Napa Auto Parts 2006 Annual Report Download - page 22

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
2006
Net Cash Provided by Operating Activities
The Company continues to generate excellent cash ows, with
$434 million in net cash provided by operating activities in 2006.
The 9% increase in net income was offset by the use of cash for
working capital requirements during the year, resulting in a slight
decrease in cash from operations compared to 2005. In 2005,
the Company generated $441 million in cash from operations, a
decrease from 2004. Despite an increase in net income in 2005,
the 2005 operating cash ows were down from the prior year
primarily due to an increase of $70 million in contributions to
Company-sponsored dened benet plans. In addition, the
Company’s extended term negotiations and other working capital
improvements in 2004 were especially favorable for operating
cash ows in that year. The Company believes existing credit
facilities and cash generated from operations will be sufcient
to fund its operations, and to meet its cash requirements.
Net Cash Used in Investing Activities
Cash ow used in investing activities was $146 million in 2006,
up from the prior two years due primarily to increased spending for
capital expenditures during the year. In 2006, capital expenditures
were $126 million compared to approximately $86 million and $72
million in 2005 and 2004, respectively. The Company believes that
2006 was an extraordinary year for capital spending due in part
to the timing of certain assets placed in service during the year.
The Company expects its investment in capital expenditures to
decrease to more customary levels in the foreseeable future.
Net Cash Used in Financing Activities
The Company used $341 million of cash in nancing activities in
2006, primarily for dividends to shareholders and the repurchase
of the Company’s common stock. Dividends and share repurchases
were also the primary nancing activities in 2005, and in 2004,
the primary nancing activities were the dividend and repayment
of borrowings. The Company paid dividends to shareholders of
$228 million, $216 million, and $209 million during 2006, 2005,
and 2004, respectively. The Company expects this trend of
increasing dividends to continue in the foreseeable future. During
2006, 2005 and 2004, the Company repurchased $123 million,
$119 million and $21 million, respectively, in Company stock.
We plan to remain active in our share repurchase program, but
the amount and value of shares repurchased will vary annually.
While no borrowings were repaid in 2006 or 2005, the Company
repaid variable rate borrowings of approximately $177 million in
2004. Long-term debt of $500 million at December 31, 2006 is
comprised of two $250 million term notes with a consortium of
nancial and insurance institutions due in 2008 and 2011. The
Company does not anticipate repaying these notes prior to their
scheduled expiration. The increasing dividends and uctuations
in cash used for share repurchases and the reduction of debt
primarily explain the changes in cash used for nancing activities
in 2006, 2005 and 2004.
Notes and Other Borrowings
The Company maintains a $350 million unsecured revolving line
of credit with a consortium of nancial institutions, which matures
in October 2008 and bears interest at LIBOR plus .25%. (5.57%
at December 31, 2006). At December 31, 2006 and 2005, no
amounts were outstanding under the line of credit.
At December 31, 2006, the Company had unsecured Senior Notes
outstanding under a $500 million nancing arrangement as follows:
$250 million, Series A, 5.86% xed, due 2008; and $250 million,
Series B, 6.23% xed, due 2011. Certain borrowings contain
covenants related to a maximum debt-to-equity ratio, a minimum
xed-charge coverage ratio and certain limitations on additional
borrowings. At December 31, 2006, the Company was in compliance
with all such covenants. The weighted average interest rate on the
Company’s outstanding borrowings was approximately 6.05%
at December 31, 2006 and 2005. Total interest expense, net of
interest income, for all borrowings was $26.4 million, $29.6 million
and $37.3 million in 2006, 2005 and 2004, respectively.
Construction and Lease Agreement
The Company also has an $85 million construction and lease
agreement with an unafiated third party. Properties acquired by
the lessor are constructed and then leased to the Company under
operating lease agreements. The total amount advanced and
outstanding under this agreement at December 31, 2006 was
approximately $84 million. Since the resulting leases are operating
leases, no debt obligation is recorded on the Company’s balance
sheet. This construction and lease agreement expires in 2009 and
no additional properties are being added to this agreement, as
the construction term has ended. Lease payments uctuate based
upon current interest rates and are generally based upon LIBOR
plus .50%. The lease agreement contains residual value guaran-
tee provisions and guarantees under events of default. Although
management believes the likelihood of funding to be remote, the
maximum guarantee obligation, which represents our residual
value guarantee, under the construction and lease agreement is
approximately $73 million at December 31, 2006. Refer to Note 8
to the Consolidated Financial Statements for further information
regarding this arrangement.
Contractual and Other Obligations
The following table shows the Company’s approximate obligations and
commitments, excluding interest due on credit facilities, to make future
payments under contractual obligations as of December 31, 2006:
Payment Due by Period
Less than Over
(in thousands) Total 1 year 1-3 years 4-5 years 5 years
Credit
facilities $ 500,000 $ – $ 250,000 $ 250,000 $ –
Capital
leases 13,615 2,509 4,502 2,852 3,752
Operating
leases 444,606 129,156 159,142 74,774 81,534
Total Contractual
Cash Obligations $ 958,221 $ 131,665 $ 413,644 $ 327,626 $ 85,286
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