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 July 28, 2012
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
(Registrants 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 August 24, 2012, there were 52,994,685 shares of the registrants Common Stock outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
(dollar amounts in thousands, except share data)
(unaudited)
|
|
July 28, 2012 |
|
January 28, 2012 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
150,833 |
|
$ |
58,244 |
|
Accounts receivable, less allowance for uncollectible accounts of $1,247 and $1,303 |
|
27,962 |
|
25,792 |
| ||
Merchandise inventories |
|
626,555 |
|
614,136 |
| ||
Prepaid expenses |
|
21,021 |
|
26,394 |
| ||
Other current assets |
|
53,083 |
|
59,979 |
| ||
Total current assets |
|
879,454 |
|
784,545 |
| ||
|
|
|
|
|
| ||
Property and equipment - net |
|
682,619 |
|
696,339 |
| ||
Goodwill |
|
46,917 |
|
46,917 |
| ||
Deferred income taxes |
|
45,825 |
|
72,870 |
| ||
Other long-term assets |
|
31,660 |
|
33,108 |
| ||
Total assets |
|
$ |
1,686,475 |
|
$ |
1,633,779 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
|
$ |
246,522 |
|
$ |
243,712 |
|
Trade payable program liability |
|
115,746 |
|
85,214 |
| ||
Accrued expenses |
|
218,548 |
|
221,705 |
| ||
Deferred income taxes |
|
61,231 |
|
66,208 |
| ||
Current maturities of long-term debt |
|
1,254 |
|
1,079 |
| ||
Total current liabilities |
|
643,301 |
|
617,918 |
| ||
|
|
|
|
|
| ||
Long-term debt less current maturities |
|
293,504 |
|
294,043 |
| ||
Other long-term liabilities |
|
72,290 |
|
77,216 |
| ||
Deferred gain from asset sales |
|
133,971 |
|
140,273 |
| ||
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 |
|
295,536 |
|
296,462 |
| ||
Retained earnings |
|
454,343 |
|
423,437 |
| ||
Accumulated other comprehensive loss |
|
(15,011 |
) |
(17,649 |
) | ||
Treasury stock, at cost 15,563,931 shares and 15,803,322 shares |
|
(260,016 |
) |
(266,478 |
) | ||
Total stockholders equity |
|
543,409 |
|
504,329 |
| ||
Total liabilities and stockholders equity |
|
$ |
1,686,475 |
|
$ |
1,633,779 |
|
See notes to consolidated financial statements.
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(dollar amounts in thousands, except per share amounts)
(unaudited)
|
|
Thirteen weeks ended |
|
Twenty-six weeks ended |
| ||||||||
|
|
July 28, |
|
July 30, |
|
July 28, |
|
July 30, |
| ||||
Merchandise sales |
|
$ |
413,380 |
|
$ |
415,267 |
|
$ |
825,712 |
|
$ |
823,894 |
|
Service revenue |
|
112,291 |
|
107,327 |
|
224,563 |
|
212,240 |
| ||||
Total revenues |
|
525,671 |
|
522,594 |
|
1,050,275 |
|
1,036,134 |
| ||||
Costs of merchandise sales |
|
288,051 |
|
287,721 |
|
578,907 |
|
573,050 |
| ||||
Costs of service revenue |
|
107,019 |
|
99,663 |
|
213,115 |
|
192,752 |
| ||||
Total costs of revenues |
|
395,070 |
|
387,384 |
|
792,022 |
|
765,802 |
| ||||
Gross profit from merchandise sales |
|
125,329 |
|
127,546 |
|
246,805 |
|
250,844 |
| ||||
Gross profit from service revenue |
|
5,272 |
|
7,664 |
|
11,448 |
|
19,488 |
| ||||
Total gross profit |
|
130,601 |
|
135,210 |
|
258,253 |
|
270,332 |
| ||||
Selling, general and administrative expenses |
|
114,277 |
|
113,268 |
|
233,987 |
|
222,168 |
| ||||
Net (loss) gain from dispositions of assets |
|
(9 |
) |
(3 |
) |
(11 |
) |
86 |
| ||||
Operating profit |
|
16,315 |
|
21,939 |
|
24,255 |
|
48,250 |
| ||||
Merger termination fees, net |
|
42,955 |
|
|
|
42,955 |
|
|
| ||||
Other income |
|
521 |
|
569 |
|
991 |
|
1,156 |
| ||||
Interest expense |
|
6,427 |
|
6,444 |
|
12,943 |
|
12,941 |
| ||||
Earnings from continuing operations before income taxes and discontinued operations |
|
53,364 |
|
16,064 |
|
55,258 |
|
36,465 |
| ||||
Income tax expense |
|
20,330 |
|
2,173 |
|
21,090 |
|
10,169 |
| ||||
Earnings from continuing operations before discontinued operations |
|
33,034 |
|
13,891 |
|
34,168 |
|
26,296 |
| ||||
Income (loss) from discontinued operations, net of tax |
|
14 |
|
52 |
|
(58 |
) |
15 |
| ||||
Net earnings |
|
33,048 |
|
13,943 |
|
34,110 |
|
26,311 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Basic earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Earnings from continuing operations before discontinued operations |
|
$ |
0.62 |
|
$ |
0.26 |
|
$ |
0.64 |
|
$ |
0.49 |
|
Discontinued operations, net of tax |
|
|
|
|
|
|
|
|
| ||||
Basic earnings per share |
|
$ |
0.62 |
|
$ |
0.26 |
|
$ |
0.64 |
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Earnings from continuing operations before discontinued operations |
|
$ |
0.61 |
|
$ |
0.26 |
|
$ |
0.63 |
|
$ |
0.49 |
|
Discontinued operations, net of tax |
|
|
|
|
|
|
|
|
| ||||
Diluted earnings per share |
|
$ |
0.61 |
|
$ |
0.26 |
|
$ |
0.63 |
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive income: |
|
|
|
|
|
|
|
|
| ||||
Defined benefit plan adjustment, net of tax |
|
354 |
|
253 |
|
708 |
|
473 |
| ||||
Derivative financial instruments adjustment, net of tax |
|
$ |
910 |
|
$ |
170 |
|
$ |
1,930 |
|
$ |
685 |
|
Other comprehensive income |
|
1,264 |
|
423 |
|
2,638 |
|
1,158 |
| ||||
Comprehensive income |
|
$ |
34,312 |
|
$ |
14,366 |
|
$ |
36,748 |
|
$ |
27,469 |
|
See notes to consolidated financial statements.
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
(unaudited)
Twenty-six weeks ended |
|
July 28, 2012 |
|
July 30, 2011 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net earnings |
|
$ |
34,110 |
|
$ |
26,311 |
|
Adjustments to reconcile net earnings to net cash provided by continuing operations: |
|
|
|
|
| ||
Net loss (income) from discontinued operations, net of tax |
|
58 |
|
(15 |
) | ||
Depreciation and amortization |
|
39,288 |
|
39,654 |
| ||
Amortization of deferred gain from asset sales |
|
(6,302 |
) |
(6,302 |
) | ||
Stock compensation expense |
|
1,043 |
|
1,908 |
| ||
Deferred income taxes |
|
20,485 |
|
4,238 |
| ||
Net loss (gain) from disposition of assets |
|
11 |
|
(86 |
) | ||
Loss from asset impairment |
|
|
|
389 |
| ||
Other |
|
13 |
|
272 |
| ||
Changes in assets and liabilities, net of the effects of acquisitions: |
|
|
|
|
| ||
Decrease in accounts receivable, prepaid expenses and other |
|
11,448 |
|
21,816 |
| ||
Increase in merchandise inventories |
|
(12,419 |
) |
(12,917 |
) | ||
Increase in accounts payable |
|
2,810 |
|
12,043 |
| ||
Decrease in accrued expenses |
|
(2,451 |
) |
(33,202 |
) | ||
Decrease in other long-term liabilities |
|
(552 |
) |
(2,831 |
) | ||
Net cash provided by continuing operations |
|
87,542 |
|
51,278 |
| ||
Net cash used in discontinued operations |
|
(92 |
) |
(44 |
) | ||
Net cash provided by operating activities |
|
87,450 |
|
51,234 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Capital expenditures |
|
(26,347 |
) |
(30,636 |
) | ||
Proceeds from dispositions of assets |
|
|
|
89 |
| ||
Premiums paid on life insurance policies |
|
|
|
(795 |
) | ||
Collateral investment |
|
|
|
(4,763 |
) | ||
Acquisitions, net of cash acquired |
|
|
|
(42,757 |
) | ||
Net cash used in investing activities |
|
(26,347 |
) |
(78,862 |
) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Borrowings under line of credit agreements |
|
1,106 |
|
5,045 |
| ||
Payments under line of credit agreements |
|
(931 |
) |
(5,045 |
) | ||
Borrowings on trade payable program liability |
|
80,836 |
|
59,097 |
| ||
Payments on trade payable program liability |
|
(50,304 |
) |
(53,944 |
) | ||
Payment for finance issuance cost |
|
|
|
(2,441 |
) | ||
Debt payments |
|
(539 |
) |
(539 |
) | ||
Dividends paid |
|
|
|
(3,171 |
) | ||
Proceeds from stock issuance |
|
1,318 |
|
363 |
| ||
Net cash provided by (used in) financing activities |
|
31,486 |
|
(635 |
) | ||
Net increase (decrease) in cash and cash equivalents |
|
92,589 |
|
(28,263 |
) | ||
Cash and cash equivalents at beginning of period |
|
58,244 |
|
90,240 |
| ||
Cash and cash equivalents at end of period |
|
$ |
150,833 |
|
$ |
61,977 |
|
|
|
|
|
|
| ||
Supplemental disclosure of cash flow information: |
|
|
|
|
| ||
Cash paid for income taxes |
|
$ |
1,705 |
|
$ |
629 |
|
Cash paid for interest |
|
$ |
11,449 |
|
$ |
11,523 |
|
Non-cash investing activities: |
|
|
|
|
| ||
Accrued purchases of property and equipment |
|
$ |
632 |
|
$ |
1,416 |
|
See notes to consolidated financial statements
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 Companys 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 Companys 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 Commissions 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 Companys Annual Report on Form 10-K for the fiscal year ended January 28, 2012. The results of operations for the twenty-six weeks ended July 28, 2012 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 July 28, 2012 and for all periods presented have been made.
The Companys fiscal year ends on the Saturday nearest January 31. Accordingly, references to fiscal years 2012 and 2011 refer to the fiscal year ending February 2, 2013 and the fiscal year ended January 28, 2012, respectively.
The Company operated 742 store locations at July 28, 2012, of which 232 were owned and 510 were leased.
NOTE 2NEW ACCOUNTING STANDARDS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04), which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. The adoption of ASU 2011-04 did not have a material impact on the consolidated financial statements.
In June of 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 was issued to improve the comparability of financial reporting between U.S. GAAP and IFRS, and eliminates previous U.S. GAAP guidance that allowed an entity to present components of other comprehensive income (OCI) as part of its statement of changes in shareholders equity. With the issuance of ASU 2011-05, companies are now required to report all components of OCI either in a single continuous statement of total comprehensive income, which includes components of both OCI and net income, or in a separate statement appearing consecutively with the statement of income. ASU 2011-05 does not affect current guidance for the accounting of the components of OCI, or which items are included within total comprehensive income, and is effective for periods beginning after December 15, 2011, with early adoption permitted. The adoption of ASU 2011-05 affected presentation only and therefore did not have an impact on the Companys consolidated financial condition, results of operations or cash flows.
In September 2011, the FASB issued ASU 2011-08, Intangibles Goodwill and Other (Topic 350) Testing Goodwill for Impairment (ASU 2011-08). The new guidance provides entities with the option to perform a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the quantitative two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the quantitative two-step goodwill impairment test. Entities also have the option to bypass the assessment of qualitative factors for any reporting unit in any period and proceed directly to performing the first step of the quantitative two-step goodwill impairment test, as was required prior to the issuance of this new guidance. The new guidance is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-08 will not have a material impact on the consolidated financial statements.
NOTE 3ACQUISITIONS
During the twenty-six weeks ended July 30, 2011, the Company made three separate acquisitions. The Company acquired the assets related to seven service and tire centers located in the Seattle-Tacoma area, the assets related to seven service and tire centers located in the Houston, Texas area and all outstanding shares of capital stock of Tire Stores Group Holding Corporation which operated an 85-store chain in Florida, Georgia and Alabama under the name Big 10. Collectively, the acquired stores produced approximately $94.7 million (unaudited) in sales annually based on pre-acquisition historical information. The total purchase price of these stores was approximately $42.6 million in cash and the assumption of certain liabilities. The acquisitions were financed through cash flows provided by operations. The results of operations of these acquired stores are included in the Companys results from their respective acquisition dates.
The Company expensed all costs related to these acquisitions during fiscal 2011. The total costs related to these acquisitions were $1.5 million and are included in the consolidated statement of operations within selling, general and administrative expenses.
As the Companys acquisitions (including Big 10) were immaterial to the Companys operating results both individually and in aggregate for the thirteen and twenty six week periods ended July 30, 2011, pro forma results of operations are not disclosed. Sales and net earnings for the fiscal 2011 acquired stores totaled $21.9 million and $0.7 million, respectively for the period from acquisition date through July 30, 2011.
NOTE 4MERCHANDISE INVENTORIES
Merchandise inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out (LIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on managements 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 $553.9 million and $536.4 million as of July 28, 2012 and January 28, 2012, respectively.
The Companys inventory, consisting primarily of auto parts and accessories, is used on vehicles typically having long lives. Because of this, and combined with the Companys historical experience of returning excess inventory to the Companys vendors for full credit, the risk of obsolescence is minimal. The Company establishes a reserve for excess inventory for instances where less than full credit will be received for such returns or where the Company anticipates items will be sold at retail prices that are less than recorded costs. The reserve is based on managements judgment, including estimates and assumptions regarding marketability of products, the market value of inventory to be sold in future periods and on historical experiences where the Company received less than full credit from vendors for product returns. The Company also provides for estimated inventory shrinkage based upon historical levels and the results of its cycle counting program. The Companys inventory adjustments for these matters were approximately $4.3 million at July 28, 2012 and $4.6 million at January 28, 2012.
NOTE 5PROPERTY AND EQUIPMENT
The Companys property and equipment as of July 28, 2012 and January 28, 2012 was as follows:
(dollar amounts in thousands) |
|
July 28, 2012 |
|
January 28, 2012 |
| ||
|
|
|
|
|
| ||
Property and equipment |
|
|
|
|
| ||
Land |
|
$ |
204,023 |
|
$ |
204,023 |
|
Buildings and improvements |
|
885,485 |
|
875,999 |
| ||
Furniture, fixtures and equipment |
|
738,815 |
|
723,938 |
| ||
Construction in progress |
|
3,852 |
|
3,279 |
| ||
Accumulated depreciation and amortization |
|
(1,149,556 |
) |
(1,110,900 |
) | ||
Property and equipment net |
|
$ |
682,619 |
|
$ |
696,339 |
|
NOTE 6WARRANTY RESERVE
The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by the respective vendors, with the Company covering any costs above the vendors 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 twenty-six weeks ended July 28, 2012 and the fifty-two weeks ended January 28, 2012 is as follows:
(dollar amounts in thousands) |
|
July 28, 2012 |
|
January 28, 2012 |
| ||
Beginning balance |
|
$ |
673 |
|
$ |
673 |
|
|
|
|
|
|
| ||
Additions related to current period sales |
|
5,410 |
|
12,122 |
| ||
|
|
|
|
|
| ||
Warranty costs incurred in current period |
|
(5,410 |
) |
(12,122 |
) | ||
|
|
|
|
|
| ||
Ending balance |
|
$ |
673 |
|
$ |
673 |
|
NOTE 7DEBT AND FINANCING ARRANGEMENTS
The following are the components of debt and financing arrangements:
(dollar amounts in thousands) |
|
July 28, 2012 |
|
January 28, 2012 |
| ||
7.50% Senior Subordinated Notes, due December 2014 |
|
$ |
147,565 |
|
$ |
147,565 |
|
Senior Secured Term Loan, due October 2013 |
|
147,018 |
|
147,557 |
| ||
Revolving Credit Agreement, through January 2016 |
|
175 |
|
|
| ||
Long-term debt |
|
294,758 |
|
295,122 |
| ||
Current maturities |
|
(1,254 |
) |
(1,079 |
) | ||
Long-term debt less current maturities |
|
$ |
293,504 |
|
$ |
294,043 |
|
As of July 28, 2012, 126 stores collateralized the Senior Secured Term Loan.
The Companys ability to borrow under its Revolving Credit Agreement (the Agreement) is based on a specific borrowing base consisting of inventory and accounts receivable. The interest rate on this credit line is daily LIBOR plus 2.00% to 2.50% based upon the then current availability under the Agreement. As of July 28, 2012, there was $0.2 million outstanding under this agreement and $29.6 million of availability was utilized to support outstanding letters of credit. Taking this into account and the borrowing base requirements, as of July 28, 2012, there was $175.1 million of availability remaining.
Several of the Companys 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 Companys availability under its Revolving Credit Agreement drops below $50.0 million. As of July 28, 2012, the Company was in compliance with all financial covenants contained in its debt agreements.
Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange and are considered a level 2 measure under the fair value hierarchy. The estimated fair value of long-term debt including current maturities was $296.6 million and $293.6 million as of July 28, 2012 and January 28, 2012, respectively.
NOTE 8ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss are:
(dollar amounts in thousands) |
|
July 28, 2012 |
|
January 28, 2012 |
| ||
|
|
|
|
|
| ||
Defined benefit plan adjustment, net of tax |
|
$ |
(8,988 |
) |
$ |
(9,696 |
) |
Derivative financial instrument adjustment, net of tax |
|
(6,023 |
) |
(7,953 |
) | ||
Accumulated other comprehensive loss |
|
$ |
(15,011 |
) |
$ |
(17,649 |
) |
NOTE 9EARNINGS 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 |
|
Twenty-six Weeks Ended |
| |||||||||||
(in thousands, except per share amounts) |
|
|
July 28, |
|
July 30, |
|
July 28, |
|
July 30, |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
(a) |
|
Earnings from continuing operations |
|
$ |
33,034 |
|
$ |
13,891 |
|
$ |
34,168 |
|
$ |
26,296 |
| |
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
Income (loss) from discontinued operations, net of tax |
|
14 |
|
52 |
|
(58 |
) |
15 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
Net earnings |
|
$ |
33,048 |
|
$ |
13,943 |
|
$ |
34,110 |
|
$ |
26,311 |
| |
|
|
|
|
|
|
|
|
|
|
|
| |||||
(b) |
|
Basic average number of common shares outstanding during period |
|
53,146 |
|
52,952 |
|
53,110 |
|
52,901 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
Common shares assumed issued upon exercise of dilutive stock options, net of assumed repurchase, at the average market price |
|
651 |
|
697 |
|
765 |
|
691 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
(c) |
|
Diluted average number of common shares assumed outstanding during period |
|
53,797 |
|
53,649 |
|
53,875 |
|
53,592 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
| |||||
|
|
Earnings from continuing operations (a/b) |
|
$ |
0.62 |
|
$ |
0.26 |
|
$ |
0.64 |
|
$ |
0.49 |
| |
|
|
Discontinued operations, net of tax |
|
|
|
|
|
|
|
|
| |||||
|
|
Basic earnings per share |
|
$ |
0.62 |
|
$ |
0.26 |
|
$ |
0.64 |
|
$ |
0.49 |
| |
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
| |||||
|
|
Earnings from continuing operations (a/c) |
|
$ |
0.61 |
|
$ |
0.26 |
|
$ |
0.63 |
|
$ |
0.49 |
| |
|
|
Discontinued operations, net of tax |
|
|
|
|
|
|
|
|
| |||||
|
|
Diluted earnings per share |
|
$ |
0.61 |
|
$ |
0.26 |
|
$ |
0.63 |
|
$ |
0.49 |
| |
At July 28, 2012 and July 30, 2011, respectively, there were 2,382,000 and 2,682,000 outstanding options and restricted stock units. Certain stock options were excluded from the calculation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares for the periods then ended and therefore would be anti-dilutive. The total number of such shares excluded from the diluted earnings per share calculation are 503,000 and 830,000 for the twenty-six weeks ended July 28, 2012 and July 30, 2011, respectively. The total number of such shares excluded from the diluted earnings per share calculation are 706,000 and 888,000 for the thirteen weeks ended July 28, 2012 and July 30, 2011, respectively.
NOTE 10BENEFIT PLANS
The Company has a qualified 401(k) savings plan and a separate plan for employees residing in Puerto Rico, which cover all full-time employees who are at least 21 years of age with one or more years of service. The Company also maintains a non-qualified defined contribution Supplemental Executive Retirement Plan (the Account Plan) for key employees designated by the Board of Directors. The Companys contribution to these plans for fiscal 2012 is contingent upon meeting certain performance metrics. The Company did not record any contribution expense for these plans in the first half of 2012 or 2011.
The Company also has a frozen defined benefit pension plan covering the Companys full-time employees hired on or before February 1, 1992. The Companys expense for its pension plan follows:
|
|
Thirteen Weeks Ended |
|
Twenty-six Weeks Ended |
| ||||||||
(dollar amounts in thousands) |
|
July 28, 2012 |
|
July 30, 2011 |
|
July 28, 2012 |
|
July 30, 2011 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest cost |
|
619 |
|
627 |
|
1,238 |
|
1,278 |
| ||||
Expected return on plan assets |
|
(704 |
) |
(721 |
) |
(1,408 |
) |
(1,372 |
) | ||||
Amortization of net loss |
|
566 |
|
405 |
|
1,133 |
|
756 |
| ||||
Net periodic benefit cost |
|
$ |
481 |
|
$ |
311 |
|
$ |
963 |
|
$ |
662 |
|
The defined benefit pension plan is subject to minimum funding requirements of the Employee Retirement Income Security Act of 1974 as amended. While the Company has no minimum funding requirement during fiscal 2011, it made a $3.0 million discretionary contribution to the defined benefit pension plan on April 28, 2011. There were no discretionary contributions made during the first half of 2012.
During the third quarter of fiscal 2011, the Company began the process of terminating the Plan. The termination of the Plan is expected to be completed by the end of fiscal 2012. In order to terminate the Plan, in accordance with Internal Revenue Service and Pension Benefit Guaranty Corporation requirements, the Company is required to fully fund the Plan on a termination basis and will commit to contribute the additional assets necessary to do so. Plan participants will not be adversely affected by the Plan termination, but rather will have their benefits either converted into a lump sum cash payment or an annuity contract placed with an insurance carrier.
NOTE 11FAIR VALUE MEASUREMENTS AND DERIVATIVES
The Companys fair value measurements consist of (a) financial assets and liabilities that are recognized or disclosed at fair value in the Companys financial statements on a recurring basis (at least annually) and (b) all non-recurring non-financial assets and liabilities.
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. There is a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Companys assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following table provides information by level for assets and liabilities that are measured at fair value, on a recurring basis:
(dollar amounts in thousands) |
|
Fair Value |
|
Fair Value Measurements |
| ||||||||
Description |
|
July 28, 2012 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
$ |
150,833 |
|
$ |
150,833 |
|
$ |
|
|
$ |
|
|
Collateral investments (1) |
|
17,276 |
|
17,276 |
|
|
|
|
| ||||
Rabbi trust assets (1) |
|
3,596 |
|
|
|
3,596 |
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Other liabilities |
|
|
|
|
|
|
|
|
| ||||
Derivative liability (2) |
|
9,494 |
|
|
|
9,494 |
|
|
| ||||
(dollar amounts in thousands) |
|
Fair Value |
|
Fair Value Measurements |
| ||||||||
Description |
|
January 28, 2012 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
$ |
58,244 |
|
$ |
58,244 |
|
$ |
|
|
$ |
|
|
Collateral investments (1) |
|
17,276 |
|
17,276 |
|
|
|
|
| ||||
Rabbi trust assets (1) |
|
3,576 |
|
|
|
3,576 |
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Other liabilities |
|
|
|
|
|
|
|
|
| ||||
Derivative liability (2) |
|
12,540 |
|
|
|
12,540 |
|
|
| ||||
(1) included in other long-term assets
(2) included in other long-term liabilities
As of January 28, 2012 the Company invested $17.3 million in restricted accounts as collateral for its retained liabilities included within existing insurance programs in lieu of previously outstanding letters of credit, of which $4.8 million was invested during the first half of fiscal year 2011.
The Company has one interest rate swap designated as a cash flow hedge on $145.0 million of the Companys Senior Secured Term Loan that is due in October 2013. The swap is used to minimize interest rate exposure and overall interest costs by converting the variable component of the total interest rate to a fixed rate of 5.036%. Since February 1, 2008, this swap was deemed to be fully effective and all adjustments in the interest rate swaps fair value have been recorded to accumulated other comprehensive loss.
The table below shows the effect of the Companys interest rate swap on the consolidated financial statements for the periods indicated:
(dollar amounts in thousands) |
|
Amount of Gain in |
|
Earnings Statement |
|
Amount of Loss |
| ||
Thirteen weeks ended July 28, 2012 |
|
$ |
897 |
|
Interest expense |
|
$ |
(1,685 |
) |
Thirteen weeks ended July 30, 2011 |
|
$ |
150 |
|
Interest expense |
|
$ |
(1,772 |
) |
|
|
|
|
|
|
|
|
|
|
Twenty-six weeks ended July 28, 2012 |
|
$ |
1,904 |
|
Interest expense |
|
$ |
(3,339 |
) |
Twenty-six weeks ended July 30, 2011 |
|
$ |
648 |
|
Interest expense |
|
$ |
(3,491 |
) |
(a) represents the effective portion of the loss reclassified from accumulated other comprehensive loss
The fair value of the derivative was $9.5 million and $12.5 million payable at July 28, 2012 and January 28, 2012, respectively. Of the $3.0 million decrease in the fair value during the twenty-six weeks ended July 28, 2012, $1.9 million net of tax was recorded to accumulated other comprehensive loss on the consolidated balance sheet.
Non-financial assets measured at fair value on a non-recurring basis:
Certain assets are measured at fair value on a non-recurring basis, that is, the assets are subject to fair value adjustments in certain circumstances such as when there is evidence of impairment. These measures of fair value, and related inputs, are considered level 2 or level 3 measures under the fair value hierarchy. During the second quarter of fiscal 2011, the Company recorded a $0.4 million
impairment charge related to stores classified as held and used. The Company used a probability-weighted approach and estimates of expected future cash flows to determine the fair value of the stores. Discount and growth rate assumptions were derived from current economic conditions, managements expectations and projected trends of current operating results. The fair market value estimate is classified as a Level 3 measure within the fair value hierarchy.
NOTE 12LEGAL 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 Companys financial position. However, there exists a reasonable possibility of loss in excess of the amounts accrued, the amount of which cannot currently be estimated. While the Company does not believe that the amount of such excess loss could be material to the Companys financial position, any such loss could have a material adverse effect on the Companys results of operations in the period(s) during which the underlying matters are resolved.
NOTE 13MERGER UPDATE
On May 29, 2012, the Company, Auto Acquisition Company, LLC, a Delaware limited liability company (Parent), Auto Mergersub, Inc., a Delaware corporation (Merger Sub), and The Gores Group, LLC, a Delaware limited liability company (Gores), entered into a Settlement Agreement (the Settlement Agreement) relating to the previously announced Agreement and Plan of Merger, dated as of January 29, 2012, by and among the Company, Parent and Merger Sub (the Merger Agreement). The Settlement Agreement provided for, among other things: (i) the termination of the Merger Agreement and the related financing commitments from Gores Capital Partners II, L.P. and Gores Capital Partners III, L.P.; (ii) Parents payment of a $50.0 million fee to the Company and reimbursement to the Company for certain of its merger related expenses; and (iii) mutual releases of the parties. Such payments were made by Parent on June 8, 2012 and the Company recorded $43.0 million of merger termination fees, net of related expenses, on the consolidated statements of operations and comprehensive income which is presented within cash flows from operations on the consolidated statement of cash flows.
NOTE 14SUPPLEMENTAL GUARANTOR INFORMATION
The Companys Notes are fully and unconditionally and joint and severally guaranteed by certain of the Companys direct and indirectly wholly-owned subsidiariesnamely, The Pep Boys Manny Moe & Jack of California, The Pep BoysManny Moe & Jack of Delaware, Inc. (the Pep Boys of Delaware); Pep BoysManny Moe & Jack of Puerto Rico, Inc.; Tire Stores Group Holding Corporation (on and after May 5, 2011); Big 10 Tire Stores, LLC (on and after May 5, 2011), (collectively, the Subsidiary Guarantors). The Notes are not guaranteed by the Companys wholly owned subsidiary, Colchester Insurance Company.
The following consolidating information presents, in separate columns, the condensed consolidating balance sheets as of July 28, 2012 and January 28, 2012 and the related condensed consolidating statements of operations and comprehensive income for the thirteen and twenty-six weeks ended July 28, 2012 and July 30, 2011 and condensed consolidating statements of cash flows for the twenty-six weeks ended July 28, 2012 and July 30, 2011 for (i) the Company (Pep Boys) on a parent only basis, with its investment in subsidiaries recorded under the equity method, (ii) the Subsidiary Guarantors on a combined basis, (iii) the subsidiary of the Company that does not guarantee the Notes, and (iv) the Company on a consolidated basis.
CONDENSED CONSOLIDATING BALANCE SHEET
(dollars in thousands)
(unaudited)
As of July 28, 2012 |
|
Pep Boys |
|
Subsidiary |
|
Subsidiary Non- |
|
Consolidation/ |
|
Consolidated |
| |||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
|
$ |
92,508 |
|
$ |
47,160 |
|
$ |
11,165 |
|
$ |
|
|
$ |
150,833 |
|
Accounts receivable, net |
|
14,546 |
|
13,416 |
|
|
|
|
|
27,962 |
| |||||
Merchandise inventories |
|
221,294 |
|
405,261 |
|
|
|
|
|
626,555 |
| |||||
Prepaid expenses |
|
8,929 |
|
12,577 |
|
7,102 |
|
(7,587 |
) |
21,021 |
| |||||
Other current assets |
|
1,776 |
|
|
|
56,148 |
|
(4,841 |
) |
53,083 |
| |||||
Total current assets |
|
339,053 |
|
478,414 |
|
74,415 |
|
(12,428 |
) |
879,454 |
| |||||
Property and equipmentnet |
|
240,096 |
|
431,087 |
|
29,835 |
|
(18,399 |
) |
682,619 |
| |||||
Investment in subsidiaries |
|
2,204,475 |
|
|
|
|
|
(2,204,475 |
) |
|
| |||||
Intercompany receivables |
|
|
|
1,412,350 |
|
68,966 |
|
(1,481,316 |
) |
|
| |||||
Goodwill |
|
2,549 |
|
44,368 |
|
|
|
|
|
46,917 |
| |||||
Deferred income taxes |
|
3,083 |
|
42,742 |
|
|
|
|
|
45,825 |
| |||||
Other long-term assets |
|
29,868 |
|
1,792 |
|
|
|
|
|
31,660 |
| |||||
Total assets |
|
$ |
2,819,124 |
|
$ |
2,410,753 |
|
$ |
173,216 |
|
$ |
(3,716,618 |
) |
$ |
1,686,475 |
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
| |||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Accounts payable |
|
$ |
246,522 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
246,522 |
|
Trade payable program liability |
|
115,746 |
|
|
|
|
|
|
|
115,746 |
| |||||
Accrued expenses |
|
25,211 |
|
60,694 |
|
140,230 |
|
(7,587 |
) |
218,548 |
| |||||
Deferred income taxes |
|
26,243 |
|
39,829 |
|
|
|
(4,841 |
) |
61,231 |
| |||||
Current maturities of long-term debt |
|
1,254 |
|
|
|
|
|
|
|
1,254 |
| |||||
Total current liabilities |
|
414,976 |
|
100,523 |
|
140,230 |
|
(12,428 |
) |
643,301 |
| |||||
Long-term debt less current maturities |
|
293,504 |
|
|
|
|
|
|
|
293,504 |
| |||||
Other long-term liabilities |
|
26,704 |
|
45,586 |
|
|
|
|
|
72,290 |
| |||||
Deferred gain from asset sales |
|
59,215 |
|
93,155 |
|
|
|
(18,399 |
) |
133,971 |
| |||||
Intercompany liabilities |
|
1,481,316 |
|
|
|
|
|
(1,481,316 |
) |
|
| |||||
Total stockholders equity |
|
543,409 |
|
2,171,489 |
|
32,986 |
|
(2,204,475 |
) |
543,409 |
| |||||
Total liabilities and stockholders equity |
|
$ |
2,819,124 |
|
$ |
2,410,753 |
|
$ |
173,216 |
|
$ |
(3,716,618 |
) |
$ |
1,686,475 |
|
CONDENSED CONSOLIDATING BALANCE SHEET
(dollars in thousands)
(unaudited)
As of January 28, 2012 |
|
Pep Boys |
|
Subsidiary |
|
Subsidiary Non- |
|
Consolidation/ |
|
Consolidated |
| ||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
| ||||||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents |
|
$ |
22,740 |
|
$ |
27,181 |
|
$ |
8,323 |
|
$ |
|
|
$ |
58,244 |
| |||
Accounts receivable, net |
|
14,566 |
|
11,226 |
|
|
|
|
|
25,792 |
| ||||||||
Merchandise inventories |
|
214,584 |
|
399,552 |
|
|
|
|
|
614,136 |
| ||||||||
Prepaid expenses |
|
12,945 |
|
16,873 |
|
14,996 |
|
(18,420 |
) |
26,394 |
| ||||||||
Other current assets |
|
606 |
|
|
|
64,214 |
|
(4,841 |
) |
59,979 |
| ||||||||
Total current assets |
|
265,441 |
|
454,832 |
|
87,533 |
|
(23,261 |
) |
784,545 |
| ||||||||
Property and equipmentnet |
|
243,108 |
|
441,645 |
|
30,177 |
|
(18,591 |
) |
696,339 |
| ||||||||
Investment in subsidiaries |
|
2,176,992 |
|
|
|
|
|
(2,176,992 |
) |
|
| ||||||||
Intercompany receivables |
|
|
|
1,389,910 |
|
82,206 |
|
(1,472,116 |
) |
|
| ||||||||
Goodwill |
|
2,549 |
|
44,368 |
|
|
|
|
|
46,917 |
| ||||||||
Deferred income taxes |
|
20,468 |
|
52,402 |
|
|
|
|
|
72,870 |
| ||||||||
Other long-term assets |
|
31,068 |
|
2,040 |
|
|
|
|
|
33,108 |
| ||||||||
Total assets |
|
$ |
2,739,626 |
|
$ |
2,385,197 |
|
$ |
199,916 |
|
$ |
(3,690,960 |
) |
$ |
1,633,779 |
| |||
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
| ||||||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
| ||||||||
Accounts payable |
|
$ |
243,712 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
243,712 |
| |||
Trade payable program liability |
|
85,214 |
|
|
|
|
|
|
|
85,214 |
| ||||||||
Accrued expenses |
|
17,887 |
|
55,527 |
|
166,711 |
|
(18,420 |
) |
221,705 |
| ||||||||
Deferred income taxes |
|
29,383 |
|
41,666 |
|
|
|
(4,841 |
) |
66,208 |
| ||||||||
Current maturities of long-term debt |
|
1,079 |
|
|
|
|
|
|
|
1,079 |
| ||||||||
Total current liabilities |
|
377,275 |
|
97,193 |
|
166,711 |
|
(23,261 |
) |
617,918 |
| ||||||||
Long-term debt less current maturities |
|
294,043 |
|
|
|
|
|
|
|
294,043 |
| ||||||||
Other long-term liabilities |
|
30,540 |
|
46,676 |
|
|
|
|
|
77,216 |
| ||||||||
Deferred gain from asset sales |
|
61,323 |
|
97,541 |
|
|
|
(18,591 |
) |
140,273 |
| ||||||||
Intercompany liabilities |
|
1,472,116 |
|
|
|
|
|
(1,472,116 |
) |
|
| ||||||||
Total stockholders equity |
|
504,329 |
|
2,143,787 |
|
33,205 |
|
(2,176,992 |
) |
504,329 |
| ||||||||
Total liabilities and stockholders equity |
|
$ |
2,739,626 |
|
$ |
2,385,197 |
|
$ |
199,916 |
|
$ |
(3,690,960 |
) |
$ |
1,633,779 |
| |||
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)
|
|
|
|
Subsidiary |
|
Subsidiary Non- |
|
Consolidation / |
|
|
| |||||
Thirteen Weeks Ended July 28, 2012 |
|
Pep Boys |
|
Guarantors |
|
Guarantors |
|
Elimination |
|
Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Merchandise sales |
|
$ |
135,439 |
|
$ |
277,941 |
|
$ |
|
|
$ |
|
|
$ |
413,380 |
|
Service revenue |
|
37,703 |
|
74,588 |
|
|
|
|
|
112,291 |
| |||||
Other revenue |
|
|
|
|
|
6,161 |
|
(6,161 |
) |
|
| |||||
Total revenues |
|
173,142 |
|
352,529 |
|
6,161 |
|
(6,161 |
) |
525,671 |
| |||||
Costs of merchandise sales |
|
96,843 |
|
191,668 |
|
|
|
(460 |
) |
288,051 |
| |||||
Costs of service revenue |
|
34,108 |
|
72,958 |
|
|
|
(47 |
) |
107,019 |
| |||||
Costs of other revenue |
|
|
|
|
|
6,142 |
|
(6,142 |
) |
|
| |||||
Total costs of revenues |
|
130,951 |
|
264,626 |
|
6,142 |
|
(6,649 |
) |
395,070 |
| |||||
Gross profit from merchandise sales |
|
38,596 |
|
86,273 |
|
|
|
460 |
|
125,329 |
| |||||
Gross profit from service revenue |
|
3,595 |
|
1,630 |
|
|
|
47 |
|
5,272 |
| |||||
Gross profit from other revenue |
|
|
|
|
|
19 |
|
(19 |
) |
|
| |||||
Total gross profit |
|
42,191 |
|
87,903 |
|
19 |
|
488 |
|
130,601 |
| |||||
Selling, general and administrative expenses |
|
36,323 |
|
78,061 |
|
83 |
|
(190 |
) |
114,277 |
| |||||
Net loss from dispositions of assets |
|
(8 |
) |
(1 |
) |
|
|
|
|
(9 |
) | |||||
Operating profit |
|
5,860 |
|
9,841 |
|
(64 |
) |
678 |
|
16,315 |
| |||||
Merger termination fees, net |
|
42,955 |
|
|
|
|
|
|
|
42,955 |
| |||||
Non-operating income (expense) |
|
(4,059 |
) |
16,911 |
|
679 |
|
(13,010 |
) |
521 |
| |||||
Interest expense (income) |
|
18,129 |
|
1,151 |
|
(521 |
) |
(12,332 |
) |
6,427 |
| |||||
Earnings from continuing operations before income taxes |
|
26,627 |
|
25,601 |
|
1,136 |
|
|
|
53,364 |
| |||||
Income tax expense |
|
10,509 |
|
9,401 |
|
420 |
|
|
|
20,330 |
| |||||
Equity in earnings of subsidiaries |
|
16,949 |
|
|
|
|
|
(16,949 |
) |
|
| |||||
Net earnings from continuing operations |
|
33,067 |
|
16,200 |
|
716 |
|
(16,949 |
) |
33,034 |
| |||||
Discontinued operations, net of tax |
|
(19 |
) |
33 |
|
|
|
|
|
14 |
| |||||
Net earnings |
|
$ |
33,048 |
|
$ |
16,233 |
|
$ |
716 |
|
$ |
(16,949 |
) |
$ |
33,048 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
| |||||
Defined benefit plan adjustment |
|
354 |
|
|
|
|
|
|
|
354 |
| |||||
Derivative financial instruments adjustment |
|
910 |
|
|
|
|
|
|
|
910 |
| |||||
Other comprehensive income |
|
1,264 |
|
|
|
|
|
|
|
1,264 |
| |||||
Comprehensive income |
|
$ |
34,312 |
|
$ |
16,233 |
|
$ |
716 |
|
$ |
(16,949 |
) |
$ |
34,312 |
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)
|
|
|
|
Subsidiary |
|
Subsidiary Non- |
|
Consolidation / |
|
|
| |||||
Thirteen Weeks Ended July 30, 2011 |
|
Pep Boys |
|
Guarantors |
|
Guarantors |
|
Elimination |
|
Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Merchandise sales |
|
$ |
137,881 |
|
$ |
277,386 |
|
$ |
|
|
$ |
|
|
$ |
415,267 |
|
Service revenue |
|
37,113 |
|
70,214 |
|
|
|
|
|
107,327 |
| |||||
Other revenue |
|
|
|
|
|
5,732 |
|
(5,732 |
) |
|
| |||||
Total revenues |
|
174,994 |
|
347,600 |
|
5,732 |
|
(5,732 |
) |
522,594 |
| |||||
Costs of merchandise sales |
|
98,345 |
|
189,785 |
|
|
|
(409 |
) |
287,721 |
| |||||
Costs of service revenue |
|
32,886 |
|
66,815 |
|
|
|
(38 |
) |
99,663 |
| |||||
Costs of other revenue |
|
|
|
|
|
5,830 |
|
(5,830 |
) |
|
| |||||
Total costs of revenues |
|
131,231 |
|
256,600 |
|
5,830 |
|
(6,277 |
) |
387,384 |
| |||||
Gross profit from merchandise sales |
|
39,536 |
|
87,601 |
|
|
|
409 |
|
127,546 |
| |||||
Gross profit from service revenue |
|
4,227 |
|
3,399 |
|
|
|
38 |
|
7,664 |
| |||||
Gross profit from other revenue |
|
|
|
|
|
(98 |
) |
98 |
|
|
| |||||
Total gross profit |
|
43,763 |
|
91,000 |
|
(98 |
) |
545 |
|
135,210 |
| |||||
Selling, general and administrative expenses |
|
38,562 |
|
74,698 |
|
80 |
|
(72 |
) |
113,268 |
| |||||
Net gain from dispositions of assets |
|
|
|
(3 |
) |
|
|
|
|
(3 |
) | |||||
Operating profit |
|
5,201 |
|
16,299 |
|
(178 |
) |
617 |
|
21,939 |
| |||||
Non-operating (expense) income |
|
(4,216 |
) |
15,852 |
|
618 |
|
(11,685 |
) |
569 |
| |||||
Interest expense (income) |
|
17,534 |
|
499 |
|
(521 |
) |
(11,068 |
) |
6,444 |
| |||||
(Loss) earnings from continuing operations before income taxes |
|
(16,549 |
) |
31,652 |
|
961 |
|
|
|
16,064 |
| |||||
Income tax (benefit) expense |
|
(3,100 |
) |
5,114 |
|
159 |
|
|
|
2,173 |
| |||||
Equity in earnings of subsidiaries |
|
27,365 |
|
|
|
|
|
(27,365 |
) |
|
| |||||
Net earnings from continuing operations |
|
13,916 |
|
26,538 |
|
802 |
|
(27,365 |
) |
13,891 |
| |||||
Discontinued operations, net of tax |
|
27 |
|
25 |
|
|
|
|
|
52 |
| |||||
Net earnings |
|
$ |
13,943 |
|
$ |
26,563 |
|
$ |
802 |
|
$ |
(27,365 |
) |
$ |
13,943 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
| |||||
Defined benefit plan adjustment |
|
253 |
|
|
|
|
|
|
|
253 |
| |||||
Derivative financial instruments adjustment |
|
170 |
|
|
|
|
|
|
|
170 |
| |||||
Other comprehensive income |
|
423 |
|
|
|
|
|
|
|
423 |
| |||||
Comprehensive income |
|
$ |
14,366 |
|
$ |
26,563 |
|
$ |
802 |
|
$ |
(27,365 |
) |
$ |
14,366 |
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)
|
|
|
|
Subsidiary |
|
Subsidiary Non- |
|
Consolidation / |
|
|
| |||||
Twenty-six Weeks Ended July 28, 2012 |
|
Pep Boys |
|
Guarantors |
|
Guarantors |
|
Elimination |
|
Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Merchandise sales |
|
$ |
272,022 |
|
$ |
553,690 |
|
$ |
|
|
$ |
|
|
$ |
825,712 |
|
Service revenue |
|
75,744 |
|
148,819 |
|
|
|
|
|
224,563 |
| |||||
Other revenue |
|
|
|
|
|
12,320 |
|
(12,320 |
) |
|
| |||||
Total revenues |
|
347,766 |
|
702,509 |
|
12,320 |
|
(12,320 |
) |
1,050,275 |
| |||||
Costs of merchandise sales |
|
194,553 |
|
385,274 |
|
|
|
(920 |
) |
578,907 |
| |||||
Costs of service revenue |
|
68,394 |
|
144,815 |
|
|
|
(94 |
) |
213,115 |
| |||||
Costs of other revenue |
|
|
|
|
|
12,714 |
|
(12,714 |
) |
|
| |||||
Total costs of revenues |
|
262,947 |
|
530,089 |
|
12,714 |
|
(13,728 |
) |
792,022 |
| |||||
Gross profit from merchandise sales |
|
77,469 |
|
168,416 |
|
|
|
920 |
|
246,805 |
| |||||
Gross profit from service revenue |
|
7,350 |
|
4,004 |
|
|
|
94 |
|
11,448 |
| |||||
Gross profit from other revenue |
|
|
|
|
|
(394 |
) |
394 |
|
|
| |||||
Total gross profit |
|
84,819 |
|
172,420 |
|
(394 |
) |
1,408 |
|
258,253 |
| |||||
Selling, general and administrative expenses |
|
75,260 |
|
158,508 |
|
167 |
|
52 |
|
233,987 |
| |||||
Net loss from dispositions of assets |
|
(8 |
) |
(3 |
) |
|
|
|
|
(11 |
) | |||||
Operating profit |
|
9,551 |
|
13,909 |
|
(561 |
) |
1,356 |
|
24,255 |
| |||||
Merger termination fees |
|
42,955 |
|
|
|
|
|
|
|
42,955 |
| |||||
Non-operating income (expense) |
|
(8,167 |
) |
32,870 |
|
1,357 |
|
(25,069 |
) |
991 |
| |||||
Interest expense (income) |
|
35,789 |
|
1,910 |
|
(1,043 |
) |
(23,713 |
) |
12,943 |
| |||||
Earnings from continuing operations before income taxes |
|
8,550 |
|
44,869 |
|
1,839 |
|
|
|
55,258 |
| |||||
Income tax expense |
|
3,265 |
|
17,123 |
|
702 |
|
|
|
21,090 |
| |||||
Equity in earnings of subsidiaries |
|
28,839 |
|
|
|
|
|
(28,839 |
) |
|
| |||||
Net earnings from continuing operations |
|
34,124 |
|
27,746 |
|
1,137 |
|
(28,839 |
) |
34,168 |
| |||||
Discontinued operations, net of tax |
|
(14 |
) |
(44 |
) |
|
|
|
|
(58 |
) | |||||
Net earnings |
|
$ |
34,110 |
|
$ |
27,702 |
|
$ |
1,137 |
|
$ |
(28,839 |
) |
$ |
34,110 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
| |||||
Defined benefit plan adjustment |
|
708 |
|
|
|
|
|
|
|
708 |
| |||||
Derivative financial instruments adjustment |
|
1,930 |
|
|
|
|
|
|
|
1,930 |
| |||||
Other comprehensive income |
|
2,638 |
|
|
|
|
|
|
|
2,638 |
| |||||
Comprehensive income |
|
$ |
36,748 |
|
$ |
27,702 |
|
$ |
1,137 |
|
$ |
(28,839 |
) |
$ |
36,748 |
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)
|
|
|
|
Subsidiary |
|
Subsidiary Non- |
|
Consolidation / |
|
|
| |||||
Twenty-six Weeks Ended July 30, 2011 |
|
Pep Boys |
|
Guarantors |
|
Guarantors |
|
Elimination |
|
Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Merchandise sales |
|
$ |
279,262 |
|
$ |
544,632 |
|
$ |
|
|
$ |
|
|
$ |
823,894 |
|
Service revenue |
|
75,648 |
|
136,592 |
|
|
|
|
|
212,240 |
| |||||
Other revenue |
|
|
|
|
|
11,466 |
|
(11,466 |
) |
|
| |||||
Total revenues |
|
354,910 |
|
681,224 |
|
11,466 |
|
(11,466 |
) |
1,036,134 |
| |||||
Costs of merchandise sales |
|
197,518 |
|
376,348 |
|
|
|
(816 |
) |
573,050 |
| |||||
Costs of service revenue |
|
65,974 |
|
126,854 |
|
|
|
(76 |
) |
192,752 |
| |||||
Costs of other revenue |
|
|
|
|
|
11,656 |
|
(11,656 |
) |
|
| |||||
Total costs of revenues |
|
263,492 |
|
503,202 |
|
11,656 |
|
(12,548 |
) |
765,802 |
| |||||
Gross profit from merchandise sales |
|
81,744 |
|
168,284 |
|
|
|
816 |
|
250,844 |
| |||||
Gross profit from service revenue |
|
9,674 |
|
9,738 |
|
|
|
76 |
|
19,488 |
| |||||
Gross profit from other revenue |
|
|
|
|
|
(190 |
) |
190 |
|
|
| |||||
Total gross profit |
|
91,418 |
|
178,022 |
|
(190 |
) |
1,082 |
|
270,332 |
| |||||
Selling, general and administrative expenses |
|
76,386 |
|
145,767 |
|
166 |
|
(151 |
) |
222,168 |
| |||||
Net gain from dispositions of assets |
|
|
|
86 |
|
|
|
|
|
86 |
| |||||
Operating profit |
|
15,032 |
|
32,341 |
|
(356 |
) |
1,233 |
|
48,250 |
| |||||
Non-operating (expense) income |
|
(8,491 |
) |
31,921 |
|
1,234 |
|
(23,508 |
) |
1,156 |
| |||||
Interest expense (income) |
|
34,859 |
|
1,400 |
|
(1,043 |
) |
(22,275 |
) |
12,941 |
| |||||
(Loss) earnings from continuing operations before income taxes |
|
(28,318 |
) |
62,862 |
|
1,921 |
|
|
|
36,465 |
| |||||
Income tax (benefit) expense |
|
(7,714 |
) |
17,347 |
|
536 |
|
|
|
10,169 |
| |||||
Equity in earnings of subsidiaries |
|
46,896 |
|
|
|
|
|
(46,896 |
) |
|
| |||||
Net earnings from continuing operations |
|
26,292 |
|
45,515 |
|
1,385 |
|
(46,896 |
) |
26,296 |
| |||||
Discontinued operations, net of tax |
|
19 |
|
(4 |
) |
|
|
|
|
15 |
| |||||
Net earnings |
|
$ |
26,311 |
|
$ |
45,511 |
|
$ |
1,385 |
|
$ |
(46,896 |
) |
$ |
26,311 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
| |||||
Defined benefit plan adjustment |
|
473 |
|
|
|
|
|
|
|
473 |
| |||||
Derivative financial instruments adjustment |
|
685 |
|
|
|
|
|
|
|
685 |
| |||||
Other comprehensive income |
|
1,158 |
|
|
|
|
|
|
|
1,158 |
| |||||
Comprehensive income |
|
$ |
27,469 |
|
$ |
45,511 |
|
$ |
1,385 |
|
$ |
(46,896 |
) |
$ |
27,469 |
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(dollars in thousands)
(unaudited)
Twenty-six Weeks Ended July 28, 2012 |
|
Pep Boys |
|
Subsidiary |
|
Subsidiary Non- |
|
Consolidation / |
|
Consolidated |
| |||||
Net Cash Provided by (Used in) Operating Activities |
|
$ |
41,640 |
|
$ |
56,208 |
|
$ |
(9,042 |
) |
$ |
(1,356 |
) |
$ |
87,450 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Capital expenditures |
|
(15,124 |
) |
(11,223 |
) |
|
|
|
|
(26,347 |
) | |||||
Net Cash (Used in) Investing Activities |
|
(15,124 |
) |
(11,223 |
) |
|
|
|
|
(26,347 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Borrowings under line of credit agreements |
|
500 |
|
606 |
|
|
|
|
|
1,106 |
| |||||
Payments under line of credit agreements |
|
(325 |
) |
(606 |
) |
|
|
|
|
(931 |
) | |||||
Borrowings on trade payable program liability |
|
80,836 |
|
|
|
|
|
|
|
80,836 |
| |||||
Payments on trade payable program liability |
|
(50,304 |
) |
|
|
|
|
|
|
(50,304 |
) | |||||
Debt Payments |
|
(539 |
) |
|
|
|
|
|
|
(539 |
) | |||||
Dividends paid |
|
|
|
|
|
(1,356 |
) |
1,356 |
|
|
| |||||
Intercompany (payments) borrowings |
|
11,766 |
|
(25,006 |
) |
13,240 |
|
|
|
|
| |||||
Proceeds from stock issuance |
|
1,318 |
|
|
|
|
|
|
|
1,318 |
| |||||
Net Cash Provided by (Used in) Financing Activities |
|
43,252 |
|
(25,006 |
) |
11,884 |
|
1,356 |
|
31,486 |
| |||||
Net increase in cash and cash equivalents |
|
69,768 |
|
19,979 |
|
2,842 |
|
|
|
92,589 |
| |||||
Cash and cash equivalents at beginning of period |
|
22,740 |
|
27,181 |
|
8,323 |
|
|
|
58,244 |
| |||||
Cash and cash equivalents at end of period |
|
$ |
92,508 |
|
$ |
47,160 |
|
$ |
11,165 |
|
$ |
|
|
$ |
150,833 |
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(dollars in thousands)
(unaudited)
Twenty-six Weeks Ended July 30, 2011 |
|
Pep Boys |
|
Subsidiary |
|
Subsidiary Non- |
|
Consolidation / |
|
Consolidated |
| |||||
Net Cash Provided by (Used in) Operating Activities |
|
$ |
13,152 |
|
$ |
49,122 |
|
$ |
(9,807 |
) |
$ |
(1,233 |
) |
$ |
51,234 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Capital expenditures |
|
(15,555 |
) |
(15,081 |
) |
|
|
|
|
(30,636 |
) | |||||
Proceeds from dispositions of assets |
|
|
|
89 |
|
|
|
|
|
89 |
| |||||
Premiums paid on life insurance policies |
|
(795 |
) |
|
|
|
|
|
|
(795 |
) | |||||
Collateral investment |
|
(4,763 |
) |
|
|
|
|
|
|
(4,763 |
) | |||||
Acquisitions, net of cash acquired |
|
(144 |
) |
(42,613 |
) |
|
|
|
|
(42,757 |
) | |||||
Net Cash Provided by (Used in) Investing Activities |
|
(21,257 |
) |
(57,605 |
) |
|
|
|
|
(78,862 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Borrowings under line of credit agreements |
|
1,771 |
|
3,274 |
|
|
|
|
|
5,045 |
| |||||
Payments under line of credit agreements |
|
(1,771 |
) |
(3,274 |
) |
|
|
|
|
(5,045 |
) | |||||
Borrowings on trade payable program liability |
|
59,097 |
|
|
|
|
|
|
|
59,097 |
| |||||
Payments on trade payable program liability |
|
(53,944 |
) |
|
|
|
|
|
|
(53,944 |
) | |||||
Payment for finance issuance cost |
|
(2,441 |
) |
|
|
|
|
|
|
(2,441 |
) | |||||
Debt Payments |
|
(539 |
) |
|
|
|
|
|
|
(539 |
) | |||||
Dividends paid |
|
(3,171 |
) |
|
|
(1,233 |
) |
1,233 |
|
(3,171 |
) | |||||
Intercompany (payments) borrowings |
|
(8,985 |
) |
(2,821 |
) |
11,806 |
|
|
|
|
| |||||
Proceeds from stock issuance |
|
363 |
|
|
|
|
|
|
|
363 |
| |||||
Net Cash (Used in) Provided by Financing Activities |
|
(9,620 |
) |
(2,821 |
) |
10,573 |
|
1,233 |
|
(635 |
) | |||||
Net (decrease) increase in cash and cash equivalents |
|
(17,725 |
) |
(11,304 |
) |
766 |
|
|
|
(28,263 |
) | |||||
Cash and cash equivalents at beginning of period |
|
37,912 |
|
42,779 |
|
9,549 |
|
|
|
90,240 |
| |||||
Cash and cash equivalents at end of period |
|
$ |
20,187 |
|
$ |
31,475 |
|
$ |
10,315 |
|
$ |
|
|
$ |
61,977 |
|
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis explains the results of operations for the second fiscal quarter and first half of 2012 and 2011 and significant developments affecting our financial condition for the six months ended July 28, 2012. 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 28, 2012.
INTRODUCTION
The Pep BoysManny, Moe & Jack is the leading national chain offering automotive service, tires, parts and accessories. This positioning allows us to streamline the distribution channel and pass the savings on to our customers facilitating our vision to be the automotive solutions provider of choice for the value-oriented customer. The majority of our stores are in a Supercenter format, which serves both do-it-for-me (DIFM), which includes service labor, installed merchandise and tires, and do-it-yourself (DIY) customers with the highest quality service and merchandise offerings. Most of our Supercenters also have a commercial sales program that provides delivery of tires, parts and other products to automotive repair shops and dealers. In 2009, as part of our long-term strategy to lead with automotive service, we began complementing our existing Supercenter store base with Service & Tire Centers. These Service & Tire Centers are designed to capture market share and leverage our existing Supercenters and support infrastructure. This growth will occur both organically and through acquisitions. The growth is targeted at existing markets, but may include new markets opportunistically. The objective is to grow our market share and to leverage inventory, marketing, distribution and support costs. Acquisitions will be used to accelerate growth in markets where the Company is under-penetrated.
In the first half of fiscal 2012, we opened eight Service & Tire Centers and one Supercenter and closed five stores whose leases expired and were not renewed. We are targeting a total of 30 new Service & Tire Centers and 10 Supercenters in fiscal 2012. As of July 28, 2012, we operated 562 Supercenters and 173 Service & Tire Centers, as well as 7 legacy Pep Boys Express (retail only) stores throughout 35 states and Puerto Rico.
EXECUTIVE SUMMARY
Net earnings for the second quarter of 2012 were $33.0 million, a $19.1 million increase from the $13.9 million reported for the second quarter of 2011. In the second quarter of 2012, we terminated our proposed merger and recorded the settlement proceeds, net of merger related costs, of $43.0 million in the consolidated statement of operations and comprehensive income. Net earnings for the second quarter of 2012 also included, on a pre-tax basis, a $0.7 million charge for severance costs from a reduction in force at our Store Support Center. The prior year included, on a pre-tax basis, a $0.4 million asset impairment charge, $1.0 million of acquisition related expenses and a $3.4 million benefit from the release of state tax valuation allowances.
Our diluted earnings per share for the second quarter and the first six months of 2012 were $0.61 and $0.63, respectively, an improvement of $0.35 and $0.14 over the $0.26 and $0.49 recorded for the corresponding periods of 2011.
Total revenue increased for the second quarter of 2012 by 0.6%, or $3.1 million, as compared to the same period of the prior year as a result of our store growth. This increase in total revenues was comprised of a 4.6% increase in service revenue partially offset by a 0.5% decrease in merchandise sales. For the second quarter of 2012, comparable store sales (sales generated by locations in operation during the same period) were relatively flat and were comprised of a 3.1% increase in comparable store service revenue and a 0.9% 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. We are also encouraged that from January through June 2012, miles driven (which favorably impacts sales of our services and non-discretionary products) grew 1.1% after declining throughout 2011. However, we believe the tough macroeconomic environment, including continued high unemployment and negative consumer confidence in the overall U.S. economy, depressed our second quarter sales. In addition, we believe the recent spike in gasoline prices in August will continue to challenge consumer spending relative to discretionary and deferrable purchases in the short-term. However, given the nature of these macroeconomic factors, we cannot predict whether or for how long these trends will continue, nor can we predict to what degree these trends will affect us in the future.
Our primary response to fluctuations in customer demand is to adjust our service and product assortment, store staffing and advertising messages. In addition, we continue to make it easy for customers to choose us to do it for them and to expand our online efforts to make Pep Boys the most convenient place to shop for all of their automotive needs. We believe that we are well positioned to help our customers save money and meet their needs in a challenging macroeconomic environment.
RESULTS OF OPERATIONS
The following discussion explains the material changes in our results of operations.
Analysis of Statement of Operations
Thirteen weeks ended July 28, 2012 vs. Thirteen weeks ended July 30, 2011
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 |
|
July 28, 2012 |
|
July 30, 2011 |
|
Favorable |
|
|
|
|
|
|
|
|
|
Merchandise sales |
|
78.6 |
% |
79.5 |
% |
(0.5 |
)% |
Service revenue (1) |
|
21.4 |
|
20.5 |
|
4.6 |
|
Total revenues |
|
100.0 |
|
100.0 |
|
0.6 |
|
Costs of merchandise sales (2) |
|
69.7 |
(3) |
69.3 |
(3) |
(0.1 |
) |
Costs of service revenue (2) |
|
95.3 |
(3) |
92.9 |
(3) |
(7.4 |
) |
Total costs of revenues |
|
75.2 |
|
74.1 |
|
(2.0 |
) |
Gross profit from merchandise sales |
|
30.3 |
(3) |
30.7 |
(3) |
(1.7 |
) |
Gross profit from service revenue |
|
4.7 |
(3) |
7.1 |
(3) |
(31.2 |
) |
Total gross profit |
|
24.8 |
|
25.9 |
|
(3.4 |
) |
Selling, general and administrative expenses |
|
21.7 |
|
21.7 |
|
(0.9 |
) |
Net gain (loss) from dispositions of assets |
|
|
|
|
|
|
|
Operating profit |
|
3.1 |
|
4.2 |
|
(25.6 |
) |
Merger termination fees, net |
|
8.2 |
|
|
|
NA |
|
Other income |
|
0.1 |
|
0.1 |
|
(8.4 |
) |
Interest expense |
|
1.2 |
|
1.2 |
|
0.3 |
|
Earnings from continuing operations before income taxes |
|
10.2 |
|
3.1 |
|
232.2 |
|
Income tax expense |
|
38.1 |
(4) |
13.5 |
(4) |
(835.6 |
) |
Earnings from continuing operations |
|
6.3 |
|
2.7 |
|
137.8 |
|
Discontinued operations, net of tax |
|
|
|
|
|
|
|
Net earnings |
|
6.3 |
|
2.7 |
|
137.0 |
|
(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 second quarter of 2012 increased by $3.1 million to $525.7 million from $522.6 million in the second quarter of 2011, while comparable store sales for the second quarter of 2012 were relatively flat as compared to the second quarter of 2011. Our comparable store sales consisted of an increase of 3.1% in comparable store service revenue offset by a decrease of 0.9% in comparable store merchandise sales. Total comparable store sales were flat as a result of lower customer counts offset by an increase in the average transaction amount per customer. While our total revenue figures were favorably impacted by the opening or acquisition of new stores, a new store is not added to our comparable store sales until it reaches its 13th month of operation. Non-
comparable stores contributed an additional $3.4 million of total revenue in the second quarter of 2012 as compared to the second quarter of 2011.
Total merchandise sales decreased 0.5%, or $1.9 million, to $413.4 million in the second quarter of fiscal 2012, compared to $415.3 million during the prior year quarter. The decrease in total merchandise sales was due to a decline in comparable store merchandise sales of 0.9%, or $3.6 million, partially offset by our non-comparable stores which contributed an additional $1.7 million of sales in the quarter. The decrease in comparable store merchandise sales was driven primarily by lower comparable store customer counts partially offset by a higher average transaction amount per customer. The decrease in comparable store merchandise sales was comprised of a 3.8% decline in our retail business, mostly offset by a 4.3% increase in merchandise sold through our service business. Total service revenue increased 4.6%, or $5.0 million, to $112.3 million in the second quarter of 2012 from the $107.3 million recorded in the prior year quarter. The increase in service revenue was comprised of a $3.3 million, or 3.1%, increase in comparable store service revenue and our new non-comparable stores contributed an additional $1.7 million of service revenues. The increase in comparable store service revenue was due to higher customer counts offset by a decrease in the average transaction amount per customer.
We believe that total comparable store customer counts decreased due to macroeconomic conditions, while the average transaction amount per customer increased due to selling price increases implemented to reflect the inflation in material costs. However, in our service business, we believe that comparable store service customer counts increased due to the strength in our maintenance business led by increased oil change transactions, which have a lower average transaction amount per customer. This shift in service sales mix towards oil changes reduced the average transaction amount per service customer. We believe that the current economic environment including continued high unemployment weighed heavily on consumer spending relative to discretionary and deferrable purchases and depressed our second quarter sales. Over the long-term, we believe that utilizing innovative marketing programs to communicate our value-priced, differentiated service and merchandise assortment will drive increased customer counts and that our continued focus on delivering a better customer experience than our competitors will convert those increased customer counts into sales improvements consistently over all lines of business.
Total gross profit decreased by $4.6 million, or 3.4%, to $130.6 million in the second quarter of 2012 from $135.2 million in the second quarter of 2011. Total gross profit margin decreased to 24.8% for the second quarter of 2012 from 25.9% for the second quarter of 2011. The decrease in total gross profit margin was primarily due to the shift in sales to lower margin tires and oil combined with decreased tire margin rates due to cost increases exceeding retail price increases (70 basis points) and higher occupancy and payroll and related expenses as a percent of total sales (35 basis points). The new Service & Tire Centers have a higher concentration of their sales in lower margin tires and have higher rent and payroll costs as a percent of total sales. While the new Service & Tire Centers have had a negative impact on total gross profit margin, these Service & Tire Centers positively contributed to total gross profit in both years.
Gross profit from merchandise sales decreased by $2.2 million, or 1.7%, to $125.3 million for the second quarter of 2012 from $127.5 million in the second quarter of 2011. Gross profit margin from merchandise sales decreased to 30.3% for the second quarter of 2012 from 30.7% in the second quarter of 2011. The decrease in gross profit from merchandise sales was due to the shift in sales mix to lower margin tires and oil, decreased tire margin rates due to cost increases exceeding retail price increases and higher warehousing costs partially offset by lower store occupancy costs (utilities, and depreciation) as a percent of merchandise sales.
Gross profit from service revenue decreased by $2.4 million, or 31.2%, to $5.3 million in the second quarter of 2012 from $7.7 million recorded in the second quarter of 2011. Gross profit margin from service revenue decreased to 4.7% for the second quarter of 2012 from 7.1% for the prior year quarter. In accordance with GAAP, service revenue is limited to labor sales (excludes any revenue from installed parts and materials) and costs of service revenues includes the fully loaded service center payroll and related employee benefits and service center occupancy costs. The decrease in service revenue gross profit margin was primarily due to the growth of our Service & Tire Centers, which lowered margins by 647 and 565 basis points in the first quarter of 2012 and 2011, respectively. Excluding the impact of Service & Tire Centers, gross profit from service revenue decreased to 11.2% for the second quarter of 2012 from 13.1% for the second quarter of 2011. The decrease in gross profit, exclusive of Service & Tire Centers, was mostly due to increased payroll and related benefit costs combined with higher store occupancy costs (utilities and depreciation).
Selling, general and administrative expenses as a percentage of total revenues were 21.7% for the second quarter of 2012 and 2011. Selling, general and administrative expenses increased $1.0 million, or 0.9%, to $114.3 million from $113.3 million in the prior year quarter. Higher media expense of $3.5 million, higher store payroll expense of $1.2 million and severance costs for a reduction in force at our Store Support Center of $0.7 million were partially offset by lower acquisition costs of $2.2 million, lower credit card transaction fees of $1.7 million and lower Store Support Center payroll expense of $0.7 million. Selling, general and administrative expenses further benefited from a $1.6 million reclassification of merger costs to merger termination fees, net.
In the second quarter of 2012, we terminated our proposed merger and recorded the settlement proceeds, net of merger related costs of $43.0 million in the consolidated statement of operations and comprehensive income.
Interest expense remained relatively flat at $6.4 million in the second quarter of 2012 and 2011.
Our income tax expense for the second quarter of 2012 was $20.3 million, or an effective rate of 38.1%, as compared to an expense of $2.2 million, or an effective rate of 13.5%, for the second quarter of 2011. The second quarter 2011 income tax expense includes the benefit of the release of $3.4 million (net of federal tax) of valuation allowance relating primarily to certain unitary state net operating loss carryforwards and credits. 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 $33.0 million in the second quarter of 2012 as compared to net earnings of $13.9 million in the prior year period. Our diluted earnings per share were $0.61 as compared to $0.26 in the prior year period.
Twenty-six weeks ended July 28, 2012 vs. Twenty-six weeks ended July 30, 2011
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 |
| ||
Twenty-six weeks ended |
|
July 28, 2012 |
|
July 30, 2011 |
|
Favorable |
|
|
|
|
|
|
|
|
|
Merchandise sales |
|
78.6 |
% |
79.5 |
% |
0.2 |
% |
Service revenue (1) |
|
21.4 |
|
20.5 |
|
5.8 |
|
Total revenues |
|
100.0 |
|
100.0 |
|
1.4 |
|
Costs of merchandise sales (2) |
|
70.1 |
(3) |
69.6 |
(3) |
(1.0 |
) |
Costs of service revenue (2) |
|
94.9 |
(3) |
90.8 |
(3) |
(10.6 |
) |
Total costs of revenues |
|
75.4 |
|
73.9 |
|
(3.4 |
) |
Gross profit from merchandise sales |
|
29.9 |
(3) |
30.5 |
(3) |
(1.6 |
) |
Gross profit from service revenue |
|
5.1 |
(3) |
9.2 |
(3) |
(41.3 |
) |
Total gross profit |
|
24.6 |
|
26.1 |
|
(4.5 |
) |
Selling, general and administrative expenses |
|
22.3 |
|
21.4 |
|
(5.3 |
) |
Net gain (loss) from dispositions of assets |
|
|
|
|
|
|
|
Operating profit |
|
2.3 |
|
4.7 |
|
(49.7 |
) |
Merger termination fees, net |
|
4.1 |
|
|
|
NA |
|
Non-operating income |
|
0.1 |
|
0.1 |
|
(14.3 |
) |
Interest expense |
|
1.2 |
|
1.3 |
|
|
|
Earnings from continuing operations before income taxes |
|
5.3 |
|
3.5 |
|
51.5 |
|
Income tax expense |
|
38.2 |
(4) |
27.9 |
(4) |
(107.4 |
) |
Earnings from continuing operations |
|
3.3 |
|
2.5 |
|
29.9 |
|
Discontinued operations, net of tax |
|
|
|
|
|
|
|
Net earnings |
|
3.3 |
|
2.5 |
|
29.6 |
|
(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 half of 2012 increased by $14.1 million to $1,050.3 million from $1,036.1 million in the first half of 2011, while comparable store sales for the first half of 2012 decreased by $14.3 million, or 1.4%, as compared to the first half of 2011. The decrease in comparable store sales consisted of a decrease of 2.0% in comparable store merchandise revenue partially offset by an increase of 1.0% in comparable store service sales. Comparable store merchandise sales consisted of a decrease in customer counts, partially offset by an increase in the average transaction amount per customer. Comparable store service revenue was characterized by an increase in customer counts, partially offset by a decrease in the average transaction amount per customer. 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 $28.5 million of total revenue in the first half of 2012 as compared to the prior year period.
Total gross profit decreased by $12.1 million, or 4.5%, to $258.3 million in the first half of 2012 from $270.3 million in the first half of 2011. Total gross profit margin decreased to 24.6% for the first half of 2012 from 26.1% for the first half of 2011. The decrease in total gross profit margin was primarily due to the shift in sales to lower margin tires and oil combined with decreased tire margin rates due to cost increases exceeding retail price increases (90 basis points) combined with higher occupancy and payroll and related expenses as a percent to total sales (80 basis points). The new Service & Tire Centers have a higher concentration of their sales in lower margin tires and have higher rent and payroll costs as a percent of total sales. While the new Service & Tire Centers have had a negative impact on total gross profit margin, these Service & Tire Centers positively contributed to total gross profit in both years.
Gross profit from merchandise sales decreased by $4.0 million, or 1.6%, to $246.8 million for the first half of 2012 from $250.8 million in the first half of 2011. Gross profit margin from merchandise sales decreased to 29.9% from 30.5% for the prior year period. The decrease in gross profit from merchandise sales was due to shift in sales mix to lower margin tires and oil, combined with a decline in tire margins due to cost increases exceeding retail price increases and higher warehousing costs partially offset by lower store occupancy costs (utilities and depreciation) as a percent of merchandise sales.
Gross profit from service revenue decreased by $8.0 million, or 41.3%, to $11.4 million for the first half of 2012 from $19.5 million in the first half of 2011. Gross profit margin from service revenue decreased to 5.1% for the first half of 2012 from 9.2% in the first half of 2011. In accordance with GAAP, service revenue is limited to labor sales (excludes any revenue from installed parts and materials) and costs of service revenues includes the fully loaded service center payroll and related employee benefits and service center occupancy costs. The decrease in service revenue gross profit margin was primarily due to the growth of our Service & Tire Centers, which lowered margins by 654 and 420 basis points in the first half of 2012 and 2011, respectively. Excluding the impact of Service & Tire Centers, gross profit from service revenue decreased to 11.6% for the first half of 2012 from 13.5% for the first half of 2011. The decrease in gross profit, exclusive of Service & Tire Centers, was mostly due to increased payroll and related benefit costs combined with higher store occupancy costs (utilities and depreciation).
Selling, general and administrative expenses, as a percentage of total revenues increased to 22.3% for the first half of 2012 as compared to 21.4% the prior year period. Selling, general and administrative expenses increased $11.8 million, or 5.3%, compared to the first half of 2011 due to higher media expense of $7.0 million, higher store and Store Support Center payroll and related expenses of $6.4 million, severance costs for a reduction in force at our Store Support Center of $0.7 million, and higher legal and professional services costs of $1.0 million, partially offset by lower credit card fees of $2.9 million and lower acquisition related costs of $1.0 million.
In the second quarter of 2012, we terminated our proposed merger and recorded the settlement proceeds, net of merger related costs of $43.0 million in the consolidated statement of operations and comprehensive income.
Interest expense remained relatively flat at $12.9 million in the first half of 2012 and 2011.
Our income tax expense for the first half of 2012 was $21.1 million, or an effective rate of 38.2%, as compared to an expense of $10.2 million, or an effective rate of 27.9%, for the first half of 2011. The change was primarily due to the release of valuation allowances on state net operating loss carry forwards and credits in the first half of 2011. The annual rate is dependent on a number of factors, including the jurisdiction in which operating profit is earned and the timing and nature of discrete items.
As a result of the foregoing, we reported net earnings of $34.1 million for the first half of 2012 as compared to net earnings of $26.3 million in the prior year period. Our diluted earnings per share were $0.63 as compared to $0.49 in the prior year period.
INDUSTRY COMPARISON
We operate in the U.S. automotive aftermarket, which has two general lines of business: (1) the Service business, defined as Do-It-For-Me (service labor, installed merchandise and tires) and (2) the Retail business, defined as Do-It-Yourself (retail merchandise) and commercial. Generally, specialized automotive retailers focus on either the Retail or Service area of the business. We believe that operation in both the Retail and Service areas of the business positively differentiates us from most of our competitors. Although we manage our store performance at a store level in aggregation, we believe that the following presentation, which includes the reclassification of revenue from installed products from retail sales to service center revenue, shows an accurate comparison against competitors within the two sales arenas. We compete in the Retail area of the business through our retail sales floor and commercial sales business. Our Service Center business competes in the Service area of the industry.
The following table presents the revenues and gross profit for each area of our business:
|
|
Thirteen Weeks Ended |
|
Twenty-six Weeks Ended |
| ||||||||
|
|
July 28, |
|
July 30, |
|
July 28, |
|
July 30, |
| ||||
(Dollar amounts in thousands) |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Service Center Revenue (1) |
|
$ |
274,257 |
|
$ |
260,835 |
|
$ |
545,346 |
|
$ |
508,165 |
|
Retail Sales (2) |
|
251,414 |
|
261,759 |
|
504,929 |
|
527,969 |
| ||||
Total revenues |
|
$ |
525,671 |
|
$ |
522,594 |
|
$ |
1,050,275 |
|
$ |
1,036,134 |
|
|
|
|
|
|
|
|
|
|
| ||||
Gross profit from Service Center Revenue (3) |
|
$ |
55,868 |
|
$ |
60,669 |
|
$ |
109,756 |
|
$ |
119,631 |
|
Gross profit from Retail Sales (3) |
|
74,733 |
|
74,541 |
|
148,497 |
|
150,701 |
| ||||
Total gross profit |
|
$ |
130,601 |
|
$ |
135,210 |
|
$ |
258,253 |
|
$ |
270,332 |
|
(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 $87.5 million in the first half of 2012, as compared to $51.2 million in the prior year period. The $36.2 million increase from the prior year period was due to increased net earnings (including on a pre-tax basis, $43.0 million of net, merger termination fees), net of non-cash adjustments of $22.3 million and a favorable change in operating assets and liabilities of $13.9 million. The change in operating assets and liabilities was primarily due to favorable changes in accrued expenses and other current assets of $20.4 million and other long-term liabilities of $2.3 million, offset by unfavorable changes in inventory, net of accounts payable of $8.7 million.
In both fiscal 2012 and 2011, the increased investment in inventory of $12.4 and $12.9 million, respectively, was funded entirely by the improvement in our trade vendor payment terms. Taking into consideration changes in our trade payable program liability (shown as cash flows from financing activities on the consolidated statements of cash flows), cash generated from accounts payable was $33.3 million and $17.2 million for the first half of 2012 and 2011, respectively. The ratio of accounts payable, including our trade payable program, to inventory was 57.8% at July 28, 2012, 53.6% at January 28, 2012 and 50.0% at July 30, 2011, respectively. The $12.4 million increase in inventory from January 28, 2012 was primarily due to an expanded inventory assortment in certain hard part categories, seasonal purchases and increased investment in our new stores of $1.3 million.
The change in accrued expenses and other current assets was primarily due to a reduction in sales tax and employee payroll tax accruals of $8.9 million due to the timing of payments to taxing authorities and a reduction in the amount of payments for 401(k) employer match, supplemental executive retirement plan pension and management incentive compensation of $9.4 million in 2012 as compared to 2011. The change in other long-term liabilities was primarily due to a voluntary pension contribution of $3.0 million in the prior year.
Cash used in investing activities was $26.3 million in the first half of 2012 as compared to $78.9 million in the prior year period. Capital expenditures were $26.3 million and $30.6 million in the first half of 2012 and 2011, respectively. Capital expenditures for the first half of 2012, in addition to our regularly scheduled store and distribution center improvements and information technology enhancements, included the addition of eight new Service & Tire Centers and one new Supercenter. Capital expenditures for the first half of 2011 included the addition of four new Service & Tire Centers and one new Supercenter. During the first half of 2011, we acquired 99 Service & Tire Centers through three separate transactions, including 85 stores in Florida, Georgia and Alabama, seven stores in Houston and seven stores in the Seattle/Tacoma market for $42.8 million, net of cash acquired. During the first half of 2011 we invested $4.8 million in a restricted account as collateral for retained liabilities included within existing insurance programs in lieu of previously outstanding letters of credit.
Our targeted capital expenditures for fiscal 2012 are $60.0 million. Our fiscal year 2012 capital expenditures include the addition of approximately 40 new locations, the conversion of 15 Supercenters into Superhubs, and required expenditures for our existing stores, offices and distribution centers. These expenditures are expected to be funded by cash on hand and net cash generated from operating activities. Additional capacity, if needed, exists under our existing line of credit.
In the first half of 2012, cash provided by financing activities was $31.5 million, as compared to cash used in financing activities of $0.6 million in the prior year period, primarily due to increased net borrowings on our trade payable program of $25.4 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 July 28, 2012 and January 28, 2012, we had an outstanding balance of $115.7 million and $85.2 million, respectively (classified as trade payable program liability on the consolidated balance sheet). In the first half of 2011, we paid $2.4 million in financing costs to amend and restate our revolving credit agreement to reduce its interest rate by 75 basis points and to extend its maturity to July 2016 and paid a cash dividend of $3.2 million.
We anticipate that cash on hand and cash generated by operating activities will exceed our expected cash requirements in fiscal year 2012. In addition, we expect to have excess availability under our existing revolving credit agreement during the entirety of fiscal year 2012. As of July 28, 2012, we had undrawn availability on our revolving credit facility of $175.1 million. As of July 28, 2012, we had $150.8 million of cash and cash equivalents on hand. Our current intention is to use our cash on hand together with proceeds from a new debt facility to retire our term loan and senior subordinated notes, both in advance of their respective 2013 and 2014 maturities. This contemplated refinancing will reduce our overall long-term debt by approximately $100.0 million, extend our maturities and reduce our overall interest expense, while maintaining flexibility for accelerated growth and/or returning capital to our shareholders.
During fiscal 2011, the Company began the process of terminating its defined benefit pension plan (the Plan), which covered full-time employees hired on or before February 1, 1992. The termination of the Plan, which has been frozen since December 31, 1996, is expected to be completed by the end of fiscal 2012. In order to terminate the Plan, in accordance with Internal Revenue Service and Pension Benefit Guaranty Corporation requirements, the Company is required to fully fund the Plan on a termination basis and will commit to contribute the additional assets necessary to do so with cash on hand. The amount necessary to do so is not yet known, but is currently estimated to be between $13.0 and $18.0 million. Plan participants will not be adversely affected by the Plan termination, but rather will have their benefits either converted into a lump sum cash payment or an annuity contract placed with an insurance carrier.
Our working capital was $236.2 million and $166.6 million at July 28, 2012 and January 28, 2012, respectively. Our total debt, net of cash on hand, as a percentage of our total capitalization, was 17.2% and 29.6% at July 28, 2012 and January 28, 2012, respectively.
Contractual Obligations
For a discussion of our other contractual obligations, see a discussion of future commitments under Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, in our Form 10-K for the fiscal year ended January 28, 2012. There have been no other significant developments with respect to our contractual obligations since January 28, 2012.
NEW ACCOUNTING STANDARDS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04), which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. The adoption of ASU 2011-04 did not have a material impact on the consolidated financial statements.
In June of 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 was issued to improve the comparability of financial reporting between U.S. GAAP and IFRS, and eliminates previous U.S. GAAP guidance that allowed an entity to present components of other comprehensive income (OCI) as part of its statement of changes in shareholders equity. With the issuance of ASU 2011-05, companies are now required to report all components of OCI either in a single continuous statement of total comprehensive income, which includes components of both OCI and net income, or in a separate statement appearing consecutively with the statement of income. ASU 2011-05 does not affect current guidance for the accounting of the components of OCI, or which items are included within total comprehensive income, and is effective for periods beginning after December 15, 2011, with early adoption permitted. The adoption of ASU 2011-05 affected presentation only and therefore did not have an impact on the Companys consolidated financial condition, results of operations or cash flows.
In September 2011, the FASB issued ASU 2011-08, Intangibles Goodwill and Other (Topic 350) Testing Goodwill for Impairment (ASU 2011-08). The new guidance provides entities with the option to perform a qualitative assessment of whether it
is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the quantitative two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the quantitative two-step goodwill impairment test. Entities also have the option to bypass the assessment of qualitative factors for any reporting unit in any period and proceed directly to performing the first step of the quantitative two-step goodwill impairment test, as was required prior to the issuance of this new guidance. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-08 will not have a material impact on the consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements 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 28, 2012.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. The words guidance, expect, anticipate, estimates, forecasts and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include managements expectations regarding implementation of its long-term strategic plan, future financial performance, automotive aftermarket trends, levels of competition, business development activities, future capital expenditures, financing sources and availability and the effects of regulation and litigation. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. Our actual results may differ materially from the results discussed in the forward-looking statements due to factors beyond our control, including the strength of the national and regional economies, retail and commercial consumers ability to spend, the health of the various sectors of the automotive aftermarket, the weather in geographical regions with a high concentration of our stores, competitive pricing, the location and number of competitors stores, product and labor costs and the additional factors described in our filings with the Securities and Exchange Commission (SEC). We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposure with regard to financial instruments is due to changes in interest rates. Pursuant to the terms of our Revolving Credit Agreement, changes in LIBOR or the Prime Rate could affect the rates at which we could borrow funds thereunder. At July 28, 2012, we had $0.2 million of borrowings under this facility. Additionally, we have a $147.0 million Senior Secured Term Loan that bears interest at three month LIBOR plus 2.0%.
We have an interest rate swap for a notional amount of $145.0 million, which is designated as a cash flow hedge on our Senior Secured Term Loan. We record the effective portion of the change in fair value through accumulated other comprehensive loss.
The fair value of the derivative was $9.5 million and $12.5 million payable at July 28, 2012 and January 28, 2012, respectively. Of the $3.0 million decrease in the liabilities during the twenty-six weeks ended July 28, 2012, $1.9 million net of tax was recorded to accumulated other comprehensive loss on the consolidated balance sheet.
ITEM 4 CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the Exchange Act)) are designed to provide reasonable assurance that the information required to be disclosed is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. The term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the SECs 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 issuers management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Companys management, with the participation of the Companys chief executive officer and chief financial officer, evaluated the effectiveness of the Companys 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 SECs 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 Companys 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 Companys internal control over financial reporting.
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 Companys financial position. However, there exists a reasonable possibility of loss in excess of the amounts accrued, the amount of which cannot currently be estimated. While the Company does not believe that the amount of such excess loss could be material to the Companys financial position, any such loss could have a material adverse effect on the Companys results of operations in the period(s) during which the underlying matters are resolved.
There have been no changes to the risks described in the Companys previously filed Annual Report on Form 10-K for the fiscal year ended January 28, 2012, except that the Risk Factor entitled Failure to complete the proposed Merger could adversely affect our business. is no longer applicable.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
31.1 |
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Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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|
|
31.2 |
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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|
|
32.1 |
|
Principal Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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|
|
32.2 |
|
Principal 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 (1) |
|
XBRL Instance Document |
|
|
|
101.SCH(1) |
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XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL(1) |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.LAB(1) |
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XBRL Taxonomy Extension Labels Linkbase Document |
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|
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101.PRE(1) |
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XBRL Taxonomy Extension Presentation Linkbase Document |
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|
|
101.DEF(1) |
|
XBRL Taxonomy Extension Definition Linkbase Document |
(1) In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except to the extent expressly set forth by specific reference in such filing.
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.
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THE PEP BOYS - MANNY, MOE & JACK | |
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(Registrant) | |
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Date: |
September 6, 2012 |
by: |
/s/ Sanjay Sood |
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|
| |
|
|
Sanjay Sood | |
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|
Vice President Controller and Chief Accounting Officer |
31.1 |
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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|
|
31.2 |
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
|
Principal Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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|
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32.2 |
|
Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101.INS (1) |
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XBRL Instance Document |
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|
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101.SCH(1) |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL(1) |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB(1) |
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XBRL Taxonomy Extension Labels Linkbase Document |
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101.PRE(1) |
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XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF(1) |
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XBRL Taxonomy Extension Definition Linkbase Document |
(1) In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except to the extent expressly set forth by specific reference in such filing.
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael R. Odell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Pep Boys - Manny, Moe & Jack;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periods covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: September 6, 2012 |
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by: |
/s/ Michael R. Odell |
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Michael R. Odell |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Sanjay Sood, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Pep Boys - Manny, Moe & Jack;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periods covered by this report based on such evaluation; and
(d) Disclosed in this quarterly report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: September 6, 2012 |
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by |
/s/ Sanjay Sood |
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Sanjay Sood |
| |
Vice President Controller and Chief Accounting Officer |
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(Principal Financial Officer) |
|
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report on Form 10-Q of The Pep Boys - Manny, Moe & Jack (the Company) for the quarterly period ending July 28, 2012, as filed with the Securities and Exchange Commission on the date hereof (the Report),
I, Michael R. Odell, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(i) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Date: September 6, 2012 |
by: |
/s/ Michael R. Odell |
|
Michael R. Odell | |
|
President and Chief Executive Officer | |
|
(Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report on Form 10-Q of The Pep Boys - Manny, Moe & Jack (the Company) for the quarterly period ending July 28, 2012, as filed with the Securities and Exchange Commission on the date hereof (the Report),
I, Sanjay Sood, Vice President Controller and Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(i) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Date: September 6, 2012 |
by: |
/s/ Sanjay Sood |
|
Sanjay Sood | |
|
Vice President Controller and Chief Accounting Officer | |
|
(Principal Financial Officer) |
MERGER UPDATE (Details) (USD $)
|
3 Months Ended | 6 Months Ended | |
---|---|---|---|
Jul. 28, 2012
|
Jul. 28, 2012
|
May 29, 2012
Parent
|
|
MERGER UPDATE | |||
Fees due related to merger settlement agreement | $ 50,000,000 | ||
Merger termination fees, net | $ 42,955,000 | $ 42,955,000 |
DEBT AND FINANCING ARRANGEMENTS (Details) (USD $)
|
6 Months Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Jul. 28, 2012
item
|
Jan. 28, 2012
|
Jul. 28, 2012
7.50% Senior Subordinated Notes, due December 2014
|
Jan. 28, 2012
7.50% Senior Subordinated Notes, due December 2014
|
Jul. 28, 2012
Senior Secured Term Loan, due October 2013
item
|
Jan. 28, 2012
Senior Secured Term Loan, due October 2013
|
Jul. 28, 2012
Revolving Credit Agreement, through January 2016
|
Jul. 28, 2012
Revolving Credit Agreement, through January 2016
Minimum
|
Jul. 28, 2012
Revolving Credit Agreement, through January 2016
Maximum
|
Jul. 28, 2012
Letters of credit
|
|
Debt and financing arrangements | ||||||||||
Long-term debt | $ 294,758,000 | $ 295,122,000 | $ 147,565,000 | $ 147,565,000 | $ 147,018,000 | $ 147,557,000 | $ 175,000 | |||
Current maturities | (1,254,000) | (1,079,000) | ||||||||
Long-term debt less current maturities | 293,504,000 | 294,043,000 | ||||||||
Interest rate on debt instrument (as a percent) | 7.50% | 7.50% | ||||||||
Number of stores collateralized | 742 | 126 | ||||||||
LIBOR | LIBOR | |||||||||
Margin added to derive interest rate (as a percent) | 2.00% | 2.50% | ||||||||
Amount outstanding under agreement | 200,000 | |||||||||
Amount of availability utilized to support outstanding leters of credit | 29,600,000 | |||||||||
Outstanding letters of credit | 29,600,000 | |||||||||
Available borrowing capacity remaining | 175,100,000 | |||||||||
Minimum borrowing availability required to prevent the triggering of an EBITDA requirement covenant | 50,000,000 | |||||||||
Long-term debt estimated fair value | $ 296,600,000 | $ 293,600,000 |
BENEFIT PLANS (Tables)
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jul. 28, 2012
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BENEFIT PLANS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of expense for pension plan |
|
FAIR VALUE MEASUREMENTS AND DERIVATIVES (Details) (USD $)
In Thousands, unless otherwise specified |
6 Months Ended | ||
---|---|---|---|
Jul. 30, 2011
|
Jul. 28, 2012
|
Jan. 28, 2012
|
|
Other liabilities | |||
Derivative liability | $ 9,500 | $ 12,500 | |
Additional investment in restricted accounts as collateral | 4,763 | ||
Recurring basis | Fair Value
|
|||
Other liabilities | |||
Derivative liability | 9,494 | 12,540 | |
Recurring basis | Fair Value | Cash and cash equivalents
|
|||
Assets: | |||
Assets | 150,833 | 58,244 | |
Recurring basis | Fair Value | Collateral investments
|
|||
Assets: | |||
Assets | 17,276 | 17,276 | |
Recurring basis | Fair Value | Rabbi trust assets
|
|||
Assets: | |||
Assets | 3,596 | 3,576 | |
Recurring basis | Fair Value Measurements Using Inputs Considered as Level 1 | Cash and cash equivalents
|
|||
Assets: | |||
Assets | 150,833 | 58,244 | |
Recurring basis | Fair Value Measurements Using Inputs Considered as Level 1 | Collateral investments
|
|||
Assets: | |||
Assets | 17,276 | 17,276 | |
Recurring basis | Fair Value Measurements Using Inputs Considered as Level 2
|
|||
Other liabilities | |||
Derivative liability | 9,494 | 12,540 | |
Recurring basis | Fair Value Measurements Using Inputs Considered as Level 2 | Rabbi trust assets
|
|||
Assets: | |||
Assets | $ 3,596 | $ 3,576 |
MERCHANDISE INVENTORIES
|
6 Months Ended | |
---|---|---|
Jul. 28, 2012
|
||
MERCHANDISE INVENTORIES | ||
MERCHANDISE INVENTORIES |
|
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