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EX-31.2 - EX-31.2 - MSC INDUSTRIAL DIRECT CO INCmsm-20161203xex31_2.htm
EX-31.1 - EX-31.1 - MSC INDUSTRIAL DIRECT CO INCmsm-20161203xex31_1.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 December 3, 2016

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, 2016, 44,847,717 shares of Class A common stock and 11,850,636 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 September 3, 2016. 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;

·

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;  

·

the inability to successfully manage the upgrade of our core financial systems;

·

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;

·

risks associated with the integration of acquired businesses; and

·

financial restrictions on outstanding borrowings.





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 December 3, 2016 and September 3, 2016



Condensed Consolidated Statements of Income for the Thirteen Weeks Ended December 3, 2016 and November 28, 2015



Condensed Consolidated Statements of Comprehensive Income for the Thirteen Weeks Ended December 3, 2016 and November 28, 2015



Condensed Consolidated Statement of Shareholders’ Equity for the Thirteen Weeks Ended December 3, 2016



Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended December 3, 2016 and November 28, 2015



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

22 

Item 1A.

Risk Factors

22 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22 

Item 3.

Defaults Upon Senior Securities

23 

Item 4.

Mine Safety Disclosures

23 

Item 5.

Other Information

23 

Item 6.

Exhibits

23 

SIGNATURES

24 





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)







 

 

 

 

 



 

 

 

 

 



December 3,

 

September 3,



2016

 

2016



(Unaudited)

 

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

$

32,122 

 

$

52,890 

Accounts receivable, net of allowance for doubtful accounts of $12,009 and $12,353, respectively

 

391,685 

 

 

392,463 

Inventories

 

453,965 

 

 

444,221 

Prepaid expenses and other current assets

 

41,473 

 

 

45,290 

Deferred income taxes

 

 —

 

 

46,627 

Total current assets

 

919,245 

 

 

981,491 

Property, plant and equipment, net

 

319,696 

 

 

320,544 

Goodwill

 

623,473 

 

 

624,081 

Identifiable intangibles, net

 

103,140 

 

 

105,307 

Other assets

 

33,925 

 

 

33,528 

Total assets

$

1,999,479 

 

$

2,064,951 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Revolving credit note

$

166,000 

 

$

217,000 

Current maturities of long-term debt

 

72,356 

 

 

50,050 

Accounts payable

 

112,357 

 

 

110,601 

Accrued liabilities

 

107,744 

 

 

100,951 

Total current liabilities

 

458,457 

 

 

478,602 

Long-term debt, net of current maturities

 

305,416 

 

 

339,772 

Deferred income taxes and tax uncertainties

 

101,574 

 

 

148,201 

Total liabilities

 

865,447 

 

 

966,575 

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; 53,132,716 and 52,992,682 shares issued, respectively

 

53 

 

 

53 

Class B common stock (ten votes per share); $0.001 par value; 50,000,000 shares authorized; 11,933,233 shares issued and outstanding

 

12 

 

 

12 

Additional paid-in capital

 

595,118 

 

 

584,017 

Retained earnings

 

1,068,617 

 

 

1,040,148 

Accumulated other comprehensive loss 

 

(20,645)

 

 

(19,098)

Class A treasury stock, at cost, 8,370,720 and 8,344,514 shares, respectively

 

(509,123)

 

 

(506,756)

Total shareholders’ equity

 

1,134,032 

 

 

1,098,376 

Total liabilities and shareholders’ equity

$

1,999,479 

 

$

2,064,951 



 

 

 

 

 

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



 

December 3,

 

November 28,



 

2016

 

2015

Net sales

 

$

686,271 

 

$

706,819 

Cost of goods sold

 

 

377,536 

 

 

387,847 

Gross profit

 

 

308,735 

 

 

318,972 

Operating expenses

 

 

218,135 

 

 

228,584 

Income from operations

 

 

90,600 

 

 

90,388 

Other (expense) income:

 

 

 

 

 

 

Interest expense

 

 

(2,934)

 

 

(1,556)

Interest income

 

 

163 

 

 

163 

Other (expense) income, net

 

 

(284)

 

 

63 

Total other expense

 

 

(3,055)

 

 

(1,330)

Income before provision for income taxes

 

 

87,545 

 

 

89,058 

Provision for income taxes

 

 

33,442 

 

 

34,029 

Net income

 

$

54,103 

 

$

55,029 

Per share information:

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

Basic

 

$

0.96 

 

$

0.89 

Diluted

 

$

0.95 

 

$

0.89 

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

 

 

 

 

 

 

Basic

 

 

56,381 

 

 

61,296 

Diluted

 

 

56,572 

 

 

61,408 

Cash dividend declared per common share

 

$

0.45 

 

$

0.43 



 

 

 

 

 

 

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



 

December 3,

 

November 28,



 

2016

 

2015

Net income, as reported

 

$

54,103 

 

$

55,029 

Foreign currency translation adjustments

 

 

(1,547)

 

 

(1,115)

Comprehensive income

 

$

52,556 

 

$

53,914 



 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

























 

6


 

 

MSC INDUSTRIAL DIRECT CO., INC.

Condensed Consolidated Statement of Shareholders’ Equity

Thirteen Weeks Ended December 3, 2016

(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 September 3, 2016

 

52,993 

 

$

53 

 

11,933 

 

$

12 

 

$

584,017 

 

$

1,040,148 

 

$

(19,098)

 

8,345 

 

$

(506,756)

 

$

1,098,376 

Exercise of common stock options, including income tax benefits of $185

 

104 

 

 

 —

 

 —

 

 

 —

 

 

7,116 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

7,116 

Common stock issued under associate stock purchase plan

 

 —

 

 

 —

 

 —

 

 

 —

 

 

382 

 

 

 —

 

 

 —

 

(14)

 

 

527 

 

 

909 

Shares issued from restricted stock units, including dividend equivalent units

 

36 

 

 

 —

 

 —

 

 

 —

 

 

65 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

65 

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

3,538 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

3,538 

Repurchases of common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

40 

 

 

(2,894)

 

 

(2,894)

Cash dividends on Class A common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(20,125)

 

 

 —

 

 —

 

 

 —

 

 

(20,125)

Cash dividends on Class B common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(5,370)

 

 

 —

 

 —

 

 

 —

 

 

(5,370)

Dividend equivalent units declared, net of cancellations

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(139)

 

 

 —

 

 —

 

 

 —

 

 

(139)

Foreign currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,547)

 

 —

 

 

 —

 

 

(1,547)

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

54,103 

 

 

 —

 

 —

 

 

 —

 

 

54,103 

Balance at December 3, 2016

 

53,133 

 

$

53 

 

11,933 

 

$

12 

 

$

595,118 

 

$

1,068,617 

 

$

(20,645)

 

8,371 

 

$

(509,123)

 

$

1,134,032 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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



 

December 3,

 

November 28,



 

2016

 

2015

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income

 

$

54,103 

 

$

55,029 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

15,447 

 

 

17,925 

Stock-based compensation

 

 

3,538 

 

 

3,621 

Loss on disposal of property, plant, and equipment

 

 

49 

 

 

247 

Provision for doubtful accounts

 

 

1,305 

 

 

2,997 

Deferred income taxes and tax uncertainties

 

 

 —

 

 

(78)

Excess tax benefits from stock-based compensation

 

 

(525)

 

 

(154)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(1,021)

 

 

12,567 

Inventories

 

 

(10,299)

 

 

13,832 

Prepaid expenses and other current assets

 

 

3,792 

 

 

(3,226)

Other assets

 

 

(465)

 

 

583 

Accounts payable and accrued liabilities

 

 

9,511 

 

 

18,767 

Total adjustments

 

 

21,332 

 

 

67,081 

Net cash provided by operating activities

 

 

75,435 

 

 

122,110 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(12,497)

 

 

(15,575)

Net cash used in investing activities

 

 

(12,497)

 

 

(15,575)

Cash Flows from Financing Activities:

 

 

 

 

 

 

Repurchases of common stock

 

 

(3,207)

 

 

(5,796)

Payments of cash dividends

 

 

(25,495)

 

 

(26,391)

Payments on capital lease and financing obligations

 

 

(388)

 

 

(161)

Excess tax benefits from stock-based compensation

 

 

525 

 

 

154 

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

 

 

909 

 

 

826 

Proceeds from exercise of Class A common stock options

 

 

6,931 

 

 

268 

Borrowings under financing obligations

 

 

739 

 

 

453 

Borrowings under Credit Facility

 

 

15,000 

 

 

35,000 

Private Placement Loan financing costs

 

 

(142)

 

 

 —

Payment of notes payable and revolving credit note under the Credit Facility

 

 

(78,500)

 

 

(111,250)

Net cash used in financing activities

 

 

(83,628)

 

 

(106,897)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

(78)

 

 

(26)

Net decrease in cash and cash equivalents

 

 

(20,768)

 

 

(388)

Cash and cash equivalents—beginning of period

 

 

52,890 

 

 

38,267 

Cash and cash equivalents—end of period

 

$

32,122 

 

$

37,879 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Cash paid for income taxes

 

$

1,983 

 

$

4,495 

Cash paid for interest

 

$

1,400 

 

$

1,247 



 

 

 

 

 

 

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 December 3, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending September 2, 2017. 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 September 3, 2016.





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 2017 fiscal year will be a 52-week accounting period that will end on September 2, 2017 and its 2016 fiscal year was a 53-week accounting period that ended on September 3, 2016.



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 December 3, 2016 and November 28, 2015, respectively:







 

 

 

 

 

 



 

Thirteen Weeks Ended



 

December 3,

 

November 28,



 

2016

 

2015

Net income as reported

 

$

54,103 

 

$

55,029 

Less: Distributed net income available to participating securities

 

 

(77)

 

 

(89)

Less: Undistributed net income available to participating securities

 

 

(114)

 

 

(163)

Numerator for basic net income per share:

 

 

 

 

 

 

Undistributed and distributed net income available to common shareholders         

 

$

53,912 

 

$

54,777 

  Add: Undistributed net income allocated to participating securities

 

 

114 

 

 

163 

Less: Undistributed net income reallocated to participating securities

 

 

(113)

 

 

(162)



 

 

 

 

 

 

Numerator for diluted net income per share:

 

 

 

 

 

 

Undistributed and distributed net income available to common shareholders

 

$

53,913 

 

$

54,778 

Denominator:

 

 

 

 

 

 

Weighted average shares outstanding for basic net income per share

 

 

56,381 

 

 

61,296 

Effect of dilutive securities

 

 

191 

 

 

112 

Weighted average shares outstanding for diluted net income per share

 

 

56,572 

 

 

61,408 

Net income per share Two-class method:

 

 

 

 

 

 

Basic

 

$

0.96 

 

$

0.89 

Diluted

 

$

0.95 

 

$

0.89 



9


 

MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

Antidilutive stock options of 606 were not included in the computation of diluted earnings per share for the thirteen-week period ended December 3, 2016. 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.  



Note 3. Stock-Based Compensation



The Company accounts for all share-based payments in accordance with ASC Topic 718, "Compensation—Stock Compensation" ("ASC 718"). Stock‑based compensation expense included in operating expenses for the thirteen-week periods ended December 3, 2016 and November 28, 2015 was as follows:







 

 

 

 

 

 



 

Thirteen Weeks Ended



 

December 3,

 

November 28,



 

2016

 

2015

Stock options

 

$

1,112 

 

$

1,186 

Restricted share awards

 

 

1,322 

 

 

1,726 

Restricted stock units

 

 

1,042 

 

 

639 

Associate Stock Purchase Plan

 

 

62 

 

 

70 

Total 

 

 

3,538 

 

 

3,621 

Deferred income tax benefit

 

 

(1,344)

 

 

(1,376)

Stock-based compensation expense, net

 

$

2,194 

 

$

2,245 



Stock options



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



 

December 3,

 

November 28,



 

2016

 

2015

Expected life (in years)

 

4.1 

 

 

3.9 

 

Risk-free interest rate

 

1.16 

%

 

1.09 

%

Expected volatility

 

20.50 

%

 

21.82 

%

Expected dividend yield

 

2.40 

%

 

2.40 

%

Weighted-average grant-date fair value

 

$9.29 

 

 

$8.03 

 



A summary of the Company’s stock option activity for the thirteen-week period ended December 3, 2016 is as follows:







 

 

 

 

 

 

 

 

 



Options

 

Weighted-Average Exercise Price per Share

 

Weighted-Average Remaining Contractual Term (in years)

 

Aggregate Intrinsic Value

Outstanding on September 3, 2016

1,645 

 

$

69.86 

 

 

 

 

 

Granted

537 

 

 

71.33 

 

 

 

 

 

Exercised

(104)

 

 

66.39 

 

 

 

 

 

Canceled/Forfeited

(2)

 

 

82.41 

 

 

 

 

 

Outstanding on December 3, 2016

2,076 

 

$

70.41 

 

5.0 

 

$

42,475 

Exercisable on December 3, 2016

872 

 

$

72.06 

 

3.6 

 

$

16,400 



The unrecognized share‑based compensation cost related to stock option expense at December 3, 2016 was $10,815 and will be recognized over a weighted average period of 3.1 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 December 3, 2016 and November 28, 2015 was $1,596 and $165, respectively.



10


 

MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

Restricted share awards



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-week period ended December 3, 2016 is as follows:







 

 

 

 



Shares

 

Weighted-Average  Grant-Date Fair Value

Non-vested restricted share awards at September 3, 2016

265 

 

$

78.58 

Granted

 —

 

 

 —

Vested

(86)

 

 

75.26 

Canceled/Forfeited

(1)

 

 

80.15 

Non-vested restricted share awards at December 3, 2016

178 

 

$

80.17 



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 when vested. The unrecognized compensation cost related to RSAs at December 3, 2016 was $8,075 and will be recognized over a weighted average period of 2.3 years.    



Restricted stock units



A summary of the Company’s non-vested Restricted Stock Unit (“RSU”) award activity for the thirteen-week period ended December 3, 2016 is as follows:





 

 

 

 



Shares

 

 

Weighted- Average Grant- Date Fair Value

Non-vested restricted stock unit awards at September 3, 2016

198 

 

$

58.98 

Granted

162 

 

 

71.33 

Vested

(36)

 

 

59.15 

Canceled/Forfeited

(1)

 

 

59.89 

Non-vested restricted stock unit awards at December 3, 2016

323 

 

$

65.14 



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 when vested. 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. The unrecognized compensation cost related to the RSUs at December 3, 2016 was $17,770 and is expected to be recognized over a weighted average period of 4.2 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.



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.



11


 

MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

In connection with the construction of the Company’s customer fulfillment center in Columbus, Ohio, the Company entered into an arrangement during fiscal 2013 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 issued taxable bonds to finance the structure and site improvements of the Company’s customer fulfillment center. The bonds ($27,022 outstanding at both December 3, 2016 and September 3, 2016)  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 Condensed 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 gains or losses on these securities during the thirteen-week period ended December 3, 2016. 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 December 3, 2016 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 December 3, 2016 and September 3, 2016 due to the short-term maturity of these items.



During the thirteen weeks ended December 3, 2016 and November 28, 2015, 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 December 3, 2016 and September 3, 2016 consisted of the following:





 

 

 

 

 

 



 

December 3,

 

September 3,



 

2016

 

2016



 

(Dollars in thousands)

Credit Facility:

 

 

 

 

 

 

   Revolver

 

$

166,000 

 

$

217,000 

   Term loan

 

 

175,000 

 

 

187,500 

Private Placement Debt:

 

 

 

 

 

 

   Senior notes, series A

 

 

75,000 

 

 

75,000 

   Senior notes, series B

 

 

100,000 

 

 

100,000 

Capital lease and financing obligations

 

 

28,613 

 

 

28,268 

   Less: unamortized debt issuance costs

 

 

(841)

 

 

(946)

Total debt

 

$

543,772 

 

$

606,822 

   Less: current maturities of long-term debt(1)

 

 

(238,356)

 

 

(267,050)

Long-term debt

 

$

305,416 

 

$

339,772 

____________________

(1)

Net of unamortized debt issuance costs expected to be amortized in the next twelve months.



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.  



12


 

MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

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 weighted average applicable borrowing rate for the Company for any borrowings outstanding under the Credit Facility at December 3, 2016 was 1.70% 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. Borrowings under the Credit Facility are guaranteed by certain of the Company’s subsidiaries.



During the thirteen-week period ended December 3, 2016, the Company borrowed $15,000 under the revolving loan facility and repaid $66,000 and $12,500 of the revolving loan facility and the term loan facility, respectively.



Private Placement Debt



In July 2016, in connection with the Company’s “modified Dutch auction” tender offer, the Company completed the issuance and sale of the following unsecured senior notes (collectively “Private Placement Debt”):



·

$75,000 aggregate principal amount of 2.65% Senior Notes, Series A, due July 28, 2023 (“Senior notes, series A”); and



·

$100,000 aggregate principal amount of 2.90% Senior Notes, Series B, due July 28, 2026 (“Senior notes, series B”).



The Private Placement Debt is due, in full, on the stated maturity dates.  Interest is payable semi-annually at the fixed stated interest rates.



The Credit Facility and Private Placement Debt contain 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 and Private Placement Debt. At December 3, 2016, the Company was in compliance with the operating and financial covenants of the Credit Facility and Private Placement Debt.



Capital Lease and Financing Obligations



In connection with the construction of the Company’s 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 December 3, 2016 and September 3, 2016, the capital lease obligation was approximately $27,022. 

13


 

MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

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 for over a specified period of time based on the terms agreed upon. During the thirteen-week period ended December 3, 2016, the Company entered into various financing obligations for certain information technology equipment totaling $739.  During the fiscal year ended September 3, 2016, the Company entered into a capital lease and various financing obligations for certain information technology equipment totaling $1,321 and $453, respectively. The gross amount of property and equipment acquired under these capital leases and financing agreements at December 3, 2016 and September 3, 2016 was approximately $29,684 and $30,298,  respectively. Related accumulated amortization totaled $2,540 and $2,878 as of December 3, 2016 and September 3, 2016, respectively. 



Note 6. Shareholders’ Equity



The Company paid cash dividends of  $0.45 per common share totaling $25,495 for the thirteen weeks ended December 3, 2016. For the thirteen weeks ended November 28, 2015, the Company paid cash dividends of $0.43 per common share totaling $26,391. On December 20, 2016, the Board of Directors declared a quarterly cash dividend of $0.45 per share payable on January 24, 2017  to shareholders of record at the close of business on January 10, 2017. The dividend will result in a payout of approximately $25,514, based on the number of shares outstanding at December 28, 2016.



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 December 3, 2016, the Company repurchased 40 shares of its Class A common stock for $2,894, which is reflected at cost as treasury stock in the accompanying condensed consolidated financial statements. All 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 December 3, 2016, the maximum number of shares that can be repurchased under the Repurchase Plan was 1,444 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 thirteen-week periods ended December 3, 2016 and November 28, 2015 was minimal.



Note 8. Income Taxes



During the thirteen-week period ended December 3, 2016, 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



Recently Adopted Accounting Pronouncements



Deferred Taxes

14


 

MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 



In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. This update requires an entity to classify deferred tax liabilities and assets as non-current 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. The FASB allowed early adoption of this standard and, therefore, the Company prospectively adopted ASU 2015-17 during its first quarter of fiscal 2017. As a result of adopting this standard, $46,627 of deferred income taxes that were previously presented as a current asset are now included within long-term liabilities, as the Company is in a net deferred tax liability position in its first quarter of fiscal 2017.  Prior periods were not retrospectively adjusted.



Accounting Pronouncements Not Yet Adopted



Share-based Payments



In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements.  This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period.  Early adoption is permitted. The new standard is effective for the Company for its fiscal 2018 first quarter.  The Company is currently evaluating the impact the adoption of the pronouncement may have on its financial position, results of operations or cash flows.



Leases



In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability by providing additional information to users of financial statements regarding an entity's leasing activities. ASU 2016-02 requires reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. ASU 2016-02 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2018.  The new standard is effective for the Company for its fiscal 2020 first quarter. The guidance will be applied on a modified retrospective basis beginning with the earliest period presented. The Company is currently evaluating this standard to determine the impact of adoption on its consolidated financial statements.



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 new standard is effective for the Company for its fiscal 2018 first quarter. 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.



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 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 September 3, 2016 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.



Overview



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. We 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 over 6,000 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 1,160,000 stock-keeping units (“SKUs”) through our master catalogs; weekly, monthly and quarterly specialty and promotional catalogs; brochures; and the Internet, including our website, mscdirect.com (“MSC website”). 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 85 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.



Our field sales and service associate headcount was 2,352 at December 3, 2016,  compared to 2,370 at September 3, 2016 and November 28, 2015. We will continue to manage our sales and service headcount based on economic conditions and our business plans.



Business Environment



We utilize various indices when evaluating the level of our business activity.  Approximately 68% of our revenues came from sales in the manufacturing sector during the first quarter of our fiscal year 2017, including certain national account customers. Through statistical analysis, we have found that the strongest correlation is between our customers’ activity and the Metalworking Business Index (“MBI”). The MBI is a sentiment index developed from a monthly survey of the US metalworking industry, focusing on durable goods manufacturing. We have experienced the highest correlation to our sales using the rolling 12-month MBI average on a four-month lag. For the MBI, a value below 50.0 generally indicates contraction and a value above 50.0 generally indicates expansion. The MBI index over the past quarter and for the past 12-month period was as follows:







 

 

Period

 

MBI

September

 

48.4

October

 

48.4

November

 

49.7



 

 

Fiscal 2017 Q1 average

 

48.8

12-month average

 

46.7



The MBI had increased steadily throughout the back half of our fiscal year 2016 and this trend has continued into our first quarter of fiscal 2017. While improving, this still implies contraction in the metalworking manufacturing environment. Details released with the December MBI of 49.8 indicate a roughly flat environment for the past two months after 19 months of contraction; however, this is the highest reading since March 2015 when the index last indicated expansion.



16


 

 

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.



Thirteen-Week Period Ended December 3, 2016 Compared to the Thirteen-Week Period Ended November 28, 2015



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

 

 

 

 

 



 

December 3, 2016

 

November 28, 2015

 

Change



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

$

 

 

%

 

 

$

 

 

%

 

 

$

 

 

%

Net sales

 

$

686,271 

 

 

100.0% 

 

$

706,819 

 

 

100.0% 

 

$

(20,548)

 

 

(2.9)%

Cost of goods sold

 

 

377,536 

 

 

55.0% 

 

 

387,847 

 

 

54.9% 

 

 

(10,311)

 

 

(2.7)%

Gross profit

 

 

308,735 

 

 

45.0% 

 

 

318,972 

 

 

45.1% 

 

 

(10,237)

 

 

(3.2)%

Operating expenses

 

 

218,135 

 

 

31.8% 

 

 

228,584 

 

 

32.3% 

 

 

(10,449)

 

 

(4.6)%

Income from operations

 

 

90,600 

 

 

13.2% 

 

 

90,388 

 

 

12.8% 

 

 

212 

 

 

0.2% 

Total other expense

 

 

(3,055)

 

 

(0.4)%

 

 

(1,330)

 

 

(0.2)%

 

 

(1,725)

 

 

129.7% 

Income before provision for income taxes

 

 

87,545 

 

 

12.8% 

 

 

89,058 

 

 

12.6% 

 

 

(1,513)

 

 

(1.7)%

Provision for income taxes

 

 

33,442 

 

 

4.9% 

 

 

34,029 

 

 

4.8% 

 

 

(587)

 

 

(1.7)%

Net income

 

$

54,103 

 

 

7.9% 

 

$

55,029 

 

 

7.8% 

 

$

(926)

 

 

(1.7)%



Net Sales



Net sales decreased 2.9% or approximately $20.5 million for the thirteen-week period ended December 3, 2016 as compared to the thirteen-week period ended November 28, 2015.  We estimate that this $20.5 million decrease in net sales is comprised of (i) approximately $9.3 million of lower sales volume, (ii) approximately $2.7 million from foreign exchange impact, and (iii) approximately $8.5 million from pricing, which includes changes in customer and product mix, discounting and other items.  Of the above $20.5 million decrease in net sales, sales to our government and national account programs (“Large Account Customers”) decreased by approximately $5.7 million and sales other than to our Large Account Customers decreased by approximately $14.8 million.



The table below shows the change in our average daily sales by total company and by customer type for the thirteen-week period ended December 3, 2016 compared to the same period in the prior fiscal year:







 

 

 

 

 

 

Average Daily Sales Percentage Change

(unaudited)



 

 

 

 

 

 

2017 vs. 2016 Fiscal Period

 

Thirteen-Week Period Ended Fiscal Q1

 

% of Total Business



 

 

 

 

 

 

Total Company

 

(2.9)

%

 

 

 

Manufacturing Customers(1)

 

(4.2)

%

 

68 

%

Non-Manufacturing Customers(1)

 

0.6 

%

 

32 

%

____________________





 

 

 

(1)

Excludes U.K. operations.



We believe that our ability to transact business with our customers through various electronic portals and directly through the MSC website gives us a competitive advantage over smaller suppliers. Sales made through our eCommerce platforms, including sales made through Electronic Data Interchange (“EDI”) systems, VMI systems, Extensible Markup Language ordering based systems, vending machine systems, hosted systems and other electronic portals (“eCommerce platforms”), represented 59.6% of consolidated net sales for the thirteen-week period ended December 3, 2016, compared to

17


 

 

57.0% of consolidated net sales for the same period in the prior fiscal year. This increase was primarily associated with the MSC website, EDI, and vending machine systems. 



Gross Profit



Gross profit margin was 45.0% for the thirteen-week period ended December 3, 2016 as compared to 45.1% for the same period in the prior fiscal year.  The decline was primarily a result of changes in pricing and customer mix.



Operating Expenses



Operating expenses decreased 4.6% to $218.1 million for the thirteen-week period ended December 3, 2016, as compared to $228.6 million for the same period in the prior fiscal year. This decrease was primarily the result of lower payroll and payroll-related costs, as discussed below.  In addition, depreciation and amortization decreased as a result of certain intangible assets acquired from our fiscal 2006 J&L acquisition becoming fully amortized during the second half of fiscal 2016.



Operating expenses were 31.8% of net sales for the thirteen-week period ended December 3, 2016 compared to 32.3% of net sales for the same period in the prior fiscal year. 



Included in payroll and payroll-related costs are salary, incentive compensation, sales commission and fringe benefit costs. A decrease in fringe benefit costs was the main driver for the decrease in payroll and payroll-related costs.   As a result of transitioning from a self-insured plan to a fully insured private healthcare exchange during the second quarter of fiscal 2016, we experienced large claims and increased cost in the first quarter of fiscal 2016, as compared to the first quarter of fiscal 2017. The decrease in the first quarter of fiscal 2017 was partially offset by an increase in the incentive compensation accrual. Payroll and payroll-related costs increased to approximately 56.3% of total operating expenses for the thirteen-week period ended December 3, 2016, as compared to approximately 55.1% for the thirteen-week period ended November 28, 2015.  



Income from Operations



Income from operations increased 0.2% to $90.6 million for the thirteen-week period ended December 3, 2016, as compared to $90.4 million for the same period in the prior fiscal year. This increase was primarily due to lower operating expenses, which were mostly offset by the decrease in gross profit.  Income from operations as a percentage of net sales increased to 13.2% for the thirteen-week period ended December 3, 2016, as compared to 12.8% for the same period in the prior fiscal year primarily due to a decrease in operating expenses as discussed above.    



Provision for Income Taxes



The effective tax rate for the thirteen-week periods ended December 3, 2016 and November 28, 2015 was 38.2%.



Net Income





The factors which affected net income for the thirteen-week period ended December 3, 2016, as compared to the same period in the previous fiscal year, have been discussed above.

18


 

 

Liquidity and Capital Resources





 

 

 

 

 

 

 

 

 



 

 

  

 

December 3,

 

September 3,

 

 



 

2016

 

2016

 

$ Change

Total debt

 

$

543,772 

 

$

606,822 

 

$

(63,050)

Less: Cash and cash equivalents

 

 

(32,122)

 

 

(52,890)

 

 

20,768 

   Net debt

 

$

511,650 

 

$

553,932 

 

$

(42,282)

Equity