Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - PEP BOYS MANNY MOE & JACKFinancial_Report.xls
EX-32.2 - EX-32.2 - PEP BOYS MANNY MOE & JACKa14-24673_1ex32d2.htm
EX-31.1 - EX-31.1 - PEP BOYS MANNY MOE & JACKa14-24673_1ex31d1.htm
EX-31.2 - EX-31.2 - PEP BOYS MANNY MOE & JACKa14-24673_1ex31d2.htm
EX-32.1 - EX-32.1 - PEP BOYS MANNY MOE & JACKa14-24673_1ex32d1.htm

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 November 1, 2014

 

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 x  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 29, 2014, there were 53,507,509 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 — November 1, 2014 and February 1, 2014

1

 

 

 

 

Consolidated Statements of Operations and Comprehensive (Loss) Income — Thirteen and Thirty-nine Weeks Ended November 1, 2014 and November 2, 2013

2

 

 

 

 

Consolidated Statements of Cash Flows — Thirty-nine Weeks Ended November 1, 2014 and November 2, 2013

3

 

 

 

 

Notes to the Consolidated Financial Statements

4

 

 

 

Item 2.

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

11

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

18

 

 

 

Item 4.

Controls and Procedures

19

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

19

 

 

 

Item 1A.

Risk Factors

19

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

20

 

 

 

Item 3.

Defaults Upon Senior Securities

20

 

 

 

Item 4.

Mine Safety Disclosures

20

 

 

 

Item 5.

Other Information

20

 

 

 

Item 6.

Exhibits

21

 

 

 

SIGNATURES

22

 

 

INDEX TO EXHIBITS

23

 

i



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)

 

 

 

November 1,
2014

 

February 1,
2014

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

36,430

 

$

33,431

 

Accounts receivable, less allowance for uncollectible accounts of $1,616 and $1,320

 

31,622

 

25,152

 

Merchandise inventories

 

667,438

 

672,354

 

Prepaid expenses

 

15,314

 

29,282

 

Other current assets

 

51,470

 

63,405

 

Assets held for disposal

 

4,636

 

2,013

 

Total current assets

 

806,910

 

825,637

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $1,257,988 and $1,227,121

 

614,326

 

625,525

 

Goodwill

 

56,794

 

56,794

 

Deferred income taxes

 

57,070

 

57,686

 

Other long-term assets

 

37,301

 

39,839

 

Total assets

 

$

1,572,401

 

$

1,605,481

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

217,066

 

$

256,031

 

Trade payable program liability

 

145,105

 

129,801

 

Accrued expenses

 

209,524

 

237,403

 

Deferred income taxes

 

68,556

 

69,373

 

Current maturities of long-term debt

 

2,000

 

2,000

 

Total current liabilities

 

642,251

 

694,608

 

 

 

 

 

 

 

Long-term debt less current maturities

 

229,500

 

199,500

 

Other long-term liabilities

 

45,843

 

48,485

 

Deferred gain from asset sales

 

105,370

 

114,823

 

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

 

297,313

 

297,009

 

Retained earnings

 

428,845

 

432,332

 

Accumulated other comprehensive income

 

43

 

379

 

Treasury stock, at cost — 15,177,705 shares and 15,358,872 shares

 

(245,321

)

(250,212

)

Total stockholders’ equity

 

549,437

 

548,065

 

Total liabilities and stockholders’ equity

 

$

1,572,401

 

$

1,605,481

 

 

See notes to consolidated financial statements.

 

1



Table of Contents

 

THE PEP BOYS — MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(dollar amounts in thousands, except per share data)

(unaudited)

 

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

 

 

November 1,
2014

 

November 2,
2013

 

November 1,
2014

 

November 2,
2013

 

Merchandise sales

 

$

395,941

 

$

394,346

 

$

1,208,778

 

$

1,223,813

 

Service revenue

 

121,643

 

112,696

 

373,401

 

347,022

 

Total revenues

 

517,584

 

507,042

 

1,582,179

 

1,570,835

 

Costs of merchandise sales

 

278,800

 

267,489

 

843,946

 

838,126

 

Costs of service revenue

 

120,450

 

116,741

 

362,473

 

349,348

 

Total costs of revenues

 

399,250

 

384,230

 

1,206,419

 

1,187,474

 

Gross profit from merchandise sales

 

117,141

 

126,857

 

364,832

 

385,687

 

Gross profit (loss) from service revenue

 

1,193

 

(4,045

)

10,928

 

(2,326

)

Total gross profit

 

118,334

 

122,812

 

375,760

 

383,361

 

Selling, general and administrative expenses

 

117,651

 

115,104

 

365,345

 

354,236

 

Net loss from dispositions of assets

 

(109

)

(67

)

(519

)

(213

)

Operating profit

 

574

 

7,641

 

9,896

 

28,912

 

Other income

 

418

 

524

 

1,175

 

1,367

 

Interest expense

 

3,485

 

3,643

 

10,269

 

10,885

 

(Loss) earnings from continuing operations before income taxes and discontinued operations

 

(2,493

)

4,522

 

802

 

19,394

 

Income tax (benefit) expense

 

(723

)

3,509

 

1,108

 

9,074

 

(Loss) earnings from continuing operations before discontinued operations

 

(1,770

)

1,013

 

(306

)

10,320

 

Loss from discontinued operations, net of tax

 

(194

)

(49

)

(319

)

(124

)

Net (loss) earnings

 

(1,964

)

964

 

(625

)

10,196

 

 

 

 

 

 

 

 

 

 

 

Basic (loss) earnings per share:

 

 

 

 

 

 

 

 

 

(Loss) earnings from continuing operations before discontinued operations

 

$

(0.03

)

$

0.02

 

$

 

$

0.19

 

(Loss) from discontinued operations, net of tax

 

 

 

(0.01

)

 

Basic (loss) earnings per share

 

$

(0.03

)

$

0.02

 

$

(0.01

)

$

0.19

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) earnings per share:

 

 

 

 

 

 

 

 

 

(Loss) earnings from continuing operations before discontinued operations

 

$

(0.03

)

$

0.02

 

$

 

$

0.19

 

(Loss) from discontinued operations, net of tax

 

 

 

(0.01

)

 

Diluted (loss) earnings per share

 

$

(0.03

)

$

0.02

 

$

(0.01

)

$

0.19

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Derivative financial instruments adjustment, net of tax

 

(170

)

(372

)

(336

)

1,319

 

Comprehensive (loss) income

 

$

(2,134

)

$

592

 

$

(961

)

$

11,515

 

 

See notes to consolidated financial statements.

 

2



Table of Contents

 

THE PEP BOYS — MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

(unaudited)

 

 

 

Thirty-nine weeks ended

 

 

 

November 1
2014

 

November 2,
2013

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss) earnings

 

$

(625

)

$

10,196

 

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

 

 

 

 

 

Loss from discontinued operations, net of tax

 

319

 

124

 

Depreciation

 

55,518

 

59,941

 

Amortization of deferred gain from asset sales

 

(9,453

)

(9,453

)

Amortization of deferred financing costs

 

1,937

 

1,952

 

Stock compensation expense

 

1,533

 

2,451

 

Deferred income taxes

 

(66

)

(478

)

Net loss from disposition of assets

 

519

 

213

 

Loss from asset impairment

 

5,243

 

4,882

 

Other

 

(238

)

(322

)

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease in accounts receivable, prepaid expenses and other

 

19,644

 

18,431

 

Decrease (increase) in merchandise inventories

 

4,916

 

(23,693

)

(Decrease) increase in accounts payable

 

(36,494

)

7,746

 

Decrease in accrued expenses

 

(28,363

)

(6,589

)

Decrease in other long-term liabilities

 

(2,182

)

(2,354

)

Net cash provided by continuing operations

 

12,208

 

63,047

 

Net cash used in discontinued operations

 

(583

)

(193

)

Net cash provided by operating activities

 

11,625

 

62,854

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(54,975

)

(38,334

)

Proceeds from dispositions of assets

 

56

 

19

 

Acquisitions, net of cash acquired

 

 

(10,741

)

Release of collateral investment

 

 

1,000

 

Net cash used in investing activities

 

(54,919

)

(48,056

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Borrowings under line of credit agreements

 

479,438

 

1,926

 

Payments under line of credit agreements

 

(447,938

)

(1,926

)

Borrowings on trade payable program liability

 

143,614

 

114,804

 

Payments on trade payable program liability

 

(128,310

)

(129,819

)

Debt payments

 

(1,500

)

(1,500

)

Proceeds from stock issuance

 

989

 

1,079

 

Repurchase of common stock

 

 

(2,750

)

Net cash provided by (used in) financing activities

 

46,293

 

(18,186

)

Net increase (decrease) in cash and cash equivalents

 

2,999

 

(3,388

)

Cash and cash equivalents at beginning of period

 

33,431

 

59,186

 

Cash and cash equivalents at end of period

 

$

36,430

 

$

55,798

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for income taxes

 

$

845

 

$

4,322

 

Cash received from income tax refunds

 

$

244

 

$

51

 

Cash paid for interest

 

$

8,482

 

$

9,149

 

Non-cash investing activities:

 

 

 

 

 

Accrued purchases of property and equipment

 

$

1,350

 

$

2,369

 

 

See notes to consolidated financial statements.

 

3



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 February 1, 2014. The results of operations for the thirty-nine weeks ended November 1, 2014 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 November 1, 2014 and for all periods presented have been made.

 

The Company’s fiscal year ends on the Saturday nearest to January 31. Fiscal 2014, which ends January 31, 2015, and Fiscal 2013, which ended February 1, 2014, are comprised of 52 weeks. The Company operated 802 store locations as of November 1, 2014, of which 226 were owned and 576 were leased.

 

NOTE 2NEW ACCOUNTING STANDARDS

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-15, “Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. This ASU is effective for annual periods ending after December 15, 2016, and interim periods thereafter; earlier adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on the consolidated financial statements.

 

In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 with early adoption permitted. The Company is currently evaluating the new standard, but does not expect adoption of ASU 2014-12 to have a material impact on our consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 supersedes the revenue recognition requirements in “Topic 605, Revenue Recognition” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective retrospectively for annual or interim reporting periods beginning after December 15, 2016, with early adoption not permitted. The Company is currently evaluating the new standard, but does not expect the adoption of ASU 2014-09 to have a material impact on the consolidated financial statements.

 

In April 2014, the FASB issued ASU No. 2014-08, “Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 provides a narrower definition of discontinued operations than under existing U.S. GAAP. ASU 2014-08 requires that only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entity’s operations and financial results should be reported in the financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and

 

4



Table of Contents

 

disclosures of discontinued operations. ASU 2014-08 is effective prospectively for disposals (or classifications as held for disposal) of components of an entity that occur in annual or interim periods beginning after December 15, 2014. The Company does not expect the adoption of ASU 2014-08 to have a material impact on the consolidated financial statements.

 

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. ASU 2013-11 states that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, if available at the reporting date under the applicable tax law to settle any additional income taxes that would result from the disallowance of a tax position. If the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact on the Company’s consolidated financial statements.

 

NOTE 3—ACQUISITIONS

 

During the thirteen weeks ended November 2, 2013, the Company paid $10.7 million to purchase 18 Service & Tire Centers located in Southern California from AKH Company, Inc., which had operated under the name Discount Tire Centers. This acquisition was financed using cash on hand. Collectively, the acquired stores produced approximately $26.1 million in sales annually based on unaudited pre-acquisition historical information. The results of operations of these acquired stores are included in the Company’s results of operations as of the date of acquisition.

 

The Company expensed all costs related to this acquisition during Fiscal 2013. The total costs related to this acquisition were immaterial and are included in the consolidated statement of operations within selling, general and administrative expenses.

 

The purchase price of the acquisition was allocated to tangible assets of approximately $0.8 million and $0.1 million in intangible assets, with the remaining $9.9 million recorded as goodwill. The goodwill was primarily related to growth opportunities and assembled workforces, and is deductible for tax purposes.

 

As the acquisition was immaterial to the Company’s operating results for the thirteen and thirty-nine week periods ended November 2, 2013, pro forma results of operations are not disclosed.

 

NOTE 4—MERCHANDISE INVENTORIES

 

Merchandise inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out (“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected fiscal year-end inventory levels and costs. If the first-in, first-out (“FIFO”) method of costing inventory had been used by the Company, inventory would have been $590.3 million and $579.8 million as of November 1, 2014 and February 1, 2014, respectively.

 

The Company’s inventory, consisting primarily of automotive tires, 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 suppliers 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 suppliers 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 immaterial as of November 1, 2014 and February 1, 2014, respectively.

 

NOTE 5WARRANTY 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.

 

5



Table of Contents

 

The reserve for warranty cost activity for the thirty-nine weeks ended November 1, 2014 and the fifty-two weeks ended February 1, 2014 is as follows:

 

(dollar amounts in thousands)

 

November 1, 2014

 

February 1, 2014

 

Beginning balance

 

$

682

 

$

864

 

 

 

 

 

 

 

Additions related to current period sales

 

10,369

 

13,748

 

 

 

 

 

 

 

Warranty costs incurred in current period

 

(10,369

)

(13,930

)

 

 

 

 

 

 

Ending balance

 

$

682

 

$

682

 

 

NOTE 6DEBT AND FINANCING ARRANGEMENTS

 

The following are the components of debt and financing arrangements:

 

(dollar amounts in thousands)

 

November 1, 2014

 

February 1, 2014

 

Senior Secured Term Loan, due October 2018

 

$

196,500

 

$

198,000

 

Revolving Credit Agreement, through July 2016

 

35,000

 

3,500

 

Long-term debt

 

231,500

 

201,500

 

Current maturities

 

(2,000

)

(2,000

)

Long-term debt less current maturities

 

$

229,500

 

$

199,500

 

 

The Company has a Revolving Credit Agreement (the “Agreement”) with available borrowings up to $300.0 million and a maturity of July 2016. As of November 1, 2014, the Company had $35.0 million in borrowings outstanding under the Agreement and $37.8 million of availability was utilized to support outstanding letters of credit. Taking this into account and the borrowing base requirements (including reduction for amounts outstanding under the supplier financing program), as of November 1, 2014 there was $118.9 million of availability remaining under the Agreement.

 

The Company’s debt agreements require compliance with covenants. The most restrictive of these covenants, an earnings before interest, taxes, depreciation and amortization (“EBITDA”) requirement, is triggered if the Company’s availability under its Revolving Credit Agreement plus unrestricted cash drops below $50.0 million. As of November 1, 2014, the Company was in compliance with all financial covenants contained in its debt agreements.

 

The Company has a supplier financing program with availability up to $200.0 million which is funded by various bank participants who have the ability, but not the obligation, to purchase account receivables owed by the Company directly from suppliers. The Company, in turn, makes the regularly scheduled full supplier payments to the bank participants. There was an outstanding balance of $145.1 million and $129.8 million under the program as of November 1, 2014 and February 1, 2014, respectively (classified as trade payable program liability on the consolidated balance sheet).

 

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 obligations and are considered a level 2 measure under the fair value hierarchy. The estimated fair value of long-term debt including current maturities was $230.0 million and $203.7 million as of November 1, 2014 and February 1, 2014, respectively.

 

NOTE 7—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’s effective income tax rate differs from the U.S. statutory rate principally due to state taxes, foreign taxes related to the Company’s Puerto Rico operations and certain other permanent tax items. The annual rate depends on a number of factors, including the jurisdiction in which pre-tax earnings is derived and the timing and nature of discrete items. For the thirteen weeks ended November 1, 2014 the effective tax rate was a 29.0% benefit as compared to a 77.6% expense recorded in the corresponding period of the prior year. The decrease in the effective tax rate was primarily due to a change in the mix of pre-tax (loss) earnings within certain jurisdictions and the impact of permanent tax differences in relation to pre-tax (loss) earnings.

 

6



Table of Contents

 

For the thirty-nine weeks ended November 1, 2014 and November 2, 2013, the effective tax rate was 138.2% and 46.8%, respectively. The increase in the effective tax rate was primarily attributable to a change in the mix of pre-tax earnings within certain jurisdictions, the impact of permanent tax differences in relation to pre-tax earnings and the effect of discrete items recorded in each year.

 

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 thirty-nine weeks ended November 1, 2014, unrecognized tax benefits were reduced by $0.6 million primarily as a result of a tax settlement within certain jurisdictions where the Company operates. The Company does not expect any significant increases or decreases to the amount of unrecognized tax benefits within the next 12 months.

 

NOTE 8EARNINGS 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

 

(dollar amounts in thousands, except per share amounts)

 

November 1,
2014

 

November 2,
2013

 

November 1,
2014

 

November 2,
2013

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

 

(Loss) earnings from continuing operations

 

$

(1,770

)

$

1,013

 

$

(306

)

$

10,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

(194

)

(49

)

(319

)

(124

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

$

(1,964

)

$

964

 

$

(625

)

$

10,196

 

 

 

 

 

 

 

 

 

 

 

 

 

(b)

 

Basic average number of common shares outstanding during period

 

53,590

 

53,315

 

53,533

 

53,363

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

615

 

 

599

 

 

 

 

 

 

 

 

 

 

 

 

 

(c)

 

Diluted average number of common shares assumed outstanding during period

 

53,590

 

53,930

 

53,533

 

53,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings from continuing operations (a/b)

 

$

(0.03

)

$

0.02

 

$

 

$

0.19

 

 

 

(Loss) from discontinued operations, net of tax

 

 

 

(0.01

)

 

 

 

Basic (loss) earnings per share

 

$

(0.03

)

$

0.02

 

$

(0.01

)

$

0.19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings from continuing operations (a/c)

 

$

(0.03

)

$

0.02

 

$

 

$

0.19

 

 

 

(Loss) from discontinued operations, net of tax

 

 

 

(0.01

)

 

 

 

Diluted (loss) earnings per share

 

$

(0.03

)

$

0.02

 

$

(0.01

)

$

0.19

 

 

As of November 1, 2014 and November 2, 2013, respectively, there were 2,797,000 and 2,572,000 outstanding options and restricted stock units. Certain stock options were excluded from the calculation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares for the periods then ended and therefore would be anti-dilutive. The total number of such shares excluded from the diluted earnings per share calculation is 2,797,000 and 824,000 for the thirteen weeks ended November 1, 2014 and November 2, 2013, respectively. The total number of such shares excluded from the diluted earnings per share calculation is 2,797,000 and 1,011,000 for the thirty-nine weeks ended November 1, 2014 and November 2, 2013.

 

7



Table of Contents

 

NOTE 9ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

 

The following table presents changes in accumulated other comprehensive (loss) income for the thirteen and thirty-nine weeks ended November 1, 2014 and November 2, 2013, net of tax:

 

 

 

Gains on Cash Flow Hedges

 

 

 

Thirteen weeks ended

 

Thirty- nine weeks ended

 

(dollar amounts in thousands)

 

November 1,
2014

 

November 2,
2013

 

November 1,
2014

 

November 2,
2013

 

Beginning balance

 

$

213

 

$

711

 

$

379

 

$

(980

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income before reclassifications, net of $160 tax benefit, $283 tax benefit, $372 tax benefit and $618 tax expense

 

(267

)

(471

)

(623

)

1,032

 

Amounts reclassified from accumulated other comprehensive income net of $58, $59, $173 and $172 tax (a)

 

97

 

99

 

287

 

287

 

Net current-period other comprehensive (loss) income

 

(170

)

(372

)

(336

)

1,319

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

43

 

$

339

 

$

43

 

$

339

 

 


(a)  Reclassified amount increased interest expense.

 

NOTE 10BENEFIT PLANS

 

The Company continues to maintain the non-qualified defined contribution portion of the Supplemental Executive Retirement Plan (the “Account Plan”) for key employees designated by the Board of Directors. On January 31, 2014, the Account Plan was amended to eliminate the retirement plan contributions that have historically been made by the Company effective for calendar year 2015. For fiscal 2014 and fiscal 2013, contributions to the Account Plan are contingent upon meeting certain performance metrics. The Company had no contribution expense for the Account Plan in the first three quarters of fiscal 2014 or fiscal 2013.

 

The Company also 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 18 years of age with one or more years of service. The Company contributes the lesser of 50% of the first 6% of a participant’s contributions or 3% of the participant’s compensation under both savings plans. The Company’s savings plans’ contribution expense was $2.3 million in the first three quarters of fiscal 2014 and was $2.5 million in the first three quarters of fiscal 2013.

 

NOTE 11—STOCKHOLDERS’ EQUITY

 

On December 12, 2012, the Company’s Board of Directors authorized a program to repurchase up to $50.0 million of the Company’s common stock to be made from time to time in the open market or in privately negotiated transactions, with no expiration date. In the first three quarters of fiscal 2013, the Company repurchased 237,624 shares of common stock for $2.8 million. The repurchased shares are included in the Company’s treasury stock.

 

NOTE 12—EQUITY COMPENSATION PLANS

 

The Company has stock-based compensation plans under which it grants stock options, performance share units 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.

 

In the first nine months of fiscal 2014 and fiscal 2013, the Company granted approximately 684,000 and 309,000 stock options, respectively, with a weighted average grant date fair value of $3.95 per unit and $5.11 per unit, respectively. These options have a seven-year term and vest over a three-year period with a third vesting on each of the first three anniversaries of their grant date.  The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The compensation expense recorded for the options granted during the thirty-nine weeks ended November 1, 2014 and November 2, 2013 was immaterial.

 

In the first nine months of fiscal 2014 and fiscal 2013, the Company granted approximately 155,000 and 109,000 performance share units, respectively, 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 2016 and fiscal 2015, respectively. The number of underlying shares that may be issued upon vesting will range from 0% to 150% depending upon the Company achieving the financial

 

8



Table of Contents

 

targets in fiscal 2016 and fiscal 2015, respectively. The fair value for these awards was $10.26 per unit and $11.85 per unit, respectively, at the date of the grant. The compensation expense recorded for these performance share units during the thirty-nine weeks ended November 1, 2014 and November 2, 2013 was immaterial.

 

In the first nine months of fiscal 2014 and fiscal 2013, the Company granted approximately 77,000 and 55,000 performance share units, respectively, 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 for the three-year period ending with fiscal 2016 and fiscal 2015, respectively. 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 $9.13 per unit and $13.41 per unit grant date fair value for fiscal 2014 and fiscal 2013, respectively. The compensation expense recorded for these performance share units during the thirty-nine weeks ended November 1, 2014 and November 2, 2013 was immaterial.

 

In the first nine months of fiscal 2014, the Company granted approximately 116,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant. The fair value for these awards was $10.26 per unit at the date of the grant. The compensation expense recorded for these restricted stock units during the thirty-nine weeks ended November 1, 2014 was immaterial.

 

During the third quarter of fiscal 2014, the Company granted approximately 142,000 restricted stock units that vest continuously over approximately 15 months and have an average fair value of $9.28 per share.

 

NOTE 13FAIR VALUE MEASUREMENTS AND DERIVATIVES

 

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

 

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.

 

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:

 

The Company’s long-term investments and interest rate swap agreements are measured at fair value on a recurring basis. The information in the following paragraphs and tables primarily addresses matters relative to these assets and liabilities.

 

Cash equivalents:

 

Cash equivalents, other than credit card receivables, include highly liquid investments with an original maturity of three months or less at acquisition. The Company carries these investments at fair value. As a result, the Company has determined that its cash equivalents in their entirety are classified as a Level 1 measure within the fair value hierarchy.

 

Collateral investments:

 

Collateral investments include monies on deposit that are restricted. The Company carries these investments at fair value. As a result, the Company has determined that its collateral investments are classified as a Level 1 measure within the fair value hierarchy.

 

Deferred compensation assets:

 

Deferred compensation assets include variable life insurance policies held in a Rabbi Trust. The Company values these policies using observable market data. The inputs used to value the variable life insurance policy fall within Level 2 of the fair value hierarchy.

 

Derivative asset:

 

The Company has two interest rate swaps designated as cash flow hedges on $100.0 million of the Company’s Senior Secured Term Loan facility that expires in October 2018. The Company values these swaps using observable market data to discount

 

9



Table of Contents

 

projected cash flows and for credit risk adjustments. The inputs used to value derivatives fall within Level 2 of the fair value hierarchy.

 

The following tables provide 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

 

November 1, 2014

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,430

 

$

36,430

 

$

 

$

 

Collateral investments (1)

 

21,611

 

21,611

 

 

 

Deferred compensation assets (1) 

 

4,450

 

 

4,450

 

 

Derivative asset (1)

 

68

 

 

68

 

 

 

(dollar amounts in thousands)

 

Fair Value at

 

Fair Value Measurements Using Inputs Considered as

 

Description

 

February 1, 2014

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

33,431

 

$

33,431

 

$

 

$

 

Collateral investments (1)

 

21,611

 

21,611

 

 

 

Deferred compensation assets (1) 

 

4,242

 

 

4,242

 

 

Derivative asset (1)

 

606

 

 

606

 

 

 


(1) Included in other long-term assets.

 

The following represents the impact of fair value accounting for the Company’s derivative asset on its consolidated financial statements:

 

(dollar amounts in thousands)

 

Amount of (Loss) Gain
in
Other Comprehensive

(Loss) Income
(Effective Portion)

 

Earnings Statement
Classification

 

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

 

Thirteen weeks ended November 1, 2014

 

$

(170

)

Interest expense

 

$

(155

)

Thirteen weeks ended November 2, 2013

 

$

(372

)

Interest expense

 

$

(158

)

 

 

 

 

 

 

 

 

Thirty-nine weeks ended November 1, 2014

 

$

(336

)

Interest expense

 

$

(459

)

Thirty-nine weeks ended November 2, 2013

 

$

1,319

 

Interest expense

 

$

(459

)

 


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

 

The fair value of the derivative was a $0.1 million asset and a $0.6 million asset as of November 1, 2014 and February 1, 2014, respectively. Of the $0.5 million decrease in the fair value during the thirty-nine weeks ended November 1, 2014, a $0.3 million loss, net of tax, was recorded to accumulated other comprehensive income 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 3 measures under the fair value hierarchy. Measurements of assets held and used are discussed in Note 14, “Impairments”.

 

NOTE 14—IMPAIRMENTS

 

During the third quarter of fiscal 2014, the Company recorded a $1.4 million impairment charge related to 10 stores classified as held and used. Of the $1.4 million impairment charge, $0.3 million was charged to costs of merchandise sales, and $1.1 million was charged to costs of service revenue. In the third quarter of fiscal 2013, the Company recorded a $2.0 million impairment charge related to 10 stores classified as held and used. Of the $2.0 million impairment charge, $0.9 million was charged to costs of merchandise sales, and $1.1 million was charged to costs of service revenue. In both periods, 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

 

10



Table of Contents

 

derived from current economic conditions, management’s expectations and projected trends of current operating results. The remaining fair value of the impaired stores is approximately $1.9 million as of November 1, 2014 and is classified as a Level 2 or 3 measure within the fair value hierarchy.

 

NOTE 15LEGAL MATTERS

 

The Company is party to a Consent Decree, effective July 15, 2010, with the United States Environmental Protection Agency (“EPA”) that, among other things, required the Company to implement a formal compliance program with respect to certain small gasoline engine merchandise sold by the Company. In the fourth quarter of fiscal 2013, the EPA alleged, in writing, that the Company had violated certain inspection, testing and reporting requirements of the Consent Decree and made an aggregated stipulated penalty demand of $2.3 million as a result thereof. In November 2014, the Company reached a settlement in principle to resolve these allegations for an aggregate payment of $1.0 million, of which $0.4 million was previously paid.

 

The Company is also 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 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 will 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 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 quarter of fiscal 2014 and 2013 and significant developments affecting our financial condition as of November 1, 2014. 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 February 1, 2014.

 

Introduction

 

The Pep Boys—Manny, Moe & Jack and subsidiaries (the “Company”) has been the best place to shop and care for your car since it began operations in 1921. Approximately 19,000 associates are focused on delivering the best customer service in the automotive aftermarket to our customers across our over 800 locations throughout the United States and Puerto Rico and on-line at pepboys.com. Pep Boys satisfies all of a customer’s automotive needs through our unique offering of service, tires, parts and accessories.

 

Our stores are organized into a hub and spoke network consisting of Supercenters and Service & Tire Centers. Supercenters average approximately 20,000 square feet and combine do-it-for-me service labor, installed merchandise and tire offerings (“DIFM”) with do-it-yourself parts and accessories (“DIY”). Most of our Supercenters also have a commercial sales program that delivers parts, tires and equipment to automotive repair shops and dealers. Service & Tire Centers, which average approximately 5,000 square feet, provide DIFM services in neighborhood locations that are conveniently located where our customers live or work. Service & Tire Centers are designed to capture market share and leverage our existing Supercenters and support infrastructure. We also operate a handful of legacy DIY only Pep Express stores.

 

In the first nine months of fiscal 2014, we opened 11 Service & Tire Centers, one Supercenter and converted one Supercenter to a Service & Tire Center. We also closed four Service & Tire Centers and five Supercenters. As of November 1, 2014, we operated 563 Supercenters, 233 Service & Tire Centers and six Pep Express stores located in 35 states and Puerto Rico.

 

11



Table of Contents

 

EXECUTIVE SUMMARY

 

Net loss for the third quarter of 2014 was $2.0 million, or $0.03 per share, as compared to net earnings of $1.0 million, or $0.02 per share, reported for the third quarter of 2013.

 

Total revenues increased for the third quarter of 2014 by 2.1%, or $10.5 million, as compared to the third quarter of 2013 due to a 1.2% increase in comparable store sales. This increase in comparable store sales (sales generated by locations in operation during the same period of the prior year) was comprised of a 6.1% increase in comparable store service revenues, offset by a 0.2% decrease in comparable store merchandise sales.

 

We believe that the industry fundamentals of increasing vehicle complexity and customer preference for DIFM remain solid over the long-term resulting in consistent demand for maintenance and repair services. Consistent with this long-term trend, we have adopted a long-term strategy of growing our automotive service business, while maintaining our DIY customer base.

 

In the short-term, however, various factors within the economy affect both our customers and our industry, including a weak recovery from the recent recession, continued high underemployment and the tepid growth in real wages. We believe that these factors challenge our customers’ spending relative to discretionary and deferrable purchases. These spending habits impact miles driven which, in turn, impact sales of our services and non-discretionary products. Given the nature of these macroeconomic factors, we cannot predict whether or for how long these trends may continue, nor can we predict to what degree these trends will affect us in the future.

 

Over the past few years, we have invested in our business to drive top line sales with investments in marketing & promotions, new stores (Service & Tire Centers), digital operations and, most recently, a new market concept that we call the “Road Ahead.”  Designed around the shopping habits of our target customer segments, this concept enhances the entire store — our people, the product assortment, its exterior and interior look and feel and the marketing programs — to learn how we can be successful in attracting more of these target customers and earn a greater share of their annual spend in the automotive aftermarket. While each initiative has produced results, they have also brought added expense. Total sales growth has been relatively flat due in large part to the decline in our DIY business and combined with increased expenses has led to declining profit margins. Accordingly, we continue to review expenses related to our base business so we can continue to invest in our initiatives.

 

RESULTS OF OPERATIONS

 

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

 

Analysis of Statement of Operations

 

Thirteen weeks ended November 1, 2014 vs. Thirteen weeks ended November 2, 2013

 

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.

 

12



Table of Contents

 

 

 

Percentage of Total Revenues

 

Percentage Change

 

Thirteen weeks ended

 

November 1, 2014
(Fiscal 2014)

 

November 2, 2013
(Fiscal 2013)

 

Favorable
(Unfavorable)

 

 

 

 

 

 

 

 

 

Merchandise sales

 

76.5

%

77.8

%

0.4

%

Service revenue (1)

 

23.5

 

22.2

 

7.9

 

Total revenues

 

100.0

 

100.0

 

2.1

 

Costs of merchandise sales (2)

 

70.4

(3)

67.8

(3)

(4.2

)

Costs of service revenue (2)

 

99.0

(3)

103.6

(3)

(3.2

)

Total costs of revenues

 

77.1

 

75.8

 

(3.9

)

Gross profit from merchandise sales

 

29.6

(3)

32.2

(3)

(7.7

)

Gross profit from service revenue

 

1.0

(3)

(3.6)

(3)

129.5

 

Total gross profit

 

22.9

 

24.2

 

(3.6

)

Selling, general and administrative expenses

 

22.7

 

22.7

 

(2.2

)

Net loss from dispositions of assets

 

 

 

 

Operating profit

 

0.1

 

1.5

 

(92.5

)

Other income

 

0.1

 

0.1

 

(20.2

)

Interest expense

 

0.7

 

0.7

 

4.3

 

(Loss) Earnings from continuing operations before income taxes

 

(0.5

)

0.9

 

(155.1

)

Income tax expense

 

29.0

(4)

77.6

(4)

120.6

 

(Loss)Earnings from continuing operations

 

(0.3

)

0.2

 

(274.9

)

Discontinued operations, net of tax

 

 

 

 

Net (loss) earnings

 

(0.4

)

0.2

 

(304.1

)

 


(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 for the third quarter of 2014 increased by $10.5 million, or 2.1%, to $517.6 million from $507.0 million for the third quarter of 2013. While our total revenues are 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. Comparable store sales for the third quarter of 2014 increased by 1.2% as compared to the third quarter of 2013. This increase in comparable store sales consisted of a 6.1% increase in comparable store service revenue offset by a decrease of 0.2% in comparable store merchandise sales.

 

Customer online purchases that are picked up at our stores are included in our comparable store sales calculation. Customer online purchases that are delivered to customers’ homes are not included in our comparable store sales and are immaterial to our total sales and comparable store sales.

 

Total merchandise sales increased 0.4%, or $1.6 million, to $395.9 million in the third quarter of fiscal 2014, compared to $394.3 million during the prior year quarter. Comparable store merchandise sales decreased by 0.2%, or $1.0 million, primarily due to a decline in comparable store transaction counts mostly offset by a higher average revenue per transaction. The lower comparable store transactions counts are due, in part, to the repositioning of our retail business as part of our Road Ahead strategy. During the transition, as we target those more profitable customers that are seeking the best place to shop and care for their car, we are gaining these customers at a somewhat slower rate than we have been losing our less profitable lowest-price only customers. Non-comparable stores contributed an additional $2.6 million of merchandise sales during the quarter.

 

Total service revenue increased 7.9%, or $8.9 million, to $121.6 million in the third quarter of 2014 from $112.7 million during the prior year quarter. Comparable store service revenue increased by 6.1%, or $6.8 million, primarily due to a higher average revenue per transaction, partially offset by a decline in transaction counts. Non-comparable stores contributed an additional $2.1 million of service revenue during the quarter.

 

In our retail business (as defined below in Industry Comparison), continued competitive pressures led to a comparable store transaction count decline of 4.6%, while higher selling prices resulted in a 2.8% increase in average revenue per transaction.

 

In our service business (as defined below in Industry Comparison), we believe that the decline in comparable store transaction counts of 1.9% was due to a cooler than normal summer/early fall which reduced demand for batteries, air-conditioning services, engine performance and diagnostic services. In addition, oil change transactions declined due to less promotional activity in the current year as compared to the prior year. Service average revenue per transaction increased by 5.6%, primarily due to higher selling prices and a shift in sales mix to higher priced tires.

 

Total gross profit decreased by $4.5 million, or 3.6%, to $118.3 million in the third quarter of 2014 from $122.8 million in the third quarter of 2013. Total gross profit margin decreased to 22.9% for the third quarter of 2014 from 24.2% for the third quarter of 2013. Excluding the impairment charge of $1.4 million and $2.0 million in the third quarter of 2014 and 2013, respectively, total gross profit margin decreased by 150 basis points to 23.1% for fiscal 2014 from 24.6% in fiscal 2013. The decrease in total gross profit margin was primarily due to lower gross margins of 130 basis points primarily due to change in sales mix, lower vendor support funds, higher inventory shrinkage and higher freight costs.

 

Gross profit from merchandise sales decreased by $9.7 million, or 7.7%, to $117.1 million for the third quarter of 2014 from $126.9 million in the third quarter of 2013. Gross profit margin from merchandise sales decreased to 29.6% for the third quarter of

 

13



Table of Contents

 

2014 from 32.2% for the third quarter of 2013. Excluding the impairment charge of $0.3 million and $0.9 million in the third quarter of 2014 and 2013, respectively, gross profit margin from merchandise sales decreased by 270 basis points to 29.7% for fiscal 2014 from 32.4% in fiscal 2013. The decrease in gross profit margin was primarily due to lower product margins of 260 basis points primarily due to change in sales mix, lower vendor support funds, higher inventory shrinkage and higher freight costs.

 

Gross profit from service revenue increased by $5.2 million, or 129.5%, to $1.2 million in the third quarter of 2014 from a loss of $4.0 million in the third quarter of 2013. Gross profit margin from service revenue increased to 1.0% for the third quarter of 2014 from a loss of 3.6% for the third quarter of 2013. In accordance with GAAP, service revenue is limited to labor sales (excludes any revenue from installed parts and materials) and costs of service revenue includes the fully loaded service center payroll and related employee benefits, and service center occupancy costs (rent, utilities and building maintenance). Excluding the impairment charge of $1.1 million and $1.2 million in the third quarter of 2014 and 2013, respectively, gross profit margin from service revenue increased by 450 basis points to 1.9% for fiscal 2014 from a loss of 2.6% in fiscal 2013. The increase in service revenue gross margin was primarily due to the leveraging effect of higher sales on the fixed component of payroll and related costs and occupancy costs.

 

Selling, general and administrative expenses as a percentage of total revenues remained flat at 22.7% for both the third quarter of 2014 and 2013, respectively. Selling, general and administrative expenses increased by $2.5 million to $117.7 million in the third quarter of 2014 from $115.1 million in the prior year quarter. The increase was primarily due to an increase in severance costs of $0.8 million, higher media spend of $0.7 million and higher store selling expense of $1.0 million due to store growth.

 

Interest expense for the third quarter of 2014 was $3.5million, a decrease of $0.1 million compared to the $3.6 million reported for the third quarter of 2013.

 

Our income tax benefit for the third quarter of 2014 was $0.7 million, or an effective rate of 29.0%, as compared to an expense of $3.5 million, or an effective rate of 77.6% in the third quarter of 2013. The decrease in the effective tax rate was primarily due to a change in the mix of pre-tax (loss) earnings within certain jurisdictions and the impact of permanent tax differences in relation to pre-tax (loss) earnings.

 

As a result of the foregoing, we reported a net loss of $2.0 million in the third quarter of 2014 as compared to net earnings of $1.0 million in the prior year quarter. Our basic and diluted loss per share was $0.03 for the third quarter of 2014 as compared to earnings $0.02 for the third quarter of 2013.

 

Thirty-nine weeks ended November 1, 2014 vs. Thirty-nine weeks ended November 2, 2013

 

The following table presents for the periods indicated certain items in the consolidated statements of operations and comprehensive income 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

 

November 1, 2014
(Fiscal 2014)

 

November 2, 2013
(Fiscal 2013)

 

Favorable
(Unfavorable)

 

 

 

 

 

 

 

 

 

Merchandise sales

 

76.4

%

77.9

%

(1.2

)%

Service revenue (1)

 

23.6

 

22.1

 

7.6

 

Total revenues

 

100.0

 

100.0

 

0.7

 

Costs of merchandise sales (2)

 

69.8

(3)

68.5

(3)

(0.7

)

Costs of service revenue (2)

 

97.1

(3)

100.7

(3)

(3.8

)

Total costs of revenues

 

76.3

 

75.6

 

(1.6

)

Gross profit from merchandise sales

 

30.2

(3)

31.5

(3)

(5.4

)

Gross profit from service revenue

 

2.9

(3)

(0.7)

(3)

569.7

 

Total gross profit

 

23.8

 

24.4

 

(2.0

)

Selling, general and administrative expenses

 

23.1

 

22.6

 

(3.1

)

Net loss from dispositions of assets

 

 

 

 

Operating profit

 

0.6

 

1.8

 

(65.8

)

Non-operating income

 

0.1

 

0.1

 

(14.0

)

Interest expense

 

0.7

 

0.7

 

5.7

 

Earnings from continuing operations before income taxes

 

0.1

 

1.2

 

(95.9

)

Income tax expense

 

138.2

(4)

46.8

(4)

87.8

 

Earnings from continuing operations

 

0.0

 

0.7

 

(103.0

)

Discontinued operations, net of tax

 

 

 

 

Net earnings

 

0.0

 

0.7

 

(106.1

)

 


(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.

 

14



Table of Contents

 

Total revenue for the first nine months of 2014 increased by $11.3 million to $1,582.2 million from $1,570.8 million for the first nine months of 2013, while comparable store sales for the first nine months of 2014 decreased by $11.2 million, or 0.7%, as compared to the first nine months of 2013. The decrease in comparable store sales consisted of an increase of 4.9% in comparable store service revenues offset by a decrease of 2.3% in comparable store merchandise sales. While our total revenue figures were favorably impacted by the opening of the new stores, a new store is not added to our comparable store sales until it reaches its 13th month of operation. Non-comparable stores contributed an additional $22.5 million of total revenue in the first nine months of 2014 as compared to the prior year period.

 

Total gross profit for the first nine months of 2014 decreased by $7.6 million, or 2.0%, to $375.8 million from $383.4 million for the first nine months of 2013. Total gross profit margin decreased to 23.8% for the first nine months of 2014 from 24.4% for the first nine months of 2013. Excluding the impairment charges of $5.2 million and $4.9 million in the first nine months of 2014 and 2013, respectively, total gross profit margin decreased by 60 basis points period over period primarily due to  higher payroll and related expenses of 30 basis points and higher occupancy costs (rent, utilities) of 30 basis points.

 

Gross profit from merchandise sales for the first nine months of 2014 decreased by $20.9 million, or 5.4%, to $364.8 million from $385.7 million for the first nine months of 2013. Gross profit margin from merchandise sales decreased to 30.2% for the first nine months of 2014 from 31.5% for the prior year period. Excluding the impairment charge of $1.8 million and $1.4 million in the first nine months of 2014 and 2013, respectively, gross profit margin from merchandise sales decreased by 130 basis points period over period. The decrease in gross profit margin from merchandise sales was due to lower product margins of 90 basis points, higher  occupancy costs (rent, utilities) of 20 basis points and higher warehousing costs of 20 basis points.

 

Gross profit from service revenue for the first nine months of 2014 increased by $13.3 million to $10.9 million from a loss of $2.3 million for the first nine months of 2013. Gross profit margin from service revenue for the first nine months of 2014 increased to 2.9% from a loss of 0.7% for the first nine months of 2013. In accordance with GAAP, service revenue is limited to labor sales (excludes any revenue from installed parts and materials). Costs of service revenues include the fully loaded service center payroll and related employee benefits and service center occupancy costs. Excluding the impairment charge of $3.5 million in the first nine months of both 2014 and 2013, gross profit margin from service revenue increased by 350 basis points period over period. The increase in service revenue gross profit margin was primarily due to the leveraging effect of higher sales on the fixed component of payroll and related costs.

 

Selling, general and administrative expenses, as a percentage of total revenues for the first nine months of 2014 increased to 23.1% as compared to 22.6% for the first nine months of 2013. Selling, general and administrative expenses increased $11.1 million, or 3.1%, compared to the first nine months of 2013 primarily due to the establishment of a litigation accrual of $4.0 million, higher media expense of $4.4 million, higher severance cost of $1.9 million and higher store selling expense due to store growth of $2.0 million.

 

Interest expense for the first nine months of 2014 was $10.3 million, a decrease of $0.6 million compared to the $10.9 million reported for the first nine months of 2013.

 

Our income tax expense for the first nine months of 2014 was $1.1 million, or an effective rate of 138.2%, as compared to an expense of $9.1million, or an effective rate of 46.8%, for the first nine months of 2013. The increase in the effective tax rate was primarily attributable to a change in the mix of pre-tax earnings within certain jurisdictions, the impact of permanent tax differences in relation to pre-tax earnings and the effect of discrete items recorded in each year.

 

As a result of the foregoing, we reported a net loss of $0.6 million for the first nine months of 2014 as compared to net earnings of $10.2 million in the prior year period. Our diluted loss per share was $0.01 as compared to earnings per share of $0.19 in the prior year period.

 

15



Table of Contents

 

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 Service or Retail area of the business. We believe that operating in both the Service and Retail areas of the business positively differentiates us from 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. Our Service Center business competes in the Service area of the industry. We compete in the Retail area of the business through our retail sales floor and commercial sales business.

 

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

 

 

 

Thirteen Weeks Ended

 

Thirty-nine Weeks Ended

 

 

 

November 1,

 

November 2,

 

November 1,

 

November 2,

 

(Dollar amounts in thousands)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Service Center Revenue (1)

 

$

289,375

 

$

273,944

 

$

871,590

 

$

841,827

 

Retail Sales (2)

 

228,209

 

233,098

 

710,589

 

729,008

 

Total revenues

 

$

517,584

 

$

507,042

 

$

1,582,179

 

$

1,570,835

 

 

 

 

 

 

 

 

 

 

 

Gross profit from Service Center Revenue (3)

 

$

57,673

 

$

54,016

 

$

182,137

 

$

167,751

 

Gross profit from Retail Sales (3)

 

60,661

 

68,796

 

193,623

 

215,610

 

Total gross profit

 

$

118,334

 

$

122,812

 

$

375,760

 

$

383,361

 

 


(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 $11.6 million in the first nine months of 2014, as compared to $62.9 million in the first nine months of 2013. The $51.2 million decline from the first nine months of 2013 was due to decreased net earnings, net of non-cash adjustments of $14.8 million and an unfavorable change in operating assets and liabilities of $36.0 million. The change in operating assets and liabilities was primarily due to an unfavorable change in accrued expenses and other current assets of $20.6 million and an unfavorable change in accounts payable of $44.2 million offset by a favorable change in inventory of $28.6 million. The change in accrued expenses and other current assets was primarily due to the timing of our Savings Plan (401k) matching contribution and timing differences related to media buys and employee payroll accruals combined with the run-off of our medical claims as we converted from our self insurance program to a fully insured program.

 

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 used in accounts payable was $21.2 million in the first nine months of 2014 and $7.3 million in the first nine months of 2013. The ratio of accounts payable, including our trade payable program, to inventory was 54.3% as of November 1, 2014, 57.4% as of February 1, 2014, and 58.4% as of November 2, 2013. Inventory declined by $4.9 million or 0.7% from year end fiscal 2013 primarily due to lower purchases in the first nine months of 2014.

 

Cash used in investing activities was $54.9 million in the first nine months of 2014 as compared to $48.1 million in the first nine months of 2013. Capital expenditures were $55.0 million and $38.3 million in the first nine months of 2014 and 2013,

 

16



Table of Contents

 

respectively. Capital expenditures for the first nine months of 2014, in addition to our regularly scheduled store, distribution center improvements and information technology enhancements, included the addition of 11 new Service and Tire Centers, one Supercenter and the conversion of twenty-one stores into our new “Road Ahead” format. Capital expenditures for the first nine months of 2013 included the addition of 14 new Service & Tire Centers and six new Supercenters. In addition, in the third quarter of 2013 the Company acquired 18 Service and Tire Centers in Southern California for $10.7 million. Also during the first nine months of 2013, we received $1.0 million of previously posted collateral for retained liabilities related to existing insurance programs.

 

Our targeted capital expenditures for fiscal 2014 are approximately $70.0 million, which includes the planned addition of 19 Service and Tire Centers, two Supercenters (both of which are relocations), 25 Speed Shops within existing Supercenters and the conversion of 30 stores to the “Road Ahead” format. As the Road Ahead conversions have progressed, we have refined their scope to include a range of alternatives, from full to moderate investment, to be determined on a store by store basis. We now expect the gross investment in future conversions to average approximately $0.4 million per store, down from the approximately $0.55 million per store investment made to date.

 

In the first nine months of 2014, cash provided by financing activities was $46.3 million, as compared to cash used in financing activities of $18.2 million in the first nine months of 2013. The cash provided by financing activities in the first nine months of 2014 was primarily related to net borrowings under our revolving credit facility of $31.5 million and $15.3 million under our trade payable program, as compared to net payments of $15.0 million under the trade payable program in the first nine months of 2013. In addition, in the first nine months of 2013, the Company repurchased 237,624 shares of common stock for $2.8 million. 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 November 1, 2014 and February 1, 2014, we had an outstanding balance of $145.1 million and $129.8 million, respectively (classified as trade payable program liability on the consolidated balance sheet).

 

We anticipate that cash on hand, cash generated by operating activities, and availability under our existing revolving credit agreement will exceed our expected cash requirements in fiscal 2014. As of November 1, 2014, we had $36.4 million of cash and cash equivalents on hand, $35.0 million drawn on our revolving credit agreement and maintained undrawn availability on our revolving credit agreement of $118.9 million.

 

Our working capital was $164.7 million and $131.0 million as of November 1, 2014 and February 1, 2014, respectively. Our total debt, net of cash on hand, as a percentage of our net capitalization, was 26.2% and 23.5% as of November 1, 2014 and February 1, 2014, respectively.

 

NEW ACCOUNTING STANDARDS

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-15, “Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. This ASU is effective for annual periods ending after December 15, 2016, and interim periods thereafter; earlier adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on the consolidated financial statements.

 

In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 with early adoption permitted. The Company is currently evaluating the new standard, but does not expect adoption of ASU 2014-12 to have a material impact on our consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 supersedes the revenue recognition requirements in “Topic 605, Revenue Recognition” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective retrospectively for annual or interim reporting periods beginning after December 15, 2016, with early adoption not permitted. The Company is currently evaluating the new standard, but does not expect the adoption of ASU 2014-09 to have a material impact on the consolidated financial statements.

 

In April 2014, the FASB issued ASU No. 2014-08, “Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU 2014-08 provides a narrower definition of discontinued operations than under existing U.S. GAAP. ASU 2014-08 requires that only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entity’s operations and financial results should be reported in the

 

17



Table of Contents

 

financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations. ASU 2014-08 is effective prospectively for disposals (or classifications as held for disposal) of components of an entity that occur in annual or interim periods beginning after December 15, 2014. The Company does not expect the adoption of ASU 2014-08 to have a material impact on the consolidated financial statements.

 

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. ASU 2013-11 states that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, if available at the reporting date under the applicable tax law to settle any additional income taxes that would result from the disallowance of a tax position. If the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact 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 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 February 1, 2014.

 

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,” “targets,” “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 daily LIBOR could affect the rates at which we could borrow funds thereunder. At November 1, 2014 we had borrowings of $35.0 million under this facility. Additionally, we have a $200.0 million Term Loan that bears interest at LIBOR, with a floor of 1.25%, plus 3.00%.

 

We have two interest rate swaps for a notional amount of $50.0 million each, which are designated as a cash flow hedge on the first $100.0 million our Term Loan. We record the effective portion of the change in fair value through accumulated other comprehensive income (loss).

 

The fair value of the derivative was a $0.1 million asset and a $0.6 million asset at November 1, 2014 and February 1, 2014, respectively. Of the $0.5 million decrease in the fair value during the thirty-nine weeks ended November 1, 2014, a $0.3 million loss, net of tax, was recorded to accumulated other comprehensive income on the consolidated balance sheet.

 

18



Table of Contents

 

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.

 

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.

 

PART II - OTHER INFORMATION

 

ITEM 1  LEGAL PROCEEDINGS

 

The Company is party to a Consent Decree, effective July 15, 2010, with the United States Environmental Protection Agency (“EPA”) that, among other things, required the Company to implement a formal compliance program with respect to certain small gasoline engine merchandise sold by the Company. In the fourth quarter of fiscal 2013, the EPA alleged, in writing, that the Company had violated certain inspection, testing and reporting requirements of the Consent Decree and made an aggregated stipulated penalty demand of $2.3 million as a result thereof. In November 2014, the Company reached a settlement in principle to resolve these allegations for an aggregate payment of $1.0 million, of which $0.4 million was previously paid.

 

The Company is also 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 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 will 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

 

We may be required to record a goodwill impairment charge in the future.

 

At November 1, 2014, we had $56.8 million of goodwill on our balance sheet. Certain factors, including consumer and business spending levels, industry and macroeconomic conditions, the price of our stock and the future profitability of our business might have a negative impact on the carrying value of our goodwill. Our reporting units have experienced challenging economic, industry and operating pressures, and if these pressures were to continue for a sustained period of time, this would increase the risk associated with their significant goodwill balances. Additionally, if our stock price were to experience a sustained and significant

 

19



Table of Contents

 

decline, we could incur impairment charges. The process of testing goodwill for impairment involves numerous judgments, assumptions and estimates made by management which inherently reflect a high degree of uncertainty. If the business climate deteriorates or if our plans change, then actual results may not be consistent with these judgments, assumptions and estimates, and our goodwill may become impaired in future periods. This could have an adverse impact on our financial position and results of operations.

 

ITEM 2  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On December 12, 2012, the Company’s Board of Directors authorized a program to repurchase up to $50.0 million of the Company’s common stock to be made from time to time in the open market or in privately negotiated transactions, with no expiration date. There were no common stock repurchases for the third quarter of 2014.

 

ITEM 3  DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4  MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5  OTHER INFORMATION

 

None.

 

20



Table of Contents

 

ITEM 6  EXHIBITS

 

31.1

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

 

 

31.2

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

 

 

32.1

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

 

 

32.2

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

 

 

101.INS

XBRL Instance Document

 

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

21



Table of Contents

 

SIGNATURES

 

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

 

 

 

 

THE PEP BOYS - MANNY, MOE & JACK

 

 

(Registrant)

 

 

 

 

Date:

December 9, 2014

by:

/s/ David R. Stern

 

 

 

 

 

 

David R. Stern

 

 

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

 

22



Table of Contents

 

INDEX TO EXHIBITS

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32.1

 

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

 

 

 

32.2

 

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

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

23