Pep Boys 2009 Annual Report Download - page 135

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 30, 2010, January 31, 2009 and February 2, 2008
(dollar amounts in thousands, except share and per share data)
NOTE 17—FAIR VALUE MEASUREMENTS (Continued)
The following represents the impact of fair value accounting for the Company’s derivative liability
on its consolidated financial statements:
Amount of Loss in
Other Comprehensive Amount of Loss
Income Earnings Statement Recognized in Earnings
(Effective Portion) Classification (Effective Portion)
Fiscal 2009 ....................... $373 Interest expense $5,796
Non-financial assets measured at fair value on a non-recurring basis:
Certain assets are measured at fair value on a non-recurring basis, that is, the assets are subject to
fair value adjustments in certain circumstances such as when there is evidence of impairment. In
response to a continuing weak real estate market, the Company reduced its prices for certain properties
held for disposal and recorded impairment charges of $3,110 and $5,353 for fiscal 2009 and 2008,
respectively. The fair values were based on selling prices of comparable properties. These measures of
fair value, and related inputs, are considered level 2 measures under the fair value hierarchy.
NOTE 18—LEGAL MATTERS
In September 2006, the United States Environmental Protection Agency (‘‘EPA’’) requested certain
information from the Company as part of an investigation to determine whether the Company had
violated, and is in violation of, the Clean Air Act and its non-road engine regulations. The information
requested concerned certain generator and personal transportation merchandise offered for sale by the
Company. In the fourth quarter of fiscal 2008, the EPA informed the Company that it believed that the
Company had violated the Clean Air Act by virtue of the fact that certain of this merchandise did not
conform to their corresponding EPA Certificates of Conformity. During the third quarter of fiscal 2009,
the Company and the EPA reached a settlement in principle of this matter requiring that the Company
(i) pay a monetary penalty of $5 million, (ii) take certain corrective action with respect to certain
inventory that had been restricted from sale during the course of the investigation, (iii) implement a
formal compliance program and (iv) participate in certain non-monetary emission offset activities. The
Company had previously accrued an amount equal to the agreed upon civil penalty and a $3 million
contingency accrual with respect to the restricted inventory. During each of the third and fourth
quarters of fiscal 2009, the Company reversed $1 million of the inventory accrual as a portion of the
subject inventory was released for sale.
The Company is also party to various other actions and claims arising in the normal course of
business.
The Company believes that amounts accrued for awards or assessments in connection with all such
matters are adequate and that the ultimate resolution of these matters will not have a material adverse
effect on the Company’s financial position. However, there exists a reasonable possibility of loss in
excess of the amounts accrued, the amount of which cannot currently be estimated. While the
Company does not believe that the amount of such excess loss could be material to the Company’s
financial position, any such loss could have a material adverse effect on the Company’s results of
operations in the period(s) during which the underlying matters are resolved.
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