Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 29, 2001,
[] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from_____to______
DELAWARE 36-0700810 & nbsp;
(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)
(630) 990-6600
(Registrant's telephone number, including area code)
(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 [x] NO []
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as
of the close of the latest practicable date.
Class Outstanding at September 29, 2001
Class A Voting Stock - $1,000 par value 3,717 shares
Class B Stock - $1,000 par value 2,136 shares
Class C Stock - $ 100 par value 2,622,895 shares
Part I. - Financial Information: Page No.
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
September 29, 2001 and December 30, 2000 1
Condensed Consolidated Statements of Earnings and
Condensed Consolidated Statements of Comprehensive
Income - Thirty-nine Weeks and Thirteen Weeks Ended
September 29, 2001 and September 30, 2000 2
Condensed Consolidated Statements of Cash Flows -
Thirty-nine Weeks Ended September 29, 2001
and September 30, 2000 3
Notes to Condensed Consolidated Financial Statements 4 - 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 9
Part II. - Other Information
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
ACE HARDWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
September 29, December 30,
2001 2000
(Unaudited)
Current Assets:
Cash and Cash Equivalents $ 25,626 $ 24,644
Short-term Investments 12,860 12,772
Accounts Receivable, Net 329,335 372,971
Merchandise Inventory 456,760 395,565
Prepaid Expenses and Other Current Assets 17,861 15,105
Total Current Assets 842,442 821,057
Property and Equipment, Net 292,660 261,890
Other Assets 41,996 40,863
Total Assets $ 1,177,098 $ 1,123,810
============ ============
Current Liabilities:
Current Installment of Long-Term Debt $ 7,091 $ 6,904
Short-Term Borrowings 78,500 81,500
Accounts Payable 433,348 448,766
Patronage Dividends Payable in Cash 23,190 34,764
Patronage Refund Certificates Payable 9,089 4,795
Accrued Expenses 75,664 63,224
Total Current Liabilities 626,882 639,953
Long-Term Debt 172,864 105,891
Patronage Refund Certificates Payable 70,257 68,385
Other Long-Term Liabilities 27,770 24,923
Total Liabilities 897,773 839,152
Member Dealers' Equity:
Class A Stock of $1,000 Par Value 3,918 3,783
Class B Stock of $1,000 Par Value 6,499 6,499
Class C Stock of $100 Par Value 274,355 250,480
Class C Stock of $100 Par Value, Issuable 15,037 24,267
Additional Stock Subscribed, Net of Unpaid Portion 317 351
Retained Deficit (12,060) (5,551)
Contributed Capital 13,485 13,485
Accumulated Other Comprehensive Income (1,234) (162)
300,317 293,152
Less: Treasury Stock, at Cost (20,992) (8,494)
Total Member Dealers' Equity 279,325 284,658
Total Liabilities and Member Dealers' Equity $ 1,177,098 $ 1,123,810
============ ============
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(000's omitted)
(Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
Net Sales $ 707,998 $ 718,933 $ 2,159,826 $ 2,227,058
Cost of Sales 636,639 648,615 1,956,806 2,019,848
Gross Profit 71,359 70,318 203,020 207,210
Operating Expenses:
Warehouse and Distribution 7,326 7,274 23,238 21,372
Selling, General and Administrative 20,638 21,613 65,671 67,389
Retail Success and Development 17,510 16,307 55,574 51,100
Total Operating Expenses 45,474 45,194 144,483 139,861
Operating Income 25,885 25,124 58,537 67,349
Interest Expense (5,715) (5,842) (17,311) (15,808)
Other Income, net 3,096 3,043 10,629 10,016
Income Taxes (412) 60 (1,790) 718
Net Earnings $ 22,854 $ 22,385 $ 50,065 $ 62,275
============= ============= ============= =============
Distribution of Net Earnings:
Patronage Dividends $ 23,715 $ 23,153 $ 56,574 $ 64,818
Retained Earnings (861) (768) (6,509) (2,543)
Net Earnings $ 22,854 $ 22,385 $ 50,065 $ 62,275
============= ============= ============= =============
(000's omitted)
(Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
Net Earnings $ 22,854 $ 22,385 $ 50,065 $ 62,275
Unrealized gains on securities 133 - 53 -
Foreign currency translation, net (769) (402) (1,125) (959)
Comprehensive Income $ 22,218 $ 21,983 $ 48,993 $ 61,316
============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(Unaudited)
Thirty-Nine Weeks Ended
September 29, September 30,
2001 2000
Operating Activities:
Net Earnings $ 50,065 $ 62,275
Adjustments to reconcile net earnings
to net cash used in operating activities:
Depreciation and amortization 21,240 18,757
Gain on sale of property and equipment, net of
deferred taxes of $1,587 (3,079) -
Decrease (increase) in accounts receivable, net 35,384 (6,449)
Increase in inventories (61,195) (69,747)
Increase in other current assets (2,849) (2,149)
Increase (decrease) in accounts payable and
accrued expenses (2,978) 486
Increase in other long-term liabilities 2,847 2,314
Net Cash Provided by Operating Activities 39,435 5,487
Investing Activities:
Purchase of property and equipment (48,838) (36,974)
Proceeds from sale of property and equipment - 9,664 -
Increase in other assets (2,293) (14,320)
Net Cash Used in Investing Activities (51,131) (41,630)
Financing Activities:
Proceeds (payments) of short-term borrowings (3,000) 98,928
Proceeds from issuance of long-term debt 70,000 -
Principal payments on long-term debt (2,840) (2,679)
Payments of patronage refund certificates (5,381) (400)
Proceeds from sale of common stock 1,161 1,477
Repurchase of common stock (12,498) (10,859)
Payments of cash portion of patronage dividend (34,764) (38,173)
Net Cash Provided by Financing Activities 12,678 48,294
Increase in Cash and Cash Equivalents 982 12,151
Cash and Cash Equivalents at Beginning of Period 24,644 35,422
Cash and Cash Equivalents at End of Period�� $ 25,626 $ 47,573
============= =============
See accompanying 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 22, 2001. In the opinion of management, these financial statements have been
prepared in conformity with accounting principles generally accepted in the United States
and reflect all adjustments necessary for a fair statement of the results of operations and
cash flows for the interim periods ended September 29, 2001 and September 30, 2000 and of
the Company's financial position as of September 29, 2001. All such adjustments are of a
normal recurring nature. The results of operations for the thirteen week and thirty-nine
week periods ended September 29, 2001 and September 30, 2000 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 to3) Reclassifications
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 are paid to consenting member dealers. International operations and
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.
Certain financial statement reclassifications have been made to prior year and prior
quarter amounts to conform to comparable classifications followed in 2001.
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:
Thirty-Nine Weeks Ended
September 29, 2001
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
Net Sales from External Customers 2,105,557 13,921 40,348 - 2,159,826
Intersegment Sales 19,850 89,628 - (109,478) -
Segment Earnings (Loss) 41,707 10,420 (1,822) (240) 50,065
Thirty-Nine Weeks Ended
September 30, 2000
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
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
Thirteen Weeks Ended
September 29, 2001
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
Net Sales from External Customers 690,179 3,339 14,420 - 707,998
Intersegment Sales 7,509 32,788 - (40,297) -
Segment Earnings (Loss) 19,311 3,581 82 (120) 22,854
Thirteen Weeks Ended
September 30, 2000
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
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
5) Subsequent Events
On November 5, 2001, the Company announced that its Calgary, Canada distribution center
will be closed within the next six months. Closure costs which are non-patronage and estimated to be in the range of $1.6 to $2.5 million, will be recorded in the fourth quarter of 2001.
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Thirteen Weeks Ended September 29, 2001 compared to Thirteen Weeks Ended September 30, 2000.
Results of Operations
Consolidated sales decreased 1.5%. Domestic sales increased 1.1% primarily due to
conversions of new stores to the Ace program. Sales to our existing retailer base were flat
due to the soft economy and inventory reductions at retail. The decline in international
sales was affected by a sale of Ace stores and reduced sales in Canada.
Gross profit increased $1.0 million and increased as a percent of total sales from 9.78% in
2000 to 10.08% in 2001. The increase, as a percent of sales, results primarily from higher margin from Company-owned retail locations. Excluding company-owned stores, gross profit was 9.42% of sales in 2001.
Warehouse and distribution expenses increased $52,000 over 2000 and increased slightly as a percent of total handled sales from 1.33% in 2000 to 1.34% in 2001. Increased utilities and distribution expenses associated with the new Loxley, Alabama distribution facility and the start-up of the Prince George, Virginia facility drove the higher expenses.
Selling, general and administrative expenses decreased $975,000 over 2000 and decreased as a percent of total sales from 3.01% in 2000 to 2.91% in 2001 due to continued cost control
measures put in place.
Retail success and development expenses increased $1.2 million primarily due to investments
made at retail to support our Vision 21 strategy, the timing of advertising expenditures and
costs associated with operating additional company-owned retail locations. Increases in this category are directly related to retail support of the Ace retailer as the Company continues to make investments in our dealer base.
Interest expense decreased $127,000 due to a decline in interest rates partially offset by
higher average borrowings. The higher borrowing levels result from the issuance of long-term debt earlier in the year to support the expansion of our distribution network (including the completion of the Loxley, Alabama and Prince George, Virginia distribution centers and the expansion of the LaCrosse, Wisconsin facility) and increased retailer dating programs.
Income taxes increased $472,000 primarily due to lower tax benefits from non-patronage activities.
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Consolidated sales decreased 3.0%. Domestic sales were flat while International sales were affected by a sale of Ace stores and reduced sales in Canada.
Gross profit decreased $4.2 million and increased slightly as a percent of total sales from
9.30% in 2000 to 9.40% in 2001. The decrease resulted primarily from lower handling charges
and lower cash discounts due to lower sales and merchandise purchases. Higher vendor rebates
and margin from company-owned retail locations offset the gross profit decline and contribute to the increase in gross profit as a percent of sales.
Warehouse and distribution expenses increased $1.9 million over 2000 and increased as a
percent of total handled sales from 1.33% in 2000 to 1.47% in 2001. Increased utilities and
distribution expenses associated with the new Loxley, Alabama distribution facility and the
start-up of the Prince George, Virginia facility drove the higher warehouse expenses.
Selling, general and administrative expenses decreased $1.7 million due to continued cost
control measures put in place.
Retail success and development expenses increased $4.5 million primarily due to costs
associated with investments made at retail to support our Vision 21 strategy, the timing of
advertising expenditures and operating additional company-owned retail locations. Increases in this category are directly related to retail support of the Ace retailer as the Company continues to make investments in our dealer base.
Interest expense increased $1.5 million due to higher average borrowing levels during the
year partially offset by lower interest rates. The higher borrowing levels result from the
completion of the Loxley, Alabama and Prince George, Virginia distribution centers, the
expansion of the LaCrosse, Wisconsin facility and increased retailer dating programs.
Other income increased $613,000 primarily due to a gain recognized on the sale of two retail support centers partially offset by lower income realized on non-controlling investments in affiliates and a partial write-down of an affiliate investment.
Income taxes increased $2.5 million primarily due to the tax incurred on the sale of two
retail support centers and lower non-patronage losses.
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.
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 29, 2001. For additional
information, refer to Item 7a in the Company's Annual Report on Form
10-K for the year ended December 30, 2000.
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
None.
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
DATE November 13, 2001
Rita D. Kahle
Executive Vice President
(Principal Financial and Accounting
Officer, and duly authorized
Officer of the registrant)