MSC INDUSTRIAL DIRECT CO INC - Quarter Report: 2019 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-Q
__________________________________________
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(Mark One) |
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 1, 2019 |
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OR |
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For transition period from to
Commission File No.: 1-14130
__________________________________________
MSC INDUSTRIAL DIRECT CO., INC.
(Exact name of registrant as specified in its charter)
__________________________________________
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New York |
11-3289165 |
75 Maxess Road, Melville, New York |
11747 |
(516) 812-2000
(Registrant’s telephone number, including area code)
__________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Class A Common Stock, par value $.001 |
MSM |
The New York Stock Exchange |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ |
Accelerated filer ☐ |
Non‑accelerated filer ☐ |
Smaller reporting company ☐ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 19, 2019, 45,008,191 shares of Class A common stock and 10,193,348 shares of Class B common stock of the registrant were outstanding.
SAFE HARBOR STATEMENT
This Quarterly Report on Form 10-Q (the “Report”) contains forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing such forward‑looking statements may be found in Items 2 and 3 of Part I and Item 1 of Part II of this Report, as well as within this Report generally. The words “believes,” “anticipates,” “thinks,” “expects,” “estimates,” “plans,” “intends,” and similar expressions are intended to identify forward‑looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward‑looking statements. We undertake no obligation to publicly disclose any revisions to these forward‑looking statements to reflect events or circumstances occurring subsequent to filing this Report with the Securities and Exchange Commission (the “SEC”). These forward‑looking statements are subject to risks and uncertainties, including, without limitation, those discussed in this section and Items 2 and 3 of Part I, as well as in Part II, Item 1A, “Risk Factors” of this Report, and in Part I, Item 1A, “Risk Factors” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended September 1, 2018. In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, future results may differ materially from historical results or from those discussed or implied by these forward‑looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward‑looking statements. These risks and uncertainties include, but are not limited to:
· |
general economic conditions in the markets in which the Company operates; |
· |
changing customer and product mixes; |
· |
competition, including the adoption by competitors of aggressive pricing strategies and sales methods; |
· |
industry consolidation and other changes in the industrial distribution sector; |
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volatility in commodity and energy prices; |
· |
the outcome of government or regulatory proceedings or future litigation; |
· |
credit risk of our customers; |
· |
risk of customer cancellation or rescheduling of orders; |
· |
work stoppages or other business interruptions (including those due to extreme weather conditions) at transportation centers, shipping ports, our headquarters or our customer fulfillment centers; |
· |
dependence on our information systems and the risks of business disruptions arising from changes to our information systems and disruptions due to catastrophic events, power outages, natural disasters, computer system or network failures, computer viruses, physical or electronic break-ins and cyberattacks; |
· |
retention of key personnel; |
· |
retention of qualified sales and customer service personnel and metalworking specialists; |
· |
risk of loss of key suppliers, key brands or supply chain disruptions; |
· |
changes to trade policies, including the impact from significant restrictions or tariffs; |
· |
risks related to opening or expanding our customer fulfillment centers; |
· |
litigation risk due to nature of our business; |
· |
risks associated with the integration of acquired businesses or other strategic transactions; |
· |
financial restrictions on outstanding borrowings; |
· |
failure to comply with applicable environmental, health and safety laws and regulations; |
· |
goodwill and intangible assets recorded resulting from our acquisitions could be impaired; |
· |
our common stock price may be volatile; and |
· |
our principal shareholders exercise significant control over us. |
2
MSC INDUSTRIAL DIRECT CO., INC.
INDEX
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Page |
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Item 1. |
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Condensed Consolidated Balance Sheets as of June 1, 2019 and September 1, 2018 |
4 |
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5 | |
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6 | |
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7 | |
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8 | |
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9 | |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
18 |
Item 3. |
26 | |
Item 4. |
26 | |
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Item 1. |
26 | |
Item 1A. |
26 | |
Item 2. |
27 | |
Item 3. |
27 | |
Item 4. |
27 | |
Item 5. |
27 | |
Item 6. |
28 | |
29 |
3
Item 1. Condensed Consolidated Financial Statements
MSC INDUSTRIAL DIRECT CO., INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
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|
|
|
|
|
|
|
|
|
|
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June 1, |
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September 1, |
||
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2019 |
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2018 |
||
|
(Unaudited) |
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ASSETS |
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|
|
|
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Current Assets: |
|
|
|
|
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Cash and cash equivalents |
$ |
38,771 |
|
$ |
46,217 |
Accounts receivable, net of allowance for doubtful accounts of $17,945 and $12,992, respectively |
|
546,486 |
|
|
523,892 |
Inventories |
|
560,800 |
|
|
518,496 |
Prepaid expenses and other current assets |
|
69,715 |
|
|
58,902 |
Total current assets |
|
1,215,772 |
|
|
1,147,507 |
Property, plant and equipment, net |
|
306,564 |
|
|
311,685 |
Goodwill |
|
676,845 |
|
|
674,998 |
Identifiable intangibles, net |
|
119,778 |
|
|
122,724 |
Other assets |
|
5,389 |
|
|
31,813 |
Total assets |
$ |
2,324,348 |
|
$ |
2,288,727 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
Short-term debt |
$ |
246,298 |
|
$ |
224,097 |
Accounts payable |
|
146,815 |
|
|
145,133 |
Accrued liabilities |
|
92,955 |
|
|
121,293 |
Total current liabilities |
|
486,068 |
|
|
490,523 |
Long-term debt |
|
284,691 |
|
|
311,236 |
Deferred income taxes and tax uncertainties |
|
99,714 |
|
|
99,714 |
Total liabilities |
|
870,473 |
|
|
901,473 |
Commitments and Contingencies |
|
|
|
|
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Shareholders’ Equity: |
|
|
|
|
|
MSC Industrial Shareholders’ Equity: |
|
|
|
|
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Preferred stock; $0.001 par value; 5,000,000 shares authorized; none issued and outstanding |
|
— |
|
|
— |
Class A common stock (one vote per share); $0.001 par value; 100,000,000 shares authorized; 54,484,700 and 54,649,158 shares issued, respectively |
|
54 |
|
|
55 |
Class B common stock (ten votes per share); $0.001 par value; 50,000,000 shares authorized; 10,193,348 and 10,454,765 shares issued and outstanding, respectively |
|
10 |
|
|
10 |
Additional paid-in capital |
|
675,674 |
|
|
657,749 |
Retained earnings |
|
1,394,551 |
|
|
1,325,822 |
Accumulated other comprehensive loss |
|
(22,730) |
|
|
(19,634) |
Class A treasury stock, at cost, 9,476,509 and 9,207,635 shares, respectively |
|
(599,116) |
|
|
(576,748) |
Total MSC Industrial shareholders’ equity |
|
1,448,443 |
|
|
1,387,254 |
Noncontrolling interest |
|
5,432 |
|
|
— |
Total Equity |
|
1,453,875 |
|
|
1,387,254 |
Total liabilities and shareholders’ equity |
$ |
2,324,348 |
|
$ |
2,288,727 |
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|
|
|
|
See accompanying notes to condensed consolidated financial statements. |
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4
MSC INDUSTRIAL DIRECT CO., INC.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
|
||||||||||||
|
Thirteen Weeks Ended |
Thirty-Nine Weeks Ended |
||||||||||
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June 1, |
June 2, |
June 1, |
June 2, |
||||||||
|
2019 |
2018 |
2019 |
2018 |
||||||||
Net sales |
$ |
866,546 |
$ |
828,345 |
$ |
2,521,147 |
$ |
2,365,893 | ||||
Cost of goods sold |
497,891 | 467,344 | 1,442,693 | 1,332,600 | ||||||||
Gross profit |
368,655 | 361,001 | 1,078,454 | 1,033,293 | ||||||||
Operating expenses |
258,154 | 245,619 | 768,972 | 720,530 | ||||||||
Income from operations |
110,501 | 115,382 | 309,482 | 312,763 | ||||||||
Other (expense) income: |
||||||||||||
Interest expense |
(4,565) | (3,532) | (13,160) | (10,319) | ||||||||
Interest income |
178 | 108 | 504 | 484 | ||||||||
Other (expense) income, net |
(95) | (141) | (330) | (472) | ||||||||
Total other expense |
(4,482) | (3,565) | (12,986) | (10,307) | ||||||||
Income before provision for income taxes |
106,019 | 111,817 | 296,496 | 302,456 | ||||||||
Provision for income taxes |
26,505 | 32,748 | 74,320 | 46,250 | ||||||||
Net income |
79,514 | 79,069 | 222,176 | 256,206 | ||||||||
Less: Net income (loss) attributable to noncontrolling interest |
(87) |
— |
(81) |
— |
||||||||
Net income attributable to MSC Industrial |
$ |
79,601 |
$ |
79,069 |
$ |
222,257 |
$ |
256,206 | ||||
Per share data attributable to MSC Industrial: |
||||||||||||
Net income per common share: |
||||||||||||
Basic |
$ |
1.44 |
$ |
1.40 |
$ |
4.02 |
$ |
4.54 | ||||
Diluted |
$ |
1.44 |
$ |
1.39 |
$ |
4.00 |
$ |
4.51 | ||||
Weighted average shares used in computing net income per common share: |
||||||||||||
Basic |
55,158 | 56,420 | 55,266 | 56,382 | ||||||||
Diluted |
55,387 | 56,804 | 55,556 | 56,733 | ||||||||
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See accompanying notes to condensed consolidated financial statements. |
5
MSC INDUSTRIAL DIRECT CO., INC.
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
|
Thirteen Weeks Ended |
Thirty-Nine Weeks Ended |
||||||||||
|
June 1, |
June 2, |
June 1, |
June 2, |
||||||||
|
2019 |
2018 |
2019 |
2018 |
||||||||
Net income, as reported |
$ |
79,514 |
$ |
79,069 |
$ |
222,176 |
$ |
256,206 | ||||
Other comprehensive income, net of tax: |
||||||||||||
Foreign currency translation adjustments |
(2,576) | (889) | (3,242) | (1,705) | ||||||||
Comprehensive income |
76,938 | 78,180 | 218,934 | 254,501 | ||||||||
Comprehensive loss attributable to noncontrolling interest |
170 |
— |
227 |
— |
||||||||
Comprehensive income attributable to MSC Industrial (1) |
$ |
77,108 |
$ |
78,180 |
$ |
219,161 |
$ |
254,501 | ||||
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(1) There were no material taxes associated with other comprehensive income during the thirteen and thirty-nine-week periods ending June 1, 2019 and June 2, 2018, respectively. |
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See accompanying notes to condensed consolidated financial statements. |
6
MSC INDUSTRIAL DIRECT CO., INC.
Condensed Consolidated Statements of Shareholders’ Equity
(In thousands)
(Unaudited)
|
|||||||||||||||
|
Thirteen Weeks Ended |
Thirty-Nine Weeks Ended |
|||||||||||||
|
June 1, |
June 2, |
June 1, |
June 2, |
|||||||||||
|
2019 |
2018 |
2019 |
2018 |
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Class A Common Stock |
|||||||||||||||
Beginning Balance |
$ |
54 |
$ |
55 |
$ |
55 |
$ |
54 | |||||||
Repurchase and retirement of Class A common stock |
— |
— |
(1) |
— |
|||||||||||
Exchange of Class B common stock for Class A common stock |
— |
— |
— |
1 | |||||||||||
Ending Balance |
54 | 55 | 54 | 55 | |||||||||||
Class B Common Stock |
|||||||||||||||
Beginning Balance |
10 | 11 | 10 | 12 | |||||||||||
Exchange of Class B common stock for Class A common stock |
— |
(1) |
— |
(2) | |||||||||||
Ending Balance |
10 | 10 | 10 | 10 | |||||||||||
Additional Paid-in-Capital |
|||||||||||||||
Beginning Balance |
670,047 | 652,440 | 657,749 | 626,995 | |||||||||||
Associate Incentive Plans |
5,627 | 10,959 | 29,812 | 36,404 | |||||||||||
Repurchase and retirement of Class A common stock |
— |
— |
(11,887) |
— |
|||||||||||
Ending Balance |
675,674 | 663,399 | 675,674 | 663,399 | |||||||||||
Retained Earnings |
|||||||||||||||
Beginning Balance |
1,349,972 | 1,285,681 | 1,325,822 | 1,168,812 | |||||||||||
Net Income |
79,601 | 79,069 | 222,257 | 256,206 | |||||||||||
Repurchase and retirement of Class A common stock |
— |
— |
(48,439) |
— |
|||||||||||
Cash dividends declared on Class A common stock |
(28,335) | (26,598) | (85,042) | (74,285) | |||||||||||
Cash dividends declared on Class B common stock |
(6,422) | (6,162) | (19,266) | (18,348) | |||||||||||
Dividend equivalents declared, net of cancellations |
(265) | (202) | (781) | (597) | |||||||||||
Ending Balance |
1,394,551 | 1,331,788 | 1,394,551 | 1,331,788 | |||||||||||
Accumulated Other Comprehensive Loss |
|||||||||||||||
Beginning Balance |
(20,237) | (18,079) | (19,634) | (17,263) | |||||||||||
Foreign Currency Translation Adjustment |
(2,493) | (889) | (3,096) | (1,705) | |||||||||||
Ending Balance |
(22,730) | (18,968) | (22,730) | (18,968) | |||||||||||
Treasury Stock |
|||||||||||||||
Beginning Balance |
(599,603) | (574,073) | (576,748) | (553,470) | |||||||||||
Associate Incentive Plans |
526 | 499 | 1,769 | 1,624 | |||||||||||
Repurchases of Class A common stock |
(39) | (3,656) | (24,137) | (25,384) | |||||||||||
Ending Balance |
(599,116) | (577,230) | (599,116) | (577,230) | |||||||||||
Total Shareholders’ Equity Attributable to MSC Industrial |
1,448,443 | 1,399,054 | 1,448,443 | 1,399,054 | |||||||||||
Noncontrolling Interest |
|||||||||||||||
Beginning Balance |
5,602 |
— |
— |
— |
|||||||||||
Issuance of Noncontrolling Interest in MSC Mexico |
— |
— |
4,637 |
— |
|||||||||||
Capital Contributions |
— |
— |
1,022 |
— |
|||||||||||
Foreign Currency Translation Adjustment |
(83) |
— |
(146) |
— |
|||||||||||
Net Income (loss) |
(87) |
— |
(81) |
— |
|||||||||||
Ending Balance |
5,432 |
— |
5,432 |
— |
|||||||||||
Total Shareholders’ Equity |
$ |
1,453,875 |
$ |
1,399,054 |
$ |
1,453,875 |
$ |
1,399,054 | |||||||
Dividends declared per Class A Common share |
$ |
0.63 |
$ |
0.58 |
$ |
1.89 |
$ |
1.64 | |||||||
Dividends declared per Class B Common share |
$ |
0.63 |
$ |
0.58 |
$ |
1.89 |
$ |
1.64 | |||||||
|
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See accompanying notes to condensed consolidated financial statements. |
7
MSC INDUSTRIAL DIRECT CO., INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
||||||
|
|
Thirty-Nine Weeks Ended |
||||
|
|
June 1, |
|
June 2, |
||
|
|
2019 |
|
2018 |
||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
Net income |
|
$ |
222,176 |
|
$ |
256,206 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
|
48,539 |
|
|
47,133 |
Stock-based compensation |
|
|
12,167 |
|
|
11,275 |
Loss on disposal of property, plant, and equipment |
|
|
325 |
|
|
280 |
Provision for doubtful accounts |
|
|
9,013 |
|
|
4,956 |
Deferred income taxes and tax uncertainties |
|
|
— |
|
|
(41,199) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
|
(30,180) |
|
|
(34,434) |
Inventories |
|
|
(33,672) |
|
|
(26,740) |
Prepaid expenses and other current assets |
|
|
(10,841) |
|
|
1,005 |
Other assets |
|
|
(609) |
|
|
3,191 |
Accounts payable and accrued liabilities |
|
|
(29,718) |
|
|
8,564 |
Total adjustments |
|
|
(34,976) |
|
|
(25,969) |
Net cash provided by operating activities |
|
|
187,200 |
|
|
230,237 |
Cash Flows from Investing Activities: |
|
|
|
|
|
|
Expenditures for property, plant and equipment |
|
|
(35,956) |
|
|
(30,794) |
Proceeds from sale of available for sale securities |
|
|
27,025 |
|
|
— |
Cash used in business acquisitions, net of cash received |
|
|
(11,625) |
|
|
(85,845) |
Net cash used in investing activities |
|
|
(20,556) |
|
|
(116,639) |
Cash Flows from Financing Activities: |
|
|
|
|
|
|
Repurchases of common stock |
|
|
(84,464) |
|
|
(25,384) |
Payments of cash dividends |
|
|
(104,308) |
|
|
(92,633) |
Proceeds from sale of Class A common stock in connection with associate stock purchase plan |
|
|
3,472 |
|
|
3,398 |
Proceeds from exercise of Class A common stock options |
|
|
15,527 |
|
|
23,135 |
Borrowings under Shelf Facility Agreement |
|
|
— |
|
|
50,000 |
Borrowings under the revolving credit facilities |
|
|
358,000 |
|
|
172,000 |
Payments under the revolving credit facilities |
|
|
(336,000) |
|
|
(220,000) |
Contributions from noncontrolling interest |
|
|
918 |
|
|
— |
Payments on capital lease and financing obligations |
|
|
(28,007) |
|
|
(829) |
Other, net |
|
|
903 |
|
|
604 |
Net cash used in financing activities |
|
|
(173,959) |
|
|
(89,709) |
Effect of foreign exchange rate changes on cash and cash equivalents |
|
|
(131) |
|
|
21 |
Net increase (decrease) in cash and cash equivalents |
|
|
(7,446) |
|
|
23,910 |
Cash and cash equivalents—beginning of period |
|
|
46,217 |
|
|
16,083 |
Cash and cash equivalents—end of period |
|
$ |
38,771 |
|
$ |
39,993 |
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
69,413 |
|
$ |
76,753 |
Cash paid for interest |
|
$ |
10,791 |
|
$ |
8,231 |
|
||||||
See accompanying notes to condensed consolidated financial statements. |
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8
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
The accompanying unaudited condensed consolidated financial statements have been prepared by the management of MSC Industrial Direct Co., Inc. (together with its wholly owned subsidiaries and entities in which it maintains a controlling financial interest, the “Company”) and in the opinion of management include all normal recurring material adjustments necessary to present fairly the Company’s financial position as of June 1, 2019 and June 2, 2018, the results of operations for the thirteen and thirty-nine weeks ended June 1, 2019 and June 2, 2018, and cash flows for the thirty-nine weeks ended June 1, 2019 and June 2, 2018. The September 1, 2018 financial information was derived from the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 1, 2018.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the SEC. The Company, however, believes that the disclosures contained in this report comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934 for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 1, 2018.
The Company’s fiscal year ends on the Saturday closest to August 31 of each year. Unless the context requires otherwise, references to years contained herein pertain to the Company’s fiscal year. The Company’s 2019 fiscal year will be a 52-week accounting period that will end on August 31, 2019 and its 2018 fiscal year was a 52-week accounting period that ended on September 1, 2018.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of MSC Industrial Direct Co., Inc., its wholly owned subsidiaries and entities in which it maintains a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.
Recently Adopted Accounting Pronouncements
Effective September 2, 2018, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12, 2016-20 and 2017-05. These ASUs outline a single comprehensive model for entities to use in the accounting for revenue arising from contracts with customers and supersede prior revenue recognition guidance, including industry-specific guidance. Revenue continues to be recognized when products are shipped to the customer and the customer obtains control of the products, and the adoption of these ASUs, using the modified retrospective approach, had no impact on the Company’s opening retained earnings. The Company reports its sales net of estimated sales returns and sales incentives. Sales tax collected from customers is excluded from net sales. Additional information and disclosures required by this new standard are contained in Note 2, “Revenue”.
Effective September 2, 2018, the Company adopted ASU 2017-01, Business Combinations (Topic 805), which clarifies the definition of a business to assist entities with evaluating when a set of transferred assets and activities is considered a business.
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), a comprehensive new standard that amends various aspects of existing accounting guidance for leases, including the recognition of a right-of-use asset and a lease liability in the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. During 2018, the FASB issued additional ASUs that address implementation issues and correct or improve certain aspects of the new accounting guidance for leases, including ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements. These ASUs do not change the core principles in the lease accounting standard outlined above. The amendments in ASU 2018-11 provide an optional transition method that allows entities to
9
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
initially apply the new lease accounting standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods will continue to be in accordance with current lease accounting guidance. Management established a cross-functional team to evaluate and implement the new standard. The team selected a third-party software solution to facilitate the accounting and financial reporting requirements of the new lease accounting standard. Lease data elements have been gathered and are currently being migrated to the software solution. The new standard will be adopted in the first quarter of fiscal 2020 and the Company expects to use the optional transition method. While the Company has not yet completed its evaluation of the effects of adopting this ASU, right-of-use assets and lease liabilities will be recorded in the Consolidated Balance Sheets as of the effective date and thereafter.
In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for financial statement periods beginning after December 15, 2019. The new standard is effective for the Company for its fiscal year 2021. The Company is currently evaluating the standard and does not expect a significant impact to its consolidated financial statements.
In January 2017, the FASB issued its final standard on simplifying the test for goodwill impairment, ASU 2017-04, Intangibles – Goodwill and Other (Topic 350). This standard requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This update is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The new standard is effective for the Company for its fiscal year 2021. Upon adoption, the Company will apply this guidance prospectively to its annual and interim goodwill impairment tests and disclose the change in accounting principle.
Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the Company’s financial position, results of operations or cash flows.
Reclassification
Certain of the prior period line items contained in the Condensed Consolidated Statements of Shareholders’ Equity were condensed to conform to our current period presentation. The Company combined the “Exercise of common stock options”, the “Common stock issued under associate stock purchase plan”, the “Shares issued upon vesting of restricted stock units, including dividend equivalent units”, the “Stock-based compensation”, and the “Issuance of restricted common stock, net of cancellations” line items into a single line titled “Associate Incentive Plans”. These reclassifications did not affect the total amount of Shareholders’ Equity.
Note 2. Revenue
Revenue Recognition
Net sales include product revenue and shipping and handling charges, net of estimated sales returns and any related sales incentives. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. All revenue is recognized when the Company satisfies its performance obligations under the contract, and invoicing occurs at approximately the same point in time. The Company recognizes revenue once the customer obtains control of the products. The Company’s product sales have standard payment terms that do not exceed one year. The Company considers shipping and handling as activities to fulfill its performance obligation. The Company’s contracts have a single performance obligation, to deliver products, and are short-term in nature. The Company estimates product returns based on historical return rates. Total accrued sales returns were $4,897 and $4,832 as of June 1, 2019 and September 1, 2018, respectively, and are reported as Accrued liabilities in the Condensed Consolidated Balance Sheets. Sales taxes and value-added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales.
10
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Consideration Payable to a Customer
The Company offers customers sales incentives, which primarily consist of volume rebates, and upfront sign-on payments. These volume rebates and payments are not in exchange for a distinct good or service and result in a reduction of net sales from the goods transferred to the customer at the later of when the related revenue is recognized or when the Company promises to pay the consideration. The Company estimates its volume rebate accruals and records its sign-on payments based on various factors, including contract terms, historical experience, and performance levels. Total accrued sales incentives, primarily related to volume rebates, were $13,840 and $14,000 as of June 1, 2019 and September 1, 2018, respectively, and are included in Accrued liabilities in the Condensed Consolidated Balance Sheets. Sign-on payments, not yet recognized as a reduction of revenue, are recorded in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets and were $2,698 and $2,457 as of June 1, 2019 and September 1, 2018, respectively.
Contract Assets and Liabilities
The Company records a contract asset when it has a right to payment from a customer that is conditioned on events other than the passage of time. The Company records a contract liability when customers prepay but the Company has not yet satisfied its performance obligation. The Company did not have material unsatisfied performance obligations, contract assets or liabilities as of June 1, 2019 and September 1, 2018.
Disaggregation of Revenue
The Company operates in one operating and reportable segment as a distributor of metalworking and maintenance, repair, and operations (“MRO”) products and services. The Company serves a large number of customers in diverse industries, which are subject to different economic and industry factors. The Company's presentation of net sales by customer end-market most reasonably depicts how the nature, amount, timing, and uncertainty of Company revenue and cash flows are affected by economic and industry factors. The Company does not disclose net sales information by product category as it is impracticable to do so as a result of its numerous product offerings and the way its business is managed. The following table presents the Company's percentage of net sales by customer end-market for the thirteen and thirty-nine-week periods ended June 1, 2019:
|
||||||
|
Thirteen Weeks Ended |
Thirty-Nine Weeks Ended |
||||
|
June 1, 2019 |
June 1, 2019 |
||||
Manufacturing Heavy |
47 |
% |
48 |
% |
||
Manufacturing Light |
22 |
% |
22 |
% |
||
Government |
7 |
% |
8 |
% |
||
Retail/Wholesale |
6 |
% |
6 |
% |
||
Commercial Services |
4 |
% |
4 |
% |
||
Other (1) |
14 |
% |
12 |
% |
||
Total net sales |
100 |
% |
100 |
% |
__________________________
(1) |
The other category primarily includes individual customer and small business net sales not assigned to a specific industry classification. |
The Company’s net sales originating from the following geographic areas were as follows for the thirteen and thirty-nine-week periods ended June 1, 2019:
|
||||||||||||
|
Thirteen Weeks Ended |
Thirty-Nine Weeks Ended |
||||||||||
|
June 1, 2019 |
June 1, 2019 |
||||||||||
United States |
$ |
831,533 | 96 |
% |
$ |
2,434,603 | 97 |
% |
||||
UK |
14,399 | 2 |
% |
43,373 | 2 |
% |
||||||
Canada |
10,747 | 1 |
% |
30,363 | 1 |
% |
||||||
Mexico |
9,867 | 1 |
% |
12,808 |
< 1 |
% |
||||||
Total net sales |
$ |
866,546 | 100 |
% |
$ |
2,521,147 | 100 |
% |
11
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Note 3. Net Income per Share
The Company’s non-vested restricted share awards contain non-forfeitable rights to dividends and meet the criteria of a participating security as defined by Accounting Standards Codification (“ASC”) Topic 260, “Earnings Per Share”. Under the two-class method, net income per share is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, net income is allocated to both common shares and participating securities based on their respective weighted average shares outstanding for the period. The following table sets forth the computation of basic and diluted net income per common share under the two-class method for the thirteen and thirty-nine weeks ended June 1, 2019 and June 2, 2018, respectively:
|
|
Thirteen Weeks Ended |
|
Thirty-Nine Weeks Ended |
||||||||
|
|
June 1, |
|
June 2, |
|
June 1, |
|
June 2, |
||||
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
||||
Net income attributable to MSC Industrial as reported |
|
$ |
79,601 |
|
$ |
79,069 |
|
$ |
222,257 |
|
$ |
256,206 |
Less: Distributed net income available to participating securities |
|
|
(10) |
|
|
(14) |
|
|
(34) |
|
|
(73) |
Less: Undistributed net income available to participating securities |
|
|
(19) |
|
|
(56) |
|
|
(66) |
|
|
(248) |
Numerator for basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed and distributed net income available to common shareholders |
|
$ |
79,572 |
|
$ |
78,999 |
|
$ |
222,157 |
|
$ |
255,885 |
Add: Undistributed net income allocated to participating securities |
|
|
19 |
|
|
56 |
|
|
66 |
|
|
248 |
Less: Undistributed net income reallocated to participating securities |
|
|
(19) |
|
|
(55) |
|
|
(66) |
|
|
(247) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed and distributed net income available to common shareholders |
|
$ |
79,572 |
|
$ |
79,000 |
|
$ |
222,157 |
|
$ |
255,886 |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic net income per share |
|
|
55,158 |
|
|
56,420 |
|
|
55,266 |
|
|
56,382 |
Effect of dilutive securities |
|
|
229 |
|
|
384 |
|
|
290 |
|
|
351 |
Weighted average shares outstanding for diluted net income per share |
|
|
55,387 |
|
|
56,804 |
|
|
55,556 |
|
|
56,733 |
Net income per share two-class method: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.44 |
|
$ |
1.40 |
|
$ |
4.02 |
|
$ |
4.54 |
Diluted |
|
$ |
1.44 |
|
$ |
1.39 |
|
$ |
4.00 |
|
$ |
4.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities |
|
|
1,093 |
|
|
- |
|
|
939 |
|
|
- |
Potentially dilutive securities attributable to outstanding stock options and restricted stock units are excluded from the calculation of diluted earnings per share where the combined exercise price and average unamortized fair value are greater than the average market price of MSC common stock, and therefore their inclusion would be anti-dilutive.
Note 4. Stock-Based Compensation
The Company accounts for all share-based payments in accordance with ASC Topic 718, “Compensation—Stock Compensation”. Stock‑based compensation expense included in operating expenses for the thirteen and thirty-nine-week periods ended June 1, 2019 and June 2, 2018 was as follows:
|
Thirteen Weeks Ended |
Thirty-Nine Weeks Ended |
||||||||||
|
June 1, |
June 2, |
June 1, |
June 2, |
||||||||
|
2019 |
2018 |
2019 |
2018 |
||||||||
Stock options |
$ |
1,215 |
$ |
1,132 |
$ |
3,541 |
$ |
3,455 | ||||
Restricted share awards |
346 | 658 | 1,216 | 2,230 | ||||||||
Restricted stock units |
2,452 | 1,827 | 7,181 | 5,401 | ||||||||
Associate Stock Purchase Plan |
76 | 68 | 229 | 189 | ||||||||
Total |
4,089 | 3,685 | 12,167 | 11,275 | ||||||||
Deferred income tax benefit |
(1,026) | (1,080) | (3,054) | (3,304) | ||||||||
Stock-based compensation expense, net |
$ |
3,063 |
$ |
2,605 |
$ |
9,113 |
$ |
7,971 |
12
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Stock options
The fair value of each option grant is estimated on the date of grant using the Black‑Scholes option pricing model with the following assumptions:
|
Thirty-Nine Weeks Ended |
|||||
|
June 1, |
June 2, |
||||
|
2019 |
2018 |
||||
Expected life (in years) |
4.0 | 4.0 | ||||
Risk-free interest rate |
2.98 |
% |
1.87 |
% |
||
Expected volatility |
23.13 |
% |
22.13 |
% |
||
Expected dividend yield |
2.70 |
% |
2.30 |
% |
||
Weighted-average grant-date fair value |
$14.05 | $12.25 |
A summary of the Company’s stock option activity for the thirty-nine-week period ended June 1, 2019 is as follows:
|
Options |
|
Weighted-Average Exercise Price per Share |
|
Weighted-Average Remaining Contractual Term (in years) |
|
Aggregate Intrinsic Value |
||
Outstanding on September 1, 2018 |
1,760 |
$ |
72.96 | ||||||
Granted |
398 | 83.21 | |||||||
Exercised |
(207) | 75.07 | |||||||
Canceled/Forfeited |
(32) | 77.66 | |||||||
Outstanding on June 1, 2019 |
1,919 |
$ |
74.78 | 4.4 |
$ |
4,510 | |||
Exercisable on June 1, 2019 |
892 |
$ |
72.64 | 3.3 |
$ |
3,086 |
The unrecognized share‑based compensation cost related to stock option expense at June 1, 2019 was $9,190 and will be recognized over a weighted average period of 2.3 years. The total intrinsic value of options exercised, which represents the difference between the exercise price and market value of common stock measured at each individual exercise date, during the thirty-nine-week periods ended June 1, 2019 and June 2, 2018 was $1,882 and $7,234, respectively.
Restricted share awards
A summary of the non‑vested restricted share award (“RSA”) activity under the Company’s 2005 Omnibus Incentive Plan and 2015 Omnibus Incentive Plan for the thirty-nine-week period ended June 1, 2019 is as follows:
|
Shares |
|
Weighted-Average Grant-Date Fair Value |
|
Non-vested restricted share awards at September 1, 2018 |
63 |
$ |
81.98 | |
Granted |
— |
— |
||
Vested |
(39) | 82.36 | ||
Canceled/Forfeited |
(1) | 82.55 | ||
Non-vested restricted share awards at June 1, 2019 |
23 |
$ |
81.30 |
The fair value of each RSA is the closing stock price on the NYSE of the Company’s Class A common stock on the date of grant. Upon vesting, a portion of the RSA award may be withheld to satisfy the statutory income tax withholding obligation. The remaining RSAs will be settled in shares of the Company’s Class A common stock when vested. The unrecognized share-based compensation cost related to RSAs at June 1, 2019 was $620 and will be recognized over a weighted average period of 0.5 years.
13
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Restricted stock units
A summary of the Company’s non-vested Restricted Stock Unit (“RSU”) award activity for the thirty-nine-week period ended June 1, 2019 is as follows:
|
Shares |
|
Weighted-Average Grant-Date Fair Value |
|
Non-vested restricted stock unit awards at September 1, 2018 |
377 |
$ |
73.18 | |
Granted |
173 | 82.99 | ||
Vested |
(101) | 72.69 | ||
Canceled/Forfeited |
(21) | 77.27 | ||
Non-vested restricted stock unit awards at June 1, 2019 |
428 |
$ |
77.06 |
The fair value of each RSU is the closing stock price on the NYSE of the Company’s Class A common stock on the date of grant. Upon vesting, a portion of the RSU award may be withheld to satisfy the statutory income tax withholding obligation. The remaining RSUs will be settled in shares of the Company’s Class A common stock when vested. These awards accrue dividend equivalents on outstanding units (in the form of additional stock units) based on dividends declared on the Company’s Class A common stock and these dividend equivalents convert to unrestricted common stock on the vesting dates of the underlying RSUs. The dividend equivalents are not included in the RSU table above. The unrecognized share-based compensation cost related to the RSUs at June 1, 2019 was $26,641 and is expected to be recognized over a weighted average period of 3.2 years.
Note 5. Fair Value
Fair value accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value into three levels, with Level 1 being of the highest priority. The three levels of inputs used to measure fair value are as follows:
|
Level 1— |
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|
Level 2— |
Include other inputs that are directly or indirectly observable in the marketplace. |
|
Level 3— |
Unobservable inputs which are supported by little or no market activity. |
In connection with the construction of the Company’s customer fulfillment center (“CFC”) in Columbus, Ohio, the Company entered into an arrangement during fiscal 2013 with the Columbus-Franklin County Finance Authority (“Finance Authority”) which provides savings on state and local sales taxes imposed on construction materials purchased by entities that finance the transactions through them. Under this arrangement, the Finance Authority issued taxable bonds in the amount of $27,025 to finance the structure and site improvements of the Company’s CFC. The Company purchased these bonds at issuance. The bonds were redeemed on May 29, 2019 and all funds have been settled as of June 1, 2019. The bonds had an outstanding balance of $27,025 at September 1, 2018 and were classified as available for sale securities in accordance with ASC Topic 320. The fair values of these securities were based on observable inputs in non-active markets, which are therefore classified as Level 2 in the hierarchy. The Company did not record any gains or losses on these securities during the thirty-nine-week period ended June 1, 2019.
The Company’s financial instruments, other than those presented in the disclosure above, include cash and cash equivalents, accounts receivable, accounts payable, and outstanding indebtedness. The Company uses a market approach to determine the fair value of its debt instruments, utilizing quoted prices in active markets, interest rates and other relevant information generated by market transactions involving similar instruments. Therefore, the inputs used to measure the fair value of the Company's debt instruments are classified as Level 2 within the fair value hierarchy. The reported carrying amounts of the Company’s financial instruments approximated their fair values as of June 1, 2019 and September 1, 2018.
During the thirty-nine weeks ended June 1, 2019 and June 2, 2018, the Company had no remeasurements of non-financial assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition.
14
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Note 6. Debt and Capital Lease Obligations
Debt at June 1, 2019 and September 1, 2018 consisted of the following:
|
June 1, |
September 1, |
||||
|
2019 |
2018 |
||||
|
(Dollars in thousands) |
|||||
Revolving Credit Facilities |
||||||
Committed bank facility |
$ |
- |
$ |
224,000 | ||
Uncommitted bank facilities |
246,000 |
- |
||||
Private Placement Debt: |
||||||
Senior notes, series A |
75,000 | 75,000 | ||||
Senior notes, series B |
100,000 | 100,000 | ||||
Senior Notes |
20,000 | 20,000 | ||||
Shelf Facility Agreements: |
90,000 | 90,000 | ||||
Capital lease and financing obligations |
1,264 | 27,926 | ||||
Less: unamortized debt issuance costs |
(1,275) | (1,593) | ||||
Total debt |
$ |
530,989 |
$ |
535,333 | ||
Less: short-term debt(1) |
(246,298) | (224,097) | ||||
Long-term debt |
$ |
284,691 |
$ |
311,236 |
__________________________
(1) |
Net of unamortized debt issuance costs expected to be amortized in the next twelve months. |
Revolving Credit Facilities
In April 2017, the Company entered into a $600,000 committed credit facility (the “Committed Facility”). The Committed Facility, which matures on April 14, 2022, provides for a five-year unsecured revolving loan facility.
The Committed Facility permits up to $50,000 to be used to fund letters of credit. The Committed Facility also permits the Company to request one or more incremental term loan facilities and/or increase the revolving loan commitments in an aggregate amount not to exceed $300,000. Subject to certain limitations, each such incremental term loan facility or revolving commitment increase will be on terms as agreed to by the Company, the Administrative Agent and the lenders providing such financing.
The interest rate is based on either LIBOR or a base rate, plus in either case a spread based on the Company’s leverage ratio at the end of each fiscal reporting quarter. Based on the interest period the Company selects, interest may be payable every one, two, or three months. Interest is reset at the end of each interest period. The Company currently elects to have loans under the Committed Facility bear interest based on LIBOR with one-month interest periods.
During the first quarter of fiscal 2019, the Company entered into six unsecured credit facilities that are uncommitted (the “Uncommitted Facilities”), totaling $440,000 of maximum uncommitted availability. Borrowings under the Uncommitted Facilities are generally due at the end of the applicable agreed interest period, but, in any event, no later than the one-year anniversary of the entrance into the applicable Uncommitted Facility. The Uncommitted Facilities contain limited covenants. An event of default under the Company’s Committed Facility is an event of default under the Uncommitted Facilities. The interest rate on the Uncommitted Facilities is based on LIBOR or the bank’s cost of funds or as otherwise agreed upon by the applicable bank and the Company. The $246,000 outstanding at the end of the fiscal third quarter of 2019 under the Uncommitted Facilities is classified as short-term in the Company’s Condensed Consolidated Balance Sheet.
During the thirty-nine-week period ended June 1, 2019, the Company borrowed $358,000 and repaid $336,000 under its revolving credit facilities. As of June 1, 2019 and September 1, 2018, the weighted average interest rates on borrowings under all its revolving credit facilities were 3.26% and 3.20%, respectively.
15
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Private Placement Debt
In July 2016, the Company completed the issuance and sale of $75,000 aggregate principal amount of 2.65% Senior Notes, Series A, due July 28, 2023 and $100,000 aggregate principal amount of 2.90% Senior Notes, Series B, due July 28, 2026; and in June 2018, the Company completed the issuance and sale of $20,000 aggregate principal amount of 3.79% Senior Notes, due June 11, 2025 (collectively “Private Placement Debt”). Interest is payable semiannually at the fixed stated interest rates.
Shelf Facility Agreements
In January 2018, the Company entered into Note Purchase and Private Shelf Agreements with Metropolitan Life Insurance Company (“Met Life Note Purchase Agreement”) and PGIM, Inc. (“Prudential Note Purchase Agreement” and together with the Met Life Note Purchase Agreement, the “Shelf Facility Agreements”).
The Met Life Note Purchase Agreement provides for an uncommitted facility for the issuance and sale of up to an aggregate total of $250,000 of senior notes, at either fixed or floating rates. In June 2018, the Company completed the issuance and sale of $20,000 aggregate principal amount of 3.22% Series 2018A Notes, due June 11, 2020 and $20,000 aggregate principal amount of 3.42% Series 2018B Notes, due June 11, 2021. Interest is payable semiannually at the fixed stated interest rates. As of June 1, 2019, the uncommitted availability under the Met Life Note Purchase Agreement is $210,000.
The Prudential Note Purchase Agreement provides for an uncommitted facility for the issuance and sale of up to an aggregate total of $250,000 of senior notes, at a fixed rate. In January 2018, the Company completed the issuance and sale of $50,000 aggregate principal amount of 3.04% Senior Notes due January 12, 2023. Interest is payable semiannually. As of June 1, 2019, the uncommitted availability under the Prudential Note Purchase Agreement is $200,000.
Each of the credit facilities, Private Placement Debt, and Shelf Facility Agreements imposes several restrictive covenants including the requirement that the Company maintain a maximum consolidated leverage ratio of total indebtedness to EBITDA (earnings before interest expense, taxes, depreciation, amortization and stock-based compensation) of no more than 3.00 to 1.00 (or, at the election of the Company after it consummates a material acquisition, a four-quarter temporary increase to 3.50 to 1.00), and a minimum consolidated interest coverage ratio of EBITDA to total interest expense of at least 3.00 to 1.00, during the terms of the credit facilities, Private Placement Debt, and Shelf Facility Agreements. At June 1, 2019, the Company was in compliance with the operating and financial covenants of the credit facilities, Private Placement Debt, and Shelf Facility Agreements.
Capital Lease and Financing Obligations
In connection with the construction of the Company’s CFC in Columbus, Ohio in fiscal 2013, the Finance Authority holds the title to the building and entered into a long-term lease with the Company. The lease was classified as a capital lease in accordance with ASC Topic 840 and was terminated and paid in full on May 29, 2019.
From time to time, the Company enters into capital leases and financing arrangements with vendors to purchase certain information technology equipment or software. The equipment or software acquired from these vendors is paid for over a specified period of time based on the terms agreed upon. During the thirty-nine-week period ended June 1, 2019, the Company entered into capital lease and financing obligations related to certain IT equipment and software totaling $1,345. The gross amount of property and equipment acquired under the capital lease obligation and its accumulated amortization at June 1, 2019 was $442 and $46, respectively.
Note 7. Shareholders’ Equity
Common Stock Repurchases and Treasury Stock
During the thirteen and thirty-nine-week periods ended June 1, 2019, the Company repurchased 0.5 and 1,054 shares of its Class A common stock for $39 and $84,464, respectively. From these totals, 0.5 and 316 shares have not been retired and the amounts of $39 and $24,137 are reflected at cost as treasury stock in the accompanying condensed consolidated financial statements for the thirteen and thirty-nine weeks ended June 1, 2019, respectively.
16
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
During the thirteen and thirty-nine-week periods ended June 2, 2018, the Company repurchased 42 and 291 shares of its Class A common stock for $3,656 and $25,384, respectively. These shares were not retired, and the values are reflected at cost as treasury stock in the accompanying condensed consolidated financial statements for the thirteen and thirty-nine weeks ended June 2, 2018, respectively. The total number of shares of Class A common stock authorized for future repurchase was 1,157 shares at June 1, 2019.
The Company reissued 14 and 47 shares of treasury stock during the thirteen and thirty-nine-week periods ended June 1, 2019 and reissued 13 and 43 shares of treasury stock during the thirteen and thirty-nine-week periods ended June 2, 2018, respectively, to fund the Associate Stock Purchase Plan.
Dividends on Common Stock
On July 9, 2019, the Board of Directors declared a quarterly cash dividend of $0.75 per share payable on August 6, 2019 to shareholders of record at the close of business on July 23, 2019. The dividend will result in a payout of $41,401, based on the number of shares outstanding at June 19, 2019.
Note 8. Product Warranties
The Company generally offers a maximum one-year warranty, including parts and labor, for some of its machinery products. The specific terms and conditions of those warranties vary depending upon the product sold. The Company may be able to recoup some of these costs through product warranties it holds with its original equipment manufacturers, which typically range from thirty to ninety days. In general, many of the Company’s general merchandise products are covered by third-party original equipment manufacturers’ warranties. The Company’s warranty expense for the thirteen and thirty-nine-week periods ended June 1, 2019 and June 2, 2018 was minimal.
Note 9. Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted. The TCJA made significant changes to U.S. federal income tax laws including permanently lowering the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. As the Company has a fiscal August year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory rate of 25.6% for the fiscal year ending September 1, 2018. The Company’s statutory federal tax rate will be 21.0% for fiscal years 2019 and beyond. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118, which allows a company to report provisional numbers related to the TCJA and adjust those amounts during a measurement period not to extend beyond one year. The Company recorded a net tax benefit of $40,464 on a provisional basis in fiscal 2018 from the revaluation of its net deferred tax liabilities primarily related to the lower federal corporate tax rate, partially offset by the lower federal benefit for state taxes and the change from a worldwide tax system to a territorial tax system. The measurement period ended during our fiscal quarter ended March 2, 2019, and no adjustments were recorded during this period. As a result, we consider our accounting for the tax effects of the TCJA to be complete based on our interpretation of the law and subsequently issued guidance. However, the U.S. Treasury may continue to issue regulations and other guidance on the application of certain provisions of the TCJA that may impact our interpretation of the rules and our calculation of the tax impact of the provisions of the TCJA.
During the thirty-nine-week period ended June 1, 2019, there were no material changes in unrecognized tax benefits.
Note 10. Legal Proceedings
There are various claims, lawsuits, and pending actions against the Company incidental to the operation of its business. Although the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.
17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is intended to update the information contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 1, 2018 and presumes that readers have access to, and will have read, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in such Annual Report on Form 10-K.
Overview
MSC Industrial Direct Co., Inc. (together with its subsidiaries, “MSC,” the “Company,” “we,” “our,” or “us”) is a leading North American distributor of a broad range of MRO products and services. We help our customers drive greater productivity, profitability and growth with more than 1.7 million products, inventory management and other supply chain solutions, and deep expertise from more than 75 years of working with customers across industries. We continue to implement our strategies to gain market share, generate new customers, increase sales to existing customers, and diversify our customer base.
We offer approximately 1,712,000 active, saleable stock-keeping units through our catalogs; brochures; eCommerce channels, including our website, mscdirect.com (“MSC website”); our inventory management solutions; and call-centers and branches. We service our customers from 12 customer fulfillment centers (eight are located within the United States which includes five primary customer fulfillment centers, one is located in the United Kingdom, and three are in Canada) and 99 branch offices. Many of our products are carried in stock, and orders for these in-stock products are typically fulfilled the day on which the order is received.
Our business model focuses on providing overall procurement cost reduction and just-in-time delivery to meet our customers’ needs. We focus on offering inventory, process and procurement solutions that reduce MRO supply chain costs and improve plant floor productivity for our customers. We will seek to continue to achieve cost reduction throughout our business through cost-saving strategies and increased leverage from our existing infrastructure and continue to provide additional procurement cost-saving solutions to our customers through technology such as our Customer Managed Inventory, Vendor Managed Inventory (“VMI”), and vending programs.
Our field sales and service associate headcount was 2,411 at June 1, 2019, compared to 2,348 at June 2, 2018. Beginning in our fiscal fourth quarter of 2018, field sales and service personnel includes all customer-facing associates in an external sales or service role. Prior period headcount numbers have been adjusted to reflect this new definition. We have migrated our sales force from one designed to sell a spot buy value proposition to one prepared to deliver upon the new, more complex and high-touch role that we play for our customers, to enable our customers to achieve higher levels of growth, profitability, and productivity.
Recent Developments and Highlights
Highlights during the three fiscal quarters ended June 1, 2019 include the following:
· |
We generated $187.2 million of cash from operations. |
· |
We repurchased 1.1 million shares for $84.5 million. |
· |
We paid out $104.3 million in cash dividends, compared to $92.6 million for the same periods in the prior fiscal year. |
· |
On February 1, 2019, we completed the acquisition of certain assets of TAC Insumos Industriales, S. de R.L. de C.V. and certain of its affiliates (together, “TAC”) for aggregate consideration of $18.5 million (subject to finalizing the post-closing working capital adjustment), of which our 75% portion of the aggregate consideration was $13.9 million. |
Our Strategy
Our objective is to continue to grow sales profitably while helping our customers become more productive and profitable by reducing their total cost for purchasing, using and maintaining MRO supplies. We continue to pursue strategic acquisitions that expand or complement our business in new and existing markets or further enhance the value and offerings we provide.
18
Business Environment
We utilize various indices when evaluating the level of our business activity. Approximately 69% of our revenues came from sales in the manufacturing sector during the third quarter of our fiscal year 2019. Through statistical analysis, we have found that trends in our customers’ activity have correlated to changes in the Metalworking Business Index (“MBI”). The MBI is a sentiment index developed from a monthly survey of the U.S. metalworking industry, focusing on durable goods manufacturing. For the MBI, a value below 50.0 generally indicates contraction and a value above 50.0 generally indicates expansion. The MBI index over the last three months and for the past 12-month period ending May 2019 were as follows:
Period |
|
MBI |
March |
|
53.6 |
April |
|
53.6 |
May |
|
51.6 |
|
|
|
Fiscal 2019 Q3 average |
|
52.9 |
12-month average |
|
55.1 |
The May 2019 MBI reading of 51.6 continued its trend of expansion in the manufacturing industry, but at its slowest level of expansion since 2017. Details released with the May MBI indicate continued expansion in supplier deliveries, new orders, production, and employment while backlogs and exports lowered the index. The most recent June MBI reading of 51.8 is indicative of continued expansion, albeit at a rate consistent with May. We will continue to monitor economic conditions for their impact on our customers and markets and continue to assess business risks and opportunities.
Thirteen-Week Period Ended June 1, 2019 Compared to the Thirteen-Week Period Ended June 2, 2018
The table below summarizes the Company’s results of operations both in dollars (in thousands) and as a percentage of net sales for the periods indicated:
|
||||||||||||||||||
|
|
Thirteen Weeks Ended |
|
|
|
|
|
|||||||||||
|
|
June 1, 2019 |
|
June 2, 2018 |
|
Change |
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
Net sales |
|
$ |
866,546 |
|
|
100.0% |
|
$ |
828,345 |
|
|
100.0% |
|
$ |
38,201 |
|
|
4.6% |
Cost of goods sold |
|
|
497,891 |
|
|
57.5% |
|
|
467,344 |
|
|
56.4% |
|
|
30,547 |
|
|
6.5% |
Gross profit |
|
|
368,655 |
|
|
42.5% |
|
|
361,001 |
|
|
43.6% |
|
|
7,654 |
|
|
2.1% |
Operating expenses |
|
|
258,154 |
|
|
29.8% |
|
|
245,619 |
|
|
29.7% |
|
|
12,535 |
|
|
5.1% |
Income from operations |
|
|
110,501 |
|
|
12.8% |
|
|
115,382 |
|
|
13.9% |
|
|
(4,881) |
|
|
(4.2)% |
Total other expense |
|
|
(4,482) |
|
|
(0.5)% |
|
|
(3,565) |
|
|
(0.4)% |
|
|
(917) |
|
|
25.7% |
Income before provision for income taxes |
|
|
106,019 |
|
|
12.2% |
|
|
111,817 |
|
|
13.5% |
|
|
(5,798) |
|
|
(5.2)% |
Provision for income taxes |
|
|
26,505 |
|
|
3.1% |
|
|
32,748 |
|
|
(4.0)% |
|
|
(6,243) |
|
|
(19.1)% |
Net income |
|
|
79,514 |
|
|
9.2% |
|
|
79,069 |
|
|
9.5% |
|
|
445 |
|
|
0.6% |
Less: Net income (loss) attributable to noncontrolling interest |
|
|
(87) |
|
|
0.0% |
|
|
- |
|
|
0.0% |
|
|
(87) |
|
|
0.0% |
Net income attributable to MSC Industrial |
|
$ |
79,601 |
|
|
9.2% |
|
$ |
79,069 |
|
|
9.5% |
|
$ |
532 |
|
|
0.7% |
Net Sales
Net sales increased 4.6% or $38.2 million for the thirteen-week period ended June 1, 2019, as compared to the thirteen-week period ended June 2, 2018. We estimate that this $38.2 million increase in net sales is comprised of (i) $13.3 million of higher sales volume, excluding our All Integrated Solutions (“AIS”) subsidiary and MSC Mexico operations; (ii) $11.6 million from AIS, which we acquired in April 2018; (iii) $9.9 million from MSC Mexico, which commenced operations in February 2019; and (iv) $4.9 million from improved pricing, inclusive of changes in customer and product mix, discounting and other items; partially offset by (v) $1.5 million from foreign exchange impact. Of the above $38.2 million increase in net sales, sales to our government and national account programs (“Large Account Customers”) increased by $3.2 million and sales other than to our Large Account Customers increased by $35.0 million, which includes $11.6 million and $9.9 million of net sales from AIS and MSC Mexico, respectively.
19
The table below shows the change in our average daily sales by total company and by customer type for the thirteen- week period ended June 1, 2019 compared to the same period in the prior fiscal year:
Average Daily Sales Percentage Change |
||||||
(unaudited) |
||||||
|
||||||
2019 vs. 2018 Fiscal Period |
Thirteen Week Period Ended Fiscal Q3 |
% of Total Business |
||||
|
||||||
Total Company |
4.6 |
% |
||||
Manufacturing Customers |
5.1 |
% |
69 |
% |
||
Non-Manufacturing Customers |
3.4 |
% |
31 |
% |
We believe that our ability to transact business with our customers through various electronic portals and directly through the MSC website gives us a competitive advantage over smaller suppliers. Sales made through our eCommerce platforms, including sales made through Electronic Data Interchange (“EDI”) systems, VMI systems, Extensible Markup Language ordering-based systems, vending, hosted systems and other electronic portals, represented 60.1% of consolidated net sales for the thirteen-week period ended June 1, 2019, compared to 60.6% of consolidated net sales for the same period in the prior fiscal year. These percentages of consolidated net sales do not include eCommerce sales from the recent acquisitions of DECO Tool Supply Company and AIS, and from MSC Mexico operations.
Gross Profit
Gross profit margin was 42.5% for the thirteen-week period ended June 1, 2019 as compared to 43.6% for the same period in the prior fiscal year. The decline was primarily the result of increased product costs and changes in our customer and product mix. In addition, 30 basis points of the decline resulted from MSC Mexico operations which commenced in the fiscal second quarter of 2019 and another 10 basis points of the decline came from the AIS business we acquired in the fiscal third quarter of 2018.
Operating expenses increased 5.1% to $258.2 million for the thirteen-week period ended June 1, 2019, as compared to $245.6 million for the same period in the prior fiscal year. Operating expenses were 29.8% of net sales for the thirteen-week period ended June 1, 2019, as compared to 29.7% for the thirteen-week period ended June 2, 2018. The increase in operating expenses was primarily attributable to an increase in payroll and payroll-related costs and freight costs, associated with higher sales volumes. Operating expenses also increased due to the acquisition of AIS in our third quarter of fiscal 2018 and from the operations of MSC Mexico which commenced in our second quarter of fiscal 2019. AIS and MSC Mexico operating expenses, including non-recurring acquisition and integration costs, accounted for $5.1 million and $1.9 million, respectively, of total operating expenses for the thirteen-week period ended June 1, 2019 and AIS accounted for $2.4 million of total operating expenses for the thirteen-week period ended June 2, 2018.
Payroll and payroll-related costs were 56.3% of total operating expenses for the thirteen-week period ended June 1, 2019, as compared to 56.6% for the thirteen-week period ended June 2, 2018. Included in payroll and payroll-related costs are salary, incentive compensation, sales commission, and fringe benefit costs. All of these costs, with the exception of incentive compensation, increased for the thirteen-week period ended June 1, 2019, as compared to the same period in the prior fiscal year, with much of the increase attributable to an increase in salary expenses, primarily related to annual merit increases and an increase in our field sales and service associate headcount. Also contributing to the increase in payroll and payroll-related costs were increased sales commissions due to higher sales volume and increased fringe costs associated with higher medical costs. The incentive compensation accrual decreased as the fiscal 2019 bonus payout is currently expected to be made at lower levels than fiscal 2018.
Freight expense was $35.1 million for the thirteen-week period ended June 1, 2019, as compared to $33.4 million for the same period in the prior fiscal year. The primary driver of this increase was increased sales.
20
Income from Operations
Income from operations decreased 4.2% to $110.5 million for the thirteen-week period ended June 1, 2019, as compared to $115.4 million for the same period in the prior fiscal year. This was primarily attributable to the increase in operating expenses as described above, partially offset by the increase in net sales and gross profit. Income from operations as a percentage of net sales decreased to 12.8% for the thirteen-week period ended June 1, 2019, from 13.9% for the same period in the prior fiscal year, primarily as the result of the decrease in the gross profit margin mentioned above.
The effective tax rate for the thirteen-week period ended June 1, 2019 was 25.0% as compared to 29.3% for the same period in the prior fiscal year. The decrease in the effective tax rate was primarily due to the reduction in the corporate tax rate to 21% resulting from the TCJA. During fiscal 2018, the reduction in the corporate tax rate was pro-rated due to the effective date of the change. See Note 9 “Income Taxes” in the Notes to the unaudited Condensed Consolidated Financial Statements for further discussion.
Net Income
The factors which affected net income for the thirteen-week period ended June 1, 2019, as compared to the same period in the previous fiscal year, have been discussed above.
Thirty-Nine-Week Period Ended June 1, 2019 Compared to the Thirty-Nine-Week Period Ended June 2, 2018
The table below summarizes the Company’s results of operations both in dollars (in thousands) and as a percentage of net sales for the periods indicated:
|
||||||||||||||||||
|
|
Thirty-Nine Weeks Ended |
|
|
|
|
|
|||||||||||
|
|
June 1, 2019 |
|
June 2, 2018 |
|
Change |
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
Net sales |
|
$ |
2,521,147 |
|
|
100.0% |
|
$ |
2,365,893 |
|
|
100.0% |
|
$ |
155,254 |
|
|
6.6% |
Cost of goods sold |
|
|
1,442,693 |
|
|
57.2% |
|
|
1,332,600 |
|
|
56.3% |
|
|
110,093 |
|
|
8.3% |
Gross profit |
|
|
1,078,454 |
|
|
42.8% |
|
|
1,033,293 |
|
|
43.7% |
|
|
45,161 |
|
|
4.4% |
Operating expenses |
|
|
768,972 |
|
|
30.5% |
|
|
720,530 |
|
|
30.5% |
|
|
48,442 |
|
|
6.7% |
Income from operations |
|
|
309,482 |
|
|
12.3% |
|
|
312,763 |
|
|
13.2% |
|
|
(3,281) |
|
|
(1.0)% |
Total other expense |
|
|
(12,986) |
|
|
(0.5)% |
|
|
(10,307) |
|
|
(0.4)% |
|
|
(2,679) |
|
|
26.0% |
Income before provision for income taxes |
|
|
296,496 |
|
|
11.8% |
|
|
302,456 |
|
|
12.8% |
|
|
(5,960) |
|
|
(2.0)% |
Provision for income taxes |
|
|
74,320 |
|
|
2.9% |
|
|
46,250 |
|
|
2.0% |
|
|
28,070 |
|
|
60.7% |
Net income |
|
|
222,176 |
|
|
8.8% |
|
|
256,206 |
|
|
10.8% |
|
|
(34,030) |
|
|
(13.3)% |
Less: Net income (loss) attributable to noncontrolling interest |
|
|
(81) |
|
|
0.0% |
|
|
- |
|
|
0.0% |
|
|
(81) |
|
|
0.0% |
Net income attributable to MSC Industrial |
|
$ |
222,257 |
|
|
8.8% |
|
$ |
256,206 |
|
|
10.8% |
|
$ |
(33,949) |
|
|
(13.3)% |
Net Sales
Net sales increased 6.6% or $155.3 million for the thirty-nine-week period ended June 1, 2019, as compared to the thirty-nine-week period ended June 2, 2018. We estimate that this $155.3 million increase in net sales is comprised of (i) $83.1 million of higher sales volume, excluding AIS and MSC Mexico operations; (ii) $46.3 million from AIS, which we acquired in April 2018; (iii) $12.8 million from MSC Mexico, which commenced operations in February 2019; and (iv) $16.7 million from improved pricing, inclusive of changes in customer and product mix, discounting and other items; partially offset by (v) $3.6 million from foreign exchange impact. Of the above $155.3 million increase in net sales, sales to our Large Account Customers increased by $37.0 million and sales other than to our Large Account Customers increased by $118.3 million, which includes $46.3 million and $12.8 million of net sales from AIS and MSC Mexico, respectively.
21
The table below shows the change in our average daily sales by total company and by customer type for the thirty-nine-week period ended June 1, 2019 compared to the same period in the prior fiscal year:
Average Daily Sales Percentage Change |
||||||
(unaudited) |
||||||
|
||||||
2019 vs. 2018 Fiscal Period |
Thirty-Nine-Week Period Ended Fiscal Q3 |
% of Total Business |
||||
|
||||||
Total Company |
7.1 |
% |
||||
Manufacturing Customers |
7.4 |
% |
70 |
% |
||
Non-Manufacturing Customers |
6.3 |
% |
30 |
% |
We believe that our ability to transact business with our customers through various electronic portals and directly through the MSC website gives us a competitive advantage over smaller suppliers. Sales made through our eCommerce platforms, including sales made through EDI systems, VMI systems, Extensible Markup Language ordering-based systems, vending, hosted systems and other electronic portals, represented 60.1% of consolidated net sales for the thirty-nine-week period ended June 1, 2019, compared to 60.2% of consolidated net sales for the same period in the prior fiscal year. These percentages of consolidated net sales do not include eCommerce sales from the recent acquisitions of DECO and AIS and from MSC Mexico operations.
Gross Profit
Gross profit margin was 42.8% for the thirty-nine-week period ended June 1, 2019 as compared to 43.7% for the same period in the prior fiscal year. The decline was primarily the result of increased product costs and changes in our customer and product mix. In addition, 10 basis points of the decline resulted from MSC Mexico operations which commenced in the fiscal second quarter of 2019 and another 20 basis points of the decline came from the AIS business we acquired in the fiscal third quarter of 2018.
Operating Expenses
Operating expenses increased 6.7% to $769.0 million for the thirty-nine-week period ended June 1, 2019, as compared to $720.5 million for the same period in the prior fiscal year. Operating expenses were 30.5% of net sales for both the thirty-nine-week periods ended June 1, 2019 and June 2, 2018. The increase in operating expenses was primarily attributable to an increase in payroll and payroll-related costs and freight costs, associated with higher sales volumes. Operating expenses also increased due to the acquisition of AIS in our third quarter of the prior fiscal year and from the operations of MSC Mexico which commenced in the second quarter of fiscal 2019. AIS and MSC Mexico operating expenses, including non-recurring acquisition and integration costs, accounted for $14.8 million and $2.7 million, respectively, of total operating expenses for the thirty-nine-week period ended June 1, 2019 and AIS accounted for $2.4 million of total operating expenses for the thirty-nine-week period ended June 2, 2018.
Payroll and payroll-related costs were 56.2% of total operating expenses for the thirty-nine-week period ended June 1, 2019, as compared to 56.9% for the thirty-nine-week period ended June 2, 2018. Included in payroll and payroll-related costs are salary, incentive compensation, sales commission, and fringe benefit costs. All of these costs, with the exception of incentive compensation, increased for the thirty-nine-week period ended June 1, 2019, as compared to the same period in the prior fiscal year, with much of the increase attributable to an increase in salary expenses, primarily related to annual merit increases and an increase in our field sales and service associate headcount. Also contributing to the increase in payroll and payroll-related costs were increased sales commissions due to higher sales volume and increased fringe costs associated with higher medical costs. The incentive compensation accrual decreased as the fiscal 2019 bonus payout is currently expected to be made at lower levels than fiscal 2018.
22
Freight expense was $103.5 million for the thirty-nine-week period ended June 1, 2019, as compared to $96.7 million for the same period in the prior fiscal year. The primary driver of this increase was increased sales.
Income from Operations
Income from operations decreased 1.0% to $309.5 million for the thirty-nine-week period ended June 1, 2019, as compared to $312.8 million for the same period in the prior fiscal year. This was primarily attributable to the increase in operating expenses as described above. Income from operations as a percentage of net sales decreased to 12.3% for the thirty-nine-week period ended June 1, 2019, from 13.2% for the same period in the prior fiscal year, primarily as the result of the decrease in the gross profit margin mentioned above.
Provision for Income Taxes
The effective tax rate for the thirty-nine-week period ended June 1, 2019 was 25.1% as compared to 15.3% for the same period in the prior fiscal year. The increase in the effective tax rate was primarily due to the prior year period adjustment resulting from the revaluation of net deferred tax liabilities as of the enactment date of the TCJA. See Note 9 “Income Taxes” in the Notes to the unaudited Condensed Consolidated Financial Statements for further discussion.
Net Income
The factors which affected net income for the thirty-nine-week period ended June 1, 2019, as compared to the same period in the previous fiscal year, have been discussed above.
Liquidity and Capital Resources
|
|||||||||
June 1, |
September 1, |
||||||||
|
2019 |
2018 |
$ Change |
||||||
|
(Dollars in thousands) |
||||||||
Total debt |
$ |
530,989 |
$ |
535,333 |
$ |
(4,344) | |||
Less: Cash and cash equivalents |
(38,771) | (46,217) | 7,446 | ||||||
Net debt |
$ |
492,218 |
$ |
489,116 |
$ |
3,102 | |||
Equity |
$ |
1,453,875 |
$ |
1,387,254 |
$ |
66,621 |
As of June 1, 2019, we held $38.8 million in cash and cash equivalents, substantially all with well-known financial institutions. Historically, our primary financing needs have been to fund our working capital requirements necessitated by our sales growth and the costs of acquisitions, new products, new facilities, facility expansions, investments in vending solutions, technology investments, and productivity investments. Cash generated from operations, together with borrowings under our credit facilities, Private Placement Debt, and Shelf Facility Agreements, have been used to fund these needs, to repurchase shares of our Class A common stock, and to pay dividends. As of June 1, 2019, total borrowings outstanding, representing amounts due under our credit facilities, Private Placement Debt, and Shelf Facility Agreements, as well as all capital leases and financing arrangements, were $531.0 million, net of unamortized debt issuance costs of $1.3 million. As of September 1, 2018, total borrowings outstanding, representing amounts due under our credit facilities, Private Placement Debt, and Shelf Facility Agreements, as well as all capital leases and financing arrangements, were $535.3 million, net of unamortized debt issuance costs of $1.6 million. We believe, based on our current business plan, that our existing cash, funds available under our credit facilities, and cash flow from operations will be sufficient to fund our planned capital expenditures and operating cash requirements for at least the next 12 months.
23
The table below summarizes information regarding the Company’s liquidity and capital resources:
|
Thirty-Nine Weeks Ended |
|||||
|
June 1, |
June 2, |
||||
|
2019 |
2018 |
||||
|
||||||
|
(Dollars in thousands) |
|||||
Net cash provided by operating activities |
$ |
187,200 |
$ |
230,237 | ||
Net cash used in investing activities |
(20,556) | (116,639) | ||||
Net cash used in financing activities |
(173,959) | (89,709) | ||||
Effect of foreign exchange rate changes on cash and cash equivalents |
(131) | 21 | ||||
Net increase (decrease) in cash and cash equivalents |
$ |
(7,446) |
$ |
23,910 |
Operating Activities
Net cash provided by operating activities for the thirty-nine-week periods ended June 1, 2019 and June 2, 2018 was $187.2 million and $230.2 million, respectively. There are various increases and decreases contributing to this change. A decrease in the change in accounts payable and accrued liabilities relating to a greater decrease in the change in the payroll accrual based on the payroll periods, an increase in the change in prepaid expenses and other assets primarily relating to a greater increase in the change in vendor rebate receivables, and a greater increase in the change in inventories, partially offset by the increase in net income, after offsetting the income tax benefit recognized from the revaluation of the net deferred tax liabilities as of the enactment date of the TCJA, contributed to most of the decrease in net cash provided by operating activities.
|
June 1, |
September 1, |
June 2, |
||||||
|
2019 |
2018 |
2018 |
||||||
|
(Dollars in thousands) |
||||||||
Working Capital |
$ |
729,704 |
$ |
656,984 |
$ |
587,692 | |||
Current Ratio |
2.5 | 2.3 | 2.1 | ||||||
|
|||||||||
Days Sales Outstanding |
59.2 | 55.6 | 56.2 | ||||||
Inventory Turnover |
3.5 | 3.7 | 3.6 |
The increases in working capital and the current ratio as of June 1, 2019 compared to June 2, 2018 is primarily due to an increase in inventories and accounts receivable resulting from an increase in sales, as well as a reduction in our current debt outstanding.
The increase in days sales outstanding is primarily due to a receivables portfolio consisting of a greater percentage of our national account program sales, which are typically at longer terms. Inventory turns, calculated using a thirteen-point average inventory balance, remained relatively consistent with the prior year periods displayed.
Investing Activities
Net cash used in investing activities for the thirty-nine-week periods ended June 1, 2019 and June 2, 2018 was $20.6 million and $116.6 million, respectively. The use of cash for the thirty-nine-week period ended June 1, 2019 consisted of expenditures for property, plant, and equipment and the acquisition of certain assets of TAC. This was offset by the cash received from the sale of the Finance Authority bonds that were redeemed on May 29, 2019. The use of cash for the thirty-nine-week period ended June 2, 2018 was primarily related to the AIS acquisition with the remainder consisting of expenditures for property, plant, and equipment.
Financing Activities
Net cash used in financing activities for the thirty-nine-week periods ended June 1, 2019 and June 2, 2018 was $174.0 million and $89.7 million, respectively. The major components contributing to the use of cash for the thirty-nine-week period ended June 1, 2019 were the repurchase of our common stock of $84.5 million, dividends paid of $104.3 million, and payments on capital lease and financing obligations of $28.0 million primarily related to the lease with the Finance Authority upon the settlement of the bonds. This was partially offset by net borrowings on all the credit facilities of $22.0 million and proceeds from the exercise of common stock options of $15.5 million. The major components contributing to the use of cash for the thirty-nine-week period ended June 2, 2018 were dividends paid of $92.6 million, and the
24
repurchase of our common stock of $25.4 million. This was partially offset by proceeds from the exercise of common stock options of $23.1 million.
Contractual Obligations
Information regarding our long-term debt payments, operating lease payments, capital lease payments and other commitments is provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on our Form 10-K for the fiscal year ended September 1, 2018. As of June 1, 2019, there have been no material changes in our contractual obligations and commitments since September 1, 2018, with the exception of the $27.0 million payment on the capital lease obligation to the Finance Authority.
Long-term Debt
Credit Facilities
In April 2017, the Company entered into a $600 million Committed Facility. The Company also has six Uncommitted Facilities, totaling $440 million of maximum uncommitted availability. See Note 6 “Debt and Capital Lease Obligations” in the Notes to the unaudited Condensed Consolidated Financial Statements for more information about the credit facilities. As of June 1, 2019, we were in compliance with the operating and financial covenants of the credit facilities. The current unused balance of $597 million from the Committed Facility, which is reduced by outstanding letters of credit, is available for working capital purposes if necessary.
Private Placement Debt and Shelf Facility Agreements
In July 2016, we completed the issuance and sale of unsecured senior notes. In January 2018, we entered into two Note Purchase and Private Shelf Agreements. In June 2018, we entered into an additional note purchase agreement. See Note 6 “Debt and Capital Lease Obligations” in the Notes to the unaudited Condensed Consolidated Financial Statements for more information about these transactions.
Capital Lease and Financing Arrangements
From time to time, we enter into capital leases and financing arrangements. See Note 6 “Debt and Capital Lease Obligations” in the Notes to the unaudited Condensed Consolidated Financial Statements for more information about our capital lease and financing arrangements.
Operating Leases
As of June 1, 2019, certain of our operations are conducted on leased premises. These leases are for varying periods, the longest extending to fiscal 2028. In addition, we are obligated under certain equipment and automobile operating leases, which expire on varying dates through fiscal 2023.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Critical Accounting Estimates
On an ongoing basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition, inventory valuation, allowance for doubtful accounts, warranty reserves, contingencies and litigation, income taxes, accounting for goodwill and long-lived assets, stock-based compensation, and business combinations. We make estimates, judgments and assumptions in determining the amounts reported in the condensed consolidated financial statements and accompanying notes. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The estimates are used to form the basis for making judgments about the carrying values of assets and liabilities and the amount of revenues and expenses reported that are not readily apparent from other sources. Actual results may differ from these estimates.
There have been no material changes in the Company’s Critical Accounting Policies, as disclosed in its Annual Report on Form 10-K for the fiscal year ended September 1, 2018.
25
Recently Issued Accounting Standards
See Note 1 “Basis of Presentation” in the Notes to the unaudited Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding our exposure to certain market risks, see “Interest Rate Risks” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”, in our Annual Report on Form 10-K for the fiscal year ended September 1, 2018. Except as described in Management’s Discussion and Analysis of Financial Condition and Results of Operations above, there have been no significant changes in our financial instrument portfolio or interest rate risk since our September 1, 2018 fiscal year-end.
Item 4. Controls and Procedures
Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, as well as other key members of our management, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is (i) accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
No changes occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act) during the fiscal quarter ended June 1, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
There are various claims, lawsuits, and pending actions against the Company incidental to the operation of its business. Although the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
In addition to the other information set forth in this Report, consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 1, 2018, which could materially affect our business, financial condition or future results. The risks described in the aforementioned report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be not material also may materially adversely affect our business, financial condition and/or operating results.
26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth repurchases by the Company of its outstanding shares of Class A common stock during the thirteen-week period ended June 1, 2019:
Period |
Total Number of Shares Purchased(1) |
Average Price Paid Per Share(2) |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(3) |
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
|||||
3/3/19-4/2/19 |
371 |
$ |
83.32 |
— |
1,157,038 | ||||
4/3/19-5/2/19 |
51 |
82.69 |
— |
1,157,038 | |||||
5/3/19-6/1/19 |
49 |
75.83 |
— |
1,157,038 | |||||
Total |
471 |
$ |
82.60 |
— |
__________________________
(1) |
During the thirteen weeks ended June 1, 2019, 471 shares of our common stock were withheld by the Company as payment to satisfy our associates’ tax withholding liability associated with our share-based compensation program and are included in the total number of shares purchased. |
(2) |
Activity is reported on a trade date basis. |
(3) |
During fiscal year 1999, the Board of Directors established the MSC Stock Repurchase Plan, which we refer to as the “Repurchase Plan.” The total number of shares of our Class A common stock initially authorized for future repurchase was set at 5,000,000 shares. On January 8, 2008, and on October 21, 2011, the Board of Directors reaffirmed and replenished the Repurchase Plan. Most recently, on January 9, 2018, the Board of Directors authorized the repurchase of an additional 2,000,000 shares of Class A common stock under the Company’s ongoing Repurchase Plan. As of June 1, 2019, the maximum number of shares that may yet be repurchased under the Repurchase Plan was 1,157,038 shares. There is no expiration date for this program. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
None.
27
EXHIBIT INDEX
|
|
|
|
Exhibit No. |
Exhibit |
31.1 |
Chief Executive Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
31.2 |
Chief Financial Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
32.1 |
|
32.2 |
|
101.INS |
XBRL Instance Document.* |
101.SCH |
XBRL Taxonomy Extension Schema Document.* |
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document.* |
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document.* |
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document.* |
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document.* |
__________________________
|
|
* |
Filed herewith. |
** |
Furnished herewith. |
28
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.
|
||
|
MSC Industrial Direct Co., Inc. (Registrant)
|
|
Dated: July 10, 2019 |
By: |
/s/ ERIK GERSHWIND
President and Chief Executive Officer
|
Dated: July 10, 2019 |
By: |
/s/ RUSTOM JILLA
Executive Vice President and Chief Financial Officer |
29