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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 30, 2010

 

OR

 

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

 

For the transition period from             to            

 

Commission File No. 1-3381

 

The Pep Boys - Manny, Moe & Jack

(Exact name of registrant as specified in its charter)

 

Pennsylvania

 

23-0962915

(State or other jurisdiction of

 

(I.R.S. Employer ID number)

incorporation or organization)

 

 

 

 

 

3111 W. Allegheny Ave. Philadelphia, PA

 

19132

(Address of principal executive offices)

 

(Zip code)

 

215-430-9000

(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 26, 2010, there were 52,521,080 shares of the registrant’s Common Stock outstanding.

 

 

 



Table of Contents

 

Index

 

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets – October 30, 2010 and January 30, 2010

3

 

 

 

 

Condensed Consolidated Statements of Operations and Changes in Retained Earnings - Thirteen and Thirty-nine Weeks Ended October 30, 2010 and October 31, 2009

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Thirty-nine Weeks Ended October 30, 2010 and October 31, 2009

5

 

 

 

 

Notes to the Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

Item 5.

Other Information

28

 

 

 

PART II - OTHER INFORMATION

28

 

 

 

Item 1.

Legal Proceedings

28

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

Item 3.

Defaults Upon Senior Securities

29

 

 

 

Item 4.

(Removed and Reserved)

29

 

 

 

Item 5.

Other Information

29

 

 

 

Item 6.

Exhibits

30

 

 

 

SIGNATURES

31

 

 

 

INDEX TO EXHIBITS

32

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except share data)

UNAUDITED

 

 

 

October 30, 2010

 

January 30, 2010

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

107,253

 

$

39,326

 

Accounts receivable, less allowance for uncollectible accounts of $1,593 and $1,488

 

20,469

 

22,983

 

Merchandise inventories

 

568,592

 

559,118

 

Prepaid expenses

 

16,647

 

24,784

 

Other current assets

 

48,350

 

65,428

 

Assets held for disposal

 

1,378

 

4,438

 

Total current assets

 

762,689

 

716,077

 

 

 

 

 

 

 

Property and equipment - net

 

691,833

 

706,450

 

Deferred income taxes

 

54,461

 

58,171

 

Other long-term assets

 

22,017

 

18,388

 

Total assets

 

$

1,531,000

 

$

1,499,086

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

207,838

 

$

202,974

 

Trade payable program liability

 

57,017

 

34,099

 

Accrued expenses

 

224,262

 

242,416

 

Deferred income taxes

 

37,461

 

29,984

 

Current maturities of long-term debt

 

1,079

 

1,079

 

Total current liabilities

 

527,657

 

510,552

 

 

 

 

 

 

 

Long-term debt less current maturities

 

305,392

 

306,201

 

Other long-term liabilities

 

73,127

 

73,933

 

Deferred gain from asset sales

 

156,026

 

165,105

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $1 per share: authorized 500,000,000 shares; issued 68,557,041 shares

 

68,557

 

68,557

 

Additional paid-in capital

 

294,781

 

293,810

 

Retained earnings

 

397,100

 

374,836

 

Accumulated other comprehensive loss

 

(18,720

)

(17,691

)

Less cost of shares in treasury – 16,041,930 shares and 16,164,074 shares

 

272,920

 

276,217

 

Total stockholders’ equity

 

468,798

 

443,295

 

Total liabilities and stockholders’ equity

 

$

1,531,000

 

$

1,499,086

 

 

See notes to condensed consolidated financial statements.

 

3



Table of Contents

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND CHANGES IN RETAINED EARNINGS

(dollar amounts in thousands, except per share amounts)

UNAUDITED

 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

 

 

October 30,
2010

 

October 31,
2009

 

October 30,
2010

 

October 31,
2009

 

Merchandise sales

 

$

398,368

 

$

378,860

 

$

1,213,736

 

$

1,169,108

 

Service revenue

 

97,996

 

93,783

 

297,516

 

288,934

 

Total revenues

 

496,364

 

472,643

 

1,511,252

 

1,458,042

 

Costs of merchandise sales

 

279,690

 

269,604

 

845,848

 

826,429

 

Costs of service revenue

 

90,818

 

84,770

 

267,452

 

255,553

 

Total costs of revenues

 

370,508

 

354,374

 

1,113,300

 

1,081,982

 

Gross profit from merchandise sales

 

118,678

 

109,256

 

367,888

 

342,679

 

Gross profit from service revenue

 

7,178

 

9,013

 

30,064

 

33,381

 

Total gross profit

 

125,856

 

118,269

 

397,952

 

376,060

 

Selling, general and administrative expenses

 

110,840

 

109,545

 

335,580

 

327,080

 

Net gain from dispositions of assets

 

109

 

1,332

 

2,603

 

1,319

 

Operating profit

 

15,125

 

10,056

 

64,975

 

50,299

 

Non-operating income

 

650

 

724

 

1,855

 

1,666

 

Interest expense

 

6,630

 

6,922

 

19,881

 

15,324

 

Earnings from continuing operations before income taxes and discontinued operations

 

9,145

 

3,858

 

46,949

 

36,641

 

Income tax expense

 

3,471

 

1,501

 

18,316

 

15,363

 

Earnings from continuing operations before discontinued operations

 

5,674

 

2,357

 

28,633

 

21,278

 

Income (loss) from discontinued operations, net of tax

 

44

 

(233

)

(367

)

(510

)

Net earnings

 

5,718

 

2,124

 

28,266

 

20,768

 

 

 

 

 

 

 

 

 

 

 

Retained earnings, beginning of period

 

393,245

 

373,963

 

374,836

 

358,670

 

Cash dividends

 

(1,581

)

(1,557

)

(4,741

)

(4,709

)

Dividend reinvested and other

 

(282

)

(69

)

(1,261

)

(268

)

Retained earnings, end of period

 

$

397,100

 

$

374,461

 

$

397,100

 

$

374,461

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Earnings from continuing operations before discontinued operations

 

$

0.11

 

$

0.05

 

$

0.54

 

$

0.41

 

Loss from discontinued operations, net of tax

 

 

(0.01

)

(0.01

)

(0.01

)

Basic earnings per share

 

$

0.11

 

$

0.04

 

$

0.53

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Earnings from continuing operations before discontinued operations

 

$

0.11

 

$

0.04

 

$

0.54

 

$

0.40

 

Loss from discontinued operations, net of tax

 

 

 

(0.01

)

 

Diluted earnings per share

 

$

0.11

 

$

0.04

 

$

0.53

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share

 

$

0.03

 

$

0.03

 

$

0.09

 

$

0.09

 

 

See notes to condensed consolidated financial statements.

 

4



Table of Contents

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

UNAUDITED

 

Thirty-nine weeks ended

 

October 30, 2010

 

October 31, 2009

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

28,266

 

$

20,768

 

Adjustments to reconcile net earnings to net cash provided by continuing operations:

 

 

 

 

 

Loss from discontinued operations, net of tax

 

367

 

510

 

Depreciation and amortization

 

55,260

 

53,248

 

Amortization of deferred gain from asset sales

 

(9,451

)

(9,186

)

Stock compensation expense

 

2,748

 

1,930

 

Gain on debt retirement

 

 

(6,248

)

Deferred income taxes

 

11,795

 

7,270

 

Net gain from disposition of assets

 

(2,603

)

(1,319

)

Loss from asset impairment

 

970

 

3,117

 

Other

 

52

 

267

 

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease in accounts receivable, prepaid expenses and other

 

29,382

 

33,241

 

Increase in merchandise inventories

 

(9,474

)

(5,806

)

Increase in accounts payable

 

4,864

 

6,455

 

Decrease in accrued expenses

 

(17,993

)

(23,922

)

(Decrease) increase in other long-term liabilities

 

(2,122

)

2,230

 

Net cash provided by continuing operations

 

92,061

 

82,555

 

Net cash used in discontinued operations

 

(1,263

)

(594

)

Net cash provided by operating activities

 

90,798

 

81,961

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Cash paid for property and equipment

 

(42,976

)

(27,775

)

Proceeds from dispositions of assets

 

6,713

 

12,093

 

Acquisition of Florida Tire Inc.

 

(144

)

(2,610

)

Collateral investment

 

(5,000

)

 

Other

 

 

(500

)

Net cash used in continuing operations

 

(41,407

)

(18,792

)

Net cash provided by discontinued operations

 

569

 

1,762

 

Net cash used in investing activities

 

(40,838

)

(17,030

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Borrowings under line of credit agreements

 

20,482

 

244,011

 

Payments under line of credit agreements

 

(20,482

)

(267,873

)

Borrowings on trade payable program liability

 

247,346

 

122,914

 

Payments on trade payable program liability

 

(224,428

)

(128,385

)

Debt payments

 

(809

)

(11,720

)

Dividends paid

 

(4,741

)

(4,709

)

Other

 

599

 

342

 

Net cash provided by (used in) financing activities

 

17,967

 

(45,420

)

Net increase in cash and cash equivalents

 

67,927

 

19,511

 

Cash and cash equivalents at beginning of period

 

39,326

 

21,332

 

Cash and cash equivalents at end of period

 

$

107,253

 

$

40,843

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for income taxes

 

$

882

 

$

4,046

 

Cash paid for interest

 

$

14,412

 

$

15,492

 

Accrued purchases of property and equipment

 

$

1,280

 

$

1,575

 

 

See notes to condensed consolidated financial statements

 

5


 


Table of Contents

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. Basis of Presentation

 

The Pep Boys — Manny, Moe & Jack and subsidiaries (the “Company”) consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the Company’s financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, costs and expenses, as well as the disclosure of contingent assets and liabilities and other related disclosures. The Company bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of the Company’s assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates, and the Company includes any revisions to its estimates in the results for the period in which the actual amounts become known.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted, as permitted by Rule 10-01 of the Securities and Exchange Commission’s Regulation S-X, “Interim Financial Statements.” It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2010. The results of operations for the thirty-nine weeks ended October 30, 2010 are not necessarily indicative of the operating results for the full fiscal year.

 

The condensed consolidated financial statements presented herein are unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows as of October 30, 2010 and for all periods presented have been made.

 

The Company’s fiscal year ends on the Saturday nearest January 31. Accordingly, references to fiscal years 2010 and 2009 refer to the year ending January 29, 2011 and the year ended January 30, 2010, respectively.

 

NOTE 2. New Accounting Standards

 

In October 2009, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2009-13 “Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force,” (“ASU 2009-13”). This update eliminates the residual method of allocation and requires that consideration be allocated to all deliverables using the relative selling price method. ASU 2009-13 is effective for material revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company does not believe the adoption of ASU 2009-13 will have a material impact on its consolidated financial statements.

 

In January 2010, the FASB issued ASU 2010-06 “Fair Value Measurements — Improving Disclosures on Fair Value Measurements” (“ASU 2010-06”). This guidance requires new disclosures surrounding transfers in and out of level 1 or 2 in the fair value hierarchy and also requires that the reconciliation of level 3 inputs includes separately reported information on purchases, sales, issuances and settlements. The increased disclosures should be reported for each class of assets or liabilities. ASU 2010-06 also clarifies existing disclosures for the level of disaggregating, disclosures about valuation techniques and inputs used to determine level 2 or 3 fair value measurements and includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances or settlements in the roll forward activity for level 3 fair value measurements which are effective for interim and annual periods beginning after December 15, 2010. The adoption of ASU 2010-06 for requirements effective December 15, 2009 did not have a material impact on the Company’s consolidated financial statements. The Company does not believe the adoption of those requirements of ASU 2010-06 which are effective for periods beginning after December 15, 2010 will have a material impact on its consolidated financial statements.

 

NOTE 3. Merchandise Inventories

 

Merchandise inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out (“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on 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 $497.4 million and $482.0 million as of October 30, 2010 and January 30, 2010, respectively.

 

6



Table of Contents

 

The Company provides for estimated inventory shrinkage based upon historical levels and the results of its cycle counting program, and also records adjustments for potentially excess and obsolete inventories based on current inventory levels, the historical analysis of product sales and current market conditions. The nature of the 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 adjustments when less than full credit is expected from a vendor or when market is lower than recorded costs. These adjustments are reviewed on a quarterly basis for adequacy. The Company’s inventory adjustments for these matters were $10.7 million and $13.0 million at October 30, 2010 and January 30, 2010, respectively.

 

NOTE 4. Property and Equipment

 

The Company’s property and equipment as of October 30, 2010 and January 30, 2010 was as follows:

 

(dollar amounts in thousands)

 

October 30, 2010

 

January 30, 2010

 

 

 

 

 

 

 

Property and equipment

 

 

 

 

 

Land

 

$

203,838

 

$

204,709

 

Buildings and improvements

 

839,058

 

826,804

 

Furniture, fixtures and equipment

 

698,127

 

695,072

 

Construction in progress

 

2,315

 

1,550

 

Accumulated depreciation and amortization

 

(1,051,505

)

(1,021,685

)

Property and equipment – net

 

$

691,833

 

$

706,450

 

 

NOTE 5. Warranty Reserve

 

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

 

The reserve for warranty cost activity for the thirty-nine weeks ended October 30, 2010 and the fifty-two weeks ended January 30, 2010 is as follows:

 

(dollar amounts in thousands)

 

October 30, 2010

 

January 30, 2010

 

Beginning balance

 

$

694

 

$

797

 

 

 

 

 

 

 

Additions related to current period sales

 

9,136

 

15,572

 

 

 

 

 

 

 

Warranty costs incurred in current period

 

(9,157

)

(15,675

)

 

 

 

 

 

 

Ending balance

 

$

673

 

$

694

 

 

NOTE 6. Debt and Financing Arrangements

 

The following are the components of debt and financing arrangements:

 

(dollar amounts in thousands)

 

October 30, 2010

 

January 30, 2010

 

7.50% Senior Subordinated Notes, due December 2014

 

$

157,565

 

$

157,565

 

Senior Secured Term Loan, due October 2013

 

148,906

 

149,715

 

Revolving Credit Agreement, expiring January 2014

 

 

 

 

 

306,471

 

307,280

 

Less current maturities

 

1,079

 

1,079

 

Long-term debt, less current maturities

 

$

305,392

 

$

306,201

 

 

7



Table of Contents

 

During the first quarter of fiscal 2009, the Company repurchased $17.0 million of its outstanding 7.50% Senior Subordinated Notes (the “Notes”) for $10.7 million resulting in a gain of $6.2 million which is reflected in interest expense on the accompanying condensed consolidated statements of operations and changes in retained earnings.

 

As of October 30, 2010, 126 of the Company’s 231 owned stores were used as collateral under the Company’s Senior Secured Term Loan due October 2013.

 

The Company’s ability to borrow under its $300.0 million Revolving Credit Agreement is based on a specific borrowing base consisting of inventory and accounts receivable. The interest rate on this credit line is LIBOR or Prime plus 2.75% to 3.25% based upon the then current availability under the facility. As of October 30, 2010, there were no outstanding borrowings under this agreement and $107.9 million of availability was utilized to support outstanding letters of credit. Taking this into account and the borrowing base requirements, as of October 30, 2010, there was $139.5 million of availability remaining.

 

Several of the Company’s debt agreements require compliance with covenants. The most restrictive of these requirements is contained in the Company’s Revolving Credit Agreement. During any period when the availability under the Revolving Credit Agreement drops below the greater of $50.0 million or 17.5% of the borrowing base, the Company is required to maintain a consolidated fixed charge coverage ratio of at least 1.1:1.0, calculated as the ratio of (a) EBITDA (net income plus interest charges, provision for taxes, depreciation and amortization expense, non-cash stock compensation expenses and other non-recurring, non-cash items) minus capital expenditures and income taxes paid to (b) the sum of debt service charges and restricted payments made. The failure to satisfy this covenant would constitute an event of default under the Revolving Credit Agreement, which would result in a cross-default under the Company’s Notes and Senior Secured Term Loan. As of October 30, 2010, the Company was in compliance with all such financial covenants.

 

Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange. The estimated fair value of long-term debt including current maturities was $301.2 million and $290.8 million as of October 30, 2010 and January 30, 2010, respectively.

 

During the third quarter of 2010, the Company invested $5.0 million in a restricted account as collateral for its retained liabilities included within existing insurance programs in lieu of a previously outstanding letter of credit. The collateral investment is included in other long term assets on the condensed consolidated balance sheet.

 

NOTE 7. Sale-Leaseback Transactions

 

During the thirty-nine weeks ended October 30, 2010, the Company sold one property to an unrelated third party. Net proceeds from this sale were $1.6 million. Concurrent with this sale, the Company entered into an agreement to lease the property back from the purchaser over a minimum lease term of 15 years. The Company classified this lease as an operating lease. The Company actively uses this property and considers the lease as a normal leaseback. A deferred gain of $0.4 million is being recognized over the minimum term of the lease. No sale leaseback transactions were completed during the thirteen weeks ended October 30, 2010.

 

During the thirteen and thirty-nine weeks ended October 31, 2009, the Company sold three properties to unrelated third parties. Net proceeds from these sales were $11.0 million. Concurrent with these sales, the Company entered into agreements to lease the properties back from the purchasers over minimum lease terms of 15 years. The Company classified these leases as operating leases. The Company actively uses these properties and considers the leases as normal leasebacks. A $1.4 million gain on the sale of these properties was recognized immediately upon execution of the sale and a $6.5 million gain was deferred. The deferred gain is being recognized over the minimum term of these leases.

 

The Company operated 602 store locations at October 30, 2010, of which 231 were owned and 371 were leased.

 

NOTE 8. Income Taxes

 

The Company recognizes taxes payable for the current year, as well as deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the 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. All available evidence, both positive and negative is considered to determine whether based on the weight of that evidence, a valuation allowance is needed. To

 

8



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establish this positive evidence, the Company considers future projections of income and various tax planning strategies for generating income sufficient to utilize the deferred tax assets. Based on its improved profitability, the Company released $2.2 million of valuation allowance relating to certain unitary state net operating loss carryforwards and credits during the thirty-nine weeks ended October 30, 2010.

 

For income tax benefits related to uncertain tax positions to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. During the thirteen and thirty-nine weeks ended October 30, 2010, the Company did not have a material change to its uncertain tax position liabilities. During the thirteen weeks ended October 31, 2009, the Company reduced its uncertain tax position liabilities by approximately $0.6 million, of which $0.2 million was interest, and during the thirty-nine weeks ended October 31, 2009, the Company reduced its uncertain tax position liabilities by $1.4 million, of which $0.7 million was interest. These reductions related to settlement of previously established liabilities with the applicable taxing authorities.

 

NOTE 9. Accumulated Other Comprehensive Loss

 

The following are the components of other comprehensive income:

 

 

 

Thirteen Weeks Ended

 

Thirty-nine Weeks Ended

 

(dollar amounts in thousands)

 

October 30,
2010

 

October 31,
2009

 

October 30,
2010

 

October 31,
2009

 

Net earnings

 

$

5,718

 

$

2,124

 

$

28,266

 

$

20,768

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Defined benefit plan adjustment

 

264

 

280

 

794

 

840

 

Derivative financial instrument adjustment

 

(226

)

(542

)

(1,823

)

496

 

Comprehensive income

 

$

5,756

 

$

1,862

 

$

27,237

 

$

22,104

 

 

The components of accumulated other comprehensive loss are:

 

(dollar amounts in thousands)

 

October 30, 2010

 

January 30, 2010

 

 

 

 

 

 

 

Defined benefit plan adjustment, net of tax

 

$

(6,364

)

$

(7,158

)

Derivative financial instrument adjustment, net of tax

 

(12,356

)

(10,533

)

Accumulated other comprehensive loss

 

$

(18,720

)

$

(17,691

)

 

NOTE 10: Impairments and Assets Held for Disposal

 

The Company evaluates the ability to recover long-lived assets whenever events or circumstances indicate that the carrying value of the asset may not be recoverable. In the event assets are impaired, losses are recognized to the extent the carrying value exceeds fair value. In addition, the Company reports assets held for disposal at the lower of the carrying amount or the estimated fair market value, net of disposal costs. A store is classified as “held for disposal” when (i) the Company has committed to a plan to sell, (ii) the building is vacant and the property is available for sale, (iii) the Company is actively marketing the property for sale, (iv) the sale price is reasonable in relation to its current fair value and (v) the Company expects to complete the sale within one year. No depreciation expense is recognized during the period the asset is held for disposal.

 

During the second quarter of fiscal 2010, the Company recorded an $0.8 million impairment charge related to two stores classified as held and used. The Company used a probability-weighted approach and estimates of expected future cash flows to determine the fair value of these stores. Discount and growth rate assumptions were derived from current economic conditions, management’s expectations and projected trends of current operating results. The fair market value estimate is classified as a Level 3 measure within the fair value hierarchy. Of the $0.8 million impairment charge, $0.6 million was charged to cost of merchandise sales, and $0.2 million was charged to cost of service revenues.

 

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During the second quarter of fiscal 2010, the Company also recorded a $0.2 million impairment charge related to a store classified as held for disposal. The Company lowered its selling price reflecting declines in the commercial real estate market. The fair market value of the store is classified as a Level 2 measure within the fair value hierarchy. Substantially all of this impairment was charged to cost of merchandise sales.

 

During the thirteen week period ended October 30, 2010, the Company sold one store classified as held for disposal for net proceeds of $0.6 million and recognized a net gain of $0.2 million. During the thirteen week period ended October 31, 2009, the Company did not sell any stores classified as held for disposal. During the thirty-nine week period ended October 30, 2010, the Company sold five stores classified as held for disposal for net proceeds of $3.5 million and recognized a net gain of $0.5 million. During the thirty-nine week period ended October 31, 2009, the Company sold three stores that were classified as held for disposal for net proceeds of $2.8 million and recognized a net gain of $0.1 million. In the third quarter of 2009, the Company recorded an impairment charge of $3.3 million on the then remaining stores classified as held for disposal reflecting further declines in the real estate market for vacant properties. The fair market value of the stores is classified as a Level 2 measure within the fair value hierarchy. Of the entire $3.3 million impairment, $2.5 million was charged to cost of merchandise sales, $0.7 million was charged to cost of service revenues and $0.2 million was charged to discontinued operations.

 

Assets held for disposal are as follows:

 

(dollar amounts in thousands)

 

October 30, 2010

 

January 30, 2010

 

 

 

 

 

 

 

Land

 

$

949

 

$

2,980

 

Buildings and improvements

 

1,870

 

5,453

 

Accumulated depreciation and amortization

 

(1,441

)

(3,995

)

Property and equipment - net

 

$

1,378

 

$

4,438

 

Number of properties

 

3

 

8

 

 

In addition to the above stores, the Company reached a settlement agreement during the second quarter of 2010 on a previously closed store for $2.8 million, resulting in a net gain from the disposition of assets of $2.1 million.

 

NOTE 11. Earnings Per Share

 

The following table presents the calculation of basic and diluted earnings per share for earnings from continuing operations and net earnings:

 

 

 

Thirteen Weeks Ended

 

Thirty-nine Weeks Ended

 

(in thousands, except per share amounts)

 

October 30,
2010

 

October 31,
2009

 

October 30,
2010

 

October 31,
2009

 

 

 

 

 

 

 

 

 

 

 

(a)

Earnings from continuing operations

 

$

5,674

 

$

2,357

 

$

28,633

 

$

21,278

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of tax

 

44

 

(233

)

(367

)

(510

)

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

5,718

 

$

2,124

 

$

28,266

 

$

20,768

 

 

 

 

 

 

 

 

 

 

 

 

(b)

Basic average number of common shares outstanding during period

 

52,717

 

52,419

 

52,637

 

52,379

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

447

 

367

 

434

 

242

 

 

 

 

 

 

 

 

 

 

 

 

(c)

Diluted average number of common shares assumed outstanding during period

 

53,164

 

52,786

 

53,071

 

52,621

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations (a/b)

 

$

0.11

 

$

0.05

 

$

0.54

 

$

0.41

 

 

Discontinued operations, net of tax

 

 

(0.01

)

(0.01

)

(0.01

)

 

Basic earnings per share

 

$

0.11

 

$

0.04

 

$

0.53

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

Net earnings from continuing operations (a/c)

 

$

0.11

 

$

0.04

 

$

0.54

 

$

0.40

 

 

Discontinued operations, net of tax

 

 

 

(0.01

)

 

 

Diluted earnings per share

 

$

0.11

 

$

0.04

 

$

0.53

 

$

0.40

 

 

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Table of Contents

 

At October 30, 2010 and October 31, 2009, respectively, there were 2,321,000 and 1,949,000 outstanding options and restricted stock units. Certain stock options were excluded from the calculation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares for the periods then ended and therefore would be anti-dilutive. The total numbers of such shares excluded from the diluted earnings per share calculation are 1,059,000 and 901,000 for the thirteen weeks ended October 30, 2010 and October 31, 2009, respectively. The total number of such shares excluded from the diluted earnings per share calculation are 1,078,000 and 1,203,000 for the thirty-nine weeks ended October 30, 2010 and October 31, 2009, respectively.

 

NOTE 12. Benefit Plans

 

The Company has a qualified 401(k) savings plan and a separate plan for employees residing in Puerto Rico, which cover all full-time employees who are at least 21 years of age with one or more years of service. The Company’s expense related to the savings plans was approximately $0.9 million and $0.6 million for the thirteen weeks ended October 30, 2010 and October 31, 2009, respectively and approximately $2.5 million and $2.4 million for the thirty-nine weeks ended October 30, 2010 and October 31, 2009, respectively. The Company also maintains a non-qualified defined contribution Supplemental Executive Retirement Plan (the “Account Plan”) for key employees designated by the Board of Directors. The Company’s expense for the Account Plan was approximately $0.3 million and $0.2 million for the thirteen weeks ended October 30, 2010 and October 31, 2009, respectively and approximately $1.0 million and $0.7 million for the thirty-nine weeks ended October 30, 2010 and October 31, 2009, respectively. The Company’s contribution to these plans for fiscal 2010 is contingent upon meeting certain performance metrics. The Company currently estimates that these performance metrics will be achieved and has recorded expense accordingly.

 

The Company also has a frozen defined benefit pension plan covering the Company’s full-time employees hired on or before February 1, 1992. The Company’s expense for its pension plan follows:

 

 

 

Thirteen Weeks Ended

 

Thirty-nine Weeks Ended

 

(dollar amounts in thousands)

 

October 30, 2010

 

October 31, 2009

 

October 30, 2010

 

October 31, 2009

 

 

 

 

 

 

 

 

 

 

 

Interest cost

 

640

 

635

 

1,920

 

1,904

 

Expected return on plan assets

 

(538

)

(451

)

(1,613

)

(1,353

)

Amortization of prior service cost

 

 

3

 

 

10

 

Amortization of net loss

 

421

 

442

 

1,264

 

1,326

 

Net periodic benefit cost

 

$

523

 

$

629

 

$

1,571

 

$

1,887

 

 

The defined benefit pension plan is subject to minimum funding requirements of the Employee Retirement Income Security Act of 1974 as amended. While the Company has no minimum funding requirement during fiscal 2010, it made a $5.0 million discretionary contribution to the defined benefit pension plan on October 22, 2010.

 

NOTE 13. Equity Compensation Plans

 

The Company has stock-based compensation plans, under which it grants stock options and restricted stock units to key employees and members of its Board of Directors. The Company generally recognizes compensation expense on a straight-line basis over the vesting period.

 

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

 

 

 

Number of Shares

 

Outstanding — January 30, 2010

 

1,682,325

 

Granted

 

303,556

 

Exercised

 

(38,738

)

Forfeited

 

(26,477

)

Expired

 

(29,142

)

Outstanding — October 30, 2010

 

1,891,524

 

 

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Table of Contents

 

During the thirty-nine weeks ended October 30, 2010 and October 31, 2009, the Company granted approximately 303,500 and 948,000 stock options with a weighted average grant date fair value of $4.26 and $2.10, respectively. These options have a seven year term and vest over a three year period with a third vesting on each of the three grant date anniversaries. The compensation expense recorded during the thirty-nine weeks ended October 30, 2010 for the options granted during fiscal 2010 was minimal.

 

Of the options granted in fiscal year 2009, the Company granted 736,000 stock options with a weighted average grant date fair value of $1.69. These options have a seven year term and include both a service and a market appreciation vesting requirement. These options vest over a three year period with a third vesting on each of the three grant date anniversaries, provided the market price of the Company’s stock has appreciated by a certain amount. From the date of grant, the market price of the Company’s stock must have appreciated, for at least 15 consecutive trading days, by $2.00 or more above grant price for 536,000 options and by $6.88 or more above grant price for 200,000 options in order to vest. The Company used a Monte Carlo simulation model to estimate the expected term and is recording the compensation expense over the service period for each separately vesting portion of the options granted. As of October 30, 2010, the market appreciation requirements of both grants have been satisfied.

 

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model, and in certain situations where the grant includes both a market and service condition as described more fully above, using a Monte Carlo simulation. Expected volatility is based on historical volatilities for a time period similar to that of the expected term. The risk-free rate is based on the U.S. treasury yield curve for issues with a remaining term equal to the expected term.

 

The following are the weighted-average assumptions:

 

 

 

October 30, 2010

 

October 31, 2009

 

Dividend yield

 

1.4

%

2.3

%

Expected volatility

 

55.7

%

65.2

%

Risk-free interest rate range:

 

 

 

 

 

High

 

2.0

%

2.3

%

Low

 

1.7

%

1.6

%

Ranges of expected lives in years

 

4 - 5

 

4 - 5

 

 

Restricted Stock Units

 

In the third quarter of fiscal 2010, the Company did not grant any restricted stock units.

 

In the second quarter of fiscal 2010, the Company granted approximately 52,000 restricted stock units to its non-employee directors of the Board that vested immediately. The fair value was $9.55 per unit and the Company recognized compensation expense of approximately $0.5 million for these restricted stock units.

 

In the first quarter of fiscal 2010, the Company granted approximately 105,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant and the Company achieves certain financial targets for fiscal year 2012. The number of underlying shares that may be issued upon vesting will range from 0% to 150%, depending upon the Company achieving the financial targets in fiscal year 2012. The fair value for these awards was $10.34 at the date of the grant. The compensation expense recorded during the thirty-nine weeks ended October 30, 2010 for these restricted stock units was minimal.

 

In the first quarter of fiscal 2010, the Company also granted approximately 52,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant and will become exercisable if the Company satisfies a market condition in fiscal 2012. The number of underlying shares that may become exercisable will range from 0% to 175% depending upon whether the market condition is achieved. The Company used a Monte Carlo simulation to estimate a $12.99 grant date fair value. The compensation expense recorded during the thirty-nine weeks ended October 30, 2010 for these restricted stock units was minimal.

 

In the first quarter of fiscal 2010, the Company granted approximately 61,000 restricted stock units related to officer’s deferred bonus match under the Company’s non-qualified deferred compensation plan, which vest over a three year period. The following table

 

12


 


Table of Contents

 

summarizes the units under the Company’s plan, assuming maximum vesting of underlying shares for the performance and market based awards described above:

 

 

 

Number of RSUs

 

Nonvested — January 30, 2010

 

232,593

 

Granted

 

362,283

 

Forfeited

 

(13,588

)

Vested

 

(151,676

)

Nonvested — October 30, 2010

 

429,612

 

 

NOTE 14. Fair Value Measurements and Derivatives

 

The Company’s fair value measurements consist of (a) non-financial assets and liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities.

 

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. There is a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

The following table provides information by level for assets and liabilities that are measured at fair value, on a recurring basis:

 

(dollar amounts in thousands)

 

Fair Value
at

 

Fair Value Measurements
Using Inputs Considered as

 

Description

 

October 30, 2010

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

107,253

 

$

107,253

 

 

 

 

 

Collateral investments (a)

 

$

5,000

 

$

5,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Derivative liability (b)

 

$

28

 

 

 

$

28

 

 

 

Contingent consideration (b)

 

$

144

 

 

 

 

 

$

144

 

Other liabilities

 

 

 

 

 

 

 

 

 

Derivative liability (c)

 

$

19,388

 

 

 

$

19,388

 

 

 

Contingent consideration (c)

 

$

1,340

 

 

 

 

 

$

1,340

 

 


(a)          Included in other long-term assets

(b)         included in accrued liabilities

(c)          included in other long-term liabilities

 

The Company has one interest rate swap designated as a cash flow hedge on $145.0 million of the Company’s Senior Secured Term Loan that is due in October 2013. The swap is used to minimize interest rate exposure and overall interest costs by converting the variable component of the total interest rate to a fixed rate of 5.036%. Since February 1, 2008, this swap was deemed to be fully effective and all adjustments in the interest rate 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 financial statements for the periods indicated:

 

(dollar amounts in thousands)

 

Amount of Loss in
Other Comprehensive
Income
(Effective Portion)

 

Earnings Statement
Classification

 

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

 

Thirteen weeks ended October 30, 2010

 

$

(256

)

Interest expense

 

$

(1,721

)

Thirty-nine weeks ended October 30, 2010

 

$

(1,877

)

Interest expense

 

$

(5,169

)

 

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

 

In the second quarter of fiscal 2010, the Company entered into a price stability agreement (“Agreement”) that is also designated as a cash flow hedge. This Agreement is intended to hedge the price risks associated with the market volatility of retail gasoline. This hedge is deemed to be fully effective and all adjustments in the hedge’s fair value have been recorded to accumulated other comprehensive loss. The effect of this Agreement on the Company’s condensed consolidated financial statements is immaterial.

 

The fair value of the derivatives was $19.4 million and $16.4 million payable at October 30, 2010 and January 30, 2010, respectively. Of the $3.0 million increase in the fair value during the thirty-nine weeks ended October 30, 2010, $1.9 million net of tax was recorded to accumulated other comprehensive loss on the condensed consolidated balance sheet.

 

Non-financial assets measured at fair value on a non-recurring basis:

 

Certain assets are measured at fair value on a non-recurring basis, that is, the assets are subject to fair value adjustments in certain circumstances such as when there is evidence of impairment. These measures of fair value, and related inputs, are considered level 2 or level 3 measures under the fair value hierarchy.

 

NOTE 15. Legal Matters

 

In the fourth quarter of fiscal 2008, the United States Environmental Protection Agency (“EPA”) informed the Company that it believed that the Company had violated the Clean Air Act by virtue of the fact that certain of this merchandise did not conform to their corresponding EPA Certificates of Conformity. During the third quarter of fiscal 2009, the Company and the EPA reached a settlement in principle of this matter requiring that the Company (i) pay a monetary penalty of $5.0 million, (ii) take certain corrective action with respect to certain inventory that had been restricted from sale during the course of the investigation, (iii) implement a formal compliance program and (iv) participate in certain non-monetary emission offset activities. The Company had previously accrued an amount equal to the agreed upon civil penalty and a $3.0 million contingency accrual with respect to the restricted inventory. During fiscal 2009, the Company reversed $2.0 million of the inventory accrual as a portion of the subject inventory was released for sale. During the second quarter of fiscal 2010, the Company reversed the remaining $1.0 million of the inventory accrual as the Company reached an agreement with the merchandise vendor to cover the entire cost of retrofitting a portion of the remaining subject merchandise and to accept the balance of the subject inventory for return for full credit. During the second quarter of fiscal 2010, the formal settlement agreement between the Company and the EPA became effective and the Company paid the monetary penalty.

 

The Company is also party to various other actions and claims arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with all such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the 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.

 

14



Table of Contents

 

NOTE 16. Supplemental Guarantor Information

 

The Company’s 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 30, 2010 and January 30, 2010 and the related condensed consolidating statements of operations for the thirteen and thirty-nine weeks ended October 30, 2010 and October 31, 2009 and condensed consolidating statements of cash flows for the thirty-nine weeks ended October 30, 2010 and October 31, 2009 for (i) the Company (“Pep Boys”) on a parent only basis, with its investment in subsidiaries recorded under the equity method, (ii) the Subsidiary Guarantors on a combined basis including the consolidation by PBY Corporation of its wholly owned subsidiary, The Pep Boys Manny Moe & Jack of California, (iii) the subsidiary of the Company that does not guarantee the Notes, and (iv) the Company on a consolidated basis.

 

CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

(unaudited)

 

As of October 30, 2010

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation/
Elimination

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

55,772

 

$

41,441

 

$

10,040

 

$

 

$

107,253

 

Accounts receivable, net

 

9,288

 

11,181

 

 

 

20,469

 

Merchandise inventories

 

195,180

 

373,412

 

 

 

568,592

 

Prepaid expenses

 

6,078

 

7,621

 

2,978

 

(30

)

16,647

 

Other current assets

 

974

 

2,662

 

52,776

 

(8,062

)

48,350

 

Assets held for disposal

 

903

 

475

 

 

 

1,378

 

Total current assets

 

268,195

 

436,792

 

65,794

 

(8,092

)

762,689

 

Property and equipment—net

 

232,033

 

447,825

 

31,033

 

(19,058

)

691,833

 

Investment in subsidiaries

 

1,806,873

 

 

 

(1,806,873

)

 

Intercompany receivables

 

 

1,089,934

 

62,075

 

(1,152,009

)

 

Deferred income taxes

 

7,457

 

47,004

 

 

 

54,461

 

Other long-term assets

 

20,785

 

1,232

 

 

 

22,017

 

Total assets

 

$

2,335,343

 

$

2,022,787

 

$

158,902

 

$

(2,986,032

)

$

1,531,000

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

207,838

 

$

 

$

 

$

 

$

207,838

 

Trade payable program liability

 

57,017

 

 

 

 

57,017

 

Accrued expenses

 

30,485

 

64,559

 

131,910

 

(2,692

)

224,262

 

Deferred income taxes

 

10,423

 

32,438

 

 

(5,400

)

37,461

 

Current maturities of long-term debt

 

1,079

 

 

 

 

1,079

 

Total current liabilities

 

306,842

 

96,997

 

131,910

 

(8,092

)

527,657

 

Long-term debt less current maturities

 

305,392

 

 

 

 

305,392

 

Other long-term liabilities

 

35,728

 

37,399

 

 

 

73,127

 

Deferred gain from asset sales

 

66,574

 

108,510

 

 

(19,058

)

156,026

 

Intercompany liabilities

 

1,152,009

 

 

 

(1,152,009

)

 

Total stockholders’ equity

 

468,798

 

1,779,881

 

26,992

 

(1,806,873

)

468,798

 

Total liabilities and stockholders’ equity

 

$

2,335,343

 

$

2,022,787

 

$

158,902

 

$

(2,986,032

)

$

1,531,000

 

 

15



Table of Contents

 

As of January 30, 2010

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation/
Elimination

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,844

 

$

10,279

 

$

3,203

 

$

 

$

39,326

 

Accounts receivable, net

 

13,032

 

9,951

 

 

 

22,983

 

Merchandise inventories

 

195,314

 

363,804

 

 

 

559,118

 

Prepaid expenses

 

12,607

 

15,070

 

14,255

 

(17,148

)

24,784

 

Other current assets

 

1,101

 

2,667

 

67,038

 

(5,378

)

65,428

 

Assets held for disposal

 

1,045

 

3,393

 

 

 

4,438

 

Total current assets

 

248,943

 

405,164

 

84,496

 

(22,526

)

716,077

 

Property and equipment—net

 

232,115

 

462,128

 

31,544

 

(19,337

)

706,450

 

Investment in subsidiaries

 

1,755,426

 

 

 

(1,755,426

)

 

Intercompany receivables

 

 

1,058,132

 

83,953

 

(1,142,085

)

 

Deferred income taxes

 

11,200

 

46,971

 

 

 

58,171

 

Other long-term assets

 

17,566

 

822

 

 

 

18,388

 

Total assets

 

$

2,265,250

 

$

1,973,217

 

$

199,993

 

$

(2,939,374

)

$

1,499,086

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

202,974

 

$

 

$

 

$

 

$

202,974

 

Trade payable program liability

 

34,099

 

 

 

 

34,099

 

Accrued expenses

 

24,042

 

62,106

 

173,429

 

(17,161

)

242,416

 

Deferred income taxes

 

6,626

 

28,723

 

 

(5,365

)

29,984

 

Current maturities of long-term debt

 

1,079

 

 

 

 

1,079

 

Total current liabilities

 

268,820

 

90,829

 

173,429

 

(22,526

)

510,552

 

Long-term debt less current maturities

 

306,201

 

 

 

 

306,201

 

Other long-term liabilities

 

35,125

 

38,808

 

 

 

73,933

 

Deferred gain from asset sales

 

69,724

 

114,718

 

 

(19,337

)

165,105

 

Intercompany liabilities

 

1,142,085

 

 

 

(1,142,085

)

 

Total stockholders’ equity

 

443,295

 

1,728,862

 

26,564

 

(1,755,426

)

443,295

 

Total liabilities and stockholders’ equity

 

$

2,265,250

 

$

1,973,217

 

$

199,993

 

$

(2,939,374

)

$

1,499,086

 

 

16



Table of Contents

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(dollars in thousands)

(unaudited)

 

 

 

 

 

Subsidiary

 

Subsidiary Non-

 

Consolidation /

 

 

 

Thirteen Weeks Ended October 30, 2010

 

Pep Boys

 

Guarantors

 

Guarantors

 

Elimination

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise sales

 

$

135,716

 

$

262,652

 

$

 

$

 

$

398,368

 

Service revenue

 

35,246

 

62,750

 

 

 

97,996

 

Other revenue

 

 

 

5,736

 

(5,736

)

 

Total revenues

 

170,962

 

325,402

 

5,736

 

(5,736

)

496,364

 

Costs of merchandise sales

 

96,266

 

183,831

 

 

(407

)

279,690

 

Costs of service revenue

 

31,960

 

58,896

 

 

(38

)

90,818

 

Costs of other revenue

 

 

 

5,067

 

(5,067

)

 

Total costs of revenues

 

128,226

 

242,727

 

5,067

 

(5,512

)

370,508

 

Gross profit from merchandise sales

 

39,450

 

78,821

 

 

407

 

118,678

 

Gross profit from service revenue

 

3,286

 

3,854

 

 

38

 

7,178

 

Gross profit from other revenue

 

 

 

669

 

(669

)

 

Total gross profit

 

42,736

 

82,675

 

669

 

(224

)

125,856

 

Selling, general and administrative expenses

 

37,672

 

73,920

 

88

 

(840

)

110,840

 

Net gain from dispositions of assets

 

(105

)

214

 

 

 

109

 

Operating profit

 

4,959

 

8,969

 

581

 

616

 

15,125

 

Non-operating (expense) income

 

(4,120

)

21,206

 

617

 

(17,053

)

650

 

Interest expense (income)

 

16,824

 

6,759

 

(516

)

(16,437

)

6,630

 

(Loss) earnings from continuing operations before income taxes

 

(15,985

)

23,416

 

1,714

 

 

9,145

 

Income tax (benefit) expense

 

(6,173

)

8,979

 

665

 

 

3,471

 

Equity in earnings of subsidiaries

 

15,517

 

 

 

(15,517

)

 

Net earnings from continuing operations

 

5,705

 

14,437

 

1,049

 

(15,517

)

5,674

 

Discontinued operations, net of tax

 

13

 

31

 

 

 

44

 

Net earnings

 

$

5,718

 

$

14,468

 

$

1,049

 

$

(15,517

)

$

5,718

 

 

 

 

 

 

Subsidiary

 

Subsidiary Non-

 

Consolidation /

 

 

 

Thirteen Weeks Ended October 31, 2009

 

Pep Boys

 

Guarantors

 

Guarantors

 

Elimination

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise Sales

 

$

127,689

 

$

251,171

 

$

 

$

 

$

378,860

 

Service Revenue

 

32,813

 

60,970

 

 

 

93,783

 

Other Revenue

 

 

 

5,723

 

(5,723

)

 

Total Revenues

 

160,502

 

312,141

 

5,723

 

(5,723

)

472,643

 

Costs of Merchandise Sales

 

91,008

 

179,003

 

 

(407

)

269,604

 

Costs of Service Revenue

 

28,607

 

56,201

 

 

(38

)

84,770

 

Costs of Other Revenue

 

 

 

4,270

 

(4,270

)

 

Total Costs of Revenues

 

119,615

 

235,204

 

4,270

 

(4,715

)

354,374

 

Gross Profit from Merchandise Sales

 

36,681

 

72,168

 

 

407

 

109,256

 

Gross Profit from Service Revenue

 

4,206

 

4,769

 

 

38

 

9,013

 

Gross Profit from Other Revenue

 

 

 

1,453

 

(1,453

)

 

Total Gross Profit

 

40,887

 

76,937

 

1,453

 

(1,008

)

118,269

 

Selling, General and Administrative Expenses

 

39,249

 

71,841

 

79

 

(1,624

)

109,545

 

Net Gain from Dispositions of Assets

 

877

 

455

 

 

 

1,332

 

Operating Profit

 

2,515

 

5,551

 

1,374

 

616

 

10,056

 

Non-Operating (Expense) Income

 

(3,650

)

21,650

 

616

 

(17,892

)

724

 

Interest Expense (Income)

 

17,280

 

7,440

 

(522

)

(17,276

)

6,922

 

(Loss) Earnings from Continuing Operations Before Income Taxes

 

(18,415

)

19,761

 

2,512

 

 

3,858

 

Income Tax (Benefit) Expense

 

(6,760

)

7,208

 

1,053

 

 

1,501

 

Equity in Earnings of Subsidiaries

 

13,791

 

 

 

(13,791

)

 

Net Earnings from Continuing Operations

 

2,136

 

12,553

 

1,459

 

(13,791

)

2,357

 

Discontinued Operations, Net of Tax

 

(12

)

(221

)

 

 

(233

)

Net Earnings

 

$

2,124

 

$

12,332

 

$

1,459

 

$

(13,791

)

$

2,124

 

 

17



Table of Contents

 

 

 

 

 

Subsidiary

 

Subsidiary Non-

 

Consolidation /

 

 

 

Thirty-nine Weeks Ended October 30, 2010

 

Pep Boys

 

Guarantors

 

Guarantors

 

Elimination

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise sales

 

$

421,160

 

$

792,576

 

$

 

$

 

$

1,213,736

 

Service revenue

 

107,616

 

189,900

 

 

 

297,516

 

Other revenue

 

 

 

17,208

 

(17,208

)

 

Total revenues

 

528,776

 

982,476

 

17,208

 

(17,208

)

1,511,252

 

Costs of merchandise sales

 

296,773

 

550,298

 

 

(1,223

)

845,848

 

Costs of service revenue

 

94,316

 

173,250

 

 

(114

)

267,452

 

Costs of other revenue

 

 

 

16,628

 

(16,628

)

 

Total costs of revenues

 

391,089

 

723,548

 

16,628

 

(17,965

)

1,113,300

 

Gross profit from merchandise sales

 

124,387

 

242,278

 

 

1,223

 

367,888

 

Gross profit from service revenue

 

13,300

 

16,650

 

 

114

 

30,064

 

Gross profit from other revenue

 

 

 

580

 

(580

)

 

Total gross profit

 

137,687

 

258,928

 

580

 

757

 

397,952

 

Selling, general and administrative expenses

 

118,983

 

217,431

 

258

 

(1,092

)

335,580

 

Net gain from dispositions of assets

 

1,975

 

628

 

 

 

2,603

 

Operating profit

 

20,679

 

42,125

 

322

 

1,849

 

64,975

 

Non-operating (expense) income

 

(12,533

)

61,727

 

1,850

 

(49,189

)

1,855

 

Interest expense (income)

 

49,176

 

19,610

 

(1,565

)

(47,340

)

19,881

 

(Loss) earnings from continuing operations before income taxes

 

(41,030

)

84,242

 

3,737

 

 

46,949

 

Income tax (benefit) expense

 

(16,029

)

32,884

 

1,461

 

 

18,316

 

Equity in earnings of subsidiaries

 

53,295

 

 

 

(53,295

)

 

Net earnings from continuing operations

 

28,294

 

51,358

 

2,276

 

(53,295

)

28,633

 

Discontinued operations, net of tax

 

(28

)

(339

)

 

 

(367

)

Net earnings

 

$

28,266

 

$

51,019

 

$

2,276

 

$

(53,295

)

$

28,266

 

 

 

 

 

 

Subsidiary

 

Subsidiary Non-

 

Consolidation /

 

 

 

Thirty-nine Weeks Ended October 31, 2009

 

Pep Boys

 

Guarantors

 

Guarantors

 

Elimination

 

Consolidated

 

Merchandise Sales

 

$

397,677

 

$

771,431

 

$

 

$

 

$

1,169,108

 

Service Revenue

 

101,672

 

187,262

 

 

 

288,934

 

Other Revenue

 

 

 

17,168

 

(17,168

)

 

Total Revenues

 

499,349

 

958,693

 

17,168

 

(17,168

)

1,458,042

 

Costs of Merchandise Sales

 

282,482

 

545,170

 

 

(1,223

)

826,429

 

Costs of Service Revenue

 

86,371

 

169,296

 

 

(114

)

255,553

 

Costs of Other Revenue

 

 

 

16,412

 

(16,412

)

 

Total Costs of Revenues

 

368,853

 

714,466

 

16,412

 

(17,749

)

1,081,982

 

Gross Profit from Merchandise Sales

 

115,195

 

226,261

 

 

1,223

 

342,679

 

Gross Profit from Service Revenue

 

15,301

 

17,966

 

 

114

 

33,381

 

Gross Profit from Other Revenue

 

 

 

756

 

(756

)

 

Total Gross Profit

 

130,496

 

244,227

 

756

 

581

 

376,060

 

Selling, General and Administrative Expenses

 

116,471

 

211,643

 

234

 

(1,268

)

327,080

 

Net Gain from Dispositions of Assets

 

891

 

428

 

 

 

1,319

 

Operating Profit

 

14,916

 

33,012

 

522

 

1,849

 

50,299

 

Non-Operating (Expense) Income

 

(11,700

)

64,429

 

1,855

 

(52,918

)

1,666

 

Interest Expense (Income)

 

45,680

 

22,278

 

(1,565

)

(51,069

)

15,324

 

(Loss) Earnings from Continuing Operations Before Income Taxes

 

(42,464

)

75,163

 

3,942

 

 

36,641

 

Income Tax (Benefit) Expense

 

(17,865

)

31,569

 

1,659

 

 

15,363

 

Equity in Earnings of Subsidiaries

 

45,372

 

 

 

(45,372

)

 

Net Earnings from Continuing Operations

 

20,773

 

43,594

 

2,283

 

(45,372

)

21,278

 

Discontinued Operations, Net of Tax

 

(5

)

(505

)

 

 

(510

)

Net Earnings

 

$

20,768

 

$

43,089

 

$

2,283

 

$

(45,372

)

$

20,768

 

 

18



Table of Contents

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

Thirty-nine Weeks Ended October 30, 2010

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation /
Elimination

 

Consolidated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

28,266

 

$

51,019

 

$

2,276

 

$

(53,295

)

$

28,266

 

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

 

(24,436

)

31,651

 

476

 

51,447

 

59,138

 

Changes in operating assets and liabilities

 

21,750

 

(1,148

)

(15,945

)

 

4,657

 

Net cash provided by (used in) continuing operations

 

25,580

 

81,522

 

(13,193

)

(1,848

)

92,061

 

Net cash used in discontinued operations

 

(30

)

(1,233

)

 

 

(1,263

)

Net cash provided by (used in) operating activities

 

25,550

 

80,289

 

(13,193

)

(1,848

)

90,798

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in continuing operations

 

(23,593

)

(17,814

)

 

 

(41,407

)

Net cash provided by discontinued operations

 

 

569

 

 

 

569

 

Net cash used in investing activities

 

(23,593

)

(17,245

)

 

 

(40,838

)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

27,971

 

(31,882

)

20,030

 

1,848

 

17,967

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

29,928

 

31,162

 

6,837

 

 

67,927

 

Cash and cash equivalents at beginning of period

 

25,844

 

10,279

 

3,203

 

 

39,326

 

Cash and cash equivalents at end of period

 

$

55,772

 

$

41,441

 

$

10,040

 

$

 

$

107,253

 

 

Thirty-Nine Weeks Ended October 31, 2009

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation /
Elimination

 

Consolidated

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

20,768

 

$

43,089

 

$

2,283

 

$

(45,372

)

$

20,768

 

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

 

(30,554

)

35,260

 

1,360

 

43,523

 

49,589

 

Changes in operating assets and liabilities

 

29,151

 

(1,436

)

(15,517

)

 

12,198

 

Net cash provided by (used in) continuing operations

 

19,365

 

76,913

 

(11,874

)

(1,849

)

82,555

 

Net cash used in discontinued operations

 

(5

)

(589

)

 

 

(594

)

Net Cash Provided by (Used in) Operating Activities

 

19,360

 

76,324

 

(11,874

)

(1,849

)

81,961

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in continuing operations

 

(11,144

)

(7,648

)

 

 

(18,792

)

Net cash provided by discontinued operations

 

 

1,762

 

 

 

1,762

 

Net Cash Used in Investing Activities

 

(11,144

)

(5,886

)

 

 

(17,030

)

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Provided by (Used In) Financing Activities

 

5,066

 

(68,097

)

15,762

 

1,849

 

(45,420

)

 

 

 

 

 

 

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

13,282

 

2,341

 

3,888

 

 

19,511

 

Cash and Cash Equivalents at Beginning of Period

 

12,753

 

6,393

 

2,186

 

 

21,332

 

Cash and Cash Equivalents at End of Period

 

$

26,035

 

$

8,734

 

$

6,074

 

$

 

$

40,843

 

 

19



Table of Contents

 

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

 

OVERVIEW

 

The following discussion and analysis explains the results of operations for the third fiscal quarter and the first nine months of 2010 and 2009 and significant developments affecting our financial condition for the first nine months of 2010. This discussion and analysis should be read in conjunction with the condensed consolidated interim financial statements and the notes to such condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, and the consolidated financial statements and the notes to such financial statements included in Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the fiscal year ended January 30, 2010.

 

Introduction

 

The Pep Boys-Manny, Moe & Jack is the only national chain offering automotive service, tires, parts and accessories. This positioning allows us to streamline the distribution channel and pass the savings on to our customers facilitating our vision of being the automotive solutions provider of choice for the value oriented customer. The majority of our stores are in a Supercenter format, which serves both “do-it-for-me” (“DIFM”, which includes service labor, installed merchandise and tires) and “do-it-yourself” (“DIY” or retail) customers with the highest quality service offerings and merchandise. Most of our Supercenters also have a commercial sales program that provides delivery of tires, parts and other products to automotive repair shops and dealers. In 2009, as part of our long-term strategy to lead with automotive service, we began complementing our existing Supercenter store base with Service & Tire Centers. These Service & Tire Centers are designed to capture market share and leverage our existing Supercenter and support infrastructure. We opened 24 Service & Tire Centers in fiscal 2009 and year-to-date in fiscal 2010 we have opened an additional 11 locations. We also opened four new Supercenters including two smaller prototypes (14,000 sq. feet) in fiscal 2010. We are targeting a total of 35 new locations in fiscal 2010 and 55 in fiscal 2011. As of October 30, 2010, we operated 557 Supercenters and 36 Service & Tire Centers, as well as nine legacy Pep Boys Express (retail only) stores throughout 35 states and Puerto Rico.

 

EXECUTIVE SUMMARY

 

Net earnings for the third quarter of 2010 were $5.7 million, a $3.6 million improvement over the $2.1 million reported for the third quarter of 2009. The increase in profitability was the result of increased sales across all lines of business and improved total gross profit margins, partially offset by a minimal increase in selling, general and administrative expenses.

 

Our diluted earnings per share for the third quarter and first nine months of 2010 were $0.11 and $0.53, respectively, an improvement of $0.07 and $0.13 over the $0.04 and $0.40 recorded for the corresponding periods of 2009.

 

Total revenue increased for the third quarter and first nine months of 2010 by 5.0% and 3.6%, respectively, as compared to the same periods of the prior year. For the third quarter of 2010, comparable store sales (sales generated by locations in operation during the same period) increased by 3.5% compared to an increase of 1.6% for the prior year quarter. This increase in comparable store sales included a 3.9% increase in comparable store merchandise sales and a 1.9% increase in comparable store service revenue. For the first nine months of 2010, our comparable store sales increased by 2.2% compared to a decrease of 0.4% for the prior year period. This increase in comparable store sales included a 2.7% increase in comparable store merchandise sales and a 0.4% increase in comparable store service revenue.

 

Various economic factors affect both our consumers and our industry. Sales of non-discretionary product categories are primarily impacted by miles driven, which have returned to pre-recession low single-digit growth rates from February 2010 through September 2010 (latest publicly available information), in part due to lower gasoline prices. Given the uncertainty of gasoline prices, we cannot predict whether gasoline prices will increase or decrease in the future, nor can we predict how any future changes in gasoline prices will impact miles driven in future periods. In addition, we believe that continued high unemployment, the recent recession and the credit crisis have also benefited our non-discretionary product categories as customers have focused on maintaining their existing vehicles rather than purchasing new vehicles. However, these same trends have negatively impacted sales in our discretionary product categories like accessories and complementary merchandise, although the rate of decline has moderated significantly since the beginning of fiscal 2010 and were flat in the current year third quarter as compared to the corresponding period of the prior year.

 

We continue to focus on refining and expanding our parts assortment to improve our in-stock position, improving execution and the customer experience, utilizing television and radio advertising to communicate our value offerings and growing our rewards program to build customer loyalty and drive repeat business. We believe these efforts are responsible for increased customer traffic in our stores in all lines of business for the third quarter and first nine months of 2010.

 

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RESULTS OF OPERATIONS

 

The following discussion explains the material changes in our results of operations.

 

Analysis of Statement of Operations

 

Thirteen weeks ended October 30, 2010 vs. Thirteen weeks ended October 31, 2009

 

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

 

 

 

Percentage of Total Revenues

 

Percentage Change

 

Thirteen weeks ended

 

October 30, 2010
(Fiscal 2010)

 

October 31, 2009
(Fiscal 2009)

 

Favorable
(Unfavorable)

 

 

 

 

 

 

 

 

 

Merchandise sales

 

80.3

%

80.2

%

5.1

%

Service revenue (1)

 

19.7

 

19.8

 

4.5

 

Total revenues

 

100.0

 

100.0

 

5.0

 

Costs of merchandise sales (2)

 

70.2

(3)

71.2

(3)

(3.7

)

Costs of service revenue (2)

 

92.7

(3)

90.4

(3)

(7.1

)

Total costs of revenues

 

74.6

 

75.0

 

(4.6

)

Gross profit from merchandise sales

 

29.8

(3)

28.8

(3)

8.6

 

Gross profit from service revenue

 

7.3

(3)

9.6

(3)

(20.4

)

Total gross profit

 

25.4

 

25.0

 

6.4

 

Selling, general and administrative expenses

 

22.3

 

23.2

 

(1.2

)

Net gain (loss) from dispositions of assets

 

 

0.3

 

(91.8

)

Operating profit

 

3.0

 

2.1

 

50.4

 

Non-operating income

 

0.1

 

0.2

 

(10.2

)

Interest expense

 

1.3

 

1.5

 

4.2

 

Earnings from continuing operations before income taxes

 

1.8

 

0.8

 

137.0

 

Income tax expense

 

38.0

(4)

38.9

(4)

(131.2

)

Earnings from continuing operations

 

1.1

 

0.5

 

140.7

 

Discontinued operations, net of tax

 

 

 

118.9

 

Net Earnings

 

1.2

 

0.4

 

169.2

 

 


(1)

 

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

(2)

 

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

(3)

 

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

(4)

 

As a percentage of earnings from continuing operations before income taxes.

 

Total revenue and comparable store sales for the third quarter of 2010 increased 5.0% and 3.5%, respectively, as compared to the third quarter of 2009. Total revenue for the third quarter of 2010 increased by $23.7 million to $496.4 million from $472.6 million in the third quarter of 2009. The 3.5% increase in comparable store sales consisted of increases of 3.9% in comparable store merchandise sales and 1.9% in comparable store service revenue. While our total revenue figures were favorably impacted by the opening of new stores, a new store is not added to our comparable store sales until it reaches its 13th month of operation. Non-comparable stores contributed an additional $7.2 million of total revenue in the third quarter of 2010 as compared to the third quarter of 2009. Total comparable store sales increased due to growth in customer counts in all three lines of business combined with an increase in the average transaction amount per customer.

 

Total merchandise sales increased 5.1%, or $19.5 million, to $398.4 million in the third quarter of fiscal 2010, compared to $378.9 million during the prior year quarter. Comparable store merchandise sales increased 3.9%, or $14.7 million, as compared to the prior

 

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year quarter, driven primarily by a higher average transaction amount per customer combined with an increase in comparable store customer count. The balance of the increase in merchandise sales was due to the contribution from our new stores. Total service revenue increased 4.5% to $98.0 million in the third quarter of 2010 from the $93.8 million recorded in the prior year quarter. Comparable store service revenue increased 1.9% due to higher customer counts partially offset by a decrease in average transaction amount per customer. The remaining increase in service revenue was due to the contribution from our new stores which accounted for an additional $2.4 million of service revenue.

 

In the third quarter of 2010, comparable store customer counts increased versus the third quarter of 2009 due to our traffic-driving promotional events and rewards program, and customer receptiveness to our improved in-stock position and better store execution. We also experienced a 5.0% increase in comparable store sales of our core automotive parts categories which make up approximately 81% of our merchandise sales. Sales of our discretionary product categories were relatively flat as compared to the prior year quarter. We believe that utilizing innovative marketing programs to communicate our value-priced, differentiated merchandise assortment will continue to drive increased customer counts and that our continued focus on delivering a better customer experience than our competitors will convert those increased customer counts into sales improvements consistently over all lines of business.

 

Gross profit from merchandise sales increased by $9.4 million, or 8.6%, to $118.7 million for the third quarter of 2010 from $109.3 million in the third quarter of 2009. Gross profit margin from merchandise sales increased to 29.8% for the third quarter of 2010 from 28.8% for the third quarter of 2009. Gross profit from merchandise sales for the third quarter of 2009 included an asset impairment charge of $2.4 million, offset by the reversal of inventory related accruals of $1.0 million and a gain from an insurance settlement of $0.6 million. Excluding these adjustments, gross profit margin from merchandise sales increased to 29.8% from 29.1% in the prior year quarter. The increase in gross profit margins was primarily due to increased merchandise sales which resulted in higher absorption of occupancy costs such as rent and utilities, improved inventory shrinkage, and lower defective product expense, slightly offset by higher in-bound freight costs.

 

Gross profit from service revenue decreased by $1.8 million, or 20.4%, to $7.2 million in the third quarter of 2010 from $9.0 million recorded in the third quarter of 2009. Gross profit margin from service revenue decreased to 7.3% for the third quarter of 2010 from 9.6% for the prior year quarter. Gross profit from service revenue for the third quarter of 2009 included an asset impairment charge of $0.7 million. Excluding this adjustment, gross profit margin from service revenue decreased to 7.3% for the third quarter of 2010  from 10.3% in the prior year quarter. The decrease in gross profit was due to higher payroll and related expenses, including health insurance costs, state payroll taxes and workers compensation claims, which increased by 131 basis points as compared to the prior year quarter. In addition, there was an unfavorable impact on gross profit from service revenue due to our new Service & Tire Centers, which are in their ramp up stage for sales while incurring the full amount of fixed expenses, including payroll and occupancy costs (includes such items as rent, utilities and building maintenance). Our new Service & Tire Centers negatively impacted gross margins by 149 basis points in the third quarter of 2010  as compared to prior year third quarter.

 

Selling, general and administrative expenses as a percentage of total revenues decreased to 22.3% for the third quarter of 2010 from 23.2% for the third quarter of 2009. Selling, general and administrative expenses increased $1.3 million, or 1.2%, to $110.8 million in the third quarter of 2010 from $109.5 million in the prior year quarter. The reduction as a percentage of sales reflects improved leverage of selling, general and administrative expenses achieved through increased sales in the third quarter of 2010.

 

Net gains from the disposition of assets declined by $1.2 million to $0.1 million in the third quarter of 2010 from $1.3 million in the prior year quarter. The third quarter of 2009 included gains of $1.3 million from the sale and leaseback of three stores.

 

Interest expense declined by $0.3 million to $6.6 million in the third quarter of 2010 compared to $6.9 million in the third quarter of 2009.

 

Our income tax expense for the third quarter of 2010 was $3.5 million, or an effective rate of 38.0%, as compared to an expense of $1.5 million, or an effective rate of 38.9%, for the third quarter of 2009. The annual rate depends on a number of factors, including the jurisdiction in which operating profit is earned and the timing and nature of discrete items.

 

As a result of the foregoing, we reported net earnings of $5.7 million in the third quarter of 2010 as compared to net earnings of $2.1 million in the prior year period. Our basic and diluted earnings per share were $0.11 for the third quarter of 2010, as compared to $0.04 for the prior year quarter.

 

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Table of Contents

 

Thirty-nine weeks ended October 30, 2010 vs. Thirty-nine weeks ended October 31, 2009

 

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

 

 

 

Percentage of Total Revenues

 

Percentage Change

 

Thirty-nine weeks ended

 

October 30, 2010
(Fiscal 2010)

 

October 31, 2009
(Fiscal 2009)

 

Favorable
(Unfavorable)

 

 

 

 

 

 

 

 

 

Merchandise sales

 

80.3

%

80.2

%

3.8

%

Service revenue (1)

 

19.7

 

19.8

 

3.0

 

Total revenues

 

100.0

 

100.0

 

3.6

 

Costs of merchandise sales (2)

 

69.7

(3)

70.7

(3)

(2.3

)

Costs of service revenue (2)

 

89.9

(3)

88.4

(3)

(4.7

)

Total costs of revenues

 

73.7

 

74.2

 

(2.9

)

Gross profit from merchandise sales

 

30.3

(3)

29.3

(3)

7.4

 

Gross profit from service revenue

 

10.1

(3)

11.6

(3)

(9.9

)

Total gross profit

 

26.3

 

25.8

 

5.8

 

Selling, general and administrative expenses

 

22.2

 

22.4

 

(2.6

)

Net gain (loss) from dispositions of assets

 

0.2

 

0.1

 

97.3

 

Operating profit

 

4.3

 

3.4

 

29.2

 

Non-operating income

 

0.1

 

0.1

 

11.3

 

Interest expense

 

1.3

 

1.1

 

(29.7

)

Earnings from continuing operations before income taxes

 

3.1

 

2.5

 

28.1

 

Income tax expense

 

39.0

(4)

41.9

(4)

(19.2

)

Earnings from continuing operations

 

1.9

 

1.5

 

34.6

 

Discontinued operations, net of tax

 

 

 

28.0

 

Net Earnings

 

1.9

 

1.4

 

36.1

 

 


(1)

 

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

(2)

 

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

(3)

 

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

(4)

 

As a percentage of earnings from continuing operations before income taxes.

 

Total revenue and comparable store sales for the first nine months of 2010 increased 3.6% and 2.2%, respectively, as compared to the first nine months of 2009. The 2.2% increase in comparable store sales consisted of increases of 2.7% in comparable store merchandise sales and 0.4% in comparable store service revenue. While our total revenue figures were favorably impacted by the opening of new stores, a new store is not added to our comparable store sales until it reaches its 13th month of operation. Non-comparable stores contributed an additional $21.0 million of total revenue in the first nine months of 2010 as compared to the prior year period. Total comparable store sales increased due to growth in customer counts in all three lines of business combined with an increase in the average transaction amount.

 

Gross profit from merchandise sales increased by $25.2 million, or 7.4%, to $367.9 million for the first nine months of 2010 from $342.7 million in the first nine months of 2009. Gross profit margin from merchandise sales increased to 30.3% from 29.3% in the prior year period. The increase in gross profit margin was primarily due to lower inventory shrinkage and lower defective product expenses.

 

Gross profit from service revenue decreased by $3.3 million, or 9.9%, to $30.1 million in the first nine months of 2010 from $33.4 million in the first nine months of 2009. Gross profit margin from service revenue decreased to 10.1% for the first nine months of 2010 from 11.6% for the prior year period. The decrease in gross profit was primarily due to higher payroll and related expenses and occupancy costs (rent, utilities and building maintenance), which increased by 140 basis points combined as compared to the prior

 

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Table of Contents

 

year period, incurred at our new Service & Tire Centers. Excluding the impact of the new Service & Tire Centers, which are in their ramp up stage for sales while incurring the full amount of fixed expenses, margins remained relatively flat period over period.

 

Selling, general and administrative expenses as a percentage of total revenues decreased to 22.2% for the first nine months of 2010 from 22.4% for the first nine months of 2009. Selling, general and administrative expenses increased $8.5 million, or 2.6%, over the amount recorded in the first nine months of 2009. The increase was primarily due to higher payroll and related benefits expense of $6.8 million and increased media expense of $1.5 million.

 

Net gains from the disposition of assets increased by $1.3 million to $2.6 million in the first nine months of 2010 from $1.3 million in the first nine months of 2009. The current year includes $2.1 million in net settlement proceeds from the disposition of a previously closed property, while the prior year period reflects gains of $1.3 million from the sale and leaseback of three stores.

 

Interest expense for the first nine months of 2010 was $19.9 million, an increase of $4.6 million compared to the first nine months of 2009. The prior year included a $6.2 million gain resulting from the retirement of debt. Excluding this gain, interest expense declined period over period, by $1.7 million due to reduced debt levels.

 

Our income tax expense for the first nine months of 2010 was $18.3 million, or an effective rate of 39.0%, as compared to an expense of $15.4 million, or an effective rate of 41.9%, for the first nine months of 2009. The change was primarily due to release of valuation reserves on certain unitary state net operating loss carryforwards as a result of our improved profitability. The annual rate is dependent on a number of factors, including the jurisdiction in which operating profit is earned and the timing and nature of discrete items.

 

As a result of the foregoing, we reported net earnings of $28.3 million in the first nine months of 2010 as compared to net earnings of $20.8 million in the first nine months of 2009. Our diluted earnings per share was $0.53 for the first nine months of 2010 as compared to $0.40 for the prior year period.

 

INDUSTRY COMPARISON

 

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

 

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

 

 

 

Thirteen Weeks Ended

 

Thirty-nine Weeks Ended

 

 

 

October 30,

 

October 31,

 

October 30,

 

October 31,

 

(Dollar amounts in thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Retail Sales (1)

 

$

256,862

 

$

246,275

 

$

795,373

 

$

770,121

 

Service Center Revenue (2)

 

239,502

 

226,368

 

715,879

 

687,921

 

Total revenues

 

$

496,364

 

$

472,643

 

$

1,511,252

 

$

1,458,042

 

 

 

 

 

 

 

 

 

 

 

Gross profit from Retail Sales (3)

 

$

73,954

 

$

65,846

 

$

232,538

 

$

210,147

 

Gross profit from Service Center Revenue (3)

 

51,902

 

52,423

 

165,414

 

165,913

 

Total gross profit

 

$

125,856

 

$

118,269

 

$

397,952

 

$

376,060

 

 


(1)   Excludes revenues from installed products.

(2)   Includes revenues from installed products.

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

 

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Table of Contents

 

CAPITAL AND LIQUIDITY

 

Our cash requirements arise principally from (1) the purchase of inventory and capital expenditures related to existing and new stores, offices and distribution centers, (2) debt service and (3) contractual obligations. Cash flows realized through the sales of automotive services, tires, parts and accessories are our primary source of liquidity. Net cash provided by operating activities was $90.8 million in the first nine months of 2010, as compared to $82.0 million in the prior year period. The $8.8 million improvement from the prior year period was due to increased net earnings (net of non-cash adjustments) of $17.0 million, partially offset by an unfavorable change in operating assets and liabilities of $7.5 million and an increase in cash used in discontinued operations of $0.7 million. The change in operating assets and liabilities was primarily due to unfavorable changes in inventory net of accounts payable of $5.3 million and in other long term liabilities of $4.4 million. However, after taking into consideration changes in our trade payable program liability (shown as cash flows from financing activities on the condensed consolidated statements of cash flows), inventory net of accounts payable improved by $23.1 million primarily due to increased inventory purchases and an improvement in our vendor trade payable terms. The ratio of accounts payable, including our trade payable program, to inventory was 46.6% at October 30, 2010, and 43.0% at October 31, 2009. The change in other long-term liabilities was due to a discretionary contribution to our defined benefit pension plan of $5.0 million (see Note 12 to the condensed consolidated financial statements).

 

Cash used in investing activities was $40.8 million in the first nine months of 2010 as compared to $17.0 million in the prior year period. During the first nine months of 2010, we sold five properties classified as held for disposal for net proceeds of $3.5 million, of which $0.6 million is included in discontinued operations, completed one sale leaseback transaction for net proceeds of $1.6 million and received $2.1 million in net settlement proceeds from the disposition of a previously closed property. During the first nine months of 2009, we sold three properties classified as held for disposal for net proceeds of $2.8 million, of which $1.8 million is reported in discontinued operations, and completed three sale leaseback transactions for net proceeds of $11.0 million. Capital expenditures in the first nine months of 2010 increased by $15.2 million, to $43.0 million, from $27.8 million in the prior year period. Capital expenditures for the current year were for improvements of our existing stores, offices, distribution centers and for the opening of the new facilities. During the third quarter of 2010, we invested $5.0 million in a restricted account as collateral for retained liabilities included within existing insurance programs in lieu of previously outstanding letters of credit.

 

Our targeted capital expenditures for fiscal 2010 are $80.0 million. Our fiscal year 2010 capital expenditures include the addition of approximately 35 new locations and required expenditures for our existing stores, offices and distribution centers. These expenditures are expected to be funded by cash on hand and net cash generated from operating activities. Additional capacity, if needed, exists under our existing line of credit.

 

In the first nine months of 2010, cash provided by financing activities was $18.0 million, as compared to cash used in financing of $45.4 million in the prior year period. The $63.4 million improvement was primarily due to increased net borrowings under our trade payable program of $28.4 million. This program is funded by various bank participants who have the ability, but not the obligation, to purchase, directly from our vendors, account receivables owed by Pep Boys. In the current year, we increased the availability under this financing program to $80.0 million from $50.0 million and as of October 30, 2010, January 30, 2010 and October 31, 2009, we had an outstanding balance of $57.0 million, $34.1 million and $26.5 million, respectively, (classified as trade payable program liability on the condensed consolidated balance sheet). Additionally, in the first nine months of 2009, we repurchased $17.0 million of our outstanding 7.5% Senior Subordinated Notes for $10.7 million and repaid $23.9 million of borrowings under our revolving credit agreement.

 

We anticipate that cash on hand and cash generated by operating activities will exceed our expected cash requirements in fiscal year 2010. In addition, we expect to have excess availability under our existing revolving credit agreement during the entirety of fiscal year 2010. As of October 30, 2010, we had zero drawn on our revolving credit facility and maintained undrawn availability of $139.5 million.

 

Our working capital was $235.0 million and $205.5 million at October 30, 2010 and January 30, 2010, respectively. Our long-term debt, as a percentage of our total capitalization, was 39.4% and 40.9% at October 30, 2010 and January 30, 2010, respectively.

 

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Table of Contents

 

NEW ACCOUNTING STANDARDS

 

In October 2009, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) 2009-13 “Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force,” (“ASU 2009-13”). This update eliminates the residual method of allocation and requires that consideration be allocated to all deliverables using the relative selling price method. ASU 2009-13 is effective for material revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company does not believe the adoption of ASU 2009-13 will have a material impact on its consolidated financial statements.

 

In January 2010, the FASB issued ASU 2010-06 “Fair Value Measurements — Improving Disclosures on Fair Value Measurements” (“ASU 2010-06”). This guidance requires new disclosures surrounding transfers in and out of level 1 or 2 in the fair value hierarchy and also requires that in the reconciliation of level 3 inputs, the entity should report separately information on purchases, sales, issuances or settlements. The increased disclosures should be reported for each class of assets or liabilities. ASU 2010-06 also clarifies existing disclosures for the level of disaggregating, disclosures about valuation techniques and inputs used to determine level 2 or 3 fair value measurements and includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances or settlements in the roll forward activity for level 3 fair value measurements which are effective for interim and annual periods beginning after December 15, 2010. The adoption of ASU 2010-06 for requirements effective December 15, 2009 did not have a material impact on the Company’s consolidated financial statements. The Company does not believe the adoption of those requirements of ASU 2010-06 which are effective for periods beginning after December 15, 2010 will have a material impact on its consolidated financial statements.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

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.

 

On an on-going basis, we evaluate our estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, merchandise inventories, income taxes, financing operations, restructuring costs, retirement benefits, risk participation agreements, contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment or complexity, refer to “Critical Accounting Policies and Estimates” as reported in our Annual Report on Form 10-K for the fiscal year ended January 30, 2010.

 

FORWARD-LOOKING STATEMENTS

 

Certain statements contained herein constitute “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. The words “guidance,” “expect,” “anticipate,” “estimates,” “forecasts” and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include 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.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Our primary market risk exposure with regard to financial instruments is due to changes in interest rates. Pursuant to the terms of our Revolving Credit Agreement, changes in LIBOR or the Prime Rate could affect the rates at which we could borrow funds thereunder. At October 30, 2010 we had no borrowings under this facility. Additionally, we have a $148.9 million Senior Secured Term Loan that bears interest at three month LIBOR plus 2.0%.

 

We have an interest rate swap for a notional amount of $145.0 million, which is designated as a cash flow hedge on our Senior Secured Term Loan. We also have a fuel hedge which is intended to maintain a fixed price for retail gasoline through January 31, 2011. This is also designated as a cash flow hedge. We record the effective portion of the changes in fair value through accumulated other comprehensive loss.

 

The fair value of the derivatives was $19.4 million and $16.4 million payable at October 30, 2010 and January 30, 2010, respectively. Of the $3.0 million increase in the liabilities during the thirty-nine weeks ended October 30, 2010, $1.9 million net of tax was recorded to accumulated other comprehensive loss on the condensed consolidated balance sheet.

 

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Item 4.  Controls and Procedures

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

Our disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. The term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the 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 Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Item 5.  Other Information

 

None.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

In the fourth quarter of fiscal 2008, the United States Environmental Protection Agency (“EPA”) informed the Company that it believed that the Company had violated the Clean Air Act by virtue of the fact that certain of this merchandise did not conform to their corresponding EPA Certificates of Conformity. During the third quarter of fiscal 2009, the Company and the EPA reached a settlement in principle of this matter requiring that the Company (i) pay a monetary penalty of $5.0 million, (ii) take certain corrective action with respect to certain inventory that had been restricted from sale during the course of the investigation, (iii) implement a formal compliance program and (iv) participate in certain non-monetary emission offset activities. The Company had previously accrued an amount equal to the agreed upon civil penalty and a $3.0 million contingency accrual with respect to the restricted inventory. During fiscal 2009, the Company reversed $2.0 million of the inventory accrual as a portion of the subject inventory was released for sale. During the second quarter of fiscal 2010, the Company reversed the remaining $1.0 million of the inventory accrual as the Company reached an agreement with the merchandise vendor to cover the entire cost of retrofitting a portion of the remaining subject merchandise and to accept the balance of the subject inventory for return for full credit. During the second quarter of fiscal 2010, the formal settlement agreement between the Company and the EPA became effective and the Company paid the monetary penalty.

 

The Company is also party to various other actions and claims arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with all such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position. However, there exists a reasonable possibility of

 

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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 30, 2010.

 

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

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  (Removed and Reserved)

 

Item 5.  Other Information

 

None.

 

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Item 6.  Exhibits

 

(31.1)

 

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

 

 

 

(31.2)

 

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

 

 

 

(32.1)

 

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

 

 

 

(32.2)

 

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

 

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SIGNATURES

 

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

 

 

 

THE PEP BOYS - MANNY, MOE & JACK

 

(Registrant)

 

 

 

Date:   December 7, 2010

by:

/s/ Raymond L. Arthur

 

 

 

Raymond L. Arthur

 

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

 

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INDEX TO EXHIBITS

 

(31.1)

 

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

 

 

 

(31.2)

 

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

 

 

 

(32.1)

 

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

 

 

 

(32.2)

 

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

 

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