SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period ended July 3, 1999 Commission File Number 2-63880
ACE HARDWARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-0700810
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Kensington Court, Oak Brook, IL 60523
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (630) 990-6600
___________________________________NONE___________________________________
Former name, former address and former
fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES XX NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
Class Outstanding at July 3, 1999
Class A Voting Stock - $1,000 par value 3,840 shares
Class B Stock - $1,000 par value 2,496 shares
Class C Stock - $ 100 par value 2,462,033 shares
ACE HARDWARE CORPORATION
INDEX
Part I. - Financial Information: Page No.
Item 1. Financial Statements
Consolidated Balance Sheets -
July 3, 1999 and January 2, 1999 1
Consolidated Statements of Earnings and
Consolidated Statements of Comprehensive Income -
Twenty-six Weeks and Thirteen Weeks Ended July 3,
1999 and July 4, 1998 2
Consolidated Statements of Cash Flows - Twenty-six
Weeks Ended July 3, 1999 and July 4, 1998 3
Notes to Consolidated Financial Statements 4 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 10 - 11
Part II. - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
PART I. ITEM 1. FINANCIAL INFORMATION
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
July 3, January 2,
1999 1999
(000's omitted)
ASSETS
Current Assets:
Cash $ 29,398 $ 53,901
Accounts Receivable, Net 476,044 397,120
Merchandise Inventory 335,292 334,405
Prepaid Expenses and Other Current Assets 18,287 15,146
------------ ------------
Total Current Assets 859,021 800,572
Property and Equipment, Net 243,670 239,845
Other Assets 15,698 7,309
------------ ------------
Total Assets $ 1,118,389 $ 1,047,726
============ ============
LIABILITIES AND MEMBER DEALERS' EQUITY
Current Liabilities:
Current Installment of Long-Term Debt $ 5,443 $ 7,433
Short-Term Borrowings 55,000 25,000
Accounts Payable 516,134 466,008
Patronage Dividends Payable in Cash 19,286 34,826
Patronage Refund Certificates Payable 399 20,655
Accrued Expenses 68,777 54,724
------------ ------------
Total Current Liabilities 665,039 608,646
Notes Payable 112,472 115,421
Patronage Refund Certificates Payable 51,898 43,465
Other Long-Term Liabilities 20,784 18,682
------------ ------------
Total Liabilities 850,193 786,214
Member Dealers' Equity:
Class A Stock of $1,000 Par Value 3,965 3,846
Class B Stock of $1,000 Par Value 6,499 6,499
Class C Stock of $100 Par Value 252,566 226,571
Class C Stock of $100 Par Value, Issuable 14,509 26,170
Additional Stock Subscribed,
Net of Unpaid Portion 517 471
Retained Earnings and Contributed Capital 5,293 6,587
Accumulated Other Comprehensive Income (716) (818)
------------ ------------
Total Member Dealers' Equity 282,633 269,326
Less: Treasury Stock, at Cost 14,437 7,814
------------ ------------
Total Member Dealers' Equity 268,196 261,512
------------ ------------
Total Liabilities and
Member Dealers' Equity $ 1,118,389 $ 1,047,726
============ ============
See accompanying notes to consolidated financial statements.
<TABLE>
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen Weeks Ended Thirteen Weeks Ended Twenty-six Weeks Ended Twenty-six Weeks Ended
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
(000's omitted) (000's omitted)
<S> <C> <C> <C> <C>
Net Sales $ 907,308 $ 829,569 $ 1,681,533 $ 1,550,972
Cost of Sales 829,256 758,501 1,540,306 1,426,678
------------------ ------------------ -------------------- --------------------
Gross Profit 78,052 71,068 141,227 124,294
Operating Expenses:
Warehouse and Distribution 9,207 9,039 19,374 19,510
Selling, General
and Administrative 21,945 20,995 44,611 41,812
Retail Success
and Development 12,550 7,537 23,680 14,347
------------------ ------------------ -------------------- --------------------
Total Operating Expenses 43,702 37,571 87,665 75,669
Operating Income 34,350 33,497 53,562 48,625
Interest Expense (4,570) (4,294) (8,386) (8,149)
Other Income, net 2,096 1,332 4,259 3,120
Income Taxes (587) (665) (837) (1,348)
------------------ ------------------ -------------------- --------------------
Net Earnings $ 31,289 $ 29,870 $ 48,598 $ 42,248
================== ================== ==================== ====================
Distribution of Net Earnings:
Patronage Dividends $ 31,154 $ 29,568 $ 49,892 $ 42,156
Retained Earnings 135 302 (1,294) 92
------------------ ------------------ -------------------- --------------------
Net Earnings $ 31,289 $ 29,870 $ 48,598 $ 42,248
================== ================== ==================== ====================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Thirteen Weeks Ended Thirteen Weeks Ended Twenty-six Weeks Ended Twenty-six Weeks Ended
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
(000's omitted) (000's omitted)
<S> <C> <C> <C> <C>
Net Earnings $ 31,289 $ 29,870 $ 48,598 $ 42,248
Foreign currency translation, net 58 (741) 102 (618)
------------------ ---------------------- ------------------ --------------------
Comprehensive Income $ 31,347 $ 29,129 $ 48,700 $ 41,630
================== ====================== =================== ====================
See accompanying notes to consolidated financial statements.
</TABLE>
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-six Weeks Ended Twenty-six Weeks Ended
July 3, July 4,
1999 1998
(000's omitted)
Operating Activities:
Net Earnings $ 48,598 $ 42,248
Adjustments to reconcile net
earnings to net cash
provided by operating
activities:
Depreciation 11,026 10,812
Loss on sale of property
and equipment - 415
Increase in accounts
receivable, net (79,454) (87,366)
Decrease in merchandise
inventory 4 6,205
Increase in prepaid
expenses and other (3,141) (3,060)
current assets
Increase in accounts
payable and
accrued expenses 63,920 99,023
Increase in other
long-term liabilities 2,102 2,347
---------------- ----------------
Net Cash Provided By
Operating Activities 43,055 70,624
Investing Activities:
Purchases of property and
equipment (14,851) (11,460)
Proceeds from sale of
property and equipment - 8,143
Increase in other assets (8,389) (2,466)
---------------- ----------------
Net Cash Used In Investing
Activities (23,240) (5,783)
Financing Activities:
Proceeds of short-term
borrowings 30,000 1,990
Proceeds from notes payable - 25,713
Principal payments on
long-term debt (4,939) (5,420)
Payments on refund
certificates and patronage
financing programs (28,741) (18,983)
Proceeds from sale of
common stock 811 564
Repurchase of common stock (6,623) (6,441)
Payments of cash portion
of patronage dividend (34,826) (29,943)
---------------- ----------------
Net Cash Used In Financing
Activities (44,318) (32,520)
---------------- ----------------
Increase (Decrease) in Cash
and Cash Equivalents (24,503) 32,321
Cash and Cash Equivalents at
Beginning of Period 53,901 14,171
---------------- ----------------
Cash and Cash Equivalents at
End of Period $ 29,398 $ 46,492
================ ================
See accompanying notes to consolidated financial statements.
ACE HARDWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) General
The accompanying consolidated financial statements have
not been examined by independent public accountants
except for the January 2, 1999 balance sheet but in the
opinion of the Company reflect all adjustments necessary
to present fairly the financial position as of July 3,
1999 and July 4, 1998 and the results of operations and
cash flows for the twenty-six weeks then ended. These
interim figures are not necessarily indicative of the
results to be expected for the full year.
2) Patronage Dividends
The Company operates as a cooperative organization and
will pay patronage dividends to consenting member
dealers based on the earnings derived from business done
with such dealers. It has been the practice of the
Company to distribute substantially all patronage
sourced earnings in the form of patronage dividends.
Net earnings and patronage dividends will normally be
similar since patronage sourced net earnings is paid to
consenting member dealers. International dealers signed
under a Retail Merchant Agreement are not eligible for
patronage dividends and related earnings or loss are not
included in patronage sourced earnings.
3) Reclassifications
Certain financial statement reclassifications have been
made to prior year and prior quarter amounts to conform
to comparable classifications followed in 1999.
4) Fiscal Year
Effective January 1, 1998, the Board of Directors
approved a change to the Company's fiscal year from
December 31 to the Saturday nearest December 31.
Accordingly, the second quarter of 1999 and 1998
consists of thirteen weeks.
5) Year 2000
A detailed plan has been established to identify and
track progress on the identification of systems,
changing of non-compliant systems and testing of those
systems for Year 2000 compliance. Project completion
is planned for the middle of 1999. In addition, a
plan has been developed for all devices (time clocks,
power systems, etc.) within the Company. The Company
is nearly 100% complete with the project as of July 3,
1999. The Company expects its Year 2000 date
conversion project to be completed on a timely basis.
The Company expects to incur internal staff costs as
well as incremental consulting and other expenses
related to infrastructure and facilities enhancements
necessary to prepare the systems for the Year 2000. A
significant portion of these costs will represent the
re-deployment of existing information technology
resources. Based upon current estimates, such costs
could range between $5.0 million and $6.5 million. The
Company has expended approximately $5.1 million
through July 3, 1999.
Correspondence has been received from the Company's
primary vendors that plans are being developed to
address processing of transactions in the Year 2000.
However, there can be no assurance that the systems of
other companies on which the Company's system rely
will be converted timely or that any such failure to
convert by another company would not have an adverse
affect on the Company's systems.
The Company has developed a Business Recovery Plan to
address specific business risks related to year 2000.
This plan includes specific direction, including but
not limited to, trigger events to invoking the Plan,
length of period that could be sustained under the
Plan, implementation procedures, training, data
security and integrity and resource requirements in
the unlikely event that the plan will be implemented.
6) Segments
The Company is principally engaged as a wholesaler of
hardware and related products and manufactures paint
products. The Company identifies segments based on
management responsibility and the nature of the
business activities of each component of the Company.
The company measures segments earnings as operating
earnings including an allocation for interest expense
and income taxes. Information regarding the identified
segments and the related reconciliation to
consolidated information is as follows:
<TABLE>
Twenty-six Weeks Ended
July 3, 1999
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
<S> <C> <C> <C> <C> <C>
Net Sales from External Customers 1,659,658 12,393 9,482 1,681,533
Intersegment Sales 11,225 56,514 (67,739)
Segment Earnings (Loss) 44,324 5,358 (864) (220) 48,598
Identifiable Segment Assets 1,050,165 36,602 45,243 (13,621) 1,118,389
Twenty-six Weeks Ended
July 4, 1998
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
Net Sales from External Customers 1,530,633 15,009 5,330 1,550,972
Intersegment Sales 5,013 50,859 (55,872)
Segment Earnings (Loss) 37,141 5,445 (18) (320) 42,248
Identifiable Segment Assets 1,030,379 32,902 27,900 (3,254) 1,087,927
- -
Thirteen Weeks Ended
July 3, 1999
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
Net Sales from External Customers 894,034 7,878 5,396 907,308
Intersegment Sales 6,226 28,918 (35,144)
Segment Earnings (Loss) 28,774 2,675 (60) (100) 31,289
Thirteen Weeks Ended
July 4, 1998
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
Net Sales from External Customers 817,982 8,058 3,529 829,569
Intersegment Sales 2,636 29,689 (32,325)
Segment Earnings (Loss) 25,001 4,829 131 (91) 29,870
</TABLE>
7) BMA
On June 30,1999 the Company entered into a business
combination agreement with Builder Marts of America,
Inc. (BMA) to combine the LBM Division of the Company
with BMA. Under this agreement, the Company will
contribute defined business assets (primarily vendor
rebate receivables, fixed assets and inventories) for
a non-controlling interest in the combined entity.
The investment in the combined entity will be
accounted for under the equity method of accounting.
The accompanying consolidated financial statements
include the financial results of the LBM Division
through July 3, 1999 as the closing is scheduled for
August 2, 1999.
ACE HARDWARE CORPORATION
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Thirteen Weeks Ended July 3, 1999 compared to Thirteen Weeks Ended July 4, 1998.
Results of Operations
Net sales increased 9.4% in 1999 primarily due to increased existing retailer
volume, targeted efforts on new store development within our retailer base and
conversions to the Ace program. Sales of basic hardware and paint merchandise
(including warehouse, bulletin and direct shipments) increased 6.8% for the
quarter. A decline in International business negatively impacted basic sales
for the quarter.
Gross profit increased $7.0 million and increased as a percent of sales from
8.57% in 1998 to 8.60% in 1999. Increased handling charges from warehouse
shipments, higher cash discounts, increased margin from retail operations and
lower costs absorbed into inventory resulted in the increase.
Warehouse and distribution expenses increased slightly vs. 1998 but decreased
as a percent of total sales from 1.09% in 1998 to 1.01% in 1999. Increased
warehouse and distribution costs required to support increased handled sales
partially offset higher traffic and freight consolidations income.
Selling, general and administrative expenses increased $950,000 or 4.5%
but decreased as a percent of sales due to increased information technology
costs to support our year 2000 efforts partially offset by increased Spring
convention income.
Retail success and development expenses increased $5.0 million due to costs
associated with additional company-owned stores, costs to support retail
computer initiatives, new business development costs and decreased advertising
income.
Twenty-six Weeks Ended July 3, 1999 compared to Twenty-six Weeks Ended
July 4, 1998.
Results of Operations
Net sales increased 8.4% in 1999 primarily due to increased existing retailer
volume, targeted efforts on new store development within our retailer base and
conversions to the Ace program. Sales of basic hardware and paint merchandise
(including warehouse, bulletin and direct shipments) increased 6.8%. A decline
in International business negatively impacted basic sales. Excluding
International, basic sales are up 7.6%. The rebound of lumber prices has also
contributed to the total sales increase. 1999 includes three fewer working days
than 1998.
Gross profit increased $16.9 million and increased as a percent of sales from
8.01% in 1998 to 8.40% in 1999. Increased handling charges from warehouse
shipments, higher cash discounts and increased margin from retail operations
resulted in the year-to-date increase.
Warehouse and distribution expenses decreased slightly vs. 1998 and decreased
as a percent of total sales from 1.26% in 1998 to 1.15% in 1999. Increased
warehouse and distribution costs required to support increased handled sales
are partially offset by higher traffic and freight consolidations income.
Selling, general and administrative expenses increased $2.8 million or 6.7%
but decreased as a percent of sales due to increased information technology
costs to support our year 2000 efforts.
Retail success and development expenses increased $9.3 million due to costs
associated with additional company-owned stores, costs to support retail
computer initiatives, new business development costs and decreased
advertising income.
Income taxes decreased due to decreased income from non-patronage activities.
Liquidity and Capital Resources
The Company expects that existing and internally generated funds, along with
new and established lines of credit and long-term financing, will continue to
be sufficient to finance the Company's working capital requirements and
patronage dividend and capital expenditures programs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to certain market risks, including foreign
currency and interest rates. The Company uses a variety of practices
to manage these market risks, including, when considered appropriate,
derivative financial instruments. The Company uses derivative
financial instruments only for risk management and does not use them
for trading or speculative purposes. The Company is exposed to
potential gains or losses from foreign currency fluctuations affecting
net investments and earnings denominated in foreign currencies. The
Company's primary exposure is to changes in exchange rates from the
U.S. dollar versus the Canadian dollar.
Interest rate risk is managed through a combination of fixed rate debt
and variable rate short-term borrowings with varying maturities. At
July 3, 1999, all short-term and long-term debt was issued at fixed
rates.
The table below presents principal amounts and related weighted
average interest rates by year of maturity of the Company's
investments and debt obligations:
<TABLE>
1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Thereafter Total
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Short-term investment-fixed $ 5,381 $ $ $ $ $ $ 5,381
Fixed interest rate 4.82% 4.82%
Liabilities:
Short-term borrowings-fixed $ 55,000 $ 55,000
Average fixed interest rate 5.42% 5.42%
Long-term debt-fixed rate $ 5,443 $ 5,152 $ 6,164 $ 6,156 $ 4,000 $ 91,000 $117,915
Average fixed interest rate 7.87% 7.65% 7.27% 7.27% 6.47% 7.09% 7.13%
</TABLE>
The Company is exposed to credit risk on certain assets, primarily
accounts receivable. The Company provides credit to customers in the
ordinary course of business and performs ongoing credit evaluations.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's
customer base. The Company currently believes its allowance for
doubtful accounts is sufficient to cover customer credit risks.
The Company's various currency exposures often offset each other,
providing a natural hedge against currency risk. The Company has
utilized foreign exchange forward contracts to hedge non-U.S. equity
investments. Gains and losses on these foreign hedges are included
in the basis of the underlying hedged investment. As of July 3, 1999,
the Company has outstanding foreign currency contracts to sell the
equivalent of $30.5 million of Canadian dollars to hedge a portion of
a foreign investment. All contracts mature within one year. The fair
value of these agreements result in an unrecognized gain of $1.4
million reflected within accumulated other comprehensive income at
July 3, 1999. Settlement of foreign sales and purchases are generally
denominated in U.S. currency resulting in limited foreign currency
transaction exposure.
PART II. OTHER INFORMATION
ACE HARDWARE CORPORATION
Item 4. Submission of Matters to a Vote of Security Holders
The following information is furnished with respect to
matters submitted to a vote of the stockholders of the
registrant at a meeting thereof held during the quarter
covered by this report:
(a) Date of meeting: June 7, 1999 - said meeting was
an annual meeting.
(b) 1. The following directors were elected at said
meeting for a three year term expiring in 2002:
Richard F. Baalmann, Jr.
Richard W. Stine
2. The following directors were reelected at said
meeting for a three year term expiring in 2002:
J. Thomas Glenn
3. The names of the other directors other than the
above elected directors whose terms of office as
directors continue after the meeting are:
Eric R. Bibbens, II
D. William Hagan
Jennifer C. Anderson
Mark Jeronimus
Daniel L. Gust
Lawrence R. Bowman
Howard J. Jung
Mario R. Nathusius
Roger E. Peterson
Item 6. Exhibits and Reports on Form 8-K.
(b) A Form 8-K was filed on April 30, 1999 containing
Notice of Annual Meeting of Stockholders on June 7,
1999 and Proxy solicited by Board of Directors and
related information.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ACE HARDWARE CORPORATION
LORI L. BOSSMANN DATE August 16, 1999
Lori L. Bossmann
Vice President, Controller
(Principal Accounting Officer, and duly
authorized Officer of the registrant)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
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<S> <C>
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