive loss |
| (3,312) |
| (3,161) |
| (4,475) |
| (4,248) | ||||
Retained earnings |
|
| 527,119 |
|
| 498,651 |
|
| 582,101 |
|
| 539,286 |
Total shareholders' equity |
|
| 614,616 |
|
| 581,254 |
|
| 686,134 |
|
| 628,476 |
Total liabilities and shareholders' equity |
| $ | 1,213,411 |
| $ | 1,185,264 |
| $ | 1,267,081 |
| $ | 1,218,432 |
The accompanying notes are an integral part of these financial statements.
3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
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| Quarter Ended |
| Nine Months Ended |
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| Fiscal December |
| Fiscal December |
| Quarter Ended |
| Nine Months Ended | ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| Fiscal December |
| Fiscal December | ||||||||||||
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| (Dollars in thousands, |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||||||||
|
| except per share data) |
| (Dollars in thousands, except per share data) | ||||||||||||||||||||
Sales |
| $ | 285,730 |
| $ | 288,283 |
| $ | 842,237 |
| $ | 769,500 |
| $ | 310,110 |
| $ | 285,730 |
| $ | 913,027 |
| $ | 842,237 |
Cost of sales, including distribution and occupancy costs |
|
| 178,743 |
|
| 182,683 |
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| 514,426 |
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| 465,834 |
|
| 192,144 |
|
| 178,743 |
|
| 557,876 |
|
| 514,426 |
Gross profit |
|
| 106,987 |
|
| 105,600 |
|
| 327,811 |
|
| 303,666 |
|
| 117,966 |
|
| 106,987 |
|
| 355,151 |
|
| 327,811 |
Operating, selling, general and administrative expenses |
|
| 77,688 |
|
| 72,526 |
|
| 230,943 |
|
| 207,372 |
|
| 87,256 |
|
| 77,688 |
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| 256,862 |
|
| 230,943 |
Operating income |
|
| 29,299 |
|
| 33,074 |
|
| 96,868 |
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| 96,294 |
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| 30,710 |
|
| 29,299 |
|
| 98,289 |
|
| 96,868 |
Interest expense, net of interest income |
| 6,138 |
| 5,261 |
| 17,997 |
| 14,233 |
| 6,797 |
| 6,138 |
| 20,180 |
| 17,997 | ||||||||
Other income, net |
|
| (99) |
|
| (165) |
|
| (336) |
|
| (445) |
|
| (321) |
|
| (99) |
|
| (809) |
|
| (336) |
Income before provision for income taxes |
|
| 23,260 |
|
| 27,978 |
|
| 79,207 |
|
| 82,506 |
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| 24,234 |
|
| 23,260 |
|
| 78,918 |
|
| 79,207 |
Provision for income taxes |
|
| 11,659 |
|
| 10,412 |
|
| 32,755 |
|
| 30,641 |
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| 3,703 |
|
| 11,659 |
|
| 15,982 |
|
| 32,755 |
Net income |
|
| 11,601 |
|
| 17,566 |
|
| 46,452 |
|
| 51,865 |
|
| 20,531 |
|
| 11,601 |
|
| 62,936 |
|
| 46,452 |
Other comprehensive loss, net of tax: |
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Changes in pension, net of tax benefit |
|
| (50) |
|
| (83) |
|
| (151) |
|
| (211) |
|
| (76) |
|
| (50) |
|
| (227) |
|
| (151) |
Comprehensive income |
| $ | 11,551 |
| $ | 17,483 |
| $ | 46,301 |
| $ | 51,654 |
| $ | 20,455 |
| $ | 11,551 |
| $ | 62,709 |
| $ | 46,301 |
Earnings per common share: |
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Basic |
| $ | .35 |
| $ | .54 |
| $ | 1.41 |
| $ | 1.59 |
| $ | .62 |
| $ | .35 |
| $ | 1.90 |
| $ | 1.41 |
Diluted |
| $ | .35 |
| $ | .53 |
| $ | 1.39 |
| $ | 1.56 |
| $ | .61 |
| $ | .35 |
| $ | 1.87 |
| $ | 1.39 |
Weighted average number of common shares outstanding |
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Basic |
|
| 33,032 |
|
| 32,779 |
|
| 32,932 |
|
| 32,746 | ||||||||||||
Diluted |
|
| 33,766 |
|
| 33,352 |
|
| 33,605 |
|
| 33,317 |
The accompanying notes are an integral part of these financial statements.
4
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(Dollars and shares in thousands)
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| Preferred Stock |
| Common Stock |
| Treasury Stock |
| Additional |
| Accumulated |
| Retained |
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| Class C Convertible |
| Common Stock |
| Treasury Stock |
| Additional |
| Accumulated |
| Retained |
|
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| ||||||||||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Loss |
| Earnings |
| Total |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Loss |
| Earnings |
| Total | ||||||||||||||
Balance at March 25, 2017 |
| 22 |
| $ | 33 |
| 39,012 |
| $ | 390 |
| 6,322 |
| $ | (106,212) |
| $ | 191,553 |
| $ | (3,161) |
| $ | 498,651 |
| $ | 581,254 | |||||||||||||||||||||||||||
Balance at March 31, 2018 |
| 22 |
| $ | 33 |
| 39,166 |
| $ | 392 |
| 6,330 |
| $ | (106,563) |
| $ | 199,576 |
| $ | (4,248) |
| $ | 539,286 |
| $ | 628,476 | |||||||||||||||||||||||||||
Net income |
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| 46,452 |
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| 46,452 |
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| 62,936 |
|
| 62,936 |
Other comprehensive loss: |
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Pension liability adjustment |
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| (151) |
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| (151) | |||||||||||||||||||||||||||
Pension liability adjustment ($302) pre-tax |
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| (227) |
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| (227) | |||||||||||||||||||||||||||
Cash dividends (1): Preferred |
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| (276) |
|
| (276) |
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| (306) |
|
| (306) |
Common |
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| (17,690) |
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| (17,690) |
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| (19,778) |
|
| (19,778) |
Dividend payable |
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| (18) |
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| (18) |
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| (37) |
|
| (37) |
Exercise of stock options |
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|
| 112 |
|
| 1 |
| 8 |
|
| (351) |
|
| 3,385 |
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|
| 3,035 | |||||||||||||||||||||||||||
Activity related to equity- |
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|
| 293 |
|
| 3 |
| 30 |
|
| (2,166) |
|
| 14,083 |
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| 11,920 | |||||||||||||||||||||||||||
Stock-based compensation |
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| 2,010 |
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| 2,010 |
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| 3,150 |
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| 3,150 |
Balance at December 23, 2017 |
| 22 |
| $ | 33 |
| 39,124 |
| $ | 391 |
| 6,330 |
| $ | (106,563) |
| $ | 196,948 |
| $ | (3,312) |
| $ | 527,119 |
| $ | 614,616 | |||||||||||||||||||||||||||
Balance at December 29, 2018 |
| 22 |
| $ | 33 |
| 39,459 |
| $ | 395 |
| 6,360 |
| $ | (108,729) |
| $ | 216,809 |
| $ | (4,475) |
| $ | 582,101 |
| $ | 686,134 |
(1) |
|
The accompanying notes are an integral part of these financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
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| ||||
|
| Nine Months Ended |
| Nine Months Ended | ||||||||
|
| Fiscal December |
| Fiscal December | ||||||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
|
| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||
|
| Increase (Decrease) in Cash |
| Increase (Decrease) in Cash | ||||||||
Cash flows from operating activities: |
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Net income |
| $ | 46,452 |
| $ | 51,865 |
| $ | 62,936 |
| $ | 46,452 |
Adjustments to reconcile net income to net cash provided by operating activities - |
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Depreciation and amortization |
| 36,477 |
| 33,310 |
| 41,035 |
| 36,477 | ||||
Gain on bargain purchase |
| (13) |
| — |
| - |
| (13) | ||||
(Gain) loss on disposal of assets |
| (400) |
| 219 | ||||||||
Gain on disposal of assets |
| (314) |
| (400) | ||||||||
Stock-based compensation expense |
| 2,010 |
| 2,230 |
| 3,150 |
| 2,010 | ||||
Net change in deferred income taxes |
| 12,183 |
| 6,859 |
| 10,707 |
| 12,183 | ||||
Change in operating assets and liabilities (excluding acquisitions) |
|
|
|
| ||||||||
Change in operating assets and liabilities (excluding acquisitions): |
|
|
|
| ||||||||
Trade receivables |
| (1,367) |
| 142 |
| (1,777) |
| (1,367) | ||||
Inventories |
| 118 |
| 8,724 |
| 2,225 |
| 118 | ||||
Other current assets |
| (6,390) |
| (12,326) |
| 772 |
| (6,390) | ||||
Other non-current assets |
| 2,305 |
| 2,637 |
| 1 |
| 2,305 | ||||
Trade payables |
| 6,802 |
| 11,580 |
| 10,598 |
| 6,802 | ||||
Accrued expenses |
| 547 |
| (2,413) |
| 1,596 |
| 547 | ||||
Federal and state income taxes payable |
| (1,445) |
| (472) |
| (1,091) |
| (1,445) | ||||
Other long-term liabilities |
| (780) |
| (1,153) |
| (1,767) |
| (780) | ||||
Long-term income taxes payable |
|
| 610 |
|
| 552 |
|
| 536 |
|
| 610 |
Total adjustments |
|
| 50,657 |
|
| 49,889 |
|
| 65,671 |
|
| 50,657 |
Net cash provided by operating activities |
|
| 97,109 |
|
| 101,754 |
|
| 128,607 |
|
| 97,109 |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
| (29,727) |
| (28,082) |
| (30,763) |
| (29,727) | ||||
Acquisitions, net of cash acquired |
| (16,363) |
| (133,684) |
| (46,052) |
| (16,363) | ||||
Proceeds from the disposal of assets |
|
| 2,333 |
|
| 1,467 |
| 492 |
| 2,333 | ||
Other |
|
| 281 |
|
| - | ||||||
Net cash used for investing activities |
|
| (43,757) |
|
| (160,299) |
|
| (76,042) |
|
| (43,757) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings |
| 260,951 |
| 389,703 |
| 313,875 |
| 260,951 | ||||
Principal payments on long-term debt, capital leases |
|
|
|
|
|
|
|
| ||||
and financing obligations |
| (300,514) |
| (318,297) |
| (356,834) |
| (300,514) | ||||
Exercise of stock options |
| 3,035 |
| 2,491 |
| 12,148 |
| 3,035 | ||||
Dividends paid |
|
| (17,966) |
|
| (16,874) |
|
| (20,084) |
|
| (17,966) |
Net cash (used for) provided by financing activities |
|
| (54,494) |
|
| 57,023 | ||||||
Decrease in cash |
|
| (1,142) |
|
| (1,522) | ||||||
Net cash used for financing activities |
|
| (50,895) |
|
| (54,494) | ||||||
Increase (decrease) in cash |
|
| 1,670 |
|
| (1,142) | ||||||
Cash at beginning of period |
|
| 8,995 |
|
| 7,985 |
|
| 1,909 |
|
| 8,995 |
Cash at end of period |
| $ | 7,853 |
| $ | 6,463 |
| $ | 3,579 |
| $ | 7,853 |
The accompanying notes are an integral part of these financial statements.
6
Note 1 – Condensed Consolidated Financial Statements
The consolidated balance sheets as of December 23, 201729, 2018 and March 25, 2017,31, 2018, the consolidated statements of comprehensive income for the quarters and nine months ended December 23, 201729, 2018 and December 24, 2016,23, 2017, the consolidated statement of changes in shareholders’ equity for the nine months ended December 23, 2017,29, 2018 and the consolidated statements of cash flows for the nine months ended December 23, 201729, 2018 and December 24, 2016,23, 2017, include financial information for Monro, Inc. and its wholly-owned subsidiaries, Monro Service Corporation and Car-X, LLC (collectively, “Monro”, “we”, “us”, “our” and“Monro,” “we,” “us,” “our,” the “Company”). These unaudited, condensed consolidated financial statements have been prepared by Monro. We believe all known adjustments (consisting of normal recurring accruals or adjustments) have been made to fairly state the financial position, results of operations and cash flows for the unaudited periods presented.
Interim results are not necessarily indicative of results for a full year. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).America. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 25, 2017.31, 2018.
We report our 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:
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|
“Quarter Ended Fiscal December 2018” | September 30, 2018 – December 29, 2018 (13 weeks) |
“Quarter Ended Fiscal December 2017” | September 24, 2017 – December 23, 2017 (13 weeks) |
“ |
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“Nine Months Ended Fiscal December 2017” | March 26, 2017 – December 23, 2017 (39 weeks) |
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Fiscal year 2018,2019, ending March 31, 2018,30, 2019, is a 5352 week year.
Monro’s operations are organized and managed in one operating segment. The internal management financial reporting that is the basis for evaluation in order to assess performance and allocate resources by our chief operating decision maker consists of consolidated data that includes the results of our retail, commercial and wholesale locations. As such, our one operating segment reflects how our operations are managed, how resources are allocated, how operating performance is evaluated by senior management and the structure of our internal financial reporting.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance for the reporting of revenue from contracts with customers. This guidance provides guidelines a company will apply to determine the measurement of revenue and timing of when it is recognized. Additional guidance has subsequently been issued to amend or clarify the reporting of revenue from contracts with customers. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption was permitted, but we did not early adopt this guidance.permitted. We have completed our initial assessment of the effect of adoption. Based on this assessment, we expect the impact of the new guidance on the amount and timing of revenue recognition to be insignificant. While the evaluation of the impact of the new revenue recognition guidance on our Consolidated Financial Statements has not yet been fully determined, we anticipate the provisions to primarily impact the deferral of revenue generated by the sale of an extended warranty. We are required to adoptadopted this guidance utilizing one of two methods: retrospective restatement for each reporting period presented at time of adoption, or a modified retrospective approach with the cumulative effect of initially applying this guidance recognized at the date of initial application. We have identified, and are in the process of implementing, appropriate changes to our business processes and controls to support recognition and disclosure under the guidance. We will elect an adoption methodology inall related amendments during the first quarter of fiscal 2019 using the fiscal year ended March 2019, after wemodified retrospective approach. The adoption of this guidance did not have fully evaluated thea material impact on our Consolidated Financial Statements, and we expect to adopt the modified retrospective method. Under this method, we would recognize the cumulative effect of the changes in retained earnings at the date of adoption, but would not restate prior periods. In addition, we expect adoption to lead to increased footnote disclosures.Statements. See Note 7 for additional information.
7
In February 2016, the FASB issued new accounting guidance related to leases. This guidance establishes a right of use (“ROU”) model that requires a lessee to record a ROU asset and lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. AAdditional guidance has subsequently been issued in order to provide an additional transition method as well as an additional practical expedient to be available upon adoption. We are required to adopt the new lease guidance utilizing one of two methods: retrospective restatement for each reporting period presented at time of adoption, or a modified retrospective transition approach is required for lessees for capital and operating leases existingwith the cumulative effect of initially applying this guidance recognized at or entered into after, the beginningdate of initial application. Under the earliest comparative period presented in the financial statements, with certain practical expedients available.modified retrospective approach, prior periods would not be restated. Early adoption is permitted, but we have not early adopted this guidance. ApproximatelyWe expect to adopt using the modified retrospective approach and that the new lease standard will have a material impact on our Consolidated Financial Statements. While we are continuing to assess the effects of adoption, we currently believe the most significant changes relate to the recognition of new ROU assets and lease liabilities on the Consolidated Balance Sheet for operating leases as approximately 50% of our store leases, all of our land leases and all of our landnon-real estate leases are currently not recorded on our balance sheet. RecordingWe expect that substantially all of our operating lease commitments will be subject to the new guidance and will be recognized as operating lease liabilities and ROU assets and liabilities for these leases is expected to have a material impact onupon adoption. Absent potential acquisitions, we do not anticipate any significant changes in the volume of our Consolidated Balance Sheet. We are currently evaluatingleasing activity until the impact that recording ROU assets and liabilities will have on our Consolidated Statementperiod of Comprehensive Income and the financial statement impact, if material, that the standard will have on leases, which are currently recorded on our Consolidated Balance Sheet.adoption.
In March 2016, the FASB issued new accounting guidance intended to simplify various aspects related to accounting for share-based payments and their presentation in the financial statements. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016. We adopted this guidance during the first quarter of fiscal 2018. Amendments to this guidance related to accounting for excess tax benefits and tax deficiencies have been adopted prospectively and had an immaterial impact on the Consolidated Statement of Comprehensive Income for the nine months ended December 23, 2017. Excess tax benefits related to share-based payments are now included in operating cash flows rather than financing cash flows. This change has been applied prospectively in accordance with the guidance and prior periods have not been adjusted. We have previously classified cash paid for tax withholding purposes as a financing activity in the statement of cash flows. Therefore, there is no change related to this requirement. The amendments allow for a one-time accounting policy election to either account for forfeitures as they occur or continue to estimate forfeitures as required by current guidance. We have elected to continue estimating forfeitures through applying a forfeiture rate.
7
In August 2016, the FASB issued new accounting guidance related to cash flow classification. This guidance clarifies and provides specific guidance on eight cash flow classification issues that are not addressed by current GAAPgenerally accepted accounting principles and thereby reduce the current diversity in practice. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption was permitted, but wepermitted. We adopted this guidance during the first quarter of fiscal 2019. The adoption of this guidance did not early adopt this guidance. This guidance is not expected to have a material impact on our Consolidated Financial Statements.
In January 2017, the FASB issued new accounting guidance which clarifies the definition of a business, particularly when evaluating whether transactions should be accounted for as acquisitions or dispositions of assets or businesses. This guidance provides a screen to determine when a set of assets and activities (collectively referred to as a “set”) is not a business. This screen requires that when substantially all of the fair value of the assets is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If the screen is not met, the guidance provides a framework to evaluate whether both an input and a substantive process are present to be considered a business. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption was permitted for certain transactions, but wetransactions. We adopted this guidance during the first quarter of fiscal 2019. The adoption of this guidance did not early adopt this guidance. This guidance is not expected to have a material impact on our Consolidated Financial Statements.
In January 2017, the FASB issued new accounting guidance simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which required the determination of an implied fair value of goodwill. Under this guidance, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. This guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We have not early adopted this guidance. This guidance isduring the third quarter of fiscal 2019. The adoption of this guidance did not expected to have a material impact on our Consolidated Financial Statements.
In March 2017, the FASB issued accounting guidance related tothat amends how employers present the presentation of net periodic pensionbenefit cost and net periodic postretirement benefit cost. Thisin the income statement. The new guidance requires employers to disaggregate and present separately the current service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost are to be presented separately from the service cost component and outside of any subtotal of income from operations. Employers will have to disclose the line(s) used to present the other components of the net periodic benefit cost ifwithin the components are not presented separately in the income statement.Consolidated Statement of Comprehensive Income. This guidance is effective for fiscal years and interim periods beginning after December 15, 2017, and should be applied retrospectively. Early adoption was permitted, but wepermitted. We adopted this guidance during the first quarter of fiscal 2019. The adoption of this guidance did not early adopt this guidance. This guidance is not expected to have a material impact on our Consolidated Financial Statements.
8
In May 2017, the FASB issued new accounting guidance which clarifies when to account for a change to the terms or conditions of a share based payment award as a modification. Under this guidance, modification is required only if the fair value, the vesting conditions, or the classification of an award as equity or liability changes as a result of the change in terms or conditions. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption was permitted, but wepermitted. We adopted this guidance during the first quarter of fiscal 2019. The adoption of this guidance did not early adopt this guidance.have a material impact on our Consolidated Financial Statements.
In June 2018, the FASB issued new accounting guidance that amends the accounting for nonemployee share-based awards. Under the new guidance, the existing guidance related to the accounting for employee share-based awards will apply to nonemployee share-based transactions, with certain exceptions. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the potential impact of the adoption of this guidance on our Consolidated Financial Statements.
In August 2018, the FASB issued new accounting guidance which eliminates, adds and modifies certain disclosure requirements for fair value measurements. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the potential impact of the adoption of this guidance on our Consolidated Financial Statements.
In August 2018, the FASB issued new accounting guidance that aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2019. Early adoption was permitted. We adopted this guidance during the third quarter of fiscal 2019. The adoption of this guidance did not expected to have a material impact on our Consolidated Financial Statements.
Other recent authoritative guidance issued by the FASB (including technical corrections to the Accounting Standards Codification) and the Securities and Exchange Commission did not, or are not expected to have a material effect on Monro’sour Consolidated Financial Statements.
8
Guarantees
At the time we issue a guarantee, we recognize an initial liability for the fair value, or market value, of the obligation we assume under that guarantee. Monro has guaranteed certain lease payments, primarily related to franchisees, amounting to $5.4$2.2 million. This amount represents the maximum potential amount of future payments under the guarantees as of December 23, 2017.29, 2018. The leases are guaranteed through April 2020. In the event of default by the franchise owner, Monro generally retains the right to assume the lease of the related store, enabling Monro to re-franchise the location or to operate that location as a Company-operated store. As of December 29, 2018, no liability related to anticipated defaults under the foregoing leases is recorded. We have recorded a liability related to anticipated defaults under the foregoing leases of $.2 million and $.6 million as of December 23, 2017 and March 25, 2017, respectively.31, 2018.
Note 2 – Acquisitions
Monro’s acquisitions are strategic moves in our plan to fill in and expand our presence in existing and contiguous markets, and leverage fixed operating costs such as distribution, advertising and administration. Acquisitions in this footnote include acquisitions of five or more locations as well as acquisitions of one to four locations that are part of the Company’sour greenfield store growth strategy.
Subsequent Events
We haveSubsequent to December 29, 2018, we signed a definitive asset purchase agreementagreements to complete the acquisition of seven12 retail tire and automotive repair stores located within our existing markets.in Louisiana. This transaction is expected to close during the fourth quarter of fiscal 20182019 and is expected to be financed through our existing credit facility.
On January 14, 2018,13, 2019, we acquired three13 retail tire and automotive repair stores located in PennsylvaniaFlorida from Valley Tire Co.,R.A. Johnson, Inc. These stores operate under the Mr.The Tire Choice name. The acquisition was financed through our existing credit facility.
Fiscal 2019
During the first nine months of fiscal 2019, we acquired the following businesses for an aggregate purchase price of $45.4 million. The acquisitions were financed through our existing credit facility. The results of operations for these acquisitions are included in our financial results from the respective acquisition dates.
· | On December 9, 2018, we acquired two retail tire and automotive repair stores located in Virginia from Colony Tire Corporation. These stores operate under the Mr. Tire name. |
· | On November 4, 2018, we acquired five retail tire and automotive repair stores located in Ohio from Jeff Pohlman Tire & Auto Service, Inc. These stores operate under the Car-X and Mr. Tire names. |
· | On October 14, 2018, we acquired one retail tire and automotive repair store located in Illinois from Quality Tire and Auto, Inc. This store operates under the Car-X name. |
· | On September 23, 2018, we acquired one retail tire and automotive repair store located in South Carolina from Walton’s Automotive, LLC. This store operates under the Treadquarters name. |
· | On September 16, 2018, we acquired one retail tire and automotive repair store located in Illinois from C&R Auto Service, Inc. This store operates under the Car-X name. |
· | On September 9, 2018, we acquired four retail tire and automotive repair stores in Arkansas and Tennessee from Steele-Guiltner, Inc. These stores operate under the Car-X name. |
· | On July 15, 2018, we acquired one retail tire and automotive repair store located in Pennsylvania from Mayfair Tire & Service Center, Inc. This store operates under the Mr. Tire name. |
· | On July 8, 2018, we acquired eight retail tire and automotive repair stores in Missouri from Sawyer Tire, Inc. These stores operate under the Car-X name. |
· | On May 13, 2018, we acquired 12 retail/commercial tire and automotive repair stores and one retread facility located in Tennessee, as well as four wholesale locations in North Carolina, Tennessee and Virginia, from Free Service Tire Company, Incorporated. These locations operate under the Free Service Tire name. |
9
· | On April 1, 2018, we acquired four retail tire and automotive repair stores located in Minnesota from Liberty Auto Group, Inc. These stores operate under the Car-X name. |
These acquisitions resulted in goodwill related to, among other things, growth opportunities, synergies and economies of scale expected from combining these businesses with ours, as well as unidentifiable intangible assets. All of the goodwill is expected to be deductible for tax purposes. We have recorded finite-lived intangible assets at their estimated fair value related to customer lists, favorable leases and a trade name.
We expensed all costs related to acquisitions in the nine months ended December 29, 2018. The total costs related to completed acquisitions were $.1 million and $.4 million for the quarter and nine months ended December 29, 2018, respectively. These costs are included in the Consolidated Statements of Comprehensive Income primarily under operating, selling, general and administrative expenses.
Sales for the fiscal 2019 acquired entities for the quarter and nine months ended December 29, 2018 totaled $14.7 million and $33.4 million, respectively, for the period from acquisition date through December 29, 2018.
Supplemental pro forma information for the current or prior reporting periods has not been presented due to the impracticability of obtaining detailed, accurate or reliable data for the periods the acquired entities were not owned by Monro.
The preliminary fair values of identifiable assets acquired and liabilities assumed were based on preliminary valuations and estimates. The excess of the net purchase price over net identifiable assets acquired was recorded as goodwill. The preliminary allocation of the aggregate purchase price as of December 29, 2018 was as follows:
As of | |||
(Dollars in | |||
Trade receivables | $ | 1,674 | |
Inventories | 8,517 | ||
Other current assets | 230 | ||
Property, plant and equipment | 12,490 | ||
Intangible assets | 7,646 | ||
Other non-current assets | 17 | ||
Long-term deferred income tax assets | 1,555 | ||
Total assets acquired | 32,129 | ||
Warranty reserves | 314 | ||
Other current liabilities | 1,578 | ||
Long-term capital leases and financing obligations | 9,018 | ||
Other long-term liabilities | 523 | ||
Total liabilities assumed | 11,433 | ||
Total net identifiable assets acquired | $ | 20,696 | |
Total consideration transferred | $ | 45,447 | |
Less: total net identifiable assets acquired | 20,696 | ||
Goodwill | $ | 24,751 |
The following are the intangible assets acquired and their respective fair values and weighted average useful lives:
As of | ||||||
Dollars in | Weighted | |||||
Customer lists | $ | 5,697 | 13 years | |||
Favorable leases | 1,549 | 10 years | ||||
Trade name | 400 | 2 years | ||||
Total | $ | 7,646 | 12 years |
10
Fiscal 2018
During the first nine months of fiscal 2018, we acquired the following businesses for an aggregate purchase price of $15.7 million. The acquisitions were financed through our existing credit facility. The results of operations for these acquisitions are included in our financial results from the respective acquisition dates.
· | On December 17, 2017, we acquired one retail tire and automotive repair store located in Indiana from MLR, Incorporated. This store operates under the Car-X name. |
· | On December 10, 2017, we acquired two retail tire and automotive repair stores located in Pennsylvania from TriGar Tire & Auto Service Center, LLC. One store operates under the Monro name and one store operates under the Mr. Tire name. |
· | On August 13, 2017, we acquired eight retail tire and automotive repair stores located in Indiana and Illinois from Auto MD, LLC. These stores operate under the Car-X name. |
· | On July 30, 2017, we acquired 13 retail tire and automotive repair stores in Michigan, 12 of which were operating as Speedy Auto Service and Tire dealer locations, from UVR, Inc. One of the acquired stores was not opened by Monro. These stores operate under the Monro name. |
· | On July 9, 2017, we acquired one retail tire and automotive repair store located in North Carolina from Norman Young Tires, Inc. This store operates under the Treadquarters name. |
9
· | On June 25, 2017, we acquired one retail tire and automotive repair store located in Illinois from D&S Pulaski, LLC. This store operates under the Car-X name. |
· | On June 11, 2017, we acquired two retail tire and automotive repair stores located in Minnesota and Wisconsin from J & R Diversified, Inc. These stores operate under the Car-X name. |
· | On June 11, 2017, we acquired one retail tire and automotive repair store located in Ohio from Michael N. McGroarty, Inc. This store operates under the Mr. Tire name. |
· | On June 2, 2017, we acquired one retail tire and automotive repair store located in Connecticut from Tires Plus LLC. This store operates under the Monro name. |
· | On May 21, 2017, we acquired one retail tire and automotive repair store located in Ohio from Bob Sumerel Tire Co., Inc. This store operates under the Mr. Tire name. |
· | On April 23, 2017, we acquired one retail tire and automotive repair store located in Florida from Collier Automotive Group, Inc. This store operates under The Tire Choice name. |
These acquisitions resulted in goodwill related to, among other things, growth opportunities, synergies and economies of scale expected from combining these businesses with ours, as well as unidentifiable intangible assets. All of the goodwill is expected to be deductible for tax purposes. We have recorded finite-lived intangible assets at their estimated fair value related to favorable leases and customer lists.
We expensed all costs related to acquisitions in the nine months ended December 23, 2017. The total costs related to completed acquisitions were $.1 million and $.4 million for the threequarter and nine months ended December 23, 2017, respectively. These costs are included in the Consolidated Statements of Comprehensive Income primarily under operating, selling, general and administrative expenses.
Sales for the fiscal 2018 acquired entities for the threequarter and nine months ended December 23, 2017 totaled $4.6 million and $8.2 million, respectively, for the period from acquisition date through December 23, 2017.
Supplemental pro forma information for the current or prior reporting periods has not been presented due to the impracticability of obtaining detailed, accurate or reliable data for the periods the acquired entities were not owned by Monro.
The preliminary fair values
11
We have recorded the identifiable assets acquired and liabilities assumed were based on preliminary valuations and estimates. The excessat their fair values as of their respective acquisition dates (including any measurement period adjustments), with the net purchase price over net tangible and intangible assets acquired wasremainder recorded as goodwill. The preliminary allocation of the aggregate purchase price as of December 23, 2017 wasgoodwill as follows:
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| As of | |
|
| (Dollars in | |
Inventories |
| $ | |
Other current assets |
|
| 146 |
Property, plant and equipment |
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Intangible assets |
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Other non-current assets |
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| 7 |
Long-term deferred income tax assets |
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Total assets acquired |
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Other current liabilities |
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Long-term capital leases and financing obligations |
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| 11,298 |
Other long-term liabilities |
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Total liabilities assumed |
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Total net identifiable assets |
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Total consideration transferred |
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Less: total net identifiable assets |
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Goodwill |
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10
The following are the intangible assets acquired and their respective fair values and weighted average useful lives:
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| As of | ||||
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Favorable leases |
| $ | 2,304 |
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Customer lists |
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| 7 years | |
Total |
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| 9 |
Fiscal 2017
During the first nine months of fiscal 2017, we acquired the following businesses for an aggregate purchase price of $133.1 million. The acquisitions were financed through our existing credit facility. The results of operations for these acquisitions are included in Monro’s financial results from the respective acquisition dates.
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The acquisitions resulted in goodwill related to, among other things, growth opportunities, synergies and economies of scale expected from combining these businesses with ours, and unidentifiable intangible assets. All of the goodwill is expected to be deductible for tax purposes. We have recorded finite-lived intangible assets at their estimated fair value related to customer lists, favorable leases and trade names.
11
We expensed all costs related to acquisitions in the nine months ended December 24, 2016. The total costs related to completed acquisitions were $.3 million and $.7 million for the three and nine months ended December 24, 2016, respectively. These costs are included in the Consolidated Statements of Comprehensive Income primarily under operating, selling, general and administrative expenses.
Sales for the fiscal 2017 acquired entities for the three and nine months ended December 24, 2016 totaled $43.0 million and $65.0 million, respectively, for the period from acquisition date through December 24, 2016.
Supplemental pro forma information for the current or prior reporting periods has not been presented due to the impracticability of obtaining detailed, accurate or reliable data for the periods the acquired entities were not owned by Monro.
We have recorded the identifiable assets acquired and liabilities assumed at their fair values as of their respective acquisition dates (including any measurement period adjustments), with the remainder recorded as goodwill as follows:
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The total consideration of $133.1 million is comprised of $133 million in cash, and a $.1 million payable to a seller. The payable is being paid via equal annual payments through September 2019.
The following are the intangible assets acquired and their respective fair values and weighted average useful lives:
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As a result of the updated purchase price allocations for the entities acquired during the fiscal year ended March 31, 2018, certain of the fair value amounts previously estimated were adjusted during the measurement period. These measurement period adjustments related toresulted from updated valuation reports and appraisals received from our external valuation specialists, as well as revisions to internal estimates. The changes in estimates include a decrease in other current assetsinventories of $.1 million; an increasea decrease in property, plant and equipment of $1.4 million;$.2 million and a decrease in intangible assets of $2.2 million; a decrease in long-term deferred income tax assets of $.3 million; a decrease in other current liabilities of $.2 million; an increase in long-term capital leases and financing obligations of $.2 million; and an increase in other long-term liabilities of $.1 million. The measurement period adjustments resulted in an increase of goodwill of $1.3$.5 million.
12
TheseThe measurement period adjustments were not material to the Consolidated StatementsStatement of Comprehensive Income for the quarter and nine months ended December 23, 2017, respectively.29, 2018.
We continue to refine the valuation data and estimates primarily related to inventory, road hazard warranty reserves, intangible assets, real estate, and real property leases for fiscal 20172018 acquisitions which closed subsequent to December 24, 201623, 2017 and the fiscal 20182019 acquisitions, and expect to complete the valuations no later than the first anniversary date of the respective acquisition. We anticipate that adjustments will continue to be made to the fair values of identifiable assets acquired and liabilities assumed and those adjustments may or may not be material.
Note 3 – Earnings per Common Share
Basic earnings per common share amounts are computed by dividing income available to common shareholders, after deducting preferred stock dividends, by the average number of common shares outstanding. Diluted earnings per common share amounts assume the issuance of common stock for all potentially dilutive equivalent securities outstanding.
12
The following is a reconciliation of basic and diluted earnings per common share for the respective periods:
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|
| ||||||||
Net income |
| $ | 11,601 |
| $ | 17,566 |
| $ | 46,452 |
| $ | 51,865 |
| $ | 20,531 |
| $ | 11,601 |
| $ | 62,936 |
| $ | 46,452 |
Preferred stock dividends |
|
| (92) |
|
| (102) |
|
| (276) |
|
| (361) | ||||||||||||
Less: Preferred stock dividends |
|
| (102) |
|
| (92) |
|
| (306) |
|
| (276) | ||||||||||||
Income available to common shareholders |
| $ | 11,509 |
| $ | 17,464 |
| $ | 46,176 |
| $ | 51,504 |
| $ | 20,429 |
| $ | 11,509 |
| $ | 62,630 |
| $ | 46,176 |
Denominator for earnings per common share calculation: |
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|
|
Weighted average common shares, basic |
| 32,779 |
| 32,466 |
| 32,746 |
| 32,338 |
| 33,032 |
| 32,779 |
| 32,932 |
| 32,746 | ||||||||
Effect of dilutive securities: |
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|
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|
|
|
| ||||||||
Preferred stock |
| 510 |
| 635 |
| 510 |
| 718 |
| 510 |
| 510 |
| 510 |
| 510 | ||||||||
Stock options |
| 52 |
| 191 |
| 57 |
| 250 |
| 195 |
| 52 |
| 134 |
| 57 | ||||||||
Restricted stock |
|
| 11 |
|
| — |
|
| 4 |
|
| — |
|
| 29 |
|
| 11 |
|
| 29 |
|
| 4 |
Weighted average number of common shares, diluted |
|
| 33,352 |
|
| 33,292 |
|
| 33,317 |
|
| 33,306 |
|
| 33,766 |
|
| 33,352 |
|
| 33,605 |
|
| 33,317 |
Basic earnings per common share: |
| $ | .35 |
| $ | .54 |
| $ | 1.41 |
| $ | 1.59 |
| $ | .62 |
| $ | .35 |
| $ | 1.90 |
| $ | 1.41 |
Diluted earnings per common share: |
| $ | .35 |
| $ | .53 |
| $ | 1.39 |
| $ | 1.56 |
| $ | .61 |
| $ | .35 |
| $ | 1.87 |
| $ | 1.39 |
The computation of diluted earnings per common share excludes the effect of the assumed exercise of approximately 120,000 and 274,000 stock options for the quarter and nine months ended December 29, 2018, respectively, and 934,000 and 1,096,000 stock options for the three and nine months ended fiscal December 23, 2017, respectively, and 242,000 and 241,000 for the threequarter and nine months ended December 24, 2016,23, 2017, respectively. Such amounts were excluded as the exercise pricesprice of these stock options werewas greater than the average market value of our common stock for those periods, resulting in an anti-dilutive effect on diluted earnings per common share.
Note 4 – Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act made broad and complex changes to U.S. federal corporate income taxation. Additionally, in December 2017, the staff of the SEC issued guidance under Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” allowing taxpayers to record provisional amounts for reasonable estimates when they did not have the necessary information available, prepared or analyzed in reasonable detail to complete their accounting for certain income tax effects of the Tax Act. During the quarter ended December 23, 2017, we recorded a provisional reduction to our net deferred tax asset, as well as a corresponding increase to income tax expense of $5.3 million related to the revaluation of our net deferred tax asset. Additionally, we recognized an income tax benefit of approximately $2.3 million during the quarter ended December 23, 2017 related to the impact of the reduction in the federal statutory income tax rate on our fiscal 2018 estimated annual effective tax rate. The guidance also provided a measurement period, which extended no longer than one year from the enactment date of the Tax Act, during which a company may complete its accounting for the income tax accounting implications of the Tax Act. As of December 29, 2018, our accounting for the impact of the Tax Act is complete. We did not record any material adjustments for the quarter and nine months ended December 29, 2018 to provisional amounts previously recorded. See Note 7 of our Consolidated Financial Statements included in our 2018 Annual Report on Form 10-K for further information.
In the normal course of business, we provide for uncertain tax positions and the related interest and penalties, and adjust our unrecognized tax benefits and accrued interest and penalties accordingly. The total amounts of unrecognized tax benefits were $7.8$6.9 million and $6.9$6.2 million at December 23, 201729, 2018 and March 25, 2017,31, 2018, respectively, the majority of which, if recognized, would affect theour effective tax rate. Additionally, we have accrued interest and penalties related to unrecognized tax benefits of approximately $.5 million and $.4 million as of December 23, 201729, 2018 and March 25, 2017,31, 2018, respectively.
We file U.S. federal income tax returns and income tax returns in various state jurisdictions. OurWe have finalized the examination by the Internal Revenue Service of our fiscal 2015 through2016 and fiscal 2017 U.S. federal tax years and have recorded an income tax benefit of approximately $2.0 million related to a retroactive accounting method change application that was accepted by the Internal Revenue Service. An income tax benefit was recorded primarily due to the difference in the federal statutory income tax rate of 35% that applies to the refund amounts resulting from the accounting method change for the examination years, as compared to the federal statutory income tax rate of 21% for which deferred tax accounting applies. Additionally, various state tax years remain subject to income tax examinations by tax authorities.
13
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (the “Act”) into legislation. The new U.S. tax legislation is subject to a number of provisions, including a reduction of the U.S. federal corporate income tax rate from 35% to 21% (effective January 1, 2018). On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin 118 that provides additional guidance allowing companies to record provisional amounts during a measurement period not to exceed one year from enactment date to account for the impacts of the Act in their financial statements. We have accounted for the impacts of the Act to the extent a reasonable estimate could be made during the quarter ended December 23, 2017. We will continue to refine our estimates throughout the measurement period or until the accounting is complete, and the impact of the Act may differ from these estimates, possibly materially, due to, among other things, changes in estimates and assumptions that we have made.
As a result of the reduction in the U.S. federal corporate income tax rate from 35% to 21% under the Act, we have recorded a provisional reduction to our net deferred tax asset of $5.3 million, and a corresponding increase to income tax expense for the quarter ended December 23, 2017. The revaluation of our net deferred tax asset is subject to further adjustments during the measurement period due to the complexity of determining our net deferred tax asset as of the enactment date. Some of the information necessary to determine the accounting impacts of the tax rate change includes finalization of our fiscal 2017 tax return as well as refining the analysis of which existing deferred balances at the enactment date will reverse in fiscal 2018 and which deferred balances will reverse after fiscal 2018. Further, we recognized an income tax benefit related to the reduction of approximately 300 basis points in our fiscal 2018 estimated annual effective tax rate due to the decrease in the statutory tax rate during the quarter ended December 23, 2017.
Note 5 – Fair Value
Long-term debt had a carrying amount andthat approximates a fair value of $154.6$119.9 million as of December 23, 2017,29, 2018, as compared to a carrying amount and a fair value of $182.4$148.1 million as of March 25, 2017.31, 2018. The fair value of long-term debt was estimated based on discounted cash flow analyses using either quoted market prices for the same or similar issues, or the current interest rates offered to Monro for debt with similar maturities.
Note 6 – Supplemental Disclosure of Cash Flow Information
The following represents non-cash investing and financing activities during the periods indicated:
Nine Months Ended December 23, 2017:
In connection with the fiscal 2018 acquisitions and fiscal 2017 acquisition measurement period adjustments (see Note 2), liabilities were assumed as follows:
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Nine Months Ended December 24, 2016:
In connection with the fiscal 2017 acquisitions and fiscal 2016 acquisition measurement period adjustments, liabilities were assumed as follows:
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14
Note 7 – Cash Dividend
In May 2017,2018, our Board of Directors declared its intention to pay a regular quarterly cash dividend during fiscal year 20182019 of $.18$.20 per common share or common share equivalent beginning with the first quarter of fiscal year 2018.2019. We paid dividends of $18.0$20.1 million during the nine months ended December 23, 2017.29, 2018. However, the declaration of and any determination as to the payment of future dividends will be at the discretion of the Board of Directors and will depend on our financial condition, results of operations, capital requirements, compliance with charter and credit facility restrictions, and such other factors as the Board of Directors deems relevant.
Note 7 – Revenues
Automotive undercar repair, tire sales and tire services represent the vast majority of our revenues. We also earn revenue from the sale of tire road hazard warranty agreements as well as commissions earned from the delivery of tires on behalf of certain tire vendors.
Revenue from automotive undercar repair, tire sales and tire services is recognized at the time the customers take possession of their vehicle or merchandise. For sales to certain customers that are financed through the offering of credit on account, payment terms are established for customers based on our pre-established credit requirements. Payment terms vary depending on the customer and generally range from 15 to 45 days. Based on the nature of receivables, no significant financing components exist. Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns and allowances. We estimate the reduction to sales and cost of sales for returns based on current sales levels and our historical return experience. Such amounts are immaterial to our Consolidated Financial Statements.
Revenue from the sale of tire road hazard warranty agreements (included in the Tires product group in the table summarizing disaggregated revenue by product group below) is initially deferred and is recognized over the contract period as costs are expected to be incurred in performing such services, typically 21 to 36 months. The amounts recorded for deferred revenue balances at December 29, 2018 and March 31, 2018 were $17.3 million and $17.2 million, respectively, of which $12.1 million and $11.9 million, respectively, are reported in Warranty reserves and $5.2 million and $5.3 million, respectively, are reported in Other long-term liabilities in our Consolidated Balance Sheets.
The following table summarizes deferred revenue related to road hazard warranty agreements from March 31, 2018 to December 29, 2018:
Dollars in | ||
thousands | ||
Balance at March 31, 2018 | $ | 17,182 |
Deferral of revenue | 12,647 | |
Deferral of revenue from acquisitions | 566 | |
Recognition of revenue | (13,121) | |
Balance at December 29, 2018 | $ | 17,274 |
We expect to recognize $4.0 million of deferred revenue related to road hazard warranty agreements in the remainder of fiscal 2019, $9.7 million of such deferred revenue during our fiscal year ending March 28, 2020, and $3.6 million of such deferred revenue thereafter.
Under various arrangements, we receive from certain tire vendors a delivery commission and reimbursement for the cost of the tire that we may deliver to customers on behalf of the tire vendor. The commission we earn from these transactions (included in the Tires product group in the following table) is as an agent and the net amount retained is recorded as sales.
14
The following table summarizes disaggregated revenue by product group:
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| Quarter Ended |
| Nine Months Ended | ||||||||
|
| Fiscal December |
| Fiscal December | ||||||||
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| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
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| (Dollars in thousands) | ||||||||||
Revenues: |
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Brakes |
| $ | 38,028 |
| $ | 33,313 |
| $ | 124,677 |
| $ | 109,917 |
Exhaust |
|
| 6,802 |
|
| 6,264 |
|
| 22,751 |
|
| 20,137 |
Steering |
|
| 23,188 |
|
| 22,778 |
|
| 71,894 |
|
| 69,642 |
Tires |
|
| 167,715 |
|
| 152,544 |
|
| 459,236 |
|
| 420,173 |
Maintenance |
|
| 73,582 |
|
| 70,043 |
|
| 232,062 |
|
| 219,834 |
Other |
|
| 795 |
|
| 788 |
|
| 2,407 |
|
| 2,534 |
Total |
| $ | 310,110 |
| $ | 285,730 |
| $ | 913,027 |
| $ | 842,237 |
Note 8 – Subsequent Events
See Note 2 for a discussion of acquisitions subsequent to December 23, 2017.29, 2018.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The statements contained in this Quarterly Report on 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. When used in this Quarterly Report on Form 10-Q, the words “anticipates,” “believes,” “contemplates,” “expects,” “see,” “could,” “may,” “estimate,” “appear,” “intend,” “plans” and variations thereof and similar expressions, are intended to identify forward-looking statements. 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 Monro’s stores are located, the need for and costs associated with store renovations and other capital expenditures, the effect of economic conditions, seasonality, the impact of weather conditions and natural disasters, the impact of competitive services and pricing, parts supply restraints or difficulties, our dependence on vendors, including foreign vendors, changes in U.S. or foreign trade policies, industry regulation, risks relating to leverage and debt service (including sensitivity to fluctuations in interest rates), continued availability of capital resources and financing, advances in automotive technology, disruption or unauthorized access to our computer systems, risks relating to protection of customer and employee personal data, business interruptions, risks relating to litigation, risks related to the accuracy of the estimates and assumptions we used to revalue our net deferred tax asset in accordance with the Tax Cuts and Jobs Act, risks relating to integration of acquired businesses, including goodwill impairment and the risks set forth in our Annual Report on Form 10-K for the fiscal year ended March 25, 2017.31, 2018. Except as required by law, we do not undertake and specifically disclaim any obligation to update any forward-looking statement to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. References to fiscal 20182019 and fiscal 20172018 in this Management’s Discussion and Analysis of Financial Condition and Results of Operations refer to our fiscal years ending March 30, 2019 and March 31, 2018, and ended March 25, 2017, respectively.
Results of Operations
The following table sets forth income statement data of Monro expressed as a percentage of sales for the fiscal periods indicated:
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| Quarter Ended |
| Nine Months Ended |
| Quarter Ended |
| Nine Months Ended | ||||||||||||||||
|
| Fiscal December |
| Fiscal December |
| Fiscal December |
| Fiscal December | ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Sales |
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
Cost of sales, including distribution and occupancy costs |
| 62.6 |
|
| 63.4 |
|
| 61.1 |
|
| 60.5 |
|
| 62.0 |
|
| 62.6 |
|
| 61.1 |
|
| 61.1 |
|
Gross profit |
| 37.4 |
|
| 36.6 |
|
| 38.9 |
|
| 39.5 |
|
| 38.0 |
|
| 37.4 |
|
| 38.9 |
|
| 38.9 |
|
Operating, selling, general and administrative expenses |
| 27.2 |
|
| 25.2 |
|
| 27.4 |
|
| 26.9 |
|
| 28.1 |
|
| 27.2 |
|
| 28.1 |
|
| 27.4 |
|
Operating income |
| 10.3 |
|
| 11.5 |
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| 11.5 |
|
| 12.5 |
|
| 9.9 |
|
| 10.3 |
|
| 10.8 |
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| 11.5 |
|
Interest expense - net |
| 2.1 |
|
| 1.8 |
|
| 2.1 |
|
| 1.8 |
|
| 2.2 |
|
| 2.1 |
|
| 2.2 |
|
| 2.1 |
|
Other income - net |
| — |
|
| (0.1) |
|
| — |
|
| (0.1) |
|
| (0.1) |
|
| - |
|
| (0.1) |
|
| - |
|
Income before provision for income taxes |
| 8.1 |
|
| 9.7 |
|
| 9.4 |
|
| 10.7 |
|
| 7.8 |
|
| 8.1 |
|
| 8.7 |
|
| 9.4 |
|
Provision for income taxes |
| 4.1 |
|
| 3.6 |
|
| 3.9 |
|
| 4.0 |
|
| 1.2 |
|
| 4.1 |
|
| 1.8 |
|
| 3.9 |
|
Net income |
| 4.1 | % |
| 6.1 | % |
| 5.5 | % |
| 6.7 | % |
| 6.6 | % |
| 4.1 | % |
| 6.9 | % |
| 5.5 | % |
Third Quarter and Nine Months Ended December 23, 201729, 2018 as Compared to Third Quarter and Nine Months Ended December 24, 201623, 2017
Sales were $310.1 million for the quarter ended December 29, 2018 as compared with $285.7 million for the quarter ended December 23, 2017 as compared with $288.3 million for the quarter ended December 24, 2016.2017. The sales decreaseincrease of $2.6$24.4 million, or .9%8.5%, was due to a decrease in comparable store sales of 3.1%. Largely offsetting the comparable store sales decline was a salesan increase of $6.4$19.8 million related to new stores, of which $2.3$14.3 million came from the fiscal 20172019 and fiscal 2018 acquisitions. Additionally, therecomparable store sales increased by 2.2%. Partially offsetting this was a decrease in sales from closed stores amounting to $1.4$1.3 million. There were 90 selling days in both the quartersquarter ended December 23, 2017 andas compared to 89 selling days in the quarter ended December 24, 2016.29, 2018 due to the timing of the Christmas holiday. Adjusting for days, comparable store sales increased by 3.3%.
Sales were $913.0 million for the nine months ended December 29, 2018 as compared with $842.2 million for the nine months ended December 23, 2017 as compared with $769.5 million for the nine months ended December 24, 2016.2017. The sales increase of $72.7$70.8 million, or 9.5%8.4%, was due to an increase of $82.4$54.0 million related to new stores, of which $66.4$39.5 million came from the fiscal 20172019 and fiscal 2018 acquisitions. Partially offsetting this was a decrease inAdditionally, comparable store sales of .7%increased by 2.4%. Additionally, therePartially offsetting this was a decrease in sales from closed stores amounting to $4.3$4.8 million. There were 271 selling days in the first nine months ended December 23, 2017 as compared to 270 selling days in the nine months ended December 29, 2018. Adjusting for days, comparable store sales increased by 2.8%.
Barter sales of slower moving inventory totaled approximately $3.7 million and $1.8 million for the nine months ended December 29, 2018 and December 23, 2017, respectively. There were no barter sales in the third quarter of fiscal 2018 and2019 or fiscal 2017. 2018.
16
Barter sales of slower moving inventory totaled approximately $1.8 million and $1.5 million for the nine months ended December 23, 2017 and December 24, 2016, respectively.
At December 23, 2017,29, 2018, we had 1,186 Company-operated stores and 99 franchised locations as compared with 1,138 Company-operated stores and 103 franchised locations as compared with 1,098at December 23, 2017. At March 31, 2018, we had 1,150 Company-operated stores and 132 franchised locations at December 24, 2016. At March 25, 2017, we had 1,118 Company-operated stores and 114102 franchised locations. During the quarter ended December 23, 2017,29, 2018, we added fournine Company-operated stores (including one purchased from an existing franchisee) and closed one store. Additionally, two stores. Additionally, one franchised location was closedlocations were opened during the quarter and nine months ended December 23, 2017.29, 2018. Year-to-date, we have added 3445 Company-operated stores (including tenfive purchased from existing franchisees) and closed 14nine stores. Additionally, we closed two and opened one franchised locations during the nine months ended December 23, 2017.
Comparable store brakes, maintenance services, tires and alignment category sales for the quarter ended December 23, 2017 decreased29, 2018 increased by approximately 1%12%, 3%, 4% and 5%1%, respectively, from the prior year period. Thequarter when adjusted for days. However, front end/shocks category was relatively flatsales for the quarter ended December 29, 2018 decreased by approximately 4% on a comparable store basis when adjusted for days as compared to the same period in the prior year. Comparable store maintenance services category sales for the quarter ended December 29, 2018 when adjusted for days were relatively flat from the prior year quarter. Comparable store sales when adjusted for days were impacted by higher average ticket offset by lower traffic.from improved in-store execution.
Gross profit for the quarter ended December 23, 201729, 2018 was $107.0$118.0 million or 37.4%38.0% of sales as compared with $105.6$107.0 million or 36.6%37.4% of sales for the quarter ended December 24, 2016.23, 2017. The increase in gross profit for the quarter ended December 23, 2017,29, 2018, as a percentage of sales, was due primarily to a decrease in material costs. Total materiallabor costs including outside purchases, decreased as a percentage of sales as compared to the prior year quarter ended December 24, 2016 largely due to a continued focus on our store staffing optimization initiative, as well as a decrease in distribution and occupancy costs as a percentage of sales mix. from the prior year as we gained leverage on these largely fixed costs with higher overall comparable store sales. Partially offsetting these decreases was an increase in material costs which increased slightly as a percentage of sales as compared to the prior year quarter due primarily to a shift in sales mix related to recent acquisitions that have included commercial and wholesale tire locations.
At our retail tire and automotive repair locations, we provide a broad range of services on passenger cars, light trucks and vans for brakes; mufflers and exhaust systems; and steering, drive train, suspension and wheel alignment. We also provide other products and services, including tires and routine maintenance services, such asincluding state inspections. DuringIn recent years, including fiscal 2017,2019, we acquired certain tire and automotive repair locations that also serve commercial customers and sell tires to customers for resale. These locations conduct tire and automotive repair activities that are similar to our retail locations, other than with respect to the lower gross margin sales mix resulting from the sale of commercial tires and the lower gross margin of the wholesale locations. The lower gross margin at our wholesale locations is due primarily to the higher mix of tires sold and the fact that those tire sales do not include installation or other tire related services that are more common at other locations. InDuring the aggregate,quarter ended December 29, 2018, there was an increase in consolidated revenue from the prior year quarter of approximately $8.3 million due to increased sales from commercial and wholesale locations had consolidated revenue of approximately $21.2 million and $21.7 million for the quarters ended December 23, 2017 and December 24, 2016, respectively.acquired in fiscal 2019. Additionally, due to the sales mix from our commercial and wholesale locations acquired in fiscal 2019, our consolidated gross margin for the quarter ended December 23, 201729, 2018 was reduced by approximately 21090 basis points as compared to a reduction in consolidated gross margin of approximately 270 basis points forfrom the prior year quarter.
On a consolidatedcomparable store basis, distribution and occupancy costsgross profit for the quarter ended December 23, 201729, 2018 increased as a percentage of sales,by approximately 160 basis points as compared to the prior year quarter as we lost leverage on these largely fixed costs due to a decrease in comparable store sales. Labor costs were relatively flat, as a percentage of sales, as compared to the prior year quarter.
Gross profit for the nine months ended December 23, 201729, 2018 was $327.8$355.2 million or 38.9% of sales as compared with $303.7to $327.8 million or 39.5% of sales for the nine months ended December 24, 2016. The year-to-date decrease23, 2017 and remained flat at 38.9% of sales as compared to the same period of the prior year. For the nine months ended December 29, 2018, the increase in gross profit,material costs as a percentage of sales, was due primarily toresulting from a shift in sales mix related to recent acquisitions, including the recently acquired commercial and wholesale tire locations. locations, was offset by a decrease in labor costs, as well as distribution and occupancy costs, which decreased as a percentage of sales, when compared to the same period in the prior year.
On a comparable store basis, gross profit for the nine months ended December 23, 201729, 2018 increased by approximately 70 basis points as a percentage of sales, fromcompared to the prior year nine months due primarily to lower material costs as a percentage of sales.period.
Operating expenses for the quarter ended December 23, 201729, 2018 were $87.3 million or 28.1% of sales as compared to $77.7 million or 27.2% of sales as compared with $72.5 million or 25.2% of sales for the quarter ended December 24, 2016. The increase of $5.2 million is primarily attributable to23, 2017. During the quarter ended December 23, 2017, operating expenses included approximately $2.7 million in one-time costs consisting of $2.0 million in litigation settlement costs and $.7 million in management transition costs. The remaining year-over-year dollar increase representsin operating expenses from 40the comparable period of the prior year is primarily due to $1.5 million in costs related to Monro.Forward initiatives and investments, including $.4 million in one-time costs, in order to enhance operational excellence and customer experience, as well as $.4 million of corporate and field management realignment costs. The remaining increase includes increased expenses for 48 net new stores.stores, as well as increased incentive compensation expense related to our improved performance.
For the nine months ended December 23, 2017,29, 2018, operating expenses increased by $23.6$25.9 million to $230.9$256.9 million from the comparable period of the prior year and were 27.4%28.1% of sales as compared to 26.9%27.4% of sales for the nine months ended December 24, 2016.23, 2017. During the nine months ended December 23, 2017, operating expenses included approximately $4.2 million in one-time costs consisting of $2.0 million in litigation settlement costs and $2.2 million in management transition costs. The increase is due primarily to increased expenses for new stores, as well as litigation settlement expenses of approximately $2.0 million and expenses related to the management transition of approximately $2.2 million.
in operating
17
expenses from the comparable period of the prior year is primarily due to $4.9 million in costs related to Monro.Forward initiatives and investments, including $2.2 million in one-time costs, in order to enhance operational excellence and customer experience, as well as $.4 million of corporate and field management realignment costs. The remaining increase includes increased expenses for new stores, as well as increased incentive compensation expense related to our improved performance.
Operating income for the quarter ended December 23, 201729, 2018 of approximately $29.3$30.7 million decreasedincreased by 11.4%4.8% as compared to operating income of approximately $33.1$29.3 million for the quarter ended December 24, 2016,23, 2017, and decreased as a percentage of sales from 10.3% to 9.9% for the reasons described above. Adjusting for the impact on operating income for the reduction of selling days due to the Christmas holiday shift, operating income was 10.3% of sales.
Operating income for the nine months ended December 29, 2018 of approximately $98.3 million increased by 1.5% as compared to operating income of approximately $96.9 million for the nine months ended December 23, 2017, and decreased as a percentage of sales from 11.5% to 10.3%10.8% for the reasons described above. ExcludingAdjusting for the litigation settlement and management transition costs in the quarter,impact on operating income would have been $32.0 million, a decrease of 3.4% year-over-year and operating margin would have been 11.2%, a decline of 30 basis points year-over-year.
Operating income for the nine months ended December 23, 2017reduction of approximately $96.9 million increased by .6% as comparedselling days due to the Christmas holiday shift, operating income was 10.9% of approximately $96.3 million for the nine months ended December 24, 2016, and decreased as a percentage of sales from 12.5% to 11.5% for the reasons described above. Excluding the expenses related to the litigation settlement and management transition, operating income would have been $101.1 million, an increase of 5.0% year-over-year and operating margin would have been 12.0%, a decline of 50 basis points year-over-year.sales.
Net interest expense for the quarter ended December 23, 201729, 2018 increased by approximately $.9$.7 million as compared to the same period in the prior year, and increased from 1.8%2.1% to 2.1%2.2% as a percentage of sales for the same periods. The weighted average debt outstanding for the quarter ended December 23, 201729, 2018 decreased by approximately $14$7 million as compared to the quarter ended December 24, 2016.23, 2017. This decrease is primarily related to a decrease in debt outstanding under our Revolving Credit Facility. This wasFacility, partially offset by an increase in capital lease debt recorded in connection with the fiscal 20172018 and fiscal 20182019 acquisitions and greenfield expansion, as well asexpansion. There was also an increase in the weighted average interest rate for the quarter ended December 23, 201729, 2018 of approximately 11070 basis points as compared to the third quarter of the prior year. The increase in the weighted average interest rate for the quarter ended December 23, 201729, 2018 was largely due to an increase in capital lease debt, as well as an increase in the LIBOR and prime raterates from the same period of the prior year.year period.
Net interest expense for the nine months ended December 23, 201729, 2018 increased by approximately $3.8$2.2 million as compared to the same period in the prior year, and increased from 1.8%2.1% to 2.1%2.2% as a percentage of sales for the same periods. The weightedWeighted average debt outstanding increased by approximately $27$11 million as compared toand the same period of the prior year. This increase is primarily related to an increase in capital lease debt recorded in connection with the fiscal 2017 and fiscal 2018 acquisitions, partially offset by a decrease in debt outstanding under our Revolving Credit Facility. The weighted average interest rate increased by approximately 9060 basis points as compared to the same period of the prior year.
The effective income tax rate for the quarter ended December 29, 2018 and December 23, 2017 was 15.3% and December 24, 2016 was 50.1% and 37.2%, respectively, of pre-tax income. On December 22, 2017, President Trump signedThe effective income tax rate for each respective period was significantly impacted by the Tax Cuts and Jobs Act (the “Act”“Tax Act”) into legislation. The new U.S. tax legislation is subject to a number of provisions, including a reduction of the U.S. federal corporate. Our effective income tax rate for the quarter ended December 29, 2018 benefited from 35% to 21% (effective January 1, 2018).a reduced federal statutory income tax rate. The increase in the effective income tax rate for the quarter ended December 29, 2018 reflects an income tax benefit of $2.0 million arising from the Internal Revenue Service’s examination of our fiscal 2016 and fiscal 2017 tax years. An income tax benefit was recorded primarily due to the difference in the federal statutory income tax rate of 35% that applies to refund amounts resulting from an application for a retroactive accounting method change that was accepted by the Internal Revenue Service, as compared to the federal statutory income tax rate of 21% for which deferred tax accounting applies. In addition, as it relates to the Tax Act, we recorded a provisional tax expense of $5.3 million reduction in deferred tax assets resulting from enactment of the Act, partially offset by the impact from the decrease in the statutory tax rate. We will continue to refine our estimates until the accounting is complete, and the impact of the Act may differ from these estimates, possibly materially, due to, among other things, changes in estimates and assumptions that we have made.
Forduring the quarter ended December 23, 2017 for the estimatedrevaluation of our net deferred tax effects of the Actassets. Additional discrete tax items recognized in tax expense decreased diluted earnings per share by approximately $.10. We expect future earnings to be positively impacted largely due to the reduction of the U.S. federal corporate income tax rate from 35% to 21% (effective January 1, 2018).during each respective quarter are insignificant.
The effective income tax rate for the nine months ended December 29, 2018 and December 23, 2017 was 20.3% and December 24, 2016 was 41.4% and 37.1%, respectively, of pre-tax income. The difference ineffective income tax rate for each respective period was significantly impacted by the Tax Act. Our effective income tax rate was primarily duefor the nine months ended December 29, 2018 benefited from a reduced federal statutory income tax rate. The effective income tax rate for the nine months ended December 29, 2018 reflects an income tax benefit of $2.0 million arising from the Internal Revenue Service’s examination of our fiscal 2016 and fiscal 2017 tax years. In addition, as it relates to the netTax Act, we recorded a provisional tax expense of approximately $3.2$5.3 million recorded during the quarternine months ended December 23, 2017 related tofor the estimated impactrevaluation of the Act.our net deferred tax assets. Additional discrete tax items recognized during each respective period are insignificant.
Net income for the quarter ended December 23, 201729, 2018 of $11.6$20.5 million decreased 34.0%increased 77.0% from net income for the quarter ended December 24, 2016.23, 2017. Earnings per common share on a diluted basis for the quarter ended December 23, 201729, 2018 of $.61, including $.06 per share of income tax benefit offset by $.01 per share of non-recurring costs related to Monro.Forward initiatives and investments, $.01 per share of corporate and field management realignment costs and $.04 per share of negative impact from the reduction in selling days, increased 74.3% as compared to diluted earnings per share of $.35 decreased 34.0% as compared tofor the quarter ended December 24, 2016. Excluding23, 2017, which included $.15 per share of one-time costs, including $.10 per share related to the net impact of newly enacted tax legislation,the Tax Act, $.04 per share in litigation settlement costs and $.01 per share in management transition costs and adjusted for rounding, adjusted diluted earnings per share for the third quarter of fiscal 2018 were $.49, a decrease of 7.5% year-over-year.costs.
For the nine months ended December 23, 2017,29, 2018, net income of $46.5$62.9 million decreased 10.4% and diluted earnings per common share of $1.39 decreased 10.9% as compared toincreased 35.5% from net income for the nine months ended December 24, 2016. Excluding $.1023, 2017. Earnings per common share on a diluted basis for the nine months ended December 29, 2018 of $1.87, including $.05 per share of non-recurring costs related to the net impact of newly enacted tax legislation, $.04Monro.Forward initiatives and investments, $.01 per share in litigation settlementof corporate and field management realignment costs, and $.04 per share of negative impact from the reduction in management transition costs, adjustedselling days, partially offset by $.06 per share of income tax benefit, increased 34.5% as compared to diluted earnings per share of $1.39 for the third quarter of fiscal 2018 were $1.57, relatively flat as compared to $1.56 in the prior year comparable period.
nine months
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ended December 23, 2017, which included $.18 per share in one-time costs, including $.10 per share related to the net impact of the Tax Act, $.04 per share in litigation settlement costs and $.04 per share in management transition costs.
Capital Resources and Liquidity
Capital Resources
Our primary capital requirements in fiscal 20182019 are the upgrading of facilities and systems and the funding of our store expansion program, including potential acquisitions of existing store chains. For the nine months ended December 23, 2017,29, 2018, we spent approximately $46.1$76.8 million on these items. Capital requirements were met primarily by cash flow from operations and from our revolving credit facility.
In May 2017,2018, our Board of Directors declared its intention to pay a regular quarterly cash dividend of $.18$.20 per common share or common share equivalent beginning with the first quarter of fiscal 2018.2019. We paid dividends of $18.0$20.1 million during the nine months ended December 23, 2017.29, 2018. However, the declaration of and any determination as to the payment of future dividends will be at the discretion of the Board of Directors and will depend on Monro’s financial condition, results of operations, capital requirements, compliance with charter and credit facility restrictions, and such other factors as the Board of Directors deems relevant.
Additionally, we have signed a definitive asset purchase agreement to complete the acquisition of seven12 retail tire and automotive repair stores located within our existing markets.in Louisiana. This transaction is expected to close during the fourth quarter of fiscal 20182019 and is expected to be financed through our existing credit facility.
The acquisition subsequent to December 23, 201729, 2018 was financed through our existing credit facility. See “Acquisitions” in Note 2 of our Condensed Consolidated Financial Statements.
We plan to continue to seek suitable acquisition candidates. We believe we have sufficient resources available (including cash flow from operations and bank financing) to expand our business as currently planned for the next twelve months.
Liquidity
In January 2016, we entered into a new five-year $600 million revolving credit facility agreement currently with nineeight banks (the “Credit Facility”). The Credit Facility replaced our previous revolving credit facility, as amended, which would have expired in December 2017. Interest only is payable monthly throughout the Credit Facility’s term. The Credit Facility increased our current borrowing capacity from our prior financing agreement by $350 million to $600 million, and includes an accordion feature permitting us to request an increase in availability of up to an additional $100 million, an increase of $25 million from our prior revolving credit facility. The expanded facility bears interest at 75 to 175 basis points over LIBOR. The Credit Facility requires fees payable quarterly throughout the term between .15% and .35% of the amount of the average net availability under the Credit Facility during the preceding quarter. There was $154.5$119.9 million outstanding under the Credit Facility at December 29, 2018, as compared to $154.5 million outstanding at December 23, 2017.
Within the Credit Facility, we have a sub-facility of $80 million available for the purpose of issuing standby letters of credit. The line requires fees aggregating 87.5 to 187.5 basis points over LIBOR annually of the face amount of each standby letter of credit, payable quarterly in arrears. There was $29.4$31.4 million in an outstanding letter of credit at December 23, 2017.29, 2018.
The net availability under the Credit Facility at December 23, 201729, 2018 was $416.1$448.7 million.
Specific terms of the Credit Facility permit the payment of cash dividends not to exceed 50% of the prior year’s net income, and permit mortgages and specific lease financing arrangements with other parties with certain limitations. Other specific terms and the maintenance of specified ratios are generally consistent with our prior financing agreement. Additionally, the Credit Facility is not secured by our real property, although we have agreed not to encumber our real property, with certain permissible exceptions. We were in compliance with all debt covenants at December 23, 2017.29, 2018.
In addition, we have financed certain store properties and equipment with capital leases/financing obligations, which amounted to $244.8$250.2 million at December 23, 201729, 2018 and are due in installments through May 2045.
Recent Accounting Pronouncements
See “Recent Accounting Pronouncements” in Note 1 of the Company’s Condensed Consolidated Financial Statements for a discussion of the impact of recently issued accounting standards on our Condensed Consolidated Financial Statements as of December 23, 201729, 2018 and the expected impact on the Consolidated Financial Statements for future periods.
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Item 3. Quantitative and Qualitative Disclosures Aboutabout Market Risk
We are exposed to market risk from potential changes in interest rates. As of December 23, 2017,29, 2018, approximately .05%.03% of our debt financing, excluding capital leases and financing obligations, was at fixed interest rates and, therefore, the fair value of such debt financing is affected by changes in market interest rates. Our cash flow exposure on floating rate debt would result in annual interest expense fluctuations of approximately $1.5$1.2 million based upon our debt position at December 23, 201729, 2018 and $1.8approximately $1.5 million for the fiscal year ended March 25, 2017,31, 2018, respectively, given a 1% change in LIBOR.
Debt financing had a carrying amount andthat approximates a fair value of $154.6$119.9 million as of December 23, 2017,29, 2018, as compared to a carrying amount and a fair value of $182.4$148.1 million as of March 25, 2017.31, 2018.
Item 4. Controls and Procedures
Disclosure controls and procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that we file or submit to the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In conjunction with the close of each fiscal quarter and under the supervision of our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), we conduct an update, a review and an evaluation of the effectiveness of our disclosure controls and procedures. It is the conclusion of our 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 our disclosure controls and procedures were effective.
Changes in internal controls over financial reporting
There were no changes in our internal control over financial reporting during the quarter ended December 23, 201729, 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
On December 13, 2017, the Company settled an ongoing litigation matter, entitled Ellersick, et.al.v. Monro Muffler Brake, Inc. and Monro Service Corporation (U.S. District Court, Western District of New York), together with related matters, which were first instituted in September 2010, regarding current and former Company technicians and assistant managers who alleged violations of the Fair Labor Standards Act and various state laws relating to, among other things, overtime and unpaid wages. The settlement amount of $1,950,000 is included within operating, selling, general and administrative expenses in the Company’s Consolidated Financial Statements. Such amount was estimated by the Company to be less than the legal fees and expenses that the Company believed it would likely incur in connection with defending such matter during the next twelve months.
We are not a party or subject to any legal proceedings other than certain claims and lawsuits that arise in the normal course of our business. We do not believe that such claims or lawsuits, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.
Except as provided below, there have not been any material changes to the risk factors previously discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2018.
Changes in the U.S. trade environment, including the recent imposition of import tariffs, could adversely affect our consolidated results of operations and cash flows.
The U.S. government recently proposed new or higher tariffs on specified imported products originating from China in response to what it characterizes as unfair trade practices, and China has responded by proposing new or higher tariffs on specified products imported from the United States. Additionally, the U.S. government has recently imposed imported steel and aluminum tariffs in response to national security concerns and several countries have retaliated by proposing or imposing new tariffs on specified products imported from the United States. Although we have no foreign operations and do not manufacture any products, tariffs imposed on products that we sell, such as tires, may cause our expenses to increase, which could adversely affect our profitability unless we are able to raise our prices for these products. If we increase the price of products impacted by tariffs, our service offerings may become less attractive relative to services offered by our competitors or cause our customers to delay needed maintenance. Given the uncertainty regarding the scope and duration of these trade actions by the U.S. or other countries, the impact of these trade actions on our operations or results remains uncertain. However, the tariffs, along with any additional tariffs or retaliatory trade restrictions implemented by other countries, could adversely affect the operating profits of our business, which could have an adverse effect on our consolidated results of operations and cash flows.
Exhibit Index
31.1 – Certification of Brett T. Ponton pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
101.CAL - XBRL Taxonomy Extension Calculation Linkbase
101.INS - XBRL Instance Document
101.LAB - XBRL Taxonomy Extension Label Linkbase
101.PRE - XBRL Taxonomy Extension Presentation Linkbase
101.SCH - XBRL Taxonomy Extension Schema Linkbase
101.DEF - XBRL Taxonomy Extension Definition Linkbase
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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.
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| MONRO, INC. | |
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DATE: February |
| By: | /s/ Brett T. Ponton |
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| Brett T. Ponton |
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| Chief Executive Officer and President |
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DATE: February |
| By: | /s/ Brian J. D’Ambrosia |
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| Brian J. D’Ambrosia |
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| Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
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