MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Note 1. Basis of Pres
ent
ation
The accompanying condensed consolidated financial statements include MSC Industrial Direct Co., Inc. (“MSC”) and all of its subsidiaries (hereinafter referred to collectively as the “Company”). All intercompany balances and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. Operating results for the
thirteen and thirty-nine
week period
s
ended
June 3, 2017
are not necessarily indicative of the results that may be expected for the fiscal year ending
September 2, 2017
. For further information, refer to the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended
September 3, 2016
.
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
2017
fiscal year will be a 52
-week accounting period that will end on
September 2, 2017
and its
2016
fiscal year was a 53
-week accounting period that ended on
September 3, 2016
.
There have been no changes to significant accounting policies since September 3, 2016, except for the adoption of Accounting Standards Update (“ASU”) No. 2016-09,
Improvements to Employee Share-Based Payment Accounting, and ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes,
which resulted in changes to the condensed consolidated financial statements, including adjustments recorded as of the beginning of fiscal 2017, as described below in
“Recently Adopted Accounting Pronouncements”
.
The Company combined
the
revolving credit note and c
urrent maturities of long-term debt into
s
hort-term debt
for the prior year
in the Condensed Consolidated Balance Sheets in order to conform to
the
current period’s presentation.
Recently Adopted Accounting Pronouncements
Share-based Payments
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements.
The Company early adopted ASU 2016-09 in the second quarter of fiscal 2017,
which required
us to reflect any adjustments as of
September 4
, 2016, the beginning of
the annual period that includes the interim period of adoption.
Prior fiscal year periods were not retrospectively adjusted.
Adoption of the new standard affected our previously reported fiscal first quarter of 2017 net income per share as follows:
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
December 3, 2016
|
|
|
As Reported
|
|
As Adjusted
|
Condensed Consolidated Statements of Income:
|
|
(in thousands, except per share data)
|
Provision for income taxes
|
|
$
|
33,442
|
|
$
|
33,257
|
Net income
|
|
$
|
54,103
|
|
$
|
54,288
|
Per share information:
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
Basic
|
|
$
|
0.96
|
|
$
|
0.96
|
Diluted
|
|
$
|
0.95
|
|
$
|
0.96
|
Weighted average shares used in computing net income per common share:
|
|
|
|
|
|
|
Basic
|
|
|
56,381
|
|
|
56,381
|
Diluted
|
|
|
56,572
|
|
|
56,608
|
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Deferred Taxes
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. This update requires an entity to classify deferred tax liabilities and assets as non-current within a classified balance sheet. ASU 2015-17 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016. This update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The FASB allowed early adoption of this standard and, therefore, the Company prospectively adopted ASU 2015-17 during its first quarter of fiscal 2017. As a result of adopting this standard,
$46,627
of deferred income taxes that were previously presented as a current asset are now included within long-term liabilities, as the Company was in a net deferred tax liability position in its first quarter of fiscal 2017 which was the time of adoption. Prior periods were not retrospectively adjusted.
Accounting Pronouncements Not Yet Adopted
Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 in the goodwill impairment test that required an entity to calculate the implied fair value of goodwill. An entity will now apply a one-step quantitative test and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 will be applied prospectively and is
effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019
. The new standard is effective for the Company for its fiscal 2021 fourth quarter goodwill impai
rment test. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.
The Company
does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
Business Combinations
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations – Clarifying the Definition of a Business. ASU 2017-01
clarifies the definition of a business to assist entities with evaluating when a set of transferred assets and activities is considered a business.
The amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard is effective for the Company for
its fiscal 2019 first quarter, with early adoption permitted. The amendments are to be applied prospectively to business combinations that occur after the effective date.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842),
to increase transparency and comparability by providing additional information to users of financial statements regarding an entity’s leasing activities. ASU 2016-02 requires reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. ASU 2016-02 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2018. The new standard is effective for the Company for its fiscal 2020 first quarter. The guidance will be applied on a modified retrospective basis beginning with the earliest period presented. The Company is currently evaluating this standard to determine the impact of adoption on its consolidated financial statements.
Simplifying the Measurement of Inventory
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory
(
Topic 330), which requires an entity to measure inventory at the lower of cost or net realizable value, which consists of the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. For public entities, the updated guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The guidance is to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The new standard is effective for the Company for its fiscal 2018 first quarter. The Company does not expect adoption of ASU 2015-11 to have a material impact on its consolidated financial statements.
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company for its fiscal 2019 first quarter. Early application is permitted. The standard permits the use of either the retrospective or cumulative effect transition method.
To date, the Company has performed a preliminary detailed review of key contracts and compared historical accounting policies and practices to the new standard. While the Company is still evaluating this standard, it is not expected that this standard will have a material impact on the Company’s consolidated financial statements. The Company will continue to evaluate ASU 2014-09 and other amendments and related interpretive guidance through the date of adoption. The Company expects to adopt
ASU 2014-09 under the modified
retrospective approach in the first quarter of fiscal 2019.
Note 2. Net Income per Share
The Company’s non-vested restricted stock awards contain non-forfeitable rights to dividends and meet the criteria of a participating security as defined by
Ac
counting 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 shar
es 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 3, 2017 and May 28, 2016, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
|
June 3,
|
|
May 28,
|
|
June 3,
|
|
May 28,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income as reported
|
|
$
|
62,836
|
|
$
|
64,816
|
|
$
|
170,683
|
|
$
|
169,370
|
Less: Distributed net income available to participating securities
|
|
|
(39)
|
|
|
(81)
|
|
|
(151)
|
|
|
(251)
|
Less: Undistributed net income available to participating securities
|
|
|
(107)
|
|
|
(170)
|
|
|
(309)
|
|
|
(442)
|
Numerator for basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed and distributed net income available to common shareholders
|
|
$
|
62,690
|
|
$
|
64,565
|
|
$
|
170,223
|
|
$
|
168,677
|
Add: Undistributed net income allocated to participating securities
|
|
|
107
|
|
|
170
|
|
|
309
|
|
|
442
|
Less: Undistributed net income reallocated to participating securities
|
|
|
(106)
|
|
|
(170)
|
|
|
(307)
|
|
|
(441)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed and distributed net income available to common shareholders
|
|
$
|
62,691
|
|
$
|
64,565
|
|
$
|
170,225
|
|
$
|
168,678
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic net income per share
|
|
|
56,779
|
|
|
61,133
|
|
|
56,593
|
|
|
61,206
|
Effect of dilutive securities
|
|
|
485
|
|
|
236
|
|
|
435
|
|
|
158
|
Weighted average shares outstanding for diluted net income per share
|
|
|
57,264
|
|
|
61,369
|
|
|
57,028
|
|
|
61,364
|
Net income per share Two-class method:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.10
|
|
$
|
1.06
|
|
$
|
3.01
|
|
$
|
2.76
|
Diluted
|
|
$
|
1.09
|
|
$
|
1.05
|
|
$
|
2.98
|
|
$
|
2.75
|
There were
no
antidilutive stock options
included in the computation of diluted earnings
per share for the thirteen and thirty-nine week
period
s
ended
June 3, 2017.
Antidilutive stock options of
639
and
1,009
were not included in the computation of diluted earnings
per share for the thirteen and thirty-nine week periods ended
May 28, 2016, respectively.
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Note 3. Stock-Based Compensation
The Company accounts for all share-based payments in accordance with ASC Topic 718, "Compensation—Stock Compensation" ("ASC 718").
S
tock
‑based compensation expense
included in operating expenses f
or the thirteen and thirty-nine
week periods ended June 3, 2017 and May 28, 2016 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Thirty-Nine Weeks Ended
|
|
|
June 3,
|
|
May 28,
|
|
June 3,
|
|
May 28,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Stock options
|
|
$
|
1,088
|
|
$
|
1,044
|
|
$
|
3,275
|
|
$
|
3,296
|
Restricted share awards
|
|
|
998
|
|
|
1,420
|
|
|
3,332
|
|
|
4,619
|
Restricted stock units
|
|
|
1,286
|
|
|
785
|
|
|
3,561
|
|
|
2,197
|
Associate Stock Purchase Plan
|
|
|
78
|
|
|
54
|
|
|
207
|
|
|
190
|
Total
|
|
|
3,450
|
|
|
3,303
|
|
|
10,375
|
|
|
10,302
|
Deferred income tax benefit
|
|
|
(1,311)
|
|
|
(1,255)
|
|
|
(3,943)
|
|
|
(3,915)
|
Stock-based compensation expense, net
|
|
$
|
2,139
|
|
$
|
2,048
|
|
$
|
6,432
|
|
$
|
6,387
|
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 3,
|
|
May 28,
|
|
|
2017
|
|
2016
|
Expected life (in years)
|
|
4.1
|
|
|
3.9
|
|
Risk-free interest rate
|
|
1.16
|
%
|
|
1.09
|
%
|
Expected volatility
|
|
20.50
|
%
|
|
21.82
|
%
|
Expected dividend yield
|
|
2.40
|
%
|
|
2.40
|
%
|
Weighted-average grant-date fair value
|
|
$9.29
|
|
|
$8.03
|
|
A summary of the Company’s stock opti
on activity for the thirty-nine
week period ended June 3, 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted-Average Exercise Price per Share
|
|
Weighted-Average Remaining Contractual Term (in years)
|
|
Aggregate Intrinsic Value
|
Outstanding on September 3, 2016
|
1,645
|
|
$
|
69.86
|
|
|
|
|
|
Granted
|
537
|
|
|
71.33
|
|
|
|
|
|
Exercised
|
(335)
|
|
|
67.44
|
|
|
|
|
|
Canceled/Forfeited
|
(36)
|
|
|
70.73
|
|
|
|
|
|
Outstanding on June 3, 2017
|
1,811
|
|
$
|
70.73
|
|
4.8
|
|
$
|
28,033
|
Exercisable on June 3, 2017
|
649
|
|
$
|
73.51
|
|
3.4
|
|
$
|
8,238
|
The unrecognized share
‑based compensation cost
related to stock option expense at
June 3, 2017
was
$8,385
and will
be recognized over a weighted average period of
2.6
years. The total intrinsic va
lue 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 3, 2017
and
May 28, 2016
was
$9,232
and
$2,164
, 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 3, 2017
is as follows:
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
|
Shares
|
|
Weighted-Average Grant-Date Fair Value
|
Non-vested restricted share awards at September 3, 2016
|
265
|
|
$
|
78.58
|
Granted
|
—
|
|
|
—
|
Vested
|
(96)
|
|
|
75.30
|
Canceled/Forfeited
|
(7)
|
|
|
81.06
|
Non-vested restricted share awards at June 3, 2017
|
162
|
|
$
|
80.40
|
The fair value of each RSA is the closing stock price on the New York Stock Exchange 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 compensation cost related to
RSAs
at
June 3, 2017
was
$5,870
and will be recognized over a weighted average period of
1.9
years.
Restricted stock units
A summa
ry of the Company’s non-vested Restricted Stock U
nit
(“RSU”)
award activity for the
thirty-nine week period
ended
June 3, 2017
is as follows:
|
|
|
|
|
|
Shares
|
|
Weighted-Average Grant-Date Fair Value
|
Non-vested restricted stock unit awards at September 3, 2016
|
198
|
|
$
|
58.98
|
Granted
|
174
|
|
|
73.33
|
Vested
|
(45)
|
|
|
59.12
|
Canceled/Forfeited
|
(12)
|
|
|
65.10
|
Non-vested restricted stock unit awards at June 3, 2017
|
315
|
|
$
|
66.66
|
The fair value of each RSU is the closing stock price on the New York Stock Exchange 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 compensation cost related to the RSUs at
June 3, 2017
was
$16,143
and is
expected to be recognized over a weighted average period of
3.8
years.
Note 4. 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 co
nstruction of the Company’s
customer fulfillment center 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 to entities that finance the transactions through them.
Under this arrangement,
the Finance Authority issued
taxable bonds to finance the structure and site improvements of the Company’s c
ustomer fulfillment center. The bonds (
$27,025
outstanding
at
both
June 3, 2017
and
September 3, 2016
)
are classified as available for sale securities in accordance with ASC Topic 320. The securities are recorded at fair value
in Other Assets
in the
Condensed
Consolidated Balance Sheet. The fair values of these securities are
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
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
thirteen and
thirty-nine w
eek period
s
ended
June 3, 2017
. The outstanding principal amount of each bond bears interest at the rate of
2.4%
per year. Interest is payable on a semiannual basis in arrears on each interest payment date.
In addition, based on borrowing rates currently available to the Company for borrowings with similar terms, the carrying values of the Company’s capital lease obligations also approximate fair value. The fair value of the Company’s long-term deb
t
is estimated based on quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. The carrying amount of the Company’s debt at
June 3, 2017
approximates its fair value.
The Company’s financial instruments, other than those presented in the disclosure above, include cash, receivables, accounts payable, and accrued liabilities. Management believes the carrying amount of the aforementioned financial instruments is a reasonable estimate of fair value as of
June 3, 2017
and
September 3, 2016
due to the short-term maturity of these items.
During the
thirty-nine
weeks ended
June 3, 2017
and
May 28, 2016
, the Company had
no
measurements of non-financial assets or
liabilities
at fair value on a non-recurring basis subsequent to their initial recognition.
Note 5. Debt and Capital Lease Obligations
Debt at
June 3, 2017
and
September 3, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
June 3,
|
|
September 3,
|
|
|
2017
|
|
2016
|
|
|
(Dollars in thousands)
|
Credit Facility:
|
|
|
|
|
|
|
Revolver
|
|
$
|
314,000
|
|
$
|
217,000
|
Term loan
|
|
|
-
|
|
|
187,500
|
Private Placement Debt:
|
|
|
|
|
|
|
Senior notes, series A
|
|
|
75,000
|
|
|
75,000
|
Senior notes, series B
|
|
|
100,000
|
|
|
100,000
|
Capital lease and financing obligations
|
|
|
28,100
|
|
|
28,268
|
Less: unamortized debt issuance costs
|
|
|
(1,953)
|
|
|
(946)
|
Total debt
|
|
$
|
515,147
|
|
$
|
606,822
|
Less: short-term debt
(1)
|
|
|
(314,171)
|
|
|
(267,050)
|
Long-term debt
|
|
$
|
200,976
|
|
$
|
339,772
|
____________________
|
(1)
|
|
Net of unamortized debt issuance costs expected to be amortized in the next twelve months.
|
Credit Facility
In April 2017, the
Company
entered into a new $600 million credit facility (the
“New Credit Facility”).
The New Credit Facility, which matures on
April 14, 2022
, provides for a
five
-year unsecured revolving loan facility in the aggregate amount of
$600
million. The New Credit Facility replaced the Company’s previous
$650
million credit facility (the “Previous
Credit Facility
”), dated April 22, 2013.
The New Credit Facility permits up to
$50
million to be used to fund letters of credit. The New Credit 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
million. 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.
Borrowings under the New Credit Facility bear interest, at the Company’s option, either at (i) the LIBOR (London Interbank Offered Rate) rate plus the applicable margin for LIBOR loans ranging from
1.00%
to
1.375%
, based on the Company’s consolidated leverage ratio; or (ii) the greatest of (a) the Administrative Agent’s prime rate in effect on such day,
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
(b) the federal funds effective rate in effect on such day, plus
0.50%
and (c) the LIBOR rate that would be calculated as of such day in respect of a proposed LIBOR loan with a one-month interest perio
d, plus 1.00%, plus, in th
e case of each of clauses (a) through (c), an applicable margin ranging from
0.00%
to
0.375%
, based on the Company’s consolidated leverage ratio. The Company is required to pay a quarterly undrawn fee ranging from
0.10%
to
0.20%
per annum on the unutilized portion of the New Credit Facility, based on the Company’s consolidated leverage ratio. The Company is also required to pay quarterly letter of credit usage fees ranging between
1.00%
to
1.375%
(based on the Company’s consolidated leverage ratio) on the amount of the daily average outstanding letters of credit, and a quarterly fronting fee of
0.125%
per annum on the undrawn and unexpired amount of each letter of credit.
The weighted average applicable borrowing rate for the Company for any borrowings outstanding under the
New
Credit Facility at
June 3, 2017
was
2.12%
which represents LIBOR plus
1.125%
. Based on the interest period the Company selects, interest may be payable every one, two, three or six months. Interest is reset at the end of each interest period. The Company currently elects to have loans under the
New
Credit Facility bear interest based on LIBOR with one-month interest periods. Borrowings under the
New
Credit Facility are guaranteed by certain of the Company’s subsidiaries.
During the
thirty-nine
week period ended
June 3, 2017
, the Company borrowed
$109,000
under the revolving loan facility and repaid
$147,000
and
$37,500
of the revolving loan facility and the term loan facility, respectively.
In addition, as a result of entering into the New Credit Facility
, the Company borrowed
$330,000
under the New Credit Facility and used an additional
$16,70
6
in cash on hand to pay down and close the
$345,000
outsta
nding balance under the Previous
Credit Facility plus the applicable interest and fees.
Private Placement Debt
In July 2016, in connection with the Company’s “modified Dutch auction” tender offer, the Company completed the issuance and sale of the following unsecured senior notes (collectively “Private Placement Debt”):
|
·
|
|
$75,000
aggregate principal amount of
2.65%
Senior Notes, Series A, due
July 28, 2023
(“Senior notes, series A”); and
|
|
·
|
|
$100,000
aggregate principal amount of
2.90%
Senior Notes, Series B, due
July 28, 2026
(“Senior notes, series B”).
|
The Private Placement Debt is due, in full, on the stated maturity dates. Interest is payable semiannually at the fixed stated interest rates.
The
New
Credit Facility and Private Placement Debt contain 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
to1.00)
, and a minimum consolidated interest coverage ratio of EBITDA to total interest expense of at least
3.00
to 1.00, during the term
s
of the
New
Credit Facility and Private Placement Debt.
At
June 3, 2017
, the Company was in compliance with the operating and financial covenants of the
New
Credit Facility and Private Placement Debt.
Capital Lease and Financing Obligations
In connection with the construction of the Company’s customer fulfillment center in Columbus, Ohio, the Finance Authority holds the title to the building and entered into a long-term lease with the Company.
The lease has a
20
-year term with a prepayment option without penalty between
7
and
20
years. At the end of the lease term, the building’s title is transferred to the Company for a nominal amount when the principal of and interest on the bonds have been fully paid. The lease has been classified as a capital lease in accordance with ASC Topic 840. At
June 3, 2017
and
September 3, 2016
, the capital lease obligation was approximately
$27,025
.
Note 6. Shareholders’ Equity
The Company paid cash
dividends
o
f
$1.35
per common share
totali
ng
$76,632
fo
r
the
thirty-nine
weeks ended
June 3, 2017
. For the
thirty-nine
weeks ended
May 28, 2016
, the Company paid
cash dividends of
$1.29
per common share
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
totaling
$79,351
. On
July 7, 2017
, th
e Board of Directors declared a quarterly cash dividend
of
$0.45
per
share pa
yable on
August 1, 2017
t
o shareholder
s of record at the close of business on
July 18, 2017
. T
he dividend will result in a payout of
approximately
$25,629
, ba
sed on the number of shares
outstanding at
June 30
, 2017
.
The Board of Directors established the MSC Stock Repurchase Plan (the “Repurchase Plan”) which allows the Company to repurc
hase shares at any time and in such
amounts
as
it deems appropriate in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During the
thirty-nine w
eek period ended
June 3, 2017
, the Company repurcha
sed
42
shares
of its Class A common stock for
$3,080
, wh
ic
h is reflected at cost as treasury stock in the accompanying condensed consolidat
ed financial statements. All
of these shares
were repurchased by the Company to satisfy the Company’s associates’ tax withholding liability associated with its share-based compensation
program.
Note
7
. 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 merchandis
e products are covered by third-
party original equipment manufacturers’ warranties. The Company’s warranty expense for
the thirteen and
thirty-nine
week
period
s
ended
June 3, 2017
and
May 28, 2016
was minimal.
Note
8
. Income Taxes
During the
thirty-nine
week
period ended
June 3, 2017
, there were
no
material changes in unrecognized tax benefits.
Note
9
. 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, resu
lts of operations, or liquidity
.
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 3, 2016
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 Americ
an distributor
of
a broad range of
metalworking and maintenance, repair, and operations (“MRO”) products and services.
We
help our customers drive greater productivity, profitability and
growth with more than one million products, inventory management and other supply chain solutions, and deep expertise from
over
75 years of working with customers across industries
. We continue to implement our strategies to gain mark
et share
, generate new customers, increase sales to existing customers, and diversify our customer base.
Our experienced team
of
over 6,000
associates w
orks with our customers to help drive results for their businesses, from keeping operations running efficiently today to continuously rethinking, retooling, and optimizing for a more productive tomorrow.
We offer
approximat
ely
1,545,000
active,
saleable
stock-keeping units
(“SKUs”) 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 customer fulfillment centers are located within the United States which includes five primary customer fulfillment centers, one is located in the United Kingdom (the “U.K.”), and three are located in Canada) and
84
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 drive cost reduction throughout our business through cost-saving strategies and increased leverage from our existing infrastructure, and continue to provide additional procurement cost-savings solutions to our customers through technology such as our Customer Managed Inventory (“CMI”),
Vendor Managed Inventory (“
VMI
”)
, and vending programs.
Our
field sales
and service associate headcoun
t was
2,309
at
June 3, 2017
,
compared to
2,356
at
May 28, 2016
. We will continue to
manage our sales and service headcount
based on economic conditions and our
business plans
.
Business Environment
We utilize various indices when evaluating the level of our business acti
vity. Approximat
ely
67%
of our
revenues came from sales in the manufacturing sector during
the
third
quarter of our fiscal year 2017
, including certain national account customers.
Thr
ough statistical analysis, we have
found
that
the strongest correlation
is
between
our
customers’ activity and the Metalworking Business Index (“MBI”).
The MBI is a sentiment index developed from a monthly survey of the US metalworking industry, focusing on durable goods manufacturing.
We have experienced the highest correlation to our sales using the rolling 12-month MBI average on a four-month lag.
For the MBI
, a value below 50
.0 generally indicates contraction and a value above 50.0 gener
ally indicates expansion.
The MBI index over the past three months and for the past 12-month period was as follows:
|
|
|
Period
|
|
MBI
|
March
|
|
56.4
|
April
|
|
54.8
|
May
|
|
57.1
|
|
|
|
Fiscal 2017 Q3 average
|
|
56.1
|
12-month average
|
|
51.1
|
The MBI has
continued to increase
throughout the third quarter
of ou
r fiscal year 2017,
raising the 12-month
average to expansion. The index reached 57.1 in May, the highest
MBI reading in over five years,
then
moved
slightly down to 56.2 in June.
Details released with the
June
MBI
indicate an expanding metalworking environment, including growth in new orders, production, backlog, and pricing. We will continue to monitor the current
economic conditions for its impact on our customers and markets and continue to assess both risks and opportunities that may affect our business.
Thirteen
Week Period Ended June 3
, 2017 Compared to the Thirteen
Week Period Ended
May 28, 2016
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 3, 2017
|
|
May 28, 2016
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
Net sales
|
|
$
|
743,923
|
|
|
100.0%
|
|
$
|
727,495
|
|
|
100.0%
|
|
$
|
16,428
|
|
|
2.3%
|
Cost of goods sold
|
|
|
414,423
|
|
|
55.7%
|
|
|
400,467
|
|
|
55.0%
|
|
|
13,956
|
|
|
3.5%
|
Gross profit
|
|
|
329,500
|
|
|
44.3%
|
|
|
327,028
|
|
|
45.0%
|
|
|
2,472
|
|
|
0.8%
|
Operating expenses
|
|
|
227,724
|
|
|
30.6%
|
|
|
221,244
|
|
|
30.4%
|
|
|
6,480
|
|
|
2.9%
|
Income from operations
|
|
|
101,776
|
|
|
13.7%
|
|
|
105,784
|
|
|
14.5%
|
|
|
(4,008)
|
|
|
(3.8)%
|
Total other expense
|
|
|
(3,194)
|
|
|
(0.4)%
|
|
|
(930)
|
|
|
(0.1)%
|
|
|
(2,264)
|
|
|
243.4%
|
Income before provision for income taxes
|
|
|
98,582
|
|
|
13.3%
|
|
|
104,854
|
|
|
14.4%
|
|
|
(6,272)
|
|
|
(6.0)%
|
Provision for income taxes
|
|
|
35,746
|
|
|
4.8%
|
|
|
40,038
|
|
|
5.5%
|
|
|
(4,292)
|
|
|
(10.7)%
|
Net income
|
|
$
|
62,836
|
|
|
8.4%
|
|
$
|
64,816
|
|
|
8.9%
|
|
$
|
(1,980)
|
|
|
(3.1)%
|
Net Sales
Net sales
increa
sed
2.3%
or approximately
$16.4
million for the thirteen
week period ended
June 3
, 2017
,
as compared to the thirteen
week period ended
May 28
, 2016. We estimate that this
$16.4 million increase
in net sales is comprised of
(i) approxi
mately $36.3 million of h
igher
sales volume,
partially offset by (ii) approximately $11.2 million in sales attributable to an extra day in fiscal 2016; (
ii
i
) approximate
ly $6.8 million in reductions from
pricing, resulting from
changes in customer
and product mix, discounting and
other items,
and (i
v
) approximately $1.9 million
from an unfavorable foreign exchange impact
. Of the above
$16.4
million increase in net sales, sales to our government and national account programs (“Large Account Customers”) increased by approxi
mately $
13.
4
million an
d sales other than to our Large Account Customers increased by approxim
ately $
3.
0
million.
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 3, 2017 compared to
the same period in the prior fiscal year:
|
|
|
|
|
|
|
Average Daily Sales Percentage Change
|
(unaudited)
|
|
|
|
|
|
|
|
2017 vs. 2016 Fiscal Period
|
|
Thirteen Week Period Ended Fiscal Q3
|
|
% of Total Business
|
|
|
|
|
|
|
|
Total Company
|
|
3.8
|
%
|
|
|
|
Manufacturing Customers
(1)
|
|
2.8
|
%
|
|
67
|
%
|
Non-Manufacturing Customers
(1)
|
|
6.5
|
%
|
|
33
|
%
|
_____________
|
(1)
|
|
Excludes U.K. operations.
|
We believe that our ability to transact business with our customers through various electronic portal
s 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, Exte
nsible Markup Language ordering-
ba
sed systems, vending machine systems, hosted systems and other electronic portals (“eCommerce platforms”), represented 60.5% of c
onsolidated net sales for the
thirteen
week period ended
June 3, 2017
, compared to
58.6%
of
consolidated
net sales for the same period in the prior fiscal year.
This increase was primarily associated with the MSC website and vending machine systems.
Gross Profit
Gross
profit
margin
was
44.3%
for
the thirteen
week period ended
June 3, 2017
as compared to 45.0% for the same period
in the prior fiscal year
. The decline was primaril
y a result of changes in
pricing and customer and product mix.
We experienced g
rowth in
both
our vending
program
and Large Account Customer
sales
, which
are
typically transacted at lower gross margins
.
Operating Expenses
Operating expenses
increased
2.9%
to
$227.7
million for
the thirteen
week period ended
June 3, 2017
, as compared to
$221.2
million for the same period in the prior fiscal y
ear.
Operating
expenses
were
30.6%
of net sales for
the thirteen
week period ended
June 3, 2017
compared to 30.4% of net sales for the same period in the prior fiscal year.
The increase in volume-related expenses, combined with a larger incentive compensation accrual and increase in
sales commissions
was partially offset by lower depreciation and amortization. The decrease in depreciation and amortization is a result of certain intangible assets acquired from our fiscal 2006 J&L acquisition becoming fully amortized during the second half of fiscal 2016.
Payroll and payroll-
related costs
were
approxima
tely
55.6%
of to
tal operating expenses
for the thirteen
week period ended
June 3, 2017
, as compared to approximat
ely
53.4%
for th
e thirteen
week perio
d ended May 28, 2016
.
Included in payroll and payroll-related costs are salary, incentive compensation, sales commission and fringe benefit costs.
All of these c
osts increased for the thirteen
week period ended June 3, 2017, as compared to the same period in the prior fiscal year, with the majority of the increase attributable to the incentive compensation accrual.
O
ur fiscal third quarter incentive compensation accrual
this year
is higher than the prior year third quarter based on our actual third quarter performance and our fourth quarter expectations as compared to the prior fiscal year.
Income from Operations
I
ncome from operations
decreased
3.8%
to
$101.8
mil
lion for the thirteen
week period ended
June 3, 2017
, as compared to
$105.8
million for the same period in the prior fisc
al year. This
was primarily
due to the increase in operating expenses as discussed above.
Inc
ome from operations as a percentage of net sales
decreased
to
13.7%
for
the thirteen
week period ended
June 3, 2017
, as compared to
14.5%
for the same period in the prior fiscal year, primarily the result of the pricing and mix-driven gross margin decrease as well as the increase in operating expenses as a percentage of net sales.
Provision for Income Taxes
The effe
ctive tax rate for the thirteen
week period ended
June 3, 2017
was
36.3%, as compared to
38.2%
for the same period in the prior fiscal year.
The decrease in the effective tax rate is primarily due to the application of a research and development tax credit resulting from a study completed during the third quarter of fiscal 2017.
Net Income
The factors which affec
ted net income for the thirteen
week period
ended
June 3, 2017
,
as compared to the same period
in the previous fiscal year, have been discussed above.
Thirty-Nine
Week Period Ended
June 3
, 2017 Compared to the
Thirty-Nine
Week Period Ended
May 28
, 2016
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 3, 2017
|
|
May 28, 2016
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
Net sales
|
|
$
|
2,133,974
|
|
|
100.0%
|
|
$
|
2,118,431
|
|
|
100.0%
|
|
$
|
15,543
|
|
|
0.7%
|
Cost of goods sold
|
|
|
1,181,177
|
|
|
55.4%
|
|
|
1,163,640
|
|
|
54.9%
|
|
|
17,537
|
|
|
1.5%
|
Gross profit
|
|
|
952,797
|
|
|
44.6%
|
|
|
954,791
|
|
|
45.1%
|
|
|
(1,994)
|
|
|
(0.2)%
|
Operating expenses
|
|
|
673,776
|
|
|
31.6%
|
|
|
678,077
|
|
|
32.0%
|
|
|
(4,301)
|
|
|
(0.6)%
|
Income from operations
|
|
|
279,021
|
|
|
13.1%
|
|
|
276,714
|
|
|
13.1%
|
|
|
2,307
|
|
|
0.8%
|
Total other expense
|
|
|
(9,089)
|
|
|
(0.4)%
|
|
|
(2,652)
|
|
|
(0.1)%
|
|
|
(6,437)
|
|
|
242.7%
|
Income before provision for income taxes
|
|
|
269,932
|
|
|
12.6%
|
|
|
274,062
|
|
|
12.9%
|
|
|
(4,130)
|
|
|
(1.5)%
|
Provision for income taxes
|
|
|
99,249
|
|
|
4.7%
|
|
|
104,692
|
|
|
4.9%
|
|
|
(5,443)
|
|
|
(5.2)%
|
Net income
|
|
$
|
170,683
|
|
|
8.0%
|
|
$
|
169,370
|
|
|
8.0%
|
|
$
|
1,313
|
|
|
0.8%
|
Net Sales
N
et sales in
creased
0.7%
or approximately
$15.5
million for the
thirty-nine
week period ended
June 3
, 2017
, as compared to the
thirty-nine
week period ended
May 28
, 2016. We estimate that this
$15.5
million
increase
in net sales is comprised of
(i) approxi
mately
$57
.3 million of h
igher
sales volume,
partially offset by
(ii
) approximate
ly $
24.3
million in reductions from
pricing, resulting from
changes in customer
and product mix, discounting and other items
;
(
i
ii) approximately $11.2 million in sales attributable to an extra day in fiscal 2016
, and (i
v
) approximately $
6.3
million
from an unfavorable foreign exchange impact
.
Of the above
$15.5
million increase
in net sales, sales to our
Large Account Customers
increased by approxima
tely
$
19.
5
million and sales other than to our Large Account Customers decreased by approximately
$
4.0
million.
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 3
, 2017 compared to
the same period in the prior fiscal year:
|
|
|
|
|
|
|
Average Daily Sales Percentage Change
|
(unaudited)
|
|
|
|
|
|
|
|
2017 vs. 2016 Fiscal Period
|
|
Thirty-Nine Week Period Ended Fiscal Q3
|
|
% of Total Business
|
|
|
|
|
|
|
|
Total Company
|
|
1.2
|
%
|
|
|
|
Manufacturing Customers
(1)
|
|
0.4
|
%
|
|
68
|
%
|
Non-Manufacturing Customers
(1)
|
|
3.8
|
%
|
|
32
|
%
|
_____________
|
(1)
|
|
Excludes U.K. operations.
|
Sales made through our eCommerce platforms
represented
60.0%
of
consolidated net sales for the
thirty-nine
week period ended
June 3
, 2017
, compared to
57.8%
of
consolidated
net sales for the same period in the prior fiscal year.
This increase was primarily associated with the MSC website and vending machine systems.
Gross P
rofi
t
Gross
profit
margin
was
44.6%
for
the
thirty-nine
week period ended
June 3
, 2017
as compared to
45.1%
for the same period
in the prior fiscal year
.
The decline was primarily a result of changes in
pricing and customer and product mix. We experienced g
rowth in
both
our vending
program
and Large Account Customer sales
, which are typically transacted at
lower gross margins
.
Operating Expenses
Operating expenses
decreased
0.6%
to
$673.8
million for
the
thirty
-
nine
week period ended
June 3
, 2017
, as compared to
$678.1
million for the same period in the prior fiscal y
ear,
yielding approximately
4
0 basis points of expense leverage on nearly flat net sales.
Operating
expenses
were
31.6%
of net sales for
the t
hirty-nine
week period ended
June 3
, 2017
compared to
32.0%
of net sales for the same period in the prior fiscal year.
Fringe benefit costs and d
epreciation and amortization
were
the main contributor
s
to the decrease in operating expenses. The decrease in depreciation and amortization is a result of certain intangible assets acquired from our fiscal 2006 J&L acquisition becoming fully amortized during the second half of fiscal 2016.
Payroll and payroll-
related costs
were
approxima
tely
56.4%
of to
tal operating expenses
for the t
hirty-nine
week period ended
June 3
, 2017
, as compared to approximat
ely
55.1%
for
the same period in the prior fiscal year
.
Salaries, commissions, and the incentive compensation accrual al
l increased for the thirty-nine
week period ended June 3, 2017, as compared to the same period in the prior fiscal year, with the majority of the increase attributable to the incentive compensation accrual. This increase was partially offset by
lower fringe benefit costs. As a result of transitioning from a self-insured plan to a fully insured private healthcare exchange during the second quarter of fiscal 2016, we experienced large claims and increased costs in the
first half of fiscal 2016.
Income from Operations
I
ncome from operations
increased
0.8%
to
$279.0
mil
lion for the t
hirty-nine
week period ended
June 3
, 2017
, as compared to
$276.7
million for the same period in the prior fisc
al year. This increase was primarily due to lower operating expenses as mentioned above.
I
nc
ome from operations as a percentage of net sales
remained unchanged at
13.1%
for
the t
hirty-nine
week period
s
ended
June 3
, 2017
and May 28, 2016.
Provision for Income Taxes
The effe
ctive tax rate for the t
hirty-nine
week period ended
June 3
, 2017
was
36.8%
as compared to 38.2% for the same period in the prior fiscal year.
The decrease in the effective tax rate is
primarily due to the application of a research and development tax credit resulting from a study completed during t
he third quarter of fiscal 2017
and the adoption of ASU 2016-09 in the second quarter of fiscal 2017.
See Note 1
“
Basis of Presentation
” in the Notes to the Condensed Consolidated Financial Statements.
Net Income
The factors which affec
ted net income for the t
hirty-nine
week period
ended
June 3
, 2017
,
as compared to the same period
in the previous fiscal year, have been discussed above
.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 3,
|
|
September 3,
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
|
(Dollars in thousands)
|
Total debt
|
|
$
|
515,147
|
|
$
|
606,822
|
|
$
|
(91,675)
|
Less: Cash and cash equivalents
|
|
|
(27,578)
|
|
|
(52,890)
|
|
|
25,312
|
Net debt
|
|
$
|
487,569
|
|
$
|
553,932
|
|
$
|
(66,363)
|
Equity
|
|
$
|
1,222,989
|
|
$
|
1,098,376
|
|
$
|
124,613
|
As of
June 3, 2017
, we held
$27.6
million in cash, substantially all with well-known financial institutions.
Historically, our primary capital needs have been to fund our working capital requirements necessitated by our sales growth, 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
and Private Placement Debt, have been used to fund these needs, to repurchase shares of our Class A common stock, and to pay dividends.
At
June 3, 2017
, total borrowings outstanding, representing amounts due under the
New
Credit Facility and Private Placement Debt, as well as all capital leases and financing arrangements, were approximately
$515.1
million, net of
unamortized debt issuance costs of
$2.0
million. At
September 3, 2016
, total borrowings outstanding,
representing amounts due under the
Previous
Credit Facility and Private Placement Debt, as well as all capital leases and financing arrangements, were approximately
$606.8
million, net of unamortized debt issuance costs of
$0.9
million. We believe, based on our current business plan, that our existing cash, funds available under our revolving credit facility, 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.
The table below summarizes information regarding the Company’s liquidity and capital resources:
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
|
June 3,
|
|
May 28,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Net cash provided by operating activities
|
|
$
|
159,131
|
|
$
|
285,822
|
Net cash used in investing activities
|
|
|
(37,923)
|
|
|
(34,714)
|
Net cash used in financing activities
|
|
|
(146,466)
|
|
|
(257,013)
|
Effect of foreign exchange rate changes on cash and cash equivalents
|
|
|
(54)
|
|
|
(34)
|
Net decrease in cash and cash equivalents
|
|
$
|
(25,312)
|
|
$
|
(5,939)
|
Operating Activities
Net cash provided by operating activities for the
thirty-nine
week periods ended
June 3, 2017
and
May 28, 2016
was
$159.1
million and
$285.8
million, respectively. There are various increases and decreases contri
buting to this change.
Increases in inventories
and accounts receivable
, resulting from
increased sales volume
,
co
ntributed to the majority of the decrease in net cash provided by operating activities.
The table below provides the Company’s working capital and current ratio:
|
|
|
|
|
|
|
|
|
|
|
|
June 3,
|
|
September 3,
|
|
May 28,
|
|
|
2017
|
|
2016
|
|
2016
(1)
|
|
|
(Dollars in thousands)
|
Working Capital
|
|
$
|
454,973
|
|
$
|
502,889
|
|
$
|
680,820
|
Current Ratio
|
|
|
1.9
|
|
|
2.1
|
|
|
3.3
|
____________________
|
(1)
|
|
Amounts as of
May 28
, 2016 have been adjusted to reflect the adoption of
ASU No.
2015-03, Simplifying the Presentation of Debt Issuance Costs
(
Subtopic 835-30). The Company adopted this ASU during the fourth quarter of fiscal 2016.
|
The decrease
in working capital and the current ratio at
June 3, 2017
compared to
September 3, 2016
and
May 28, 2016
is
related to the
adoption of ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which resulted in a prospective reclassification of $46.6 million from current deferred income tax assets to long-term liabilities during the first quarter of fiscal 2017. See Note
1
“
Basis of Presentation
” in the Notes to the Condensed Consolidated Financial Statements for more information about this ASU adoption.
Investing Activities
Net cash used in investing activities for the
thirty-nine
week periods ended
June 3, 2017
and
May 28, 2016
was
$37.9
million and
$34.7
million, respectively.
The use of cash for both periods was attributable to expenditures for property, plant, and equipment.
Financing Activities
Net cash used in financing activities for the
thirty-nine
week periods ended
June 3, 2017
and
May 28, 2016
was
$146.5
million and
$257.0
million, respectively.
The major components contributing to the use of cash for the
thirty-nine
w
eek period ended
June 3, 2017
were repayments on
our credit facilities
of
$90.5
million
, net of borrowings,
and
cash dividends paid of
$76.6
million. This was partially offset by proceeds from the exercise of common stock options of
$22.6
million.
The major components contributing to the use of cash for the
t
hirty-nine
week period ended
May 28
, 2016 were repayments on the
Previous
Credit Facility of $1
66.8
million, net of borrowings, related to both the revolving loan facility
and term loan facility, cash dividends paid of $
79.4
million, and the repurchase of shares
of Class A common stock of $19.4
million.
Long-term Debt
New
Credit Facility
In April
2017, the Company entered into a new $600 million credit facility (the “New Credit Facility
”).
See Note 5 “Debt and Capital Lease
Obligations”
in the Notes to the Condensed Consolidated Financial Statements for more information about
the
New
Credit Facility.
At
June 3, 2017
, we were in compliance with the operating and financial covenants of the
New
Credit Facility. The Company had additional repayments
of $
52
.0
million, ne
t of borrowings,
in June 2017
. Th
e current unused balance of $
338
.0 million o
f the
New Credit Facility
is available for working capital purposes if necessary.
Private Placement Debt
In July 2016, in connection with our tender offer and stock purchase, we completed the issuance and sale of unsecured senior notes. See Note 5 “Debt and Capital Lease Obligations” in the Notes to the Condensed Consolidated Financial Statements for more information about this transaction.
Capital Expenditures
Upgrade of Core Financial Systems
In
fiscal 2016
,
we initiated the upgrade of our core financial systems, including the receivables, payables
, treasury, fixed assets and general ledger. Capital expenditures relating to this project were approxima
tely $
10.3
million a
nd $6.
6 million in the first
three
q
uarters of fiscal 2017 and full-
year fiscal 2016, respectively.
This project was completed in April 2017.
Contractual Obligations
Capital Lease and Financing Arrangements
From time to time, we enter into capital leases and financing arrangem
ents
.
See Note 5 “Debt and Capital Lease Obligations” in the Notes to the Condensed Consolidated Financial Statements for more information about our capital lease and financing arrangements.
Operating Leases
As of
June 3, 2017
, certain of our operations ar
e conducted on leased premises
. These leases are for varying periods, the longest extending
to fiscal
202
7
. In addition, we are obligated under certain equipment and automobile operating leases, which expire on varying dates through fiscal
202
1
.
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 3, 2016
except for the adoption of ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting, and ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes,
which resulted in changes to the condensed consolidated financial statements, including adjustments recorded as of the beginning of fisc
al 2017, as described in Note 1
“
Basis of Presentation
”
.
Recently Issued Accounting Standards
See Note 1
“
Basis of Presentation
” in the Notes to the Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our exposures to market risks since
September 3, 2016
. Please refer to the Annual Report on Form 10-K for the fiscal year ended
September 3, 2016
for a complete discussion of our exposures to market risks.
Item 4. C
ontrols
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 reporte
d
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.
We completed the upgrade of our core financial systems
in April 2017, which impacted
some of
our key
financial applications and
processes. As a result, 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 3, 2017
.
In connection with this upgrade, we updated the processes that constitute our internal control over financial reporting, as necessary.
Except as described above, there have been no other changes in our internal control over financial reporting during the quarter ended June 3, 2017 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II.
OTHER
INFORMATION
Item 1. 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.
Item 1A. Risk Factors
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 3, 2016
, 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.
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 c
ommon stock during the thirteen
week period ended
June 3, 2017
:
|
|
|
|
|
|
|
|
|
|
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
|
3/5/17 - 4/4/17
|
|
144
|
|
$
|
102.25
|
|
—
|
|
1,444,034
|
4/5/17 - 5/4/17
|
|
—
|
|
|
—
|
|
—
|
|
1,444,034
|
5/5/17 - 6/3/17
|
|
—
|
|
|
—
|
|
—
|
|
1,444,034
|
Total
|
|
144
|
|
$
|
102.25
|
|
—
|
|
|
____________________
|
(1)
|
|
During the thirteen weeks ended
June 3, 2017
,
144
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, the Board of Directors reaffirmed and replenished the Repurchase Plan and set the total number of shares of Class A common stock authorized for future repurchase at 7,000,000 shares. On October 21, 2011, the Board of Directors reaffirmed and replenished the Repurchase Plan and set the total number of shares of Class A common stock authorized for future repurchase at 5,000,000 shares. As of
June 3, 2017
, the maximum number of shares that may yet be repurchased under the Repurchase Plan was
1,444,034
shares. There is no expiration date for this program.
|
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5.
Other
Information
None.
Item 6. Exhibits
|
|
|
|
|
|
Exhibits:
|
|
10.1
|
Credit Agreement, dated as of April 14, 2017, by and among MSC Industrial Direct Co., Inc., the several banks and other financial institutions or entities from time to time parties thereto, and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 18, 2017).
|
10.2
|
Amended and Restated Note Purchase Agreement, dated as of April 14, 2017, by and among MSC Industrial Direct Co., Inc. and the noteholders named therein (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 18, 2017).
|
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
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
|
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
|
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.
|
SIGNATURES
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 12
, 2017
|
By:
|
/s/
ERIK GERSHWIND
President and Chief Executive Officer
(Principal Executive Officer)
|
Dated:
July 12
, 2017
|
By:
|
/s/ RUSTOM JILLA
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
EXHIBIT INDEX
|
|
Exhibit No.
|
Exhibit
|
10.1
|
Credit Agreement, dated as of April 14, 2017, by and among MSC Industrial Direct Co., Inc., the several banks and other financial institutions or entities from time to time parties thereto, and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 18, 2017).
|
10.2
|
Amended and Restated Note Purchase Agreement, dated as of April 14, 2017, by and among MSC Industrial Direct Co., Inc. and the noteholders named therein (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 18, 2017).
|
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
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
|
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
|
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.
|
.