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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 April 30, 2011

 

OR

 

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

 

For the transition period from             to            

 

Commission File No.  1-3381

 

The Pep Boys - Manny, Moe & Jack

(Exact name of registrant as specified in its charter)

 

Pennsylvania

23-0962915

(State or other jurisdiction of

(I.R.S. Employer ID number)

incorporation or organization)

 

 

 

3111 W. Allegheny Ave. Philadelphia, PA

19132

(Address of principal executive offices)

(Zip code)

 

215-430-9000

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

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

 

As of  May 27, 2011, there were 52,673,823 shares of the registrant’s Common Stock outstanding.

 

 

 



Table of Contents

 

Index

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Balance Sheets – April 30, 2011 and January 29, 2011

3

 

 

 

 

Consolidated Statements of Operations and Changes in Retained Earnings - Thirteen Weeks Ended April 30, 2011 and May 1, 2010

4

 

 

 

 

Consolidated Statements of Cash Flows – Thirteen Weeks Ended April 30, 2011 and May 1, 2010

5

 

 

 

 

Notes to the Consolidated Financial Statements

6

 

 

 

Item 2.

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

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

 

 

 

Item 4.

Controls and Procedures

24

 

 

 

Item 5.

Other Information

25

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

25

 

 

 

Item 1A.

Risk Factors

25

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

 

 

Item 3.

Defaults Upon Senior Securities

25

 

 

 

Item 4.

(Removed and Reserved)

25

 

 

 

Item 5.

Other Information

25

 

 

 

Item 6.

Exhibits

26

 

 

 

SIGNATURES

27

 

 

 

INDEX TO EXHIBITS

28

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

ITEM 1  CONSOLIDATED FINANCIAL STATEMENTS

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except share data)

(unaudited)

 

 

 

April 30, 2011

 

January 29, 2011

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

100,374

 

$

90,240

 

Accounts receivable, less allowance for uncollectible accounts of $1,385 and $1,551

 

19,460

 

19,540

 

Merchandise inventories

 

578,272

 

564,402

 

Prepaid expenses

 

26,225

 

28,542

 

Other current assets

 

56,598

 

60,812

 

Total current assets

 

780,929

 

763,536

 

 

 

 

 

 

 

Property and equipment - net

 

696,090

 

700,981

 

Deferred income taxes

 

62,851

 

66,019

 

Other long-term assets

 

32,642

 

26,136

 

Total assets

 

$

1,572,512

 

$

1,556,672

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

231,663

 

$

210,440

 

Trade payable program liability

 

53,060

 

56,287

 

Accrued expenses

 

225,891

 

236,028

 

Deferred income taxes

 

58,066

 

56,335

 

Current maturities of long-term debt

 

1,079

 

1,079

 

Total current liabilities

 

569,759

 

560,169

 

 

 

 

 

 

 

Long-term debt less current maturities

 

294,852

 

295,122

 

Other long-term liabilities

 

67,338

 

70,046

 

Deferred gain from asset sales

 

149,732

 

152,875

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

68,557

 

68,557

 

Additional paid-in capital

 

294,984

 

295,361

 

Retained earnings

 

412,716

 

402,600

 

Accumulated other comprehensive loss

 

(16,293

)

(17,028

)

Treasury stock, at cost — 15,901,648 shares and 15,971,910 shares

 

(269,133

)

(271,030

)

Total stockholders’ equity

 

490,831

 

478,460

 

Total liabilities and stockholders’ equity

 

$

1,572,512

 

$

1,556,672

 

 

See notes to consolidated financial statements.

 

3



Table of Contents

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND CHANGES IN RETAINED EARNINGS

(dollar amounts in thousands, except per share amounts)

(unaudited)

 

Thirteen weeks ended

 

April 30, 2011

 

May 1, 2010

 

Merchandise sales

 

$

408,627

 

$

409,189

 

Service revenue

 

104,913

 

100,844

 

Total revenues

 

513,540

 

510,033

 

Costs of merchandise sales

 

285,329

 

283,796

 

Costs of service revenue

 

93,089

 

88,642

 

Total costs of revenues

 

378,418

 

372,438

 

Gross profit from merchandise sales

 

123,298

 

125,393

 

Gross profit from service revenue

 

11,824

 

12,202

 

Total gross profit

 

135,122

 

137,595

 

Selling, general and administrative expenses

 

108,900

 

111,632

 

Net gain from dispositions of assets

 

89

 

45

 

Operating profit

 

26,311

 

26,008

 

Non-operating income

 

587

 

584

 

Interest expense

 

6,497

 

6,608

 

Earnings from continuing operations before income taxes and discontinued operations

 

20,401

 

19,984

 

Income tax expense

 

7,996

 

7,824

 

Earnings from continuing operations before discontinued operations

 

12,405

 

12,160

 

Loss from discontinued operations, net of tax

 

(37

)

(210

)

Net earnings

 

12,368

 

11,950

 

 

 

 

 

 

 

Retained earnings, beginning of period

 

402,600

 

374,836

 

Cash dividends

 

(1,585

)

(1,579

)

Shares issued and other

 

(667

)

(756

)

Retained earnings, end of period

 

$

412,716

 

$

384,451

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Earnings from continuing operations before discontinued operations

 

$

0.23

 

$

0.23

 

Loss from discontinued operations, net of tax

 

 

 

Basic earnings per share

 

$

0.23

 

$

0.23

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Earnings from continuing operations before discontinued operations

 

$

0.23

 

$

0.23

 

Loss from discontinued operations, net of tax

 

 

 

Diluted earnings per share

 

$

0.23

 

$

0.23

 

 

See notes to consolidated financial statements.

 

4



Table of Contents

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

(unaudited)

 

Thirteen weeks ended

 

April 30, 2011

 

May 1, 2010

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

12,368

 

$

11,950

 

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

 

 

 

 

 

Loss from discontinued operations, net of tax

 

37

 

210

 

Depreciation and amortization

 

19,884

 

18,214

 

Amortization of deferred gain from asset sales

 

(3,143

)

(3,148

)

Stock compensation expense

 

638

 

737

 

Deferred income taxes

 

4,458

 

3,552

 

Net gain from disposition of assets

 

(89

)

(45

)

Other

 

(63

)

(72

)

Changes in assets and liabilities, net of the effects of acquisitions:

 

 

 

 

 

Decrease in accounts receivable, prepaid expenses and other

 

7,406

 

10,581

 

Increase in merchandise inventories

 

(13,323

)

(2,233

)

Increase in accounts payable

 

21,223

 

15,498

 

(Decrease) increase in accrued expenses

 

(8,242

)

3,231

 

(Decrease) increase in other long-term liabilities

 

(2,458

)

603

 

Net cash provided by continuing operations

 

38,696

 

59,078

 

Net cash used in discontinued operations

 

(66

)

(324

)

Net cash provided by operating activities

 

38,630

 

58,754

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(18,123

)

(12,511

)

Proceeds from dispositions of assets

 

89

 

3,143

 

Premiums paid on life insurance policies

 

(741

)

(500

)

Collateral investment

 

(4,763

)

500

 

Other

 

(144

)

(144

)

Net cash used in continuing operations

 

(23,682

)

(9,512

)

Net cash provided by discontinued operations

 

 

569

 

Net cash used in investing activities

 

(23,682

)

(8,943

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Borrowings under line of credit agreements

 

1,067

 

1,029

 

Payments under line of credit agreements

 

(1,067

)

(1,029

)

Borrowings on trade payable program liability

 

24,589

 

23,027

 

Payments on trade payable program liability

 

(27,816

)

(22,853

)

Debt payments

 

(270

)

(270

)

Dividends paid

 

(1,585

)

(1,579

)

Other

 

268

 

344

 

Net cash used in financing activities

 

(4,814

)

(1,331

)

Net increase in cash and cash equivalents

 

10,134

 

48,480

 

Cash and cash equivalents at beginning of period

 

90,240

 

39,326

 

Cash and cash equivalents at end of period

 

$

100,374

 

$

87,806

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for income taxes

 

$

57

 

$

70

 

Cash paid for interest

 

$

2,885

 

$

2,616

 

Non-cash investing activities:

 

 

 

 

 

Accrued purchases of property and equipment

 

$

993

 

$

1,302

 

 

See notes to consolidated financial statements

 

5



Table of Contents

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1BASIS 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 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 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 29, 2011. The results of operations for the thirteen weeks ended April 30, 2011 are not necessarily indicative of the operating results for the full fiscal year.

 

The 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 April 30, 2011 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 2011 and 2010 refer to the year ending January 28, 2012 and the year ended January 29, 2011, respectively.

 

The Company maintains a trade payable program that is funded by various bank participants who have the ability, but not the obligation, to purchase account receivables owed by the Company from its vendors. The Company, in turn, makes the regularly scheduled full vendor payments to the bank participants. In the first quarter of fiscal 2011 as a result of the Company’s review, the Company determined that the gross amount of borrowings and payments on the trade payable program shown on the statement of cash flows under “Cash flows from financing activities” for the thirteen weeks ended May 1, 2010 included certain vendors that had not participated in the trade payable program. As such, the Company made an equal and offsetting adjustment to reduce the trade payables borrowings and payments line items within financing activities by $45.3 million for the thirteen weeks ended May 1, 2010. The full year impact of this adjustment is to reduce the line items $225.2 million and $90.3 million for the years ended January 29, 2011 and January 30, 2010, respectively. These adjustments have no net impact on net cash used in financing activities or on any other cash flow line items.

 

NOTE 2NEW ACCOUNTING STANDARDS

 

In December 2010, the FASB issued ASU 2010-29 “Business Combinations (Topic 805) — Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”). This accounting standard update clarifies that SEC registrants presenting comparative financial statements should disclose in their pro forma information revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for material (either on an individual or aggregate basis) business combinations entered into in fiscal years beginning on or after December 15, 2010 with early adoption permitted. The Company adopted ASU 2010-29 during the first quarter of the current fiscal year.

 

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”), which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. The Company is currently evaluating ASU 2011-04 and has not yet determined the impact the adoption will have on the consolidated financial statements.

 

6



Table of Contents

 

NOTE 3ACQUISITIONS

 

 

On May 5, 2011, the Company acquired all outstanding capital stock of Tire Stores Group Holding Corporation which operates an 85-store chain in Florida, Georgia and Alabama under the name Big 10. The Tire Stores Group Holding Corporation acquisition occurred subsequent to the completion of the first quarter and is not reflected in the consolidated financial statements. Currently the Company is unable to provide pro forma financial information as well as amounts recognized as of the acquisition date for major classes of assets and liabilities acquired and resulting from the transaction as the initial purchase accounting is not yet complete.

 

As of June 7, 2011, including the acquisition of seven stores in the Seattle-Tacoma market that closed during the thirteen weeks ended April 30, 2011, the Company has acquired 92 operating locations with $93 million in annual sales for an aggregate purchase price of approximately $41 million.

 

NOTE 4MERCHANDISE 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 $510.9 million and $486.0 million as of April 30, 2011 and January 29, 2011, respectively.

 

The Company’s inventory, consisting primarily of auto parts and accessories, is used on vehicles typically having long lives. Because of this, and combined with the Company’s historical experience of returning excess inventory to the Company’s vendors for full credit, the risk of obsolescence is minimal. The Company establishes a reserve for excess inventory for instances where less than full credit will be received for such returns or where the Company anticipates items will be sold at retail prices that are less than recorded costs. The reserve is based on management’s judgment, including estimates and assumptions regarding marketability of products, the market value of inventory to be sold in future periods and on historical experiences where the Company received less than full credit from vendors for product returns. The Company also provides for estimated inventory shrinkage based upon historical levels and the results of its cycle counting program. The Company’s inventory adjustments for these matters were approximately $6.0 million at April 30, 2011 and January 29, 2011.

 

NOTE 5PROPERTY AND EQUIPMENT

 

The Company’s property and equipment as of April 30, 2011 and January 29, 2011 was as follows:

 

(dollar amounts in thousands)

 

April 30, 2011

 

January 29, 2011

 

 

 

 

 

 

 

Property and equipment

 

 

 

 

 

Land

 

$

204,023

 

$

204,023

 

Buildings and improvements

 

852,110

 

848,268

 

Furniture, fixtures and equipment

 

701,892

 

685,481

 

Construction in progress

 

2,988

 

8,781

 

Accumulated depreciation and amortization

 

(1,064,923

)

(1,045,572

)

Property and equipment — net

 

$

696,090

 

$

700,981

 

 

NOTE 6WARRANTY 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 is warranted in full by the Company for a limited specific time period. The Company establishes its warranty reserves based on historical experiences. These costs are included in either costs of merchandise sales or costs of service revenues in the consolidated statements of operations.

 

The reserve for warranty cost activity for the thirteen weeks ended April 30, 2011 and the fifty-two weeks ended January 29, 2011 is as follows:

 

(dollar amounts in thousands)

 

April 30, 2011

 

January 29, 2011

 

Beginning balance

 

$

673

 

$

694

 

 

 

 

 

 

 

Additions related to current period sales

 

2,959

 

12,261

 

 

 

 

 

 

 

Warranty costs incurred in current period

 

(2,959

)

(12,282

)

 

 

 

 

 

 

Ending balance

 

$

673

 

$

673

 

 

7



Table of Contents

 

NOTE 7DEBT AND FINANCING ARRANGEMENTS

 

The following are the components of debt and financing arrangements:

 

(dollar amounts in thousands)

 

April 30, 2011

 

January 29, 2011

 

7.50% Senior Subordinated Notes, due December 2014

 

$

147,565

 

$

147,565

 

Senior Secured Term Loan, due October 2013

 

148,366

 

148,636

 

Revolving Credit Agreement, expiring January 2014

 

 

 

Long-term debt

 

295,931

 

296,201

 

Current maturities

 

(1,079

)

(1,079

)

Long-term debt less current maturities

 

$

294,852

 

$

295,122

 

 

As of April 30, 2011, 126 stores collateralized the Senior Secured Term Loan.

 

The Company’s ability to borrow under its 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 April 30, 2011, there were no outstanding borrowings under this agreement and $104.6 million of availability was utilized to support outstanding letters of credit. Taking this into account and the borrowing base requirements, as of April 30, 2011, there was $153.0 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 April 30, 2011, 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 $299.5 million and $298.3 million as of April 30, 2011 and January 29, 2011, respectively.

 

NOTE 8SALE-LEASEBACK TRANSACTIONS

 

The Company did not execute any sale-leaseback transactions in the first quarter of 2011. During the first quarter of fiscal year 2010, the Company sold one property to an unrelated third party for net proceeds of $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. The Company recorded a deferred gain of $0.4 million.

 

The Company operated 630 store locations at April 30, 2011, of which 232 were owned and 398 were leased.

 

NOTE 9ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The following are the components of other comprehensive income:

 

 

 

Thirteen weeks ended

 

(dollar amounts in thousands)

 

April 30, 2011

 

May 1, 2010

 

 

 

 

 

 

 

Net earnings

 

$

12,368

 

$

11,950

 

Other comprehensive income, net of tax:

 

 

 

 

 

Defined benefit plan adjustment

 

220

 

265

 

Derivative financial instrument adjustments

 

515

 

203

 

Comprehensive income

 

$

13,103

 

$

12,418

 

 

8



Table of Contents

 

The components of accumulated other comprehensive loss are:

 

(dollar amounts in thousands)

 

April 30, 2011

 

January 29, 2011

 

 

 

 

 

 

 

Defined benefit plan adjustment, net of tax

 

$

(6,356

)

$

(6,576

)

Derivative financial instrument adjustment, net of tax

 

(9,937

)

(10,452

)

Accumulated other comprehensive loss

 

$

(16,293

)

$

(17,028

)

 

NOTE 10ASSETS HELD FOR SALE

 

During the thirteen week period ended May 1, 2010, the Company sold three stores that were classified as held for disposal for net proceeds of $2.1 million and recognized a net gain of $0.1 million. Assets held for sale were $0.5 million as of April 30, 2011 and January 29, 2011 and are recorded within other current assets.

 

NOTE 11EARNINGS 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

 

(dollar amounts in thousands, except per share amounts)

 

April 30, 2011

 

May 1, 2010

 

 

 

 

 

 

 

(a) Earnings from continuing operations

 

$

12,405

 

$

12,160

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

(37

)

(210

)

 

 

 

 

 

 

Net earnings

 

$

12,368

 

$

11,950

 

 

 

 

 

 

 

(b) Basic average number of common shares outstanding during period

 

52,881

 

52,526

 

 

 

 

 

 

 

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

 

685

 

407

 

 

 

 

 

 

 

(c) Diluted average number of common shares assumed outstanding during period

 

53,566

 

52,933

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Earnings from continuing operations (a/b)

 

$

0.23

 

$

0.23

 

Discontinued operations, net of tax

 

 

 

Basic earnings per share

 

$

0.23

 

$

0.23

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Earnings from continuing operations (a/c)

 

$

0.23

 

$

0.23

 

Discontinued operations, net of tax

 

 

 

Diluted earnings per share

 

$

0.23

 

$

0.23

 

 

At April 30, 2011 and May 1, 2010, respectively, there were 2,717,000 and 2,419,000 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 773,000 and 1,104,000 for the thirteen weeks ended April 30, 2011 and May 1, 2010, respectively.

 

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Table of Contents

 

NOTE 12BENEFIT 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 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 contribution to these plans for fiscal 2011 is contingent upon meeting certain performance metrics. The Company has not recorded any contribution expense for these plans in the first quarter of 2011. The Company’s expense related to the savings plans and the Account Plan for the thirteen weeks ended May 1, 2010 was approximately $0.9 million and $0.3 million, respectively.

 

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

 

(dollar amounts in thousands)

 

April 30, 2011

 

May 1, 2010

 

 

 

 

 

 

 

Interest cost

 

$

651

 

$

640

 

Expected return on plan assets

 

(651

)

(538

)

Amortization of net loss

 

351

 

421

 

Net periodic benefit cost

 

$

351

 

$

523

 

 

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 2011, it made a $3.0 million discretionary contribution to the defined benefit pension plan on April 28, 2011.

 

NOTE 13EQUITY 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 29, 2011

 

1,831,802

 

Granted

 

265,139

 

Exercised

 

(27,360

)

Forfeited

 

(2,350

)

Expired

 

(22,133

)

Outstanding — April 30, 2011

 

2,045,098

 

 

In the first quarter of fiscal year 2011, the Company granted approximately 265,000 stock options with a weighted average grant date fair value of $5.38. These options have a seven year term and vest over a three year period with a third vesting on each of the three grant date anniversaries. The compensation expense recorded during the first quarter of fiscal 2011 for the options granted was minimal.

 

In the first quarter of fiscal year 2010, the Company granted approximately 303,000 stock options with a weighted average grant date fair value of $4.26. These options have a seven year term and vest over a three year period with a third vesting on each of the three grant date anniversaries. The compensation expense recorded during the first quarter of fiscal 2010 for the options granted was minimal.

 

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility is based on historical volatilities for a time period similar to that of the expected term blended with market based implied volatility at the time of the grant. The risk-free rate is based on the U.S. treasury yield curve for issues with a remaining term equal to the expected term.

 

10


 


Table of Contents

 

The following are the weighted-average assumptions:

 

 

 

April 30, 2011

 

May 1, 2010

 

Dividend yield

 

1.04

%

1.35

%

Expected volatility

 

58.17

%

55.71

%

Risk-free interest rate range:

 

 

 

 

 

High

 

1.90

%

2.01

%

Low

 

1.60

%

1.71

%

Ranges of expected lives in years

 

4 - 5

 

4 - 5

 

 

RESTRICTED STOCK UNITS

 

Performance Based Awards

 

In the first quarter of fiscal 2011, the Company granted approximately 95,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant and the Company achieves a return on invested capital target for fiscal year 2013. 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 2013. The fair value for these awards was $12.48 at the date of the grant. The compensation expense recorded during the thirteen weeks ended April 30, 2011 for these restricted stock units was minimal.

 

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 a return on invested capital target 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 thirteen weeks ended April 30, 2011 and May 1, 2010, respectively, for these restricted stock units was minimal.

 

Market Based Awards

 

In the first quarter of fiscal 2011, the Company granted approximately 48,000 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 total shareholder return target in fiscal 2013. 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 $14.73 grant date fair value. The compensation expense recorded during the thirteen weeks ended April 30, 2011 for these restricted stock units was minimal.

 

In the first quarter of fiscal 2010, the Company 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 total shareholder return target 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 thirteen weeks ended April 30, 2011 and May 1, 2010, respectively, for these restricted stock units was minimal.

 

Other Awards

 

In the first quarter of fiscal 2011 and 2010, the Company granted approximately 50,000 and 61,000 restricted stock units related to officers’ deferred bonus matches under the Company’s non-qualified deferred compensation plan, which vest over a three year period.

 

The following table 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 29, 2011

 

432,331

 

Granted

 

275,637

 

Forfeited

 

 

Vested

 

(36,552

)

Nonvested — April 30, 2011

 

671,416

 

 

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Table of Contents

 

NOTE 14FAIR 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:

 

 

 

Fair Value

 

Fair Value Measurements

 

(dollar amounts in thousands)

 

at

 

Using Inputs Considered as

 

Description

 

April 30, 2011

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

100,374

 

$

100,374

 

$

 

$

 

Collateral investments (1)

 

14,400

 

14,400

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Contingent consideration (2)

 

144

 

 

 

144

 

Other liabilities

 

 

 

 

 

 

 

 

 

Derivative liability (3)

 

15,631

 

 

15,631

 

 

Contingent consideration (3)

 

1,252

 

 

 

1,252

 

 

 

 

Fair Value

 

Fair Value Measurements

 

(dollar amounts in thousands)

 

at

 

Using Inputs Considered as

 

Description

 

January 29, 2011

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

90,240

 

$

90,240

 

$

 

$

 

Collateral investments (1)

 

9,638

 

9,638

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Contingent consideration (2)

 

288

 

 

 

288

 

Other liabilities

 

 

 

 

 

 

 

 

 

Derivative liability (3)

 

16,424

 

 

16,424

 

 

Contingent consideration (3)

 

1,224

 

 

 

1,224

 

 


(1) included in other long-term assets

(2) included in accrued liabilities

(3) included in other long-term liabilities

 

During fiscal 2010, the Company invested $9.6 million in restricted accounts as collateral for its retained liabilities included within existing insurance programs in lieu of previously outstanding letters of credit. During the first quarter of 2011, the company invested an additional $4.8 million. The collateral investment is included in other long-term assets on the consolidated balance sheet.

 

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.

 

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Table of Contents

 

The table below shows the effect of the Company’s interest rate swap on the consolidated financial statements for the periods indicated:

 

(dollar amounts in thousands)

 

Amount of Gain in
Other Comprehensive
Income
(Effective Portion)

 

Earnings Statement
Classification

 

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

 

Thirteen weeks ended April 30, 2011

 

$

(498

)

Interest expense

 

$

(1,719

)

Thirteen weeks ended May 1, 2010

 

$

180

 

Interest expense

 

$

(1,695

)

 


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

 

The fair value of the derivative was $15.6 million and $16.4 million payable at April 30, 2011 and January 29, 2011, respectively. Of the $0.8 million decrease in the fair value during the thirteen weeks ended April 30, 2011, $0.5 million net of tax was recorded to accumulated other comprehensive loss on the 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. There were no remeasurements of non-financial assets in the first quarter of 2011 or 2010.

 

NOTE 15LEGAL MATTERS

 

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

 

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Table of Contents

 

NOTE 16SUPPLEMENTAL 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, The Pep Boys—Manny Moe & Jack of Delaware, Inc. (the “Pep Boys of Delaware”), Pep Boys—Manny Moe & Jack of Puerto Rico, Inc. and PBY Corporation (as of January 29, 2011), (collectively, the “Subsidiary Guarantors”). The Notes are not guaranteed by the Company’s wholly owned subsidiary, Colchester Insurance Company.

 

The following consolidating information presents, in separate columns, the condensed consolidating balance sheets as of April 30, 2011 and January 29, 2011 and the related condensed consolidating statements of operations for the thirteen weeks ended April 30, 2011 and May 1, 2010 and condensed consolidating statements of cash flows for the thirteen weeks ended April 30, 2011 and May 1, 2010 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.

 

On January 29, 2011, The Pep Boys- Manny, Moe & Jack of Pennsylvania made a capital contribution of $264.0 million to Pep Boys of Delaware consisting of intercompany receivables due from the latter. This contribution resulted in an increase in the Pep Boys’ investment in subsidiaries and the Subsidiary Guarantors’ stockholders’ equity. On January 30, 2011, the Company merged PBY Corporation into Pep Boys of Delaware and accordingly, The Pep Boys Manny Moe & Jack of California became the wholly owned subsidiary of  Pep Boys of Delaware. This merger did not affect the presentation of the following condensed consolidating information.

 

14



Table of Contents

 

CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

(unaudited)

 

As of April 30, 2011

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation/
Elimination

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

84,084

 

$

6,655

 

$

9,635

 

$

 

$

100,374

 

Accounts receivable, net

 

7,328

 

12,132

 

 

 

19,460

 

Merchandise inventories

 

195,369

 

382,903

 

 

 

578,272

 

Prepaid expenses

 

11,482

 

14,438

 

11,794

 

(11,489

)

26,225

 

Other current assets

 

823

 

475

 

60,316

 

(5,016

)

56,598

 

Total current assets

 

299,086

 

416,603

 

81,745

 

(16,505

)

780,929

 

Property and equipment—net

 

238,188

 

446,081

 

30,692

 

(18,871

)

696,090

 

Investment in subsidiaries

 

2,112,394

 

 

 

(2,112,394

)

 

Intercompany receivables

 

 

1,413,922

 

73,557

 

(1,487,479

)

 

Deferred income taxes

 

15,547

 

47,304

 

 

 

62,851

 

Other long-term assets

 

29,893

 

2,749

 

 

 

32,642

 

Total assets

 

$

2,695,108

 

$

2,326,659

 

$

185,994

 

$

(3,635,249

)

$

1,572,512

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

231,663

 

$

 

$

 

$

 

$

231,663

 

Trade payable program liability

 

53,060

 

 

 

 

53,060

 

Accrued expenses

 

13,863

 

68,361

 

155,156

 

(11,489

)

225,891

 

Deferred income taxes

 

24,549

 

38,533

 

 

(5,016

)

58,066

 

Current maturities of long-term debt

 

1,079

 

 

 

 

1,079

 

Total current liabilities

 

324,214

 

106,894

 

155,156

 

(16,505

)

569,759

 

Long-term debt less current maturities

 

294,852

 

 

 

 

294,852

 

Other long-term liabilities

 

33,250

 

34,088

 

 

 

67,338

 

Deferred gain from asset sales

 

64,482

 

104,121

 

 

(18,871

)

149,732

 

Intercompany liabilities

 

1,487,479

 

 

 

(1,487,479

)

 

Total stockholders’ equity

 

490,831

 

2,081,556

 

30,838

 

(2,112,394

)

490,831

 

Total liabilities and stockholders’ equity

 

$

2,695,108

 

$

2,326,659

 

$

185,994

 

$

(3,635,249

)

$

1,572,512

 

 

15



Table of Contents

 

As of January 29, 2011

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation/
Elimination

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

52,214

 

$

28,477

 

$

9,549

 

$

 

$

90,240

 

Accounts receivable, net

 

8,976

 

10,564

 

 

 

19,540

 

Merchandise inventories

 

198,062

 

366,340

 

 

 

564,402

 

Prepaid expenses

 

11,839

 

17,649

 

16,202

 

(17,148

)

28,542

 

Other current assets

 

2,260

 

936

 

62,655

 

(5,039

)

60,812

 

Total current assets

 

273,351

 

423,966

 

88,406

 

(22,187

)

763,536

 

Property and equipment—net

 

236,853

 

452,230

 

30,862

 

(18,964

)

700,981

 

Investment in subsidiaries

 

2,093,479

 

 

 

(2,093,479

)

 

Intercompany receivables

 

 

1,375,958

 

79,270

 

(1,455,228

)

 

Deferred income taxes

 

15,749

 

50,270

 

 

 

66,019

 

Other long-term assets

 

24,941

 

1,195

 

 

 

26,136

 

Total assets

 

$

2,644,373

 

$

2,303,619

 

$

198,538

 

$

(3,589,858

)

$

1,556,672

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

210,440

 

$

 

$

 

$

 

$

210,440

 

Trade payable program liability

 

56,287

 

 

 

 

56,287

 

Accrued expenses

 

23,341

 

62,168

 

167,667

 

(17,148

)

236,028

 

Deferred income taxes

 

23,024

 

38,350

 

 

(5,039

)

56,335

 

Current maturities of long-term debt

 

1,079

 

 

 

 

1,079

 

Total current liabilities

 

314,171

 

100,518

 

167,667

 

(22,187

)

560,169

 

Long-term debt less current maturities

 

295,122

 

 

 

 

295,122

 

Other long-term liabilities

 

35,870

 

34,176

 

 

 

70,046

 

Deferred gain from asset sales

 

65,522

 

106,317

 

 

(18,964

)

152,875

 

Intercompany liabilities

 

1,455,228

 

 

 

(1,455,228

)

 

Total stockholders’ equity

 

478,460

 

2,062,608

 

30,871

 

(2,093,479

)

478,460

 

Total liabilities and stockholders’ equity

 

$

2,644,373

 

$

2,303,619

 

$

198,538

 

$

(3,589,858

)

$

1,556,672

 

 

16



Table of Contents

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(dollars in thousands)

(unaudited)

 

 

 

 

 

Subsidiary

 

Subsidiary Non-

 

Consolidation /

 

 

 

Thirteen Weeks Ended April 30, 2011

 

Pep Boys

 

Guarantors

 

Guarantors

 

Elimination

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise sales

 

$

141,381

 

$

267,246

 

$

 

$

 

$

408,627

 

Service revenue

 

38,535

 

66,378

 

 

 

104,913

 

Other revenue

 

 

 

5,734

 

(5,734

)

 

Total revenues

 

179,916

 

333,624

 

5,734

 

(5,734

)

513,540

 

Costs of merchandise sales

 

99,173

 

186,563

 

 

(407

)

285,329

 

Costs of service revenue

 

33,088

 

60,039

 

 

(38

)

93,089

 

Costs of other revenue

 

 

 

5,826

 

(5,826

)

 

Total costs of revenues

 

132,261

 

246,602

 

5,826

 

(6,271

)

378,418

 

Gross profit from merchandise sales

 

42,208

 

80,683

 

 

407

 

123,298

 

Gross profit from service revenue

 

5,447

 

6,339

 

 

38

 

11,824

 

Gross profit from other revenue

 

 

 

(92

)

92

 

 

Total gross profit

 

47,655

 

87,022

 

(92

)

537

 

135,122

 

Selling, general and administrative expenses

 

37,824

 

71,069

 

86

 

(79

)

108,900

 

Net gain from dispositions of assets

 

 

89

 

 

 

89

 

Operating profit

 

9,831

 

16,042

 

(178

)

616

 

26,311

 

Non-operating (expense) income

 

(4,275

)

16,069

 

616

 

(11,823

)

587

 

Interest expense (income)

 

17,325

 

901

 

(522

)

(11,207

)

6,497

 

(Loss) earnings from continuing operations before income taxes

 

(11,769

)

31,210

 

960

 

 

20,401

 

Income tax (benefit) expense

 

(4,614

)

12,233

 

377

 

 

7,996

 

Equity in earnings of subsidiaries

 

19,531

 

 

 

(19,531

)

 

Net earnings from continuing operations

 

12,376

 

18,977

 

583

 

(19,531

)

12,405

 

Discontinued operations, net of tax

 

(8

)

(29

)

 

 

(37

)

Net earnings

 

$

12,368

 

$

18,948

 

$

583

 

$

(19,531

)

$

12,368

 

 

 

 

 

 

Subsidiary

 

Subsidiary Non-

 

Consolidation /

 

 

 

Thirteen Weeks Ended May 1, 2010

 

Pep Boys

 

Guarantors

 

Guarantors

 

Elimination

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise sales

 

$

144,425

 

$

264,764

 

$

 

$

 

$

409,189

 

Service revenue

 

36,641

 

64,203

 

 

 

100,844

 

Other revenue

 

 

 

5,736

 

(5,736

)

 

Total revenues

 

181,066

 

328,967

 

5,736

 

(5,736

)

510,033

 

Costs of merchandise sales

 

100,996

 

183,207

 

 

(407

)

283,796

 

Costs of service revenue

 

31,170

 

57,510

 

 

(38

)

88,642

 

Costs of other revenue

 

 

 

6,470

 

(6,470

)

 

Total costs of revenues

 

132,166

 

240,717

 

6,470

 

(6,915

)

372,438

 

Gross profit from merchandise sales

 

43,429

 

81,557

 

 

407

 

125,393

 

Gross profit from service revenue

 

5,471

 

6,693

 

 

38

 

12,202

 

Gross profit from other revenue

 

 

 

(734

)

734

 

 

Total gross profit

 

48,900

 

88,250

 

(734

)

1,179

 

137,595

 

Selling, general and administrative expenses

 

40,053

 

70,935

 

81

 

563

 

111,632

 

Net gain from dispositions of assets

 

(138

)

183

 

 

 

45

 

Operating profit

 

8,709

 

17,498

 

(815

)

616

 

26,008

 

Non-operating (expense) income

 

(4,250

)

20,208

 

616

 

(15,990

)

584

 

Interest expense (income)

 

16,046

 

6,458

 

(522

)

(15,374

)

6,608

 

(Loss) earnings from continuing operations before income taxes

 

(11,587

)

31,248

 

323

 

 

19,984

 

Income tax (benefit) expense

 

(4,545

)

12,242

 

127

 

 

7,824

 

Equity in earnings of subsidiaries

 

18,994

 

 

 

(18,994

)

 

Net earnings from continuing operations

 

11,952

 

19,006

 

196

 

(18,994

)

12,160

 

Discontinued operations, net of tax

 

(2

)

(208

)

 

 

(210

)

Net earnings

 

$

11,950

 

$

18,798

 

$

196

 

$

(18,994

)

$

11,950

 

 

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Table of Contents

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

Thirteen Weeks Ended April 30, 2011

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation /
Elimination

 

Consolidated

 

Net earnings

 

$

12,368

 

$

18,948

 

$

583

 

$

(19,531

)

$

12,368

 

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

 

(10,555

)

13,169

 

193

 

18,915

 

21,722

 

Changes in operating assets and liabilities

 

16,980

 

(6,587

)

(5,787

)

 

4,606

 

Net cash provided by (used in) continuing operations

 

18,793

 

25,530

 

(5,011

)

(616

)

38,696

 

Net cash (used in) discontinued operations

 

(37

)

(29

)

 

 

(66

)

Net Cash Provided by (Used in) Operating Activities

 

18,756

 

25,501

 

(5,011

)

(616

)

38,630

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in continuing operations

 

(14,323

)

(9,359

)

 

 

(23,682

)

Net cash provided by discontinued operations

 

 

 

 

 

 

Net Cash Used in Investing Activities

 

(14,323

)

(9,359

)

 

 

(23,682

)

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Provided by (Used in) Financing Activities

 

27,437

 

(37,964

)

5,097

 

616

 

(4,814

)

 

 

 

 

 

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash

 

31,870

 

(21,822

)

86

 

 

10,134

 

Cash and Cash Equivalents at Beginning of Period

 

52,214

 

28,477

 

9,549

 

 

90,240

 

Cash and cash equivalents at end of period

 

$

84,084

 

$

6,655

 

$

9,635

 

$

 

$

100,374

 

 

Thirteen Weeks Ended May 1, 2010

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation /
Elimination

 

Consolidated

 

Net earnings

 

$

11,950

 

$

18,798

 

$

196

 

$

(18,994

)

$

11,950

 

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

 

(8,850

)

9,774

 

146

 

18,378

 

19,448

 

Changes in operating assets and liabilities

 

29,952

 

426

 

(2,698

)

 

27,680

 

Net cash provided by (used in) continuing operations

 

33,052

 

28,998

 

(2,356

)

(616

)

59,078

 

Net cash used in discontinued operations

 

 

(324

)

 

 

(324

)

Net cash provided by (used in) operating activities

 

33,052

 

28,674

 

(2,356

)

(616

)

58,754

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in continuing operations

 

(5,168

)

(4,344

)

 

 

(9,512

)

Net cash provided by discontinued operations

 

 

569

 

 

 

569

 

Net cash used in investing activities

 

(5,168

)

(3,775

)

 

 

(8,943

)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

13,295

 

(21,685

)

6,443

 

616

 

(1,331

)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

41,179

 

3,214

 

4,087

 

 

48,480

 

Cash and cash equivalents at beginning of period

 

25,844

 

10,279

 

3,203

 

 

39,326

 

Cash and cash equivalents at end of period

 

$

67,023

 

$

13,493

 

$

7,290

 

$

 

$

87,806

 

 

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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 first fiscal quarter of 2011 and 2010 and significant developments affecting our financial condition for the three months ended April 30, 2011. This discussion and analysis should be read in conjunction with the consolidated interim financial statements and the notes to such 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 29, 2011.

 

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 customer facilitating our vision to be 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”) customers with the highest quality service and merchandise offerings. 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 Supercenters and support infrastructure. This growth will occur both organically and through acquisitions. The growth is targeted at existing markets, but may include new markets opportunistically. The objective is to grow our market share and to leverage inventory, marketing, distribution and support costs. Acquisitions will be used to accelerate the growth in markets where the company is significantly under-penetrated.

 

In the first quarter of fiscal 2011, we opened nine Service & Tire Centers. As of April 30, 2011, we operated 560 Supercenters and 62 Service & Tire Centers, as well as 8 legacy Pep Boys Express (retail only) stores throughout 35 states and Puerto Rico.

 

Shortly after the end of the first quarter of fiscal 2011, we acquired Big 10 Tires and Automotive, an automotive service and tire provider operating 85 stores throughout Florida, Georgia and Alabama.

 

EXECUTIVE SUMMARY

 

The first quarter of 2011 was our ninth consecutive quarter of improved profitability (period-over-period) accomplished through disciplined spending controls which more than offset a slight decline in comparable store sales. Net earnings for the first quarter of 2011 were $12.4 million, a $0.4 million improvement over the $12.0 million reported for the first quarter of 2010. Our diluted earnings per share were $0.23 for the first quarter of 2011, which were flat compared to the same period in the prior year.

 

Total revenue increased for the first quarter of 2011 by 0.7% as compared to the same period of the prior year. For the first quarter of 2011, comparable store sales (sales generated by locations in operation during the same period) decreased by 0.6% as compared to an increase of 1.4% recorded for the first quarter of 2010. This decrease in comparable store sales was comprised of a 1.6% increase in comparable store service revenue offset by a 1.2% decrease in comparable store merchandise sales.

 

Sales of our services and non-discretionary products are impacted by miles driven. The increase in gasoline prices in recent months has moderated the growth in miles driven as well as reduced our customers’ disposable income. In March 2011, miles driven fell as compared to March 2010, after growing modestly year over year in the previous 11 months. This change in trend combined with the financial burden of higher gasoline prices, continued high unemployment and a tighter credit environment depressed first quarter sales. We believe these factors have also led customers to maintain their existing vehicles,  rather than purchasing new ones which, in turn, has partially offset the negative impact the reduction in miles driven has had on our sales of services and non-discretionary products. However, these same factors, combined with a rainy spring,  have negatively affected sales in our discretionary product categories like accessories and complementary merchandise which declined from the previous year first quarter.

 

Given the nature of these macroeconomic factors, we cannot predict whether or for how long these trends will continue, nor can we predict to what degree these trends will affect us in the future.

 

Our primary response to fluctuations in customer demand is to adjust our service and product assortment, store staffing and advertising messages. We believe that we are well positioned to help our customers save money and meet their needs in a challenging macroeconomic environment. In 2011, we have continued our “surround sound” media campaign that utilizes television, radio and direct mail advertising to communicate our “DOES EVERYTHING. FOR LESS.” brand vision and have focused on “execution excellence” in our stores in order to earn the TRUST of our customers every day.

 

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Table of Contents

 

RESULTS OF OPERATIONS

 

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

 

Analysis of Statement of Operations

 

Thirteen weeks ended April 30, 2011 vs. Thirteen weeks ended May 1, 2010

 

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

 

 

 

Percentage of Total Revenues

 

Percentage Change

 

Thirteen weeks ended

 

April 30, 2011
(Fiscal 2011)

 

May 1, 2010
 (Fiscal 2010)

 

Favorable
(Unfavorable)

 

 

 

 

 

 

 

 

 

Merchandise sales

 

79.6

%

80.2

%

(0.1

)%

Service revenue (1)

 

20.4

 

19.8

 

4.0

 

Total revenues

 

100.0

 

100.0

 

0.7

 

Costs of merchandise sales (2)

 

69.8

(3)

69.4

(3)

(0.5

)

Costs of service revenue (2)

 

88.7

(3)

87.9

(3)

(5.0

)

Total costs of revenues

 

73.7

 

73.0

 

(1.6

)

Gross profit from merchandise sales

 

30.2

(3)

30.6

(3)

(1.7

)

Gross profit from service revenue

 

11.3

(3)

12.1

(3)

(3.1

)

Total gross profit

 

26.3

 

27.0

 

(1.8

)

Selling, general and administrative expenses

 

21.2

 

21.9

 

2.4

 

Net gain (loss) from dispositions of assets

 

 

 

 

Operating profit

 

5.1

 

5.1

 

1.2

 

Non-operating income

 

0.1

 

0.1

 

0.5

 

Interest expense

 

1.3

 

1.3

 

1.7

 

Earnings from continuing operations before income taxes

 

4.0

 

3.9

 

2.1

 

Income tax expense

 

39.2

(4)

39.2

(4)

(2.2

)

Earnings from continuing operations

 

2.4

 

2.4

 

2.0

 

Discontinued operations, net of tax

 

 

 

 

Net earnings

 

2.4

 

2.3

 

3.5

 

 


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

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

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

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

 

Total revenue for the first quarter of 2011 increased by $3.5 million to $513.5 million from $510.0 million in the first quarter of 2010, while comparable store sales for the first quarter of 2011 decreased 0.6% as compared to the first quarter of 2010. This decrease in comparable store sales consisted of an increase of 1.6% in comparable store service revenue offset by a decrease of 1.2% in comparable store merchandise sales. Total comparable store sales decreased due to lower customer counts in all three lines of business mostly offset by an increase in the average transaction amount per customer. 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 $6.7 million of total revenue in the first quarter of 2011 as compared to the first quarter of 2010.

 

Total merchandise sales decreased 0.1%, or $0.6 million, to $408.6 million in the first quarter of fiscal 2011, compared to $409.2 million during the prior year quarter. The decrease in total sales was due to a decline in comparable store merchandise sales of 1.2%,

 

20



Table of Contents

 

or $4.8 million, which was mostly offset by sales generated by our non-comparable new stores. The decrease in comparable store sales was driven primarily by lower comparable store customer counts offset by a higher average transaction amount per customer. Total service revenue increased 4.0% to $104.9 million in the first quarter of 2011 from the $100.8 million recorded in the prior year quarter, comprised of a $1.6 million, or 1.6%, increase in comparable store service revenue and the contribution from our new stores, which accounted for an additional $2.5 million of service revenue. The increase in comparable store service revenue was due to higher average transaction amount per customer partially offset by a decrease in customer counts.

 

We believe that comparable store customer counts decreased due to macroeconomic conditions including increased gasoline prices, while the average transaction amount per customer increased due to selling price increases that were implemented to reflect the significant inflation in material costs. We believe that the significant increase in gasoline prices negatively affected miles driven as well as our customers’ disposable income in the first quarter of 2011. This negative headwind was somewhat mitigated by the continued aging of the US light vehicle fleet as consumers spent more money on maintaining their vehicles as opposed to buying new vehicles. We believe that utilizing innovative marketing programs to communicate our value-priced, differentiated service and merchandise assortment will 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 over the long-term.

 

Gross profit from merchandise sales decreased by $2.1 million, or 1.7%, to $123.3 million for the first quarter of 2011 from $125.4 million in the first quarter of 2010. Gross profit margin from merchandise sales decreased to 30.2% for the first quarter of 2011 from 30.6% for the first quarter of 2010. The decrease in gross profit margin was primarily due to increased occupancy costs which increased as a percent of merchandise sales by 65 basis points from the prior year. The increase in occupancy costs was due to (i) higher depreciation expense as a result of increased capital investment in new and existing stores and (ii) an increase in the number of Superhub locations leading to higher delivery costs. These costs were partially offset by improved product gross margins of 21 basis points.

 

Gross profit from service revenue decreased by $0.4 million, or 3.1%, to $11.8 million in the first quarter of 2011 from $12.2 million recorded in the first quarter of 2010. Gross profit margin from service revenue decreased to 11.3% for the first quarter of 2011 from 12.1% for the prior year quarter. The decrease in gross profit from service revenue was due to the opening of new Service & Tire Centers, which while in their ramp up stage for sales incur their full amount of fixed expenses, including payroll and occupancy costs (rent, utilities and building maintenance). Our new Service & Tire Centers negatively affected gross profit margin from service revenue by 275 basis points and 147 basis points in the first quarter of 2011 and 2010, respectively. Excluding the impact of new Service & Tire Centers, gross profit from service revenue increased to 14.0% for the first quarter of 2011 from 13.6% for the first quarter of 2010. The increase in gross profit, exclusive of new locations, was primarily due to increased service revenues, which better leveraged fixed store occupancy costs, offset by higher labor and related benefits costs.

 

Selling, general and administrative expenses as a percentage of total revenues decreased to 21.2% for the first quarter of 2011 from 21.9% for the first quarter of 2010. Selling, general and administrative expenses decreased $2.7 million, or 2.4%, to $108.9 million in the first quarter of 2011 from $111.6 million in the prior year quarter primarily due to lower payroll and related costs of $1.9 million and lower media expense of $0.6 million.

 

Interest expense declined by $0.1 million to $6.5 million in the first quarter of 2011 compared to $6.6 million in the first quarter of 2010.

 

Our income tax expense for the first quarter of 2011 was $8.0 million, or an effective rate of 39.2%, as compared to an expense of $7.8 million, or an effective rate of 39.2%, for the first quarter of 2010. The annual rate depends on a number of factors, including the jurisdiction in which operating profit is earned and the timing and nature of discrete items.

 

As a result of the foregoing, we reported net earnings of $12.4 million in the first quarter of 2011 as compared to net earnings of $12.0 million in the prior year period. Our basic and diluted earnings per share were $0.23 for both the first quarter of 2011 and the first quarter of 2010.

 

INDUSTRY COMPARISON

 

We operate in the U.S. automotive aftermarket, which has two general lines of business: (1) the Service business, defined as Do-It-For-Me (service labor, installed merchandise and tires) and (2) 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

 

21



Table of Contents

 

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

 

(dollar amounts in thousands)

 

April 30, 2011

 

May 1, 2010

 

 

 

 

 

 

 

Service Center Revenue (1)

 

$

247,330

 

$

240,326

 

Retail Sales (2)

 

266,210

 

269,707

 

Total revenues

 

$

513,540

 

$

510,033

 

 

 

 

 

 

 

Gross profit from Service Center Revenue (3)

 

$

58,962

 

$

57,841

 

Gross profit from Retail Sales (3)

 

76,160

 

79,754

 

Total gross profit

 

$

135,122

 

$

137,595

 

 


(1)                     Includes revenues from installed products.

(2)                     Excludes revenues from installed products.

(3)                     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. Gross profit from Retail Sales includes the cost of products sold, purchasing, warehousing and store occupancy costs.

 

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 $38.6 million in the first quarter of 2011, as compared to $58.8 million in the prior year period. The $20.1 million decrease from the prior year period was due to an unfavorable change in operating assets and liabilities of $23.1 million partially offset by increased net earnings (net of non-cash adjustments) of $2.7 million and by a decrease in cash used in discontinued operations of $0.3 million. The change in operating assets and liabilities was primarily due to unfavorable changes in inventory, net of accounts payable of $5.4 million, accrued expenses and other current assets of  $14.6 million, and in other-long term liabilities of $3.1 million.

 

In both fiscal year 2011 and 2010, the increased investment in inventory of $13.3 million and $2.2 million, respectively was funded entirely by the improvement in our trade vendor payment terms. Taking into consideration changes in our trade payable program liability (shown as cash flows from financing activities on the consolidated statements of cash flows), cash generated from accounts payable was $ 18.0 million and $15.7 million for 2011 and 2010, respectively. The ratio of accounts payable, including our trade payable program, to inventory was 49.2% at April 30, 2011, 47.3% at January 29, 2011 and 45.0% at May 1, 2010, respectively. The increase in inventory over the prior year first quarter was due to (i) investment in our new stores of $7.0 million (ii) higher tire inventory of $2.3 million as a result of cost increases and (iii) reduction in our reserve for excess inventory of $6.0 million due to significant improvement in our inventory management processes.

 

The change in accrued liabilities and other current assets was primarily due to a reduction in payroll and related accruals of $3.0 million, a reduction in employee payroll tax accruals of $6.1 million due to the timing of payments to taxing authorities and collection of certain vendor allowances of $3.5 million in the prior year due to timing of billings. The change in other long-term liabilities was primarily due to a voluntary pension contribution of $3.0 million made in the current year first quarter.

 

Cash used in investing activities was $23.7 million in the first quarter of 2011 as compared to $8.9 million in the prior year period. Capital expenditures were $18.1 million and $12.5 million in the first quarter of 2011 and 2010, respectively. Capital expenditures for the first quarter of 2011, in addition to our regularly scheduled store, distribution center improvements and information technology enhancements, included the addition of two new Service & Tire Centers and the acquisition of seven service and tire centers in the Seattle/Tacoma area. During the first quarter of 2011, we invested $4.8 million in a restricted account as collateral for retained liabilities included within existing insurance programs in lieu of previously outstanding letters of credit. During the first quarter of 2010, we sold three properties that were classified as held for sale for net proceeds of $2.1 million, of which $0.6 million is included in discontinued

 

22



Table of Contents

 

operations, and completed one sale-leaseback transaction for net proceeds of $1.6 million.

 

Our targeted capital expenditures for fiscal 2011 are $80.0 million. Our fiscal year 2011 capital expenditures include the addition of approximately 55 new locations, the conversion of 24 Supercenters into Superhubs 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. Subsequent to the end our first quarter, we acquired Big 10 Tires and Automotive, an operator of 85 service and tire centers throughout  Florida, Georgia and Alabama.  The Big 10 acquisition, which was not included in our $80.0 million fiscal 2011 capital expenditures budget, was funded from cash on hand.

 

In the first quarter of 2011, cash used in financing activities was $4.8 million, as compared to cash used in financing of $1.3 million in the prior year period. The cash used in financing activities in the first quarter of 2011 was primarily related to net payments on our trade payable program liability and the payment of cash dividends. The trade payable 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. As of April 30, 2011 and January 29, 2011, we had an outstanding balance of $53.1 million and $56.3 million, respectively (classified as trade payable program liability on the consolidated balance sheet).

 

We anticipate that cash on hand and cash generated by operating activities will exceed our expected cash requirements in fiscal year 2011. In addition, we expect to have excess availability under our existing revolving credit agreement during the entirety of fiscal year 2011. As of April 30, 2011, we had zero drawn on our revolving credit facility and maintained undrawn availability of $153.0 million.

 

Our working capital was $211.2 million and $203.4 million at April 30, 2011 and January 29, 2011, respectively. Our long-term debt, as a percentage of our total capitalization, was 37.5% and 38.2% at April 30, 2011 and January 29, 2011, respectively.

 

Contractual Obligations

 

For a discussion of our other contractual obligations, see a discussion of future commitments under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-K for the fiscal year ended January 29, 2011.  There have been no significant developments with respect to our contractual obligations since January 29, 2011.

 

NEW ACCOUNTING STANDARDS

 

In December 2010, the FASB issued ASU 2010-29 “Business Combinations (Topic 805) — Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”). This accounting standard update clarifies that SEC registrants presenting comparative financial statements should disclose in their pro forma information revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for material (either on an individual or aggregate basis) business combinations entered into in fiscal years beginning on or after December 15, 2010 with early adoption permitted. The Company adopted ASU 2010-29 during the first quarter of the current fiscal year.

 

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”), which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. The Company is currently evaluating ASU 2011-04 and has not yet determined the impact the adoption will have on the Company’s Consolidated Financial Statements.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, inventories, income taxes, financing operations, restructuring costs, retirement benefits, share-based compensation, risk

 

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participation agreements, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment or complexity, refer to “Critical Accounting Policies and Estimates” as reported in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

 

FORWARD-LOOKING STATEMENTS

 

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

 

ITEM 3   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our primary market risk exposure with regard to financial instruments is 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 April 30, 2011 we had no borrowings under this facility. Additionally, we have a $148.4 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 record the effective portion of the change in fair value through accumulated other comprehensive loss.

 

The fair value of the derivative was $15.6 million and $16.4 million payable at April 30, 2011 and January 29, 2011, respectively. Of the $0.8 million decrease in the liabilities during the thirteen weeks ended April 30, 2011, $0.5 million net of tax was recorded to accumulated other comprehensive loss on the consolidated balance sheet.

 

ITEM 4  CONTROLS AND PROCEDURES

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

Our disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to provide reasonable assurance that the 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 effective in providing 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 and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

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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 PROCEDDINGS

 

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

 

ITEM 1A  RISK FACTORS

 

There have been no changes to the risks described in the Company’s previously filed Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

 

ITEM 2    UNREGRISTERED 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

 

(21)

 

Subsidiaries of the Company

 

 

 

(31.1)

 

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

 

 

 

(31.2)

 

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

 

 

 

(32.1)

 

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

 

 

 

(32.2)

 

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

 

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SIGNATURES

 

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

 

 

 

 

THE PEP BOYS - MANNY, MOE & JACK

 

 

(Registrant)

 

 

 

 

Date:

June 7, 2011

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

 

(21)

 

Subsidiaries of the Company

 

 

 

(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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