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 Presentation
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 March 2, 2019 and March 3, 2018, the results of operations for the thirteen and twenty-six weeks ended March 2, 2019 and March 3, 2018, and cash flows for the twenty-six weeks ended March 2, 2019 and March 3, 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 S
EC
. 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 Financi
al 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 contrac
ts with customers and supersede
most current 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 t
he 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, which
clarifies the definition of a business to assist entities with evaluating when a set of transferred assets and activities is considered a business.
This standard will be applied to appropriate business combinations that occur beginning September 2, 2018.
In August 2018, the SEC
amended certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded in
SEC Release No. 33-10532, Disclosure Update and Simplification. In addition, the amendments expanded the disclosure requirements on the analysis of s
hare
holders’ equity for interim financial statements. Under the amendments, an analysis of change in each caption of s
hare
holders’ equity presented in the consolidate
d balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The final rules are effective for all filings made on or after November 5, 2018, with the option for the filer’s first presentation of the changes in shareholders’ equity to be included in its Form 10-Q for the quarter that begins after the effective date of the amendments. The Company
has
include
d
this
new
presentation
of
interim
changes
in
share
holders'
equity
.
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Accounting Pronouncements Not Yet Adopted
I
n February 2016, the FASB issued its final standard on accounting for leases
, ASU 2016-02, Leases (Topic 842).
This standard
requires that an entity that is a lessee recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. This update is effective for
fiscal years
beginning after December 15, 2018,
including interim periods within those fiscal years,
with earlier application permitted. The new standard is effective for the Company for its fiscal year 2020.
While
the Company is
still in the process of evaluating the effect of adoption on
its
consolidated financial statements and
is
currently assessing
its
leases,
the Company expects
the adoption will
result in
a
significant
increase in the assets and liabilities recorded on
its
Condensed Consolidated Balance Sheets.
In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, 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, 2018. The new standard is effective for the Company for its fiscal year 202
1
.
T
he Company is currently evaluating this standard to determine the impact of adoption on 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
will require
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 202
1
. 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
Statement 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 asso
ciate 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 P
lans
”.
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 approximately
$4,822
and
$
4,832
as of
March 2, 2019
and
September 1, 2018
, respectively, and are reported as Accrued liabilities in the Consolidated Balanc
e 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.
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 approximately
$13,556
and
$14,000
as of
March 2, 2019
and
September 1, 2018
, respectively, and are included in Accrued liabilities in the 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 Consolidated Balance Sheets, and were approximately
$3,017
and
$2,457
as of
March 2, 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
no
t have material unsatisfied performance obligations, contract assets or liabilities as of
March 2, 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 twenty-six
-week periods ended
March 2, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
March 2, 2019
|
|
March 2, 2019
|
Manufacturing Heavy
|
|
49
|
%
|
|
49
|
%
|
Manufacturing Light
|
|
22
|
%
|
|
22
|
%
|
Government
|
|
7
|
%
|
|
8
|
%
|
Retail/Wholesale
|
|
6
|
%
|
|
5
|
%
|
Commercial Services
|
|
5
|
%
|
|
4
|
%
|
Other
(1)
|
|
11
|
%
|
|
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
twenty-six
-week periods
ended
March 2, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
March 2, 2019
|
|
March 2, 2019
|
United States
|
|
$
|
796,995
|
|
97
|
%
|
|
$
|
1,603,070
|
|
97
|
%
|
UK
|
|
|
13,769
|
|
2
|
%
|
|
|
28,974
|
|
2
|
%
|
Canada
|
|
|
9,299
|
|
1
|
%
|
|
|
19,616
|
|
1
|
%
|
Mexico
|
|
|
2,941
|
|
< 1
|
%
|
|
|
2,941
|
|
< 1
|
%
|
Total net sales
|
|
$
|
823,004
|
|
100
|
%
|
|
$
|
1,654,601
|
|
100
|
%
|
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 s
hare
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
twenty-six
weeks ended
March 2, 2019
and
March 3, 2018
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
March 2,
|
|
March 3,
|
|
March 2,
|
|
March 3,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income attributable to MSC Industrial as reported
|
|
$
|
68,424
|
|
$
|
117,552
|
|
$
|
142,656
|
|
$
|
177,137
|
Less: Distributed net income available to participating securities
|
|
|
(5)
|
|
|
(22)
|
|
|
(24)
|
|
|
(59)
|
Less: Undistributed net income available to participating securities
|
|
|
(15)
|
|
|
(105)
|
|
|
(46)
|
|
|
(197)
|
Numerator for basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed and distributed net income available to common shareholders
|
|
$
|
68,404
|
|
$
|
117,425
|
|
$
|
142,586
|
|
$
|
176,881
|
Add: Undistributed net income allocated to participating securities
|
|
|
15
|
|
|
105
|
|
|
46
|
|
|
197
|
Less: Undistributed net income reallocated to participating securities
|
|
|
(15)
|
|
|
(104)
|
|
|
(46)
|
|
|
(196)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed and distributed net income available to common shareholders
|
|
$
|
68,404
|
|
$
|
117,426
|
|
$
|
142,586
|
|
$
|
176,882
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic net income per share
|
|
|
55,139
|
|
|
56,439
|
|
|
55,320
|
|
|
56,363
|
Effect of dilutive securities
|
|
|
223
|
|
|
453
|
|
|
299
|
|
|
335
|
Weighted average shares outstanding for diluted net income per share
|
|
|
55,362
|
|
|
56,892
|
|
|
55,619
|
|
|
56,698
|
Net income per share t
wo-class method:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.24
|
|
$
|
2.08
|
|
$
|
2.58
|
|
$
|
3.14
|
Diluted
|
|
$
|
1.24
|
|
$
|
2.06
|
|
$
|
2.56
|
|
$
|
3.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities
|
|
|
1,123
|
|
|
-
|
|
|
718
|
|
|
-
|
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”
.
S
tock
‑based compensation expense
included in operating expenses for the
thirteen
and
twenty-six
-week periods ended
March 2, 2019
and
March 3, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
March 2,
|
|
March 3,
|
|
March 2,
|
|
March 3,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Stock options
|
|
$
|
1,121
|
|
$
|
1,128
|
|
$
|
2,326
|
|
$
|
2,322
|
Restricted share awards
|
|
|
338
|
|
|
670
|
|
|
870
|
|
|
1,572
|
Restricted stock units
|
|
|
2,364
|
|
|
1,821
|
|
|
4,729
|
|
|
3,575
|
Associate Stock Purchase Plan
|
|
|
81
|
|
|
76
|
|
|
153
|
|
|
120
|
Total
|
|
|
3,904
|
|
|
3,695
|
|
|
8,078
|
|
|
7,589
|
Deferred income tax benefit
|
|
|
(980)
|
|
|
(1,083)
|
|
|
(2,028)
|
|
|
(2,224)
|
Stock-based compensation expense, net
|
|
$
|
2,924
|
|
$
|
2,612
|
|
$
|
6,050
|
|
$
|
5,365
|
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:
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
March 2,
|
|
March 3,
|
|
|
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
twenty-six
-week period ended
March 2, 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
|
(191)
|
|
|
75.85
|
|
|
|
|
|
Canceled/Forfeited
|
(32)
|
|
|
77.66
|
|
|
|
|
|
Outstanding on March 2, 2019
|
1,935
|
|
$
|
74.71
|
|
4.6
|
|
$
|
17,655
|
Exercisable on March 2, 2019
|
899
|
|
$
|
72.49
|
|
3.5
|
|
$
|
10,197
|
The unrecognized share
‑based compensation cost
related to stock option expense at
March 2, 2019
was
$10,405
and will
be recognized over a weighted average period of
2.5
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
d
ate,
during the
twenty-six
-week periods
ended
March 2, 2019
and
March 3, 2018
was
$1,617
and
$5,283
, 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
twenty-six
-week period
ended
March 2, 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)
|
|
|
82.38
|
Canceled/Forfeited
|
(1)
|
|
|
82.47
|
Non-vested restricted share awards at March 2, 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
March 2, 2019
was
$978
and will be recognized over a weighted average period of
0.7
years.
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 summa
ry of the Company’s non-vested Restricted Stock U
nit
(“RSU”)
award activity for the
twenty-six
-week period
ended
March 2, 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
|
171
|
|
|
83.01
|
Vested
|
(98)
|
|
|
72.54
|
Canceled/Forfeited
|
(17)
|
|
|
77.08
|
Non-vested restricted stock unit awards at March 2, 2019
|
433
|
|
$
|
77.05
|
The fair value of each RSU is the closing stock price on the N
YSE
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
March 2, 2019
was
$29,243
and is
expected to be recognized over a weighted average period of
3.4
years.
Note
5. Business Combination
On February 1, 2019,
two
subsidiaries of the Company,
MSC IndustrialSupply, S. de R.L. de C.V. and MSC Import Export LLC (together, “MSC Mexico”)
completed the acquisition of certain assets of TAC Insumos Industriales, S. de R.L. de C.V. and certain of its
affiliates (together, “TAC”). The
Company holds a
75%
interest in each of the MSC Mexico entities.
The acquisition provides the Company
with
the opportunity to further expand its busin
ess throughout North America.
The portion of the consideration attributable to the Company
is
$13,911
, which includes
the Company’s portion of
a post-closing working capital adjustment in the amount of
$2,286
that is payable to TAC in December 2019
and is subject to finalization
.
Total cash consideration
funded
by the Company came
from available cash resources and borrowings under
its revolving credit facilities (see Note 8 “Debt and Capital Lease Obligations”)
. The Company
also
loaned
the noncontrolling interest owner
$2,850
to fund
a portion of its
initial capital contributions to MSC Mexico.
The acquisition was accounted for as a business acquisition pursuant to ASC Topic 805, “Business Combinations” (“ASC 805”). As required by ASC 805, the Company allocated the consideration to assets and liabilities based on their estimated fair value at the acquisition date. The Company’s acquisition accounting as of March 2, 2019 is preliminary primarily due to the pending final valuation and any additional working capital adjustments to the purchase price. The following table summarizes the amounts of identified assets acquired based on the estimated fair value at the acquisition date:
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
9,476
|
Identifiable intangibles
|
|
|
6,200
|
Goodwill
|
|
|
2,872
|
Total Assets Acquired
|
|
$
|
18,548
|
Less: Fair Value of Noncontrolling Interest
|
|
|
(4,637)
|
Total MSC Industrial Purchase Price Consideration
|
|
$
|
13,911
|
Acquired intangible assets with a fair value of
$6,200
consisted of customer relationships with a useful life of
9
years. The good
will amount of
$2,872
represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired
and noncontrolling interest
. The primary items that generated the goodwill were the premiums paid by the Company for the right to control the
acquisition of certain assets
and benefit from adding a platform to expand
the Company’s
footprint in Mexico
. This goodwill will not be amortized and will be included in the Company’s periodic test for impairment at least annually.
Goodwill is
deductible for tax purposes.
The fair value of the noncontrolling interest was determined utilizing the market approach and consideration of the overall business enterprise
valu
e.
The amount of revenue and
income
before provision for income taxes from MSC Mexico included in the condensed consolidated statements of income
was
$2,941
and
$31
, respectively
,
for both the thirteen and twenty-six-week periods ended March 2, 2019
. In
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
addition, the Company incurred n
on-recurring transaction and integration costs
relating to MSC Mexico
totaling
$158
,
which
are included in the Company’s condensed consolidated statement of income as operating expenses for the thirteen and twenty-six-week period
s
ended March 2, 2019.
Note 6. Goodwill and Other Intangible Assets
The change in the carrying amount of goodwill is as follows:
|
|
|
|
|
|
|
|
Balance as of September 1, 2018
|
|
$
|
674,998
|
TAC acquisition
|
|
|
2,872
|
Foreign currency translation adjustment
|
|
|
(369)
|
Balance as of March 2, 2019
|
|
$
|
677,501
|
The components of the Company’s other intangible assets as of March 2, 2019 and September 1, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2, 2019
|
|
September 1, 2018
|
|
Weighted Average Useful Life (in years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
Customer Relationships
|
5
|
-
|
18
|
|
$
|
214,460
|
|
$
|
(107,423)
|
|
$
|
208,260
|
|
$
|
(101,916)
|
Trademarks
|
1
|
-
|
5
|
|
|
6,516
|
|
|
(4,690)
|
|
|
6,630
|
|
|
(4,384)
|
Trademarks
|
Indefinite
|
|
|
14,199
|
|
|
—
|
|
|
14,134
|
|
|
—
|
Total
|
|
|
|
|
$
|
235,175
|
|
$
|
(112,113)
|
|
$
|
229,024
|
|
$
|
(106,300)
|
For the twenty-six-week period ended March 2, 2019, the Company recorded approximately
$6,200
of intangible assets, primarily consisting of the acquired customer relationships from the TAC acquisition. See Note 5 “Business Combination.” During the twenty-six-week period ended March 2, 2019, approximately
$49
in gross intangible assets, and any related accumulated amortization, were written off related to trademarks that are no longer being utilized.
The C
ompany’s
intangible assets are
amortized
on a straight-line basis, including customer relationships, as it approximates customer attrition patterns and best estimates the use pattern of the asset. Amortization expense of the Company’s intangible assets was
$5,664
and
$4,904
for the twenty-six-week periods ended March 2, 2019 and March 3, 2018, respectively. The Company expects amortization expense to be approximately
$5,720
for the remainder of fiscal 2019 and for each of the five succeeding fiscal years as follows:
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2020
|
|
$
|
10,485
|
2021
|
|
|
9,807
|
2022
|
|
|
9,793
|
2023
|
|
|
9,793
|
2024
|
|
|
9,770
|
Note
7
. 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:
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
|
Level 1
—
|
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active
m
arkets
.
|
|
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
(“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 to finance the structure and site
improvements of the Company’s CFC. The bonds (
$27,025
outstanding
at
both
March 2, 2019
and
September 1, 2018
)
are classified as available for sale securities in accordance with ASC Topic 320. The securities are recorded at fair value
and classified in Prepaid expenses and other current assets
in the
Condensed
Consolidated Balance Sheet
at March 2, 2019 and in Other assets at September 1, 2018
. The fair values of these securities are 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
twenty-six
-week
period ended
March 2, 2019
. 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
short-term and
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 a
s of
March 2, 2019
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
March 2, 2019
and
September 1, 2018
due to the short-term maturity of these items.
During the
twenty-six
weeks ended
March 2, 2019
and
March 3, 2018
, the Company had
no
remeasurement
s of non-financial assets or
liabilities
at fair value on a non-recurring basis subsequent to their initial recognition.
Note 8
. Debt and Capital Lease Obligations
Debt at
March 2, 2019
and
September 1, 2018
consisted of the following:
|
|
|
|
|
|
|
|
|
March 2,
|
|
September 1,
|
|
|
2019
|
|
2018
|
|
|
(Dollars in thousands)
|
Revolving Credit Facilities
|
|
|
|
|
|
|
Committed bank facility
|
|
$
|
-
|
|
$
|
224,000
|
Uncommitted bank facilities
|
|
|
281,000
|
|
|
-
|
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
|
|
|
28,609
|
|
|
27,926
|
Less: unamortized debt issuance costs
|
|
|
(1,381)
|
|
|
(1,593)
|
Total debt
|
|
$
|
593,228
|
|
$
|
535,333
|
Less: short-term debt
(1)
|
|
|
(308,562)
|
|
|
(224,097)
|
Long-term debt
|
|
$
|
284,666
|
|
$
|
311,236
|
__________________________
|
(1)
|
|
Net of unamortized debt issuance costs expected to be amortized in the next twelve months.
|
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
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 our 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 late
r 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 $
281,000
outstanding at the end of
the
fiscal
second
quarter
of
2019
under the Uncommitted Facilities
is
classified as short-term in
the Company’s
Condensed Consolidated Balance Sheet
.
Durin
g the
twenty-six
-week period ended
March 2, 2019
, the Company borrowed
$326,000
and repaid
$269,000
under its revolving credit facilities
.
As of
March 2, 2019
and
September 1, 2018
, the weighted average interest rate
s
on borrowings under all its revolving credit facilities
were
3.33%
and
3.20%
, respectively.
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 J
une 2018, the Company complete
d 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
March 2, 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
March 2, 2019
, the
uncommitted
availability under the Prudential Note
Purchase Agreement is
$200,000
.
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Each of the
credit facilities
, Private Placement Debt, and Shelf Facility Agreements
impose
s
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
March 2, 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 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
March 2,
2019
,
the capital lease obligation was approximately
$27,025
and classified as short-term debt.
At
September 1, 2018,
the capital lease obligation was approximately
$27,025
and classified as long-term debt.
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 o
ver a specified period of time based on the terms agreed upon. During the
twenty-six
-week period ended
March 2, 2019
, the Company entered into capital lease and financing obligations related
to
certain IT equipment and software totaling
$1,345
.
T
he gross amount of property and equipment acquired under the capital lease
obligation
and its accumulated amortization
at
March 2, 2019
was approximately
$442
and $
18
, respectively.
Note 9
. Shareholders’ Equity
C
ommon Stock Repurchases and Treasury Stock
During the
thirteen and
twenty-six
-week period
s
ended
March 2, 2019
, the Company repurchased
275
and
1,053
shares of its Class A common stock for
$20,898
and
$84,425
, respectively.
From these totals,
275
and
315
shares have not been retired and the amounts of
$20,898
and
$24,098
are
reflected at cost as treasury stock in the accompanying condensed consolidated financial statements
for the thirteen and twenty-six weeks ended March 2, 2019, respectively.
During the
thirteen and
twenty-six
-week period
s
ended
March 3, 2018
, the Company repurchased
198
and
249
shares of its Class A common stock for
$17,710
and
$21,728
, 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 twenty-six weeks ended March 3, 2018.
The total number of shares of Class A common stock authorized for future repurchase was approximately
1,157
shares at March 2, 2019.
The Company reissued
20
and
33
shares of treasury stock during the
thirteen and
twenty-six
-week period
s
ended
March 2, 2019
, respectively
,
and
reissued
17
and
30
shares of treasury stock during the
thirteen and
twenty-six
-week period
s
ended
March
3, 2018, respectively
,
to fund the Associate Stock Purchase Plan.
Dividends on Common Stock
On
March 26, 2019
, the Board of Directors declared a quarterly cash dividend of
$0.63
per share payable on
April 23, 2019
to shareholders of record at the close of business on
April 9, 2019
. The dividend will result in a payout of approximately
$34,757
, based on the number of shares outstanding at March 18, 2019.
Note
10
. 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
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
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 wa
rranty expense for
the
thirteen
and
twenty-six
-week p
eriods ended
March 2, 2019
and
March 3, 2018
was minimal.
Note
11
. 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 issu
ed 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
twenty-six
-week period ended
March 2, 2019
, there were
no
material changes in unrecognized tax benefits.
Note
12
. Legal Proceedings
There are various claims, lawsuits, and pending actions against the Company inc
idental 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 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 metalworking and maintenance, repair, and operations (“MRO”) products and services. We help our customers drive greater productivity, profitability and growth with more than 1.6 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
1,669,000
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
100
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 add
itional procurement cost-saving
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 headcount w
as 2,433 at March 2, 2019, compared to 2,331
at
March 3, 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
two fiscal quarters ended
March 2, 2019
include the following:
|
·
|
|
We gen
erated $98.6 million of cash from operations.
|
|
·
|
|
We repurchased 1.1 million shares for $84.4 million.
|
|
·
|
|
We paid out $69.6 million in cash dividends, compared to $5
9.9 million for the same periods
in the prior fiscal year.
|
|
·
|
|
On February 1, 2019, we completed the acquisition of certain assets of TAC for aggregate consideration of approximately $18.5 million (subject to finalizing the post-closing working capital adjustment), of which our 75% portion of the aggregate consideration is approximately $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.
Business Environment
We utilize various indices when evaluating the level of our business activity.
Approximately
71%
of
our revenues came from sales in the manufacturing sector during
the
second
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. We have experienced the highest correlation between our sales trends and the MBI by 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 generally indicates expansion. The MBI index over the last three months and for the past 12-month period w
ere
as follows:
|
|
|
Period
|
|
MBI
|
December
|
|
53.4
|
January
|
|
54.9
|
February
|
|
53.6
|
|
|
|
Fiscal 2019 Q2 average
|
|
54.0
|
12-month average
|
|
56.7
|
A
lthough the February 2019 MBI moved slightly downward from the previous month, the February reading of 53.6 represents the
25th
c
onsecutive month of expansion in the manufacturing industry.
Details released with
the
February MBI indicate continued expansion in supplier deliveries, new orders, production, and employment while backlog recorded slower growth and exports recorded c
ontraction. The most recent March MBI reading of 53.6 is indicative of continued expansion, albeit at a rate consistent with February. W
e wi
ll 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
March 2, 2019
Compared to the Thirteen-Week Period Ended
March 3, 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
|
|
|
|
|
|
|
|
March 2, 2019
|
|
March 3, 2018
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
Net sales
|
|
$
|
823,004
|
|
|
100.0%
|
|
$
|
768,987
|
|
|
100.0%
|
|
$
|
54,017
|
|
|
7.0%
|
Cost of goods sold
|
|
|
471,190
|
|
|
57.3%
|
|
|
431,764
|
|
|
56.1%
|
|
|
39,426
|
|
|
9.1%
|
Gross profit
|
|
|
351,814
|
|
|
42.7%
|
|
|
337,223
|
|
|
43.9%
|
|
|
14,591
|
|
|
4.3%
|
Operating expenses
|
|
|
255,833
|
|
|
31.1%
|
|
|
239,120
|
|
|
31.1%
|
|
|
16,713
|
|
|
7.0%
|
Income from operations
|
|
|
95,981
|
|
|
11.7%
|
|
|
98,103
|
|
|
12.8%
|
|
|
(2,122)
|
|
|
(2.2)%
|
Total other expense
|
|
|
(4,612)
|
|
|
(0.6)%
|
|
|
(3,260)
|
|
|
(0.4)%
|
|
|
(1,352)
|
|
|
41.5%
|
Income before provision for income taxes
|
|
|
91,369
|
|
|
11.1%
|
|
|
94,843
|
|
|
12.3%
|
|
|
(3,474)
|
|
|
(3.7)%
|
Provision (benefit) for income taxes
|
|
|
22,939
|
|
|
2.8%
|
|
|
(22,709)
|
|
|
(3.0)%
|
|
|
45,648
|
|
|
201.0%
|
Net income
|
|
|
68,430
|
|
|
8.3%
|
|
|
117,552
|
|
|
15.3%
|
|
|
(49,122)
|
|
|
(41.8)%
|
Less: Net income attributable to noncontrolling interest
|
|
|
6
|
|
|
0.0%
|
|
|
-
|
|
|
0.0%
|
|
|
6
|
|
|
0.0%
|
Net income attributable to MSC Industrial
|
|
$
|
68,424
|
|
|
8.3%
|
|
$
|
117,552
|
|
|
15.3%
|
|
$
|
(49,128)
|
|
|
(41.8)%
|
Net Sales
Net sales increased
7.0%
or approximately
$54.0
million for the
thirteen
-week period ended
March 2, 2019
, as compared to the
thirteen
-week period ended
March 3, 2018
. We estimate that this
$54.0
million increase in net sales is comprised of (i) approximately
$29.5
million of higher sales volume, excluding AIS
and MSC Mexico
ope
rations; (ii) approximately $17.0
million from AIS,
which we acquired in April 2018; (iii) approximately $2.9 million from MSC Mexico, which was formed in February 2019; and (iv) approximately $6.0
million from improved pricing, inclusive of changes in customer and product mix, discounting and other items; partially of
fset by (v) approximately $1.4
milli
on from foreign exchange impact
. Of the above
$54.0
million increase in net sales, sales to our government and national account programs (“Large Account Customers”) increased by approximately
$18.0
million and sales other than to our Large Account Customers increased by approximately
$36.0
million, which includes $17.0
million
and $2.9 million
of net sales from AIS
and MSC Mexico, respectively
.
The table below shows the change in our average daily sales by total company and by customer type for the
thirteen
- week period ended
March 2, 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 Q2
|
|
% of Total Business
|
|
|
|
|
|
|
|
Total Company
|
|
8.8
|
%
|
|
|
|
Manufacturing Customers
|
|
8.6
|
%
|
|
71
|
%
|
Non-Manufacturing Customers
|
|
9.5
|
%
|
|
29
|
%
|
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
60.0
%
of consolidated net sales for the
thirteen
-week period ended
March 2, 2019
, compared
to 60.3
%
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
42.7%
for the
thirteen
-week period ended
March 2, 2019
as compared to
43.9%
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, a
pproximately
3
0 basis points of the decline
resulted from
the AIS business we acquired in the fiscal third quarter of 2018
and 10 basis points of the decline is from MSC Mexico operations.
Operating Expenses
Operating expenses
increased
7.0%
to
$255.8
million
for
the
thirteen
-
week period ended
March 2, 2019
, as compared to
$239.1
million
for the same period in the prior fiscal y
ear.
Operating
expenses
were
31.1%
of net sales for
both the
thirteen
-
week period
s
ended
March 2, 2019
and
March 3, 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 i
ncreased due to the acquisition of AIS in our third quarter of
fiscal 2018 and from the operations of
MSC Mexico
which was formed
in our second quarter of fiscal 2019. AIS and MSC Mexico operating expenses, including non-recurring acquisition and integration costs, accounted for approx
imately $4.9 million and $0.7 million, respectively, of total operating expenses for the thirteen-week period ended March 2, 2019.
Payroll and payroll-
related costs
were
approxima
tely
56.4%
of to
tal operating expenses
for the
thirteen
-
week period ended
March 2, 2019
, a
s compared to approximately
57.4%
for the
thirteen
-week period ended
March 3, 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
March 2, 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 costs associated with the acquire
d AIS operations 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 approximately $34.2 million for the
thirteen
-week period ended
March 2, 2019
, as compared to $31.9 million for the same period in the prior fiscal year. The primary driver of this was increased sales.
Income from Operations
I
ncome from operations
decreased 2.2% to $
96.0
million for the
thirteen
-
week period ended
March 2, 2019
, as compared to
$9
8.1 million
for the same period in the prior fisc
al year. This was primarily attributable to the increases in operating expenses as described above, partially offset by the increase in net sales and gross profit. I
nc
ome from operations as a percentage of net sales
decreased
to
11.7%
for
the
thirteen
-
week period ended
March 2, 2019
,
from
1
2.8%
for the same period in the prior fiscal year, primarily as the result of the decrease in the gross profit margin mentioned above.
Provision
(Benefit)
for Income Taxes
The effective tax rate for the
thirteen
-week period ended
March 2, 2019
was 25.1% as compared to (23.9)% for the same period in the prior fiscal year. Th
e 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.
We expect our full-year tax rate for fiscal 2019 to be in the 25.0% to 25.5% range.
See Note 11 “Income Taxes” in the Notes to the unaudited Condensed Consolidated Financial Statements for further discussion.
Net Income
The factors which affec
ted net income for the
thirteen
-week period
ended
March 2, 2019
,
as compared to the same period
in the previous fiscal year, have been discussed above.
Twenty-Six-Week Period Ended
March 2, 2019
Compared to the Twenty-Six-Week Period Ended
March 3, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
|
|
|
|
March 2, 2019
|
|
March 3, 2018
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
Net sales
|
|
$
|
1,654,601
|
|
|
100.0%
|
|
$
|
1,537,548
|
|
|
100.0%
|
|
$
|
117,053
|
|
|
7.6%
|
Cost of goods sold
|
|
|
944,802
|
|
|
57.1%
|
|
|
865,256
|
|
|
56.3%
|
|
|
79,546
|
|
|
9.2%
|
Gross profit
|
|
|
709,799
|
|
|
42.9%
|
|
|
672,292
|
|
|
43.7%
|
|
|
37,507
|
|
|
5.6%
|
Operating expenses
|
|
|
510,818
|
|
|
30.9%
|
|
|
474,911
|
|
|
30.9%
|
|
|
35,907
|
|
|
7.6%
|
Income from operations
|
|
|
198,981
|
|
|
12.0%
|
|
|
197,381
|
|
|
12.8%
|
|
|
1,600
|
|
|
0.8%
|
Total other expense
|
|
|
(8,504)
|
|
|
(0.5)%
|
|
|
(6,742)
|
|
|
(0.4)%
|
|
|
(1,762)
|
|
|
26.1%
|
Income before provision for income taxes
|
|
|
190,477
|
|
|
11.5%
|
|
|
190,639
|
|
|
12.4%
|
|
|
(162)
|
|
|
(0.1)%
|
Provision for income taxes
|
|
|
47,815
|
|
|
2.9%
|
|
|
13,502
|
|
|
0.9%
|
|
|
34,313
|
|
|
254.1%
|
Net income
|
|
|
142,662
|
|
|
8.6%
|
|
|
177,137
|
|
|
11.5%
|
|
|
(34,475)
|
|
|
(19.5)%
|
Less: Net income attributable to noncontrolling interest
|
|
|
6
|
|
|
0.0%
|
|
|
-
|
|
|
0.0%
|
|
|
6
|
|
|
0.0%
|
Net income attributable to MSC Industrial
|
|
$
|
142,656
|
|
|
8.6%
|
|
$
|
177,137
|
|
|
11.5%
|
|
$
|
(34,481)
|
|
|
(19.5)%
|
Net Sales
Net sales increased
7.6%
or approximately
$
117.1
million for the
twenty-six
-week period ended
March 2, 2019
, as compared to the
twenty-six
-week period ended
March 3, 2018
. We estimate that this
$
117.1
million increase in net sales is comprised of (i) approximately
$69.8
million of higher sales volume, excluding AIS
and MSC Mexico
ope
rations; (ii) approximately $34.7
million from AIS, which we acquired in April 2018;
(iii) approximately $2.9 million from MSC Mexico, which was formed in February 2019; and (iv) approximately $11
.8 million from improved pricing, inclusive of changes in customer and product mix, discounting and other items; partially of
fset by (v) approximately $2.1
million from foreign exchange impact. Of the above
$
117.1
million increase in net sales, sales to our
Large Account Customers
increased by approximately
$33.8
million and sales other than to our Large Account Customers increased by approximately
$83
.
3 million, which includes $34
.7 million
and $2.9 million
of net sales from AIS
and MSC Mexico, respectively
.
The table below shows the change in our average daily sales by total company and by customer type for the
twenty-six
-
week period ended
March 2, 2019
compared to the same period in the prior fiscal year
:
|
|
|
|
|
|
|
Average Daily Sales Percentage Change
|
(unaudited)
|
|
|
|
|
|
|
|
2019 vs. 2018 Fiscal Period
|
|
Twenty-Six-Week Period Ended Fiscal Q2
|
|
% of Total Business
|
|
|
|
|
|
|
|
Total Company
|
|
8.5
|
%
|
|
|
|
Manufacturing Customers
|
|
8.7
|
%
|
|
71
|
%
|
Non-Manufacturing Customers
|
|
8.2
|
%
|
|
29
|
%
|
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
twenty-six
-week period ended
March 2, 2019
, compared
to
60
.
0
%
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
4
2.9
%
for
the
twenty-six
-
week period ended
March 2, 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, a
pproximately
3
0 basis points of the decline
resulted
from the AIS business we acquired in the fiscal third quarter of 2018
.
Operating Expenses
Operating expenses
increased
7
.6%
to
$
510.8 million
for
the
twenty-six
-
week period ended
March 2, 2019
, as compared to
$
474.9 million
for the same period in the prior fiscal y
ear.
Operating
expenses
were
30.
9
%
of net sales for
both the
twenty-six
-
week period
s
ended
March 2, 2019
and
March 3, 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 d
ue to the acquisition of AIS in our third quarter of fiscal 2018 and
from
the operations of
MSC Mexico
which was formed
in the second quarter of fiscal 2019. AIS and MSC Mexico operating expenses, including non-recurring acquisition and integration costs, accounted for approximately $9.8 million and $0.7 million, respectively, of total operating expenses for the twenty-
six-
week period ended March 2, 2019.
Payroll and payroll-
related costs
were
approxima
tely
56.2
%
of to
tal operating expenses
for the
twenty-six
-
week period ended
March 2, 2019
, a
s compared to approximately
5
7.1
%
for the
twenty-six
-week period ended
March 3, 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
t
wenty-six
-week period ended
March 2, 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 costs associated with the acquire
d AIS operations 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 approximately $68.4 million for the
twenty-six
-week period ended
March 2, 2019
, as compared to $63.4 million for the same period in the prior fiscal year. The primary driver of this was increased sales.
Income from Operations
I
ncome from operations
increased 0.8% to $
1
99.0 million for the
twenty-six
-
week period ended
March 2, 2019
, as compared to
$
197.4 million
for the same period in the prior fisc
al year. This was primarily attributable to the increase in net sales and gross profit, offset in part by the increases in operating expenses as described above. I
nc
ome from operations as a percentage of net sales
decreased
to
12.
0
%
for
the
twenty-six
-
week period ended
March 2, 2019
,
from
12.8%
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
twenty-six
-week period ended
March 2, 2019
was 25.1% as compared to 7.1
%
for the same period in the prior fiscal year. Th
e 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.
We expect our full-year tax rate for fiscal 2019 to be in the 25.0% to 25.5% range.
See Note 11 “Income Taxes” in the Notes to the unaudited Condensed Consolidated Financial Statements for further discussion.
Net Income
The factors which affec
ted net income for the
twenty-six
-week period
ended
March 2, 2019
,
as compared to the same period
in the previous fiscal year, have been discussed
above.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2,
|
|
September 1,
|
|
|
|
|
2019
|
|
2018
|
|
$ Change
|
|
|
(Dollars in thousands)
|
Total debt
|
|
$
|
593,228
|
|
$
|
535,333
|
|
$
|
57,895
|
Less: Cash and cash equivalents
|
|
|
(31,167)
|
|
|
(46,217)
|
|
|
15,050
|
Net debt
|
|
$
|
562,061
|
|
$
|
489,116
|
|
$
|
72,945
|
Equity
|
|
$
|
1,405,845
|
|
$
|
1,387,254
|
|
$
|
18,591
|
As of
March 2, 2019
, we
held $
31.2
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 necessita
ted 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.
A
s of
March 2, 2019
, total borrowings outstanding, representing amounts due u
nder our credit facilities, Private Placement Debt, and Shelf Facility Agreements
, as well as a
ll capital leases and financing
arrangements, were
approximately $
593.2
million
, net of
unamortized debt issuance costs of
$
1.4
million
. A
s 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 approximately
$
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.
The table below summarizes information regarding the Company’s liquidity and capital resources:
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
March 2,
|
|
March 3,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Net cash provided by operating activities
|
|
$
|
98,578
|
|
$
|
118,187
|
Net cash used in investing activities
|
|
|
(34,781)
|
|
|
(17,999)
|
Net cash used in financing activities
|
|
|
(78,870)
|
|
|
(84,761)
|
Effect of foreign exchange rate changes on cash and cash equivalents
|
|
|
23
|
|
|
98
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(15,050)
|
|
$
|
15,525
|
Operating
Activities
Net cash provided by operating activities for the
twenty-six
-week periods ended
March 2, 2019
and
March 3, 2018
was $98.6 million and $
118.2
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
, a greater increase in the change in inventories, and a greater increase in the change in prepaid expenses and other assets relating to a smaller decrease in the change in prepaid taxes, parti
ally 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.
|
|
|
|
|
|
|
|
|
|
|
|
March 2,
|
|
September 1,
|
|
March 3,
|
|
|
2019
|
|
2018
|
|
2018
|
|
|
(Dollars in thousands)
|
Working Capital
|
|
$
|
676,012
|
|
$
|
656,984
|
|
$
|
593,480
|
Current Ratio
|
|
|
2.2
|
|
|
2.3
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
Days Sales Outstanding
|
|
|
54.5
|
|
|
55.6
|
|
|
54.3
|
Inventory Turnover
|
|
|
3.6
|
|
|
3.7
|
|
|
3.6
|
The increase in working capital as of
March 2, 2019
compared to
September 1, 2018 and March 3, 2018
is primarily due to an increase in inventories and accounts receivable resulting from an incr
ease in sales, an increase in
prepaid and other current assets, partially offset by the increase in our current debt outstanding. The current ratio remained consistent with the prior year periods displayed.
Day sales outstanding and inventory turns (calculated using a thirteen-point average inventory balance) remained consistent with the prior year periods displayed.
Investing Activities
Net cash used in investing activities for
the
twenty-six
-week
periods ended
March 2, 2019
and
March 3, 2018
was
$34.8 million
and
$18.0 million
, respectively.
The use of cash for the
twenty-six
-week period
ended
March 2, 2019
consisted of
expenditures for property, plant, and equipment and the acquisition of certain assets of TAC. The use of cash for the
twenty-six
-week period
ended
March
3, 2018
consisted of expenditures for property, plant, and equipment.
Financing Activities
Net cash used in financing activities for the
twenty-six
-week periods ended
March 2, 2019
and
March 3, 2018
was $78.9 million
and
$84.8
million, respectively.
The major components contributing to the use of cash for the
twenty-six
-week period
ended
March 2, 2019
were the repurchase of our common stock of $
84.4
million and dividends paid of $
69.6
million. This was partially offset by
net borrowings on all the credit facilities of $57.0 million and
proceeds from the exercise of common stock options of $
14.5
million.
The major components contributing to the use of cash for the
twenty-six-week period ended March 3, 2018 were repayments on our interest-bearing debt of $22.0 million, net of borrowings, cash dividends paid of $59.9 million, and the repurchase of our common stock of $21.7 million. This was partially offset by proceeds from the exercise of common stock options of $16.4 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
March 2, 2019
, there have been no
material changes in our contractual obligations and commitments since
September 1, 2018
.
Long-term Debt
Credit Facilities
In April 2017, the
Company entered into a $600 million
committed credit facility (the “Committed Facility”). The Company also has
six unsecured credit facilities that are uncommitted (the “Uncommitted Facilities”)
,
totaling $440 million
of maximum
uncommitted
avai
lability
.
See Note
8
“Debt and Capital Lease
Obligations”
in the Notes to the unaudited Condensed Consolidated Financial Statements for more information about
the credit f
acilities.
As of
March 2, 2019
, we
were in compliance with the operating and financial covenants of the credit facilities. The current unused balance of
appro
ximately $597 million from the C
ommitted
F
acility, 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
8
“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
8
“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
March 2, 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
.
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 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.
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
March 2, 2019
that ha
s materially affected, or is
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 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.
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
March 2, 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
|
12/2/18 - 1/1/19
|
|
266,885
|
|
$
|
76.04
|
|
265,710
|
|
1,164,575
|
1/2/19 - 2/1/19
|
|
7,609
|
|
|
74.96
|
|
7,537
|
|
1,157,038
|
2/2/19 - 3/2/19
|
|
321
|
|
|
84.44
|
|
—
|
|
1,157,038
|
Total
|
|
274,815
|
|
$
|
76.02
|
|
273,247
|
|
|
__________________________
|
(1)
|
|
During the thirteen weeks ended
March 2, 2019
,
1,568
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 2,0
00
,000
shares of Class A common stock under the Company’s ongoing Repurchase Plan
.
As of
March 2, 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.
Item 5. Other Information
None.
Item 6. Exhibits
EXHIBIT INDEX
__________________________
|
|
*
|
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 I
ndustrial
D
irect
C
o
., I
nc
.
(Registrant)
|
Dated:
April 10, 2019
|
By:
|
/s/
ERIK GERSHWIND
President and Chief Executive Officer
(Principal Executive Officer)
|
Dated:
April 10, 2019
|
By:
|
/s/ RUSTOM JILLA
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|