MONRO, INC. - Quarter Report: 2016 December (Form 10-Q)









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549



FORM 10-Q



(Mark One)

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended December 24, 2016.



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 MUFFLER BRAKE, INC.

(Exact name of registrant as specified in its charter)







585-647-6400

(Registrant’s telephone number, including area code)



(Former name, former address and former fiscal year, if changed since last report)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      ☒  Yes     ☐  No



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      ☒  Yes     ☐  No



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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).      ☐  Yes     ☒  No



As of January 20, 2017, 32,566,220 shares of the registrant's common stock, par value $ .01 per share, were outstanding.





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MONRO MUFFLER BRAKE, INC.



INDEX







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MONRO MUFFLER BRAKE, INC.

PART I - FINANCIAL INFORMATION



Item 1. Financial Statements



MONRO MUFFLER BRAKE, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)







The accompanying notes are an integral part of these financial statements.

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MONRO MUFFLER BRAKE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)







The accompanying notes are an integral part of these financial statements.

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MONRO MUFFLER BRAKE, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

(UNAUDITED)



(Dollars and shares in thousands)









The accompanying notes are an integral part of these financial statements.



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MONRO MUFFLER BRAKE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)







The accompanying notes are an integral part of these financial statements.

 



 

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Note 1 – Condensed Consolidated Financial Statements



The consolidated balance sheets as of December 24, 2016 and March 26, 2016, the consolidated statements of comprehensive income for the quarters and nine months ended December 24, 2016 and December 26, 2015,  the consolidated statement of changes in shareholders’ equity for the nine months ended December 24, 2016,  and the consolidated statements of cash flows for the nine months ended December 24, 2016 and December 26, 2015, include financial information for Monro Muffler Brake, Inc. and its wholly-owned subsidiaries, Monro Service Corporation and Car-X, LLC (collectively, “Monro”, “we”, “us”, “our”).  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 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 year ended March 26, 2016.



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:





Fiscal year 2017, ending March 25, 2017, is a 52 week year.



Revisions and Reclassifications



We have evaluated the principal vs. agent accounting guidance in assessing the appropriate presentation for certain transactions primarily related to our fiscal 2017 acquisitions.  We have determined agent accounting is appropriate for such transactions and therefore concluded that amounts previously presented on a gross basis should have been recorded on a net basis.  Accordingly, we have revised amounts previously recorded in connection with these transactions during the first and second quarters of fiscal 2017.  The revisions resulted in a reduction of sales and cost of sales by equal amounts of $1.6 million and $2.7 million for the first and second quarters of fiscal 2017, respectively.  These revisions were not material to any prior period financial statements and did not impact gross profit as previously reported.



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



Recent Accounting Pronouncements



In May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance for the reporting of revenue from contracts with customers.  This guidance provides guidelines a company will apply to determine the measurement of revenue and timing of when it is recognized.  Additional guidance has subsequently been issued to amend or clarify the reporting of revenue from contracts with customers.    The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017.  Early adoption is permitted, but not before the original effective date of December 15, 2016.  We are currently evaluating the potential effect of the adoption of this guidance on our Consolidated Financial Statements.



In August 2014, the FASB issued new accounting guidance for the disclosure of an entity’s ability to continue as a going concern.  This guidance establishes specific guidelines to an organization’s management on their responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern.  This guidance is effective for fiscal years ending after December 15, 2016, and interim periods thereafter.  This guidance is not expected to have an impact on our Consolidated Financial Statements.



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In February 2016, the FASB issued new accounting guidance related to leases.  This guidance establishes a right of use (“ROU”) model that requires a lessee to record a ROU asset and lease liability on the balance sheet for all leases with terms longer than twelve months.  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition.   The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years.  A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.  Early adoption is permitted.  We are currently evaluating the potential impact of the adoption of this guidance on our Consolidated Financial Statements.



In March 2016, the FASB issued new accounting guidance intended to simplify various aspects related to accounting for share-based payments and their presentation in the financial statements.  This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016.  Early adoption is permitted.  We are currently evaluating the potential impact of the adoption of this guidance on our Consolidated Financial Statements.



In August 2016, the FASB issued new accounting guidance related to cash flow classification.  This guidance clarifies and provides specific guidance on eight cash flow classification issues that are not addressed by current GAAP and thereby reduce the current diversity in practice.  This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017.  Early adoption is permitted.  We are currently evaluating the potential impact of the adoption of this guidance on our Consolidated Financial Statements.



In October 2016, the FASB issued new accounting guidance related to the income tax consequences of an intra-entity transfer of an asset other than inventory.  This guidance will require that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs instead of when the asset is sold.  This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017.  Early adoption is permitted. This guidance is not expected to have an impact on our Consolidated Financial Statements.



In November 2016, the FASB issued new accounting guidance to clarify how entities should present restricted cash and restricted cash equivalents in the statement of cash flows.  This guidance will require that entities show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows.  This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017.  Early adoption is permitted.  This guidance is not expected to have an impact on our Consolidated Financial Statements.



Other recent authoritative guidance issued by the FASB (including technical corrections to the Accounting Standards Codification) and the Securities and Exchange Commission did not, or are not expected to have a material effect on Monro’s Consolidated Financial Statements.



Guarantees



At the time we issue a guarantee, we recognize an initial liability for the fair value, or market value, of the obligation we assume under that guarantee.  Monro has guaranteed certain lease payments, primarily related to franchisees, amounting to $8.5 million.  This amount represents the maximum potential amount of future payments under the guarantees as of December 24, 2016.  The leases are guaranteed through April 2020.  In the event of default by the franchise owner, Monro generally retains the right to assume the lease of the related store, enabling Monro to re-franchise the location or to operate that location as a Company-operated store.  We have recorded a liability related to anticipated defaults under the foregoing leases of $.7 million and $.4 million as of December 24, 2016 and December 26, 2015, respectively.  

   

Note 2 – Acquisitions



Monro’s acquisitions are strategic moves in our plan to fill in and expand our presence in existing and contiguous markets, and leverage fixed operating costs such as distribution and advertising.



Subsequent Event



We have signed a definitive asset purchase agreement to complete the acquisition of 16 retail tire and automotive repair stores located in Illinois and Iowa from a Car-X franchisee.  These stores will continue to operate under the Car-X brand.  We have also signed definitive asset purchase agreements to complete the acquisition of three retail tire and automotive repair stores located within our existing markets through two additional acquisitions.  These transactions are expected to close during the fourth quarter of fiscal 2017.  The acquisitions are expected to be financed through our existing credit facility.



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Fiscal 2017



During the first nine months of fiscal 2017, we acquired the following businesses for an aggregate purchase price of $133.1 million.  The acquisitions were financed through our existing credit facility.  The results of operations for these acquisitions are included in our financial results from the respective acquisition dates.



























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 trade names.



We expensed all costs related to acquisitions in the nine months ended December 24, 2016.  The total costs related to completed acquisitions were $.3 million and $.7 million for the three and nine months ended December 24, 2016, respectively.  These costs are included in the Consolidated Statements of Comprehensive Income primarily under operating, selling, general and administrative expenses.



Sales for the fiscal 2017 acquired entities for the three and nine months ended December 24, 2016 totaled $43.0 million and $65.0 million, respectively, for the period from acquisition date through December 24, 2016.



Supplemental pro forma information for the current or prior reporting periods has not been presented due to the impracticability of obtaining detailed, accurate or reliable data for the periods the acquired entities were not owned by Monro.



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The preliminary fair values of identifiable assets acquired and liabilities assumed were based on preliminary valuations and estimates.  The excess of the net purchase price over net tangible and intangible assets acquired was recorded as goodwill.  The preliminary allocation of the aggregate purchase price as of December 24, 2016 was as follows:







The total consideration of $133.1 million is comprised of $133 million in cash, and a $.1 million payable to a seller.  The payable is being paid via equal annual payments through September 2019.



The following are the intangible assets acquired and their respective fair values and weighted average useful lives:







Fiscal 2016



During the first nine months of fiscal 2016, we acquired the following businesses for an aggregate purchase price of $50.8 million.  The acquisitions were financed through our existing credit facility.  The results of operations for these acquisitions are included in Monro’s financial results from the respective acquisition dates.









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The acquisitions resulted in goodwill related to, among other things, growth opportunities, synergies and economies of scale expected from combining these businesses with ours, and unidentifiable intangible assets.  All of the goodwill is expected to be deductible for tax purposes.  We have recorded finite-lived intangible assets at their estimated fair value related to franchise agreements, trade name, favorable leases and customer lists.



We expensed all costs related to acquisitions in the nine months ended December 26, 2015.  The total costs related to completed acquisitions were $.1 million and $.6 million for the three and nine months ended December 26, 2015, respectively.   These costs are included in the Consolidated Statements of Comprehensive Income primarily under operating, selling, general and administrative expenses.



Sales for the fiscal 2016 acquired entities, including franchise royalty income, for the three and nine months ended December 26, 2015 totaled $9.6 million and $15.6 million, respectively, for the period from acquisition date through December 26, 2015.



Supplemental pro forma information for the current or prior reporting periods has not been presented due to the impracticability of obtaining detailed, accurate or reliable data for the periods the acquired entities were not owned by Monro.  



We have recorded the identifiable assets acquired and liabilities assumed at their fair values as of their respective acquisition dates (including any measurement period adjustments), with the remainder recorded as goodwill as follows:







The total consideration of $50.8 million is comprised of $44.8 million in cash, and a $6.0 million payable to a seller.  The payable is being liquidated via equal monthly payments through August 2022.



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The following are the intangible assets acquired and their respective fair values and weighted average useful lives:



 



As a result of the purchase price allocations that have been updated from the fiscal year ended March 26, 2016, certain of the fair value amounts previously estimated were adjusted during the measurement period.  These measurement period adjustments related to updated valuation reports and appraisals received from our external valuation specialists, as well as revisions to internal estimates.  The changes in estimates include an increase in total current assets of $.1 million; an increase in property, plant and equipment of $2.6 million; an increase in intangible assets of $.4 million; an increase in long-term deferred income tax assets of $1.4 million; an increase in total current liabilities of $.6 million; and an increase in long-term capital leases and financing obligations of $5.8 million.  The measurement period adjustments resulted in an increase of goodwill of $1.9 million.



These measurement period adjustments were not material to the Consolidated Statements of Comprehensive Income for the three and nine months ended December 24, 2016, respectively.    



We continue to refine the valuation data and estimates primarily related to inventory, road hazard warranty, intangible assets, real estate and real property leases for fiscal 2016 acquisitions which closed subsequent to December 26, 2015, and for the fiscal 2017 acquisitions, and expect to complete 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 Share



Basic earnings per common share (“EPS”) amounts are computed by dividing income available to common shareholders, after deducting preferred stock dividends, by the average number of common shares outstanding.  Diluted EPS amounts assume the issuance of common stock for all potentially dilutive equivalent securities 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 242,000 and 241,000 stock options for the three and nine months ended fiscal December 24, 2016, respectively, and 164,000 and 168,000 stock options for the three and nine months ended December 26, 2015, respectively.  Such amounts were excluded as the exercise prices of these stock options were greater than the average market value of our Common Stock for those periods, resulting in an anti-dilutive effect on diluted EPS. 

  

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Note 4 – Income Taxes



In the normal course of business, we provide for uncertain tax positions and the related interest and penalties, and adjust our unrecognized tax benefits and accrued interest and penalties accordingly.  The total amounts of unrecognized tax benefits were $7.6 million and $6.9 million at December 24, 2016 and March 26, 2016, respectively, the majority of which, if recognized, would affect the effective tax rate.  As of December 24, 2016, we had approximately $.5 million of interest and penalties accrued related to unrecognized tax benefits.



We file U.S. federal income tax returns and income tax returns in various state jurisdictions.  Our fiscal 2014 through fiscal 2016 U.S. federal tax years and various state tax years remain subject to income tax examinations by tax authorities. 

  

Note 5 – Fair Value



Long-term debt had a carrying amount and a fair value of $184.6 million as of December 24, 2016, as compared to a carrying amount and a fair value of $103.3 million as of March 26, 2016.  The fair value of long-term debt was estimated based on discounted cash flow analyses using either quoted market prices for the same or similar issues, or the current interest rates offered to Monro for debt with similar maturities.



Note 6 – Supplemental Disclosure of Cash Flow Information



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



Nine Months Ended December 24, 2016:



In connection with the fiscal 2017 acquisitions and fiscal 2016 acquisition measurement period adjustments (see Note 2), liabilities were assumed as follows:



 



Nine Months Ended December 26, 2015:



In connection with the fiscal 2016 acquisitions (see Note 2), liabilities were assumed as follows:



 

 

 

Note 7 – Cash Dividend



In May 2016, our Board of Directors declared its intention to pay a regular quarterly cash dividend during fiscal year 2017 of $.17 per common share or common share equivalent beginning with the first quarter of fiscal year 2017.  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 8 – Subsequent Events



See Note 2 for a discussion of acquisitions subsequent to December 24, 2016.

 



 

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations



Forward-Looking Statements



The statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including (without limitation) statements made in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, may contain statements of future expectations and other forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.  When used in this Quarterly Report on Form 10-Q, the words “anticipates”, “believes”, “contemplates”, “expects”, “see”, “could”, “may”, “estimate”, “appear”, “intend”, “plans” and variations thereof and similar expressions, are intended to identify forward-looking statements.  Forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed.  These factors include, but are not necessarily limited to, product demand, dependence on and competition within the primary markets in which Monro’s stores are located, the need for and costs associated with store renovations and other capital expenditures, the effect of economic conditions, seasonality, the impact of weather conditions, the impact of competitive services and pricing, parts supply restraints or difficulties, our dependence on vendors, including foreign vendors, industry regulation, risks relating to leverage and debt service (including sensitivity to fluctuations in interest rates), continued availability of capital resources and financing, advances in automotive technology, disruption or unauthorized access to our computer systems, risks relating to protection of customer and employee personal data, 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 26, 2016.  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 2017 and fiscal 2016 in this Management’s Discussion and Analysis of Financial Condition and Results of Operations refer to our fiscal years ended March 25, 2017 and March 26, 2016, respectively.



Results of Operations



The following table sets forth income statement data of Monro expressed as a percentage of sales for the fiscal periods indicated:



 



Third Quarter and Nine Months Ended December 24, 2016 Compared to Third Quarter and Nine Months Ended December 26, 2015



Sales were $288.3 million for the quarter ended December 24, 2016 as compared with $238.9 million for the quarter ended December 26, 2015.  The sales increase of $49.3 million, or 20.6%, was due to an increase of $46.2 million related to new stores, of which $43.8 million came from the fiscal 2016 and fiscal 2017 acquisitions.  Additionally, comparable store sales increased by 2.3%.  Partially offsetting this was a decrease in sales from closed stores amounting to $1.9 million.  There were 90 selling days in the quarter ended December 24, 2016 and 89 selling days in the quarter ended December 26, 2015.  Adjusted for selling days, comparable store sales increased 1.1%.



Sales were $769.5 million for the nine months ended December 24, 2016 as compared with $714.6 million for the nine months ended December 26, 2015.  The sales increase of $54.9 million, or 7.7%, was due to an increase of $83.4 million related to new stores, of which $77.1 million came from the fiscal 2016 and fiscal 2017 acquisitions.  Largely offsetting this was a decrease in comparable store sales of 3.1%.  Additionally, there was a decrease in sales from closed stores amounting to $6.5 million.  There were 271 selling days in the nine months ended December 24, 2016 and 270 selling days in the nine months ended December 26, 2015.  Adjusted for selling days, comparable stores sales decreased 3.5%. 



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As described in Note 1 to the financial statements, we revised our accounting from a gross to net basis for certain fiscal 2017 transactions related to the delivery of tires to national account customers.   The impact of the adjustments, which lowered sales and cost of sales by equal amounts, was $3.1 million and $7.4 million for the quarter and nine months ended December 24, 2016, respectively.  These adjustments were not material to the comparable periods of the prior year or to previously disclosed comparable store sales percentages.



Barter sales of slower moving inventory totaled approximately $1.4 million and $2.0 million for the nine months ended December 24, 2016 and December 26, 2015, respectively.  There were no barter sales in the third quarter of fiscal 2017 or fiscal 2016.



At December 24, 2016, we had 1,098 Company-operated stores and 132 franchised locations as compared with 1,031 Company-operated stores and 138 franchised locations at December 26, 2015.  (At March 26, 2016, we had 1,029 Company-operated stores and 135 franchised locations.)  During the quarter ended December 24, 2016, we added nine Company-operated stores and closed eight stores, including two damaged locations expected to reopen in the fourth quarter.  Year-to-date, we have added 81 Company-operated stores (including one purchased from an existing franchisee) and closed 12 stores.  Additionally, two franchised locations have closed and we purchased one franchised location from an existing franchisee as a Company-operated store.



The increase in comparable store sales for the quarter ended December 24, 2016 resulted primarily from increased comparable store tire sales, which we believe is related to harsher winter weather conditions than in the quarter ended December 26, 2015.  However, due to a continued challenging consumer environment, we believe that consumers continue to defer service repairs, as evidenced by comparable store sales declines in other service categories.



Gross profit for the quarter ended December 24, 2016 was $105.6 million or 36.6% of sales as compared with $93.4 million or 39.1% of sales for the quarter ended December 26, 2015.  The decrease in gross profit for the quarter ended December 24, 2016, as a percentage of sales, was primarily due to the fiscal 2017 acquisitions, including the newly acquired tire wholesale business, which have a higher material cost of sales than the retail business. 



On a consolidated basis, labor costs for the quarter ended December 24, 2016 decreased slightly as a percentage of sales as compared to the prior year quarter due to the impact of positive comparable store sales.  Distribution and occupancy costs decreased moderately as a percentage of sales from the prior year as we gained leverage on these largely fixed costs with higher overall sales.



On a comparable store basis, gross margin for the quarter ended December 24, 2016 remained flat from the prior year quarter as lower product costs, particularly tires, offset a shift in mix from higher margin service categories to the lower margin tire category.



Gross profit for the nine months ended December 24, 2016 was $303.7 million or 39.5% of sales as compared with $293.8 million or 41.1% of sales for the nine months ended December 26, 2015.  The year-to-date decrease in gross profit as a percent of sales was largely due to the fiscal 2017 acquisitions, as described above for the quarter ended December 24, 2016.  Additionally, labor costs increased slightly and distribution and occupancy costs decreased slightly as a percentage of sales as compared to the prior year.



On a comparable store basis, gross margin for the nine months ended December 24, 2016 remained flat with the same period in the prior year at 41.2% of sales.



Operating expenses for the quarter ended December 24, 2016 were $72.5 million or 25.2% of sales as compared with $66.9 million or 28.0% of sales for the quarter ended December 26, 2015.  The increase of $5.6 million is primarily due to increased expenses for new stores, partially offset by reduced due diligence costs.  On a comparable store basis and excluding due diligence costs, total operating expense dollars in the quarter ended December 24, 2016 increased less than one percent from the prior year period.  We believe that this demonstrates the effectiveness of our strong cost control.



For the nine months ended December 24, 2016, operating expenses increased by $7.7 million to $207.4 million from the comparable period of the prior year and were 26.9% of sales as compared to 27.9% of sales for the nine months ended December 26, 2015.  The dollar increase primarily relates to increased expenses for new stores, partially offset by reduced due diligence costs.  On a comparable store basis and excluding the impact of the reduced due diligence costs, operating expenses for the nine months ended December 24, 2016 decreased by approximately $4.0 million as compared to the comparable period of the prior year. 



Operating income for the quarter ended December 24, 2016 of approximately $33.1 million increased by 25.1% as compared to operating income of approximately $26.4 million for the quarter ended December 26, 2015, and increased as a percentage of sales from 11.1% to 11.5% for the reasons described above.



Operating income for the nine months ended December 24, 2016 of approximately $96.3 million increased by 2.3% as compared to operating income of approximately $94.1 million for the nine months ended December 26, 2015, and decreased as a percentage of sales from 13.2% to 12.5% for the reasons described above.



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Net interest expense for the quarter ended December 24, 2016 increased by approximately $1.4 million as compared to the same period in the prior year, and increased from 1.6% to 1.8% as a percentage of sales for the same periods.  The weighted average debt outstanding for the quarter ended December 24, 2016 increased by approximately $99 million as compared to the quarter ended December 26, 2015.  This increase is due to an increase in debt outstanding under our existing credit facility agreement, as well as an increase in capital lease debt recorded in connection with the fiscal 2016 and fiscal 2017 acquisitions.  The weighted average interest rate for the quarter ended December 24, 2016 increased by approximately 20 basis points as compared to the third quarter of the prior year, largely due to an increase in capital lease debt, as well as an increase in the LIBOR and prime rate from the same period of the prior year.



Net interest expense for the nine months ended December 24, 2016 increased by approximately $3.2 million as compared to the same period in the prior year, and increased from 1.5% to 1.8% as a percentage of sales for the same periods.  Weighted average debt increased by approximately $72 million and the weighted average interest rate increased by approximately 20 basis points as compared to the same period of the prior year.



The effective income tax rate for the quarter ended December 24, 2016 and December 26, 2015 was 37.2% and 33.1%, respectively, of pre-tax income.  The effective income tax rate for the quarter ended December 26, 2015 was impacted primarily by a net tax benefit of $.7 million that was recognized as a discrete item during the period.  Excluding this net benefit, the effective income tax rate would have been approximately 36.3% for the quarter ended December 26, 2015.  The increase in the rate for the quarter ended December 24, 2016 was due to a variety of factors, none of which was individually significant.



The effective income tax rate for the nine months ended December 24, 2016 and December 26, 2015 was 37.1% and 36.7%, respectively, of pre-tax income.



Net income for the quarter ended December 24, 2016 of $17.6 million increased 15.3% from net income for the quarter ended December 26, 2015.  Earnings per share on a diluted basis for the quarter ended December 24, 2016 of $.53 increased 15.2%.



For the nine months ended December 24, 2016, net income of $51.9 million decreased 2.0% and diluted earnings per share of $1.56 decreased 1.9%.



Capital Resources and Liquidity



Capital Resources



Our primary capital requirements in fiscal 2017 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 24, 2016, we spent approximately $162 million on these items.  Capital requirements were met primarily by cash flow from operations and from our revolving credit facility.



In May 2016, our Board of Directors declared its intention to pay a regular quarterly cash dividend of $.17 per common share or common share equivalent beginning with the first quarter of fiscal 2017.  We paid dividends of $16.9 million during the nine months ended December 24, 2016.  However, the declaration of and any determination as to the payment of future dividends will be at the discretion of the Board of Directors and will depend on Monro’s financial condition, results of operations, capital requirements, compliance with charter and credit facility restrictions, and such other factors as the Board of Directors deems relevant.



Additionally, we have signed a definitive asset purchase agreement to acquire 16 retail tire and automotive repair stores from a Car-X franchisee.  We have also signed definitive asset purchase agreements to acquire three retail tire and automotive repair stores through two additional acquisitions.  These transactions are expected to close prior to the end of the fourth quarter of fiscal 2017.  The acquisitions are expected to be financed through our existing Credit Facility.



We plan to continue to seek suitable acquisition candidates.  We believe we have sufficient resources available (including cash flow from operations and bank financing) to expand our business as currently planned for the next twelve months.



Liquidity



In January 2016, we entered into a new five-year $600 million revolving credit facility agreement with nine banks (the “Credit Facility”).  The Credit Facility replaced our previous revolving credit facility, as amended, which would have expired in December 2017.  Interest only is payable monthly throughout the Credit Facility’s term.  The Credit Facility increases our current borrowing capacity from our prior financing agreement by $350 million to $600 million, and includes an accordion feature permitting us to request an increase in availability of up to an additional $100 million, an increase of $25 million from our prior revolving credit facility.  The expanded facility bears interest at 75 to 175 basis points over LIBOR.  The Credit Facility requires fees payable quarterly throughout the term between .15% and .35% of the amount of the average net availability under the Credit Facility during the preceding quarter.  There was $184.5 million outstanding under the Credit Facility at December 24, 2016.

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Within the Credit Facility, we have a sub-facility of $80 million available for the purpose of issuing standby letters of credit.  The line requires fees aggregating 87.5 to 187.5 basis points over LIBOR annually of the face amount of each standby letter of credit, payable quarterly in arrears.  There was $26.5 million in an outstanding letter of credit at December 24, 2016.



The net availability under the Credit Facility at December 24, 2016 was $389 million.



Specific terms of the Credit Facility permit the payment of cash dividends not to exceed 50% of the prior year’s net income, and permit mortgages and specific lease financing arrangements with other parties with certain limitations.  Other specific terms and the maintenance of specified ratios are generally consistent with our prior financing agreement.  Additionally, the Credit Facility is not secured by our real property, although we have agreed not to encumber our real property, with certain permissible exceptions.  We were in compliance with all debt covenants at December 24, 2016.



In addition, we have financed certain store properties and equipment with capital leases/financing obligations, which amounted to $209.9 million at December 24, 2016 and are due in installments through fiscal year 2045.  We also have a $.1 million payable to a seller at December 24, 2016, due in equal installments through September 2019.



Recent Accounting Pronouncements



See “Recent Accounting Pronouncements” in Note 1 of the Company’s Condensed Consolidated Financial Statements for a discussion of the impact of recently issued accounting standards on our Condensed Consolidated Financial Statements as of December 24, 2016 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.  There was no fixed rate debt outstanding at December 24, 2016.  Our cash flow exposure on floating rate debt would result in annual interest expense fluctuations of approximately $1.8 million based upon our debt position at December 24, 2016 and $1.0 million for the fiscal year ended March 26, 2016, given a 1% change in LIBOR.



Debt financing had a carrying amount and a fair value of $184.6 million as of December 24, 2016, as compared to a carrying amount and a fair value of $103.3 million as of March 26, 2016.



Item 4.  Controls and Procedures



Disclosure controls and procedures



We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that we file or submit to the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 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 and Chief 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 24, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

   

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MONRO MUFFLER BRAKE, INC.

PART II – OTHER INFORMATION



Item 1.  Legal Proceedings



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.



Item 6.  Exhibits



Exhibits



31.1 – Certification of John W. Van Heel 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



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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.





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EXHIBIT INDEX



 





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