ITASCA, IL — Midas reported net income of $2.6 million, or 17 cents per diluted share, for the second quarter ended July 1, compared to a loss of $2.5 million, or 16 cents per share in 2005, when the company recorded significant special items related to the company’s exit from exhaust manufacturing.
During the second quarter of 2006, Midas recorded pre-tax business transformation charges of $0.4 million as part of the system-wide shop re-imaging program. In addition, the company celebrated its 50th anniversary during the second quarter hosting North American and international franchisees at a cost of $1.5 million. Incremental stock option expense under provisions of SFAS 123R was $0.6 million for the quarter. In the second quarter last year, the company recorded special charges of $9.5 million related to its exit from exhaust manufacturing, reported operating losses in the quarter of $0.8 million related to the exhaust distribution business, and recorded gains on asset sales of $1.1 million.
After a string of 12 consecutive quarters of positive comparable shop retail sales, the U.S. Midas system reported a decline of 3.8 percent in the second quarter. Sales growth in tires continued to be strong at more than 14 percent, while maintenance revenue continued to grow. However, sales in brakes and exhaust were weak. Comparable shop sales increased by 1.6 percent in Canada.
Alan Feldman, Midas chairman and chief executive officer, said retail sales remain soft in the U.S. automotive service market as a result of high gas prices and consumer uncertainty. “We continue to believe that consumers are delaying big ticket repair and maintenance expenditures,” Feldman said. “However, these repairs, including replacement of brakes and exhaust, cannot be deferred forever because of vehicle safety and reliability issues. Therefore, we expect to see an improvement in the service market in the second half of this year.”
The 74 company-operated shops produced a break-even operating performance in the second quarter, up from a loss of $0.4 million in the second quarter of 2005. Sales growth at company shops in Florida continued to be strong as comparable store sales there grew by 7.2 percent in the second quarter.
For the first six months of fiscal 2006, operating activities provided net cash of $13.4 million, compared to using $1.3 million of cash last year. So far in 2006, the company has spent $3.5 million of cash for business transformation costs. Changes in assets and liabilities created $3.9 million of cash, primarily as a result of the final liquidation of exhaust inventories at the Chicago exhaust warehouse and the deferral of certain payments.
The company has spent $7.6 million during the first half of 2006 to repurchase 368,000 shares of its common stock as part of a $50 million share repurchase program that began in February 2005. The company used the balance of its free cash flow to temporarily reduce debt. Through the end of the second quarter, the company has spent $22.4 million to repurchase 1.08 million shares, leaving $27.6 million remaining under the repurchase authorization. The company anticipates spending a total of approximately $20 million to repurchase shares in 2006.
“We are on track with our full-year guidance of cash flow from operating activities of $27 to $30 million, having banked $13.4 million of cash flow from operating activities in the first half of 2006,” Feldman said.
Sales and revenues for the second quarter were $45.1 million, down from $50.3 million last year. For the first six months, sales and revenues were $87.7 million, down from $99.8 million in 2005.
The majority of the decline in revenue in both periods was due to lower replacement part sales and product royalties as a result of the company’s withdrawal from the exhaust manufacturing and distribution business during the second half of 2005.
Franchise royalties and license fees were $16.9 million for the second quarter and $32.1 million for the first half, compared to $17.3 million and $32.8 million, respectively, last year. The decline in franchise royalties for the quarter is a result of lower retail sales in the U.S. Midas system, while the decline for the six-month period is due to comparing this year’s results to the effects of a one-time positive adjustment in Canadian royalties in 2005. Real estate revenues were $9.1 million for the quarter and $18.2 million for the first six months, compared to $8.9 million and $17.9 million for the same periods a year ago.
Retail sales at Midas’ 74 company-owned shops in the United States were $10.5 million for the second quarter and $20 million for the first half, up from $9.6 million and $18.7 million, respectively, in 2005. Comparable shop retail sales in company shops were up 0.5 percent in the second quarter. There were four additional company shops in operation for the quarter this year compared to 2005. These shops were acquired from an exiting dealer.
“Importantly, our company shop operation broke even for the quarter, compared to losses of $0.2 million in the first quarter of 2006 and $0.4 million in the second quarter last year,” Feldman said. “Company shops are on target to break even for all of 2006 and to be profitable in 2007.”
Replacement part sales and product royalties were $7.7 million for the quarter and $15.5 million for the first half, down from $13.6 million and $28.8 million for the same periods last year, reflecting the company’s exit from the exhaust distribution business.
Selling, general and administrative (SG&A) expenses were $22.2 million for the quarter and $44.4 million for the first six months, compared to $23 million and $45.5 million for the same periods in 2005. This year’s SG&A for the second quarter and first six months includes $0.6 million and $1.1 million, respectively, for the expensing of stock options under SFAS 123R.
“We committed to a total SG&A target of $85 million for 2006, excluding the cost of SFAS 123R. We are on track to meet that commitment which represents a $6 million reduction from the 2005 level,” Feldman said.
Midas reported operating income of $6.3 million for the second quarter and $14.4 million for the first half, compared to an operating loss of $2 million in the second quarter and operating income of $4.5 million for the first half last year. Operating margin was 14 percent for the quarter and 16.4 percent for the first half. Excluding the convention expenses and business transformation charges, operating margin was 18.2 percent for the quarter and 18.7 percent for the first half.
The 2005 operating results included exhaust-related special charges of $9.5 million in the second quarter and $9.6 million in the first half.
Interest expense for the second quarter was $2.3 million and $4.5 million for the first six months, compared to $2.5 million for the second quarter and $5 million for the first six months in 2005. The company’s bank debt was $60.7 million at the end of the second quarter.
Midas recorded income tax expense of $1.6 million for the quarter. The company does not expect to pay a significant amount of income tax until the end of the decade because of net operating loss carry forwards of approximately $110 million generated in prior years.
Feldman said that because of continuing softness in the retail market, Midas has adjusted its projections for 2006 revenues to $177 million from $180 million and expects full-year operating income to be in the lower half of its previously announced range of $29 to $31 million, excluding the effects of exhaust-related operating losses, restructuring charges, incremental SFAS 123R expenses and gains on asset sales. “We believe that system sales will improve in the second half, because of our stronger promotional focus on brakes and as motorists again seek the automotive repairs and services they have deferred in recent months as a result of high fuel prices,” Feldman said. “We will continue our cost-control efforts to meet or exceed our target of a $6 million reduction in expenses in 2006.”
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