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 September 30, 2000 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
NOT APPLICABLE
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 September 30, 2000
--------------------------------------- ---------------------------------
Class A Voting Stock - $1,000 par value 4,045 shares
Class B Stock - $1,000 par value 6,499 shares
Class C Stock - $ 100 par value 2,642,648 shares
ACE HARDWARE CORPORATION
INDEX
Part I. - Financial Information: Page No.
--------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2000 and January 1, 2000 1
Condensed Consolidated Statements of Earnings and
Condensed Consolidated Statements of Comprehensive
Income - Thirty-nine Weeks and Thirteen Weeks Ended
September 30, 2000 and October 2, 1999 2
Condensed Consolidated Statements of Cash Flows -
Thirty-nine Weeks Ended September 30, 2000 and
October 2, 1999 3
Notes to Condensed Consolidated Financial Statements 4 - 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 10
Part II. - Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
PART I. FINANCIAL INFORMATION
ACE HARDWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
September 30, January 1,
2000 2000
------------- -------------
(Unaudited)
ASSETS
[S] [C] [C]
Current Assets:
Cash and Cash Equivalents $ 47,573 $ 35,422
Accounts Receivable, Net 370,188 370,879
Merchandise Inventory 442,837 373,090
Prepaid Expenses and Other Current Assets 15,455 13,341
------------- ------------
Total Current Assets 876,053 792,732
Property and Equipment, Net 256,100 247,174
Other Assets 54,601 41,578
------------- ------------
Total Assets $ 1,186,754 $ 1,081,484
============= ============
LIABILITIES AND MEMBER DEALERS' EQUITY
Current Liabilities:
Current Installment of Long-Term Debt $ 4,874 $ 4,067
Short-Term Borrowings 148,797 49,869
Accounts Payable 453,206 449,497
Patronage Dividends Payable in Cash 26,132 38,173
Patronage Refund Certificates Payable 4,792 373
Accrued Expenses 68,128 69,990
------------ ------------
Total Current Liabilities 705,928 611,969
Notes Payable 108,409 111,895
Patronage Refund Certificates Payable 63,616 55,257
Other Long-Term Liabilities 24,714 22,400
------------ ------------
Total Liabilities 902,667 801,521
Member Dealers' Equity:
Class A Stock of $1,000 Par Value 4,045 3,856
Class B Stock of $1,000 Par Value 6,499 6,499
Class C Stock of $100 Par Value 264,265 241,226
Class C Stock of $100 Par Value, Issuable 17,008 21,648
Additional Stock Subscribed, Net of Unpaid
Portion 395 498
Retained Earnings (Deficit) (1,949) 594
Contributed Capital 13,485 13,485
Accumulated Other Comprehensive Income (668) 291
------------ ------------
Total Member Dealers' Equity 303,080 288,097
Less: Treasury Stock, at Cost 18,993 8,134
------------ ------------
Total Member Dealers' Equity 284,087 279,963
Total Liabilities and Member Dealers' Equity $ 1,186,754 $ 1,081,484
============ ============
See accompanying notes to condensed consolidated financial statements.
ACE HARDWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(000's omitted)
(Unaudited)
<TABLE>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net Sales $ 718,933 $ 787,104 $ 2,227,058 $ 2,468,637
Cost of Sales 648,615 714,281 2,019,848 2,263,100
-------------- ------------- -------------- -------------
Gross Profit 70,318 72,823 207,210 205,537
Operating Expenses:
Warehouse and Distribution 7,282 5,720 21,398 19,394
Selling, General and Administration 21,197 22,284 66,131 65,928
Retail Success and Development 16,715 15,512 52,332 38,972
-------------- ------------- -------------- -------------
Total Operating Expenses 45,194 43,516 139,861 124,294
-------------- ------------- -------------- -------------
Operating Income 25,124 29,307 67,349 81,243
Interest Expense (5,842) (4,088) (15,808) (12,525)
Other Income, net 3,043 1,490 10,016 7,426
Income Taxes 60 (352) 718 (1,189)
-------------- ------------- -------------- -------------
Net Earnings $ 22,385 $ 26,357 $ 62,275 $ 74,955
============== ============= ============== =============
Distribution of Net Earnings:
Patronage Dividends $ 23,153 $ 27,129 $ 64,818 $ 77,021
Retained Earnings (768) (772) (2,543) (2,066)
-------------- ------------- -------------- -------------
Net Earnings $ 22,385 $ 26,357 $ 62,275 $ 74,955
============== ============= ============== =============
</TABLE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(000's omitted)
(Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C>
Net Earnings $ 22,385 $ 26,357 $ 62,275 $ 74,955
Foreign currency translation, net (402) 766 (959) 868
-------------- -------------- -------------- --------------
Comprehensive Income $ 21,983 $ 27,123 $ 61,316 $ 75,823
============== ============== ============== ==============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
ACE HARDWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(Unaudited)
<TABLE>
Thirty-nine Weeks Ended Thirty-nine Weeks Ended
September 30, October 2,
2000 1999
------------- -------------
<S> <C> <C>
Operating Activities:
Net Earnings $ 62,275 $ 74,955
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation 18,384 17,396
Decrease in accounts receivable, net 691 30,131
Increase in merchandise inventory (69,747) (37,290)
Increase in prepaid expenses and other (2,114) (2,869)
current assets
Increase (Decrease) in accounts payable and 1,846 (3,934)
accrued expenses
Increase in other long-term liabilities 2,314 2,793
------------- -------------
Net Cash Provided by Operating Activities 13,649 81,182
Investing Activities:
Purchases of property and equipment, net (36,974) (27,723)
Proceeds from sale of property and equipment 9,664 325
Increase in other assets (13,982) (19,421)
------------- -------------
Net Cash Used In Investing Activities (41,292) (46,819)
Financing Activities:
Proceeds of short-term borrowings, net 98,928 30,000
Principal payments on long-term debt (2,679) (6,207)
Payments on refund certificates and
patronage financing programs (8,900) (32,643)
Proceeds from sale of common stock 1,477 147
Repurchase of common stock (10,859) (9,170)
Payments of cash portion of patronage dividend (38,173) (34,826)
------------- -------------
Net Cash Provided By (Used In) Financing Activities 39,794 (52,699)
------------- -------------
Increase (Decrease) in Cash and Cash Equivalents 12,151 (18,336)
Cash and Cash Equivalents at Beginning of Period 35,422 53,901
------------- -------------
Cash and Cash Equivalents at End of Period $ 47,573 $ 35,565
============= =============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
ACE HARDWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) General
The condensed consolidated interim period financial
statements presented herein do not include all of the
information and disclosures required in annual
financial statements and have not been audited, as
permitted by the rules and regulations of the
Securities and Exchange Commission. The condensed
consolidated interim period financial statements
should be read in conjunction with the annual
financial statements included in the Ace Hardware
Corporation Annual Report on Form 10-K as filed with
the Securities and Exchange Commission on March 17,
2000. In the opinion of management, these financial
statements have been prepared in conformity with
generally accepted accounting principles and reflect
all adjustments necessary for a fair statement of the
results of operations and cash flows for the interim
periods ended September 30, 2000 and October 2, 1999
and of it's financial position as of September 30,
2000. All such adjustments are of a normal recurring
nature. The results of operations for the thirteen
week and thirty-nine week periods ended September 30,
2000 and October 2, 1999 are not necessarily
indicative of the results of operations for a 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
2000.
-4-
4) 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 segment earnings as operating
earnings including an allocation for administrative
expenses, 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
September 30, 2000
----------------------------------------------------------------------------
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales from External Customers 2,177,560 16,687 32,811 - 2,227,058
Intersegment Sales 19,211 83,051 - (102,262) -
Segment Earnings (Loss) 56,035 8,463 (2,048) (175) 62,275
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
Thirteen Weeks Ended
September 30, 2000
---------------------------------------------------------------------------
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales from External Customers 702,241 4,979 11,713 - 718,933
Intersegment Sales 7,245 26,397 - (33,642) -
Segment Earnings (Loss) 20,181 2,815 (551) (60) 22,385
Thirteen Weeks Ended
October 2, 1999
---------------------------------------------------------------------------
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
--------- ------------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales from External Customers 772,690 6,370 8,045 - 787,104
Intersegment Sales 7,073 28,593 - (35,666) -
Segment Earnings (Loss) 23,871 3,186 (610) (90) 26,357
</TABLE>
-5-
5) 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 is 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. Accordingly, the
accompanying financial statements for the thirty-nine
weeks ended September 30, 2000 do not include activity
for the LBM Division of the Company.
-6-
ACE HARDWARE CORPORATION
------------------------
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-------------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Thirteen Weeks Ended September 30, 2000 compared to Thirteen
-----------------------------------------------------------------
Weeks Ended October 2, 1999.
----------------------------
Results of Operations
The total sales decrease for the quarter of 8.7% was affected 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. Excluding LBM, sales
increased 1.0% in 2000 primarily due to retailer conversions
to the Ace program. Domestically, basic business sales
increased 1.5% while international basic business sales
declined 9.8% for the quarter.
Gross profit decreased $2.5 million but increased as a percent of
total sales from 9.3% in 1999 to 9.8% in 2000. 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 decreased slightly for the quarter as a percent of basic
business sales due to higher warehousing costs absorbed into
inventory and sales mix shifts towards the lower margin
direct ship sales category. Higher vendor rebates combined
with higher Corporate store gross profit partially offset the
gross profit decline for the quarter.
Warehouse and distribution expenses increased $1.6 million over
1999 and increased as a percent of total sales from 0.7% in 1999
to 1.0% in 2000. As a percent to basic business sales, these
costs increased from 0.8% in 1999 to 1.0% in 2000. Pre-opening
costs for the Loxley, Alabama distribution facility and higher
distribution wages due to rate increases drove the higher
warehouse expenses for the quarter.
Selling, general and administrative expenses decreased $1.1
million or 4.9% due to decreased printing costs and lower LBM
Division costs. Higher information technology costs partially
offset these expense decreases.
Retail success and development expenses increased $1.2 million
due to higher Corporate store expenses resulting from operating
additional Corporate stores in 2000. Additional costs to
merchandise Ace retailer stores also contributed to the current
quarter increase.
Interest expense increased $1.8 million due to higher average
borrowing levels and increased interest rates. The increased
borrowing levels result from the construction and stocking of
the Loxley, Alabama distribution center and increased
retailer dating programs.
-7-
ACE HARDWARE CORPORATION
------------------------
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-------------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Thirty-nine Weeks Ended September 30, 2000 compared to Thirty-
-----------------------------------------------------------------
nine Weeks Ended October 2, 1999.
---------------------------------
Results of Operations
The total sales decrease of 9.8% was affected 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. Excluding LBM, sales increased 6.2%
in 2000 primarily due to increased existing retailer volume,
targeted efforts on new store development within our retailer
base, conversions to the Ace program and additional sales to
non-members. Domestic and international basic business sales
increased 6.4% and 1.6%, respectively.
Gross profit increased $1.7 million and increased as a percent of
total sales from 8.3% in 1999 to 9.3% in 2000. The increase, as a
percent of sales, results primarily from the loss of lower margin
LBM sales volume since August 1999. Basic business (excluding
LBM) gross profit decreased slightly as a percent of basic
business sales (9.3% in 2000 vs. 9.5% in 1999) due to a sales
mix shift towards the lower margin direct ship sales category and
higher warehousing costs absorbed into inventory. Increased
Corporate store gross profit driven by higher sales volume
partially offset the year-to-date gross profit decline.
Warehouse and distribution expenses increased $2.0 million over
1999 and increased as a percent of total sales from 0.8% in 1999
to 1.0% in 2000. As a percent of basic business sales, these
costs increased from 0.9% in 1999 to 1.0% in 2000. Higher
distribution wages required to support the increased sales
volume combined with pre-opening costs associated for a new
Loxley, Alabama distribution facility are partially offset by
higher logistics income.
Selling, general and administrative expenses increased $203,000,
or 0.3% and increased as a percent of total sales due to higher
information technology costs and expenses associated with opening
the Loxley, Alabama distribution facility. Lower LBM Division
costs partially offset these expense increases.
Retail success and development expenses increased $13.4 million
primarily due to operating costs associated with operating
additional Corporate stores. Excluding Corporate store operating
expenses, retail success and development expenses are up $7.0
million or 21.4% due to increased retail field personnel costs,
costs to support retail computer initiatives and costs to
merchandise Ace retailer stores. Additional paint advertising
costs also contribute to the year-to-date expense increase.
-8-
Interest expense increased $3.3 million due to higher average
borrowing levels and increased interest rates. The increased
borrowing levels result from the construction of the Loxley,
Alabama distribution center and increased retailer dating
programs.
Other income increased $2.6 million primarily due to income
realized on non-controlling investments in affiliates and higher
income on retailer loan programs.
Income tax expense decreased due to lower income from non-
patronage activities. Operating losses from non-patronage
activities resulted in a net income tax benefit in 2000.
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 in the foreseeable
future to finance the Company's working capital requirements and
patronage dividend and capital expenditures programs.
-9-
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
There have been no material changes in the Company's
market risk during the thirty-nine week period ended
September 30, 2000. For additional information, refer
to Item 7a in the Company's Annual Report on Form 10-K
for the year ended January 1, 2000.
-10-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
-11-
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
------------------------
RITA D. KAHLE DATE November 14, 2000
Rita D. Kahle
Executive Vice President
(Principal Finance Officer, and duly
authorized Officer of the registrant)
-12-
