Midas, Inc. (NYSE: MDS) reported net earnings of $2.1 million—or
$0.15 per diluted share—for the second quarter ended July 2, 2011,
compared to $0.8 million—or $0.06 per diluted share—in the second
quarter of 2010.
For the first six months of 2011, net earnings were $3.0
million—or $0.21 per diluted share, an increase from $1.5
million—or $0.11 per diluted share—in 2010.
Second quarter 2011 results were negatively impacted by $0.02
per share as a result of losses on the sale of eight
company-operated shops to franchisees and a final foreign currency
exchange loss related to the April payment to the company’s master
European licensee as part of the now-concluded arbitration.
However, these losses were offset by a $0.03 per share warranty
liability reduction due to the declining trend in claims
experience.
Second quarter 2010 earnings were negatively affected by $0.8
million of incremental legal and other expenses related to the
now-concluded arbitration. The second quarter 2010 arbitration
costs had an after-tax impact of $0.03 per diluted share.
Retail sales
“The positive trend in retail sales continues as comparable shop
sales at Midas shops in the United States were up by 2.2 percent,
the seventh consecutive quarter of increases,” said Alan D.
Feldman, Midas’ chairman and chief executive officer. “Average
daily car count at U.S. Midas shops increased by two percent during
the quarter—following a four percent increase in the first quarter
and a 10 percent increase for all of 2010.”
In U.S. Midas shops, oil changes increased by five percent and
tire sales grew by 3.2 percent in the quarter. Suspension sales
were up by 8.1 percent, while exhaust was flat and brakes declined
by 2.5 percent.
Midas’ overall comparable shop sales in Canada increased by 7.2
percent, driven by a 19 percent increase in oil changes.
Comparable shop sales at SpeeDee shops in the U.S. were
flat.
“The positive sales trends we experienced at Midas shops in the
first half of the year have continued into the third quarter, with
preliminary reports for July showing a comparable shop sales
increase per selling day of more than four percent for U.S. Midas
shops,” Feldman said.
In the second quarter, comparable shop sales at company-operated
Midas shops were up 4.5 percent, led by increases of 19 percent in
the Northeast shops, 13.5 percent in Milwaukee and 10 percent in
Northern California.
There were 98 company-operated Midas and SpeeDee shops at the
end of the quarter, down from 118 at the end of the second quarter
of 2010. Over the past 12 months, the company has re-franchised 22
shops, closed one Midas shop and acquired three shops.
SpeeDee Co-Brand Update
The company achieved solid progress during the quarter on its
core strategy to co-brand Midas and SpeeDee shops as a means to
accelerate top-line growth and profitability across the network.
Three additional shops were co-branded in the second quarter
bringing the total to 51.
Of the 51 co-branded shops, 34 are Midas shops and 17 are
SpeeDee shops. Twenty-five of the Midas shops are company-operated
locations and nine are operated by Midas franchisees. Franchisee
interest in co-branding continues to grow, with the co-branded
shops operated by Midas franchisees reporting an 18 percent
increase in comparable shop sales in the second quarter.
Since the end of the second quarter, five additional Midas shops
have been co-branded. The company expects to have between 75 and 85
co-branded shops by the end of 2011.
Results for the Second Quarter, First Six Months
Total sales and revenues for the quarter were $47.7 million,
compared to $49.3 million in the second quarter last year. Sales
for the first six months were $93.8 million down from $97.0 million
in the first half last year. This anticipated decline in the second
quarter was due to having 20 fewer company-operated Midas and
SpeeDee shops compared to 2010, as a result of the company’s
ongoing re-franchising efforts.
Midas’ franchising revenues were $14.4 million for the quarter
and $27.4 million for the first six months, up from $14.0 million
and $26.9 million for the respective periods in 2010. The
comparable shop sales gains in Midas shops in the U.S. and Canada
drove this increase in revenues. Further revenue growth from the
favorable foreign exchange rates, as well as the royalties from
former company-operated shops which were re-franchised in the last
12 months offset the net decline in the franchised shop count.
Real estate revenues were $8.1 million for the second quarter
and $16.0 million for the first six months, compared to $7.9
million in the second quarter and $15.8 million in the first six
months of last year. Higher rents and the favorable Canadian
exchange rate offset a slight decline in rent-producing shops.
Revenues from retail sales at company-operated shops were $18.0
million during the quarter and $36.0 million for the first six
months, down from $20.5 million in the second quarter and $40.3
million in the first six months of last year.
The ongoing re-franchising of company-operated shops resulted in
having 20 fewer company-operated shops this year compared to 2010,
which was offset partially by the 4.5 percent increase in
comparable shop sales at Midas company-operated shops in the second
quarter.
Replacement part sales and product royalties were $5.1 million
in the quarter and $10.3 million in the first six months, compared
to $5.1 million and $10.5 million, respectively in 2010.
Revenues from the company’s R.O. Writer software business were
$1.6 million in the second quarter and $3.2 million in the first
six months, up from $1.5 million in the quarter and $3.0 in the
first half last year.
Operating income was $6.0 million in the second quarter and
$10.7 million in the first six months, compared to $4.0 million and
$7.5 million for the same periods in 2010.
All of the company’s business units were profitable during the
quarter and operating income improved across many of the units,
including improvements of $0.6 million in operating contribution
from the Midas franchising and R.O. Writer businesses. Most
importantly, the actions that the company is taking to strengthen
performance at its company-operated shop business are working as
company-operated shops generated an operating contribution of $0.2
million in the second quarter of 2011, compared to a loss of $0.5
million in the second quarter last year.
Company-operated shop parts cost of sales as a percentage of
retail sales declined to 25.6 percent in the second quarter of
2011, from 27.8 percent in the second quarter last year, due to a
combination of improved inventory management and pricing
actions.
Selling, general and administrative (SG&A) expenses were
$13.4 million during the quarter and $25.7 million for the first
six months, down from $13.9 million and $27.6 million for the same
periods a year ago. These savings are largely attributable to lower
legal expenses due to the completion of the European
arbitration.
Interest expense was $2.0 million for the quarter and $4.0
million for the first six months, down from $2.4 million and $4.9
million, respectively, in late 2010. The decline is due to lower
interest rates as a result of the expiration of interest rate swaps
late in 2010. The company’s bank debt was $79.0 million at the end
of the second quarter, compared to $62.0 million at the end of the
first quarter of 2011 and $70.1 million at the end of the second
quarter last year. The increase is the result of paying the $22.4
million net arbitration settlement in April 2011. Excluding net
borrowings required to make the arbitration payment, the company
reduced debt by $5.4 million in the second quarter and $13.5
million over the past year.
Midas recorded income tax expense of $1.8 million during the
second quarter and $2.4 million for the first six months, up from
$0.8 million and $1.3 million, respectively, a year ago. The
company does not pay a significant amount of income taxes because
of net operating loss carry forwards of approximately $83
million.
Cash Flow
Selected Cash Flow Information ($ in millions)
YTD Q2
YTD Q2 2011 2010 Cash provided by
operating activities before
payment of European arbitration award
andnet changes in assets and liabilities
$ 11.6 $ 9.3 Payment of European arbitration award (22.4 ) - Net
changes in assets and liabilities (4.9 ) (0.2
) Net cash provided by/(used in) operating activities $ (15.7 )
$ 9.1 Capital investments $ (1.7 ) $ (2.6 )
Cash paid for acquired businesses - (3.5 ) Net
borrowings/(repayments) of long-term debt and leases $ 15.5 $ (2.6
)
Net cash flow used in operating activities was $15.7 million for
the first six months of 2011, compared to $9.1 million provided by
operating activities in the first six months of 2010.
Improved operating results increased cash provided by operating
activities by 25 percent, to $11.6 million in 2011 from $9.3
million in 2010. However, the payment of the net European
arbitration award of $22.4 million and net changes in assets and
liabilities drove down cash provided by operating activities to a
negative $15.7 million. The $4.9 million net change in assets and
liabilities was primarily due to a $2.2 million increase in
company-operated shop inventory to support the new shop operating
model and a $2.4 million decrease in accounts payable and accrued
expenses due to the timing of payments.
2011 growth opportunities and forecast
“We are encouraged by the improvement in our operating income,
led by a return to profitability in our company-operated shops and
growing royalties from our North American franchised business as a
result of higher retail sales,” Feldman said.
“We are also encouraged by the growing interest in co-branding
by many of our leading franchises, who are embracing the co-branded
model,” he said.
“We will continue to execute on our growth strategies, building
shop traffic and retail sales by promoting value-added oil changes
and with training programs to enhance the execution of in-shop
operations,” Feldman said. “We currently expect comparable shop
retail sales gains of between two percent and three percent in U.S.
Midas shops in each of the next two quarters.”
Assuming these comparable shop sales increases are achieved,
Midas expects earnings per diluted share of between $0.18 and
$0.22, excluding the impact of gains or losses on the sale of
assets, for the second half of the year.
Midas is one of the world’s largest providers of automotive
service, offering brake, maintenance, tires, exhaust, steering and
suspension services at nearly 2,300 franchised, licensed and
company-owned Midas shops in 15 countries, including more than
1,500 in the United States and Canada. Midas also owns the SpeeDee
Oil Change business, with 171 auto service centers in the United
States and Mexico.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This news release contains certain forward-looking statements
that are based on management’s beliefs as well as assumptions made
by and information currently available to management. Such
statements are subject to risks and uncertainties, both known and
unknown, that could cause actual results, performance or
achievement to vary materially from those expressed or implied in
the forward-looking statements. The company may experience
significant fluctuations in future results, performance or
achievements due to a number of economic, competitive,
governmental, technological or other factors. Additional
information with respect to these and other factors, which could
materially affect the company and its operations, is included in
the company’s filings with the Securities and Exchange Commission,
including the company’s 2010 annual report on Form 10-K and
subsequent filings.
MIDAS, INC. CONDENSED STATEMENTS OF INCOME
(Unaudited) (In millions, except for earnings per share)
For the quarter For the six months
ended fiscal
June
ended fiscal
June
2011(13
weeks)
2010(13
weeks)
2011(26
weeks)
2010(26
weeks)
Sales and revenues: Franchise royalties and license fees $
14.4 $ 14.0 $ 27.4 $ 26.9 Real estate revenues from franchised
shops 8.1 7.9 16.0 15.8 Company-operated shop retail sales 18.0
20.5 36.0 40.3 Replacement part sales and product royalties 5.1 5.1
10.3 10.5 Warranty fee revenue 0.5 0.3 0.9 0.5 Software sales and
maintenance revenue
1.6 1.5
3.2 3.0 Total sales and
revenues
47.7 49.3
93.8 97.0 Operating costs and
expenses: Franchised shops – occupancy expenses 5.8 5.4 11.5 10.9
Company-operated shop parts cost of sales 4.6 5.7 9.4 11.2
Company-operated shop payroll and employee benefits 7.5 8.7 15.0
16.8 Company-operated shop occupancy and other operating expenses
5.7 6.6 11.4 13.0 Replacement part cost of sales 4.7 4.6 9.5 9.5
Warranty expense (benefit) (0.4 ) 0.4 0.0 0.6 Selling, general, and
administrative expenses 13.4 13.9 25.7 27.6 (Gain) loss on sale of
assets, net
0.4 —
0.6 (0.1 ) Total operating costs
and expenses
41.7 45.3
83.1 89.5 Operating
income 6.0 4.0 10.7 7.5 Interest expense (2.0 ) (2.4 ) (4.0
) (4.9 ) Other income (expense), net
(0.1 )
—
(1.3 )
0.2 Income before
income taxes 3.9 1.6 5.4 2.8 Income tax expense
1.8 0.8 2.4
1.3 Net income
$
2.1 $ 0.8 $
3.0 $ 1.5 Earnings
per share: Basic
$ 0.15
$ 0.06 $ 0.21
$ 0.11 Diluted
$
0.15 $ 0.06 $
0.21 $ 0.11
Average number of shares: Shares applicable to basic
earnings 13.9 13.9 13.9 13.8 Equivalent shares on outstanding stock
awards
0.0 0.1
0.1 0.1 Shares applicable to
diluted earnings
13.9 14.0
14.0 13.9
MIDAS, INC.
CONDENSED BALANCE SHEETS
(In millions, except per share
data)
Fiscal Fiscal June December
2011
2010
(Unaudited)
Assets: Current assets: Cash and cash
equivalents $ 0.4 $ 0.6 Receivables, net 23.8 29.5 Inventories 7.2
5.0 Deferred income taxes 6.8 18.0 Prepaid assets 4.5 4.1 Other
current assets
3.1 3.0
Total current assets 45.8 60.2 Property and equipment, net 77.4
81.1 Goodwill 23.3 23.4 Other intangible assets, net 17.1 17.6
Deferred income taxes 52.3 43.9 Other assets
3.8 3.5 Total assets
$ 219.7 $ 229.7
Liabilities and equity: Current liabilities: Current
portion of long-term obligations $ 1.7 $ 1.7 Current portion of
accrued warranty 1.6 1.7 Accounts payable 19.9 21.1 Accrued
expenses 19.3 20.5 Accrued European arbitration settlement
0.0 25.5 Total current liabilities
42.5 70.5 Long-term debt 79.0 62.7 Obligations under capital leases
1.2 1.3 Finance lease obligation 28.4 29.1 Pension liability 21.9
22.5 Accrued warranty 7.7 9.1 Deferred warranty obligation 7.3 6.8
Other liabilities
5.3 6.7
Total liabilities
193.3
208.7 Temporary equity: Non-vested restricted
stock subject to redemption 3.5 3.8 Shareholders’ equity:
Common stock ($.001 par value, 100 million shares authorized, 17.7
million shares issued) and paid-in capital 5.1 8.9 Treasury stock,
at cost (3.2 million shares and 3.5 million shares) (66.1 ) (71.8 )
Retained income 100.6 97.6 Accumulated other comprehensive loss
(16.7 )
(17.5 ) Total
shareholders’ equity
22.9
17.2 Total liabilities and shareholders’ equity
$ 219.7 $ 229.7
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