Attached files

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EX-31.2 - SECTION 302 CFO CERTIFICATION - MONRO, INC.dex312.htm
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - MONRO, INC.dex321.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - MONRO, INC.dex311.htm
EX-23.01 - CONSENT OF PRICEWATERHOUSECOOPERS LLP - MONRO, INC.dex2301.htm
EX-21.01 - SUBSIDIARIES OF THE COMPANY - MONRO, INC.dex2101.htm
EX-10.03 - DEFERRED COMPENSATION PLAN, DATED JANUARY 1, 2005, AMENDED AND RESTATED - MONRO, INC.dex1003.htm
EX-24.01 - POWERS OF ATTORNEY - MONRO, INC.dex2401.htm

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(MARK ONE)

  x

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

For Fiscal Year Ended March 26, 2011

OR

 

  ¨

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

Commission File Number 0-19357

MONRO MUFFLER BRAKE, INC.

(Exact name of registrant as specified in its charter)

 

New York   16-0838627
(State of incorporation)   (I.R.S. Employer 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:

Common Stock, par value $.01 per share

Name of each exchange on which registered: the NASDAQ Stock Market LLC

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

NONE

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

 

Large Accelerated Filer  x

 

Accelerated Filer  ¨

  Non-Accelerated Filer  ¨   Smaller Reporting Company  ¨
    (Do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨    No  x

The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, September 25, 2010, was approximately $887,199,000.

As of May 13, 2011, 30,486,607 shares of the registrant’s Common Stock, par value $.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s definitive proxy statement (to be filed pursuant to Regulation 14A) for the 2011 Annual Meeting of Shareholders (the “Proxy Statement”) are incorporated by reference into Part III hereof.

 

 

 


PART I

Item 1.    Business

GENERAL

Monro Muffler Brake, Inc. (“Monro” or the “Company”) is a chain of 781 Company-operated stores (as of March 26, 2011), three franchised locations and 14 dealer-operated stores providing automotive undercar repair and tire services in the United States. At March 26, 2011, Monro operated Company stores in New York, Pennsylvania, Ohio, Connecticut, Massachusetts, West Virginia, Virginia, Maryland, Vermont, New Hampshire, New Jersey, North Carolina, South Carolina, Indiana, Rhode Island, Delaware, Maine, Illinois and Missouri primarily under the names “Monro Muffler Brake & Service”, “Tread Quarters Discount Tire”, “Mr. Tire”, “Autotire Car Care Center” and “Tire Warehouse” (together, the “Company Stores”). Company Stores typically are situated in high-visibility locations in suburban areas and small towns, as well as in major metropolitan areas. Company Stores serviced approximately 4.3 million vehicles in fiscal 2011. (References herein to fiscal years are to the Company’s year ended fiscal March [e.g., references to “fiscal 2011” are to the Company’s fiscal year ended March 26, 2011].)

The predecessor to the Company was founded by Charles J. August in 1957 as a Midas Muffler franchise in Rochester, New York, specializing in mufflers and exhaust systems. In 1966, the Company discontinued its affiliation with Midas Muffler, and began to diversify into a full line of undercar repair services. An investor group led by Peter J. Solomon and Donald Glickman purchased a controlling interest in the Company in July 1984. At that time, Monro operated 59 stores, located primarily in upstate New York, with approximately $21 million in sales in fiscal 1984. Since 1984, Monro has continued its growth and has expanded its marketing area to include 19 additional states (including dealer locations).

In December 1998, the Company appointed Robert G. Gross as President and Chief Executive Officer, who began full-time responsibilities on January 1, 1999.

The Company was incorporated in the State of New York in 1959. The Company’s principal executive offices are located at 200 Holleder Parkway, Rochester, New York 14615, and its telephone number is (585) 647-6400.

The Company provides a broad range of services on passenger cars, light trucks and vans for brakes; mufflers and exhaust systems; and steering, drive train, suspension and wheel alignment. The Company also provides other products and services including tires and routine maintenance services including state inspections. Monro specializes in the repair and replacement of parts which must be periodically replaced as they wear out. Normal wear on these parts generally is not covered by new car warranties. The Company typically does not perform under-the-hood repair services except for oil change services, various “flush and fill” services and some minor tune-up services. The Company does not sell parts or accessories to the do-it-yourself market.

All of the Company’s stores, except Tire Warehouse stores, provide the services described above. (Tire Warehouse stores only provide tire related services and alignments.) However, a growing number of the Company’s stores are more specialized in tire replacement and service and, accordingly, have a higher mix of sales in the tire category. These stores are described below as tire stores, whereas the majority of the Company’s stores are described as service stores. (See additional discussion under “Operating Strategy”.) At March 26, 2011, there were 547 stores designated as service stores and 234 as tire stores.

 

1


The Company’s sales mix for fiscal 2011, 2010 and 2009 is as follows:

 

     Service Stores     Tire Stores     Total Company  
     FY11     FY10     FY09     FY11     FY10     FY09     FY11     FY10     FY09  

Brakes

     26     27     27     9     10     12     18     19     21

Exhaust

     10        10        10        1        1        1        5        6        6   

Steering

     12        12        13        8        10        10        11        11        12   

Tires

     16        15        14        62        58        54        38        34        29   

Maintenance

     36        36        36        20        21        23        28        30        32   
                                                                        

Total

     100     100     100     100     100     100     100     100     100
                                                                        

The Company has one wholly-owned subsidiary, Monro Service Corporation, which is a Delaware corporation qualified to do business in the states of New York, Maryland, Illinois and New Hampshire.

Monro Service Corporation holds all assets, rights, responsibilities and liabilities associated with the Company’s warehousing, purchasing, advertising, accounting, office services, payroll, cash management and certain other operations that are performed in the states of New York, Maryland, Illinois and New Hampshire. The Company believes that this structure has enhanced operational efficiency and provides cost savings.

INDUSTRY OVERVIEW

According to industry reports, demand for automotive repair services, including undercar repair and tire services, has increased due to the general increase in the number of vehicles registered, the increase in the average age of vehicles and the increased complexity of vehicles, which makes it more difficult for a vehicle owner to perform do-it-yourself repairs.

At the same time as demand for automotive repair services has grown, the number of general repair outlets has decreased, principally because fewer gas stations now perform repairs, and because there are fewer new car dealers as a result of dealership closures by car manufacturers such as Chrysler and General Motors. Monro believes that these factors present opportunities for increased sales by the Company, even though the number of specialized repair outlets (such as those operated by the Company and its direct competitors) has increased to meet the growth in demand.

EXPANSION STRATEGY

Monro has experienced significant growth in recent years due to acquisitions and, to a lesser extent, the opening of new stores. Management believes that the continued growth in sales and profits of the Company is dependent, in large part, upon its continued ability to open/acquire and operate new stores on a profitable basis. Overall profitability of the Company could be reduced if acquired or new stores do not attain profitability.

Monro believes that there are significant expansion opportunities in new as well as existing market areas which will result from a combination of constructing stores on vacant land and acquiring existing store locations. The Company believes that, as the industry consolidates due to the increasingly complex nature of automotive repair and the expanded capital requirements for state-of-the-art equipment, there will be increasing opportunities for acquisitions of existing businesses or store structures.

In that regard, the Company has completed several acquisitions in recent years, as follows:

Effective March 1, 2004, the Company completed the acquisition of Mr. Tire stores (the “Mr. Tire Acquisition”) from Atlantic Automotive Corp., which added 26 retail tire and automotive repair stores in Maryland and Virginia, as well as a wholesale operation based in Baltimore, Maryland. The Company has closed one of these stores and the wholesale operation.

 

2


In fiscal 2005, the Company further expanded its presence in Maryland through the acquisition of certain assets of Rice Tire, Inc. (the “Rice Acquisition”) and Henderson Holdings, Inc. (the “Henderson Acquisition”), which added five and ten retail tire and automotive repair stores in the Frederick and southern Maryland markets, respectively. Thirteen of these stores operate under the Mr. Tire brand name and one under the Tread Quarters brand name. The Company has closed one Rice store.

On April 29, 2006, the Company acquired substantially all of the assets of ProCare Automotive Service Solutions LLC (the “ProCare Acquisition”). The Company acquired 75 ProCare locations that offer automotive maintenance and repair services. The stores are located in eight metropolitan areas throughout Ohio and Pennsylvania. The Company converted 31 of the acquired ProCare stores to tire stores which operate under the Mr. Tire brand. The remaining stores operate as service stores under the Monro brand. In April 2007, the Company closed three of the acquired locations in accordance with its plan for this acquisition, leaving it with 43 service stores and 29 tire stores. The Company closed one additional tire store after 2007.

On July 21, 2007, the Company acquired 11 retail tire and automotive repair stores located primarily in the Philadelphia, PA market from Valley Forge Tire & Auto Centers (“the Valley Forge Acquisition”); on July 28, 2007, the Company acquired eight retail tire and automotive repair stores located in the northern Virginia market from Craven Tire & Auto (“the Craven Acquisition”); and on January 26, 2008, the Company acquired seven retail tire and automotive repair stores located in Buffalo, NY from the Broad Elm Group (“the Broad Elm Acquisition”). These stores all operate under the Mr. Tire brand name.

On June 14, 2009, the Company acquired 26 Autotire Car Care Center retail tire and automotive repair stores located primarily in the St. Louis, MO market from Am-Pac Tire Distributors, Inc., a wholly-owned subsidiary of American Tire Distributors (“the Autotire Acquisition”); on September 20, 2009, the Company acquired four retail tire and automotive repair stores located in northwest Indiana from Midwest Tire & Auto Repair (“the Midwest Acquisition”); on October 4, 2009, the Company acquired 41 retail tire stores, including one that was under construction, and six franchised locations located in Maine, Massachusetts, New Hampshire, Rhode Island and Vermont, from Tire Warehouse Central, Inc. (“the Tire Warehouse Acquisition”); and on November 29, 2009, the Company acquired a retail tire and automotive repair store located in New Hampshire from Cheshire Tire Center, Inc. (“the Cheshire Acquisition”). These stores operate primarily under the Autotire, Mr. Tire and Tire Warehouse brand names, respectively. Additionally, during January 2010, the Company acquired two of the former Tire Warehouse franchise locations. These stores operate under the Tire Warehouse brand name. The Company has closed one Tire Warehouse store.

On March 28, 2010, the Company acquired five Import Export Tire retail tire and automotive repair stores located in the Pittsburgh, PA market from Import Export Tire, Co.; on June 13, 2010, the Company acquired one of the former Tire Warehouse franchise locations and an additional service store, both of which are located in Maine, from the same owner; and on November 1, 2010, the Company acquired three retail tire and automotive repair stores located in the Fredericksburg, VA market from Courthouse Tire (collectively, the “FY 2011 Acquisitions”). The tire stores, except for the franchise location that operates under the Tire Warehouse brand name, operate under the Mr. Tire brand name. The service store operates under the Monro brand name.

The total number of stores that the Company operates in BJ’s Wholesale Clubs is 35 at March 26, 2011.

 

3


As of March 26, 2011, Monro had 781 Company-operated stores, three franchised locations and 14 dealer locations located in 20 states. The following table shows the growth in the number of Company-operated stores over the last five fiscal years:

STORE ADDITIONS AND CLOSINGS

 

      Year Ended Fiscal March   
     2011     2010     2009     2008     2007  

Stores open at beginning of year

     777        710        720        698        625   

Stores added during year

     12 (e)      79 (d)      3        31 (c)      84 (b) 

Stores closed during year(a)

     (8     (12     (13     (9     (11
                                        

Stores open at end of year

     781        777        710        720        698   
                                        

Service (including BJ’s) stores

     547        551        566        579        584   
                                        

Tire stores

     234        226        144        141        114   
                                        

 

(a)

Generally, stores were closed because they failed to achieve or maintain an acceptable level of profitability or because a new Company store was opened in the same market at a more favorable location.

 

(b)

Includes 75 stores acquired in the ProCare Acquisition and three stores opened in BJ’s Wholesale Club locations.

 

(c)

Includes 11 stores acquired in the Valley Forge Acquisition, eight stores acquired in the Craven Acquisition and seven stores acquired in the Broad Elm Acquisition.

 

(d)

Includes 26 stores acquired in the Autotire Acquisition, four stores acquired in the Midwest Acquisition, 41 stores acquired in the Tire Warehouse Acquisition, one store acquired in the Cheshire Tire Acquisition and two franchised locations acquired.

 

(e)

Includes 10 stores acquired in the FY 2011 Acquisitions.

The Company plans to add approximately four new greenfield stores in fiscal 2012 and to pursue appropriate acquisition candidates.

The Company has developed a systematic method for selecting new greenfield store locations and a targeted approach to marketing new stores. Key factors in market and site selection include population, demographic characteristics, vehicle population and the intensity of competition. The characteristics of each potential site are compared to the profiles of existing stores in projecting sales for that site. Monro attempts to cluster stores in market areas in order to achieve economies of scale in advertising, supervision and distribution costs. All new sites presently under consideration are within Monro’s established market areas.

As a result of extensive analysis of its historical and projected store opening strategy, the Company has established major market profiles, as defined by market awareness: mature, existing and new markets. Over the next several years, the Company expects to build a greater percentage of stores in mature and existing markets in order to capitalize on the Company’s market presence and consumer awareness. During fiscal 2011, all of the stores added (including acquired stores) were in existing markets.

The Company believes that management and operating improvements implemented over the last several fiscal years have enhanced its ability to sustain its growth. The Company has a chain-wide computerized inventory control and electronic point-of-sale (“POS”) management information system, which has increased management’s ability to monitor operations as the number of stores has grown.

The Company has customized the POS system to specific service and tire store requirements and deploys the appropriate version in each type of store. Being Windows-based, the system has simplified training of new employees. Additionally, the system includes electronic mail and electronic cataloging, which allows store managers to electronically research the specific parts needed for the make and model of the car being serviced. This enhanced system includes software which contains data that mirrors the scheduled maintenance requirements in vehicle owners’ manuals, specifically by make, model, year and mileage for every major automobile brand.

 

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Management believes that this software facilitates the presentation and sale of scheduled maintenance services to customers. Other enhancements include the streamlining of estimating and other processes; graphic catalogs; a feature which facilitates tire searches by size; direct mail support; appointment scheduling; customer service history; a thermometer graphic which guides store managers on the profitability of each job; the ability to view inventory of up to the closest 14 stores or warehouse; and expanded monitoring of price changes. This latter change requires more specificity on the reason for a discount, which management believes helps to control discounting. Enhancements will continue to be made to the POS system annually in an effort to increase efficiency, improve the quality and timeliness of store reporting and enable the Company to better serve its customers.

The financing to open a new greenfield service store location may be accomplished in one of three ways: a store lease for the land and building (in which case, land and building costs will be financed primarily by the lessor), a land lease with the building constructed by the Company (with building costs paid by the Company), or a land purchase with the building constructed by the Company. In all three cases, for service stores, each new store also will require approximately $190,000 for equipment (including a POS system and a truck) and approximately $55,000 in inventory. Because Monro generally does not extend credit to its customers, stores generate almost no receivables and a new store’s actual net working capital investment is nominal. Total capital required to open a new greenfield service store ranges, on average (based upon the last five fiscal years’ openings, excluding the BJ’s locations and the acquired stores), from $350,000 to $950,000 depending on the location and which of the three financing methods is used. In general, tire stores are larger and have more service bays than Monro’s traditional service stores and, as a result, construction costs are at the high end of the range of new store construction costs. Total capital required to open a new greenfield tire (leased) location costs, on average, approximately $600,000, including $220,000 for equipment and $140,000 for inventory. In instances where Monro acquires an existing business, it may pay additional amounts for intangible assets such as customer lists, covenants not-to-compete, trade names and goodwill, but generally will pay less per bay for equipment and real property.

At March 26, 2011, the Company leased the land and/or the building at approximately 71% of its store locations and owned the land and building at the remaining locations. Monro’s policy is to situate new stores in the best locations, without regard to the form of ownership required to develop the locations.

New service and tire stores, (excluding acquired stores and BJ’s locations), have average sales of approximately $384,000 and $1,015,000, respectively, in their first 12 months of operation, or $64,000 and $145,000, respectively, per bay.

STORE OPERATIONS

Store Format

The typical format for a Monro repair store is a free-standing building consisting of a sales area, fully-equipped service bays and a parts/tires storage area. In BJ’s locations, the Company and BJ’s both operate counters in the sales area, while the Company operates the service bay area. Most service bays are equipped with above-ground electric vehicle lifts. Generally, each store is located within 25 miles of a “key” store which carries approximately double the inventory of a typical store and serves as a mini-distribution point for slower moving inventory for other stores in its area. Individual store sizes, number of bays and stocking levels vary greatly, even within the service and tire store groups, and are dependent primarily on the availability of suitable store locations, population, demographics and intensity of competition among other factors (See additional discussion under “Store Additions and Closings”). A summary of average store data for service and tire stores is presented below:

 

     Average
Number
of Bays
   Average
Square
Feet
   Average
Inventory
   Average
Number
of Stock
Keeping
Units (SKUs)

Service stores (excluding BJ’s and ProCare)

       6          4,400        $ 104,000          2,700  

Tire stores (excluding Tire Warehouse stores)

       7          6,000        $ 157,000          1,500  

 

5


Data for the acquired ProCare service stores has been excluded because the stores’ stock rooms are smaller than those in typical service stores and therefore, they generally carry less than half the amount of inventory of a typical service store.

Data for the acquired Tire Warehouse stores has been excluded because most stores have no indoor service bays. The store building houses a waiting room, storage area and an area to mount and balance tires on the car’s wheels once the wheels and tires have been removed from the car. Removal of old tires and wheels from, and installation of new tires and wheels on, customers’ cars are performed outdoors under a carport. A small number of Tire Warehouse stores have an indoor bay to perform alignments.

Stores generally are situated in high-visibility locations in suburban areas, major metropolitan areas or small towns and offer easy customer access. The typical store is open from 7:30 a.m. to 7:00 p.m. on Monday through Friday and from 7:30 a.m. to 6:00 p.m. on Saturday. A majority of store locations are also open Sundays from 9:00 a.m. to 5:00 p.m.

Inventory Control and Management Information System

All Company stores communicate daily with the central office and warehouse by computerized inventory control and electronic POS management information systems, which enable the Company to collect sales and operational data on a daily basis, to adjust store pricing to reflect local conditions and to control inventory on a near “real-time” basis. Additionally, each store has access, through the POS system, to the inventory carried by up to the 14 stores or warehouse nearest to it. Management believes that this feature improves customer satisfaction and store productivity by reducing the time required to locate out-of-stock parts and tires. It also improves profitability because it reduces the amount of inventory which must be purchased outside the Company from local vendors.

Quality Control and Warranties

To maintain quality control, the Company conducts audits to rate its employees’ telephone sales manner and the accuracy of pricing information given.

The Company has a customer survey program to monitor customer attitudes toward service quality, friendliness, speed of service, and several other factors for each store. Customer concerns are addressed by customer service and field management personnel.

The Company uses a “Double Check for Accuracy Program” as part of its routine store procedures. This quality assurance program requires that a technician and supervisory-level employee (or in certain cases, another technician in tire stores) independently inspect a customer’s vehicle, diagnose and document the necessary repairs, and agree on an estimate before presenting it to a customer. This process is formally documented on the written estimate by store personnel.

The Company is an active member of the Automotive Maintenance & Repair Association (AMRA). AMRA is an organization of automotive retailers, wholesalers and manufacturers which was established as part of an industry-wide effort to address the ethics and business practices of companies in the automotive repair industry through the Motorist Assurance Program (MAP). Participating companies commit to improving consumer confidence and trust in the automotive repair industry by adopting “Uniform Inspection Communication Standards” (“UICS”) established by MAP. These “UICS” are available in the Company’s stores and serve to provide consistent recommendations to customers in the diagnosis and repair of a vehicle.

Monro offers limited warranties on substantially all of the products and services that it provides. The Company believes that these warranties are competitive with industry practices and serve as a marketing tool to increase repeat business at the stores.

 

6


Store Personnel and Training

The Company supervises store operations primarily through its Divisional Vice Presidents who oversee Zone Managers who, in turn, oversee Market Managers. The typical service store is staffed by a Store Manager and four to six technicians, one of whom serves as the Assistant Manager. The typical tire store, except Tire Warehouse stores, is staffed by a Store Manager, an Assistant Manager and/or Service Manager, and four to eight technicians. Larger volume service and tire stores may also have one or two sales people. The higher staffing level at many tire stores is necessary to support their higher sales volume. Tire Warehouse stores are generally staffed by a Store Manager and two to four technicians, one of whom serves as the Assistant Manager. All Store Managers receive a base salary, and Assistant Managers receive hourly compensation. In addition, Store Managers and Assistant Managers may receive other compensation based on their store’s customer relations, gross profit, labor cost controls, safety, sales volume and other factors via a monthly or quarterly bonus based on performance in these areas.

Monro believes that the ability to recruit and retain qualified technicians is an important competitive factor in the automotive repair industry, which has historically experienced a high turnover rate. Monro makes a concerted effort to recruit individuals who will have a long-term commitment to the Company and offers an hourly rate structure and additional compensation based on productivity; a competitive benefits package including health, dental, life and disability insurance; a 401(K)/profit-sharing plan; as well as the opportunity to advance within the Company. Many of the Company’s Managers and Market Managers started with the Company as technicians.

Many of the Company’s new technicians join the Company in their early twenties as trainees or apprentices. As they progress, they are promoted to technician and eventually master technician, the latter requiring ASE certification in both brakes and suspension. The Company offers a tool purchase program through which trainee technicians can acquire their own set of tools. The Company also will reimburse technicians for the cost of ASE certification registration fees and test fees and encourages all technicians to become certified by providing a higher hourly wage rate following their certification.

The Company’s training program provides multiple training sessions to both store managers and technicians in each store, each year.

Management training courses are developed and delivered by the Company’s dedicated training department and Operations management, and are supplemented with live and on-line vendor training courses. Management training covers customer service, sales, human resources (counseling, recruiting, interviewing, etc.), leadership, scheduling, financial and operational areas, and is delivered on a regular basis. The Company believes that involving Operations management in the development and delivery of these sessions results in more relevant and actionable training for store managers, and will improve overall performance and staff retention.

The Company’s training department develops and coordinates technical training courses on critical areas of automotive repair to Company technicians (e.g. Antilock braking systems (“ABS”) brake repair, drivability, tire pressure monitoring system (“TPMS”), etc.) and also conducts required technical training to maintain compliance with state inspection licenses, where applicable, and AMRA/MAP accreditation. Additionally, the Company’s training department holds periodic in-house technical clinics for store personnel and coordinates technician attendance at technical clinics offered by the Company’s vendors. The Company has on-line repair manuals installed in all of its stores for daily reference. It also issues technical bulletins to all stores on innovative or complex repair processes, and maintains a centralized database for technical repair problems. In addition, the Company has established a telephone technical hotline to provide assistance to store personnel in resolving problems encountered while diagnosing and repairing vehicles. The help line is available during all hours of store operation. The Company also maintains a training web page that contains many resources that are available for the technicians to reference.

 

7


OPERATING STRATEGY

Monro’s operating strategy is to provide its customers with a wide range of dependable, high-quality automotive service at a competitive price by emphasizing the following key elements.

Products and Services

The typical service or tire store provides a full range of undercar repair services for brakes, steering, mufflers and exhaust systems, drive train, suspension and wheel alignment, as well as tire replacement and service. These services apply to all makes and models of domestic and foreign cars, light trucks and vans. As a percentage of sales, the service stores provide significantly more brake and exhaust service than tire stores, and tire stores provide substantially more tire replacement and related services than service stores.

Stores generally provide many of the routine maintenance services (except engine diagnostic), which automobile manufacturers suggest or require in the vehicle owners’ manuals, and which fulfill manufacturers’ requirements for new car warranty compliance. The Company offers “Scheduled Maintenance” services in its stores whereby the aforementioned services are packaged and offered to consumers based upon the year, make, model and mileage of each specific vehicle. Management believes that the Company is able to offer this service in a more convenient and cost competitive fashion than auto dealers can provide.

Included in maintenance services are oil change services, heating and cooling system “flush and fill” service, belt installation, fuel system service and a transmission “flush and fill” service. Additionally, most stores replace and service batteries, starters and alternators. Stores in New York, West Virginia, New Hampshire, Maryland, Rhode Island, New Jersey, Pennsylvania, North Carolina, Virginia, Missouri, Maine and Vermont also perform annual state inspections. Approximately 52% of the Company’s stores also offer air conditioning services.

The Company began a program in the third quarter of fiscal year 2007 to increase tire and tire related sales, such as alignments, in its service stores. The goal is to increase the overall sales of these stores by capturing tire and related sales from existing store traffic and eventually drive additional traffic and sales. The program involves increasing the specific sales training of store managers, expanding the tire merchandise selection in these stores, and raising the focus of store advertising in this category. This initiative, which is called “Black Gold”, has now been rolled out to 248 of the Company’s service stores.

The format of the Tire Warehouse stores, acquired in fiscal year 2010, is different from Monro’s typical service or tire stores (as described above) in that over 99% of the stores’ sales involve tire services, including the mounting and balancing of tires, and the sale of road hazard warranties, but generally excluding alignments. All stores provide the installation of wiper blades. Several stores recently began performing alignments. In fiscal 2012, the Company plans to expand the number of stores offering alignment services.

Customer Satisfaction

The Company’s vision of being the dominant Auto Service provider in the markets it serves is supported by a set of values displayed in each Company store emphasizing TRUST:

 

   

Total Customer Satisfaction

 

   

Respect, Recognize and Reward (employees who are committed to these values)

 

   

Unparalleled Quality and Integrity

 

   

Superior Value and

 

   

Teamwork

 

8


Also displayed in each Company store are guiding principles in support of its commitment to customer service: only present needed work; fix vehicles right the first time; complete vehicle service on time; and exceed the customer’s expectations.

Additionally, each Company-operated store operates under the following set of customer satisfaction principles: free inspection of brakes, tires, shocks, front end and exhaust systems (as applicable); item-by-item review with customers of problem areas; free written estimates; written guarantees; drive-in service without an appointment; fair and reasonable prices; a 30-day best price guarantee; and repairs by professionally trained undercar and tire specialists. (See additional discussion under “Store Operations: Quality Control and Warranties”.)

Competitive Pricing, Advertising and Co-branding Initiatives

The Company seeks to set competitive prices for quality services and products. The Company supports its pricing strategy by advertising through direct mail coupon inserts and in-store promotional signage and displays. In addition, the Company advertises through radio, yellow pages, newspapers, service reminders and digital marketing to increase consumer awareness of the services offered. The Company also maintains websites for the Monro, Mr. Tire/Tread Quarters/Autotire and Tire Warehouse brands which allow customers to search for a location, print coupons, make service appointments, search tires for their vehicle and access information and tips on vehicle services offered at the Company’s stores.

The Company is promoting the Monro Muffler Brake & Service brand in its Tire Warehouse stores, to encourage Tire Warehouse customers to use Monro stores for their automotive service needs outside of tire replacement.

Centralized Control

Unlike many of its competitors, the Company operates, rather than franchises, most of its stores (except for the three Tire Warehouse franchises and 14 dealer locations). Monro believes that direct operation of stores enhances its ability to compete by providing centralized control of such areas of operations as service quality, store appearance, promotional activity and pricing. A high level of technical competence is maintained throughout the Company, as Monro requires, as a condition of employment, that employees participate in training programs to keep pace with changes in technology. Additionally, purchasing, distribution, merchandising, advertising, accounting and other store support functions are centralized primarily in the Company’s corporate headquarters in Rochester, New York, and are provided through the Company’s subsidiary, Monro Service Corporation. The centralization of these functions results in efficiencies and gives management the ability to closely monitor and control costs.

Comprehensive Training

The Company provides ongoing, comprehensive training to its store employees. Monro believes that such training provides a competitive advantage by enabling its technicians to provide quality service to its customers in all areas of undercar repair and tire service. (See additional discussion under “Store Operations: Store Personnel and Training”.)

PURCHASING AND DISTRIBUTION

The Company, through its wholly-owned subsidiary Monro Service Corporation, selects and purchases tires, parts and supplies for all Company-operated stores on a centralized basis through an automatic replenishment system. Although purchases outside the centralized system (“outside purchases”) are made when needed at the store level, these purchases are low by industry standards, and accounted for approximately 14% of all parts and tires used in fiscal 2011.

 

9


The Company’s ten largest vendors accounted for approximately 78% of its parts and tire purchases, with the largest vendor accounting for approximately 15% of total stocking purchases in fiscal 2011. The Company purchases parts and tires from approximately 100 vendors. Management believes that the Company’s relationships with vendors are excellent and that alternative sources of supply exist, at comparable cost, for substantially all parts used in the Company’s business. The Company routinely obtains bids from vendors to ensure it is receiving competitive pricing and terms.

Most parts are shipped by vendors to the Company’s primary warehouse facility in Rochester, New York, and are distributed to stores by the Company-operated tractor/trailer fleet. Stores are replenished either on a weekly or bi-weekly basis from this warehouse, and such replenishment fills, on average, 97% of all items ordered by the stores’ automatic POS-driven replenishment system. The Rochester warehouse stocks approximately 7,200 SKUs. The Company also operates warehouses in Maryland, Virginia, Illinois and New Hampshire. These warehouses carry, on average, 4,600, 1,800, 900 and 1,300 SKUs, respectively.

The Company enters into contracts with parts and tire suppliers, certain of which require the Company to buy (at market prices) up to 100% of its annual purchases of specific products. These agreements expire at various dates through November 2013. The Company believes these agreements provide it with high quality, branded merchandise at preferred pricing, along with strong marketing and training support.

COMPETITION

The Company competes in the retail automotive service industry. This industry is generally highly competitive and fragmented, and the number, size and strength of competitors vary widely from region to region. The Company believes that competition in this industry is based on customer service and reputation, store location, name awareness and price. Monro’s primary competitors include national and regional undercar, tire specialty and general automotive service chains, both franchised and company-operated; car dealerships, mass merchandisers operating service centers; and, to a lesser extent, gas stations, independent garages and Internet tire sellers. Monro considers Midas, Inc. and Meineke Discount Mufflers Inc. to be direct competitors. In most of the new markets that the Company has entered, at least one competitor was already present. In identifying new markets, the Company analyzes, among other factors, the intensity of competition. (See “Expansion Strategy” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.)

EMPLOYEES

As of March 26, 2011, Monro had 5,005 employees, of whom 4,734 were employed in the field organization, 81 were employed at the warehouses, 164 were employed at the Company’s corporate headquarters and 26 were employed in other offices. Monro’s employees are not members of any union. The Company believes that its relations with its employees are good.

REGULATION

The Company stores new oil and recycled antifreeze and generates and/or handles used tires and automotive oils, antifreeze and certain solvents, which are disposed of by licensed third-party contractors. In certain states, as required, the Company also recycles oil filters. Thus, the Company is subject to a number of federal, state and local environmental laws including the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”). In addition, the United States Environmental Protection Agency (the “EPA”), under the Resource Conservation and Recovery Act (“RCRA”), and various state and local environmental protection agencies regulate the Company’s handling and disposal of waste. The EPA, under the Clean Air Act, also regulates the installation of catalytic converters by the Company and all other repair stores by periodically spot checking repair jobs, and has the power to fine businesses that use improper procedures or materials. The EPA has the authority to impose sanctions, including civil penalties up to $25,000 per violation (or up to $25,000 per day for certain willful violations or failures to cooperate with authorities), for violations of RCRA and the Clean Air Act.

 

10


The Company is subject to various laws and regulations concerning workplace safety, zoning and other matters relating to its business. The Company maintains programs to facilitate compliance with these laws and regulations. The Company believes that it is in substantial compliance with all applicable environmental and other laws and regulations and that the cost of such compliance is not material to the Company.

The Company is environmentally conscious, and takes advantage of recycling opportunities at its offices, warehouses and stores. Cardboard, plastic shrink wrap and parts’ cores are returned to the warehouse by the stores on the Company stock trucks. There, they are accumulated for sale to recycling companies or returned to parts manufacturers for credit.

SEASONALITY

Although the Company’s business is not highly seasonal, customers do purchase more undercar service during the period of March through October than the period of November through February, when miles driven tend to be lower. In the tire stores, the better sales months are typically May through August, and October through December. The slowest months are typically January through April and September. As a result, profitability is typically lower during slower sales months, or months where mix is more heavily weighted toward tires, which is a lower margin category. Additionally, since the Company’s stores are primarily located in the northeastern United States, profitability trends to be lower in the winter months when certain costs, such as utilities and snow plowing, are typically higher.

COMPANY INFORMATION AND SEC FILINGS

The Company maintains a website at www.monro.com and makes its annual, quarterly and periodic Securities and Exchange Commission (“SEC”) filings available through the Investor Information section of that website. The Company’s SEC filings are available through this website free of charge, via a direct link to the SEC website at www.sec.gov. The Company’s filings with the SEC are also available to the public at the SEC Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330.

Item 1A.    Risk Factors

RISKS RELATED TO OUR BUSINESS

In addition to the risk factors discussed elsewhere in this annual report, the following are the important factors that could cause the Company’s actual results to differ materially from those projected in any forward looking statements:

We operate in the highly competitive automotive repair industry.

The automotive repair industry in which we operate is generally highly competitive and fragmented, and the number, size and strength of our competitors varies widely from region to region. We believe that competition in the industry is based primarily on customer service, reputation, store location, name awareness and price. Our primary competitors include national and regional undercar, tire specialty and general automotive service chains, both franchised and company-operated, car dealerships, mass merchandisers operating service centers and, to a lesser extent, gas stations, independent garages and Internet tire sellers. Some of our competitors have greater financial resources, are more geographically diverse and have better name recognition than we do, which might place us at a competitive disadvantage to those competitors. Because we seek to offer competitive prices, if our competitors reduce prices, we may be forced to reduce our prices, which could have a material adverse effect on our business, financial condition and results of operations. Further, our success within this industry also depends upon our ability to respond in a timely manner to changes in customer demands for both products and services. We cannot assure that we or any of our stores will be able to compete effectively. If we are unable to compete successfully in new and existing markets, we may not achieve our projected revenue and profitability targets.

 

11


We are subject to seasonality and cycles in the general economy that impact demand for our products and services.

Although our business is not highly seasonal, our customers typically purchase more undercar services during the period of March through October than the period of November through February, when miles driven tend to be lower. Further, customers may defer or forego vehicle maintenance at any time during periods of inclement weather. In the tire stores, the better sales months are typically May through August, and October through December. The slowest months are typically January through April and September. As a result, profitability is typically lower during slower sales months, or months where mix is more heavily weighted toward tires, which is a lower margin category.

Additionally, since the Company’s stores are primarily located in the northeastern United States, profitability trends to be lower in the winter months when certain costs, such as utilities and snow plowing, are typically higher.

The automotive repair industry is subject to fluctuations in the general economy. During a downturn in the economy, customers may defer or forego vehicle maintenance or repair. During periods of good economic conditions, consumers may decide to purchase new vehicles rather than having their older vehicles serviced. Should a significant reduction in the number of miles driven by automobile owners occur, it would likely have an adverse effect on the demand for our products and services. For example, when the retail cost of gasoline increases, the number of miles driven by automobile owners may decrease, which could result in less frequent service intervals and fewer repairs.

We depend on our relationships with our vendors, including foreign sources, for certain inventory. Our business may be negatively affected by the risks associated with such relationships and international trade.

We depend on close relationships with our vendors for parts, tires and supplies and for our ability to purchase products at competitive prices and terms. Our ability to purchase at competitive prices and terms results from the volume of our purchases from these vendors. We have entered into various contracts with parts suppliers that require us to buy from them (at market prices) up to 100% of our annual purchases of specific products. These agreements expire at various dates through November 2013.

We believe that alternative sources exist for most of the products we sell or use at our stores, and we would not expect the loss of any one supplier to have a material adverse effect on our business, financial condition or results of operations. Our dependence on a small number of suppliers, however, subjects us to the risks of shortages and interruptions. If any of our suppliers do not perform adequately or otherwise fail to distribute parts or other supplies to our stores, our inability to replace the suppliers in a timely manner and on acceptable terms could increase our costs and could cause shortages or interruptions that could have a material adverse effect on our business, financial condition and results of operations.

Further, we depend on a number of products (e.g. brake parts, tires, oil filters) produced in foreign markets. We face risks associated with the delivery of inventory originating outside the United States, including:

 

   

potential economic and political instability in countries where our suppliers are located,

 

   

increases in shipping costs,

 

   

transportation delays and interruptions, and

 

   

changes in U.S. and foreign laws affecting the importation and taxation of goods, including duties, tariffs and quotas, or changes in the enforcement of those laws.

Our industry is subject to environmental, consumer protection and other regulation.

We are subject to various federal, state and local environmental laws, building and zoning requirements, employment laws and other governmental regulations regarding the operation of our business. For example, we

 

12


are subject to rules governing the handling, storage and disposal of hazardous substances contained in some of the products such as motor oil that we sell and use at our stores, the recycling of batteries, tires and used lubricants, and the ownership and operation of real property. These laws and regulations can impose fines and criminal sanctions for violations and require the installation of pollution control equipment or operational changes to decrease the likelihood of accidental hazardous substance releases. Accordingly, we could become subject to material liabilities relating to the investigation and cleanup of contaminated properties, and to claims alleging personal injury or property damage as a result of exposure to, or release of, hazardous substances. In addition, stricter interpretation of existing laws and regulations, new laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require us to incur costs or become the basis of new or increased liabilities that could have a material adverse effect on our business, financial condition and results of operations.

National automotive repair chains have also been the subject of investigations and reports by consumer protection agencies and the Attorneys General of various states. Publicity in connection with these kinds of investigations could have an adverse effect on our sales and, consequently, our business, financial condition and results of operations. State and local governments have also enacted numerous consumer protection laws with which we must comply.

The costs of operating our stores may increase if there are changes in laws governing minimum hourly wages, working conditions, overtime, workers’ compensation insurance rates, unemployment tax rates or other laws and regulations. A material increase in these costs that we were unable to offset by increasing our prices or by other means could have a material adverse effect on our business, financial condition and results of operations.

We are involved in litigation from time to time arising from the operation of our business and, as such, we could incur substantial judgments, fines, legal fees or other costs.

We are sometimes the subject of complaints or litigation from customers, employees or other third parties for various actions. From time to time, we are involved in litigation involving claims related to, among other things, breach of contract, tortious conduct and employment law matters, including payment of wages. The damages sought against us in some of these litigation proceedings are substantial. Although we maintain liability insurance for some litigation claims, if one or more of the claims were to greatly exceed our insurance coverage limits or if our insurance policies do not cover a claim, this could have a material adverse affect on our business, financial condition, results of operations and cash flows.

We rely extensively on computer systems to process transactions, summarize results and manage our business. Disruptions in these systems could harm our ability to run our business.

Given the number of individual transactions we have each year, it is critical that we maintain uninterrupted operation of our computer and communications hardware and software systems. Our systems could be subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, including breaches of our transaction processing or other systems that result in the compromise of confidential customer data, catastrophic events such as fires, tornadoes and hurricanes, and usage errors by our employees. If our systems are breached, damaged or cease to function properly, we may have to make a significant investment to fix or replace them, we may suffer interruptions in our operations in the interim, we may face costly litigation, and our reputation with our customers may be harmed. Any material interruption in our computer operations may have a material adverse effect on our business or results of operations. The risk of disruption is increased in periods where complex and significant systems changes are undertaken.

Our business is affected by advances in automotive technology.

The demand for our products and services could be adversely affected by continuing developments in automotive technology. Automotive manufacturers are producing cars that last longer and require service and

 

13


maintenance at less frequent intervals in certain cases. Quality improvement of manufacturers’ original equipment parts has in the past reduced, and may in the future reduce, demand for our products and services, adversely affecting our sales. For example, manufacturers’ use of stainless steel exhaust components has significantly increased the life of those parts, thereby decreasing the demand for exhaust repairs and replacements. Longer and more comprehensive warranty or service programs offered by automobile manufacturers and other third parties also could adversely affect the demand for our products and services. We believe that a majority of new automobile owners have their cars serviced by a dealer during the period that the car is under warranty. In addition, advances in automotive technology continue to require us to incur additional costs to update our diagnostic capabilities and technical training programs.

We may not be successful in integrating new and acquired stores.

Management believes that our continued growth in sales and profit is dependent, in large part, upon our ability to open/acquire and operate new stores on a profitable basis. In order to do so, we must find reasonably priced new store locations and acquisition candidates that meet our criteria and we must integrate any new stores (opened or acquired) into our system. Our growth and profitability could be adversely affected if we are unable to open or acquire new stores or if new or existing stores do not operate at a sufficient level of profitability. If new stores do not achieve expected levels of profitability, this may adversely impact our ability to remain in compliance with our debt covenants or to make required payments under our credit facility.

Store closings result in costs.

From time to time, in the ordinary course of our business, we close certain stores, generally based on considerations of store profitability, competition, strategic factors and other considerations. Closing a store could subject us to costs including the write-down of leasehold improvements, equipment, furniture and fixtures. In addition, we could remain liable for future lease obligations.

We rely on an adequate supply of skilled field personnel.

In order to continue to provide high quality services, we require an adequate supply of skilled field managers and technicians. Trained and experienced automotive field personnel are in high demand, and may be in short supply in some areas. We cannot assure that we will be able to attract, motivate and maintain an adequate skilled workforce necessary to operate our existing and future stores efficiently, or that labor expenses will not increase as a result of a shortage in the supply of skilled field personnel, thereby adversely impacting our financial performance. While the automotive repair industry generally operates with high field employee turnover, any material increases in employee turnover rates in our stores or any widespread employee dissatisfaction could also have a material adverse effect on our business, financial condition and results of operations.

If we are unable to generate sufficient cash flows from our operations, our liquidity will suffer and we may be unable to satisfy our obligations.

We currently rely on cash flow from operations and our revolving credit facility to fund our business. Amounts outstanding on the revolving credit facility are reported as debt on our balance sheet. While we believe that we have the ability to sufficiently fund our planned operations and capital expenditures for the foreseeable future, various risks to our business could result in circumstances that would materially affect our liquidity. For example, cash flows from our operations could be affected by changes in consumer spending habits, the failure to maintain favorable vendor payment terms or our inability to successfully implement sales growth initiatives, among other factors. We may be unsuccessful in securing alternative financing when needed on terms that we consider acceptable.

 

14


In addition, a significant increase in our leverage could have the following risks:

 

   

our ability to obtain additional financing for working capital, capital expenditures, store renovations, acquisitions or general corporate purposes may be impaired in the future;

 

   

our failure to comply with the financial and other restrictive covenants governing our debt, which, among other things, require us to comply with certain financial ratios and limit our ability to incur additional debt and sell assets, could result in an event of default that, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations; and

 

   

our exposure to certain financial market risks, including fluctuations in interest rates associated with bank borrowings could become more significant.

If we do not perform in accordance with our debt covenants, the institutions providing the funds have the option to withdraw their funding support. We cannot assure that we will remain in compliance with our debt covenants in the future.

We depend on the services of key executives.

Our senior executives are important to our success because they have been instrumental in setting our strategic direction, operating our business, identifying, recruiting and training key personnel, identifying expansion opportunities and arranging necessary financing. Losing the services of any of these individuals could adversely affect our business until a suitable replacement could be found. It may be difficult to replace them quickly with executives of equal experience and capabilities. Although we have employment agreements with selected executives, we cannot prevent them from terminating their employment with us. Other executives are not bound by employment agreements with us.

New accounting guidance or changes in the interpretation or application of existing accounting guidance could affect our financial performance adversely.

New accounting guidance may require systems and other changes that could increase our operating costs and/or change our financial statements. For example, implementing future accounting guidance related to leases, contingencies, and other areas impacted by the current convergence project between the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) could require us to make significant changes to our lease management system or other accounting systems, and could result in changes to our financial statements. Additionally, implementing future accounting guidance related to leases or other items could potentially impact certain performance metrics and financial ratios, and potentially require the renegotiation of debt covenants.

Unanticipated changes in the interpretation or application of existing accounting guidance could result in material charges or restatements of our financial statements, which may further result in litigation or regulatory actions which could have an adverse effect on our financial condition and results of operations.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

The Company, through Monro Service Corporation, owns its office/warehouse facility of approximately 95,000 square feet, which is located on 12.7 acres of land in Holleder Technology Park, in Rochester, New York. Monro Service Corporation also owns a second office/warehouse facility of approximately 28,000 square feet, which is located on 11.8 acres of land in Swanzey, New Hampshire. Additionally, the Company leases warehouse space in Maryland, Virginia and Illinois.

 

15


Of Monro’s 781 Company-operated stores at March 26, 2011, 228 were owned, 433 were leased and for 120, the land only was leased. In general, the Company leases store sites for a ten-year period with several five-year renewal options. Giving effect to all renewal options, approximately 54% of the leases (300 stores) expire after 2021. Certain of the leases provide for contingent rental payments if a percentage of annual gross sales exceeds the base fixed rental amount. The highest contingent percentage rent of any lease is 6.75%, and no such lease has adversely affected profitability of the store subject thereto. An officer of the Company or members of his family are the lessors, or have interests in entities that are the lessors, with respect to six of the leases. No related party leases, other than the six assumed as part of the Mr. Tire Acquisition in March 2004, have been entered into, and no new related party leases are contemplated.

As of March 26, 2011, there was $.7 million outstanding under a mortgage held by the City of Rochester, New York, secured by the land on which the headquarters office and warehouse is located.

Item 3.    Legal Proceedings

The Company currently and from time to time is involved in litigation incidental to the conduct of its business, including employment-related litigation arising from claims by current and former employees. Although the Company diligently defends against these claims, it may enter into discussions regarding settlement of these and other lawsuits, and may enter into settlement agreements, if management believes settlement is in the best interests of the Company and its shareholders. Although the amount of liability that may result from these matters cannot be ascertained, management does not currently believe that, in the aggregate, they will result in liabilities material to the Company’s financial condition or results of operations.

Item 4.    Reserved

 

16


Part II

Item 5.    Market for the Company’s Common Equity and Related Stockholder Matters

MARKET INFORMATION

The Common Stock is traded on the NASDAQ Stock Market LLC under the symbol “MNRO”. The following table sets forth, for the Company’s last two fiscal years, the range of high and low sales prices on the NASDAQ Stock Market LLC for the Common Stock (1):

 

     Fiscal 2011      Fiscal 2010  

Quarter Ended

   High      Low      High      Low  

June

   $ 26.57       $ 23.29       $ 19.60       $ 15.13   

September

   $ 31.37       $ 24.33       $ 21.64       $ 15.85   

December

   $ 36.49       $ 29.88       $ 23.23       $ 18.58   

March

   $ 35.97       $ 30.55       $ 25.25       $ 20.77   

 

(1)

Adjusted for the three-for-two stock split that became effective on December 23, 2010.

HOLDERS

At May 13, 2011, the Company’s Common Stock was held by approximately 5,200 shareholders of record or through nominee or street name accounts with brokers.

EQUITY COMPENSATION PLAN INFORMATION

As of March 26, 2011, the Company maintained stock option plans under which employees and non-employee directors could be granted Common Stock options to purchase shares of the Company’s Common Stock. The following table contains information relating to such plans as of March 26, 2011.

 

Plan Category

   Number of
Securities To  Be
Issued Upon
Exercise of
Outstanding
Options

(a)
   Weighted Average
Exercise Price of
Outstanding

Options
(b)
   Number of Securities
Remaining Available

for Future Issuance
Under Equity
Compensation Plans
(Excluding

Securities
Reflected in
Column (a))
(c)

Equity compensation plans approved by security holders

       2,525,678        $ 19.35          931,007  

Equity compensation plans not approved by security holders

              
                                

Total

       2,525,678        $ 19.35          931,007  
                                

 

17


DIVIDENDS

On November 15, 2010, the Company’s Board of Directors declared a three-for-two stock split to be effected in the form of a 50% stock dividend (“the December 2010 stock split”). The stock split was distributed on December 23, 2010 to shareholders of record as of December 13, 2010. Information regarding the number of shares of Common Stock outstanding, as set forth in the Form 10-K, reflect the impact of this stock split.

In May 2009 and April 2010, the Company’s Board of Directors declared its intention to pay a regular quarterly cash dividend of $.05 and $.06 per common share or common share equivalent, as retroactively adjusted for the December 2010 stock split, beginning with the first quarter of fiscal 2010 and 2011, respectively.

In November 2010, the Company’s Board of Directors declared its intention to pay a regular quarterly cash dividend during the remainder of fiscal 2011 of $.08 per common share or common share equivalent, as retroactively adjusted for the December 2010 stock split, beginning with the third quarter of fiscal 2011.

However, the declaration of and determination as to the payment of future dividends will be at the discretion of the Board of Directors and will depend on the Company’s financial condition, results of operations, capital requirements, compliance with charter and contractual restrictions, and such other factors as the Board of Directors deems relevant.

 

18


PERFORMANCE GRAPH

Set forth below is a line-graph presentation comparing the cumulative shareholder return on the Company’s Common Stock, on an indexed basis, against the cumulative total returns of the S & P Industrials and the S & P Retail Stores-Specialty Index for the sixty month period from March 25, 2006 to March 26, 2011 (March 25, 2006 = 100):

LOGO

 

      3/06    3/07    3/08    3/09    3/10    3/11

Monro Muffler Brake, Inc.

     100.00          95.22          69.50        113.89        150.46        210.54  

S & P Industrials

   100.00    106.99    113.90      56.36      97.41    118.73

S & P Specialty Stores

   100.00    107.40      73.66      48.66      76.61      71.42

 

19


Item 6.    Selected Financial Data

The following table sets forth selected financial and operating data of the Company for each year in the five-year period ended March 26, 2011. The financial data and certain operating data have been derived from the Company’s audited financial statements. This data should be read in conjunction with the financial statements and related notes included under Item 8 of this report and in conjunction with other financial information included elsewhere in this Form 10-K.

 

         Year Ended Fiscal March  
         2011     2010     2009     2008     2007  
         (Amounts in thousands, except per share data)  

Income Statement Data:

          

Sales

   $ 636,678      $ 564,639      $ 476,106      $ 439,389      $ 417,226   

Cost of sales, including distribution and occupancy costs

     379,166        333,465        284,640        264,783        250,804   
                                          

Gross profit

     257,512        231,174        191,466        174,606        166,422   

Operating, selling, general and administrative expenses

     176,969        169,896        148,374        137,338        126,660   

Intangible amortization

     1,379        894        490        564        1,051   

Loss (gain) on disposal of assets

     779        1,148        (1,061     (1,670     (2,846
                                          

Total operating expenses

     179,127        171,938        147,803        136,232        124,865   
                                          

Operating income

     78,385        59,236        43,663        38,374        41,557   

Interest expense, net

     5,095        6,090        5,979        5,753        4,564   

Other (income) expense, net

     (647     (279     (430     (799     2,529   
                                          

Income before provision for income taxes

     73,937        53,425        38,114        33,420        34,464   

Provision for income taxes

     28,096        20,234        14,026        11,499        12,193   
                                          

Net income

   $ 45,841      $ 33,191      $ 24,088      $ 21,921      $ 22,271   
                                        

Earnings per share

 

Basic(a)(b)

   $ 1.52      $ 1.12      $ 0.85      $ 0.73      $ 0.71   
                                          
 

Diluted(a)(b)

   $ 1.44      $ 1.07      $ 0.80      $ 0.67      $ 0.65   
                                          

Weighted average number of Common Stock and
equivalents

          
 

Basic(b)

     30,200        29,508        28,255        30,036        31,226   
                                          
 

Diluted(b)

     31,807        30,978        30,149        32,806        34,317   
                                          

Cash dividends per common share or common share
equivalent(b)(c)

   $ .28      $ .23      $ .16      $ .15      $ .11   

Selected Operating Data:(d)

          

Sales growth:

          

Total

     12.8     18.6     8.4     5.3     13.2

Comparable store(e)

     4.2     7.2     6.7     1.2     3.2

Stores open at beginning of year

     777        710        720        698        625   
         
         

Stores open at end of year

     781        777        710        720        698   
         
         

Capital expenditures(f)

   $ 17,507      $ 21,333      $ 23,637      $ 20,574      $ 22,319   

Balance Sheet Data (at period end):

          

Net working capital

   $ 19,343      $ 24,715      $ 30,389      $ 34,562      $ 29,338   

Total assets

     451,840        444,143        376,866        370,469        339,758   

Long-term obligations

     41,990        96,427        97,098        122,585        52,525   

Shareholders’ equity

     280,249        232,670        194,291        174,848        215,119   

 

(a)

See Note 10 for calculation of basic and diluted earnings per share.

 

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(b)

Adjusted in fiscal years 2007-2010 for the effect of the Company’s December 2010 three-for-two stock split. In addition, fiscal year 2007 was adjusted for the effect of the Company’s October 2007 stock split.

 

(c)

All years include four dividend payments other than fiscal year 2010 which has five payments/accruals due to timing.

 

(d)

Includes Company-operated stores only — no dealer or franchise locations.

 

(e)

Comparable store sales data is calculated based on the change in sales of only those stores open as of the beginning of the preceding fiscal year.

 

(f)

Amount does not include the funding of the purchase price related to acquisitions.

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

 

     Year Ended Fiscal March  
     2011     2010     2009  

Sales

     100.0     100.0     100.0

Cost of sales, including distribution and occupancy costs

     59.6        59.1        59.8   
                        

Gross profit

     40.4        40.9        40.2   
                        

Operating, selling, general and administrative expenses

     27.8        30.1        31.2   

Intangible amortization

     .2        .2        .1   

Loss (gain) on disposal of assets

     .1        .2        (.2
                        

Total operating expenses

     28.1        30.5        31.1   
                        

Operating income

     12.3        10.5        9.2   

Interest expense, net

     .8        1.1        1.3   

Other income, net

     (.1            (.1
                        

Income before provision for income taxes

     11.6        9.5        8.0   

Provision for income taxes

     4.4        3.6        2.9   
                        

Net income

     7.2     5.9     5.1
                        

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. Forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed. These factors include, but are not necessarily limited to, product demand, dependence on and competition within the primary markets in which the Company’s stores are located, the need for and costs associated with store renovations and other capital expenditures, the effect of economic conditions, the impact of competitive services and pricing, product development, parts supply restraints or difficulties, industry regulation, risks relating to leverage and debt service (including sensitivity to fluctuations in interest rates), continued availability of capital resources and financing, risks relating to litigation, risks relating to integration of acquired businesses, the risks set forth in “Item 1A. Risk Factors” and other factors set forth or incorporated elsewhere herein and in the Company’s other SEC filings. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.

CRITICAL ACCOUNTING POLICIES

The Company believes that the accounting policies listed below are those that are most critical to the portrayal of the Company’s financial condition and results of operations, and that required management’s most

 

21


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.

Inventory

The Company evaluates 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 the Company believes inventory is stated at the lower of cost or market in the consolidated financial statements. In addition, historically the Company has 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

The Company has 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. Other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses. The carrying values of goodwill, customer list and trade name assets are subject to annual impairment reviews in accordance with accounting guidance on goodwill and other intangible assets, which the Company typically performs in the third quarter of the fiscal year. Impairment reviews may also be triggered by any significant events or changes in circumstances affecting the Company’s business.

The Company has one reporting unit that is not at risk. The goodwill impairment test consists of a two-step process, if necessary. The first step is to compare the fair value of the Company’s invested capital to the book value of its invested capital. 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.

A deterioration of macroeconomic conditions may not only negatively impact the estimated operating cash flows used in the Company’s cash flow models, but may also negatively impact other assumptions used in the Company’s analyses, including, but not limited to, the estimated cost of capital and/or discount rates. Additionally, as discussed above, in accordance with accounting guidance, the Company is required to ensure that assumptions used to determine fair value in the Company’s 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 the Company’s analyses may increase or decrease based on market conditions and trends, regardless of whether the Company’s actual cost of capital has changed. Therefore, the Company may recognize an impairment of an intangible asset or assets even though realized actual cash flows are approximately equal to or greater than its previously forecasted amounts.

Self-Insurance Reserves

The Company is largely self-insured with respect to workers’ compensation, general liability and employee medical claims. In order to reduce its risk and better manage its overall loss exposure, the Company purchases stop-loss insurance that covers individual claims in excess of the deductible amounts. The Company maintains 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 the Company’s business and workforce, and general economic factors. These accruals are reviewed on a quarterly basis, or more frequently if factors

 

22


dictate a more frequent review is warranted. For more complex reserve calculations, such as workers compensation, the Company uses the services of an actuary on an annual basis to assist in determining the required reserve for open claims.

Stock-Based Compensation

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. The Company uses historical data to estimate forfeitures. The dividend yield is based on historical experience and expected future changes.

Income Taxes

The Company’s provision for income taxes and effective tax rates are calculated by legal entity and jurisdiction and are based on a number of factors, including the Company’s income, tax planning strategies, differences between tax laws and accounting rules, statutory tax rates and credits, uncertain tax positions and valuation allowances. The Company uses significant judgment and estimates in evaluating its 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 the Company’s tax return (the current or cash tax rate) is different from the tax rate reflected in the Company’s Consolidated Financial Statements. Some of the differences are permanent, while other differences are temporary as they reverse over time. The Company records deferred tax assets and liabilities for any temporary differences between the tax reflected in the Company Consolidated Financial Statements and tax bases. The Company establishes valuation allowances when it believes it is more-likely-than-not that some portion of its deferred tax assets will not be realized.

At any one time, the Company’s tax returns for several tax years are subject to examination by U.S. federal and state taxing jurisdictions. The Company establishes tax liabilities in accordance with the accounting guidance on income taxes. The accounting guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attributes of income tax positions taken or expected to be taken on a tax return. 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. The Company adjusts 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 the Company’s actual tax liability differs from its established tax liabilities for unrecognized tax benefits, the Company’s 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, the Company believes that its tax balances reflect the more-likely-than-not outcome of known tax contingencies.

RESULTS OF OPERATIONS

Overview

The Company experienced strong comparable store sales in both of its fiscal years 2011 and 2010.

Management believes that the improvement in comparable store sales resulted from several factors, including an increase in sales across most product categories. It is management’s belief that strong in-store sales

 

23


execution, highly effective advertising campaigns and price increases in all product categories also contributed to the sales improvement. Comparable store traffic as well as average ticket increased over the prior year as well. Soft economic conditions and the related decrease in consumer spending and tightening of credit, resulting in declining automobile sales (as compared to historical levels), helped to contribute to the improved sales. Management believes that consumers are keeping their cars longer and repairing them instead of trading them in for new cars. Additionally, while consumers can and often defer repairs when the economy is weak, most repairs can only be deferred for a period of time. When customers do come in to have their vehicles repaired, it is management’s belief that they spend more on average because the problem with their vehicle has worsened due to additional wear.

Management also believes that the closings of dealerships by Chrysler and General Motors are driving more business to the Company’s stores as consumers look for alternative, proven, economical and more geographically convenient locations to service their automobiles.

Fiscal 2011 As Compared To Fiscal 2010

Sales for fiscal 2011 increased $72.1 million or 12.8% to $636.7 million as compared to $564.6 million in fiscal 2010. The increase was partially due to a comparable store sales increase of 4.2%. Additionally, there was an increase of $54.6 million related to new stores, of which $41.2 million and $10.3 million came from the fiscal 2010 and fiscal 2011 acquisitions, respectively. Partially offsetting this was a decrease in sales from closed stores amounting to $3.5 million. There were 361 selling days in both fiscal 2011 and 2010.

The Company has slightly modified its methodology for calculating the number of selling days in each month and quarter. Previously, in computing its comparable store sales percentage increases (adjusted for days), the Company did not include Sundays or open holidays in the number of selling days, but included all sales in each comparable period. This was because only a small number of stores were open Sundays, and some were not open holidays. Also, these days were generally much shorter selling days. Now that over 50% of the Company’s stores are open Sundays, almost all stores are open holidays, and the selling days are longer, the Company concluded that counting Sundays and open holidays as selling days is now appropriate. Accordingly, selling days now include each day other than Easter, Thanksgiving and Christmas. This change was made beginning in fiscal year 2011 (April 2010) and retroactively applied to prior months and quarters. There is no impact on reported actual comparable store sales increases for any prior periods. Nor will the change impact calculated comparable store sales increases in future periods. However, this change may result in a change in the calculated comparable store sales percent increase in certain prior periods when adjusted for days.

For the fiscal year 2010 fiscal quarters and full year, the results were as follows:

 

     Reported
Comparable  Store
Sales

Increase
  Originally
Reported
Comparable Store
Sales Increase,
Adjusted For Days
  Restated
Comparable Store
Sales Increase,
Adjusted For Days

Q1 FY10

       6.2 %       6.2 %       7.4 %(1)

Q2 FY10

       7.4 %       7.4 %       7.4 %

Q3 FY10

       7.2 %       7.2 %       7.2 %

Q4 FY10

       8.0 %       8.0 %       6.8 %(2)

Full year FY10

       7.2 %       7.2 %       7.2 %

 

(1)

This adjustment for days relates to the fact that the Easter holiday fell in April 2009, reducing the number of selling days as compared to the prior year quarter.

 

(2)

This adjustment for days relates to the fact that the Company was open for business for the first time on New Year’s Day on January 1, 2010, increasing the number of selling days as compared to the prior year quarter.

 

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During the year, 12 stores were added and eight were closed. At March 26, 2011, the Company had 781 Company-operated stores in operation.

Gross profit for fiscal 2011 was $257.5 million or 40.4% of sales as compared with $231.2 million or 40.9% of sales for fiscal 2010. The decline in gross profit as a percent of sales is largely due to the shift in mix to the lower margin tire sales category, resulting from a full year of sales from the fiscal 2010 acquired stores, including Tire Warehouse whose sales mix is almost 100% tires.

Labor costs decreased slightly as a percentage of sales as compared to the prior year, largely due to a shift in mix to increased tire sales as well as improved labor efficiency as measured by sales per man hour.

Distribution and occupancy costs also decreased slightly as a percentage of sales from the prior year as the Company, with improved sales, was able to better leverage these largely fixed costs.

Total material costs, including outside purchases, increased as a percentage of sales as compared to the prior fiscal year, largely due to the shift in mix to increased tire sales, as well as cost increases in various items such as oil and tires. These increases were partially offset by selling price increases across the chain and increased vendor rebates recognized as compared to the prior year.

Operating expenses for fiscal 2011 were $179.1 million or 28.1% of sales compared with $171.9 million or 30.5% of sales for fiscal 2010. Within operating expenses, selling, general and administrative (“SG&A”) expenses for fiscal 2011 increased by $7.1 million to $177.0 million from fiscal 2010, and were 27.8% of sales, compared with 30.1% in the prior year. The Company experienced meaningful leverage in this line through focused cost control on increased sales.

Over $7.3 million in SG&A expense is directly attributed to increased direct store expenses such as manager pay, advertising and supplies related to the fiscal 2011 acquisition stores and a full year of expenses for the fiscal 2010 acquisition stores. In addition, advertising expense, in connection with the Company’s focused efforts to drive traffic, gain market share and improve comparable store sales, and other direct store expenses increased by $2.7 million. Other drivers of the dollar increases in SG&A expenses in fiscal 2011 in both store direct and store support costs were: store manager pay and related benefits increased by approximately $1.0 million, attributable to raises and increased incentives in fiscal 2011 due to improved store performance as compared to the prior year. Store support costs decreased by approximately $3.9 million including decreased workers compensation and health care costs, partially offset by increased management compensation expense as compared to the prior year. Management bonus expense was up due to the Company attaining higher profit goals for fiscal 2011 and thus earning higher bonuses.

Intangible amortization for fiscal 2011 increased $.5 million to $1.4 million from fiscal 2010, and remained flat at .2% of sales as compared to the prior year. The increase is due primarily to a full year of amortization expense for the fiscal 2010 acquisitions.

Operating income in fiscal 2011 of $78.4 million increased 32.3% compared to operating income in fiscal 2010, and increased as a percentage of sales from 10.5% to 12.3%.

Net interest expense for fiscal 2011 decreased by approximately $1.0 million as compared to the same period in the prior year, and decreased from 1.1% to 0.8% as a percentage of sales for the same periods. The weighted average debt outstanding for the year ended March 26, 2011 decreased by approximately $32.9 million from fiscal 2010, primarily related to a decrease in debt outstanding under the Company’s Revolving Credit Facility agreement. The weighted average interest rate increased by approximately 130 basis points in fiscal 2011 due to a shift to a larger percentage of debt (capital lease vs. revolver) outstanding at a higher rate.

The Company’s effective tax rate was 38.0% and 37.9%, respectively, of pre-tax income in fiscal 2011 and 2010.

 

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Net income for fiscal 2011 increased by $12.7 million, or 38.1%, from $33.2 million in fiscal 2010, to $45.8 million in fiscal 2011, and earnings per diluted share increased by 34.6% from $1.07 to $1.44 due to the factors discussed above.

Fiscal 2010 As Compared To Fiscal 2009

Sales for fiscal 2010 increased $88.5 million or 18.6% to $564.6 million as compared to $476.1 million in fiscal 2009. The increase was partially due to a comparable store sales increase of 7.2%. The former Craven and Valley Forge stores acquired in July 2007 and the former Broad Elm stores acquired in January 2008 are now included in comparable store sales numbers. Additionally, there was an increase of $64.0 million related to new stores, of which $58.5 million came from the FY 2010 Acquisitions. Partially offsetting this was a decrease in sales from closed stores amounting to $7.6 million. There were 361 selling days in both fiscal 2010 and fiscal 2009. Selling days are defined as days other than Easter, Thanksgiving and Christmas.

During the year, 79 stores were added and 12 were closed. At March 27, 2010, the Company had 777 stores in operation.

Gross profit for fiscal 2010 was $231.2 million or 40.9% of sales as compared with $191.5 million or 40.2% of sales for fiscal 2009. The increase in gross profit for the year ended March 27, 2010, as a percentage of sales, is due to several factors. There was a decrease in labor costs as a percent of sales due partially to a continued shift in mix to tire sales and improved labor productivity.

Distribution and occupancy costs decreased as a percentage of sales from the prior year as the Company, with improved sales, was able to better leverage largely fixed costs.

Total material costs, including outside purchases, increased as a percentage of sales as compared to the prior fiscal year. This was due to margin pressure caused by a shift in mix to the lower margin categories of tires and maintenance services from the higher margin categories of brakes and exhaust. The fiscal year 2010 Acquisitions, which were all tire stores, have resulted in a more pronounced shift in mix this year. Partially offsetting this were the sale of lower cost import tires, a decrease in the material cost of oil as well as selling price increases.

Operating expenses for fiscal 2010 were $171.9 million or 30.5% of sales compared with $147.8 million or 31.1% of sales for fiscal 2009. Within operating expenses, selling, general and administrative (“SG&A”) expenses for fiscal 2010 increased by $21.5 million to $169.9 million from fiscal 2009, and were 30.1% of sales, compared with 31.2% in the prior year. Over $12.0 million of the increase in operating expense is directly attributed to the acquired stores’ operating expenses.

The largest drivers of the dollar increases in SG&A expenses in fiscal 2010 in both store direct and store support costs (excluding the $12.0 million described above) were as follows: Store manager pay and related benefits increased by approximately $4.9 million, attributable to raises and increased incentives in fiscal 2010 due to improved store performance as compared to the prior year. Store support costs increased by approximately $5.4 million including increased management compensation expense as compared to the prior year. Management bonus expense was up due to the Company attaining higher profit goals for fiscal 2010 and thus earning higher bonuses. In addition, benefits expense increased due to an increase in FICA expense related to higher wages paid, as well as increased workers compensation costs.

Loss on disposal of assets for fiscal 2010 increased $2.2 million from a gain of $1.1 million for fiscal 2009, to a loss of $1.1 million for fiscal 2010. The increase is due to the closure of underperforming stores as well as the timing of, proceeds from and number of sales of property in one year compared to another.

Operating income in fiscal 2010 of $59.2 million increased 35.7% compared to operating income in fiscal 2009, and increased as a percentage of sales from 9.2% to 10.5%.

 

26


Net interest expense for fiscal 2010 increased by approximately $.1 million as compared to the same period in the prior year, and decreased from 1.3% to 1.1% as a percentage of sales for the same periods. The weighted average debt outstanding for the year ended March 27, 2010 increased by approximately $2.7 million from fiscal 2009, primarily related to additional capital leases recorded with the FY 2010 acquisitions. This was offset by a decrease in debt outstanding under the Company’s Revolving Credit Facility agreement. The weighted average interest rate remained flat compared to the prior year.

The Company’s effective tax rate was 37.9% and 36.8%, respectively, of pre-tax income in fiscal 2010 and 2009. The difference in rate relates to the accounting for uncertain tax positions which may vary from year to year.

Net income for fiscal 2010 increased by $9.1 million, or 37.8%, from $24.1 million in fiscal 2009, to $33.2 million in fiscal 2010, and earnings per diluted share increased by 33.8% from $.80 to $1.07 due to the factors discussed above.

CAPITAL RESOURCES, CONTRACTUAL OBLIGATIONS AND LIQUIDITY

Capital Resources

The Company’s primary capital requirements for fiscal 2011 were divided among the funding of acquisitions for $10.2 million, as well as the upgrading of facilities and systems and funding of its store expansion program totaling $17.5 million. In fiscal 2010, the Company’s primary capital requirements involved the funding of acquisitions for $46.1 million, as well as the upgrading of facilities and systems and the funding of its store expansion program totaling $21.3 million. Included in fiscal 2010 capital expenditures was $7.5 million spent to acquire nine store properties previously under lease agreements. In both fiscal years 2011 and 2010, capital requirements were primarily met by cash flow from operations.

In fiscal 2012, the Company intends to open approximately four new stores. Total capital required to open a new service store ranges, on average (excluding the acquired stores and BJ’s locations), from $350,000 to $950,000 depending on whether the store is leased, owned or land leased. Total capital required to open a new greenfield tire (leased) location costs, on average, approximately $600,000, including $220,000 for equipment and $140,000 for inventory.

The Company paid dividends of $8.7 million in fiscal 2011. In May 2011, the Company’s Board of Directors declared its intention to pay a regular quarterly cash dividend of $.08 per common share or common share equivalent beginning with the first quarter of fiscal year 2012.

On May 10, 2011, the Company signed a definitive asset purchase agreement to acquire 24 retail tire and automotive repair stores from Vespia Tire Centers, Inc. (“Vespia”). The transaction is expected to close June 5, 2011. The Vespia stores are located in Pennsylvania and New Jersey. These stores will operate under the Mr. Tire name. The acquisition will be financed through the Company’s existing bank facility.

The Company also plans to continue to seek suitable acquisition candidates. Management believes that the Company has sufficient resources available (including cash flow from operations and bank financing) to expand its 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:

 

     Total      Within
1 Year
     Within 2 to
3 Years
     Within 4 to
5 Years
     After
5 Years
 
     (Dollars in thousands)  

Long-term debt

   $ 10,722       $ 10,062       $ 0       $ 660       $ 0   

Capital lease commitments

     44,301         2,971         6,801         6,306         28,223   

Operating lease commitments

     105,373         26,623         41,332         22,429         14,989   
                                            

Total

   $ 160,396       $ 39,656       $ 48,133       $ 29,395       $ 43,212   
                                            

 

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Liquidity

In July 2005, the Company entered into a five-year, $125 million Revolving Credit Facility agreement with five banks. A sixth bank was added in June 2008. Interest only is payable monthly throughout the Credit Facility’s term. The facility included a provision allowing the Company to expand the amount of the overall facility to $160 million. Amendments in January 2007 and June 2008 were made to these amounts which increased the overall facility to $200 million. Currently, the committed sum is $163.3 million and the accordion feature is $36.7 million. There was $10.1 million outstanding at March 26, 2011. The facility expires in January 2012. The Company was in compliance with all debt covenants at March 26, 2011.

In anticipation of the expiration of its existing facility, the Company has received commitments for a new five-year $175 million Revolving Credit Facility with seven banks. The Company expects to sign the new agreement by May 31, 2011. The facility includes a provision allowing the Company to expand the amount of the overall facility to $250 million.

The terms of the new Credit Facility permit the payment of cash dividends not to exceed 50% of the preceding year’s net income, and allow stock buybacks subject to the Company being able to meet its existing financial covenants. The agreement requires the maintenance of specified interest and rent coverage ratios. The agreement permits mortgages and specific lease financing arrangements with other parties with certain limitations.

The Credit Facility is not secured by the Company’s real property, although the Company has agreed not to encumber its real property, with certain permissible exceptions.

Within the aforementioned $175 million Revolving Credit Facility, the Company has available a sub-facility of $40 million for the purpose of issuing standby letters of credit. The line requires fees aggregating 1.125% annually of the face amount of each standby letter of credit, payable quarterly in arrears. There were $16.8 million in outstanding letters of credit at March 26, 2011.

In addition, the Company has financed certain store properties and vehicles with capital leases, which amount to $44.3 million and are due in installments through 2039.

From time to time, the Company enters into interest rate hedge agreements, which involve the exchange of fixed and floating rate interest payments periodically over the life of the agreement without the exchange of the underlying principal amounts. The differential to be paid or received is accrued as interest rates change and is recognized over the life of the agreements as an offsetting adjustment to interest expense. The Company entered into three $10 million interest rate swap agreements in July 2008 which expired in July 2010. The purpose of these agreements was to limit the interest rate exposure in the Company’s floating rate debt. Fixed rates under these agreements ranged from 3.27% to 3.29%.

INFLATION

The Company does not believe its operations have been materially affected by inflation. The Company 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 the Company’s consolidated financial statements as of March 26, 2011 and for the year then ended, as well as the expected impact on the Company’s consolidated financial statements for future periods.

 

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Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risk from potential changes in interest rates. At year end March 2011 and 2010, approximately 6% and 58%, respectively, of the Company’s debt financing, excluding capital leases, was at fixed interest rates and therefore, the fair value of such debt financing is affected by changes in market interest rates. The Company’s cash flow exposure on floating rate debt, which is not supported by interest rate swap agreements, would result in interest expense fluctuating approximately $.1 million based upon the Company’s debt position at fiscal year ended March 26, 2011 and $.2 million for fiscal year ended March 27, 2010, given a 1% change in LIBOR.

The Company regularly evaluates these risks and had entered into three interest rate swap agreements, which expired in July 2010, with an aggregate notional amount of $30.0 million. These agreements limited the interest rate exposure on the Company’s floating rate debt, related specifically to the Revolving Credit Facility, via the exchange of fixed and floating rate interest payments periodically over the life of the agreements without the exchange of the underlying principal amount. The fixed rates paid by the Company under these agreements ranged from 3.27% to 3.29%.

The Company believes the amount of risk and the use of derivative financial instruments described above are not material to the Company’s financial condition or results of operations.

Debt financing, including current portion, had a carrying amount of $10.7 million and a fair value of $10.7 million as of March 26, 2011, as compared to a carrying amount of $52.7 million and a fair value of $52.6 million as of March 27, 2010.

 

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Item 8.    Financial Statements and Supplementary Data

 

     Page  

Report of Independent Registered Public Accounting Firm

     31   

Audited Financial Statements:

  

Consolidated Balance Sheets at March 26, 2011 and March 27, 2010

     32   

Consolidated Statements of Income for the fiscal three years ended March 26, 2011

     33   

Consolidated Statements of Changes in Shareholders’ Equity for the fiscal three years ended
March 26, 2011

     34   

Consolidated Statements of Cash Flows for the fiscal three years ended March 26, 2011

     35   

Notes to Consolidated Financial Statements

     36   

Selected Quarterly Financial Information (Unaudited)

     66   

 

30


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Monro Muffler Brake, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Monro Muffler Brake, Inc. and its subsidiary at March 26, 2011 and March 27, 2010, and the results of its operations and its cash flows for each of the three years in the period ended March 26, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 26, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Rochester, New York

May 25, 2011

 

31


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

       March 26,
2011
       March 27,
2010
 
       (Dollars in thousands)  
Assets          

Current assets:

         

Cash and equivalents

     $ 2,670         $ 11,180   

Trade receivables

       1,821           1,922   

Inventories

       98,964           85,817   

Deferred income tax asset

       8,667           7,800   

Other current assets

       16,661           17,373   
                     

Total current assets

       128,783           124,092   
                     

Property, plant and equipment

       398,524           386,238   

Less – Accumulated depreciation and amortization

       (197,928        (183,492
                     

Net property, plant and equipment

       200,596           202,746   

Goodwill

       98,535           90,372   

Intangible assets

       13,506           13,888   

Other non-current assets

       10,420           13,045   
                     

Total assets

     $ 451,840         $ 444,143   
                     
Liabilities and Shareholders’ Equity          

Current liabilities:

         

Current portion of long-term debt

     $ 13,033         $ 2,933   

Trade payables

       41,301           43,229   

Federal and state income taxes payable

       1,132           4,169   

Accrued payroll, payroll taxes and other payroll benefits

       16,825           16,730   

Accrued insurance

       21,095           15,595   

Warranty reserves

       6,254           5,510   

Other current liabilities

       9,800           11,211   
                     

Total current liabilities

       109,440           99,377   

Long-term debt

       41,990           96,427   

Accrued rent expense

       6,476           6,473   

Other long-term liabilities

       4,617           4,551   

Deferred income tax liability

       4,353           560   

Long-term income taxes payable

       4,715           4,085   
                     

Total liabilities

       171,591           211,473   
                     

Commitments

         

Shareholders’ equity:

         

Class C Convertible Preferred Stock, $1.50 par value, $.064 and $.096 conversion value at March 26, 2011 and March 27, 2010, respectively; 150,000 shares authorized, 32,500 shares issued and outstanding

       49           49   

Common Stock, $.01 par value, 45,000,000 shares authorized; 36,038,664 and 23,646,460 shares issued at March 26, 2011 and March 27, 2010, respectively

       360           236   

Treasury Stock, 5,577,984 and 3,682,429 shares at March 26, 2011 and March 27, 2010, respectively, at cost

       (72,317        (70,590

Additional paid-in capital

       99,871           88,377   

Accumulated other comprehensive loss

       (1,578        (2,237

Retained earnings

       253,864           216,835   
                     

Total shareholders’ equity

       280,249           232,670   
                     

Total liabilities and shareholders’ equity

     $ 451,840         $ 444,143   
                     

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

 

32


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

 

    Year Ended Fiscal March  
    2011     2010     2009  
    (Amounts in thousands, except
per share data)
 

Sales

  $ 636,678      $ 564,639      $ 476,106   

Cost of sales, including distribution and occupancy costs

    379,166        333,465        284,640   
                       

Gross profit

    257,512        231,174        191,466   

Operating, selling, general and administrative expenses

    176,969        169,896        148,374   

Intangible amortization

    1,379        894        490   

Loss (gain) on disposal of assets

    779        1,148        (1,061
                       

Total operating expenses

    179,127        171,938        147,803   
                       

Operating income

    78,385        59,236        43,663   

Interest expense, net of interest income of $39 in 2011, $68 in 2010 and $32 in 2009

    5,095        6,090        5,979   

Other income, net

    (647     (279     (430
                       

Income before provision for income taxes

    73,937        53,425        38,114   

Provision for income taxes

    28,096        20,234        14,026   
                       

Net income

  $ 45,841      $ 33,191      $ 24,088   
                       

Earnings per share:

     

Basic

  $ 1.52      $ 1.12      $ .85   
                       

Diluted

  $ 1.44      $ 1.07      $ .80   
                       

Weighted average number of common shares outstanding used in computing earnings per share:

     

Basic

    30,200        29,508        28,255   
                       

Diluted

    31,807        30,978        30,149   
                       

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

 

33


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

    Class C
Convertible
Preferred
Stock
  Common
Stock
  Treasury
Stock
  Additional
Paid-In
Capital
  Retained
Earnings
  Accumulated
Other
Comprehensive
Income
  Total
    (Dollars in thousands)

Balance at March 29, 2008

    $ 97       $ 217       $ (62,160 )     $ 66,756       $ 171,120       $ (1,182 )     $ 174,848  

Net income

                      24,088             24,088  

Other comprehensive loss

                           

Unrealized loss on derivatives contracts ($1,008 pre-tax)(2)

                          (625 )       (625 )

Pension liability adjustment ($2,602 pre-tax)(1)

                          (1,678 )       (1,678 )
                                 

Total comprehensive income

                              21,785  

Dividends:

                           

Preferred ($.16 per CSE)(3)

                      (213 )           (213 )

Common ($.16 per share)

                      (4,487 )           (4,487 )

Tax benefit from exercise of stock options

                  2,266                 2,266  

Conversion of Class C preferred stock

      (48 )       5             43                 0  

Exercise of stock options(5)

          8         (5,294 )       3,648                 (1,638 )

Stock option compensation

                  1,730                 1,730  
                                                                     

Balance at March 28, 2009

      49         230         (67,454 )       74,443         190,508         (3,485 )       194,291  

Net income

                      33,191             33,191  

Other comprehensive income

                           

Unrealized gain on derivatives contracts ($702 pre-tax)(2)

                          435         435  

Pension liability adjustment ($1,311 pre-tax)(1)

                          813         813  
                                 

Total comprehensive income

                              34,439  

Dividends:

                           

Preferred ($.23 per CSE)(3)(4)

                      (172 )           (172 )

Common ($.23 per share)(4)

                      (6,692 )           (6,692 )

Tax benefit from exercise of stock options

                  2,990                 2,990  

Exercise of stock options(5)

          6         (3,136 )       8,967                 5,837  

Stock option compensation

                  1,977                 1,977  
                                                                     

Balance at March 27, 2010

      49         236         (70,590 )       88,377         216,835         (2,237 )       232,670  

Net income

                      45,841             45,841  

Other comprehensive income

                           

Unrealized gain on derivatives contracts ($306 pre-tax)(2)

                          190         190  

Pension liability adjustment ($756 pre-tax)(1)

                          469         469  
                                 

Total comprehensive income

                              46,500  

Dividends:

                           

Preferred ($.28 per CSE)(3)

                      (213 )           (213 )

Common ($.28 per share)

                      (8,477 )           (8,477 )

Tax benefit from exercise of stock options

                  3,531                 3,531  

Exercise of stock options(5)

          4         (1,727 )       5,670                 3,947  

Shares issued in connection with three-for-two stock split
(See Note 1)

          120             (6 )       (122 )           (8 )

Stock option compensation

                  2,299                 2,299  
                                                                     

Balance at March 26, 2011

    $ 49       $ 360       $ (72,317 )     $ 99,871       $ 253,864       $ (1,578 )     $ 280,249  
                                                                     

 

(1)

The balance related to the pension liability was $(1,578), $(2,047) and $(2,860), respectively, at March 26, 2011, March 27, 2010 and March 28, 2009.

(2)

The balance related to the derivatives contracts was $0, $(190) and $(625), respectively, at March 26, 2011, March 27, 2010 and March 28, 2009.

(3)

CSE – Common stock equivalent

(4)

Includes five payments/accruals due to timing.

(5)

Includes the receipt of treasury stock in connection with the exercise of stock options and to partially satisfy tax withholding obligations.

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

 

34


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended Fiscal March  
     2011     2010     2009  
     (Dollars in thousands)  
     Increase (Decrease) in Cash  

Cash flows from operating activities:

      

Net income

   $ 45,841      $ 33,191      $ 24,088   
                        

Adjustments to reconcile net income to net cash provided

by operating activities -

Depreciation and amortization

     22,803        22,505        20,429   

Stock-based compensation expense

     2,299        1,977        1,730   

Excess tax benefits from share-based payment arrangements

     (5,839     (2,367     (2,856

Net change in deferred income taxes

     2,551        1,004        2,603   

Loss (gain) on disposal of property, plant and equipment

     779        1,148        (1,061

Decrease in trade receivables

     101        671        65   

Increase in inventories

     (12,887     (655     (5,260

Decrease in other current assets

     974        3,538        569   

Decrease (increase) in other non-current assets

     2,846        404        (791

(Decrease) increase in trade payables

     (2,349     8,348        7,183   

Increase in accrued expenses

     3,374        7,266        3,360   

Increase in federal and state income taxes payable

     501        8,457        70   

Increase (decrease) in other long-term liabilities

     97        36        (1,606

Increase in long-term income taxes payable

     630        1,004        61   
                        

Total adjustments

     15,880        53,336        24,496   
                        

Net cash provided by operating activities

     61,721        86,527        48,584   
                        

Cash flows from investing activities:

      

Capital expenditures

     (17,507     (21,333     (23,637

Acquisitions, net of cash acquired

     (10,193     (46,103  

Proceeds from the disposal of property, plant and equipment

     143        780        1,969   
                        

Net cash used for investing activities

     (27,557     (66,656     (21,668
                        

Cash flows from financing activities:

      

Proceeds from borrowings

     173,998        166,301        127,759   

Principal payments on long-term debt and capital lease obligations

     (218,888     (181,894     (153,329

Exercise of stock options

     5,067        6,629        1,726   

Excess tax benefits from share-based payment arrangements

     5,839        2,367        2,856   

Dividends paid

     (8,690     (5,430     (4,700
                        

Net cash used for financing activities

     (42,674     (12,027     (25,688
                        

(Decrease) increase in cash

     (8,510     7,844        1,228   

Cash at beginning of year

     11,180        3,336        2,108   
                        

Cash at end of year

   $ 2,670      $ 11,180      $ 3,336   
                        

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

 

35


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES

Background

Monro Muffler Brake, Inc. and its wholly owned subsidiary, Monro Service Corporation (the “Company”), is engaged principally in providing automotive undercar repair services in the United States. The Company had 781 Company-operated stores, three franchised locations and 14 dealer-operated automotive repair centers located primarily in the northeast region of the United States as of March 26, 2011. The Company’s operations are organized and managed in one operating segment.

Accounting estimates

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles. The preparation of financial statements in conformity with such principles requires the use of estimates by management during the reporting period. Actual results could differ from those estimates.

Fiscal year

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

“Year ended Fiscal March 2011”: March 28, 2010 – March 26, 2011 (52 weeks)

“Year ended Fiscal March 2010”: March 29, 2009 – March 27, 2010 (52 weeks)

“Year ended Fiscal March 2009”: March 30, 2008 – March 28, 2009 (52 weeks)

Consolidation

The consolidated financial statements include the Company and its wholly owned subsidiary, Monro Service Corporation, after the elimination of intercompany transactions and balances.

Revenue recognition

Sales are recorded upon completion of automotive undercar repair and tire services provided to customers. The following was the Company’s sales mix for fiscal 2011, 2010 and 2009:

 

     Year Ended
Fiscal  March
 
     2011     2010     2009  

Brakes

     18     19     21

Exhaust

     5        6        6   

Steering

     11        11        12   

Tires

     38        34        29   

Maintenance

     28        30        32   
                        

Total

     100     100     100
                        

Revenue from the sale of tire road hazard warranty agreements is recognized on a straight-line basis over the contract period or other method where costs are not incurred ratably.

 

36


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Cash equivalents

The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents.

Inventories

The Company’s inventories consist of automotive parts and tires. Inventories are valued at the lower of cost or market value using the first-in, first-out (FIFO) method.

Barter credits

In accordance with the guidance on nonmonetary transactions, the Company values barter credits at the fair market value of the inventory exchanged, as determined by reference to price lists for buying groups and jobber pricing. The Company uses these credits primarily to pay vendors for purchases (mainly inventory vendors for the purchase of parts and tires) or to purchase other goods or services from the barter company such as advertising and travel.

Property, plant and equipment

Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment is provided on a straight-line basis. Buildings and improvements related to owned locations are depreciated over lives varying from 10 to 39 years; machinery, fixtures and equipment over lives varying from 5 to 15 years; and vehicles over lives varying from 5 to 10 years. Computer software is depreciated over lives varying from 3 to 7 years. Buildings and improvements related to leased locations are depreciated over the shorter of the asset’s useful life or the reasonably assured lease term, as defined in the accounting guidance on leases. When property is sold or retired, the cost and accumulated depreciation are eliminated from the accounts and a gain or loss is recorded in the Consolidated Statement of Income. Expenditures for maintenance and repairs are expensed as incurred.

Certain leases have been capitalized and are classified on the balance sheet as fixed assets. These assets are being amortized on a straight-line basis over their estimated lives, which coincide with the terms of the leases. (See Note 4.)

Long-lived assets

The Company evaluates the ability to recover long-lived assets whenever events or circumstances indicate that the carrying value of the asset may not be recoverable. In the event assets are impaired, losses are recognized to the extent the carrying value exceeds the fair value. In addition, the Company reports assets to be disposed of at the lower of the carrying amount or the fair market value.

Store opening and closing costs

New store opening costs are charged to expense in the fiscal year when incurred. When the Company closes a store, the estimated unrecoverable costs, including the remaining lease obligation net of sublease income, if any, are charged to expense.

 

37


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Leases

The Company recognizes rent expense, including rent escalations, on a straight-line basis over the reasonably assured lease term, as defined in the accounting guidance on leases. Generally, the lease term is the base lease term plus certain renewal option periods for which renewal is reasonably assured.

Goodwill and intangible assets

The Company has 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. Other intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses. The carrying values of goodwill, customer list and trade name assets are subject to annual impairment reviews in accordance with accounting guidance on goodwill and other intangible assets, which the Company typically performs in the third quarter of the fiscal year. Impairment reviews may also be triggered by any significant events or changes in circumstances affecting the Company’s business.

The Company has one reporting unit. The goodwill impairment test consists of a two-step process, if necessary. The first step is to compare the fair value of the Company’s invested capital to the book value of its invested capital. 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.

A deterioration of macroeconomic conditions may not only negatively impact the estimated operating cash flows used in the Company’s cash flow models, but may also negatively impact other assumptions used in the Company’s analyses, including, but not limited to, the estimated cost of capital and/or discount rates. Additionally, as discussed above, in accordance with accounting guidance, the Company is required to ensure that assumptions used to determine fair value in the Company’s 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 the Company’s analyses may increase or decrease based on market conditions and trends, regardless of whether the Company’s actual cost of capital has changed. Therefore, the Company may recognize an impairment of an intangible asset or assets even though realized actual cash flows are approximately equal to or greater than its previously forecasted amounts.

There were no impairments as a result of the Company’s annual impairment tests in the third quarter of fiscal year 2011 and there have been no triggering events as of the fourth quarter of fiscal year 2011.

Self-insurance reserves

The Company is largely self-insured with respect to workers’ compensation, general liability and employee medical claims. In order to reduce its risk and better manage its overall loss exposure, the Company purchases stop-loss insurance that covers individual claims in excess of the deductible amounts. The Company maintains 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 the Company’s business and workforce,

 

38


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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, the Company uses the services of an actuary on an annual basis to assist in determining the required reserve for open claims.

Warranty

The Company provides an accrual for estimated future warranty costs based upon the historical relationship of warranty costs to sales. Warranty expense related to all product warranties at and for the fiscal years ended March 2011, 2010 and 2009 was not material to the Company’s financial position or results of operations.

Derivative financial instruments

The Company recognizes all derivatives at fair value, whether designated in hedging relationships or not, in the balance sheet as either an asset or liability. The accounting for changes in the fair value of a derivative, including certain derivative instruments embedded in other contracts, depends on the intended use of the derivative and the resulting designation. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged item are recognized in the Statement of Income. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the Statement of Income when the hedged item affects net income. If a derivative does not qualify as a hedge, it is marked to fair value through the Statement of Income. (See Note 16.)

Comprehensive income

As it relates to the Company, comprehensive income is defined as net earnings as adjusted for pension liability adjustments and unrealized gains or losses on financial instruments qualifying for cash flow hedge accounting, and is reported net of related taxes in the Consolidated Statements of Changes in Shareholders’ Equity.

Income taxes

Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using tax rates based on currently enacted rules and legislation and anticipated rates that will be in effect when the differences are expected to reverse.

Treasury stock

Treasury stock is accounted for using the par value method. During the years ended March 26, 2011, March 27, 2010 and March 28, 2009, the Company’s Chief Executive Officer surrendered 50,000, 138,000 and 387,000 shares, respectively, of Monro Common Stock at fair market value to pay the exercise price and to partially satisfy tax withholding obligations on the exercise of 90,000, 180,000 and 834,000 stock options, respectively.

Stock-based compensation

In accordance with the guidance on accounting for stock options issued to employees, the Company measures compensation cost arising from the grant of share-based payments to an employee at fair value, and

 

39


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

recognizes such cost in income over the period during which the employee is required to provide service in exchange for the award, usually the vesting period. Forfeitures are estimated on the grant date and revised in subsequent periods if actual forfeitures differ from those estimates.

The Company recognizes compensation expense related to stock options using the straight-line approach. Option awards generally vest equally over the service period established in the award, typically four years. The Company estimates fair value using the Black-Scholes valuation model. Assumptions used to estimate the compensation expense are determined as follows:

 

   

Expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees;

 

   

Expected volatility is measured using historical changes in the market price of the Company’s Common Stock;

 

   

Risk-free interest rate is equivalent to the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards;

 

   

Forfeitures are based substantially on the history of cancellations of similar awards granted by the Company in prior years; and

 

   

Dividend yield is based on historical experience and expected future changes.

The weighted average fair value of options granted during fiscal 2011, 2010 and 2009 was $8.58, $5.38 and $3.53, respectively. The fair values of the options granted were estimated on the date of their grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

     Year Ended Fiscal March  
     2011     2010     2009  

Risk-free interest rate

     1.52     2.24     3.10

Expected life

     4 years        5 years        5 years   

Expected volatility

     35.1     32.8     30.2

Expected dividend yield

     .93     1.04     1.38

Total stock-based compensation expense included in selling, general and administrative and distribution expenses in the Company’s Consolidated Statements of Income for the years ended March 26, 2011, March 27, 2010 and March 28, 2009 was $2.3 million, $2.0 million and $1.7 million, respectively. The related income tax benefit was $.9 million, $.8 million and $.7 million, respectively.

Stock split effected in the form of a stock dividend

On November 15, 2010, the Company’s Board of Directors declared a three-for-two stock split to be effected in the form of a 50% stock dividend (“the December 2010 stock split”). The stock split was distributed on December 23, 2010 to shareholders of record as of December 13, 2010. All basic and diluted earnings per share, average shares outstanding information and all applicable footnotes have been adjusted to reflect the aforementioned stock split.

 

40


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Earnings per share

Basic earnings per share is calculated by dividing net income less preferred stock dividends by the weighted average number of shares of Common Stock outstanding during the year. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares of Common Stock and equivalents outstanding during the year. Common Stock equivalents represent shares issuable upon assumed exercise of stock options. (See Note 10.)

Advertising

The Company expenses the production costs of advertising the first time the advertising takes place, except for direct response advertising which is capitalized and amortized over its expected period of future benefits.

Direct response advertising consists primarily of coupons for the Company’s services. The capitalized costs of this advertising are amortized over the period of the coupon’s validity, which ranges from six weeks to one year.

Prepaid advertising at fiscal year end March 2011 and 2010, and advertising expense for the fiscal years ended March 2011, 2010 and 2009, were not material to these financial statements.

Vendor rebates and cooperative advertising credits

The Company accounts for vendor rebates and cooperative advertising credits as a reduction of the cost of products purchased, except where the rebate or credit is a reimbursement of costs incurred to sell the vendor’s product, in which case it is offset against the costs incurred.

Guarantees

At the time the Company issues a guarantee, it recognizes an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee.

Recent accounting pronouncements

In December 2010, the Financial Accounting Standards Board issued new accounting guidance on when to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The guidance requires reporting entities with zero or negative carrying amounts of goodwill to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. This guidance is effective for impairment tests performed during an entity’s fiscal year, and interim periods within those years, beginning after December 15, 2010, and is applicable to the Company for fiscal year 2012. The Company does not expect the adoption of this guidance to have a material impact on the Company’s Consolidated Financial Statements.

In December 2010, the Financial Accounting Standards Board issued new accounting guidance on disclosures of supplementary pro forma information for business combinations. The guidance requires reporting entities that present comparative financial statements to present the pro forma disclosures as if the business combination occurred at the beginning of the prior annual period. The guidance also expands the supplementary pro forma disclosures to include additional disclosures describing the nature and amount of material,

 

41


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

nonrecurring pro forma adjustments. This guidance is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, and is applicable to the Company for fiscal year 2012. Although early adoption is permitted, the Company has chosen not to adopt this guidance prior to fiscal year 2012. This guidance requires new disclosures only, and will have no impact on the Company’s Consolidated Financial Statements.

NOTE 2 — ACQUISITIONS

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

Subsequent Event

On May 10, 2011, the Company signed a definitive asset purchase agreement to acquire 24 retail tire and automotive repair stores from Vespia Tire Centers, Inc. (“Vespia”). The transaction is expected to close June 5, 2011. The Vespia stores are located in Pennsylvania and New Jersey. These stores will operate under the Mr. Tire brand name. The acquisition will be financed through the Company’s existing bank facility.

Fiscal 2011

During the year, the Company acquired eight retail tire and automotive repair stores located in Pennsylvania and Virginia through two acquisition transactions. Also during the year, the Company acquired a retail tire store that was a former Tire Warehouse franchisee and an adjacent automotive repair store located in Maine. Collectively, these fiscal 2011 acquisition stores produced approximately $16.3 million in sales annually based on unaudited pre-acquisition historical information. The total purchase price of these stores was approximately $10.2 million in cash and the assumption of certain liabilities. The acquisitions were financed through the Company’s existing bank facility and cash flow from operations. The results of operations of these acquired stores are included in the Company’s results from their respective acquisition dates. The eight retail tire and automotive repair stores, former Tire Warehouse franchisee and adjacent automotive repair store operate under the Mr. Tire, Tire Warehouse and Monro brand name, respectively.

The Company has recorded its initial accounting for these acquisitions in accordance with accounting guidance on business combinations. The acquisitions resulted in goodwill related to, among other things, growth opportunities and unidentified intangible assets. All of the goodwill is expected to be deductible for tax purposes. The Company has recorded finite-lived intangible assets at their estimated fair value related to customer relationships, non-compete agreement, refuse disposal agreement and favorable leases.

In accordance with accounting guidance on business combinations, the Company expensed all costs related to these acquisitions during fiscal 2011. The total costs related to these acquisitions were not material to the Consolidated Statement of Income. These costs are included in the Consolidated Statement of Income primarily under operating, selling, general and administrative expenses.

 

42


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The purchase price of the acquisitions have been preliminarily allocated to the net tangible and intangible assets acquired, with the remainder recorded as goodwill on the basis of estimated fair values, as follows:

 

     As of Acquisition Date
     (Dollars in thousands)

Other current assets

     $ 685  

Intangible assets

       1,480  

Other non-current assets

       452  

Current liabilities

       (571 )

Other long-term liabilities

       (21 )
          

Total net identifiable assets acquired

     $ 2,025  
          

Total consideration transferred

     $ 10,194  

Less: total net identifiable assets acquired

       2,025  
          

Goodwill

     $ 8,169  
          

Intangible assets consist of customer lists ($648,000), a non-compete agreement ($345,000), a refuse disposal agreement ($130,000) and favorable leases ($357,000). Customer lists, the non-compete agreement and the refuse disposal agreement are being amortized over their estimated useful lives. The weighted average useful lives are approximately four, four and five years, respectively. Favorable lease intangible assets are being amortized over their respective lease terms, ranging from 13 to 15 years. The weighted average useful life of all intangible assets is approximately seven years.

Sales and net income for the fiscal 2011 acquired entities totaled $10.3 million and $.6 million, respectively for the period from acquisition date through March 26, 2011.

The purchase price allocation remains preliminary for some of the acquired stores due to the finalization of the valuation of real estate and real property leases. The Company believes that this will be finalized in the first quarter of fiscal 2012 and that any adjustments to the purchase price allocation will not be material.

Fiscal 2010

In January 2010, the Company acquired two retail tire stores from Me & Dad’s Tire & Auto Parts located in New Hampshire and TND Tires and Auto Parts located in Massachusetts. These were former Tire Warehouse franchisees which produced approximately $2.0 million in sales annually based on unaudited pre-acquisition historical information. The total purchase price was approximately $1.0 million in cash and the assumption of certain liabilities. The acquisition was financed through the Company’s existing bank facility. These stores operate under the Tire Warehouse brand name. The results of operations of these stores are included in the Company’s results from January 24, 2010 and January 31, 2010, respectively.

On November 29, 2009, the Company acquired a retail tire and automotive repair store located in New Hampshire from Cheshire Tire Center, Inc. (“Cheshire”). This store produced approximately $3 million in sales annually based on unaudited pre-acquisition historical information. The total purchase price was approximately $1.9 million in cash and the assumption of certain liabilities. The acquisition was financed through the Company’s existing bank facility. The results of operations of Cheshire are included in the Company’s results from November 30, 2009.

On October 4, 2009, the Company acquired 41 retail tire stores, including one that was under construction, located in Maine, Massachusetts, New Hampshire, Rhode Island and Vermont, from Tire Warehouse Central,

 

43


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Inc. (“Tire Warehouse”). These stores produced approximately $48 million in sales annually based on unaudited pre-acquisition historical information. In addition, six franchisees and a distribution center in New Hampshire were acquired. The total purchase price was approximately $34.0 million in cash and the assumption of certain liabilities. The acquisition was financed through the Company’s existing bank facility. These stores all operate under the Tire Warehouse brand name. The results of operations of Tire Warehouse are included in the Company’s results from October 4, 2009.

On September 20, 2009, the Company acquired four retail tire and automotive repair stores located in northwest Indiana from Midwest Tire & Auto Repair (“Midwest”). These stores produced approximately $6 million in sales annually based on unaudited pre-acquisition historical information. The total purchase price of these stores was approximately $2 million in cash and the assumption of certain liabilities. The acquisition was financed through the Company’s existing bank facility. These stores all operate under the Mr. Tire brand name. The results of operations of Midwest are included in the Company’s results from September 20, 2009.

On June 14, 2009, the Company acquired 26 Autotire Car Care Center (“Autotire”) retail tire and automotive repair stores located primarily in the St. Louis, MO market from Am-Pac Tire Distributors, Inc., a wholly-owned subsidiary of American Tire Distributors. These stores produced approximately $31 million in sales annually based on unaudited pre-acquisition historical information. The total purchase price of these stores was approximately $7.4 million in cash and the assumption of certain liabilities. The acquisition was financed through the Company’s existing bank facility. These stores all operate under the Autotire brand name. The results of operations of Autotire are included in the Company’s results from June 14, 2009.

The acquisitions resulted in goodwill related to, among other things, growth opportunities and unidentified intangible assets. All of the goodwill is expected to be deductible for tax purposes. The Company has recorded finite-lived intangible assets at their estimated fair value related to customer relationships, trade names and favorable leases.

In accordance with accounting guidance on business combinations, the Company expensed all costs related to the acquisitions in fiscal 2010. The total costs related to the acquisitions were $.7 million for the fiscal year ended March 27, 2010. These costs are included in the Consolidated Statement of Income primarily under operating, selling, general and administrative expenses.

The purchase price of the acquisitions has been allocated to the net tangible and intangible assets acquired, with the remainder recorded as goodwill on the basis of estimated fair values, as follows:

 

     Final
     (Dollars in thousands)

Other current assets

       $15,585  

Intangible assets

       10,645  

Other non-current assets

       20,235  

Current liabilities

       (4,942 )

Long-term liabilities

       (12,854 )
          

Total net identifiable assets acquired

       $28,669  
          

Total consideration transferred

       $47,219  

Less: total net identifiable assets acquired

       28,669  
          

Goodwill

       $18,550  
          

 

44


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Intangible assets consist of customer lists ($970,000), trade names ($4,610,000), favorable leases ($4,945,000) and franchise agreements ($120,000). Customer lists, trade names and franchise agreements are being amortized over their estimated useful lives. The weighted average useful lives are approximately five, 16 and two years, respectively. Favorable lease intangible assets are being amortized over their respective lease terms, ranging from one to 36 years. The weighted average useful life of all intangible assets is 15 years.

Sales and net income for the fiscal 2010 acquired entities totaled $58.5 million and $3.3 million, respectively for the period from acquisition date through March 27, 2010.

Supplemental pro forma information for fiscal 2010 and 2009 have not been presented due to the impracticability of obtaining detailed, accurate or reliable data for the periods the acquired entities were not owned by the Company.

During the fourth quarter of fiscal 2010, the Company substantially completed the purchase price allocation for the fiscal year 2010 acquisitions. Some of the amounts previously estimated have changed during the measurement period. The significant changes in estimates included a decrease in inventory of $1.4 million for the third quarter; an increase in deferred income tax assets of $1.1 million and $2.6 million for the second and third quarters, respectively; an increase in property, plant and equipment of $2.0 and $2.5 million for the first and second quarters, respectively and a decrease of $1.7 million for the third quarter; an increase in goodwill of $10.1 million for the third quarter; an increase in intangible assets of $1.1 million, $1.7 million and $3.4 million for the first, second and third quarters, respectively; an increase in current portion of long-term debt of $1.3 million for the third quarter; and an increase in long-term debt of $3.9 million, $4.6 million and $11.4 million for the first, second and third quarters, respectively. The measurement period adjustments represent updates made to the purchase price allocation based on revisions to valuation estimates in quarters subsequent to the quarter of acquisition and initial accounting. There were no significant adjustments to the Company’s Consolidated Statement of Income.

The purchase price allocation for the valuation of real estate, real property leases and intangible assets was finalized during the third quarter of fiscal 2011. The resulting adjustments to the purchase price allocation did not have a material impact on the Company’s Consolidated Financial Statements.

NOTE 3 — OTHER CURRENT ASSETS

The composition of other current assets is as follows:

 

     Year Ended Fiscal March  
         2011              2010      
     (Dollars in thousands)  

Vendor rebates receivable

   $ 6,742       $ 5,723   

Barter credit receivable

     2,950         2,450   

Prepaid insurance

     1,818         1,319   

Other receivables

     1,755         1,533   

Prepaid advertising

     1,443         1,530   

Prepaid real estate taxes

     923         1,927   

Notes receivable

     93         1,085   

Other

     937         1,806   
                 
   $ 16,661       $ 17,373   
                 

 

45


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

NOTE 4 — PROPERTY, PLANT AND EQUIPMENT

The major classifications of property, plant and equipment are as follows:

 

        March 26, 2011           March 27, 2010    
    Assets
Owned
  Assets
Under
Capital
Lease
  Total   Assets
Owned
  Assets
Under
Capital
Lease
  Total
    (Dollars in thousands)

Land

      $54,708             $54,708         $53,642             $53,642  

Buildings and improvements

      148,715         $38,236         186,951         146,153         $38,059         184,212  

Equipment, signage and fixtures

      139,552             139,552         133,197             133,197  

Vehicles

      14,493         67         14,560         13,976         67         14,043  

Construction-in-progress

      2,753             2,753         1,144             1,144  
                                                           
      360,221         38,303         398,524         348,112         38,126         386,238  

Less – Accumulated depreciation and amortization

      185,868         12,060         197,928         173,789         9,703         183,492  
                                                           
      $174,353         $26,243         $200,596         $174,323         $28,423         $202,746  
                                                           

Amortization expense recorded under capital leases totaled $2,901,000, $2,912,000 and $2,162,000 for the fiscal years ended March 2011, 2010 and 2009, respectively.

NOTE 5 — GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill during fiscal 2011 and 2010 were as follows:

 

     (Dollars in thousands)

Balance at March 28, 2009

       $71,816  

Acquisitions

       18,556  
          

Balance at March 27, 2010

       90,372  

Acquisitions or other adjustments

       8,163  
          

Balance at March 26, 2011

       $98,535  
          

In fiscal 2011, the other adjustments relates to purchase accounting adjustments for the fiscal 2010 acquisitions.

 

46


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The composition of other intangible assets and other non-current assets is as follows:

 

     Year Ended Fiscal March
     2011         2010
     (Dollars in thousands)
     Gross
Carrying
Amount
   Accumulated
Amortization
        Gross
Carrying
Amount
   Accumulated
Amortization

Customer list

     $ 7,629        $ 3,112             $ 6,981        $ 2,276  

Trade name

       6,932          2,921               6,932          2,556  

Favorable leases

       5,389          788               4,953          254  

Other intangible assets

       646          269               171          63  
                                                

Total intangible assets

     $ 20,596        $ 7,090             $ 19,037        $ 5,149  
                                                

Barter receivable

     $ 6,255                  $ 7,997       

Prepaid pension asset

       2,723                    1,888       

Other non-current assets

       1,442                    3,160       
                                    

Total other non-current assets

     $ 10,420                  $ 13,045       
                                    

The Company’s intangible assets are being amortized over their estimated useful lives. The weighted average useful lives of the Company’s intangible assets are approximately 12 years for customer lists, 12 years for trade names, 18 years for favorable leases and five years for other intangible assets.

Also included in other non-current liabilities as of March 26, 2011 and March 27, 2010 are unfavorable lease intangibles with a net carrying amount of $.9 million and $1.0 million, respectively.

Amortization of intangible assets during fiscal 2011, 2010 and 2009 totaled $1.4 million, $.9 million and $.5 million, respectively.

Estimated future amortization of intangible assets is as follows:

 

Year Ending Fiscal March

   (Dollars in thousands)

2012

     $ 1,279  

2013

       1,152  

2014

       1,059  

2015

       866  

2016

       731  

 

47


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

NOTE 6 — LONG-TERM DEBT

Long-term debt consists of the following:

 

     March 26,
2011
     March 27,
2010
 
     (Dollars in thousands)  

Revolving Credit Facility, LIBOR-based(a)

   $ 10,062       $ 52,000   

Mortgage Note Payable, non-interest bearing, secured by warehouse and office land, due in one installment in 2015

     660         660   

Obligations under capital leases at various interest rates, secured by store properties and certain equipment, due in installments through 2039

     44,301         46,700   
                 
     55,023         99,360   

Less – Current portion

     13,033         2,933   
                 
   $ 41,990       $ 96,427   
                 

 

(a)

The London Interbank Offered Rate (LIBOR) at March 26, 2011 was .25%.

In July 2005, the Company entered into a five-year, $125 million Revolving Credit Facility agreement with five banks. A sixth bank was added in June 2008. Interest only is payable monthly throughout the Credit Facility’s term. The facility included a provision allowing the Company to expand the amount of the overall facility to $160 million. Amendments in January 2007 and June 2008 were made to these amounts which increased the overall facility to $200 million. Currently, the committed sum is $163.3 million and the accordion feature is $36.7 million. There was $10.1 million outstanding at March 26, 2011. The facility expires in January 2012. The Company was in compliance with all debt covenants at March 26, 2011.

The interest rate on the facility fluctuated between 50 and 75 basis points over LIBOR during fiscal year 2011. At March 26, 2011, the interest rate was 50 basis points over LIBOR. Additionally, the Company had three $10 million interest rate swap agreements at interest rates that ranged from 3.27% to 3.29%, replacing the LIBOR rate on that portion of the debt. The interest rate swap agreements expired in July 2010.

In anticipation of the expiration of its existing facility, the Company has received commitments for a new five-year $175 million revolving Credit Facility with seven banks. The Company expects to sign the new agreement by May 31, 2011. The facility includes a provision allowing the Company to expand the amount of the overall facility to $250 million.

The terms of the new Credit Facility permit the payment of cash dividends not to exceed 50% of the preceding year’s net income, and allow stock buybacks subject to the Company being able to meet its existing financial covenants. The agreement requires the maintenance of specified interest and rent coverage ratios. The agreement permits mortgages and specific lease financing arrangements with other parties with certain limitations.

The Credit Facility is not secured by the Company’s real property, although the Company has agreed not to encumber its real property, with certain permissible exceptions.

Within the aforementioned $175 million Revolving Credit Facility, the Company has available a sub-facility of $40 million for the purpose of issuing standby letters of credit. The line requires fees aggregating 1.125% annually of the face amount of each standby letter of credit, payable quarterly in arrears. There were $16.8 million in outstanding letters of credit at March 26, 2011.

 

48


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

In addition, the Company has financed certain store properties and vehicles with capital leases, which amount to $44.3 million and are due in installments through 2039.

During fiscal 1995, the Company purchased 12.7 acres of land for $.7 million from 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 2015.

Aggregate debt maturities over the next five years are as follows:

 

      Capital Leases                

Year Ending Fiscal March

   Aggregate
Amount
     Imputed
Interest
     All Other
Debt
     Total  
     (Dollars in thousands)  

2012

   $ 6,964       $ (3,993    $ 10,062       $ 13,033   

2013

     7,016         (3,752      0         3,264   

2014

     7,014         (3,477      0         3,537   

2015

     6,513         (3,180      660         3,993   

2016

     5,856         (2,883      0         2,973   

NOTE 7 — FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments consist of the following:

 

     March 26, 2011      March 27, 2010  
     Notional
Amount
     Carrying
Amount
     Fair
Value
     Notional
Amount
     Carrying
Amount
     Fair
Value
 
     (Dollars in thousands)  

Liabilities

                 

Long-term debt, including current portion and excluding capital leases

      $ 10,722       $ 10,663          $ 52,660       $ 52,578   

The fair value of cash and cash equivalents, accounts receivable and accounts payable approximated book value at March 26, 2011 and March 27, 2010 because their maturity is generally less than one year in duration. The fair value of long-term debt was estimated based on discounted cash flow analyses using either quoted market prices for the same or similar issues, or the current interest rates offered to the Company for debt with similar maturities.

 

49


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

NOTE 8 — INCOME TAXES

The components of the provision for income taxes are as follows:

 

     Year Ended Fiscal March  
     2011     2010     2009  
     (Dollars in thousands)  

Current –

      

Federal

   $ 22,094      $ 17,202      $ 10,404   

State

     3,451        2,028        1,019   
                        
     25,545        19,230        11,423   
                        

Deferred –

      

Federal

     3,121        1,206        2,840   

State

     (570     (202     (237
                        
     2,551        1,004        2,603   
                        

Total

   $ 28,096      $ 20,234      $ 14,026   
                        

Deferred tax (liabilities) assets consist of the following:

 

     March 26,
2011
    March 27,
2010
    March 28,
2009
 
     (Dollars in thousands)  

Goodwill

   $ (7,211   $ (5,319   $ (3,832

Property and equipment

     (4,602     (2,636     (690

Pension

     (995     (685     (305

Prepaid expenses

     (544     (852     (896

Other

     (341     (194     (168
                        

Total deferred tax liabilities

     (13,693     (9,686     (5,891
                        

Insurance reserves

     6,016        5,692        2,466   

Stock options

     2,671        2,176        1,508   

Deferred rent

     2,244        2,286        2,319   

Warranty and other reserves

     2,106        1,993        1,198   

Accrued compensation

     1,301        1,426        1,457   

Indirect effect of unrecognized tax benefits in other jurisdictions

     1,180        787        778   

Other

     2,489        2,566        2,000   
                        

Total deferred tax assets

     18,007        16,926        11,726   
                        

Net deferred tax assets

   $ 4,314      $ 7,240      $ 5,835   
                        

The Company has $2.2 million of state net operating loss carryforwards available as of March 26, 2011. The carryforwards expire in varying amounts through 2031. Based on all available evidence, the Company has determined that it is more likely than not that sufficient taxable income of the appropriate character within the carryforward period will exist for the realization of the tax benefits on existing state net operating loss carryforwards.

The Company believes it is more likely than not that all other future tax benefits will be realized as a result of current and future income.

 

50


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

A reconciliation between the U. S. Federal statutory tax rate and the effective tax rate reflected in the accompanying financial statements is as follows:

 

     Year Ended Fiscal March  
     2011     2010      2009  
     Amount     Percent     Amount      Percent      Amount      Percent  
     (Dollars in thousands)  

Federal income tax based on statutory tax rate applied to income before taxes

   $ 25,878        35.0      $ 18,699         35.0       $ 13,340         35.0   

State income tax, net of federal income tax benefit

     2,291        3.1        1,155         2.2         425         1.1   

Other

     (73     (.1     380         .7         261         .7   
                                                   
   $ 28,096        38.0      $ 20,234         37.9       $ 14,026         36.8   
                                                   

The following is a rollforward of the Company’s liability for income taxes associated with unrecognized tax benefits:

 

     (Dollars in thousands)

Balance at March 29, 2008

       $3,870  

Tax positions related to current year:

    

Additions

       1,175  

Reductions

    

Tax positions related to prior years:

    

Additions

       39  

Reductions

       (400 )

Settlements

    

Lapses in statutes of limitations

       (191 )
          

Balance at March 28, 2009

       4,493  

Tax positions related to current year:

    

Additions

       1,415  

Reductions

    

Tax positions related to prior years:

    

Additions

    

Reductions

       (16 )

Settlements

    

Lapses in statutes of limitations

       (306 )
          

Balance at March 27, 2010

       5,586  

Tax positions related to current year:

    

Additions

       799  

Reductions

    

Tax positions related to prior years:

    

Additions

       335  

Reductions

       (612 )

Settlements

    

Lapses in statutes of limitations

       (144 )
          

Balance at March 26, 2011

     $ 5,964  
          

 

51


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The total amount of unrecognized tax benefits was $6.0 million at March 26, 2011, the majority of which, if recognized, would affect the effective tax rate.

In the normal course of business, the Company provides for uncertain tax positions and the related interest and penalties, and adjusts its unrecognized tax benefits and accrued interest and penalties accordingly. During the years ended March 26, 2011, March 27, 2010 and March 28, 2009, the Company recognized interest and penalties of approximately $.3 million, $.1 million and $.1 million, respectively, in income tax expense. Additionally, the Company had approximately $.9 million and $.6 million of interest and penalties associated with uncertain tax benefits accrued as of March 26, 2011 and March 27, 2010, respectively.

The Company is currently under audit by the Internal Revenue Service for the fiscal 2010 tax year, and also currently under audit by certain state tax jurisdictions for the fiscal 2001 to 2010 tax years. It is reasonably possible that the examination phase of the audits for these years may conclude in the next 12 months, and that the related unrecognized tax benefits for tax positions taken regarding previously filed tax returns may change from those recorded as liabilities for uncertain tax positions in the Company’s financial statements as of March 26, 2011. However, based on the status of the examinations, it is not possible to estimate the effect of any amount of such change to previously recorded uncertain tax positions.

The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The Company’s fiscal 2009 and fiscal 2010 U.S. federal tax years and various state tax years remain subject to income tax examinations by tax authorities.

NOTE 9 — CONVERTIBLE PREFERRED STOCK AND COMMON STOCK

A summary of the changes in the number of shares of Common Stock, Class C preferred stock and treasury stock is as follows:

 

    Common
Stock Shares
Issued
       Class C
Convertible
Preferred
Stock
Shares
Issued
     Treasury
Stock
Shares
 

Balance at March 29, 2008

    21,683,859           65,000         3,322,392   

Conversion of preferred shares

    506,755           (32,500   

Stock options exercised

    808,699              258,437   
                           

Balance at March 28, 2009

    22,999,313           32,500         3,580,829   

Stock options exercised

    647,147              101,600   
                           

Balance at March 27, 2010

    23,646,460           32,500         3,682,429   

Shares issued in connection with three-for-two stock split

    11,983,603              1,859,328   

Stock options exercised

    408,601              36,227   
                           

Balance at March 26, 2011

    36,038,664           32,500         5,577,984   
                           

In November 2010, the Board of Directors authorized a three-for-two stock split that was paid on December 23, 2010 to shareholders of record as of December 13, 2010. All share amounts have been adjusted for this stock split.

Holders of at least 60% of the Class C preferred stock must approve any action authorized by the holders of Common Stock. In addition, there are certain restrictions on the transferability of shares of Class C preferred

 

52


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

stock. In the event of a liquidation, dissolution or winding-up of the Company, the holders of the Class C preferred stock would be entitled to receive $1.50 per share out of the assets of the Company before any amount would be paid to holders of Common Stock. The conversion value of the Class C convertible preferred stock is $.064 and $.096 per share at March 26, 2011 and March 27, 2010, respectively.

The Company currently grants stock option awards under the 2007 Incentive Stock Option Plan (the “2007 Plan”). This Plan was authorized by the Board of Directors in June 2007, initially reserving 873,000 shares (as retroactively adjusted for stock splits) of Common Stock for issuance to eligible employees and all non-employee directors. The 2007 Plan was approved by shareholders in August 2007. Prior to fiscal 2008, the Company had options outstanding under three other stock option plans: the 1994 Non-Employee Directors Stock Option Plan (the “1994 Plan”) (which was approved by shareholders in August 1995); the 1998 Incentive Stock Option Plan (the “1998 Plan”) (which was approved by shareholders in August 1999); and the 2003 Non-Employee Directors Stock Option Plan (the “2003 Plan”) (which was approved by shareholders in August 2003), collectively the “Prior Plans.” Upon shareholder approval of the 2007 Plan, all shares of Common Stock available for award under the 1998 and 2003 Plans were transferred to, and made available for award under the 2007 Plan. The 1994 Plan had no options available for grant upon adoption of the 2007 Plan. No further option grants may be made under the Prior Plans, although outstanding awards under the Prior Plans will remain outstanding in accordance with the terms of those plans and the stock option agreements entered into under those plans.

The 1994 Plan had a total of 675,345 common shares authorized for issuance; the 1998 Plan had a total of 4,016,250 shares authorized for issuance; and the 2003 Plan had a total of 315,000 shares authorized for issuance (all as retroactively adjusted for stock splits). Upon authorization of the 2007 Plan by shareholders, 628,662 shares (as retroactively adjusted for stock splits) transferred from the 1998 and 2003 Plans into the 2007 Plan, bringing the total authorized shares to 1,501,662 (as retroactively adjusted for stock splits). In addition, in May 2010, the Compensation Committee of the Board of Directors authorized an additional 1,500,000 shares (as retroactively adjusted for stock splits), which were approved by shareholders in August 2010.

Generally, employee options vest within the first five years of their term, and have a duration of six to ten years. Outstanding options are exercisable for various periods through October 2019.

 

53


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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

 

     Weighted Average
Exercise Price
   Shares
Outstanding
  Shares
Exercisable
  Shares
Available
For Grant

At March 29, 2008

     $ 8.91          4,120,169         3,087,423         640,425  

Granted

     $ 12.44          212,145         71,820         (212,145 )

Became exercisable

                308,762      

Exercised

     $ 3.01          (1,213,047 )       (1,213,047 )    

Canceled

     $ 14.50          (33,677 )       (11,006 )       6,413  
                                   

At March 28, 2009

     $ 11.41          3,085,590         2,243,952         434,693  

Granted

     $ 17.89          255,420         71,820         (255,420 )

Became exercisable

                335,052      

Exercised

     $ 9.25          (970,721 )       (970,721 )    

Canceled

     $ 14.99          (27,841 )       (8,153 )       11,157  
                                   

At March 27, 2010

     $ 12.96          2,342,448         1,671,950         190,430  

Authorized

                    1,500,000  

Granted

     $ 31.51          788,027         71,820         (788,027 )

Became exercisable

                425,835      

Exercised

     $ 9.97          (569,063 )       (569,063 )    

Canceled

     $ 18.22          (35,734 )       (4,903 )       28,604  
                                   

At March 26, 2011

     $ 19.35          2,525,678         1,595,639         931,007  
                                   

The weighted average contractual term of all options outstanding at March 26, 2011 and March 27, 2010 was 3.9 years and 4.3 years, respectively. The aggregate intrinsic value of all options outstanding at March 26, 2011 and March 27, 2010 was $32.9 million and $25.8 million, respectively.

The weighted average contractual term of all options exercisable at March 26, 2011 and March 27, 2010 was 3.0 years and 3.5 years, respectively. The aggregate intrinsic value of all options exercisable at March 26, 2011 and March 27, 2010 was $28.1 million and $19.9 million, respectively.

A summary of the status of and changes in nonvested stock options granted is as follows:

 

     Shares   Weighted
Average
Grant-Date

Fair Value
(per Share)

Non-vested at March 29, 2008

       1,032,746       $ 4.36  

Granted

       212,145       $ 3.53  

Vested

       (380,582 )     $ 4.22  

Canceled

       (22,671 )     $ 4.53  
              

Non-vested at March 28, 2009

       841,638       $ 4.21  

Granted

       255,420       $ 5.38  

Vested

       (406,872 )     $ 4.37  

Canceled

       (19,688 )     $ 4.78  
              

Non-vested at March 27, 2010

       670,498       $ 4.49  

Granted

       788,027       $ 8.58  

Vested

       (497,655 )     $ 4.73  

Canceled

       (30,831 )     $ 5.57  
              

Non-vested at March 26, 2011

       930,039       $ 7.83  
              

 

54


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes information about fixed stock options outstanding at March 26, 2011:

 

     Options Outstanding    Options Exercisable

Range of

Exercise Prices

   Shares
Under Option
   Weighted
Average
Remaining
Life
   Weighted
Average
Exercise
Price
   Shares
Under Option
   Weighted
Average
Exercise
Price

$  3.26 - $13.00

       577,085          2.91        $ 10.08          519,521        $ 9.90  

$13.01 - $15.27

       676,971          1.82        $ 15.05          675,659        $ 15.05  

$15.28 - $24.27

       635,352          5.61        $ 18.45          328,639        $ 16.43  

$24.28 - $35.31

       636,270          4.78        $ 33.25          71,820        $ 26.64  

During the fiscal years ended March 26, 2011, March 27, 2010 and March 28, 2009, the fair value of awards vested under the Company’s stock plans was $2.4 million, $1.8 million and $1.6 million, respectively.

The aggregate intrinsic value in the preceding tables is based on the Company’s closing stock price of $31.78, $23.99 and $17.34 as of the last trading day of the periods ended March 26, 2011, March 27, 2010 and March 28, 2009, respectively. The aggregate intrinsic value of options (the amount by which the market price of the stock on the date of exercise exceeded the exercise price of the option) exercised during the fiscal years ended March 26, 2011, March 27, 2010 and March 28, 2009 was $9.4 million, $10.1 million and $12.5 million, respectively. As of March 26, 2011, March 27, 2010 and March 28, 2009, there was $6.4 million, $1.8 million and $2.7 million, respectively, of unrecognized compensation expense related to non-vested fixed stock options that is expected to be recognized over a weighted average period of approximately four years, two years and two years, respectively.

Cash received from option exercises under all stock option plans was $5.1 million, $6.6 million and $1.7 million for the fiscal years ended March 26, 2011, March 27, 2010 and March 28, 2009, respectively. The actual tax benefit realized for the tax deductions from option exercises was $3.5 million, $3.0 million and $2.3 million for the fiscal years ended March 26, 2011, March 27, 2010 and March 28, 2009, respectively.

The Company issues new shares of Common Stock upon exercise of stock options.

 

55


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

NOTE 10 — EARNINGS PER COMMON SHARE

The following is a reconciliation of basic and diluted earnings per common share for the respective years:

 

     Year Ended Fiscal March  
     2011     2010     2009  
     (Amounts in thousands, except per
share data)
 

Numerator for earnings per common share calculation:

      

Net Income

   $ 45,841      $ 33,191      $ 24,088   

Less: Preferred stock dividends

     (213     (172     (213
                        

Income available to common stockholders

   $ 45,628      $ 33,019      $ 23,875   
                        

Denominator for earnings per common share calculation:

      

Weighted average common shares, basic

     30,200        29,508        28,255   

Effect of dilutive securities:

      

Preferred stock

     760        760        1,218   

Stock options

     847        710        676   
                        

Weighted average common shares, diluted

     31,807        30,978        30,149   
                        

Basic earnings per common share:

   $ 1.52      $ 1.12      $ .85   
                        

Diluted earnings per common share:

   $ 1.44      $ 1.07      $ .80   
                        

The computation of diluted earnings per common share for fiscal years 2011, 2010 and 2009 excludes the effect of assumed exercise of approximately 705,000, 150,000 and 1,382,000, respectively, of stock options, as the exercise price of these options was greater than the average market value of the Company’s Common Stock for those periods, resulting in an anti-dilutive effect on diluted earnings per share.

NOTE 11 — OPERATING LEASES AND OTHER COMMITMENTS

The Company leases retail facilities under noncancellable lease agreements which expire at various dates through fiscal year 2032. In addition to stated minimum payments, certain real estate leases have provisions for contingent rentals when retail sales exceed specified levels. Generally, the leases provide for renewal for various periods at stipulated rates. Most of the facilities’ leases require payment of property taxes, insurance and maintenance costs in addition to rental payments, and several provide an option to purchase the property at the end of the lease term.

In recent years, the Company has entered into agreements for the sale/leaseback of certain stores. Realized gains are deferred and are credited to income as rent expense adjustments over the lease terms. The Company has lease renewal options under the real estate agreements at projected future fair market values.

 

56


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Future minimum payments required under noncancellable leases (including closed stores) are as follows:

 

Year Ending Fiscal March

   Leases      Less –
Sublease
Income
    Net  
     (Dollars in thousands)  

2012

   $ 27,055       $ (432   $ 26,623   

2013

     23,265         (283     22,982   

2014

     18,542         (192     18,350   

2015

     14,217         (161     14,056   

2016

     8,499         (126     8,373   

Thereafter

     15,147         (158     14,989   
                         

Total

   $ 106,725       $ (1,352   $ 105,373   
                         

Rent expense under operating leases, net of sublease income, totaled $27,994,000, $25,586,000 and $24,030,000 in fiscal 2011, 2010 and 2009, respectively, including contingent rentals of $110,000, $117,000 and $103,000 in each respective fiscal year. Sublease income totaled $371,000, $442,000 and $446,000, respectively, in fiscal 2011, 2010 and 2009.

The Company enters into contracts with parts and tire suppliers, certain of which require the Company to buy (at market prices) up to 100% of its annual purchases of specific products. The agreements expire at various dates through November 2013. The Company believes these agreements provide it with high quality, branded merchandise at preferred pricing, along with strong marketing and training support.

On October 1, 2007, the Company entered into a new Employment Agreement with its Chief Executive Officer. The Agreement became effective on October 1, 2007 and has a five-year term. Under the Agreement, Mr. Gross (i) is paid a base salary of $840,000; (ii) is eligible to earn a target annual bonus, pursuant to the terms of the Company’s Management Incentive Compensation Plan, of up to 150% of his base salary upon the achievement of certain predetermined corporate objectives and (iii) participates in the Company’s other incentive and welfare and benefit plans made available to executives. Mr. Gross also receives a special bonus of $750,000, payable in five annual installments of $150,000, which began on October 1, 2007 (the “Special Bonus”). If the Agreement terminates before October 1, 2012 either for Cause (as defined therein) or as the result of Mr. Gross’s resignation without Good Reason (as defined therein), then Mr. Gross will be required to repay a portion of the last-received annual installment of the Special Bonus, pro-rata to the date of termination. In consideration for Mr. Gross’s covenant not-to-compete with the Company or to solicit its employees, the Company will pay him an additional $750,000, payable in five equal installments of $150,000, beginning on October 1, 2012 or the earlier termination of the Agreement (the “Non-Compete Payment”). Finally, Mr. Gross is entitled to certain payments upon death, disability, a termination without Cause (as defined therein), a resignation by Mr. Gross for Good Reason (as defined therein) or a termination in the event of a Change in Control of the Company (as defined therein), all as set forth in detail in the Agreement.

On October 2, 2007, and in consideration for Mr. Gross’s execution of the Agreement, the Company’s Compensation Committee awarded to Mr. Gross an option to purchase 562,500 shares of Common Stock at an exercise price equal to the closing price of the Company’s stock on the date of the award of $15.20 per share, pursuant to the Company’s 2007 Stock Incentive Plan. (Both the number of shares and share price reflect the impact of the December 2010 stock split.)

On December 30, 2010, the Company entered into Employment Agreements with John W. Van Heel, its President; Joseph Tomarchio Jr., its Executive Vice President-Store Operations; and Catherine D’Amico, its Executive Vice President and Chief Financial Officer (“the Agreements”). All three Agreements became effective on January 1, 2011 and have a four-year term.

 

57


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Under the Agreements, Messrs. Van Heel and Tomarchio and Ms. D’Amico (i) will be paid an annual base salary of $445,000, $475,000, and $330,000 respectively; (ii) will be eligible to earn a target bonus, pursuant to the terms of the Company’s bonus plan, up to, in the case of Mr. Van Heel, 100% of his base salary, and, in the case of Mr. Tomarchio and Ms. D’Amico, 87.5% of the executive’s base salary, upon the achievement of certain predetermined corporate objectives and (iii) will participate in the Company’s other incentive and welfare and benefit plans made available to executives. The base salary of each executive will be reviewed annually by the Compensation Committee and may be increased to reflect performance and responsibilities of each such executive.

Finally, each executive is entitled to certain payments upon death, disability, and termination without Cause (as defined in the Agreements), a resignation by the executive for Good Reason (as defined in the Agreements) or a termination in the event of a Change in Control of the Company (as defined in the Agreements), all set forth in detail in the Agreements. In accordance with the policy adopted by the Compensation Committee in May 2009, the executives’ contracts do not include any provision for the payment of what is commonly referred to as an “excise tax gross-up” with respect to payments received by an executive upon Change in Control (as defined in the Agreements).

Also, on December 30, 2010 and in consideration of the executives’ execution of the Agreements, the Company’s Compensation Committee awarded to Messrs. Van Heel and Tomarchio and Ms. D’Amico an option to purchase 150,000, 120,000 and 90,000 shares of Common Stock, respectively, at an exercise price of $35.31 per share (the closing price of the Company’s stock on the date of the award), pursuant to the Company’s 2007 Stock Incentive Plan (together, the “Executive Options”). Each of the Executive Options will vest equally over four years, beginning December 30, 2011.

NOTE 12 — EMPLOYEE RETIREMENT AND PROFIT SHARING PLANS

The Company sponsors a noncontributory defined benefit pension plan for Monro employees and the former Kimmel Automotive, Inc. employees. In fiscal 2005, the previously separate Monro and Kimmel pension plans were merged. The plan provides benefits to certain full-time employees who were employed with Monro and with Kimmel prior to April 2, 1998 and May 15, 2001, respectively.

Effective as of those dates, each company’s Board of Directors approved plan amendments whereby the benefits of each of the defined benefit plans would be frozen and the plans would be closed to new participants. Prior to these amendments, coverage under the plans began after employees completed one year of service and attainment of age 21. Benefits under both plans, and now the merged plan, are based primarily on years of service and employees’ pay near retirement. The funding policy for the Company’s merged plan is consistent with the funding requirements of Federal law and regulations. The measurement date used to determine the pension plan measurements disclosed herein is March 31 for both 2011 and 2010.

The overfunded status of the Company’s defined benefit plan is recognized as an asset in the Consolidated Balance Sheets as of March 26, 2011 and March 27, 2010.

 

58


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The funded status of each plan is set forth below:

 

     Year Ended
Fiscal March
 
     2011     2010  
     (Dollars in thousands)  

Change in Plan Assets:

    

Fair value of plan assets at beginning of year

   $ 15,361      $ 11,631   

Actual return on plan assets

     2,444        4,262   

Employer contribution

     0        0   

Benefits paid

     (531     (532
                

Fair value of plan assets at end of year

     17,274        15,361   
                

Change in Projected Benefit Obligation:

    

Benefit obligation at beginning of year

     13,473        10,724   

Interest cost

     814        769   

Actuarial gain

     795        2,512   

Benefits paid

     (531     (532
                

Benefit obligation at end of year

     14,551        13,473   
                

Funded status of plan

   $ 2,723      $ 1,888   
                

The projected and accumulated benefit obligations were equivalent at March 27, 2010 and March 26, 2011.

Amounts recognized in accumulated other comprehensive loss consist of:

 

     Year Ended
Fiscal March
 
     2011      2010  
     (Dollars in thousands)  

Unamortized transition obligation

   $ 0       $ 0   

Unamortized prior service cost

     0         0   

Unamortized net loss

     2,545         3,301   
                 

Total

   $ 2,545       $ 3,301   
                 

Changes in plan assets and benefit obligations recognized in other comprehensive income consist of:

 

     Year Ended
Fiscal March
 
     2011      2010  
     (Dollars in thousands)  

Net transition obligation

   $ 0       $ 0   

Prior service cost

     0         0   

Net actuarial gain

     756         1,311   
                 

Total

   $ 756       $ 1,311   
                 

 

59


MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Pension (income) expense included the following components:

 

     Year Ended Fiscal March