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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 31, 2009

 

 

 

OR

 

 

 

o

 

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

 

For the transition period from             to                  

 

Commission File No.  1-3381

 

The Pep Boys - Manny, Moe & Jack

(Exact name of registrant as specified in its charter)

 

Pennsylvania

 

23-0962915

(State or other jurisdiction of

 

(I.R.S. Employer ID number)

incorporation or organization)

 

 

 

 

 

3111 W. Allegheny Ave. Philadelphia, PA

 

19132

(Address of principal executive offices)

 

(Zip code)

 

215-430-9000

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

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

 

As of November 27, 2009, there were 52,349,520 shares of the registrant’s Common Stock outstanding.

 

 

 



Table of Contents

 

Index

 

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements

3

 

 

 

 

Condensed Consolidated Balance Sheets - October 31, 2009 and January 31, 2009

3

 

 

 

 

Condensed Consolidated Statements of Operations and Changes in Retained Earnings - Thirteen and Thirty-Nine Weeks Ended October 31, 2009 and November 1, 2008

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Thirty-Nine Weeks Ended October 31, 2009 and November 1, 2008

5

 

 

 

 

Notes to the Condensed Consolidated Financial Statements

6 - 18

 

 

 

Item 2.

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

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

 

 

 

Item 4.

Controls and Procedures

25

 

 

 

Item 5.

Other Information

25

 

 

 

PART II - OTHER INFORMATION

26

 

 

 

Item 1.

Legal Proceedings

26

 

 

 

Item 1A.

Risk Factors

26

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

 

 

 

Item 3.

Defaults Upon Senior Securities

26

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

26

 

 

 

Item 5.

Other Information

26

 

 

 

Item 6.

Exhibits

27

 

 

 

SIGNATURES

28

 

 

 

INDEX TO EXHIBITS

29

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except share data)

UNAUDITED

 

 

 

October 31,
2009

 

January 31,
2009

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

40,843

 

$

21,332

 

Accounts receivable, less allowance for uncollectible accounts of $1,853 and $1,912

 

20,461

 

28,831

 

Merchandise inventories

 

571,789

 

564,931

 

Prepaid expenses

 

14,946

 

25,390

 

Other

 

50,205

 

62,421

 

Assets held for disposal

 

6,616

 

12,653

 

Total Current Assets

 

704,860

 

715,558

 

 

 

 

 

 

 

Property and Equipment - net

 

708,972

 

740,331

 

Deferred income taxes

 

72,970

 

77,708

 

Other

 

20,118

 

18,792

 

Total Assets

 

$

1,506,920

 

$

1,552,389

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

219,205

 

$

212,340

 

Trade payable program liability

 

26,459

 

31,930

 

Accrued expenses

 

231,468

 

254,754

 

Deferred income taxes

 

39,170

 

35,848

 

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

 

1,079

 

1,453

 

Total Current Liabilities

 

517,381

 

536,325

 

 

 

 

 

 

 

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

 

306,471

 

352,382

 

Other long-term liabilities

 

72,164

 

70,322

 

Deferred gain from asset sales

 

168,243

 

170,204

 

Commitments and Contingencies

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Common Stock, par value $1 per share: Authorized 500,000,000 shares; Issued 68,557,041 shares

 

68,557

 

68,557

 

Additional paid-in capital

 

293,330

 

292,728

 

Retained earnings

 

374,461

 

358,670

 

Accumulated other comprehensive loss

 

(16,739

)

(18,075

)

Less cost of shares in treasury — 14,014,018 shares and 14,124,021 shares

 

217,684

 

219,460

 

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

 

59,264

 

59,264

 

Total Stockholders’ Equity

 

442,661

 

423,156

 

Total Liabilities and Stockholders’ Equity

 

$

1,506,920

 

$

1,552,389

 

 

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 31,
2009

 

November 1,
2008

 

October 31,
2009

 

November 1,
2008

 

Merchandise Sales

 

$

378,860

 

$

378,461

 

$

1,169,108

 

$

1,189,872

 

Service Revenue

 

93,783

 

85,705

 

288,934

 

272,380

 

Total Revenues

 

472,643

 

464,166

 

1,458,042

 

1,462,252

 

Costs of Merchandise Sales

 

269,604

 

268,235

 

826,429

 

838,574

 

Costs of Service Revenue

 

84,770

 

81,087

 

255,553

 

250,434

 

Total Costs of Revenues

 

354,374

 

349,322

 

1,081,982

 

1,089,008

 

Gross Profit from Merchandise Sales

 

109,256

 

110,226

 

342,679

 

351,298

 

Gross Profit from Service Revenue

 

9,013

 

4,618

 

33,381

 

21,946

 

Total Gross Profit

 

118,269

 

114,844

 

376,060

 

373,244

 

Selling, General and Administrative Expenses

 

109,545

 

119,827

 

327,080

 

361,445

 

Net Gain (Loss) from Dispositions of Assets

 

1,332

 

(53

)

1,319

 

9,555

 

Operating Profit (Loss)

 

10,056

 

(5,036

)

50,299

 

21,354

 

Non-operating Income

 

724

 

305

 

1,666

 

1,797

 

Interest Expense

 

6,922

 

7,098

 

15,324

 

18,977

 

Earnings (Loss) From Continuing Operations Before Income Taxes

 

3,858

 

(11,829

)

36,641

 

4,174

 

Income Tax Expense (Benefit)

 

1,501

 

(4,775

)

15,363

 

185

 

Net Earnings (Loss)From Continuing Operations

 

2,357

 

(7,054

)

21,278

 

3,989

 

Discontinued Operations, Net of Tax

 

(233

)

(228

)

(510

)

(1,151

)

Net Earnings (Loss)

 

2,124

 

(7,282

)

20,768

 

2,838

 

 

 

 

 

 

 

 

 

 

 

Retained Earnings, beginning of period

 

373,963

 

408,351

 

358,670

 

406,819

 

Cumulative effect of change in method of accounting for split dollar life insurance, net of tax

 

 

 

 

(1,165

)

Cash Dividends

 

(1,557

)

(3,523

)

(4,709

)

(10,551

)

Dividend Reinvested and Other

 

(69

)

(849

)

(268

)

(1,244

)

Retained Earnings, end of period

 

$

374,461

 

$

396,697

 

$

374,461

 

$

396,697

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings (Loss) Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Earnings (Loss) from Continuing Operations

 

$

0.05

 

$

(0.13

)

$

0.41

 

$

0.08

 

Discontinued Operations, Net of Tax

 

(0.01

)

(0.01

)

(0.01

)

(0.03

)

Basic Earnings (Loss) Per Share

 

$

0.04

 

$

(0.14

)

$

0.40

 

$

0.05

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings (Loss) Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Earnings (Loss) from Continuing Operations

 

$

0.04

 

$

(0.13

)

$

0.40

 

$

0.08

 

Discontinued Operations, Net of Tax

 

 

(0.01

)

 

(0.03

)

Diluted Earnings (Loss) Per Share

 

$

0.04

 

$

(0.14

)

$

0.40

 

$

0.05

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Per Share

 

$

0.0300

 

$

0.0675

 

$

0.0900

 

$

0.2025

 

 

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 31,
2009

 

November 1,
2008

 

 

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net Earnings

 

$

20,768

 

$

2,838

 

Adjustments to reconcile net earnings to net cash provided by (used in) continuing operations:

 

 

 

 

 

Net loss from discontinued operations

 

510

 

1,151

 

Depreciation and amortization

 

53,248

 

55,109

 

Amortization of deferred gain from asset sales

 

(9,186

)

(7,305

)

Stock compensation expense

 

1,930

 

2,314

 

Gain from debt retirement

 

(6,248

)

(3,460

)

Deferred income taxes

 

7,270

 

(3,603

)

Gain from dispositions of assets

 

(1,319

)

(9,555

)

Loss from asset impairment

 

3,117

 

370

 

Other

 

267

 

441

 

Changes in Operating Assets and Liabilities:

 

 

 

 

 

Decrease in accounts receivable, prepaid expenses and other

 

33,241

 

39,759

 

Increase in merchandise inventories

 

(5,806

)

(23,548

)

Increase (decrease) in accounts payable

 

6,455

 

(23,560

)

Decrease in accrued expenses

 

(23,922

)

(37,077

)

Increase (decrease) in other long-term liabilities

 

2,230

 

(3,818

)

Net cash provided by (used in) continuing operations

 

82,555

 

(9,944

)

Net cash used in discontinued operations

 

(594

)

(880

)

Net Cash Provided by (Used in) Operating Activities

 

81,961

 

(10,824

)

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Cash paid for master lease properties

 

 

(117,121

)

Cash paid for property and equipment

 

(27,775

)

(22,653

)

Proceeds from dispositions of assets

 

12,093

 

209,085

 

Acquisition of Florida Tire Inc.

 

(2,610

)

 

Other

 

(500

)

 

Net cash (used in) provided by continuing operations

 

(18,792

)

69,311

 

Net cash provided by discontinued operations

 

1,762

 

2,558

 

Net Cash (Used in) Provided by Investing Activities

 

(17,030

)

71,869

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Borrowings under line of credit agreements

 

244,011

 

99,888

 

Payments under line of credit agreements

 

(267,873

)

(141,413

)

Borrowings on trade payable program liability

 

122,914

 

154,886

 

Payments on trade payable program liability

 

(128,385

)

(130,824

)

Payment for finance issuance cost

 

 

(182

)

Proceeds from lease financing

 

 

8,661

 

Long-term debt and capital lease obligations payments

 

(11,720

)

(24,696

)

Dividends paid

 

(4,709

)

(10,551

)

Other

 

342

 

631

 

Net Cash Used in Financing Activities

 

(45,420

)

(43,600

)

Net Increase in Cash and Cash Equivalents

 

19,511

 

17,445

 

Cash and Cash Equivalents at Beginning of Period

 

21,332

 

20,926

 

Cash and Cash Equivalents at End of Period

 

$

40,843

 

$

38,371

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid for income taxes

 

$

4,046

 

$

1,070

 

Cash paid for interest

 

$

15,492

 

$

17,043

 

Accrued purchases of property and equipment

 

$

1,575

 

$

1,435

 

 

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

(dollar amounts in thousands)

 

NOTE 1. Condensed Consolidated Financial Statements

 

The condensed consolidated balance sheet as of October 31, 2009, the condensed consolidated statements of operations and changes in retained earnings for the thirteen and thirty-nine week periods ended October 31, 2009 and November 1, 2008 and the condensed consolidated statements of cash flows for the thirty-nine week periods ended October 31, 2009 and November 1, 2008 are unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at October 31, 2009 and for all periods presented have been made.

 

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

 

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

 

The Company has evaluated subsequent events and transactions for recognition or disclosure that occurred after the balance sheet date of October 31, 2009, through the filing of these financial statements, which occurred on December 9, 2009.

 

NOTE 2. New Accounting Standards

 

On December 30, 2008 the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP FAS 132(R)-1). This pronouncement provides additional guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan and is effective for fiscal years ending after December 15, 2009. The Company does not expect the adoption of FSP FAS 132(R)-1 to have a material impact on its consolidated financial statements.

 

In October 2009, the FASB issued Accounting Standards Update 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 is currently evaluating the impact ASU 2009-13 will have on its consolidated financial statements.

 

NOTE 3. Business Combinations

 

On October 31, 2009 the Company acquired substantially all of the assets (other than real property) of Florida Tire, Inc. (“Florida Tire”), a privately held automotive service and tire business located in the Orlando Florida area consisting of 10 service locations. The Company agreed to pay up to $4,350 for Florida Tire and assume certain liabilities. The Company has completed the preliminary purchase accounting for the Florida Tire acquisition and has recorded net assets of $4,198, including goodwill of $2,565 and contingent consideration of $1,660 which could result in future payments through November 2013.

 

NOTE 4. Merchandise Inventories

 

Merchandise inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out (LIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected fiscal year-end inventory levels and costs. If the first-in, first-out (FIFO) method of costing inventory had been used by the Company, inventory would have been $508,637 and $493,886 as of October 31, 2009 and January 31, 2009, respectively.

 

6



Table of Contents

 

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

 

The Company also provides for potentially excess and obsolete inventories based on current inventory levels, the historical analysis of product sales and current market conditions. The nature of the Company’s inventory is such that the risk of obsolescence is minimal and excess inventory has historically been returned to the Company’s vendors for credit. The Company records a provision when less than full credit is expected from a vendor or when market is lower than recorded costs. These provisions are reviewed on a quarterly basis for adequacy. The Company’s inventory is recorded net of provisions for these matters, which were $16,424 and $15,874 at October 31, 2009 and January 31, 2009, respectively.

 

NOTE 5. Property and Equipment

 

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

 

(dollar amounts in thousands)

 

October 31,
2009

 

January 31,
2009

 

 

 

 

 

 

 

Property and Equipment - at cost:

 

 

 

 

 

Land

 

$

204,762

 

$

207,608

 

Buildings and improvements

 

822,955

 

822,950

 

Furniture, fixtures and equipment

 

704,446

 

685,707

 

Construction in progress

 

1,795

 

2,576

 

Accumulated depreciation and amortization

 

(1,024,986

)

(978,510

)

Property and Equipment – net

 

$

708,972

 

$

740,331

 

 

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

 

The carrying values of these assets follow:

 

(dollar amounts in thousands)

 

October 31,
2009

 

January 31,
2009

 

 

 

 

 

 

 

Land

 

$

4,331

 

$

7,332

 

Buildings and improvements

 

6,878

 

11,265

 

Accumulated depreciation and amortization

 

(4,593

)

(5,944

)

Assets held for disposal

 

$

6,616

 

$

12,653

 

 

The Company held thirteen properties that were classified as held for disposal on January 31, 2009. During the thirty-nine week period ended October 31, 2009, the Company sold three of these properties for net proceeds of $2,783 and recognized a net gain of $89. Of the remaining ten properties held for disposal on October 31, 2009, three of the properties were then under contract. The Company recorded a loss on these three properties of $204 in the third quarter of 2009. The Company took an additional asset impairment charge of $3,139 on the remaining properties reflecting further declines in the commercial real estate market for vacant properties. Of the entire $3,343 impairment, $2,454 was charged to merchandise cost of sales, $663 was charged to service cost of sales and $226 was charged to discontinued operations.

 

NOTE 6. 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 Company’s financial statements or tax returns. The Company must assess the likelihood that any recorded deferred tax assets will be recovered against future taxable income. To the extent the Company believes it is more likely than not that the asset will not be recoverable, a valuation allowance must be established. Cumulative losses in recent

 

7



Table of Contents

 

years constitute “negative evidence” that a recovery is not more likely than not, which must be rebutted by “positive evidence” to avoid establishing a valuation allowance. To establish this positive evidence, the Company considers various tax planning strategies for generating income sufficient to utilize the deferred tax assets, including the potential sale of real estate and the conversion of the Company’s accounting policy for its inventory from LIFO to FIFO. After considering all this evidence, the Company did not have any material change to its valuation allowance for the thirteen weeks ending October 31, 2009.

 

For income tax benefits related to uncertain tax positions to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

 

During the thirteen weeks ended October 31, 2009, the Company reduced its gross unrecognized income tax benefits by approximately $572, of which $242 was interest, due to settlement of a previously established liability with the applicable taxing authority.

 

NOTE 7. Pension and Savings Plan

 

Pension expense includes the following:

 

 

 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

 

(dollar amounts in thousands)

 

October
31, 2009

 

November
1, 2008

 

October
31, 2009

 

November
1, 2008

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

 

$

30

 

$

 

$

90

 

Interest cost

 

635

 

858

 

1,904

 

2,602

 

Expected return on plan assets

 

(451

)

(612

)

(1,353

)

(1,837

)

Amortization of transition obligation

 

 

40

 

 

122

 

Amortization of prior service cost

 

3

 

92

 

10

 

277

 

Amortization of net loss

 

442

 

255

 

1,326

 

763

 

Net periodic benefit cost

 

$

629

 

$

663

 

$

1,887

 

$

2,017

 

 

The Company’s expense for its Account Plan (Defined Contribution SERP) was approximately $168 for the thirteen weeks ended October 31, 2009, whereas the Company recorded a benefit of $248 for the thirteen weeks ended November 1, 2008. The Company’s expense was approximately $695 and $59 for the thirty-nine weeks ended October 31, 2009 and November 1, 2008, respectively.

 

The Company has two qualified savings plans that cover all full-time employees who are at least 21 years of age with one or more years of service. Generally, the Company contributes the lesser of 50% of the first 6% of a participant’s contributions or 3% of the participant’s compensation. The Company’s savings plans’ expense was approximately $645 and $927 for the thirteen weeks ended October 31, 2009 and November 1, 2008, respectively, and approximately $2,442 and $2,971 for the thirty-nine weeks ended October 31, 2009 and November 1, 2008, respectively. The Company’s contribution to these plans for fiscal year 2009 is contingent upon meeting certain performance metrics. The company currently estimates that these performance metrics will be achieved and has recorded expense accordingly.

 

NOTE 8.  Sale-Leaseback Transactions

 

During the third quarter of fiscal year 2009, the Company sold three properties to unrelated third parties. Net proceeds from these sales were $10,986. 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 $1,365 gain on the sale of these properties was recognized immediately upon execution of the sale and a $6,483 gain was deferred. The deferred gain is being recognized over the minimum term of these leases.

 

During the first half of fiscal year 2008, the Company sold 63 owned properties to unrelated third parties. Net proceeds from these sales were $211,470. Concurrent with the sale, the Company entered into agreements to lease the properties back from the purchaser over a minimum lease term of 15 years. The Company classified 61 of these leases as operating leases. The Company actively uses these properties and considers the leases as normal leasebacks. A $7,655 gain on the sale of these properties was recognized

 

8



Table of Contents

 

immediately upon execution of the sale and an $89,930 gain was deferred. The deferred gain is being recognized over the minimum term of these leases. The Company initially had continuing involvement in two properties and, accordingly, recorded $8,479 of the transaction’s total net proceeds as a borrowing and as a financing activity in the Condensed Consolidated Statement of Cash Flows. The Company provided the necessary documentation to satisfy its indemnity and remove its continuing involvement with these properties by the end of the third quarter 2008. The Company then recorded the sale of these properties as a sale-leaseback transaction, removing the assets and related lease financing and recorded a $3,963 deferred gain that is being recognized over the remaining minimum term of these leases.

 

Of the 581 store locations operated by the Company at October 31, 2009, 232 are owned and 349 are leased.

 

NOTE 9. Debt and Financing Arrangements

 

(dollar amounts in thousands)

 

October 31,
2009

 

January 31,
2009

 

7.50% Senior Subordinated Notes, due December 2014

 

$

157,565

 

$

174,535

 

Senior Secured Term Loan, due October 2013

 

149,985

 

150,794

 

Lease financing obligations

 

 

4,515

 

Capital lease obligations

 

 

129

 

Revolving Credit Agreement, expiring January 2014

 

 

23,862

 

 

 

307,550

 

353,835

 

Less current maturities

 

1,079

 

1,453

 

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

 

$

306,471

 

$

352,382

 

 

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

 

During the thirty-nine week periods ending October 31, 2009 and November 1, 2008, the Company repurchased $16,970 and $25,465, respectively of its outstanding 7.5% Senior Subordinated Notes for $10,722 and $22,005, respectively resulting in a pre-tax gain of $6,248 and $3,460, respectively. The gain is reflected in interest expense on the accompanying Condensed Consolidated Statement of Operations and Changes in Retained Earnings.

 

As of October 31, 2009, 126 of the 232 owned stores are used as collateral under our Senior Secured Term Loan agreement due October 2013. The estimated fair market value of these collateralized properties was $300,965 as of the end of the second quarter 2009, based on an appraisal which is conducted every twenty months in accordance with the agreement.

 

Several of the Company’s debt agreements require compliance with covenants. The most restrictive of which is contained in the Company’s Revolving Credit Agreement. During any period that the Company’s availability under its Revolving Credit Agreement drops below $50,000, the Company is required to maintain a consolidated fixed charge coverage ratio, of at least 1.1:1.0, calculated as the ratio of (a) EBITDA (net income plus interest charges, provision for taxes, depreciation and amortization expense, non-cash stock compensation expenses and other non-recurring, non-cash items) minus capital expenditures and income taxes paid to (b) the sum of debt service charges and restricted payments made. The failure to satisfy this covenant would constitute an event of default under the Company’s Revolving Credit Agreement, which would result in a cross-default under the Company’s 7.5% Senior Subordinated Notes and Senior Secured Term Loan. As of October 31, 2009, the Company had availability under the Revolving Credit Agreement of approximately $133,693 and was in compliance with its financial covenants.

 

The Company determines fair value on its fixed rate debt by using quoted market prices and current interest rates. For debt issues that are not quoted on an exchange, the Company determines fair value by reference to debt issues with similar terms and maturities. The estimated fair value of long-term debt including current maturities was $287,680 and $200,276 as of October 31, 2009 and January 31, 2009, respectively.

 

NOTE 10. Warranty Reserve

 

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

 

9



Table of Contents

 

warranty transactions.

 

The reserve for warranty cost activity follows:

 

 

 

Thirty-Nine Weeks Ended

 

(dollar amounts in thousands)

 

October
31, 2009

 

November
1, 2008

 

Beginning Balance

 

$

797

 

$

247

 

 

 

 

 

 

 

Additions related to current period sales

 

12,056

 

9,188

 

 

 

 

 

 

 

Warranty costs incurred in current period

 

(12,159

)

(8,790

)

 

 

 

 

 

 

Ending Balance

 

$

694

 

$

645

 

 

NOTE 11. Earnings Per Share

 

 

 

 

 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

 

(in thousands, except per share amounts)

 

October 31,
2009

 

November 1,
2008

 

October 31,
2009

 

November 1,
2008

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

 

Net Earnings (Loss) From Continuing Operations

 

$

2,357

 

$

(7,054

)

$

21,278

 

$

3,989

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued Operations, Net of Tax

 

(233

)

(228

(510

)

(1,151

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Earnings (Loss)

 

$

2,124

 

$

(7,282

$

20,768

 

$

2,838

 

 

 

 

 

 

 

 

 

 

 

 

 

(b)

 

Basic average number of common shares outstanding during period

 

52,419

 

52,099

 

52,379

 

52,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

367

 

 

242

 

83

 

 

 

 

 

 

 

 

 

 

 

 

 

(c)

 

Diluted average number of common shares assumed outstanding during period

 

52,786

 

52,099

 

52,621

 

52,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings (Loss) per Share:

 

 

 

 

 

 

 

 

 

 

 

Net Earnings (Loss) From Continuing Operations (a/b)

 

$

0.05

 

$

(0.13

$

0.41

 

$

0.08

 

 

 

Discontinued Operations, Net of Tax

 

(0.01

)

(0.01

(0.01

)

(0.03

)

 

 

Basic Earnings (Loss) per Share

 

$

0.04

 

$

(0.14

$

0.40

 

$

0.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings (Loss) per Share:

 

 

 

 

 

 

 

 

 

 

 

Net Earnings (Loss) From Continuing Operations (a/c)

 

$

0.04

 

$

(0.13

$

0.40

 

$

0.08

 

 

 

Discontinued Operations, Net of Tax

 

 

(0.01

 

(0.03

)

 

 

Diluted Earnings (Loss) per Share

 

$

0.04

 

$

(0.14

$

0.40

 

$

0.05

 

 

At October 31, 2009 and November 1, 2008, respectively, there were 1,949,000 and 1,339,000 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 number of such shares excluded from the diluted earnings per share calculation are 901,000 and 1,059,000 for the thirteen weeks ended October 31, 2009 and November 1, 2008, respectively. The total number of such shares excluded from the diluted earnings per share calculation are 1,203,000 and 1,059,000 for the thirty-nine weeks ended October 31, 2009 and November 1, 2008, respectively.

 

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Table of Contents

 

NOTE 12. Supplemental Guarantor Information

 

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

 

The following condensed consolidating information presents, in separate columns, the condensed consolidating balance sheets as of October 31, 2009 and January 31, 2009 and the related condensed consolidating statements of operations for the thirteen and thirty-nine weeks ended October 31, 2009 and November 1, 2008 and condensed consolidating statements of cash flows for the thirty-nine weeks ended October 31, 2009 and November 1, 2008 for (i) the Company (“Pep Boys”) on a parent only basis, with its investment in subsidiaries recorded under the equity method, (ii) the Subsidiary Guarantors on a combined basis including the consolidation by PBY Corporation of its wholly owned subsidiary, The Pep Boys Manny Moe & Jack of California, (iii) the subsidiary of the Company that does not guarantee the Notes, and (iv) the Company on a consolidated basis.

 

CONDENSED CONSOLIDATING BALANCE SHEETS

(dollars in thousands)

(unaudited)

 

As of October 31, 2009

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Consolidation /
Elimination

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

26,035

 

$

8,734

 

$

6,074

 

$

 

$

40,843

 

Accounts receivable, net

 

8,956

 

11,505

 

 

 

20,461

 

Merchandise inventories

 

200,095

 

371,694

 

 

 

571,789

 

Prepaid expenses

 

7,410

 

7,395

 

2,621

 

(2,480

)

14,946

 

Other

 

886

 

8

 

54,208

 

(4,897

)

50,205

 

Assets held for disposal

 

1,045

 

5,571

 

 

 

 

6,616

 

Total Current Assets

 

244,427

 

404,907

 

62,903

 

(7,377

)

704,860

 

Property and Equipment—Net

 

233,016

 

463,672

 

31,714

 

(19,430

)

708,972

 

Investment in subsidiaries

 

1,743,091

 

 

 

(1,743,091

)

 

Intercompany receivables

 

 

1,041,684

 

67,534

 

(1,109,218

)

 

Deferred income taxes

 

20,948

 

52,022

 

 

 

72,970

 

Other

 

19,296

 

822

 

 

 

20,118

 

Total Assets

 

$

2,260,778

 

$

1,963,107

 

$

162,151

 

$

(2,879,116

)

$

1,506,920

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

219,196

 

$

9

 

$

 

$

 

$

219,205

 

Trade payable program liability

 

26,459

 

 

 

 

26,459

 

Accrued expenses

 

33,109

 

63,410

 

137,429

 

(2,480

)

231,468

 

Deferred income taxes

 

14,894

 

29,173

 

 

(4,897

)

39,170

 

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

 

1,079

 

 

 

 

1,079

 

Total Current Liabilities

 

294,737

 

92,592

 

137,429

 

(7,377

)

517,381

 

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

 

306,471

 

 

 

 

306,471

 

Other long-term liabilities

 

36,915

 

35,249

 

 

 

72,164

 

Deferred gain from asset sales

 

70,776

 

116,897

 

 

(19,430

)

168,243

 

Intercompany liabilities

 

1,109,218

 

 

 

(1,109,218

)

 

Total Stockholders’ Equity

 

442,661

 

1,718,369

 

24,722

 

(1,743,091

)

442,661

 

Total Liabilities and Stockholders’ Equity

 

$

2,260,778

 

$

1,963,107

 

$

162,151

 

$

(2,879,116

)

$

1,506,920

 

 

11



Table of Contents

 

As of January 31, 2009

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Consolidation/
Elimination

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,753

 

$

6,393

 

$

2,186

 

$

 

$

21,332

 

Accounts receivable, net

 

16,571

 

12,260

 

 

 

28,831

 

Merchandise inventories

 

199,304

 

365,627

 

 

 

564,931

 

Prepaid expenses

 

13,597

 

15,820

 

13,919

 

(17,946

)

25,390

 

Other

 

1,193

 

11

 

66,797

 

(5,580

)

62,421

 

Assets held for disposal

 

1,830

 

10,823

 

 

 

12,653

 

Total Current Assets

 

245,248

 

410,934

 

82,902

 

(23,526

)

715,558

 

Property and Equipment—Net

 

239,859

 

487,956

 

32,226

 

(19,710

)

740,331

 

Investment in subsidiaries

 

1,699,568

 

 

 

(1,699,568

)

 

Intercompany receivables

 

 

989,077

 

85,145

 

(1,074,222

)

 

Deferred income taxes

 

24,075

 

53,633

 

 

 

77,708

 

Other

 

17,614

 

1,178

 

 

 

18,792

 

Total Assets

 

$

2,226,364

 

$

1,942,778

 

$

200,273

 

$

(2,817,026

)

$

1,552,389

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

212,331

 

$

9

 

$

 

$

 

$

212,340

 

Trade payable program liability

 

31,930

 

 

 

 

31,930

 

Accrued expenses

 

28,802

 

67,748

 

175,985

 

(17,781

)

254,754

 

Deferred income taxes

 

16,355

 

25,238

 

 

(5,745

)

35,848

 

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

 

1,208

 

245

 

 

 

1,453

 

Total Current Liabilities

 

290,626

 

93,240

 

175,985

 

(23,526

)

536,325

 

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

 

332,682

 

19,700

 

 

 

352,382

 

Other long-term liabilities

 

34,868

 

35,454

 

 

 

70,322

 

Deferred gain from asset sales

 

70,810

 

119,104

 

 

(19,710

)

170,204

 

Intercompany liabilities

 

1,074,222

 

 

 

(1,074,222

)

 

Stockholders’ Equity

 

423,156

 

1,675,280

 

24,288

 

(1,699,568

)

423,156

 

Total Liabilities and Stockholders’ Equity

 

$

2,226,364

 

$

1,942,778

 

$

200,273

 

$

(2,817,026

)

$

1,552,389

 

 

12



Table of Contents

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(dollars in thousands)

(unaudited)

 

 

 

 

 

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

 

 

Thirteen Weeks Ended November 1, 2008

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation /
Elimination

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise Sales

 

$

126,430

 

$

252,031

 

$

 

$

 

$

378,461

 

Service Revenue

 

29,283

 

56,422

 

 

 

85,705

 

Other Revenue

 

 

 

5,797

 

(5,797

)

 

Total Revenues

 

155,713

 

308,453

 

5,797

 

(5,797

)

464,166

 

Costs of Merchandise Sales

 

88,368

 

180,273

 

 

(406

)

268,235

 

Costs of Service Revenue

 

25,523

 

55,602

 

 

(38

)

81,087

 

Costs of Other Revenue

 

 

 

2,814

 

(2,814

)

 

Total Costs of Revenues

 

113,891

 

235,875

 

2,814

 

(3,258

)

349,322

 

Gross Profit from Merchandise Sales

 

38,062

 

71,758

 

 

406

 

110,226

 

Gross Profit from Service Revenue

 

3,760

 

820

 

 

38

 

4,618

 

Gross Profit from Other Revenue

 

 

 

2,983

 

(2,983

)

 

Total Gross Profit

 

41,822

 

72,578

 

2,983

 

(2,539

)

114,844

 

Selling, General and Administrative Expenses

 

44,688

 

78,226

 

67

 

(3,154

)

119,827

 

Net Gain (Loss) from Dispositions of Assets

 

82

 

(135

)

 

 

(53

)

Operating (Loss) Profit

 

(2,784

)

(5,783

)

2,916

 

615

 

(5,036

)

Non-Operating (Expense) Income

 

(3,685

)

26,740

 

636

 

(23,386

)

305

 

Interest Expense (Income)

 

21,976

 

8,695

 

(802

)

(22,771

)

7,098

 

(Loss) Earnings from Continuing Operations Before Income Taxes

 

(28,445

)

12,262

 

4,354

 

 

(11,829

)

Income Tax (Benefit) Expense

 

(10,587

)

4,395

 

1,417

 

 

(4,775

)

Equity in Earnings of Subsidiaries

 

10,473

 

 

 

(10,473

)

 

Net Earnings from Continuing Operations

 

(7,385

)

7,867

 

2,937

 

(10,473

)

(7,054

)

Discontinued Operations, Net of Tax

 

103

 

(331

)

 

 

(228

)

Net (Loss) Earnings

 

$

(7,282

)

$

7,536

 

$

2,937

 

$

(10,473

)

$

(7,282

)

 

13



Table of Contents

 

 

 

 

 

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

 

 

 

Thirty-Nine Weeks Ended November 1, 2008

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation /
Elimination

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise Sales

 

$

404,555

 

$

785,317

 

$

 

$

 

$

1,189,872

 

Service Revenue

 

94,526

 

177,854

 

 

 

272,380

 

Other Revenue

 

 

 

17,167

 

(17,167

)

 

Total Revenues

 

499,081

 

963,171

 

17,167

 

(17,167

)

1,462,252

 

Costs of Merchandise Sales

 

283,416

 

556,382

 

 

(1,224

)

838,574

 

Costs of Service Revenue

 

82,604

 

167,943

 

 

(113

)

250,434

 

Costs of Other Revenue

 

 

 

12,105

 

(12,105

)

 

Total Costs of Revenues

 

366,020

 

724,325

 

12,105

 

(13,442

)

1,089,008

 

Gross Profit from Merchandise Sales

 

121,139

 

228,935

 

 

1,224

 

351,298

 

Gross Profit from Service Revenue

 

11,922

 

9,911

 

 

113

 

21,946

 

Gross Profit from Other Revenue

 

 

 

5,062

 

(5,062

)

 

Total Gross Profit

 

133,061

 

238,846

 

5,062

 

(3,725

)

373,244

 

Selling, General and Administrative Expenses

 

134,104

 

232,688

 

227

 

(5,574

)

361,445

 

Net Gain from Dispositions of Assets

 

3,385

 

6,170

 

 

 

9,555

 

Operating Profit

 

2,342

 

12,328

 

4,835

 

1,849

 

21,354

 

Non-Operating (Expense) Income

 

(11,640

)

88,230

 

1,920

 

(76,713

)

1,797

 

Interest Expense (Income)

 

73,089

 

23,430

 

(2,678

)

(74,864

)

18,977

 

(Loss) Earnings from Continuing Operations Before Income Taxes

 

(82,387

)

77,128

 

9,433

 

 

4,174

 

Income Tax (Benefit) Expense

 

(27,077

)

24,291

 

2,971

 

 

 

185

 

Equity in Earnings of Subsidiaries

 

58,250

 

 

 

(58,250

)

 

Net Earnings from Continuing Operations

 

2,940

 

52,837

 

6,462

 

(58,250

)

3,989

 

Discontinued Operations, Net of Tax

 

(102

)

(1,049

)

 

 

(1,151

)

Net Earnings

 

$

2,838

 

$

51,788

 

$

6,462

 

$

(58,250

)

$

2,838

 

 

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Table of Contents

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

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

 

 

15



Table of Contents

 

Thirty-Nine Weeks Ended November 1, 2008

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary
Non-
Guarantors

 

Consolidation
/ Elimination

 

Consolidated

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

2,838

 

$

51,788

 

$

6,462

 

$

(58,250

)

$

2,838

 

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

 

(46,872

)

24,653

 

1,278

 

56,403

 

35,462

 

Changes in operating assets and liabilities

 

(29,894

)

(6,979

)

(11,371

)

 

(48,244

)

Net cash (used in) provided by continuing operations

 

(73,928

)

69,462

 

(3,631

)

(1,847

)

(9,944

)

Net cash used in discontinued operations

 

(221

)

(659

)

 

 

(880

)

Net Cash (Used in) Provided by Operating Activities

 

(74,149

)

68,803

 

(3,631

)

(1,847

)

(10,824

)

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Provided by Investing Activities

 

25,877

 

45,992

 

 

 

71,869

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Provided by (Used in) Financing Activities

 

63,590

 

(113,894

)

4,857

 

1,847

 

(43,600

)

 

 

 

 

 

 

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

15,318

 

901

 

1,226

 

 

17,445

 

Cash and Cash Equivalents at Beginning of Period

 

12,208

 

6,655

 

2,063

 

 

20,926

 

Cash and Cash Equivalents at End of Period

 

$

27,526

 

$

7,556

 

$

3,289

 

$

 

$

38,371

 

 

16



Table of Contents

 

NOTE 13. Commitments and Contingencies

 

In September 2006, the United States Environmental Protection Agency (“EPA”) requested certain information from the Company as part of an investigation to determine whether the Company had violated, and is in violation of, the Clean Air Act and its non-road engine regulations. The information requested concerned certain generator and personal transportation merchandise offered for sale by the Company. In the fourth quarter of fiscal year 2008, the EPA informed the Company that it believed that the Company had violated the Clean Air Act by virtue of the fact that certain of this merchandise did not conform to their corresponding EPA Certificates of Conformity. 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 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 million contingency accrual with respect to the restricted inventory. During the third quarter of fiscal 2009, the Company reversed $1 million of the inventory accrual as a portion of the subject inventory was released for sale. When the Company successfully completes the required corrective action with respect to the remaining restricted inventory, it may reverse all or a portion of the remaining $2 million accrual in future periods.

 

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

 

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

 

NOTE 14. Comprehensive Income (Loss)

 

The following are the components of other comprehensive income (loss):

 

 

 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

 

(dollar amounts in thousands)

 

October 31,
2009

 

November 1,
2008

 

October 31,
2009

 

November 1,
2008

 

Net earnings (loss)

 

$

2,124

 

$

(7,282

)

$

20,768

 

$

2,838

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Defined benefit plan adjustment

 

280

 

246

 

840

 

733

 

Derivative financial instrument adjustment

 

(542

)

(1,080

)

496

 

1,980

 

Comprehensive Income (Loss)

 

$

1,862

 

$

(8,116

)

$

22,104

 

$

5,551

 

 

The components of accumulated other comprehensive loss are:

 

(dollar amounts in thousands)

 

October 31, 2009

 

January 31, 2009

 

Defined benefit plan adjustment, net of tax

 

$

(6,913

)

$

(7,753

)

Derivative financial instrument adjustment, net of tax

 

(9,826

)

(10,322

)

Accumulated other comprehensive loss

 

$

(16,739

)

$

(18,075

)

 

NOTE 15. Fair Value Measurements

 

Fair value is the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses a framework for measuring fair value based on a hierarchy of valuation inputs used to measure fair value.

 

The hierarchy prioritizes the inputs into three broad levels:

 

Level 1 inputs—unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occur with sufficient frequency and volume to provide ongoing pricing information.

 

Level 2 inputs—inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted market prices that are

 

17



Table of Contents

 

observable for the asset or liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risk and default rates.

 

Level 3 inputs—unobservable inputs for the asset or liability.

 

The following table provides the fair value measurement amounts for assets and liabilities recorded on the Company’s Condensed Consolidated Balance Sheet at fair value as of October 31, 2009:

 

(dollar amounts in thousands)

 

Fair Value
at
October

 

Fair Value Measurements
Using Inputs Considered as

 

Description

 

31, 2009

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

40,843

 

$

40,843

 

 

 

 

 

Assets held for disposal

 

6,616

 

 

 

$

6,616

 

 

 

Investments (a)

 

500

 

500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liability (b)

 

15,246

 

 

 

15,246

 

 

 

Contingent Consideration (c)

 

1,660

 

 

 

 

 

1,660

 

 


(a)          included in other long-term assets

(b)         included in other long-term liabilities

(c)          based on weighted average probability scenarios including management’s assumptions on expected future cash flow

 

The Company has one interest rate swap designated as a cash flow hedge on $145,000 of the Company’s $149,985 Senior Secured Term Loan facility that expires in October 2013. The swap is used to minimize interest rate exposure and overall interest costs by converting the variable interest rate to a fixed rate of 5.036%. Since February 1, 2008, this swap was deemed to be fully effective and all adjustments in the interest rate swap’s fair value have been recorded to Accumulated Other Comprehensive Loss.

 

The table below shows the effect of the Company’s interest rate swap on the Condensed Consolidated Statement of Operations for the periods indicated:

 

(dollar amounts in thousands)

 

Amount of Gain in
Other
Comprehensive Income

(Effective Portion)

 

Earnings Statement Classification

 

Amount of Loss
Recognized in
Earnings (Effective
Portion) (a)

 

Thirteen weeks ended October 31, 2009

 

$

571

 

Interest expense

 

$

(1,599

)

Thirty-nine weeks ended October 31, 2009

 

$

354

 

Interest expense

 

$

(4,030

)

 


(a) represents the effective portion of the loss reclassified from accumulated other comprehensive loss

 

18



Table of Contents

 

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

 

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

 

OVERVIEW

 

The Pep Boys-Manny, Moe & Jack is the only national chain offering automotive service, tires, parts and accessories, positioning us to achieve our vision of becoming the automotive solutions provider of choice for the value-oriented customer. Our primary operating unit is our Supercenter format, which serves both “do-it-for-me” DIFM (service labor, installed merchandise and tires) and “do-it-yourself” DIY (retail) customers with the highest quality service offerings and merchandise. In most of our Supercenters, we also have a commercial sales program that provides commercial credit and prompt delivery of tires, parts and other products to local, regional and national repair shops and dealers. As part of our long-term strategy to lead with automotive service, in 2009 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 Supercenters and support infrastructure. In the third quarter of 2009, we opened five new Service & Tire Centers and acquired ten additional locations through our purchase of Florida Tire, Inc. (see note 3). As of October 31, 2009, we operated 552 Supercenters and 20 Service & Tire Centers, as well as nine legacy Pep Boys Express (retail only) stores throughout 35 states and Puerto Rico.

 

The prototypical Service & Tire Center is expected to have between four and eight service bays, preferably six. The capital investment for a prototype, including inventory net of payables, is projected to be approximately $450,000 to $550,000 and a prototype is expected to generate approximately $1,000,000 to $1,500,000 in sales and $150,000 to $250,000 of EBITDA annually. We currently plan to lease Service & Tire Center locations, as we believe that there are sufficient existing available locations with attractive lease terms to enable our expansion. We are targeting a total of 25 new Service & Tire Centers in fiscal year 2009, 40 in fiscal 2010 and 80 in fiscal 2011.

 

For the thirteen weeks ended October 31, 2009, our comparable sales (sales generated by locations in operation during the same period) increased by 1.6% compared to a decrease of 10.4% for the thirteen weeks ended November 1, 2008. This increase in comparable sales was comprised of an 8.9% increase in comparable service revenue and a 0.1% decrease in comparable merchandise sales. The difficult macro environment, including higher unemployment and the credit crisis, continues to negatively impact sales in our discretionary product categories like accessories and complementary merchandise. Sales of non-discretionary product categories like service and hard parts have benefited somewhat from these trends, as customers have focused on maintaining their existing vehicles rather than purchasing new vehicles. Our non-discretionary product categories are primarily impacted by miles driven, which has stabilized since the second quarter of 2009, after having declined for the previous year.

 

We continue to focus on refining and expanding our parts assortment to improve our in stock position, improving execution and the customer experience and utilizing television and radio advertising to communicate our value offerings. In the thirteen and thirty-nine weeks ended October 31, 2009, we were able to successfully increase customer traffic and sales in our service and commercial businesses. In addition, for the thirteen week period ended October 31, 2009, total customer traffic and total revenue increased for the first time in twenty-one quarters and 10 quarters, respectively.

 

Our net earnings for the thirteen weeks ended October 31, 2009 were $2,124,000, a $9,406,000 improvement over the net loss of $7,282,000 reported for the thirteen weeks ended November 1, 2008. This increase in profitability resulted primarily from increased sales and gross profit margins in our service business and lower selling, general and administrative expenses due to continued disciplined spending control.

 

Our diluted earnings per share for the thirteen and thirty-nine weeks ended October 31, 2009 were $0.04 and $0.40 per share, respectively, as compared to ($0.14) and $0.05 per share for the corresponding periods ended November 1, 2008, respectively. (See Results of Operations).

 

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

 

19



Table of Contents

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our cash requirements arise principally from the purchase of inventory and capital expenditures related to existing and new stores, offices and distribution centers, debt service and contractual obligations. Cash flows realized through the sales of automotive services, tires, parts and accessories are our primary source of liquidity. Net cash provided by continuing operations was $82,555,000 in the thirty-nine weeks ended October 31, 2009 compared to a use of cash of $9,944,000 in the thirty-nine weeks ended November 1, 2008. The $92,499,000 improvement from the prior year was due to a $32,057,000 increase in our net earnings (net of non-cash adjustments) and a $60,442,000 favorable change in operating assets and liabilities. The change in operating assets and liabilities was primarily due to favorable changes in inventory of $17,742,000, accounts payable of $30,015,000 and in all other assets and liabilities of $12,685,000. The improved cash flows from inventory resulted from more disciplined inventory management, including reduced seasonal inventory purchases, inventory lead times and safety stocks. The improvement in accounts payable was attributable to the timing of our accounts payable cycle. The favorable change in all other assets and liabilities was due to reduced accounts receivable as a result of improved collection of vendor allowances and trade receivables and as a result of lower declines in accrued expenses due in part to a payment in the prior year first quarter of $4,539,000 in connection with reducing the notional value on an interest rate swap by $55,000,000.

 

Cash used in investing activities by continuing operations was $18,792,000 for the thirty-nine week period ended October 31, 2009 as compared to cash provided of $69,311,000 in the thirty-nine weeks ended November 1, 2008. During the thirty-nine week period ended October 31, 2009, we sold three properties that were classified as held for sale for net proceeds of $2,783,000, of which $1,758,000 is included in discontinued operations, and completed sale leaseback transactions on three stores for net proceeds of $10,986,000. In the thirteen weeks ended October 31, 2009 we acquired substantially all of the assets (other than real property) of Florida Tire, Inc.  which included a cash payment of $2,610,000 and the recording of a $1,660,000 contingent liability which could result in future payments through November 2013. During fiscal year 2008, we generated $209,085,000 from the disposition of assets primarily due to sale-leaseback transactions, the proceeds of which were used to repurchase 29 properties for $117,121,000 that were previously leased under a master operating lease. Capital expenditures in the first thirty-nine weeks of 2009 and 2008 were $27,775,000 and $22,653,000, respectively. Capital expenditures for the current year were for maintenance of our existing stores and distribution centers, and for the opening of the new Service & Tire Centers.

 

Our fiscal year 2009 capital expenditures are expected to be approximately $45,000,000 which includes the addition of approximately 25 Service & Tire Centers and required expenditures for our existing stores, offices and distribution centers. These expenditures are expected to be funded by net cash generated from operating activities, opportunistic single store sale leaseback transactions and our existing line of credit.

 

In the thirty-nine weeks ended October 31, 2009 and November 1, 2008, we used cash in financing activities of $45,420,000 and $43,600,000, respectively. In the current year, we repurchased $16,970,000 of our outstanding 7.5% Senior Subordinated Notes for $10,722,000, repaid $23,862,000 of borrowings under our credit facility and repaid $5,471,000 on borrowings under our trade payable financing program discussed below. In the prior year, we used the proceeds from the sale-leaseback transactions discussed above to reduce debt obligations under our then existing credit facility, and to repurchase $25,465,000 principal amount of our 7.5% Senior Secured Notes for $22,005,000.

 

We anticipate that cash provided by operating activities, opportunistic single store sale leaseback transactions and our existing line of credit and cash on hand will exceed our expected cash requirements in fiscal year 2009. We expect to have excess availability under our existing line of credit during the entirety of fiscal year 2009. As of October 31, 2009, we had undrawn availability under our revolving credit facility of $133,693,000. We also have substantial owned real estate which we believe we can monetize, if necessary, through additional sale leaseback or other financing transactions

 

Our working capital was $187,479,000 and $179,233,000 at October 31, 2009 and January 31, 2009, respectively. Our long-term debt, as a percentage of our total capitalization, was 41% and 45% at October 31, 2009 and January 31, 2009, respectively.

 

As of October 31, 2009, we had an outstanding balance of $26,459,000 (classified as trade payable program liability on the condensed consolidated balance sheet) under our vendor financing program. On April 6, 2009, a previously existing program was replaced by this new program which is funded by various bank participants who have the ability, but not the obligation, to purchase directly  from our vendors their account receivables owed by us.

 

20



Table of Contents

 

RESULTS OF OPERATIONS

 

Thirteen Weeks Ended October 31, 2009 vs. Thirteen Weeks Ended November 1, 2008

 

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 31, 2009
(Fiscal 2009)

 

November 1, 2008
(Fiscal 2008)

 

Favorable
(Unfavorable)

 

 

 

 

 

 

 

 

 

Merchandise Sales

 

80.2

%

81.5

%

0.1

%

Service Revenue (1)

 

19.8

 

18.5

 

9.4

 

Total Revenues

 

100.0

 

100.0

 

1.8

 

Costs of Merchandise Sales (2)

 

71.2

(3)

70.9

(3)

(0.5

)

Costs of Service Revenue (2)

 

90.4

(3)

94.6

(3)

(4.5

)

Total Costs of Revenues

 

75.0

 

75.3

 

(1.4

)

Gross Profit from Merchandise Sales

 

28.8

(3)

29.1

(3)

(0.9

)

Gross Profit from Service Revenue

 

9.6

(3)

5.4

(3)

95.1

 

Total Gross Profit

 

25.0

 

24.7

 

3.0

 

Selling, General and Administrative Expenses

 

23.2

 

25.8

 

8.6

 

Net Gain (Loss) from Dispositions of Assets

 

0.3

 

 

NM

 

Operating Profit (Loss)

 

2.1

 

(1.1

)

299.7

 

Non-operating Income

 

0.2

 

0.1

 

137.4

 

Interest Expense

 

1.5

 

1.5

 

2.5

 

Earnings (Loss) from Continuing Operations Before Income Taxes

 

0.8

 

(2.5

)

132.6

 

Income Tax Expense

 

38.9

(4)

40.4

(4)

(131.4

)

Net Earnings (Loss) from Continuing Operations

 

0.5

 

(1.5

)

133.4

 

Discontinued Operations, Net of Tax

 

 

 

(2.2

)

Net Earnings (Loss)

 

0.4

 

(1.6

)

129.2

 

 


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

(3)

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

(4)

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

NM  Percentage not meaningful

 

Total revenue and comparable sales for the thirteen weeks ended October 31, 2009 increased 1.8% and 1.6% respectively, as compared to the thirteen weeks ended November 1, 2008. The 1.6% increase in comparable store revenues consisted of a 0.1% decrease in comparable merchandise sales that was offset by an increase of 8.9% in comparable service revenue. The slight decrease in merchandise sales was primarily due to weaker sales in our retail business stemming from less discretionary spending by our customers.

 

In the third quarter of fiscal year 2009, customer traffic generated by improved store execution, promotional events and improved stock position resulted in an increase in service and commercial customer count. While offset in part by a decrease in DIY customer count, total customer count increased in the third quarter of fiscal year 2009. We believe the decrease in retail customer count is a result of the long-term industry decline in the DIY business, overall reduced spending due to the current economic environment and our competitors continuing to open new stores. In addition, we carry a large assortment of more discretionary retail product that is more susceptible to consumer spending deferrals. We continue to believe, and our third quarter performance has validated, that providing a differentiated merchandise assortment, better customer experience, value proposition and innovative marketing will stem the overall decline in customer counts and sales over the long term.

 

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Gross profit as a percentage of merchandise sales decreased from 29.1% for the third quarter of fiscal year 2008 to 28.8% for the third quarter of fiscal year 2009. Gross profit decreased by $970,000 primarily due to a $2,417,000 asset impairment charge, partially offset by a reduction in inventory related accruals of $1,000,000 and a gain from an insurance settlement of $562,000.

 

Gross profit from service revenue increased as a percentage of service revenue to 9.6 % for the third quarter of fiscal year 2009 from 5.4% for the third quarter of 2008. Gross profit from service revenue grew by $4,395,000 or 95.1%. The current year third quarter gross profit included a $653,000 asset impairment charge. The increase in gross profit was primarily due to the increase in service revenue which resulted in higher absorption of fixed expenses such as occupancy costs and to a certain extent, labor costs.

 

Selling, General and Administrative expenses, as a percentage of total revenues decreased from 25.8% for the third quarter of fiscal year 2008 to 23.2% for the third quarter of fiscal year 2009. Selling, General and Administrative expenses decreased $10,282,000 or 8.6%. The decrease was primarily due to reduced payroll and related expenses of $1,632,000, less media expense of $3,958,000, lower legal expenses and professional services fees of $2,242,000, improved store selling expenses of $1,208,000 and lower travel expenses of $740,000.

 

Net gains from the disposition of assets for the thirteen weeks ended October 1, 2009, reflects $1,332,000 in gains from the sale and leaseback of three stores.

 

Interest expense declined by $176,000 to $6,922,000 in the third quarter of fiscal 2009 compared to $7,098,000 for the third quarter of fiscal 2008 primarily due to reduced debt levels.

 

Our income tax expense for the third quarter of fiscal year 2009 was $1,501,000 or an effective rate of 38.9% as compared to a tax benefit of $4,775,000 or an effective rate of 40.4% for the third quarter of fiscal year 2008. The current year third quarter included an $80,000 tax benefit resulting primarily from the settlement of certain state tax liabilities. Excluding this adjustment the effective tax rate would have been 41.0 %.

 

Thirty-Nine Weeks Ended October 31, 2009 vs. Thirty-Nine Weeks Ended November 1, 2008

 

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 31, 2009
(Fiscal 2009)

 

November 1, 2008
(Fiscal 2008)

 

Favorable
(Unfavorable)

 

 

 

 

 

 

 

 

 

Merchandise Sales

 

80.2

%

81.4

%

(1.7

)%

Service Revenue (1)

 

19.8

 

18.6

 

6.1

 

Total Revenues

 

100.0

 

100.0

 

(0.3

)

Costs of Merchandise Sales (2)

 

70.7

(3)

70.5

(3)

1.4

 

Costs of Service Revenue (2)

 

88.4

(3)

91.9

(3)

(2.0

)

Total Costs of Revenues

 

74.2

 

74.5

 

0.6

 

Gross Profit from Merchandise Sales

 

29.3

(3)

29.5

(3)

(2.5

)

Gross Profit from Service Revenue

 

11.6

(3)

8.1

(3)

52.1

 

Total Gross Profit

 

25.8

 

25.5

 

0.8

 

Selling, General and Administrative Expenses

 

22.4

 

24.7

 

9.5

 

Net Gain from Dispositions of Assets

 

0.1

 

0.7

 

(86.2

)

Operating Profit

 

3.4

 

1.5

 

135.5

 

Non-operating Income

 

0.1

 

0.1

 

(7.3

)

Interest Expense

 

1.1

 

1.3

 

19.2

 

Earnings from Continuing Operations Before Income Taxes

 

2.5

 

0.3

 

777.8

 

Income Tax Expense Benefit

 

41.9

(4)

4.4

(4)

NM

 

Net Earnings from Continuing Operations

 

1.5

 

0.3

 

433.4

 

Discontinued Operations, Net of Tax

 

 

(0.1

)

55.7

 

Net Earnings

 

1.4

 

0.2

 

631.8

 

 

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Table of Contents

 


(1)

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

(2)

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

(3)

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

(4)

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

NM  Percentage not meaningful

 

Total revenue and comparable sales for the thirty-nine weeks ended October 31, 2009 decreased by approximately 0.3% and 0.4% as compared to the thirty-nine weeks ended November 1, 2008. Comparable merchandise sales decreased 1.8% and was mostly offset by an increase in comparable service revenue of 5.9%. The decrease in merchandise sales was due to weaker sales in our retail business stemming from lower customer counts and less discretionary spending by our customers.

 

Gross profit as a percent of merchandise sales decreased to 29.3% for the thirty-nine weeks ended October 31, 2009 from 29.5% for the thirty-nine weeks ended November 1, 2008. Gross profit from merchandise sales decreased $8,619,000 or 2.5% primarily due to the reduced merchandise sales discussed above. Merchandise sales gross profit margins declined by 70 basis points as result of increased product promotions and an overall change in product mix, offset by lower occupancy and warehousing costs, which improved by 40 basis points.

 

Gross profit from service revenue increased as a percentage of service revenues to 11.6% for the thirty-nine weeks ended October 31, 2009 from 8.1% for the thirty-nine weeks ended November 1, 2008. Gross profit from service revenue increased by 52.1% or $11,435,000. This increase in gross profit was primarily due to the increase in service revenue which resulted in higher absorption of fixed expenses such as occupancy costs and to a certain extent, labor costs.

 

Selling, General and Administrative expenses, as a percentage of total revenues decreased from 24.7% for the thirty-nine weeks ended November 1, 2008 to 22.4% for the thirty-nine weeks ended October 31, 2009. Selling, General and Administrative expenses decreased $34,365,000 or 9.5%. The decrease was primarily due to reduced payroll and related expenses of $7,042,000, less media expense of $15,008,000, lower legal expenses and professional services fees of $7,604,000 and lower travel expenses of $2,384,000.

 

Net gain from the disposition of assets for the thirty-nine weeks ended October 31, 2009 and November 1, 2008 reflects gains of $1,319,000 and $ 9,555,000, respectively, primarily as a result of the sale and lease back transactions.

 

Interest expense declined by $3,653,000 to $15,324,000 for the thirty-nine weeks ended October 31, 2009 from $18,977,000 for the thirty-nine weeks ended November 1, 2008. Both periods included gains from the retirement of debt of $6,248,000 and $3,460,000, respectively. Excluding these gains, interest expense declined by $865,000 from 2008 to 2009 primarily due to reduced debt levels.

 

Income tax expense was $15,363,000 or an effective rate of 41.9% for the thirty-nine weeks ended October 31, 2009 as compared to $185,000 or an effective rate of 4.4% for the thirty-nine weeks ended November 1, 2008. The increase in tax expense was primarily due to improved earnings. The prior year included a one-time tax benefit of $2,200,000 resulting from the recording of a deferred tax asset due to a state tax law change.

 

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.

 

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Table of Contents

 

The following table presents the revenues and gross profit for each area of the business:

 

 

 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

 

 

 

October 31,

 

November 1,

 

October 31,

 

November 1,

 

(Dollar amounts in thousands)

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Retail Sales (1)

 

$

246,275

 

$

253,492

 

$

770,121

 

$

802,707

 

Service Center Revenue (2)

 

226,368

 

210,674

 

687,921

 

659,545

 

Total Revenues

 

$

472,643

 

$

464,166

 

$

1,458,042

 

$

1,462,252

 

 

 

 

 

 

 

 

 

 

 

Gross Profit from Retail Sales (3)

 

$

65,846

 

$

68,360

 

$

210,147

 

$

220,139

 

Gross Profit from Service Center Revenue (3)

 

52,423

 

46,484

 

165,913

 

153,105

 

Total Gross Profit

 

$

118,269

 

$

114,844

 

$

376,060

 

$

373,244

 

 


(1)

Excludes revenues from installed products.

(2)

Includes revenues from installed products.

(3)

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

 

NEW ACCOUNTING STANDARDS

 

On December 30, 2008 the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP FAS 132(R)-1). This pronouncement provides additional guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan and is effective for fiscal years ending after December 15, 2009.  The Company does not expect the adoption of FSP FAS 132(R)-1 to have a material impact on its consolidated financial statements.

 

In October 2009, the FASB issued Accounting Standards Update 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 is currently evaluating the impact ASU 2009-13 will have on its consolidated financial statements.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Additionally, we estimate our interim product gross margins in accordance with the FASB’s ASC on Interim Reporting.

 

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

 

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Table of Contents

 

FORWARD-LOOKING STATEMENTS

 

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

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Our primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the terms of our revolving credit agreement, changes in LIBOR or the Prime Rate could affect the rates at which we could borrow funds thereunder. At October 31, 2009 we had no borrowings under this facility. Additionally, we have a $149,985,000 Senior Secured Term Loan facility that bears interest at three month LIBOR plus 2.0%.

 

We have an interest rate swap for a notional amount of $145,000,000, which is designated as a cash flow hedge on our Senior Secured Term Loan. We record the effective portion of the change in fair value through Accumulated Other Comprehensive Loss.

 

The fair value of the interest rate swap was $15,246,000 and $15,808,000 payable at October 31, 2009 and January 31, 2009, respectively. Of the net $562,000 decrease in fair value during the thirty-nine weeks ended October 31, 2009, $496,000, net of tax, was recorded to accumulated other comprehensive loss on the condensed consolidated balance sheet.

 

Item 4.  Controls and Procedures.

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

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

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

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

 

Item 5.  Other Information

 

None.

 

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Table of Contents

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

In September 2006, the United States Environmental Protection Agency (“EPA”) requested certain information from the Company as part of an investigation to determine whether the Company had violated, and is in violation of, the Clean Air Act and its non-road engine regulations. The information requested concerned certain generator and personal transportation merchandise offered for sale by the Company. In the fourth quarter of fiscal year 2008, the EPA informed the Company that it believed that the Company had violated the Clean Air Act by virtue of the fact that certain of this merchandise did not conform to their corresponding EPA Certificates of Conformity. 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 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 million contingency accrual with respect to the restricted inventory. During the third quarter of fiscal 2009, the Company reversed $1 million of the inventory accrual as a portion of the subject inventory was released for sale. When the Company successfully completes the required corrective action with respect to the remaining restricted inventory, it may reverse all or a portion of the remaining $2 million accrual in future periods.

 

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

 

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

 

Item 1A.  Risk Factors

 

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

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

None.

 

Item 5.  Other Information

 

None.

 

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Table of Contents

 

Item 6.  Exhibits

 

(31.1)

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

 

 

(31.2)

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

 

 

(32.1)

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

 

 

(32.2)

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

 

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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  09, 2009

 

by:

/s/ Raymond L. Arthur

 

 

 

 

 

 

 

 

Raymond L. Arthur

 

 

 

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

 

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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

 

29