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Significant Accounting Policies (Policies)
 12 Months Ended
Mar. 31, 2012
Significant Accounting Policies [Abstract]  
Background

Background

Monro Muffler Brake, Inc. and its wholly owned subsidiary, Monro Service Corporation (together, the “Company”), is engaged principally in providing automotive undercar repair and tire services in the United States. The Company had 803 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 31, 2012. The Company’s operations are organized and managed in one operating segment.

Accounting estimates

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

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 2012”: March 27, 2011 – March 31, 2012 (53 weeks)

“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)

Consolidation

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

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 2012, 2011 and 2010:

 

 

                         
    Year Ended Fiscal March  
    2012     2011     2010  
       

Brakes

     18 %      18 %      19 % 
       

Exhaust

     5       5       6  
       

Steering

     10       11       11  
       

Tires

     39       38       34  
       

Maintenance

     28       28       30  
   

 

 

    

 

 

    

 

 

  
       

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.

Cash equivalents

Cash equivalents

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

Inventories

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

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

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 Statements 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

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

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.

Leases

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

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 Company performs a qualitative assessment to determine if it is more likely than not that the fair value is less than the carrying value of goodwill. If the qualitative factors are triggered, the Company performs the two-step process. 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 market 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 2012 and there have been no triggering events as of the fourth quarter of fiscal year 2012.

Self-insurance reserves

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 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

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 2012, 2011 and 2010 was not material to the Company’s financial position or results of operations.

Comprehensive income

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

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

Treasury stock is accounted for using the par value method. During the years ended March 31, 2012, March 26, 2011 and March 27, 2010, the Company’s Chief Executive Officer surrendered 386,000, 50,000 and 138,000 shares, respectively, of the Company’s Common Stock at fair market value to pay the exercise price and to partially satisfy tax withholding obligations on the exercise of 563,000, 90,000 and 180,000 stock options, respectively.

Stock-based compensation

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 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 2012, 2011 and 2010 was $8.41, $8.58 and $5.38, 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  
    2012     2011     2010  

Risk-free interest rate

     1.11  %      1.52  %      2.24  % 

Expected life, in years

     4       4       5  

Expected volatility

     33.9  %      35.1  %      32.8  % 

Expected dividend yield

     1.03  %      .93 %      1.04  % 

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 31, 2012, March 26, 2011 and March 27, 2010 was $2.7 million, $2.3 million and $2.0 million, respectively. The related income tax benefit was $1.0 million, $.9 million and $.8 million, respectively.

Stock split effected in the form of a stock dividend

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.

Earnings per share

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 the assumed exercise of stock options. (See Note 11.)

Advertising

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 2012 and 2011, and advertising expense for the fiscal years ended March 2012, 2011 and 2010, were not material to these financial statements.

Vendor rebates and cooperative advertising credits

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

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.

Reclassifications

Reclassifications

Certain amounts in these financial statements have been reclassified to maintain comparability among the periods presented.

Recent accounting pronouncements

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 reporting periods within those years beginning after December 15, 2010 (March 27, 2011 for the Company). The adoption of this guidance in the first quarter of fiscal year 2012 had no 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, 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 (March 27, 2011 for the Company). The adoption of this guidance in the first quarter of fiscal year 2012 did not have an impact on the Company’s Consolidated Financial Statements.

 

In May 2011, the Financial Accounting Standards Board issued guidance to amend certain measurement and disclosure requirements related to fair value measurements. The guidance updates existing fair value measurement guidance and is intended to clarify how fair value should be measured and expand the disclosures required. This guidance is effective for interim reporting periods and fiscal years beginning after December 15, 2011, with early adoption prohibited. The adoption of this guidance in the fourth quarter of fiscal year 2012 had no impact on the Company’s Consolidated Financial Statements.

In June 2011, the Financial Accounting Standards Board issued new accounting guidance that revises the manner in which entities present comprehensive income in their financial statements. The guidance removes the presentation options in previously issued accounting guidance on comprehensive income, and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The guidance does not change the items that must be reported in other comprehensive income. This guidance is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2011 (April 1, 2012 for the Company). This guidance requires new disclosures only, and will have no impact on the Company’s Consolidated Financial Statements.

In September 2011, the Financial Accounting Standards Board issued updated guidance on the periodic testing of goodwill for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This guidance is applicable for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of this guidance in the third quarter of fiscal 2012 had no impact on the Company’s Consolidated Financial Statements.