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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 1, 2002
Commission File No.: 1-14130
MSC INDUSTRIAL DIRECT CO., INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-3289165
(State of incorporation) (I.R.S. Employer
Identification No.)
75 MAXESS ROAD
MELVILLE, NY 11747
(Address of principal executive offices, including zip code)
(516) 812-2000
(Registrant's telephone number, including area code)
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 X No
----- -----
As of July 9, 2002 36,637,535 shares of Class A Common Stock and 32,137,294
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 hereof, as well as within this Report generally. In addition, when
used in this Report, the words "believes," "anticipates," "expects,"
"estimates," "plans," "intends," and similar expressions are intended to
identify forward-looking statements. All forward-looking statements are subject
to a number of risks and uncertainties that could cause actual results to differ
materially from projected results. Factors that may cause these differences
include, but are not limited to:
o changing market conditions,
o competitive and regulatory matters,
o general economic conditions in the markets in which the Company operates,
o risk of cancellation or rescheduling of orders,
o the risk of war, terrorism and similar hostilities,
o availability of suitable acquisition opportunities, and
o the other matters discussed in the Business Description contained in the
Company's Annual Report on Form 10-K for the fiscal year ended September 1,
2001.
Consequently, such forward-looking statements should be regarded solely as the
Company's current plans, estimates and beliefs. The Company does not undertake
any obligation to update any forward-looking statements to reflect future events
or circumstances after the date of such statements.
MSC INDUSTRIAL DIRECT CO., INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets
June 1, 2002 and September 1, 2001 3
Consolidated Statements of Income
Thirteen and thirty-nine weeks ended June 1, 2002 and May 26, 2001 4
Consolidated Statement of Shareholders' Equity
Thirty-nine weeks ended June 1, 2002 5
Consolidated Statements of Cash Flows
Thirty-nine weeks ended June 1, 2002 and May 26, 2001 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
PART II. OTHER INFORMATION
ITEM 5. OTHER EVENTS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Balance Sheets
(In thousands, except share data)
June 1, September 1,
2002 2001
---- ----
(Unaudited) (Audited)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 85,844 $ 12,466
Accounts receivable, net of allowance for doubtful
accounts of $4,120 and $4,927, respectively 95,221 95,263
Inventories 211,576 233,131
Prepaid expenses and other current assets 7,848 5,728
Deferred income taxes 4,805 5,264
--------------- -------------
Total current assets 405,294 351,852
--------------- -------------
Property, Plant and Equipment, net 114,825 121,149
--------------- -------------
Other Assets:
Goodwill 63,354 63,354
Other 9,395 17,553
--------------- -------------
72,749 80,907
--------------- -------------
Total Assets $ 592,868 $ 553,908
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 20,703 $ 25,776
Accrued liabilities 38,456 37,755
Current portion of long-term notes payable 217 214
--------------- -------------
Total current liabilities 59,376 63,745
Long-term notes payable 1,361 1,517
Deferred income tax liability 16,157 16,069
--------------- -------------
Total liabilities 76,894 81,331
--------------- -------------
Shareholders' Equity:
Preferred stock; $0.001 par value; 5,000,000 shares authorized; none outstanding - -
Class A common stock (one vote per share); $0.001 par value; 100,000,000 shares
authorized; 38,546,467 and 36,133,385 shares issued, and 37,607,467 and
35,139,385 shares outstanding, respectively 38 36
Class B common stock (ten votes per share); $0.001 par value; 50,000,000
shares authorized; 32,137,294 and 33,478,778 shares issued and
outstanding, respectively 32 34
Additional paid-in capital 252,833 238,314
Retained earnings 281,501 253,704
Class A treasury stock, at cost, 939,000 and 994,000 shares, respectively (18,430) (19,511)
--------------- -------------
Total shareholders' equity 515,974 472,577
--------------- -------------
Total Liabilities and Shareholders' Equity $ 592,868 $ 553,908
=============== =============
The accompanying notes are an integral part of these consolidated balance
sheets.
Page 3
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------------- ------------------------------
June 1, May 26, June 1, May 26,
2002 2001 2002 2001
Net sales $ 208,592 $ 216,335 $ 592,235 $ 661,308
Cost of goods sold 117,731 122,786 333,565 378,699
------------- ------------- ------------- --------------
Gross profit 90,861 93,549 258,670 282,609
Operating expenses 72,589 72,158 213,070 212,508
------------- ------------- ------------- --------------
Income from operations 18,272 21,391 45,600 70,101
------------- ------------- ------------- --------------
Other income (expense):
Interest income (expense), net 320 (778) 686 (3,127)
Provision for impairment in carrying
value of investments (Note 4) - (10,284) - (10,284)
Other income (expense), net (43) 36 54 99
------------- ------------- ------------- --------------
Total other income (expense) 277 (11,026) 740 (13,312)
------------- ------------- ------------- --------------
Income before provision
for income taxes 18,549 10,365 46,340 56,789
Provision for income taxes 7,326 7,883 18,303 26,453
------------- ------------- ------------- --------------
Net income $ 11,223 $ 2,482 $ 28,037 $ 30,336
============= ============= ============== ==============
Per share information (Note 1):
Net income per common share:
Basic $ 0.16 $ 0.04 $ 0.41 $ 0.45
============= ============= ============== ==============
Diluted $ 0.16 $ 0.04 $ 0.39 $ 0.44
============= ============= ============== ==============
Weighted average common shares
outstanding used in computing per share
amounts (Note 1):
Basic 69,476 68,264 69,037 68,099
============= ============= ============== ==============
Diluted 72,006 69,615 71,125 69,288
============= ============= ============== ==============
The accompanying notes are an integral part of these consolidated statements.
Page 4
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statement of Shareholders' Equity
Thirty-nine weeks ended June 1, 2002
(In thousands)
(Unaudited)
Class A Class B Additional
Common Stock Common Stock Paid-In
------------------ -----------------
Shares Amount Shares Amount Capital
------ ------ ------- ------ ----------
Balance at September 1, 2001 36,133 $ 36 33,479 $ 34 $ 238,314
Exchange of Class B common stock for Class 1,342 2 (1,342) (2) -
A common stock
Common stock issued under associate stock - - - - -
purchase plan
Exercise of common stock options 1,071 - - - 13,453
Stock option income tax benefit - - - - 1,066
Net income - - - - -
------ ------ ------- ------ ----------
Balance at June 1, 2002 38,546 $ 38 32,137 $ 32 $ 252,833
====== ====== ======= ====== ==========
Class A
Retained Treasury Stock
----------------------
Amount at
Earnings Shares Cost Total
--------- ------ ---------- ---------
Balance at September 1, 2001 $ 253,704 994 $ (19,511) $ 472,577
Exchange of Class B common stock for Class - - - -
A common stock
Common stock issued under associate stock (240) (55) 1,081 841
purchase plan
Exercise of common stock options - - - 13,453
Stock option income tax benefit - - - 1,066
Net income 28,037 - - 28,037
--------- ------ ---------- ---------
Balance at June 1, 2002 $ 281,501 939 $ (18,430) $ 515,974
========= ====== ========== =========
The accompanying notes are an integral part of these consolidated statements.
Page 5
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Thirty-Nine Weeks Ended
---------------------------------------
June 1, May 26,
2002 2001
-------------- --------------
Cash Flows from Operating Activities:
Net income $ 28,037 $ 30,336
-------------- --------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for impairment in carrying value of investments - 10,284
Depreciation and amortization 11,505 12,626
Amortization of deferred stock compensation - 209
Provision for doubtful accounts 1,980 1,526
Deferred income taxes 547 1,723
Stock option income tax benefit 1,066 597
Changes in operating assets and liabilities:
Accounts receivable (1,938) 1,856
Inventories 21,555 16,668
Prepaid expenses and other current assets (2,120) 438
Other assets 8,158 5,460
Accounts payable and accrued liabilities (4,372) (18,203)
-------------- --------------
Total adjustments 36,381 33,184
-------------- --------------
Net cash provided by operating activities 64,418 63,520
-------------- --------------
Cash Flows from Investing Activities:
Expenditures for property, plant and equipment (5,181) (16,267)
Cash paid for investment in affiliates - (1,852)
-------------- --------------
Net cash used in investing activities (5,181) (18,119)
-------------- --------------
Cash Flows from Financing Activities:
Proceeds from sale of common stock in connection with associate
stock purchase plan 841 827
Proceeds from exercise of common stock options 13,453 3,506
Net repayments of notes payable (153) (23,139)
-------------- --------------
Net cash provided by (used in) financing activities 14,141 (18,806)
-------------- --------------
Net increase in cash and cash equivalents 73,378 26,595
Cash and cash equivalents - beginning of period 12,466 3,209
-------------- --------------
Cash and cash equivalents - end of period $ 85,844 $ 29,804
============== ==============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest 34 2,564
Cash paid for income taxes 11,329 19,727
The accompanying notes are an integral part of these consolidated statements.
Page 6
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
June 1, 2002
NOTE 1. BASIS OF PRESENTATION
MSC Industrial Direct Co., Inc. ("MSC") was incorporated in the State of New
York on October 24, 1995. The accompanying consolidated financial statements
include MSC and all of its subsidiaries, including its principal operating
subsidiary, Sid Tool Co., Inc. and is hereinafter referred to collectively as
the "Company." All intercompany balances and transactions have been eliminated
in consolidation.
The unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation (consisting of normal
recurring adjustments) have been included. Operating results for the thirty-nine
weeks ended June 1, 2002 are not necessarily indicative of the results that may
be expected for the fiscal year ending August 31, 2002. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 1,
2001.
The Company's fiscal year ends on a Saturday close to August 31 of each year.
Certain prior period balances have been reclassified to conform with current
period's presentation.
The Company follows the provisions of the Financial Accounting Standards Board's
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share". SFAS No. 128 requires the Company to present basic and diluted
earnings per share ("EPS") on the face of the income statement. Basic earnings
per common share were computed based on the weighted average number of common
shares issued and outstanding during the relevant periods. Diluted earnings per
common share were computed based on the weighted average number of common shares
issued and outstanding plus additional shares assumed to be outstanding to
reflect the diluted effect of common stock equivalents using the treasury stock
method.
A reconciliation between the numerator and denominator of the basic and diluted
EPS calculation is as follows:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------- ------------------------
June 1, May 26, June 1, May 26,
2002 2001 2002 2001
---- ---- ---- ----
Net income for EPS
Computation $11,223 $2,482 $28,037 $30,336
======= ======= ======= =======
Basic EPS:
Weighted average
common shares 69,476 68,264 69,037 68,099
======= ======= ======= =======
Page 7
Basic EPS $0.16 $0.04 $0.41 $0.45
======= ======= ======= =======
Diluted EPS:
Weighted average
Common shares 69,476 68,264 69,037 68,099
Shares issuable from
assumed conversion of
common stock equivalents 2,530 1,351 2,088 1,189
------- ------- ------- -------
Weighted average common
and common equivalent shares 72,006 69,615 71,125 69,288
======= ======= ======= =======
Diluted EPS $0.16 $0.04 $0.39 $0.44
======= ======= ======= =======
NOTE 2. COMPREHENSIVE INCOME
The Company complies with the provisions of SFAS No. 130 "Reporting
Comprehensive Income," which establishes standards for the reporting of
comprehensive income and its components. For the thirteen and thirty-nine weeks
ended June 1, 2002 and May 26, 2001, the Company's operations did not give rise
to items includable in comprehensive income which were not already included in
net income. Accordingly, the Company's comprehensive income is the same as its
net income for all periods presented.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2000, the Emerging Issue Task Force ("EITF") reached a consensus with
respect to EITF issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." The purpose of this issue discussion was to clarify the classification
of shipping and handling fees and costs. The consensus reached was that all
shipping and handling billed to customers is revenue and the cost associated
with these revenues should be classified as either cost of sales or, if not cost
of sales, as selling, general, and administrative costs, with footnote
disclosure as to the classification and amount of these costs. This standard
requires a reclassification of prior periods as discussed below. Beginning in
fiscal 2001, the Company recorded the amounts billed to customers for shipping
and handling in net revenues and classified the costs associated with these
revenues in operating expenses. Prior to this standard, the Company had recorded
net freight as a component of total operating expenses. The Company has
reclassified financial information for all periods presented to give effect to
the adoption of this new standard. Shipping and handling costs included in
operating expenses were $11.0 million and $11.5 million for the 13 week period
ended June 1, 2002 and May 26, 2001, respectively, and $31.0 million and $33.9
million for the 39 week period ended June 1, 2002 and May 26, 2001,
respectively.
Page 8
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and No. 142,
"Goodwill and other Intangible Assets". SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently, if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life).
The Company has adopted this standard effective September 2, 2001 and has
evaluated its intangible asset to identify goodwill separately from other
identifiable intangibles. The intangible asset is classified as goodwill with an
indefinite life; no other separately identifiable intangibles exist. Intangible
assets that will continue to be classified as goodwill or as other intangibles
with indefinite lives will no longer be amortized. This resulted in the
exclusion of approximately $0.4 million and $1.3 million in amortization expense
for the thirteen and thirty-nine week periods ended June 1, 2002, respectively.
In accordance with the SFAS No. 142, intangible assets, including purchased
goodwill, will be evaluated periodically for impairment. Based upon the results
of our transitional impairment testing, there has been no impact on the
consolidated financial results related to our intangible assets or purchased
goodwill.
Page 9
The following table presents pro forma net income and earnings per share
data restated to include the retroactive impact of the adoption of SFAS No.
142:
Thirteen Weeks Ended Thirty - Nine Weeks Ended
------------------------------------------ -------------------------------------
June 1, May 26, June 1, May 26,
2002 2001 2002 2001
-------------- -------------- -------------- ------------
Reported net income for EPS
computation $11,223 $2,482 $28,037 $30,336
Add back:
Goodwill amortization,
net of tax - 264 - 792
------------------------------------------ -------------------------------------
Pro forma net income $11,223 $2,746 $28,037 $31,128
========================================== =====================================
Basic EPS:
Basic EPS before effect of $ 0.16 $ 0.04 $ 0.41 $ 0.45
SFAS No.142
SFAS No. 142 effect, net
of tax - - - 0.01
------------------------------------------ -------------------------------------
Basic EPS after effect of
SFAS No. 142 $ 0.16 $ 0.04 $ 0.41 $ 0.46
========================================== =====================================
Diluted EPS:
Diluted EPS before effect $ 0.16 $ 0.04 $ 0.39 $ 0.44
of SFAS No.142
SFAS No. 142 effect, net
of tax - - - 0.01
------------------------------------------ -------------------------------------
Diluted EPS after effect of
SFAS No. 142 $ 0.16 $ 0.04 $ 0.39 $ 0.45
========================================== =====================================
Weighted average common shares:
Basic 69,476 68,264 69,037 68,099
========================================== =====================================
Diluted 72,006 69,615 71,125 69,288
========================================== =====================================
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The
provisions of this statement are required to be adopted no later than fiscal
years beginning after December 15, 2001. The Company expects to adopt this
statement as of September 1, 2002 for the fiscal year ended August 30, 2003, and
it does not expect that the adoption will have a material impact on the
Company's consolidated financial position or results of operations.
NOTE 4. OTHER EVENTS
During the third quarter of fiscal 2001, the Company determined that its ability
to ultimately recover the value of its investments in four privately held
Internet startup companies was
Page 10
significantly impaired. The Company's determination was based upon certain
economic indicators and specific events and circumstances, including these
entities' difficulty in raising additional capital, and the inability of these
entities to achieve business plan objectives and planned financial results.
Pursuant to the Company's evaluation of the respective carrying amounts of each
investment, either the entire cost of the investment or a significant portion
thereof was charged against earnings during the third quarter of fiscal 2001.
The aggregate amount of the non-cash charge recorded in the statement of income
was $10.3 million ($9.9 million, net of tax benefits, or $.14 per diluted
share).
The provision for income taxes in the third quarter of fiscal year 2001 and for
the thirty-nine weeks ended May 26, 2001 was substantially affected by the
non-deductibility of a significant portion of the Company's write down of its
Internet investments. Accordingly, the Company's effective tax rate in 2001 was
significantly higher than it is in the comparable fiscal 2002 periods.
NOTE 5. SHAREHOLDERS' EQUITY
Each holder of the Company's Class A common stock is entitled to one vote for
each share held of record on the applicable record date on all matters presented
to a vote of shareholders, including the election of directors. The holders of
Class B common stock are entitled to ten votes per share on the applicable
record date and are entitled to vote, together with the holders of the Class A
common stock, on all matters which are subject to shareholder approval. Holders
of Class A common stock and Class B common stock have no cumulative voting
rights or preemptive rights to purchase or subscribe for any stock or other
securities and there are no conversion rights or redemption or sinking fund
provisions with respect to such stock.
The holders of the Company's Class B common stock have the right to convert
their shares of Class B common stock into shares of Class A common stock at
their election and on a one-to-one basis, and all shares of Class B common stock
convert into shares of Class A common stock on a one to-one basis upon the sale
or transfer of such shares of Class B common stock to any person who is not a
member of the Jacobson or Gershwind families.
NOTE 6. SUBSEQUENT EVENT
Since June 2, 2002 and through the date of this filing, the Company has
repurchased 1,000 shares of the Company's Class A common stock at a total cost
of approximately $19.0 million, pursuant to its treasury stock purchase plan, as
approved by the Company's Board of Directors.
Page 11
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, 2001 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 Form 10-K.
This Quarterly Report on Form 10-Q contains or incorporates certain forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, and the Company
intends that such forward-looking statements be subject to the safe harbors
created thereby. Such forward-looking statements involve known and unknown risks
and uncertainties and include, but are not limited to, statements regarding
future events and our plans, goals and objectives. Such statements are generally
accompanied by words such as "believe," "anticipate," "think," "intend,"
"estimate," "expect," or similar terms. Our actual results may differ materially
from such statements. Factors that could cause or contribute to such differences
include, without limitation, changing market conditions, competitive and
regulatory matters, general economic conditions in the markets in which the
Company operates, risk of cancellation or rescheduling of orders, the risk of
war, terrorism and similar hostilities, and the availability of suitable
acquisition opportunities. Although the Company believes that the assumptions
underlying its forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, the Company cannot make any assurances
that the results contemplated in such forward-looking statements will be
realized. The inclusion of such forward-looking information should not be
regarded as a representation by the Company or any other person that the future
events, plans or expectations contemplated by the Company will be achieved.
Furthermore, past performance is not necessarily an indicator of future
performance.
OVERVIEW
MSC Industrial Direct Co., Inc. ("MSC") was formed in October 1995 and has
conducted business since 1941. MSC and its subsidiaries, including Sid Tool Co.,
Inc. (the "Operating Subsidiary"), are hereinafter referred to collectively as
the "Company."
MSC is one of the largest direct marketers of a broad range of industrial
products to small and mid-sized industrial customers throughout the United
States. We distribute a full line of industrial products intended to satisfy our
customers' maintenance, repair and operations ("MRO") supplies requirements. We
offer in excess of 500,000 stock-keeping units ("SKUs") through our master
catalogs, weekly, monthly and quarterly specialty and promotional catalogs and
brochures and service our customers from approximately 90 branch offices and
four distribution centers. Most 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.
Page 12
RESULTS OF OPERATIONS -
THIRTEEN WEEKS ENDED JUNE 1, 2002 AND MAY 26, 2001
NET SALES decreased by $7.7 million, or 3.6%, to $208.6 million in the third
quarter of fiscal 2002 from $216.3 million in the third quarter of fiscal 2001.
This decrease was primarily the result of one less business day in the third
quarter of fiscal 2002 and a decrease in sales to existing customers, most of
which are in the manufacturing sector, which continues to be negatively affected
by weakness and uncertainty in the industrial sector. Average daily sales
declined slightly for the third quarter of fiscal 2002 as compared to the third
quarter of fiscal 2001.
GROSS PROFIT decreased by $2.6 million, or 2.8%, to $90.9 million in the third
quarter of fiscal 2002 from $93.5 million in the third quarter of fiscal 2001.
As a percentage of net sales, gross profit increased from 43.2% to 43.6%. The
increase in gross profit as a percentage of net sales was the result of a
favorable change in product mix, more favorable discounts obtained from vendors,
and the success of the Company's efforts to increase gross profit margins with
new and existing customers.
OPERATING EXPENSES increased by $0.4 million, or 0.6%, to $72.6 million in the
third quarter of fiscal 2002 from $72.2 million in the third quarter of fiscal
2001. The slight increase in operating expenses in dollars was a result of an
increase in payroll related costs as compared to the third quarter of fiscal
2001. These expenses were offset by cost control initiatives and a decline in
volume related expenses. As a percentage of net sales, operating expenses
increased from 33.4% to 34.8%, primarily the result of the distribution of fixed
expenses over a smaller revenue base.
INCOME FROM OPERATIONS decreased by $3.1 million, or 14.5%, to $18.3 million in
the third quarter of fiscal 2002 from $21.4 million in the third quarter of
fiscal 2001. The decrease was primarily attributable to the decrease in net
sales described above, although results were favorably impacted by the increased
gross profit margins described above.
INTEREST INCOME (EXPENSE), NET. Net interest income was $0.3 million for the
third quarter of fiscal 2002 compared to net interest expense of $0.8 million in
the third quarter of fiscal 2001. The change from net interest expense to net
interest income reflects the Company's repayment of almost all of its
outstanding debt during fiscal 2001. As a result, the Company now has net
interest income in the third quarter of fiscal 2002, resulting from invested
cash.
PROVISION FOR IMPAIRMENT IN CARRYING VALUE OF INVESTMENTS in the third quarter
of fiscal 2001 of $10.3 million relates to the write-down of the Company's
Internet investments.
PROVISION FOR INCOME TAXES: The effective tax rate was approximately 39.5% and
76.1% for the third quarter of fiscal 2002 and fiscal 2001, respectively. The
effective tax rate in fiscal 2001 is a direct result of limited tax benefits
from the Internet investment write-downs. Excluding the effect of this
write-down, the effective tax rate would have been 40.0% for fiscal 2001.
NET INCOME increased by $8.7 million to $11.2 million in the third quarter of
fiscal 2002 from $2.5 million in the third quarter of fiscal 2001. This increase
is a direct result of the write-down of the Company's Internet investments in
fiscal 2001. Without taking into account the investment write-down, net income
would have decreased by $1.2 million or 9.7%, to $11.2 million from $12.4
million. This decrease was primarily the result of decrease in income from
operations explained above.
Page 13
RESULTS OF OPERATIONS -
THIRTY-NINE WEEKS ENDED JUNE 1, 2002 AND MAY 26, 2001
NET SALES decreased by $69.1 million, or 10.4%, to $592.2 million during the
first nine months of fiscal 2002 from $661.3 million in the first nine months of
fiscal 2001. This decrease was primarily attributable to a decrease in sales to
existing customers, most of which are in the manufacturing sector, which have
been affected by the recession and continued uncertainty in the industrial
sector. The Company believes that the events of September 11, 2001 also had a
detrimental effect on the Company's net sales in the first nine months of fiscal
2002; however, that effect cannot be reliably estimated. For the nine months of
fiscal 2002 average daily sales declined as compared to the same period last
year.
GROSS PROFIT decreased by $23.9 million, or 8.5%, to $258.7 million during the
first nine months of fiscal 2002 from $282.6 million in the first nine months of
fiscal 2001, primarily due to lower net sales. As a percentage of net sales,
gross profit increased from 42.7% to 43.7%. The increase in gross profit as a
percentage of net sales was the result of modest price increases, a favorable
change in product mix, more favorable discounts obtained from vendors, and the
success of the Company's efforts to increase gross profit margins with new and
existing customers.
OPERATING EXPENSES increased by $0.6 million, or 0.3%, to $213.1 million during
the first nine months of fiscal 2002 from $212.5 million in the first nine
months of fiscal 2001. The slight increase in operating expenses in dollars was
a result of the costs associated with the strategic increase (during the latter
part of fiscal 2001) in the Company's sales force to take advantage of
opportunities to gain market share, as compared to the first nine months of
fiscal 2001 and an increase in other payroll related costs as compared to the
first nine months of fiscal 2001. These expenses were offset by cost control
initiatives and a decline in volume related expenses. As a percentage of net
sales, operating expenses increased from 32.1% to 36.0%, primarily as a result
of the distribution of fixed expenses over a smaller revenue base.
INCOME FROM OPERATIONS decreased by $24.5 million to $45.6 million during the
first nine months of fiscal 2002 from $70.1 million in the first nine months of
fiscal 2001. The decrease was primarily attributable to the decrease in net
sales described above, although results were favorably impacted by the increased
gross profit margins described above.
INTEREST INCOME (EXPENSE), NET. Net interest income was $0.7 million in the
first nine months of fiscal 2002 compared to net interest expense of $3.1
million in the first nine months of fiscal 2001. The change from net interest
expense to net interest income reflects the Company's repayment of almost all of
its outstanding debt during fiscal 2001. As a result, the Company now has net
interest income in the first nine months of fiscal 2002, resulting from invested
cash.
PROVISION FOR IMPAIRMENT IN CARRYING VALUE OF INVESTMENTS in the third quarter
of fiscal 2001 of $10.3 million relates to the write-down of the Company's
Internet investments in fiscal 2001.
PROVISION FOR INCOME TAXES: The effective tax rate was approximately 39.5% and
46.6% for the first nine months of fiscal 2002 and fiscal 2001, respectively.
The decrease in the effective tax rate is a direct result of limited tax
benefits from the Internet investment write-downs. Excluding the effect of this
write-down, the effective tax rate would have been approximately 40.0% for the
first nine months of fiscal 2001.
NET INCOME: Net income decreased by $2.3 million, or 7.6%, to $28.0 million in
the first nine months of fiscal 2002 from $30.3 million in the first nine months
of fiscal 2001. Without taking into account the investment write-down, net
income would have decreased by $12.3 million or 30.5%, to $28.0 million from
$40.3 million. This decrease was primarily the result of decrease in income from
operations explained above, offset in part by the increase in net interest
income.
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CRITICAL ACCOUNTING POLICIES
A discussion of the critical accounting policies related to accounting estimates
is contained in the Company's fiscal 2001 Annual Report on Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital needs have been to fund the working capital requirements
necessitated by our sales growth, adding new products, and facilities
expansions. Our primary sources of financing have been cash from operations,
supplemented by bank borrowings under our credit facility. We anticipate cash
flows from operations, available cash reserves and available lines of credit
will be adequate to support our operations for the next 12 months.
Under the terms of the credit facility, the maximum permitted borrowings are
$110.0 million under an unsecured revolving credit agreement. Interest on
amounts borrowed may be paid at a rate per annum equal to the bank's base rate
(4.75% at June 1, 2002) or, alternatively, at the bankers' acceptance rate or
LIBOR rate plus margins, which vary from per annum based on the ratio of total
liabilities to effective net worth, or bid note rate. This credit facility
contains certain covenants limiting mergers, use of proceeds, indebtedness,
liens, investments, sales of assets, acquisitions, and payment of dividends.
This credit facility also contains certain standard financial covenants. As of
June 1, 2002 the Company had no outstanding borrowings under this agreement and
was in compliance with all financial covenants.
Net cash provided by operating activities for the 39 week periods ended June 1,
2002 and May 26, 2001 was $64.4 million and $63.5 million, respectively. The
increase of approximately $0.9 million is primarily attributable to improved net
working capital requirements, offset by lower net income excluding the effects
of non-cash Internet investment write-downs in the third quarter of fiscal 2001.
Net cash used in investing activities for the 39 week periods ended June 1, 2002
and May 26, 2001 was $5.1 million and $18.1 million, respectively. The net usage
of cash in the first nine months of fiscal 2002 was primarily attributable to
expenditures for property, plant and equipment. The net usage of cash in
investing activities in the first nine months of fiscal 2001 was primarily
attributable to expenditures for property, plant and equipment and cash paid for
investments in Internet technology companies.
Net cash provided by financing activities for the 39 week period ended June 1,
2002 was $14.1 million and net cash used in financing activities for the 39 week
period ended May 26, 2001 was $18.8 million. Net cash provided by financing
activities for the 39 weeks of fiscal 2002 was primarily attributable to
proceeds from the exercise of common stock options. The net cash used in
financing activities for the 39 weeks of fiscal 2001 was primarily attributable
to repayments of notes payable, offset by proceeds received from the exercise of
common stock options.
The Company believes that cash flow from operations and the revolving credit
agreement will be sufficient to fund future growth initiatives and meet planned
capital expenditure needs in the near future.
During fiscal 2001, the Board of Directors of the Company approved a stock
repurchase plan (the "Plan") that would allow for the repurchase of up to 5
million shares of the Company's Class A common stock. The Plan allows the
Company to repurchase shares at any time and in any increments it deems
appropriate. Since the end of the third quarter of fiscal 2002 and through the
date of this filing, the Company has repurchased 1 million shares in the open
market at a total cost of approximately $19.0 million. The Company currently
anticipates that it may make further repurchases
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based upon market conditions. The Company has adequate cash reserves to fund
such future repurchases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal financial instrument is long-term notes payable under a
credit agreement. The Company is affected by market risk exposure primarily
through the effect of changes in interest rates on amounts payable by the
Company under this credit agreement. Changes in these factors cause fluctuations
in the Company's consolidated net income and cash flows. The agreement allows
the company maximum borrowings of $110.0 million under a revolving credit
agreement. At June 1, 2002, the Company had no outstanding borrowings under this
agreement and was in compliance with all financial covenants. The agreement
bears interest at the bank's base rate (4.75% at June 1, 2002), or,
alternatively, at the bankers acceptance rate or LIBOR rate plus margins, which
vary from 0.65% to 1.25% per annum based on the ratio of total liabilities to
effective net worth, or bid note rate. The Company does not make material use of
derivative financial instruments to hedge against changes in interest rates or
for any other purpose.
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PART II. OTHER INFORMATION
ITEM 5. OTHER EVENTS
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
As previously reported in the Company's Current Report on Form 8-K, filed May
16, 2002, which is incorporated herein by reference, Arthur Andersen LLP have
been dismissed as the Company's independent accountants and Ernst & Young LLP
have been engaged as the Company's independent accountants.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: None.
Reports on Form 8-K:
1) Current Report on Form 8-K, filed on May 16, 2002;
2) Current Report on Form 8-K/A, filed on May 22, 2002; and
3) Current Report on Form 8-K/A, filed on May 28, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MSC INDUSTRIAL DIRECT CO., INC.
(Registrant)
Dated: July 11, 2002 By: /s/ Mitchell Jacobson
-------------------------- ----------------------------------------
President and Chief Executive Officer
Dated: July 11, 2002 By: /s/ Charles Boehlke
-------------------------- ----------------------------------------
Senior Vice President and
Chief Financial Officer
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