The following table sets forth income statement data of Monro expressed as a
percentage of sales for the fiscal years indicated:
Year Ended Fiscal March 2014 2013 2012 Sales 100.0 % 100.0 % 100.0 % Cost of sales, including distribution and occupancy costs 61.5 62.0 59.7 Gross profit 38.5 38.0 40.3 Operating, selling, general and administrative expenses 27.0 27.9 26.9 Operating income 11.5 10.1 13.3 Interest expense, net 1.1 1.0 0.8 Other income, net (0.1 ) - (0.1 ) Income before provision for income taxes 10.4 9.1 12.6 Provision for income taxes 3.9 3.3 4.7 Net income 6.5 % 5.8 % 8.0 % FORWARD-LOOKING STATEMENTS The statements contained in this Annual Report on Form 10-K that are not historical facts, including (without limitation) statements made in this Item and in "Item 1 - Business", may contain statements of future expectations and other forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this Annual Report on Form 10-K, the words "anticipates", "believes", "contemplates", "see", "could", "estimate", "intend", "plans" and variations thereof and similar expressions, are intended to identify forward-looking statements. Forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed. These factors include, but are not necessarily limited to, product demand, dependence on and competition within the primary markets in which Monro's stores are located, the need for and costs associated with store renovations and other capital expenditures, the effect of economic conditions, the impact of competitive services and pricing, parts supply restraints or difficulties, industry regulation, risks relating to leverage and debt service (including sensitivity to fluctuations in interest rates), continued availability of capital resources and financing, disruption or unauthorized access to our computer systems, risks relating to protection of customer and employee personal data, risks relating to litigation, risks relating to integration of acquired businesses, including goodwill impairment and the risks set forth in "Item 1A. Risk Factors". Except as required by law, we do not undertake to update any forward-looking statement that may be made from time to time by us or on our behalf. CRITICAL ACCOUNTING POLICIES We believe that the accounting policies listed below are those that are most critical to the portrayal of our financial condition and results of operations, and that required management's most difficult, subjective and complex judgments in estimating the effect of inherent uncertainties. This section should be read in conjunction with Note 1 to the Consolidated Financial Statements which includes other significant accounting policies.
We evaluate whether inventory is stated at the lower of cost or market based on historical experience with the carrying value and life of inventory. The assumptions used in this evaluation are based on current market conditions and we believe inventory is stated at the lower of cost or market in the consolidated financial 22
-------------------------------------------------------------------------------- statements. In addition, historically we have been able to return excess items to vendors for credit or sell such inventory to wholesalers. Future changes by vendors in their policies or willingness to accept returns of excess inventory could require a revision in the estimates.
Carrying Values of Goodwill and Long-Lived Assets
We have a history of growth through acquisitions. Assets and liabilities of acquired businesses are recorded at their estimated fair values as of the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. The carrying value of goodwill is subject to annual impairment reviews, which we typically perform in the third quarter of the fiscal year. Impairment reviews may also be triggered by any significant events or changes in circumstances affecting our business. We have only one reporting unit which encompasses all operations including new acquisitions. The goodwill impairment test consists of a two-step process, if necessary. We perform a qualitative assessment to determine if it is more likely than not that the fair value is less than the carrying value of goodwill. If the qualitative factors are triggered, we perform the two-step process. The first step is to compare the fair value to the book value of our reporting unit. If the fair value is less than its carrying value, the second step of the impairment test must be performed in order to determine the amount of impairment loss, if any. The second step compares the implied fair value of goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill. We believe there is little risk of impairment. Intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses and are amortized over their estimated useful lives. All intangibles and other long-lived assets are reviewed when events or changes in circumstances indicate that the asset's carrying value may not be recoverable. If such indicators are present, it is determined whether the sum of the estimated undiscounted future cash flows attributable to such assets is less than their carrying values. A deterioration of macroeconomic conditions may not only negatively impact the estimated operating cash flows used in our cash flow models, but may also negatively impact other assumptions used in our analyses, including, but not limited to, the estimated cost of capital and/or discount rates. Additionally, as discussed above, we are required to ensure that assumptions used to determine fair value in our analyses are consistent with the assumptions a hypothetical marketplace participant would use. As a result, the cost of capital and/or discount rates used in our analyses may increase or decrease based on market conditions and trends, regardless of whether our actual cost of capital has changed. Therefore, we may recognize an impairment of an intangible asset or assets even though realized actual cash flows are approximately equal to or greater than our previously forecasted amounts.
We are largely self-insured with respect to workers' compensation, general liability and employee medical claims. In order to reduce our risk and better manage our overall loss exposure, we purchase stop-loss insurance that covers individual claims in excess of the deductible amounts, and caps total losses in a fiscal year. We maintain an accrual for the estimated cost to settle open claims as well as an estimate of the cost of claims that have been incurred but not reported. These estimates take into consideration the historical average claim volume, the average cost for settled claims, current trends in claim costs, changes in our business and workforce, and general economic factors. These accruals are reviewed on a quarterly basis, or more frequently if factors dictate a more frequent review is warranted. For more complex reserve calculations, such as workers compensation, we use the services of an actuary on an annual basis to assist in determining the required reserve for open claims. 23
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the following assumptions. Expected volatilities are based on historical changes in the market price of the Company's Common Stock. The expected term of options granted is derived from the terms and conditions of the award, as well as historical exercise behavior, and represents the period of time that options granted are expected to be outstanding. The risk-free rate is calculated using the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards. We use historical data to estimate forfeitures. The dividend yield is based on historical experience and expected future changes.
Our provision for income taxes and effective tax rates are calculated by legal entity and jurisdiction and are based on a number of factors, including our income, tax planning strategies, differences between tax laws and accounting rules, statutory tax rates and credits, uncertain tax positions and valuation allowances. We use significant judgment and estimates in evaluating our tax positions. Tax law and accounting rules often differ as to the timing and treatment of certain items of income and expense. As a result, the tax rate reflected in our tax return (the current or cash tax rate) is different from the tax rate reflected in our Consolidated Financial Statements. Some of the differences are permanent, while other differences are temporary as they reverse over time. We record deferred tax assets and liabilities for any temporary differences between the tax reflected in our Consolidated Financial Statements and tax bases. We establish valuation allowances when we believe it is more-likely-than-not that some portion of our deferred tax assets will not be realized. At any one time, our tax returns for several tax years are subject to examination by U.S. federal and state taxing jurisdictions. We establish tax liabilities in accordance with the accounting guidance on income taxes. Under the accounting guidance, the impact of an uncertain tax position taken or expected to be taken on an income tax return must be recognized in the financial statements at the largest amount that is more-likely-than-not to be sustained. An uncertain income tax position will not be recognized in the financial statements unless it is more-likely-than-not to be sustained. We adjust these tax liabilities, as well as the related interest and penalties, based on the latest facts and circumstances, including recently published rulings, court cases and outcomes of tax audits. To the extent our actual tax liability differs from our established tax liabilities for unrecognized tax benefits, our effective tax rate may be materially impacted. While it is often difficult to predict the final outcome of, the timing of, or the tax treatment of any particular tax position or deduction, we believe that our tax balances reflect the more-likely-than-not outcome of known tax contingencies.
RESULTS OF OPERATIONS
Fiscal 2014 As Compared To Fiscal 2013
Sales for fiscal 2014 increased
$99.4 millionor 13.6% to $831.4 millionas compared to $732.0 millionin fiscal 2013. The increase was due to an increase of $110 millionrelated to new stores, of which $107 millioncame from the fiscal 2013 and fiscal 2014 acquisitions. Partially offsetting this was a decrease in comparable store sales of .5%. Additionally, there was a decrease in sales from closed stores amounting to $5.0 million. There were 361 selling days in both fiscal 2014 and fiscal 2013.
During the year, 29 stores were added and 13 were closed. At
We believe that the slight decrease in comparable store sales for fiscal 2014 resulted primarily from continued weak economic conditions. We believe that consumers continue to defer service repairs and tire replacements, especially on higher ticket items. 24
-------------------------------------------------------------------------------- For the year, comparable store traffic was up slightly while average ticket was down. The brake, exhaust and shock categories each increased by about 1% on a comparable store basis for the year. The tire category declined about 1% as consumers traded down from higher priced tires. However, tire unit sales increased approximately 1% on a comparable store basis.
Harsh winter weather also negatively impacted sales during the fourth quarter of fiscal 2014, which resulted in stores being closed for periods of time, and consumers reluctant to travel.
Gross profit for fiscal 2014 was
$320.0 millionor 38.5% of sales as compared with $278.1 millionor 38.0% of sales for fiscal 2013. The increase in gross profit for fiscal 2014, as a percentage of sales, is due to several factors. Labor costs decreased as a percentage of sales as compared to the prior year through focused payroll control. Labor productivity, as measured by sales per man hour, improved over the prior year as well. Distribution and occupancy costs decreased as a percentage of sales from the prior year as we leveraged these largely fixed costs with the increase in sales from acquired stores. Total material costs were relatively flat as a percentage of sales as compared to the prior year. This was due to a shift in mix to the lower margin service and tire categories, the latter due primarily to the acquisition of more tire stores, offset by a meaningful decline in product costs, particularly tires. Operating expenses for fiscal 2014 were $224.6 millionor 27.0% of sales compared with $204.4 millionor 27.9% of sales for fiscal 2013. Excluding the increase in operating expenses related to the stores acquired in fiscal 2014 and fiscal 2013, operating expenses actually decreased by approximately $2.2 million. This demonstrates that we experienced leverage in this line on a comparable store basis through focused cost control and pay plans which appropriately adjust for performance. Operating income in fiscal 2014 of $95.3 millionincreased 29.4% compared to operating income of $73.7 millionin fiscal 2013, and increased as a percentage of sales from 10.1% to 11.5% for the reasons described above. Net interest expense for fiscal 2014 increased by approximately $2.3 millionas compared to the prior year, and increased as a percentage of sales from 1.0% to 1.1%. The weighted average debt outstanding for the year ended March 29, 2014increased by approximately $61 millionfrom fiscal 2013, primarily related to an increase in debt outstanding under our Revolving Credit Facility to fund the purchase of our acquisitions, as well as increased capital leases related to our fiscal 2013 acquisitions. Partially offsetting this increase was a decrease in the weighted average interest rate of approximately 40 basis points from the prior year due to a shift in the percentage of debt (revolver vs. capital leases) outstanding at a lower rate. Our effective tax rate was 37.1% and 36.3%, respectively, of pre-tax income in fiscal 2014 and 2013. The difference primarily relates to the accounting for uncertain tax positions which may vary from year to year.
Net income for fiscal 2014 increased by
Fiscal 2013 As Compared To Fiscal 2012
Sales for fiscal 2013 increased
$45.4 millionor 6.6% to $732.0 millionas compared to $686.6 millionin fiscal 2012. The increase was due to an increase of $99.6 millionrelated to new stores, of which $95.3 millioncame from the fiscal 2012 and fiscal 2013 acquisitions. Offsetting this was a decrease in comparable store sales of 7.3%. Additionally, there was a decrease in sales from closed stores amounting to $6.4 million. Fiscal 2013 was a 52-week year, and therefore, there were 361 selling days as compared to 368 selling days in fiscal 2012. Adjusting for days, comparable store sales were down 5.5%. 25 -------------------------------------------------------------------------------- As occurred in previous years, we completed the bulk sale of approximately $2.4 millionof slower moving inventory to Icon International, a barter company, in exchange for barter credits. The margin recognized in these transactions is typically less than our normal profit margin. The barter transaction that occurred in fiscal 2013 decreased gross profit and operating expenses by .1% of sales.
During the year, 144 stores were added and 10 were closed. At
We believe that the decline in comparable store sales for fiscal 2013 resulted mainly from the continued weak U.S. economy. With the continuation of high gasoline prices, lack of consumer confidence and high unemployment, we believe that customers are continuing to defer tire purchases and service repairs, especially on higher ticket items. Additionally, we believe that the milder winter weather in 2013 and 2012 also led to consumers deferring tire purchases. While it appears that repairs and tire purchases are being deferred more and for longer than in prior years, most can only be deferred for a period of time due to safety issues or state inspection requirements. Gross profit for fiscal 2013 was
$278.1 millionor 38.0% of sales as compared with $276.4 millionor 40.3% of sales for fiscal 2012. The decrease in gross profit for fiscal 2013, as a percentage of sales, is due to several factors. Total material costs increased as a percentage of sales as compared to the prior year. This was due to a shift in mix to the lower margin service and tire categories, the latter due in part to the acquisition of more tire stores.
Distribution and occupancy costs increased as a percentage of sales from the prior year as we lost leverage on these largely fixed costs with lower comparable store sales.
Labor costs were relatively flat as a percentage of sales as compared to the prior year.
Operating expenses for fiscal 2013 were
$204.4 millionor 27.9% of sales compared with $185.0 millionor 26.9% of sales for fiscal 2012. Excluding the operating expenses related to the stores acquired in fiscal 2013, operating expenses actually decreased by approximately $1.5 million, after adjusting for the extra week in fiscal 2012. This demonstrates that the Company experienced leverage in this line on a comparable store basis through focused cost control and pay plans which appropriately adjust for performance. Operating income in fiscal 2013 of $73.7 milliondecreased 19.4% compared to operating income of $91.4 millionin fiscal 2012, and decreased as a percentage of sales from 13.3% to 10.1% for the reasons described above. Net interest expense for fiscal 2013 increased by approximately $2.0 millionas compared to the prior year, and increased as a percentage of sales from .8% to 1.0%. The weighted average debt outstanding for the year ended March 30, 2013increased by approximately $82 millionfrom fiscal 2012, primarily related to an increase in debt outstanding under our Revolving Credit Facility to fund the purchase of our fiscal 2013 acquisitions. Largely offsetting this increase was a decrease in the weighted average interest rate of approximately 370 basis points from the prior year due to a shift in the percentage of debt (revolver vs. capital leases) outstanding at a lower rate. Additionally, amortization of financing fees over the higher outstanding revolving credit balance is causing a decrease in the weighted average interest rate. Our effective tax rate was 36.3% and 37.0%, respectively, of pre-tax income in fiscal 2013 and 2012. The difference primarily relates to the accounting for uncertain tax positions which may vary from year to year.
Net income for fiscal 2013 decreased by
CAPITAL RESOURCES, CONTRACTUAL OBLIGATIONS AND LIQUIDITY
Our primary capital requirements for fiscal 2014 were divided among the funding of acquisitions for
$27.5 million, as well as the upgrading of facilities and systems and the funding of our store expansion program totaling $32.2 million. In fiscal 2013, our primary capital requirements were divided among the funding of acquisitions for $163.3 million, as well as the upgrading of facilities and systems, including the completion of the approximate $4.6 millionexpansion of the Rochester, New Yorkoffice and warehouse facility which began in fiscal 2012, and the funding of our store expansion program totaling $34.2 million. In both fiscal years 2014 and 2013, capital requirements were primarily met by cash flow from operations and from our revolving credit facility. In fiscal 2015, we intend to open approximately four new greenfield stores. Total capital required to open a new greenfield service store ranges, on average (excluding the acquired stores and BJ's locations), from $350,000to $950,000depending on whether the store is leased, owned or land leased. Total capital required to open a new greenfield tire (land and building leased) location costs, on average, approximately $600,000, including $225,000for equipment and $150,000for inventory. Monro paid dividends of $14.2 millionin fiscal 2014. In May 2014, Monro's Board of Directors declared its intention to pay a regular quarterly cash dividend of $.13per common share or common share equivalent beginning with the first quarter of fiscal 2015. We also plan to continue to seek suitable acquisition candidates. Management believes that we have sufficient resources available (including cash flow from operations and bank financing) to expand our business as currently planned for the next several years. Contractual Obligations
Payments due by period under long-term debt, other financing instruments and commitments are as follows:
Within 1 to 3 to After 5 Total 1 Year 3 Years 5 Years Years (Dollars in thousands) Principal payments on long-term debt
$ 106,501 $ 660 $ 105,841Capital lease commitments/financing obligations 88,091 6,892 $ 13,31114,602 $ 53,286Operating lease commitments 126,417 33,204 52,791 29,276 11,146 Total $ 321,009 $ 40,756 $ 66,102 $ 149,719 $ 64,432
We believe that we can fulfill our contractual commitments utilizing our cash flow from operations and, if necessary, bank financing.
June 2011, we entered into a five-year, $175 millionRevolving Credit Facility agreement with seven banks (the "Credit Facility"). The Credit Facility amended and restated, in its entirety, the Credit Facility agreement previously entered into by Monro as of July 2005and amended from time to time. The Credit Facility also provided an accordion feature permitting us to request an increase in availability of up to an additional $75 million.
27 -------------------------------------------------------------------------------- Credit Facility now expires in
December 2017; and the $75 millionaccordion feature was maintained. There were no other changes in terms including those related to covenants or interest rates. There are now six banks participating in the syndication. There was $105.8 millionoutstanding under the Credit Facility at March 29, 2014. We were in compliance with all debt covenants as of March 29, 2014. The interest rate on the Credit Facility increased from 100 basis points to 125 basis points over LIBOR during fiscal year 2014. At March 29, 2014, the interest rate was 125 basis points over LIBOR. Within the Credit Facility, we have a sub-facility of $40 millionfor the purpose of issuing standby letters of credit. The line requires fees aggregating 1.375% annually of the face amount of each standby letter of credit, payable quarterly in arrears. There was $22.7 millionin an outstanding letter of credit at March 29, 2014.
The net availability under the Credit Facility at
Specific terms of the Credit Facility permit the payment of cash dividends not to exceed 50% of the prior year's net income, and permit mortgages and specific lease financing arrangements with other parties with certain limitations. Additionally, the Credit Facility is not secured by our real property, although we have agreed not to encumber our real property, with certain permissible exceptions. The agreement also requires the maintenance of specified interest and rent coverage ratios.
In addition, we have financed certain store properties and vehicles with capital leases/financing obligations, which amount to
During fiscal 1995, Monro purchased 12.7 acres of land for
$.7 millionfrom the City of Rochester, New York, on which its office/warehouse facility is located. The City has provided financing for 100% of the cost of the land via a 20-year non-interest bearing mortgage, all due and payable in fiscal 2015.
We do not believe our operations have been materially affected by inflation. Monro has been successful, in many cases, in mitigating the effects of merchandise cost increases principally through the use of volume discounts and alternative vendors, as well as selling price increases. See additional discussion under Risk Factors.
FINANCIAL ACCOUNTING STANDARDS
See "Recent Accounting Pronouncements" in Note 1 to the consolidated financial statements for a discussion of the impact of recently issued accounting standards on our Consolidated Financial Statements as of
March 29, 2014and for the year then ended, as well as the expected impact on the Consolidated Financial Statements for future periods.