Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

x

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

For the quarterly period ended May 2, 2009

 

 

 

OR

 

 

 

o

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from             to           

 

Commission File No. 1-3381

 

The Pep Boys - Manny, Moe & Jack

(Exact name of registrant as specified in its charter)

 

Pennsylvania

 

23-0962915

(State or other jurisdiction of

 

(I.R.S. Employer ID number)

incorporation or organization)

 

 

 

 

 

3111 W. Allegheny Ave. Philadelphia, PA

 

19132

(Address of principal executive offices)

 

(Zip code)

 

215-430-9000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No   o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer  x

 

 

 

Non-accelerated filer o

 

Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   o   No   x

 

As of May 29, 2009 there were 52,302,443 shares of the registrant’s Common Stock outstanding.

 

 

 



Table of Contents

 

Index

 

 

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets — May 2, 2009 and January 31, 2009

2

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Changes in Retained Earnings - Thirteen Weeks Ended May 2, 2009 and May 3, 2008

3

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Thirteen Weeks Ended May 2, 2009 and May 3, 2008

4

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5-18

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19-23

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

23

 

 

 

 

Item 4.

 

Controls and Procedures

25

 

 

 

 

Item 5.

 

Other Information

25

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

25

 

 

 

 

Item 1A.

 

Risk Factors

26

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

26

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

26

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

26

 

 

 

 

Item 5.

 

Other Information

26

 

 

 

 

Item 6.

 

Exhibits

26

 

 

 

 

SIGNATURES

27

 

 

 

 

INDEX TO EXHIBITS

28

 

1



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except share data)

UNAUDITED

 

 

 

May 2, 2009

 

January 31, 2009

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

21,313

 

$

21,332

 

Accounts receivable, less allowance for uncollectible accounts of $1,701 and $1,912

 

22,680

 

28,831

 

Merchandise inventories

 

556,564

 

564,931

 

Prepaid expenses

 

21,661

 

25,390

 

Other

 

58,757

 

62,421

 

Assets held for disposal

 

11,004

 

12,653

 

Total Current Assets

 

691,979

 

715,558

 

 

 

 

 

 

 

Property and Equipment - net

 

724,698

 

740,331

 

Deferred income taxes

 

77,606

 

77,708

 

Other

 

17,477

 

18,792

 

Total Assets

 

$

1,511,760

 

$

1,552,389

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

193,894

 

$

212,340

 

Trade payable program liability

 

28,464

 

31,930

 

Accrued expenses

 

244,764

 

254,754

 

Deferred income taxes

 

38,540

 

35,848

 

Current maturities of long-term debt and obligations under capital lease

 

1,150

 

1,453

 

Total Current Liabilities

 

506,812

 

536,325

 

 

 

 

 

 

 

Long-term debt and obligations under capital lease, less current maturities

 

332,848

 

352,382

 

Other long-term liabilities

 

70,745

 

70,322

 

Deferred gain from asset sales

 

167,984

 

170,204

 

Commitments and Contingencies

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Common Stock, par value $1 per share:

 

 

 

 

 

Authorized 500,000,000 shares; Issued 68,557,041 shares

 

68,557

 

68,557

 

Additional paid-in capital

 

292,434

 

292,728

 

Retained earnings

 

367,882

 

358,670

 

Accumulated other comprehensive loss

 

(17,823

)

(18,075

)

Less cost of shares in treasury — 14,059,333 shares and 14,124,021 shares

 

218,415

 

219,460

 

Less cost of shares in benefits trust - 2,195,270 shares

 

59,264

 

59,264

 

Total Stockholders’ Equity

 

433,371

 

423,156

 

Total Liabilities and Stockholders’ Equity

 

$

1,511,760

 

$

1,552,389

 

 

See notes to condensed consolidated financial statements.

 

2



Table of Contents

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND CHANGES IN RETAINED EARNINGS

(dollar amounts in thousands, except per share amounts)

UNAUDITED

 

Thirteen weeks ended

 

May 2, 2009

 

May 3, 2008

 

Merchandise Sales

 

$

398,177

 

$

403,334

 

Service Revenue

 

98,311

 

94,709

 

Total Revenues

 

496,488

 

498,043

 

Costs of Merchandise Sales

 

281,035

 

285,923

 

Costs of Service Revenue

 

85,852

 

84,154

 

Total Costs of Revenues

 

366,887

 

370,077

 

Gross Profit from Merchandise Sales

 

117,142

 

117,411

 

Gross Profit from Service Revenue

 

12,459

 

10,555

 

Total Gross Profit

 

129,601

 

127,966

 

Selling, General and Administrative Expenses

 

108,053

 

119,015

 

Net Gain from Dispositions of Assets

 

3

 

5,531

 

Operating Profit

 

21,551

 

14,482

 

Non-operating Income

 

403

 

330

 

Interest Expense

 

1,936

 

5,427

 

Earnings From Continuing Operations Before Income Taxes

 

20,018

 

9,385

 

Income Tax Expense

 

8,955

 

4,094

 

Net Earnings From Continuing Operations

 

11,063

 

5,291

 

Loss From Discontinued Operations, Net of Tax

 

(154

)

(619

)

Net Earnings

 

10,909

 

4,672

 

 

 

 

 

 

 

Retained Earnings, beginning of period

 

358,670

 

406,819

 

Cumulative effect adjustment for adoption of EITF 06-10, net of tax

 

 

(1,165

)

Cash Dividends

 

(1,575

)

(3,495

)

Effect of Stock Options

 

 

(12

)

Dividend Reinvestment Plan

 

(122

)

 

Retained Earnings, end of period

 

$

367,882

 

$

406,819

 

 

 

 

 

 

 

Basic Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

Net Earnings from Continuing Operations

 

$

0.21

 

$

0.10

 

Discontinued Operations, Net of Tax

 

 

(0.01

)

Basic Earnings Per Share

 

$

0.21

 

$

0.09

 

 

 

 

 

 

 

Diluted Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

Net Earnings from Continuing Operations

 

$

0.21

 

$

0.10

 

Discontinued Operations, Net of Tax

 

 

(0.01

)

Diluted Earnings Per Share

 

$

0.21

 

$

0.09

 

 

 

 

 

 

 

Cash Dividends Per Share

 

$

0.03

 

$

0.0675

 

 

See notes to condensed consolidated financial statements.

 

3



Table of Contents

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

UNAUDITED

 

Thirteen weeks ended

 

May 2, 2009

 

May 3, 2008

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net Earnings

 

$

10,909

 

$

4,672

 

Adjustments to reconcile net earnings to net cash used in continuing operations:

 

 

 

 

 

Net loss from discontinued operations

 

154

 

619

 

Depreciation and amortization

 

17,373

 

19,019

 

Amortization of deferred gain from asset sales

 

(3,049

)

(1,825

)

Stock compensation expense

 

568

 

1,322

 

Gain on debt retirement

 

(6,248

)

(2,883

)

Deferred income taxes

 

2,646

 

1,437

 

Gain from dispositions of assets

 

(3

)

(5,531

)

Other

 

181

 

1,511

 

Changes in Operating Assets and Liabilities:

 

 

 

 

 

Decrease in accounts receivable, prepaid expenses and other

 

14,603

 

7,586

 

Decrease (increase) in merchandise inventories

 

8,366

 

(287

)

Decrease in accounts payable

 

(18,446

)

(15,238

)

Decrease in accrued expenses

 

(9,442

)

(12,281

)

Increase (decrease) in other long-term liabilities

 

683

 

(2,394

)

Net cash provided by (used in) continuing operations

 

18,295

 

(4,273

)

Net cash used in discontinued operations

 

(318

)

(58

)

Net Cash Provided by (Used in) Operating Activities

 

17,977

 

(4,331

)

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Cash paid for property and equipment

 

(5,718

)

(6,942

)

Proceeds from dispositions of assets

 

10

 

132,090

 

Net cash (used in) provided by continuing operations

 

(5,708

)

125,148

 

Net cash provided by discontinued operations

 

1,758

 

 

Net Cash (Used in) Provided by Investing Activities

 

(3,950

)

125,148

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Borrowings under line of credit agreements

 

160,498

 

97,909

 

Payments under line of credit agreements

 

(158,522

)

(139,332

)

Borrowings on trade payable program liability

 

33,871

 

27,222

 

Payments on trade payable program liability

 

(37,337

)

(22,456

)

Payment for finance issuance cost

 

 

(93

)

Proceeds from lease financing

 

 

4,676

 

Long-term debt and capital lease obligations payments

 

(11,110

)

(18,905

)

Dividends paid

 

(1,575

)

(3,495

)

Other

 

129

 

8

 

Net Cash Used in Financing Activities

 

(14,046

)

(54,466

)

Net (Decrease) Increase in Cash and Cash Equivalents

 

(19

)

66,351

 

Cash and Cash Equivalents at Beginning of Period

 

21,332

 

20,926

 

Cash and Cash Equivalents at End of Period

 

$

21,313

 

$

87,277

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid for income taxes

 

$

831

 

$

 

Cash paid for interest, net of amounts capitalized

 

$

3,830

 

$

3,994

 

Accrued purchases of property and equipment

 

$

599

 

$

3,689

 

 

See notes to condensed consolidated financial statements.

 

4


 


Table of Contents

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Dollar Amounts in Thousands)

 

NOTE 1. Condensed Consolidated Financial Statements

 

The condensed consolidated balance sheet as of May 2, 2009, the condensed consolidated statements of operations and changes in retained earnings for the thirteen week periods ended May 2, 2009 and May 3, 2008 and the condensed consolidated statements of cash flows for the thirteen week periods ended May 2, 2009 and May 3, 2008 are unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at May 2, 2009 and for all periods presented have been made.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, as permitted by Rule 10-01 of the Securities and Exchange Commission’s Regulation S-X, “Interim Financial Statements.” It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009. The results of operations for the thirteen weeks ended May 2, 2009 are not necessarily indicative of the operating results for the full fiscal year.

 

Our fiscal year ends on the Saturday nearest January 31. Accordingly, references to fiscal years 2008 and 2009 refer to the years ended January 31, 2009 and January 30, 2010, respectively.

 

NOTE 2. New Accounting Standards

 

Effective February 1, 2009, the Company adopted Statement of Financial Accounting Standards (SFAS) No.161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No.133” (SFAS No.161). SFAS No.161 requires increased qualitative, quantitative, and credit-risk disclosures. Qualitative disclosures include how and why an entity uses derivatives or hedging activity, how the entity is accounting for these activities and how the instruments affect the entity’s financial position, financial performance and cash flows. Quantitative disclosures include information (in a tabular format) about the fair value of the derivative instruments, including gains and losses, and should contain more detailed information about the location of the derivative instrument in the entity’s financial statements. Credit-risk disclosures include information about the existence and nature of credit risk-related contingent features included in derivative instruments. Credit-risk-related contingent features can be defined as those that require entities, upon the occurrence of a credit event (e.g., credit rating downgrade), to settle derivative instruments or to post collateral. See note 16 for additional information related to our derivatives.

 

In April 2009, the Financial Accounting Standards Board (FASB) jointly issued FASB Staff Position No.107-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP No.107-1) and Accounting Practices Bulletin Opinion No.28-1 (APB No.28-1). FSP No.107-1 and APB No.28-1 amend SFAS No.107 “Disclosures about Fair Value of Financial Instruments”, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP No.107-1 and APB No.28-1 are effective for interim reporting periods ending after June 15, 2009. The Company is currently evaluating the impact FSP No.107-1 and APB No.28-1will have on its consolidated financial statements.

 

NOTE 3. Accounting for Stock-Based Compensation

 

The Company has stock-based compensation plans, under which it grants stock options and restricted stock units to key employees and members of its Board of Directors.

 

In accordance with FASB Statement No.123(R), “Share-Based Payment” (SFAS No.123(R)), the Company generally recognizes compensation expense on a straight-line basis over the vesting period. A summary of total compensation expense and associated income benefit recognized related to stock-based compensation follows:

 

 

 

Thirteen Weeks Ended

 

(dollar amount in thousands)

 

May 2, 2009

 

May 3, 2008

 

Compensation expense

 

$

568

 

$

1,322

 

Income tax benefit

 

$

211

 

$

491

 

 

5



Table of Contents

 

Stock Options

 

The following table summarizes the options under the Company’s plan:

 

 

 

Number of Shares

 

Outstanding — January 31, 2009

 

915,711

 

Granted

 

736,000

 

Expired

 

(59,350

)

Outstanding — May 2, 2009

 

1,592,361

 

 

Expected volatility is based on historical volatilities for a time period similar to that of the expected term. In estimating the expected term of the options, the Company has utilized the actual experience method during the quarters ended May 2, 2009, and May 3, 2008, respectively. The risk-free rate is based on the U.S. treasury yield curve for issues with a remaining term equal to the expected term. The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model and, in certain situations where the grant includes both a market and a service condition as described more fully below, the Monte Carlo simulation model is used. The following are the weighted-average assumptions:

 

 

 

May 2, 2009

 

May 3, 2008

 

Dividend yield

 

1.76

%

2.90

%

Expected volatility

 

65.10

%

45.43

%

Risk-free interest rate range:

 

 

 

 

 

High

 

2.30

%

2.86

%

Low

 

2.30

%

2.69

%

Ranges of expected lives in years

 

4 - 5

 

4 - 5

 

 

In the first quarter of fiscal year 2009, the Company granted 736,000 stock options with a weighted average grant date fair value of $1.69. These options have a seven year term and include both a service and a market appreciation vesting requirement. These options vest over a three year period with a third vesting on each of the three grant date anniversaries provided the market price of the Company’s stock has appreciated by a certain amount. From the date of grant, the market price of the Company’s stock must have appreciated, for at least 15 consecutive trading days, by $2.00 above grant price or more for 536,000 options and by $6.88 above grant price or more for 200,000 options in order to vest. The Company used a Monte Carlo simulation model to estimate the expected term and is recording the compensation expense over the service period for each separately vesting portion of the options granted. At May 2, 2009, the $2.00 market appreciation vesting requirement was satisfied.

 

Restricted Stock Units

 

The Company did not grant any restricted stock units (RSUs) during the first quarter ended May 2, 2009. In the prior year first fiscal quarter, the Company issued 237,021 RSUs with a weighted average grant fair value of $11.50.

 

NOTE 4. Merchandise Inventories

 

Merchandise inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out (LIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected fiscal year-end inventory levels and costs. If the first-in, first-out (FIFO) method of costing inventory had been used by the Company, inventory would have been $485,513 and $493,886 as of May 2, 2009 and January 31, 2009, respectively.

 

The Company provides estimates for inventory shrinkage based upon historical levels and the results of its cycle counting program.

 

The Company also provides for potentially excess and obsolete inventories based on current inventory levels, the historical analysis of product sales and current market conditions. The nature of the Company’s inventory is such that the risk of obsolescence is minimal and excess inventory has historically been returned to the Company’s vendors for credit. The Company records a provision when less than full credit is expected from a vendor or when market is lower than recorded costs. These provisions are revised, if necessary, on a quarterly basis for adequacy. The Company’s inventory is recorded net of provisions for these matters which were $16,755 and $15,874 at May 2, 2009 and January 31, 2009, respectively.

 

NOTE 5. Property and Equipment

 

The Company’s property and equipment as of May 2, 2009 and January 31, 2009 was as follows:

 

6



Table of Contents

 

(dollar amounts in thousands)

 

May 2, 2009

 

January 31, 2009

 

 

 

 

 

 

 

Property and Equipment - at cost:

 

 

 

 

 

Land

 

$

205,749

 

$

207,608

 

Buildings and improvements

 

823,392

 

822,950

 

Furniture, fixtures and equipment

 

686,626

 

685,707

 

Construction in progress

 

2,858

 

2,576

 

Accumulated depreciation and amortization

 

(993,927

)

(978,510

)

Property and Equipment - net

 

$

724,698

 

$

740,331

 

 

NOTE 6. Income Taxes

 

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No.109, “Accounting for Income Taxes” (SFAS No.109) and Financial Accounting Standard Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48).

 

Under SFAS No.109, the temporary differences between the book and tax treatment of income and expenses result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. The Company must assess the likelihood that any recorded deferred tax assets will be recovered against future taxable income. To the extent the Company believes it is more likely than not that the asset will not be recoverable,  a valuation allowance must be established. Cumulative losses in recent years constitute “negative evidence” that a recovery is not more likely than not, which must be rebutted by “positive evidence” to avoid establishing a valuation allowance. To establish this positive evidence, the Company considers various tax planning strategies for generating income sufficient to utilize the deferred tax assets, including the potential sale of real estate and the conversion of the Company’s accounting policy for its inventory from LIFO to FIFO. After considering all this evidence, the Company did not have any material change to its valuation allowance for the thirteen weeks ended May 2, 2009.

 

FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. During the thirteen weeks ended May 2, 2009, the Company recognized no material adjustment in the liability for unrecognized income tax benefits.

 

7



Table of Contents

 

NOTE 7. Discontinued Operations

 

In accordance with FASB Statement No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No.144), the Company’s discontinued operations reflect the operating results for 11 of the 31 low-return stores closed as part of the Company’s long term strategic plan adopted in 2007. The remaining stores are reflected in continuing operations, as the Company believes its remaining stores will retain the cash flows from the 20 closed locations. For the thirteen weeks ended May 2, 2009 and May 3, 2008 the discontinued stores had pre-tax losses of $237 and $988, respectively.

 

A store location is classified as “held for sale” when (i) the Company has committed to a plan to sell the store location, (ii) the store location is vacant and is available for sale, (iii) the Company is actively marketing the store location for sale, (iv) the sale price is reasonable in relation to its current fair value and (v) the Company expects to complete the sale within one year from the date the store location is first classified as held for sale. No depreciation expense is recognized during the period the asset is held for sale.

 

The Company has classified certain closed store properties as assets held for disposal on its balance sheets. The carrying values of these assets follow:

 

(dollar amounts in thousands)

 

May 2, 2009

 

January 31, 2009

 

 

 

 

 

 

 

Land

 

$

5,914

 

$

7,332

 

Buildings and improvements

 

9,628

 

11,265

 

Accumulated depreciation and amortization

 

(4,538

)

(5,944

)

Assets held for disposal

 

$

11,004

 

$

12,653

 

 

During the first quarter of fiscal year 2009, the Company sold two properties that were classified as held for sale for net proceeds of $1,758 and recognized a $109 net gain which was reported in discontinued operations. The Company had 11 and 13 properties held for sale at May 2, 2009 and January 31, 2009, respectively.

 

The following details the first quarter of fiscal year 2009 activity, principally related to lease commitments, in the reserve for closed stores:

 

(dollar amount in thousands)

 

Lease
Expenses

 

Balance at January 31, 2009

 

$

2,112

 

Provision for present value of liabilities

 

121

 

Other

 

224

 

Cash payments

 

(312

)

Balance at May 2, 2009

 

$

2,145

 

 

8



Table of Contents

 

NOTE 8. Pension and Savings Plan

 

Pension expense includes the following:

 

 

 

Thirteen weeks ended

 

(dollar amounts in thousands)

 

May 2, 2009

 

May 3, 2008

 

 

 

 

 

 

 

Service cost

 

$

 

$

43

 

Interest cost

 

621

 

885

 

Expected return on plan assets

 

(537

)

(615

)

Amortization of transitional obligation

 

 

41

 

Amortization of prior service cost

 

 

92

 

Amortization of net loss

 

325

 

303

 

Net periodic benefit cost

 

$

409

 

$

749

 

 

On December 31, 2008, the Company terminated the defined benefit portion of the SERP. Since that date, the Company now only has a non-qualified Supplemental Executive Retirement Plan (SERP) defined contribution plan for key employees designated by the Board of Directors. The Company’s contribution expense to this plan was approximately $263 and $105 for the thirteen weeks ended May 2, 2009 and May 3, 2008, respectively.

 

The Company has two qualified savings plans, which cover all full-time employees who are at least 21 years of age with one or more years of service. Generally, the Company contributes the lesser of 50% of the first 6% of a participant’s contributions or 3% of the participant’s compensation. In the first quarter of 2009, the Company’s contribution to this plan became contingent upon meeting certain fiscal year 2009 performance metrics. The Company’s savings plans’ contribution expense was approximately $1,078 and $1,052 for the thirteen weeks ended May 2, 2009 and May 3, 2008, respectively.

 

NOTE 9.  Sale-Leaseback Transactions

 

During the first quarter of fiscal year 2008, the Company sold 41 owned properties to independent third parties. Net proceeds from these sales were $135,519. Concurrent with the sale, the Company entered into agreements to lease the properties back from the purchaser over a minimum lease term of 15 years. The Company classified 40 of these leases as operating leases in accordance with SFAS No.13 as amended by FASB Statement No.98. The Company actively uses these properties and considers the leases as normal leasebacks. A $5,531 gain on the sale of these properties was recognized immediately upon execution of the sale and a $61,292 gain was deferred. The deferred gain is being recognized over the minimum term of these leases. The Company initially had continuing involvement in one property relating to an environmental indemnity and, accordingly, recorded $4,583 of the transaction’s total net proceeds as a borrowing and as a financing activity in the Statement of Cash Flows. During the second quarter of fiscal year 2008, the Company provided the necessary documentation to satisfy its indemnity and remove its continuing involvement with this property. The Company then recorded the sale of this property as a sale-leaseback transaction, removing the asset and related lease financing and recorded a $1,515 deferred gain which is being recognized over the remaining minimum term of this lease.

 

Of the 563 store locations operated by the Company at May 2, 2009, 235 are owned and 328 are leased.

 

NOTE 10. Debt and Financing Arrangements

 

(dollar amounts in thousands)

 

May 2, 2009

 

January 31, 2009

 

7.50% Senior Subordinated Notes, due December 2014

 

$

157,565

 

$

174,535

 

Senior Secured Term Loan, due October 2013

 

150,524

 

150,794

 

Lease financing obligations, payable through October 2022

 

 

4,515

 

Capital lease obligations payable through October 2009

 

71

 

129

 

Line of credit agreement, expiring January 2014

 

25,838

 

23,862

 

 

 

333,998

 

353,835

 

Less current maturities

 

1,150

 

1,453

 

Long-term debt and obligations under capital leases, less current maturities

 

$

332,848

 

$

352,382

 

 

On January 16, 2009, the Company entered into a new revolving credit agreement with available borrowings up to $300,000. Our ability to borrow under the revolving credit agreement is based on a specific borrowing base consisting of inventory and accounts receivable. The interest rate on this credit line is LIBOR or Prime plus 2.75% to 3.25% based upon the then current availability under the facility.

 

9



Table of Contents

 

During the first quarter of fiscal 2009 and 2008 , the Company repurchased $16,970 and $20,965, respectively of its outstanding 7.5% Senior Subordinated Notes for $10,722 and $18,082, respectively resulting in a gain of $6,248 and $2,833, respectively and are  reflected in interest expense on the accompanying Condensed Consolidated Statement of Operations and Changes in Retained Earnings.

 

As part of the November 27, 2007 sale leaseback transaction, the Company determined that it had continuing involvement in one property and recorded the $4,742 proceeds, net of execution costs, as a borrowing in accordance with Statement of Financial Accounting Standards No.13, “Accounting for Leases,” (SFAS No.13). During the first quarter of 2009, the Company determined it no longer had continuing involvement with this property. Accordingly, the Company recorded this property as a sale leaseback, retired the asset and related lease financing and recorded an $829 deferred gain which is being amortized over the remaining minimum term of the lease.

 

Several of the Company’s debt agreements require compliance with covenants. The most restrictive of these requirements is contained in the Company’s revolving credit agreement. During any period that the Company’s availability under its revolving credit agreement drops below $52,500 the Company is required to maintain a consolidated fixed charge coverage ratio, of at least 1.1:1.0, calculated as the ratio of (a) EBITDA (net income plus interest charges, provision for taxes, depreciation and amortization expense, non-cash stock compensation expenses and other non-recurring, non-cash items) minus capital expenditures and  income taxes paid to (b) the sum of debt service charges and restricted payments made. The failure to satisfy this covenant would constitute an event of default under the Company’s revolving credit agreement, which would result in a cross-default under the Company’s 7.5% Senior Subordinated Notes and Senior Secured Term Loan.

 

As of May 2, 2009, the Company had additional availability under the revolving credit agreement of approximately $171,704 and was in compliance with its financial covenants.

 

NOTE 11. Warranty Reserve

 

The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by the respective vendors, with the Company covering any costs above the vendor’s stipulated allowance. Service labor warranties are covered in full by the Company on a limited lifetime basis. The Company establishes its warranty reserves based on historical data of warranty transactions.

 

The reserve for warranty costs activity follows:

 

 

 

Thirteen Weeks Ended

 

(dollar amounts in thousands)

 

May 2, 2009

 

May 3, 2008

 

Beginning Balance

 

$

797

 

$

247

 

 

 

 

 

 

 

Additions related to current period sales

 

4,104

 

2,230

 

 

 

 

 

 

 

Warranty costs incurred in current period

 

(4,207

)

(2,013

)

 

 

 

 

 

 

Ending Balance

 

$

694

 

$

464

 

 

10



Table of Contents

 

NOTE 12. Earnings Per Share

 

(in thousands, except per share amounts)

 

 

 

Thirteen Weeks Ended

 

(dollar amounts in thousands, except per share amounts)

 

May 2, 2009

 

May 3, 2008

 

 

 

 

 

 

 

 

(a)

Net Earnings From Continuing Operations

 

$

11,063

 

$

5,291

 

 

 

 

 

 

 

 

 

Discontinued Operations, Net of Tax

 

(154

)

(619

)

 

 

 

 

 

 

 

 

Net Income

 

$

10,909

 

$

4,672

 

 

 

 

 

 

 

 

(b)

Basic average number of common shares outstanding during period

 

52,333

 

52,063

 

 

 

 

 

 

 

 

 

Common shares assumed issued upon exercise of dilutive stock options, net of assumed repurchase, at the average market price

 

43

 

107

 

 

 

 

 

 

 

 

(c)

Diluted average number of common shares assumed outstanding during period

 

52,376

 

52,170

 

 

 

 

 

 

 

 

 

Basic Earnings per Share:

 

 

 

 

 

 

Net Earnings From Continuing Operations (a/b)

 

$

0.21

 

$

0.10

 

 

Discontinued Operations, Net of Tax

 

 

(0.01

)

 

Basic Earnings per Share

 

$

0.21

 

$

0.09

 

 

 

 

 

 

 

 

 

Diluted Earnings per Share:

 

 

 

 

 

 

Net Earnings From Continuing Operations (a/c)

 

$

0.21

 

$

0.10

 

 

Discontinued Operations, Net of Tax

 

 

(0.01

)

 

Diluted Earnings per Share

 

$

0.21

 

$

0.09

 

 

As of May 2, 2009 and May 3, 2008, respectively, there were 1,885,000 and 2,210,000 outstanding options and nonvested restricted stock units. Certain stock options were excluded from the calculation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares for the periods then ended and therefore would be anti-dilutive. The total numbers of such shares excluded from the diluted earnings per share calculation are 1,691,000 and 1,729,000 for the thirteen weeks ended May 2, 2009 and May 3, 2008, respectively.

 

NOTE 13. Supplemental Guarantor Information

 

The Company’s 7.50% Senior Subordinated Notes (the “Notes”) are fully and unconditionally and joint and severally guaranteed by certain of the Company’s direct and indirectly wholly-owned subsidiaries - namely, The Pep Boys Manny Moe & Jack of California, Pep Boys - Manny Moe & Jack of Delaware, Inc., Pep Boys — Manny Moe & Jack of Puerto Rico, Inc. and PBY Corporation, (collectively, the “Subsidiary Guarantors”). The Notes are not guaranteed by the Company’s wholly owned subsidiary, Colchester Insurance Company.

 

The following condensed consolidating information presents, in separate columns, the condensed consolidating balance sheets as of May 3, 2009 and January 31, 2009 and the related condensed consolidating statements of operations for the thirteen weeks ended May 2, 2009 and May 3, 2008 and condensed consolidating statements of cash flows for the thirteen weeks ended May 2, 2009 and May 3, 2008 for (i) the Company (“Pep Boys”) on a parent only basis, with its investment in subsidiaries recorded under the equity method, (ii) the Subsidiary Guarantors on a combined basis including the consolidation by PBY Corporation of its wholly owned subsidiary, Pep Boys Manny Moe & Jack of California, (iii) the subsidiary of the Company that does not guarantee the Notes, and (iv) the Company on a consolidated basis.

 

11



Table of Contents

 

CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

 

As of May 2, 2009

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation /
Elimination

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,929

 

$

7,450

 

$

2,934

 

$

 

$

21,313

 

Accounts receivable, net

 

10,297

 

12,383

 

 

 

22,680

 

Merchandise inventories

 

195,194

 

361,370

 

 

 

556,564

 

Prepaid expenses

 

9,871

 

12,879

 

10,136

 

(11,225

)

21,661

 

Other

 

759

 

7

 

63,622

 

(5,631

)

58,757

 

Assets held for disposal

 

1,830

 

9,174

 

 

 

11,004

 

Total Current Assets

 

228,880

 

403,263

 

76,692

 

(16,856

)

691,979

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and Equipment— net

 

236,436

 

475,824

 

32,055

 

(19,617

)

724,698

 

Investment in subsidiaries

 

1,713,751

 

 

 

(1,713,751

)

 

Intercompany receivable

 

 

1,006,139

 

78,276

 

(1,084,415

)

 

Deferred income taxes

 

24,865

 

52,741

 

 

 

77,606

 

Other

 

16,611

 

866

 

 

 

17,477

 

Total Assets

 

$

2,220,543

 

$

1,938,833

 

$

187,023

 

$

(2,834,639

)

$

1,511,760

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

193,884

 

$

10

 

$

 

$

 

$

193,894

 

Trade payable program liability

 

28,464

 

 

 

 

28,464

 

Accrued expenses

 

41,561

 

51,066

 

163,362

 

(11,225

)

244,764

 

Deferred income taxes

 

16,684

 

27,487

 

 

(5,631

)

38,540

 

Current maturities of long-term debt and obligations under capital leases

 

1,150

 

 

 

 

1,150

 

Total Current Liabilities

 

281,743

 

78,563

 

163,362

 

(16,856

)

506,812

 

Long-term debt and obligations under capital leases, less current maturities

 

316,072

 

16,776

 

 

 

332,848

 

Other long-term liabilities

 

35,132

 

35,613

 

 

 

70,745

 

Deferred gain from asset sales

 

69,810

 

117,791

 

 

(19,617

)

167,984

 

Intercompany liabilities

 

1,084,415

 

 

 

(1,084,415

)

 

Stockholders’ Equity

 

433,371

 

1,690,090

 

23,661

 

(1,713,751

)

433,371

 

Total Liabilities and Stockholders’ Equity

 

$

2,220,543

 

$

1,938,833

 

$

187,023

 

$

(2,834,639

)

$

1,511,760

 

 

12



Table of Contents

 

As of January 31, 2009

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation/
Elimination

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,753

 

$

6,393

 

$

2,186

 

$

 

$

21,332

 

Accounts receivable, net

 

16,571

 

12,260

 

 

 

28,831

 

Merchandise inventories

 

199,304

 

365,627

 

 

 

564,931

 

Prepaid expenses

 

13,597

 

15,820

 

13,919

 

(17,946

)

25,390

 

Other

 

1,193

 

11

 

66,797

 

(5,580

)

62,421

 

Assets held for disposal

 

1,830

 

10,823

 

 

 

12,653

 

Total Current Assets

 

245,248

 

410,934

 

82,902

 

(23,526

)

715,558

 

Property and Equipment—Net

 

239,859

 

487,956

 

32,226

 

(19,710

)

740,331

 

Investment in subsidiaries

 

1,699,568

 

 

 

(1,699,568

)

 

Intercompany receivable

 

 

989,077

 

85,145

 

(1,074,222

)

 

Deferred income taxes

 

24,075

 

53,633

 

 

 

77,708

 

Other

 

17,614

 

1,178

 

 

 

18,792

 

Total Assets

 

$

2,226,364

 

$

1,942,778

 

$

200,273

 

$

(2,817,026

)

$

1,552,389

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

212,331

 

$

9

 

$

 

$

 

$

212,340

 

Trade payable program liability

 

31,930

 

 

 

 

31,930

 

Accrued expenses

 

28,802

 

67,748

 

175,985

 

(17,781

)

254,754

 

Deferred income taxes

 

16,355

 

25,238

 

 

(5,745

)

35,848

 

Current maturities of long-term debt and obligations under capital leases

 

1,208

 

245

 

 

 

1,453

 

Total Current Liabilities

 

290,626

 

93,240

 

175,985

 

(23,526

)

536,325

 

Long-term debt and obligations under capital leases, less current maturities

 

332,682

 

19,700

 

 

 

352,382

 

Other long-term liabilities

 

34,868

 

35,454

 

 

 

70,322

 

Deferred gain from asset sales

 

70,810

 

119,104

 

 

(19,710

)

170,204

 

Intercompany liabilities

 

1,074,222

 

 

 

(1,074,222

)

 

Stockholders’ Equity

 

423,156

 

1,675,280

 

24,288

 

(1,699,568

)

423,156

 

Total Liabilities and Stockholders’ Equity

 

$

2,226,364

 

$

1,942,778

 

$

200,273

 

$

(2,817,026

)

$

1,552,389

 

 

13



Table of Contents

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(dollars in thousands)

 

Thirteen Weeks Ended May 2, 2009

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Consolidation /
Elimination

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise Sales

 

$

136,328

 

$

261,849

 

$

 

$

 

$

398,177

 

Service Revenue

 

34,813

 

63,498

 

 

 

98,311

 

Other Revenue

 

 

 

5,723

 

(5,723

)

 

Total Revenues

 

171,141

 

325,347

 

5,723

 

(5,723

)

496,488

 

Costs of Merchandise Sales

 

96,018

 

185,424

 

 

(407

)

281,035

 

Costs of Service Revenue

 

28,813

 

57,077

 

 

(38

)

85,852

 

Costs of Other Revenue

 

 

 

6,805

 

(6,805

)

 

Total Costs of Revenues

 

124,831

 

242,501

 

6,805

 

(7,250

)

366,887

 

Gross Profit from Merchandise Sales

 

40,310

 

76,425

 

 

407

 

117,142

 

Gross Profit from Service Revenue

 

6,000

 

6,421

 

 

38

 

12,459

 

Gross Gain from Other Revenue

 

 

 

(1,082

)

1,082

 

 

Total Gross Profit (Loss)

 

46,310

 

82,846

 

(1,082

)

1,527

 

129,601

 

Selling, General and Administrative Expenses

 

37,982

 

69,082

 

78

 

911

 

108,053

 

Net Gain from Disposition of Assets

 

1

 

2

 

 

 

3

 

Operating Profit (Loss)

 

8,329

 

13,766

 

(1,160

)

616

 

21,551

 

Non-Operating (Expense) Income

 

(4,011

)

21,271

 

619

 

(17,476

)

403

 

Interest Expense (Income)

 

11,384

 

7,934

 

(522

)

(16,860

)

1,936

 

(Loss) Earnings from Continuing Operations Before Income Taxes

 

(7,066

)

27,103

 

(19

)

 

20,018

 

Income Tax (Benefit) Expense

 

(3,165

)

12,129

 

(9

)

 

 

8,955

 

Equity in Earnings of Subsidiaries

 

14,800

 

 

 

(14,800

)

 

Net Earnings (Loss) from Continuing Operations

 

10,899

 

14,974

 

(10

)

(14,800

)

11,063

 

Discontinued Operations, Net of Tax

 

10

 

(164

)

 

 

(154

)

Net Earnings (Loss)

 

$

10,909

 

$

14,810

 

$

(10

)

$

(14,800

)

$

10,909

 

 

Thirteen weeks ended May 3, 2008

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary
Non-Guarantors

 

Consolidation /
Elimination

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise Sales

 

$

138,613

 

$

264,721

 

$

 

$

 

$

403,334

 

Service Revenue

 

33,373

 

61,336

 

 

 

94,709

 

Other Revenue

 

 

 

5,667

 

(5,667

)

 

Total Revenues

 

171,986

 

326,057

 

5,667

 

(5,667

)

498,043

 

Costs of Merchandise Sales

 

98,334

 

187,997

 

 

(408

)

285,923

 

Costs of Service Revenue

 

28,614

 

55,578

 

 

(38

)

84,154

 

Costs of Other Revenue

 

 

 

5,806

 

(5,806

)

 

Total Costs of Revenues

 

126,948

 

243,575

 

5,806

 

(6,252

)

370,077

 

Gross Profit from Merchandise Sales

 

40,279

 

76,724

 

 

408

 

117,411

 

Gross Profit from Service Revenue

 

4,759

 

5,758

 

 

38

 

10,555

 

Gross Loss from Other Revenue

 

 

 

(139

)

139

 

 

Total Gross Profit (Loss)

 

45,038

 

82,482

 

(139

)

585

 

127,966

 

Selling, General and Administrative Expenses

 

42,453

 

76,504

 

90

 

(32

)

119,015

 

Net Gain from Dispositions of Assets

 

556

 

4,975

 

 

 

5,531

 

Operating Profit (Loss)

 

3,141

 

10,953

 

(229

)

617

 

14,482

 

Non-Operating (Expense) Income

 

(4,104

)

28,475

 

648

 

(24,689

)

330

 

Interest Expense (Income)

 

23,836

 

6,710

 

(1,047

)

(24,072

)

5,427

 

(Loss) Earnings from Continuing Operations Before Income Taxes

 

(24,799

)

32,718

 

1,466

 

 

9,385

 

Income Tax (Benefit) Expense

 

(10,473

)

13,917

 

650

 

 

 

4,094

 

Equity in Earnings of Subsidiaries

 

19,131

 

 

 

(19,131

)

 

Net Earnings from Continuing Operations

 

4,805

 

18,801

 

816

 

(19,131

)

5,291

 

Discontinued Operations, Net of Tax

 

(133

)

(486

)

 

 

(619

)

Net Earnings

 

$

4,672

 

$

18,315

 

$

816

 

$

(19,131

)

$

4,672

 

 

14



Table of Contents

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(dollars in thousands)

 

Thirteen Weeks Ended May 2, 2009

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation /
Elimination

 

Consolidated

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

Net Earnings (Loss)

 

$

10,909

 

$

14,810

 

$

(10

)

$

(14,800

)

$

10,909

 

Adjustments to Reconcile Net Earnings to Net Cash (Used In) Provided By Continuing Operations

 

(15,396

)

12,550

 

285

 

14,183

 

11,622

 

Changes in operating assets and liabilities

 

10,498

 

(8,955

)

(5,779

)

 

(4,236

)

Net cash provided by (used in) continuing operations

 

6,011

 

18,405

 

(5,504

)

(617

)

18,295

 

Net cash provided by (used in) discontinued operations

 

10

 

(328

)

 

 

(318

)

Net Cash Provided by (Used in) Operating Activities

 

6,021

 

18,077

 

(5,504

)

(617

)

17,977

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in continuing operations

 

(2,706

)

(3,002

)

 

 

(5,708

)

Net cash provided by discontinued operations

 

 

1,758

 

 

 

1,758

 

Net Cash Used in Investing Activities

 

(2,706

)

(1,244

)

 

 

(3,950

)

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash (Used in) Provided by Financing Activities

 

(5,139

)

(15,776

)

6,252

 

617

 

(14,046

)

 

 

 

 

 

 

 

 

 

 

 

 

Net (Decrease) Increase in Cash

 

(1,824

)

1,057

 

748

 

 

(19

)

Cash and Cash Equivalents at Beginning of Period

 

12,753

 

6,393

 

2,186

 

 

21,332

 

Cash and Cash Equivalents at End of Period

 

$

10,929

 

$

7,450

 

$

2,934

 

$

 

$

21,313

 

 

Thirteen Weeks Ended May 3, 2008

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Consolidation /
Elimination

 

Consolidated

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

4,672

 

$

18,315

 

$

816

 

$

(19,131

)

$

4,672

 

Adjustments to Reconcile Net Earnings to Net Cash (Used in) Provided By Continuing Operations

 

(12,417

)

7,291

 

281

 

18,514

 

13,669

 

Changes in operating assets and liabilities

 

(16,535

)

(1,306

)

(4,773

)

 

(22,614

)

Net cash (used in) provided by continuing operations

 

(24,280

)

24,300

 

(3,676

)

(617

)

(4,273

)

Net cash (used in) provided by discontinued operations

 

(70

)

12

 

 

 

(58

)

Net Cash (Used in) Provided by Operating Activities

 

(24,350

)

24,312

 

(3,676

)

(617

)

(4,331

)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash Provided by Investing activities

 

39,255

 

85,893

 

 

 

125,148

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Provided by (Used in) Financing Activities

 

50,455

 

(109,449

)

3,911

 

617

 

(54,466

)

 

 

 

 

 

 

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

65,360

 

756

 

235

 

 

66,351

 

Cash and Cash Equivalents at Beginning of Period

 

12,208

 

6,655

 

2,063

 

 

20,926

 

Cash and Cash Equivalents at End of Period

 

$

77,568

 

$

7,411

 

$

2,298

 

$

 

$

87,277

 

 

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Table of Contents

 

NOTE 14. Commitments and Contingencies

 

In September 2006, the United States Environmental Protection Agency (“EPA”) requested certain information from the Company as part of an investigation to determine whether the Company had violated, and is in violation of, the Clean Air Act and its non-road engine regulations. The information requested concerned certain generator and personal transportation merchandise offered for sale by the Company. In the fourth quarter of fiscal year 2008, the EPA informed the Company that it believed that the Company had violated the Clean Air Act by virtue of the fact that certain of this merchandise did not conform to their corresponding EPA Certificates of Conformity and that unless the EPA and the Company were able to reach a settlement, the EPA was prepared to commence a civil action. The Company is currently engaged in settlement discussions with the EPA that would call for the payment of a civil penalty and certain injunctive relief. As a result of these discussions, the Company has accrued an amount equal to its estimate of the civil penalty that the Company is prepared to pay to settle the matter and has temporarily restricted from sale, and taken a partial asset impairment against certain inventory. If the Company is not able to reach a settlement with the EPA on mutually acceptable terms, the Company is prepared to vigorously defend any civil action filed.

 

The Company is also party to various other actions and claims arising in the normal course of business.

 

The Company believes that amounts accrued for awards or assessments in connection with all such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position. However, there exists a reasonable possibility of loss in excess of the amounts accrued, the amount of which cannot currently be estimated. While the Company does not believe that the amount of such excess loss could be material to the Company’s financial position, any such loss could have a material adverse effect on the Company’s results of operations in the period(s) during which the underlying matters are resolved.

 

NOTE 15. Other Comprehensive Income

 

The following are the components of comprehensive income:

 

 

 

Thirteen weeks ended

 

(dollar amounts in thousands)

 

May 2, 2009

 

May 3, 2008

 

 

 

 

 

 

 

Net earnings

 

$

10,909

 

$

4,672

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Defined benefit plan adjustment

 

204

 

274

 

Derivative financial instrument adjustments

 

48

 

1,423

 

Comprehensive income

 

$

11,161

 

$

6,369

 

 

The components of accumulated other comprehensive loss are:

 

(dollar amounts in thousands)

 

May 2, 2009

 

January 31, 2009

 

 

 

 

 

 

 

Defined benefit plan adjustment, net of tax

 

$

(7,549

)

$

(7,753

)

Derivative financial instrument adjustment, net of tax

 

(10,274

)

(10,322

)

Accumulated other comprehensive loss

 

$

(17,823

)

$

(18,075

)

 

NOTE 16. Fair Value Measurements

 

The Company adopted FASB Statement No.157, “Fair Value Measurement” (SFAS No.157), (as impacted by FSP Nos.157-1, 157-2, 157-3, 157-4 and 157-e) effective February 3, 2008, with respect to fair value measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. The Company adopted FSP No.157-2, “Effective Date of FASB Statement No.157” (FSP No.157-2), during the thirteen weeks ended May 2, 2009. FSP No.157-2 which deferred the effective date of SFAS No.157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years and interim periods within those fiscal years, beginning after November 15, 2008.

 

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Table of Contents

 

Under SFAS No.157, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. SFAS No.157 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets. Level 3 inputs are unobservable inputs for the asset or liability.

 

Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:

 

Effective February 3, 2008, the application of fair value under SFAS No.157 (as amended by FSP Nos.157-1, 157-2, 157-3, 157-4 and 157-e) related to the Company’s interest rate swap agreements. These items were previously, and will continue to be, recorded at fair value at each balance sheet date. The information in the following paragraphs and tables primarily addresses matters relative to these financial assets and liabilities.

 

Cash Equivalents:

 

Cash equivalents, other than credit card receivables, include highly liquid investments with an original maturity of three months or less at acquisition. The Company carries these investments at cost, which approximates fair value. As a result, the Company has determined that our cash equivalents in their entirety are classified as a Level 1 within the fair value hierarchy .

 

Derivative liability:

 

The Company has an interest rate swap which is within the scope of SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities.” The Company values this swap using observable market data to discount projected cash flows and for credit risk adjustments. The inputs used to value our derivative fall within Level 2 of the fair value hierarchy .

 

The following table provides information by level for assets and liabilities that are measured at fair value, as defined by SFAS No.157, on a recurring basis.

 

(dollar amounts in thousands)

 

Fair Value
at

 

Fair Value Measurements
Using Inputs Considered as

 

Description

 

May 2, 2009

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

21,313

 

$

21,313

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

15,867

 

 

 

$

15,867

 

 

 

 

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis:

 

The following table provides information by level for assets and liabilities that are measured at fair value, as defined by SFAS No.157, on a nonrecurring basis.

 

(dollar amounts in thousands)

 

Fair Value
at

 

Fair Value Measurements
Using Inputs Considered as

 

Description

 

May 2, 2009

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Assets held for disposal

 

$

11,004

 

 

 

$

11,004

 

 

 

 

As of the end of the first quarter of fiscal 2009, the Company had one interest rate swap designated as a cash flow hedge on $145,000 of the Company’s $150,524 Senior Secured Term Loan facility which expires on October, 2013. The swap is used to minimize interest rate exposure and overall interest costs by converting the variable interest rate to a fixed rate of 5.036%. Since February 1, 2008, this

 

17



Table of Contents

 

swap was deemed to be fully effective and pursuant to SFAS No.133, all adjustments in the interest rate swap’s fair value have been recorded to Accumulated Other Comprehensive Loss.

 

The table below shows the effect of derivative instruments on the Statement of Operations for the thirteen weeks ended May 2, 2009:

 

(dollar amounts in thousands)

 

Amount of
Gain/(Loss) in OCI
(Effective Portion)

 

Location of Gain/(Loss)
Reclassified from Accumulated
OCI into Income (Effective
Portion)

 

Amount of Gain/(Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)

 

Cash Flow Hedge

 

 

 

 

 

 

 

Interest Rate swap

 

$

(37

)

Interest expense

 

$

(657

)

 

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Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The discussion and analysis below should be read in conjunction with (i) the condensed consolidated interim financial statements and the notes to such financial statements included elsewhere in this Form 10-Q and (ii) the consolidated financial statements and the notes to such financial statements included in Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

 

OVERVIEW

 

The Pep Boys-Manny, Moe & Jack is a leader in the automotive aftermarket with 563 stores located throughout 35 states and Puerto Rico. All stores feature the nationally-recognized Pep Boys brand name, established through more than 85 years of providing high-quality automotive merchandise and services. The stores are all company-owned, ensuring chain-wide consistency for our customers. We are the only national chain offering automotive service, tires, accessories and parts under one roof, positioning us to achieve our goal of becoming the automotive solutions provider of choice for the value-oriented customer. In most of our stores we also have a commercial sales program that provides commercial credit and prompt delivery of tires, parts and other products to local, regional and national repair garages and dealers.

 

For the thirteen weeks ended May 2, 2009, our comparable sales (sales generated by locations in operation during the same period) decreased by 0.3% compared to a decrease of 5.6% for the thirteen weeks ended May 3, 2008. This decrease in comparable sales was comprised of a 1.3% decrease in comparable merchandise sales offset by a 3.8% increase in comparable service revenue. The difficult macro environment continues to negatively impact sales in our discretionary product categories as consumers defer spending while sales of non discretionary service and hard parts have improved from recent trends. We believe that the steep decline in new car sales over the last year has and will continue to generate additional service revenues and hard parts sales as consumers will ultimately spend more maintaining and repairing their existing aging vehicles. In part offsetting this trend is miles driven which has declined for the twelfth straight month in February. Miles driven affect wear items such as tires. However, the decline in miles driven has moderated in that the recent monthly declines are at a lower rate than a year ago.

 

To capitalize on these trends, we continue to focus on refining and expanding our parts assortment to improve our in stock position, improving execution and the customer experience and have developed new marketing promotions utilizing television and radio advertising to communicate our value tire and service offerings. In the first quarter of fiscal 2009, we ran the first two of these promotions, which were successful in increasing customer traffic and sales in our service business.

 

In April 2009, we opened the first of our service-only “spokes” designed to capture market share and leverage our existing supercenter and support infrastructure. The prototypical service spoke is expected to have between 4 and 8 service bays, preferably 6. The capital investment for a prototypical spoke, including inventory net of payables, is projected to be approximately $450,000 to $550,000 and a typical spoke is expected to generate approximately $1,000,000 to $1,500,000 in sales and $150,000 to $250,000 of EBITDA annually. We currently plan to lease spoke locations as we believe that there are sufficient existing available locations with attractive lease terms to enable our expansion. We are targeting 15 new service spokes in fiscal 2009 and 20 to 40 in fiscal 2010 to prove the concept and economics.

 

Our net earnings for the first quarter of 2009 were $10,909,000, a $6,237,000 improvement over the net earnings of $4,672,000 reported in the first quarter of 2008. The increase in profitability resulted primarily from increased sales in our service business, higher gross profit margins, expense control initiatives that resulted in lower Selling, General and Administrative expenses, and a reduction in interest expense. These reductions were partially offset by lower gains from the sale of assets and an increase in income tax expense. Our net earnings per share for the first quarter of 2009 were $0.21 per share, a $0.12 cent per share improvement over the $0.09 per share recorded in the first quarter of 2008 (See Results of Operations).

 

The following discussion explains the significant developments affecting our financial condition and material changes in our results of operations for the thirteen weeks ended May 2, 2009. We recommend that you read the audited consolidated financial statements, footnotes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our cash requirements arise principally from the purchase of inventory, capital expenditures related to existing and new stores, offices and distribution centers, debt service and contractual obligations. Cash flows realized through the sale of automotive parts, accessories and services is our primary source of liquidity. Net cash provided by operating activities was $17,977,000 in the first quarter of 2009 as compared to a use of $4,331,000 in the first quarter of 2008. The $22,308,000 improvement from the prior year was due to a $4,190,000 increase in our net income (net of non-cash adjustments) and an $18,378,000 favorable change in our operating assets and liabilities. The change in operating assets and liabilities was primarily due to favorable changes in inventory of $8,653,000, accounts

 

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Table of Contents

 

receivable, prepaid expenses and other of $7,017,000 and other long-term liabilities of $3,077,000. The decline in inventory resulted from more disciplined inventory management, including reduced seasonal inventory purchases, reduced lead times and safety stocks.  Accounts receivable, prepaid expenses and other declined primarily due to the improved collection of vendor support funds. The favorable change in other long-term liabilities was due to increases in various lease and related liabilities in the current year as opposed to a decline in the prior year.

 

Cash used by investing activities was $3,950,000 in the first quarter of 2009 as compared to net cash provided by investing activities of $125,148,000 in the first quarter of 2008. During the first quarter of 2008, we completed sale leaseback transactions for net proceeds of $135,519,000, of which $4,676,000 was shown in financing activities due to our continuing involvement in certain of the sold properties. The proceeds from these transactions were used to reduce debt obligations. During the first quarter of 2009, we sold the two properties that were classified as held for sale for net proceeds of $1,758,000 and recognized a $109,000 net gain which was reported in discontinued operations. Capital expenditures in the first quarter of the current year and prior year were $5,718,000 and $6,942,000, respectively. Capital expenditures for the first quarter of 2009 were for the maintenance of our existing stores, offices and distribution centers, and for the new service only spoke location.

 

Our fiscal year 2009 capital expenditures are expected to be approximately $50,000,000 which includes the addition of approximately 15 service only “spokes” and the general maintenance of our existing stores, offices and distribution centers. These expenditures are expected to be funded by net cash generated from operating activities and our existing line of credit.

 

In the first quarter of fiscal year 2009 and 2008, we used cash in financing activities of $14,046,000 and $54,466,000, respectively. During the first quarter of 2009, we repurchased $16,970,000 of its outstanding 7.5% Senior Subordinated Notes for $10,722,000. In the first quarter of 2008, we used the proceeds from the sale leaseback transactions discussed above to reduce debt obligations, including the amount then due under our revolving credit agreement of $49,915,000 and to repurchase $20,965,000 principal amount of our 7.5% Senior Secured Notes.

 

We anticipate that cash provided by operating activities, our existing line of credit and cash on hand will exceed our expected cash requirements in fiscal year 2009. We expect to have excess availability under our existing line of credit during the entirety of fiscal year 2009. We also have substantial owned real estate which we believe we can monetize, if necessary, through additional sale leaseback or other financing transactions. As of May 2, 2009, we had undrawn availability under our revolving credit facility of $171,704,000.

 

Our working capital was $185,167,000 and $179,233,000 at May 2, 2009 and January 31, 2009, respectively. Our long-term debt, as a percentage of our total capitalization, was 43% and 45% at May 2, 2009 and January 31, 2009, respectively.

 

As of May 2, 2009, we had an outstanding balance of $28,464,000 (classified as trade payable program liability on the consolidated balance sheet) under our then current vendor financing program. Under this program, the factor makes accelerated and discounted payments to our vendors and we, in turn, make our regularly scheduled full vendor payments to the factor. We are currently winding down this program in favor of a new trade payable program, entered into on April 6, 2009, which will be funded by various bank participants who will have the ability, but not the obligation, to purchase directly from our vendors their account receivables owed by the Company. As of May 2, 2009, there were no amounts outstanding under the new program.

 

DISCONTINUED OPERATIONS

 

In the third quarter of fiscal year 2007, we adopted our long-term strategic plan. One of the initial steps in this plan was the identification of 31 low-return stores for closure. We have accounted for these store closures in accordance with the provisions of SFAS No.146 “Accounting for Costs Associated with Exit or Disposal Activities” and SFAS No.144, “Accounting for Impairment or Disposal of Long-Lived Assets” (SFAS No.144). In accordance with SFAS No.144, our discontinued operations for all periods presented reflect the operating results for 11 of the 31 closed stores because we do not believe that the customers of these stores are likely to become customers of other Pep Boys stores due to geographical considerations. The operating results for the other 20 closed stores are included in continuing operations because we believe that the customers of these stores are likely to become customers of other Pep Boys stores that are in close proximity.

 

The following analysis of our results of continuing operations excludes the operating results of the above-referenced 11 stores which have been classified as discontinued operations for all periods presented.

 

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Table of Contents

 

RESULTS OF OPERATIONS

 

Thirteen Weeks Ended May 2, 2009 vs. Thirteen Weeks Ended May 3, 2008

 

The following table presents for the periods indicated certain items in the consolidated statements of operations as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.

 

 

 

Percentage of Total Revenues

 

Percentage Change

 

Thirteen weeks ended

 

May 2, 2009
(Fiscal 2009)

 

May 3, 2008
(Fiscal 2008)

 

Favorable
(Unfavorable)

 

 

 

 

 

 

 

 

 

Merchandise Sales

 

80.2

%

81.0

%

(1.3

)%

Service Revenue (1)

 

19.8

 

19.0

 

3.8

 

Total Revenue

 

100.0

 

100.0

 

(0.3

)

Costs of Merchandise Sales (2)

 

70.6

(3)

70.9

(3)

1.7

 

Costs of Service Revenue (2)

 

87.3

(3)

88.9

(3)

(2.0

)

Total Costs of Revenue

 

73.9

 

74.3

 

0.9

 

Gross Profit from Merchandise Sales

 

29.4

(3)

29.1

(3)

(0.2

)

Gross Profit from Service Revenue

 

12.7

(3)

11.1

(3)

18.0

 

Total Gross Profit

 

26.1

 

25.7

 

1.3

 

Selling, General and Administrative Expenses

 

21.8

 

23.9

 

9.2

 

Net Gain from Dispositions of Assets

 

 

1.1

 

(99.9

)

Operating Profit

 

4.3

 

2.9

 

48.8

 

Non-operating Income

 

0.1

 

0.1

 

22.1

 

Interest Expense

 

0.4

 

1.1

 

64.3

 

Earnings from Continuing Operations Before Income Taxes

 

4.0

 

1.9

 

113.3

 

Income Tax Expense

 

44.7

(4)

43.6

(4)

(118.7

)

Net Earnings from Continuing Operations

 

2.2

 

1.1

 

109.1

 

Discontinued Operations, Net of Tax

 

 

(0.1

)

75.1

 

Net Earnings

 

2.2

 

0.9

 

133.5

 

 


(1)

Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials.

(2)

Costs of merchandise sales include the cost of products sold, buying, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.

(3)

As a percentage of related sales or revenue, as applicable.

(4)

As a percentage of Loss from Continuing Operations Before Income Taxes.

 

Total revenue and comparable store revenue for the thirteen weeks ended May 2, 2009 decreased 0.3%, compared to the thirteen weeks ended May 3, 2008. This decrease was primarily due to weaker sales in our retail business stemming from lower customer counts and less discretionary spending by our customers. Comparable revenues declined by 0.3%, consisting of a 1.3% decrease in comparable merchandise sales which was mostly offset by an increase of 3.8% in comparable service revenue.

 

In the first quarter of 2009, customer traffic generated by two promotional events resulted in an increase in service and commercial customer count. However, total customer count declined in the first quarter of 2009 as a result of a decrease in Do-It-Yourself (DIY) retail customer count. We believe the decrease in retail customer count is a result of our competitors continuing to open new stores, the overall industry decline in the DIY business and overall reduced spending due to the current economic environment. In addition, we carry a large assortment of more discretionary retail product which is more susceptible to consumer spending deferrals. We continue to believe that providing a better customer experience, value proposition and innovative marketing could stem the overall decline in customer counts and sales over the long term.

 

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Gross profit as a percentage of merchandise sales increased from 29.1% for the first quarter of 2008 to 29.4% for the first quarter of 2009. Gross profit dollars remained relatively flat year over year. Product gross profit margins declined by 90 basis points as result of increased product promotions and an overall change in product mix, offset by lower occupancy and warehousing costs which improved by 110 basis points.

 

Gross profit from service revenue increased as a percentage of service revenue to 12.7 % in the first quarter of 2009 from 11.1% in the first quarter of 2008. In dollars, gross profit from service sales in dollars increased 18.0% or $1,904,000. The increase in gross profit was primarily due to the increase in service revenue. The increase in sales volume resulted in higher absorption of fixed expenses such as occupancy costs and to a certain extent, labor costs.

 

Selling, General and Administrative expenses, as a percentage of total revenues decreased from 23.9% in the first quarter of 2008 to 21.8% in the first quarter of 2009. In dollars, selling, general and administrative expenses decreased $10,962,000 or 9.2%. This decrease in dollars was primarily due to $3,758,000 in reduced payroll and related expenses, $5,466,000 of less media expense and $1,761,000 of lower legal and professional services fees.

 

Interest expense decreased to $1,936,000 in the first quarter of 2009 from $5,427,000 in the first quarter of 2008. Both years included gain from the retirement of debt of $6,248,000 and $2,883,000, respectively. Excluding these gains, interest expense remained relatively flat.

 

Our income tax expense for first quarter of 2009 was $8,955,000 or an effective rate of 44.7% as compared to an expense of $4,094,000 or an effective rate of 43.6% for the first quarter of 2008. The annual rate depends on a number of factors, including the amount and source of operating profit and the timing and nature of discrete items.

 

INDUSTRY COMPARISON

 

We operate in the U.S. automotive aftermarket, which has two general lines of business: the Service Business defined as Do-It-For-Me (service labor, installed merchandise and tires) market and the Retail Business defined as Do-It-Yourself (retail merchandise) and commercial market. Generally, specialized automotive retailers focus on either the Retail or Service areas of the business. We believe that operation in both the Retail and Service areas of the business positively differentiates us from most of our competitors. Although we manage our store performance at a store level in aggregation, we believe that the following presentation shows an accurate comparison against competitors within the two sales arenas. We compete in the Retail area of the business through our retail sales floor and commercial sales business. Our Service Center business (labor and installed merchandise and tires) competes in the Service area of the industry. The following table presents the revenues and gross profit for each area of the business.

 

 

 

Thirteen weeks ended

 

(dollar amounts in thousands)

 

May 2, 2009

 

May 3, 2008

 

 

 

 

 

 

 

Retail Sales (1)

 

$

264,411

 

$

273,325

 

Service Center Revenue (2)

 

232,077

 

224,718

 

Total Revenues

 

$

496,488

 

$

498,043

 

 

 

 

 

 

 

Gross Profit from Retail Sales (3)

 

$

73,555

 

$

73,404

 

Gross Profit from Service Center Revenue (4)

 

56,046

 

54,562

 

Total Gross Profit

 

$

129,601

 

$

127,966

 

 


(1)

Excludes revenues from installed products.

(2)

Includes revenues from installed products.

(3)

Gross Profit from Retail Sales includes the cost of products sold, buying, warehousing and store occupancy costs.

(4)

Gross Profit from Service Center Revenue includes the cost of installed products sold, buying, warehousing, service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.

 

NEW ACCOUNTING STANDARDS

 

Effective February 1, 2009, we adopted Statement of Financial Accounting Standards (SFAS) No.161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No.133” (SFAS No.161). SFAS No.161 requires increased qualitative, quantitative, and credit-risk disclosures. Qualitative disclosures include how and why an entity uses derivatives or hedging

 

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activity, how the entity is accounting for these activities and how the instruments affect the entity’s financial position, financial performance and cash flows. Quantitative disclosures include information (in a tabular format) about the fair value of the derivative instruments, including gains and losses, and should contain more detailed information about the location of the derivative instrument in the entity’s financial statements. Credit-risk disclosures include information about the existence and nature of credit risk-related contingent features included in derivative instruments. Credit-risk-related contingent features can be defined as those that require entities, upon the occurrence of a credit event (e.g., credit rating downgrade), to settle derivative instruments or to post collateral. See note 16 for additional information related to our derivatives.

 

In April 2009, the Financial Accounting Standards Board (FASB) jointly issued FASB Staff Position No.107-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP No.107-1) and Accounting Practices Bulletin Opinion No.28-1 (APB No.28-1). FSP No.107-1 and APB No.28-1 amend SFAS No.107 “Disclosures about Fair Value of Financial Instruments”, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP No.107-1 and APB No.28-1 are effective for interim reporting periods ending after June 15, 2009. We are currently evaluating the impact FSP No.107-1 and APB No.28-1will have on our consolidated financial statements.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Additionally, we estimate our interim product gross margins in accordance with Accounting Principles Bulletin No.28, “Interim Financial Reporting.”

 

On an on-going basis, we evaluate our estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, inventories, income taxes, financing operations, restructuring costs, retirement benefits, risk participation agreements and contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment or complexity, refer to “Critical Accounting Policies and Estimates” as reported in our Form
10-K for the fiscal year ended January 31, 2009, which disclosures are hereby incorporated by reference.

 

FORWARD-LOOKING STATEMENTS

 

Certain statements contained herein constitute “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. The words “guidance,” “expect,” “anticipate,” “estimates,” “forecasts” and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include management’s expectations regarding implementation of its long-term strategic plan, future financial performance, automotive aftermarket trends, levels of competition, business development activities, future capital expenditures, financing sources and availability and the effects of regulation and litigation. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. Our actual results may differ materially from the results discussed in the forward-looking statements due to factors beyond our control, including the strength of the national and regional economies, retail and commercial consumers’ ability to spend, the health of the various sectors of the automotive aftermarket, the weather in geographical regions with a high concentration of our stores, competitive pricing, the location and number of competitors’ stores, product and labor costs and the additional factors described in our filings with the Securities and Exchange Commission (SEC). We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Our primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the terms of our revolving credit agreement, changes in LIBOR or the Prime Rate could affect the rates at which we could borrow funds thereunder. At May 2, 2009, we had borrowings of $25,838,000 under this facility. Additionally, we have a $150,524,000 Senior Secured Term Loan facility that bears interest at three month LIBOR plus 2.0%.

 

We have an interest rate swap for a notional amount of $145,000,000, which is designated as a cash flow hedge on our Senior Secured Term Loan. We documented that this swap met the requirements of SFAS No.133 for hedge accounting on April 9, 2007, and have since recorded the effective portion of the change in fair value through Accumulated Other Comprehensive Loss.

 

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The fair value of the interest rate swap was $15,867,000 and $15,808,000 payable at May 2, 2009 and January 31, 2009, respectively. Of the net $59,000 increase in fair value during the thirteen weeks ended May 2, 2009, $37,000 net of tax was included in accumulated other comprehensive loss on the condensed consolidated balance sheet.

 

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Item 4.  Controls and Procedures.

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

Our disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”)) are designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. The term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were functioning effectively and provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

No change in the Company’s internal control over financial reporting occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Item 5.  Other Information

 

None.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

In September 2006, the United States Environmental Protection Agency (“EPA”) requested certain information from the Company as part of an investigation to determine whether the Company had violated, and is in violation of, the Clean Air Act and its non-road engine regulations. The information requested concerned certain generator and personal transportation merchandise offered for sale by the Company. In the fourth quarter of fiscal year 2008, the EPA informed the Company that it believed that the Company had violated the Clean Air Act by virtue of the fact that certain of this merchandise did not conform to their corresponding EPA Certificates of Conformity and that unless the EPA and the Company were able to reach a settlement, the EPA was prepared to commence a civil action. The Company is currently engaged in settlement discussions with the EPA that would call for the payment of a civil penalty and certain injunctive relief. As a result of these discussions, the Company has accrued an amount equal to its estimate of the civil penalty that the Company is prepared to pay to settle the matter and has temporarily restricted from sale, and taken a partial asset impairment against certain inventory. If the Company is not able to reach a settlement with the EPA on mutually acceptable terms, the Company is prepared to vigorously defend any civil action filed.

 

The Company is also party to various other actions and claims arising in the normal course of business.

 

The Company believes that amounts accrued for awards or assessments in connection with all such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position. However, there exists a reasonable possibility of loss in excess of the amounts accrued, the amount of which cannot currently be estimated. While the Company does not believe that the amount of such excess loss could be material to the Company’s financial position, any such loss could have a material adverse effect on the Company’s results of operations in the period(s) during which the underlying matters are resolved.

 

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Item 1A.  Risk Factors

 

There have been no changes to the risks described in the Company’s previously filed Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

None.

 

 

Item 3.

Defaults Upon Senior Securities

 

 

 

None.

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

None.

 

 

Item 5.

Other Information

 

 

 

None.

 

Item 6.    Exhibits

 

(31.1)

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

(31.2)

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

(32.1)

Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

(32.2)

Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

THE PEP BOYS - MANNY, MOE & JACK

 

 

 

(Registrant)

 

 

 

 

Date:

June 10, 2009

 

by:

/s/ Raymond L. Arthur

 

 

 

 

 

 

 

Raymond L. Arthur

 

 

 

Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

 

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INDEX TO EXHIBITS

 

(31.1)

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

(31.2)

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

(32.1)

Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

(32.2)

Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

28


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