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EX-32.2 - EX-32.2 - MSC INDUSTRIAL DIRECT CO INCmsm-20180602xex32_2.htm
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EX-31.2 - EX-31.2 - MSC INDUSTRIAL DIRECT CO INCmsm-20180602xex31_2.htm
EX-31.1 - EX-31.1 - MSC INDUSTRIAL DIRECT CO INCmsm-20180602xex31_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 June 2, 2018

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



 

Large accelerated

filer 

Accelerated

filer 

Non‑accelerated filer 
(Do not check if a smaller

reporting company)

Smaller reporting

company 

Emerging growth

company 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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 June 20, 2018, 46,061,325 shares of Class A common stock and 10,485,155 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 2, 2017. 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;

·

changing customer and product mixes;

·

competition, including the adoption by competitors of aggressive pricing strategies and sales methods;

·

industry consolidation and other changes in the industrial distribution sector;

·

volatility in commodity and energy prices;

·

the outcome of 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, shipping ports, our headquarters or our customer fulfillment centers;

·

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 electronic break-ins and cyberattacks;  

·

retention of key personnel;

·

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

·

risks associated with changes to trade policies;

·

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

·

goodwill and intangible assets recorded resulting from our acquisitions could be impaired;

·

risks associated with the integration of acquired businesses or other strategic transactions; 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 June 2, 2018 and September 2, 2017

4



Condensed Consolidated Statements of Income for the Thirteen and Thirty-Nine Weeks Ended June 2, 2018 and June 3, 2017

5



Condensed Consolidated Statements of Comprehensive Income for the Thirteen and Thirty-Nine Weeks Ended June 2, 2018 and June 3, 2017

6



Condensed Consolidated Statement of Shareholders’ Equity for the Thirty-Nine Weeks Ended June 2, 2018

7



Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended June 2, 2018 and June 3, 2017

8



Notes to Condensed Consolidated Financial Statements

9

Item 2.

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

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.

Controls and Procedures

26

PART II.  OTHER INFORMATION

 

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

Item 3.

Defaults Upon Senior Securities

27

Item 4.

Mine Safety Disclosures

27

Item 5.

Other Information

27

Item 6.

Exhibits

28

SIGNATURES

29





 

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)







 

 

 

 

 



 

 

 

 

 



June 2,

 

September 2,



2018

 

2017



(Unaudited)

 

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

$

39,993 

 

$

16,083 

Accounts receivable, net of allowance for doubtful accounts of $13,704 and $13,278, respectively

 

510,832 

 

 

471,795 

Inventories

 

512,303 

 

 

464,959 

Prepaid expenses and other current assets

 

53,057 

 

 

52,742 

Total current assets

 

1,116,185 

 

 

1,005,579 

Property, plant and equipment, net

 

311,264 

 

 

316,305 

Goodwill

 

672,785 

 

 

633,728 

Identifiable intangibles, net

 

125,773 

 

 

110,429 

Other assets

 

29,725 

 

 

32,871 

Total assets

$

2,255,732 

 

$

2,098,912 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Short-term debt

$

284,217 

 

$

331,986 

Accounts payable

 

133,679 

 

 

121,266 

Accrued liabilities

 

110,597 

 

 

104,473 

Total current liabilities

 

528,493 

 

 

557,725 

Long-term debt

 

251,304 

 

 

200,991 

Deferred income taxes and tax uncertainties

 

76,881 

 

 

115,056 

Total liabilities

 

856,678 

 

 

873,772 

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; 55,282,339 and 53,513,806 shares issued, respectively

 

55 

 

 

54 

Class B common stock (ten votes per share); $0.001 par value; 50,000,000 shares authorized; 10,485,155 and 11,850,636 shares issued and outstanding, respectively

 

10 

 

 

12 

Additional paid-in capital

 

663,399 

 

 

626,995 

Retained earnings

 

1,331,788 

 

 

1,168,812 

Accumulated other comprehensive loss 

 

(18,968)

 

 

(17,263)

Class A treasury stock, at cost, 9,221,014 and 8,972,729 shares, respectively

 

(577,230)

 

 

(553,470)

Total shareholders’ equity

 

1,399,054 

 

 

1,225,140 

Total liabilities and shareholders’ equity

$

2,255,732 

 

$

2,098,912 



 

 

 

 

 

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

 

Thirty-Nine Weeks Ended



 

June 2,

 

June 3,

 

June 2,

 

June 3,



 

2018

 

2017

 

2018

 

2017

Net sales

 

$

828,345 

 

$

743,923 

 

$

2,365,893 

 

$

2,133,974 

Cost of goods sold

 

 

467,344 

 

 

414,423 

 

 

1,332,600 

 

 

1,181,177 

Gross profit

 

 

361,001 

 

 

329,500 

 

 

1,033,293 

 

 

952,797 

Operating expenses

 

 

245,619 

 

 

227,724 

 

 

720,530 

 

 

673,776 

Income from operations

 

 

115,382 

 

 

101,776 

 

 

312,763 

 

 

279,021 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(3,532)

 

 

(3,361)

 

 

(10,319)

 

 

(9,245)

Interest income

 

 

108 

 

 

169 

 

 

484 

 

 

496 

Other (expense) income, net

 

 

(141)

 

 

(2)

 

 

(472)

 

 

(340)

Total other expense

 

 

(3,565)

 

 

(3,194)

 

 

(10,307)

 

 

(9,089)

Income before provision for income taxes

 

 

111,817 

 

 

98,582 

 

 

302,456 

 

 

269,932 

Provision for income taxes

 

 

32,748 

 

 

35,746 

 

 

46,250 

 

 

99,249 

Net income

 

$

79,069 

 

$

62,836 

 

$

256,206 

 

$

170,683 

Per share information:

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.40 

 

$

1.10 

 

$

4.54 

 

$

3.01 

Diluted

 

$

1.39 

 

$

1.09 

 

$

4.51 

 

$

2.98 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

56,420 

 

 

56,779 

 

 

56,382 

 

 

56,593 

Diluted

 

 

56,804 

 

 

57,264 

 

 

56,733 

 

 

57,028 

Cash dividends declared per common share

 

$

0.58 

 

$

0.45 

 

$

1.64 

 

$

1.35 



 

 

 

 

 

 

 

 

 

 

 

 

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

 

Thirty-Nine Weeks Ended



 

June 2,

 

June 3,

 

June 2,

 

June 3,



 

2018

 

2017

 

2018

 

2017

Net income, as reported

 

$

79,069 

 

$

62,836 

 

$

256,206 

 

$

170,683 

Foreign currency translation adjustments

 

 

(889)

 

 

87 

 

 

(1,705)

 

 

(2,161)

Comprehensive income

 

$

78,180 

 

$

62,923 

 

$

254,501 

 

$

168,522 



 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 



 

6


 

MSC INDUSTRIAL DIRECT CO., INC.

Condensed Consolidated Statement of Shareholders’ Equity

Thirty-Nine Weeks Ended June 2, 2018

(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 2, 2017

 

53,514 

 

$

54 

 

11,851 

 

$

12 

 

$

626,995 

 

$

1,168,812 

 

$

(17,263)

 

8,973 

 

$

(553,470)

 

$

1,225,140 

Exchange of Class B common stock for Class A common stock

 

1,366 

 

 

 

(1,366)

 

 

(2)

 

 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Exercise of common stock options

 

325 

 

 

 —

 

 —

 

 

 —

 

 

23,135 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

23,135 

Common stock issued under associate stock purchase plan

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,774 

 

 

 —

 

 

 —

 

(43)

 

 

1,624 

 

 

3,398 

Issuance of restricted common stock, net of cancellations

 

(4)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Shares issued upon vesting of restricted stock units, including dividend equivalent units

 

81 

 

 

 —

 

 —

 

 

 —

 

 

219 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

219 

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

11,275 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

11,275 

Repurchases of common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

291 

 

 

(25,384)

 

 

(25,384)

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

256,206 

 

 

 —

 

 —

 

 

 —

 

 

256,206 

Cash dividends on Class A common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(74,285)

 

 

 —

 

 —

 

 

 —

 

 

(74,285)

Cash dividends on Class B common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(18,348)

 

 

 —

 

 —

 

 

 —

 

 

(18,348)

Dividend equivalent units declared, net of cancellations

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(597)

 

 

 —

 

 —

 

 

 —

 

 

(597)

Foreign currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,705)

 

 —

 

 

 —

 

 

(1,705)

Balance at June 2, 2018

 

55,282 

 

$

55 

 

10,485 

 

$

10 

 

$

663,399 

 

$

1,331,788 

 

$

(18,968)

 

9,221 

 

$

(577,230)

 

$

1,399,054 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

7


 

 

MSC INDUSTRIAL DIRECT CO., INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)













 

 

 

 

 

 



 

 

 

 

 

 



 

Thirty-Nine Weeks Ended



 

June 2,

 

June 3,



 

2018

 

2017

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income

 

$

256,206 

 

$

170,683 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

47,133 

 

 

46,737 

Stock-based compensation

 

 

11,275 

 

 

10,375 

Loss on disposal of property, plant, and equipment

 

 

280 

 

 

317 

Provision for doubtful accounts

 

 

4,956 

 

 

4,713 

Deferred income taxes and tax uncertainties

 

 

(41,199)

 

 

 —

Write-off of deferred financing costs on previous credit facility

 

 

 —

 

 

94 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(34,434)

 

 

(50,730)

Inventories

 

 

(26,740)

 

 

(22,834)

Prepaid expenses and other current assets

 

 

1,005 

 

 

(4,547)

Other assets

 

 

3,191 

 

 

2,259 

Accounts payable and accrued liabilities

 

 

8,564 

 

 

2,064 

Total adjustments

 

 

(25,969)

 

 

(11,552)

Net cash provided by operating activities

 

 

230,237 

 

 

159,131 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(30,794)

 

 

(37,923)

Cash used in business acquisitions, net of cash received

 

 

(85,845)

 

 

 —

Net cash used in investing activities

 

 

(116,639)

 

 

(37,923)

Cash Flows from Financing Activities:

 

 

 

 

 

 

Repurchases of common stock

 

 

(25,384)

 

 

(3,392)

Payments of cash dividends

 

 

(92,633)

 

 

(76,632)

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

 

 

3,398 

 

 

3,165 

Proceeds from exercise of Class A common stock options

 

 

23,135 

 

 

22,600 

Borrowings under Credit Facility

 

 

172,000 

 

 

439,000 

Borrowings under Shelf Facility Agreement

 

 

50,000 

 

 

 —

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

 

 

(220,000)

 

 

(529,500)

Other, net

 

 

(225)

 

 

(1,707)

Net cash used in financing activities

 

 

(89,709)

 

 

(146,466)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

21 

 

 

(54)

Net increase (decrease) in cash and cash equivalents

 

 

23,910 

 

 

(25,312)

Cash and cash equivalents—beginning of period

 

 

16,083 

 

 

52,890 

Cash and cash equivalents—end of period

 

$

39,993 

 

$

27,578 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Cash paid for income taxes

 

$

76,753 

 

$

91,711 

Cash paid for interest

 

$

8,231 

 

$

7,350 



 

 

 

 

 

 

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 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 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 (including normal recurring adjustments) have been included. Operating results for the thirteen and thirty-nine-week periods ended June 2, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending September 1, 2018. 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 2, 2017.





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 2018 fiscal year will be a 52-week accounting period that will end on September 1, 2018 and its 2017 fiscal year was a 52-week accounting period that ended on September 2, 2017.



Recently Adopted Accounting Pronouncements



In July 2015, the FASB issued its final standard on simplifying the measurement of inventory. This standard, issued as ASU 2015-11, requires an entity to measure inventory at the lower of cost and net realizable value, which consists of the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted ASU 2015-11 during the first quarter of fiscal 2018 and the adoption did not have any impact on its consolidated financial statements.



Accounting Pronouncements Not Yet Adopted



In May 2014, the FASB issued its final standard on the recognition of revenue from contracts with customers. This standard, issued as ASU 2014-09, outlines a single comprehensive model for entities to use in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry- specific guidance. The new standard is effective for the Company for its fiscal year 2019. Early adoption is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. To date, the Company has performed a preliminary detailed review of key contracts and compared historical accounting policies and practices to the new standard. While the Company is still evaluating this standard, it is not expected to have a material impact on the Company’s consolidated financial statements. The Company will continue to evaluate ASU 2014-09 and other amendments and related interpretive guidance through the date of adoption. The Company expects to adopt ASU 2014-09 under the modified retrospective approach in the first quarter of fiscal 2019.



In February 2016, the FASB issued its final standard on accounting for leases. This standard, issued as ASU 2016-02, requires that an entity that is a lessee recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. This update is effective for annual and interim financial statement periods beginning after December 15, 2018, with earlier application permitted. The new standard is effective for the Company for its fiscal year 2020.  The Company is currently evaluating this standard to determine the impact of adoption on its consolidated financial statements.



In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for annual and interim financial statement periods beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. The new standard is effective for the Company for its fiscal year 2020.  The Company is currently evaluating this standard to determine the impact of adoption on its consolidated financial statements.



In January 2017, the FASB issued its final standard on simplifying the test for goodwill impairment. This standard, issued as ASU 2017-04, eliminates step 2 from the goodwill impairment test and instead requires an entity to perform its

9


 

 MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The new standard is effective for the Company for its fiscal year 2020.  Upon adoption, the Company will apply this guidance prospectively to its annual and interim goodwill impairment tests and disclose the change in accounting principle.



In January 2017, the FASB issued its final standard on clarifying the definition of a business in business combinations.  This standard, issued as ASU No. 2017-01, clarifies the definition of a business to assist entities with evaluating when a set of transferred assets and activities is considered a business. The amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The new standard is effective for the Company for its fiscal year 2019, with early adoption permitted.  The amendments are to be applied prospectively to business combinations that occur after the effective date.



Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the Company’s financial position, results of operations or cash flows.



Reclassification



Certain of the prior period Cash Flows from Financing Activities line items were reclassified into “Other, Net” within our condensed consolidated statements of cash flows to conform to our current period presentation. These reclassifications did not affect the total amount of Cash Flows from Financing Activities.



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 and thirty-nine weeks ended June 2, 2018 and June 3, 2017, respectively:





 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended



 

June 2,

 

June 3,

 

June 2,

 

June 3,



 

2018

 

2017

 

2018

 

2017

Net income as reported

 

$

79,069 

 

$

62,836 

 

$

256,206 

 

$

170,683 

Less: Distributed net income available to participating securities

 

 

(14)

 

 

(39)

 

 

(73)

 

 

(151)

Less: Undistributed net income available to participating securities

 

 

(56)

 

 

(107)

 

 

(248)

 

 

(309)

Numerator for basic net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed and distributed net income available to common shareholders         

 

$

78,999 

 

$

62,690 

 

$

255,885 

 

$

170,223 

  Add: Undistributed net income allocated to participating securities

 

 

56 

 

 

107 

 

 

248 

 

 

309 

Less: Undistributed net income reallocated to participating securities

 

 

(55)

 

 

(106)

 

 

(247)

 

 

(307)



 

 

 

 

 

 

 

 

 

 

 

 

Numerator for diluted net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed and distributed net income available to common shareholders

 

$

79,000 

 

$

62,691 

 

$

255,886 

 

$

170,225 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding for basic net income per share

 

 

56,420 

 

 

56,779 

 

 

56,382 

 

 

56,593 

Effect of dilutive securities

 

 

384 

 

 

485 

 

 

351 

 

 

435 

Weighted average shares outstanding for diluted net income per share

 

 

56,804 

 

 

57,264 

 

 

56,733 

 

 

57,028 

Net income per share Two-class method:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.40 

 

$

1.10 

 

$

4.54 

 

$

3.01 

Diluted

 

$

1.39 

 

$

1.09 

 

$

4.51 

 

$

2.98 



There were no antidilutive stock options included in the computation of diluted earnings per share for the thirteen and thirty-nine-week periods ended June 2, 2018 and June 3, 2017, respectively.

10


 

 MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

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 and thirty-nine-week periods ended June 2, 2018 and June 3, 2017 was as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended



 

June 2,

 

June 3,

 

June 2,

 

June 3,



 

2018

 

2017

 

2018

 

2017

Stock options

 

$

1,132 

 

$

1,088 

 

$

3,455 

 

$

3,275 

Restricted share awards

 

 

658 

 

 

998 

 

 

2,230 

 

 

3,332 

Restricted stock units

 

 

1,827 

 

 

1,286 

 

 

5,401 

 

 

3,561 

Associate Stock Purchase Plan

 

 

68 

 

 

78 

 

 

189 

 

 

207 

Total 

 

 

3,685 

 

 

3,450 

 

 

11,275 

 

 

10,375 

Deferred income tax benefit

 

 

(1,080)

 

 

(1,311)

 

 

(3,304)

 

 

(3,943)

Stock-based compensation expense, net

 

$

2,605 

 

$

2,139 

 

$

7,971 

 

$

6,432 



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:





 

 

 

 

 

 



 

Thirty-Nine Weeks Ended



 

June 2,

 

June 3,



 

2018

 

2017

Expected life (in years)

 

4.0 

 

 

4.1 

 

Risk-free interest rate

 

1.87 

%

 

1.16 

%

Expected volatility

 

22.13 

%

 

20.50 

%

Expected dividend yield

 

2.30 

%

 

2.40 

%

Weighted-average grant-date fair value

 

$12.25 

 

 

$9.29 

 



A summary of the Company’s stock option activity for the thirty-nine-week period ended June 2, 2018 is as follows:





 

 

 

 

 

 

 

 

 



Options

 

Weighted-Average Exercise Price per Share

 

Weighted-Average Remaining Contractual Term (in years)

 

Aggregate Intrinsic Value

Outstanding on September 2, 2017

1,743 

 

$

70.88 

 

 

 

 

 

Granted

436 

 

 

79.60 

 

 

 

 

 

Exercised

(325)

 

 

71.20 

 

 

 

 

 

Canceled/Forfeited

(65)

 

 

72.32 

 

 

 

 

 

Outstanding on June 2, 2018

1,789 

 

$

72.90 

 

4.7 

 

$

33,628 

Exercisable on June 2, 2018

682 

 

$

73.77 

 

3.5 

 

$

12,219 



The unrecognized share‑based compensation cost related to stock option expense at June 2, 2018 was $8,734 and will be recognized over a weighted average period of 2.4 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 thirty-nine-week periods ended June 2, 2018 and June 3, 2017 was $7,234 and $9,232, respectively.





















11


 

 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 thirty-nine-week period ended June 2, 2018 is as follows:



 

 

 

 



Shares

 

Weighted-Average  Grant-Date Fair Value

Non-vested restricted share awards at September 2, 2017

160 

 

$

80.49 

Granted

 —

 

 

 —

Vested

(90)

 

 

79.36 

Canceled/Forfeited

(4)

 

 

82.40 

Non-vested restricted share awards at June 2, 2018

66 

 

$

81.75 



The fair value of each RSA is the closing stock price on the NYSE 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 statutory income tax withholding obligation. The remaining RSAs will be settled in shares of the Company’s Class A common stock when vested. The unrecognized share-based compensation cost related to RSAs at June 2, 2018 was $2,632 and will be recognized over a weighted average period of 1.2 years.    



Restricted stock units



A summary of the Company’s non-vested Restricted Stock Unit (“RSU”) award activity for the thirty-nine-week period ended June 2, 2018 is as follows:





 

 

 

 



Shares

 

Weighted-Average  Grant-Date Fair Value

Non-vested restricted stock unit awards at September 2, 2017

313 

 

$

66.66 

Granted

169 

 

 

81.13 

Vested

(80)

 

 

66.68 

Canceled/Forfeited

(22)

 

 

71.44 

Non-vested restricted stock unit awards at June 2, 2018

380 

 

$

72.81 



The fair value of each RSU is the closing stock price on the NYSE 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 statutory income tax withholding obligation. 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 share-based compensation cost related to the RSUs at June 2, 2018 was $22,998 and is expected to be recognized over a weighted average period of 3.4 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.



In connection with the construction of the Company’s customer fulfillment center (“CFC”) 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 purchased by entities

12


 

 MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

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 CFC. The bonds ($27,025 outstanding at both June 2, 2018 and September 2, 2017)  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 and thirty-nine-week periods ended June 2, 2018. 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 short-term and long-term debt 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 as of June 2, 2018 and September 2, 2017 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 June 2, 2018 and September 2, 2017 due to the short-term maturity of these items.



During the thirty-nine weeks ended June 2, 2018 and June 3, 2017, the Company had no remeasurements of non-financial assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition. 



Note 5.  Business Combination



On April 30, 2018,  the Company acquired 100 percent of the outstanding shares of privately held Accurate Holding, Inc., a holding company whose subsidiaries do business under the name, All Integrated Solutions (“AIS”). AIS is a leading value-added distributor of industrial fasteners and components, MRO supplies and assembly tools headquartered in Franksville, Wisconsin.  Total cash consideration paid was $86,693, subject to certain post-closing adjustments, and the acquisition was funded from available cash resources and borrowings under the Credit Facility.



AIS delivers production fasteners and custom tool and fastener solutions for use in the assembly of manufactured commercial and consumer products serving customers primarily in the Midwest region. The Company plans to provide AIS’s customer base access to its product portfolio to support their full metalworking and MRO needs. Similarly, the Company will extend AIS's production fastener and Vendor Managed Inventory  (VMI) solutions to its manufacturing customers.



The acquisition of AIS was accounted for as a business purchase pursuant to ASC Topic 805, “Business Combinations” (“ASC 805”). Non-recurring transaction and integration costs totaling $682 are included in the Company’s condensed consolidated statement of income as operating expenses  for the thirteen and thirty-nine-week periods ended June 2, 2018. As required by ASC 805-20, the Company allocated the purchase price to assets and liabilities based on their estimated fair value at the acquisition date. The Company’s purchase accounting as of June 2, 2018 is preliminary primarily due to the pending final valuation and an expected working capital adjustment to the purchase price.

13


 

 MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 



The following table summarizes the amounts of identified assets acquired and liabilities assumed based on the estimated fair value at the acquisition date:





 

 

 



 

 

 

Cash and cash equivalents

 

$

1,586 

Inventories

 

 

20,629 

Accounts receivable

 

 

9,834 

Prepaid expenses and other current assets

 

 

1,303 

Identifiable intangibles

 

 

23,200 

Goodwill

 

 

39,574 

Property, plant and equipment

 

 

1,561 

Other assets

 

 

121 

Total Assets Acquired

 

$

97,808 

Accounts payable

 

 

3,119 

Accrued liabilities

 

 

4,971 

Deferred income taxes and tax uncertainties

 

 

3,025 

Total Liabilities Assumed

 

$

11,115 

Net Assets Acquired

 

$

86,693 



Acquired intangible assets with a fair value of $23,200 consisted of customer relationships of $21,000 with a useful life of 10 years and a trademark of $2,200 with a useful life of 5 years. The goodwill amount of $39,574 represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The primary items that generated the goodwill were the premiums paid by the Company for the right to control the business acquired and benefit from adding a highly complementary provider of production fasteners and custom tool and fastener solutions and services with an experienced field sales force and VMI solution. This goodwill will not be amortized and will be included in the Company’s periodic test for impairment at least annually.  The amount of goodwill deductible for tax purposes was $4,900. 



      The amount of revenue and loss before provision for income taxes from AIS included in the condensed consolidated statements of income for both the thirteen and thirty-nine-week periods ended June 2, 2018 was $6,725 and ($1,719), respectively.



Note 6.  Goodwill and Other Intangible Assets



The change in the carrying amount of goodwill is as follows:



 

 

 



 

 

 

Balance as of September 2, 2017

 

$

633,728 

AIS acquisition

 

 

39,574 

Post-closing working capital adjustment from acquisition of DECO Tool Supply Co.

 

 

738 

Foreign currency translation adjustment

 

 

(1,255)

Balance as of June 2, 2018

 

$

672,785 



The components of the Company’s other intangible assets for the thirty-nine-week period ended June 2, 2018 and for the fiscal year ended September 2, 2017 are as follows:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

June 2, 2018

 

September 2, 2017



Weighted Average Useful Life (in years)

 

Gross Carrying Amount

 

Accumulated Amortization

 

Gross Carrying Amount

 

Accumulated Amortization

Customer Relationships

-

18

 

$

208,260 

 

$

(99,229)

 

$

187,260 

 

$

(92,381)

Contract Rights

 

10

 

 

 

23,100 

 

 

(23,100)

 

 

23,100 

 

 

(23,100)

Trademark

-

5

 

 

6,692 

 

 

(4,105)

 

 

4,403 

 

 

(3,058)

Trademarks

Indefinite

 

 

14,155 

 

 

 —

 

 

14,205 

 

 

 —

Total

 

 

 

 

$

252,207 

 

$

(126,434)

 

$

228,968 

 

$

(118,539)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the thirty-nine-week period ended June 2, 2018, the Company recorded approximately $23,285 of intangible assets, primarily consisting of the acquired customer relationships and trademark from the AIS acquisition. See Note 5 “Business Combination.”  During the thirty-nine-week period ended June 2, 2018, approximately $46 in gross intangible assets, and any related accumulated amortization, were written off related to trademarks that are no longer being utilized.

14


 

 MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 



The Company’s amortizable intangible assets are recorded on a straight-line basis, including customer relationships, as it approximates customer attrition patterns and best estimates the use pattern of the asset. Amortization expense of the Company’s intangible assets was $7,541 and $6,007 for the thirty-nine-week periods ended June 2, 2018 and June 3, 2017, respectively. The Company expects amortization expense to be approximately $2,975 for the remainder of fiscal 2018 and for each of the five succeeding fiscal years as follows:





 

 

 



 

 

 

Fiscal Year

 

 

 

2019

 

$

11,194 

2020

 

 

10,217 

2021

 

 

9,534 

2022

 

 

9,520 

2023

 

 

9,375 





Note 7. Debt and Capital Lease Obligations



Debt at June 2, 2018 and September 2, 2017 consisted of the following:





 

 

 

 

 

 



 

June 2,

 

September 2,



 

2018

 

2017



 

(Dollars in thousands)

Revolving Credit Facility

 

$

284,000 

 

$

332,000 

Private Placement Debt:

 

 

 

 

 

 

   Senior notes, series A

 

 

75,000 

 

 

75,000 

   Senior notes, series B

 

 

100,000 

 

 

100,000 

Shelf Facility Agreement

 

 

50,000 

 

 

 -

Capital lease and financing obligations

 

 

28,163 

 

 

27,829 

Subtotal

 

$

537,163 

 

$

534,829 

   Less: unamortized debt issuance costs

 

 

(1,642)

 

 

(1,852)

Total debt

 

$

535,521 

 

$

532,977 

   Less: short-term debt(1)

 

 

(284,217)

 

 

(331,986)

Long-term debt

 

$

251,304 

 

$

200,991 

____________________

(1)

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



Credit Facility



In April 2017, the Company entered into a $600,000 credit facility (the “Credit Facility”). The Credit Facility, which matures on April 14, 2022, provides for a five-year unsecured revolving loan facility.



The Credit Facility permits up to $50,000 to be used to fund letters of credit.  The Credit Facility also permits the Company to request one or more incremental term loan facilities and/or increase the revolving loan commitments in an aggregate amount not to exceed $300,000.  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.



The interest rate is based on either LIBOR or a base rate, plus in either case a spread based on our leverage ratio at the end of each fiscal reporting quarter.  The weighted average applicable borrowing rate for any borrowings outstanding under the Credit Facility at June 2, 2018 was 3.03% which represents LIBOR plus 1.125%. Based on the interest period the Company selects, interest may be payable every one, two, or three 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.



During the thirty-nine-week period ended June 2, 2018, the Company borrowed $172,000 and repaid $220,000 under the Credit Facility.

15


 

 MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

Private Placement Debt



In July 2016, the Company completed the issuance and sale of $75,000 aggregate principal amount of 2.65% Senior Notes, Series A, due July 28, 2023 and $100,000 aggregate principal amount of 2.90% Senior Notes, Series B, due July 28, 2026 (collectively “Private Placement Debt”).  Interest is payable semiannually at the fixed stated interest rates.



Shelf Facility Agreements



In January 2018, the Company entered into Note Purchase and Private Shelf Agreements with Metropolitan Life Insurance Company (“Met Life Note Purchase Agreement”) and PGIM, Inc. (“Prudential Note Purchase Agreement” and together with the Met Life Note Purchase Agreement, the “Shelf Facility Agreements”).



The Met Life Note Purchase Agreement provides for an uncommitted facility for the issuance and sale of up to an aggregate total of $250,000 of senior notes, at either fixed or floating rates. As of June 2, 2018, the Company has not issued any notes under the Met Life Note Purchase Agreement.



The Prudential Note Purchase Agreement provides for an uncommitted facility for the issuance and sale of up to an aggregate total of $250,000 of senior notes, at a fixed rate. In January 2018, the Company completed the issuance and sale of $50,000 aggregate principal amount of 3.04% Senior Notes due January 12, 2023 under the Prudential Note Purchase Agreement in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. Interest is payable semiannually. As of June 2, 2018, the aggregate availability under the Prudential Note Purchase Agreement is $200,000.



Each of the Credit Facility, Private Placement Debt, and Shelf Facility Agreements 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 (or, at the election of the Company after it consummates a material acquisition, a four-quarter temporary increase to 3.50 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 terms of the Credit Facility, Private Placement Debt and Shelf Facility Agreements. At June 2, 2018, the Company was in compliance with the operating and financial covenants of the Credit Facility, Private Placement Debt, and Shelf Facility Agreements.



Capital Lease and Financing Obligations



In connection with the construction of the Company’s CFC in Columbus, Ohio in fiscal 2013, 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 June 2, 2018 and September 2, 2017, the capital lease obligation was approximately $27,025. 



From time to time, the Company enters into capital leases and financing arrangements with vendors to purchase certain information technology equipment or software. The equipment or software acquired from these vendors is paid for over a specified period of time based on the terms agreed upon. During the thirty-nine-week period ended June 2, 2018, the Company entered into capital lease and financing obligations related to certain IT equipment and software totaling $1,163.  The gross amount of property and equipment acquired under the capital lease obligation at June 2, 2018 was approximately $442.  There is no related accumulated amortization for this capital lease as of June 2, 2018.

 

Note 8. Shareholders’ Equity



On June 19, 2018, the Board of Directors declared a quarterly cash dividend of $0.58 per share payable on July 24, 2018 to shareholders of record at the close of business on July 10, 2018. The dividend will result in a payout of approximately $32,797, based on the number of shares outstanding at June 20, 2018.

 

On January 9, 2018, the Board of Directors authorized the repurchase of an additional 2,000 shares of Class A common stock under the Company’s ongoing Stock Repurchase Plan.  During the thirty-nine-week period ended June 2, 2018, the Company repurchased 291 shares of its Class A common stock for $25,384, which is reflected at cost as treasury

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 MSC INDUSTRIAL DIRECT CO., INC.

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

stock in the accompanying condensed consolidated financial statements. Of these shares, 53 shares were repurchased by the Company to satisfy the Company’s associates’ tax withholding liability associated with its share-based compensation program.   The total number of shares of Class A common stock authorized for future repurchase was approximately 2,565 shares at June 2, 2018.

 

Note 9. 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 and thirty-nine-week periods ended June 2, 2018 and June 3, 2017 was minimal.

 

Note 10. Income Taxes



On December 22, 2017, the Tax Reform Act was enacted. The Tax Reform Act made significant changes to U.S. federal income tax laws including permanently lowering the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. As the Company has a fiscal August year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory rate of 25.7% for the fiscal year ending September 1, 2018. The Company’s statutory federal tax rate will be 21.0% for fiscal years 2019 and beyond. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.



In December 2017, the SEC issued Staff Accounting Bulletin No. 118, which allows a company to report provisional numbers related to the Tax Reform Act and adjust those amounts during a measurement period not to extend beyond one year. The Company recorded a one-time provisional net tax benefit of $41,199 due to the revaluation of its net deferred tax liabilities primarily related to the lower federal corporate tax rate, partially offset by the lower federal benefit for state taxes and the change from a worldwide tax system to a territorial tax system in its fiscal second quarter of 2018. In addition, applying the reduced effective tax rate of 29.3%, including state taxes and which excludes discrete items, to the first half of the fiscal year earnings resulted in a $16,929 reduction to tax expense. The amounts recorded are provisional and are subject to change due to further interpretations of the Tax Reform Act, legislative action to address questions that arise because of the Tax Reform Act, and/or any updates or changes to estimates the Company has utilized to calculate the impacts, such as return to accrual adjustments and/or changes to current year earnings estimates and the Company’s ongoing analysis of the Tax Reform Act.



During the thirty-nine-week period ended June 2, 2018, there were no material changes in unrecognized tax benefits.    

 

Note 11. 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 12.  Subsequent Event



On June 11, 2018, the Company completed the issuance and sale of (i) (x) $20,000 aggregate principal amount of its 3.22% Senior Notes, Series 2018A, due June 11, 2020 and (y) $20,000 aggregate principal amount of its 3.42% Senior Notes, Series 2018B, due June 11, 2021 under the Met Life Note Purchase Agreement and (ii) $20,000 aggregate principal amount of its 3.79% Senior Notes due June 11, 2025 under a new Note Purchase Agreement, dated June 11, 2018, by and between the Company and certain parties related to NYL Investors LLC. 





 

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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 2, 2017 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 1.6 million products, inventory management and other supply chain solutions, and deep expertise from more than 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.



We offer approximately 1,602,000 (excluding DECO and AIS) active, saleable stock-keeping units (“SKUs”) through our catalogs; brochures; eCommerce channels, including our website, mscdirect.com (“MSC website”); our inventory management solutions; and call-centers and branches. We service our customers from 12 customer fulfillment centers (eight 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  in Canada) and 100 branch offices (including 7 branch offices from the AIS acquisition and 10 branch offices from the DECO acquisition). 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 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 achieve 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”), Vendor Managed Inventory (“VMI”), and vending programs.



Our field sales and service associate headcount was 2,329 at June 2, 2018,  which includes 53 and 65 field sales and service associates from the AIS and DECO acquisitions, respectively, compared to 2,309 at June 3, 2017. We will continue to manage our sales and service headcount based on economic conditions and our business plans.



Recent Developments and Highlights



Highlights during the three fiscal quarters ended June 2, 2018 include the following:



·

On April 30, 2018, we completed the acquisition of All Integrated Solutions (AIS”) for aggregate consideration of approximately $86.7 million.



·