Napa Auto Parts 2010 Annual Report Download - page 21

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Table of Contents
2009, income before income taxes of $644 million was down 16.0% from $768 million in 2008 and as a percentage of net sales was
6.4%, a decrease from 7.0% in 2008.
Automotive Group
Automotive income before income taxes as a percentage of net sales, which we refer to as operating margin, increased to 7.5% in
2010 from 7.4% in 2009. The improvement in operating margin for 2010 is attributed to the benefit of greater expense leverage associated
with Automotive’s 7% sales increase for the year. Automotive’s initiatives to grow sales and control costs are intended to further improve
its operating margin in the years ahead.
Automotive’s operating margin increased to 7.4% in 2009 from 7.2% in 2008. The improvement in operating margin for 2009 is
attributed to the benefit of cost reduction measures implemented during 2008 and 2009.
Industrial Group
Industrial’s operating margin increased to 7.3% in 2010 from 5.6% in 2009. The increase in operating margin in 2010 is due to the
combination of greater expense leverage associated with a 22% sales increase, cost savings and increased volume incentives. Industrial
will continue to focus on its sales initiatives and cost controls to further improve its operating margin in the years ahead.
Industrial’s operating margin decreased to 5.6% in 2009 from 8.4% in 2008. The decrease in operating margin in 2009 was
primarily a reflection of the extreme downturn in industrial demand that we began to experience in the fourth quarter of 2008. These
conditions led to lower sales volumes in 2009, which severely impacted our expense leverage despite significant cost reduction efforts.
Office Group
The operating margin in Office increased to 8.0% in 2010 from 7.7% in 2009. The increase in operating margin in 2010 reflects the
positive impact of our cost savings initiatives combined with the benefit of higher volume incentives from suppliers. The increase in
incentives was due to our fourth quarter sales growth and related increase in purchase volumes, which allowed us to achieve higher
program growth tiers with suppliers.
The operating margin in Office was 7.7% in 2009, down from 8.3% in 2008. The prevailing weakness in the office products
industry that began in 2007 continued to pressure the operating margin at Office in 2009.
Electrical Group
The operating margin in Electrical decreased to 6.9% in 2010 from 7.3% in 2009. The decrease in operating margin is mainly due to
escalating copper prices during the year, which generally do not affect profit dollars, but negatively impact margins as copper is generally
billed to customers at cost. The margin pressures associated with this industry standard pricing practice for copper more than offset the
benefits of a stronger manufacturing sector in 2010 and greater expense leverage associated with a 30% sales increase.
The operating margin in Electrical decreased to 7.3% in 2009 from 7.9% in 2008. The decrease in operating margin was primarily a
function of weak market conditions. This factor outweighed the benefits of Electrical’s sales initiatives and expense savings.
Income Taxes
The effective income tax rate of 37.6% in 2010 was down from 38.0% in 2009. The decrease from 2009 is attributable to favorable
foreign income taxes for the year. The income tax rate decreased to 38.0% in 2009 from 38.1% in 2008. The decrease from the 2008 rate is
mainly due to tax-free income in 2009 associated with a Company retirement plan.
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