Ace Hardware 2005 Annual Report Download - page 30

5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2005 ANNUAL REPORT A REVIEW OF ACE’S STRONG RESULTS
Self Insurance
The Company has a wholly-owned subsidiary which operates as a
captive insurance company. This entity provides the reinsurance
of property and casualty insurance policies for the Company’s
retailers and is the direct insurer for certain property and casualty
insurance policies of the Company. These insurance programs are
subject to varying retention levels or self insurance. Such self
insurance relates to losses and liabilities primarily associated with
property, general liability, workers’ compensation and auto liability
insurance programs. Losses are accrued based upon the Company’s
estimates of the aggregate liability for claims incurred using certain
actuarial assumptions based on Company experience and insurance
industry metrics.
Use of Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revision
In 2005, the Company has presented the change in its cash
overdraft position as a financing activity, which was previously
reported as an operating activity. Additionally, the Company has
presented its change in notes receivable and other operating assets
as an operating activity, which in prior periods was previously
reported as an investing activity. The result of these revisions
was to increase net cash provided by operating activities by
$14.7 million and $10.6 million and increase net cash used in
financing activities by $17.2 million and $4.6 million in fiscal
2004 and 2003, respectively, and decrease net cash used in
investing activities by $2.4 million in fiscal 2004 and increase in
net cash used in investing activities by $6.0 million in fiscal 2003.
Fiscal Periods
The Company’s fiscal period ends on the Saturday nearest
December 31st. Accordingly, fiscal periods 2005, 2004 and 2003
ended on December 31, 2005, January 1, 2005 and January 3, 2004,
respectively. The fiscal period ended January 3, 2004 had 53
weeks and the fiscal periods ended December 31, 2005 and
January 1, 2005 had 52 weeks.
(2) Receivables
Receivables include the following amounts at:
December 31, January 1,
2005 2005
(In thousands)
Trade .................................... $ 266,140 $ 273,901
Other .................................... 82,867 72,631
Less: allowance for
doubtful receivables ........ (5,419) (6,700)
Receivables, net .................. $ 343,588 $ 339,832
The allowance for doubtful accounts reflects management’s
estimate of the future amount of receivables that will not be
collected. Management records allowances for doubtful accounts
based on judgments made considering a number of factors,
including historical collection statistics, current member retailer
credit information, the aging of receivables, the current economic
environment and the offsetting amounts due to members for stock,
notes, interest and declared and unpaid dividends.
(3) Inventories
Inventories consist primarily of merchandise inventories.
Substantially all of the Company’s inventories are valued on
the last-in, first-out (LIFO) method; the excess of replacement
cost over the LIFO value of inventory was approximately
$86,994,000 and $68,624,000 at December 31, 2005 and
January 1, 2005, respectively. Indirect costs, consisting primarily
of an allocated portion of warehousing costs, are absorbed as
inventory costs rather than period costs.
(4) Property and Equipment
Property and equipment is summarized as follows:
December 31, January 1,
2005 2005
(In thousands)
Land .................................... $ 21,195 $ 21,729
Buildings and
improvements .................. 269,052 262,443
Warehouse equipment ........ 96,018 97,613
Office equipment ................ 94,916 108,973
Manufacturing
equipment ........................ 19,677 17,978
Transportation
equipment ........................ 26,052 21,248
Leasehold
improvements .................. 10,121 8,504
Construction in progress .... 489 7,916
537,520 546,404
Less: accumulated
depreciation and
amortization .................... (255,061) (254,642)
Net property and equipment $ 282,459 $ 291,762
On December 1, 2004, the Company completed a sale leaseback
transaction of certain corporate office buildings. The sale generated
net proceeds of $39,619,000 which were used to pay down the
revolving credit facility and to reinvest into the Company’s growth
strategy. The facilities are being leased back by the Company under
a 10-year lease agreement that contains extension periods at
the Company’s option. The transaction was recorded as a real
property sale and as an operating lease in the Company’s financial
statements. The resulting gain on the sale was deferred in the
balance sheet and is being amortized to income on a straight-line
basis over the initial 10-year lease term.