Monro - 10-Q quarterly report FY

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. þ Yes     o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act).o Yes     þ No

As of July 22, 2006, 14,174,443 shares of the Registrant’s Common Stock, par value $ .01 per share, were outstanding.

Item 1. Financial Statements

MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)

MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)

MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

          The consolidated balance sheet as of June 24, 2006, the consolidated statements of income and cash flows for the thirteen week periods ended June 24, 2006, and June 25, 2005, and the consolidated statement of changes in shareholders’ equity for the thirteen week period ended June 24, 2006, include Monro Muffler Brake, Inc. and its wholly owned subsidiaries (the “Company”). These unaudited condensed consolidated financial statements have been prepared by the Company and are subject to year-end adjustments. In the opinion of management, all known adjustments (consisting of normal recurring accruals or adjustments) have been made to present fairly the financial position, results of operations and cash flows for the unaudited periods presented.

          Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 25, 2006. The results of operations for the interim periods being reported on herein are not necessarily indicative of the operating results for the full year.

          The Company reports its results on a 52/53 week fiscal year with the fiscal year ending on the last Saturday in March of each year. The following are the dates represented by each fiscal period reported in these condensed financial statements:

          Effective April 29, 2006, the Company acquired 75 automotive maintenance and repair service stores located in eight metropolitan areas throughout Ohio and Pennsylvania from ProCare Automotive Service Solutions LLC (“ProCare”). The Company acquired substantially all of the operating assets of these stores, which consist primarily of inventory and equipment, and assumed certain liabilities. The purchase price was $14.7 million in cash which was financed through the Company’s existing bank facility. The Company converted 30 of the acquired ProCare stores to tire stores which will operate under the Mr. Tire brand name. The remaining stores will operate as service stores under the Monro brand name. The results of operations of the acquired ProCare stores are included in the Company’s results from April 29, 2006.

          On November 1, 2005, the Company acquired a 13 percent interest in R&S Parts and Service, Inc. (“R&S”), a privately owned automotive aftermarket parts and service chain, for $2.0 million from GDJ Retail LLC. As part of the transaction, the Company also loaned R&S $5.0 million under a secured subordinated debt agreement that has a five-year term and carries an 8 percent interest rate. The Company is accounting for this investment on the cost method. At June 24, 2006, the Company’s investment is recorded within Intangible assets and other noncurrent assets on the Balance Sheet.

          R&S operates 100 retail stores under the name of Strauss Discount Auto (“Strauss”) that provide automotive parts and accessories, 69 of which also have service bays that offer a full range of aftermarket services. The stores generated approximately $170 million in annual sales in their fiscal year ended December 2005, and are located throughout New York, New Jersey and Philadelphia. The Company also has the option to purchase the remaining 87 percent interest in Strauss on or before September 30, 2006, for an additional $12.0 million in cash and $1.0 million of Monro stock.

          Effective October 17, 2004, the Company acquired five retail tire and automotive repair stores located in and around Frederick, Maryland from Donald B. Rice Tire Co., Inc. (the “Rice Tire Acquisition”). On March 6, 2005, the Company acquired 10 retail tire and automotive repair stores located in southern Maryland from Henderson Holdings, Inc. (the “Henderson Acquisition”). These stores produce approximately $19 million in sales annually. The Company operates 14 of these retail locations under the Mr. Tire brand name and one under the Tread Quarters brand name. The Company purchased all of the operating assets of these stores, including fixed assets and certain inventory, and assumed certain liabilities, including obligations pursuant to the real property leases for certain of the retail store locations.

The total purchase price of these stores was approximately $11.6 million, which was funded through $5.1 million in cash, the assumption of liabilities and the issuance of 240,206 shares of the Company’s common stock, which was valued at $6.5 million. In addition, the Company recorded buildings and capital lease obligations in the amount of approximately $6.2 million in connection with new leases with the seller of Henderson Holdings for nine of the properties acquired and $.9 million in connection with a Rice Tire lease. The results of operations of these stores are included in the Company’s income statement from their respective dates of acquisition.

          The Company reports derivatives and hedging activities in accordance with Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities”, as amended. This statement requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction, and if it is, depending on the type of hedge transaction.

          Currently the Company has no hedge agreements. The most recent hedge agreement expired in October 2005.

          Basic earnings per common share (EPS) amounts are computed by dividing earnings after the deduction of preferred stock dividends by the average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive equivalents outstanding.

          The following is a reconciliation of basic and diluted EPS for the respective periods:

          The computation of diluted EPS excludes the effect of the assumed exercise of approximately 94,000 and 1,000 stock options, respectively, for the three months ended fiscal June 2006 and June 2005. Such amounts were excluded as the exercise prices of these options were greater than the average market value of the Company’s common stock for those periods, resulting in an anti-dilutive effect on diluted EPS.

          The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payments,” (“SFAS 123R”), which replaced SFAS No. 123 “Accounting for Stock-Based Compensation,” (“SFAS 123”) and superseded Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”). SFAS 123R requires entities to measure compensation cost arising from the grant of share-based payments to employees at fair value and to recognize such cost in income over the period during which the employee is required to provide service in exchange for the award, usually the vesting period. The Company adopted SFAS 123R effective March 26, 2006 under the modified prospective transition method. In accordance with the modified-prospective transition method of SFAS 123R, the Company has not restated prior periods. Accordingly, the Company will recognize compensation expense for all awards granted or modified by us after March 25, 2006. Outstanding awards at the date of adoption were fully vested and therefore there was no related expense recorded in the quarter ended June 24, 2006 for these awards. SFAS 123R requires forfeitures to be estimated on the grant date and revised in subsequent periods if actual forfeitures differ from those estimates. Prior to the adoption of SFAS 123R, the Company accounted for forfeitures as they occurred. For pro forma disclosure purposes in accordance with SFAS 123, the Company estimated forfeitures.

          Prior to the adoption of SFAS 123R, the Company used the intrinsic value method prescribed in APB 25 and also followed the disclosure requirements of SFAS 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” (“SFAS 148”); which required certain disclosures on a pro forma basis as if the fair value method had been followed for accounting for such compensation. The following table presents the pro forma effect on net income as if the Company had applied the fair value method to measure compensation cost prior to our adoption of SFAS 123R:

          Upon adoption of SFAS 123R, the Company elected to recognize compensation expense using the straight-line approach. The Company estimates fair value using the Black-Scholes valuation model. Assumptions used to estimate the compensation expense are determined as follows:

          A summary of changes in outstanding stock options is as follows:

          In August 1994, the Board of Directors authorized a non-employee directors’ stock option plan which was approved by shareholders in August 1995 (the “1994 Plan”). The 1994 Plan initially reserved 100,278 shares of common stock (as retroactively adjusted for stock dividends and the stock split), and provides for (i) the grant to each non-employee director as of August 1, 1994 of an option to purchase 4,559 shares of the Company’s common stock (as retroactively adjusted for stock dividends and the stock split) and (ii) the annual grant to each non-employee director of an option to purchase 4,559 shares (as retroactively adjusted for stock dividends and the stock split) on the date of the annual meeting of shareholders beginning in 1995. The options expire ten years from the date of grant and have an exercise price equal to the fair market value of the Company’s common stock on the date of grant. Options issued to directors generally vest immediately upon issuance.

          In May 1997 and May 1999, the Board of Directors authorized an additional 102,375 and 97,500 shares, respectively (both amounts as retroactively adjusted for stock dividends and the stock split) for issuance under the 1994 Plan. These amounts were approved by shareholders in August 1997 and August 1999, respectively.

          In May 2003, the Board of Directors authorized the 2003 Non-Employee Directors’ Stock Option Plan (the “2003 Plan”), reserving 90,000 shares (as retroactively adjusted for the stock split) of common stock for issuance to outside directors, which was approved by shareholders in August 2003. The provisions of the 2003 Plan are similar to the 1994 Plan, except that options in the 2003 Plan expire five years from the date of grant.

          In June 2005, the Compensation Committee authorized an additional 50,000 shares, which were approved by shareholders in August 2005.

          A summary of changes in outstanding stock options is as follows:

          The aggregate intrinsic value in the preceding tables is based on the Company’s closing stock price of $33.94 as of the last trading day of the period ended June 24, 2006. The aggregate intrinsic value of options (the amount by which the market price of the stock on the date of exercise exceeded the exercise price of the option) exercised during the fiscal quarter ended June 24, 2006 was $4.6 million. As of June 24, 2006, there was $358,000 of unrecognized compensation expense related to non-vested fixed stock options that is expected to be recognized over a weighted average period of 3.9 years.

          There were no shares vested during the quarter ended June 24, 2006.

          Cash received from option exercise under all stock option plans was $2.0 million and $.5 million for the three months ended June 2006 and June 2005, respectively.

          The Company issues new shares of common stock upon exercise of stock options.

          The following transactions represent non-cash investing and financing activities during the periods indicated:

THREE MONTHS ENDED JUNE 24, 2006:

          In connection with the ProCare Acquisition (Note 2), liabilities were assumed as follows:

THREE MONTHS ENDED JUNE 25, 2005:

          In connection with the disposal of assets, the Company reduced both fixed assets and long-term liabilities by $4,000.

          In connection with the recording of capital leases, the Company increased both fixed assets and long-term debt by $1,061,000.

          In connection with recording the value of the Company’s swap contracts, other comprehensive income increased by $8,000,

other long-term liabilities decreased by $13,000 and the deferred income tax liability was increased by $5,000.

     In April 2006, the Company’s Board of Directors declared a regular quarterly cash dividend of $.05 per common share or common share equivalent to be paid to shareholders of record on April 24, 2006. The dividend was paid on May 5, 2006 and amounted to $34,000 for preferred shareholders and $683,000 for common shareholders.

     In May 2006, the Company’s Board of Directors declared a regular quarterly cash dividend of $.07 per common share or common share equivalent to be paid to shareholders of record on July 18, 2006. The dividend was paid on July 28, 2006 and amounted to $48,000 for preferred shareholders and $969,000 for common shareholders.

     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 the Company’s financial condition, results of operations, capital requirements, compliance with charter and contractual restrictions, and such other factors as the Board of Directors deems relevant.

     Certain amounts in these financial statements have been reclassified to maintain comparability among the periods presented.

     In the fiscal quarter ended June 24, 2006, the Company recognized a $.4 million income tax benefit primarily related to the favorable resolution of state income tax issues.

     The statements contained in this Form 10-Q that are not historical facts, including (without limitation) statements made in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, may contain statements of future expectations and other forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed. These factors include, but are not necessarily limited to, product demand, dependence on and competition within the primary markets in which the Company’s stores are located, the need for and costs associated with store renovations and other capital expenditures, the effect of economic conditions, the impact of competitive services and pricing, product development, parts supply restraints or difficulties, industry regulation, risks relating to leverage and debt service (including sensitivity to fluctuations in interest rates), continued availability of capital resources and financing, risks relating to integration of acquired businesses and other factors set forth or incorporated elsewhere herein and in the Company’s other Securities and Exchange Commission filings. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.

     The 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:

     Sales were $98.4 million for the quarter ended June 24, 2006 as compared with $94.6 million in the quarter ended June 25, 2005. The sales increase of $3.8 million, or 4.0%, was due to an increase of $7.4 million related to new stores (including $5.5 million from the Acquired ProCare stores), offset by a comparable store sales decrease of 2.9%. There were 77 selling days in the quarter ended June 24, 2006 and in the quarter ended June 25, 2005.

     At June 24, 2006, the Company had 701 company-operated stores compared with 625 stores at June 25, 2005. During the quarter ended June 24, 2006, the Company added 75 ProCare and three other stores, and closed two.

     The new ProCare stores acquired on April 29, 2006 were purchased out of bankruptcy. These stores suffered significant declines in recent years and are not yet performing at a level where they are profitable. The ProCare stores lost approximately $.01 per share in the first quarter of fiscal 2007, and their performance negatively impacted gross margin by .7% and store direct costs (included in operating, selling, general and administrative (“SG&A”) expenses) by .4% in the current quarter.

     Gross profit for the quarter ended June 24, 2006 was $41.0 million or 41.7% of sales as compared with $40.7 million or

43.0% of sales for the quarter ended June 25, 2005. In addition to the decline attributable to the ProCare stores, the decrease in gross profit for the quarter ended June 24, 2006, as a percentage of sales, is primarily due to a shift in mix to the lower margin tire and maintenance service categories, as well as the impact of fixed occupancy costs against decreased comparable store sales. Partially offsetting these factors was a decrease in cost of goods as a percent of sales due to the recognition of increased barter credits as compared to the prior year quarter. In the quarter ended June 24, 2006, the Company used the remaining barter credits it received in prior years related to some real estate transactions and, therefore, was able to recognize them as income. This decreased cost of sales by approximately .7%. Additionally, an increase in vendor rebates recorded as a reduction of cost of sales, as compared to the prior year quarter, also helped to partially offset the aforementioned margin declines.

     SG&A expenses for the quarter ended June 24, 2006 increased by $2.7 million to $29.6 million from the quarter ended June 25, 2005, and were 30.1% of sales as compared to 28.4% in the prior year quarter. In addition to the decline attributable to the ProCare stores, the increase in SG&A expense as a percentage of sales is due primarily to the impact of fixed costs, such as manager pay and store support costs, against decreased comparable store sales. Additionally, advertising costs as a percentage of sales increased as compared to the prior year quarter.

     Operating income for the quarter ended June 24, 2006 of approximately $11.4 million decreased 17.2% as compared to operating income for the quarter ended June 25, 2005, and decreased as a percentage of sales from 14.6% to 11.6% for the same periods.

     Net interest expense for the quarter ended June 24, 2006 decreased by approximately $.2 million as compared to the same period in the prior year, and decreased from .9% to .6% as a percentage of sales for the same periods. There was an increase in the weighted average interest rate for the current year quarter of approximately 170 basis points as compared to the prior year, due to increases in prime and LIBOR interest rates, as well as some new capital leases that carry higher rates than the Company’s bank facility. Partially offsetting this was a decrease in the weighted average debt outstanding for the quarter ended June 24, 2006 of approximately $6.2 million, and an increase in interest income of $.2 million.

     Other income increased $1.1 million as compared to the prior year, primarily related to the relocation of a Mr. Tire store. The owners of the property paid the Company $.9 million to relinquish the lease. The Company vacated the property prior to the end of the quarter and was able to relocate the store a short distance away in a good location at comparable rents.

     The effective tax rate for the quarter ended June 24, 2006 and June 25, 2005 was 33.8% and 38%, respectively, of pre-tax income. Offsetting the current quarter tax provision of 37.5% of pre-tax income was the recognition of a $.4 million income tax benefit primarily related to the favorable resolution of state income tax issues.

     Net income for the quarter ended June 24, 2006 of $7.6 million decreased 2.4% from net income for the quarter ended June 25, 2005. Earnings per share on a diluted basis for the quarter ended June 24, 2006 decreased 3.8%.

     Interim Period Reporting

     The data included in this report are unaudited and are subject to year-end adjustments; however, in the opinion of management, all known adjustments (which consist only of normal recurring adjustments) have been made to present fairly the Company’s operating results and financial position for the unaudited periods. The results for interim periods are not necessarily indicative of results to be expected for the fiscal year.

     Capital Resources

     The Company’s primary capital requirements in fiscal 2007 are the upgrading of facilities and systems in existing stores and the funding of its store expansion program, including potential acquisitions of existing store chains. For the three months ended June 24, 2006, the Company spent $4.6 million principally for equipment. Funds were provided primarily by cash flow from operations. Management believes that the Company has sufficient resources available (including cash and equivalents, net cash flow from operations and bank financing) to expand its business as currently planned for the next several years.

     Liquidity

     In March 2003, the Company renewed its credit facility agreement. The amended financing arrangement consisted of an $83.4 million Revolving Credit facility, and a non-amortizing credit loan totaling $26.6 million.

     In July 2005, the Company amended its existing credit facility terms by entering into a five-year, $125 million Revolving Credit Facility agreement (the “Credit Facility”) (of which approximately $36.1 million was outstanding at June 24, 2006) with five banks in the lending syndicate that provided the Company’s prior financing arrangement. Interest only is payable monthly throughout the Credit Facility’s term. The Credit Facility increases the Company’s current borrowing capacity by $15 million to $125 million and includes a provision allowing the Company to expand the amount of the overall facility to $160 million, subject to existing or new lender(s) commitments at that time. The terms of the Credit Facility immediately reduced the spread the Company pays on LIBOR-based borrowings by 50 basis points and permit the payment of cash dividends not to exceed 25% of the preceding year’s net income. Additionally, the amended Credit Facility is not secured by the Company’s real property, although the Company has entered into an agreement not to encumber its real property, with certain permissible exceptions. Other terms of the Credit Facility are generally consistent with the Company’s prior financing agreement.

     The Company has financed the land associated with its office/warehouse facility via a mortgage note payable of $.7 million due in a balloon payment in 2015. In addition, the Company has financed certain store properties and equipment with capital leases, which amount to $11.4 million and are due in installments through 2023.

     Certain of the Company’s long-term debt agreements require, among other things, the maintenance of specified interest and rent coverage ratios and amounts of net worth. They also contain restrictions on cash dividend payments. At June 24, 2006, the Company is in compliance with the applicable debt covenants. These agreements permit mortgages and specific lease financing arrangements with other parties with certain limitations.

     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 offsetting adjustment to interest expense. Currently the Company has no hedge agreements. The most recent hedge agreement expired in October 2005.

     In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155 (“SFAS 155”), “Accounting for Certain Hybrid Financial Instruments” (an amendment of FASB Statements No. 133 and 140). This Statement permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS No. 155 is effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006 (fiscal year 2008 for the Company). Additionally, the fair value may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under previous accounting guidance prior to the adoption of this Statement. The Company does not believe the adoption of SFAS 155 will have a material impact on the financial statements.

     In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Specifically, the pronouncement prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. The accounting provisions of FIN 48 will be effective for the Company beginning April 1, 2007. The Company is in the process of determining the effect, if any, the adoption of FIN 48 will have on its financial statements.

     For a description of the Company’s market risks see “Item 7a – Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended March 25, 2006. The Company’s exposure to market risks has not changed materially from the description in the Annual Report on Form 10-K.

     Disclosure controls and procedures

     The Company maintains disclosure controls and procedures that are designed to ensure that information required to be

disclosed in reports that the Company files or submits pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission’s (SEC) rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

     In conjunction with the close of each fiscal quarter and under the supervision of the Chief Executive Officer and Chief Financial Officer, the Company conducts an update, a review and an evaluation of the effectiveness of the Company’s disclosure controls and procedures. It is the conclusion of the Company’s Chief Executive Officer and Chief Financial Officer, based upon an evaluation completed as of the end of the most recent fiscal quarter reported on herein, that the Company’s disclosure controls and procedures were effective.

     There were no changes in the Company’s internal control over financial reporting during the quarter ended June 24, 2006 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

     There have been no changes to the risk factors described in the Company’s previously filed Annual Report on Form 10-K for the fiscal year ended March 25, 2006, except for the following:

     If we do not ultimately exercise our option to purchase the remaining 87 percent interest in R&S, our existing investment may be at risk.

     As described in Note 2, in November 2005, the Company acquired a 13 percent interest in R&S Parts & Service Inc. for $2.0 million, and loaned R&S $5.0 million. R&S has experienced financial difficulties. While our current intention is to go forward with the acquisition of the remaining 87 percent investment, if we should choose not to do so for any reason, there is risk that our $2.0 million investment in R&S could be impaired in the future should their financial difficulties continue.

          a. Exhibits

     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.