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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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(Mark One)

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

For the quarterly period ended June 26, 2021

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

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Monro, Inc.

(Exact name of registrant as specified in its charter)

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Registrant’s telephone number, including area code: (585) 647-6400

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Securities registered pursuant to Section 12(b) of the Act:

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.

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 July 23, 2021, 33,505,537 shares of the registrant's common stock, $0.01 par value per share, were outstanding.

TABLE OF CONTENTS

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets

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; 39,865,158 shares issued as of June 26, 2021; 39,848,093 shares issued at March 27, 2021

Treasury stock 6,359,871 shares, at cost

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Income and Comprehensive Income

See accompanying Notes to Consolidated Financial Statements. 

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Consolidated Statements of Changes in Shareholders’ Equity

We declared $0.24 and $0.22 dividends per common share or equivalent for the three months ended June 26, 2021 and June 27, 2020, respectively.

See accompanying Notes to Consolidated Financial Statements.

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Consolidated Statements of Cash Flows

See accompanying Notes to Consolidated Financial Statements.

INDEX TO 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 1,291 Company-operated retail stores located in 32 states and 91 franchised locations as of June 26, 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 June 26, 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

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 footnote include acquisitions of five or more locations as well as acquisitions of one to four locations that are part of our greenfield store growth strategy.

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 three months ended June 26, 2021. The total costs related to the completed acquisition were $0.3 million and 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 totaled $7.9 million for the period from acquisition date through June 26, 2021.

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.

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 a lease assignment 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 three months ended June 26, 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.

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 shares issuable upon the assumed exercise of common stock options outstanding.

The calculation of diluted earnings per common share excludes the effect of the assumed exercise of approximately 203,000 and 585,000 stock options for the three months ended June 26, 2021 and June 27, 2020, respectively. Such amounts were excluded as the exercise price of these stock options was greater than the average market value of our common stock for those periods, resulting in an anti-dilutive effect on diluted earnings per common share. 

Note 5 – Income Taxes

For the three months ended June 26, 2021, our effective income tax rate was 25.4 percent, compared to 25.5 percent for the three months ended June 27, 2020.

Note 6 – Fair Value

Long-term debt had a carrying amount that approximates a fair value of $198.0 million as of June 26, 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 $8.2 million during the three months ended June 26, 2021. 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. 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. For additional information regarding our Credit Facility, see Note 9.

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.

(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 June 26, 2021 and March 27, 2021 were $18.0 million and $16.7 million, respectively, of which $12.7 million and $12.0 million, respectively, are reported in Deferred revenue and $5.3 million and $4.7 million, respectively, are reported in Other long-term liabilities in our Consolidated Balance Sheets.

As of June 26, 2021, we expect to recognize $10.5 million of deferred revenue related to road hazard warranty agreements in the remainder of fiscal 2022, $6.0 million of deferred revenue during our fiscal year ending March 25, 2023, and $1.5 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 bears 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.