1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000. ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____________ to ____________ Commission File No. 0-19357 ------- MONRO MUFFLER BRAKE, INC. ---------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New York 16-0838627 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification #) 200 Holleder Parkway, Rochester, New York 14615 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code 716-647-6400 ------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of January 24, 2001, 8,156,878 shares of the Registrant's Common Stock, par value $ .01 per share, were outstanding.
2 MONRO MUFFLER BRAKE, INC. INDEX ----- Part I. Financial Information Page No. -------- Consolidated Balance Sheet at December 31, 2000 and March 31, 2000 3 Consolidated Statement of Income for the quarter and nine months ended December 31, 2000 and 1999 4 Consolidated Statement of Changes in Common Shareholders' Equity for the nine months ended December 31, 2000 5 Consolidated Statement of Cash Flows for the nine months ended December 31, 2000 and 1999 6 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 Exhibit Index 14 - 2 -
3 MONRO MUFFLER BRAKE, INC. CONSOLIDATED BALANCE SHEET (UNAUDITED) <TABLE> <CAPTION> DECEMBER 31, MARCH 31, 2000 2000 ---- ---- (DOLLARS IN THOUSANDS) <S> <C> <C> ASSETS Current assets: Cash and equivalents, including interest-bearing accounts of $507 at December 31 and March 31, 2000 $ 507 $ 507 Trade receivables 1,459 980 Inventories, at LIFO cost 40,307 39,698 Deferred income tax asset 1,415 1,415 Other current assets 5,086 5,025 --------- --------- Total current assets 48,774 47,625 --------- --------- Property, plant and equipment 209,987 202,779 Less - Accumulated depreciation and amortization (77,060) (68,904) --------- --------- Net property, plant and equipment 132,927 133,875 Other noncurrent assets 13,032 14,013 --------- --------- Total assets $ 194,733 $ 195,513 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 8,455 $ 8,455 Trade payables 12,563 11,608 Federal and state income taxes payable 3,136 718 Accrued interest 372 288 Accrued payroll, payroll taxes and other payroll benefits 3,456 3,962 Accrued insurance 2,454 1,539 Accrued restructuring costs 1,100 1,210 Other current liabilities 7,179 8,182 --------- --------- Total current liabilities 38,715 35,962 Long-term debt 53,566 63,639 Other long-term liabilities 714 845 Accrued long-term restructuring costs 1,647 2,487 Deferred income tax liability 3,805 3,805 --------- --------- Total liabilities 98,447 106,738 --------- --------- Commitments Shareholders' equity: Class C Convertible Preferred Stock, $1.50 par value, $.216 conversion value; 150,000 shares authorized; 91,727 shares issued and outstanding 138 138 Common Stock, $.01 par value, 15,000,000 shares authorized; 8,346,701 and 8,321,701 shares issued at December 31, 2000, and March 31, 2000, respectively 83 83 Treasury Stock, 211,400 shares at December 31, 2000, and 100,100 shares at March 31, 2000, at cost (1,783) (803) Additional paid-in capital 36,182 35,978 Retained earnings 61,666 53,379 --------- --------- Total shareholders' equity 96,286 88,775 --------- --------- Total liabilities and shareholders' equity $ 194,733 $ 195,513 ========= ========= </TABLE> These financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K (File No. 0-19357), filed by the Company with the Securities and Exchange Commission on June 29, 2000. - 3 -
4 MONRO MUFFLER BRAKE, INC. CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) <TABLE> <CAPTION> QUARTER ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------ ------------ 2000 1999 2000 1999 ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> Sales $51,792 $52,077 $172,883 $173,569 Cost of sales, including distribution and occupancy costs (a) 31,952 32,145 102,051 102,892 ------- ------- -------- -------- Gross profit 19,840 19,932 70,832 70,677 Operating, selling, general and administrative expenses 15,930 15,807 52,042 52,616 ------- ------- -------- -------- Operating income 3,910 4,125 18,790 18,061 Interest expense, net of interest income for the quarter of $26 in 2000 and $12 in 1999, and year-to-date of $78 in 2000 and $39 in 1999 (a) 1,399 1,692 4,524 5,098 Other expense, net 239 524 501 1,239 ------- ------- -------- -------- Income before provision for income taxes 2,272 1,909 13,765 11,724 Provision for income taxes 904 760 5,478 4,669 ------- ------- -------- -------- Net income $ 1,368 $ 1,149 $ 8,287 $ 7,055 ======= ======= ======== ======== Earnings per share: Basic $ 0.17 $ 0.14 $ 1.01 $ 0.85 ======= ======= ======== ======== Diluted $ 0.15 $ 0.13 $ 0.93 $ 0.79 ======= ======= ======== ======== Weighted average number of shares of common stock and common stock equivalents used in computing earnings per share: Basic 8,177 8,322 8,192 8,322 ======= ======= ======== ======== Diluted 8,884 8,973 8,899 8,975 ======= ======= ======== ======== </TABLE> (a) Amounts paid under operating and capital leases with affiliated parties totaled $389 and $404 for the quarters ended December 31, 2000 and 1999, respectively, and $1,306 and $1,321 for the nine months ended December 31, 2000 and 1999, respectively. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K (File No. 0-19357), filed by the Company with the Securities and Exchange Commission on June 29, 2000. - 4 -
5 MONRO MUFFLER BRAKE, INC. CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) <TABLE> <CAPTION> LESS: NOTE NET ADDITIONAL RECEIVABLE ADDITIONAL COMMON TREASURY PAID-IN FROM PAID-IN RETAINED STOCK STOCK CAPITAL SHAREHOLDER CAPITAL EARNINGS --------- ---------- ----------- ------------ ------------ ---------- <S> <C> <C> <C> <C> <C> <C> Balance at March 31, 2000 $83 $ (803) $36,370 $(392) $35,978 $53,379 Net income 8,287 Exercise of stock options 126 126 Note receivable from shareholder 78 78 Purchase of treasury shares (111,300 (980) shares) --------- ---------- ----------- ------------ ------------ ---------- Balance at December 31, 2000 $83 $(1,783) $36,496 $(314) $36,182 $61,666 ========= ========== =========== ============ ============ ========== </TABLE> These financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K (File No. 0-19357), filed by the Company with the Securities and Exchange Commission on June 29, 2000. - 5 -
6 MONRO MUFFLER BRAKE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> NINE MONTHS ENDED DECEMBER 31, ------------ 2000 1999 ---- ---- (DOLLARS IN THOUSANDS) INCREASE (DECREASE) IN CASH <S> <C> <C> Cash flows from operating activities: Net income $ 8,287 $ 7,055 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 9,645 9,655 Gain on disposal of property, plant and equipment (176) (111) (Increase) decrease in trade receivables (479) 58 Increase in inventories (566) (6,877) (Increase) decrease in other current assets (106) 419 Decrease in other noncurrent assets 460 604 Increase in trade payables 955 2,806 Decrease in accrued expenses (531) (1,965) Increase in federal and state income taxes payable 2,418 3,174 Decrease in other long-term liabilities (1,204) (1,898) -------- -------- Total adjustments 10,416 5,865 -------- -------- Net cash provided by operating activities 18,703 12,920 -------- -------- Cash flows from investing activities: Capital expenditures (8,618) (11,850) Proceeds from the disposal of property, plant and equipment 728 1,718 -------- -------- Net cash used for investing activities (7,890) (10,132) -------- -------- Cash flows from financing activities: Exercise of stock options 126 Repurchase of common stock (980) (285) Proceeds from borrowings 77,050 60,080 Principal payments on long-term debt and capital lease obligations (87,009) (68,182) -------- -------- Net cash used for financing activities (10,813) (8,387) -------- -------- Decrease in cash 0 (5,599) Cash at beginning of period 507 5,599 -------- -------- Cash at December 31 $ 507 $ 0 ======== ======== </TABLE> These financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K (File No. 0-19357), filed by the Company with the Securities and Exchange Commission on June 29, 2000. - 6 -
7 MONRO MUFFLER BRAKE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Stock Repurchase - ------------------------- In November 1999, the Board of Directors approved a share repurchase program initially authorizing the Company to purchase up to 300,000 shares of its common stock at market prices. In May 2000, the Board of Directors approved an increase of 120,000 shares, bringing the total authorization to 420,000 shares. The amount and timing of any purchase will depend upon a number of factors, including the price and availability of the Company's shares and general market conditions. The Company's purchases of common stock are recorded as "Treasury Stock" and result in a reduction of "Shareholders' equity". At December 31, 2000, the Company had repurchased 211,400 shares under such program. Note 2 - Acquisition of Speedy Stores - ------------------------------------- In September 1998, the Company completed the acquisition of 189 company-operated and 14 dealer-operated Speedy stores, all located in the United States, from SMK Speedy International Inc. of Toronto Canada. Speedy stores provide automotive repair services, specializing in undercar care, in 11 states located primarily in the northeast. The acquisition was accounted for as a purchase, and accordingly, the operating results of Speedy have been included in the Company's consolidated financial statements since the date of the acquisition. Approximately $51 million was borrowed under a new $135 million secured credit facility to pay the all-cash purchase price, with an additional $16 million of borrowings to provide for the closing of underperforming or redundant Speedy stores, capital expenditures at remaining Speedy stores and transaction expenses. The excess of the aggregate purchase price over the fair value of net assets acquired is being amortized on a straight-line basis over 20 years. In connection with the acquisition, the Company recorded a reserve for accrued restructuring costs of approximately $7.8 million. This reserve relates to costs associated with the closing of 41 poorly performing or duplicative Speedy stores, and includes charges for rent and real estate taxes (net of anticipated sublease income), the write down of assets to their fair market value, and net losses experienced by these stores through their closure date. Note 3 - Inventories - -------------------- The Company's inventories consist of automotive parts and tires. Substantially all merchandise inventories are valued under the last-in, first-out (LIFO) method. Under the first-in, first-out (FIFO) method, these inventories would have been $39,000 and $124,000 higher at December 31, 2000 and March 31, 2000, respectively. The FIFO value of inventory approximates the current replacement cost. Note 4 - Cash and Equivalents - ----------------------------- The Company's policy is to invest cash in excess of operating requirements in income producing investments. Cash equivalents of $507,000 at December 31 and March 31, 2000 include money market accounts which have maturities of three months or less. - 7 -
8 MONRO MUFFLER BRAKE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 - Supplemental Disclosure of Cash Flow Information - --------------------------------------------------------- The following transactions represent noncash investing and financing activities during the periods indicated: NINE MONTHS ENDED DECEMBER 31, 2000: In connection with the termination of a capital lease, the Company reduced debt and fixed assets by $114,000 and $50,000, respectively, and recorded a gain of $64,000. In connection with the sale or disposal of assets, the Company reduced fixed assets by $129,000 and decreased other current liabilities and accrued long-term restructuring costs by $60,000 and $69,000, respectively. NINE MONTHS ENDED DECEMBER 31, 1999: Capital lease obligations of $85,000 were incurred under various lease obligations. In connection with the termination of a capital lease, the Company reduced debt and fixed assets by $331,000 and $196,000, respectively, and recorded a gain of $135,000. In connection with the sale of assets, the Company reduced fixed assets by $863,000 and increased other current assets, other non-current assets and accrued long-term restructuring costs by $802,000, $90,000 and $29,000, respectively. CASH PAID DURING THE PERIOD: NINE MONTHS ENDED DECEMBER 31, ------------ 2000 1999 ---- ---- Interest, net $4,292,000 $ 5,034,000 Income taxes 3,060,000 1,495,000 Debt borrowings and repayments shown in the Consolidated Statement of Cash Flows represent gross borrowings and gross repayments during the period. Under its Revolving Credit Facility, the Company either borrows or repays debt daily depending on its cash needs. Note 6 - Other - -------------- These financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K (File No. 0-19357), filed by the Company with the Securities and Exchange Commission on June 29, 2000. - 8 -
9 MONRO MUFFLER BRAKE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in this Form 10-Q which 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 that are subject to important factors that could cause actual results to differ materially from those in the forward-looking statements, including (without limitation) product demand, the effect of economic conditions, the impact of competitive services and pricing, the ability of the Company to maximize the value of the acquired Speedy stores, parts supply restraints or difficulties, industry regulation, the continued availability of capital resources and financing and other risks set forth or incorporated elsewhere herein and in the Company's Securities and Exchange Commission filings. RESULTS OF OPERATIONS The following table sets forth income statement data of Monro Muffler Brake, Inc. ("Monro" or the "Company") expressed as a percentage of sales for the fiscal periods indicated. <TABLE> <CAPTION> QUARTER ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31, -------------------------- ------------------------------ 2000 1999 2000 1999 ------- ------- ------- ------- <S> <C> <C> <C> <C> Sales ........................................... 100.0% 100.0% 100.0% 100.0% Cost of sales, including distribution and occupancy costs .......................... 61.7 61.7 59.0 59.3 ------- ------- ------- ------- Gross profit .................................... 38.3 38.3 41.0 40.7 Operating, selling, general and administrative expenses ...................... 30.8 30.4 30.1 30.3 ------- ------- ------- ------- Operating income ................................ 7.5 7.9 10.9 10.4 Interest expense - net .......................... 2.7 3.2 2.6 2.9 Other expenses - net ............................ .5 1.0 .3 .7 ------- ------- ------- ------- Income before provision for income taxes ................................. 4.3 3.7 8.0 6.8 Provision for income taxes ...................... 1.7 1.5 3.2 2.7 ------- ------- ------- ------- Net income ...................................... 2.6% 2.2% 4.8% 4.1% ======= ======= ======= ======= </TABLE> - 9 -
10 THIRD QUARTER AND NINE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THIRD QUARTER AND NINE MONTHS ENDED DECEMBER 31, 1999. Sales were $51.8 million for the quarter ended December 31, 2000 compared with $52.1 million for the quarter ended December 31, 1999. The sales decrease of $.3 million, or .5%, was primarily due to a comparable store sales decrease of 3.2% caused, in part, by one less sales day. Management believes that inclement weather also contributed to the decline. This decrease was partially offset by an increase in sales of $.7 million from stores opened since the beginning of fiscal 2000. Sales for the nine months ended December 31, 2000 were $172.9 million compared with $173.6 million for the same period of the prior year. The sales decrease of $.7 million, or .4%, was due, in part, to a decrease in comparable store sales of 1.1%, caused primarily by one less sales day. There was also a decrease of $1.5 million related to stores closed during fiscal 2000 and 2001. This decrease was partially offset by an increase in sales from new stores of $2.7 million. At December 31, 2000, the Company had 513 company-operated stores as compared to 512 at December 31, 1999. Gross profit for the quarter ended December 31, 2000 was $19.8 million as compared with $19.9 million for the quarter ended December 31, 1999. As a percent of sales, gross profit was flat between the two quarters at 38.3% of sales. Gross profit for the nine months ended December 31, 2000 was $70.8 million, or 41.0% of sales, compared to $70.7 million or 40.7% of sales, for the nine months ended December 31, 1999. While gross profit was flat as a percent of sales between the two quarters ended December 31, 2000 and 1999, there was a decrease in technician labor costs as a percent of sales due to improved productivity and control for the quarter ended December 31, 2000. However, this improvement was offset by an increase in occupancy costs as a percent of sales due to increases in rent and depreciation against negative comparable store sales. Operating, selling, general and administrative expenses for the quarter ended December 31, 2000 increased by $.1 million to $15.9 million from the quarter ended December 31, 1999, and were 30.8% of sales compared to 30.4% in the same quarter of the prior year. For the nine months ended December 31, 2000, these expenses decreased by $.6 million to $52.0 million from the comparable period of the prior year and were 30.1% of sales compared to 30.3% in the comparable period of the prior year. The third quarter increase as a percent of sales is primarily due to relatively flat spending against the comparable store sales decline. Net interest expense for the quarter ended December 31, 2000 decreased by approximately $.3 million compared to the same period in the prior year, and decreased from 3.2% to 2.7% as a percentage of sales for the same periods. Net interest expense for the nine months ended December 31, 2000 decreased by approximately $.6 million compared to the comparable period in the prior year, and decreased from 2.9% to 2.6% as a percentage of sales for the same periods. The weighted average interest rate for the quarter ended December 31, 2000 was approximately .3% higher than the rate for the quarter ended December 31, 1999. However, the weighted average debt outstanding decreased by approximately $16.0 million, resulting in a decrease in expense between the two quarters. Other expense, net, for the quarter ended December 31, 2000 decreased by $.3 million to $.2 million from the quarter ended December 31, 1999. For the nine months ended December 31, 2000, other expense, net, decreased by $.7 million to $.5 million from the nine months ended December 31, 1999. The primary reason for the decline in fiscal 2001 is a decrease in store closing expense related to Monro store closures. Net income for the quarter ended December 31, 2000 was approximately $1.4 million as compared to a net income of $1.1 million reported for the quarter ended December 31, 1999, an increase of 19.1%. For the nine months ended December 31, 2000, net income of approximately $8.3 million increased 17.5%, due to the factors discussed above. Earnings per share for the quarter and nine months ended December 31, 2000 increased 15.4% and 17.7%, respectively. Interim Period Reporting The data included in this report are unaudited and are subject to year-end adjustments; however, in the opinion of management, all known adjustments (which consist only of normal recurring adjustments) have been made to present fairly the Company's operating results for the unaudited periods. The results for interim periods are not necessarily indicative of results to be expected for the fiscal year. - 10 -
11 CAPITAL RESOURCES AND LIQUIDITY Capital Resources In fiscal year 2001, the Company's primary capital requirements have been the funding of its new store expansion program and the upgrading of facilities and systems in existing stores. For the nine months ended December 31, 2000, the Company spent approximately $8.6 million for equipment and new store construction. Funds were provided primarily by cash flow from operations. Management believes that the Company has sufficient resources available (including cash and equivalents, net cash flow from operations and bank financing) to expand its business as currently planned. Liquidity Concurrent with the closing of the Speedy acquisition in September 1998, the Company obtained a new $135 million secured credit facility ("the Credit Facility" or "the Facility") from a syndication of lenders led by The Chase Manhattan Bank. Approximately $55 million was borrowed under this Facility to pay the all-cash purchase price, including transaction expenses of approximately $4 million. In addition, the Company refinanced approximately $35 million of indebtedness through the new Credit Facility, with the balance of the Facility available for future working capital needs. More specifically, the new financing structure consists of a $25 million term loan (of which approximately $17.5 million was outstanding at December 31, 2000), a $75 million Revolving credit facility (of which approximately $32.3 million was outstanding at December 31, 2000), and synthetic lease (off-balance sheet) financing for a significant portion of the Speedy real estate, totaling $35 million (of which approximately $32.8 million was outstanding at December 31, 2000). The loans bear interest at the prime rate or LIBOR-based rate options tied to the Company's financial performance. The Company must also pay a facility fee on the unused portion of the commitment. The Credit Facility has a five-year term. Interest only is payable monthly on the Revolving credit and synthetic lease borrowings throughout the term. In addition to monthly interest payments, the $25 million term loan requires quarterly principal payments. Principal payments totalling $7.5 million have been paid through December 31, 2000. The term loan and Revolving credit facility are secured by all accounts receivable, inventory and other personal property. The Company has also entered into a negative pledge agreement whereby it is restricted from encumbering real property, with certain permissible exceptions. The synthetic lease is secured by the real property to which it relates. Certain of the Company's stores are financed by mortgages currently bearing interest at LIBOR plus 100 basis points. The Company has financed its office/warehouse facility via a 10 year mortgage with a current balance of $2.2 million, amortizable over 20 years, and an eight year term loan with a balance of $.3 million. Certain of the Company's long-term debt agreements require, among other things, the maintenance of specified current ratios, interest and rent coverage ratios and amounts of tangible net worth. They also contain restrictions on cash dividend payments. The Company enters into interest rate hedge agreements which involve the exchange of fixed and floating rate interest payments periodically over the life of the agreement without the exchange of the underlying principal amounts. The differential to be paid or received is accrued as interest rates change and is recognized over the life of the agreements as an adjustment to interest expense. FINANCIAL ACCOUNTING STANDARDS On June 17, 1998 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities" effective for fiscal years beginning after June 15, 2000. This statement standardizes the accounting for derivatives and hedging activities and requires that all derivatives be recognized in the statement of financial position as either assets or liabilities at fair value. Changes in the fair value of derivatives that do not meet the hedge accounting criteria are to be reported in earnings. Adoption of this standard is not expected to have a material effect on the Company's financial position, results of operations or cash flows. - 11 -
12 MONRO MUFFLER BRAKE, INC. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- a. Exhibits 11 - Statement of Computation of Per Share Earnings. b. Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended December 31, 2000. - 12 -
13 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MONRO MUFFLER BRAKE, INC. DATE: February 14, 2001 By /s/ Robert G. Gross ----------------------------------------- Robert G. Gross President and Chief Executive Officer DATE: February 14, 2001 By /s/ Catherine D'Amico ------------------------------------------ Catherine D'Amico Senior Vice President-Finance, Treasurer and Chief Financial Officer - 13 -
14 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 11 Statement of Computation of Per Share Earnings - 14 -