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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 May 31, 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 or Other Jurisdiction of Incorporation or Organization) (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
--------- ---------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--------- ---------
As of July 11, 2003 34,620,955 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
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets
May 31, 2003 and August 31, 2002 1
Consolidated Statements of Income
Thirteen and thirty-nine weeks ended May 31, 2003 and June 1, 2002 2
Consolidated Statement of Shareholders' Equity
Thirty-nine weeks ended May 31, 2003 3
Consolidated Statements of Cash Flows
Thirty-nine weeks ended May 31, 2003 and June 1, 2002 4
Notes to Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
ITEM 4. CONTROLS AND PROCEDURES 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES AND CERTIFICATIONS 20
41272411.08
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Balance Sheets
(In thousands, except share data)
May 31, August 31,
2003 2002
---- ----
(Unaudited) (Audited)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 108,764 $ 59,978
Accounts receivable, net of allowance for doubtful
accounts of $3,219 and $3,114, respectively 95,572 94,322
Inventories 207,540 205,563
Prepaid expenses and other current assets 9,397 6,690
Deferred income taxes 9,645 4,339
----------------- ---------------
Total current assets 430,918 370,892
----------------- ---------------
Property, Plant and Equipment, net 107,997 112,721
----------------- ---------------
Other Assets:
Goodwill 63,202 63,202
Other 9,909 16,133
----------------- ---------------
73,111 79,335
----------------- ---------------
Total Assets $ 612,026 $ 562,948
================= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 30,743 $ 31,561
Accrued liabilities 36,800 39,858
Current portion of long-term notes payable 187 213
----------------- ---------------
Total current liabilities 67,730 71,632
Long-term notes payable 1,178 1,308
Deferred income tax liability 28,739 15,329
----------------- ---------------
Total liabilities 97,647 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; 38,801,829 and 38,571,254 shares issued, and
34,606,829 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 256,916 253,564
Retained earnings 321,267 283,348
Class A treasury stock, at cost, 4,195,000 and 3,982,000 shares, respectively (63,875) (62,303)
----------------- ---------------
Total shareholders' equity 514,379 474,679
----------------- ---------------
Total Liabilities and Shareholders' Equity $ 612,026 $ 562,948
================= ===============
See accompanying notes.
Page 1
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------------------- ----------------------------------
May 31, June 1, May 31, June 1,
2003 2002 2003 2002
---------------- ----------------- ---------------- ---------------
Net sales $ 215,571 $ 208,592 $ 635,896 $ 592,235
Cost of goods sold 118,709 117,888 349,555 334,146
------------- --------------- -------------- -------------
Gross profit 96,862 90,704 286,341 258,089
Operating expenses 75,915 72,713 225,006 213,440
------------- --------------- -------------- -------------
Income from operations 20,947 17,991 61,335 44,649
------------- --------------- -------------- -------------
Other income:
Interest income, net 328 320 773 686
Other income, net 67 (40) 114 57
------------- --------------- -------------- -------------
Total other income 395 280 887 743
------------- --------------- -------------- -------------
Income before provision
for income taxes 21,342 18,271 62,222 45,392
Provision for income taxes 8,174 7,217 23,821 17,929
------------- --------------- -------------- -------------
Net income $ 13,168 $ 11,054 $ 38,401 $ 27,463
============= =============== ============== =============
Per Share Information (Note 1):
Net income per common share:
Basic $ 0.20 $ 0.16 $ 0.58 $ 0.40
============= =============== ============== =============
Diluted $ 0.19 $ 0.15 $ 0.57 $ 0.39
============= =============== ============== =============
Weighted average shares used in
computing net income per common share
(Note 1):
Basic 66,650 69,476 66,567 69,037
============= =============== ============== =============
Diluted 68,265 72,006 67,780 71,125
============= =============== ============== =============
See accompanying notes.
Page 2
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statement of Shareholders' Equity
Thirty-Nine weeks ended May 31, 2003
(In thousands)
(Unaudited)
--------------------- --------------------
Class A Class B
--------------------- -------------------- Additional
Common Stock Common Stock 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 - - - - - (482)
purchase plan
Exercise of common stock options, including 231 1 - - 3,352 -
income tax benefit of $563
Net income - - - - - 38,401
--------- ----------- --------- ---------- ---------------- ---------------
Balance at May 31, 2003 38,802 $ 39 32,137 $ 32 $ 256,916 $ 321,267
--------- ----------- --------- ---------- ---------------- ---------------
Class A
-------------------------
Treasury Stock
-------------------------
Amount
Shares at 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 (70) 1,386 904
purchase plan
Exercise of common stock options, including - - 3,353
income tax benefit of $563
Net income - - 38,401
--------- ---------------- ------------
Balance at May 31, 2003 4,195 $ (63,875) $514,379
--------- ---------------- ------------
See accompanying notes.
Page 3
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Thirty-Nine Weeks Ended
-------------------------------------------
May 31, June 1,
2003 2002
----------------- ------------------
Cash Flows from Operating Activities:
Net income $ 38,401 $ 27,463
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 11,295 11,505
Provision for doubtful accounts 1,208 1,980
Deferred income taxes 8,104 547
Stock option income tax benefit 563 1,066
Changes in operating assets and liabilities:
Accounts receivable (2,458) (1,938)
Inventories (1,977) 21,555
Prepaid expenses and other current assets (2,707) (2,120)
Other assets 6,224 8,158
Accounts payable and accrued liabilities (3,876) (3,798)
----------------- ------------------
Total adjustments 16,376 36,955
----------------- ------------------
Net cash provided by operating activities 54,777 64,418
----------------- ------------------
Cash Flows from Investing Activities:
Expenditures for property, plant and equipment (6,571) (5,181)
----------------- ------------------
Net cash used in investing activities (6,571) (5,181)
----------------- ------------------
Cash Flows from Financing Activities:
Purchases of treasury stock (2,958) -
Proceeds from sale of Class A common stock in connection
with associate stock purchase plan 904 841
Proceeds from exercise of Class A common stock options 2,790 13,453
Repayments of notes payable (156) (153)
----------------- ------------------
Net cash provided by financing activities 580 14,141
----------------- ------------------
Net increase in cash and cash equivalents 48,786 73,378
Cash and cash equivalents - beginning of period 59,978 12,466
----------------- ------------------
Cash and cash equivalents - end of period $ 108,764 $ 85,844
================= ==================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 36 $ 34
================= ==================
Cash paid for income taxes $ 14,483 $ 11,329
================= ==================
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 nine
months 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 Thirty-Nine Weeks Ended
------------------------------------ --------------------------------------
May 31, June 1, May 31, June 1,
2003 2002 2003 2002
-------------- -------------- -------------- ----------------
Net income for EPS
Computation $13,168 $11,054 $38,401 $27,463
======== ======== ======== ========
Basic EPS:
Weighted average
common shares 66,650 69,476 66,567 69,037
======= ======= ======= =======
Basic EPS $0.20 $0.16 $0.58 $0.40
====== ====== ====== ======
Diluted EPS:
Weighted average
common shares 66,650 69,476 66,567 69,037
Shares issuable from
assumed conversion of
common stock equivalents 1,615 2,530 1,213 2,088
------ ------ ------ ------
Page 5
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
Weighted average common
and common equivalent shares 68,265 72,006 67,780 71,125
======= ======= ======= =======
Diluted EPS $0.19 $0.15 $0.57 $0.39
====== ====== ====== ======
NOTE 2. FAIR VALUE DISCLOSURE OF STOCK OPTIONS
The Company accounts for its stock option plans utilizing the intrinsic value
method, under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. No compensation expense is reflected in net income, as
all options granted under the stock option plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. Interim
pro-forma information regarding net income and net income per common share is
required by Statement of Financial Accounting Standards ("SFAS") No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure, if the
Company accounts for its stock options granted under the intrinsic value method.
The following table illustrates the effect on net income and net income per
share if the Company had applied the fair value recognition provisions, under
which compensation expense would be recognized as incurred, of SFAS No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------------ -------------------------------
May 31, June 1, May 31, June 1,
2003 2002 2003 2002
-------------- -------------- -------------- -------------
Net income, as reported...................... $13,168 $11,054 $38,401 $27,463
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects................ (2,695) (3,148) (8,505) (9,261)
------- ------- ------- -------
Pro forma net income......................... $10,473 $7,906 $29,896 $18,202
======= ======= ======= =======
Net income per common share:
Net income per common share, as reported..... $0.20 $0.16 $0.58 $0.40
Net income per common share, pro forma....... $0.16 $0.11 $0.45 $0.26
Diluted net income per common share, as
reported.................................. $0.19 $0.15 $0.57 $0.39
Diluted net loss per common share, pro forma. $0.15 $0.11 $0.44 $0.26
Page 6
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
NOTE 3. COMPREHENSIVE INCOME
The Company complies with the SFAS No. 130 "Reporting Comprehensive Income,"
which establishes standards for the reporting of comprehensive income and its
components. For the thirty-nine weeks ended May 31, 2003 and June 1, 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 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 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 nine months 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 70 shares of treasury stock during the first
nine 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 May 31, 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
Page 7
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
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 thirty-nine week periods ended
May 31, 2003 and June 1, 2002 has been minimal. The Company periodically
assesses the need for a warranty liability.
NOTE 6. SUBSEQUENT EVENTS
On July 10, 2003, the Board of Directors instituted a policy of regular
quarterly cash dividends to shareholders. Initially, the quarterly dividend rate
will be $0.05 per share, or $0.20 per share annually. The first dividend is
payable on August 11, 2003 to shareholders of record at the close of business on
July 31, 2003. The dividend will result in an anticipated payout of
approximately $13,300 per year, based on the number of shares currently
outstanding.
Page 8
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. 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.
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 four distribution centers
and 90 branch offices. 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 9
RESULTS OF OPERATIONS -
THIRTEEN WEEKS ENDED MAY 31, 2003 AND JUNE 1, 2002
NET SALES increased by $7.0 million, or 3.3%, to $215.6 million in the third
quarter of fiscal 2003 from $208.6 million in the third 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 in the
third quarter of fiscal 2003 were adversely affected by severe snowstorms in the
Northeast and Midwest in March and April, and the Iraq conflict. These events
did not occur in the comparable period in fiscal 2002. Historically, the Company
generally experiences slightly lower average daily sales volume in the fourth
quarter as compared to the third quarter due to summer plant shutdowns. The
Company anticipates these summer plant shutdowns to be longer in duration than
previously experienced due to weak economic conditions, thereby having a more
significant impact on net sales in the fourth quarter of fiscal 2003 as compared
to previous years.
GROSS PROFIT increased by $6.2 million, or 6.8%, to $96.9 million in the third
quarter of fiscal 2003 from $90.7 million in the third quarter of fiscal 2002.
As a percentage of net sales, gross profit increased from 43.5% to 44.9%. 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, continued favorable product mix, and favorable discounts
obtained from vendors.
OPERATING EXPENSES increased by $3.2 million, or 4.4%, to $75.9 million in the
third quarter of fiscal 2003 from $72.7 million in the third quarter of fiscal
2002. As a percentage of net sales, operating expenses increased from 34.9% to
35.2%. The increase in operating expenses in dollars was primarily the result of
an increase in payroll and payroll related 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 third quarter of fiscal
2002.
INCOME FROM OPERATIONS increased by $3.0 million, or 16.4%, to $20.9 million in
the third quarter of fiscal 2003 from $18.0 million in the third quarter of
fiscal 2002. The increase in dollars was primarily attributable to the increase
in net sales and improved gross profit margins described above. As a percentage
of net sales, income from operations increased from 8.6% to 9.7%, primarily the
result of improved gross profit, offset minimally by an increase in operating
expenses.
INTEREST INCOME, NET. Net interest income was $0.3 million for the third quarter
of fiscal 2003 and fiscal 2002. The Company had more invested cash in the third
quarter of fiscal 2003, which was offset by lower interest rates.
PROVISION FOR INCOME TAXES. The effective tax rate was approximately 38.3% and
39.5% for the third 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 and benefits received from the donation of inventory to
educational institutions. Excluding the effect of these factors, the effective
tax rate is approximately 39.5% for both periods. The Company's expected tax
rate for the fourth quarter of fiscal 2003 is 38.3%.
Page 10
NET INCOME increased by $2.1 million, or 19.1%, to $13.2 million in the third
quarter of fiscal 2003 from $11.1 million in the third 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.
THIRTY-NINE WEEKS ENDED MAY 31, 2003 AND JUNE 1, 2002
NET SALES increased by $43.7 million, or 7.4%, to $635.9 million in the first
thirty-nine weeks of fiscal 2003 from $592.2 million in the first thirty-nine
weeks 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 from February through April 2003 by weather due to significant
snowstorms in the Midwest and Northeast, and the Iraq conflict, 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 340,000 as
compared to 329,000 in the first thirty-nine weeks of fiscal 2002. Historically,
the Company generally experiences slightly lower average daily sales volume in
the fourth quarter as compared to the third quarter due to summer plant
shutdowns. The Company anticipates these summer plant shutdowns to be longer in
duration than previously experienced due to weak economic conditions, thereby
having a more significant impact on net sales in the fourth quarter of fiscal
2003 as compared to previous years.
GROSS PROFIT increased by $28.2 million, or 10.9%, to $286.3 million in the
first thirty-nine weeks of fiscal 2003 from $258.1 million in the first
thirty-nine weeks of fiscal 2002. As a percentage of net sales, gross profit
increased from 43.6% to 45.0%. 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, continued favorable
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 $11.6 million, or 5.4%, to $225.0 million in the
first thirty-nine weeks of fiscal 2003 from $213.4 million in the first
thirty-nine weeks of fiscal 2002. The increase in operating expenses in dollars
was primarily the result of an increase in payroll and payroll related 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
thirty-nine weeks of fiscal 2002. As a percentage of net sales, operating
expenses decreased from 36.0% to 35.4%, primarily the result of the distribution
of fixed expenses over a larger revenue base.
INCOME FROM OPERATIONS increased by $16.7 million, or 37.4%, to $61.3 million in
the first thirty-nine weeks of fiscal 2003 from $44.6 million in the first
thirty-nine weeks of fiscal 2002. The increase in dollars was primarily
attributable to the increase in net sales and improved gross profit margins
described above. As a percentage of net sales, income from operations increased
from 7.5% to 9.6%, primarily the result of improved gross profit, offset
minimally by an increase in operating expenses.
Page 11
INTEREST INCOME, NET. Net interest income was approximately $0.8 million and
$0.7 million for the first thirty-nine weeks of fiscal 2003 and fiscal 2002,
respectively. The slight increase in net interest income is a result of more
invested cash in the first thirty-nine weeks of fiscal 2003 as compared to the
first thirty-nine weeks of fiscal 2002, which was offset by lower interest
rates.
PROVISION FOR INCOME TAXES. The effective tax rate was approximately 38.3% and
39.5% for the first thirty-nine weeks 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 and benefits received from the
donation of inventory to educational institutions. Excluding the effect of these
factors, the effective tax rate is approximately 39.5% for both periods. The
Company's expected tax rate for the fourth quarter of fiscal 2003 is 38.3%.
NET INCOME increased by $10.9 million, or 39.8%, to $38.4 million in the first
thirty-nine weeks of fiscal 2003 from $27.5 million in the first thirty-nine
weeks 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 340,000 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 high
quality financial institutions.
Page 12
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.
Deferred Catalog Costs
----------------------
The costs of producing and distributing the Company's principal catalogs are
deferred ($7.6 million and $14.0 million at May 31, 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 May 31, 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 May 31, 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 thirty-nine week periods ended
May 31, 2003 and June 1, 2002 was $54.8 million and $64.4 million, respectively.
The decrease of
Page 13
approximately $9.6 million in net cash provided by operations resulted from
investment in working capital to support an increase in net sales, partially
offset by fluctuations in net deferred tax liabilities and higher net income.
Net cash used in investing activities for the thirty-nine week periods ended May
31, 2003 and June 1, 2002 was $6.6 million and $5.2 million, respectively. The
usage of cash in the first thirty-nine weeks of fiscal 2003 and fiscal 2002 was
attributable to expenditures for property, plant and equipment.
Net cash provided by financing activities for the thirty-nine week period ended
May 31, 2003 and June 1, 2002 was $0.6 million and $14.1 million, respectively.
The net cash provided by financing activities for the first thirty-nine weeks of
fiscal 2003 was primarily attributable to the proceeds received from the
exercise of Class A common stock options, sales of Class A common stock in
connection with the associate stock purchase plan, principally offset by the
purchase of Class A treasury stock. The net cash provided by financing
activities for the first thirty-nine weeks of fiscal 2002 was primarily
attributable to proceeds from the exercise of Class A 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 thirty-nine weeks 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 70,000
shares of treasury stock during the first thirty-nine weeks 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.
On July 10, 2003, the Board of Directors instituted a policy of regular
quarterly cash dividends to shareholders. Initially, the quarterly dividend rate
will be $0.05 per share, or $0.20 per share annually. The first dividend is
payable on August 11, 2003 to shareholders of record at the close of business on
July 31, 2003. The dividend will result in an anticipated payout of
approximately $13.3 million per year, based on the number of shares currently
outstanding.
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 thirty-nine weeks of fiscal 2003 of approximately $1.0 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.
Page 14
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
================ ===============
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
May 31, 2003, the Company was in compliance with the covenants set forth in the
Company's credit facility.
Page 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal financial instrument is a long-term note payable under a
revolving 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 May 31, 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 May
31, 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 16
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.
In designing and evaluating the Company's disclosure controls and procedures (as
defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as
amended), management recognized that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurances of achieving
the desired control objectives and management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. We believe that our disclosure controls and procedures provide
such reasonable assurance.
Page 17
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 the Company and the plaintiffs submitted briefs. Oral arguments on the
motion have not yet been scheduled. The Company intends to defend this action
vigorously.
There are no other material legal proceedings pending against MSC.
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:
-------------------
The Company filed a Form 8-K on April 3, 2003 in connection with
a press release dated April 3, 2003 announcing the results of operations for the
quarterly period ended March 1, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MSC INDUSTRIAL DIRECT CO., INC.
(Registrant)
Dated: July 11, 2003 By: /s/ Mitchell Jacobson
------------------------------- ---------------------------
Chairman, President and
Chief Executive Officer
Dated: July 11, 2003 By: /s/ Charles Boehlke
------------------------------- ----------------------------
Executive Vice President
and Chief Financial Officer
Page 20
CERTIFICATION
I, Mitchell Jacobson, Chief Executive Officer of MSC Industrial Direct Co.,
Inc., 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: July 11, 2003
/s/ Mitchell Jacobson
------------------------------
Chairman, President
and Chief Executive Officer
Page 21
CERTIFICATION
I, Charles Boehlke, Chief Financial Officer of MSC Industrial Direct Co., Inc.,
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: July 11, 2003
/s/ Charles Boehlke
------------------------------
Executive Vice President
and Chief Financial Officer