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 1, 2010
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
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|
23-0962915
|
(State or other jurisdiction of
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(I.R.S. Employer ID number)
|
incorporation or organization)
|
|
|
|
|
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3111 W. Allegheny Ave. Philadelphia, PA
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19132
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(Address of principal executive offices)
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(Zip code)
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215-430-9000
(Registrants
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
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|
|
|
Non-accelerated filer
o
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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 28, 2010, there were 52,470,082
shares of the registrants Common Stock outstanding.
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial
Statements
THE PEP BOYS - MANNY, MOE & JACK
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
(dollar amounts in thousands, except
share data)
UNAUDITED
|
|
May 1,
2010
|
|
January 30,
2010
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
87,806
|
|
$
|
39,326
|
|
Accounts
receivable, less allowance for uncollectible accounts of $1,752 and $1,488
|
|
20,277
|
|
22,983
|
|
Merchandise
inventories
|
|
561,351
|
|
559,118
|
|
Prepaid
expenses
|
|
24,510
|
|
24,784
|
|
Other
current assets
|
|
58,787
|
|
65,428
|
|
Assets
held for disposal
|
|
2,490
|
|
4,438
|
|
Total
current assets
|
|
755,221
|
|
716,077
|
|
|
|
|
|
|
|
Property
and equipment - net
|
|
699,439
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|
706,450
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|
Deferred
income taxes
|
|
57,440
|
|
58,171
|
|
Other
long-term assets
|
|
17,541
|
|
18,388
|
|
Total
assets
|
|
$
|
1,529,641
|
|
$
|
1,499,086
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
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Current
liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
$
|
218,472
|
|
$
|
202,974
|
|
Trade
payable program liability
|
|
34,273
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|
34,099
|
|
Accrued
expenses
|
|
245,242
|
|
242,416
|
|
Deferred
income taxes
|
|
33,082
|
|
29,984
|
|
Current
maturities of long-term debt
|
|
1,079
|
|
1,079
|
|
Total
current liabilities
|
|
532,148
|
|
510,552
|
|
|
|
|
|
|
|
Long-term
debt less current maturities
|
|
305,931
|
|
306,201
|
|
Other
long-term liabilities
|
|
74,250
|
|
73,933
|
|
Deferred
gain from asset sales
|
|
162,328
|
|
165,105
|
|
|
|
|
|
|
|
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
|
|
293,363
|
|
293,810
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|
Retained
earnings
|
|
384,451
|
|
374,836
|
|
Accumulated
other comprehensive loss
|
|
(17,223
|
)
|
(17,691
|
)
|
Less
cost of shares in treasury 16,088,014 shares and 16,164,074 shares
|
|
274,164
|
|
276,217
|
|
Total
stockholders equity
|
|
454,984
|
|
443,295
|
|
Total
liabilities and stockholders equity
|
|
$
|
1,529,641
|
|
$
|
1,499,086
|
|
See
notes to condensed consolidated financial statements.
3
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 1, 2010
|
|
May 2, 2009
|
|
Merchandise
sales
|
|
$
|
409,189
|
|
$
|
398,177
|
|
Service
revenue
|
|
100,844
|
|
98,311
|
|
Total
revenues
|
|
510,033
|
|
496,488
|
|
Costs
of merchandise sales
|
|
283,796
|
|
281,035
|
|
Costs
of service revenue
|
|
88,642
|
|
85,852
|
|
Total
costs of revenues
|
|
372,438
|
|
366,887
|
|
Gross
profit from merchandise sales
|
|
125,393
|
|
117,142
|
|
Gross
profit from service revenue
|
|
12,202
|
|
12,459
|
|
Total
gross profit
|
|
137,595
|
|
129,601
|
|
Selling,
general and administrative expenses
|
|
111,632
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|
108,053
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|
Net
gain from dispositions of assets
|
|
45
|
|
3
|
|
Operating
profit
|
|
26,008
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|
21,551
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|
Non-operating
income
|
|
584
|
|
403
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|
Interest
expense
|
|
6,608
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|
1,936
|
|
Earnings
from continuing operations before income taxes and discontinued operations
|
|
19,984
|
|
20,018
|
|
Income
tax expense
|
|
7,824
|
|
8,955
|
|
Earnings
from continuing operations before discontinued operations
|
|
12,160
|
|
11,063
|
|
Loss
from discontinued operations, net of tax
|
|
(210
|
)
|
(154
|
)
|
Net
earnings
|
|
11,950
|
|
10,909
|
|
|
|
|
|
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|
Retained
earnings, beginning of period
|
|
374,836
|
|
358,670
|
|
Cash
dividends
|
|
(1,579
|
)
|
(1,575
|
)
|
Dividend
reinvested and other
|
|
(756
|
)
|
(122
|
)
|
Retained
earnings, end of period
|
|
$
|
384,451
|
|
$
|
367,882
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
Earnings
from continuing operations before discontinued operations
|
|
$
|
0.23
|
|
$
|
0.21
|
|
Loss
from discontinued operations, net of tax
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.23
|
|
$
|
0.21
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
Earnings
from continuing operations before discontinued operations
|
|
$
|
0.23
|
|
$
|
0.21
|
|
Loss
from discontinued operations, net of tax
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.23
|
|
$
|
0.21
|
|
|
|
|
|
|
|
Cash
dividends per share
|
|
$
|
0.03
|
|
$
|
0.03
|
|
See
notes to condensed consolidated financial statements.
4
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 1, 2010
|
|
May 2, 2009
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net
earnings
|
|
$
|
11,950
|
|
$
|
10,909
|
|
Adjustments
to reconcile net earnings to net cash provided by continuing operations:
|
|
|
|
|
|
Loss
from discontinued operations, net of tax
|
|
210
|
|
154
|
|
Depreciation
and amortization
|
|
18,214
|
|
17,373
|
|
Amortization
of deferred gain from asset sales
|
|
(3,148
|
)
|
(3,049
|
)
|
Stock
compensation expense
|
|
737
|
|
568
|
|
Gain
on debt retirement
|
|
|
|
(6,248
|
)
|
Deferred
income taxes
|
|
3,552
|
|
2,646
|
|
Other
|
|
(117
|
)
|
178
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
Decrease
in accounts receivable, prepaid expenses and other
|
|
10,581
|
|
14,603
|
|
(Increase)
decrease in merchandise inventories
|
|
(2,233
|
)
|
8,366
|
|
Increase
(decrease) in accounts payable
|
|
15,498
|
|
(18,446
|
)
|
Increase
(decrease) in accrued expenses
|
|
3,231
|
|
(9,442
|
)
|
Increase
in other long-term liabilities
|
|
603
|
|
683
|
|
Net
cash provided by continuing operations
|
|
59,078
|
|
18,295
|
|
Net
cash used in discontinued operations
|
|
(324
|
)
|
(318
|
)
|
Net
cash provided by operating activities
|
|
58,754
|
|
17,977
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Cash
paid for property and equipment
|
|
(12,511
|
)
|
(5,718
|
)
|
Proceeds
from dispositions of assets
|
|
3,143
|
|
10
|
|
Other
|
|
(144
|
)
|
|
|
Net
cash used in continuing operations
|
|
(9,512
|
)
|
(5,708
|
)
|
Net
cash provided by discontinued operations
|
|
569
|
|
1,758
|
|
Net
cash used in investing activities
|
|
(8,943
|
)
|
(3,950
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Borrowings
under line of credit agreements
|
|
1,029
|
|
160,498
|
|
Payments
under line of credit agreements
|
|
(1,029
|
)
|
(158,522
|
)
|
Borrowings
on trade payable program liability
|
|
68,342
|
|
33,871
|
|
Payments
on trade payable program liability
|
|
(68,168
|
)
|
(37,337
|
)
|
Debt
payments
|
|
(270
|
)
|
(11,110
|
)
|
Dividends
paid
|
|
(1,579
|
)
|
(1,575
|
)
|
Other
|
|
344
|
|
129
|
|
Net
cash used in financing activities
|
|
(1,331
|
)
|
(14,046
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
48,480
|
|
(19
|
)
|
Cash
and cash equivalents at beginning of period
|
|
39,326
|
|
21,332
|
|
Cash
and cash equivalents at end of period
|
|
$
|
87,806
|
|
$
|
21,313
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
70
|
|
$
|
831
|
|
Cash
paid for interest
|
|
$
|
2,616
|
|
$
|
3,830
|
|
Accrued
purchases of property and equipment
|
|
$
|
1,302
|
|
$
|
599
|
|
See
notes to condensed consolidated financial statements.
5
Table of Contents
THE
PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
1. Basis of Presentation
The
Pep Boys Manny, Moe & Jack and subsidiaries (the Company)
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP).
The preparation of the Companys financial statements requires the Company to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, net sales, costs and expenses, as well as the disclosure of
contingent assets and liabilities and other related disclosures. The Company
bases its estimates on historical experience and on various other assumptions
that management believes to be reasonable under the circumstances, the results
of which form the basis for making judgments about carrying values of the
Companys assets and liabilities that are not readily apparent from other
sources. Actual results could differ from those estimates, and the Company
includes any revisions to its estimates in the results for the period in which
the actual amounts become known.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with U.S. GAAP have been condensed or omitted, as
permitted by Rule 10-01 of the Securities and Exchange Commissions
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 Companys Annual Report
on Form 10-K for the fiscal year ended January 30, 2010. The results
of operations for the thirteen weeks ended May 1, 2010 are not necessarily
indicative of the operating results for the full fiscal year.
The
condensed consolidated financial statements presented herein are unaudited. In
the opinion of management, all adjustments necessary to present fairly the
financial position, results of operations and cash flows as of May 1, 2010
and for all periods presented have been made.
The Companys fiscal year ends on the Saturday
nearest January 31. Accordingly, references to fiscal years 2010 and 2009
refer to the years ended January 29, 2011 and January 30, 2010,
respectively.
NOTE
2. New Accounting Standards
In October 2009, the
FASB issued Accounting Standards Update (ASU) 2009-13 Revenue Recognition
(Topic 605) Multiple-Deliverable Revenue Arrangements a consensus of the FASB
Emerging Issues Task Force, (ASU 2009-13). This update eliminates the
residual method of allocation and requires that consideration be allocated to
all deliverables using the relative selling price method. ASU 2009-13 is
effective for material revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010. The Company does not
believe the adoption of ASU 2009-13 will have a material impact on its
consolidated financial statements.
In
January 2010, the FASB issued ASU 2010-06 Fair Value Measurements
Improving Disclosures on Fair Value Measurements (ASU 2010-06). This
guidance requires new disclosures surrounding transfers in and out of level 1
or 2 in the fair value hierarchy and also requires that in the reconciliation
of level 3 inputs, the entity should report separately information on
purchases, sales, issuances or settlements. The increased disclosures should be
reported for each class of assets or liabilities. ASU 2010-06 also clarifies
existing disclosures for the level of disaggregating, disclosures about
valuation techniques and inputs used to determine level 2 or 3 fair value
measurements and includes conforming amendments to the guidance on employers
disclosures about postretirement benefit plan assets. ASU 2010-06 was effective
for interim and annual reporting periods beginning after December 15, 2009
except for the disclosures about purchases, sales, issuances or settlements in
the roll forward activity for level 3 fair value measurements which are
effective for interim and annual periods beginning after December 15,
2010. The adoption of ASU 2010-06 did not have a material impact on the Companys
consolidated financial statements.
NOTE 3. 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 managements 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 $485.5 million and $482.0 million as of May 1, 2010
and January 30, 2010, respectively.
6
Table of Contents
The
Company provides for estimated inventory shrinkage based upon historical levels
and the results of its cycle counting program.
The Company also records adjustments 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 Companys inventory is such that the risk of obsolescence is
minimal and excess inventory has historically been returned to the Companys
vendors for credit. The Company records adjustments when less than full credit
is expected from a vendor or when market is lower than recorded costs. These
adjustments are reviewed on a quarterly basis for adequacy. The Companys
inventory adjustments for these matters were $13.5 million and $13.0 million at
May 1, 2010 and January 30, 2010, respectively.
NOTE 4. Property and Equipment
The Companys property and equipment as of May 1,
2010 and January 30, 2010 was as follows:
(dollar amounts in thousands)
|
|
May 1, 2010
|
|
January 30, 2010
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
|
|
|
Land
|
|
$
|
204,142
|
|
$
|
204,709
|
|
Buildings and improvements
|
|
829,000
|
|
826,804
|
|
Furniture, fixtures and equipment
|
|
703,014
|
|
695,072
|
|
Construction in progress
|
|
1,535
|
|
1,550
|
|
Accumulated depreciation and
amortization
|
|
(1,038,252
|
)
|
(1,021,685
|
)
|
Property and equipment net
|
|
$
|
699,439
|
|
$
|
706,450
|
|
NOTE 5. 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 vendors 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. These
costs are included in either costs of merchandise sales or costs of service
revenues in the condensed consolidated statement of operations.
The reserve for warranty cost activity for the
thirteen weeks ended May 1, 2010 and the fifty-two weeks ended January 30,
2010 is as follows:
(dollar amounts in thousands)
|
|
May 1,
2010
|
|
January 30, 2010
|
|
Beginning
balance
|
|
$
|
694
|
|
$
|
797
|
|
|
|
|
|
|
|
Additions
related to current period sales
|
|
2,702
|
|
15,572
|
|
|
|
|
|
|
|
Warranty
costs incurred in current period
|
|
(2,702
|
)
|
(15,675
|
)
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
694
|
|
$
|
694
|
|
NOTE 6. Debt and Financing Arrangements
The following are the components of debt and
financing arrangements:
(dollar amounts in thousands)
|
|
May 1, 2010
|
|
January 30, 2010
|
|
7.50%
Senior Subordinated Notes, due December 2014
|
|
$
|
157,565
|
|
$
|
157,565
|
|
Senior
Secured Term Loan, due October 2013
|
|
149,445
|
|
149,715
|
|
Revolving
Credit Agreement, expiring January 2014
|
|
|
|
|
|
|
|
307,010
|
|
307,280
|
|
Less
current maturities
|
|
1,079
|
|
1,079
|
|
Long-term
debt, less current maturities
|
|
$
|
305,931
|
|
$
|
306,201
|
|
7
Table of Contents
During the first quarter of fiscal 2009, the
Company repurchased $17.0 million of its outstanding 7.50% Senior Subordinated
Notes (the Notes) for $10.7 million resulting in a gain of $6.2 million which
is reflected in interest expense on the accompanying condensed consolidated
statement of operations and changes in retained earnings.
As of May 1, 2010, 126 of the Companys 230
owned stores were used as collateral under the Companys Senior Secured Term
Loan due October 2013.
On January 16, 2009, the Company entered
into a new $300.0 million Revolving Credit Agreement. The Companys 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. As of May 1, 2010, there were no
outstanding borrowings under this agreement and $101.1 million of availability
was utilized to support outstanding letters of credit. Taking this into account
and the borrowing base requirements, as of May 1, 2010, there was $142.8
million of availability remaining.
Several of the Companys debt agreements require
compliance with covenants. The most restrictive of these requirements is
contained in the Companys Revolving Credit Agreement. During any period when
the availability under the Revolving Credit Agreement drops below the greater
of $50.0 million or 17.5% of the borrowing base, 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 Revolving Credit Agreement, which
would result in a cross-default under the Companys 7.50% Senior Subordinated
Notes and Senior Secured Term Loan. As of May 1, 2010, the Company was in
compliance with all such financial covenants.
Interest rates that are currently available to
the Company for issuance of debt with similar terms and remaining maturities
are used to estimate fair value for debt issues that are not quoted on an
exchange. The estimated fair value of long-term debt including current
maturities was $297.9 million and $290.8 million as of May 1, 2010 and January 30,
2010, respectively.
NOTE 7.
Sale-Leaseback Transactions
During the first quarter of fiscal year 2010,
the Company sold one property to an unrelated third party. Net proceeds from
this sale were $1.6 million. Concurrent with this sale, the Company entered
into an agreement to lease the property back from the purchaser over a minimum
lease term of 15 years. The Company classified this lease as an operating
lease. The Company actively uses this property and considers the lease as a
normal leaseback. A deferred gain of $0.4 million is being recognized over the
minimum term of the lease.
Of the 590 store locations operated by the
Company at May 1, 2010, 230 are owned and 360 are leased.
NOTE 8. Income Taxes
The Company recognizes taxes payable for the
current year, as well as deferred tax assets and liabilities for the future tax
consequences of events that have been recognized in the Companys financial
statements or tax returns. 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 Companys accounting policy for its
inventory from LIFO to FIFO.
For income tax benefits related to uncertain tax
positions 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 1, 2010, the Company did not have a material change to its
uncertain tax position liabilities.
8
Table of Contents
NOTE 9. Accumulated Other Comprehensive Loss
The following are the components of other
comprehensive income:
|
|
Thirteen weeks ended
|
|
(dollar amounts in thousands)
|
|
May 1, 2010
|
|
May 2, 2009
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
11,950
|
|
$
|
10,909
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
Defined
benefit plan adjustment
|
|
265
|
|
204
|
|
Derivative
financial instrument adjustments
|
|
203
|
|
48
|
|
Comprehensive
income
|
|
$
|
12,418
|
|
$
|
11,161
|
|
The components of accumulated other
comprehensive loss are:
(dollar amounts in thousands)
|
|
May 1, 2010
|
|
January 30, 2010
|
|
|
|
|
|
|
|
Defined
benefit plan adjustment, net of tax
|
|
$
|
(6,893
|
)
|
$
|
(7,158
|
)
|
Derivative
financial instrument adjustment, net of tax
|
|
(10,330
|
)
|
(10,533
|
)
|
Accumulated
other comprehensive loss
|
|
$
|
(17,223
|
)
|
$
|
(17,691
|
)
|
NOTE 10: Store
Closures and Asset Impairments
During the
thirteen week period ended May 1, 2010, the Company sold three stores
classified as held for disposal for net proceeds of $2.1 million and recognized
a net gain of $0.1 million. During the thirteen week period ended May 2,
2009, the Company sold two stores that were classified as held for disposal for
net proceeds of $1.8 million and recognized a net gain of $0.1 million. Assets
held for disposal follows:
(dollar amounts in thousands)
|
|
May 1, 2010
|
|
January 30, 2010
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,630
|
|
$
|
2,980
|
|
Buildings and improvements
|
|
2,837
|
|
5,453
|
|
Accumulated depreciation and
amortization
|
|
(1,977
|
)
|
(3,995
|
)
|
Property and equipment - net
|
|
$
|
2,490
|
|
$
|
4,438
|
|
Number of properties
|
|
5
|
|
8
|
|
9
Table of Contents
NOTE 11. Earnings Per Share
The following table
presents the calculation of basic and diluted earnings per share for earnings
from continuing operations:
|
|
Thirteen Weeks Ended
|
|
(dollar amounts in thousands,
except per share amounts)
|
|
May 1,
2010
|
|
May 2,
2009
|
|
|
|
|
|
|
|
|
(a)
|
Earnings from continuing
operations
|
|
$
|
12,160
|
|
$
|
11,063
|
|
|
|
|
|
|
|
|
|
Loss from discontinued
operations, net of tax
|
|
(210
|
)
|
(154
|
)
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
11,950
|
|
$
|
10,909
|
|
|
|
|
|
|
|
|
(b)
|
Basic average number of
common shares outstanding during period
|
|
52,526
|
|
52,333
|
|
|
|
|
|
|
|
|
|
Common shares assumed
issued upon exercise of dilutive stock options, net of assumed repurchase, at
the average market price
|
|
407
|
|
43
|
|
|
|
|
|
|
|
|
(c)
|
Diluted average number
of common shares assumed outstanding during period
|
|
52,933
|
|
52,376
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
Earnings from
continuing operations (a/b)
|
|
$
|
0.23
|
|
$
|
0.21
|
|
|
Discontinued
operations, net of tax
|
|
|
|
|
|
|
Basic earnings per
share
|
|
$
|
0.23
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
Earnings from
continuing operations (a/c)
|
|
$
|
0.23
|
|
$
|
0.21
|
|
|
Discontinued
operations, net of tax
|
|
|
|
|
|
|
Diluted earnings per
share
|
|
$
|
0.23
|
|
$
|
0.21
|
|
At May 1, 2010 and May 2, 2009 there
were 2,419,000 and 1,885,000 stock options and restricted stock units
outstanding, respectively. 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 number of such shares
excluded from the diluted earnings per share calculation was 1,104,000 and
1,691,000 for the thirteen weeks ended May 1, 2010 and May 2, 2009,
respectively.
NOTE 12. Benefit Plans
The Company has a qualified 401(K) savings
plan and a separate plan for employees residing in Puerto Rico, which cover all
full-time employees who are at least 21 years of age with one or more years of
service. The Companys contribution expense related to the savings plans was
approximately $0.9 million and $1.1 million for the thirteen weeks ended May 1,
2010 and May 2, 2009, respectively. The Companys expense for its Account
Plan (Defined Contribution SERP) was approximately $0.3 million for both
thirteen week periods ended May 1, 2010, and May 2, 2009. The Companys
contribution to these plans for fiscal year 2010 is contingent upon meeting
certain performance metrics. The Company currently estimates that these
performance metrics will be achieved and has recorded expense accordingly.
The Company also has a frozen defined benefit
pension plan covering the Companys full-time employees hired on or before February 1,
1992. The Companys expense for its pension plan follows:
10
Table of Contents
|
|
Thirteen weeks ended
|
|
(dollar amounts in thousands)
|
|
May 1, 2010
|
|
May 2, 2009
|
|
|
|
|
|
|
|
Interest
cost
|
|
$
|
640
|
|
$
|
621
|
|
Expected
return on plan assets
|
|
(538
|
)
|
(537
|
)
|
Amortization
of net loss
|
|
421
|
|
325
|
|
Net
periodic benefit cost
|
|
$
|
523
|
|
$
|
409
|
|
NOTE 13. Equity Compensation Plans
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. The Company generally recognizes
compensation expense on a straight-line basis over the vesting period.
The following table summarizes the options under
the Companys plan:
|
|
Number of Shares
|
|
Outstanding
January 30, 2010
|
|
1,682,325
|
|
Granted
|
|
303,056
|
|
Exercised
|
|
(30,145
|
)
|
Forfeited
|
|
(6,066
|
)
|
Expired
|
|
(12,750
|
)
|
Outstanding
May 1, 2010
|
|
1,936,420
|
|
In the first quarter of fiscal year 2010, the
Company granted approximately 303,000 stock options with a weighted average
grant date fair value of $4.26. These options have a seven year term and vest
over a three year period with a third vesting on each of the three grant date
anniversaries. The compensation expense recorded during the first quarter of
fiscal 2010 for the options granted was minimal.
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 Companys stock has appreciated by a certain
amount. From the date of grant, the market price of the Companys 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. As of May 1, 2010, the market appreciation requirements of both
grants have been satisfied.
Expected volatility is
based on historical volatilities for a time period similar to that of the
expected term. 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 grant using the Black-Scholes
option-pricing model, and in certain situations where the grant includes both a
market and service condition as described more fully above, the Monte Carlo
simulation is used.
The following are the
weighted-average assumptions:
|
|
May 1,
2010
|
|
May 2, 2009
|
|
Dividend
yield
|
|
1.35
|
%
|
1.76
|
%
|
Expected
volatility
|
|
55.71
|
%
|
65.10
|
%
|
Risk-free
interest rate range:
|
|
|
|
|
|
High
|
|
2.01
|
%
|
2.30
|
%
|
Low
|
|
1.71
|
%
|
2.30
|
%
|
Ranges
of expected lives in years
|
|
4 - 5
|
|
4 - 5
|
|
11
Table of Contents
Restricted Stock Units
In
the first quarter of fiscal 2010, the Company granted approximately 105,000
restricted stock units that will vest if the employees remain continuously
employed through the third anniversary date of the grant and the Company
achieves certain financial targets for fiscal year 2012. The number of
underlying shares that may be issued upon vesting will range from 0% to 150%,
depending upon the Company achieving the financial targets for fiscal year
2012. The fair value for these awards was $10.34 at the date of the grant. The
compensation recorded during the first quarter of fiscal 2010 for these restricted
stock units granted was minimal.
In
the first quarter of fiscal 2010, the Company also granted approximately 52,000
restricted stock units that will vest if the employees remain continuously
employed through the third anniversary date of the grant and will become
exercisable if the Company satisfies a market condition in fiscal 2012. The
number of underlying shares that may become exercisable will range from 0% to
175% depending upon whether the market condition is achieved. The Company used
a Monte Carlo simulation to estimate a $12.99 grant date fair value. The
compensation recorded during the first quarter of fiscal 2010 for these
restricted stock units granted was minimal
There
were no RSUs granted in the prior year. The following table summarizes the
units under the Companys plan:
|
|
Number of RSUs
|
|
Nonvested
January 30, 2010
|
|
232,593
|
|
Granted
|
|
310,128
|
|
Forfeited
|
|
(3,700
|
)
|
Vested
|
|
(56,606
|
)
|
Nonvested
May 1, 2010
|
|
482,415
|
|
NOTE 14. Fair Value Measurements
The Companys fair value
measurements consist of (a) non-financial assets and liabilities that are
recognized or disclosed at fair value in the Companys financial statements on
a recurring basis (at least annually) and (b) all financial assets and
liabilities.
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. There is 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 Companys 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.
The following table provides
information by level for assets and liabilities that are measured at fair
value, on a recurring basis:
(dollar amounts in thousands)
|
|
Fair Value
at
|
|
Fair Value Measurements
Using Inputs Considered as
|
|
Description
|
|
May 1, 2010
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
87,806
|
|
$
|
87,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities
|
|
|
|
|
|
|
|
|
|
Derivative
liability (a)
|
|
$
|
16,114
|
|
|
|
$
|
16,114
|
|
|
|
Contingent
Consideration
|
|
$
|
1,571
|
|
|
|
|
|
$
|
1,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
included in other long-term liabilities
The Company has one interest rate swap
designated as a cash flow hedge on $145.0 million of the Companys $149.5
million Senior Secured Term Loan facility that expires in October 2013.
The swap is used to minimize interest rate exposure and overall interest
12
Table of Contents
costs by converting the variable interest rate
to a fixed rate of 5.036%. Since February 1, 2008, this swap was deemed to
be fully effective and all adjustments in the interest rate swaps fair value
have been recorded to accumulated other comprehensive loss.
The table below shows the effect of the Companys
interest rate swap on the condensed consolidated statement of operations for
the periods indicated:
(dollar amounts in thousands)
|
|
Amount
of Gain in
Other
Comprehensive
Income
(Effective
Portion)
|
|
Earnings
Statement
Classification
|
|
Amount
of Loss
Recognized in Earnings
(Effective Portion) (a)
|
|
Thirteen
weeks ended May 1, 2010
|
|
$
|
180
|
|
Interest expense
|
|
$
|
(1,695
|
)
|
|
|
|
|
|
|
|
|
|
|
(a) represents
the effective portion of the loss reclassified from accumulated other
comprehensive loss
Non-financial assets measured at fair value on a non-recurring
basis
:
Certain assets are
measured at fair value on a non-recurring basis, that is, the assets are
subject to fair value adjustments in certain circumstances such as when there
is evidence of impairment. These measures of fair value, and related inputs,
are considered level 2 measures under the fair value hierarchy. There were no remeasurements
of non-financial assets in the first quarter of 2010 or 2009.
NOTE 15. Legal Matters
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 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. During the third quarter of
fiscal 2009, the Company and the EPA reached a settlement in principle of this
matter requiring that the Company (i) pay a monetary penalty of
$5.0 million, (ii) take certain corrective action with respect to
certain inventory that had been restricted from sale during the course of the
investigation, (iii) implement a formal compliance program and (iv) participate
in certain non-monetary emission offset activities. The Company had previously
accrued an amount equal to the agreed upon civil penalty and a
$3.0 million contingency accrual with respect to the restricted inventory.
During fiscal 2009, the Company reversed $2.0 million of the inventory
accrual as a portion of the subject inventory was released for sale. On May 10,
2010, the Company and the EPA signed the formal settlement Agreement, which was
filed with the U.S. District Court for the District of Columbia. The settlement
agreement is subject to a 30-day public comment period and final approval by
the court.
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 Companys 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 Companys financial position, any such loss could have a
material adverse effect on the Companys results of operations in the period(s) during
which the underlying matters are resolved.
13
Table of Contents
NOTE 16. Supplemental Guarantor Information
The Companys Notes are fully and
unconditionally and joint and severally guaranteed by certain of the Companys
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 Companys wholly owned subsidiary, Colchester Insurance
Company.
The following condensed consolidating
information presents, in separate columns, the condensed consolidating balance
sheets as of May 1, 2010 and January 30, 2010 and the related
condensed consolidating statements of operations for the thirteen weeks ended May 1,
2010 and May 2, 2009 and condensed consolidating statements of cash flows
for the thirteen weeks ended May 1, 2010 and May 2, 2009 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, The 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.
CONDENSED CONSOLIDATING BALANCE SHEETS
(dollar amounts in thousands)
(unaudited)
As of May 1, 2010
|
|
Pep Boys
|
|
Subsidiary
Guarantors
|
|
Subsidiary Non-
Guarantors
|
|
Consolidation /
Elimination
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
67,023
|
|
$
|
13,493
|
|
$
|
7,290
|
|
$
|
|
|
$
|
87,806
|
|
Accounts receivable, net
|
|
8,059
|
|
12,218
|
|
|
|
|
|
20,277
|
|
Merchandise inventories
|
|
195,009
|
|
366,342
|
|
|
|
|
|
561,351
|
|
Prepaid expenses
|
|
12,325
|
|
11,897
|
|
11,790
|
|
(11,502
|
)
|
24,510
|
|
Other current assets
|
|
218
|
|
1,818
|
|
63,959
|
|
(7,208
|
)
|
58,787
|
|
Assets held for disposal
|
|
1,045
|
|
1,445
|
|
|
|
|
|
2,490
|
|
Total current assets
|
|
283,679
|
|
407,213
|
|
83,039
|
|
(18,710
|
)
|
755,221
|
|
Property and equipmentnet
|
|
231,355
|
|
455,955
|
|
31,373
|
|
(19,244
|
)
|
699,439
|
|
Investment in subsidiaries
|
|
1,773,804
|
|
|
|
|
|
(1,773,804
|
)
|
|
|
Intercompany receivables
|
|
|
|
1,079,817
|
|
76,894
|
|
(1,156,711
|
)
|
|
|
Deferred income taxes
|
|
10,344
|
|
47,096
|
|
|
|
|
|
57,440
|
|
Other long-term assets
|
|
16,751
|
|
790
|
|
|
|
|
|
17,541
|
|
Total assets
|
|
$
|
2,315,933
|
|
$
|
1,990,871
|
|
$
|
191,306
|
|
$
|
(2,968,469
|
)
|
$
|
1,529,641
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
218,472
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
218,472
|
|
Trade payable program liability
|
|
34,273
|
|
|
|
|
|
|
|
34,273
|
|
Accrued expenses
|
|
30,897
|
|
62,503
|
|
165,162
|
|
(
13,320
|
)
|
245,242
|
|
Deferred income taxes
|
|
9,512
|
|
28,960
|
|
|
|
(
5,390
|
)
|
33,082
|
|
Current maturities of long-term
debt
|
|
1,079
|
|
|
|
|
|
|
|
1,079
|
|
Total current liabilities
|
|
294,233
|
|
91,463
|
|
165,162
|
|
(
18,710
|
)
|
532,148
|
|
Long-term debt less current
maturities
|
|
305,931
|
|
|
|
|
|
|
|
305,931
|
|
Other long-term liabilities
|
|
35,399
|
|
38,851
|
|
|
|
|
|
74,250
|
|
Deferred gain from asset sales
|
|
68,675
|
|
112,897
|
|
|
|
(
19,244
|
)
|
162,328
|
|
Intercompany liabilities
|
|
1,156,711
|
|
|
|
|
|
(
1,156,711
|
)
|
|
|
Total stockholders equity
|
|
454,984
|
|
1,747,660
|
|
26,144
|
|
(
1,773,804
|
)
|
454,984
|
|
Total liabilities and
stockholders equity
|
|
$
|
2,315,933
|
|
$
|
1,990,871
|
|
$
|
191,306
|
|
$
|
(
2,968,469
|
)
|
$
|
1,529,641
|
|
14
Table of Contents
As of
January 30, 2010
|
|
Pep
Boys
|
|
Subsidiary
Guarantors
|
|
Subsidiary
Non-
Guarantors
|
|
Consolidation/
Elimination
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
25,844
|
|
$
|
10,279
|
|
$
|
3,203
|
|
$
|
|
|
$
|
39,326
|
|
Accounts
receivable, net
|
|
13,032
|
|
9,951
|
|
|
|
|
|
22,983
|
|
Merchandise
inventories
|
|
195,314
|
|
363,804
|
|
|
|
|
|
559,118
|
|
Prepaid
expenses
|
|
12,607
|
|
15,070
|
|
14,255
|
|
(17,148
|
)
|
24,784
|
|
Other
current assets
|
|
1,101
|
|
2,667
|
|
67,038
|
|
(5,378
|
)
|
65,428
|
|
Assets
held for disposal
|
|
1,045
|
|
3,393
|
|
|
|
|
|
4,438
|
|
Total
current assets
|
|
248,943
|
|
405,164
|
|
84,496
|
|
(22,526
|
)
|
716,077
|
|
Property
and equipmentnet
|
|
232,115
|
|
462,128
|
|
31,544
|
|
(19,337
|
)
|
706,450
|
|
Investment
in subsidiaries
|
|
1,755,426
|
|
|
|
|
|
(1,755,426
|
)
|
|
|
Intercompany
receivables
|
|
|
|
1,058,132
|
|
83,953
|
|
(1,142,085
|
)
|
|
|
Deferred
income taxes
|
|
11,200
|
|
46,971
|
|
|
|
|
|
58,171
|
|
Other
long-term assets
|
|
17,566
|
|
822
|
|
|
|
|
|
18,388
|
|
Total
assets
|
|
$
|
2,265,250
|
|
$
|
1,973,217
|
|
$
|
199,993
|
|
$
|
(2,939,374
|
)
|
$
|
1,499,086
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
202,974
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
202,974
|
|
Trade
payable program liability
|
|
34,099
|
|
|
|
|
|
|
|
34,099
|
|
Accrued
expenses
|
|
24,042
|
|
62,106
|
|
173,429
|
|
(
17,161
|
)
|
242,416
|
|
Deferred
income taxes
|
|
6,626
|
|
28,723
|
|
|
|
(
5,365
|
)
|
29,984
|
|
Current
maturities of long-term debt
|
|
1,079
|
|
|
|
|
|
|
|
1,079
|
|
Total
current liabilities
|
|
268,820
|
|
90,829
|
|
173,429
|
|
(
22,526
|
)
|
510,552
|
|
Long-term
debt less current maturities
|
|
306,201
|
|
|
|
|
|
|
|
306,201
|
|
Other
long-term liabilities
|
|
35,125
|
|
38,808
|
|
|
|
|
|
73,933
|
|
Deferred
gain from asset sales
|
|
69,724
|
|
114,718
|
|
|
|
(
19,337
|
)
|
165,105
|
|
Intercompany
liabilities
|
|
1,142,085
|
|
|
|
|
|
(
1,142,085
|
)
|
|
|
Total
stockholders equity
|
|
443,295
|
|
1,728,862
|
|
26,564
|
|
(
1,755,426
|
)
|
443,295
|
|
Total
liabilities and stockholders equity
|
|
$
|
2,265,250
|
|
$
|
1,973,217
|
|
$
|
199,993
|
|
$
|
(
2,939,374
|
)
|
$
|
1,499,086
|
|
15
Table of Contents
CONDENSED CONSOLIDATING
STATEMENTS OF OPERATIONS
(dollar amounts in
thousands)
(unaudited)
|
|
|
|
Subsidiary
|
|
Subsidiary Non-
|
|
Consolidation /
|
|
|
|
Thirteen Weeks Ended May 1, 2010
|
|
Pep Boys
|
|
Guarantors
|
|
Guarantors
|
|
Elimination
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
$
|
144,425
|
|
$
|
264,764
|
|
$
|
|
|
$
|
|
|
$
|
409,189
|
|
Service revenue
|
|
36,641
|
|
64,203
|
|
|
|
|
|
100,844
|
|
Other revenue
|
|
|
|
|
|
5,736
|
|
(5,736
|
)
|
|
|
Total revenues
|
|
181,066
|
|
328,967
|
|
5,736
|
|
(5,736
|
)
|
510,033
|
|
Costs of merchandise sales
|
|
100,996
|
|
183,207
|
|
|
|
(407
|
)
|
283,796
|
|
Costs of service revenue
|
|
31,170
|
|
57,510
|
|
|
|
(38
|
)
|
88,642
|
|
Costs of other revenue
|
|
|
|
|
|
6,470
|
|
(6,470
|
)
|
|
|
Total costs of revenues
|
|
132,166
|
|
240,717
|
|
6,470
|
|
(6,915
|
)
|
372,438
|
|
Gross profit from merchandise sales
|
|
43,429
|
|
81,557
|
|
|
|
407
|
|
125,393
|
|
Gross profit from service revenue
|
|
5,471
|
|
6,693
|
|
|
|
38
|
|
12,202
|
|
Gross profit from other revenue
|
|
|
|
|
|
(734
|
)
|
734
|
|
|
|
Total gross profit
|
|
48,900
|
|
88,250
|
|
(734
|
)
|
1,179
|
|
137,595
|
|
Selling, general and administrative expenses
|
|
40,053
|
|
70,935
|
|
81
|
|
563
|
|
111,632
|
|
Net gain from dispositions of assets
|
|
(138
|
)
|
183
|
|
|
|
|
|
45
|
|
Operating profit
|
|
8,709
|
|
17,498
|
|
(815
|
)
|
616
|
|
26,008
|
|
Non-operating (expense) income
|
|
(4,250
|
)
|
20,208
|
|
616
|
|
(15,990
|
)
|
584
|
|
Interest expense (income)
|
|
16,046
|
|
6,458
|
|
(522
|
)
|
(15,374
|
)
|
6,608
|
|
(Loss) earnings from continuing operations before
income taxes
|
|
(11,587
|
)
|
31,248
|
|
323
|
|
|
|
19,984
|
|
Income tax (benefit) expense
|
|
(4,545
|
)
|
12,242
|
|
127
|
|
|
|
7,824
|
|
Equity in earnings of subsidiaries
|
|
18,994
|
|
|
|
|
|
(18,994
|
)
|
|
|
Net earnings from continuing operations
|
|
11,952
|
|
19,006
|
|
196
|
|
(18,994
|
)
|
12,160
|
|
Discontinued operations, net of tax
|
|
(2
|
)
|
(208
|
)
|
|
|
|
|
(210
|
)
|
Net earnings
|
|
$
|
11,950
|
|
$
|
18,798
|
|
$
|
196
|
|
$
|
(18,994
|
)
|
$
|
11,950
|
|
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 profit from other revenue
|
|
|
|
|
|
(1,082
|
)
|
1,082
|
|
|
|
Total gross profit
|
|
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 dispositions 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 from continuing operations
|
|
10,899
|
|
14,974
|
|
(10
|
)
|
(14,800
|
)
|
11,063
|
|
Discontinued operations, net of tax
|
|
10
|
|
(164
|
)
|
|
|
|
|
(154
|
)
|
Net (loss) earnings
|
|
$
|
10,909
|
|
$
|
14,810
|
|
$
|
(10
|
)
|
$
|
(14,800
|
)
|
$
|
10,909
|
|
16
Table of Contents
CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS
(dollar amounts in
thousands)
(unaudited)
Thirteen Weeks Ended May 1, 2010
|
|
Pep Boys
|
|
Subsidiary
Guarantors
|
|
Subsidiary
Non-
Guarantors
|
|
Consolidation /
Elimination
|
|
Consolidated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
11,950
|
|
$
|
18,798
|
|
$
|
196
|
|
$
|
(18,994
|
)
|
$
|
11,950
|
|
Adjustments
to reconcile net earnings to net cash provided by (used in) continuing
operations
|
|
(8,850
|
)
|
9,774
|
|
146
|
|
18,378
|
|
19,448
|
|
Changes
in operating assets and liabilities
|
|
29,952
|
|
426
|
|
(2,698
|
)
|
|
|
27,680
|
|
Net
cash provided by (used in) continuing operations
|
|
33,052
|
|
28,998
|
|
(2,356
|
)
|
(616
|
)
|
59,078
|
|
Net
cash used in discontinued operations
|
|
|
|
(324
|
)
|
|
|
|
|
(324
|
)
|
Net
cash provided by (used in) operating activities
|
|
33,052
|
|
28,674
|
|
(2,356
|
)
|
(616
|
)
|
58,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in continuing operations
|
|
(5,168
|
)
|
(4,344
|
)
|
|
|
|
|
(9,512
|
)
|
Net
cash provided by discontinued operations
|
|
|
|
569
|
|
|
|
|
|
569
|
|
Net
cash used in investing activities
|
|
(5,168
|
)
|
(3,775
|
)
|
|
|
|
|
(8,943
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
13,295
|
|
(21,685
|
)
|
6,443
|
|
616
|
|
(1,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
41,179
|
|
3,214
|
|
4,087
|
|
|
|
48,480
|
|
Cash
and cash equivalents at beginning of period
|
|
25,844
|
|
10,279
|
|
3,203
|
|
|
|
39,326
|
|
Cash
and cash equivalents at end of period
|
|
$
|
67,023
|
|
$
|
13,493
|
|
$
|
7,290
|
|
$
|
|
|
$
|
87,806
|
|
Thirteen Weeks Ended May 2, 2009
|
|
Pep Boys
|
|
Subsidiary
Guarantors
|
|
Subsidiary
Non-
Guarantors
|
|
Consolidation /
Elimination
|
|
Consolidated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
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 (used in) provided by continuing operations
|
|
6,011
|
|
18,405
|
|
(5,504
|
)
|
(617
|
)
|
18,295
|
|
Net
cash used in discontinued operations
|
|
10
|
|
(328
|
)
|
|
|
|
|
(318
|
)
|
Net
cash (used in) provided by 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 provided by investing activities
|
|
(2,706
|
)
|
(1,244
|
)
|
|
|
|
|
(3,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
(5,139
|
)
|
(15,776
|
)
|
6,252
|
|
617
|
|
(14,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
(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
|
|
17
Table of Contents
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
The following discussion and analysis explains
the results of operations for the first fiscal quarter of 2010 and 2009 and
significant developments affecting our financial condition for the thirteen
weeks ended May 1, 2010. This discussion and analysis should be read in
conjunction with the condensed consolidated interim financial statements and
the notes to such condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q, and 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 30, 2010.
Introduction
The Pep Boys-Manny, Moe & Jack is the
only national chain offering automotive service, tires, parts and accessories.
This positioning allows us to streamline the distribution channel and pass the
savings on to our customers facilitating our vision of becoming the automotive
solutions provider of choice for the value oriented customer. The majority of
our stores are in a Supercenter format, which serves both do-it-for-me (DIFM,
which includes service labor, installed merchandise and tires) and do-it-yourself
(DIY, or retail) customers with the highest quality service offerings and
merchandise. Most of our Supercenters also have a commercial sales program that
provides delivery of tires, parts and other products to automotive repair shops
and dealers. In 2009, as part of our long-term strategy to lead with automotive
service, we began complementing our existing Supercenter store base with
Service & Tire Centers. These Service & Tire Centers are
designed to capture market share and leverage our existing Supercenter and
support infrastructure. We opened 24 Service & Tire Centers in fiscal
2009 and year-to-date in fiscal 2010 we have opened an additional 5 locations.
We are targeting a total of 40 new Service & Tire Centers in fiscal
2010 and 80 in fiscal 2011. In addition, we recently opened two new smaller
(14,000 sq. ft.) proto-type Supercenters, including one in the first quarter of
2010. As of May 1, 2010, we operated 554 Supercenters and 27 Service &
Tire Centers, as well as 9 legacy Pep Boys Express (retail only) stores
throughout 35 states and Puerto Rico.
EXECUTIVE SUMMARY
Net earnings for the thirteen weeks ended May 1,
2010 were $12.0 million, a $1.1 million improvement over the net earnings of
$10.9 million reported for the thirteen weeks ended May 2, 2009. The prior
year first quarter included, on a pre-tax basis, a $6.2 million gain from bond
repurchases. Our diluted earnings per share for the first quarter of 2010 were
$0.23, a $0.02 improvement over the $0.21 recorded in the first quarter of
2009. The increase in profitability was the result of increased sales across
all lines of business and improved total gross profit margins, partially offset
by higher media spend.
For the thirteen weeks ended May 1, 2010,
our comparable sales (sales generated by locations in operation during the same
period) increased by 1.4% compared to a decrease of 0.3% for the thirteen weeks
ended May 2, 2009. This increase in comparable sales was comprised of a
1.7% increase in comparable merchandise sales and a 0.1% increase in comparable
service revenue.
There are various factors within the current
economy which affect both our consumer and our industry. Sales of
non-discretionary product categories are primarily impacted by miles driven,
which after having declined in 2008, stabilized in 2009 primarily due to lower
gasoline prices. High unemployment and the credit crisis have also benefited
our non-discretionary product categories modestly as customers have focused on
maintaining their existing vehicles rather than purchasing new vehicles. These
trends, however, negatively impacted sales in our discretionary product categories
like accessories and complementary merchandise, although the rate of decline
has moderated.
We continue to focus on refining and expanding
our parts assortment to improve our in stock position, improving execution and
the customer experience and utilizing television and radio advertising to
communicate our value offerings. We believe these efforts are responsible for
increased customer traffic in our stores for the thirteen weeks ended May 1,
2010. This marks the first quarter in many years that we have experienced
increases in comparable store sales and customer counts across all lines of
business.
18
Table of Contents
RESULTS OF OPERATIONS
The following discussion explains the material
changes in our results of operation for the thirteen weeks ended May 1,
2010 and the thirteen weeks ended May 2, 2009.
Analysis of Statement of
Operations
The following table presents for the periods
indicated certain items in the condensed 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 1, 2010
(Fiscal 2010)
|
|
May 2, 2009
(Fiscal 2009)
|
|
Favorable
(Unfavorable)
|
|
|
|
|
|
|
|
|
|
Merchandise
sales
|
|
80.2
|
%
|
80.2
|
%
|
2.8
|
%
|
Service
revenue (1)
|
|
19.8
|
|
19.8
|
|
2.6
|
|
Total
revenues
|
|
100.0
|
|
100.0
|
|
2.7
|
|
Costs
of merchandise sales (2)
|
|
69.4
|
(3)
|
70.6
|
(3)
|
(1.0
|
)
|
Costs
of service revenue (2)
|
|
87.9
|
(3)
|
87.3
|
(3)
|
(3.2
|
)
|
Total
costs of revenues
|
|
73.0
|
|
73.9
|
|
(1.5
|
)
|
Gross
profit from merchandise sales
|
|
30.6
|
(3)
|
29.4
|
(3)
|
7.0
|
|
Gross
profit from service revenue
|
|
12.1
|
(3)
|
12.7
|
(3)
|
(2.1
|
)
|
Total
gross profit
|
|
27.0
|
|
26.1
|
|
6.2
|
|
Selling,
general and administrative expenses
|
|
21.9
|
|
21.8
|
|
(3.3
|
)
|
Net
gain (loss) from dispositions of assets
|
|
|
|
|
|
|
|
Operating
profit
|
|
5.1
|
|
4.3
|
|
20.7
|
|
Non-operating
income
|
|
0.1
|
|
0.1
|
|
44.9
|
|
Interest
expense
|
|
1.3
|
|
0.4
|
|
(241.3
|
)
|
Earnings
from continuing operations before income taxes
|
|
3.9
|
|
4.0
|
|
(0.2
|
)
|
Income
tax expense
|
|
39.2
|
(4)
|
44.7
|
(4)
|
12.6
|
|
Earnings
from continuing operations
|
|
2.4
|
|
2.2
|
|
9.9
|
|
Discontinued
operations, net of tax
|
|
|
|
|
|
(36.4
|
)
|
Net
Earnings
|
|
2.3
|
|
2.2
|
|
9.5
|
|
(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, purchasing,
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 earnings from continuing operations before income taxes.
|
Thirteen weeks ended May 1, 2010 vs.
Thirteen weeks ended May 2, 2009
Total
revenue and comparable sales for the first quarter of 2010 increased 2.7% and
1.4%, respectively, as compared to the first quarter of 2009. Total revenue for
the first quarter of 2010 increased by $13.5 million, or 2.7%, to $510.0
million from $496.5 million in the first quarter of 2009. The 1.4% increase in
comparable store sales consisted of a 0.1% comparable service revenue increase
and a 1.7% comparable merchandise sales increase. While our total revenue
figures were favorably impacted by the opening of the new stores, a new store
is not added to our comparable store sales until it reaches its 13
th
month of operation.
Non-comparable stores contributed an additional $6.7 million of total revenue
in the first quarter of 2010 as compared to the first quarter of 2009.
Total merchandise sales increased 2.8% to $409.2
million compared to $398.2 million in the first quarter of 2009. Total service
revenue increased 2.6% to $100.8 million from $98.3 million in the prior year.
The increase in both merchandise sales and service revenues was driven by an
increase in comparable store customer counts partially offset by a slight
decrease in the average transaction amount per customer. The balance of the
increase in sales was due to the contribution from our new stores.
19
Table of Contents
In the first quarter of 2010, customer traffic
generated by our promotional events, improved in stock position and better
store execution resulted in an increase in comparable store customer counts and
sales across all lines of business. We experienced a 2.8% increase in sales of
our core automotive parts categories which make up approximately 80% of our
merchandise sales, partially offset by a 2.0% decrease in sales of our
discretionary product categories as compared to the first quarter of 2009. We
continue to believe, and our first quarter performance supports, that providing
a differentiated merchandise assortment, better customer experience, value
proposition and innovative marketing will increase sales and customer counts
consistently over the long term across all lines of business.
Gross profit from merchandise sales increased by
$8.3 million, or 7.0%, to $125.4 million for the first quarter of 2010 from
$117.1 million in the first quarter of 2009. Gross profit from merchandise
sales increased to 30.6% for the first quarter of 2010 from 29.4% for the first
quarter of 2009. The increase in gross profit margins was primarily due to an
improvement in inventory shrinkage, lower inbound freight costs and higher
vendor support funds.
Gross profit from service revenue decreased by
$0.3 million, or 2.1%, to $12.2 million for the first quarter of 2010 from
$12.5 million in the first quarter of 2009. Gross profit from service revenue
decreased to 12.1% for the first quarter of 2010 from 12.7% for the first
quarter of 2009. The decrease in gross profit was primarily due to higher fixed
expenses such as occupancy costs (includes such items as rent, utilities and
building maintenance) which increased by 100 basis points in the current year
first quarter as compared to the prior year, primarily due to adding the new
Service & Tire Centers. Excluding the impact of the new Service &
Tire Centers (which are still in their ramp up stage for sales but incurring
the full fixed expense load), the gross profit from service revenue was
relatively flat year over year.
Selling,
general and administrative expenses increased $3.6 million, or 3.3%. The
increase was primarily due to increased media expense of $3.8 million, and
increased payroll and related expenses of $1.4 million, partially offset by
lower general liability insurance claims expense of $1.1 million.
Interest expense for the first quarter of 2010
was $6.6 million, an increase of $4.7 million compared to the prior year. The
prior year included a $6.2 million gain resulting from the retirement of debt.
Excluding this gain, interest expense declined by $1.6 million due to reduced
debt levels.
Our income tax expense for the first quarter of
2010 was $7.8 million, or an effective rate of 39.2%, as compared to an expense
of $9.0 million, or an effective rate of 44.7%, for the first quarter of 2009.
The annual rate depends on a number of factors, including the jurisdiction in
which operating profit is earned and the timing and nature of discrete items.
As a result of the foregoing, we reported net
earnings of $12.0 million for the first quarter of 2010 as compared to net
earnings of $10.9 million in the prior year. Our basic and diluted earnings per
share were $0.23 as compared to $0.21 in the prior year.
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) and the Retail
Business defined as Do-It-Yourself (retail merchandise) and commercial.
Generally, specialized automotive retailers focus on either the Retail or
Service area 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, which includes the
reclassification of revenue from installed products from retail sales to
service center revenue, 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
competes in the Service area of the industry.
20
Table of Contents
The following table presents the revenues and
gross profit for each area of our business:
|
|
Thirteen weeks ended
|
|
(dollar amounts in thousands)
|
|
May 1,
2010
|
|
May 2,
2009
|
|
|
|
|
|
|
|
Retail
Sales (1)
|
|
$
|
269,707
|
|
$
|
264,411
|
|
Service
Center Revenue (2)
|
|
240,326
|
|
232,077
|
|
Total
Revenues
|
|
$
|
510,033
|
|
$
|
496,488
|
|
|
|
|
|
|
|
Gross
Profit from Retail Sales (3)
|
|
$
|
79,754
|
|
$
|
73,555
|
|
Gross
Profit from Service Center Revenue (3)
|
|
57,841
|
|
56,046
|
|
Total
Gross Profit
|
|
$
|
137,595
|
|
$
|
129,601
|
|
(1)
|
Excludes
revenues from installed products.
|
(2)
|
Includes
revenues from installed products.
|
(3)
|
Gross Profit from
Retail Sales includes the cost of products sold, purchasing, warehousing and
store occupancy costs. Gross Profit from Service Center Revenue includes the
cost of installed products sold, purchasing, 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.
|
CAPITAL AND LIQUIDITY
Our cash requirements arise principally from the
purchase of inventory and capital expenditures related to existing and new
stores, offices and distribution centers, debt service and contractual
obligations. Cash flows realized through the sales of automotive services,
tires, parts and accessories are our primary source of liquidity. Net cash
provided by operating activities was $58.8 million in the first quarter of
2010, as compared to $18.0 million in the prior year first quarter. The $40.8 million
improvement from the prior year was due to an $8.9 million increase in net
earnings (net of non-cash adjustments) and a $31.9 million favorable change in
operating assets and liabilities. The change in operating assets and
liabilities was primarily due to favorable changes in accounts payable of $33.9
million and in all other operating assets and liabilities of $8.6 million,
partially offset by an unfavorable change in inventory of $10.6 million. The
improvement in accounts payable was primarily due to an increase in the amount
of inventory purchases in the current year. Our accounts payable to inventory
ratio was 45% at May 1, 2010, and 40% at May 2, 2009. The favorable
change in all other assets and liabilities was primarily due to an increase in
accrued expenses primarily related to the timing of payments. The unfavorable
change in cash flows from inventory resulted from an increased investment in
our new stores which added $4.1 million of inventory. Excluding this
investment, inventory remained relatively flat compared to the first quarter of
2009 despite increased purchases in the current year. We were able to achieve
this result through our continued disciplined inventory management, including
reduced seasonal inventory purchases, inventory lead times and safety stocks.
Cash used in investing activities was $8.9
million for the first quarter of 2010 as compared to $4.0 million in the prior
year first quarter. During the current year first quarter, we sold three
properties that were classified as held for sale for net proceeds of $2.1
million, of which $0.6 million is included in discontinued operations, and
completed one sale leaseback transaction for net proceeds of $1.6 million. In
the prior year first quarter, we sold two properties classified as assets held
for sale for net proceeds of $1.8 million which is reported in discontinued
operations. Capital expenditures in the first quarter of 2010 increased by $6.8
million, to $12.5 million, from $5.7 million for the first quarter of 2009.
Capital expenditures for the current year were for improvements of our existing
stores, offices, distribution centers and for the opening of the new
facilities.
Our targeted capital expenditures for fiscal
2010 increased to $80.0 million from the $68.0 million previously reported due
to accelerating certain high return capital projects in the current year as a
result of our strong liquidity position. Our fiscal year 2010 capital
expenditures includes the addition of approximately 40 Service & Tire
Centers and required expenditures for our existing stores, offices and
distribution centers. These expenditures are expected to be funded by cash on
hand, net cash generated from operating activities and opportunistic single
store sale leaseback transactions. Additional capacity, if needed, exists under
our existing line of credit.
In the first quarter of 2010 and 2009, we used
cash in financing activities of $1.3 million and $14.0 million, respectively.
The cash used in financing activities in the first quarter of 2010 is primarily
related to the payment of cash dividends. In the first quarter of 2009, we
repurchased $17.0 million of our outstanding 7.5% Senior Subordinated Notes for
$10.7 million.
21
Table of Contents
We anticipate that cash on hand, cash generated
by operating activities and cash generated by opportunistic single store sale
leaseback transactions will exceed our expected cash requirements in fiscal
year 2010. In addition, we expect to have excess availability under our
existing line of credit during the entirety of fiscal year 2010. As of May 1,
2010, we had zero drawn on our line of credit and maintained undrawn
availability under our revolving credit facility of $142.8 million.
Our working capital was $223.1 million and
$205.5 million at May 1, 2010 and January 30, 2010, respectively. Our
long-term debt, as a percentage of our total capitalization, was 40% and 41% at
May 1, 2010 and January 30, 2010, respectively.
As of May 1, 2010 and January 30, 2010,
we had an outstanding balance of $34.3 million and $34.1 million, respectively,
(classified as trade payable program liability on the condensed consolidated
balance sheet) under our vendor financing program which is funded by various
bank participants who have the ability, but not the obligation, to purchase
account receivables owed by us directly from our vendors.
NEW ACCOUNTING STANDARDS
In October 2009, the
FASB issued Accounting Standards Update (ASU) 2009-13 Revenue Recognition
(Topic 605) Multiple-Deliverable Revenue Arrangements a consensus of the FASB
Emerging Issues Task Force, (ASU 2009-13). This update eliminates the residual
method of allocation and requires that consideration be allocated to all
deliverables using the relative selling price method. ASU 2009-13 is effective
for material revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010. The Company does not believe
the adoption of ASU 2009-13 will have a material impact on its consolidated
financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements 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.
On an on-going basis, we evaluate our estimates
and judgments, including those related to customer incentives, product returns
and warranty obligations, bad debts, merchandise 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 we believe 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 Annual Report on Form 10-K for the
fiscal year ended January 30, 2010, 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 managements 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.
22
Table of Contents
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 1, 2010 we had
no borrowings under this facility. Additionally, we have a $149.5 million
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 $145.0 million, which is designated as a cash flow hedge on our
Senior Secured Term Loan. We record the effective portion of the change in fair
value through accumulated other comprehensive loss.
The fair value of the interest rate swap was
$16.1 million and $16.4 million payable at May 1, 2010 and January 30,
2010, respectively. Of the $0.3 million decrease in fair value during the
thirteen weeks ended May 1, 2010, $0.2 million net of tax was recorded to
accumulated other comprehensive loss on the condensed consolidated balance
sheet.
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, as amended
(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 Exchange Act (15 U.S.C. 78a et
seq.) is recorded, processed, summarized and reported, within the time periods
specified in the SECs 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 Exchange Act is accumulated and communicated to the issuers
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. The Companys management, with the
participation of the Companys chief executive officer and chief financial
officer, evaluated the effectiveness of the Companys 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 SECs rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL
REPORTING
No change in the Companys internal control over
financial reporting occurred during the fiscal quarter covered by this
Quarterly Report on Form 10-Q that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over
financial reporting.
Item 5. Other Information
None.
23
Table of Contents
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 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. During the third quarter of
fiscal 2009, the Company and the EPA reached a settlement in principle of this
matter requiring that the Company (i) pay a monetary penalty of $5.0
million, (ii) take certain corrective action with respect to certain
inventory that had been restricted from sale during the course of the
investigation, (iii) implement a formal compliance program and (iv) participate
in certain non-monetary emission offset activities. The Company had previously
accrued an amount equal to the agreed upon civil penalty and a
$3.0 million contingency accrual with respect to the restricted inventory.
During fiscal 2009, the Company reversed $2.0 million of the inventory
accrual as a portion of the subject inventory was released for sale. On May 10,
2010, the Company and the EPA signed the formal settlement Agreement, which was
filed with the U.S. District Court for the District of Columbia. The settlement
agreement is subject to a 30-day public comment period and final approval by
the court.
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 Companys 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 Companys financial position, any such loss could have a
material adverse effect on the Companys results of operations in the period(s) during
which the underlying matters are resolved.
Item 1A. Risk Factors
There
have been no changes to the risks described in the Companys previously filed
Annual Report on Form 10-K for the fiscal year ended January 30,
2010.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
Item 5. Other Information
None.
24
Table of Contents
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
|
25
Table of Contents
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 8,
2010
|
by:
|
/s/ Raymond L. Arthur
|
|
|
|
Raymond L. Arthur
|
|
Executive Vice
President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
|
26
Table of Contents
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
|
27
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