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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended May 2, 2015

 

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 May 30, 2015, there were 53,863,871 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 — May 2, 2015 and January 31, 2015

1

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income — Thirteen Weeks Ended May 2, 2015 and May 3, 2014

2

 

 

 

 

Consolidated Statements of Cash Flows — Thirteen Weeks Ended May 2, 2015 and May 3, 2014

3

 

 

 

 

Notes to the Consolidated Financial Statements

4

 

 

 

Item 2.

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

10

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

15

 

 

 

Item 4.

Controls and Procedures

15

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

16

 

 

 

Item 1A.

Risk Factors

16

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

16

 

 

 

Item 3.

Defaults Upon Senior Securities

16

 

 

 

Item 4.

Mine Safety Disclosures

16

 

 

 

Item 5.

Other Information

16

 

 

 

Item 6.

Exhibits

17

 

 

 

SIGNATURES

18

 

 

INDEX TO EXHIBITS

19

 

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)

 

 

 

May 2,
2015

 

January 31,
2015

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

42,166

 

$

38,044

 

Accounts receivable, less allowance for uncollectible accounts of $1,680 and $1,604

 

29,101

 

31,013

 

Merchandise inventories

 

651,461

 

656,957

 

Prepaid expenses

 

26,159

 

27,952

 

Other current assets

 

52,450

 

55,986

 

Assets held for disposal

 

2,377

 

2,648

 

Total current assets

 

803,714

 

812,600

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $1,264,412 and $1,251,797

 

597,783

 

604,380

 

Goodwill

 

32,869

 

32,869

 

Deferred income taxes

 

51,666

 

56,571

 

Other long-term assets

 

34,696

 

35,321

 

Total assets

 

$

1,520,728

 

$

1,541,741

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

230,211

 

$

227,132

 

Trade payable program liability

 

139,279

 

140,904

 

Accrued expenses

 

208,794

 

226,176

 

Deferred income taxes

 

64,357

 

61,216

 

Current maturities of long-term debt

 

2,000

 

2,000

 

Total current liabilities

 

644,641

 

657,428

 

 

 

 

 

 

 

Long-term debt less current maturities

 

193,500

 

211,000

 

Other long-term liabilities

 

44,128

 

45,567

 

Deferred gain from asset sales

 

100,360

 

103,596

 

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

 

297,563

 

298,299

 

Retained earnings

 

404,465

 

397,890

 

Accumulated other comprehensive income

 

(245

)

(391

)

Treasury stock, at cost — 14,693,191 shares and 14,988,205 shares

 

(232,241

)

(240,205

)

Total stockholders’ equity

 

538,099

 

524,150

 

Total liabilities and stockholders’ equity

 

$

1,520,728

 

$

1,541,741

 

 

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

 

 

 

May 2,
 2015

 

May 3,
 2014

 

Merchandise sales

 

$

413,125

 

$

411,906

 

Service revenue

 

129,136

 

126,915

 

Total revenues

 

542,261

 

538,821

 

Costs of merchandise sales

 

286,243

 

285,047

 

Costs of service revenue

 

122,251

 

120,648

 

Total costs of revenues

 

408,494

 

405,695

 

Gross profit from merchandise sales

 

126,882

 

126,859

 

Gross profit from service revenue

 

6,885

 

6,267

 

Total gross profit

 

133,767

 

133,126

 

Selling, general and administrative expenses

 

120,847

 

127,071

 

Net gain (loss) from dispositions of assets

 

218

 

(10

)

Gain from sale of leasehold interest

 

10,000

 

 

Operating profit

 

23,138

 

6,045

 

Other income

 

372

 

441

 

Interest expense

 

(3,329

)

(3,782

)

Earnings from continuing operations before income taxes and discontinued operations

 

20,181

 

2,704

 

Income tax expense

 

(8,322

)

(1,067

)

Earnings from continuing operations before discontinued operations

 

11,859

 

1,637

 

Gain (loss) from discontinued operations, net of tax

 

34

 

(29

)

Net earnings

 

11,893

 

1,608

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Earnings from continuing operations before discontinued operations

 

$

0.22

 

$

0.03

 

Discontinued operations, net of tax

 

 

 

Basic earnings per share

 

$

0.22

 

$

0.03

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Earnings from continuing operations before discontinued operations

 

$

0.22

 

$

0.03

 

Discontinued operations, net of tax

 

 

 

Diluted earnings per share

 

$

0.22

 

$

0.03

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

Derivative financial instruments adjustment, net of tax

 

146

 

(38

)

Other comprehensive income (loss)

 

146

 

(38

)

Comprehensive income

 

$

12,039

 

$

1,570

 

 

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)

 

 

 

Thirteen weeks ended

 

 

 

May 2,
2015

 

May 3,
2014

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

11,893

 

$

1,608

 

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

 

 

 

 

 

Net (earnings) loss from discontinued operations, net of tax

 

(34

)

29

 

Depreciation

 

16,894

 

18,320

 

Amortization of deferred gain from asset sales

 

(3,236

)

(3,151

)

Amortization of deferred financing costs

 

626

 

664

 

Stock compensation expense

 

1,017

 

826

 

Deferred income taxes

 

7,927

 

743

 

Net (gain) loss from disposition of assets

 

(218

)

10

 

Loss from asset impairment

 

798

 

1,172

 

Other

 

(473

)

(111

)

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease in accounts receivable, prepaid expenses and other

 

7,347

 

4,174

 

Decrease in merchandise inventories

 

5,496

 

8,800

 

Increase (decrease) in accounts payable

 

4,735

 

(8,903

)

Decrease in accrued expenses

 

(17,829

)

(12,467

)

Decrease in other long-term liabilities

 

(859

)

(231

)

Net cash provided by continuing operations

 

34,084

 

11,483

 

Net cash used in discontinued operations

 

(255

)

(29

)

Net cash provided by operating activities

 

33,829

 

11,454

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(12,267

)

(14,565

)

Proceeds from dispositions of assets

 

515

 

 

Net cash used in investing activities

 

(11,752

)

(14,565

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Borrowings under line of credit agreements

 

95,155

 

164,206

 

Payments under line of credit agreements

 

(112,155

)

(160,706

)

Borrowings on trade payable program liability

 

40,872

 

49,708

 

Payments on trade payable program liability

 

(42,497

)

(45,388

)

Debt payments

 

(500

)

(500

)

Proceeds from stock issuance

 

1,170

 

177

 

Net cash (used in) provided by financing activities

 

(17,955

)

7,497

 

Net increase in cash and cash equivalents

 

4,122

 

4,386

 

Cash and cash equivalents at beginning of period

 

38,044

 

33,431

 

Cash and cash equivalents at end of period

 

$

42,166

 

$

37,817

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for income taxes

 

$

42

 

$

 

Cash received from income tax refunds

 

 

174

 

Cash paid for interest

 

2,674

 

2,659

 

Non-cash investing activities:

 

 

 

 

 

Accrued purchases of property and equipment

 

2,247

 

5,748

 

 

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 January 31, 2015. The results of operations for the thirteen weeks ended May 2, 2015 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 May 2, 2015 and for all periods presented have been made.

 

The Company’s fiscal year ends on the Saturday nearest to January 31. Fiscal 2015, which ends January 30, 2016, and Fiscal 2014, which ended January 31, 2015, are comprised of 52 weeks. The Company operated 803 store locations as of May 2, 2015, of which 226 were owned and 577 were leased.

 

NOTE 2NEW ACCOUNTING STANDARDS

 

In April of 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015, including periods within that reporting period, requires retrospective application, and early adoption is permitted. The Company is currently evaluating the new standard, but does not expect the adoption of ASU 2015-03 to have a material impact on the consolidated financial statements as the application of this guidance affects balance sheet classification only.

 

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 application 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.

 

NOTE 3—MERCHANDISE INVENTORIES

 

Merchandise inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out (“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected fiscal year-end inventory levels and costs. If the first-in, first-out (“FIFO”) method of costing inventory had been used by the Company, inventory would have been $566.5 million and $570.2 million as of May 2, 2015 and January 31, 2015, 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

 

4



Table of Contents

 

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 May 2, 2015 and January 31, 2015, respectively.

 

NOTE 4WARRANTY RESERVE

 

The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by the respective suppliers, with the Company covering any costs above the supplier’s stipulated allowance. Service labor is warranted in full by the Company for a limited specific time period. The Company establishes its warranty reserves based on historical experiences. These costs are included in either costs of merchandise sales or costs of service revenues in the consolidated statements of operations.

 

The reserve for warranty cost activity for the thirteen weeks ended May 2, 2015 and the fifty-two weeks ended January 31, 2015 is as follows:

 

(dollar amounts in thousands)

 

May 2, 2015

 

January 31, 2015

 

Beginning balance

 

$

682

 

$

682

 

 

 

 

 

 

 

Additions related to current period sales

 

3,135

 

14,435

 

 

 

 

 

 

 

Warranty costs incurred in current period

 

(3,135

)

(14,435

)

 

 

 

 

 

 

Ending balance

 

$

682

 

$

682

 

 

NOTE 5DEBT AND FINANCING ARRANGEMENTS

 

The following are the components of debt and financing arrangements:

 

(dollar amounts in thousands)

 

May 2, 2015

 

January 31, 2015

 

Senior Secured Term Loan, due October 2018

 

$

195,500

 

$

196,000

 

Revolving Credit Agreement, through July 2016

 

 

17,000

 

Long-term debt

 

195,500

 

213,000

 

Current maturities

 

(2,000

)

(2,000

)

Long-term debt less current maturities

 

$

193,500

 

$

211,000

 

 

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 May 2, 2015, the Company had no 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 May 2, 2015 there was $149.6 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 May 2, 2015, 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 $139.3 million and $140.9 million under the program as of May 2, 2015 and January 31, 2015, respectively.

 

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 $195.5 million and $211.0 million as of May 2, 2015 and January 31, 2015, respectively.

 

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Table of Contents

 

NOTE 6—INCOME TAXES

 

The Company recognizes taxes payable for the current year, as well as deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The Company’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 May 2, 2015 the effective tax rate was 41.2% as compared to 39.5% for the corresponding period of the prior 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 thirteen weeks ended May 2, 2015, there were no material changes to the Company’s liability for uncertain tax positions.

 

NOTE 7EARNINGS PER SHARE

 

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

 

 

 

Thirteen Weeks Ended

 

(dollar amounts in thousands, except per share amounts)

 

May 2,
2015

 

May 3,
2014

 

 

 

 

 

 

 

(a)

Earnings from continuing operations

 

$

11,859

 

$

1,637

 

 

 

 

 

 

 

 

 

Gain (loss) from discontinued operations, net of tax

 

34

 

(29

)

 

 

 

 

 

 

 

 

Net earnings

 

$

11,893

 

$

1,608

 

 

 

 

 

 

 

 

(b)

Basic average number of common shares outstanding during period

 

54,094

 

53,470

 

 

 

 

 

 

 

 

 

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

 

90

 

539

 

 

 

 

 

 

 

 

(c)

Diluted average number of common shares assumed outstanding during period

 

54,184

 

54,009

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

Earnings from continuing operations (a/b)

 

$

0.22

 

$

0.03

 

 

Discontinued operations, net of tax

 

 

 

 

Basic earnings per share

 

$

0.22

 

$

0.03

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

Earnings from continuing operations (a/c)

 

$

0.22

 

$

0.03

 

 

Discontinued operations, net of tax

 

 

 

 

Diluted earnings per share

 

$

0.22

 

$

0.03

 

 

As of May 2, 2015 and May 3, 2014, respectively, there were 2,965,000 and 3,501,000 outstanding options, restricted stock units and performance share 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 options, restricted stock units and performance share units excluded from the diluted earnings per share calculation is 2,346,000 and 1,255,000 for the thirteen weeks ended May 2, 2015 and May 3, 2014, respectively.

 

6



Table of Contents

 

NOTE 8ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The following table presents changes in accumulated other comprehensive income (loss), net of tax:

 

 

 

Gain/(Loss) on Cash Flow Hedges

 

 

 

Thirteen weeks
ended

 

Thirteen weeks
ended

 

(dollar amounts in thousands)

 

May 2, 2015

 

May 3, 2014

 

Beginning balance

 

$

(391

)

$

379

 

 

 

 

 

 

 

Other comprehensive income/(loss) before reclassifications, net of $32 tax and $78 tax benefit

 

52

 

(132

)

Amounts reclassified from accumulated other comprehensive income/(loss), net of $57 and $57 tax (a)

 

94

 

94

 

Net current-period other comprehensive income/(loss)

 

146

 

(38

)

 

 

 

 

 

 

Ending balance

 

$

(245

)

$

341

 

 


(a)  Reclassified amount increased interest expense.

 

NOTE 9BENEFIT PLANS

 

The Company has a qualified 401(k) savings plan and a separate plan for employees residing in Puerto Rico, which cover all full-time employees who are at least 18 years of age and have completed the lesser of (1) six consecutive months of employment and have a minimum of 500 hours of service and (2) 12 consecutive months and have a minimum of 1,000 hours 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 $0.7 million and $0.8 million in the first quarter of fiscal 2015 and fiscal 2014, respectively.

 

NOTE 10—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 quarter of fiscal 2015 and fiscal 2014, the Company granted approximately 611,000 and 677,000 stock options, respectively, with a weighted average grant date fair value of $3.15 per unit and $3.95 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 thirteen weeks ended May 2, 2015 and May 3, 2014 was immaterial.

 

In the first quarter of fiscal 2015 and fiscal 2014, the Company granted approximately 116,000 and 153,000 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 2017 and fiscal 2016, 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 targets in fiscal 2017 and fiscal 2016, respectively. The fair value for these awards was $9.31 per unit and $10.26 per unit, respectively, at the date of the grant. The compensation expense recorded for these performance share units during the thirteen weeks ended May 2, 2015 and May 3, 2014 was immaterial.

 

In the first quarter of fiscal 2015 and fiscal 2014, the Company granted approximately 58,000 and 76,000 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 2017 and fiscal 2016, 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 grant date fair value for the fiscal 2014 award. The compensation expense recorded for these performance share units during the thirteen weeks ended May 2, 2015 and May 3, 2014 was immaterial.

 

In the first quarter of fiscal 2015 and fiscal 2014, the Company granted approximately 87,000 and 115,000 restricted stock units, respectively, that will vest if the employees remain continuously employed through the third anniversary date of the grant. The

 

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fair value for these awards was $9.31 and $10.26 per unit, respectively, at the date of the grant. The compensation expense recorded for these performance share units during the thirteen weeks ended May 2, 2015 and May 3, 2014 was immaterial.

 

NOTE 11FAIR 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 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

 

May 2, 2015

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

42,166

 

$

42,166

 

$

 

$

 

Collateral investments (1)

 

21,612

 

21,612

 

 

 

Deferred compensation assets (1) 

 

4,488

 

 

4,488

 

 

Other liabilities:

 

 

 

 

 

 

 

 

 

Derivative liability (2)

 

393

 

 

393

 

 

 

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(dollar amounts in thousands)

 

Fair Value at

 

Fair Value Measurements Using Inputs Considered as

 

Description

 

January 31, 2015

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

38,044

 

$

38,044

 

$

 

$

 

Collateral investments (1)

 

21,611

 

21,611

 

 

 

Deferred compensation assets (1) 

 

4,382

 

 

4,382

 

 

Other liabilities:

 

 

 

 

 

 

 

 

 

Derivative liability(2)

 

625

 

 

625

 

 

 


(1) Included in other long-term assets.

(2) Included in other long-term liabilities.

 

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 Gain/(Loss) in
Other Comprehensive
Income/(Loss)
(Effective Portion)

 

Earnings Statement
Classification

 

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

 

Thirteen weeks ended May 2, 2015

 

$

146

 

Interest expense

 

$

(151

)

Thirteen weeks ended May 3, 2014

 

$

(38

)

Interest expense

 

$

(151

)

 


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

 

The fair value of the derivative was $0.4 million and $0.6 payable as of May 2, 2015 and January 31, 2015, respectively. Of the $0.2 million decrease in the fair value during the thirteen weeks ended May 2, 2015, an immaterial portion was recorded to accumulated other comprehensive income (loss) on the consolidated balance sheet.

 

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

 

Certain assets are measured at fair value on a non-recurring basis, that is, the assets are subject to fair value adjustments in certain circumstances such as when there is evidence of impairment. These measures of fair value, and related inputs, are considered level 2 or 3 measures under the fair value hierarchy. Measurements of assets held and used are discussed in Note 12, “Impairments”.

 

NOTE 12—IMPAIRMENTS

 

During the first quarter of fiscal 2015, the Company recorded a $0.8 million impairment charge related to 5 stores classified as held and used. The $0.8 million impairment was charged to service cost of sales. In the first quarter of fiscal 2014, the Company recorded a $1.2 million impairment charge related to 8 stores classified as held and used. Of the $1.2 million impairment charge, $0.2 million was charged to merchandise cost of sales, and $1.0 million was charged to costs of service revenue. In both years the Company used a probability-weighted approach and estimates of expected future cash flows to determine the fair value of these stores. Discount and growth rate assumptions were derived from current economic conditions, management’s expectations and projected trends of current operating results. The remaining fair value of the impaired assets is approximately $0.3 million as of May 2, 2015 and is classified as a Level 2 or 3 measure within the fair value hierarchy.

 

NOTE 13—SALE OF LEASEHOLD INTEREST

 

During the first quarter of fiscal 2015, the Company sold a leasehold interest in one store for $10.0 million in exchange for termination and extinguishment of all obligations, liabilities, and benefits associated with the lease.

 

NOTE 14LEGAL MATTERS

 

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

 

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ITEM 2  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

The following discussion and analysis explains the results of operations for the first quarter of fiscal 2015 and 2014 and significant developments affecting our financial condition as of May 2, 2015. This discussion and analysis should be read in conjunction with the consolidated interim financial statements and the notes to such consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, and the consolidated financial statements and the notes to such financial statements included in Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

 

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 18,000 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 quarter of fiscal 2015, we closed two Service & Tire Centers and one Supercenter. As of May 2, 2015, we operated 562 Supercenters, 235 Service & Tire Centers and six Pep Express stores located in 35 states and Puerto Rico.

 

EXECUTIVE SUMMARY

 

Net earnings for the first quarter of 2015 were $11.9 million, or $0.22 per share, as compared to $1.6 million, or $0.03 per share reported for the first quarter of 2014. The current year period net earnings included a $10.0 million sale of a leasehold interest. Earnings from continuing operations before income taxes and discontinued operations increased by $17.5 million to $20.2 million in the first quarter of 2015 as compared to $2.7 million in the first quarter of 2014. This improvement was primarily due to the aforementioned sale of a leasehold interest and a reduction in selling, general and administrative expenses.

 

Total revenues increased for the first quarter of 2015 by 0.6%, or $3.4 million, as compared to the first quarter of 2014 due to an increase in comparable store sales of 0.8%. This increase in comparable store sales (sales generated by locations in operation during the same period of the prior year) was comprised of a 1.3 % increase in comparable store service revenues and an increase of 0.6% 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 by offering, in our Supercenters and online at pepboys.com, the newest and broadest product assortment in the automotive aftermarket.

 

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, the market model that we call the “Road Ahead.” Designed around the shopping habits of our target customer segments, this model enhances the entire store—our people, the product assortment, its exterior and interior look and feel and the marketing programs—to attract more of these target customers and earn a greater share of their annual spend in the automotive aftermarket.

 

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RESULTS OF OPERATIONS

 

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

 

Analysis of Statement of Operations

 

Thirteen weeks ended May 2, 2015 vs. Thirteen weeks ended May 3, 2014

 

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

 

Thirteen weeks ended

 

May 2, 2015
(Fiscal 2015)

 

May 3, 2014
(Fiscal 2014)

 

Favorable
(Unfavorable)

 

 

 

 

 

 

 

 

 

Merchandise sales

 

76.2

%

76.5

%

0.3

%

Service revenue (1)

 

23.8

 

23.5

 

1.7

 

Total revenues

 

100.0

 

100.0

 

0.6

 

Costs of merchandise sales (2)

 

69.3

(3)

69.2

(3)

(0.4

)

Costs of service revenue (2)

 

94.7

(3)

95.1

(3)

(1.3

)

Total costs of revenues

 

75.3

 

75.3

 

(0.7

)

Gross profit from merchandise sales

 

30.7

(3)

30.8

(3)

 

Gross profit from service revenue

 

5.3

(3)

4.9

(3)

9.9

 

Total gross profit

 

24.7

 

24.7

 

0.5

 

Selling, general and administrative expenses

 

22.3

 

23.6

 

4.9

 

Net gain (loss) dispositions of assets

 

 

 

 

Gain from sale of leasehold interest

 

1.8

 

 

100.0

 

Operating profit

 

4.3

 

1.1

 

282.8

 

Other income

 

0.1

 

0.1

 

(15.6

)

Interest expense

 

(0.6

)

(0.7

)

12.0

 

Earnings from continuing operations before income taxes

 

5.0

 

0.5

 

646.6

 

Income tax expense

 

(41.2

)(4)

(39.5

)(4)

(679.9

)

Earnings from continuing operations

 

2.2

 

0.3

 

624.8

 

Discontinued operations, net of tax

 

 

 

 

Net earnings

 

2.2

 

0.3

 

640.0

 

 


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

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

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

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

 

Total revenue for the first quarter of 2015 increased by $3.4 million, or 0.6%, to $542.3 million from $538.8 million for the first quarter of 2014. 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 first quarter of 2015 increased by 0.8% as compared to the first quarter of 2014. This increase in comparable store sales consisted of a 1.3% increase in comparable store service revenue and an increase of 0.6% in store merchandise sales.

 

Our total online sales are currently an immaterial portion of our total sales and comparable store sales. Customer online purchases that are picked up at our stores or delivered to customers’ homes are included in our comparable store sales calculation.

 

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Total merchandise sales increased 0.3%, or $1.2 million, to $413.1 million in the first quarter of fiscal 2015, compared to $411.9 million during the prior year quarter. Comparable store merchandise sales increased by 0.6%, or $2.6 million. The  contribution from the non-comparable stores declined by $1.4 million during the first quarter.

 

Total service revenue increased 1.8%, or $2.2 million, to $129.1 million in the first quarter of 2015 from $126.9 million during the prior year quarter. Comparable store service revenue increased by 1.3%, or $1.6 million. Non-comparable stores contributed an additional $0.6 million of service revenue during the quarter.

 

In our retail business, continued competitive pressures led to a comparable store transaction count decline of 4.5%, while higher selling prices resulted in a 4.0% increase in average revenue per transaction.

 

In our service business, we believe the decline in comparable store transaction counts of 3.8% was due primarily due to being less promotional as compared to the prior year and thus reduced demand for oil changes and tire services. Service average revenue per transaction increased by 5.7%, primarily due to higher selling prices and a shift in sales mix to higher priced tires.

 

Total gross profit increased by $0.6 million, or 0.5%, to $133.8 million in the first quarter of 2015 from $133.1 million in the first quarter of 2014. Total gross profit margin remained flat relative to the prior year at 24.7% although excluding the impairment charge of $0.8 million in the first quarter of 2015 and $1.2 million in the first quarter of 2014, total gross profit margin decreased slightly to 24.8% for fiscal 2015 from 24.9% in fiscal 2014.

 

Gross profit from merchandise sales remained flat at $126.9 million in the first quarter of 2014 and 2013. Gross profit margin from merchandise sales decreased to 30.7% for the first quarter of 2015 from 30.8% for the first quarter of 2014. Excluding the impairment charge of $0.1 million in the first quarter of 2015 and $0.2 million during the same period of 2014, gross profit margin from merchandise sales decreased to 30.7% for fiscal 2015 from 30.9% in fiscal 2014.

 

Gross profit from service revenue increased by $0.7 million, or 9.9%, to $6.9 million in the first quarter of 2015 from $6.3 million in the first quarter of 2014. Gross profit margin from service revenue increased to 5.3% for the first quarter of 2015 from 4.9% for the first quarter of 2014. 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 $0.8 million in the first quarter of 2015 and $1.0 million in the first quarter of 2014, gross profit margin from service revenue increased to 5.9% for fiscal 2015 from 5.7% in fiscal 2014. The increase in service revenue gross profit margin was primarily due to lower occupancy costs, partially offset by higher employee costs.

 

Selling, general and administrative expenses as a percentage of total revenues decreased to 22.3% for the first quarter of 2015 from 23.6% for the first quarter of 2014. Selling, general and administrative expenses decreased $6.2 million, or 4.9%, to $120.8 million in the first quarter of 2015 from $127.1 million in the prior year quarter primarily due to lower litigation expenses of $4.0 million and lower media expense of $5.5 million, partially offset by higher employee costs of $1.2 million and $1.6 million of higher professional fees.

 

In the first quarter of fiscal 2015, the company sold its leasehold interest in one property for $10.0 million.

 

Interest expense for the first quarter of 2015 was $3.3 million, a decrease of $0.5 million compared to the $3.8 million reported for the first quarter of 2014.

 

Our income tax expense for the first quarter of 2015 was $8.3 million, or an effective rate of 41.2%, as compared to $1.1 million, or an effective rate of 39.5%, in the first quarter of 2014. The annual rate depends on a number of factors, including the jurisdiction in which operating profit is earned and the timing and nature of discrete items.

 

As a result of the foregoing, we reported net earnings of $11.9 million in the first quarter of 2015 as compared to net earnings of $1.6 million in the prior year quarter. Our basic and diluted earnings per share were $0.22 for the first quarter of 2015 as compared to $0.03 for the first quarter of 2014.

 

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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 operation in both the Service and Retail areas differentiates us from our competitors. Although we manage our store performance at a store level in the aggregate, we believe that the following presentation, which includes the reclassification of revenue from merchandise that we install in customer vehicles to service center revenue, shows an accurate comparison against competitors within the two sales arenas. We compete in the Retail area of the business through our retail sales floor and commercial sales business. Our Service Center business competes in the Service area of the industry. The following table presents the revenues and gross profit for each area of the business:

 

 

 

Thirteen Weeks Ended

 

 

 

May 2,

 

May 3,

 

(Dollar amounts in thousands)

 

2015

 

2014

 

 

 

 

 

 

 

Service Center Revenue (1)

 

$

300,883

 

$

293,913

 

Retail Sales (2)

 

241,378

 

244,908

 

Total revenues

 

$

542,261

 

$

538,821

 

 

 

 

 

 

 

Gross profit from Service Center Revenue (3)

 

$

66,899

 

$

63,779

 

Gross profit from Retail Sales (3)

 

66,868

 

69,347

 

Total gross profit

 

$

133,767

 

$

133,126

 

 


(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 $33.8 million in the first quarter of 2015, as compared to $11.5 million in the prior year quarter. The $22.4 million increase from the prior year quarter was due to an increase in net earnings, net of non-cash adjustments of $15.1 million combined with a favorable change in operating assets and liabilities of $7.5 million. The change in operating assets and liabilities was primarily due to favorable changes in inventory, net of payables of $10.3 million, partially offset by an unfavorable change in accrued expenses and other current assets of $2.2 million.

 

Taking into consideration changes in our trade payable program liability (shown as cash flows from financing activities on the consolidated statements of cash flows), cash generated in accounts payable was $3.1 million in the first quarter of fiscal 2015 as compared to cash used in accounts payable of $4.6 million in the prior year quarter. The ratio of accounts payable, including our trade payable program, to inventory was 56.7% as of May 2, 2015, 56.0% as of January 31, 2015, and 57.6% as of May 3, 2014.

 

Cash used in investing activities was $11.8 million in the first quarter of 2015 as compared to $14.6 million in the prior year quarter. Capital expenditures were $12.3 million and $14.6 million in the first quarter of 2015 and 2014, respectively. Capital expenditures for the first quarter of 2015, in addition to our regularly scheduled store, distribution center improvements and information technology enhancements, included the continued preparation of soon to be opened new stores along with the on-going conversion of stores into our new “Road Ahead” format. Capital expenditures for the first quarter of 2014 included the addition of two new Service & Tire Centers and the conversion of five stores into our “Road Ahead” format.

 

Our targeted capital expenditures for fiscal 2015 are $60.0 million, which includes the planned addition of 10 - 15 Service and Tire Centers, one Supercenters and the conversion of up to 25 stores to the “Road Ahead” format. These expenditures are expected to be funded by cash on hand and net cash generated from operating activities. Additional capacity, if needed, exists under our existing line of credit.

 

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In the first quarter of 2015, cash used in financing activities was $18.0 million, as compared to cash provided by financing activities of $7.5 million in the prior year quarter. The cash used in financing activities in the first quarter of 2015 was primarily related to net repayments under our revolving credit facility of $17.0 million and $1.6 million under our trade payable program, as compared to net borrowings of $3.5 million and $4.3 million under the revolving credit facility and the trade payable program, respectively in the first quarter of 2014. 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 May 2, 2015 and January 31, 2015, we had an outstanding balance of $139.3 million and $140.9 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 2015. As of May 2, 2015, we had $42.2 million of cash and cash equivalents on hand and maintained undrawn availability on our revolving credit agreement of $149.6 million.

 

Our working capital was $159.1 million and $155.2 million as of May 2, 2015 and January 31, 2015, respectively. Our total debt, net of cash on hand, as a percentage of our net capitalization, was 22.2% and 25.0% as of May 2, 2015 and January 31, 2015, respectively.

 

NEW ACCOUNTING STANDARDS

 

In April of 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015, including periods within that reporting period, requires retrospective application, and early adoption is permitted. The Company is currently evaluating the new standard, but does not expect the adoption of ASU 2015-03 to have a material impact on the consolidated financial statements as the application of this guidance affects balance sheet classification only.

 

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 application 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.

 

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 January 31, 2015.

 

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, but are not limited to, management’s expectations regarding implementation of its long-term strategic plan and actions taken or contemplated to enhance shareholder value, future financial performance, automotive aftermarket trends, levels of competition, business development activities, future capital expenditures, financing sources and availability, the effects of regulation and litigation, statements regarding the anticipated proxy contest by GAMCO Asset Management Inc. and the other participants in its solicitation and statements regarding actions taken or contemplated with respect to corporate and board governance. Although we believe that the expectations reflected in such forward-looking statements are based on

 

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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, risks related to the actions of GAMCO and its affiliates as well as other activist shareholders, including the amount of related costs incurred by us and the disruption caused to our business activities and the additional factors described in our filings with the Securities and Exchange Commission. 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 May 2, 2015 we had no borrowings 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 of 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 $0.4 million and $0.6 million payable at May 2, 2015 and January 31, 2015, respectively. Of the $0.2 million decrease in the fair value during the thirteen weeks ended May 2, 2015, an immaterial portion was recorded to accumulated other comprehensive income (loss) on the consolidated balance sheet.

 

ITEM 4  CONTROLS AND PROCEDURES

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

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

 

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.

 

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PART II - OTHER INFORMATION

 

ITEM 1  LEGAL PROCEEDINGS

 

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

 

There have been no changes to the risks described in the Company’s previously filed Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

 

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 first quarter of fiscal 2015.

 

ITEM 3  DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4  MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5  OTHER INFORMATION

 

None.

 

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ITEM 6  EXHIBITS

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32.1

 

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

 

 

 

32.2

 

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

 

 

 

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

 

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SIGNATURES

 

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

 

 

 

THE PEP BOYS - MANNY, MOE & JACK

 

(Registrant)

 

 

Date: June 10, 2015

by:

/s/ David R. Stern

 

 

 

David R. Stern

 

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

 

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INDEX TO EXHIBITS

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32.1

 

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

 

 

 

32.2

 

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

 

 

 

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

 

19