Napa Auto Parts 2002 Annual Report Download - page 22

20
management’s discussion and analysis of financial condition
and results of operations (continued)
All inventory-related exit costs have been classified as cost
of goods sold in the accompanying consolidated statement of
income. Other charges have been classified as a component
of selling, administrative, and other expenses.
Financial Condition
The major balance sheet categories were relatively consistent
with the December 31, 2001 balance sheet. Prepaid expenses
and other current assets declined primarily due to the realiza-
tion of a significant income tax receivable. Goodwill and other
intangible assets declined due to the January 1, 2002 adop-
tion of a new accounting principle, as discussed below. The
Company’s cash balance at December 31, 2002 was $20
million, down $66 million as compared to December 31, 2001,
primarily due to a reduction of debt. Due to our Automotive
Group’s new store acquisitions, and favorable buying opportu-
nities in the Industrial and Office Groups, inventory increased
13.5% as compared to December 31, 2001. In connection
with the Company’s continuing focus on negotiating extended
payment terms with vendors, accounts payable at December
31, 2002 increased approximately $91 million as compared to
2001. The change in long-term debt is discussed below.
During the first quarter of 2002, the Company completed its
transitional impairment testing of goodwill as required by
SFAS 142. As a result, a non-cash charge of $395.1 million
was recorded as of January 1, 2002 representing the cumula-
tive effect of a change in accounting principle. Most of the
goodwill written down is in connection with acquisitions made
in 1998 and 1999 where the discounted cash flows was
estimated to be less than the carrying amount of the goodwill
recorded. The breakdown of this impairment by reportable
segment is summarized as follows, in thousands:
Transitional impairment losses
Automotive $213,401
Industrial 19,512
Office products 6,566
Electrical/electronic materials 155,611
Total $395,090
In addition, the adoption of the non-amortization provisions
of SFAS 142 resulted in a decrease in amortization expense of
approximately $12 million, or $.07 per share, for the year
ended December 31, 2002.
Liquidity and Capital Resources
The Company’s long-term debt decreased by approximately
$100 million in 2002 as compared to 2001. The decline in
borrowings is primarily attributable to cash generated from
operating activities of $272 million and $36 million in cash
generated from stock option exercises. In addition, the
Company had minimal stock repurchases during 2002, and
capital expenditures and other investing activities were com-
parable to 2001.
On November 30, 2001, the Company completed a $500 mil-
lion financing arrangement with a consortium of financial
institutions and insurance companies. At December 31, 2002,
the Company had unsecured Senior Notes outstanding under
this financing arrangement as follows: $250 million, Series A,
5.86% fixed, due 2008; and $250 million, Series B, 6.23%
fixed, due 2011. In addition, at December 31, 2002, the
Company had $100 million outstanding on a $200 million
unsecured revolving line of credit, LIBOR plus .55%, due 2003,
and an unsecured term note in the amount of $171 million,
LIBOR plus .55%, due 2004; and $20 million in other borrow-
ings. Certain borrowings contain covenants related to a
maximum debt-to-equity ratio, a minimum fixed-charge cover-
age ratio, and certain limitations on additional borrowings. At
December 31, 2002, the Company was in compliance with all
such covenants. The weighted average interest rate on the
Company's outstanding borrowings was approximately 4.8%
and 5.3% at December 31, 2002 and 2001, respectively. Total
interest expense for all borrowings was $59.6 million and
$59.4 million 2002 and 2001, respectively.
The Company also has an $85 million construction and lease
facility. Properties acquired by the lessor are constructed and
then leased to the Company under operating lease agree-
ments. The total amount advanced and outstanding under this
facility at December 31, 2002 was approximately $66 million.
Since the resulting leases are operating leases, no debt obli-
gation is recorded on the Company's balance sheet. This
construction and lease facility expires in 2008. Lease pay-