ACE HARDWARE CORPORATION Quarterly Report For The Period Ended July 1, 2017

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ACE HARDWARE CORPORATIONQuarterly report for the period ended July 1, 2017

ACE HARDWARE CORPORATIONINDEX TO CONSOLIDATED FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATAPageReview Report of Independent Auditors2Consolidated Balance Sheets as of July 1, 2017 (Unaudited), December 31, 2016 and July 2, 2016 (Unaudited)3Consolidated Statements of Income (Unaudited) for the three and six months ended July 1, 2017 and July 2, 20164Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended July 1, 2017 and July 2, 20165Consolidated Statements of Equity (Unaudited) for the six months ended July 1, 2017 and July 2, 20166Consolidated Statements of Cash Flows (Unaudited) for the six months ended July 1, 2017 and July 2, 20167Notes to Consolidated Financial Statements (Unaudited)8Management’s Discussion and Analysis of Financial Condition and Results of Operations14Management’s Responsibility for Financial Statements201

Review Report of Independent AuditorsThe Board of DirectorsAce Hardware CorporationWe have reviewed the consolidated financial information of Ace Hardware Corporation, which comprise the consolidated balance sheetsas of July 1, 2017 and July 2, 2016, and the related consolidated statements of income and comprehensive income for the three and sixmonth periods ended July 1, 2017 and July 2, 2016, and the consolidated statements of equity and cash flows for the six-month periodsended July 1, 2017 and July 2, 2016.Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of the interim financial information in conformity with U.S.generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control sufficient toprovide a reasonable basis for the preparation and fair presentation of interim financial information in conformity with U.S. generallyaccepted accounting principles.Auditor’s ResponsibilityOur responsibility is to conduct our review in accordance with auditing standards generally accepted in the United States applicable toreviews of interim financial information. A review of interim financial information consists principally of applying analytical proceduresand making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conductedin accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinionregarding the financial information. Accordingly, we do not express such an opinion.ConclusionBased on our review, we are not aware of any material modifications that should be made to the consolidated financial informationreferred to above for it to be in conformity with U.S. generally accepted accounting principles.Chicago, IllinoisAugust 14, 20172

ACE HARDWARE CORPORATIONCONSOLIDATED BALANCE SHEETS(In millions, except share data)AssetsCash and cash equivalentsMarketable securitiesReceivables, net of allowance for doubtful accounts of 7.3, 6.9 and 8.2, respectivelyInventoriesPrepaid expenses and other current assetsTotal current assetsProperty and equipment, netNotes receivable, net of allowance for doubtful accounts of 6.5, 7.7 and 8.0, respectivelyGoodwill and other intangible assetsOther assetsTotal assetsLiabilities and EquityCurrent maturities of long-term debtAccounts payablePatronage distributions payable in cashPatronage refund certificates payableAccrued expensesTotal current liabilitiesLong-term debtPatronage refund certificates payableOther long-term liabilitiesJuly 1,2017(Unaudited) 435.893.513.735.098.11,858.9 1,728.7 1,796.3 31.3767.032.06.9142.3979.5186.474.569.2 36.4629.762.26.9157.6892.8178.460.963.3 19.7786.533.78.5146.7995.1162.255.465.6Member Retailers’ Equity:Class A voting common stock, 1,000 par value, 10,000 shares authorized,2,723, 2,726 and 2,714 issued and outstanding, respectivelyClass C nonvoting common stock, 100 par value, 6,000,000 sharesauthorized, 4,519,944, 4,132,170 and 4,204,885 issued andoutstanding, respectivelyClass C nonvoting common stock, 100 par value, issuable to retailers forpatronage distributions, 270,616, 523,158 and 293,685 shares issuable,respectivelyContributed capitalRetained earningsAccumulated other comprehensive income (loss)Equity attributable to Ace member retailersEquity attributable to noncontrolling interestsTotal equity 549.3533.3518.01,858.9See accompanying notes to the consolidated financial statements.3July 2,2016(Unaudited) 19.147.5 Total liabilitiesTotal liabilities and equityDecember 31,2016(Audited) 16.849.1 1,728.729.420.235.4(2.0) 1,796.3

ACE HARDWARE CORPORATIONCONSOLIDATED STATEMENTS OF INCOME(Unaudited, in millions)Revenues:Wholesale revenuesRetail revenuesTotal revenuesCost of revenues:Wholesale cost of revenuesRetail cost of revenuesTotal cost of revenuesGross profit:Wholesale gross profitRetail gross profitTotal gross profitThree Months EndedJuly 1,July 2,20172016(13 Weeks)(13 Weeks)Six Months EndedJuly 1,July 2,20172016(26 Weeks)(26 Weeks) 1,401.990.31,492.2Distribution operations expensesSelling, general and administrative expensesRetailer success and development expensesRetail operating expensesWarehouse facility closure costsTotal operating expensesOperating incomeInterest expenseInterest incomeOther income, netIncome tax expenseNet incomeLess: net income attributable to noncontrolling interestsNet income attributable to Ace Hardware Corporation 1,338.887.41,426.22,588.1142.32,730.4 683.971.449.1272.096.1(6.6)1.73.1(4.8)89.50.3 50.9 63.2 79.0 89.2Patronage distributions accrued 46.5 54.9 81.2 84.2Patronage distributions accrued for third party retailers 45.4 53.9 78.9 82.2See accompanying notes to the consolidated financial statements.4

ACE HARDWARE CORPORATIONCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Unaudited, in millions)Three Months EndedJuly 1,July 2,20172016(13 Weeks)(13 Weeks) 51.1 63.4Net incomeOther comprehensive income (loss), net of tax:Unrealized gain on investmentsUnrealized gain (loss) on derivative financial instrumentTotal other comprehensive income (loss), netComprehensive incomeLess: Comprehensive income attributable tononcontrolling interestsComprehensive income attributable to Ace HardwareCorporation .2)87.30.20.20.40.351.6 62.6See accompanying notes to the consolidated financial statements.5Six Months EndedJuly 1,July 2,20172016(26 Weeks)(26 Weeks) 79.4 89.5 80.7 87.0

ACE HARDWARE CORPORATIONCONSOLIDATED STATEMENTS OF EQUITY(Unaudited, in millions)Shareholders of Ace Hardware CorporationCapital StockClass ABalances at January 2, 2016Net incomeOther comprehensive lossNet payments on subscriptionsStock issuedChange in noncontrolling interestsRepurchase of noncontrollinginterestsStock repurchasedPatronage distributions issuablePatronage distributions payableOtherBalances at July 2, 2016Balances at December 31, 2016Net incomeOther comprehensive incomeNet payments on subscriptionsStock issuedChange in noncontrolling interestsStock repurchasedPatronage distributions issuablePatronage distributions payableOtherBalances at July 1, 2017 2.7Class C 375.7Class C StockIssuable toRetailers forPatronageDistributions ainedEarnings -20.728.4AccumulatedOtherComprehensiveIncome (Loss) 0.2NoncontrollingInterests 12.0Total Equity 9.5(2.2)0.5(1.1)- 2.7 (11.0)420.5 29.429.4 - (0.5)0.220.2 (82.2)35.4 (2.0) (0.7)11.8 (1.2)(11.0)29.4(82.2)0.2518.0 2.7 413.2 52.3 - 18.2 37.2 0.5 9.2 533.3 2.7 52.3(13.5)452.0 (52.3)27.127.1 0.5(0.5)- (0.2)0.218.2 79.0(78.9)37.3 1.72.2 0.40.29.8 79.41.70.5(0.5)(13.5)27.1(78.9)0.2549.3See accompanying notes to the consolidated financial statements.6

ACE HARDWARE CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited, in millions)Six Months EndedJuly 1,July 2,20172016(26 Weeks)(26 Weeks)Operating ActivitiesNet incomeAdjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortizationAmortization of deferred financing costsLoss (gain) on disposal of assets, netBad debt incomeOther, netChanges in operating assets and liabilities, exclusive of effects of acquisitions:ReceivablesInventoriesOther current assetsOther long-term assetsAccounts payable and accrued expensesOther long-term liabilitiesDeferred taxesNet cash provided by operating activitiesInvesting ActivitiesPurchases of marketable securitiesProceeds from sale of marketable securitiesPurchases of property and equipmentCash paid for acquired businesses, net of cash acquired(Increase) decrease in notes receivable, netNet cash used in investing activitiesFinancing ActivitiesNet payments under revolving lines of creditPrincipal payments on long-term debtPayments of cash portion of patronage distributionPayments of patronage refund certificatesRepurchase of stockRepurchase of noncontrolling interestsOther, netNet cash used in financing activitiesIncrease in cash and cash equivalentsCash and cash equivalents at beginning of periodCash and cash equivalents at end of periodSupplemental disclosure of cash flow information:Interest paidIncome taxes paid 30.5)(0.6)1.1(29.6) 7)(53.7)(0.2)(0.7)(1.2)0.5(147.9)7.811.3 19.1 6.10.9See accompanying notes to the consolidated financial statements.7 6.20.6

ACE HARDWARE CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited, in millions)(1)Summary of Significant Accounting PoliciesThe Company and Its BusinessAce Hardware Corporation (“the Company”) is a wholesaler of hardware, paint and other related products. The Company alsoprovides to its retail members value-added services such as advertising, marketing, merchandising and store location and design services.The Company’s goods and services are sold predominately within the United States, primarily to retailers that operate hardware storesand with whom the Company has a retail membership agreement. As a retailer-owned cooperative, the Company distributessubstantially all of its patronage sourced income in the form of patronage distributions to member retailers based on their volume ofmerchandise purchases.In 2014, the Company formed the Ace Wholesale Holdings LLC (“AWH”) legal entity for sales to non-member retailers. During2014, AWH acquired Emery-Waterhouse (“Emery”), a distributor of hardlines products for independent lumber, paint, industrial andhardware outlets, and Jensen-Byrd Co., LLC (“Jensen”), a wholesale hardlines distributor. In 2015, AWH formed Emery JensenDistribution (“EJD”) for sales outside of Emery and Jensen territories. The Company believes that these acquisitions and the formationof EJD will serve as a catalyst to further leverage wholesale purchasing power and advance the Company’s strategic plans to be a leaderin the wholesale distribution industry.Ace Retail Holdings LLC (“ARH”) is the owner of the 101 store Westlake Ace Hardware retail chain. As a result, the Companyis also a retailer of hardware, paint and other related products.The Company’s international operations are a stand-alone legal entity with its own management team and board of directors. Theentity, Ace Hardware International Holdings, Ltd. (“AIH”), is a majority-owned and controlled subsidiary of the Company with anoncontrolling interest owned by its international retailers. International retailers do not own shares of stock in the Company nor receivepatronage distributions.Basis of PresentationThe accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accountingprinciples (“GAAP”). Certain information and note disclosures normally included in financial statements prepared in accordance withGAAP have been condensed or omitted. The unaudited consolidated financial statements and notes should be read in conjunction withthe financial statements and notes thereto included in the Company’s 2016 Annual Report. The unaudited consolidated financialstatements for the three and six months ended July 1, 2017 and July 2, 2016 both cover a 13-week period and a 26-week period,respectively.Subsequent events have been evaluated through August 14, 2017, the date these statements were available to be issued.The financial information included herein reflects all adjustments (consisting only of normal recurring adjustments), which, in theopinion of management, are necessary for a fair presentation of the results for the interim periods presented. The results of operationsfor the three and six months ended July 1, 2017 are not necessarily indicative of the results to be expected for the full fiscal year 2017.Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries.All intercompany transactions have been eliminated.Use of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.Impact of New Accounting StandardsNew Accounting Pronouncements - IssuedIn May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,“Revenue from Contracts with Customers (Topic 606).” The purpose of ASU 2014-09 is to develop a common revenue recognitionstandard for GAAP and International Financial Reporting Standards. The guidance in this update affects any entity that either entersinto contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless thosecontracts are within the scope of other standards. The core principle of the guidance is that an entity should recognize revenue to depictthe transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to beentitled in exchange for those goods or services. ASU 2014-09 allows either full retrospective adoption, meaning the standard is applied8

ACE HARDWARE CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)(Unaudited, in millions)to all periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presentedin the financial statements. This guidance is effective for the Company for fiscal 2019 year-end financial statements and quarterlyfinancial statements in fiscal 2020. The Company is currently evaluating this guidance to determine the impact it will have on itsconsolidated financial statements.In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” ASU 2016-02 requires that lessees recognize assetsand liabilities for leases with lease terms greater than twelve months in the statement of financial position. ASU 2016-02 also requiresimproved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arisingfrom leases. ASU 2016-02 is effective for the Company for fiscal 2020 year-end financial statements and quarterly financial statementsin fiscal 2021. The Company has begun evaluating its contracts under this guidance to determine the impact ASU 2016-02 will haveon its consolidated financial statements and believes the standard will have a material impact to the Company’s balance sheet.(2)InventoriesInventories consist of wholesale merchandise inventories held for sale to customers and retail merchandise inventory held forresale at company-operated retail locations. Substantially all of the Company’s wholesale inventories are valued on the LIFO method.The excess of replacement cost over the LIFO value of inventory was 81.6 million, 81.6 million and 88.2 million at July 1, 2017,December 31, 2016 and July 2, 2016, respectively. An actual valuation of inventory under the LIFO method can be made only at theend of each year based on the inventory levels and costs at that time. Inventories at retail locations operated by the Company are valuedat the lower of cost or net realizable value. Inventory cost is determined using the moving average method, which approximates thefirst-in, first-out (“FIFO”) method. The Company periodically reviews its inventory and establishes a reserve for excess and obsoleteinventory based on a number of factors, including historical sales, sales forecasts, obsolescence due to technology changes and defectivegoods.Inventories consisted of:Wholesale merchandise inventory (LIFO)Retail merchandise inventory at Company-operated stores (FIFO)Inventories(3)July 1,2017 692.890.8 783.6December 31,2016 655.785.1 740.8July 2,2016 690.684.1 774.7DebtThe Company has a 600.0 million line of credit that is expandable to 750.0 million through a 150.0 million accordion that isexercisable without the consent of existing lenders provided that the Company is not in default of the credit agreement and furtherprovided that none of the existing lenders are required to provide any portion of the increased facility. Borrowings under the creditfacility bear interest at a rate of either 25 to 100 basis points over the prime rate or 125 to 200 basis points over the London InterbankOffered Rate (“LIBOR”) depending on the Company’s leverage ratio as defined under the agreement. The credit facility was priced atLIBOR plus 125 basis points at July 1, 2017. The credit facility expires on May 29, 2020 and requires maintenance of certain financialcovenants including a maximum allowable average leverage ratio and a minimum fixed charge coverage ratio. As of July 1, 2017, theCompany was in compliance with its covenants and 171.2 million was outstanding under the credit facility.The credit facility includes a 175.0 million sublimit for the issuance of standby and commercial letters of credit. As ofJuly 1, 2017, a total of 24.7 million in letters of credit were outstanding. The credit facility requires the Company to pay fees based onthe unused portion of the line of credit at a rate of 15 to 30 basis points per annum depending on the Company’s leverage ratio.The credit facility allows the Company to make revolving loans and other extensions of credit to AIH in an aggregate principalamount not to exceed 75.0 million at any time. As of July 1, 2017, there were no loans or other extensions of credit provided to AIH.The Company entered into an interest rate swap derivative agreement to reduce the risk of interest rate volatility for the remainingterm of the credit facility. The interest rate swap started on March 13, 2017 and expires on May 13, 2020. The swap agreement fixesthe LIBOR rate on 150.0 million of the revolving credit facility at 2.18 percent, resulting in an effective rate of 3.43 percent afteradding the 1.25 percent margin based on the current pricing tier per the credit agreement. The swap arrangement has been designatedas a cash flow hedge and has been evaluated to be highly effective. As a result, the after-tax change in the fair value of the swap isrecorded in AOCI as a gain or loss on derivative financial instruments. Prior to this swap arrangement taking effect on March 13, 2017,the Company had a separate swap arrangement that fixed the LIBOR rate on a portion of the debt facility at 1.13 percent.The Company’s ARH subsidiary has a 60.0 million asset-based revolving credit facility (“ARH Facility”). The ARH Facilitymatures on June 28, 2019 and is expandable to 85.0 million under certain conditions. The ARH Facility includes a 7.5 million sublimit9

ACE HARDWARE CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)(Unaudited, in millions)for the issuance of letters of credit. At the Company’s discretion, borrowings under this facility bear interest at a rate of either the primerate plus an applicable spread of 35 basis points to 75 basis points or LIBOR plus an applicable spread of 135 basis points to 175 basispoints, depending on the Company’s availability under the ARH Facility as measured on a quarterly basis. The ARH Facility was pricedat LIBOR plus 135 basis points at July 1, 2017.The ARH Facility is collateralized by substantially all of ARH’s personal property and intangible assets. Borrowings under thefacility are subject to a borrowing base calculation consisting of certain advance rates applied to eligible collateral balances (primarilyconsisting of certain receivables and inventories). This agreement requires maintenance of certain financial covenants including aminimum fixed charge coverage ratio. As of July 1, 2017, ARH was in compliance with its covenants and had 22.0 million in loansoutstanding under the ARH Facility.The ARH Facility requirements include a lender-controlled cash concentration system that results in all of ARH’s daily availablecash being applied to the outstanding borrowings under this facility. Pursuant to FASB Accounting Standards Codification Section 47010-45, “Classification of Revolving Credit Agreements Subject to Lock-Box Arrangements and Subjective Acceleration Clauses,” theborrowings under the ARH Facility have been classified as a Current maturity of long-term debt as of July 1, 2017.Total debt outstanding is comprised of the following:July 1,2017 171.222.024.5217.7(31.3) 186.4Revolving Credit FacilityARH FacilityInstallment notes with maturities through 2021 at a fixed rate of 6.00%Total debtLess: maturities within one yearLong-term debt(4)December 31,2016 165.528.321.0214.8(36.4) 178.4July 2,2016 149.212.120.6181.9(19.7) 162.2Fair ValueThe following tables set forth, by level, the Company’s financial assets, liabilities and derivative instruments that were accountedfor at fair value as of July 1, 2017, December 31, 2016 and July 2, 2016. The tables do not include cash on hand and also do not includeassets and liabilities that are measured at historical cost or any basis other than fair value. The carrying values for other current financialassets and liabilities, such as accounts receivable and accounts payable, approximate fair value due to the short maturity of suchinstruments.Carrying ValueMeasured at FairValueItems measured at fair value on a recurring basisJuly 1, 2017Level 1Level 2Level 3Assets:Cash equivalents:Money market funds 5.4 5.4 Marketable securities:Corporate fixed income securitiesEquity mutual fund securitiesMortgage-backed securitiesU.S. government notesOtherTotal marketable securitiesOther long-term liabilities:Interest rate swap derivative10 15.015.75.711.23.851.4 2.4 15.711.226.9 - 15.05.73.824.5 - 2.4 -

ACE HARDWARE CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)(Unaudited, in millions)Items measured at fair value on a recurring basisAssets:Cash equivalents:Money market fundsCarrying ValueMeasured at FairValueDecember 31, 2016Marketable securities:Corporate fixed income securitiesEquity mutual fund securitiesMortgage-backed securitiesU.S. government notesOtherTotal marketable securitiesAccrued expenses and Other long-term liabilities:Interest rate swap derivativesItems measured at fair value on a recurring basisAssets:Cash equivalents:Money market funds 3.5Level 1 3.5 14.914.16.112.02.049.1 2.8 - 14.112.026.1 -Carrying ValueMeasured at FairValueJuly 2, 2016Marketable securities:Corporate fixed income securitiesEquity mutual fund securitiesMortgage-backed securitiesU.S. government notesOtherTotal marketable securitiesAccrued expenses and Other long-term liabilities:Interest rate swap derivatives 3.8Level 2 - 14.96.12.023.0 - 2.8 -Level 1 3.8 15.512.35.213.01.547.5 7.2Level 3Level 2 - 12.313.025.3 -Level 3 - 15.55.21.522.2 - 7.2 -Money market funds, Equity mutual fund securities and U.S. government notes - The Company’s valuation techniques used tomeasure the fair values of money market funds, equity mutual fund securities and U.S. government notes, that were classified as Level1 in the tables above, are derived from quoted market prices for identical instruments, as active markets for these instruments exist.Corporate fixed income securities and Mortgage-backed securities - The Company’s valuation techniques used to measure the fairvalues of corporate fixed income securities and mortgage-backed securities, that were classified as Level 2 in the tables above, arederived from the following: non-binding market consensus prices that are corroborated by observable market data, quoted market pricesfor similar instruments, or pricing models, such as discounted cash flow techniques, with all significant inputs derived from orcorroborated by observable market data.The fair value of the Company’s marketable securities exceeded their cost by 5.3 million and 3.5 million at July 1, 2017 andJuly 2, 2016, respectively. Gross proceeds from the sale of marketable securities and the related realized gains and losses for the threemonths and six months ended July 1, 2017 and July 2, 2016 were as follows:Three Months EndedSix Months EndedJuly 1,July 2,July 1,July 2,2017201620172016Gross proceeds 0.5 2.0 2.4 2.7Gross realized gains0.10.1Gross realized losses(0.1)-11

ACE HARDWARE CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)(Unaudited, in millions)Gross realized gains and losses were determined using the specific identification method. For the six months ended July 1, 2017,the Company reclassified an immaterial amount of unrealized gains and 0.1 million of unrealized losses on marketable securities thatwere recorded in AOCI as of December 31, 2016 into realized income. These amounts were recorded to Other income, net in theConsolidated Statement of Income.The following table summarizes the contractual maturity distributions of the Company’s debt securities at July 1, 2017. Actualmaturities may differ from the contractual or expected maturities since borrowers may have the right to prepay obligations with orwithout prepayment penalties.Due AfterDue AfterOne YearDue inthroughFive YearsFair value of available-for-sale debtDue AfterOne YearFivethroughsecuritiesor LessYearsTen YearsTen YearsTotalCorporate fixed income securities 1.0 6.5 4.4 3.1 15.0Mortgage-backed securities0.30.94.55.7U.S. government notes7.12.61.511.2Other0.10.60.42.73.8Total 1.1 14.5 8.3 11.8 35.7The Company uses variable-rate LIBOR debt to finance its operations. These debt obligations expose the Company to interestrate volatility risk. The Company attempts to minimize this risk and fix a portion of its overall borrowing costs through the utilizationof interest rate swap derivatives. Variable cash flows from outstanding debt are converted to fixed-rate cash flows by entering intoreceive-variable, pay-fixed interest rate swaps. The Company does not use derivative instruments for trading or speculative purposes,and all derivative instruments are recognized in the Consolidated Balance Sheet at fair value. Hedge ineffectiveness is eliminated bymatching all terms of the hedged item and the hedging derivative at inception and on an ongoing basis. The Company does not excludeany terms from consideration when applying the matched terms method.The Company entered into an interest rate swap derivative agreement, which started on March 13, 2017 and expires on May 13,2020. The swap agreement fixes the LIBOR rate on 150.0 million of the revolving credit facility at 2.18 percent, resulting in aneffective rate of 3.43 percent after adding the 1.25 percent margin based on the current pricing tier per the credit agreement. Prior tothis swap arrangement taking effect on March 13, 2017, the Company had a separate swap arrangement that fixed the LIBOR rate on aportion of the debt facility at 1.13 percent.The fair value of the Company’s interest rate swaps is estimated using Level 2 inputs, which are based on model-derived valuationsin which all significant inputs and significant value drivers are observable in active markets. The Company also considers counterpartycredit-risk and bilateral or “own” credit risk adjustments in estimating fair value, in accordance with the requirements of GAAP. As ofJuly 1, 2017, December 31, 2016 and July 2, 2016, the fair value of the interest rate swaps were liability balances of 2.4 million, 2.8million and 7.2 million, respectively. The Company classifies current derivative liabilities as Accrued expenses and long-termderivative liabilities as Other long-term liabilities on the Consolidated Balance Sheets.Because the interest rate swaps have been designated as cash flow hedges and have been evaluated to be highly effective, thechange in the fair value is recorded in AOCI as a gain or loss on derivative financial instruments. The amount in AOCI is reclassifiedto earnings if the derivative instrument is sold, extinguished or terminated, or at the time it becomes expected to be sold, extinguishedor terminated. The net of tax amount recorded in AOCI for the fair value adjustment of the interest rate swaps was an unrealized lossof 1.5 million, 1.7 million and 4.4 million as of July 1, 2017, December 31, 2016 and July 2, 2016, respectively. The unrealized lossas of July 1, 2017 is not expec

Ace Hardware Corporation We have reviewed the consolidated financial information of Ace Hardware Corporation, which comprise the consolidated balance sheets as of July 1, 2017 and July 2, 2016, and the related consolidated statements of income and comprehensive income for the three and six-

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