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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 November 30, 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 January 8, 2003 34,345,126 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 work stoppages at transportation centers or shipping ports,
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 August 31,
2002.
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
November 30, 2002 and August 31, 2002 1
Consolidated Statements of Income
Thirteen weeks ended November 30, 2002 and December 1, 2001 2
Consolidated Statement of Shareholders' Equity
Thirteen weeks ended November 30, 2002 3
Consolidated Statements of Cash Flows
Thirteen weeks ended November 30, 2002 and December 1, 2001 4
Notes to Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
ITEM 4. CONTROLS AND PROCEDURES 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES AND CERTIFICATIONS 17
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Balance Sheets
(In thousands, except share data)
November 30, August 31,
2002 2002
---- ----
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 65,167 $ 59,978
Accounts receivable, net of allowance for doubtful
accounts of $3,339 and $3,114, respectively 98,982 94,322
Inventories 213,567 205,563
Prepaid expenses and other current assets 8,637 6,690
Deferred income taxes 3,020 4,339
---------- -----------
Total current assets 389,373 370,892
---------- -----------
Property, Plant and Equipment, net 111,162 112,721
---------- -----------
Other Assets:
Goodwill, net of accumulated amortization of $7,286 63,202 63,202
Other 13,074 16,133
---------- -----------
76,276 79,335
---------- -----------
Total Assets $ 576,811 $ 562,948
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 37,615 $ 31,561
Accrued liabilities 37,543 39,858
Current portion of long-term notes payable 225 213
---------- -----------
Total current liabilities 75,383 71,632
Long-term notes payable 1,248 1,308
Deferred income tax liability 15,213 15,329
---------- -----------
Total liabilities 91,844 88,269
---------- -----------
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; 38,585,254 and 38,571,254 shares issued, and 34,339,254
and 34,589,254
shares outstanding, respectively 38 38
Class B common stock (ten votes per share); $0.001 par value; 50,000,000 shares
authorized; 32,137,294 and 32,137,294 shares issued and outstanding,
respectively 32 32
Additional paid-in capital 254,061 253,564
Retained earnings 295,718 283,348
Class A treasury stock, at cost, 4,246,000 and 3,982,000 shares, respectively (64,882) (62,303)
---------- -----------
Total shareholders' equity 484,967 474,679
---------- -----------
Total Liabilities and Shareholders' Equity $ 576,811 $ 562,948
========== ===========
See accompanying notes.
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Thirteen Weeks Ended
--------------------
November 30, December 1,
2002 2001
-------- --------
Net sales $210,692 $188,852
Cost of goods sold 116,175 106,584
-------- --------
Gross profit 94,517 82,268
Operating expenses 74,147 69,340
-------- --------
Income from operations 20,370 12,928
-------- --------
Other income:
Interest income, net 249 139
Other income, net 10 43
-------- --------
259 182
-------- --------
Income before provision for income taxes 20,629 13,110
Provision for income taxes 8,148 5,178
-------- --------
Net income $ 12,481 $ 7,932
======== ========
Per Share Information (Note 1):
Net income per common share:
Basic $ 0.19 $ 0.12
======== ========
Diluted $ 0.19 $ 0.11
======== ========
Weighted average shares used in computing
net income per common share (Note 1):
Basic 66,513 68,681
======== ========
Diluted 66,953 70,362
======== ========
See accompanying notes.
Page 2
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statement of Shareholders' Equity
Thirteen weeks ended November 30, 2002
(In thousands)
(Unaudited)
Class A
Class A Class B Treasury Stock
Common Stock Common Stock Additional --------------------
----------------- ------------------- Paid-In Retained Amount at
Shares Amount Shares Amount Capital Earnings Shares Cost Total
------ --------- ------- --------- ---------- --------- ------ ---------- ---------
Balance at August 31, 2002 38,571 $ 38 32,137 $ 32 $ 253,564 $ 283,348 3,982 $ (62,303) $ 474,679
Purchase of treasury stock -- -- -- -- -- -- 283 (2,958) (2,958)
Common stock issued under associate -- -- -- -- -- (111) (19) 379 268
stock purchase plan
Exercise of common stock options, 14 -- -- -- 497 -- -- -- 497
including income tax benefit of $355
Net income -- -- -- -- -- 12,481 -- -- 12,481
------ --------- ------ --------- --------- --------- ----- --------- ---------
Balance at November 30, 2002 38,585 $ 38 32,137 $ 32 $ 254,061 $ 295,718 4,246 $ (64,882) $ 484,967
====== ========= ====== ========= ========= ========= ===== ========= =========
See accompanying notes.
Page 3
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Thirteen Weeks Ended
-----------------------------
November 30, December 1,
2002 2001
------------ -------------
Cash Flows from Operating Activities:
Net income $ 12,481 $ 7,932
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,833 3,807
Provision for doubtful accounts 542 937
Deferred income taxes 1,203 (1,391)
Stock option income tax benefit 355 219
Changes in operating assets and liabilities:
Accounts receivable (5,202) 7,347
Inventories (8,004) 5,165
Prepaid expenses and other current assets (1,947) (2,178)
Other assets 3,059 2,971
Accounts payable and accrued liabilities 3,739 (1,670)
-------- --------
Total adjustments (2,422) 15,207
-------- --------
Net cash provided by operating activities 10,059 23,139
-------- --------
Cash Flows from Investing Activities:
Purchases of property, plant and equipment (2,274) (1,529)
-------- --------
Net cash used in investing activities (2,274) (1,529)
-------- --------
Cash Flows from Financing Activities:
Purchase of treasury stock (2,958) --
Proceeds from sale of common stock in connection 268 293
with associate stock purchase plan
Proceeds from exercise of common stock options 142 2,932
Net repayments of notes payable (48) (55)
-------- --------
Net cash (used in) provided by financing activities (2,596) 3,170
-------- --------
Net increase in cash and cash equivalents 5,189 24,780
Cash and cash equivalents - beginning of period 59,978 12,466
-------- --------
Cash and cash equivalents - end of period $ 65,167 $ 37,246
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest 11 10
Cash paid for income taxes $ 1,428 $ 90
======== ========
See accompanying notes.
Page 4
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
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 thirteen
weeks ended November 30, 2002 are not necessarily indicative of the results that
may be expected for the fiscal year ending August 30, 2003. 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 August 31,
2002.
The Company's fiscal year ends on a Saturday close to August 31 of each year.
A reconciliation between the numerator and denominator of the basic and diluted
EPS calculation is as follows:
Thirteen Weeks Ended
-----------------------------
November 30, December 1,
2002 2001
---- ----
Net income for EPS
Computation $12,481 $7,932
======= ======
Basic EPS:
Weighted average
common shares 66,513 68,681
======= ======
Basic EPS $0.19 $0.12
======= ======
Diluted EPS:
Weighted average
Common shares 66,513 68,681
Page 5
Shares issuable from
assumed conversion of
common stock equivalents 440 1,681
------- ------
Weighted average common
and common equivalent shares 66,953 70,362
======= ======
Diluted EPS $0.19 $0.11
======= ======
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 weeks ended November
30, 2002 and December 1, 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 August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of", and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting Results of Operations" for a disposal of a segment of
a business. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for
recognition and measurement of impairment, but amends the accounting and
reporting standards for segments of a business to be disposed of. SFAS No. 144
is effective for fiscal years beginning after December 15, 2001, with early
adoption encouraged. The Company has adopted SFAS No. 144 as of September 1,
2002; the impact of the adoption was not material to its consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity," under which a liability for an exit cost was recognized at
the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
at fair value when the liability is incurred. The provisions of this statement
are effective for exit or disposal activities that are initiated after December
31, 2002. The Company does not believe that the adoption of this statement will
have a material impact on its consolidated financial statements.
NOTE 4. 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
Page 6
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.
During the first three months of fiscal 2003, the Company repurchased 283 shares
of its Class A Common Stock for approximately $3,000, which is reflected at cost
as treasury stock in the accompanying consolidated financial statements. The
Company reissued approximately 19 shares of treasury stock during the first
three months of fiscal 2003 to fund the associate stock purchase plan. The
Company currently anticipates that it may make further repurchases based upon
market conditions.
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.
The Company has authorized 5 million shares of preferred stock. The Company's
Board of Directors has the authority to issue shares of preferred stock. Shares
of preferred stock have priority over the Company's Class A Common Stock and
Class B Common stock with respect to dividend or liquidation rights, or both. As
of November 30, 2002, there were no shares of preferred stock issued or
outstanding.
Page 7
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 August 31, 2002 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, work stoppages
at transportation centers or shipping ports, 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 8
RESULTS OF OPERATIONS -
THIRTEEN WEEKS ENDED NOVEMBER 30, 2002 AND DECEMBER 1, 2001
NET SALES increased by $21.8 million, or 11.6%, to $210.7 million in the first
quarter of fiscal 2003 from $188.9 million in the first quarter of fiscal 2002.
This increase was primarily the result of an increase in sales to existing
customers and an increase in the number of active customers. The number of
average active customers increased by 7,000 to 334,000 as compared to 327,000 in
the first quarter of fiscal 2002.
GROSS PROFIT increased by $12.2 million, or 14.9%, to $94.5 million in the first
quarter of fiscal 2003 from $82.3 million in the first quarter of fiscal 2002.
As a percentage of net sales, gross profit increased from 43.6% to 44.9%. The
increase in gross profit as a percentage of net sales was the result of modest
price increases, a favorable change in product mix, 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 $4.8 million, or 0.7%, to $74.1 million in the
first quarter of fiscal 2003 from $69.3 million in the first quarter of fiscal
2002. The increase in operating expenses in dollars was primarily the result of
an increase in payroll expenses due to an increase in head count, increased
medical and other benefit related costs and freight expense as compared to the
first quarter of fiscal 2002. As a percentage of net sales, operating expenses
decreased from 36.7% to 35.2%, primarily the result of the distribution of fixed
expenses over a larger revenue base.
INCOME FROM OPERATIONS increased by $7.4 million, or 57.6%, to $20.4 million in
the first quarter of fiscal 2003 from $12.9 million in the first quarter of
fiscal 2002. The increase was primarily attributable to the increase in net
sales described above and improved profit margins described above.
INTEREST INCOME, NET. Net interest income was $0.2 million for the first quarter
of fiscal 2003 compared to net interest income of $0.1 million in the first
quarter of fiscal 2002. The increase in net interest income is a result of more
invested cash in the first quarter of fiscal 2003 as compared to the first
quarter of fiscal 2002.
PROVISION FOR INCOME TAXES. The effective tax rate was approximately 39.5% for
the first quarter of fiscal 2003 and fiscal 2002, respectively.
NET INCOME increased by $4.5 million, or 57.3%, to $12.5 million in the first
quarter of fiscal 2003 from $7.9 million in the first quarter of fiscal 2002.
This increase was primarily the result of the increase in income from operations
explained above.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are more fully described in the
notes to the consolidated financial statements in its Annual Report on Form 10-K
for the fiscal year ended August 31, 2002. On an on-going basis, the Company
evaluates its estimates, including those related to bad debts, inventories,
goodwill, contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
Page 9
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
Concentrations of Credit Risk
The Company's mix of receivables is diverse, with approximately 334,000 of
twelve month combined active customer accounts. The Company sells its products
primarily to end-users. The Company performs periodic credit evaluations of its
customers' financial condition and collateral is not required. Receivables are
generally due within 30 days. The Company evaluates the collectibility of
accounts receivable based on numerous factors, including past transaction
history with customers and their credit worthiness. Initially, the Company
estimates an allowance for doubtful accounts as a percentage of net sales based
on historical bad debt experience. This estimate is periodically adjusted when
the Company becomes aware of a specific customer's inability to meet its
financial obligations (e.g. bankruptcy, etc.), or as a result of changes in the
overall aging of accounts receivable.
The Company maintains the majority of its cash and cash equivalents with a high
quality financial institution.
Inventory Valuation
Inventories consist of merchandise held for resale and are stated at the lower
of weighted average cost (using the first-in, first-out method) or market.
Deferred Catalog Costs
The costs of producing and distributing the Company's principal catalogs are
deferred ($10.9 million and $14.0 million at November 30, 2002 and August 31,
2002, respectively) and included in other assets in the Company's consolidated
balance sheets in accordance with SOP 93-7, "Reporting on Advertising Costs."
These costs are charged to expense over the period that the catalogs remain the
most current source of sales, which is typically one year or less. The costs
associated with brochures and catalog supplements are charged to expense as
distributed.
Revenue Recognition
The Company recognizes revenue upon shipment of products to its customers. The
Company reports its sales net of the amount of actual sales returns and the
amount of reserves established for anticipated sales returns based upon
historical return rates.
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.
Page 10
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
(4.25% at November 30, 2002) or, alternatively, at the bankers' acceptance rate
or LIBOR rate plus margins, which vary from the per annum rate 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 November 30, 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 13 week periods ended November
30, 2002 and December 1, 2001 were $10.1 million and $23.1 million,
respectively. The decrease of approximately $13.0 million is primarily
attributable to an increase in inventory and accounts receivable, offset in part
by higher net income.
Net cash used in investing activities for the 13 week periods ended November 30,
2002 and December 1, 2001 were $2.3 million and $1.5 million, respectively. The
usage of cash in the first three months of fiscal 2003 and fiscal 2002 were
attributable to expenditures for property, plant and equipment.
Net cash used in financing activities for the 13 week period ended November 30,
2002 was $2.6 million and net cash provided by financing activities for the 13
week period ended December 1, 2002 was $3.2 million. The net cash used in
financing activities for the 13 weeks of fiscal 2003 was primarily attributable
to the purchase of treasury stock, partially offset by the proceeds received
from the exercise of common stock options. The net cash provided by financing
activities for the 13 weeks of fiscal 2002 was primarily attributable to
proceeds 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.
On September 26, 2002, the Board of Directors approved the replenishment of the
Company's share buyback program which authorized the repurchase of up to 5
million shares of Class A common stock on the open market. The Plan allows the
Company to repurchase shares at any time and in any increments it deems
appropriate. During the first three months of fiscal 2003, the Company
repurchased 283,000 shares of its Class A Common Stock for approximately $3.0
million, which is reflected at cost as treasury stock in the accompanying
consolidated financial statements. The Company reissued approximately 19,250
shares of treasury stock during the first three months of fiscal 2003 to fund
the associate stock purchase plan. The Company currently anticipates that it may
make further repurchases based upon market conditions. The Company has adequate
cash reserves to fund such future repurchases.
RELATED PARTY TRANSACTIONS
The Company is affiliated with various real estate entities (together,
the "Affiliates"). The Affiliates are owned primarily by the Company's principal
shareholders. The Company paid
Page 11
rent under operating leases to Affiliates for the fiscal quarter ended November
30, 2002 of approximately $0.4 million. In the opinion of the Company's
management, based on its market research, the leases with Affiliates are on
terms which approximate fair market value.
CONTRACTUAL OBLIGATIONS
Certain of the operations of the Company are conducted on leased
premises, some of which are leased from Affiliates. The leases (most of which
provide for the payment of real estate taxes, insurance and other operating
costs) are for varying periods, the longest extending to the year 2012. In
addition, the Company is obligated under certain equipment and automobile
operating leases, which expire on varying dates through 2003. At August 31,
2002, approximate minimum annual rentals on such leases were as follows (in
thousands):
Page 12
Total (Including
Related Party Related Party
Fiscal Year Commitments) Commitments
----------- ------------ -----------
2003 5,880 1,620
2004 4,750 1,440
2005 3,509 1,312
2006 2,067 1,352
2007 1,694 1,352
Thereafter 4,165 3,825
---------- -------------- --------------
$22,065 $10,901
============== ==============
Since August 31, 2002 there has been no material change in these
obligations. The Company believes that existing cash balances together with cash
generated from operations and amounts available under the Company's $110 million
credit facility will be sufficient to meet the Company's projected working
capital and other cash flow requirements for the next five years. As of November
30, 2002, the Company was in compliance with the covenants set forth in the
Company's credit facility.
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 November 30, 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 (4.25% at November 30, 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 also has a long term note payable in the amount of approximately
$1.2 million to the Pennsylvania Industrial Development Authority which is
secured by the land on which the Harrisburg, Pennsylvania distribution center is
located, which bears interest at 3% per annum and is payable in monthly
installments of approximately $20,000 through September 2011.
The Company does not make material use of derivative financial instruments to
hedge against changes in interest rates or for any other purpose.
In addition, the Company's interest income is most sensitive to changes in the
general level of U.S. interest rates. In this regard, changes in U.S. interest
rates affect the interest earned on the Company's cash equivalents.
Page 13
ITEM 4. CONTROLS AND PROCEDURES
The Company's senior management is responsible for establishing and maintaining
a system of disclosure controls and procedures (as defined in Rule 13a-14 and
15d-14 under the Securities Exchange Act of 1934 (the "Exchange Act")) designed
to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission'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 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.
The Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures under the supervision of and with the
participation of management, including the Chief Executive Officer and Chief
Financial Officer, within 90 days prior to the filing date of this report. Based
on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
Securities and Exchange Commission filings. Subsequent to that evaluation there
have been no significant changes in our internal controls or other factors that
could significantly affect these controls after such evaluation.
Page 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 8, 2002, the Company, its directors and certain of its
officers were sued in the United States District Court for the Eastern District
of New York in an action entitled Thomas Nunziata vs. MSC Industrial Direct Co.,
Inc. et. al (CV No. 02 4422). Plaintiff, on behalf of a class of the Company's
stockholders, seeks unspecified damages based on his allegations arising from
the Company's announcement that it would restate its consolidated financial
statements for fiscal years 1999 through 2001 and the first three quarters of
fiscal 2002. Plaintiff alleges that during the periods affected by the
restatement, the Company, its directors and certain of its officers violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5
promulgated thereunder, by materially misleading the investing public by making
false statements in order to inflate the price of the Company's common stock. On
August 14, 2002, the Company and certain of its officers and directors were sued
in the United States District Court for the Eastern District of New York in an
action entitled Sandra Joan Malin Revocable Trust vs. MSC Industrial Direct Co.,
Inc. et al. (CV No. 02 4503). The allegations in this matter was substantially
similar to those made in the Nunziata action. On September 11, 2002, these
actions were consolidated under the caption In re MSC Industrial Direct Co.,
Inc. Securities Litigation, (CV No. 02 4422). A lead plaintiff, International
Association of Machinists National Pension Fund, was named on November 6, 2002,
and such lead plaintiff filed a consolidated amended class action complaint on
December 23, 2002. The Company intends to defend this action vigorously.
There are no other material legal proceedings pending against MSC.
Page 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
--------
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K:
-------------------
None.
Page 16
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: January 8, 2003 By: /s/ Mitchell Jacobson
---------------------------- -------------------------
Chairman, President and
Chief Executive Officer
Dated: January 8, 2003 By: /s/ Charles Boehlke
---------------------------- -------------------------
Senior Vice President and
Chief Financial Officer
Page 17
CERTIFICATION
I, Mitchell Jacobson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MSC Industrial Direct
Co., Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 8, 2003
/s/ Mitchell Jacobson
---------------------------
Chairman, President
and Chief Executive Officer
Page 18
CERTIFICATION
I, Charles Boehlke, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MSC Industrial Direct
Co., Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 8, 2003
/s/ Charles Boehlke
---------------------------
Senior Vice President
and Chief Financial Officer
Page 19