MSM MSC Industrial Direct Co Inc





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________

FORM 10-Q

__________________________________________



For transition period from             to



Commission File No.: 1-14130

__________________________________________

MSC INDUSTRIAL DIRECT CO., INC.

(Exact name of registrant as specified in its charter)

__________________________________________

New York (State or Other Jurisdiction of Incorporation or Organization)	11-3289165 (I.R.S. Employer Identification No.)
75 Max es s Road, Melville, New York (Address of principal executive offices)	11747 (Zip Code)



(516) 812-2000

(Registrant’s telephone number, including area code)

__________________________________________



Securities registered pursuant to Section 12(b) of the Act:




Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, par value $.001	MSM	The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒  No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ☒  No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a   small er reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



If an emerging growth company , indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐  No  ☒

As of June 1 9 , 2019, 45,008,191 shares of Class A common stock and 10,193,348 shares of Class B common stock of the registrant were outstanding.





---

 

SAFE HARBOR STATEMENT

This Quarterly Report on Form 10-Q (the “Report”) contains forward ‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing such forward ‑looking statements may be found in Items 2 and 3 of Part I and Item 1 of Part II of this Report, as well as within this Report generally. The words “believes,” “anticipates,” “thinks,” “ expects,” “estimates,” “plans,” “intends,” and similar expressions are intended to identify forward ‑looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward ‑looking statements. We undertake no obligation to publicly disclose any revisions to these forward ‑looking statements to reflect events or circumstances occurring subsequent to filing this Report with the Securities and Exchange Commission (the “SEC”). These forward ‑looking statements are subject to risks and uncertainties, including, without limitation, those discussed in this section and Items 2 and 3 of Part I, as well as in Part II, Item 1A, “Risk Factors” of this Report, and in Part I, Item 1A, “Risk Factors” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended September  1 , 201 8 . In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, future results may differ materially from historical results or from those discussed or implied by these forward ‑looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward ‑looking statements. These risks and uncertainties include, but are not limited to:

 

---

 

MSC INDUSTRIAL DIRECT CO., INC.

INDEX





 

---

 

PART I. FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

MSC INDUSTRIAL DIRECT CO., INC.

Condensed Consolidated Balance Sheets

(In thousands , except share data)







	June 1,			September 1,
	2019			2018
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	38,771		$	46,217
Accounts receivable, net of allowance for doubtful accounts of $17,945 and $12,992 , respectively		546,486			523,892
Inventories		560,800			518,496
Prepaid expenses and other current assets		69,715			58,902
Total current assets		1,215,772			1,147,507
Property, plant and equipment, net		306,564			311,685
Goodwill		676,845			674,998
Identifiable intangibles, net		119,778			122,724
Other assets		5,389			31,813
Total assets	$	2,324,348		$	2,288,727
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Short-term debt	$	246,298		$	224,097
Accounts payable		146,815			145,133
Accrued liabilities		92,955			121,293
Total current liabilities		486,068			490,523
Long-term debt		284,691			311,236
Deferred income taxes and tax uncertainties		99,714			99,714
Total liabilities		870,473			901,473
Commitments and Contingencies
Shareholders’ Equity:
MSC Industrial Shareholders’ Equity:
Preferred stock; $0.001 par value; 5,000,000 shares authorized; none issued and outstanding		—			—
Class A common stock ( one vote per share); $0.001 par value; 100,000,000 shares authorized; 54,484,700 and 54,649,158 shares issued, respectively		54			55
Class B common stock ( ten votes per share); $0.001 par value; 50,000,000 shares authorized; 10,193,348 and 10,454,765 shares issued and outstanding , respectively		10			10
Additional paid-in capital		675,674			657,749
Retained earnings		1,394,551			1,325,822
Accumulated other comprehensive loss		(22,730)			(19,634)
Class A treasury stock, at cost, 9,476,509 and 9,207,635 shares, respectively		(599,116)			(576,748)
Total MSC Industrial shareholders’ equity		1,448,443			1,387,254
Noncontrolling interest		5,432			—
Total Equity		1,453,875			1,387,254
Total liabilities and shareholders’ equity	$	2,324,348		$	2,288,727

See accompanying notes to condensed consolidated financial statements.


 

4

 

---

 

MSC INDUSTRIAL DIRECT CO., INC.

Condensed Consolidated Statements of Income

(In thousands, except per share data)

( Unaudited)








		Thirteen Weeks Ended						Thirty-Nine Weeks Ended
		June 1,			June 2,			June 1,			June 2,
		2019			2018			2019			2018
Net sales		$	866,546		$	828,345		$	2,521,147		$	2,365,893
Cost of goods sold			497,891			467,344			1,442,693			1,332,600
Gross profit			368,655			361,001			1,078,454			1,033,293
Operating expenses			258,154			245,619			768,972			720,530
Income from operations			110,501			115,382			309,482			312,763
Other (expense) income:
Interest expense			(4,565)			(3,532)			(13,160)			(10,319)
Interest income			178			108			504			484
Other (expense) income, net			(95)			(141)			(330)			(472)
Total other expense			(4,482)			(3,565)			(12,986)			(10,307)
Income before provision for income taxes			106,019			111,817			296,496			302,456
Provision for income taxes			26,505			32,748			74,320			46,250
Net income			79,514			79,069			222,176			256,206
Less: Net income (loss) attributable to noncontrolling interest			(87)			—			(81)			—
Net income attributable to MSC Industrial		$	79,601		$	79,069		$	222,257		$	256,206
Per share data attributable to MSC Industrial:
Net income per common share:
Basic		$	1.44		$	1.40		$	4.02		$	4.54
Diluted		$	1.44		$	1.39		$	4.00		$	4.51
Weighted average shares used in computing net income per common share:
Basic			55,158			56,420			55,266			56,382
Diluted			55,387			56,804			55,556			56,733

See accompanying notes to condensed consolidated financial statements.

 



5

 

---

 

MSC INDUSTRIAL DIRECT CO., INC.

Condensed Consolidated Statement s of Comprehensive Income

  (In thousands )

( Unaudited)






		Thirteen Weeks Ended						Thirty-Nine Weeks Ended
		June 1,			June 2,			June 1,			June 2,
		2019			2018			2019			2018
Net income, as reported		$	79,514		$	79,069		$	222,176		$	256,206
Other comprehensive income, net of tax:
Foreign currency translation adjustments			(2,576)			(889)			(3,242)			(1,705)
Comprehensive income			76,938			78,180			218,934			254,501
Comprehensive loss attributable to noncontrolling interest			170			—			227			—
Comprehensive income attributable to MSC Industrial (1)		$	77,108		$	78,180		$	219,161		$	254,501

(1) There were no material taxes associated with other comprehensive income duri ng the thirteen and thirty-nine - week periods ending June 1, 2019 and June 2, 2018, respectively.


See accompanying notes to condensed consolidated financial statements.









 

---

 

MSC INDUSTRIAL DIRECT CO., INC.

Condensed Consolidated Statement s of Shareholders’ Equity

(In thousands )

(Unaudited)




		Thirteen Weeks Ended						Thirty-Nine Weeks Ended
		June 1,			June 2,			June 1,			June 2,
		2019			2018			2019			2018
Class A Common Stock
Beginning Balance		$	54		$	55		$	55		$	54
Repurchase and retirement of Class A common stock			—			—			(1)			—
Exchange of Class B common stock for Class A common stock			—			—			—			1
Ending Balance			54			55			54			55
Class B Common Stock
Beginning Balance			10			11			10			12
Exchange of Class B common stock for Class A common stock			—			(1)			—			(2)
Ending Balance			10			10			10			10
Additional Paid-in-Capital
Beginning Balance			670,047			652,440			657,749			626,995
Associate Incentive Plans			5,627			10,959			29,812			36,404
Repurchase and retirement of Class A common stock			—			—			(11,887)			—
Ending Balance			675,674			663,399			675,674			663,399
Retained Earnings
Beginning Balance			1,349,972			1,285,681			1,325,822			1,168,812
Net Income			79,601			79,069			222,257			256,206
Repurchase and retirement of Class A common stock			—			—			(48,439)			—
Cash dividends declared on Class A common stock			(28,335)			(26,598)			(85,042)			(74,285)
Cash dividends declared on Class B common stock			(6,422)			(6,162)			(19,266)			(18,348)
Dividend equivalents declared, net of cancellations			(265)			(202)			(781)			(597)
Ending Balance			1,394,551			1,331,788			1,394,551			1,331,788
Accumulated Other Comprehensive Loss
Beginning Balance			(20,237)			(18,079)			(19,634)			(17,263)
Foreign Currency Translation Adjustment			(2,493)			(889)			(3,096)			(1,705)
Ending Balance			(22,730)			(18,968)			(22,730)			(18,968)
Treasury Stock
Beginning Balance			(599,603)			(574,073)			(576,748)			(553,470)
Associate Incentive Plans			526			499			1,769			1,624
Repurchases of Class A common stock			(39)			(3,656)			(24,137)			(25,384)
Ending Balance			(599,116)			(577,230)			(599,116)			(577,230)
Total Shareholders’ Equity Attributable to MSC Industrial			1,448,443			1,399,054			1,448,443			1,399,054
Noncontrolling Interest
Beginning Balance			5,602			—			—			—
Issuance of Noncontrolling Interest in MSC Mexico			—			—			4,637			—
Capital Contributions			—			—			1,022			—
Foreign Currency Translation Adjustment			(83)			—			(146)			—
Net Income (loss)			(87)			—			(81)			—
Ending Balance			5,432			—			5,432			—
Total Shareholders’ Equity		$	1,453,875		$	1,399,054		$	1,453,875		$	1,399,054
Dividends declared per Class A Common share		$	0.63		$	0.58		$	1.89		$	1.64
Dividends declared per Class B Common share		$	0.63		$	0.58		$	1.89		$	1.64

See accompanying notes to condensed consolidated financial statements.

7

 

---

 

 

MSC INDUSTRIAL DIRECT CO., INC.

Condensed Consolidated Statement s of Cash Flows

(In thousands)

(Unaudited)











		Thirty-Nine Weeks Ended
		June 1,			June 2,
		2019			2018
Cash Flows from Operating Activities:
Net income		$	222,176		$	256,206
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			48,539			47,133
Stock-based compensation			12,167			11,275
Loss on disposal of property, plant, and equipment			325			280
Provision for doubtful accounts			9,013			4,956
Deferred income taxes and tax uncertainties			—			(41,199)
Changes in operating assets and liabilities:
Accounts receivable			(30,180)			(34,434)
Inventories			(33,672)			(26,740)
Prepaid expenses and other current assets			(10,841)			1,005
Other assets			(609)			3,191
Accounts payable and accrued liabilities			(29,718)			8,564
Total adjustments			(34,976)			(25,969)
Net cash provided by operating activities			187,200			230,237
Cash Flows from Investing Activities:
Expenditures for property, plant and equipment			(35,956)			(30,794)
Proceeds from sale of available for sale securities			27,025			—
Cash used in business acquisitions, net of cash received			(11,625)			(85,845)
Net cash used in investing activities			(20,556)			(116,639)
Cash Flows from Financing Activities:
Repurchases of common stock			(84,464)			(25,384)
Payments of cash dividends			(104,308)			(92,633)
Proceeds from sale of Class A common stock in connection with associate stock purchase plan			3,472			3,398
Proceeds from exercise of Class A common stock options			15,527			23,135
Borrowings under Shelf Facility Agreement			—			50,000
Borrowings under the revolving credit facilities			358,000			172,000
Payments under the revolving credit facilities			(336,000)			(220,000)
Contributions from non controlling interest			918			—
Payments on capital lease and financing obligations			(28,007)			(829)
Other, net			903			604
Net cash used in financing activities			(173,959)			(89,709)
Effect of foreign exchange rate changes on cash and cash equivalents			(131)			21
Net increase (decrease) in cash and cash equivalents			(7,446)			23,910
Cash and cash equivalents—beginning of period			46,217			16,083
Cash and cash equivalents—end of period		$	38,771		$	39,993
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes		$	69,413		$	76,753
Cash paid for interest		$	10,791		$	8,231

See accompanying notes to condensed consolidated financial statements.


 



 

---

 

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 June 1, 2019 and June 2, 2018, the results of operations for the thirteen and thirty-nine weeks ended June 1, 2019 and June 2, 2018, and cash flows for the thirty-nine weeks ended June 1, 2019 and June 2, 2018. The September 1, 2018 financial information was derived from the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 1, 2018.



Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the SEC. The Company, however, believes that the disclosures contained in this report comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934 for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 1, 2018.



The Company’s fiscal year ends on the Saturday closest to August 31 of each year. Unless the context requires otherwise, references to years contained herein pertain to the Company’s fiscal year. The Company’s 2019 fiscal year will be a 52-week accounting period that will end on August 31, 2019 and its 2018 fiscal year was a 52-week accounting period that ended on September 1, 2018.



Principles of Consolidation



The condensed consolidated financial statements include the accounts of MSC Industrial Direct Co., Inc., its wholly owned subsidiaries and entities in which it maintains a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.





Recently Adopted Accounting Pronouncements



Effective September 2, 2018, the Company adopted the 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   prior revenue recognition guidance, including industry-specific guidance. Revenue continues to be recognized when products are shipped to the customer   and the customer obtains control of the products , and 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, Business Combinations (Topic 805), which clarifies the definition of a business to assist entities with evaluating when a set of transferred assets and activities is considered a business.



Accounting Pronouncements Not Yet Adopted



In February 2016, the FASB issued ASU 2016-02,  Leases (Topic 842) , a comprehensive new standard that amends various aspects of existing accounting guidance for leases, including the recognition of a right-of-use asset and a lease liability in the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. During 2018, the FASB issued additional ASUs that address implementation issues and correct or improve certain aspects of the new accounting guidance for leases, including ASU 2018-10,  Codification Improvements to Topic 842, Leases  and ASU 2018-11,  Leases (Topic 842): Targeted Improvements . These ASUs do not change the core principles in the leas e accounting standard outlined above. The amendments in ASU 2018-11 provide an optional transition method that allows entities to

---

 

initially apply the new lease accounting standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods will continue to be in accordance with current lease accounting guidance. Management established a cross-functional team to evaluate and implement the new standard. The team selected a third-party software solution to facilitate the accounting and financial reporting requirements of the new lease accounting standard. Lease data elements have been gathered and are currently being migrated to the software solution. The new standard will be adopted in the first quarter of fiscal 2020 and the Company expects to use the optional transition method. While the Company has not yet completed its evaluation of the effects of adopting this ASU, right-of-use assets and lease liabilities will be recorded in the Consolidated Balance Sheets as of the effective date and thereafter.



In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for financial statement periods b eginning after December 15, 2019 . The new standard is effective for the Company for its fiscal year 202 1 .   T he Co mpany is currently evaluating the standard and does not expect a significant impact to its co nsolidated financial statements.



In January 2017, the FASB issued its final standard on simplifying the test for goodwill impairment , ASU 2017-04, Intangibles – Goodwill and Other (Topic 350). This standard requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This update is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The new standard is effective for the Company for its fiscal year 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 Statements of Shareholders’ Equity were condensed to conform to our current period presentation. The Company combined the “Exercise of common stock options”, the “ Common stock issued under associate stock purchase plan”, the “Shares issued upon vesting of restricted stock units, including dividend equivalent units”, the “Stock-based compensation”, and the “Issuance of restricted common stock, net of cancellations” line items into a single line titled “Associate Incentive Plans”. These reclassifications did not affect the total amount of Shareholders’ Equity.



Note 2. Revenue



Revenue Recognition



Net sales include product revenue and shipping and handling charges, net of estimated sales returns and any related sales incentives. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. All revenue is recognized when the Company satisfies its performance obligations under the contract, and invoicing occurs at approximately the same point in time. The Company recognizes revenue once the customer obtains control of the products. The Company’s product sales have standard payment terms that do not exceed one year. The Company considers shipping and handling as activities to fulfill its performance obligation. The Company’s contracts have a single performance obligation, to deliver products, and are short-term in nature. The Company estimates product returns based on historical return rates. Total accrued sales returns were $4,897 and $ 4,832 as of June 1, 2019 and September 1, 2018 , respectively, and are reported as Accrued liabilities in the Condensed Consolidated 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.



---

 

Consideration Payable to a Customer



The Company offers customers sales incentives, which primarily consist of volume rebates, and upfront sign-on payments. These volume rebates and payments are not in exchange for a distinct good or service and result in a reduction of net sales from the goods transferred to the customer at the later of when the related revenue is recognized or when the Company promises to pay the consideration. The Company estimates its volume rebate accruals and records its sign-on payments based on various factors, including contract terms, historical experience, and performance levels. Total accrued sales incentives, primarily related to volume rebates, were $13,840 and   $14,000 as of June 1, 2019 and September 1, 2018 , respectively, and are included in Accrued liabilities in the Condensed Consolidated Balance Sheets. Sign-on payments, not yet recognized as a reduction of revenue, are recorded in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets and were $2,698 and $2,457 as of June 1, 2019 and September 1, 2018 , respectively.



Contract Assets and Liabilities



The Company records a contract asset when it has a right to payment from a customer that is conditioned on events other than the passage of time. The Company records a contract liability when customers prepay but the Company has not yet satisfied its performance obligation. The Company did no t have material unsatisfied performance obligations, contract assets or liabilities as of June 1, 2019 and September 1, 2018 .  



Disaggregation of Revenue



The Company operates in one operating and reportable segment as a distributor of metalworking and maintenance, repair, and operations (“MRO”) products and services. The Company serves a large number of customers in diverse industries, which are subject to different economic and industry factors. The Company's presentation of net sales by customer end-market most reasonably depicts how the nature, amount, timing, and uncertainty of Company revenue and cash flows are affected by economic and industry factors. The Company does not disclose net sales information by product category as it is impracticable to do so as a result of its numerous product offerings and the way its business is managed. The following table presents the Company's percentage of net sales by customer end-market for the thirteen and thirty-nine -week periods ended June 1, 2019 :



__________________________



The Company’s net sales originating from the following geographic areas were as follows for the thirteen and thirty-nine-week periods ended June 1, 2019:









---

 

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 thirty-nine weeks ended June 1, 2019 and June 2, 2018 , respectively:







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 thirty-nine -week periods ended June 1, 2019 and June 2, 2018 was as follows:





---

 

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:





A summary of the Company’s stock option activity for the thirty-nine -week period ended June 1, 2019 is as follows:





The unrecognized share ‑based compensation cost related to stock option expense at June 1, 2019   was $9,190 and will be recognized over a weighted average period of 2.3 years. The total intrinsic 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 thirty-nine -week periods ended June 1, 2019 and June 2, 2018   was $1,882 and   $7,234 , respectively.



Restricted share awards



A summary of the non ‑vested restricted share award (“RSA”) activity under the Company’s 2005 Omnibus Incentive Plan and 2015 Omnibus Incentive Plan for the thirty-nine -week period ended June 1, 2019 is as follows:



The fair value of each RSA is the closing stock price on the NYSE of the Company’s Class A common stock on the date of grant. Upon vesting, a portion of the RSA award may be withheld to satisfy the statutory income tax withholding obligation. The remaining RSAs will be settled in shares of the Company’s Class A common stock when vested. The unrecognized share-based compensation cost related to RSAs at June 1, 2019   was $620 and will be recognized over a weighted average period of 0.5 years.  



---

 

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 1, 2019 is as follows:





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 June 1, 2019   was $26,641 and is expected to be recognized over a weighted average period of 3.2   years.





Note  5 . Fair Value



Fair value accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value into three levels, with Level 1 being of the highest priority. The three levels of inputs used to measure fair value are as follows:





In connection with the construction of the Company’s customer fulfillment center (“CFC”) in Columbus, Ohio, the Company entered into an arrangement during fiscal 2013 with the Columbus-Franklin County Finance Authority (“Finance Authority”) which provides savings on state and local sales taxes imposed on construction materials purchased by entities that finance the transactions through them. Under this arrangement, the Finance Authority issued taxable bonds in the amount of $27,025 to finance the structure and site improvements of the Company’s CFC. The Company purchased these bonds at issuance. The bonds were redeemed on May 29, 2019 and all funds have been settled as of June 1, 2019. The bonds had an outstanding balance of $27,025 at September 1, 2018 and were classified as available for sale securities in accordance with ASC Topic 320. The fair values of these securities were based on observable inputs in non-active markets, which are therefore classified as Level 2 in the hierarchy. The Company did not record any gains or losses on these securities during the thirty-nine-week period ended June 1, 2019 .



The Company’s financial instruments, other than those presented in t he disclosure above, include cash and cash equivalents, accounts receivable, accounts payable, and outstanding indebtedness. The Company uses a market approach to determine the fair value of its debt instruments, utilizing quoted prices in active markets, interest rates and other relevant information generated by market transactions involving similar instruments. Therefore, the inputs used to measure the fair value of the Company's debt instruments are classified as Level 2 within the fair value hierarchy. The reported carrying amounts of the Company’s financial instruments approximated their fair values as of June 1, 2019 and September 1, 2018.



During the thirty-nine weeks ended June 1, 2019 and June 2, 2018, the Company had no remeasurements of non-financial assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition . 





---

 

Note 6 . Debt and Capital Lease Obligations



Debt at June 1, 2019 and September 1, 2018 consisted of the following:




		June 1,			September 1,
		2019			2018
		(Dollars in thousands)
Revolving Credit Facilities
Committed bank facility		$	-		$	224,000
Uncommitted bank facilities			246,000			-
Private Placement Debt:
Senior notes, series A			75,000			75,000
Senior notes, series B			100,000			100,000
Senior Notes			20,000			20,000
Shelf Facility Agreements:			90,000			90,000
Capital lease and financing obligations			1,264			27,926
Less: unamortized debt issuance costs			(1,275)			(1,593)
Total debt		$	530,989		$	535,333
Less: short-term debt (1)			(246,298)			(224,097)
Long-term debt		$	284,691		$	311,236

__________________________



Revolving Credit Facilities



In April 2017, the Company entered into a $600,000 committed credit facility (the “Committed Facility”). The Committed Facility, which matures on April 14, 2022 , provides for a five -year unsecured revolving loan facility.



The Committed Facility permits up to $50,000 to be used to fund letters of credit. The Committed Facility also permits the Company to request one or more incremental term loan facilities and/or increase the revolving loan commitments in an aggregate amount not to exceed $300,000 . Subject to certain limitations, each such incremental term loan facility or revolving commitment increase will be on terms as agreed to by the Company, the Administrative Agent and the lenders providing such financing.



The interest rate is based on either LIBOR or a base rate, plus in either case a spread based on the Company’s leverage ratio at the end of each fiscal reporting quarter. Based on the interest period the Company selects, interest may be payable every one, two, or three months. Interest is reset at the end of each interest period. The Company currently elects to have loans under the Committed Facility bear interest based on LIBOR with one-month interest periods.



During the first quarter of fiscal 2019, the Company entered into   six unsecured credit facilities that are uncommitted (the “Uncommitted Facilities”), totaling $440,000 of maximum uncommitted availability. Borrowings under the Uncommitted Facilities are generally due at the end of the applicable agreed interest period, but, in any event, no 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 $ 246,000 outstanding at the end of the fiscal third quarter of 2019 under the Uncommitted Facilities is classified as short-term in the Company’s   Condensed Consolidated Balance Sheet .  



Durin g the thirty-nine -week period ended June 1, 2019, the Company borrowed $358,000 and repaid $336,000 under its revolving credit facilities .   As of June 1, 2019 and September 1, 2018 , the weighted average interest rate s on borrowings under all its revolving credit facilities were   3.26% 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 June 1, 2019 , the uncommitted availability under the Met Life Note Purchase Agreement is $210,000 .



The Prudential Note Purchase Agreement provides for an uncommitted facility for the issuance and sale of up to an aggregate total of $250,000 of senior notes, at a fixed rate. In January 2018, the Company completed the issuance and sale of $50,000 aggregate principal amount of 3.04% Senior Notes due January 12, 2023 . Interest is payable semiannually. As of June 1, 2019 , the uncommitted availability under the Prudential Note Purchase Agreement is $200,000 .



Each of the credit facilities , Private Placement Debt, and Shelf Facility Agreements imposes several restrictive covenants including the requirement that the Company maintain a maximum consolidated leverage ratio of total indebtedness to EBITDA (earnings before interest expense, taxes, depreciation, amortization and stock-based compensation) of no more than 3.00 to 1.00 (or, at the election of the Company after it consummates a material acquisition, a four-quarter temporary increase to 3.50 to 1.00), and a minimum consolidated interest coverage ratio of EBITDA to total interest expense of at least 3.00 to 1.00, during the terms of the credit facilities , Private Placement Debt , and Shelf Facility Agreements. At June 1, 2019 , the Company was in compliance with the operating and financial covenants of the credit facilities , Private Placement Debt, and Shelf Facility Agreements.



Capital Lease and Financing Obligations



In connection with the construction of the Company’s CFC in Columbus, Ohio in fiscal 2013, the Finance Authority holds the title to the building and entered into a long-term lease with the Company. The lease was classified as a capital lease in accordance with ASC Topic 840 and was terminated and paid in full on May 29, 2019.



From time to time, the Company enters into capital leases and financing arrangements with vendors to purchase certain information technology equipment or software. The equipment or software acquired from these vendors is paid for o ver a specified period of time based on the terms agreed upon. During the thirty-nine -week period ended June 1, 2019 , the Company entered into capital lease and financing obligations related to certain IT equipment and software totaling $1,345 .  T he gross amount of property and equipment acquired under the capital lease obligation   and its accumulated amortization at June 1, 2019 was $442   and $ 46 , respectively.



Note 7 . Shareholders’ Equity



C ommon Stock Repurchases and Treasury Stock



During th e thirteen and   thirty-nine -week period s ended June 1, 2019 , the Company repurchased 0.5 and 1,054 shares of its Class A common stock for $39 and   $84,464 , respectively.   From these totals, 0.5 and 316 shares have not been retired and the amounts of $39 and   $24,137 are reflected at cost as treasury stock in the accompanying condensed consolidated financial statements for the thirteen and thirty -nine weeks ended June 1, 2019, respectively.

---

 



During the thirteen and thirty -nine-week periods ended June 2, 2018, the Company repurchased 42 and 291 shares of its Class A common stock for $3,656 and $25,384 , respectively. These shares were not retired , and the values are reflected at cost as treasury stock in the accompanying condensed consolidated financial statements  f or the thirteen and thirty-nine weeks ended June 2, 2018 , respectively .   The total number of shares of Class A common stock authorized for future repurchase was 1,157 shares at June 1, 2019 .  



The Company reissued   14   and 47 shares of treasury stock during the thirteen and   thirty-nine -week period s ended June 1, 2019 and reissued   13 and 43 shares of treasury stock during the thirteen and thirty-nine -week period s ended June 2, 2018, respectively, to fund the Associate Stock Purchase Plan.  



Dividends on Common Stock



On July 9 , 2019 , the Board of Directors declared a quarterly cash dividend of $0. 75 per share payable on August 6 , 2019 to shareholders of record at the close of business on July 23 , 2019 . The dividend will result in a payout of $ 41,401 , based on the number of shares outstanding at June 19 , 2019.



Note  8. Product Warranties



The Company generally offers a maximum one -year warranty, including parts and labor, for some of its machinery products. The specific terms and conditions of those warranties vary depending upon the product sold. The Company may be able to recoup some of these costs through product warranties it holds with its original equipment manufacturers, which typically range from thirty to ninety days. In general, many of the Company’s general merchandise products are covered by third-party original equipment manufacturers’ warranties. The Company’s wa rranty expense for the thirteen and thirty-nine -week p eriods ended June 1, 2019 and June 2, 2018 was minimal.

 

Note  9 . Income Taxes



On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted. The TCJA made significant changes to U.S. federal income tax laws including permanently lowering the U.S. corporate income tax rate from  35%  to  21%  effective January 1, 2018. As the Company has a fiscal August year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory rate of  25.6%  for the fiscal year ending September 1, 2018. The Company’s statutory federal tax rate will be 21.0% for fiscal years 2019 and beyond. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.



In December 2017, the SEC issued Staff Accounting Bulletin No. 118, which allows a company to report provisional numbers related to the TCJA and adjust those amounts during a measurement period not to extend beyond one year. The Company recorded a net tax benefit of  $40,464 on a provisional basis in fiscal 2018   from the revaluation of its net deferred tax liabilities primarily related to the lower federal corporate tax rate, partially offset by the lower federal benefit for state taxes and the change from a worldwide tax system to a territorial tax system .   The measurement period ended during our fiscal quarter ended  March 2 , 2019, and no adjustments were recorded during this period. As a result, we consider our accounting for the tax effects of the TCJA to be complete based on our interpretation of the law and subsequently 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 thirty-nine -week period ended   June 1, 2019 , there were no material changes in unrecognized tax benefits. 

 

Note  1 0 . 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.