MONRO, INC. - Quarter Report: 2021 September (Form 10-Q)

mnro-20210925x10q

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 September 25, 2021

¨ 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 (§232.405 of this chapter) 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, 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 October 22, 2021, 33,540,552 shares of the registrant's common stock, $0.01 par value per share, were outstanding.

Table of Contents

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets	3
Consolidated Statements of Income and Comprehensive Income	4
Consolidated Statements of Changes in Shareholders’ Equity	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3. Quantitative and Qualitative Disclosures About Market Risk	22
Item 4. Controls and Procedures	22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	23
Item 6. Exhibits	24
Signatures	25

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Monro, Inc. Q2 2022 Form 10-Q

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CONSOLIDATED FINANCIAL STATEMENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets



(thousands, except footnotes) (unaudited)	September 25, 2021		March 27, 2021
Assets
Current assets
Cash and equivalents	$	6,643	$	29,960
Accounts receivable		15,981		15,324
Federal and state income taxes receivable		2,213		10,844
Inventories		165,073		162,282
Other current assets		52,859		48,115
Total current assets		242,769		266,525
Property and equipment, net		315,112		327,063
Finance lease and financing obligation assets, net		274,072		275,360
Operating lease assets, net		214,215		203,329
Goodwill		757,846		689,524
Intangible assets, net		26,197		26,068
Other non-current assets		18,066		18,332
Long-term deferred income tax assets		5,088		5,613
Total assets	$	1,853,365	$	1,811,814
Liabilities and shareholders' equity
Current liabilities
Current portion of finance leases and financing obligations	$	40,285	$	37,803
Current portion of operating lease liabilities		33,298		30,903
Accounts payable		121,148		112,378
Accrued payroll, payroll taxes and other payroll benefits		22,424		20,842
Accrued insurance		49,220		49,681
Deferred revenue		12,933		11,956
Other current liabilities		31,597		27,053
Total current liabilities		310,905		290,616
Long-term debt		170,000		190,000
Long-term finance leases and financing obligations		365,645		366,330
Long-term operating lease liabilities		192,498		177,724
Other long-term liabilities		17,335		16,649
Long-term deferred income tax liabilities		22,913		19,783
Long-term income taxes payable		1,151		1,028
Total liabilities		1,080,447		1,062,130
Commitments and contingencies - Note 10
Shareholders' equity:
Class C Convertible Preferred stock		29		29
Common stock		399		398
Treasury stock		(108,729)		(108,729)
Additional paid-in capital		242,061		238,244
Accumulated other comprehensive loss		(4,825)		(4,619)
Retained earnings		643,983		624,361
Total shareholders' equity		772,918		749,684
Total liabilities and shareholders' equity	$	1,853,365	$	1,811,814

Class C Convertible Preferred stock Authorized 150,000 shares, $1.50 par value, $0.064 conversion value; 19,664 shares issued and outstanding

Common stock Authorized 65,000,000 shares, $0.01 par value; 39,900,298 shares issued as of September 25, 2021 and 39,848,093 shares issued as of March 27, 2021

Treasury stock 6,359,871 shares, at cost

See accompanying Notes to Consolidated Financial Statements.

Monro, Inc. Q2 2022 Form 10-Q

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CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Income and Comprehensive Income



	Three Months Ended				Six Months Ended
(thousands, except per share data) (unaudited)	September 25, 2021		September 26, 2020		September 25, 2021		September 26, 2020
Sales	$	347,699	$	288,587	$	689,517	$	535,646
Cost of sales, including distribution and occupancy costs		217,016		184,061		432,903		343,666
Gross profit		130,683		104,526		256,614		191,980
Operating, selling, general and administrative expenses		96,205		80,101		194,219		156,154
Operating income		34,478		24,425		62,395		35,826
Interest expense, net of interest income		6,276		7,322		13,217		14,707
Other income, net		(50)		(77)		(93)		(68)
Income before income taxes		28,252		17,180		49,271		21,187
Provision for income taxes		7,267		4,334		12,605		5,354
Net income	$	20,985	$	12,846	$	36,666	$	15,833
Other comprehensive loss
Changes in pension, net of tax		(103)		(170)		(206)		(340)
Other comprehensive loss		(103)		(170)		(206)		(340)
Comprehensive income	$	20,882	$	12,676	$	36,460	$	15,493
Earnings per share
Basic	$	0.62	$	0.38	$	1.09	$	0.47
Diluted	$	0.62	$	0.38	$	1.08	$	0.47
Weighted average common shares outstanding
Basic		33,523		33,297		33,510		33,291
Diluted		34,027		33,849		34,026		33,851

See accompanying Notes to Consolidated Financial Statements.

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Monro, Inc. Q2 2022 Form 10-Q

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CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Changes in Shareholders’ Equity



	Class C											Accumulated
	Convertible									Additional		Other
	Preferred Stock			Common Stock			Treasury Stock			Paid-In		Comprehensive		Retained		Total
(thousands) (unaudited)	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Loss		Earnings		Equity
Balance at June 27, 2020	22	$	33	39,646	$	396	6,360	$	(108,729)	$	230,683	$	(7,059)	$	615,396	$	730,720
Net income															12,846		12,846
Other comprehensive loss
Pension liability adjustment													(170)				(170)
Dividends declared
Preferred															(112)		(112)
Common															(7,328)		(7,328)
Dividend payable															(2)		(2)
Stock options and restricted stock				21		1					(199)						(198)
Stock-based compensation											611						611
Balance at September 26, 2020	22	$	33	39,667	$	397	6,360	$	(108,729)	$	231,095	$	(7,229)	$	620,800	$	736,367

Balance at June 26, 2021	20	$	29	39,865	$	399	6,360	$	(108,729)	$	239,738	$	(4,722)	$	631,876	$	758,591
Net income															20,985		20,985
Other comprehensive loss
Pension liability adjustment													(103)				(103)
Dividends declared
Preferred															(120)		(120)
Common															(8,719)		(8,719)
Dividend payable															(39)		(39)
Stock options and restricted stock				35		—					1,206						1,206
Stock-based compensation											1,117						1,117
Balance at September 25, 2021	20	$	29	39,900	$	399	6,360	$	(108,729)	$	242,061	$	(4,825)	$	643,983	$	772,918


Balance at March 28, 2020	22	$	33	39,645	$	396	6,360	$	(108,729)	$	229,774	$	(6,889)	$	619,855	$	734,440
Net income															15,833		15,833
Other comprehensive loss
Pension liability adjustment													(340)				(340)
Dividends declared
Preferred															(224)		(224)
Common															(14,651)		(14,651)
Dividend payable															(13)		(13)
Stock options and restricted stock				22		1					(194)						(193)
Stock-based compensation											1,515						1,515
Balance at September 26, 2020	22	$	33	39,667	$	397	6,360	$	(108,729)	$	231,095	$	(7,229)	$	620,800	$	736,367

Balance at March 27, 2021	20	$	29	39,848	$	398	6,360	$	(108,729)	$	238,244	$	(4,619)	$	624,361	$	749,684
Net income															36,666		36,666
Other comprehensive loss
Pension liability adjustment													(206)				(206)
Dividends declared
Preferred															(230)		(230)
Common															(16,761)		(16,761)
Dividend payable															(53)		(53)
Stock options and restricted stock				52		1					1,945						1,946
Stock-based compensation											1,872						1,872
Balance at September 25, 2021	20	$	29	39,900	$	399	6,360	$	(108,729)	$	242,061	$	(4,825)	$	643,983	$	772,918

We declared $0.26 and $0.22 dividends per common share or equivalent for the three months ended September 25, 2021 and September 26, 2020, respectively, and $0.50 and $0.44 dividends per common share or equivalent for the six months ended September 25, 2021 and September 26, 2020, respectively.

See accompanying Notes to Consolidated Financial Statements.

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Monro, Inc. Q2 2022 Form 10-Q

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CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Cash Flows



	Six Months Ended
(thousands) (unaudited)	September 25, 2021		September 26, 2020
Operating activities
Net income	$	36,666	$	15,833
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		40,257		37,877
Share-based compensation expense		1,872		1,515
(Gain) loss on disposal of assets		(281)		109
Impairment of long-lived assets		—		99
Deferred income tax expense		7,230		1,856
Change in operating assets and liabilities (excluding acquisitions)
Accounts receivable		(657)		488
Inventories		(1,680)		19,879
Other current assets		(4,470)		(5,095)
Other non-current assets		16,253		17,323
Accounts payable		8,770		28,111
Accrued expenses		5,712		12,055
Federal and state income taxes receivable		8,631		1,368
Other long-term liabilities		(16,108)		(5,792)
Long-term income taxes payable		123		69
Cash provided by operating activities		102,318		125,695
Investing activities
Capital expenditures		(10,045)		(23,644)
Acquisitions, net of cash acquired		(62,270)		(400)
Proceeds from the disposal of assets		1,022		68
Other		84		388
Cash used for investing activities		(71,209)		(23,588)
Financing activities
Proceeds from borrowings		97,066		—
Principal payments on long-term debt, finance leases and financing obligations		(136,486)		(350,391)
Exercise of stock options		1,985		10
Dividends paid		(16,991)		(14,875)
Deferred financing costs		—		(874)
Cash used for financing activities		(54,426)		(366,130)
Decrease in cash and equivalents		(23,317)		(264,023)
Cash and equivalents at beginning of period		29,960		345,476
Cash and equivalents at end of period	$	6,643	$	81,453
Supplemental information
Leased assets obtained in exchange for new finance lease liabilities	$	3,573	$	90,052
Leased assets obtained in exchange for new operating lease liabilities	$	3,977	$	17,857

See accompanying Notes to Consolidated Financial Statements.

Monro, Inc. Q2 2022 Form 10-Q

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INDEX

INDEX TO NOTES



Notes to Consolidated Financial Statements
Note 1 Description of Business and Basis of Presentation	8
Note 2 Impact of the COVID-19 Pandemic	8
Note 3 Acquisitions	9
Note 4 Earnings per Common Share	11
Note 5 Income Taxes	11
Note 6 Fair Value	11
Note 7 Cash Dividend	11
Note 8 Revenues	12
Note 9 Long-term Debt	12
Note 10 Commitments and Contingencies	13

Monro, Inc. Q2 2022 Form 10-Q

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CONSOLIDATED FINANCIAL STATEMENTS

NOTES

Note 1 – Description of Business and Basis of Presentation

Description of business

Monro, Inc. and its direct and indirect subsidiaries (together, “Monro”, the “Company”, “we”, “us”, or “our”), are engaged principally in providing automotive undercar repair and tire replacement sales and tire related services in the United States. Monro had 1,288 Company-operated retail stores located in 32 states and 92 franchised locations as of September 25, 2021.

A certain number of our retail locations also service commercial customers. Our locations that serve commercial customers generally operate consistently with our other retail locations, except that the sales mix for these locations includes a higher number of commercial tires.

As of September 25, 2021, Monro had seven wholesale locations and three retread facilities. The wholesale locations, in most cases, sell tires to customers for resale, although these tire sales do not include installation or other tire related services. The retread facilities re-manufacture tires through the replacement of tread on worn tires that are later sold to customers.

Monro’s operations are organized and managed as one single segment designed to offer to our customers replacement tires and tire related services, automotive undercar repair services as well as a broad range of routine maintenance services, primarily on passenger cars, light trucks and vans. We also provide other products and services for brakes; mufflers and exhaust systems; and steering, drive train, suspension and wheel alignment.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements. While these statements reflect all adjustments (consisting of items of a normal recurring nature) that are, in the opinion of management, necessary for a fair presentation of the results of the interim period, they do not include all of the information and footnotes required by United States generally accepted accounting principles (“U.S. GAAP”) for complete financial statement presentation. The consolidated financial statements should be read in conjunction with the financial statement disclosures in our Form 10-K for the fiscal year ended March 27, 2021.

We use the same accounting policies in preparing quarterly and annual financial statements.

Due to the seasonal nature of our business, quarterly operating results and cash flows are not necessarily indicative of the results that may be expected for other interim periods or the full year.

Fiscal year

We operate on a 52/53 week fiscal year ending on the last Saturday in March. Fiscal years 2022 and 2021 each contain 52 weeks. Unless specifically indicated otherwise, any references to “2022” or “fiscal 2022” and “2021” or “fiscal 2021” relate to the years ending March 26, 2022 and March 27, 2021, respectively.

Recent accounting pronouncements

In December 2019, the Financial Accounting Standards Board (“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 (“ASC”) 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. We adopted this guidance during the first quarter of 2022. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Other recent authoritative guidance issued by the FASB (including technical corrections to the ASC) and the SEC did not, or are not expected to have a material effect on Monro’s consolidated financial statements.

Note 2 – Impact of the COVID-19 Pandemic

The novel strain of coronavirus (“COVID-19”) pandemic has been a highly disruptive economic and societal event that has affected the Company’s business and has a significant impact on consumer shopping behavior. To date, our retail stores, wholesale locations and other facilities have remained open as an essential business. To serve our customers while also providing for the safety of employees, the Company has adapted certain aspects of the business. Throughout the pandemic, the Company has monitored the

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CONSOLIDATED FINANCIAL STATEMENTS

NOTES

rapidly evolving situation and will continue to adapt its operations to (i) address federal, state and local standards, (ii) meet the demand of customers, and (iii) implement standards that the Company believes to be in the best interests of the safety and well-being of its employees and customers.

The full impact of the COVID-19 pandemic will depend on factors such as the length of time of the pandemic; how federal, state and local governments are responding; the efficacy of the COVID-19 vaccines; the longer-term impact of the pandemic on the economy and consumer behavior; and the effect on our customers, employees, vendors and other partners.

Note 3 – Acquisitions

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

Subsequent Events

Subsequent to September 25, 2021, we signed definitive asset purchase agreements to acquire six and 11 retail tire and automotive repair stores located in California and Iowa, respectively. These transactions are expected to close during the third quarter of fiscal 2022 and are expected to be financed through our existing credit facility.

2022

On April 25, 2021, we acquired 30 retail tire and automotive repair stores located in California from Mountain View Tire & Service, Inc. for $62.1 million. These stores will operate under the Mountain View Tire & Service name. The acquisition was financed through our Credit Facility, as defined in Note 9. The results of operations for the acquisition are included in our financial results from the acquisition date.

The acquisition resulted in goodwill related to, among other things, growth opportunities, synergies and economies of scale expected from combining the business with ours, as well as unidentifiable intangible assets. All of the goodwill is expected to be deductible for tax purposes.

We expensed all costs related to the acquisition in the six months ended September 25, 2021. The total costs related to the completed acquisition were $0.1 million and $0.4 million for the three months and six months ended September 25, 2021, respectively. These costs are included in the Consolidated Statements of Income and Comprehensive Income primarily under operating, selling, general and administrative (“OSG&A”) expenses.

Sales related to the completed acquisition for the three months and six months ended September 25, 2021 totaled $11.4 million and $19.4 million, respectively, for the period from acquisition date through September 25, 2021.

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CONSOLIDATED FINANCIAL STATEMENTS

NOTES

We accounted for the acquisition as a business combination using the acquisition method of accounting in accordance with the FASB ASC Topic 805, “Business Combinations.” The assets acquired and liabilities assumed were recorded at their acquisition-date fair values and were consolidated with those of the Company as of the acquisition date. The acquisition-date fair values were assigned based on preliminary valuations and estimates, and the consideration transferred and net liabilities assumed were recorded as goodwill.



2022 Acquisition-date Fair Values Assigned
(thousands)
Inventory	$	946
Other current assets		217
Property and equipment		960
Finance lease and financing obligation assets		12,099
Operating lease assets		22,900
Intangible assets		2,211
Other non-current assets		63
Long-term deferred income tax assets		3,507
Total assets acquired		42,903
Current portion of finance leases and financing obligations		1,184
Current portion of operating lease liabilities		1,964
Deferred revenue		955
Other current liabilities		209
Long-term finance leases and financing obligations		17,480
Long-term operating lease liabilities		26,546
Other long-term liabilities		747
Total liabilities assumed		49,085
Total net identifiable liabilities assumed	$	(6,182)
Total consideration transferred	$	62,127
Less: total net identifiable liabilities assumed		(6,182)
Goodwill	$	68,309

The total consideration of $62.1 million is comprised of $61.0 million in cash, and a $1.1 million payable to the seller. The payable is due upon finalization of certain lease assignment terms for one store location.

We assigned $2.2 million to amortizable intangible assets, including customer list and trade name, with a weighted-average amortizable period of approximately eight years. We have assigned acquired right-of-use assets at the present value of remaining lease payments adjusted to reflect favorable or unfavorable market terms of the lease.

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 continue to refine the valuation data and estimates primarily related to inventory, warranty reserves, intangible assets and real property leases and certain liabilities for the 2022 acquisition and the 2021 acquisition that closed in December 2020 and expect to complete the valuations no later than the first anniversary date of the 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.

During the six months ended September 25, 2021, we paid $0.8 million to the seller of the 2021 acquisition as the lease assignment for one store location was finalized during the period.

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CONSOLIDATED FINANCIAL STATEMENTS

NOTES

Note 4 – Earnings per Common Share

Basic earnings per common share amounts are calculated by dividing income available to common shareholders, after deducting preferred stock dividends, by the weighted average number of shares of common stock outstanding. Diluted earnings per common share amounts are calculated by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding. Common stock equivalents represent potential common shares issuable from the conversion of preferred stock, as well as upon the assumed exercise of common stock options outstanding and from the vesting of restricted stock.



Earnings per Common Share	Three Months Ended				Six Months Ended
(thousands, except per share data)	September 25, 2021		September 26, 2020		September 25, 2021		September 26, 2020
Numerator for earnings per common share calculation:
Net income	$	20,985	$	12,846	$	36,666	$	15,833
Less: Preferred stock dividends		(120)		(112)		(230)		(224)
Income available to common shareholders	$	20,865	$	12,734	$	36,436	$	15,609
Denominator for earnings per common share calculation:
Weighted average common shares - basic		33,523		33,297		33,510		33,291
Effect of dilutive securities:
Preferred stock		460		510		460		510
Stock options		13		26		21		28
Restricted stock		31		16		35		22
Weighted average common shares - diluted		34,027		33,849		34,026		33,851

Basic earnings per common share	$	0.62	$	0.38	$	1.09	$	0.47
Diluted earnings per common share	$	0.62	$	0.38	$	1.08	$	0.47

Weighted average common share equivalents that have an anti-dilutive impact are excluded from the computation of diluted earnings per share.

Note 5 – Income Taxes

For the three months and six months ended September 25, 2021, our effective income tax rate was 25.7 percent and 25.6 percent, respectively, compared to 25.2 percent and 25.3 percent for the three months and six months ended September 26, 2020, respectively, as discrete items, none of which are individually significant, resulted in a larger tax rate benefit in the prior year periods.

Note 6 – Fair Value

Long-term debt had a carrying amount that approximates a fair value of $170.0 million as of September 25, 2021, as compared to a carrying amount and a fair value of $190.0 million as of March 27, 2021. The carrying value of our debt approximated its fair value due to the variable interest nature of the debt.

Note 7 – Cash Dividend

We paid dividends of $17.0 million during the six months ended September 25, 2021. Under our Credit Facility, we were permitted to declare, make or pay any dividend or distribution up to $38.5 million in the aggregate for the period from June 30, 2020 to June 30, 2021 if we were in compliance with the financial covenants and other restrictions in the Credit Facility, as amended. 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. For additional information regarding our Credit Facility, see Note 9.

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CONSOLIDATED FINANCIAL STATEMENTS

NOTES

Note 8 – Revenues

Automotive undercar repair, tire replacement sales and tire related 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 replacement sales and tire related 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.



Revenues	Three Months Ended				Six Months Ended
(thousands)	September 25, 2021		September 26, 2020		September 25, 2021		September 26, 2020
Tires ^(a)	$	178,080	$	154,505	$	354,309	$	291,775
Maintenance		85,971		70,486		170,430		128,106
Brakes		48,173		35,489		94,148		64,053
Steering		28,086		21,565		56,352		40,033
Exhaust		6,581		5,710		12,370		10,142
Other		808		832		1,908		1,537
Total	$	347,699	$	288,587	$	689,517	$	535,646

(a) Includes the sale of tire road hazard warranty agreements and tire delivery commissions.

Revenue from the sale of tire road hazard warranty agreements 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 deferred revenue balances at September 25, 2021 and March 27, 2021 were $18.5 million and $16.7 million, respectively, of which $12.9 million and $12.0 million, respectively, are reported in Deferred revenue and $5.6 million and $4.7 million, respectively, are reported in Other long-term liabilities in our Consolidated Balance Sheets.



Changes in Deferred Revenue
(thousands)
Balance at March 27, 2021	$	16,712
Deferral of revenue		9,539
Deferral of revenue from acquisitions		1,605
Recognition of revenue		(9,362)
Balance at September 25, 2021	$	18,494

As of September 25, 2021, we expect to recognize $7.8 million of deferred revenue related to road hazard warranty agreements in the remainder of fiscal 2022, $8.1 million of deferred revenue during our fiscal year ending March 25, 2023, and $2.6 million of 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.

Note 9 – Long-term Debt

In April 2019, we entered into a new five year $600 million revolving credit facility agreement with eight banks (the “Credit Facility”). 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 bore interest at 75 to 200 basis points over the London Interbank Offered Rate (“LIBOR”) (or replacement index) or at the prime rate, depending on the type of borrowing and the rates then in effect.

On June 11, 2020, we entered into a First Amendment to the Credit Facility (the “First Amendment”), which, among other things, amended the terms of certain of the financial and restrictive covenants in the credit agreement through the first quarter of fiscal 2022 to provide us with additional flexibility to operate our business. The First Amendment amended the interest rate charged on

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CONSOLIDATED FINANCIAL STATEMENTS

NOTES

borrowings to be based on the greater of adjusted one-month LIBOR or 0.75 percent. For the period from June 30, 2020 to June 30, 2021, the minimum interest rate spread charged on borrowings was 225 basis points over LIBOR. Additionally, during the same period, we were permitted to declare, make or pay any dividend or distribution up to $38.5 million in the aggregate and the acquisition of stores or other businesses up to $100 million in the aggregate were permitted if we were in compliance with the financial covenants and other restrictions in the First Amendment and Credit Facility. As of July 1, 2021, the ability of our Board of Directors to declare, make or pay any dividend or distribution and our ability to acquire stores or other businesses is no longer restricted by the terms of the Credit Facility, as amended by the First Amendment. The Credit Facility requires fees payable quarterly throughout the term between 0.125 percent and 0.35 percent of the amount of the average net availability under the Credit Facility during the preceding quarter.

Subsequent to September 25, 2021, we entered into a Second Amendment to the Credit Facility (the “Second Amendment”). The Second Amendment, which among other things, amends certain of the financial terms in the Credit Agreement, as amended by the First Amendment. Specifically, the First Amendment had amended the interest rate charged on borrowings to be based on the greater of adjusted one-month LIBOR or 0.75 percent. The Second Amendment amends the interest rate to be based on the greater of adjusted one-month LIBOR or 0.00 percent. In addition, the Second Amendment updates certain provisions regarding a successor interest rate to LIBOR. Except as amended by the First Amendment and Second Amendment, the remaining terms of the credit agreement remain in full force and effect.

Within the Credit Facility, we have a sub-facility of $80 million available for the purpose of issuing standby letters of credit. The sub-facility 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 $29.6 million outstanding letter of credit at September 25, 2021.

There was $170.0 million outstanding and $400.4 million available under the Credit Facility at September 25, 2021.

We were in compliance with all debt covenants at September 25, 2021.

Note 10 – Commitments and Contingencies

Commitments



Commitments Due by Period				Within		2 to		4 to		After
(thousands)		Total		1 Year		3 Years		5 Years		5 Years
Principal payments on long-term debt	$	170,000			$	170,000
Finance lease commitments/financing obligations ^(a)		513,723	$	57,673		112,755	$	101,480	$	241,815
Operating lease commitments ^(a)		260,773		39,565		71,506		57,389		92,313
Accrued rent		1,005		883		56		26		40
Other liabilities		733		733		—		—		—
Total	$	946,234	$	98,854	$	354,317	$	158,895	$	334,168

(a)Finance and operating lease commitments represent future undiscounted lease payments and include $104.3 million and $66.5 million, respectively, related to options to extend lease terms that are reasonably certain of being exercised.

Contingencies

We are currently a party to various claims and legal proceedings incidental to the conduct of our business. If management believes that a loss arising from any of these matters is probable and can reasonably be estimated, we will record the amount of the loss, or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Litigation is subject to inherent uncertainties, and unfavorable rulings could occur and may include monetary damages. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the financial position and results of operations of the period in which any such ruling occurs, or in future periods.

As previously disclosed by the Company, an action was filed against us on June 12, 2020 in the U.S. District Court for the Western District of Pennsylvania by Mark Cerini. The plaintiff, who is a former service store manager, sought certification to represent similarly situated store managers in a nationwide collective action for unpaid overtime wages, damages and attorneys’ fees. Plaintiff alleged violations of the Fair Labor Standards Act and various state laws relating to, among other things, overtime and unpaid wages. The parties have entered into a settlement agreement to resolve this matter that has been approved by the court. The Company included the settlement amount of $3.9 million in OSG&A expenses in the Company’s Consolidated Statement of Income and Comprehensive Income during the first quarter of fiscal 2022. The Company does not expect to incur additional expenses with respect to the settlement after the third quarter of fiscal 2022.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

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

Financial Summary

Second quarter 2022 included the following notable items:

Diluted earnings per common share (“EPS”) were $0.62.

Adjusted diluted EPS, a non-GAAP measure, were $0.62.

Sales increased 20.5 percent, driven by an increase in comparable store sales.

Comparable store sales increased 14.8 percent, driven primarily by an increase in guest traffic and average ticket amount.

Operating income of $34.5 million was 41.2 percent higher than the prior year comparable period.

Net income was $21.0 million.

Adjusted net income, a non-GAAP measure, was $21.0 million.


Earnings Per Common Share	Three Months Ended						Six Months Ended
	September 25, 2021		September 26, 2020		Change		September 25, 2021		September 26, 2020		Change
Diluted EPS	$	0.62	$	0.38	63.2	%	$	1.08	$	0.47	129.8	%
Adjustments		—		0.02				0.09		0.08
Adjusted diluted EPS	$	0.62	$	0.39	59.0	%	$	1.17	$	0.54	116.7	%

Note: Amounts may not foot due to rounding.

Adjusted diluted EPS and adjusted net income, each of which are a measure not derived in accordance with U.S. GAAP, exclude the impact of certain items. Management believes that adjusted diluted EPS and adjusted net income are useful in providing period-to-period comparisons of the results of our operations by excluding certain non-recurring items and items related to store closings as well as Monro.Forward or acquisition initiatives. Reconciliations of these non-GAAP financial measures to GAAP measures are provided beginning on page 18 under “Non-GAAP Financial Measures.”

We define comparable store sales, or same store sales, as sales for stores that have been opened or owned at least one full fiscal year. We believe this period is generally required for new store sales levels to begin to normalize. Management uses comparable store sales to assess the operating performance of the Company’s stores and believes the metric is useful to investors because our overall results are dependent upon the results of our stores. Comparable sales measures vary across the retail industry. Therefore, our comparable store sales calculation is not necessarily comparable to similarly titled measures reported by other companies.

Impact of COVID-19

The full impact of the COVID-19 pandemic will depend on factors such as the length of time of the pandemic; how federal, state and local governments are responding; the efficacy and distribution of the COVID-19 vaccines; the longer-term impact of the pandemic on the economy and consumer behavior; and the effect on our customers, referred to as “guests” employees, referred to as “teammates” vendors and other partners.

During this time, we are focused on protecting the health and safety of our teammates and guests, while seeking to continue operating our business responsibly.

While we expect many teammates to return to our offices later this fiscal year, the timing of such a return could be affected by resurgences of COVID-19 in areas where our offices are located. When we return to our offices, we expect many teammates to continue to work in a hybrid of in-person and remote work. These changes to our operations going forward may present additional challenges and increased costs to ensure our offices are safe and functional for hybrid work that enable effective collaboration of both in-person and remote teammates.

During this period when vaccine distribution has increased and more businesses are operating at levels similar to pre-pandemic capacity, we have experienced labor inefficiencies and a shortage of teammates in some of our store locations. If we are unable to fill enough teammate positions, we may be unable to earn as much revenue as if we were fully staffed. We may need to pay more for labor if our teammates continue working overtime in order to meet the surge in demand, which would decrease our gross profit and net income. Although we are experiencing unprecedented challenges during this pandemic, we continue our focus to remain as efficient as possible while still offering safe and high quality service to our guests.

Given the level of volatility and uncertainty surrounding the future impact of COVID-19, we cannot estimate with certainty the long-term impacts of the COVID-19 pandemic on our business, financial condition, results of operations, and cash flows.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Analysis of Results of Operations



Summary of Operating Income	Three Months Ended						Six Months Ended
(thousands)	September 25, 2021		September 26, 2020		Change		September 25, 2021		September 26, 2020		Change
Sales	$	347,699	$	288,587	20.5	%	$	689,517	$	535,646	28.7	%
Cost of sales, including distribution and ‎occupancy costs		217,016		184,061	17.9			432,903		343,666	26.0
Gross profit		130,683		104,526	25.0			256,614		191,980	33.7
Operating, selling, general and administrative expenses		96,205		80,101	20.1			194,219		156,154	24.4
Operating income	$	34,478	$	24,425	41.2	%	$	62,395	$	35,826	74.2	%

Sales

Sales include automotive undercar repair, tire replacement and tire related service sales, net of discounts, returns, etc., and revenue from the sale of warranty agreements and commissions earned from the delivery of tires. See Note 8 to the Company’s consolidated financial statements for further information. We use comparable store sales to evaluate the performance of our existing stores by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. There were 91 selling days in the three months ended September 25, 2021 and in the three months ended September 26, 2020, and 181 selling days in the six months ended September 25, 2021 and in the six months ended September 26, 2020.

Sales growth – from both comparable store sales and new stores – represents an important driver of our long-term profitability. We expect that comparable store sales growth will significantly impact our total sales growth. We believe that our ability to successfully differentiate our guests’ experience through a careful combination of merchandise assortment, price, convenience, guest experience, and other factors will, over the long-term, drive both increasing guest traffic and the average ticket amount.



Sales	Three Months Ended					Six Months Ended
(thousands)	September 25, 2021			September 26, 2020		September 25, 2021			September 26, 2020
Sales	$	347,699		$	288,587	$	689,517		$	535,646
Dollar change compared to prior year	$	59,112				$	153,871
Percentage change compared to prior year		20.5	%				28.7	%

The sales increase was primarily due to an increase in comparable store sales from an increase in guest traffic and average ticket amount as the comparable prior year period was impacted by lower guest traffic affected by the COVID-19 pandemic. Additionally, there was an increase in sales from new stores. Partially offsetting these increases was a decrease in sales from closed stores during the six months ended September 25, 2021. The following table shows the primary drivers of the change in sales for each of the three months and six months ended September 25, 2021, as compared to the same period ended September 26, 2020.



Sales Percentage Change	Three Months Ended			Six Months Ended
		September 25, 2021			September 25, 2021
Sales change		20.5	%		28.7	%
Primary drivers of change in sales
Comparable stores sales		14.8	%		23.8	%
New store sales ^(a)		6.2	%		6.0	%
Closed store sales		—			(1.0)	%

(a)Sales from 2022 and 2021 acquisitions contributed 6.0 percent and 5.8 percent of the sales change for the three months and the six months ended September 25, 2021, respectively.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

As the COVID-19 pandemic has evolved, demand for automotive undercar repair services as well as replacement tires and tire related services continues to be volatile. During the three months and six months ended September 25, 2021, comparable store sales growth increased across our product categories with higher growth in our higher-margin brakes, alignment and maintenance service categories, as well as our tire category, each of which experienced declines during the three months and six months ended September 26, 2020.


Comparable Store Product Category Sales Change	Three Months Ended				Six Months Ended
	September 25, 2021		September 26, 2020		September 25, 2021		September 26, 2020
Tires	10	%	(3)	%	17	%	(9)	%
Maintenance	15	%	(19)	%	27	%	(27)	%
Brakes	33	%	(24)	%	44	%	(33)	%
Alignment	31	%	(16)	%	42	%	(24)	%
Front end/shocks	16	%	(19)	%	27	%	(28)	%
Exhaust	9	%	(16)	%	20	%	(26)	%



Sales by Product Category	Three Months Ended				Six Months Ended
	September 25, 2021		September 26, 2020		September 25, 2021		September 26, 2020
Tires	51	%	54	%	52	%	55	%
Maintenance	25		25		25		24
Brakes	14		12		14		12
Steering ^(a)	8		7		8		8
Exhaust	2		2		1		1
Total	100	%	100	%	100	%	100	%

(a)Steering product category includes front end/shocks and alignment product category sales.



Change in Number of Company-Operated Retail Stores	Three Months Ended		Six Months Ended
	September 25, 2021	September 26, 2020	September 25, 2021	September 26, 2020
Beginning store count	1,291	1,247	1,263	1,283
Opened ^(a)	—	1	30	1
Closed	(3)	(6)	(5)	(42)
Ending store count	1,288	1,242	1,288	1,242

(a)The stores opened during the six months ended September 25, 2021 related to stores acquired from the 2022 acquisition.

Cost of Sales and Gross Profit


Gross Profit	Three Months Ended						Six Months Ended
(thousands)	September 25, 2021			September 26, 2020			September 25, 2021			September 26, 2020
Gross profit	$	130,683		$	104,526		$	256,614		$	191,980
Percentage of sales		37.6	%		36.2	%		37.2	%		35.8	%
Dollar change compared to prior year	$	26,157					$	64,634
Percentage change compared to prior year		25.0	%					33.7	%

The increase in gross profit, as a percentage of sales, of 140 basis points (“bps”) for the three months and six months ended September 25, 2021, as compared to the prior year comparable period, was primarily due to a decrease in material costs, as a percentage of sales, as a result of a shift in sales mix from tires to our higher margin service categories. Additionally, through the use of our tire category and management pricing tool, we expanded our gross profit per tire from the prior year comparable period. The increase in gross profit, as a percentage of sales, was also partially due to a decrease in distribution and occupancy costs, as a percentage of sales, as we gained leverage on these largely fixed costs with higher overall comparable store sales. Partially offsetting these decreases was an increase in technician labor costs, which increased as a percentage of sales, as staffing levels continued to normalize during the three months and six months ended September 25, 2021 as compared to minimum staffing levels in the comparable prior year period which were adjusted to lower demand due to the COVID-19 pandemic. Also, more technicians working overtime, in order to meet the surge in demand, during the three months and six months ended September 25, 2021 resulted in an increase in technician labor costs, as a percentage of sales, from the prior year comparable period.

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MANAGEMENT’S DISCUSSION AND ANALYSIS



Gross Profit as a Percentage of Sales Change	Three Months Ended			Six Months Ended
		September 25, 2021			September 25, 2021
Gross profit change		140	bps		140	bps
Primary drivers of change in gross profit as a percentage of sales
Material costs		240	bps		200	bps
Distribution and occupancy costs		120	bps		180	bps
Technician labor costs		(220)	bps		(250)	bps

OSG&A Expenses



OSG&A Expenses	Three Months Ended						Six Months Ended
(thousands)	September 25, 2021			September 26, 2020			September 25, 2021			September 26, 2020
OSG&A Expenses	$	96,205		$	80,101		$	194,219		$	156,154
Percentage of sales		27.7	%		27.8	%		28.2	%		29.2	%
Dollar change compared to prior year	$	16,104					$	38,065
Percentage change compared to prior year		20.1	%					24.4	%

The increase of $16.1 million and $38.1 million in OSG&A expenses for the three months and six months ended September 25, 2021, respectively, as compared to the prior year comparable period is primarily due to increased expenses from comparable stores, mainly store management compensation to match demand and advertising expense. However, we gained leverage with higher overall comparable store sales, which resulted in the decrease in OSG&A expenses, as a percentage of sales, from the prior year comparable period. The increase in OSG&A expenses for the three months and six months ended September 25, 2021 was also partially due to increased expenses from new stores, and for the six months ended September 25, 2021, an increase in litigation settlement costs (related to the Cerini matter described in Note 10) that were included in the first quarter of fiscal 2022. Partially offsetting these increases were lower expenses for the three months and six months ended September 25, 2021 from seven stores closed compared to the prior year comparable period.



OSG&A Expenses Change	Three Months Ended			Six Months Ended
(thousands)		September 25, 2021			September 25, 2021
OSG&A expenses change		$	16,104		$	38,065
Drivers of change in OSG&A expenses
Increase from comparable stores		$	12,323		$	28,442
Increase from new stores		$	4,698		$	7,882
Increase in litigation settlement costs		$	—		$	3,920
Decrease from closed stores		$	(917)		$	(2,179)

Other Performance Factors

Net Interest Expense

Net interest expense of $6.3 million for the three months ended September 25, 2021 decreased $1.0 million as compared to the prior year period, and decreased as a percentage of sales from 2.5 percent to 1.8 percent. Weighted average debt outstanding for the three months ended September 25, 2021 decreased by approximately $92 million as compared to the three months ended September 26, 2020. This decrease is related to a decrease in debt outstanding under our revolving credit facility (the “Credit Facility”). Partially offsetting this decrease was an increase in finance lease debt recorded in connection with the 2022 and 2021 acquisitions and greenfield expansion, along with renewed leases. The weighted average interest rate for the three months ended September 25, 2021 remained relatively flat as compared to the prior year period.

Net interest expense for the six months ended September 25, 2021 decreased $1.5 million as compared to the same period in the prior year, and decreased from 2.7 percent to 1.9 percent as a percentage of sales for the same periods. Weighted average debt outstanding decreased by approximately $193 million and the weighted average interest rate increased by approximately 70 basis points as compared to the same period of the prior year.

Provision for Income Taxes

Our effective income tax rate for the three months and six months ended September 25, 2021, was 25.7 percent and 25.6 percent, respectively, compared with 25.2 percent and 25.3 percent, respectively, in the comparable prior year periods.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Non-GAAP Financial Measures

In addition to reporting net income and diluted EPS, which are GAAP measures, this Form 10-Q includes adjusted net income and adjusted diluted EPS, which are non-GAAP financial measures. We have included reconciliations to adjusted net income and adjusted diluted EPS from our most directly comparable GAAP measures, net income and diluted EPS, below. Management views these non-GAAP financial measures as indicators to better assess comparability between periods because management believes these non-GAAP financial measures reflect our core business operations while excluding certain non-recurring items and items related to store closings as well as Monro.Forward or acquisition initiatives.

These non-GAAP financial measures are not intended to represent, and should not be considered more meaningful than, or as an alternative to, their most directly comparable GAAP measures. These non-GAAP financial measures may be different from similarly titled non-GAAP financial measures used by other companies.

Adjusted net income is summarized as follows:


Reconciliation of Adjusted Net Income	Three Months Ended				Six Months Ended
(thousands)	September 25, 2021		September 26, 2020		September 25, 2021		September 26, 2020
Net income	$	20,985	$	12,846	$	36,666	$	15,833
Store impairment charge		—		99		—		99
Store closing costs		(158)		(17)		(430)		2,510
Monro.Forward initiative costs		48		272		151		454
Acquisition due diligence and integration costs		110		22		420		39
Management transition costs		—		257		59		257
Litigation settlement costs		—		—		3,920		—
Provision for income taxes on adjustments		—		(147)		(997)		(787)
Adjusted net income	$	20,985	$	13,332	$	39,789	$	18,405

Adjusted diluted EPS is summarized as follows:


Reconciliation of Adjusted Diluted EPS	Three Months Ended				Six Months Ended
	September 25, 2021		September 26, 2020		September 25, 2021		September 26, 2020
Diluted EPS	$	0.62	$	0.38	$	1.08	$	0.47
Store impairment charge ^(a)		—		0.00		—		0.00
Store closing costs ^(a)		(0.00)		(0.00)		(0.01)		0.06
Monro.Forward initiative costs^(a)		0.00		0.01		0.00		0.01
Acquisition due diligence and integration costs ^(a)		0.00		0.00		0.01		0.00
Management transition costs^(a)		—		0.01		0.00		0.01
Litigation settlement costs		—		—		0.09		—
Adjusted diluted EPS	$	0.62	$	0.39	$	1.17	$	0.54

(a)Amounts, in the periods presented, may be too minor in amount, net of the impact from income taxes, to have an impact on the calculation of adjusted diluted EPS.

Note: The calculation of the impact of non-GAAP adjustments on diluted EPS is performed on each line independently. The table may not add down by +/- $0.01 due to rounding.

The adjustments to diluted EPS reflect effective tax rates of 24.3 percent and 23.2 percent for the three months ended September 25, 2021 and September 26, 2020, respectively, and 24.2 percent and 23.4 percent for the six months ended September 25, 2021 and September 26, 2020, respectively. See adjustments from the Reconciliation of Adjusted Net Income table above for pre-tax amounts.

Analysis of Financial Condition

Liquidity and Capital Resources

Capital Allocation

We expect to continue to generate positive operating cash flow as we have done in the last three fiscal years. The cash we generate from our operations allows us to support business operations and Monro.Forward initiatives as well as invest in attractive acquisition opportunities intended to drive long-term sustainable growth, while paying down debt and returning cash to our shareholders through our dividend program.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

In addition, because we believe a large portion of our future expenditures will be to fund our growth, through acquisition of retail stores and/or opening greenfield stores, we continually evaluate our cash needs and may decide it is best to fund the growth of our business through borrowings on our Credit Facility. Conversely, we may also from time to time determine that it is in our best interests to voluntarily repay certain indebtedness early.

Accordingly, we believe that our current sources of funds will provide us with adequate liquidity during the 12-month period following September 25, 2021, as well as in the long-term.

See the sections below for more details regarding material requirements for cash in our business and our sources of liquidity to meet such needs.

Material Cash Requirements

We currently expect our capital expenditures to support our projects, including upgrading our facilities and systems as well as funding our Monro.Forward initiatives, to be $30 million to $45 million in the aggregate in 2022. Additionally, we have contractual finance lease and operating lease commitments with landlords through October 2040 for $603.7 million in lease payments, of which $96.8 million is due within one year. For details regarding these lease commitments, see Note 10 to the Company’s consolidated financial statements.

As of September 25, 2021, we had $170.0 million outstanding under the Credit Facility, none of which is due in the succeeding 12 months. For details regarding our indebtedness that is due, see Note 10 to the Company’s consolidated financial statements.

We paid cash dividends totaling $17.0 million ($0.50 per share) during the six months ended September 25, 2021. For details regarding our cash dividend, see Note 7 to the Company’s consolidated financial statements.

We have signed definitive asset purchase agreements to acquire six and 11 retail tire and automotive repair stores located in California and Iowa, respectively. These transactions are expected to close during the third quarter of fiscal 2022 and are expected to be financed through our existing credit facility.

Sources and Conditions of Liquidity

Our sources to fund our material cash requirements are predominantly cash from operations, cash and equivalents on hand, and availability under our Credit Facility.

As of September 25, 2021, we had $6.6 million of cash and equivalents. In addition, we had $400.4 million available under the Credit Facility as of September 25, 2021.

Summary of Cash Flows

The following table presents a summary of our cash flows from operating, investing and financing activities.


Summary of Cash Flows	Six Months Ended
(thousands)	September 25, 2021		September 26, 2020
Cash provided by operating activities	$	102,318	$	125,695
Cash used for investing activities		(71,209)		(23,588)
Cash used for financing activities		(54,426)		(366,130)
Decrease in cash and equivalents		(23,317)		(264,023)
Cash and equivalents at beginning of period		29,960		345,476
Cash and equivalents at end of period	$	6,643	$	81,453

Cash provided by operating activities

For the six months ended September 25, 2021 cash provided by operating activities was $102.3 million, which consisted of net income of $36.7 million, adjusted by non-cash charges of $49.1 million and by a change in operating assets and liabilities of $16.5 million. The non-cash charges were largely driven by $40.3 million of depreciation and amortization. The change in operating assets and liabilities was primarily due to accounts payable and accrued liabilities, net of vendor rebate receivables, being a source of cash of $10.4 million driven by timing of payments, as well as our federal and state income taxes receivable being a source of cash of $8.6 million due largely to an income tax refund that was received. These sources of cash were partially offset by our inventory balance being a use of cash of $1.7 million due to increased inventory purchases to meet higher demand.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

For the six months ended September 26, 2020 cash provided by operating activities was $125.7 million, which consisted of net income of $15.8 million, adjusted by non-cash charges of $41.5 million and by a change in operating assets and liabilities of $68.4 million. The non-cash charges were largely driven by $37.9 million of depreciation and amortization. The change in operating assets and liabilities was primarily due to accounts payable and accrued liabilities, net of vendor rebate receivables, being a source of cash of $46.0 million driven by timing of payments, as well as our inventory balance being a source of cash of $19.9 million due to decreased inventory purchases to adjust to lower demand.

Cash used for investing activities

For the six months ended September 25, 2021 cash used for investing activities was $71.2 million. This was primarily due to cash used for acquisitions and capital expenditures, including property and equipment, of $62.3 million and $10.0 million, respectively. Included in the $62.3 million used for acquisitions was $0.8 million paid to the seller of the 2021 acquisition as the lease assignment for one store location was finalized during the period.

For the six months ended September 26, 2020 cash used for investing activities was $23.6 million. This was primarily due to cash used for capital expenditures, including property and equipment.

Cash used for financing activities

For the six months ended September 25, 2021 cash used for financing activities was $54.4 million which was primarily due to payment of the Credit Facility, net of amounts borrowed during the period, and finance lease principal of $20.0 million and $19.4 million, respectively, as well as payment of dividends of $17.0 million.

For the six months ended September 26, 2020 cash used for financing activities was $366.1 million which was primarily due to payment of amounts previously borrowed under our Credit Facility and finance lease principal of $335.1 million and $15.3 million, respectively, as well as payment of dividends of $14.9 million.

Critical Accounting Policies and Estimates

The consolidated financial statements are prepared in accordance with GAAP. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience, as appropriate, and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows may be affected.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the economy, our business operations and financial markets. The estimates used for, but not limited to, determining fair value of long-lived assets, goodwill, self-insurance reserves and our ability to realize the tax benefits associated with deferred tax assets could be impacted. We have assessed the impact and are not aware of any specific events or circumstances that required an update to our estimates and assumptions or materially affected the carrying value of our assets or liabilities as of the date of issuance of this report. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

For a description of our critical accounting policies and estimates, refer to Part II, Item 7., “Critical Accounting Policies” of our Form 10-K for the fiscal year ended March 27, 2021. There have been no material changes to our critical accounting policies and estimates since our Form 10-K for the year ended March 27, 2021.

Recent Accounting Pronouncements

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 September 25, 2021 and the expected impact on the consolidated financial statements for future periods.

Cautionary Note Regarding Forward-Looking Statements

This report contains “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they address future events, developments and results and do not relate

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MANAGEMENT’S DISCUSSION AND ANALYSIS

strictly to historical facts. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements include, without limitation, statements preceded by, followed by or including words such as “anticipate,” “appear,” “believe,” “contemplate,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “see,” “strategy,” “vision,” “will,” “would” and variations thereof and similar expressions. Forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed. For example, our forward-looking statements include, without limitation, statements regarding:

•the potential effect of general business or economic conditions on our business, including the direct and indirect effects of the COVID-19 pandemic on the economy, consumer spending levels, and unemployment in our markets;

•the uncertainty of the impact of the COVID-19 pandemic and public health measures on our business and results of operations, including uncertainties surrounding possible disruptions in our supply chain or sources of supply, the physical and financial health of our customers, the effectiveness and duration of government assistance programs to individuals, households and businesses to support consumer spending, levels of traffic in our stores, changes in customer demand for our services, labor shortages, and increased expenses for higher wages and compensation paid to employees and the cost of personal protective equipment and additional cleaning supplies and protocols for the safety of our employees;

•our expectations regarding cost increases in the future, including costs relating to our COVID-19 response initiatives, increases in the minimum wage by states and localities, potential federal minimum wage legislation, increases in distribution and fuel costs and potential new legal requirements to provide increased pay for employees who work during pandemic restrictions;

•the effect of economic conditions, seasonality and the impact of weather conditions and natural disasters on customer demand;

•the dependence on and our expectation regarding competition within the primary markets in which our stores are located;

•our growth plans, including our plans to add, renovate, re-brand, expand, remodel, relocate or close stores and any related costs or charges, our leasing strategy for future expansion, and our ability to renew leases at existing store locations;

•the impact of competitive services and pricing;

•the reliability of, and cost associated with, our sources of parts supply, particularly imported goods such as those sourced from China;

•the impact of trade relations and the ongoing trade dispute between the United States and China, including the actual and potential effect of Section 301 tariffs on Chinese goods imposed by the United States Trade Representative, uncertainties surrounding the policies of the new presidential administration, and other potential impediments to imports;

•the impact of industry regulation;

•our ability to service our debt obligations, including our expected annual interest expense;

•our cash needs, including our ability to fund our future capital expenditures and working capital requirements;

•our anticipated sales, comparable store sales, gross profit margin, costs of goods sold (including product mix), OSG&A expenses and other fixed costs, and our ability to leverage those costs;

•advances in automotive technologies;

•risks relating to disruption or unauthorized access to our computer systems;

•our failure to protect customer and employee personal data;

•business interruptions;

•potential outcomes related to pending or future litigation matters;

•risks relating to acquisitions and the integration of acquired businesses with ours;

•the effect of changes in labor laws, and the effect of the Fair Labor Standards Act as it relates to the qualification of our managers for exempt status, minimum wage and health care law;

•our assessment of the materiality and impact on our business of recent accounting pronouncements adopted by the FASB;

•management’s estimates and expectations as they relate to income tax liabilities, deferred income taxes and uncertain tax positions; and

•management’s estimates associated with our critical accounting policies, including business combinations, self-insurance liabilities and valuations for our goodwill and indefinite-lived intangible assets impairment analyses.

Any of these factors, as well as such other factors as discussed in Part I, Item 1A., “Risk Factors” of our Form 10-K for the fiscal year ended March 27, 2021, as well as in our periodic filings with the SEC, could cause our actual results to differ materially from our anticipated results. The information provided in this report is based upon the facts and circumstances known as of the date of this report, and any forward-looking statements made by us in this report speak only as of the date on which they are made. Except as required by law, we undertake no obligation to update these forward-looking statements after the date of this Form 10-Q to reflect events or circumstances after such date, or to reflect the occurrence of unanticipated events.

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DISCLOSURES ABOUT MARKET RISK & CONTROLS AND PROCEDURES

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from potential changes in interest rates. As of September 25, 2021, excluding finance leases and financing obligations, we had no debt financing at fixed interest rates, for 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 $1.7 million based upon our debt position at September 25, 2021 and approximately $1.9 million based upon our debt position at March 27, 2021, respectively, given a change in LIBOR (or replacement index) of 100 basis points.

Debt financing had a carrying amount that approximates a fair value of $170.0 million as of September 25, 2021, as compared to a carrying amount and a fair value of $190.0 million as of March 27, 2021.

Item 4. Controls and Procedures

Evaluation of 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 SEC pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’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 September 25, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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SUPPLEMENTAL INFORMATION

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we are a party to or otherwise involved in legal proceedings arising out of the normal course of business. Legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of one or more of these matters could have a material adverse impact on the Company, its financial condition and results of operations.

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SUPPLEMENTAL INFORMATION

Item 6. Exhibits

Exhibit Index

10.22b – Amendment No. 2 to Amended and Restated Credit Agreement, dated as of October 5, 2021 (October 2021 Form 8-K, Exhibit No. 10.22b)*

10.72 – Employment Agreement by and between the Company and Matt Henson, dated July 6, 2021 (June 2021 Form 10-Q, Exhibit No. 10.72)+

31.1 – Certification of Michael T. Broderick 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.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

101.CAL - XBRL Taxonomy Extension Calculation Linkbase

104 - Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

* Schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.

+ Management contract or compensatory plan or arrangement.
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SUPPLEMENTAL INFORMATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	MONRO, INC.

DATE: November 1, 2021	By:	/s/ Michael T. Broderick
		Michael T. Broderick
		President and Chief Executive Officer ‎(Principal Executive Officer)

DATE: November 1, 2021	By:	/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)

Monro, Inc. Q2 2022 Form 10-Q