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EX-31.1 - EX-31.1 - MSC INDUSTRIAL DIRECT CO INCmsm-20151128xex311.htm
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EX-32.2 - EX-32.2 - MSC INDUSTRIAL DIRECT CO INCmsm-20151128xex322.htm
EX-32.1 - EX-32.1 - MSC INDUSTRIAL DIRECT CO INCmsm-20151128xex321.htm
EX-10.4 - EX-10.4 - MSC INDUSTRIAL DIRECT CO INCmsm-20151128ex104992a39.htm
EX-10.2 - EX-10.2 - MSC INDUSTRIAL DIRECT CO INCmsm-20151128ex102548931.htm
EX-10.3 - EX-10.3 - MSC INDUSTRIAL DIRECT CO INCmsm-20151128ex103a95e53.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 10-Q

 

 

 

 

 

 

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended November 28, 2015

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For transition period from           to           

 

Commission File No.: 1-14130

 

 

 

MSC INDUSTRIAL DIRECT CO., INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York
(State or Other Jurisdiction of
Incorporation or Organization)

11-3289165
(I.R.S. Employer Identification No.)

 

 

75 Maxess Road, Melville, New York
(Address of principal executive offices)

11747
(Zip Code)

 

(516) 812-2000

(Registrant’s telephone number, including area code)

 

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a “smaller reporting company.” See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer 

Accelerated filer 

Non‑accelerated filer 
(Do not check if a smaller reporting company)

Smaller reporting company 

 

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

As of December 28, 2015, 48,220,046 shares of Class A common stock and 13,295,747 shares of Class B common stock of the registrant were outstanding.

 

 

 

 


 

 

SAFE HARBOR STATEMENT

This Quarterly Report on Form 10-Q (the “Report”) contains forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing such forward‑looking statements may be found in Items 2 and 3 of Part I and Item 1 of Part II of this Report, as well as within this Report generally. The words “believes,” “anticipates,” “thinks,” “expects,” “estimates,” “plans,” “intends,” and similar expressions are intended to identify forward‑looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward‑looking statements. We undertake no obligation to publicly disclose any revisions to these forward‑looking statements to reflect events or circumstances occurring subsequent to filing this Report with the Securities and Exchange Commission (the “SEC”). These forward‑looking statements are subject to risks and uncertainties, including, without limitation, those discussed in this section and Items 2 and 3 of Part I, as well as in Part II, Item 1A, “Risk Factors” of this Report, and in Part I, Item 1A, “Risk Factors” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended August 29, 2015. In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, future results may differ materially from historical results or from those discussed or implied by these forward‑looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward‑looking statements. These risks and uncertainties include, but are not limited to:

·

general economic conditions in the markets in which the Company operates;

·

risks associated with the integration of acquired businesses;

·

risk of delays in expanding our customer fulfillment centers;

·

current economic, political, and social conditions;

·

changing customer and product mixes;

·

competition;

·

industry consolidation and other changes in the industrial distribution sector;

·

volatility in commodity and energy prices;

·

the outcome of potential government or regulatory proceedings or future litigation;

·

credit risk of our customers;

·

risk of cancellation or rescheduling of customer orders;

·

work stoppages or other business interruptions (including those due to extreme weather conditions) at transportation centers or shipping ports;

·

risk of loss of key suppliers, key brands or supply chain disruptions;

·

dependence on our information systems and the risks of business disruptions arising from changes to our information systems and disruptions due to catastrophic events, power outages, natural disasters, computer system or network failures, computer viruses, physical or electronics break-ins and cyber-attacks;  

·

retention of key personnel;

·

failure to comply with applicable environmental, health and safety laws and regulations;

·

goodwill and intangible assets recorded as a result of our acquisitions could be impaired; and

·

disclosing our use of “conflict minerals” in certain of the products we distribute could raise reputational and other risks.

 

 

2


 

 

 

 

 

 

MSC INDUSTRIAL DIRECT CO., INC.

INDEX

 

 

 

 

 

Page

PART I.  FINANCIAL INFORMATION 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets as of November 28, 2015 and August 29, 2015

 

Condensed Consolidated Statements of Income for the Thirteen Weeks Ended November 28, 2015 and November 29, 2014

 

Condensed Consolidated Statements of Comprehensive Income for the Thirteen Weeks Ended November 28, 2015 and November 29, 2014

 

Condensed Consolidated Statement of Shareholders’ Equity for the Thirteen Weeks Ended November 28, 2015

 

Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended November 28, 2015 and November 29, 2014

 

Notes to Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

21 

Item 4.

Controls and Procedures

21 

PART II.  OTHER INFORMATION 

 

Item 1.

Legal Proceedings

23 

Item 1A.

Risk Factors

23 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23 

Item 3.

Defaults Upon Senior Securities

23 

Item 4.

Mine Safety Disclosures

23 

Item 5.

Other Information

24 

Item 6.

Exhibits

24 

SIGNATURES 

25 

 

 

3


 

 

PART I. FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

MSC INDUSTRIAL DIRECT CO., INC.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 28,

 

August 29,

 

2015

 

2015

 

(Unaudited)

 

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

$

37,879 

 

$

38,267 

Accounts receivable, net of allowance for doubtful accounts of $13,735 and $11,312, respectively

 

387,561 

 

 

403,468 

Inventories

 

492,450 

 

 

506,631 

Prepaid expenses and other current assets

 

42,275 

 

 

39,067 

Deferred income taxes

 

44,643 

 

 

44,643 

Total current assets

 

1,004,808 

 

 

1,032,076 

Property, plant and equipment, net

 

292,693 

 

 

291,156 

Goodwill

 

623,313 

 

 

623,626 

Identifiable intangibles, net

 

115,519 

 

 

119,805 

Other assets

 

33,190 

 

 

34,543 

Total assets

$

2,069,523 

 

$

2,101,206 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Revolving credit note

$

118,000 

 

$

188,000 

Current maturities of long-term debt

 

32,446 

 

 

25,515 

Accounts payable

 

103,043 

 

 

114,328 

Accrued liabilities

 

122,739 

 

 

94,494 

Total current liabilities

 

376,228 

 

 

422,337 

Long-term debt, net of current maturities

 

203,221 

 

 

214,789 

Deferred income taxes and tax uncertainties

 

131,132 

 

 

131,210 

Total liabilities

 

710,581 

 

 

768,336 

Commitments and Contingencies

 

 

 

 

 

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; 56,403,008 and 56,400,070 shares issued, respectively

 

56 

 

 

56 

Class B common stock (ten votes per share); $0.001 par value; 50,000,000 shares authorized; 13,295,747 shares issued and outstanding

 

13 

 

 

13 

Additional paid-in capital

 

608,922 

 

 

604,905 

Retained earnings

 

1,260,792 

 

 

1,232,381 

Accumulated other comprehensive loss 

 

(18,367)

 

 

(17,252)

Class A treasury stock, at cost, 8,119,876 and 8,037,696 shares, respectively

 

(492,474)

 

 

(487,233)

Total shareholders’ equity

 

1,358,942 

 

 

1,332,870 

Total liabilities and shareholders’ equity

$

2,069,523 

 

$

2,101,206 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4


 

 

MSC INDUSTRIAL DIRECT CO., INC.

Condensed Consolidated Statements of Income 

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

November 28,

 

November 29,

 

 

2015

 

2014

Net sales

 

$

706,819 

 

$

731,091 

Cost of goods sold

 

 

387,847 

 

 

400,942 

Gross profit

 

 

318,972 

 

 

330,149 

Operating expenses

 

 

228,584 

 

 

236,178 

Income from operations

 

 

90,388 

 

 

93,971 

Other (expense) income:

 

 

 

 

 

 

Interest expense

 

 

(1,556)

 

 

(944)

Interest income

 

 

163 

 

 

Other income, net

 

 

63 

 

 

177 

Total other expense

 

 

(1,330)

 

 

(762)

Income before provision for income taxes

 

 

89,058 

 

 

93,209 

Provision for income taxes

 

 

34,029 

 

 

35,792 

Net income

 

$

55,029 

 

$

57,417 

Per share information:

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

Basic

 

$

0.89 

 

$

0.92 

Diluted

 

$

0.89 

 

$

0.91 

Weighted average shares used in computing net income per common share:

 

 

 

 

 

 

Basic

 

 

61,296 

 

 

61,246 

Diluted

 

 

61,408 

 

 

61,542 

Cash dividend declared per common share

 

$

0.43 

 

$

3.40 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

5


 

 

MSC INDUSTRIAL DIRECT CO., INC.

Condensed Consolidated Statements of Comprehensive Income

 (In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

November 28,

 

November 29,

 

 

2015

 

2014

Net income, as reported

 

$

55,029 

 

$

57,417 

Foreign currency translation adjustments

 

 

(1,115)

 

 

(3,948)

Comprehensive income

 

$

53,914 

 

$

53,469 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

6


 

 

MSC INDUSTRIAL DIRECT CO., INC.

Condensed Consolidated Statement of Shareholders’ Equity

Thirteen Weeks Ended November 28, 2015

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

Class B Common Stock

 

Additional

 

 

 

 

Accumulated Other

 

Class A Treasury Stock

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Paid-In Capital

 

Retained Earnings

 

Comprehensive Loss

 

Shares

 

Amount at Cost

 

Total

Balance at August 29, 2015

 

56,400 

 

$

56 

 

13,296 

 

$

13 

 

$

604,905 

 

$

1,232,381 

 

$

(17,252)

 

8,038 

 

$

(487,233)

 

$

1,332,870 

Exercise of common stock options, including income tax deficiencies of $143

 

 

 

 —

 

 —

 

 

 —

 

 

125 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

125 

Common stock issued under associate stock purchase plan

 

 —

 

 

 —

 

 —

 

 

 —

 

 

271 

 

 

 —

 

 

 —

 

(15)

 

 

555 

 

 

826 

Issuance of restricted common stock, net of cancellations

 

(4)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

3,621 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

3,621 

Purchase of treasury stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

97 

 

 

(5,796)

 

 

(5,796)

Cash dividends on Class A common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(20,790)

 

 

 —

 

 —

 

 

 —

 

 

(20,790)

Cash dividends on Class B common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(5,717)

 

 

 —

 

 —

 

 

 —

 

 

(5,717)

Dividend equivalent units declared

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(111)

 

 

 —

 

 —

 

 

 —

 

 

(111)

Foreign currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,115)

 

 —

 

 

 —

 

 

(1,115)

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

55,029 

 

 

 —

 

 —

 

 

 —

 

 

55,029 

Balance at November 28, 2015

 

56,403 

 

$

56 

 

13,296 

 

$

13 

 

$

608,922 

 

$

1,260,792 

 

$

(18,367)

 

8,120 

 

$

(492,474)

 

$

1,358,942 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7


 

 

MSC INDUSTRIAL DIRECT CO., INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

November 28,

 

November 29,

 

 

2015

 

2014

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income

 

$

55,029 

 

$

57,417 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

17,925 

 

 

17,012 

Stock-based compensation

 

 

3,621 

 

 

5,039 

Loss on disposal of property, plant, and equipment

 

 

247 

 

 

230 

Provision for doubtful accounts

 

 

2,997 

 

 

480 

Deferred income taxes and tax uncertainties

 

 

(78)

 

 

 —

Excess tax benefits from stock-based compensation

 

 

(154)

 

 

(1,791)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

12,567 

 

 

(10,137)

Inventories

 

 

13,832 

 

 

(44,790)

Prepaid expenses and other current assets

 

 

(3,226)

 

 

(4,797)

Other assets

 

 

583 

 

 

72 

Accounts payable and accrued liabilities

 

 

18,767 

 

 

39,017 

Total adjustments

 

 

67,081 

 

 

335 

Net cash provided by operating activities

 

 

122,110 

 

 

57,752 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(15,575)

 

 

(13,358)

Net cash used in investing activities

 

 

(15,575)

 

 

(13,358)

Cash Flows from Financing Activities:

 

 

 

 

 

 

Purchases of treasury stock

 

 

(5,796)

 

 

(3,590)

Payments of regular cash dividends

 

 

(26,391)

 

 

(24,563)

Payment of special cash dividend

 

 

 —

 

 

(184,218)

Payments on capital lease and financing obligations

 

 

(161)

 

 

(767)

Excess tax benefits from stock-based compensation

 

 

154 

 

 

1,791 

Proceeds from sale of Class A common stock in connection with associate stock purchase plan

 

 

826 

 

 

942 

Proceeds from exercise of Class A common stock options

 

 

268 

 

 

6,381 

Borrowings under financing obligations

 

 

453 

 

 

530 

Borrowings under Credit Facility

 

 

35,000 

 

 

235,000 

Payment of borrowings under Credit Facility

 

 

(111,250)

 

 

(76,250)

Net cash used in financing activities

 

 

(106,897)

 

 

(44,744)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

(26)

 

 

(100)

Net decrease in cash and cash equivalents

 

 

(388)

 

 

(450)

Cash and cash equivalents—beginning of period

 

 

38,267 

 

 

47,154 

Cash and cash equivalents—end of period

 

$

37,879 

 

$

46,704 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Cash paid for income taxes

 

$

4,495 

 

$

5,523 

Cash paid for interest

 

$

1,247 

 

$

837 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8


 

MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts and shares in thousands, except per share data)

(Unaudited)

 

 

 

 

Note 1. Basis of Presentation

The accompanying condensed consolidated financial statements include MSC Industrial Direct Co., Inc. (“MSC”) and all of its subsidiaries (hereinafter referred to collectively as the “Company”). All intercompany balances and transactions have been eliminated in consolidation.

The unaudited condensed 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 notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. Operating results for the thirteen week period ended November 28, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending September 3, 2016. For further information, refer to the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 29, 2015.

 

The Company’s fiscal year ends on the Saturday closest to August 31 of each year. Unless the context requires otherwise, references to years contained herein pertain to the Company’s fiscal year. The Company’s 2016 fiscal year will be a 53-week accounting period that will end on September 3, 2016 and its 2015 fiscal year was a 52-week accounting period that ended on August 29, 2015.

Note 2. Net Income per Share

The Company’s non-vested restricted stock awards contain non-forfeitable rights to dividends and meet the criteria of a participating security as defined by Accounting Standards Codification ("ASC") Topic 260, “Earnings Per Share”. Under the two-class method, net income per share is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, net income is allocated to both common shares and participating securities based on their respective weighted average shares outstanding for the period. 

 

The following table sets forth the computation of basic and diluted net income per common share under the two-class method for the thirteen weeks ended November 28, 2015 and November 29, 2014, respectively:

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

November 28,

 

November 29,

 

 

2015

 

2014

 

 

 

 

 

 

 

Net income as reported

 

$

55,029 

 

$

57,417 

Less: Distributed net income available to participating securities

 

 

(89)

 

 

(1,238)

Less: Undistributed net income available to participating securities

 

 

(163)

 

 

 —

Numerator for basic net income per share:

 

 

 

 

 

 

Undistributed and distributed net income available to common shareholders         

 

$

54,777 

 

$

56,179 

  Add: Undistributed net income allocated to participating securities

 

 

163 

 

 

 —

Less: Undistributed net income reallocated to participating securities

 

 

(162)

 

 

 —

 

 

 

 

 

 

 

Numerator for diluted  net income per share:

 

 

 

 

 

 

Undistributed and distributed net income available to common shareholders

 

$

54,778 

 

$

56,179 

   

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

Weighted average shares outstanding for basic net income per share

 

 

61,296 

 

 

61,246 

Effect of dilutive securities

 

 

112 

 

 

296 

Weighted average shares outstanding for diluted net income per share

 

 

61,408 

 

 

61,542 

 

 

 

 

 

 

 

9


 

MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts and shares in thousands, except per share data)

(Unaudited)

 

Net income per share Two-class method:

 

 

 

 

 

 

Basic

 

$

0.89 

 

$

0.92 

Diluted

 

$

0.89 

 

$

0.91 

 

Antidilutive stock options of 1,058 were not included in the computation of diluted earnings per share for the thirteen week period ended November 28, 2015.  There were no antidilutive stock options excluded from the computation of diluted earnings per share for the thirteen week period ended November 29, 2014.  

Note 3. Stock-Based Compensation

The Company accounts for all share-based payments in accordance with ASC Topic 718, "Compensation—Stock Compensation" ("ASC 718"). The stock‑based compensation expense related to the stock option plans and the Associate Stock Purchase Plan included in operating expenses was $1,256 and $1,732 for the thirteen week periods ended November 28, 2015 and November 29, 2014, respectively. Tax benefits related to these expenses for the thirteen week periods ended November 28, 2015 and November 29, 2014 were $451 and $627, respectively. 

The fair value of each option grant is estimated on the date of grant using the Black‑Scholes option pricing model with the following assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

November 28,

 

November 29,

 

 

2015

 

2014

Expected life (in years)

 

3.9 

 

 

3.9 

 

Risk-free interest rate

 

1.09 

%

 

1.09 

%

Expected volatility

 

21.82 

%

 

24.49 

%

Expected dividend yield

 

2.40 

%

 

1.70 

%

Weighted-average grant-date fair value

$

8.03 

 

$

14.06 

 

 

 

 

 

 

 

 

 

A summary of the Company’s stock option activity for the thirteen week period ended November 28, 2015 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options

 

Weighted-Average Exercise Price per Share

 

Weighted-Average Remaining Contractual Term (in years)

 

Aggregate Intrinsic Value

Outstanding on August 29, 2015

1,274 

 

$

73.10 

 

 

 

 

 

Granted

586 

 

 

58.90 

 

 

 

 

 

Exercised

(7)

 

 

39.42 

 

 

 

 

 

Canceled/Forfeited

(18)

 

 

80.75 

 

 

 

 

 

Outstanding on November 28, 2015

1,835 

 

$

68.61 

 

5.1 

 

$

3,249 

Exercisable on November 28, 2015

774 

 

$

68.42 

 

3.5 

 

$

1,872 

 

 

 

 

 

 

 

 

 

 

The unrecognized share‑based compensation cost related to stock option expense at November 28, 2015 was $10,464 and will be recognized over a weighted average period of 3.2 years. The total intrinsic value of options exercised, which represents the difference between the exercise price and market value of common stock measured at each individual exercise date, during the thirteen week periods ended November 28, 2015 and November 29, 2014 was $165 and $1,980, respectively.

10


 

MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts and shares in thousands, except per share data)

(Unaudited)

 

A summary of the non‑vested restricted share award (“RSA”) activity under the Company’s 2005 Omnibus Incentive Plan and 2015 Omnibus Incentive Plan for the thirteen weeks ended November 28, 2015 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Weighted-Average  Grant-Date Fair Value

Non-vested restricted share awards at August 29, 2015

391 

 

$

75.39 

Granted

 

 

62.31 

Vested

(94)

 

 

65.66 

Canceled/Forfeited

(5)

 

 

77.64 

Non-vested restricted share awards at November 28, 2015

293 

 

$

78.44 

 

 

 

 

 

 

The fair value of each RSA is the closing stock price on the New York Stock Exchange of the Company’s Class A common stock on the date of grant. Upon vesting, a portion of the RSA award may be withheld to satisfy the minimum statutory withholding taxes. The remaining RSAs will be settled in shares of the Company’s Class A common stock after the vesting period.  Stock‑based compensation expense recognized for the RSAs was $1,726 and $2,767 for the thirteen week periods ended November 28, 2015 and November 29, 2014, respectively. The unrecognized compensation cost related to RSAs at November 28, 2015 was $13,815 and will be recognized over a weighted average period of 2.8 years

A summary of the Company’s non-vested Restricted Stock Unit (“RSU”) award activity for the thirteen weeks ended November 28, 2015 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Weighted- Average Grant- Date Fair Value

Non-vested restricted stock unit awards at August 29, 2015

62 

 

$

55.09 

Granted

188 

 

 

58.90 

Vested

 —

 

 

 —

Canceled/Forfeited

(1)

 

 

58.90 

Non-vested restricted stock unit awards at November 28, 2015

249 

 

$

57.95 

 

 

 

 

 

 

The fair value of each RSU is the closing stock price on the New York Stock Exchange of the Company’s Class A common stock on the date of grant. Upon vesting, a portion of the RSU award may be withheld to satisfy the minimum statutory withholding taxes. The remaining RSUs will be settled in shares of the Company’s Class A common stock after the vesting period. These awards accrue dividend equivalents on outstanding units (in the form of additional stock units) based on dividends declared on the Company’s Class A common stock and these dividend equivalents convert to unrestricted common stock on the vesting dates of the underlying RSUs. The dividend equivalents are not included in the RSU table above. Stock‑based compensation expense recognized for the RSUs was $639 and $540 for the thirteen week periods ended November 28, 2015 and November 29, 2014, respectively. The unrecognized compensation cost related to the RSUs at November 28, 2015 was  $10,050 and is expected to be recognized over a weighted average period of 3.9 years.

Note 4. Fair Value

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

Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

11


 

MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts and shares in thousands, except per share data)

(Unaudited)

 

Level 2—Include other inputs that are directly or indirectly observable in the marketplace.

Level 3—Unobservable inputs which are supported by little or no market activity.

In connection with the construction of the Company’s new customer fulfillment center in Columbus, Ohio, the Company entered into an arrangement with the Columbus-Franklin County Finance Authority (“Finance Authority”) which provides savings on state and local sales taxes imposed on construction materials to entities that finance the transactions through them. Under this arrangement, the Finance Authority has issued taxable bonds to finance the structure and site improvements of the Company’s customer fulfillment center. The taxable bonds were approximately $27,023 at both November 28, 2015 and August 29, 2015. The taxable bonds are classified as available for sale securities in accordance with ASC Topic 320. The securities are recorded at fair value in Other Assets in the Consolidated Balance Sheet. The fair values of these securities are based on observable inputs in non-active markets, which are therefore classified as Level 2 in the hierarchy. The Company did not record any significant gains or losses on these securities during the thirteen week period ended November 28, 2015. The outstanding principal amount of each bond bears interest at the rate of 2.4% per year. Interest is payable on a semiannual basis in arrears on each interest payment date.

 

In addition, based on borrowing rates currently available to the Company for borrowings with similar terms, the carrying values of the Company’s capital lease obligations also approximate fair value. The fair value of the Company’s long-term debt, including current maturities, is estimated based on quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. The carrying amount of the Company’s debt at November 28, 2015 approximates its fair value.

 

The Company’s financial instruments, other than those presented in the disclosure above, include cash, receivables, accounts payable, and accrued liabilities. Management believes the carrying amount of the aforementioned financial instruments is a reasonable estimate of fair value as of November 28, 2015 and August 29, 2015 due to the short-term maturity of these items.

 

During the thirteen weeks ended November 28, 2015 and November 29, 2014, the Company had no measurements of non-financial assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition.

 

Note 5. Debt and Capital Lease Obligations

Debt at November 28, 2015 and August 29, 2015 consisted of the following:

 

 

 

 

 

 

 

 

 

 

November 28,

 

August 29,

 

 

2015

 

2015

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Credit Facility:

 

 

 

 

 

 

   Revolver

 

$

118,000 

 

$

188,000 

   Term loan

 

 

206,250 

 

 

212,500 

Capital lease and financing obligations

 

 

29,417 

 

 

27,804 

Total debt

 

$

353,667 

 

$

428,304 

   Less: current portion of Credit Facility

 

 

(149,250)

 

 

(213,000)

   Less: current portion of capital lease and financing obligations

 

 

(1,196)

 

 

(515)

Long-term debt

 

$

203,221 

 

$

214,789 

12


 

MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts and shares in thousands, except per share data)

(Unaudited)

 

Credit Facility

In April 2013, in connection with the acquisition of the Class C Solutions Group (“CCSG”), the Company entered into a $650,000 credit facility (the “Credit Facility”). The Credit Facility, which matures in April 2018, provides for a five-year unsecured revolving loan facility in the aggregate amount of $400,000 and a five-year unsecured term loan facility in the aggregate amount of $250,000.  

 

The Credit Facility also permits the Company, at its request, and upon the satisfaction of certain conditions, to add one or more incremental term loan facilities and/or increase the revolving loan commitments in an aggregate amount not to exceed $200,000. Subject to certain limitations, each such incremental term loan facility or revolving commitment increase will be on terms as agreed to by the Company, the Administrative Agent and the lenders providing such financing.

 

Borrowings under the Credit Facility bear interest, at the Company’s option, either at (i) the LIBOR (London Interbank Offered Rate) rate plus the applicable margin for LIBOR loans ranging from 1.00% to 1.375%, based on the Company’s consolidated leverage ratio; or (ii) the greatest of (a) the Administrative Agent’s prime rate in effect on such day, (b) the federal funds effective rate in effect on such day, plus 0.50% and (c) the LIBOR rate that would be calculated as of such day in respect of a proposed LIBOR loan with a one-month interest period, plus 1.00%, plus, in the case of each of clauses (a) through (c), an applicable margin ranging from 0.00% to 0.375%, based on the Company’s consolidated leverage ratio. The Company is required to pay a quarterly undrawn fee ranging from 0.10% to 0.20% per annum on the unutilized portion of the Credit Facility based on the Company’s consolidated leverage ratio. The Company is also required to pay quarterly letter of credit usage fees ranging between 1.00% to 1.375% (based on the Company’s consolidated leverage ratio) on the amount of the daily average outstanding letters of credit, and a quarterly fronting fee of 0.125% per annum on the undrawn and unexpired amount of each letter of credit. The applicable borrowing rate for the Company for any borrowings outstanding under the Credit Facility at November 28, 2015 was 1.32% which represents LIBOR plus 1.125%. Based on the interest period the Company selects, interest may be payable every one, two, three or six months. Interest is reset at the end of each interest period. The Company currently elects to have loans under the Credit Facility bear interest based on LIBOR with one-month interest periods.

 

The Credit Facility contains several restrictive covenants including the requirement that the Company maintain a maximum consolidated leverage ratio of total indebtedness to EBITDA (earnings before interest expense, taxes, depreciation, amortization and stock based compensation) of no more than 3.00 to 1.00, and a minimum consolidated interest coverage ratio of EBITDA to total interest expense of at least 3.00 to 1.00, during the term of the Credit Facility. Borrowings under the Credit Facility are guaranteed by certain of the Company’s subsidiaries.

 

During the thirteen week period ended November 28, 2015, the Company borrowed $35,000 under the revolving loan facility and repaid $105,000 and $6,250 of the revolving loan facility and the term loan facility, respectively. At November 28, 2015 and August 29, 2015, the Company was in compliance with the operating and financial covenants of the Credit Facility.

 

Capital Lease and Financing Obligations

In connection with the construction of the Company’s new customer fulfillment center in Columbus, Ohio, the Finance Authority holds the title to the building and entered into a long-term lease with the Company. The lease has a 20-year term with a prepayment option without penalty between 7 and 20 years. At the end of the lease term, the building’s title is transferred to the Company for a nominal amount when the principal of and interest on the bonds have been fully paid. The lease has been classified as a capital lease in accordance with ASC Topic 840. At November 28, 2015 and August 29, 2015, the capital lease obligation was approximately $27,023. 

From time to time, the Company enters into capital leases and financing arrangements with vendors to purchase certain equipment. The equipment acquired from these vendors is paid over a specified period of time based on the terms agreed upon. During the thirteen week period ended November 28, 2015, the Company entered into a capital lease and various financing obligations for certain information technology equipment totaling $1,321 and $453, respectively. During the fiscal year ended August 29, 2015, the Company entered into various financing obligations for certain information

13


 

MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts and shares in thousands, except per share data)

(Unaudited)

 

technology equipment totaling $530. The gross amount of property and equipment acquired under these capital leases and financing agreements at November 28, 2015 and August 29, 2015 was approximately $33,778 and $32,535 respectively. Related accumulated amortization totaled $4,897 and $4,815 as of November 28, 2015 and August 29, 2015, respectively. 

Note 6. Shareholders’ Equity

The Company paid regular cash dividends of $0.43 per common share totaling $26,391 for the thirteen weeks ended November 28, 2015. For the thirteen weeks ended November 29, 2014, the Company paid cash dividends of $208,781 which consisted of a special cash dividend of $3.00 per common share and regular cash dividends of $0.40 per common share totaling $184,218 and $24,563, respectively.  On December 16, 2015, the Board of Directors declared a quarterly cash dividend of $0.43 per share payable on January 26, 2016 to shareholders of record at the close of business on January 12, 2016.  The dividend will result in a payout of approximately $26,452, based on the number of shares outstanding at December 28, 2015.

 

The Board of Directors established the MSC Stock Repurchase Plan (the “Repurchase Plan”) which allows the Company to repurchase shares at any time and in any increments it deems appropriate in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During the thirteen week period ended November 28, 2015, the Company repurchased 97 shares of its Class A common stock for $5,796, which is reflected at cost as treasury stock in the accompanying condensed consolidated financial statements. Approximately 31 of these shares were repurchased by the Company to satisfy the Company’s associates’ tax withholding liability associated with its share-based compensation program. As of November 28, 2015, the maximum number of shares that can be repurchased under the Repurchase Plan was 1,677 shares.

 

Note 7. Product Warranties

The Company generally offers a maximum one-year warranty, including parts and labor, for some of its machinery products. The specific terms and conditions of those warranties vary depending upon the product sold. The Company may be able to recoup some of these costs through product warranties it holds with its original equipment manufacturers, which typically range from thirty to ninety days. In general, many of the Company’s general merchandise products are covered by third party original equipment manufacturers’ warranties. The Company’s warranty expense for the thirteen week periods ended November 28, 2015 and November 29, 2014 was minimal.

Note 8. Income Taxes

During the thirteen week period ended November 28, 2015, there were no material changes in unrecognized tax benefits. 

Note 9. Legal Proceedings

There are various claims, lawsuits, and pending actions against the Company incidental to the operation of its business. Although the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.

Note 10. Recently Issued Accounting Standards

Deferred Taxes

In November 2015, the FASB issued Accounting Standards Update ASU (“ASU”) 2015-17, Balance Sheet Classification of Deferred Taxes. This update requires an entity to classify deferred tax liabilities and assets as noncurrent within a classified balance sheet. ASU 2015-17 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016. This update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Early application is permitted as of the beginning of the interim or annual

14


 

MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts and shares in thousands, except per share data)

(Unaudited)

 

reporting period. The Company does not expect adoption of ASU 2015-17 to have a material impact on its financial position, results of operations or cash flows.

Simplifying the Measurement of Inventory

In July 2015, the FASB issued ASU No.  2015-11, Simplifying the Measurement of Inventory (Topic 330), which requires an entity to measure inventory at the lower of cost or net realizable value, which consists of the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. For public entities, the updated guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The guidance is to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company does not expect adoption of ASU 2015-11 to have a material impact on its financial position, results of operations or cash flows.

Presentation of Debt Issuance Costs

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs  (Subtopic 835-30), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. For public business entities, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Entities should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, entities are required to comply with the applicable disclosures for a change in an accounting principle. The Company does not expect adoption of ASU 2015-03 to have a material impact on its financial position, results of operations or cash flows.

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company for its fiscal 2019 first quarter. Early application is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its condensed consolidated financial statements and related disclosures. The Company has neither selected a transition method, nor determined the impact that the adoption of the pronouncement may have on its financial position, results of operations or cash flows.

 

 

 

15


 

 

 

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 29, 2015 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 Annual Report on Form 10-K.

General

MSC Industrial Direct Co., Inc. (together with its subsidiaries, “MSC,” the “Company,” “we,” “our,” or “us”) is a leading North American distributor of a broad range of metalworking and maintenance, repair, and operations (“MRO”) products and services. Our goal is to help our customers drive greater productivity, profitability and growth with more than one million products, inventory management and other supply chain solutions, and deep expertise from 75 years of working with customers across industries. We continue to implement our strategies to gain market share, generate new customers, increase sales to existing customers, and diversify our customer base.

 

Our experienced team of more than 6,500 associates works with our customers to help drive results for their businesses, from keeping operations running efficiently today to continuously rethinking, retooling, and optimizing for a more productive tomorrow. We offer approximately 1,070,000 stock-keeping units (“SKUs”) through our master catalogs; weekly, monthly and quarterly specialty and promotional catalogs; brochures; and the Internet, including our websites, mscdirect.com, and use-enco.com (the “MSC Websites”). We service our customers from 12 customer fulfillment centers (eight customer fulfillment centers are located within the United States which includes five primary customer fulfillment centers, one is located in the United Kingdom (the “U.K.”), and three are located in Canada) and 97 branch offices. Many 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.

 

We grew our field sales and service associate headcount to 2,346 at November 28, 2015,  compared to 2,343 at November 29, 2014.  Beginning in fiscal 2016, we have adjusted this headcount metric to include both field sales associates and service personnel.  We believe this better reflects us as a sales and service organization given our increased concentration in inventory management solutions, including Vendor Managed Inventory (“VMI”) systems and vending machine systems.  We will continue to manage the timing of our sales and service headcount expansion based on economic conditions and our selected mix of growth investments.

 

Business Environment

We utilize various indices when evaluating the level of our business activity.  The Institute for Supply Management’s Purchasing Manager's Index (“PMI”), which measures the economic activity of the U.S. manufacturing sector, is important to our planning because it historically has been an indicator of our manufacturing customers’ activity. Approximately 69% of our revenues came from sales in the manufacturing sector during the first quarter of our fiscal year 2016, including certain national account customers.  A PMI reading below 50.0% generally indicates that the manufacturing sector is expected to contract. Conversely, a PMI reading above 50.0% generally indicates that the manufacturing sector is expected to expand. The PMI evidenced a transition from an expanding to contracting manufacturing sector environment throughout the first quarter of fiscal year 2016. The ISM index was 48.2% for the month of December 2015 indicating contraction in manufacturing for the second consecutive month, and averaged 51.4% for the past twelve months. This is also its lowest level since June 2009.  Details released with the most recent index indicate that economic activity in the manufacturing sector related to new orders and production has continued to contract for the second consecutive month; also, pricing continued to contract for the fourteenth consecutive month indicating a decrease in raw materials prices.

 

In addition to the PMI, we utilize The Metalworking Business Index (“MBI”).  The MBI measures the economic activity of the metalworking industry, focusing only on durable goods manufacturing. The MBI functions similarly to the PMI, where a value below 50.0 generally indicates contraction and a value above 50.0 generally indicates expansion.  The MBI of 43.2 showed that the industry contracted in November 2015 for the eighth month in a row and averaged 47.5 for the past twelve months.  New orders, production and employment continued to contract, although at a slower rate than the previous month. Pricing fell sharply, reaching its lowest level since May 2009.  

 

We will continue to monitor the current economic conditions for its impact on our customers and markets and continue to assess both risks and opportunities that may affect our business.

16


 

 

 

Thirteen Week Period Ended November 28, 2015 Compared to the Thirteen Week Period Ended November 29, 2014

The table below summarizes the Company’s results of operations both in dollars (in thousands) and as a percentage of net sales for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

 

 

 

 

 

November 28, 2015

 

November 29, 2014

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

 

%

 

 

$

 

 

%

 

 

$

 

 

%

Net sales

 

$

706,819 

 

 

100.0% 

 

$

731,091 

 

 

100.0% 

 

$

(24,272)

 

 

(3.3)%

Cost of goods sold

 

 

387,847 

 

 

54.9% 

 

 

400,942 

 

 

54.8% 

 

 

(13,095)

 

 

(3.3)%

Gross profit

 

 

318,972 

 

 

45.1% 

 

 

330,149 

 

 

45.2% 

 

 

(11,177)

 

 

(3.4)%

Operating expenses

 

 

228,584 

 

 

32.3% 

 

 

236,178 

 

 

32.3% 

 

 

(7,594)

 

 

(3.2)%

Income from operations

 

 

90,388 

 

 

12.8% 

 

 

93,971 

 

 

12.9% 

 

 

(3,583)

 

 

(3.8)%

Total other expense

 

 

(1,330)

 

 

(0.2)%

 

 

(762)

 

 

(0.1)%

 

 

(568)

 

 

74.5% 

Income before provision for income taxes

 

 

89,058 

 

 

12.6% 

 

 

93,209 

 

 

12.7% 

 

 

(4,151)

 

 

(4.5)%

Provision for income taxes

 

 

34,029 

 

 

4.8% 

 

 

35,792 

 

 

4.9% 

 

 

(1,763)

 

 

(4.9)%

Net income

 

$

55,029 

 

 

7.8% 

 

$

57,417 

 

 

7.9% 

 

$

(2,388)

 

 

(4.2)%

 

 

Net Sales

Net sales decreased 3.3% or approximately $24.3 million, for the thirteen week period ended November 28, 2015.  We estimate that this $24.3 million decrease in net sales is comprised of (i) approximately $24.4 million of lower sales volume, (ii) approximately $2.2 million from foreign exchange impact, partially offset by (iii) approximately $2.3 million from pricing, which includes changes in customer and product mix, discounting and other items.  Of the above $24.3 million decrease in net sales, sales to our Large Account Customers increased by approximately $5.4 million, offset by a decrease in our remaining business by approximately $29.7 million. 

 

The table below shows the change in our fiscal quarterly average daily sales by total company and by customer type from the same period in the prior fiscal year:

 

 

 

 

 

 

 

 

 

Average Daily Sales Percentage Change

(unaudited)

 

 

 

 

 

 

 

2016 vs. 2015 Fiscal Period

 

Thirteen  Week Period Ended Fiscal Q1

 

% of Total Business

 

 

 

 

 

 

 

Total Company

 

(3.3)

%

 

 

 

Manufacturing Customers(1)

 

(4.9)

%

 

69.0 

%

Non-Manufacturing Customers(1)

 

1.3 

%

 

31.0 

%

 

 

 

 

 

 

 

 

   

(1)

Excludes U.K. operations.

 

 

 

 

 

 

 

 

 

 

 

 

Exclusive of customers in the U.K., average order size decreased to approximately $414 for the thirteen week period ended November 28, 2015 as compared to $415 for the same period in the prior fiscal year. 

 

We believe that our ability to transact business with our customers through various electronic portals and directly through the MSC Websites gives us a competitive advantage over smaller suppliers. Sales made through our eCommerce platforms, including sales made through Electronic Data Interchange systems, VMI systems, Extensible Markup Language

17


 

 

ordering based systems, vending machine systems, hosted systems and other electronic portals, represented 57.0% of consolidated net sales for the thirteen week period ended November 28, 2015, compared to 54.5% of consolidated net sales for the same period in the prior fiscal year.  

 

Gross Profit

 

Gross profit margin was consistent at 45.1% for the thirteen week period ended November 28, 2015 as compared to 45.2% for the same period in the prior fiscal year.  

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses decreased 3.2% to $228.6 million for the thirteen week period ended November 28, 2015, as compared to $236.2 million for the same period in the prior fiscal year. This decrease was primarily the result of lower sales volume related expenses, including freight expense and sales commissions, as well as cost savings initiatives implemented in the quarter.    Freight expense was approximately $29.7 million for the thirteen week period ended November 28, 2015, as compared to approximately $32.6 million for the thirteen week period ended November 29, 2014.  In addition, approximately $2.7 million of executive separation costs was included in operating expenses for the thirteen week period ended November 29, 2014.  These decreases were partially offset by increases in medical costs.

 

Operating expenses represented approximately 32.3% of net sales for the thirteen week period ended November 28, 2015,  which remained consistent with the thirteen week period ended November 29, 2014.  

 

Payroll and payroll related costs increased to approximately 55.1% of total operating expenses for the thirteen week period ended November 28, 2015, as compared to approximately 51.9% for the thirteen week period ended November 29, 2014. Included in these costs are salary, incentive compensation, sales commission and fringe benefit costs. Fringe benefit costs were the main driver for the increase in payroll and payroll related costs for the thirteen week period ended November 28, 2015, as compared to the same period in the prior fiscal year, resulting from increased medical costs of our self-insured group health plan. There was an increase in the number of participants in the plan as a result of the increases in headcount which resulted in an increase in the number of medical claims filed. In addition, the average cost per claim increased due to large claims and increased cost as the Company transitions from a self-insured plan to a fully insured private healthcare exchange effective January 1, 2016. These increases were partially offset by decreases in incentive compensation and sales commissions.

 

Income from Operations

Income from operations decreased 3.8% to $90.4 million for the thirteen week period ended November 28, 2015, as compared to $94.0 million for the same period in the prior fiscal year. This decrease was primarily attributable to the decrease in gross profit, offset in part by the decrease in operating expenses discussed above.  Income from operations as a percentage of net sales decreased to 12.8% for the thirteen week period ended November 28, 2015, as compared to 12.9% for the same period in the prior fiscal year primarily due to a decrease in gross profit margin as discussed above.    

 

Provision for Income Taxes

The effective tax rate for the thirteen week period ended November 28, 2015  was 38.2%, as compared to 38.4% for the same period in the prior fiscal year.

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The factors which affected net income for the thirteen week period ended November 28, 2015, as compared to the same period in the previous fiscal year, have been discussed above.

18


 

 

Liquidity and Capital Resources

As of November 28, 2015, we held $37.9 million in cash and cash equivalent funds. We maintain a substantial portion of our cash, and invest our cash equivalents, with well-known financial institutions. Historically, our primary capital needs have been to fund our working capital requirements necessitated by our sales growth, the costs of acquisitions, adding new products, new facilities, facility expansions, investments in vending solutions, technology investments, and productivity investments. Cash generated from operations, together with borrowings under credit facilities, have been used to fund these needs, to repurchase shares of our Class A common stock, and to pay dividends. At November 28, 2015, total borrowings outstanding, representing amounts due under the Credit Facility (discussed below) and all capital leases and financing arrangements, were approximately $353.7 million. At August 29, 2015, total borrowings outstanding, representing amounts due under the Credit Facility and all capital leases and financing arrangements, were approximately $428.3 million.

 

As a distributor, our use of capital is largely for working capital to support our revenue base. Capital commitments for property, plant and equipment generally are limited to information technology assets, warehouse equipment, office furniture and fixtures, building and leasehold improvements, construction and expansion, and vending machines. Therefore, the amount of cash consumed or generated by operations other than from net earnings will primarily be due to changes in working capital as a result of the rate of increases or decreases in sales. In periods when sales are decreasing, as in the first quarter of our fiscal year 2016, the working capital needs are funded primarily by cash from operations.

We believe, based on our current business plan, that our existing cash, cash equivalents, funds available under our revolving credit facility, and cash flow from operations will be sufficient to fund our planned capital expenditures and operating cash requirements for at least the next 12 months.

We are continuing to take advantage of our strong balance sheet, which enables us to maintain optimal inventory and service levels to meet customer demands, while many of our smaller competitors in our fragmented industry continue to have difficulties in offering competitive service levels. We also believe that customers will continue to seek cost reductions and shorter cycle times from their suppliers. Our business model focuses on providing overall procurement cost reduction and just-in-time delivery to meet our customers’ needs. We focus on offering inventory, process and procurement solutions that reduce MRO supply chain costs and improve plant floor productivity for our customers. We will seek to continue to drive cost reduction throughout our business through cost saving strategies and increased leverage from our existing infrastructure, and continue to provide additional procurement cost savings solutions to our customers through technology such as our Customer Managed Inventory (“CMI”), VMI, and vending programs.

The table below summarizes information regarding the Company’s liquidity and capital resources:

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

November 28,

 

November 29,

 

 

2015

 

2014