Washington D.C. 20549
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 28, 2002
[] 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
incorporation or organization) Identification No.)
2200 Kensington Court, Oak Brook, IL 60523
(Registrant's telephone number, including area code)
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 [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 November 5, 2002
Class A Voting Stock - $1,000 par value 3,620 shares
Class B $1,000 par value 1,976 shares
Class C $ 100 par value 2,719,613 shares
ACE HARDWARE CORPORATION
INDEX
Part I. - Financial Information Page No.
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
September 28, 2002 and December 29, 2001 1
Condensed Consolidated Statements of Earnings and
Condensed Consolidated Statements of Comprehensive
Income - Thirteen Weeks Ended and Thirty-nine Weeks Ended
September 28, 2002 and September 29, 2001 2
Condensed Consolidated Statements of Cash Flows -
Thirty-nine Weeks Ended September 28, 2002
and September 29, 2001 3
Notes to 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 9
Item 4. Controls and Procedures 9
Part II. - Other Information
Item 6. Exhibits and Reports on Form 8-K 10
PART I. FINANCIAL INFORMATION
ACE HARDWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
September 28, December 29,
2002 2001
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 24,178 $ 25,213
Short-term investments 16,489 17,158
Accounts receivable, net 316,049 369,035
Merchandise inventory 401,517 412,568
Prepaid expenses and other current assets 16,684 16,295
Total current assets 774,917 840,269
Property and equipment, net 287,255 287,507
Other assets 45,259 41,015
$ 1,107,431 $ 1,168,791
LIABILITIES AND MEMBER DEALERS' EQUITY
Current Liabilities
Current installment of long-term debt $ 6,162 $ 7,179
Short-term borrowings 41,900 72,600
Accounts payable 370,430 409,789
Patronage dividends payable in cash 32,192 34,229
Patronage refund certificates payable 13,165 9,084
Accrued expenses 81,847 81,062
Total current liabilities 545,696 613,943
Long-term debt 165,020 170,387
Patronage refund certificates payable 81,097 77,401
Other long-term liabilities 29,084 27,184
Total liabilities 820,897 888,915
Member dealers' equity
Class A Stock of $1,000 par value 3,815 3,693
Class B Stock of $1,000 par value 6,499 6,499
Class C Stock of $100 par value 284,445 260,224
Class C Stock of $100 par value, issuable to dealers
for patronage dividends 21,893 23,284
Additional stock subscribed, net 263 303
Retained deficit (23,837) (17,591)
Contributed capital 13,485 13,485
Accumulated other comprehensive income (789) (1,239)
305,774 288,658
Less: Treasury Stock, at cost (19,240) (8,782)
Total member dealers' equity 286,534 279,876
Total liabilities and member dealers' equity $ 1,107,431 $ 1,168,791
See accompanying notes to condensed consolidated financial statements.
ACE HARDWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(000's omitted)
(Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
Net sales $ 749,811 $ 722,981 $ 2,298,131 $ 2,204,095
Cost of sales 669,146 648,918 2,074,861 1,993,509
Gross profit 80,665 74,063 223,270 210,586
Operating expenses:
Distribution operations 14,132 15,771 42,242 48,441
Selling, general and administrative 15,209 14,897 47,015 48,034
Retail success and development 16,007 17,510 51,108 55,574
Total operating expenses 45,348 48,178 140,365 152,049
Operating income 35,317 25,885 82,905 58,537
Interest expense (5,347) (5,715) (16,909) (17,311)
Other income, net 2,710 3,096 7,562 10,629
Income taxes (638) (412) 252 (1,790)
Net earnings $ 32,042 $ 22,854 $ 73,810 $ 50,065
Distribution of Net Earnings
Patronage dividends 32,035 23,715 80,056 56,574
Retained earnings 7 (861) (6,246) (6,509)
Net earnings $ 32,042 $ 22,854 $ 73,810 $ 50,065
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(000's omitted)
(Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
Net earnings $ 32,042 $ 22,854 $ 73,810 $ 50,065
Unrealized gains on securities 436 133 345 53
Foreign currency translation, net (432) (769) 105 (1,125)
Comprehensive income $ 32,046 $ 22,218 $ 74,260 $ 48,993
See accompanying notes to condensed consolidated financial statements.
ACE HARDWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(Unaudited)
Thirty-nine Weeks Ended
September 28, September 29,
2002 2001
Operating Activities
Net earnings $ 73,810 $ 50,065
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 23,983 21,240
Gain on sale of property and equipment,
net of deferred taxes of $1,587 - - (3,079)
Decrease in accounts receivable, net 52,986 43,636
Decrease (increase) in inventories 11,051 (61,195)
Increase in prepaid expenses and
other current assets (500) (2,849)
Decrease in accounts payable and
accrued expenses (38,574) (2,978)
Increase in other long-term liabilities 1,900 2,847
Net Cash Provided by Operating Activities 124,656 47,687
Investing Activities:
Proceeds from sale of (purchase of) short-term
investments 669 (88)
Purchase of property and equipment (23,620) (48,838)
Increase in other assets (3,794) (2,205)
Net Cash Used in Investing Activities (26,745) (51,131)
Financing Activities:
Payments of short-term borrowings (30,700) (3,000)
Proceeds from issuance of long-term debt - 70,000
Principal payments on long-term debt (6,384) (2,840)
Payments of patronage refund certificates
and patronage financing deductions (18,194) (13,633)
Proceeds from sale of common stock 1,019 1,161
Repurchase of common stock (10,458) (12,498)
Payments of cash portion of patronage dividend (34,229) (34,764)
Net Cash Provided by (Used in) Financing Activities (98,946) 4,426
Increase (decrease) in Cash and Cash Equivalents (1,035) 982
Cash and Cash Equivalents at beginning of period 25,213 24,644
Cash and Cash Equivalents at end of period $ 24,178 $ 25,626
See accompanying notes 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/A as filed with the
Securities and Exchange Commission on May 31, 2002. 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
presentation of the results of operations and cash flows for the interim periods ended
September 28, 2002 and September 29, 2001, and of the Company's financial position
as of September 28, 2002. All such adjustments are of a normal recurring nature. The
results of operations for the thirteen week and thirty-nine week periods ended
September 28, 2002 and September 29, 2001 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 substantially all
patronage sourced net earnings are 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
interim period amounts to conform to comparable classifications followed in 2002.
During 2002, the Company reclassified as sales and cost of sales certain shipping and
handling costs that had previously been presented on a net basis within distribution
operations expenses and reclassified certain amounts within selling, general and
administrative expenses to distribution operations expenses.
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. The net sales from external customers included in the other category
are primarily generated from company-owned retail locations. Information
regarding the identified segments and the related reconciliation to the consolidated
financial information is as follows:
Thirty-Nine Weeks Ended
September 28, 2002
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
Net Sales from External Customers $2,245,168 $ 15,455 $ 37,508 $ - $2,298,131
Intersegment Sales 17,557 95,757 - (113,314) -
Segment Earnings (Loss) 63,400 13,708 (3,065) (233) 73,810
Thirty-Nine Weeks Ended
September 29, 2001
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
Net Sales from External Customers $2,149,826 $ 13,921 $ 40,348 $ - $2,204,095
Intersegment Sales 19,850 89,628 - (109,478) -
Segment Earnings (Loss) 41,707 10,420 (1,822) (240) 50,065
Thirteen Weeks Ended
September 28, 2002
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
Net Sales from External Customers $ 732,970 $ 3,345 $ 13,496 $ - $ 749,811
Intersegment Sales 6,441 31,676 - (38,117) -
Segment Earnings (Loss) 26,838 4,770 467 (33) 32,042
Thirteen Weeks Ended
September 29, 2001
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
Net Sales from External Customers $ 705,162 $ 3,399 $ 14,420 $ - $ 722,981
Intersegment Sales 7,509 32,788 - (40,297) -
Segment Earnings (Loss) 19,311 3,581 82 (120) 22,854
5) Subsequent Event
On October 22, 2002, the Company announced that it had entered into a letter of
intent to sell all of the issued and outstanding shares of Ace Hardware Canada
Limited, a wholly-owned subsidiary. Proceeds from the sale are expected to be
approximately US $14 million, reflecting the value of inventory, trade receivables and
net tax operating losses. Additionally, the Company will receive ongoing royalties
for the use of the Ace name. The transaction is expected to close in December 2002.
Based on the terms of the letter of intent, the Company expects to record a fiscal
2002 fourth quarter loss in discontinued operations in the range of US $1.0 to US $5.0
million, net of tax, related to the operation and disposal of its interest in Ace Canada,
including all related shut-down costs, severance and contractual lease commitments.
ACE HARDWARE CORPORATION
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 29, 2001
Results of Operations
Consolidated sales increased 3.7%. Domestic sales increased 4.0% primarily due to
conversions of new stores to the Ace program and continued growth of same store sales
together with lower retailer cancellations partially offset by a decrease in sales to non-coop
members. International sales declined 2.6% primarily due to lower sales to our existing
customers.
Gross profit increased $6.6 million and increased as a percent of total sales from 10.24% in
2001 to 10.76% in 2002. Excluding company-owned retail stores, gross profit was 10.22%
of sales in 2002. The increase as a percent of sales resulted primarily from increased
handling charges due to a shift toward handled sales, lower retailer product returns and
increased paint margin due to lower raw material costs.
Distribution operations expenses decreased $1.6 million from 2001 and decreased as a
percent of handled sales from 2.80% in 2001 to 2.38% in 2002 primarily due to improved
productivity, continued cost controls and the closure of a Canadian distribution center.
Selling, general and administrative expenses increased $312,000 over 2001; however,
decreased as a percent of total sales from 2.06% in 2001 to 2.03% in 2002 driven by a
continued focus on cost controls together with a reduction of expenses within the Canadian
operations and lease savings due to the purchase of the corporate office location.
Retail success and development expenses decreased $1.5 million from 2001 primarily due to
continued cost control measures put in place in 2001 and the timing of retailer and vendor
advertising cost reimbursements. These expenses consist primarily of field personnel and
related costs, marketing, advertising, and training programs for Ace retailers and expenses of
company-owned retail operations. Ace continues to make investments in retail initiatives
under its Vision 21 strategy to support Ace Retailers.
Interest expense decreased $368,000 due to lower interest rates and lower average
borrowing levels under the revolving credit facility.
Other income decreased $386,000 primarily due to a decline in retailer past due and low
volume service charges and lower interest income.
Income taxes increased $226,000 primarily due to increased income recognized on non-
patronage activities.
Thirty-nine Weeks Ended September 28, 2002 compared to Thirty-Nine Weeks Ended
September 29, 2001
Results of Operations
Consolidated sales increased 4.3%. Domestic sales increased 4.5% while International sales
were affected by lower sales in Canada. The increase in domestic sales was primarily due to
higher sales to our existing retailer base, lower retailer cancellations and sales to newly
affiliated retailers. This increase was partially offset by a decrease in sales to non-coop
members.
Gross profit increased $12.7 million and increased as a percent of total sales from 9.55% in
2001 to 9.72% in 2002. The increase primarily resulted from higher handling charges due to
a shift in sales mix towards handled sales, lower retailer product returns and freight costs
and increased paint margin due to lower raw material costs partially offset by inventory
adjustments.
Distribution operations expenses decreased $6.2 million from 2001 and decreased as a
percent of handled sales from 2.98% in 2001 to 2.45% in 2002 primarily due to improved
productivity, continued cost controls, lower fixed costs as a result of the east coast
distribution center reconfiguration, the closure of a Canadian distribution center and
additional volume from logistics operations.
Selling, general and administrative expenses decreased $1.0 million due to continued cost
control measures put in place in 2001, lease savings due to the purchase of the corporate
office location and the closure of a Canadian distribution center.
Retail success and development expenses decreased $4.5 million from 2001 primarily due to
favorable timing of advertising cost reimbursements, continued cost control measures put in
place in 2001 and lower retail technology costs. These expenses consist primarily of field
personnel and related costs, marketing, advertising, and training programs for Ace retailers
and expenses of company-owned retail operations. Ace continues to make investments in
retail initiatives under its Vision 21 strategy to support Ace Retailers.
Interest expense decreased $402,000 due to lower interest rates and lower average
borrowing levels under the revolving credit facility.
Other income decreased $3.1 million primarily due to 2001 non-recurring gains recognized
on the sale of two distribution centers offset by a 2001 partial write-down of a minority-
owned investment of $3.0 million. Other income was also impacted by increased income
from non-controlling investments of $1.4 million offset by a decline in retailer past due and
low volume charges and lower interest income.
Income taxes decreased $2.0 million primarily due to the taxes incurred on the sale of two
retail support centers in 2001 and higher tax benefits from non-patronage activities in 2002.
Liquidity and Capital Resources
Ace's sources of cash necessary to operate its business ("liquidity") include internally
generated funds, short-term lines of credit and long-term financing.
Cash flow generated from operations provides a significant source of liquidity. Through
the third quarter of 2002, cash provided by operations increased to $124.7 million
compared to $47.7 million in the same period of 2001. The increase was primarily due to
an increase in net earnings, improved receivable collections, and a reduction of inventory.
Cash used in investing activities through the third quarter of 2002 was $26.7 million
compared to $51.1 million in the same period of the prior year. The decrease was
primarily due to decreased expenditures for the distribution network as 2001 included
expenditures for the acquisition of Prince George, Virginia distribution center. Net capital
expenditures of $23.6 million in 2001 were financed out of current and accumulated
internally generated funds and short-term borrowings.
Cash used in financing activities through the third quarter of 2002 was $98.9 million
compared to $4.4 million provided in the comparable period last year. In the second
quarter of 2001, Ace obtained proceeds of $70 million from the issuance of Senior Notes.
Ace has an established, unsecured revolving credit facility with a group of banks. Ace has
unsecured lines of credit of $185.0 million of which $143.1 million was available at
September 28, 2002. Borrowing under these lines of credit bear interest at a spread over
LIBOR based upon quarterly debt to EBITDA ratios. Long-term financing is arranged as
determined necessary to meet Ace's capital or other requirements, with principal amount,
timing and form dependent on prevailing debt markets and general economic conditions.
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 expenditure 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 28, 2002. For additional information,
refer to Item 7a in the Company's Annual Report on Form 10-K/A for the year
ended December 29, 2001.
Item 4. Controls and Procedures
Our Chief Executive Officer and Principal Financial Officer have concluded, based
on their evaluation within 90 days of the filing date of this report, that our
disclosure controls and procedures are effective for gathering, analyzing and
disclosing the information we are required to disclose in our reports filed under the
Securities Exchange Act of 1934. There have been no significant changes in our
internal controls or in other factors that could significantly affect these controls
subsequent to the date of the previously mentioned evaluation.PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
- Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) A Form 8-K was filed on October 23, 2002 reporting under Item 5:
A letter of intent entered into by Ace Hardware Corporation to sell all
issued and outstanding shares of its wholly-owned subsidiary Ace Hardware
Canada, Limited.
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
Date: November 12, 2002 /s/ Rita D. Kahle
Rita D. Kahle
Executive Vice President
(Principal Financial and Accounting
Officer, and duly authorized
Officer of the registrant)
Certification of President and Chief Executive Officer
1. I have reviewed this quarterly report on Form 10-Q of Ace Hardware
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most
recent evaluation, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ David F. Hodnik
President and Chief Executive Officer
Certification of Executive Vice President (Principal Financial and Accounting
Officer)
1. I have reviewed this quarterly report on Form 10-Q of Ace Hardware
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most
recent evaluation, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Rita D. Kahle
Executive Vice President
(Principal Financial and Accounting Officer)