# MONRO, INC. (MNRO) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from MONRO, INC.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/876427/000156276224000155/mnro-20240330x10k.htm
Accession: 0001562762-24-000155
Filing date: 2024-05-28
Report date: 2024-03-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/MNRO/
All MD&A years: /company/MNRO/mda/
Previous year: /company/MNRO/mda/fy2023/ (FY 2023)
Next year: /company/MNRO/mda/fy2025/ (FY 2025)

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

Executive Overview

We continue to make strategic investments to support our operating and financial model designed to drive sustainable sales and profit growth. We have done this through our investment strategy focused on improving guest experience, enhancing customer-centric engagement, optimizing product and service offerings, and accelerating productivity and team engagement, as well as our growth strategy, including executing on accretive acquisition opportunities.

Recent Developments

On May 23, 2024, we entered into a Fourth Amendment to our Credit Facility, which, among other things, amends the terms of certain of the financial and restrictive covenants in the credit agreement to provide us with additional flexibility to operate our business from the first quarter of fiscal 2025 through the fourth quarter of fiscal 2026. See additional discussion under Part II, Item 9B, “Other Information”, and Note 6 to our consolidated financial statements.

2023 Divestiture

On June 17, 2022, we completed the sale of assets relating to our wholesale tire operations and internal tire distribution operations to ATD. The total purchase price was $102 million, consisting of $62 million paid by ATD at closing, of which $5 million was held in escrow, and the remaining $40 million to be paid quarterly over approximately three years based on our tire purchases from or through ATD pursuant to a distribution and fulfillment agreement. For details regarding the sale and subsequent proceeds, see Note 2 to our consolidated financial statements.

Economic Conditions

The United States economy has experienced high inflation during fiscal 2023 and fiscal 2024 and there are market expectations that inflation may remain at elevated levels for a sustained period. In addition, labor availability has continued to be constrained and market labor costs have continued to increase. The U.S. Federal Reserve Board also has increased interest rates during fiscal 2023 and fiscal 2024 and interest rate changes may occur in the coming months. These conditions may give rise to an economic slowdown, and perhaps a recession, and could further increase our costs and/or impact our revenues. It is unclear whether the current economic conditions and government responses to these conditions, including inflation, changing interest rates, and geopolitical uncertainty, will result in an economic slowdown or recession in the United States. If that occurs, demand for our products and services may decline, possibly significantly, which may significantly and adversely impact our business, results of operations and financial position.

Financial Summary

We operate on a 52/53-week fiscal year ending on the last Saturday in March. Fiscal year 2024 contained 53 weeks and fiscal 2023 contained 52 weeks. Any amounts noted as adjusted for days have been adjusted to remove the impact of the 53rd week in fiscal 2024.

Fiscal 2024 included the following notable items:

Diluted earnings per common share (“EPS”) were $1.18.

Adjusted diluted EPS, a non-GAAP measure, were $1.33.

Sales decreased 3.7 percent, primarily due to closed stores and lower overall comparable store sales.

Comparable store sales decreased 2.0 percent from the prior year, or a decrease of 3.9 percent when adjusted for days.

Operating income of $71.4 million was 10.4 percent lower than the prior year.

Net income was $37.6 million. 

Adjusted net income, a non-GAAP measure, was $42.4 million.

[[GREPCENT_TABLE]]
[["Earnings Per Common Share","","","","","","","","Percent Change"],["","","","2024","","","2023","","2024/2023"],["Diluted EPS","","$","1.18","","$","1.20","","(1.7)","%"],["Adjustments","","","0.15","","","0.17"],["Adjusted diluted EPS","","$","1.33","","$","1.36","","(2.2)","%"]]
[[/GREPCENT_TABLE]]

Note: Amounts may not foot due to rounding.

[[GREPCENT_TABLE]]
[["","Monro, Inc. 2024 Form 10-K","25"]]
[[/GREPCENT_TABLE]]

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Adjusted net income and adjusted diluted EPS, each of which is a measure not derived in accordance with generally accepted accounting principles in the U.S. (“GAAP”), exclude the impact of certain items. Management believes that adjusted net income and adjusted diluted EPS are useful in providing period-to-period comparisons of the results of our operations by excluding certain non-recurring items, such as costs related to shareholder matters from our equity capital structure recapitalization, transition costs related to back-office optimization, corporate headquarters relocation costs, and items related to store closings, as well as acquisition initiatives. Reconciliations of these non-GAAP financial measures to GAAP measures are provided beginning on page 27 under “Non-GAAP Financial Measures.”

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

Analysis of Results of Operations

[[GREPCENT_TABLE]]
[["Summary of Operating Income","","","","","","","","Percent Change"],["(thousands)","","","2024","","","2023","","2024/2023"],["Sales","","$","1,276,789","","$","1,325,382","","(3.7)","%"],["Cost of sales, including distribution and occupancy costs","","","824,686","","","869,207","","(5.1)"],["Gross profit","","","452,103","","","456,175","","(0.9)"],["Operating, selling, general and administrative expenses","","","380,678","","","376,425","","1.1"],["Operating income","","$","71,425","","$","79,750","","(10.4)","%"]]
[[/GREPCENT_TABLE]]

We have elected to omit discussion on the earliest of the three years covered by the consolidated financial statements presented. The discussion of our fiscal 2023 performance compared to our fiscal 2022 performance and our financial condition as of March 25, 2023 is incorporated herein by reference to Part I, Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located in our Form 10-K for the fiscal year ended March 25, 2023, filed on May 22, 2023. 

Sales

Sales include automotive undercar repair, tire replacement and tire related service sales, net of discounts, returns, etc., and revenue from the sale of warranty agreements and commissions earned from the delivery of tires. See Note 7 to the Company’s consolidated financial statements for additional information. We use comparable store sales to evaluate the performance of our existing stores by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. There were 368 selling days in 2024 and 361 selling days in 2023.

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

[[GREPCENT_TABLE]]
[["Sales"],["(thousands)","","","2024","","","","2023"],["Sales","","$","1,276,789","","","$","1,325,382"],["Dollar change compared to prior year","","$","(48,593)"],["Percentage change compared to prior year","","","(3.7)","%"]]
[[/GREPCENT_TABLE]]

The sales decrease was due to a decrease in sales from closed stores from the prior year, as well as a decrease in comparable store sales. The decrease in sales from closed stores was driven primarily by the sale of our wholesale tire locations, representing approximately $23.9 million in sales for fiscal 2023. The decrease in comparable store sales is primarily driven by a strained low-to-middle income consumer that disproportionately traded-down to tires at opening price points as the industry worked to clear-through an oversupply of lower-margin tires. Additionally, milder weather contributed to the general tire deferral cycle. This put pressure on overall tire units industry-wide across all regions of the country. This led to weaker store traffic, which was not supportive to sales of our higher-margin service categories. These decreases were partially offset by an increase in sales from new stores and franchise royalties. The following table shows the primary drivers of the change in sales between 2024 and 2023.

[[GREPCENT_TABLE]]
[["","Monro, Inc. 2024 Form 10-K","26"]]
[[/GREPCENT_TABLE]]

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

[[GREPCENT_TABLE]]
[["Sales Percentage Change","","2024"],["Sales change","","(3.7)","%"],["Primary drivers of change in sales"],["Closed store sales (a)","","(2.2)","%"],["Comparable stores sales (b)","","(2.0)","%"],["New store sales (c)","","0.3","%"],["Franchise royalties","","0.2","%"]]
[[/GREPCENT_TABLE]]

(a)The change in closed store sales is primarily due to sales from the wholesale locations sold to American Tire Distributors (“ATD”).

(b)Comparable store sales decreased by 3.9 percent when adjusted for days.

(c)Sales from the fiscal 2023 acquisitions primarily represent the change.

Broad-based inflationary pressures impacting consumers partly led to lower demand in tires and our higher margin service categories during fiscal 2024. We expect the inflationary environment to continue to impact our customers in fiscal 2025.

[[GREPCENT_TABLE]]
[["Comparable Store Product Category Sales Change (a)","","2024","","","2023"],["Tires","","(4)","%","","5","%"],["Maintenance Service","","(2)","%","","5","%"],["Brakes","","(4)","%","","(1)","%"],["Alignment","","(4)","%","","(4)","%"],["Front end/shocks","","(8)","%","","(2)","%"]]
[[/GREPCENT_TABLE]]

(a)The comparable store product category sales change for the year ended March 30, 2024 are adjusted for days.

[[GREPCENT_TABLE]]
[["Sales by Product Category","","2024","","","2023"],["Tires","","48","%","","50","%"],["Maintenance service","","28","","","27"],["Brakes","","14","","","14"],["Steering (a)","","8","","","8"],["Other","","2","","","1"],["Total","","100","%","","100","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["Change in Number of Stores","","2024"],["Beginning store count","","1,299"],["Opened","","1"],["Closed","","(12)"],["Ending store count","","1,288"]]
[[/GREPCENT_TABLE]]

Cost of Sales and Gross Profit

[[GREPCENT_TABLE]]
[["Gross Profit"],["(thousands)","","","2024","","","","2023"],["Gross profit","","$","452,103","","","$","456,175"],["Percentage of sales","","","35.4","%","","","34.4","%"],["Dollar change compared to prior year","","$","(4,072)"],["Percentage change compared to prior year","","","(0.9)","%"]]
[[/GREPCENT_TABLE]]

Gross profit, as a percentage of sales, increased 100 basis points (“bps”) in 2024 as compared to the prior year. Retail material costs, as a percentage of sales, decreased due primarily to tire mix improvement and opportunistic pricing actions. Partially offsetting this increase in gross profit, as a percentage of sales, were increased retail occupancy costs, as a percentage of sales, as we lost leverage on these largely fixed costs with lower overall comparable store sales, as well as an increase in technician labor costs, as a percentage of sales, due to the impact from wage inflation.

[[GREPCENT_TABLE]]
[["Gross Profit as a Percentage of Sales Change","","2024"],["Gross profit change","","100","bps"],["Drivers of change in gross profit as a percentage of sales"],["Retail material costs","","140","bps"],["Retail occupancy costs","","(30)","bps"],["Technician labor costs","","(10)","bps"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Monro, Inc. 2024 Form 10-K","27"]]
[[/GREPCENT_TABLE]]

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Operating, Selling, General and Administrative Expenses

[[GREPCENT_TABLE]]
[["Operating, Selling, General and Administrative Expenses"],["(thousands)","","","2024","","","","2023"],["Operating, Selling, General and Administrative Expenses","","$","380,678","","","$","376,425"],["Percentage of sales","","","29.8","%","","","28.4","%"],["Dollar change compared to prior year","","$","4,253"],["Percentage change compared to prior year","","","1.1","%"]]
[[/GREPCENT_TABLE]]

The increase of $4. 3 million in operating, selling, general and administrative (“OSG&A”) expenses from the prior year is primarily due to an increase in OSG&A expenses from the gain on the sale to ATD of our wholesale tire locations and distribution assets, net of closing costs and costs associated with the closing of a related warehouse and inventory adjustments during the prior year, comparable and new stores, store impairment charges, as well as transition costs related to back-office optimization. Partially offsetting these increases were decreases in costs related to closed stores, litigation reserve/settlement costs and other non-recurring costs.

[[GREPCENT_TABLE]]
[["OSG&A Expenses Change"],["(thousands)","","","2024"],["OSG&A expenses change","","$","4,253"],["Drivers of change in OSG&A expenses"],["Increase from gain on sale of wholesale tire locations and distribution assets, net","","$","3,800"],["Increase from comparable stores","","$","3,171"],["Increase from new stores","","$","1,187"],["Increase from store impairment charges","","$","933"],["Increase from transition costs related to back-office optimization","","$","875"],["Decrease from other non-recurring costs, net","","$","(264)"],["Decrease from litigation reserve/settlement costs","","$","(2,000)"],["Decrease from closed stores","","$","(3,449)"]]
[[/GREPCENT_TABLE]]

Other Performance Factors

Net Interest Expense

Net interest expense of $20.0 million for 2024 decreased $3.2 million as compared to the prior year and decreased as a percentage of sales from 1.7 percent to 1.6 percent. Weighted average debt outstanding for 2024 decreased by approximately $105 million as compared to 2023. This decrease is primarily related to lower finance lease debt related to our stores, as well as a decrease in debt outstanding under our Credit Facility. The weighted average interest rate increased approximately 70 basis points from the prior year due primarily to an increase in the Credit Facility’s floating borrowing rates.

Provision for Income Taxes

Our effective income tax rate was 27.6 percent for 2024 compared to 31.7 percent for 2023. The effective income tax rate for 2023 was higher by 4.1 percent, primarily due to discrete tax impacts from the divestiture of assets relating to our wholesale tire operations and internal tire distribution operations as well as the revaluation of deferred tax balances due to changes in the mix of pre-tax income in various U.S. state jurisdictions because of the divestiture. See Note 8 to the Company’s consolidated financial statements for additional information.

Non-GAAP Financial Measures

In addition to reporting net income and diluted EPS, which are GAAP measures, this Form 10-K includes adjusted net income and adjusted diluted EPS, which are non-GAAP financial measures. We have included reconciliations to adjusted net income and adjusted diluted EPS from our most directly comparable GAAP measures, net income, and diluted EPS, below. Management views these non-GAAP financial measures as indicators to better assess comparability between periods because management believes these non-GAAP financial measures reflect our core business operations while excluding certain non-recurring items, such as costs related to shareholder matters from our equity capital structure recapitalization, transition costs related to back-office optimization, corporate headquarters relocation costs, and items related to store closings, as well as acquisition initiatives.

[[GREPCENT_TABLE]]
[["","Monro, Inc. 2024 Form 10-K","28"]]
[[/GREPCENT_TABLE]]

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

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

Adjusted net income is summarized as follows:

[[GREPCENT_TABLE]]
[["Reconciliation of Adjusted Net Income"],["(thousands)","","","2024","","","2023"],["Net income","","$","37,571","","$","39,048"],["Store impairment charges","","","1,915","","","982"],["Net loss (gain) on sale of wholesale tire and distribution assets (a)","","","304","","","(3,496)"],["Store closing costs","","","208","","","515"],["Monro.Forward initiative costs","","","\u2014","","","260"],["Acquisition due diligence and integration costs","","","5","","","31"],["Litigation reserve/settlement costs","","","\u2014","","","2,000"],["Management restructuring/transition costs (b)","","","1,210","","","1,338"],["Costs related to shareholder matters","","","1,355","","","1,232"],["Transition costs related to back-office optimization","","","1,236","","","361"],["Corporate headquarters relocation costs","","","334","","","\u2014"],["Provision for income taxes on pre-tax adjustments","","","(1,740)","","","(825)"],["Certain discrete tax items (c)","","","\u2014","","","3,034"],["Adjusted net income","","$","42,398","","$","44,480"]]
[[/GREPCENT_TABLE]]

(a)Amounts include a loss on subsequent inventory adjustments in fiscal 2024, and gain on sale of related warehouse, net of associated closing costs, in fiscal 2023.

(b)Costs incurred in connection with restructuring and elimination of certain management positions.

(c)Certain discrete tax items related to the sale of our wholesale tire locations and tire distribution assets as well as the revaluation of deferred tax balances due to changes in the mix of pre-tax income in various U.S. state jurisdictions because of the sale.

Adjusted diluted EPS is summarized as follows:

[[GREPCENT_TABLE]]
[["Reconciliation of Adjusted Diluted EPS","","","2024","","","2023"],["Diluted EPS","","$","1.18","","$","1.20"],["Store impairment charges","","","0.04","","","0.02"],["Net loss (gain) on sale of wholesale tire and distribution assets","","","0.01","","","(0.08)"],["Store closing costs (a)","","","0.00","","","0.01"],["Monro.Forward initiative costs","","","\u2014","","","0.01"],["Acquisition due diligence and integration costs (a)","","","0.00","","","0.00"],["Litigation reserve/settlement costs","","","\u2014","","","0.05"],["Management restructuring/transition costs","","","0.03","","","0.03"],["Costs related to shareholder matters","","","0.03","","","0.03"],["Transition costs related to back-office optimization","","","0.03","","","0.01"],["Corporate headquarters relocation costs","","","0.01","","","\u2014"],["Certain discrete tax items","","","\u2014","","","0.09"],["Adjusted diluted EPS","","$","1.33","","$","1.36"]]
[[/GREPCENT_TABLE]]

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

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

The certain discrete tax items for 2023 are tax affected. The other adjustments to diluted EPS reflect adjusted effective tax rates of 26.5 percent and 25.6 percent for 2024 and 2023, respectively. These adjusted effective tax rates exclude the income tax impacts from share-based compensation and for 2024 and 2023 and exclude certain discrete tax items for 2023. See adjustments from the Reconciliation of Adjusted Net Income table above for pre-tax amounts.

[[GREPCENT_TABLE]]
[["","Monro, Inc. 2024 Form 10-K","29"]]
[[/GREPCENT_TABLE]]

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Analysis of Financial Condition

Liquidity and Capital Resources

Capital Allocation

We expect to continue to generate positive operating cash flow as we have done in each of the last three fiscal years. We believe the cash we generate from our operations will allow us to continue to support business operations as well as invest in attractive acquisition opportunities intended to drive long-term sustainable growth, pay down debt and return cash to our shareholders through our dividend program.

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

Dividends

We paid cash dividends of $1.12 per share totaling $35.5 million in 2024 and $36.4 million in 2023.

Share Repurchases

We returned $44.5 million to shareholders through share repurchases during fiscal 2024, inclusive of excise tax of $0.4 million. The excise tax is assessed at one percent of the fair market value of net stock repurchases after December 31, 2022. For details regarding our share repurchase program, see Part II, Item 5, “Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this report and to our consolidated financial statements.

Working Capital Management

As of March 30, 2024, we had a working capital deficit of $201.9 million, an increase from $190.7 million as of March 25, 2023. The overall working capital deficit is a result of our supply chain finance program. We have agreed to contractual payment terms and conditions with our suppliers. As part of our working capital management, we facilitate a voluntary supply chain finance program to provide our suppliers with the opportunity to sell receivables due from Monro to a participating financial institution. For details regarding our supply chain finance program, see Note 15 to our consolidated financial statements.

Future Cash Requirements

We enter into contractual obligations in the ordinary course of business that may require future cash payments. Such obligations include, but are not limited to, debt service and leasing arrangements. The timing and nature of these obligations are expected to have an impact on our liquidity and capital requirements in future periods.

Contractual Obligations

[[GREPCENT_TABLE]]
[["Commitments Due by Period","","","","","","Within","","","2 to","","","4 to","","","After"],["(thousands)","","","Total","","","1 Year","","","3 Years","","","5 Years","","","5 Years"],["Principal payments on long-term debt","","$","102,000","","","","","","","","$","102,000"],["Finance lease commitments/financing obligations (a)","","","350,900","","$","49,955","","$","92,853","","","76,516","","$","131,576"],["Operating lease commitments (a)","","","255,954","","","46,895","","","83,368","","","58,285","","","67,406"],["Total","","$","708,854","","$","96,850","","$","176,221","","$","236,801","","$","198,982"]]
[[/GREPCENT_TABLE]]

(a)Finance and operating lease commitments represent future undiscounted lease payments and include $77.2 million and $49.8 million, respectively, related to options to extend lease terms that are reasonably certain of being exercised.

Sources and Conditions of Liquidity

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

[[GREPCENT_TABLE]]
[["","Monro, Inc. 2024 Form 10-K","30"]]
[[/GREPCENT_TABLE]]

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Summary of Cash Flows

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

[[GREPCENT_TABLE]]
[["Summary of Cash Flows"],["(thousands)","","2024","","2023"],["Cash provided by operating activities","","$","125,196","","$","215,016"],["Cash (used for) provided by investing activities","","","(1,956)","","","26,546"],["Cash used for financing activities","","","(121,563)","","","(244,626)"],["Increase (decrease) in cash and equivalents","","","1,677","","","(3,064)"],["Cash and equivalents at beginning of period","","","4,884","","","7,948"],["Cash and equivalents at end of period","","$","6,561","","$","4,884"]]
[[/GREPCENT_TABLE]]

Cash provided by operating activities

For 2024, cash provided by operating activities was $125.2 million, which consisted of net income of $37.6 million, adjusted by non-cash charges of $86.3 million and by a change in operating assets and liabilities of $1.4 million. The non-cash charges were largely driven by $72.2 million of depreciation and amortization. The change in operating assets and liabilities was largely due to an increase in accrued expenses of $14.9 million, primarily related to timing of payroll and insurance payments. This source of cash was offset by our accounts payable and inventory balances being a use of cash of $9.8 million and $6.4 million, respectively.

For 2023, cash provided by operating activities was $215.0 million, which consisted of net income of $39.0 million, adjusted by non-cash charges of $80.9 million and by a change in operating assets and liabilities of $95.1 million. The non-cash charges were largely driven by $77.0 million of depreciation and amortization. The change in operating assets and liabilities was largely due to our supply chain finance program being a source of cash as we improved our cash flow by $120.5 million. This source of cash was partially offset by our inventory balance being a use of cash of $18.2 million as well as our federal and state income taxes payable being a use of cash of $2.4 million.

Cash used for / provided by investing activities

For 2024, cash used for investing activities was $2.0 million. This was primarily due to cash used for capital expenditures, including property and equipment, of $25.5 million, offset by subsequent proceeds from the sale of our wholesale tire locations and distribution assets and from other property and equipment for $20.6 million and 2.9 million, respectively.

For 2023, cash provided by investing activities was $26.5 million. This was primarily due to cash from the sale of our wholesale tire locations and distribution assets and from other property and equipment for $65.3 million and $7.2 million, respectively, partially offset by cash used for capital expenditures, including property and equipment, and acquisitions of $39.0 million and $6.7 million, respectively.

Cash used for financing activities

For 2024, cash used for financing activities was $121.6 million which was primarily due to the payment of finance lease principal and dividends of $39.0 million and $35.5 million, respectively, as well as payment on our Credit Facility, net of amounts borrowed during the period, of $3.0 million. Also, we used $44.0 million to repurchase common stock during 2024.

For 2023, cash used for financing activities was $244.6 million which was primarily due to payment on our Credit Facility, net of amounts borrowed during the period, of $71.5 million, as well as payment of finance lease principal and dividends of $39.5 million and $36.4 million, respectively. Also, we used $96.9 million to repurchase common stock during 2023.

Credit Facility

Interest only is payable monthly throughout the term of our Credit Facility. The borrowing capacity for the Credit Facility of $600 million includes an accordion feature permitting us to request an increase in availability of up to an additional $250 million.

On June 11, 2020, we entered into a First Amendment to the Credit Facility (the “First Amendment”), which, among other things, amended the terms of certain of the financial and restrictive covenants in the credit agreement through the first quarter of 2022 to provide us with additional flexibility to operate our business. The First Amendment amended the interest rate charged on borrowings to be based on the greater of adjusted one-month LIBOR or 0.75 percent. For the period from June 30, 2020 to June 30, 2021, the minimum interest rate spread charged on borrowings was 225 basis points over LIBOR.

[[GREPCENT_TABLE]]
[["","Monro, Inc. 2024 Form 10-K","31"]]
[[/GREPCENT_TABLE]]

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Additionally, during the same period, we were permitted to declare, make, or pay any dividend or distribution up to $38.5 million in the aggregate and the acquisition of stores or other businesses up to $100 million in the aggregate were permitted if we are in compliance with the financial covenants and other restrictions in the First Amendment and Credit Facility. The Credit Facility requires fees payable quarterly throughout the term between 0.125 percent and 0.35 percent of the amount of the average net availability under the Credit Facility during the preceding quarter.

On October 5, 2021, we entered into a Second Amendment to the Credit Facility (the “Second Amendment”). The Second Amendment amended the interest rate charged on borrowings to be based on the greater of adjusted one-month LIBOR or 0.00 percent. In addition, the Second Amendment updated certain provisions regarding a successor interest rate to LIBOR.

On November 10, 2022, we entered into a Third Amendment to the Credit Facility (the “Third Amendment”). The Third Amendment, among other things, extended the term of the Credit Facility to November 10, 2027 and amended certain of the financial terms in the Credit Agreement, as amended by the Second Amendment. The Third Amendment amended the interest rate charged on borrowings to be based on 0.10 percent over the Secured Overnight Financing Rate (“SOFR”), replacing the previously used LIBOR. In addition, one additional bank was added to the bank syndicate for a total of nine banks now within the syndicate.

Within the Credit Facility, we have a sub-facility of $80 million available for the purpose of issuing standby letters of credit. The sub-facility requires fees aggregating 87.5 to 212.5 basis points annually of the face amount of each standby letter of credit, payable quarterly in arrears. There was a $30.1 million outstanding letter of credit at March 30, 2024.

Mortgages and specific lease financing arrangements with other parties (with certain limitations) are permitted under the Credit Facility. Other specific terms and the maintenance of specified ratios are generally consistent with our prior financing agreement. Additionally, the Credit Facility is not secured by our real property, although we have agreed not to encumber our real property, with certain permissible exceptions.

We were in compliance with all debt covenants at March 30, 2024.

On May 23, 2024, we entered into an amendment (the “Fourth Amendment”) to our Credit Facility. The Fourth Amendment amends the terms of certain of the financial and restrictive covenants in the Credit Facility to provide us with additional flexibility to operate our business from the first quarter of fiscal 2025 through the fourth quarter of fiscal 2026 (the “Covenant Relief Period”). We may voluntarily exit the Covenant Relief Period at any time, which would revert the terms of the Credit Facility to the terms existing before the Fourth Amendment, with the exception of the modified definition of “EBITDAR,” described below.

During the Covenant Relief Period, the minimum interest coverage ratio will be reduced from 1.55x to 1.00x to: (a) 1.25x to 1.00x from the first quarter of fiscal 2025 through the first quarter of fiscal 2026; (b) 1.35x to 1.00x from the second quarter of fiscal 2026 through the fourth quarter of fiscal 2026; and (c) 1.55x to 1.00x for the first quarter of fiscal 2027 and thereafter. During the Covenant Relief Period, the maximum ratio of adjusted debt to EBITDAR remains at 4.75x to 1.00x, except that, if we completed a qualified acquisition during the Covenant Relief Period, the maximum ratio would increase to 5.00x to 1.00x for a certain 12-month period after the qualified acquisition. In addition, the Fourth Amendment modifies the definition of “EBITDAR” to permit add-backs relating to expenses, and restrict add-backs related to gains, associated with store closures of (a) all non-cash items and (b) cash items up to 20% of EBITDA from the first quarter of fiscal 2025 through the fourth quarter of fiscal 2026 and up to 15% of EBITDA from the first quarter of fiscal 2027 and thereafter.

During the Covenant Relief Period, the interest rate spread charged on borrowings increases by 25 basis points.

During the Covenant Relief Period, the restrictions on our ability to declare dividends were modified to reduce the cushion inside the threshold required for us to be able to declare dividends without restriction from 0.50x to 0.25x. In addition, during the Covenant Relief Period, we must have minimum liquidity of at least $400 million to declare dividends. We are prohibited from repurchasing our securities during the Covenant Relief Period if there are outstanding amounts under the Credit Facility immediately before or after giving effect to the repurchase. During the Covenant Relief Period, we may acquire stores or other businesses as long as we have minimum liquidity of at least $400 million after completing the acquisition.

Except as amended by the First Amendment, Second Amendment, Third Amendment and Fourth Amendment, the remaining terms of the Credit Facility remain in full force and effect.

As of May 17, 2024, we had approximately $6.9 million in cash on hand. In addition, we had $472.9 million available under the Credit Facility as of May 17, 2024.

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[["","Monro, Inc. 2024 Form 10-K","32"]]
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MANAGEMENT’S DISCUSSION AND ANALYSIS

We believe that our sources of liquidity, namely cash flow from operations, availability under our Credit Facility, and cash and equivalents on hand, will continue to be adequate to meet our contractual obligations, working capital and capital expenditure needs, finance acquisitions, fund debt maturities, and pay dividends for at least the next 12 months and the foreseeable future.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP, which requires us to make estimates and apply judgments that affect the reported amounts. In Note 1 to the Company’s consolidated financial statements, we describe the significant accounting policies used in preparing the consolidated financial statements. Our management believes that the accounting estimates listed below are those that are most critical to the portrayal of our financial condition and results of operations, and that require management’s most difficult, subjective, and complex judgments in estimating the effect of inherent uncertainties.

Business Combinations

We use the acquisition method in accounting for acquired businesses. Under the acquisition method, our financial statements reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is often required in estimating the fair value of assets acquired, particularly the right of use (“ROU”) assets and intangible assets, including trade names, customer relationships, and reacquired franchise rights. ROU assets are recorded at the present value of remaining lease payments adjusted to reflect favorable or unfavorable market terms of the lease. As a result, in the case of significant acquisitions, we normally obtain the assistance of a third-party valuation specialist in estimating the value of the ROU assets as well as intangible assets. The fair value measurements are based on available historical information and on expectations and assumptions about the future, considering the perspective of marketplace participants. Favorable or unfavorable market terms used to value the ROU assets are estimated based on comparable market data. Fair values of acquired trade names are estimated using an income approach, specifically the relief-from-royalty method. Customer relationships are valued using the cost approach or an income approach such as the excess earnings method. Reacquired franchise rights are valued using the excess earnings method under an income approach. Assumptions utilized in the determination of fair value include forecasted sales, discount rates, royalty rates (trade names), and customer attrition rates (customer relationships). While we believe the expectations and assumptions about the future are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.

Valuation of Long-Lived Assets

We assess potential impairments to our long-lived assets, which include property and equipment and ROU assets, whenever events or changes in circumstances indicate that the carrying value of an asset group may not be recoverable. Long-lived assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets. The carrying value of an asset group is considered impaired when its carrying value exceeds its estimated undiscounted future cash flows. The amount of any impairment loss recorded is calculated as the excess of the asset group’s carrying value over its fair value. Fair value of the assets is determined based on the highest and best use of the asset group, considering external market participant assumptions. During the fourth quarter, we consider changes in the actual and forecasted financial performance of certain asset groups and we have determined such events indicated that a triggering event occurred for certain asset groups. We assessed the recoverability of certain asset groups through the use of an undiscounted cash flow model, which involved significant judgement in a number of assumptions including projected revenues and operating income. Such indicators may include, among others: a significant decline in our expected future cash flows; changes in expected useful life; unanticipated competition; slower growth rates, ongoing maintenance and improvements of the assets, or changes in operating performance. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements. 

Insurance Reserves

We maintain a high retention deductible plan with respect to workers’ compensation and general liability insurance claims (except for in Ohio in which we are self-insured) and are otherwise self-insured for employee medical insurance claims. To reduce our risk and better manage our overall loss exposure, we purchase stop-loss insurance that covers individual claims more than the deductible amounts, and caps total losses in a fiscal year. We maintain an accrual for the estimated cost to settle open claims as well as an estimate of the cost of claims that have been incurred but not reported. These estimates take into consideration the historical average claim volume, the average cost for settled claims, current trends in claim costs, changes in our business and workforce, and general economic factors. These accruals are reviewed on a quarterly basis. For more complex reserve calculations, such as workers’ compensation, we periodically use the services of an actuary to assist in determining the required reserve for open claims.

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[["","Monro, Inc. 2024 Form 10-K","33"]]
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MANAGEMENT’S DISCUSSION AND ANALYSIS

Income Taxes

We estimate our provision for income taxes, deferred tax assets and liabilities, income taxes payable, and unrecognized tax benefit liabilities based on several factors including, but not limited to, historical pre-tax operating income, future estimates of pre-tax operating income, tax planning strategies, differences between tax laws and accounting rules of various items of income and expense, statutory tax rates and credits, uncertain tax positions, and valuation allowances.

We record deferred tax assets and liabilities based upon the expected future tax outcome of differences between tax laws and accounting rules of various items of income and expense recognized in our results of operations using enacted tax rates in effect for the year in which the future tax outcome is expected. We evaluate our ability to realize the tax benefits associated with deferred tax assets and establish valuation allowances when we believe it is more likely than not that some portion of our deferred tax assets will not be realized.

We measure and recognize the tax benefit from an uncertain tax position taken or expected to be taken on an income tax return based on the largest benefit that we determine is more likely than not of being realized upon settlement. We use significant judgment and estimates in evaluating our tax positions. Due to the complexity of some of these uncertain tax positions, the ultimate resolution may result in an actual tax liability that differs from our estimated tax liabilities for unrecognized tax benefits and our effective tax rate may be materially impacted. Income taxes are described further in Note 8 of the Company’s consolidated financial statements.

Accounting Standards

See “Recent Accounting Pronouncements” in Note 1 to the Company’s consolidated financial statements for a discussion of the impact of recently issued accounting standards on our consolidated financial statements as of March 30, 2024 and for the year then ended, as well as the expected impact on the consolidated financial statements for future periods.