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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended October 30, 2004
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from to
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Commission File No. 1-3381
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The Pep Boys - Manny, Moe & Jack
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0962915
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(State or other jurisdiction of (I.R.S. Employer ID number)
incorporation or organization)
3111 W. Allegheny Ave. Philadelphia, PA 19132
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(Address of principal executive offices) (Zip code)
215-430-9000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports); and (2) has been subject
to such filing requirements for the past 90 days. Yes ( x ) No ( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes ( x ) No ( )
As of November 27, 2004 there were 54,987,786 shares of the registrant's Common
Stock outstanding.
1
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Index Page
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PART I - FINANCIAL INFORMATION
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Item 1. Condensed Consolidated
Financial Statements (Unaudited)
Consolidated Balance Sheets -
October 30, 2004 and January 31, 2004 3
Consolidated Statements of Operations -
Thirteen and Thirty-nine weeks ended
October 30, 2004 and November 1, 2003 4
Consolidated Statements of
Cash Flows - Thirty-nine weeks ended
October 30, 2004 and November 1, 2003 5
Notes to Condensed Consolidated
Financial Statements 6-20
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 21-30
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 31
Item 4. Controls and Procedures 31
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings 32
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of
Security Holders 33
Item 5. Other Information 34
Item 6. Exhibits 34
SIGNATURES 35
INDEX TO EXHIBITS 36
2
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Consolidated Financial Statements (Unaudited)
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands, except per share amounts)
UNAUDITED
Oct. 30, 2004 Jan. 31, 2004*
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ASSETS
Current Assets:
Cash and cash equivalents $ 35,185 $ 60,984
Accounts receivable, net 40,827 30,562
Merchandise inventories 611,645 553,562
Prepaid expenses 25,049 39,480
Deferred income taxes - 20,826
Other 116,342 81,096
Assets held for disposal 2,185 16,929
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Total Current Assets 831,233 803,439
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Property and Equipment-at cost:
Land 263,201 263,907
Buildings and improvements 909,752 899,114
Furniture, fixtures and equipment 606,183 586,607
Construction in progress 31,101 12,800
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1,810,237 1,762,428
Less accumulated depreciation and amortization 823,017 776,242
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Property and Equipment - Net 987,220 986,186
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Other 51,769 51,398
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Total Assets $1,870,222 $1,841,023
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 307,921 $ 342,584
Accrued expenses 246,707 267,565
Current deferred taxes 20,164 -
Current maturities of long-term debt and obligations
under capital leases 147,171 117,063
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Total Current Liabilities 721,963 727,212
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Long-term debt and obligations under capital leases,
less current maturities 180,253 258,016
Convertible long-term debt 150,000 150,000
Other long-term liabilities 28,321 28,802
Deferred income taxes 68,488 57,492
Deferred gain on sale leaseback 53 3,907
Commitments and Contingencies
Stockholders' Equity:
Common Stock, par value $1 per share:
Authorized 500,000,000 shares; Issued 68,557,041
and 63,910,577 shares 68,557 63,911
Additional paid-in capital 284,660 177,317
Retained earnings 600,495 577,793
Common stock subscriptions receivable (82) -
Accumulated other comprehensive loss (284) (15)
- ------------------------------------------------------------------------------------------------------
953,346 819,006
Less cost of shares in treasury - 11,319,985 shares
and 8,928,159 shares 172,938 144,148
Less cost of shares in benefits trust - 2,195,270 shares 59,264 59,264
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Total Stockholders' Equity 721,144 615,594
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Total Liabilities and Stockholders' Equity $1,870,222 $1,841,023
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See notes to condensed consolidated financial statements.
* Taken from the audited financial statements at January 31, 2004.
3
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollar amounts in thousands, except per share amounts)
UNAUDITED
Thirteen Weeks Ended Thirty-nine Weeks Ended
--------------------------- -----------------------------
Oct. 30, 2004 Nov. 1, 2003 Oct. 30, 2004 Nov. 1, 2003
------------- ------------ -------------- ------------
Amount Amount Amount Amount
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Merchandise Sales $ 456,814 $ 435,055 $ 1,406,411 $ 1,297,472
Service Revenue 102,384 102,636 312,346 307,159
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Total Revenues 559,198 537,691 1,718,757 1,604,631
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Costs of Merchandise Sales 328,088 301,871 998,036 937,114
Costs of Service Revenue 79,109 76,333 237,476 231,986
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Total Costs of Revenues 407,197 378,204 1,235,512 1,169,100
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Gross Profit from Merchandise Sales 128,726 133,184 408,375 360,358
Gross Profit from Service Revenue 23,275 26,303 74,870 75,173
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Total Gross Profit 152,001 159,487 483,245 435,531
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Selling, General and Administrative
Expenses 132,524 130,034 398,780 420,860
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Operating Profit 19,477 29,453 84,465 14,671
Non-operating Income 1,089 786 2,151 2,687
Interest Expense 8,056 8,959 25,154 29,263
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Earnings (Loss) From Continuing
Operations Before Income Taxes and
Cumulative Effect of Change in
Accounting Principle 12,510 21,280 61,462 (11,905)
Income Tax Expense (Benefit) 4,629 7,874 22,741 (4,405)
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Net Earnings (Loss) from Continuing
Operations Before Cumulative Effect of
Change in Accounting Principle 7,881 13,406 38,721 (7,500)
Discontinued Operations, Net of Tax (236) 1,294 (1,619) (20,914)
Cumulative Effect of Change in
Accounting Principle, Net of Tax - - - (2,484)
- ------------------------------------------------------------------------------------------------------
Net Earnings (Loss) 7,645 14,700 37,102 (30,898)
Retained Earnings, beginning of period 597,236 571,403 577,793 630,847
Cash Dividends (3,925) (3,550) (11,738) (10,528)
Effect of Stock Options (461) (2,035) (2,662) (8,583)
Dividend Reinvestment Plan - - - (320)
- ------------------------------------------------------------------------------------------------------
Retained Earnings, end of period $ 600,495 $ 580,518 $ 600,495 $ 580,518
- ------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share:
Net Earnings (Loss) From Continuing
Operations Before Cumulative Effect
of Change in Accounting Principle $ 0.14 $ 0.26 $ 0.68 $ (0.14)
Discontinued Operations, Net of Tax (0.01) 0.02 (0.03) (0.40)
Cumulative Effect of Change in
Accounting Principle, Net of Tax - - - (0.05)
- ------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share $ 0.13 $ 0.28 $ 0.65 $ (0.59)
- ------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share:
Net Earnings (Loss) From Continuing
Operations Before Cumulative Effect
of Change in Accounting Principle $ 0.14 $ 0.24 $ 0.64 $ (0.14)
Discontinued Operations, Net of Tax (0.01) 0.02 (0.02) (0.40)
Cumulative Effect of Change in
Accounting Principle, Net of Tax - - - (0.05)
- ------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share $ 0.13 $ 0.26 $ 0.62 $ (0.59)
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Cash Dividends Per Share $ .0675 $ .0675 $ 0.2025 $ 0.2025
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See notes to condensed consolidated financial statements.
4
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
UNAUDITED
Thirty-nine Weeks Ended Oct. 30, 2004 Nov. 1, 2003
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net earnings (loss) $ 37,102 $ (30,898)
Net loss from discontinued operations (1,619) (20,914)
- ----------------------------------------------------------------------------------------------------------------
Net earnings (loss) from continuing operations 38,721 (9,984)
Adjustments to Reconcile Net Earnings (Loss) From Continuing
Operations to Net Cash Provided by Continuing Operations:
Cumulative effect of change
in accounting principle, net of tax - 2,484
Depreciation and amortization 50,366 52,558
Accretion of asset disposal obligation 105 140
Stock compensation expense 996 -
Deferred income taxes 52,572 (36,144)
Deferred gain on sale lease back (125) (32)
Loss on asset impairment - 2,121
Loss from sales of assets 384 633
Changes in Operating Assets and Liabilities:
(Increase) decrease in accounts receivable,
prepaid expenses and other (29,143) 17,485
Increase in merchandise inventories (58,083) (43,994)
(Decrease) increase in accounts payable (27,447) 98,385
(Decrease) increase in accrued expenses (21,347) 28,965
(Decrease) increase in other long-term liabilities (481) 3,746
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Net cash provided by continuing operations 6,518 116,363
Net cash used in discontinued operations (2,242) (1)
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Net Cash Provided by Operating Activities 4,276 116,362
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Cash Flows from Investing Activities:
Capital expenditures (52,631) (32,679)
Proceeds from sales of assets 1,472 3,362
Proceeds from sales of assets held for disposal 11,859 -
- ----------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (39,300) (29,317)
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net borrowings under line of credit agreements 35,669 140
Repayments of short-term borrowings (7,216) -
Reduction of long-term debt (84,431) (92,930)
Other (306) (578)
Dividends paid (11,738) (10,528)
Repurchase of common stock (38,900) -
Proceeds from issuance of common stock 108,854 -
Proceeds from exercise of stock options 6,384 7,011
Proceeds from dividend reinvestment plan 909 907
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Net Cash Provided by (Used in) Financing Activities 9,225 (95,978)
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Net Decrease in Cash (25,799) (8,933)
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Cash and Cash Equivalents at Beginning of Period 60,984 42,770
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Cash and Cash Equivalents at End of Period $ 35,185 $ 33,837
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Non-cash financing activities:
Equipment Capital Leases $ 1,413 $ -
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See notes to condensed consolidated financial statements.
5
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Condensed Consolidated Financial Statements
The consolidated balance sheets as of October 30, 2004, the consolidated
statements of operations for the thirteen and thirty-nine week periods ended
October 30, 2004 and November 1, 2003 and the consolidated statements of cash
flows for the thirty-nine week periods ended October 30, 2004 and November 1,
2003 have been prepared by the Company without audit. In the opinion of
management, all adjustments necessary to present fairly the financial position,
results of operations and cash flows at October 30, 2004 and for all periods
presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended January 31, 2004. The results of
operations for the thirteen and thirty-nine week periods ended October 30, 2004
are not necessarily indicative of the operating results for the full year.
NOTE 2. Accounting for Stock-Based Compensation
The Company accounts for its stock-based employee compensation plans in
accordance with the recognition and measurement principles of Accounting
Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. For all stock options, no stock-based
employee compensation cost is reflected in net earnings, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. In the first quarter of 2004, the
Company issued restricted stock unit awards to certain employees. The recorded
expense for these awards under the intrinsic method was $149,000 ($94,000 net
of tax) and $996,000 ($628,000 net of tax) for the thirteen and thirty-nine
weeks ended October 30, 2004, respectively. The following table illustrates the
effect on net earnings and earnings per share if the Company had applied the
fair value recognition provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation:
(dollar amounts in thousands,
except per share amounts)
Thirteen weeks ended Thirty-nine weeks ended
----------------------------------- ------------------------------------
October 30, 2004 November 1, 2003 October 30, 2004 November 1, 2003
- ------------------------------------------------------------------------------------------------------------------------
Net earnings (loss):
As reported $ 7,645 $ 14,700 $ 37,102 $ (30,898)
Add: Stock compensation expense,
net of tax 94 - 628 -
Less: Total stock-based compensation
expense determined under fair
value-based method, net of tax (734) (675) (2,805) (2,122)
- ------------------------------------------------------------------------------------------------------------------------
Pro forma $ 7,005 $ 14,025 $ 34,925 $ (33,020)
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Net earnings (loss) per share:
Basic:
As reported $ .13 $ .28 $ .65 $ (.59)
Pro forma $ .12 $ .27 $ .61 $ (.64)
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Diluted:
As reported $ .13 $ .26 $ .62 $ (.59)
Pro forma $ .12 $ .25 $ .58 $ (.64)
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6
The fair value of each option granted during the periods ending October 30,
2004 and November 1, 2003 is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
October 30, 2004 November 1, 2003
- ------------------------------------------------------------------
Dividend yield 1.67% 1.57%
Expected volatility 41% 42%
Risk-free interest rate range:
high 4.7% 4.6%
low 2.0% 2.2%
Ranges of expected lives in years 3-8 4-8
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NOTE 3. New Accounting Standards
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, "Accounting for Stock-based Compensation - Transition and Disclosure,
an Amendment of FASB Statement No. 123," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation. We have adopted the disclosure requirements of
this statement. In March 2004, the FASB issued a proposed SFAS - "Share-based
Payment: an Amendment of FASB Statements No. 123 and 95." The proposed standard
would require companies to expense share-based payments to employees, including
stock options, based on the fair value of the award at the grant date. The
proposed statement would eliminate the intrinsic value method of accounting for
stock-based compensation permitted by APB No. 25, "Accounting for Stock Issued
to Employees," which we currently follow. We will continue to monitor the
actions of the FASB and assess the impact, if any, on our consolidated
financial statements.
NOTE 4. Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market. Cost is
determined by using the last-in, first-out ("LIFO") method. An actual valuation
of inventory under the LIFO method can be made only at the end of each fiscal
year based on inventory and costs at that time. Accordingly, interim LIFO
calculations must be based on management's estimates of expected fiscal
year-end inventory levels and costs. Replacement cost, which approximates
first-in, first-out ("FIFO") cost was $593,175,000 and $531,830,000 at
October 30, 2004 and January 31, 2004, respectively.
NOTE 5. Accrued Expenses
The Company's accrued expenses for the periods ending October 30, 2004 and
January 31, 2004 were as follows:
(dollar amounts in thousands) Oct. 30, 2004 Jan. 31, 2004
- ---------------------------------------------------------------------
Medical and casualty risk .
participation reserve $ 125,386 $ 136,599
Accrued compensation and
related taxes 45,476 51,043
Legal Reserves 1,640 26,576
Other 74,205 53,347
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Total $ 246,707 $ 267,565
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7
NOTE 6. Other Current Assets
The Company's other current assets for the periods ending October 30, 2004 and
January 31, 2004 were as follows:
(dollar amounts in thousands) Oct. 30, 2004 Jan. 31, 2004
- ---------------------------------------------------------------------
Reinsurance premiums receivable $ 65,268 $ 67,326
Income taxes receivable 50,689 13,517
Other 385 253
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Total $ 116,342 $ 81,096
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The increase in income taxes receivable is a result of the cumulative effect of
the election of alternative tax accounting methods.
NOTE 7. Restructuring
Building upon the Profit Enhancement Plan launched in October 2000, the
Company conducted a comprehensive review of its operations including
individual store performance, the entire management infrastructure and
its merchandise and service offerings. On July 31, 2003, the Company
announced several initiatives aimed at realigning its business and continuing
to improve upon the Company's profitability. These actions, including the
disposal and sublease of the closed properties, were substantially completed by
October 30, 2004 with costs of approximately $71,300,000. The Company is
accounting for these initiatives in accordance with the provisions of SFAS No.
146 "Accounting for Costs Associated with Exit or Disposal Activities" and SFAS
No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets".
Reserve Summary
The following chart details the reserve balances through October 30, 2004. The
reserve includes remaining rent on leases net of sublease income, other
contractual obligations associated with leased properties and employee
severance.
(dollar amounts Lease Contractual
in thousands) Severance Expenses Obligations Total
- ---------------------------------------------------------------------------------
Reserve balance
at Jan. 31, 2004 $ 373 $ 2,368 $ 463 $ 3,204
Provision for present
value of liabilities - 121 198 319
Changes in assumptions
about future sublease
income, lease termination
and severance - 272 - 272
Cash payments (215) (676) (401) (1,292)
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Reserve balance at
October 30, 2004 $ 158 $ 2,085 $ 260 $ 2,503
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8
Note 8. Discontinued Operations
In accordance with SFAS No. 144, the Company's discontinued operations reflect
the operating results for the 33 stores closed on July 31, 2003 as part of the
Company's corporate restructuring.
Additionally, the Company has classified certain assets as assets held for
disposal on its consolidated balance sheets. As of October 30, 2004 and
January 31, 2004, these assets were as follows:
(Dollar amounts in thousands) Oct. 30, 2004 Jan. 31, 2004
- -------------------------------------------------------------------------------
Land $ 1,302 $ 8,954
Building and improvements 883 7,975
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Assets held for disposal $ 2,185 $ 16,929
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Five of the Company's closed stores remained unsold as of October 30, 2004.
Three of the properties are without executed agreements of sale and were
reclassified in the second quarter of fiscal 2004 to assets held for use at
market value, which is lower than cost adjusted for depreciation. The other
two properties are the subject of executed agreements of sale as of
October 30, 2004 and therefore will remain in assets held for disposal until
the completion of those sales.
During the third quarter of 2004, the Company sold assets held for disposal for
proceeds of $1,328,000 resulting in a loss of $160,000 which was recorded in
discontinued operations on the consolidated statement of operations.
During the second quarter of 2004, the Company sold assets held for disposal
for proceeds of $3,652,000 resulting in a loss of $157,000 which was recorded
in discontinued operations on the consolidated statement of operations.
During the first quarter of 2004, the Company sold assets held for disposal for
proceeds of $6,879,000 resulting in a gain of $172,000 which was recorded in
discontinued operations on the consolidated statement of operations.
9
NOTE 9. Pension and Savings Plan
Pension expense includes the following:
Thirteen weeks ended Thirty-nine weeks ended
(dollar amounts in thousands) Pension Benefits Pension Benefits
- ----------------------------------------------------------------------- -----------------------
10/30/2004 11/1/2003 10/30/2004 11/1/2003
- ----------------------------------------------------------------------- -----------------------
Service cost $ 110 $ 153 $ 329 $ 459
Interest Cost 725 764 2,176 2,292
Expected return on plan assets (575) (516) (1,724) (1,548)
Amortization of transition obligation 41 68 123 205
Amortization of prior service cost 91 155 273 463
Amortization of net loss 433 431 1,299 1,292
FAS 88 settlement - - - 5,231
-------- -------- --------- ---------
Net periodic benefit cost $ 825 $ 1,055 $ 2,476 $ 8,394
======== ======== ========= =========
The Company previously disclosed in its financial statements for the fiscal
year ended January 31, 2004 that it expected to contribute $1,356,000 to its
pension plan in fiscal 2004. As of October 30, 2004, $979,000 of contributions
have been made. The Company anticipates no change in expected total
contributions for fiscal 2004.
The Company has 401(k) savings plans which cover all full-time employees who
are at least 21 years of age with one or more years of service. The Company
contributes the lesser of 50% of the first 6% of a participant's
contributions or 3% of the participant's compensation. The Company's savings
plans' contribution expense was $741,000 and $740,000 for the thirteen weeks
ending October 30, 2004 and November 1, 2003, respectively, and $2,548,000 and
$3,015,000 for the thirty-nine weeks ending October 30, 2004 and November 1,
2003, respectively.
On January 31, 2004, the Company amended and restated its Executive
Supplemental Retirement Plan (SERP). This amendment converted the
defined benefit plan to a defined contribution plan for certain unvested
participants and all future participants. All vested participants will continue
to accrue benefits according to the previous defined benefit formula. The
Company's contribution expense for the defined contribution portion of the plan
was $215,000 and $644,000 for the thirteen and thirty-nine weeks ending
October 30, 2004, respectively.
10
NOTE 10. Net Earnings Per Share
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(in thousands, except per share amounts)
UNAUDITED
Thirteen weeks ended Thirty-nine weeks ended
----------------------------------- ----------------------------------
Oct. 30, 2004 Nov. 1, 2003 Oct. 30, 2004 Nov. 1, 2003
-------------- --------------- -------------- ------------
(a) Net earnings (loss) from continuing operations
before cumulative effect of change in
accounting principle $ 7,881 $ 13,406 $ 38,721 $ (7,500)
Adjustment for interest on convertible senior
notes, net of income tax effect - 1,001 3,004 -
- ---------------------------------------------------------------------------------------------------------------------------------
(b) Adjusted net earnings (loss) from continuing
operations before cumulative effect
of change in accounting principle $ 7,881 $ 14,407 $ 41,725 $ (7,500)
- ---------------------------------------------------------------------------------------------------------------------------------
(c) Average number of common shares outstanding
during period 57,574 52,537 56,798 52,002
Common shares assumed issued upon conversion of
convertible senior notes - 6,697 6,697 -
Common shares assumed issued upon exercise
of dilutive stock options, net of assumed
repurchase, at the average market price 752 1,176 1,482 -
- ---------------------------------------------------------------------------------------------------------------------------------
(d) Average number of common shares assumed
outstanding during period 58,326 60,410 64,977 52,002
- ---------------------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share:
Net Earnings (Loss) From Continuing Operations
Before Cumulative Effect of Change in
Accounting Principle (a/c) $ 0.14 $ 0.26 $ 0.68 $ (0.14)
Discontinued Operations, Net of Tax (0.01) 0.02 (0.03) (0.40)
Cumulative Effect of Change in
Accounting Principle, Net of Tax - - - (0.05)
- ---------------------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share $ 0.13 $ 0.28 $ 0.65 $ (0.59)
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss)Per share:
Net Earnings (Loss) From Continuing Operations
Before Cumulative Effect of Change in
Accounting Principle (b/d) $ 0.14 $ 0.24 $ 0.64 $ (0.14)
Discontinued Operations, Net of Tax (0.01) 0.02 (0.02) (0.40)
Cumulative Effect of Change in
Accounting Principle, Net of Tax - - - (0.05)
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share $ 0.13 $ 0.26 $ 0.62 $ (0.59)
- --------------------------------------------------------------------------------------------------------------------------------
Adjustments for the convertible senior notes were anti-dilutive during the
thirteen week period ended October 30, 2004 and the thirty-nine week period
ended November 1, 2003 and therefore excluded from the computation of diluted
EPS. Options to purchase 2,066,000 and 4,599,000 shares of common stock were
outstanding at October 30, 2004 and November 1, 2003, respectively, but were
not included in the computation of diluted EPS because the options' exercise
prices were greater than the average market price of the common shares on such
dates.
11
NOTE 11. Warranty Reserve
The Company provides warranties for both its merchandise sales and service
labor. Warranties for merchandise are generally covered by its vendors, with
the Company covering any costs above the vendor's stipulated allowance. Service
labor warranties are covered in full by the Company on a limited lifetime
basis. The Company establishes its warranty reserves based on historical data
of warranty transactions.
Components of the reserve for warranty costs for the thirty-nine week period
ending October 30, 2004 are as follows:
(dollar amounts in thousands)
- ------------------------------------------------------------------------
Beginning balance at January 31, 2004 $ 614
Additions related to current period sales 9,428
Warranty costs incurred in current period (7,837)
Adjustments to accruals related to
prior year sales -
- ------------------------------------------------------------------------
Ending Balance at October 30, 2004 $ 2,205
- ------------------------------------------------------------------------
NOTE 12. Debt and Financing Arrangements
In the third quarter of fiscal 2004, the company entered into a vendor
financing program. Under this program, the Company's factor makes
accelerated and discounted payments to the Company's vendors and the Company,
in turn, makes its regularly-scheduled full vendor payments to the factor.
As of October 30, 2004, there was no outstanding balance under this program.
In the second quarter of 2004, the Company reclassified $100,000,000
aggregate principal amount of 7.00% notes with a stated maturity date of
June 1, 2005 to current liabilities on the consolidated balance sheet.
In the second quarter of fiscal 2004, the Company prepaid $5,000,000 aggregate
principal amount of 6.71% Medium-Term Notes with a stated maturity date of
November 3, 2004.
In October 2001, the Company entered into a contractual commitment to purchase
media advertising services with equal annual purchase requirements totaling
$39,773,000 over four years. The minimum required purchases for 2004 and 2005
(the remaining two years of this commitment) are $8,112,000 and $7,457,000,
respectively. During the second quarter of fiscal 2004, it was determined that
the Company would be unable to meet this obligation for the 2004 contract year
which ends on November 30, 2004. As a result, the Company recorded a $1,579,000
charge to selling, general and administrative expenses in the quarter ending
July 31, 2004 related to the anticipated shortfall in this purchase commitment.
In May 2001, the Company sold certain operating assets for $14,000,000. The
assets were leased back from the purchaser in a lease structured as a one-year
term with three one-year renewal options. The resulting lease was accounted for
as an operating lease and the gain of $3,817,000 from the sale of certain
operating assets was deferred at the time of sale. In May 2004, the Company
repurchased these assets for $5,468,000. The remaining deferred gain of
$3,729,000 was netted against the purchase price of the repurchased assets
resulting in a net book value of $1,739,000 recorded on the consolidated
balance sheet as of July 31, 2004 for the repurchased assets.
In the first quarter of fiscal 2004, the Company prepaid $20,919,000 aggregate
principal amount of its Senior Secured Credit Facility with a stated maturity
date of July 1, 2006.
In the first quarter of fiscal 2004, the Company retired $32,000,000 aggregate
principal amount of 6.75% Medium-Term Notes with a stated maturity date of
March 10, 2004 and $25,000,000 aggregate principal amount of 6.65% Medium-Term
Notes with a stated maturity date of March 3, 2004.
In the first quarter of fiscal 2004, the Company entered into arrangements with
certain of its vendors and banks to extend payment terms on certain merchandise
purchases. Under this program, the bank makes payments to the vendor based
upon a negotiated discount rate between the parties and the Company makes its
payment of the full payable to the bank at the extended payment term. As of
July 31, 2004, all obligations under these arrangements were fully satisfied
and the agreement was terminated.
12
NOTE 13. Supplemental Guarantor Information - Convertible Senior Notes
On May 21, 2002, the Company issued $150,000,000 aggregate principal amount of
4.25% Convertible Senior Notes. The notes are jointly and severally and fully
and unconditionally guaranteed by the Company's wholly-owned direct and
indirect operating subsidiaries ("subsidiary guarantors"), The Pep Boys Manny
Moe & Jack of California, Pep Boys - Manny, Moe & Jack of Delaware, Inc. and
Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc.
The following are consolidating balance sheets of the Company as of
October 30, 2004 and January 31, 2004 and the related consolidating statements
of operations for the thirteen and thirty-nine weeks ended October 30, 2004 and
November 1, 2003 and condensed consolidating statements of cash flows for the
thirty-nine weeks ended October 30, 2004 and November 1, 2003:
CONSOLIDATING BALANCE SHEET
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
October 30, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 17,714 $ 8,193 $ 9,278 $ - $ 35,185
Accounts receivable, net 21,006 19,821 - - 40,827
Merchandise inventories 208,504 403,141 - - 611,645
Prepaid expenses 19,187 12,270 3,431 (9,839) 25,049
Other 58,293 7,457 50,592 - 116,342
Assets held for disposal 1,520 665 - - 2,185
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 326,224 451,547 63,301 (9,839) 831,233
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - at cost:
Land 87,407 175,794 - - 263,201
Buildings and improvements 312,475 597,277 - - 909,752
Furniture, fixtures and equipment 290,859 315,324 - - 606,183
Construction in progress 31,043 58 - - 31,101
- -----------------------------------------------------------------------------------------------------------------------------
721,784 1,088,453 - - 1,810,237
Less accumulated depreciation and amortization 362,801 460,216 - - 823,017
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - Net 358,983 628,237 - - 987,220
- -----------------------------------------------------------------------------------------------------------------------------
Investment in subsidiaries 1,532,688 - 1,221,662 (2,754,350) -
Intercompany receivable - 533,714 353,909 (887,623) -
Other 48,380 3,389 - - 51,769
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,266,275 $ 1,616,887 $ 1,638,872 $ (3,651,812) $ 1,870,222
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 307,912 $ 9 $ - $ - $ 307,921
Accrued expenses (13,763) 139,485 130,824 (9,839) 246,707
Current deferred taxes 5,401 19,315 (4,552) 20,164
Current maturities of long-term debt and
obligations under capital leases 147,171 - - - 147,171
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 446,721 158,809 126,272 (9,839) 721,963
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt and obligations under capital
leases, less current maturities 156,711 23,542 - - 180,253
Convertible long-term debt 150,000 - - - 150,000
Other long-term liabilities 9,117 19,204 - - 28,321
Intercompany liabilities 746,014 141,609 - (887,623) -
Deferred income taxes 36,551 31,937 - - 68,488
Deferred gain on sale leaseback 17 36 - - 53
Stockholders' Equity:
Common stock 68,557 1,501 101 (1,602) 68,557
Additional paid-in capital 284,660 240,359 200,398 (440,757) 284,660
Retained earnings 600,495 999,890 1,312,101 (2,311,991) 600,495
Common stock subscriptions receivable (82) - - - (82)
Accumulated other comprehensive loss (284) - - - (284)
- -----------------------------------------------------------------------------------------------------------------------------
953,346 1,241,750 1,512,600 (2,754,350) 953,346
Less:
Cost of shares in treasury 172,938 - - - 172,938
Cost of shares in benefits trust 59,264 - - - 59,264
- -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 721,144 1,241,750 1,512,600 (2,754,350) 721,144
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 2,266,275 $ 1,616,887 $ 1,638,872 $ (3,651,812) $ 1,870,222
- -----------------------------------------------------------------------------------------------------------------------------
13
CONSOLIDATING BALANCE SHEET
(dollar amounts in thousands)
Non-
Subsidiary guarantor
January 31, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 43,929 $ 9,070 $ 7,985 $ - $ 60,984
Accounts receivable, net 14,573 15,989 - - 30,562
Merchandise inventories 191,111 362,451 - - 553,562
Prepaid expenses 25,860 16,714 17,656 (20,750) 39,480
Deferred income taxes 7,224 8,354 5,248 - 20,826
Other 17,891 7,457 55,748 - 81,096
Assets held for disposal 8,083 8,846 - - 16,929
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 308,671 428,881 86,637 (20,750) 803,439
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - at cost:
Land 87,484 176,423 - - 263,907
Buildings and improvements 308,066 591,048 - - 899,114
Furniture, fixtures and equipment 286,472 300,135 - - 586,607
Construction in progress 12,800 - - - 12,800
- -----------------------------------------------------------------------------------------------------------------------------
694,822 1,067,606 - - 1,762,428
Less accumulated depreciation and amortization 344,773 431,469 - - 776,242
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - Net 350,049 636,137 - - 986,186
- -----------------------------------------------------------------------------------------------------------------------------
Investment in subsidiaries 1,473,013 - 1,162,965 (2,635,978) -
Intercompany receivable - 410,107 356,382 (766,489) -
Other 48,240 3,158 - - 51,398
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,179,973 $ 1,478,283 $ 1,605,984 $ (3,423,217) $ 1,841,023
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 342,575 $ 9 $ - $ - $ 342,584
Accrued expenses 43,670 85,790 158,855 (20,750) 267,565
Current maturities of long-term debt and
obligations under capital leases 117,063 - - - 117,063
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 503,308 85,799 158,855 (20,750) 727,212
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt and obligations under capital
leases, less current maturities 257,983 33 - - 258,016
Convertible long-term debt, less current maturities 150,000 - - - 150,000
Other long-term liabilities 9,952 18,850 - - 28,802
Intercompany liabilities 607,168 159,321 - (766,489) -
Deferred income taxes 34,811 22,681 - - 57,492
Deferred gain on sale leaseback 1,157 2,750 - - 3,907
Stockholders' Equity:
Common stock 63,911 1,501 101 (1,602) 63,911
Additional paid-in capital 177,317 240,359 200,398 (440,757) 177,317
Retained earnings 577,793 946,989 1,246,630 (2,193,619) 577,793
Accumulated other comprehensive loss (15) - - - (15)
- -----------------------------------------------------------------------------------------------------------------------------
819,006 1,188,849 1,447,129 (2,635,978) 819,006
Less:
Cost of shares in treasury 144,148 - - - 144,148
Cost of shares in benefits trust 59,264 - - - 59,264
- -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 615,594 1,188,849 1,447,129 (2,635,978) 615,594
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 2,179,973 $ 1,478,283 $ 1,605,984 $ (3,423,217) $ 1,841,023
- -----------------------------------------------------------------------------------------------------------------------------
14
CONSOLIDATING STATEMENT OF OPERATIONS
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
Thirteen weeks ended October 30, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $ 157,195 $ 299,619 $ - $ - $ 456,814
Service Revenue 35,064 67,320 - - 102,384
Other Revenue - - 7,079 (7,079) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 192,259 366,939 7,079 (7,079) 559,198
- -----------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 113,860 214,228 - - 328,088
Costs of Service Revenue 26,883 52,226 - - 79,109
Costs of Other Revenue - - 8,101 (8,101) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 140,743 266,454 8,101 (8,101) 407,197
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 43,335 85,391 - - 128,726
Gross Profit from Service Revenue 8,181 15,094 - - 23,275
Gross Loss from Other Revenue - - (1,022) 1,022 -
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit (Loss) 51,516 100,485 (1,022) 1,022 152,001
- -----------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 46,672 84,722 108 1,022 132,524
- -----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 4,844 15,763 (1,130) - 19,477
Non-operating (Expense) Income (4,418) 14,391 18,140 (27,024) 1,089
Interest Expense 14,823 7,342 12,915 (27,024) 8,056
- -----------------------------------------------------------------------------------------------------------------------------
(Loss) Earnings From Continuing Operations
Before Income Taxes (14,397) 22,812 4,095 - 12,510
Income Tax (Benefit) Expense (5,327) 8,440 1,516 - 4,629
Equity in Earnings of Subsidiaries 16,657 - 17,944 (34,601) -
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings From Continuing Operations 7,587 14,372 20,523 (34,601) 7,881
Discontinued Operations, Net of Tax 58 (294) - - (236)
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 7,645 $ 14,078 $ 20,523 $ (34,601) $ 7,645
- -----------------------------------------------------------------------------------------------------------------------------
15
CONSOLIDATING STATEMENT OF OPERATIONS
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
Thirteen weeks ended November 1, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $ 149,460 $ 285,595 $ - $ - $ 435,055
Service Revenue 35,560 67,076 - - 102,636
Other Revenue - - 6,674 (6,674) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 185,020 352,671 6,674 (6,674) 537,691
- -----------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 104,253 197,618 - - 301,871
Costs of Service Revenue 24,594 51,739 - - 76,333
Costs of Other Revenue - - 6,608 (6,608) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 128,847 249,357 6,608 (6,608) 378,204
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 45,207 87,977 - - 133,184
Gross Profit from Service Revenue 10,966 15,337 - - 26,303
Gross Profit from Other Revenue - - 66 (66) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit 56,173 103,314 66 (66) 159,487
- -----------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 44,374 85,640 86 (66) 130,034
- -----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 11,799 17,674 (20) - 29,453
Non-operating (Expense) Income (4,248) 12,107 5,019 (12,092) 786
Interest Expense 14,829 6,222 - (12,092) 8,959
- -----------------------------------------------------------------------------------------------------------------------------
(Loss) Earnings From Continuing Operations
Before Income Taxes (7,278) 23,559 4,999 - 21,280
Income Tax (Benefit) Expense (2,693) 8,717 1,850 - 7,874
Equity in Earnings of Subsidiaries 19,718 - 18,129 (37,847) -
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from Continuing Operations 15,133 14,842 21,278 (37,847) 13,406
Net (Loss) Earnings from Discontinued
Operations, Net of Tax (433) 1,727 - - 1,294
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 14,700 $ 16,569 $ 21,278 $ (37,847) $ 14,700
- -----------------------------------------------------------------------------------------------------------------------------
16
CONSOLIDATING STATEMENT OF OPERATIONS
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
Thirty-nine weeks ended October 30, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $ 486,661 $ 919,750 $ - $ - $ 1,406,411
Service Revenue 108,313 204,033 - - 312,346
Other Revenue - - 21,228 (21,228) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 594,974 1,123,783 21,228 (21,228) 1,718,757
- -----------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 348,966 649,070 - - 998,036
Costs of Service Revenue 81,127 156,349 - - 237,476
Costs of Other Revenue - - 25,591 (25,591) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 430,093 805,419 25,591 (25,591) 1,235,512
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 137,695 270,680 - - 408,375
Gross Profit from Service Revenue 27,186 47,684 - - 74,870
Gross Loss from Other Revenue - - (4,363) 4,363 -
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit (Loss) 164,881 318,364 (4,363) 4,363 483,245
- -----------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 142,235 251,879 303 4,363 398,780
- -----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 22,646 66,485 (4,666) - 84,465
Non-operating (Expense) Income (13,783) 39,373 28,334 (51,773) 2,151
Interest Expense 44,271 19,741 12,915 (51,773) 25,154
- -----------------------------------------------------------------------------------------------------------------------------
(Loss) Earnings From Continuing Operations
Before Income Taxes (35,408) 86,117 10,753 - 61,462
Income Tax (Benefit) Expense (13,101) 31,863 3,979 - 22,741
Equity in Earnings of Subsidiaries 59,675 - 58,697 (118,372) -
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings From Continuing
Operations 37,368 54,254 65,471 (118,372) 38,721
Discontinued Operations, Net of Tax (266) (1,353) - - (1,619)
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 37,102 $ 52,901 $ 65,471 $ (118,372) $ 37,102
- -----------------------------------------------------------------------------------------------------------------------------
17
CONSOLIDATING STATEMENT OF OPERATIONS
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
Thirty-nine weeks ended November 1, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $ 446,226 $ 851,246 $ - $ - $ 1,297,472
Service Revenue 107,137 200,022 - - 307,159
Other Revenue - - 20,025 (20,025) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 553,363 1,051,268 20,025 (20,025) 1,604,631
- -----------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 324,597 612,517 - - 937,114
Costs of Service Revenue 79,238 152,748 - - 231,986
Costs of Other Revenue - - 24,575 (24,575) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 403,835 765,265 24,575 (24,575) 1,169,100
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 121,629 238,729 - - 360,358
Gross Profit from Service Revenue 27,899 47,274 - - 75,173
Gross Loss from Other Revenue - - (4,550) 4,550 -
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit (Loss) 149,528 286,003 (4,550) 4,550 435,531
- -----------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 128,384 287,685 241 4,550 420,860
- -----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 21,144 (1,682) (4,791) - 14,671
Non-operating (Expense) Income (12,837) 36,444 14,834 (35,754) 2,687
Interest Expense 47,703 17,314 - (35,754) 29,263
- -----------------------------------------------------------------------------------------------------------------------------
(Loss) Earnings From Continuing Operations
Before Income Taxes and Cumulative Effect
of Change in Accounting Principle (39,396) 17,448 10,043 - (11,905)
Income Tax (Benefit) Expense (14,577) 6,456 3,716 - (4,405)
Equity in Earnings of Subsidiaries (880) - 16,651 (15,771) -
- -----------------------------------------------------------------------------------------------------------------------------
Net (Loss) Earnings From Continuing
Operations Before Cumulative Effect of
Change in Accounting Principle (25,699) 10,992 22,978 (15,771) (7,500)
Net Loss from Discontinued
Operations, Net of Tax (4,300) (16,614) - - (20,914)
Cumulative Effect of Change in
Accounting Principle, Net of Tax (899) (1,585) - - (2,484)
- -----------------------------------------------------------------------------------------------------------------------------
Net (Loss) Earnings $ (30,898) $ (7,207) $ 22,978 $ (15,771) $ (30,898)
- -----------------------------------------------------------------------------------------------------------------------------
18
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(dollar amount in thousands)
(unaudited)
Non-
Subsidiary guarantor
Thirty-nine weeks ended October 30, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net earnings $ 37,102 $ 52,901 $ 65,471 $ (118,372) $ 37,102
Net loss from discontinued operations (266) (1,353) - - (1,619)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Earnings from Continuing Operations 37,368 54,254 65,471 (118,372) 38,721
Adjustments to Reconcile Net Earnings from
Continuing Operations to Net Cash (Used In)
Provided by Continuing Operations:
Non-cash operating activities (23,096) 67,023 (58,001) 118,372 104,298
Change in operating assets and
liabilities (141,738) 13,887 (8,650) - (136,501)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by continuing
operations (127,466) 135,164 (1,180) - 6,518
Net Cash used in discontinued operations (228) (2,014) - - (2,242)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by
Operating Activities (127,694) 133,150 (1,180) - 4,276
Cash Flows from Investing Activities:
Net Cash Used in Investing Activities (26,395) (12,905) - - (39,300)
Cash Flows from Financing Activities:
Net Cash Provided by (Used in)
Financing Activities 127,874 (121,122) 2,473 - 9,225
- ---------------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash (26,215) (877) 1,293 - (25,799)
Cash and Cash Equivalents at Beginning of Period 43,929 9,070 7,985 - 60,984
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 17,714 $ 8,193 $ 9,278 $ - $ 35,185
- ---------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(dollar amount in thousands)
(unaudited)
Non-
Subsidiary guarantor
Thirty-nine weeks ended November 1, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net (loss) earnings $ (30,898) $ (7,207) $ 22,978 $ (15,771) $ (30,898)
Net loss from discontinued operations (4,300) (16,614) - - (20,914)
- ---------------------------------------------------------------------------------------------------------------------------------
Net (Loss) Earnings from continuing
operations (26,598) 9,407 22,978 (15,771) (9,984)
Adjustments to Reconcile Net (Loss)
Earnings from Continuing Operations to
Net Cash Provided by Continuing Operations:
Non-cash operating activities 15,839 3,635 (13,485) 15,771 21,760
Change in operating assets and
liabilities 58,243 45,391 953 - 104,587
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 47,484 58,433 10,446 - 116,363
Net cash (used in) provided by discontinued
operations (3) 2 - - (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 47,481 58,435 10,446 - 116,362
Cash Flows from Investing Activities:
Net Cash Used in Investing Activities (22,204) (7,113) - - (29,317)
Cash Flows from Financing Activities:
Net Cash Used in Financing Activities (39,659) (52,052) (4,267) - (95,978)
- ---------------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash (14,382) (730) 6,179 - (8,933)
Cash and Cash Equivalents at Beginning of Period 32,654 9,714 402 - 42,770
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 18,272 $ 8,984 $ 6,581 $ - $ 33,837
- ---------------------------------------------------------------------------------------------------------------------------------
19
NOTE 14. Contingencies
An action entitled "Tomas Diaz Rodriguez; Energy Tech Corporation v. Pep Boys
Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc. d/b/a Pep Boys" was
previously instituted against the Company in the Court of First Instance of
Puerto Rico, Bayamon Superior Division on March 15, 2002. The action was
subsequently removed to, and is currently pending in, the United States
District Court for the District of Puerto Rico. Plaintiffs are distributors of
a product that claims to improve gas mileage. The plaintiffs alleged that the
Company entered into an agreement with them to act as the exclusive retailer of
the product in Puerto Rico that was breached when the Company determined to
stop selling the product. On March 29, 2004, the Company's motion for summary
judgment was granted and the case was dismissed. The plaintiff has appealed.
The Company continues to believe that the claims are without merit and to
vigorously defend this matter.
The Company is also party to various other actions and claims, including
purported class actions, arising in the normal course of business. The Company
believes that amounts accrued for awards or assessments in connection with the
foregoing matters are adequate and that the ultimate resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
NOTE 15. Sale of Common Stock
On March 24, 2004, the Company sold 4,646,464 shares of common stock
(par value $1 per share) at a price of $24.75 per share for net proceeds of
$108,854,000.
NOTE 16. Comprehensive Income
The following are the components of comprehensive income (loss):
Thirteen weeks ended Thirty-nine weeks ended
--------------------------------- -----------------------------------
(Amounts in thousands) Oct. 30, 2004 Nov. 1, 2003 Oct. 30, 2004 Nov. 1, 2003
- ------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 7,645 $ 14,700 $ 37,102 $ (30,898)
Other comprehensive (loss)
income, net of tax:
Derivative financial
instrument adjustments (1,382) (1,609) (269) 2,291
- ------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 6,263 $ 13,091 $ 36,833 $ (28,607)
- ------------------------------------------------------------------------------------------------------
The components of accumulated other comprehensive loss are:
October 30, January 31,
2004 2004
----------- -------------
Derivative financial
instrument adjustment,
net of tax $ 1,120 $ 1,389
Minimum pension liability
adjustment, net of tax (1,404) (1,404)
----------- -------------
$ (284) $ (15)
----------- -------------
Note 17. Stock Repurchase Program
In the third quarter of fiscal 2004, the Company announced a share repurchase
program for up to $100,000,000 of the Company's shares. Under the program, the
Company may repurchase its shares of common stock in the open market or in
privately negotiated transactions, from time to time prior to
September 8, 2005. As of October 30, 2004, the Company had repurchased a total
of 3,018,000 shares at an average cost of $12.89 ($38,900,000).
Note 18. Subsequent Events
On December 2, 2004, the Company amended its revolving credit agreement to
increase its credit availability to $357,500,000, reduce the interest rate to
LIBOR plus 1.75% (after June 1, 2005, the rate reduces to LIBOR plus 1.50%,
subject to 0.25% incremental increases as excess availability falls below
$50,000,000), provide the ability to release up to $99,000,000 of reserves
currently required to support certain operating leases and extend the term to
December 2, 2009.
On November 29, 2004, the Company commenced an offering of $150,000,000 Senior
Subordinated Notes due 2014. The Company expects to use the net proceeds from
this offering to retire up to $100,000,000 of its 7% Senior Notes due 2005, for
which the Company has commenced a tender offer that expires on
December 28, 2004, and to pay down the outstanding balance on its revolving
credit facility.
20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
OVERVIEW
- --------
The Pep Boys - Manny, Moe & Jack is a leader in the automotive aftermarket with
595 stores located throughout 36 states and Puerto Rico. All of our stores
feature the nationally-recognized Pep Boys brand name, established through
more than 80 years of providing high-quality automotive merchandise and
services, and are company-owned, ensuring chain-wide consistency for our
customers. We are the only national chain offering automotive service,
accessories, tires and parts under one roof, positioning us to achieve our goal
of becoming the category dominant one-stop shop for automotive maintenance and
accessories.
For the thirteen and thirty-nine weeks ended October 30, 2004, our comparative
sales increased by 4.1% and 7.2%, respectively, compared to 2.2% and (1.7)%
for the thirteen and thirty-nine weeks ended November 1, 2003, respectively.
This increase in comparable sales is due primarily to new product offerings and
increased overall foot traffic at our stores.
During the third quarter of fiscal 2004, we continued to reinvest in our
existing stores to completely redesign their interiors and enhance their
exterior appeal. Our new interior design features four distinct merchandising
worlds: accessories (fashion, electronic and performance merchandise),
maintenance (hard parts and chemicals), garage (repair shop and travel) and
service (including tire, wheel and accessory installation). We believe that
this layout provides customers with a clear and concise way of finding what
they need and will promote cross-selling. The most important of these changes
is to move all of our service desks and waiting areas inside the retail
stores adjacent to our tire offering displays. Modifications to the exterior of
our stores are designed to increase customer traffic.
During the third quarter of fiscal 2004, we also invested $38,900,000 in
repurchases of our common stock at an average cost of $12.89 per share.
To improve our liquidity, during the third quarter of fiscal 2004, we entered
into a vendor financing program that allows us to maintain extended financing
terms on our inventory purchases. Subsequent to the quarter, we amended our
revolving credit facility to provide an additional $32,500,000 in availability
at lower interest rates and launched an offer for $150,000,000 Senior
Subordinated Notes, the proceeds of which will be used to pay down outstanding
indebtedness.
The following discussion explains the material changes in our results of
operations for the thirteen and thirty-nine weeks ended October 30, 2004 and
November 1, 2003 and the significant developments affecting our financial
condition since January 31, 2004. We strongly recommend that you read our
audited financial statements and footnotes and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our
Annual Report on Form 10-K for the fiscal year ended January 31, 2004.
21
LIQUIDITY AND CAPITAL RESOURCES - October 30, 2004
- ---------------------------------------------------
For the thirty-nine weeks ended October 30, 2004, our cash and cash equivalents
decreased by $25,799,000 from the balance at January 31, 2004. This decrease
was due primarily to capital expenditures and the reduction in long-term debt
offset, in part, by the net proceeds from our March 24, 2004 common stock
offering.
We have used the $108,854,000 net proceeds from the common stock offering to
repay the outstanding balance under our existing line of credit (which was
used along with cash from operations to repay the $57,000,000 aggregate
principal amount of medium term notes that matured on March 3, 2004 and
March 10, 2004) and to prepay $20,919,000 aggregate principal amount
outstanding under our senior secured (equipment and real estate) credit
facility in the first quarter of 2004. The remaining balance was applied to
store redesigns.
Our cash requirements arise principally from capital expenditures related to
existing stores, offices and warehouses and from the purchase of inventory. The
primary capital expenditures for the thirty-nine weeks ended October 30, 2004
were attributed to capital maintenance of our existing stores and offices
including store redesigns. During this period, we invested $52,631,000 in
property and equipment. We estimate that capital expenditures related to
existing stores, warehouses and offices during the remainder of fiscal 2004
will be approximately $37,569,000, related primarily to the redesign of our
existing stores.
We anticipate that our net cash provided by operating activities, the net
proceeds from our common stock offering and our existing line of credit will
exceed our principal cash requirements for capital expenditures and inventory
purchases in fiscal 2004.
Working Capital increased from $76,227,000 at January 31, 2004 to $109,270,000
at October 30, 2004. At October 30, 2004, we had stockholders' equity of
$721,144,000 and long-term debt, net of current maturities, of $330,253,000.
Our long-term debt was 31% of our total capitalization at October 30, 2004 and
40% at January 31, 2004. As of October 30, 2004, we had an available line of
credit totaling $150,171,000.
On December 2, 2004, we amended our revolving credit agreement to increase our
credit availability to $357,500,000, reduce the interest rate to LIBOR plus
1.75% (after June 1, 2005, the rate reduces to LIBOR plus 1.50%, subject to
0.25% incremental increases as excess availability falls below $50,000,000),
provide the ability to release up to $99,000,000 of reserves currently required
to support certain operating leases and extend the term to December 2, 2009.
On November 29, 2004, we commenced an offering of $150,000,000 Senior
Subordinated Notes due 2014. We expect to use the net proceeds from this
offering to retire up to $100,000,000 of our 7% Senior Notes due 2005, for
which we commenced a tender offer that expires on December 28, 2004, and to pay
down the outstanding balance on our revolving credit facility.
In the third quarter of fiscal 2004, we entered into a vendor financing
program. Under this program, our factor makes accelerated and discounted
payments to our vendors and we, in turn, makes our regularly-scheduled full
vendor payments to the factor.
In the third quarter of fiscal 2004, we announced a share repurchase program
for up to $100,000,000 of our common stock. Under the program, we may
repurchase shares of our common stock in the open market or in privately
negotiated transactions, from time to time prior to September 8, 2005. As of
October 30, 2004, we had repurchased a total of 3,018,000 shares at an average
cost of $12.89 ($38,900,000).
In the second quarter of fiscal 2004, we reclassified $100,000,000 aggregate
principal amount of 7.00% notes with a stated maturity date of June 1, 2005 to
current liabilities on the consolidated balance sheet. We anticipate that we
will repurchase these notes with proceeds from the $150,000,000 Senior
Subordinated Notes offering that we commenced on November 29, 2004.
In the second quarter of fiscal 2004, we prepaid $5,000,000 aggregate principal
amount of 6.71% Medium-Term Notes with a stated maturity date of November 3,
2004 from cash from operations.
In October 2001, we entered into a contractual commitment to purchase media
advertising services with equal annual purchase requirements totaling
$39,773,000 over four years. The minimum required purchases for 2004 and 2005
(the remaining two years of this commitment) are $8,112,000 and $7,457,000
respectively. During the second quarter of fiscal 2004, it was determined that
we would be unable to meet this obligation for the 2004 contract year which
ends on November 30, 2004. As a result, we recorded a $1,579,000 charge to
selling, general and administrative expenses in the quarter ended
July 31, 2004 related to the anticipated shortfall in this purchase commitment.
22
In May 2001, we sold certain operating assets for $14,000,000. The assets were
leased back from the purchaser in a lease structured as a one-year term with
three one-year renewal options. The resulting lease was accounted for as an
operating lease and the gain of $3,817,000 from the sale of certain operating
assets was deferred at the time of sale. In May 2004, we repurchased these
assets for $5,468,000. The remaining deferred gain of $3,729,000 was netted
against the purchase price of the repurchased assets resulting in a net book
value of $1,739,000 recorded on the consolidated balance sheet as of July 31,
2004 for the repurchased assets.
In the first quarter of fiscal 2004, we prepaid $20,919,000 aggregate
principal amount of our senior secured (equipment and real estate) credit
facility with a stated maturity date of July 1, 2006. This prepayment was
funded out of cash from operations and our existing revolving credit facility.
In the first quarter of fiscal 2004, we retired $32,000,000 aggregate principal
amount of 6.75% Medium-Term Notes with a stated maturity date of March 10, 2004
and $25,000,000 aggregate principal amount of 6.65% Medium-Term Notes with a
stated maturity date of March 3, 2004. These notes were retired with cash from
operations and our existing line of credit.
In the first quarter of fiscal 2004, we entered into arrangements with certain
of our vendors and banks to extend payment terms on certain merchandise
purchases. Under this program, the banks made payments to the vendors based
upon a negotiated discount rate between the parties and we made our payment of
the full payable to the bank at the extended payment term. As of July 31, 2004,
all obligations under these arrangements were fully satisfied and the agreement
was terminated.
In the third quarter of 2003, we reached an agreement, through binding
arbitration, to settle the consolidated action entitled "Dubrow et al vs. The
Pep Boys - Manny Moe & Jack". The two consolidated actions, originally filed
on March 29, 2000 and July 25, 2000 in the California Superior Court in Orange
County, involved former and current store management employees who claimed that
they were improperly classified as exempt from the overtime provisions of
California law and sought to be compensated for all overtime hours worked. We
paid the settlement in the first quarter of fiscal 2004 from cash from
operations and our existing line of credit.
OFF-BALANCE SHEET ARRANGEMENTS
- ------------------------------
In the third quarter of fiscal 2004, we entered into a new operating lease for
certain operating equipment. The new $35,000,000 equipment operating lease, has
an interest rate of LIBOR plus 2.25%. We have evaluated this transaction in
accordance with the original guidance of Financial Interpretation Number (FIN)
46 and have determined that we are not required to consolidate the leasing
entity.
RESTRUCTURING
- -------------
Building upon the Profit Enhancement Plan launched in October 2000, we
conducted a comprehensive review of our operations including individual store
performance, the entire management infrastructure and our merchandise and
service offerings. On July 31, 2003, we announced several initiatives aimed
at realigning our business and continuing to improve upon our profitability.
These actions, including the disposal and sublease of the properties, were
substantially completed by October 30, 2004 and costs were approximately
$71,300,000. We are accounting for these initiatives in accordance with the
provisions of SFAS No. 146 "Accounting for Costs Associated with Exit or
Disposal Activities" and SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets".
Reserve Summary
The following chart details the reserve balances through October 30, 2004. The
reserve includes remaining rent on leases net of sublease income, other
contractual obligations associated with leased properties and employee
severance.
(dollar amounts Lease Contractual
in thousands) Severance Expenses Obligations Total
- ---------------------------------------------------------------------------------
Reserve balance
at Jan. 31, 2004 $ 373 $ 2,368 $ 463 $ 3,204
Provision for present
value of liabilities - 121 198 319
Changes in assumptions
about future sublease
income, lease termination
and severance - 272 - 272
Cash payments (215) (676) (401) (1,292)
- ---------------------------------------------------------------------------------
Reserve balance at
October 30, 2004 $ 158 $ 2,085 $ 260 $ 2,503
- ---------------------------------------------------------------------------------
23
Discontinued Operations
- ------------------------
In accordance with SFAS No. 144, our discontinued operations reflect the
operating results for the 33 stores closed on July 31, 2003 as part of our
corporate restructuring.
Additionally, we have classified certain assets as assets held for
disposal on our consolidated balance sheets. As of October 30, 2004 and
January 31, 2004, these assets were as follows:
(Dollar amounts in thousands) Oct. 30, 2004 Jan. 31, 2004
- -------------------------------------------------------------------------------
Land $ 1,302 $ 8,954
Building and improvements 883 7,975
- -------------------------------------------------------------------------------
Assets held for disposal $ 2,185 $ 16,929
- -------------------------------------------------------------------------------
Five of our closed stores remained unsold as of October 30, 2004. Three of the
properties are without executed agreements of sale and were reclassified in the
second quarter of fiscal 2004 to assets held for use at market value, which is
lower than cost adjusted for depreciation. The other two properties are the
subject of executed agreements of sale as of October 30, 2004 and therefore
will remain in assets held for disposal until the completion of those sales.
During the third quarter of 2004, we sold assets held for disposal for proceeds
of $1,328,000 resulting in a loss of $160,000 which was recorded in
discontinued operations on the consolidated statement of operations.
During the second quarter of 2004, we sold assets held for disposal for
proceeds of $3,652,000 resulting in a loss of $157,000 which was recorded in
discontinued operations on the consolidated statement of operations.
During the first quarter of 2004, we sold assets held for disposal for proceeds
of $6,879,000 resulting in a gain of $172,000 which was recorded in
discontinued operations on the consolidated statement of operations.
24
Results of Operations -
The following table presents for the periods indicated certain items in the
consolidated statements of operations as a percentage of total revenues
(except as otherwise provided) and the percentage change in dollar amounts of
such items compared to the indicated prior period.
Percentage of Total Revenues Percentage Change
- ----------------------------------------------------------------------------------------------------------------
Thirteen weeks ended Oct. 30, 2004 Nov. 1, 2003 Fiscal 2004 vs.
(Fiscal 2004) (Fiscal 2003) Fiscal 2003
- ----------------------------------------------------------------------------------------------------------------
Merchandise Sales 81.7% 80.9% 5.0 %
Service Revenue (1) 18.3 19.1 (0.2)
- ----------------------------------------------------------------------------------------------------------------
Total Revenues 100.0 100.0 4.0
- ----------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales (2) 71.8 (3) 69.4 (3) 8.7
Costs of Service Revenue (2) 77.3 (3) 74.4 (3) 3.6
- ----------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 72.8 70.3 7.7
- ----------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 28.2 (3) 30.6 (3) (3.3)
Gross Profit from Service Revenue 22.7 (3) 25.6 (3) (11.5)
- ----------------------------------------------------------------------------------------------------------------
Total Gross Profit 27.2 29.7 (4.7)
- ----------------------------------------------------------------------------------------------------------------
Selling, General and Administrative
Expenses 23.7 24.2 1.9
- ----------------------------------------------------------------------------------------------------------------
Operating Profit 3.5 5.5 (33.9)
Non-operating Income 0.1 0.1 38.5
Interest Expense 1.4 1.6 (10.1)
- ----------------------------------------------------------------------------------------------------------------
Earnings from Continuing Operations
Before Income Taxes 2.2 4.0 (41.2)
Income Tax Expense 37.0 (4) 37.0 (4) (41.2)
- ----------------------------------------------------------------------------------------------------------------
Net Earnings from Continuing Operations 1.4 2.5 (41.2)
Discontinued Operations, Net of Tax 0.0 0.2 (118.2)
Net Earnings 1.4 2.7 (48.0)
- ----------------------------------------------------------------------------------------------------------------
(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, buying,
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 before income taxes.
25
Thirteen Weeks Ended October 30, 2004 vs. Thirteen Weeks Ended November 1, 2003
- -------------------------------------------------------------------------------
Total revenues for the third quarter increased 4.0%. This increase was due
primarily to an increase in comparable revenues (revenues generated by
locations in operation during the same period) of 4.1%. Comparable merchandise
sales increased 5.1% while comparable service revenue decreased 0.2%.
Gross profit from merchandise sales decreased as a percentage of merchandise
sales, to 28.2% in fiscal 2004 from 30.6% in fiscal 2003. This was a 3.3% or
$4,458,000 decrease from the prior year. This decrease, as a percentage of
merchandise sales was due primarily to lower merchandise margins and increased
warehousing costs offset, in part, by lower store occupancy costs. The decrease
in merchandise margins was primarily due to increased inventory shrinkage and a
shift in product mix towards more promotionally priced items. The increase in
warehousing costs was due primarily to increased distribution costs. The
decrease in store occupancy costs was due primarily to improved cost control.
Gross profit from service revenue decreased, as a percentage of service revenue
to 22.7% in fiscal 2004 from 25.6% in fiscal 2003. This was an 11.5% or
$3,028,000 decrease from the prior year. This decrease, as a percentage of
service revenue, was due primarily to increases in service employee benefits.
The increase in employee benefits was due primarily to increased workers'
compensation costs.
Selling, general and administrative expenses decreased, as a percentage of
total revenues, to 23.7% in fiscal 2004 from 24.2% in fiscal 2003. This
decrease, as a percentage of total revenues, was due primarily to decreases in
store expenses as a percentage of sales and net media expenses offset, in part,
by increases in general office costs and employee benefits. The decrease in
store expenses as a percent of sales was due primarily to comparable levels of
store expenses for the third quarter of fiscal 2004 and the third quarter of
fiscal 2003 coupled with the increase in total revenues in the third quarter of
fiscal 2004. The decrease in net media costs was due primarily to increases in
cooperative advertising offset, in part, by increases in media spending. The
increase in general office costs was due primarily to increased legal costs.
Interest expense decreased 10.1% due primarily to lower debt levels.
Results from discontinued operations for the third quarter of 2004 was a loss
of $236,000 (net of tax) compared to income of $1,294,000 (net of tax) in the
third quarter of fiscal 2003. The loss recorded in the third quarter of fiscal
2004 is primarily related to changes in estimated market values for assets held
for disposal and lease and maintenance costs related to stores closed in the
second quarter of fiscal 2003. The income in fiscal 2003 was due primarily to
the increase in value of assets held for disposal offset, in part, by expenses
incurred related to the exit and continuing maintenance of the properties
closed on July 31, 2003.
Net earnings decreased, as a percentage of total revenues, due primarily to
a decrease in total gross profit, as a percentage of sales.
26
Results of Operations -
The following table presents for the periods indicated certain items in the
consolidated statements of operations as a percentage of total revenues
(except as otherwise provided) and the percentage change in dollar amounts of
such items compared to the indicated prior period.
Percentage of Total Revenues Percentage Change
- ----------------------------------------------------------------------------------------------------------------
Thirty-nine weeks ended Oct. 30, 2004 Nov. 1, 2003 Fiscal 2004 vs.
(Fiscal 2004) (Fiscal 2003) Fiscal 2003
- ----------------------------------------------------------------------------------------------------------------
Merchandise Sales 81.8% 80.9% 8.4 %
Service Revenue (1) 18.2 19.1 1.7
- ----------------------------------------------------------------------------------------------------------------
Total Revenues 100.0 100.0 7.1
- ----------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales (2) 71.0 (3) 72.2 (3) 6.5
Costs of Service Revenue (2) 76.0 (3) 75.5 (3) 2.4
- ----------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 71.9 72.9 5.7
- ----------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 29.0 (3) 27.8 (3) 13.3
Gross Profit from Service Revenue 24.0 (3) 24.5 (3) (0.4)
- ----------------------------------------------------------------------------------------------------------------
Total Gross Profit 28.1 27.1 11.0
- ----------------------------------------------------------------------------------------------------------------
Selling, General and Administrative
Expenses 23.2 26.2 (5.2)
- ----------------------------------------------------------------------------------------------------------------
Operating Profit 4.9 0.9 475.7
Non-operating Income 0.2 0.2 (19.9)
Interest Expense 1.5 1.8 (14.0)
- ----------------------------------------------------------------------------------------------------------------
Earnings (Loss) from Continuing Operations
Before Income Taxes and Cumulative Effect
of Change in Accounting Principle 3.6 (0.7) 616.3
Income Tax Expense (Benefit) 37.0 (4) 37.0 (4) 616.3
- ----------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) from Continuing
Operations and Cumulative Effect of
Change in Accounting Principle 2.3 (0.5) 616.3
Discontinued Operations, Net of Tax (0.1) (1.3) 92.3
Cumulative Effect of Change in
Accounting Principle, Net of Tax 0.0 (0.1) 100.0
Net Earnings (Loss) 2.2 (1.9) 220.1
- ----------------------------------------------------------------------------------------------------------------
(1) Service revenue consists of the labor charge for installing merchandise or
maintaining or repairing vehicles, excluding the sale of any installed parts or
materials.
(2) Costs of merchandise sales include the cost of products sold, buying,
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 before income taxes.
27
Thirty-nine Weeks Ended Oct. 30, 2004 vs.Thirty-nine Weeks Ended Nov. 1, 2003
- -----------------------------------------------------------------------------
Total revenues for the first thirty-nine weeks increased 7.1%. This increase
was due primarily to an increase in comparable revenues (revenues generated by
locations in operation during the same period) of 7.2%. Comparable merchandise
sales increased 8.5%, while comparable service revenue increased 1.8%.
Gross profit from merchandise sales increased, as a percentage of merchandise
sales, to 29.0% in fiscal 2004 from 27.8% in fiscal 2003. This was a 13.3% or
$48,017,000 increase from the prior year. This increase, as a percentage of
merchandise sales, was due primarily to an increase in merchandise margins and
a decrease in store occupancy costs offset, in part, by an increase in
warehousing costs. The increase in merchandise margins was primarily due to the
impact of a $24,580,000 inventory write-down made in the second quarter of
fiscal 2003 associated with the corporate restructuring. The decrease in store
occupancy costs, as a percentage of merchandise sales, was due to the impact of
a charge made in 2003 for an asset impairment of $2,121,000 coupled with lower
rent, as a percentage of merchandise sales. The increase in warehousing costs,
as a percentage of merchandise sales, was a result of increased distribution
and storage costs.
Selling, general and administrative expenses decreased, as a percentage of
total revenues, to 23.2% in fiscal 2004 from 26.2% in fiscal 2003. This was a
5.2% or $22,080,000 decrease from the prior year. This decrease, as a
percentage of total revenues, was due primarily to a decrease in general
office costs and employee benefits offset, in part, by an increase in net media
expenses. The decrease in general office costs was due primarily to the impact
of charges made in fiscal 2003 of $26,500,000 and $5,613,000 for litigation
expenses and costs associated with the corporate restructuring, respectively.
The decrease in employee benefits is due primarily to the impact of a charge
made in 2003 for the settlement of a retirement plan obligation. The increase
in net media expense, as a percentage of total revenues was due primarily to
an increase in media expenditures.
Interest expense decreased 14.0% or $4,109,000 due primarily to lower debt
levels.
Results from discontinued operations for 2004 was a loss of $1,619,000
(net of tax) compared to a loss of $20,914,000 (net of tax) in 2003. The change
was due primarily to the discontinued stores being in operation through the
second quarter of 2003. The loss in 2004 is primarily related to changes in
estimated market values of assets held for disposal and lease and maintenance
costs related to stores closed in the second quarter of 2003. The loss in
fiscal 2003 was due primarily to the charge associated with the closure of
those stores.
Net earnings increased, as a percentage of total revenues, due primarily to
an increase in gross profit from merchandise sales, as a percentage of
merchandise sales, a decrease in selling, general and administrative expenses
and a decrease in interest expense, as a percentage of total revenues coupled
with a decrease in the loss from discontinued operations and the impact of a
net charge for the cumulative effect of a change in accounting principle for
the adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations"
recorded in fiscal 2003.
28
INDUSTRY COMPARISON
- --------------------
We operate in the U.S. automotive aftermarket, which is split into two areas:
the Do-It-For-Me ("DIFM") (service labor, installed merchandise and tires)
market and the Do-It-Yourself ("DIY") (retail merchandise) market. Generally,
the specialized automotive retailers focus on either the "DIY" or "DIFM" areas
of the business. We believe that our operation in both the "DIY" and "DIFM"
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 shows the comparison
against competitors within the two areas. We compete in the "DIY" area of the
business through our retail sales floor and commercial sales business
(Retail Business). We consider our Service Business (labor and installed
merchandise and tires) to compete in the DIFM area of the industry. The
following table presents the revenues and gross profit for each area of the
business.
Thirteen weeks ended Thirty-nine weeks ended
---------------------------- -----------------------------
Oct. 30, 2004 Nov. 1, 2003 Oct. 30, 2004 Nov. 1, 2003
------------- ------------- ------------- -------------
(Dollar amounts in thousands) Amount Amount Amount Amount
- -----------------------------------------------------------------------------------------------------------------------------
Retail Revenues $ 323,903 $ 293,938 $ 1,020,564 $ 888,245
Service Center Revenues 235,295 243,753 698,193 716,386
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues $ 559,198 $ 537,691 $ 1,718,757 $ 1,604,631
=============================================================================================================================
Gross Profit from Retail Revenues (1) $ 86,796 $ 82,158 $ 286,258 $ 223,924
Gross Profit from Service Center Revenues (1) 65,205 77,329 196,987 211,607
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit $ 152,001 $ 159,487 $ 483,245 $ 435,531
=============================================================================================================================
(1) Gross Profit from Retail Revenues includes the cost of products sold, buying, warehousing
and store occupancy costs. Gross Profit from Service Business Revenues includes the cost
of installed products sold, buying, 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.
29
NEW ACCOUNTING STANDARDS
- ------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure, an Amendment of FASB Statement
No. 123," to provide alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based compensation. We
have adopted the disclosure requirements of this statement. In March 2004,
the FASB issued a proposed SFAS - "Share-based Payment: an Amendment of FASB
Statements No. 123 and 95." The proposed standard would require companies to
expense share-based payments to employees, including stock options, based on
the fair value of the award at the grant date. The proposed statement would
eliminate the intrinsic value method of accounting for stock-based compensation
permitted by APB (Accounting Principles Board) No. 25, "Accounting for Stock
Issued to Employees," which we currently follow. We will continue to monitor
the actions of the FASB and assess the impact, if any, on our consolidated
financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's 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, risk participation agreements and 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 the Company's Form 10-K for the year ended
January 31, 2004, which disclosures are hereby incorporated by reference.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements contained herein constitute "forward-looking statements"
within the meaning of The Private Securities Litigation Reform Act of 1995.
The words "guidance," "expect," "anticipate," "estimates," "forecasts" and
similar expressions are intended to identify such forward-looking statements.
Forward-looking statements include management's expectations regarding 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 the
Company believes that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, it can give no assurance that
its expectations will be achieved. The Company's actual results may differ
materially from the results discussed in the forward-looking statements due to
factors beyond the control of the Company, 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 the Company's
stores, competitive pricing, the location and number of competitors' stores,
product and labor costs and the additional factors described in the Company's
filings with the Securities and Exchange Commission (SEC). The Company assumes
no obligation to update or supplement forward-looking statements that become
untrue because of subsequent events.
30
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not utilize financial instruments for trading purposes
and holds no derivative financial instruments which could expose the Company to
significant market risk. The Company's primary market risk exposure with
regard to financial instruments is to changes in interest rates. Pursuant to
the terms of its revolving credit agreement, changes in the London Interbank
Offered Rate (LIBOR) could affect the rates at which the Company could borrow
funds thereunder. At October 30, 2004, the Company had outstanding borrowings
of $35,719,000 under this facility. Additionally, we have $132,000,000 of real
estate operating leases which vary based on changes in LIBOR. We have entered
into an interest rate swap, which was designated as a cash flow hedge to
convert the variable LIBOR portion of these lease payments to a fixed rate of
2.90% and terminates on July 1,2008. If the critical terms of the interest rate
swap or the hedge item do not change, the interest rate swap will be considered
to be highly effective with all changes in fair value included in other
comprehensive income. As of October 30, 2004, the fair value of the interest
rate swap was $1,767,000 ($1,120,000 net of tax) and this change in value was
included in accumulated other comprehensive income on the consolidated balance
sheet.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's principal
executive officer and principal financial officer, evaluated the effectiveness
of the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the chief executive officer
and principal financial officer concluded that our disclosure controls and
procedures as of the end of the period covered by this report are functioning
effectively to provide reasonable assurance that the information required to be
disclosed by the Company in reports filed under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. A controls system, no matter how well
designed and operated, cannot provide absolute assurance that the objectives of
the controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company have been detected.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in the Company's internal control over financial reporting occurred
during the fiscal quarter covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
31
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
An action entitled "Tomas Diaz Rodriguez; Energy Tech Corporation v.
Pep Boys Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc.
d/b/a Pep Boys" was previously instituted against the Company in the
Court of First Instance of Puerto Rico, Bayamon Superior Division on
March 15, 2002. The action was subsequently removed to, and is
currently pending in, the United States District Court for the
District of Puerto Rico. Plaintiffs are distributors of a product
that claims to improve gas mileage. The plaintiffs alleged that the
Company entered into an agreement with them to act as the exclusive
retailer of the product in Puerto Rico that was breached when the
Company determined to stop selling the product. On March 29, 2004,
the Company's motion for summary judgment was granted and the case
was dismissed. The plaintiff has appealed. The Company continues to
believe that the claims are without merit and to vigorously defend
this matter.
The Company is also party to various other actions and claims,
including purported class actions, arising in the normal course of
business. The Company believes that amounts accrued for awards or
assessments in connection with the foregoing matters are adequate
and that the ultimate resolution of these matters will not have a
material adverse effect on the Company's financial position or
results of operations.
32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information with respect to repurchases of our
common stock for the quarter ended October 30, 2004 (amounts in thousands,
except per share amounts):
Total Number of Maximum Dollar
Shares Purchased Value That May
Total Number Average Price as Part of Yet Be Purchased
of Shares Paid Publicly Announcing Under the Plans
Period Purchased Per Share Plans or Programs(1) or Programs(1)(2)
------------------------------------ ------------ --------------- --------------------- ------------------
$ 100,000
September 27, 2004 to October 2, 2004 133 $ 13.44 133 98,212
October 3, 2004 to October 30, 2004 2,885 12.86 2,885 61,100
------------ --------------- --------------------- ------------------
Total 3,018 $ 12.89 3,018 $ 61,100
============ =============== ===================== ==================
(1) All of the above repurchases were made on the open market at prevailing market rates plus related expenses
under our stock repurchase program, which was authorized by our Board of Directors and publicly announced on
September 9, 2004 for a maximum of $100 million in common stock expiring September 8, 2005.
(2) The maximum dollar value yet to be purchased under our stock repurchase program excludes related expenses
on previous purchases or anticipated expenses on future purchases.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
33
Item 5. Other Information
None.
Item 6. Exhibits
(31.1) Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(31.2) Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(32.1) Chief Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(32.2) Chief Financial Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
34
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PEP BOYS - MANNY, MOE & JACK
--------------------------------
(Registrant)
Date: December 7, 2004 by: /s/ Harry F. Yanowitz
----------------------- --------------------------
Harry F. Yanowitz
Chief Financial Officer
35
INDEX TO EXHIBITS
- -----------------
(31.1) Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(31.2) Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(32.1) Chief Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(32.2) Chief Financial Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
36