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
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 29, 2002
[] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from_____to______
PART I. FINANCIAL INFORMATION
ACE HARDWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted)
June 29,
December 29,
2002
2001
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents
$ 22,364
$ 25,213
Short-term investments
17,987
17,158
Accounts receivable, net
388,997
369,035
Merchandise inventory
392,378
412,568
Prepaid expenses and other current assets
17,108
16,295
Total current assets
838,834
840,269
Property and equipment, net
279,120
287,507
Other assets
43,123
41,015
$ 1,161,077
$ 1,168,791
LIABILITIES AND MEMBER DEALERS' EQUITY
Current Liabilities:
Current installment of long-term debt
$ 7,183
$ 7,179
Short-term borrowings
8,500
72,600
Accounts payable
495,596
409,789
Patronage dividends payable in cash
19,335
34,229
Patronage refund certificates payable
13,203
9,084
Accrued expenses
67,026
81,062
Total current liabilities
610,843
613,943
Long-term debt
166,519
170,387
Patronage refund certificates payable
74,186
77,401
Other long-term liabilities
28,647
27,184
Total liabilities
880,195
888,915
Member dealers' equity:
Class A Stock of $1,000 par value
3,794
3,693
Class B Stock of $1,000 par value
6,499
6,499
Class C Stock of $100 par value
284,176
260,224
Class C Stock of $100 par value, issuable to dealers
for patronage dividends
13,149
23,284
Additional stock subscribed, net
248
303
Retained deficit
(23,844)
(17,591)
Contributed capital
13,485
13,485
Accumulated other comprehensive income
(793)
(1,239)
296,714
288,658
Less: Treasury Stock, at cost
(15,832)
(8,782)
Total member dealers' equity
280,882
279,876
Total Liabilities and Member Dealers' Equity
$ 1,161,077
$ 1,168,791
See accompanying notes to condensed consolidated financial statements.
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ACE HARDWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(000's omitted)
(Unaudited)
Thirteen Weeks Ended
Twenty-six Weeks Ended
June 29, June 30,
June 29, June 30,
2002
2001
2002
2001
Net sales
$ 841,153 $ 808,288 $1,548,320
$1,481,114
Cost of sales
757,440 731,613
1,405,715 1,344,591
Gross profit
83,713 76,675
142,605 136,523
Operating expenses:
Distribution operations
13,441 15,798
28,110
32,670
Selling, general and administrative
15,891 15,937
31,806
33,137
Retail success and development
16,991 19,489
35,101
38,064
Total operating expenses
46,323 51,224
95,017 103,871
Operating income
37,390 25,451
47,588 32,652
Interest expense
(5,848) (5,993)
(11,562) (11,596)
Other income, net
2,518
4,323 4,852
7,533
Income taxes
(552) (1,606)
890
(1,378)
Net earnings
$ 33,508 $ 22,175
$ 41,768 $ 27,211
Distribution of net earnings:
Patronage dividends
$ 34,935 $ 24,649
$ 48,021 $ 32,859
Retained earnings
(1,427)
(2,474) (6,253)
(5,648)
Net earnings
$ 33,508 $ 22,175
$ 41,768 $ 27,211
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(000's omitted)
(Unaudited)
Thirteen Weeks Ended
Twenty-six Weeks Ended
June 29,
June 30, June 29,
June 30,
2002
2001
2002
2001
Net earnings
$ 33,508 $ 22,175
$ 41,768 $ 27,211
Unrealized gains on securities
(30)
(419)
(91)
(80)
Foreign currency translation, net
592
824
537
(356)
Comprehensive income
$ 34,070 $ 22,580
$ 42,214 $ 26,775
See accompanying notes to condensed consolidated financial statements.
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ACE HARDWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(Unaudited)
Twenty-Six Weeks Ended
June 29,
June 30,
2002
2001
Operating activities:
Net earnings
$ 41,768
$ 27,211
Adjustments to reconcile net earnings
to net cash used in operating activities:
Depreciation and amortization
15,888
13,855
Gain on sale of property and equipment,
Net of deferred taxes of $1,522
- -
(2,953)
Increase in accounts receivable, net
(19,962)
(31,139)
Decrease in inventories
20,190
484
Increase in prepaid expenses and
other current assets
(887)
(1,208)
Increase in accounts payable and
accrued expenses
71,771
49,351
Increase in other long-term liabilities
1,463
2,061
Net Cash Provided by Operating Activities
130,231
57,662
Investing Activities:
Purchase of (proceeds from) short-term
investments
(829)
1,260
Purchase of property and equipment
(7,427)
(34,338)
Increase (decrease) in other assets
(1,662)
468
Net Cash Used in Investing Activities
(9,918)
(32,610)
Financing Activities:
Payments of short-term borrowings
(64,100)
(39,500)
Proceeds from issuance of long-term debt
- -
70,000
Principal payments on long-term debt
(3,864)
(2,619)
Payments of patronage refund certificates
and patronage financing deductions
(14,633)
(10,657)
Proceeds from sale of common stock
714
802
Repurchase of common stock
(7,050)
(10,552)
Payments of cash portion of patronage dividend
(34,229)
(34,764)
Net Cash Used in Financing Activities
(123,162)
(27,290)
Decrease in Cash and Cash Equivalents
(2,849)
(2,238)
Cash and Cash Equivalents at Beginning of Period
25,213
24,644
Cash and Cash Equivalents at End of Period
$ 22,364
$ 22,406
See accompanying notes to condensed consolidated financial statements.
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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/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 statement of the results of operations and cash flows for the interim periods ended June 29, 2002 and June 30, 2001 and of the Company's financial position as of June 29, 2002. All such adjustments are of a normal recurring nature. The results of operations for the thirteen week and twenty-six week periods ended June 29, 2002 and June 30, 2001 are not ne cessarily 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 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 quarter 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 consolidated information is as follows:
Twenty-six Weeks Ended
June 29, 2002
Elimination
Paint Intersegment
Wholesale Manufacturing Other Activities Consolidated
Net Sales from External Customers $ 1,512,198 $ 12,110 $ 24,012 - $ 1,548,320
Intersegment Sales 11,116 64,081 - (75,197) -
Segment Earnings (Loss) 36,562 8,938 (3,532) (200) 41,768
Twenty-six Weeks Ended June 30, 2001 Elimination Paint Intersegment Wholesale Manufacturing Other Activities Consolidated Net Sales from External Customers $ 1,444,664 $ 10,522 $ 25,928 - $ 1,481,114 Intersegment Sales 12,341 56,840 - (69,181) - Segment Earnings (Loss) 22,396 6,839 (1,904) (120) 27,211
Thirteen Weeks Ended June 29, 2002 Elimination Paint Intersegment Wholesale Manufacturing Other Activities Consolidated Net Sales from External Customers $ 821,278 $ 6,497 $ 13,378 - $ 841,153 Intersegment Sales 6,891 33,321 - (40,212) - Segment Earnings (Loss) 28,850 4,981 177 (200) 33,508
Thirteen Weeks Ended June 30, 2001 Elimination Paint Intersegment Wholesale Manufacturing Other Activities Consolidated Net Sales from External Customers $ 787,403 $ 6,368 $ 14,517 - $ 808,288 Intersegment Sales 8,120 32,921 - (41,041) - Segment Earnings (Loss) 18,397 4,477 (579) (120) 22,175
ACE HARDWARE CORPORATION
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Thirteen Weeks Ended June 29, 2002 compared to Thirteen Weeks Ended June 30, 2001.
Results of Operations
Consolidated sales increased 4.1%. Domestic sales increased 3.8% primarily due to conversions of new stores to the Ace program and continued growth of same store sales. Domestic sales were positively impacted by the Memorial Day Weekend sale. International sales increased 10.9% primarily from growth within existing customers.
Gross profit increased $7.0 million and increased as a percent of total sales from 9.49% in 2001 to 9.95% in 2002. Excluding company-owned retail stores, gross profit was 9.47% 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 $2.4 million from 2001 and decreased as a percent of handled sales from 2.76% in 2001 to 2.18% in 2002 primarily due to improved productivity, lower fixed costs as a result of the east coast distribution center reconfiguration and the closure of a Canadian distribution center.
Selling, general and administrative expenses were flat with 2001, however, decreased as a percent of total sales from 1.97% in 2001 to 1.89% in 2002 driven by increased sales and continued focus on cost controls.
Retail success and development expenses decreased $2.5 million from 2001 primarily due to favorable timing of advertising cost reimbursements, continued cost control measures put in place in 2001 and lower company-owned store operating 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 $145,000 due to lower interest rates and lower average borrowing levels under the revolving credit facility.
Other income decreased $1.8 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. Additionally, lower retailer past due and low volume service charges were offset by increased income on non-controlling investments in affiliates.
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Income taxes decreased $1.1 million primarily due to the tax incurred on the sale of two retail support centers in 2001.
Twenty-six Weeks Ended June 29, 2002 compared to Twenty-six Weeks Ended June 30, 2001.
Results of Operations
Consolidated sales increased 4.5%. Domestic sales increased 4.7% 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.
Gross profit increased $6.1 million and decreased slightly as a percent of total sales from 9.22% in 2001 to 9.21% 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 increased paint margin due to lower raw material costs partially offset by inventory adjustments.
Distribution operations expenses decreased $4.6 million from 2001 and decreased as a percent of handled sales from 3.13% in 2001 to 2.52% in 2002 primarily due to improved productivity, lower fixed costs as a result of the east coast distribution center reconfiguration and the closure of a Canadian distribution center.
Selling, general and administrative expenses decreased $1.3 million or 4.0% due to continued cost control measures put in place in 2001 and additional income realized on the spring convention.
Retail success and development expenses decreased $3.0 million or 7.8% from 2001 primarily due to favorable timing of advertising cost reimbursements, improvements in retail technology and continued cost control measures put in place in 2001. 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.
Other income decreased $2.7 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 on non-controlling investments of $1.1 million offset by a decline in retailer past due and low volume charges and lower interest income.
Income taxes decreased $2.3 million primarily due to the taxes incurred on the sale of two retail support centers in 2001.
- -7- Liquidity and Capital Resources
Ace's ability to generate cash adequate to meet its needs ("liquidity") results from 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 second quarter of 2002, cash provided by operations increased to $130.2 million compared to $57.7 million in the same period of 2001. The increase was primarily due to an increase in net earnings, reduction of inventory and a growth in accounts payable due to the timing of vendor dating programs.
Cash used in investing activities through the second quarter of 2002 was $9.9 million compared to $32.6 million in the comparable period last year. The decrease was primarily due to decreased expenditures for the distribution network. Capital expenditures of $7.4 million were financed out of current and accumulated internally generated funds and short-term borrowings.
Cash used in financing activities through the second quarter of 2002 was $123.2 million compared to $27.3 million in the comparable period last year. In the second quarter of 2001, Ace obtained proceeds of $70 million from the issuance of Senior Notes to fund capital investments made in 2000 and 2001.
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 $176.5 million was available at June 29, 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 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 twenty-six week period ended June 29, 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.
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PART II. OTHER INFORMATION
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
shareholders of the registrant at a meeting thereof held during the quarter
covered by this report:
(a) Date of meeting: June 3, 2002 - said meeting was
an annual meeting.
(b) 1. The following director was elected at said
meeting for a three year term expiring in 2005:
Jeffery M. Schulein
2. The following directors were reelected at said
meeting for a three year term expiring in 2005:
Richard F. Baalmann, Jr.
J. Thomas Glenn
Richard W. Stine
4. 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. Bibens II
Daniel L. Gust
D. William Hagan
Howard J. Jung
Richard A. Karp
David S. Ziegler
- 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 August 8, 2002 containing:
- Statements submitted under oath by the Company's President and Chief Executive Officer, David F. Hodnik, and Executive Vice President (Principal Financial and Accounting Officer), Rita D. Kahle, in response to the order of the Securities and Exchange Commission pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934.
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
/s/ Rita D.
Kahle
DATE August 13, 2002
Rita D. Kahle
Executive Vice President
(Principal Financial and Accounting
Officer, and duly authorized
Officer of the registrant)
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