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 October 2, 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 October 2, 1999
_____________________________________ _______________________________
Class A Voting Stock - $1,000 par value 3,838 shares
Class B Stock - $1,000 par value 2,460 shares
Class C Stock - $ 100 par value 2,440,436 shares
ACE HARDWARE CORPORATION
INDEX
Part I. - Financial Information: Page No.
________
Item 1. Financial Statements
Consolidated Balance Sheets -
October 2, 1999 and January 2, 1999 1
Consolidated Statements of Earnings and
Consolidated Statements of Comprehensive Income-
Thirty-nine Weeks and Thirteen Weeks Ended
October 2, 1999 and October 3, 1998 2
Consolidated Statements of Cash Flows - Thirty-nine
Weeks Ended October 2, 1999 and October 3, 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 6. Exhibits and Reports on Form 8-K 12
PART I. ITEM 1. FINANCIAL INFORMATION
ACE HARDWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
October 2, January 2,
1999 1999
_______________ ______________
(000's omitted)
ASSETS
Current Assets:
Cash $ 35,565 $ 53,901
Accounts Receivable, Net 369,262 397,120
Merchandise Inventory 371,695 334,405
Prepaid Expenses and Other Current
Assets 18,015 15,146
_____________ _____________
Total Current Assets 794,537 800,572
Property and Equipment, Net 250,127 239,845
Other Assets 27,318 7,309
_____________ _____________
Total Assets $ 1,071,982 $ 1,047,726
============= =============
LIABILITIES AND MEMBER DEALERS' EQUITY
Current Liabilities:
Current Installment of Long-Term Debt $ 4,299 $ 7,433
Short-Term Borrowings 55,000 25,000
Accounts Payable 444,958 466,008
Patronage Dividends Payable in Cash 29,955 34,826
Patronage Refund Certificates Payable 399 20,655
Accrued Expenses 74,113 54,724
_____________ _____________
Total Current Liabilities 608,724 608,646
Notes Payable 112,348 115,421
Patronage Refund Certificates Payable 57,957 43,465
Other Long-Term Liabilities 21,475 18,682
_____________ _____________
Total Liabilities 800,504 786,214
Member Dealers' Equity:
Class A Stock of $1,000 Par Value 4,013 3,846
Class B Stock of $1,000 Par Value 6,499 6,499
Class C Stock of $100 Par Value 252,768 226,571
Class C Stock of $100 Par Value, Issue 20,186 26,170
Additional Stock Subscribed, Net of
Unpaid Portion 425 471
Retained Earnings and Contributed Capital 4,521 6,587
Accumulated Other Comprehensive Income 50 (818)
_____________ _____________
Total Member Dealers' Equity 288,462 269,326
Less: Treasury Stock, at Cost 16,984 7,814
_____________ _____________
Total Member Dealers' Equity 271,478 261,512
Total Liabilities and Member Dealers
Equity $ 1,071,982 $ 1,047,726
============= =============
See accompanying notes to consolidated financial statements.
<TABLE>
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Thirteen Weeks Ended Thirteen Weeks Ended Thirty-nine Weeks Ended Thirty-nine Weeks Ended
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
________________ ________________ __________________ __________________
(000's omitted) (000's omitted)
<S> <C> <C> <C> <C>
Net Sales $ 787,104 $ 782,002 $ 2,468,637 $ 2,332,974
Cost of Sales 710,452 714,694 2,250,758 2,141,372
_______________ ________________ __________________ __________________
Gross Profit 76,652 67,308 217,879 191,602
Operating Expenses:
Warehouse and Distribution 9,755 9,201 29,129 28,711
Selling, General and
Administrative 23,135 20,975 67,746 62,787
Retail Success and
Development 15,292 9,703 38,972 24,050
_______________ _______________ __________________ __________________
Total Operating Expenses 48,182 39,879 135,847 115,548
_______________ _______________ __________________ __________________
Operating Income 28,470 27,429 82,032 76,054
Interest Expense (4,138) (4,941) (12,525) (13,090)
Other Income, net 2,377 1,917 6,637 5,037
Income Taxes (352) (514) (1,189) (1,862)
_______________ _______________ __________________ __________________
Net Earnings $ 26,357 $ 23,891 $ 74,955 $ 66,139
=============== =============== ================== ==================
Distribution of Net Earnings:
Patronage Dividend $ 27,129 $ 23,638 $ 77,021 $ 65,794
Retained Earnings (772) 253 (2,066) 345
_______________ _______________ __________________ __________________
Net Earnings $ 26,357 $ 23,891 $ 74,955 $ 66,139
=============== =============== ================== ==================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Thirteen Weeks Ended Thirteen Weeks Ended Thirty-nine Weeks Ended Thirty-nine Weeks Ended
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
________________ ________________ ___________________ ___________________
(000's omitted) (000's omitted)
Net Earnings $ 26,357 $ 23,891 $ 74,955 $ 66,139
Foreign currency translation, net 766 (36) 868 (654)
________________ ________________ ___________________ ___________________
Comprehensive Income $ 27,123 $ 23,855 $ 75,823 $ 65,485
================ ================ =================== ===================
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
ACE HARDWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-nine Weeks Ended Thirty-nine Weeks Ended
October 2, October 3,
1999 1998
__________________ ___________________
(000's omitted)
<S> <C> <C>
Operating Activities:
Net Earnings $ 74,955 $ 66,139
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation 17,396 16,124
Loss on sale of property and equipment 52 417
Decrease (Increase) in accounts
receivable 27,734 (22,054)
Increase in merchandise inventory (36,560) (24,879)
Increase in prepaid expenses and other (2,869) (4,162)
current assets
Increase (Decrease) in accounts payable and
accrued expenses (1,396) 36,944
Increase in other long-term liabilities 2,793 2,964
__________________ ___________________
Net Cash Provided By Operating Activities 82,105 71,493
Investing Activities:
Purchases of property and equipment, net (28,055) (17,697)
Proceeds from sale of property and
equipment 325 8,149
Increase in other assets (20,009) (5,754)
__________________ ___________________
Net Cash Used In Investing Activities (47,739) (15,302)
Financing Activities:
Proceeds (payments) of short-term borrowings 30,000 (2,995)
Proceeds from notes payable - 26,022
Principal payments on long-term debt (6,207) (7,402)
Payments on refund certificates and
patronage financing programs (33,467) (21,266)
Proceeds from sale of common stock 968 993
Repurchase of common stock (9,170) (9,311)
Payments of cash portion of patronage
dividend (34,826) (29,943)
__________________ ___________________
Net Cash Used In Financing Activities (52,702) (43,902)
__________________ ___________________
Increase (Decrease) in Cash and Cash Equivalents (18,336) 12,289
Cash and Cash Equivalents at Beginning of Period 53,901 14,171
__________________ ___________________
Cash and Cash Equivalents at End of Period $ 35,565 $ 26,460
================== ===================
See accompanying notes to consolidated financial statements.
</TABLE>
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 October 2, 1999 and October 3, 1998 and the
results of operations and cash flows for the thirty-nine 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 losses 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 third 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. 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 October 2, 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. The Company has expended
approximately $5.1 million through October 2, 1999. Remaining costs to be
incurred are anticipated to be minimal.
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.
-5-
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>
Thirty-nine Weeks Ended
October 2, 1999
_________________________________________________________________________________
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
_________ _____________ ______ __________ ____________
<S> <C> <C> <C> <C> <C>
Net Sales from External Customers 2,432,348 18,763 17,526 - 2,468,637
Intersegment Sales 18,298 85,107 - (103,405) -
Segment Earnings (Loss) 68,195 8,544 (1,474) (310) 74,955
Identifiable Segment Assets 991,825 37,985 50,522 (8,350) 1,071,982
Thirty-nine Weeks Ended
October 3, 1998
_________________________________________________________________________________
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
_________ _____________ ______ __________ ____________
Net Sales from External Customers 2,306,372 18,396 8,206 - 2,332,974
Intersegment Sales 8,370 76,889 - (85,259) -
Segment Earnings (Loss) 57,980 8,741 (138) (444) 66,139
Identifiable Segment Assets 972,803 33,113 35,402 (2,348) 1,038,969
Thirteen Weeks Ended
October 2, 1999
_________________________________________________________________________________
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
_________ _____________ _____ __________ ____________
Net Sales from External Customers 772,690 6,370 8,044 - 787,104
Intersegment Sales 7,073 28,593 - (35,666) -
Segment Earnings (Loss) 23,871 3,186 (610) (90) 26,357
Thirteen Weeks Ended
October 3, 1998
_________________________________________________________________________________
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
_________ _____________ _____ __________ ____________
Net Sales from External Customers 775,739 3,387 2,876 - 782,002
Intersegment Sales 3,357 26,030 - (29,387) -
Segment Earnings (Loss) 20,839 3,296 (120) (124) 23,891
</TABLE>
-6-
7) Business Combination
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 contributed 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 the closing date of 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 October 2, 1999 compared to Thirteen Weeks
Ended October 3, 1998.
Results of Operations
The total sales increase of .7% was effected by the business combination of
Ace LBM with BMA. As a result of this transaction, LBM sales are not reported
within the Company's sales results after August 2, 1999. Basic business sales
increased 10.2% 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. A slight decline in International business
negatively impacted basic sales for the quarter.
Gross profit increased $9.3 million and increased as a percent of total sales
from 8.6% in 1998 to 9.7% in 1999. The increase as a percent of sales results
primarily from the loss of lower margin LBM sales volume since August 1999.
Basic business gross profit was positively impacted for the quarter by higher
vendor rebates and increased margin from retail and import operations. Higher
costs absorbed into inventory partially offset this positive improvement for
the quarter.
Warehouse and distribution expenses increased $554,000 over 1998 and increased
as a percent of total sales from 1.18% in 1998 to 1.24% in 1999. As a percent
to basic business sales, these costs decreased from 1.42% in 1998 to 1.37% in
1999. Increased warehouse and distribution costs required to support increased
handled sales are partially offset by higher traffic and freight consolidations
income for the quarter.
Selling, general and administrative expenses increased $2.2
million or 10.3% and increased as a percent of total sales.
Increased information technology costs and the timing of
convention and printing income resulted in the third quarter
increase.
Retail success and development expenses increased $5.6 million due to costs
associated with additional company-owned stores, costs to support retail
computer initiatives and new business development costs.
Interest expense decreased as a result of lower borrowing levels due to the
settlement of LBM retailer receivables.
Thirty-nine Weeks Ended October 2, 1999 compared to Thirty-nine
Weeks Ended October 3, 1998.
Results of Operations
The total sales increase of 5.8% was effected by the business combination of
Ace LBM with BMA. As a result of this transaction, LBM sales are not reported
within the Company's sales results after August 2, 1999. Basic business sales
increased 7.8% 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. A decline in International business
negatively impacted basic sales. Excluding International, basic business
domestic sales are up 8.7%. 1999 includes three fewer working days than 1998.
Gross profit increased $26.3 million and increased as a percent of sales from
8.2% in 1998 to 8.8% in 1999. This increase as a percent of sales results
partially from the loss of lower margin LBM volume. Higher cash discounts and
vendor rebates and increased margin from retail and import operations resulted
in the year-to-date gross profit increase.
Warehouse and distribution expenses increased slightly vs. 1998 but decreased
as a percent of total sales from 1.23% in 1998 to 1.18% in 1999. Expenses also
decreased as a percent to basic business sales from 1.47% in 1998 to 1.39% 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 $5.0 million or 7.9%
and increased as a percent of sales due to increased information technology
costs to support our year 2000 efforts.
Retail success and development expenses increased $14.9 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.
- -7-
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 October 2, 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 rate $ 17,497 $ - $ - $ - $ - $ - $ 17,497
Fixed interest rate 5.21% 5.21%
Liabilities:
Short-term borrowings-fixed rate $ 55,000 $ - $ - $ - $ - $ - $ 55,000
Average fixed interest rate 5.66% 5.66%
Long-term debt-fixed rate $ 4,299 $ 5,028 $ 6,164 $ 6,156 $ 4,000 $ 91,000 $116,647
Average fixed interest rate 7.76% 8.02% 7.27% 7.27% 6.47% 7.09% 7.14%
</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.
-10-
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. During the
thirteen weeks ended October 2, 1999, the Company sold $30.5 million
of Canadian dollars to settle all outstanding foreign currency
contracts. This resulted in an unrecognized gain of approximately
$2.0 million reflected within accumulated other comprehensive income
at October 2, 1999. Settlement of foreign sales and purchases are
generally denominated in U.S. currency resulting in limited foreign
currency transaction exposure. The Company does not have any
outstanding foreign exchange forward contracts at October 2, 1999.
-11-
PART II. OTHER INFORMATION
__________________________
ACE HARDWARE CORPORATION
________________________
Item 6. Exhibits and Reports on Form 8-K.
(b) There were no reports on Form 8-K for the thirteen
weeks ended October 2, 1999.
-12-
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 _11/15/99___________
Lori L. Bossmann
Vice President, Finance
(Principal Accounting Officer, and duly
authorized Officer of the registrant)
- -13-
<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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<PERIOD-END> OCT-2-1999
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