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 October 30, 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
|
|
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
(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
|
|
|
|
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 November 26, 2010, there were 52,521,080
shares of the registrants Common Stock outstanding.
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
|
|
October 30, 2010
|
|
January 30, 2010
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
107,253
|
|
$
|
39,326
|
|
Accounts receivable, less allowance for
uncollectible accounts of $1,593 and $1,488
|
|
20,469
|
|
22,983
|
|
Merchandise inventories
|
|
568,592
|
|
559,118
|
|
Prepaid expenses
|
|
16,647
|
|
24,784
|
|
Other current assets
|
|
48,350
|
|
65,428
|
|
Assets held for disposal
|
|
1,378
|
|
4,438
|
|
Total current assets
|
|
762,689
|
|
716,077
|
|
|
|
|
|
|
|
Property and equipment - net
|
|
691,833
|
|
706,450
|
|
Deferred income taxes
|
|
54,461
|
|
58,171
|
|
Other long-term assets
|
|
22,017
|
|
18,388
|
|
Total assets
|
|
$
|
1,531,000
|
|
$
|
1,499,086
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
207,838
|
|
$
|
202,974
|
|
Trade payable program liability
|
|
57,017
|
|
34,099
|
|
Accrued expenses
|
|
224,262
|
|
242,416
|
|
Deferred income taxes
|
|
37,461
|
|
29,984
|
|
Current maturities of long-term debt
|
|
1,079
|
|
1,079
|
|
Total current liabilities
|
|
527,657
|
|
510,552
|
|
|
|
|
|
|
|
Long-term debt less current maturities
|
|
305,392
|
|
306,201
|
|
Other long-term liabilities
|
|
73,127
|
|
73,933
|
|
Deferred gain from asset sales
|
|
156,026
|
|
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
|
|
294,781
|
|
293,810
|
|
Retained earnings
|
|
397,100
|
|
374,836
|
|
Accumulated other comprehensive loss
|
|
(18,720
|
)
|
(17,691
|
)
|
Less cost of shares in treasury 16,041,930
shares and 16,164,074 shares
|
|
272,920
|
|
276,217
|
|
Total stockholders equity
|
|
468,798
|
|
443,295
|
|
Total liabilities and stockholders equity
|
|
$
|
1,531,000
|
|
$
|
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
|
|
Thirty-nine weeks ended
|
|
|
|
October 30,
2010
|
|
October 31,
2009
|
|
October 30,
2010
|
|
October 31,
2009
|
|
Merchandise sales
|
|
$
|
398,368
|
|
$
|
378,860
|
|
$
|
1,213,736
|
|
$
|
1,169,108
|
|
Service revenue
|
|
97,996
|
|
93,783
|
|
297,516
|
|
288,934
|
|
Total revenues
|
|
496,364
|
|
472,643
|
|
1,511,252
|
|
1,458,042
|
|
Costs of merchandise sales
|
|
279,690
|
|
269,604
|
|
845,848
|
|
826,429
|
|
Costs of service revenue
|
|
90,818
|
|
84,770
|
|
267,452
|
|
255,553
|
|
Total costs of revenues
|
|
370,508
|
|
354,374
|
|
1,113,300
|
|
1,081,982
|
|
Gross profit from merchandise sales
|
|
118,678
|
|
109,256
|
|
367,888
|
|
342,679
|
|
Gross profit from service revenue
|
|
7,178
|
|
9,013
|
|
30,064
|
|
33,381
|
|
Total gross profit
|
|
125,856
|
|
118,269
|
|
397,952
|
|
376,060
|
|
Selling, general and administrative expenses
|
|
110,840
|
|
109,545
|
|
335,580
|
|
327,080
|
|
Net gain from dispositions of assets
|
|
109
|
|
1,332
|
|
2,603
|
|
1,319
|
|
Operating profit
|
|
15,125
|
|
10,056
|
|
64,975
|
|
50,299
|
|
Non-operating income
|
|
650
|
|
724
|
|
1,855
|
|
1,666
|
|
Interest expense
|
|
6,630
|
|
6,922
|
|
19,881
|
|
15,324
|
|
Earnings from continuing operations before income
taxes and discontinued operations
|
|
9,145
|
|
3,858
|
|
46,949
|
|
36,641
|
|
Income tax expense
|
|
3,471
|
|
1,501
|
|
18,316
|
|
15,363
|
|
Earnings from continuing operations before
discontinued operations
|
|
5,674
|
|
2,357
|
|
28,633
|
|
21,278
|
|
Income (loss) from discontinued operations, net of
tax
|
|
44
|
|
(233
|
)
|
(367
|
)
|
(510
|
)
|
Net earnings
|
|
5,718
|
|
2,124
|
|
28,266
|
|
20,768
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings, beginning of period
|
|
393,245
|
|
373,963
|
|
374,836
|
|
358,670
|
|
Cash dividends
|
|
(1,581
|
)
|
(1,557
|
)
|
(4,741
|
)
|
(4,709
|
)
|
Dividend reinvested and other
|
|
(282
|
)
|
(69
|
)
|
(1,261
|
)
|
(268
|
)
|
Retained earnings, end of period
|
|
$
|
397,100
|
|
$
|
374,461
|
|
$
|
397,100
|
|
$
|
374,461
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before
discontinued operations
|
|
$
|
0.11
|
|
$
|
0.05
|
|
$
|
0.54
|
|
$
|
0.41
|
|
Loss from discontinued operations, net of tax
|
|
|
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
Basic earnings per share
|
|
$
|
0.11
|
|
$
|
0.04
|
|
$
|
0.53
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before discontinued
operations
|
|
$
|
0.11
|
|
$
|
0.04
|
|
$
|
0.54
|
|
$
|
0.40
|
|
Loss from discontinued operations, net of tax
|
|
|
|
|
|
(0.01
|
)
|
|
|
Diluted earnings per share
|
|
$
|
0.11
|
|
$
|
0.04
|
|
$
|
0.53
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.09
|
|
$
|
0.09
|
|
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
Thirty-nine weeks ended
|
|
October 30, 2010
|
|
October 31, 2009
|
|
|
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
Net earnings
|
|
$
|
28,266
|
|
$
|
20,768
|
|
Adjustments to reconcile net earnings to net cash
provided by continuing operations:
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
367
|
|
510
|
|
Depreciation and amortization
|
|
55,260
|
|
53,248
|
|
Amortization of deferred gain from asset sales
|
|
(9,451
|
)
|
(9,186
|
)
|
Stock compensation expense
|
|
2,748
|
|
1,930
|
|
Gain on debt retirement
|
|
|
|
(6,248
|
)
|
Deferred income taxes
|
|
11,795
|
|
7,270
|
|
Net gain from disposition of assets
|
|
(2,603
|
)
|
(1,319
|
)
|
Loss from asset impairment
|
|
970
|
|
3,117
|
|
Other
|
|
52
|
|
267
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Decrease in accounts receivable, prepaid expenses
and other
|
|
29,382
|
|
33,241
|
|
Increase in merchandise inventories
|
|
(9,474
|
)
|
(5,806
|
)
|
Increase in accounts payable
|
|
4,864
|
|
6,455
|
|
Decrease in accrued expenses
|
|
(17,993
|
)
|
(23,922
|
)
|
(Decrease) increase in other long-term liabilities
|
|
(2,122
|
)
|
2,230
|
|
Net cash provided by continuing operations
|
|
92,061
|
|
82,555
|
|
Net cash used in discontinued operations
|
|
(1,263
|
)
|
(594
|
)
|
Net cash provided by operating activities
|
|
90,798
|
|
81,961
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
Cash paid for property and equipment
|
|
(42,976
|
)
|
(27,775
|
)
|
Proceeds from dispositions of assets
|
|
6,713
|
|
12,093
|
|
Acquisition of Florida Tire Inc.
|
|
(144
|
)
|
(2,610
|
)
|
Collateral investment
|
|
(5,000
|
)
|
|
|
Other
|
|
|
|
(500
|
)
|
Net cash used in continuing operations
|
|
(41,407
|
)
|
(18,792
|
)
|
Net cash provided by discontinued operations
|
|
569
|
|
1,762
|
|
Net cash used in investing activities
|
|
(40,838
|
)
|
(17,030
|
)
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
Borrowings under line of credit agreements
|
|
20,482
|
|
244,011
|
|
Payments under line of credit agreements
|
|
(20,482
|
)
|
(267,873
|
)
|
Borrowings on trade payable program liability
|
|
247,346
|
|
122,914
|
|
Payments on trade payable program liability
|
|
(224,428
|
)
|
(128,385
|
)
|
Debt payments
|
|
(809
|
)
|
(11,720
|
)
|
Dividends paid
|
|
(4,741
|
)
|
(4,709
|
)
|
Other
|
|
599
|
|
342
|
|
Net cash provided by (used in) financing
activities
|
|
17,967
|
|
(45,420
|
)
|
Net increase in cash and cash equivalents
|
|
67,927
|
|
19,511
|
|
Cash and cash equivalents at beginning of period
|
|
39,326
|
|
21,332
|
|
Cash and cash equivalents at end of period
|
|
$
|
107,253
|
|
$
|
40,843
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
882
|
|
$
|
4,046
|
|
Cash paid for interest
|
|
$
|
14,412
|
|
$
|
15,492
|
|
Accrued purchases of property and equipment
|
|
$
|
1,280
|
|
$
|
1,575
|
|
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 of America (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, 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 consolidated 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
thirty-nine weeks ended October 30, 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 October 30, 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 year ending January 29, 2011 and the year ended
January 30, 2010, respectively.
NOTE 2. New Accounting Standards
In October 2009, the Financial
Accounting Standards Board (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 the reconciliation of level 3 inputs includes separately
reported information on purchases, sales, issuances and 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 for requirements effective December 15,
2009 did not have a material impact on the Companys consolidated financial
statements. The Company does not believe the adoption of those requirements of
ASU 2010-06 which are effective for periods beginning after December 15,
2010 will have a material impact on its 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 $497.4 million and $482.0 million as
of October 30, 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, and 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 $10.7 million and $13.0 million at October 30, 2010 and January 30,
2010, respectively.
NOTE 4. Property and Equipment
The Companys property and
equipment as of October 30, 2010 and January 30, 2010 was as follows:
(dollar amounts in thousands)
|
|
October 30, 2010
|
|
January 30, 2010
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
|
|
|
Land
|
|
$
|
203,838
|
|
$
|
204,709
|
|
Buildings
and improvements
|
|
839,058
|
|
826,804
|
|
Furniture,
fixtures and equipment
|
|
698,127
|
|
695,072
|
|
Construction
in progress
|
|
2,315
|
|
1,550
|
|
Accumulated
depreciation and amortization
|
|
(1,051,505
|
)
|
(1,021,685
|
)
|
Property
and equipment net
|
|
$
|
691,833
|
|
$
|
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 statements of
operations.
The reserve for warranty cost
activity for the thirty-nine weeks ended October 30, 2010 and the
fifty-two weeks ended January 30, 2010 is as follows:
(dollar amounts in thousands)
|
|
October 30,
2010
|
|
January 30, 2010
|
|
Beginning balance
|
|
$
|
694
|
|
$
|
797
|
|
|
|
|
|
|
|
Additions related to
current period sales
|
|
9,136
|
|
15,572
|
|
|
|
|
|
|
|
Warranty costs incurred in
current period
|
|
(9,157
|
)
|
(15,675
|
)
|
|
|
|
|
|
|
Ending balance
|
|
$
|
673
|
|
$
|
694
|
|
NOTE 6. Debt and Financing
Arrangements
The following are the components of
debt and financing arrangements:
(dollar amounts in thousands)
|
|
October 30, 2010
|
|
January 30, 2010
|
|
7.50% Senior Subordinated Notes, due
December 2014
|
|
$
|
157,565
|
|
$
|
157,565
|
|
Senior Secured Term Loan, due October 2013
|
|
148,906
|
|
149,715
|
|
Revolving Credit Agreement, expiring
January 2014
|
|
|
|
|
|
|
|
306,471
|
|
307,280
|
|
Less current maturities
|
|
1,079
|
|
1,079
|
|
Long-term debt, less current maturities
|
|
$
|
305,392
|
|
$
|
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 statements of operations and changes in retained earnings.
As of October 30, 2010, 126 of
the Companys 231 owned stores were used as collateral under the Companys
Senior Secured Term Loan due October 2013.
The Companys ability to borrow
under its $300.0 million 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 October 30, 2010, there
were no outstanding borrowings under this agreement and $107.9 million of
availability was utilized to support outstanding letters of credit. Taking this
into account and the borrowing base requirements, as of October 30, 2010,
there was $139.5 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 Notes and Senior
Secured Term Loan. As of October 30, 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 $301.2 million and $290.8 million as of October 30, 2010
and January 30, 2010, respectively.
During the third quarter of 2010,
the Company invested $5.0 million in a restricted account as collateral for its
retained liabilities included within existing insurance programs in lieu of a
previously outstanding letter of credit. The collateral investment is included
in other long term assets on the condensed consolidated balance sheet.
NOTE 7. Sale-Leaseback Transactions
During the thirty-nine weeks ended October 30,
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. No sale leaseback transactions
were completed during the thirteen weeks ended October 30, 2010.
During the thirteen and thirty-nine
weeks ended October 31, 2009, the Company sold three properties to
unrelated third parties. Net proceeds from these sales were $11.0 million.
Concurrent with these sales, the Company entered into agreements to lease the
properties back from the purchasers over minimum lease terms of 15 years.
The Company classified these leases as operating leases. The Company actively
uses these properties and considers the leases as normal leasebacks. A $1.4
million gain on the sale of these properties was recognized immediately upon
execution of the sale and a $6.5 million gain was deferred. The deferred gain
is being recognized over the minimum term of these leases.
The Company operated 602 store
locations at October 30, 2010, of which 231 were owned and 371 were
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. All available evidence, both positive and
negative is considered to determine whether based on the weight of that
evidence, a valuation allowance is needed. To
8
Table of Contents
establish
this positive evidence, the Company considers future projections of income and
various tax planning strategies for generating income sufficient to utilize the
deferred tax assets. Based on its improved profitability, the Company released
$2.2 million of valuation allowance relating to certain unitary state net
operating loss carryforwards and credits during the thirty-nine weeks ended October 30,
2010.
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 and thirty-nine weeks ended October 30,
2010, the Company did not have a material change to its uncertain tax position
liabilities. During the thirteen weeks ended October 31, 2009, the Company
reduced its uncertain tax position liabilities by approximately $0.6 million,
of which $0.2 million was interest, and during the thirty-nine weeks ended October 31,
2009, the Company reduced its uncertain tax position liabilities by $1.4
million, of which $0.7 million was interest. These reductions related to settlement
of previously established liabilities with the applicable taxing authorities.
NOTE 9. Accumulated Other
Comprehensive Loss
The following are the components of
other comprehensive income:
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
(dollar amounts in thousands)
|
|
October 30,
2010
|
|
October 31,
2009
|
|
October 30,
2010
|
|
October 31,
2009
|
|
Net earnings
|
|
$
|
5,718
|
|
$
|
2,124
|
|
$
|
28,266
|
|
$
|
20,768
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
Defined benefit plan adjustment
|
|
264
|
|
280
|
|
794
|
|
840
|
|
Derivative financial instrument adjustment
|
|
(226
|
)
|
(542
|
)
|
(1,823
|
)
|
496
|
|
Comprehensive income
|
|
$
|
5,756
|
|
$
|
1,862
|
|
$
|
27,237
|
|
$
|
22,104
|
|
The components of accumulated other
comprehensive loss are:
(dollar amounts in thousands)
|
|
October 30, 2010
|
|
January 30, 2010
|
|
|
|
|
|
|
|
Defined benefit plan adjustment, net of tax
|
|
$
|
(6,364
|
)
|
$
|
(7,158
|
)
|
Derivative financial instrument adjustment, net of
tax
|
|
(12,356
|
)
|
(10,533
|
)
|
Accumulated other comprehensive loss
|
|
$
|
(18,720
|
)
|
$
|
(17,691
|
)
|
NOTE 10: Impairments and Assets Held for Disposal
The
Company evaluates the ability to recover long-lived assets whenever events or
circumstances indicate that the carrying value of the asset may not be
recoverable. In the event assets are impaired, losses are recognized to the extent
the carrying value exceeds fair value. In addition, the Company reports assets
held for disposal at the lower of the carrying amount or the estimated fair
market value, net of disposal costs. A store is classified as held for
disposal when (i) the Company has committed to a plan to sell,
(ii) the building is vacant and the property is available for sale,
(iii) the Company is actively marketing the property 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. No
depreciation expense is recognized during the period the asset is held for
disposal.
During
the second quarter of fiscal 2010, the Company recorded an $0.8 million
impairment charge related to two stores classified as held and used. The
Company used a probability-weighted approach and estimates of expected future
cash flows to determine the fair value of these stores. Discount and growth
rate assumptions were derived from current economic conditions, managements
expectations and projected trends of current operating results. The fair market
value estimate is classified as a Level 3 measure within the fair value
hierarchy. Of the $0.8 million impairment charge, $0.6 million was charged to
cost of merchandise sales, and $0.2 million was charged to cost of service
revenues.
9
Table of
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During the second quarter of fiscal 2010, the Company also recorded a
$0.2 million impairment charge related to a store classified as held for
disposal. The Company lowered its selling price reflecting declines in the
commercial real estate market. The fair market value of the store is classified
as a Level 2 measure within the fair value hierarchy. Substantially all of
this impairment was charged to cost of merchandise sales.
During the thirteen week period
ended October 30, 2010, the Company sold one store classified as held for
disposal for net proceeds of $0.6 million and recognized a net gain of $0.2
million. During the thirteen week period ended October 31, 2009, the
Company did not sell any stores classified as held for disposal. During the
thirty-nine week period ended October 30, 2010, the Company sold five
stores classified as held for disposal for net proceeds of $3.5 million and
recognized a net gain of $0.5 million. During the thirty-nine week period ended
October 31, 2009, the Company sold three stores that were classified as
held for disposal for net proceeds of $2.8 million and recognized a net gain of
$0.1 million. In the third quarter of 2009, the Company recorded an impairment
charge of $3.3 million on the then remaining stores classified as held for
disposal reflecting further declines in the real estate market for vacant
properties. The fair market value of the stores is classified as a Level 2
measure within the fair value hierarchy. Of the entire $3.3 million impairment,
$2.5 million was charged to cost of merchandise sales, $0.7 million was charged
to cost of service revenues and $0.2 million was charged to discontinued
operations.
Assets held for disposal are as follows:
(dollar amounts in thousands)
|
|
October 30, 2010
|
|
January 30, 2010
|
|
|
|
|
|
|
|
Land
|
|
$
|
949
|
|
$
|
2,980
|
|
Buildings
and improvements
|
|
1,870
|
|
5,453
|
|
Accumulated
depreciation and amortization
|
|
(1,441
|
)
|
(3,995
|
)
|
Property
and equipment - net
|
|
$
|
1,378
|
|
$
|
4,438
|
|
Number
of properties
|
|
3
|
|
8
|
|
In addition to the above stores,
the Company reached a settlement agreement during the second quarter of 2010 on
a previously closed store for $2.8 million, resulting in a net gain from the
disposition of assets of $2.1 million.
NOTE 11. Earnings Per Share
The
following table presents the calculation of basic and diluted earnings per
share for earnings from continuing operations and net earnings:
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
(in thousands, except per share amounts)
|
|
October 30,
2010
|
|
October 31,
2009
|
|
October 30,
2010
|
|
October 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Earnings from continuing operations
|
|
$
|
5,674
|
|
$
|
2,357
|
|
$
|
28,633
|
|
$
|
21,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of
tax
|
|
44
|
|
(233
|
)
|
(367
|
)
|
(510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
5,718
|
|
$
|
2,124
|
|
$
|
28,266
|
|
$
|
20,768
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
Basic average number of common shares outstanding
during period
|
|
52,717
|
|
52,419
|
|
52,637
|
|
52,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares assumed issued upon exercise of
dilutive stock options, net of assumed repurchase, at the average market
price
|
|
447
|
|
367
|
|
434
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
Diluted average number of common shares assumed
outstanding during period
|
|
53,164
|
|
52,786
|
|
53,071
|
|
52,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations (a/b)
|
|
$
|
0.11
|
|
$
|
0.05
|
|
$
|
0.54
|
|
$
|
0.41
|
|
|
Discontinued operations, net of tax
|
|
|
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
|
Basic earnings per share
|
|
$
|
0.11
|
|
$
|
0.04
|
|
$
|
0.53
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations (a/c)
|
|
$
|
0.11
|
|
$
|
0.04
|
|
$
|
0.54
|
|
$
|
0.40
|
|
|
Discontinued operations, net of tax
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
Diluted earnings per share
|
|
$
|
0.11
|
|
$
|
0.04
|
|
$
|
0.53
|
|
$
|
0.40
|
|
10
Table of
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At October 30, 2010 and October 31,
2009, respectively, there were 2,321,000 and 1,949,000 outstanding options and
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 1,059,000 and
901,000 for the thirteen weeks ended October 30, 2010 and October 31,
2009, respectively. The total number of such shares excluded from the diluted
earnings per share calculation are 1,078,000 and 1,203,000 for the thirty-nine
weeks ended October 30, 2010 and October 31, 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 expense related to the savings plans was approximately
$0.9 million and $0.6 million for the thirteen weeks ended October 30,
2010 and October 31, 2009, respectively and approximately $2.5 million and
$2.4 million for the thirty-nine weeks ended October 30, 2010 and October 31,
2009, respectively. The Company also maintains a non-qualified defined
contribution Supplemental Executive Retirement Plan (the Account Plan) for
key employees designated by the Board of Directors. The Companys expense for
the Account Plan was approximately $0.3 million and $0.2 million for the
thirteen weeks ended October 30, 2010 and October 31, 2009,
respectively and approximately $1.0 million and $0.7 million for the
thirty-nine weeks ended October 30, 2010 and October 31, 2009,
respectively. The Companys contribution to these plans for fiscal 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:
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
(dollar amounts in thousands)
|
|
October 30, 2010
|
|
October 31, 2009
|
|
October 30, 2010
|
|
October 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
640
|
|
635
|
|
1,920
|
|
1,904
|
|
Expected return on plan assets
|
|
(538
|
)
|
(451
|
)
|
(1,613
|
)
|
(1,353
|
)
|
Amortization of prior service cost
|
|
|
|
3
|
|
|
|
10
|
|
Amortization of net loss
|
|
421
|
|
442
|
|
1,264
|
|
1,326
|
|
Net periodic benefit cost
|
|
$
|
523
|
|
$
|
629
|
|
$
|
1,571
|
|
$
|
1,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The defined benefit pension plan is
subject to minimum funding requirements of the Employee Retirement Income
Security Act of 1974 as amended. While the Company has no minimum funding
requirement during fiscal 2010, it made a $5.0 million discretionary
contribution to the defined benefit pension plan on October 22, 2010.
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
|
|
303,556
|
|
Exercised
|
|
(38,738
|
)
|
Forfeited
|
|
(26,477
|
)
|
Expired
|
|
(29,142
|
)
|
Outstanding October 30, 2010
|
|
1,891,524
|
|
11
Table of
Contents
During the thirty-nine weeks ended October 30,
2010 and October 31, 2009, the Company granted approximately 303,500 and
948,000 stock options with a weighted average grant date fair value of $4.26
and $2.10, respectively. 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 thirty-nine weeks
ended October 30, 2010 for the options granted during fiscal 2010 was
minimal.
Of the options granted in 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 or more above grant price for 536,000 options and by $6.88 or
more above grant price 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 October 30, 2010, the market
appreciation requirements of both grants have been satisfied.
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,
using a Monte Carlo simulation. 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
following are the weighted-average assumptions:
|
|
October 30, 2010
|
|
October 31, 2009
|
|
Dividend yield
|
|
1.4
|
%
|
2.3
|
%
|
Expected volatility
|
|
55.7
|
%
|
65.2
|
%
|
Risk-free interest rate range:
|
|
|
|
|
|
High
|
|
2.0
|
%
|
2.3
|
%
|
Low
|
|
1.7
|
%
|
1.6
|
%
|
Ranges of expected lives in years
|
|
4 - 5
|
|
4 - 5
|
|
Restricted Stock Units
In the third quarter of fiscal
2010, the Company did not grant any restricted stock units.
In the second quarter of fiscal
2010, the Company granted approximately 52,000 restricted stock units to its
non-employee directors of the Board that vested immediately. The fair value was
$9.55 per unit and the Company recognized compensation expense of approximately
$0.5 million for these 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 in fiscal year 2012. The fair value for these
awards was $10.34 at the date of the grant. The compensation expense recorded
during the thirty-nine weeks ended October 30, 2010 for these restricted
stock units 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 expense recorded during
the thirty-nine weeks ended October 30, 2010 for these restricted stock
units was minimal.
In the first quarter of fiscal
2010, the Company granted approximately 61,000 restricted stock units related
to officers deferred bonus match under the Companys non-qualified deferred
compensation plan, which vest over a three year period. The following table
12
Table of Contents
summarizes the units under the
Companys plan, assuming maximum vesting of underlying shares for the
performance and market based awards described above:
|
|
Number of RSUs
|
|
Nonvested January 30, 2010
|
|
232,593
|
|
Granted
|
|
362,283
|
|
Forfeited
|
|
(13,588
|
)
|
Vested
|
|
(151,676
|
)
|
Nonvested October 30, 2010
|
|
429,612
|
|
NOTE 14. Fair Value Measurements
and Derivatives
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
|
|
October 30, 2010
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
107,253
|
|
$
|
107,253
|
|
|
|
|
|
Collateral investments (a)
|
|
$
|
5,000
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Derivative liability (b)
|
|
$
|
28
|
|
|
|
$
|
28
|
|
|
|
Contingent consideration (b)
|
|
$
|
144
|
|
|
|
|
|
$
|
144
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
Derivative liability (c)
|
|
$
|
19,388
|
|
|
|
$
|
19,388
|
|
|
|
Contingent consideration (c)
|
|
$
|
1,340
|
|
|
|
|
|
$
|
1,340
|
|
(a)
Included in
other long-term assets
(b)
included in
accrued liabilities
(c)
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 Senior
Secured Term Loan that is due in October 2013. The swap is used to
minimize interest rate exposure and overall interest costs by converting the
variable component of the total 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 financial
statements for the periods indicated:
(dollar amounts in thousands)
|
|
Amount of Loss in
Other Comprehensive
Income
(Effective Portion)
|
|
Earnings Statement
Classification
|
|
Amount of Loss
Recognized in Earnings
(Effective Portion) (a)
|
|
Thirteen weeks ended October 30, 2010
|
|
$
|
(256
|
)
|
Interest expense
|
|
$
|
(1,721
|
)
|
Thirty-nine weeks ended October 30, 2010
|
|
$
|
(1,877
|
)
|
Interest expense
|
|
$
|
(5,169
|
)
|
13
Table of
Contents
(a) represents
the effective portion of the loss reclassified from accumulated other
comprehensive loss
In the second quarter of fiscal
2010, the Company entered into a price stability agreement (Agreement) that
is also designated as a cash flow hedge. This Agreement is intended to hedge
the price risks associated with the market volatility of retail gasoline. This
hedge is deemed to be fully effective and all adjustments in the hedges fair
value have been recorded to accumulated other comprehensive loss. The effect of
this Agreement on the Companys condensed consolidated financial statements is
immaterial.
The
fair value of the derivatives was $19.4 million and $16.4 million payable at October 30,
2010 and January 30, 2010, respectively. Of the $3.0 million increase in
the fair value during the thirty-nine weeks ended October 30, 2010, $1.9
million net of tax was recorded to accumulated other comprehensive loss on the
condensed consolidated balance sheet.
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 or level 3 measures under the fair value
hierarchy.
NOTE 15. Legal Matters
In the fourth quarter of
fiscal 2008, the United States Environmental Protection Agency (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.
During the second quarter of fiscal 2010, the Company reversed the remaining
$1.0 million of the inventory accrual as the Company reached an agreement with
the merchandise vendor to cover the entire cost of retrofitting a portion of
the remaining subject merchandise and to accept the balance of the subject
inventory for return for full credit. During the second quarter of fiscal 2010,
the formal settlement agreement between the Company and the EPA became effective
and the Company paid the monetary penalty.
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.
14
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 October 30, 2010 and January 30,
2010 and the related condensed consolidating statements of operations for the
thirteen and thirty-nine weeks ended October 30, 2010 and October 31,
2009 and condensed consolidating statements of cash flows for the thirty-nine
weeks ended October 30, 2010 and October 31, 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
SHEET
(dollars in thousands)
(unaudited)
As of October 30, 2010
|
|
Pep Boys
|
|
Subsidiary
Guarantors
|
|
Subsidiary Non-
Guarantors
|
|
Consolidation/
Elimination
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
55,772
|
|
$
|
41,441
|
|
$
|
10,040
|
|
$
|
|
|
$
|
107,253
|
|
Accounts receivable, net
|
|
9,288
|
|
11,181
|
|
|
|
|
|
20,469
|
|
Merchandise inventories
|
|
195,180
|
|
373,412
|
|
|
|
|
|
568,592
|
|
Prepaid expenses
|
|
6,078
|
|
7,621
|
|
2,978
|
|
(30
|
)
|
16,647
|
|
Other current assets
|
|
974
|
|
2,662
|
|
52,776
|
|
(8,062
|
)
|
48,350
|
|
Assets held for disposal
|
|
903
|
|
475
|
|
|
|
|
|
1,378
|
|
Total current assets
|
|
268,195
|
|
436,792
|
|
65,794
|
|
(8,092
|
)
|
762,689
|
|
Property and equipmentnet
|
|
232,033
|
|
447,825
|
|
31,033
|
|
(19,058
|
)
|
691,833
|
|
Investment in subsidiaries
|
|
1,806,873
|
|
|
|
|
|
(1,806,873
|
)
|
|
|
Intercompany receivables
|
|
|
|
1,089,934
|
|
62,075
|
|
(1,152,009
|
)
|
|
|
Deferred income taxes
|
|
7,457
|
|
47,004
|
|
|
|
|
|
54,461
|
|
Other long-term assets
|
|
20,785
|
|
1,232
|
|
|
|
|
|
22,017
|
|
Total assets
|
|
$
|
2,335,343
|
|
$
|
2,022,787
|
|
$
|
158,902
|
|
$
|
(2,986,032
|
)
|
$
|
1,531,000
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
207,838
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
207,838
|
|
Trade payable program liability
|
|
57,017
|
|
|
|
|
|
|
|
57,017
|
|
Accrued expenses
|
|
30,485
|
|
64,559
|
|
131,910
|
|
(
2,692
|
)
|
224,262
|
|
Deferred income taxes
|
|
10,423
|
|
32,438
|
|
|
|
(5,400
|
)
|
37,461
|
|
Current maturities of long-term debt
|
|
1,079
|
|
|
|
|
|
|
|
1,079
|
|
Total current liabilities
|
|
306,842
|
|
96,997
|
|
131,910
|
|
(
8,092
|
)
|
527,657
|
|
Long-term debt less current maturities
|
|
305,392
|
|
|
|
|
|
|
|
305,392
|
|
Other long-term liabilities
|
|
35,728
|
|
37,399
|
|
|
|
|
|
73,127
|
|
Deferred gain from asset sales
|
|
66,574
|
|
108,510
|
|
|
|
(19,058
|
)
|
156,026
|
|
Intercompany liabilities
|
|
1,152,009
|
|
|
|
|
|
(1,152,009
|
)
|
|
|
Total stockholders equity
|
|
468,798
|
|
1,779,881
|
|
26,992
|
|
(
1,806,873
|
)
|
468,798
|
|
Total liabilities and stockholders equity
|
|
$
|
2,335,343
|
|
$
|
2,022,787
|
|
$
|
158,902
|
|
$
|
(
2,986,032
|
)
|
$
|
1,531,000
|
|
15
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
|
|
16
Table
of Contents
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
(dollars
in thousands)
(unaudited)
|
|
|
|
Subsidiary
|
|
Subsidiary Non-
|
|
Consolidation /
|
|
|
|
Thirteen Weeks Ended October 30, 2010
|
|
Pep Boys
|
|
Guarantors
|
|
Guarantors
|
|
Elimination
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
$
|
135,716
|
|
$
|
262,652
|
|
$
|
|
|
$
|
|
|
$
|
398,368
|
|
Service revenue
|
|
35,246
|
|
62,750
|
|
|
|
|
|
97,996
|
|
Other revenue
|
|
|
|
|
|
5,736
|
|
(5,736
|
)
|
|
|
Total revenues
|
|
170,962
|
|
325,402
|
|
5,736
|
|
(5,736
|
)
|
496,364
|
|
Costs of merchandise sales
|
|
96,266
|
|
183,831
|
|
|
|
(407
|
)
|
279,690
|
|
Costs of service revenue
|
|
31,960
|
|
58,896
|
|
|
|
(38
|
)
|
90,818
|
|
Costs of other revenue
|
|
|
|
|
|
5,067
|
|
(5,067
|
)
|
|
|
Total costs of revenues
|
|
128,226
|
|
242,727
|
|
5,067
|
|
(5,512
|
)
|
370,508
|
|
Gross profit from merchandise sales
|
|
39,450
|
|
78,821
|
|
|
|
407
|
|
118,678
|
|
Gross profit from service revenue
|
|
3,286
|
|
3,854
|
|
|
|
38
|
|
7,178
|
|
Gross profit from other revenue
|
|
|
|
|
|
669
|
|
(669
|
)
|
|
|
Total gross profit
|
|
42,736
|
|
82,675
|
|
669
|
|
(224
|
)
|
125,856
|
|
Selling, general and administrative expenses
|
|
37,672
|
|
73,920
|
|
88
|
|
(840
|
)
|
110,840
|
|
Net gain from dispositions of assets
|
|
(105
|
)
|
214
|
|
|
|
|
|
109
|
|
Operating profit
|
|
4,959
|
|
8,969
|
|
581
|
|
616
|
|
15,125
|
|
Non-operating (expense) income
|
|
(4,120
|
)
|
21,206
|
|
617
|
|
(17,053
|
)
|
650
|
|
Interest expense (income)
|
|
16,824
|
|
6,759
|
|
(516
|
)
|
(16,437
|
)
|
6,630
|
|
(Loss) earnings from continuing operations before
income taxes
|
|
(15,985
|
)
|
23,416
|
|
1,714
|
|
|
|
9,145
|
|
Income tax (benefit) expense
|
|
(6,173
|
)
|
8,979
|
|
665
|
|
|
|
3,471
|
|
Equity in earnings of subsidiaries
|
|
15,517
|
|
|
|
|
|
(15,517
|
)
|
|
|
Net earnings from continuing operations
|
|
5,705
|
|
14,437
|
|
1,049
|
|
(15,517
|
)
|
5,674
|
|
Discontinued operations, net of tax
|
|
13
|
|
31
|
|
|
|
|
|
44
|
|
Net earnings
|
|
$
|
5,718
|
|
$
|
14,468
|
|
$
|
1,049
|
|
$
|
(15,517
|
)
|
$
|
5,718
|
|
|
|
|
|
Subsidiary
|
|
Subsidiary Non-
|
|
Consolidation /
|
|
|
|
Thirteen Weeks Ended October 31, 2009
|
|
Pep Boys
|
|
Guarantors
|
|
Guarantors
|
|
Elimination
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise Sales
|
|
$
|
127,689
|
|
$
|
251,171
|
|
$
|
|
|
$
|
|
|
$
|
378,860
|
|
Service Revenue
|
|
32,813
|
|
60,970
|
|
|
|
|
|
93,783
|
|
Other Revenue
|
|
|
|
|
|
5,723
|
|
(5,723
|
)
|
|
|
Total Revenues
|
|
160,502
|
|
312,141
|
|
5,723
|
|
(5,723
|
)
|
472,643
|
|
Costs of Merchandise Sales
|
|
91,008
|
|
179,003
|
|
|
|
(407
|
)
|
269,604
|
|
Costs of Service Revenue
|
|
28,607
|
|
56,201
|
|
|
|
(38
|
)
|
84,770
|
|
Costs of Other Revenue
|
|
|
|
|
|
4,270
|
|
(4,270
|
)
|
|
|
Total Costs of Revenues
|
|
119,615
|
|
235,204
|
|
4,270
|
|
(4,715
|
)
|
354,374
|
|
Gross Profit from Merchandise Sales
|
|
36,681
|
|
72,168
|
|
|
|
407
|
|
109,256
|
|
Gross Profit from Service Revenue
|
|
4,206
|
|
4,769
|
|
|
|
38
|
|
9,013
|
|
Gross Profit from Other Revenue
|
|
|
|
|
|
1,453
|
|
(1,453
|
)
|
|
|
Total Gross Profit
|
|
40,887
|
|
76,937
|
|
1,453
|
|
(1,008
|
)
|
118,269
|
|
Selling, General and Administrative Expenses
|
|
39,249
|
|
71,841
|
|
79
|
|
(1,624
|
)
|
109,545
|
|
Net Gain from Dispositions of Assets
|
|
877
|
|
455
|
|
|
|
|
|
1,332
|
|
Operating Profit
|
|
2,515
|
|
5,551
|
|
1,374
|
|
616
|
|
10,056
|
|
Non-Operating (Expense) Income
|
|
(3,650
|
)
|
21,650
|
|
616
|
|
(17,892
|
)
|
724
|
|
Interest Expense (Income)
|
|
17,280
|
|
7,440
|
|
(522
|
)
|
(17,276
|
)
|
6,922
|
|
(Loss) Earnings from Continuing Operations Before
Income Taxes
|
|
(18,415
|
)
|
19,761
|
|
2,512
|
|
|
|
3,858
|
|
Income Tax (Benefit) Expense
|
|
(6,760
|
)
|
7,208
|
|
1,053
|
|
|
|
1,501
|
|
Equity in Earnings of Subsidiaries
|
|
13,791
|
|
|
|
|
|
(13,791
|
)
|
|
|
Net Earnings from Continuing Operations
|
|
2,136
|
|
12,553
|
|
1,459
|
|
(13,791
|
)
|
2,357
|
|
Discontinued Operations, Net of Tax
|
|
(12
|
)
|
(221
|
)
|
|
|
|
|
(233
|
)
|
Net Earnings
|
|
$
|
2,124
|
|
$
|
12,332
|
|
$
|
1,459
|
|
$
|
(13,791
|
)
|
$
|
2,124
|
|
17
Table of Contents
|
|
|
|
Subsidiary
|
|
Subsidiary Non-
|
|
Consolidation /
|
|
|
|
Thirty-nine Weeks Ended October 30, 2010
|
|
Pep Boys
|
|
Guarantors
|
|
Guarantors
|
|
Elimination
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
$
|
421,160
|
|
$
|
792,576
|
|
$
|
|
|
$
|
|
|
$
|
1,213,736
|
|
Service revenue
|
|
107,616
|
|
189,900
|
|
|
|
|
|
297,516
|
|
Other revenue
|
|
|
|
|
|
17,208
|
|
(17,208
|
)
|
|
|
Total revenues
|
|
528,776
|
|
982,476
|
|
17,208
|
|
(17,208
|
)
|
1,511,252
|
|
Costs of merchandise sales
|
|
296,773
|
|
550,298
|
|
|
|
(1,223
|
)
|
845,848
|
|
Costs of service revenue
|
|
94,316
|
|
173,250
|
|
|
|
(114
|
)
|
267,452
|
|
Costs of other revenue
|
|
|
|
|
|
16,628
|
|
(16,628
|
)
|
|
|
Total costs of revenues
|
|
391,089
|
|
723,548
|
|
16,628
|
|
(17,965
|
)
|
1,113,300
|
|
Gross profit from merchandise sales
|
|
124,387
|
|
242,278
|
|
|
|
1,223
|
|
367,888
|
|
Gross profit from service revenue
|
|
13,300
|
|
16,650
|
|
|
|
114
|
|
30,064
|
|
Gross profit from other revenue
|
|
|
|
|
|
580
|
|
(580
|
)
|
|
|
Total gross profit
|
|
137,687
|
|
258,928
|
|
580
|
|
757
|
|
397,952
|
|
Selling, general and administrative expenses
|
|
118,983
|
|
217,431
|
|
258
|
|
(1,092
|
)
|
335,580
|
|
Net gain from dispositions of assets
|
|
1,975
|
|
628
|
|
|
|
|
|
2,603
|
|
Operating profit
|
|
20,679
|
|
42,125
|
|
322
|
|
1,849
|
|
64,975
|
|
Non-operating (expense) income
|
|
(12,533
|
)
|
61,727
|
|
1,850
|
|
(49,189
|
)
|
1,855
|
|
Interest expense (income)
|
|
49,176
|
|
19,610
|
|
(1,565
|
)
|
(47,340
|
)
|
19,881
|
|
(Loss) earnings from continuing operations before
income taxes
|
|
(41,030
|
)
|
84,242
|
|
3,737
|
|
|
|
46,949
|
|
Income tax (benefit) expense
|
|
(16,029
|
)
|
32,884
|
|
1,461
|
|
|
|
18,316
|
|
Equity in earnings of subsidiaries
|
|
53,295
|
|
|
|
|
|
(53,295
|
)
|
|
|
Net earnings from continuing operations
|
|
28,294
|
|
51,358
|
|
2,276
|
|
(53,295
|
)
|
28,633
|
|
Discontinued operations, net of tax
|
|
(28
|
)
|
(339
|
)
|
|
|
|
|
(367
|
)
|
Net earnings
|
|
$
|
28,266
|
|
$
|
51,019
|
|
$
|
2,276
|
|
$
|
(53,295
|
)
|
$
|
28,266
|
|
|
|
|
|
Subsidiary
|
|
Subsidiary Non-
|
|
Consolidation /
|
|
|
|
Thirty-nine Weeks Ended October 31, 2009
|
|
Pep Boys
|
|
Guarantors
|
|
Guarantors
|
|
Elimination
|
|
Consolidated
|
|
Merchandise Sales
|
|
$
|
397,677
|
|
$
|
771,431
|
|
$
|
|
|
$
|
|
|
$
|
1,169,108
|
|
Service Revenue
|
|
101,672
|
|
187,262
|
|
|
|
|
|
288,934
|
|
Other Revenue
|
|
|
|
|
|
17,168
|
|
(17,168
|
)
|
|
|
Total Revenues
|
|
499,349
|
|
958,693
|
|
17,168
|
|
(17,168
|
)
|
1,458,042
|
|
Costs of Merchandise Sales
|
|
282,482
|
|
545,170
|
|
|
|
(1,223
|
)
|
826,429
|
|
Costs of Service Revenue
|
|
86,371
|
|
169,296
|
|
|
|
(114
|
)
|
255,553
|
|
Costs of Other Revenue
|
|
|
|
|
|
16,412
|
|
(16,412
|
)
|
|
|
Total Costs of Revenues
|
|
368,853
|
|
714,466
|
|
16,412
|
|
(17,749
|
)
|
1,081,982
|
|
Gross Profit from Merchandise Sales
|
|
115,195
|
|
226,261
|
|
|
|
1,223
|
|
342,679
|
|
Gross Profit from Service Revenue
|
|
15,301
|
|
17,966
|
|
|
|
114
|
|
33,381
|
|
Gross Profit from Other Revenue
|
|
|
|
|
|
756
|
|
(756
|
)
|
|
|
Total Gross Profit
|
|
130,496
|
|
244,227
|
|
756
|
|
581
|
|
376,060
|
|
Selling, General and Administrative Expenses
|
|
116,471
|
|
211,643
|
|
234
|
|
(1,268
|
)
|
327,080
|
|
Net Gain from Dispositions of Assets
|
|
891
|
|
428
|
|
|
|
|
|
1,319
|
|
Operating Profit
|
|
14,916
|
|
33,012
|
|
522
|
|
1,849
|
|
50,299
|
|
Non-Operating (Expense) Income
|
|
(11,700
|
)
|
64,429
|
|
1,855
|
|
(52,918
|
)
|
1,666
|
|
Interest Expense (Income)
|
|
45,680
|
|
22,278
|
|
(1,565
|
)
|
(51,069
|
)
|
15,324
|
|
(Loss) Earnings from Continuing Operations Before
Income Taxes
|
|
(42,464
|
)
|
75,163
|
|
3,942
|
|
|
|
36,641
|
|
Income Tax (Benefit) Expense
|
|
(17,865
|
)
|
31,569
|
|
1,659
|
|
|
|
15,363
|
|
Equity in Earnings of Subsidiaries
|
|
45,372
|
|
|
|
|
|
(45,372
|
)
|
|
|
Net Earnings from Continuing Operations
|
|
20,773
|
|
43,594
|
|
2,283
|
|
(45,372
|
)
|
21,278
|
|
Discontinued Operations, Net of Tax
|
|
(5
|
)
|
(505
|
)
|
|
|
|
|
(510
|
)
|
Net Earnings
|
|
$
|
20,768
|
|
$
|
43,089
|
|
$
|
2,283
|
|
$
|
(45,372
|
)
|
$
|
20,768
|
|
18
Table
of Contents
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
(dollars
in thousands)
(unaudited)
Thirty-nine Weeks Ended October 30, 2010
|
|
Pep Boys
|
|
Subsidiary
Guarantors
|
|
Subsidiary Non-
Guarantors
|
|
Consolidation /
Elimination
|
|
Consolidated
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
28,266
|
|
$
|
51,019
|
|
$
|
2,276
|
|
$
|
(53,295
|
)
|
$
|
28,266
|
|
Adjustments to reconcile net earnings to net cash
(used in) provided by continuing operations
|
|
(24,436
|
)
|
31,651
|
|
476
|
|
51,447
|
|
59,138
|
|
Changes in operating assets and liabilities
|
|
21,750
|
|
(1,148
|
)
|
(15,945
|
)
|
|
|
4,657
|
|
Net cash provided by (used in) continuing
operations
|
|
25,580
|
|
81,522
|
|
(13,193
|
)
|
(1,848
|
)
|
92,061
|
|
Net cash used in discontinued operations
|
|
(30
|
)
|
(1,233
|
)
|
|
|
|
|
(1,263
|
)
|
Net cash provided by (used in) operating
activities
|
|
25,550
|
|
80,289
|
|
(13,193
|
)
|
(1,848
|
)
|
90,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations
|
|
(23,593
|
)
|
(17,814
|
)
|
|
|
|
|
(41,407
|
)
|
Net cash provided by discontinued operations
|
|
|
|
569
|
|
|
|
|
|
569
|
|
Net cash used in investing activities
|
|
(23,593
|
)
|
(17,245
|
)
|
|
|
|
|
(40,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities
|
|
27,971
|
|
(31,882
|
)
|
20,030
|
|
1,848
|
|
17,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
29,928
|
|
31,162
|
|
6,837
|
|
|
|
67,927
|
|
Cash and cash equivalents at beginning of period
|
|
25,844
|
|
10,279
|
|
3,203
|
|
|
|
39,326
|
|
Cash and cash equivalents at end of period
|
|
$
|
55,772
|
|
$
|
41,441
|
|
$
|
10,040
|
|
$
|
|
|
$
|
107,253
|
|
Thirty-Nine Weeks Ended October 31, 2009
|
|
Pep Boys
|
|
Subsidiary
Guarantors
|
|
Subsidiary Non-
Guarantors
|
|
Consolidation /
Elimination
|
|
Consolidated
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
$
|
20,768
|
|
$
|
43,089
|
|
$
|
2,283
|
|
$
|
(45,372
|
)
|
$
|
20,768
|
|
Adjustments to Reconcile Net Earnings to Net Cash
Provided by (Used in) Continuing Operations
|
|
(30,554
|
)
|
35,260
|
|
1,360
|
|
43,523
|
|
49,589
|
|
Changes in operating assets and liabilities
|
|
29,151
|
|
(1,436
|
)
|
(15,517
|
)
|
|
|
12,198
|
|
Net cash provided by (used in) continuing
operations
|
|
19,365
|
|
76,913
|
|
(11,874
|
)
|
(1,849
|
)
|
82,555
|
|
Net cash used in discontinued operations
|
|
(5
|
)
|
(589
|
)
|
|
|
|
|
(594
|
)
|
Net Cash Provided by (Used in) Operating
Activities
|
|
19,360
|
|
76,324
|
|
(11,874
|
)
|
(1,849
|
)
|
81,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations
|
|
(11,144
|
)
|
(7,648
|
)
|
|
|
|
|
(18,792
|
)
|
Net cash provided by discontinued operations
|
|
|
|
1,762
|
|
|
|
|
|
1,762
|
|
Net Cash Used in Investing Activities
|
|
(11,144
|
)
|
(5,886
|
)
|
|
|
|
|
(17,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used In) Financing
Activities
|
|
5,066
|
|
(68,097
|
)
|
15,762
|
|
1,849
|
|
(45,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents
|
|
13,282
|
|
2,341
|
|
3,888
|
|
|
|
19,511
|
|
Cash and Cash Equivalents at Beginning of Period
|
|
12,753
|
|
6,393
|
|
2,186
|
|
|
|
21,332
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
26,035
|
|
$
|
8,734
|
|
$
|
6,074
|
|
$
|
|
|
$
|
40,843
|
|
19
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 third fiscal quarter and
the first nine months of 2010 and 2009 and significant developments affecting
our financial condition for the first nine months of 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 being 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 11 locations.
We also opened four new Supercenters including two smaller prototypes (14,000
sq. feet) in fiscal 2010. We are targeting a total of 35 new locations in
fiscal 2010 and 55 in fiscal 2011. As of October 30, 2010, we operated 557
Supercenters and 36 Service & Tire Centers, as well as nine legacy Pep
Boys Express (retail only) stores throughout 35 states and Puerto Rico.
EXECUTIVE SUMMARY
Net earnings for the third quarter
of 2010 were $5.7 million, a $3.6 million improvement over the $2.1 million
reported for the third 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 a minimal increase in selling, general and
administrative expenses.
Our diluted earnings per share for
the third quarter and first nine months of 2010 were $0.11 and $0.53,
respectively, an improvement of $0.07 and $0.13 over the $0.04 and $0.40
recorded for the corresponding periods of 2009.
Total revenue increased for the
third quarter and first nine months of 2010 by 5.0% and 3.6%, respectively, as
compared to the same periods of the prior year. For the third quarter of 2010,
comparable store sales (sales generated by locations in operation during the
same period) increased by 3.5% compared to an increase of 1.6% for the prior
year quarter. This increase in comparable store sales included a 3.9% increase
in comparable store merchandise sales and a 1.9% increase in comparable store
service revenue. For the first nine months of 2010, our comparable store sales
increased by 2.2% compared to a decrease of 0.4% for the prior year period.
This increase in comparable store sales included a 2.7% increase in comparable
store merchandise sales and a 0.4% increase in comparable store service
revenue.
Various economic factors affect
both our consumers and our industry. Sales of non-discretionary product
categories are primarily impacted by miles driven, which have returned to
pre-recession low single-digit growth rates from February 2010 through September 2010
(latest publicly available information), in part due to lower gasoline prices.
Given the uncertainty of gasoline prices, we cannot predict whether gasoline
prices will increase or decrease in the future, nor can we predict how any
future changes in gasoline prices will impact miles driven in future periods.
In addition, we believe that continued high unemployment, the recent recession
and the credit crisis have also benefited our non-discretionary product
categories as customers have focused on maintaining their existing vehicles
rather than purchasing new vehicles. However, these same trends have negatively
impacted sales in our discretionary product categories like accessories and
complementary merchandise, although the rate of decline has moderated
significantly since the beginning of fiscal 2010 and were flat in the current
year third quarter as compared to the corresponding period of the prior year.
We continue to focus on refining
and expanding our parts assortment to improve our in-stock position, improving
execution and the customer experience, utilizing television and radio
advertising to communicate our value offerings and growing our rewards program
to build customer loyalty and drive repeat business. We believe these efforts
are responsible for increased customer traffic in our stores in all lines of
business for the third quarter and first nine months of 2010.
20
Table of Contents
RESULTS OF OPERATIONS
The following discussion explains
the material changes in our results of operations.
Analysis of Statement of
Operations
Thirteen weeks ended October 30,
2010 vs. Thirteen weeks ended October 31, 2009
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
|
|
October 30, 2010
(Fiscal 2010)
|
|
October 31, 2009
(Fiscal 2009)
|
|
Favorable
(Unfavorable)
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
80.3
|
%
|
80.2
|
%
|
5.1
|
%
|
Service revenue (1)
|
|
19.7
|
|
19.8
|
|
4.5
|
|
Total revenues
|
|
100.0
|
|
100.0
|
|
5.0
|
|
Costs of merchandise sales (2)
|
|
70.2
|
(3)
|
71.2
|
(3)
|
(3.7
|
)
|
Costs of service revenue (2)
|
|
92.7
|
(3)
|
90.4
|
(3)
|
(7.1
|
)
|
Total costs of revenues
|
|
74.6
|
|
75.0
|
|
(4.6
|
)
|
Gross profit from merchandise sales
|
|
29.8
|
(3)
|
28.8
|
(3)
|
8.6
|
|
Gross profit from service revenue
|
|
7.3
|
(3)
|
9.6
|
(3)
|
(20.4
|
)
|
Total gross profit
|
|
25.4
|
|
25.0
|
|
6.4
|
|
Selling, general and administrative expenses
|
|
22.3
|
|
23.2
|
|
(1.2
|
)
|
Net gain (loss) from dispositions of assets
|
|
|
|
0.3
|
|
(91.8
|
)
|
Operating profit
|
|
3.0
|
|
2.1
|
|
50.4
|
|
Non-operating income
|
|
0.1
|
|
0.2
|
|
(10.2
|
)
|
Interest expense
|
|
1.3
|
|
1.5
|
|
4.2
|
|
Earnings from continuing operations before income
taxes
|
|
1.8
|
|
0.8
|
|
137.0
|
|
Income tax expense
|
|
38.0
|
(4)
|
38.9
|
(4)
|
(131.2
|
)
|
Earnings from continuing operations
|
|
1.1
|
|
0.5
|
|
140.7
|
|
Discontinued operations, net of tax
|
|
|
|
|
|
118.9
|
|
Net Earnings
|
|
1.2
|
|
0.4
|
|
169.2
|
|
(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.
|
Total revenue and comparable store
sales for the third quarter of 2010 increased 5.0% and 3.5%, respectively, as
compared to the third quarter of 2009. Total revenue for the third quarter of
2010 increased by $23.7 million to $496.4 million from $472.6 million in the
third quarter of 2009. The 3.5% increase in comparable store sales consisted of
increases of 3.9% in comparable store merchandise sales and 1.9% in comparable
store service revenue. While our total revenue figures were favorably impacted
by the opening of 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 $7.2 million of total revenue
in the third quarter of 2010 as compared to the third quarter of 2009. Total
comparable store sales increased due to growth in customer counts in all three
lines of business combined with an increase in the average transaction amount
per customer.
Total merchandise sales increased
5.1%, or $19.5 million, to $398.4 million in the third quarter of fiscal 2010,
compared to $378.9 million during the prior year quarter. Comparable store
merchandise sales increased 3.9%, or $14.7 million, as compared to the prior
21
Table of Contents
year quarter, driven primarily by a
higher average transaction amount per customer combined with an increase in
comparable store customer count. The balance of the increase in merchandise
sales was due to the contribution from our new stores. Total service revenue
increased 4.5% to $98.0 million in the third quarter of 2010 from the $93.8
million recorded in the prior year quarter. Comparable store service revenue
increased 1.9% due to higher customer counts partially offset by a decrease in
average transaction amount per customer. The remaining increase in service
revenue was due to the contribution from our new stores which accounted for an
additional $2.4 million of service revenue.
In the third quarter of 2010,
comparable store customer counts increased versus the third quarter of 2009 due
to our traffic-driving promotional events and rewards program, and customer
receptiveness to our improved in-stock position and better store execution. We
also experienced a 5.0% increase in comparable store sales of our core
automotive parts categories which make up approximately 81% of our merchandise
sales. Sales of our discretionary product categories were relatively flat as
compared to the prior year quarter. We believe that utilizing innovative
marketing programs to communicate our value-priced, differentiated merchandise
assortment will continue to drive increased customer counts and that our
continued focus on delivering a better customer experience than our competitors
will convert those increased customer counts into sales improvements
consistently over all lines of business.
Gross profit from merchandise sales
increased by $9.4 million, or 8.6%, to $118.7 million for the third quarter of
2010 from $109.3 million in the third quarter of 2009. Gross profit margin from
merchandise sales increased to 29.8% for the third quarter of 2010 from 28.8%
for the third quarter of 2009. Gross profit from merchandise sales for the third
quarter of 2009 included an asset impairment charge of $2.4 million, offset by
the reversal of inventory related accruals of $1.0 million and a gain from an
insurance settlement of $0.6 million. Excluding these adjustments, gross profit
margin from merchandise sales increased to 29.8% from 29.1% in the prior year
quarter. The increase in gross profit margins was primarily due to increased
merchandise sales which resulted in higher absorption of occupancy costs such
as rent and utilities, improved inventory shrinkage, and lower defective
product expense, slightly offset by higher in-bound freight costs.
Gross profit from service revenue
decreased by $1.8 million, or 20.4%, to $7.2 million in the third quarter of
2010 from $9.0 million recorded in the third quarter of 2009. Gross profit
margin from service revenue decreased to 7.3% for the third quarter of 2010
from 9.6% for the prior year quarter. Gross profit from service revenue for the
third quarter of 2009 included an asset impairment charge of $0.7 million.
Excluding this adjustment, gross profit margin from service revenue decreased
to 7.3% for the third quarter of 2010
from 10.3% in the prior year quarter. The decrease in gross profit was
due to higher payroll and related expenses, including health insurance costs,
state payroll taxes and workers compensation claims, which increased by 131
basis points as compared to the prior year quarter. In addition, there was an
unfavorable impact on gross profit from service revenue due to our new Service &
Tire Centers, which are in their ramp up stage for sales while incurring the
full amount of fixed expenses, including payroll and occupancy costs (includes
such items as rent, utilities and building maintenance). Our new Service &
Tire Centers negatively impacted gross margins by 149 basis points in the third
quarter of 2010 as compared to prior
year third quarter.
Selling, general and administrative
expenses as a percentage of total revenues decreased to 22.3% for the third
quarter of 2010 from 23.2% for the third quarter of 2009. Selling, general and
administrative expenses increased $1.3 million, or 1.2%, to $110.8 million in
the third quarter of 2010 from $109.5 million in the prior year quarter. The
reduction as a percentage of sales reflects improved leverage of selling,
general and administrative expenses achieved through increased sales in the
third quarter of 2010.
Net gains from the disposition of
assets declined by $1.2 million to $0.1 million in the third quarter of 2010
from $1.3 million in the prior year quarter. The third quarter of 2009 included
gains of $1.3 million from the sale and leaseback of three stores.
Interest expense declined by $0.3
million to $6.6 million in the third quarter of 2010 compared to $6.9 million
in the third quarter of 2009.
Our income tax expense for the
third quarter of 2010 was $3.5 million, or an effective rate of 38.0%, as
compared to an expense of $1.5 million, or an effective rate of 38.9%, for the
third 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 $5.7 million in the third quarter of 2010 as compared
to net earnings of $2.1 million in the prior year period. Our basic and diluted
earnings per share were $0.11 for the third quarter of 2010, as compared to
$0.04 for the prior year quarter.
22
Table of Contents
Thirty-nine weeks ended October 30,
2010 vs. Thirty-nine weeks ended October 31, 2009
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
|
|
Thirty-nine weeks ended
|
|
October 30, 2010
(Fiscal 2010)
|
|
October 31, 2009
(Fiscal 2009)
|
|
Favorable
(Unfavorable)
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
80.3
|
%
|
80.2
|
%
|
3.8
|
%
|
Service revenue (1)
|
|
19.7
|
|
19.8
|
|
3.0
|
|
Total revenues
|
|
100.0
|
|
100.0
|
|
3.6
|
|
Costs of merchandise sales (2)
|
|
69.7
|
(3)
|
70.7
|
(3)
|
(2.3
|
)
|
Costs of service revenue (2)
|
|
89.9
|
(3)
|
88.4
|
(3)
|
(4.7
|
)
|
Total costs of revenues
|
|
73.7
|
|
74.2
|
|
(2.9
|
)
|
Gross profit from merchandise sales
|
|
30.3
|
(3)
|
29.3
|
(3)
|
7.4
|
|
Gross profit from service revenue
|
|
10.1
|
(3)
|
11.6
|
(3)
|
(9.9
|
)
|
Total gross profit
|
|
26.3
|
|
25.8
|
|
5.8
|
|
Selling, general and administrative expenses
|
|
22.2
|
|
22.4
|
|
(2.6
|
)
|
Net gain (loss) from dispositions of assets
|
|
0.2
|
|
0.1
|
|
97.3
|
|
Operating profit
|
|
4.3
|
|
3.4
|
|
29.2
|
|
Non-operating income
|
|
0.1
|
|
0.1
|
|
11.3
|
|
Interest expense
|
|
1.3
|
|
1.1
|
|
(29.7
|
)
|
Earnings from continuing operations before income
taxes
|
|
3.1
|
|
2.5
|
|
28.1
|
|
Income tax expense
|
|
39.0
|
(4)
|
41.9
|
(4)
|
(19.2
|
)
|
Earnings from continuing operations
|
|
1.9
|
|
1.5
|
|
34.6
|
|
Discontinued operations, net of tax
|
|
|
|
|
|
28.0
|
|
Net Earnings
|
|
1.9
|
|
1.4
|
|
36.1
|
|
(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.
|
Total revenue and comparable store
sales for the first nine months of 2010 increased 3.6% and 2.2%, respectively,
as compared to the first nine months of 2009. The 2.2% increase in comparable
store sales consisted of increases of 2.7% in comparable store merchandise
sales and 0.4% in comparable store service revenue. While our total revenue
figures were favorably impacted by the opening of 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 $21.0 million of total revenue
in the first nine months of 2010 as compared to the prior year period. Total
comparable store sales increased due to growth in customer counts in all three
lines of business combined with an increase in the average transaction amount.
Gross profit from merchandise sales
increased by $25.2 million, or 7.4%, to $367.9 million for the first nine
months of 2010 from $342.7 million in the first nine months of 2009. Gross
profit margin from merchandise sales increased to 30.3% from 29.3% in the prior
year period. The increase in gross profit margin was primarily due to lower
inventory shrinkage and lower defective product expenses.
Gross profit from service revenue
decreased by $3.3 million, or 9.9%, to $30.1 million in the first nine months of
2010 from $33.4 million in the first nine months of 2009. Gross profit margin
from service revenue decreased to 10.1% for the first nine months of 2010 from
11.6% for the prior year period. The decrease in gross profit was primarily due
to higher payroll and related expenses and occupancy costs (rent, utilities and
building maintenance), which increased by 140 basis points combined as compared
to the prior
23
Table of Contents
year period, incurred at our new
Service & Tire Centers. Excluding the impact of the new Service &
Tire Centers, which are in their ramp up stage for sales while incurring the
full amount of fixed expenses, margins remained relatively flat period over
period.
Selling, general and administrative
expenses as a percentage of total revenues decreased to 22.2% for the first
nine months of 2010 from 22.4% for the first nine months of 2009. Selling,
general and administrative expenses increased $8.5 million, or 2.6%, over the
amount recorded in the first nine months of 2009. The increase was primarily
due to higher payroll and related benefits expense of $6.8 million and
increased media expense of $1.5 million.
Net gains from the disposition of
assets increased by $1.3 million to $2.6 million in the first nine months of
2010 from $1.3 million in the first nine months of 2009. The current year
includes $2.1 million in net settlement proceeds from the disposition of a previously
closed property, while the prior year period reflects gains of $1.3 million
from the sale and leaseback of three stores.
Interest expense for the first nine
months of 2010 was $19.9 million, an increase of $4.6 million compared to the
first nine months of 2009. The prior year included a $6.2 million gain
resulting from the retirement of debt. Excluding this gain, interest expense
declined period over period, by $1.7 million due to reduced debt levels.
Our income tax expense for the
first nine months of 2010 was $18.3 million, or an effective rate of 39.0%, as
compared to an expense of $15.4 million, or an effective rate of 41.9%, for the
first nine months of 2009. The change was primarily due to release of valuation
reserves on certain unitary state net operating loss carryforwards as a result
of our improved profitability. The annual rate is dependent 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 $28.3 million in the first nine months of 2010 as
compared to net earnings of $20.8 million in the first nine months of 2009. Our
diluted earnings per share was $0.53 for the first nine months of 2010 as compared
to $0.40 for the prior year period.
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.
The following table presents the
revenues and gross profit for each area of our business:
|
|
Thirteen Weeks Ended
|
|
Thirty-nine Weeks Ended
|
|
|
|
October 30,
|
|
October 31,
|
|
October 30,
|
|
October 31,
|
|
(Dollar amounts in thousands)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Retail Sales (1)
|
|
$
|
256,862
|
|
$
|
246,275
|
|
$
|
795,373
|
|
$
|
770,121
|
|
Service Center Revenue (2)
|
|
239,502
|
|
226,368
|
|
715,879
|
|
687,921
|
|
Total revenues
|
|
$
|
496,364
|
|
$
|
472,643
|
|
$
|
1,511,252
|
|
$
|
1,458,042
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit from Retail Sales (3)
|
|
$
|
73,954
|
|
$
|
65,846
|
|
$
|
232,538
|
|
$
|
210,147
|
|
Gross profit from Service Center Revenue (3)
|
|
51,902
|
|
52,423
|
|
165,414
|
|
165,913
|
|
Total gross profit
|
|
$
|
125,856
|
|
$
|
118,269
|
|
$
|
397,952
|
|
$
|
376,060
|
|
(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.
24
Table
of Contents
CAPITAL AND LIQUIDITY
Our cash requirements arise
principally from (1) the purchase of inventory and capital expenditures
related to existing and new stores, offices and distribution centers, (2) debt
service and (3) 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 $90.8
million in the first nine months of 2010, as compared to $82.0 million in the
prior year period. The $8.8 million improvement from the prior year period was
due to increased net earnings (net of non-cash adjustments) of $17.0 million,
partially offset by an unfavorable change in operating assets and liabilities
of $7.5 million and an increase in cash used in discontinued operations of $0.7
million. The change in operating assets and liabilities was primarily due to
unfavorable changes in inventory net of accounts payable of $5.3 million and in
other long term liabilities of $4.4 million. However, after taking into
consideration changes in our trade payable program liability (shown as cash
flows from financing activities on the condensed consolidated statements of
cash flows), inventory net of accounts payable improved by $23.1 million
primarily due to increased inventory purchases and an improvement in our vendor
trade payable terms. The ratio of accounts payable, including our trade payable
program, to inventory was 46.6% at October 30, 2010, and 43.0% at October 31,
2009. The change in other long-term liabilities was due to a discretionary
contribution to our defined benefit pension plan of $5.0 million (see Note 12
to the condensed consolidated financial statements).
Cash used in investing activities
was $40.8 million in the first nine months of 2010 as compared to $17.0 million
in the prior year period. During the first nine months of 2010, we sold five
properties classified as held for disposal for net proceeds of $3.5 million, of
which $0.6 million is included in discontinued operations, completed one sale
leaseback transaction for net proceeds of $1.6 million and received $2.1 million
in net settlement proceeds from the disposition of a previously closed
property. During the first nine months of 2009, we sold three properties
classified as held for disposal for net proceeds of $2.8 million, of which $1.8
million is reported in discontinued operations, and completed three sale
leaseback transactions for net proceeds of $11.0 million. Capital expenditures
in the first nine months of 2010 increased by $15.2 million, to $43.0 million,
from $27.8 million in the prior year period. Capital expenditures for the
current year were for improvements of our existing stores, offices,
distribution centers and for the opening of the new facilities. During the
third quarter of 2010, we invested $5.0 million in a restricted account as
collateral for retained liabilities included within existing insurance programs
in lieu of previously outstanding letters of credit.
Our targeted capital expenditures
for fiscal 2010 are $80.0 million. Our fiscal year 2010 capital expenditures
include the addition of approximately 35 new locations and required
expenditures for our existing stores, offices and distribution centers. These
expenditures are expected to be funded by cash on hand and net cash generated
from operating activities. Additional capacity, if needed, exists under our
existing line of credit.
In the first nine months of 2010,
cash provided by financing activities was $18.0 million, as compared to cash
used in financing of $45.4 million in the prior year period. The $63.4 million
improvement was primarily due to increased net borrowings under our trade
payable program of $28.4 million. This program is funded by various bank
participants who have the ability, but not the obligation, to purchase,
directly from our vendors, account receivables owed by Pep Boys. In the current
year, we increased the availability under this financing program to $80.0
million from $50.0 million and as of October 30, 2010, January 30,
2010 and October 31, 2009, we had an outstanding balance of $57.0 million,
$34.1 million and $26.5 million, respectively, (classified as trade payable
program liability on the condensed consolidated balance sheet). Additionally,
in the first nine months of 2009, we repurchased $17.0 million of our
outstanding 7.5% Senior Subordinated Notes for $10.7 million and repaid $23.9
million of borrowings under our revolving credit agreement.
We anticipate that cash on hand and
cash generated by operating activities will exceed our expected cash
requirements in fiscal year 2010. In addition, we expect to have excess
availability under our existing revolving credit agreement during the entirety
of fiscal year 2010. As of October 30, 2010, we had zero drawn on our
revolving credit facility and maintained undrawn availability of $139.5
million.
Our working capital was $235.0
million and $205.5 million at October 30, 2010 and January 30, 2010,
respectively. Our long-term debt, as a percentage of our total capitalization,
was 39.4% and 40.9% at October 30, 2010 and January 30, 2010,
respectively.
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NEW ACCOUNTING STANDARDS
In October 2009, the Financial
Accounting Standards Board (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 for
requirements effective December 15, 2009 did not have a material impact on
the Companys consolidated financial statements. The Company does not believe
the adoption of those requirements of ASU 2010-06 which are effective for
periods beginning after December 15, 2010 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, 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.
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.
26
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Item 3. Quantitative and
Qualitative Disclosures About Market Risk
Our primary market risk exposure
with regard to financial instruments is due 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 October 30, 2010 we had no borrowings under this facility.
Additionally, we have a $148.9 million Senior Secured Term Loan 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 also have a fuel hedge which is intended to
maintain a fixed price for retail gasoline through January 31, 2011. This
is also designated as a cash flow hedge. We record the effective portion of the
changes in fair value through accumulated other comprehensive loss.
The fair value of the derivatives
was $19.4 million and $16.4 million payable at October 30, 2010 and
January 30, 2010, respectively. Of the $3.0 million increase in the
liabilities during the thirty-nine weeks ended October 30, 2010, $1.9
million net of tax was recorded to accumulated other comprehensive loss on the
condensed consolidated balance sheet.
27
Table
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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, 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the fourth quarter of
fiscal 2008, the United States Environmental Protection Agency (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. During the
second quarter of fiscal 2010, the Company reversed the remaining $1.0 million
of the inventory accrual as the Company reached an agreement with the
merchandise vendor to cover the entire cost of retrofitting a portion of the
remaining subject merchandise and to accept the balance of the subject
inventory for return for full credit. During the second quarter of fiscal 2010,
the formal settlement agreement between the Company and the EPA became
effective and the Company paid the monetary penalty.
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
28
Table of Contents
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.
29
Table
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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
|
30
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: December 7,
2010
|
by:
|
/s/
Raymond L. Arthur
|
|
|
|
Raymond
L. Arthur
|
|
Executive
Vice President and Chief Financial Officer
(Principal Financial Officer)
|
31
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
|
32
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