Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 2019.
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)
New York
16-0838627
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
200 Holleder Parkway, Rochester, New York
14615
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (585) 647-6400
_________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
MNRO
The Nasdaq Stock Market
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. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). x 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 x 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 x No
As of January 24, 2020, 33,283,751 shares of the registrant's common stock, par value $0.01 per share, were outstanding.
INDEX
Part I. Financial Information
Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of December 28, 2019 and March 30, 2019
3
Consolidated Statements of Comprehensive Income for the quarters and nine months ended December 28, 2019 and December 29, 2018
4
Consolidated Statements of Changes in Shareholders’ Equity for the quarters and nine months ended December 28, 2019 and December 29, 2018
5
Consolidated Statements of Cash Flows for the nine months ended December 28, 2019 and December 29, 2018
6
Notes to Consolidated Financial Statements
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
21
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
22
Item 6. Exhibits
Signatures
23
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 28,
March 30,
2019
(Dollars in thousands)
Assets
Current assets:
Cash and equivalents
$
8,826
6,214
Trade receivables
16,973
14,617
Federal and state income taxes receivable
1,652
5,586
Inventories
179,171
171,038
Other current assets
45,883
42,452
Total current assets
252,505
239,907
Property, plant and equipment
676,071
640,421
Less - Accumulated depreciation and amortization
(349,798)
(327,869)
Net property, plant and equipment
326,273
312,552
Finance lease and financing obligation assets, net
193,900
128,029
Operating lease assets, net
211,573
—
Goodwill
673,569
565,503
Intangible assets, net
30,916
51,107
Other non-current assets
18,436
13,024
Long-term deferred income tax assets
5,041
2,166
Total assets
1,712,213
1,312,288
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt, finance leases and financing obligations
31,084
22,229
Current portion of operating lease liabilities
30,534
Trade payables
115,512
103,602
Accrued payroll, payroll taxes and other payroll benefits
20,692
20,231
Accrued insurance
39,234
38,742
Deferred revenue
13,635
12,059
Other current liabilities
22,037
21,584
Total current liabilities
272,728
218,447
Long-term debt
196,985
137,682
Long-term finance leases and financing obligations
298,888
238,089
Long-term operating lease liabilities
176,583
Accrued rent expense
4,053
Other long-term liabilities
10,824
12,724
Long-term deferred income tax liabilities
7,258
Long-term income taxes payable
2,355
1,783
Total liabilities
965,621
612,778
Commitments and contingencies
Shareholders' equity:
Class C Convertible Preferred Stock, $1.50 par value, $0.064 conversion value,150,000 shares authorized; 21,802 shares issued and outstanding
33
Common Stock, $0.01 par value, 65,000,000 shares authorized; 39,639,544 and39,510,932 shares issued at December 28, 2019 and March 30, 2019, respectively
396
395
Treasury Stock, 6,359,871 shares at December 28, 2019 and March 30, 2019, at cost
(108,729)
Additional paid-in capital
228,617
220,173
Accumulated other comprehensive loss
(4,802)
(4,536)
Retained earnings
631,077
592,174
Total shareholders' equity
746,592
699,510
Total liabilities and shareholders' equity
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Quarter Ended
Nine Months Ended
Fiscal December
2018
(Dollars in thousands, except per share data)
Sales
329,281
310,110
970,458
913,027
Cost of sales, including distribution and occupancy costs
204,929
192,144
595,886
557,876
Gross profit
124,352
117,966
374,572
355,151
Operating, selling, general and administrative expenses
92,781
87,256
273,273
256,862
Operating income
31,571
30,710
101,299
98,289
Interest expense, net of interest income
6,983
6,797
21,100
20,180
Other income, net
(274)
(321)
(655)
(809)
Income before provision for income taxes
24,862
24,234
80,854
78,918
Provision for income taxes
5,982
3,703
19,054
15,982
Net income
18,880
20,531
61,800
62,936
Other comprehensive loss, net of tax:
Changes in pension, net of tax benefit
(89)
(76)
(266)
(227)
Comprehensive income
18,791
20,455
61,534
62,709
Earnings per common share:
Basic
0.56
0.62
1.85
1.90
Diluted
0.61
1.82
1.87
Weighted average number of common shares outstanding used in computing earnings per share:
33,274
33,032
33,234
32,932
33,973
33,766
33,971
33,605
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars and shares in thousands)
Class C ConvertiblePreferred Stock
Common Stock
Treasury Stock
AdditionalPaid-in
AccumulatedOtherComprehensive
Retained
Shares
Amount
Capital
Loss
Earnings
Total
Balance at September 29, 2018
39,300
393
6,345
(107,523)
206,533
(4,399)
568,304
663,341
Other comprehensive loss:
Pension liability adjustment ($100) pre-tax
Cash dividends (1):
Preferred
(102)
Common
(6,620)
Dividend payable
(12)
Activity related to equity-based plans
159
2
15
(1,206)
9,191
7,987
Stock-based compensation
1,085
Balance at December 29, 2018
39,459
6,360
216,809
(4,475)
582,101
686,134
Balance at September 28, 2019
39,628
226,948
(4,713)
619,641
733,576
Pension liability adjustment ($118) pre-tax
(112)
(7,321)
(11)
12
701
968
Balance at December 28, 2019
39,640
Balance at March 31, 2018
39,166
392
6,330
(106,563)
199,576
(4,248)
539,286
628,476
Pension liability adjustment ($302) pre-tax
(306)
(19,778)
(37)
293
30
(2,166)
14,083
11,920
3,150
Balance at March 30, 2019
39,511
Accounting change - cumulative effect
(582)
Adjusted balance
591,592
698,928
Pension liability adjustment ($353) pre-tax
(337)
(21,944)
(34)
129
1
5,589
5,590
2,855
(1)First, second and third quarter fiscal year 2020 dividend payments of $0.22 per common share or common share equivalent paid on June 17, 2019, September 9, 2019 and December 24, 2019, respectively. First, second and third quarter fiscal year 2019 dividend payments of $0.20 per common share or common share equivalent paid on June 14, 2018, September 6, 2018 and December 21, 2018, respectively.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities -
Depreciation and amortization
47,329
41,035
Gain on disposal of assets
(840)
(314)
Stock-based compensation expense
Net change in deferred income taxes
7,426
10,707
Change in operating assets and liabilities (excluding acquisitions):
(2,356)
(1,777)
(3,768)
2,225
(447)
772
18,097
11,918
10,598
Accrued expenses
1,097
1,596
Federal and state income taxes payable
3,934
(1,091)
(22,954)
(1,767)
572
536
Total adjustments
62,863
65,671
Net cash provided by operating activities
124,663
128,607
Cash flows from investing activities:
Capital expenditures
(42,226)
(30,763)
Acquisitions, net of cash acquired
(104,254)
(46,052)
Proceeds from the disposal of assets
426
492
Other
587
281
Net cash used for investing activities
(145,467)
(76,042)
Cash flows from financing activities:
Proceeds from borrowings
356,779
313,875
Principal payments on long-term debt, finance leases and financing obligations
(317,039)
(356,834)
Exercise of stock options
5,957
12,148
Dividends paid
(22,281)
(20,084)
Net cash provided by (used for) financing activities
23,416
(50,895)
Increase in cash
2,612
1,670
Cash at beginning of period
1,909
Cash at end of period
3,579
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 – Condensed Consolidated Financial Statements
The consolidated balance sheets as of December 28, 2019 and March 30, 2019, the consolidated statements of comprehensive income and changes in shareholders’ equity for the quarters and nine months ended December 28, 2019 and December 29, 2018 and the consolidated statements of cash flows for the nine months ended December 28, 2019 and December 29, 2018, include financial information for Monro, Inc. and its wholly-owned subsidiaries, Monro Service Corporation; Car-X, LLC; MNRO Holdings, LLC and MNRO Service Holdings, LLC (collectively, “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. 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 30, 2019.
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:
“Quarter Ended Fiscal December 2019”
September 29, 2019 – December 28, 2019 (13 weeks)
“Quarter Ended Fiscal December 2018”
September 30, 2018 – December 29, 2018 (13 weeks)
“Nine Months Ended Fiscal December 2019”
March 31, 2019 – December 28, 2019 (39 weeks)
“Nine Months Ended Fiscal December 2018”
April 1, 2018 – December 29, 2018 (39 weeks)
Fiscal 2020, ending March 28, 2020, is a 52 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 February 2016, the Financial Accounting Standards Board (“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 are 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. We adopted this standard as of March 31, 2019 using the modified retrospective approach and elected the optional transition relief amendment that allows for a cumulative-effect adjustment in the period of adoption and did not restate prior periods. In addition, we elected the package of practical expedients permitted under the transition guidance, which among other things, allowed us to carry forward the historical lease classification and provided relief from reviewing existing contracts to determine if they contain leases. We did not elect to use hindsight in determining the lease term.
The adoption of this guidance resulted in a $165.3 million increase to total assets and a $165.9 million increase to total liabilities as of March 31, 2019. The Company recognized $186.9 million of operating lease ROU assets, $174.4 million of operating lease obligations, and a $0.7 million finance lease asset and liability related to embedded leases. The difference between the operating lease ROU assets and operating lease liabilities primarily represents the existing favorable lease intangibles of $19.6 million and unfavorable lease intangibles and deferred rent accruals of $7.2 million resulting from historical operating lease accounting. These were reclassified as operating ROU assets upon adoption. In addition, we recognized $8.4 million and $16.6 million of finance lease assets and liabilities, respectively, and removed $11.1 million and $18.6 million of assets and liabilities related to financial obligations connected with the construction of leased stores that are no longer considered a failed sale leaseback. As a result of using the modified retrospective approach, the adoption resulted in a cumulative-effect adjustment to retained earnings, net of tax, of approximately $0.6 million. The adoption of this guidance did not have a material impact to our Consolidated Statements of Comprehensive Income or Consolidated Statements of Cash Flows. At adoption, we reclassified prior year capital lease and financing obligation assets from the Net property, plant and equipment line to the Finance lease and financing obligation assets, net line of our Consolidated Balance Sheet. See Note 8 for additional lease disclosures.
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 was permitted. We adopted this guidance during the first quarter of fiscal 2020. The adoption of this guidance did not have a material impact 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 December 2019, the FASB issued new accounting guidance intended to simplify the accounting for income taxes. The new guidance removes certain exceptions to the general principles in Accounting Standards Codification Topic 740 Income Taxes and amends existing guidance to improve consistent application. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2020. Early adoption is permitted. We are currently evaluating the potential impact of the adoption of this guidance 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 our Consolidated Financial Statements.
Financing
In April 2019, we entered into a new five year $600 million revolving credit facility agreement with eight banks (the “Credit Facility”). The Credit Facility amended and restated our previous revolving credit facility which would have expired in January 2021. Interest only is payable monthly throughout the Credit Facility’s term. The borrowing capacity for the Credit Facility of $600 million includes an accordion feature permitting us to request an increase in availability of up to an additional $250 million. The Credit Facility bears interest at 75 to 200 basis points over LIBOR (or replacement index) or at the prime rate, depending on the type of borrowing and the rates then in effect. The Credit Facility requires fees payable quarterly throughout the term between 0.125% and 0.35% of the amount of the average net availability under the Credit Facility during the preceding quarter.
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 212.5 basis points annually of the face amount of each standby letter of credit, payable quarterly in arrears.
Specific terms of the Credit Facility permit the payment of cash dividends (with certain limitations), 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 28, 2019.
Commitments and Contingencies
As of the date of this report, other than changes related to adoption of the new lease accounting standard as described in Note 8 to the Consolidated Financial Statements, there were no material changes to our commitments and contingencies outside those related to business acquisitions since March 30, 2019, as reported in our Form 10-K.
Note 2 – Acquisitions
Monro’s acquisitions are strategic moves in our plan to fill in and expand our presence in existing and contiguous markets, expand into new 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 our greenfield store growth strategy.
Fiscal 2020
During the first nine months of fiscal 2020, we acquired the following businesses for an aggregate purchase price of $103.6 million. The acquisitions were financed through our Credit Facility and our prior credit facility. The results of operations for these acquisitions are included in our financial results from the respective acquisition dates.
On November 17, 2019, we acquired 18 retail tire and automotive repair stores located in Nevada and Idaho from Nevada Tire Holdings, LLC and Idaho Tire Holdings, LLC. (One retail tire and automotive repair store is expected to open during the fourth quarter of fiscal 2020.) These stores will operate under the Tire Choice name.
On October 27, 2019, we acquired six retail tire and automotive repair stores located in California from S & S Unlimited, Inc. These stores will operate under the Tire Choice name.
On October 27, 2019, we acquired three retail tire and automotive repair stores located in California from Lloyd’s Tire Service, Inc. These stores will operate under the Tire Choice name.
On August 25, 2019, we acquired one retail tire and automotive repair store located in Louisiana from Atlas Tire Center, Inc. This store operates under the Tire Choice name.
On August 25, 2019, we acquired two retail tire and automotive repair stores located in Louisiana from LRZ3 Auto, LLC. These stores operate under the Tire Choice name.
On August 25, 2019, we acquired one retail tire and automotive repair store located in Louisiana from T-Boy's Tire and Automotive, LLC. This store operates under the Tire Choice name.
On August 25, 2019, we acquired two retail tire and automotive repair stores located in Louisiana from Twin Tire & Auto Care, Inc. These stores operate under the Tire Choice name.
On August 25, 2019, we acquired one retail tire and automotive repair store located in Louisiana from Twin Tire & Auto Care Team, Inc. This store operates under the Tire Choice name.
On August 25, 2019, we acquired one retail tire and automotive repair store located in Louisiana from Scotty's Tire & Automotive, Inc. This store operates under the Tire Choice name.
On June 23, 2019, we acquired two retail tire and automotive repair stores located in California from BAW LLC. These stores operate under the Tire Choice name.
On May 19, 2019, we acquired 40 retail tire and automotive repair stores and one distribution center located in California from Certified Tire & Service Centers, Inc. These stores operate under the Tire Choice name.
On March 31, 2019, we acquired 12 retail tire and automotive repair stores located in Louisiana from Allied Discount Tire & Brake, Inc. These stores operate 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 customer lists.
We expensed all costs related to acquisitions in the nine months ended December 28, 2019. The total costs related to completed acquisitions were $0.4 million and $1.2 million for the quarter and nine months ended December 28, 2019, respectively. These costs are included in the Consolidated Statements of Comprehensive Income primarily under operating, selling, general and administrative expenses.
Sales for the fiscal 2020 acquired entities for the quarter and nine months ended December 28, 2019 totaled $18.5 million and $38.7 million, respectively, for the period from acquisition date through December 28, 2019.
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 consideration transferred and net identifiable liabilities assumed were recorded as goodwill. The preliminary allocation of the aggregate purchase price as of December 28, 2019, with respect to the acquisitions during the nine months ended December 28, 2019, was as follows:
As ofAcquisitionDate
(Dollars inthousands)
4,374
706
2,299
29,127
42,680
Intangible assets
2,847
304
3,174
Total assets acquired
85,511
2,672
4,416
1,545
361
36,225
43,668
1,658
Total liabilities assumed
90,545
Total net identifiable liabilities assumed
(5,034)
Total consideration transferred
103,639
Less: total net identifiable liabilities assumed
108,673
The following are the intangible assets acquired and their respective fair values and weighted average useful lives:
As ofAcquisition Date
Dollars inthousands
WeightedAverageUseful Life
Customer lists
7 years
Fiscal 2019
During the first nine months of fiscal 2019, we acquired the following businesses for an aggregate purchase price of $45.5 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.
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 $0.1 million and $0.4 million for the quarter and nine months ended December 29, 2018. 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.
We have recorded the identifiable assets acquired and liabilities assumed, with respect to the acquisitions during the nine months ended December 29, 2018, at their fair values as of their respective acquisition dates (including any measurement period adjustments), with the remainder recorded as goodwill as follows:
1,674
8,280
252
8,203
4,422
7,646
10
1,568
32,055
1,046
342
501
9,018
546
11,453
Total net identifiable assets acquired
20,602
45,487
Less: total net identifiable assets acquired
24,885
5,697
13 years
Favorable leases
1,549
10 years
Trade name
400
2 years
12 years
As a result of the updated purchase price allocations for the entities acquired during the fiscal year ended March 30, 2019, certain of the fair value amounts previously estimated were adjusted during the measurement period. These measurement period adjustments resulted 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 inventories of $0.3 million; an increase in property, plant and equipment of $0.1 million; a decrease in finance lease and financing obligation assets, net of $0.8 million; a decrease in intangible assets of $0.3 million; a decrease in long-term deferred income tax assets of $0.3 million; an increase in current portion of long-term debt, finance leases and financing obligations of $0.2 million and a decrease in long-term finance leases and financing obligations of $2.4 million. The measurement period adjustments resulted in a decrease of goodwill of $0.6 million.
The measurement period adjustments were not material to the Consolidated Statement of Comprehensive Income for the quarter and nine months ended December 28, 2019.
We continue to refine the valuation data and estimates primarily related to inventory, warranty reserves, intangible assets, real estate, and real property leases for fiscal 2019 acquisitions which closed subsequent to December 29, 2018 and the fiscal 2020 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.
The following is a reconciliation of basic and diluted earnings per common share for the respective periods:
(Amounts in thousands,
except per share data)
Numerator for earnings per common share calculation:
Less: Preferred stock dividends
Income available to common shareholders
18,768
20,429
61,463
62,630
Denominator for earnings per common share calculation:
Weighted average common shares, basic
Effect of dilutive securities:
Preferred stock
510
Stock options
165
195
196
134
Restricted stock
24
29
31
Weighted average common shares, diluted
Basic earnings per common share:
Diluted earnings per common share:
The computation of diluted earnings per common share excludes the effect of the assumed exercise of approximately 177,000 and 169,000 stock options for the quarter and nine months ended December 28, 2019, respectively, and 120,000 and 274,000 stock options for the quarter and nine months ended December 29, 2018, respectively. Such amounts were excluded as the exercise price of these stock options was 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
Our effective income tax rate was 24.1% and 15.3% for the quarters ended December 28, 2019 and December 29, 2018, respectively, and 23.6% and 20.3% for the nine months ended December 28, 2019 and December 29, 2018, respectively. The effective income tax rate for the periods ended December 29, 2018 included a discrete income tax benefit of $2.0 million as a result of the Internal Revenue Service’s examination of our fiscal 2016 and fiscal 2017 tax years. This 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 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. Additional discrete items recognized during each respective period are insignificant.
Note 5 – Fair Value
Long-term debt had a carrying amount that approximates a fair value of $197.0 million as of December 28, 2019, as compared to a carrying amount and a fair value of $137.7 million as of March 30, 2019. 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 – Cash Dividend
In May 2019, our Board of Directors declared its intention to pay a regular quarterly cash dividend during fiscal 2020 of $0.22 per common share or common share equivalent beginning with the first quarter of fiscal 2020. We paid dividends of $22.3 million during the nine months ended December 28, 2019. 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 second table 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 28, 2019 and March 30, 2019 were $19.5 million and $17.2 million, respectively, of which $13.6 million and $12.1 million, respectively, are reported in Deferred revenue and $5.9 million and $5.1 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 30, 2019 to December 28, 2019:
Dollars in
thousands
17,150
Deferral of revenue
13,711
Deferral of revenue from acquisitions
2,823
Recognition of revenue
(14,168)
19,516
We expect to recognize $4.4 million of deferred revenue related to road hazard warranty agreements in the remainder of fiscal 2020, $11.0 million of such deferred revenue during our fiscal year ending March 27, 2021, and $4.1 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 is as an agent and the net amount retained is recorded as sales. (Included in the Tires product group in the following table.)
The following table summarizes disaggregated revenue by product group:
Revenues:
Brakes
38,261
37,549
131,575
124,677
Exhaust
6,256
7,128
20,317
22,751
Steering
24,987
23,223
77,397
71,894
Tires
179,086
167,984
491,956
459,236
Maintenance
79,889
73,430
246,704
232,062
802
796
2,509
2,407
Note 8 – Leasing
We enter into lease agreements for certain retail stores, warehouses, distribution centers, office space and land as well as service contracts that are considered leases. We determine if an arrangement is or contains a lease at inception. We record ROU assets and lease obligations for our finance and operating leases, which are initially based on the discounted future minimum lease payments over the term of the lease. As the rate implicit in our leases is not easily determinable, our applicable incremental borrowing rate is used in calculating the present value of the lease payments. We estimate our incremental borrowing rate considering the market rates of our outstanding collateralized borrowings and comparisons to comparable borrowings of similar terms.
Lease term is defined as the non-cancelable period of the lease plus any options to extend the lease when it is reasonably certain that it will be exercised. Our leases have remaining lease terms of less than one year to approximately 38 years. Most of our leases include one or more options to extend the lease, for periods ranging from one year to 30 years or more. For leases with an initial term of 12 months or less, no ROU assets or lease obligations are recorded on the balance sheet and we recognize short-term lease expense for these leases on a straight-line basis over the lease term.
Certain of our lease agreements include rental payments based on a percentage of retail sales over specified levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. For the majority of all classes of underlying assets, we have elected to separate lease from non-lease components. We have elected to combine lease and non-lease components for certain classes of equipment. We sublease excess space to third parties.
Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of sales or general and administrative expense. Amortization expense for finance leases is recognized on a straight-line basis over the lease term and is included in cost of sales or general and administrative expense. Interest expense for finance leases is recognized using the effective interest method. Variable payments, short-term rentals and payments associated with non-lease components are expensed as incurred.
Historical failed sale leasebacks that were assumed through acquisitions and do not qualify for sale leaseback accounting continue to be accounted for as financing obligations. As of December 28, 2019, net assets of $4.6 million and liabilities of $7.6 million due to failed sale leaseback arrangements were included with finance lease assets and liabilities, respectively, on the Consolidated Balance Sheet.
The components of operating and finance lease cost were as follows:
Operating lease cost
9,861
28,812
Finance lease/financing obligations cost:
Amortization of assets
5,568
14,750
Interest on liabilities
5,354
15,945
Short term and variable lease cost
558
1,643
Sublease income
(32)
(98)
Total lease cost
21,309
61,052
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in measurement of lease obligations:
Operating cash flows from operating leases
27,507
Operating cash flows from finance leases/financing obligations
15,925
Financing cash flows from finance leases/financing obligations
19,512
Net assets obtained in exchange for operating lease obligations
5,871
Net assets obtained in exchange for finance lease obligations
54,286
The following table summarizes weighted average remaining lease term and discount rates:
Operating Leases
Finance Leases and Financing Obligations
Weighted average remaining lease term, in years
9.4
10.0
Weighted average discount rate
3.53
%
9.05
Future maturities of our lease liabilities, excluding subleases, as of December 28, 2019 are as follows:
Remainder 2020
9,447
12,928
2021
36,553
52,126
2022
33,155
51,956
2023
29,170
51,999
2024
24,648
45,601
Thereafter
113,167
251,798
Total undiscounted lease obligations
246,140
466,408
Less: imputed interest
(39,023)
(136,436)
Net lease obligation
207,117
329,972
Total lease payments include $80 million related to options to extend operating leases that are reasonably certain of being exercised, include $119 million related to options to extend finance leases that are reasonably certain of being exercised and exclude $16 million of legally binding lease payments for leases signed but not yet commenced as of December 28, 2019.
The aggregate minimum annual lease rentals at March 30, 2019 for the remaining contractual term of non-cancelable leases were as follows:
2020
33,225
43,034
28,819
43,791
23,552
43,459
17,949
42,981
11,488
37,733
33,614
191,366
Total minimum rentals before sublease income
148,647
402,364
Less: minimum sublease rentals
(488)
Total minimum rentals
148,159
(142,086)
Present value of minimum lease payments
260,278
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 this 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,” “potential,” “strategy,” “will” 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, including the impacts of tariffs on products imported from China, 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 technologies, 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 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 30, 2019. 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 2020 and fiscal 2019 in this Management’s Discussion and Analysis of Financial Condition and Results of Operations refer to our fiscal years ending March 28, 2020 and March 30, 2019, respectively.
Non-GAAP Financial Measures
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes certain financial measures, such as adjusted diluted earnings per common share (“EPS”) not derived in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Non-GAAP financial measures should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows. We have included a reconciliation of the non-GAAP financial measures used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to their most directly comparable GAAP measures in the section titled “Reconciliation of Non-GAAP Financial Measures” below.
Results of Operations
The following table sets forth income statement data of Monro expressed as a percentage of sales for the fiscal periods indicated:
100.0
62.2
62.0
61.4
61.1
37.8
38.0
38.6
38.9
28.2
28.1
9.6
9.9
10.4
10.8
Interest expense - net
2.1
2.2
Other income - net
(0.1)
7.6
7.8
8.3
8.7
1.9
1.2
1.8
5.7
6.6
6.4
6.9
Third Quarter and Nine Months Ended December 28, 2019 as Compared to Third Quarter and Nine Months Ended December 29, 2018
Sales were $329.3 million for the quarter ended December 28, 2019 as compared with $310.1 million for the quarter ended December 29, 2018. The sales increase of $19.2 million, or 6.2%, was due to an increase of $22.7 million related to new stores, of which $20.7 million came from the fiscal 2020 and fiscal 2019 acquisitions. Partially offsetting this was a decrease in comparable store sales for the quarter ended December 28, 2019 of 0.9% as compared to the same period in the prior year. Additionally, there was a decrease in sales from closed stores amounting to $0.8 million in the quarter. There were 89 selling days in the quarter ended December 28, 2019 and in the quarter ended December 29, 2018. We define comparable store sales as sales for stores that have been open or acquired at least one fiscal year prior to March 31, 2019.
Sales were $970.5 million for the nine months ended December 28, 2019 as compared with $913.0 million for the nine months ended December 29, 2018. The sales increase of $57.5 million, or 6.3%, was due to an increase of $59.9 million related to new stores, of which $51.4 million came from the fiscal 2020 and fiscal 2019 acquisitions. Partially offsetting this was a decrease in sales from closed stores amounting to $2.2 million in the period. Additionally, comparable store sales for the nine months ended December 28, 2019 decreased by 0.1% as compared to the same period in the prior year. There were 270 selling days in the nine months ended December 28, 2019 and in the nine months ended December 29, 2018.
Barter sales of slower moving inventory totaled approximately $4.0 million and $3.7 million for the nine months ended December 28, 2019 and December 29, 2018, respectively. There were no barter sales in the third quarter of fiscal 2020 and fiscal 2019.
At December 28, 2019, we had 1,289 Company-operated stores in operation and 99 franchised locations as compared with 1,186 Company-operated stores in operation and 99 franchised locations at December 29, 2018. At March 30, 2019, we had 1,197 Company-operated stores in operation and 98 franchised locations. During the quarter ended December 28, 2019, we added 27 Company-operated stores. Additionally, one franchised location was opened during the quarter and nine months ended December 28, 2019. Year-to-date, we have added 95 Company-operated stores and closed three stores.
Comparable store brakes and alignment category sales for the quarter ended December 28, 2019 both decreased by approximately 3% from the prior year quarter. Additionally, tires and front end/shocks category sales for the quarter ended December 28, 2019 both decreased by approximately 1% on a comparable store basis as compared to the same period in the prior year. Comparable store maintenance services category sales for the quarter ended December 28, 2019 were relatively flat from the prior year quarter. Comparable store sales were impacted by lower traffic resulting from milder winter weather conditions in certain of our markets, partially offset by higher average ticket from improved in-store execution.
Gross profit for the quarter ended December 28, 2019 was $124.4 million or 37.8% of sales as compared with $118.0 million or 38.0% of sales for the quarter ended December 29, 2018. The decrease in gross profit for the quarter ended December 28, 2019, as a percentage of sales, was due primarily to an increase in distribution and occupancy costs, as a percentage of sales, as we lost leverage on these largely fixed costs with lower overall comparable store sales, as well as an increase in labor costs, which increased from the prior year quarter as a percentage of sales, due to technician staffing levels and wage inflation. Largely offsetting these increases was a decrease in material costs as a percentage of sales as compared to the prior year quarter.
Gross profit for the nine months ended December 28, 2019 was $374.6 million or 38.6% of sales as compared with $355.2 million or 38.9% of sales for the nine months ended December 29, 2018. The year-to-date decrease, as a percentage of sales, was due primarily to an increase in labor costs, as well as distribution and occupancy costs, which both increased as a percentage of sales, partially offset by a decrease in material costs as a percentage of sales, when compared to the same period of the prior year.
Operating expenses for the quarter ended December 28, 2019 were $92.8 million or 28.2% of sales as compared to $87.3 million or 28.1% of sales for the quarter ended December 29, 2018. The increase of $5.5 million in operating expenses from the comparable period of the prior year is primarily due to increased expenses for 103 net new stores.
For the nine months ended December 28, 2019, operating expenses increased by $16.4 million to $273.3 million from the comparable period of the prior year and were 28.2% of sales as compared to 28.1% of sales for the nine months ended December 29, 2018. The increase is primarily due to increased expenses for new stores.
Operating income for the quarter ended December 28, 2019 of approximately $31.6 million increased by 2.8% as compared to operating income of approximately $30.7 million for the quarter ended December 29, 2018, and decreased as a percentage of sales from 9.9% to 9.6% for the reasons described above.
Operating income for the nine months ended December 28, 2019 of approximately $101.3 million increased by 3.1% as compared to operating income of approximately $98.3 million for the nine months ended December 29, 2018, and decreased as a percentage of sales from 10.8% to 10.4% for the reasons described above.
Net interest expense for the quarter ended December 28, 2019 increased by approximately $0.2 million as compared to the same period in the prior year, and decreased from 2.2% to 2.1% as a percentage of sales for the same periods. The weighted average debt outstanding for the quarter ended December 28, 2019 increased by approximately $112 million as compared to the quarter ended December 29, 2018. This increase is primarily related to an increase in finance lease debt recorded in connection with the fiscal 2020 and fiscal 2019 acquisitions and greenfield expansion, as well as an increase in debt outstanding under our existing credit facility to fund the purchase of our acquisitions. Partially offsetting this increase was a decrease in the weighted average interest rate of approximately 140 basis points from the prior year quarter due to lower borrowing rates associated with new leases, as well as a decrease in the LIBOR and prime rates from the prior year quarter.
Net interest expense for the nine months ended December 28, 2019 increased by approximately $0.9 million as compared to the same period in the prior year, and remained at 2.2% as a percentage of sales for the same periods. Weighted average debt outstanding increased by approximately $57 million and the weighted average interest rate decreased by approximately 60 basis points as compared to the same period of the prior year.
Income before taxes for the quarter ended December 28, 2019 of approximately $24.9 million increased by 2.6% as compared to income before taxes of approximately $24.2 million for the quarter ended December 29, 2018, and decreased as a percentage of sales from 7.8% to 7.6% for the reasons described above.
Income before taxes for the nine months ended December 28, 2019 of approximately $80.9 million increased by 2.5% as compared to income before taxes of approximately $78.9 million for the nine months ended December 29, 2018, and decreased as a percentage of sales from 8.7% to 8.3% for the reasons described above.
The effective income tax rate was 24.1% and 15.3% for the quarters ended December 28, 2019 and December 29, 2018, respectively, and 23.6% and 20.3% for the nine months ended December 28, 2019 and December 29, 2018, respectively. The effective income tax rate for the periods ended December 29, 2018 included a discrete income tax benefit of $2.0 million as a result of the Internal Revenue Service’s examination of our fiscal 2016 and fiscal 2017 tax years. This 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 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 accounting applies. Additional discrete items recognized during each respective period are insignificant.
Net income for the quarter ended December 28, 2019 of $18.9 million decreased 8.0% from net income for the quarter ended December 29, 2018. Diluted EPS for the quarter ended December 28, 2019 of $0.56 decreased 8.2% as compared to diluted EPS of $0.61 for the quarter ended December 29, 2018. Adjusted diluted EPS (a non-GAAP financial measure) was $0.60 and $0.57 for the quarters ended December 28, 2019 and December 29, 2018, respectively. Please refer to the “Reconciliation of Non-GAAP Financial Measures” section below for a discussion of this non-GAAP financial measure and a reconciliation to its most comparable GAAP measure, diluted EPS.
For the nine months ended December 28, 2019, net income of $61.8 million decreased 1.8% from net income for the nine months ended December 29, 2018. Diluted EPS for the nine months ended December 28, 2019 of $1.82 decreased 2.7% as compared to diluted EPS of $1.87 for the nine months ended December 29, 2018. Adjusted diluted EPS (a non-GAAP financial measure) was $1.91 and $1.88 for the nine months ended December 28, 2019 and December 29, 2018, respectively. Please refer to the “Reconciliation of Non-GAAP Financial Measures” section below for a discussion of this non-GAAP financial measure and a reconciliation to its most comparable GAAP measure, diluted EPS.
Reconciliation of Non-GAAP Financial Measures
In addition to reporting diluted EPS, which is a GAAP measure, this Form 10-Q includes adjusted diluted EPS, which is a non-GAAP financial measure. The Company has included a reconciliation to adjusted diluted EPS from its most directly comparable GAAP measure, diluted EPS, below. Management views this non-GAAP financial measure as an indicator to better assess comparability between periods because management believes this non-GAAP financial measure reflects the core business operations while excluding certain non-recurring items and items related to Monro.Forward or acquisition initiatives.
This non-GAAP financial measure is not intended to represent, and should not be considered more meaningful than, or as an alternative to, its most directly comparable GAAP measure. This non-GAAP financial measure may be different from similarly titled non-GAAP financial measures used by other companies.
Adjusted diluted EPS is summarized as follows:
Reconciliation of Adjusted Diluted EPS
Diluted EPS
Monro.Forward initiative costs
0.03
0.01
0.06
0.05
Acquisition due diligence and integration costs
Corporate and field management realignment costs
One-time income tax benefit
(0.06)
Adjusted diluted EPS
0.60
0.57
1.91
1.88
Adjusted net income is summarized as follows:
Supplemental Reconciliation of Adjusted Net Income
1,378
387
2,685
2,202
435
102
1,204
430
350
Provision for income taxes on adjustments
(435)
(200)
(953)
(713)
(2,050)
Adjusted net income
20,258
19,120
64,736
63,155
Capital Resources and Liquidity
Capital Resources
Our primary capital requirements in fiscal 2020 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 28, 2019, we spent approximately $146.5 million on these items. Capital requirements were met primarily by cash flow from operations and from our existing credit facility.
In May 2019, our Board of Directors declared its intention to pay a regular quarterly cash dividend during fiscal 2020 of $0.22 per common share or common share equivalent beginning with the first quarter of fiscal 2020. We paid dividends of $22.3 million during the nine months ended December 28, 2019. 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.
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 April 2019, we entered into a new five-year $600 million revolving credit facility agreement with eight banks (the “Credit Facility”). The Credit Facility amended and restated our previous revolving credit facility which would have expired in January 2021. Interest only is payable monthly throughout the Credit Facility’s term. The borrowing capacity for the Credit Facility of $600 million includes an accordion feature permitting us to request an increase in availability of up to an additional $250 million. The Credit Facility bears interest at 75 to 200 basis points over LIBOR (or replacement index) or at the prime rate, depending on the type of borrowing and the rates then in effect. The Credit Facility requires fees payable quarterly throughout the term between 0.125% and 0.35% of the amount of the average net availability under the Credit Facility during the preceding quarter. There was $197.0 million outstanding under the Credit Facility at December 28, 2019.
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 212.5 basis points annually of the face amount of each standby letter of credit, payable quarterly in arrears. There was a $33.6 million outstanding letter of credit at December 28, 2019.
The net availability under the Credit Facility at December 28, 2019 was $369.4 million.
In addition, we have financed certain store properties with finance leases/financing obligations, which amounted to $330.0 million at December 28, 2019 and are due in installments through March 2049.
See “Recent Accounting Pronouncements” in Note 1 to our Consolidated Financial Statements for a discussion of the impact of recently issued accounting standards on our Consolidated Financial Statements as of December 28, 2019 and the expected impact on the Consolidated Financial Statements for future periods.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from potential changes in interest rates. As of December 28, 2019, excluding finance leases and financing obligations, we had no debt financing at fixed interest rates, of which the fair value would be affected by changes in market interest rates. Our cash flow exposure on floating rate debt would result in annual interest expense fluctuations of approximately $2.0 million based upon our debt position at December 28, 2019 and approximately $1.4 million for the fiscal year ended March 30, 2019, respectively, given a change in LIBOR of 100 basis points.
Debt financing had a carrying amount that approximates a fair value of $197.0 million as of December 28, 2019, as compared to a carrying amount and a fair value of $137.7 million as of March 30, 2019.
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 28, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
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.
Exhibit Index
10.69 – Letter Agreement, effective September 30, 2019, between the Company and Rob Rajkowski, incorporated by reference to Exhibit 10.69 to the Company’s Quarterly Report on Form 10-Q filed on November 7, 2019
31.1 – Certification of Brett T. Ponton pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
31.2 – Certification of Brian J. D’Ambrosia pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
32.1 – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002
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
104 - Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
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.
DATE: February 6, 2020
By:
/s/ Brett T. Ponton
Brett T. Ponton
Chief Executive Officer and President (Principal Executive Officer)
/s/ Brian J. D’Ambrosia
Brian J. D’Ambrosia
Executive Vice President-Finance, Chief Financial Officer and
Treasurer
(Principal Financial Officer and Principal Accounting Officer)