MONRO, INC. (MNRO) FY 2023 MD&A

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. During fiscal 2023, we:

Invested in our team, including incremental investment in our technician labor and wages to support topline sales growth;

Offered attractive price points on key items to grow market share and capture new customers for the long-term; and

Opened six stores through acquisition.

Recent Developments

On May 12, 2023, we entered into a reclassification agreement (the “Reclassification Agreement”) with the holders of our Class C Preferred Stock (the “Class C Holders”) in support of our plan to reclassify our equity capital structure to eliminate the Class C Preferred Stock, subject to shareholder approval.

The Reclassification Agreement provides that, subject to the satisfaction of certain conditions, we will file amendments to our certificate of incorporation (the “Certificate of Incorporation”) to create a mandatory conversion of any outstanding shares of Class C Preferred Stock prior to an agreed sunset date. In exchange for this sunset of the Class C Preferred Stock, the conversion rate of Class C Preferred Stock will be adjusted so that each share of Class C Preferred Stock will convert into 61.275 shares of common stock (the “adjusted conversion rate”), an increase from the current conversion rate of 23.389 shares of common stock for each share of Class C Preferred Stock under the Certificate of Incorporation. At the end of the sunset period, all shares of Class C Preferred Stock remaining outstanding will be automatically converted into shares of common stock at the adjusted conversion rate. The Reclassification Agreement also provides that, during the sunset period, the Class C Holders will have the right to appoint one member of the board of directors. This designee is expected to be Peter J. Solomon, who is one of the Company’s current directors and one of the Class C Holders.

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 is currently being held in escrow, and the remaining $40 million will be paid quarterly over approximately two years based on our tire purchases from or through ATD pursuant to a distribution and fulfillment agreement, of which $8.7 million was received during fiscal 2023. For details regarding the sale, see Note 2 to our consolidated financial statements. During fiscal 2023, we experienced lower top-line sales due to the sale of our wholesale tire operations to ATD and we incurred $1.3 million in costs in connection with restructuring and elimination of certain executive management positions upon completion of the divestiture.

Economic Conditions

The United States economy has experienced high inflation during fiscal 2023 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 additional interest rate increases 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, and increasing interest rates 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

Fiscal 2023 included the following notable items:

Diluted earnings per common share (“EPS”) were $1.20.

Adjusted diluted EPS, a non-GAAP measure, were $1.36.

Sales decreased 2.5 percent, primarily due to lower overall tire sales because of the sale of our wholesale operations.

Comparable store sales increased 2.8 percent from the prior year, driven primarily by an approximately 11 percent comparable store sales increase in approximately 300 of our small or underperforming stores.

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Operating income of $79.8 million was 21.3 percent lower than the prior year, driven primarily by a decrease in gross profit.

Net income was $39.0 million.

Adjusted net income, a non-GAAP measure, was $44.5 million.

Note: Amounts may not foot due to rounding.

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, litigation reserves/settlement costs, and items related to store impairment charges and closings, as well as Monro.Forward or 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

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 2022 performance compared to our fiscal 2021 performance and our financial condition as of March 26, 2022 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 26, 2022, filed on May 23, 2022.

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 361 selling days in both 2023 and 2022.

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.

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

The sales decrease was due to a decrease in sales from closed stores, driven by the sale of our wholesale tire operations in the first quarter of 2023. The decrease in sales in 2023 from the prior year for the wholesale locations was approximately $90.6 million. This was partially offset by an increase in comparable store sales from an increase in average ticket amount across product categories and price points, primarily due to a comparable store sales increase in approximately 300 of our small or underperforming stores, and an increase in sales from new stores. The following table shows the primary drivers of the change in sales between 2023 and 2022.

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

(b)On a comparable store sales basis, comparable store sales increased by 2.8 percent.

(c)On a comparable store sales basis, comparable store sales at our retail locations increased by 3.5 percent.

(d)Sales from the fiscal 2023 acquisitions and fiscal 2022 acquisitions represent the change.

Broad-based inflationary pressures impacting consumers, including higher fuel prices and the negative impact on miles driven, partly led to lower demand in some of our key service categories during fiscal 2023. We expect the inflationary environment to continue to impact our customers in fiscal 2024.

(a)Comparable store tire sales increased six percent at our retail locations during 2023.

For 2022, the comparable store sales increase across all product categories reflect higher traffic and higher average ticket sales compared to the prior period in which the COVID-19 pandemic had a more volatile impact on demand.

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

(a)Includes six stores opened related to the 2023 acquisitions.

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Cost of Sales and Gross Profit

The decrease in gross profit, as a percentage of sales, of 100 basis points (“bps”) for 2023 as compared to the prior year was primarily due to an increase in retail material costs, which increased as a percentage of sales, mainly a result of a shift to a higher mix of tire sales at our retail locations and customers trading down to opening price point tires. The decrease in gross profit, as a percentage of sales, was also partially due to an increase in technician labor costs, as a percentage of sales, as we have continued our incremental investment in technician labor costs during fiscal 2023 to support current and future sales growth. We do not expect further significant incremental investment in technician headcount. Partially offsetting these increases was the impact from our wholesale operations which were sold during the first three months of fiscal 2023. Additionally, there was a decrease in distribution and occupancy costs, as a percentage of sales, as we gained leverage on these largely fixed costs with higher overall comparable store sales.

Operating, Selling, General and Administrative Expenses

The decrease of $4.1 million in operating, selling, general and administrative (“OSG&A”) expenses from the prior year is primarily due to lower expenses from 16 retail stores closed and our wholesale tire locations that were sold as well as decreased expenses from comparable stores mainly a result of cost control. The decrease in OSG&A expenses is also partially due to the gain on the sale of our wholesale tire locations and tire distribution assets, as well as the gain on the sale of related warehouses, net of associated closing costs, and a decrease in litigation reserve/settlement costs. Partially offsetting these decreases were increased expenses from 11 new stores, a full year of expenses for stores acquired in 2022, an increase in costs incurred in connection with restructuring and elimination of certain executive management positions upon completion of the divestiture to ATD, and an increase in costs related to shareholder matters.

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Other Performance Factors

Net Interest Expense

Net interest expense of $23.2 million for 2023 decreased $1.5 million as compared to the prior year and decreased as a percentage of sales from 1.8 percent to 1.7 percent. Weighted average debt outstanding for 2023 decreased by approximately $98 million as compared to 2022. This decrease is primarily related to a decrease in debt outstanding under our Credit Facility. The weighted average interest rate increased approximately 50 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 31.7 percent for 2023 compared to 20.3 percent for 2022. The effective income tax rate for 2023 was higher by 5.3 percent because of 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. Our effective income tax rate for 2022 was lower by 4.0 percent due to the difference in statutory tax rates from a loss year to years in which such net operating loss may be carried back. Additionally, the increase in our effective income tax rate for 2023 over the prior year was also due to other state income tax impacts from 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, litigation reserves/settlement costs, and items related to store impairment charges and closings, as well as Monro.Forward or acquisition initiatives.

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:

(a)Amount includes the gain on sale of related warehouse, net of associated closing costs.

(b)Costs incurred in fiscal 2023 in connection with restructuring and elimination of certain management positions upon completion of our sale of wholesale tire locations and distribution assets.

(c)Income tax benefit related to net operating loss carryback adjustment that reflects the difference in statutory tax rates from a loss year to years in which such net operating loss may be carried back.

(d)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.

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Adjusted diluted EPS is summarized as follows:

(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 and income tax benefit related to net operating loss carryback adjustment for 2022 to each of net income and diluted EPS are tax affected. The other adjustments to diluted EPS reflect adjusted effective tax rates of 25.6 percent and 24.1 percent for 2023 and 2022, respectively. These adjusted effective tax rates exclude the income tax impacts from share-based compensation and for 2023 and 2022 exclude certain discrete tax items and differences in statutory tax rates for net operating loss carrybacks, respectively. See adjustments from the Reconciliation of Adjusted Net Income table above for pre-tax amounts.

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. 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, return cash to our shareholders through our dividend program and repurchase shares of our common stock under our common stock repurchase 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 totaling $36.4 million ($1.12 per share) in 2023 and $34.7 million ($1.02 per share) in 2022, a per share increase of 10 percent. We have paid dividends annually since fiscal 2006 and it is our intent to continue to do so in the future.

Share Repurchases

We returned $96.9 million to shareholders through share repurchases during fiscal 2023. 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 Note 15 to our consolidated financial statements.

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Working Capital Management

As of March 25, 2023, we had a working capital deficit of $190.7 million, an increase from $76.5 million as of March 26, 2022. The increase was driven by an increase in accounts payable as a result of certain of our suppliers that participate in 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 1 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

(a)Finance and operating lease commitments represent future undiscounted lease payments and include $88.5 million and $57.6 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.

Summary of Cash Flows

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

Cash provided by operating activities

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.

For 2022, cash provided by operating activities was $173.8 million, which consisted of net income of $61.6 million, adjusted by non-cash charges of $99.3 million and by a change in operating assets and liabilities of $12.8 million. The non-cash charges were largely driven by $81.2 million of depreciation and amortization. The change in operating assets and liabilities was largely due to our federal and state income taxes payable being a source of cash of $13.8 million due primarily to an income tax refund that was received.

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Cash provided by / used for investing activities

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.

For 2022, cash used for investing activities was $109.8 million. This was primarily due to cash used for acquisitions and capital expenditures, including property and equipment, of $83.3 million and $27.8 million, respectively. Included in the $83.3 million used for acquisitions was $0.8 million paid to the seller of the 2021 acquisition as the lease assignment for one store location was finalized during the period.

Cash used for financing activities

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.

For 2022, cash used for financing activities was $86.0 million which was primarily due to payment of finance lease principal and dividends of $39.4 million and $34.7 million, respectively, as well as payment on our Credit Facility, net of amounts borrowed during the period, of $13.5 million.

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. 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. As of July 1, 2021, the ability of our Board of Directors to declare, make, or pay any dividend or distribution and our ability to acquire stores or other businesses is no longer restricted by the terms of the Credit Facility, as amended by the First Amendment. 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. Except as amended by the First Amendment, Second Amendment and Third Amendment, the remaining terms of the credit agreement remain in full force and effect.

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 $29.6 million outstanding letter of credit at March 25, 2023.

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 25, 2023.

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

As of May 12, 2023, we had approximately $15.1 million in cash on hand. In addition, we had $494.9 million available under the Credit Facility as of May 12, 2023.

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, pay dividends and repurchase our common stock 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.

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

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.

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 to the 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 25, 2023 and for the year then ended, as well as the expected impact on the consolidated financial statements for future periods.