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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 March 1, 2003
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)
Website: WWW.MSCDIRECT.COM
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 April 1, 2003 34,451,103 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.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, information statements and other
information with the Securities and Exchange Commission (the "SEC"). The public
may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC. The address of that site is
http://www.sec.gov.
INTERNET ADDRESS
We maintain a website where additional information concerning our business and
various upcoming events can be found. The address of our website is
www.mscdirect.com. We provide a link on our website, under About MSC -- Investor
Relations, through which investors can access our latest annual report on Form
10-K.
MSC INDUSTRIAL DIRECT CO., INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets
March 1, 2003 and August 31, 2002 1
Consolidated Statements of Income
Thirteen and twenty-six weeks ended March 1, 2003 and March 2, 2002 2
Consolidated Statement of Shareholders' Equity
Twenty-six weeks ended March 1, 2003 3
Consolidated Statements of Cash Flows
Twenty-six weeks ended March 1, 2003 and March 2, 2002 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 15
ITEM 4. CONTROLS AND PROCEDURES 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES AND CERTIFICATIONS 20
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Balance Sheets
(In thousands, except share data)
March 1, August 31,
2003 2002
--------- ---------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 73,888 $ 59,978
Accounts receivable, net of allowance for doubtful
accounts of $3,471 and $3,114, respectively 99,513 94,322
Inventories 215,764 205,563
Prepaid expenses and other current assets 7,558 6,690
Deferred income taxes 2,185 4,339
--------- ---------
Total current assets 398,908 370,892
--------- ---------
Property, Plant and Equipment, net 108,896 112,721
--------- ---------
Other Assets:
Goodwill 63,202 63,202
Other 11,408 16,133
--------- ---------
74,610 79,335
--------- ---------
Total Assets $ 582,414 $ 562,948
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 37,836 $ 31,561
Accrued liabilities 28,587 39,858
Current portion of long-term notes payable 225 213
--------- ---------
Total current liabilities 66,648 71,632
Long-term notes payable 1,194 1,308
Deferred income tax liability 15,092 15,329
--------- ---------
Total liabilities 82,934 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; 38,677,829 and 38,571,254 shares issued, and 34,465,829
and 34,589,254 shares outstanding, respectively 39 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 255,449 253,564
Retained earnings 308,180 283,348
Class A treasury stock, at cost, 4,212,000 and 3,982,000 shares, respectively (64,220) (62,303)
--------- ---------
Total shareholders' equity 499,480 474,679
--------- ---------
Total Liabilities and Shareholders' Equity $ 582,414 $ 562,948
========= =========
See accompanying notes.
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------- ----------------------
March 1, March 2, March 1, March 2,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales $209,633 $194,791 $420,325 $383,643
Cost of goods sold 114,671 109,674 230,846 216,258
-------- -------- -------- --------
Gross profit 94,962 85,117 189,479 167,385
Operating expenses 74,944 71,387 149,091 140,727
-------- -------- -------- --------
Income from operations 20,018 13,730 40,388 26,658
-------- -------- -------- --------
Other income:
Interest income, net 196 227 445 366
Other income, net 37 54 47 97
-------- -------- -------- --------
Total other income 233 281 492 463
-------- -------- -------- --------
Income before provision
for income taxes 20,251 14,011 40,880 27,121
Provision for income taxes 7,499 5,534 15,647 10,712
-------- -------- -------- --------
Net income $ 12,752 $ 8,477 $ 25,233 $ 16,409
======== ======== ======== ========
Per Share Information (Note 1):
Net income per common share:
Basic $ 0.19 $ 0.12 $ 0.38 $ 0.24
======== ======== ======== ========
Diluted $ 0.19 $ 0.12 $ 0.37 $ 0.23
======== ======== ======== ========
Weighted average shares used
in computing net income per
common share (Note 1):
Basic 66,532 69,012 66,525 68,821
======== ======== ======== ========
Diluted 68,117 71,429 67,358 70,838
======== ======== ======== ========
See accompanying notes.
Page 2
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statement of Shareholders' Equity
Twenty-Six weeks ended March 1, 2003
(In thousands)
(Unaudited)
-------------------- --------------------
Class A Class B
-------------------- --------------------
Common Stock Common Stock Additional
-------------------- -------------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings
------ --------- ------ --------- --------- ---------
Balance at August 31, 2002 38,571 $ 38 32,137 $ 32 $ 253,564 $ 283,348
Purchases of treasury stock -- -- -- -- -- --
Common stock issued under associate stock -- -- -- -- -- (401)
purchase plan
Exercise of common stock options, including 107 1 -- -- 1,885 --
income tax benefit of $630
Net income -- -- -- -- -- 25,233
------ --------- ------ --------- --------- ---------
Balance at March 1, 2003 38,678 $ 39 32,137 $ 32 $ 255,449 $ 308,180
------ --------- ------ --------- --------- ---------
Class A
----------------------
Treasury Stock
----------------------
Amount at
Shares Cost Total
------ ----------- ---------
Balance at August 31, 2002 3,982 $ (62,303) $ 474,679
Purchases of treasury stock 283 (2,958) (2,958)
Common stock issued under associate stock (53) 1,041 640
purchase plan
Exercise of common stock options, including -- -- 1,886
income tax benefit of $630
Net income -- -- 25,233
----- --------- ---------
Balance at March 1, 2003 4,212 $ (64,220) $ 499,480
----- --------- ---------
See accompanying notes.
Page 3
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Twenty-Six Weeks Ended
----------------------
March 1, March 2,
2003 2002
-------- --------
Cash Flows from Operating Activities:
Net income $ 25,233 $ 16,409
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,674 7,648
Provision for doubtful accounts 857 1,432
Deferred income taxes 1,917 42
Stock option income tax benefit 630 567
Changes in operating assets and liabilities:
Accounts receivable (6,048) 722
Inventories (10,201) 22,802
Prepaid expenses and other current assets (868) (2,019)
Other assets 4,725 5,220
Accounts payable and accrued liabilities (4,996) (6,751)
-------- --------
Total adjustments (6,310) 29,663
-------- --------
Net cash provided by operating activities 18,923 46,072
-------- --------
Cash Flows from Investing Activities:
Expenditures for property, plant and equipment (3,849) (3,673)
-------- --------
Net cash used in investing activities (3,849) (3,673)
-------- --------
Cash Flows from Financing Activities:
Purchases of treasury stock (2,958) --
Proceeds from sale of common stock in connection
with associate stock purchase plan 640 606
Proceeds from exercise of common stock options 1,256 7,118
Net repayments of notes payable (102) (104)
-------- --------
Net cash (used in) provided by financing activities (1,164) 7,620
-------- --------
Net increase in cash and cash equivalents 13,910 50,019
Cash and cash equivalents - beginning of period 59,978 12,466
-------- --------
Cash and cash equivalents - end of period $ 73,888 $ 62,485
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest 22 22
Cash paid for income taxes 15,549 7,970
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 first half
of fiscal 2003 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 Twenty-Six Weeks Ended
-------------------- ----------------------
March 1, March 2, March 1, March 2,
2003 2002 2003 2002
-------- -------- -------- --------
Net income for EPS
Computation $12,752 $ 8,477 $25,233 $16,409
======= ======= ======= =======
Basic EPS:
Weighted average
Common shares 66,532 69,012 66,525 68,821
======= ======= ======= =======
Basic EPS $ 0.19 $ 0.12 $ 0.38 $ 0.24
======= ======= ======= =======
Diluted EPS:
Weighted average
Common shares 66,532 69,012 66,525 68,821
Shares issuable from
Assumed conversion of
Common stock equivalents 1,585 2,417 833 2,017
------- ------- ------- -------
Page 5
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
Weighted average common
and common equivalent shares 68,117 71,429 67,358 70,838
======= ======= ======= =======
Diluted EPS $ 0.19 $ 0.12 $ 0.37 $ 0.23
======= ======= ======= =======
NOTE 2. COMPREHENSIVE INCOME
The Company complies with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130 "Reporting Comprehensive Income," which establishes
standards for the reporting of comprehensive income and its components. For the
twenty-six weeks ended March 1, 2003 and March 2, 2002, 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 Financial Accounting Standards Board ("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 the Accounting Principles Board ("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 Emerging Issues Task
Force ("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
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
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 half of fiscal 2003, the Company repurchased 283 shares of its
Class A Common Stock for approximately $3 million, which is reflected at cost as
treasury stock in the accompanying consolidated financial statements. The
Company reissued approximately 53 shares of treasury stock during the first half
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 March 1, 2003, there were no shares of preferred stock issued or outstanding.
NOTE 5. PRODUCT WARRANTIES
The Company offers a one-year warranty for certain of its machinery products.
The specific terms and conditions of those warranties vary depending upon the
product sold. Generally, the Company provides a basic limited warranty,
including parts and labor, for these products for one-year. The Company would be
able to recoup certain of these costs through product warranties it holds with
its original equipment manufacturers, which typically range from thirty to
ninety days. In addition, the Company's general merchandise products are covered
by third party original equipment manufacturers' warranties. The Company's
warranty expense for the thirteen and twenty-six week periods ended March 1,
2003 and March 2, 2002 has been minimal. The Company periodically assesses the
need for a warranty liability.
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 MARCH 1, 2003 AND MARCH 2, 2002
NET SALES increased by $14.8 million, or 7.6%, to $209.6 million in the second
quarter of fiscal 2003 from $194.8 million in the second 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. Net sales were
adversely affected during the weeks of Christmas and New Year's in the fiscal
2003 period as a result of our customers extended holiday shutdown periods, and
in February 2003 by weather due to significant snowstorms in the Midwest and
Northeast, which did not occur in the comparable period in fiscal 2002. The
Company gained market share as the number of average active customers increased
by 10,000 to 338,000 as compared to 328,000 in the second quarter of fiscal
2002.
GROSS PROFIT increased by $9.8 million, or 11.6%, to $95.0 million in the second
quarter of fiscal 2003 from $85.1 million in the second quarter of fiscal 2002.
As a percentage of net sales, gross profit increased from 43.7% to 45.3%. The
increase in gross profit as a percentage of net sales was the result of modest
price increases, an increase in freight revenue from shipping and handling fees,
vendor rebates, a favorable change in product mix, and the success of the
Company's efforts to increase gross profit margins with new and existing
customers.
OPERATING EXPENSES increased by $3.6 million, or 5.0%, to $74.9 million in the
second quarter of fiscal 2003 from $71.4 million in the second quarter of fiscal
2002. The increase in operating expenses in dollars was primarily the result of
an increase in payroll expenses due to annual salary increases, an increase in
head count, increased medical and other benefit related costs and freight
expense as compared to the second quarter of fiscal 2002. Additionally, we
incurred costs in the second quarter of fiscal 2003 related to the disposition
of three small machine shops, which did not occur in the second quarter of
fiscal 2002. As a percentage of net sales, operating expenses decreased from
36.6% to 35.8%, which is primarily the result of the distribution of fixed
expenses over a larger revenue base.
INCOME FROM OPERATIONS increased by $6.3 million, or 45.8%, to $20.0 million in
the second quarter of fiscal 2003 from $13.7 million in the second quarter of
fiscal 2002. The increase was primarily attributable to the increase in net
sales and improved gross profit margins described above.
INTEREST INCOME, NET. Net interest income was $0.2 million for the second
quarter of fiscal 2003 and fiscal 2002.
PROVISION FOR INCOME TAXES. The effective tax rate was approximately 37.0% and
39.5% for the second quarter of fiscal 2003 and fiscal 2002, respectively. The
reduction in the effective tax rate is a direct result of settlements from the
closing of two tax years. The Company recorded the necessary adjustment to the
tax provision in the second quarter of fiscal 2003 to adjust the year to date
provision to 38.3%, resulting in the 37.0% effective rate for the second quarter
of fiscal 2003. Excluding the effect of these settlements, the effective tax
rate is approximately 39.5% for both periods. The Company's expected tax rate
for the second half of fiscal 2003 is 38.3%.
Page 9
NET INCOME increased by $4.3 million, or 50.4%, to $12.8 million in the second
quarter of fiscal 2003 from $8.5 million in the second quarter of fiscal 2002.
This increase was primarily the result of the increase in income from operations
and the favorable change in the effective tax rate as described above.
TWENTY- SIX WEEKS ENDED MARCH 1, 2003 AND MARCH 2, 2002
NET SALES increased by $36.7 million, or 9.6%, to $420.3 million in the first
half of fiscal 2003 from $383.6 million in the first half 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. Net sales were adversely
affected during the weeks of Christmas and New Year's in the fiscal 2003 period
as a result of our customers extended holiday shutdown periods, and in February
2003 by weather due to significant snowstorms in the Midwest and Northeast,
which did not occur in the comparable period in fiscal 2002. The Company gained
market share as the number of average active customers increased by 11,000 to
338,000 as compared to 327,000 in the first half of fiscal 2002.
GROSS PROFIT increased by $22.1 million, or 13.2%, to $189.5 million in the
first half of fiscal 2003 from $167.4 million in the first half of fiscal 2002.
As a percentage of net sales, gross profit increased from 43.6% to 45.1%. The
increase in gross profit as a percentage of net sales was the result of modest
price increases, an increase in freight revenue from shipping and handling fees,
vendor rebates, 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 $8.4 million, or 5.9%, to $149.1 million in the
first half of fiscal 2003 from $140.7 million in the first half of fiscal 2002.
The increase in operating expenses in dollars was primarily the result of an
increase in payroll expenses due to annual salary increases, an increase in head
count, increased medical and other benefit related costs and freight expense as
compared to the first half of fiscal 2002. As a percentage of net sales,
operating expenses decreased from 36.7% to 35.5%, primarily the result of the
distribution of fixed expenses over a larger revenue base.
INCOME FROM OPERATIONS increased by $13.7 million, or 51.5%, to $40.4 million in
the first half of fiscal 2003 from $26.7 million in the first half of fiscal
2002. The increase was primarily attributable to the increase in net sales and
improved gross profit margins described above.
INTEREST INCOME, NET. Net interest income was approximately $0.4 million for the
first half of fiscal 2003 and fiscal 2002. The slight increase in net interest
income is a result of more invested cash in the first half of fiscal 2003 as
compared to the first half of fiscal 2002.
PROVISION FOR INCOME TAXES. The effective tax rate was approximately 38.3% and
39.5% for the first half of fiscal 2003 and fiscal 2002, respectively. The
reduction in the effective tax rate is a direct result of settlements from the
closing of two tax years. Excluding the effect of these settlements, the
effective tax rate is approximately 39.5% for both periods. The Company's
expected tax rate for the second half of fiscal 2003 is 38.3%.
Page 10
NET INCOME increased by $8.8 million, or 53.8%, to $25.2 million in the first
half of fiscal 2003 from $16.4 million in the first half 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
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 338,000 combined
active customer accounts defined as customers who have purchased from MSC in the
preceding twelve months. The Company sells its products primarily to end-users.
No significant concentration of credit risk is considered to exist. 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 primarily 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. Management evaluates the need to record adjustments for impairment of
inventory on a quarterly basis. Slow moving inventory, obsolete inventory or
inventory in excess of management's estimated usage is written-down, using
historical data and reasonable assumptions, to its estimated market value, if
less than its cost. Inherent in the estimates of market value are management's
estimates related to customer demand, technological and/or market obsolescence,
possible alternative uses and ultimate realization of excess inventory.
Page 11
Deferred Catalog Costs
The costs of producing and distributing the Company's principal catalogs are
deferred ($9.1 million and $14.0 million at March 1, 2003 and August 31, 2002,
respectively) and included in other assets in the Company's consolidated balance
sheets in accordance with Statement Of Position ("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.
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 March 1, 2003) 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 March 1, 2003 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 26 week periods ended March 1,
2003 and March 2, 2002 were $18.9 million and $46.1 million, respectively. The
decrease of approximately $27.1 million in net cash provided from operations
resulted from investment in working capital to support an increase in net sales,
offset in part by higher net income.
Net cash used in investing activities for the 26 week periods ended March 1,
2003 and March 2, 2002 were $3.8 million and $3.7 million, respectively. The
usage of cash in the first half of fiscal 2003 and fiscal 2002 were attributable
to expenditures for property, plant and equipment.
The net cash used in financing activities for the 26 week period ended March 1,
2003 was $1.2 million and net cash provided by financing activities for the 26
week period ended March 2, 2002
Page 12
was $7.6 million. The net cash used in financing activities for the first half
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 first half 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 half 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 53,000 shares of
treasury stock during the first half 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 rent under operating leases to Affiliates for the
first half of fiscal 2003 of approximately $0.8 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):
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
======= =======
Page 13
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 $110.0
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
March 1, 2003, the Company was in compliance with the covenants set forth in the
Company's credit facility.
Page 14
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 March 1, 2003, 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 March 1, 2003), 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 15
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 16
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 were 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 filed a motion to dismiss on February 3, 2003,
and that motion is currently being briefed. The Company intends to defend this
action vigorously.
There are no other material legal proceedings pending against MSC.
Page 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 8, 2003 the Company held its 2003 Annual Meeting of Shareholders (the
"Meeting"). In connection with the Meeting, the Company solicited proxies from
its shareholders pursuant to Regulation 14 of the Securities Exchange Act of
1934.
At the Meeting, the Company's shareholders elected as directors Mitchell
Jacobson, Sidney Jacobson, David Sandler, Charles Boehlke, James Schroeder,
Shelley Boxer, Roger Fradin, Denis Kelly, Raymond Langton, and Philip Peller.
In addition, the shareholders ratified the selection by the Board of Directors
of Ernst & Young LLP as independent certified public accountants of the Company
for fiscal year 2003.
The following tables summarize the votes cast at the meeting on the matters
brought before the shareholders:
1. Election of Directors
Nominee Votes Votes Votes Broker
Name For Against Withheld Non-Votes
Mitchell Jacobson 296,670,778 9,280,845 0 0
Sidney Jacobson 296,684,591 9,267,042 0 0
David Sandler 304,438,648 1,512,985 0 0
Charles Boehlke 304,438,648 1,512,985 0 0
James Schroeder 304,438,648 1,512,985 0 0
Shelley Boxer 296,684,591 9,267,042 0 0
Roger Fradin 296,710,489 9,241,144 0 0
Denis Kelly 296,684,591 9,267,042 0 0
Raymond Langton 296,684,591 9,267,042 0 0
Philip Peller 304,438,648 1,512,985 0 0
2. Ratification of Ernst & Young LLP as independent certified public accountants
of the Company for fiscal year 2003.
Votes Votes Votes Broker
For Against Withheld Non-Votes
304,665,544 1,285,989 100 0
Page 18
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 19
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: April 1, 2003 By: /s/ Mitchell Jacobson
------------------------------- ---------------------------
Chairman, President and
Chief Executive Officer
Dated: April 1, 2003 By: /s/ Charles Boehlke
------------------------------- ----------------------------
Executive Vice President and
Chief Financial Officer
Page 20
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: April 1, 2003
/s/ Mitchell Jacobson
---------------------------
Chairman, President
and Chief Executive Officer
Page 21
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: April 1, 2003
/s/ Charles Boehlke
---------------------------
Executive Vice President
and Chief Financial Officer
Page 22