Napa Auto Parts 2006 Annual Report Download - page 21

Income Taxes
The effective income tax rate was 38.3% in 2006, unchanged
from the effective rate in 2005. The effective income tax rate
increased to 38.3% in 2005 from 37.8% in 2004. The increase
in 2005 was primarily due to higher state income taxes in that
year and favorable non-recurring items in the prior year.
Net Income
Net income was $475 million in 2006, an increase of 9% from
$437 million in 2005. On a per share diluted basis, net income
was $2.76 in 2006 compared to $2.50 in 2005, up 10%. 2006
represents our third consecutive year of double-digit growth in
diluted earnings per share. Net income in 2006 and 2005 was
4.5% of net sales.
Net income was $437 million in 2005, up 11% from $396 million
in 2004, and on a per share diluted basis, net income was $2.50
in 2005 compared to $2.25 in 2004. Net income in 2005 was
4.5% of net sales compared to 4.3% in 2004.
Share-Based Compensation
Effective January 1, 2006 the Company adopted Statement of
Financial Accounting Standards (“SFAS”) No. 123(R) choosing the
“modied prospective” method. Compensation cost recognized for
the year ended December 31, 2006 includes: (a) compensation
cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS
No. 123, and (b) compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant date
fair value estimated with the provisions of SFAS No. 123(R).
Results for prior periods have not been restated. Most options
may be exercised not earlier than twelve months nor later than
ten years from the date of grant. As of January 1, 2006, there
was approximately $1.2 million of unrecognized compensation
cost for all awards granted prior to January 1, 2003 to employees
that remained unvested prior to the effective date of SFAS No.
123(R). This compensation cost is expected to be recognized over
a weighted-average period of approximately four years. For the
year ended December 31, 2006, total compensation cost related
to nonvested awards not yet recognized was approximately $20.2
million. The weighted-average period over which this compensa-
tion cost is expected to be recognized is approximately three
years. For the years ended December 31, 2006, 2005 and 2004,
$11.9 million, $6.9 million and $2.5 million of share-based
compensation cost was recorded, respectively. There have
been no modications to valuation methodologies or methods
subsequent to the adoption of SFAS No. 123(R).
Financial Condition
The major consolidated balance sheet categories at December 31,
2006, with the exception of the accounts discussed below, were
relatively consistent with the December 31, 2005 balance sheet
categories. The Company’s cash balances decreased $53 million or
28% from December 31, 2005, due primarily to cash used during
the year for increased working capital requirements and invest-
ments in capital expenditures. Our accounts receivable balance
at December 31, 2006 increased 3% compared to the prior year,
which is less than our increase in revenues for the fourth quarter
and year. Inventory at December 31, 2006, was up less than 1%
from December 31, 2005, reecting our continued emphasis on
inventory management. Prepaid expenses and other current assets
increased $20 million or 10% from December 31, 2005, reecting
the increase in receivables due from vendors. Accounts payable at
December 31, 2006 decreased $63 million or 7% from the prior
year, due primarily to the termination of extended terms with
certain suppliers during 2006 and the resulting decrease in days
payables outstanding.
Other assets at December 31, 2006 decreased $339 million or
67%; other long-term liabilities increased $73 million or 64%;
and accumulated other comprehensive (loss) income, included
as a component of shareholders’ equity, was a loss of $243 million
at December 31, 2006 compared to income of $46 million at
December 31, 2005. These changes in other assets, other long-
term liabilities and accumulated other comprehensive loss were
primarily due to the pension adjustments required by SFAS No.
158 Employers’ Accounting for Dened Benet Pension and
Other Postretirement Plans.
Liquidity and Capital Resources
The ratio of current assets to current liabilities was 3.2 to 1 at
December 31, 2006 compared to 3.0 to 1 at December 31, 2005.
Our cash position remains strong. The Company had $500 million
in total debt outstanding at December 31, 2006 and 2005.
A summary of the Company’s consolidated statements of cash ows
is as follows:
Year Ended December 31,
Net Cash (in thousands) Percent Change
Provided by 2006 vs. 2005 vs.
(Used in): 2006 2005 2004 2005 2004
Operating
Activities $ 433,500 $ 440,517 $ 555,236 -2% -21%
Investing
Activities (145,599) (70,174) (67,955) 107% 3%
Financing
Activities (340,729) (317,469) (369,328) 7% -14%
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