Napa Auto Parts 2002 Annual Report Download - page 21

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from 2001 to 2000. At 23.7% of net sales in 2001, these
expenses increased slightly from 23.4% in 2000. Excluding
the effect of the 2001 Charges, selling, administrative, and
other expenses declined by just over 1%, generally consistent
with the sales decrease.
Operating profit as a percentage of sales was 8.5% in 2001 as
compared to 9.0% in 2000. These results are reflective of the
overall economic conditions in 2001 and the fixed costs inher-
ent in distribution. Automotive operating margins decreased
slightly from 9.2% in 2000 to 8.9% in 2001. Office operating
margins showed slight improvement from 10.1% in 2000 to
10.3% in 2001. The current economic conditions continued to
place the most pressure on the Industrial and Electrical seg-
ment. Industrial margins declined to 7.7% in 2001 from 8.8%
in 2000. EIS, with a sales decrease in 2001 of 30%, had an
operating margin of 1% in 2001 and 5% in 2000. The margin
decline at EIS is because the operating expenses associated
with EIS’ business could not be reduced to the extent of the
sales decline.
The effective income tax rate was 40.1% in 2001 as com-
pared to 40.4% in 2000. Net income in 2001 was $297
million, reflecting a 23% decrease over 2000 net income.
Net income as a percent of net sales was 3.6% in 2001 as
compared to 4.6% in 2000. Excluding the effect of the Facility
Consolidation, Impairment and Other Charges, net income
was down 6% from 2000 and was 4.4% of sales. This
decrease in net income is primarily attributable to the sales
decline. In 2001, diluted earnings per share were $1.71, a
22% decrease from $2.20 reported in 2000. Excluding the
2001 Charges, diluted earnings per share were $2.08, a
5% decrease from 2000.
Facility Consolidation, Impairment and Other Charges
In the fourth quarter of 2001, the Company’s manage-
ment approved a plan to close and consolidate certain
Company-operated facilities, terminate certain employees,
and exit certain other activities. The Company also
determined that certain assets were impaired. Following
is a summary of the charges ($107.8 million pre-tax;
$64.4 million, net of tax) and accruals related to
continuing liabilities associated with the plan (in thousands):
Paid in Liability at Paid in Liability at
TotalNon-cash 2001 Dec. 31, 2001 2002 Dec. 31, 2002
Impairment
charges $ 49,400 $(49,400) $ -- $ -- $ -- $ --
Facility
consolidation
expenses 17,900 (6,900) (300) 10,700 (4,800) 5,900
Severance
expenses 6,700 -- (100) 6,600 (4,800) 1,800
Inventory-related
exit costs –
cost of
goods sold 17,400 (17,400) -- -- -- --
Other – selling,
administrative
and other
expenses 16,400 (15,800) -- 600 (300) 300
$107,800 $(89,500) $(400) $17,900 $(9,900) $8,000
Impairment charges are primarily comprised of two separate
technology projects: (1) an abandoned software system imple-
mentation in the Office Products Group totaling approximately
$30 million, and (2) an impaired technology-related venture in
the Automotive Group totaling approximately $15 million for
which the Company projects the undiscounted cash flows to
be less than the carrying amount of the related investment.
Facility consolidation expenses relate to facility consolidations
in each of the Company’s business segments. In 2001, the
Company identified certain distribution, branch and retail facil-
ities that were to be closed prior to December 31, 2002. The
Company appropriately accrued the estimated lease obligation
from the planned exit date through the end of the contractual
lease term, net of estimated sublease income. The facility con-
solidations did not result in any material decline in net sales,
as all such closed facilities have been served by other
Company-operated facilities.
Severance expenses include charges for employees who have
been involuntarily terminated in connection with the Company’s
facility consolidations. All terminations occurred prior to
December 31, 2002. Inventory-related exit costs relate to
inventory considered by the Company to be impaired as a
result of the facility consolidations described above and
related inventory rationalization and optimization programs.