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 and twenty-six-
week period
s
ended
March 4, 2017
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
.
There have been no changes to significant accounting policies since September 3, 2016, except for the adoption of Accounting Standards Update (“ASU”) No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
,
and ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes,
which resulted in changes to the condensed consolidated financial statements, including adjustments recorded as of the beginning of fiscal 2017, as described in Note 10
“Recently Issued Accounting Standards”
.
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
Ac
counting 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 shar
es 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 twenty-six weeks ended March 4, 2017 and February 27, 2016, respectively:
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Thirteen Weeks Ended
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Twenty-Six Weeks Ended
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|
March 4,
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February 27,
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March 4,
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February 27,
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2017
|
|
2016
|
|
2017
|
|
2016
|
Net income as reported
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$
|
53,559
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|
$
|
49,525
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|
$
|
107,847
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|
$
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104,554
|
Less: Distributed net income available to participating securities
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(36)
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(80)
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(113)
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(169)
|
Less: Undistributed net income available to participating securities
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(84)
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(106)
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(199)
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(266)
|
Numerator for basic net income per share:
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Undistributed and distributed net income available to common shareholders
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$
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53,439
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$
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49,339
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$
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107,535
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$
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104,119
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Add: Undistributed net income allocated to participating securities
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84
|
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|
106
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199
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266
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Less: Undistributed net income reallocated to participating securities
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(83)
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(106)
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(197)
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(265)
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Numerator for diluted net income per share:
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Undistributed and distributed net income available to common shareholders
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$
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53,440
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$
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49,339
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$
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107,537
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$
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104,120
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Denominator:
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Weighted average shares outstanding for basic net income per share
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56,620
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61,187
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56,500
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61,242
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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)
Effect of dilutive securities
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593
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126
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410
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119
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Weighted average shares outstanding for diluted net income per share
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57,213
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61,313
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56,910
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61,361
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Net income per share Two-class method:
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Basic
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$
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0.94
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$
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0.81
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$
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1.90
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$
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1.70
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Diluted
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$
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0.93
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$
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0.80
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$
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1.89
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$
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1.70
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There were
no
antidilutive stock options
included in the computation of diluted earnings
per share for the thirteen and twenty-six-week
period
s
ended
March 4, 2017, respectively.
Antidilutive stock options of
1,025
were not included in the computation of diluted earnings
per share for the thirteen and twenty-six-week periods ended February 27, 2016
.
Note 3. Stock-Based Compensation
The Company accounts for all share-based payments in accordance with ASC Topic 718, "Compensation—Stock Compensation" ("ASC 718").
S
tock
‑based compensation expense
included in operating expenses for the thirteen and twenty-six-week periods ended March 4, 2017 and February 27, 2016 was as follows:
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Thirteen Weeks Ended
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Twenty-Six Weeks Ended
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March 4,
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February 27,
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March 4,
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February 27,
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2017
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2016
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2017
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2016
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Stock options
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$
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1,075
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$
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1,066
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$
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2,187
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$
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2,252
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Restricted share awards
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1,012
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1,473
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2,334
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3,199
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Restricted stock units
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1,233
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773
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2,275
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1,412
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Associate Stock Purchase Plan
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67
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66
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129
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136
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Total
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3,387
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3,378
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6,925
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6,999
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Deferred income tax benefit
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(1,288)
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(1,284)
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(2,632)
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(2,660)
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Stock-based compensation expense, net
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$
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2,099
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$
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2,094
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$
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4,293
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$
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4,339
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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:
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Twenty-Six Weeks Ended
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March 4,
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February 27,
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2017
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2016
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Expected life (in years)
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4.1
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3.9
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Risk-free interest rate
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1.16
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%
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1.09
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%
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Expected volatility
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20.50
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%
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21.82
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%
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Expected dividend yield
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2.40
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%
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2.40
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%
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Weighted-average grant-date fair value
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$9.29
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$8.03
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A summary of the Company’s stock option activity for the twenty-six-week period ended March 4, 2017 is as follows:
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Options
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Weighted-Average Exercise Price per Share
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Weighted-Average Remaining Contractual Term (in years)
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Aggregate Intrinsic Value
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Outstanding on September 3, 2016
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1,645
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$
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69.86
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Granted
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537
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71.33
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Exercised
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(329)
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67.24
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Canceled/Forfeited
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(30)
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70.91
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Outstanding on March 4, 2017
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1,823
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$
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70.75
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5.0
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$
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61,232
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Exercisable on March 4, 2017
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655
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$
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73.54
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3.6
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$
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20,176
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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)
The unrecognized share
‑based compensation cost
related to stock option expense at
March 4, 2017
was
$9,489
and will
be recognized over a weighted average period of
2.8
years. The total intrinsic va
lue 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
twenty-six-
week periods
ended
March 4, 2017
and
February 27, 2016
was
$9,100
and
$481
, respectively.
Restricted share awards
A summary of the non
‑vested restricted share award
(“RSA”)
activity under the Company’s 2005 Omnibus Incentive Plan
and 2015 Omnibus Incentive Plan
for the
twenty-six-
week period
ended
March 4, 2017
is as follows:
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Shares
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Weighted-Average Grant-Date Fair Value
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Non-vested restricted share awards at September 3, 2016
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265
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$
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78.58
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Granted
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—
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—
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Vested
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(96)
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75.28
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Canceled/Forfeited
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(4)
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80.99
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Non-vested restricted share awards at March 4, 2017
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165
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$
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80.41
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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 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 compensation cost related to
RSAs
at
March 4, 2017
was
$6,923
and will be recognized over a weighted average period of
2.1
years.
Restricted
s
tock units
A summa
ry of the Company’s non-vested Restricted Stock U
nit
(“RSU”)
award activity for the
twenty-six-week period
ended
March 4, 2017
is as follows:
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Shares
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Weighted-Average Grant-Date Fair Value
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Non-vested restricted stock unit awards at September 3, 2016
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198
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$
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58.98
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Granted
|
174
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73.32
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Vested
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(45)
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59.05
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Canceled/Forfeited
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(7)
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64.83
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Non-vested restricted stock unit awards at March 4, 2017
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320
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$
|
66.63
|
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
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 compensation cost related to the RSUs at
March 4, 2017
was
$17,486
and is
expected to be recognized over a weighted average period of
4.0
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.
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Level 2
—Include other inputs that are directly or indirectly observable in the marketplace.
Level 3
—Unobservable inputs which are supported by little or no market activity.
In connection with the co
nstruction 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 c
ustomer fulfillment center. The bonds (
$27,022
outstanding
at
both
March 4, 2017
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 and
twenty-six-
week period
s
ended
March 4, 2017
. 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
March 4, 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
March 4, 2017
and
September 3, 2016
due to the short-term maturity of these items.
During the
twenty-six
weeks ended
March 4, 2017
and
February 27, 2016
, 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
March 4, 2017
and
September 3, 2016
consisted of the following:
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March 4,
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September 3,
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2017
|
|
2016
|
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(Dollars in thousands)
|
Credit Facility:
|
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|
|
|
|
Revolver
|
|
$
|
184,000
|
|
$
|
217,000
|
Term loan
|
|
|
162,500
|
|
|
187,500
|
Private Placement Debt:
|
|
|
|
|
|
|
Senior notes, series A
|
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|
75,000
|
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|
75,000
|
Senior notes, series B
|
|
|
100,000
|
|
|
100,000
|
Capital lease and financing obligations
|
|
|
28,368
|
|
|
28,268
|
Less: unamortized debt issuance costs
|
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|
(736)
|
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|
(946)
|
Total debt
|
|
$
|
549,132
|
|
$
|
606,822
|
Less: current maturities of long-term debt
(1)
|
|
|
(278,072)
|
|
|
(267,050)
|
Long-term debt
|
|
$
|
271,060
|
|
$
|
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 C
redit Facility, which matures in
April 2018
, provides for a
five
-
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
year unsecured revolving loan facility in the aggregate amount of
$400,000
and a
five
-year unsecured term loan facility in the aggregate amount of
$250,000
.
The Credit Facility also permits the Company, at its request, and upon the satisfaction of certain conditions, to add one or more incremental term loan facilities and/or increase the revolving loan commitments in an aggregate amount not to exceed
$200,000
. Subject to certain limitations, each such incremental term loan facility or revolving commitment increase will be on terms as agreed to by the Company, the Administrative Agent and the lenders providing such financing.
Borrowings under the Credit Facility bear interest, at the Comp
any’s option, either at (i)
LIBOR (Lond
on Interbank Offered 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) LIBOR
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
March
4, 2017 was
1.91%
which r
epresents 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
twenty-six-
week
period ended
March 4, 2017
, the Company
borrow
ed
$78,000
under the revolving loan facility and repaid
$111,000
and
$25,000
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 d
ates. 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 March 4, 2017, 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 co
nstruction 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
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
lease has been classified as a capital lease in accordance with ASC Topic 840. At
March 4, 2017
and
September 3, 2016
, the capital lease obligation was approximately
$27,022
.
Note 6. Shareholders’ Equity
The Company paid cash
dividends
o
f
$0.90
per common share
totali
ng
$51,010
fo
r
the
twenty-six
weeks ended
March 4, 2017
. For the
twenty-six
weeks ended
February 27, 2016
, the Company paid
cash dividends of
$0.86
per common share totaling
$52,948
. On
March 30, 2017
, th
e Board of Directors declared a quarterly cash dividend
of
$0.45
per
share pa
yable on
May 2, 2017
t
o shareholder
s of record at the close of business on
April 18, 2017
. T
he dividend will result in a payout of
approximately
$25,622
, ba
sed on the number of shares
outstanding at March 23, 2017
.
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
twenty-six-
week period ended
March 4, 2017
, the Company repurcha
sed
42
shares
of its Class A common stock for
$3,064
, wh
ic
h is reflected at cost as treasury stock in the accompanying condensed consolidat
ed 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
March 4, 2017
, the maximum number of shares that
can
be repurchased under the Rep
urchase 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 merchandis
e products are covered by third-
party original equipment manufacturers’ warranties. The Company’s warranty expense for
the thirteen and
twenty-six-
week
period
s
ended
March 4, 2017
and
February 27, 2016
was minimal.
Note
8
. Income Taxes
During the
twenty-six
-
week
period ended
March 4, 2017
, 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
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 Company early adopted ASU 2016-09 in the second quarter of fiscal 2017,
which requires us to reflect any adjustments as of
September 4
, 2016, the beginning of
the annual period that includes the interim period of adoption.
Prior fiscal year periods were not retrospectively adjusted.
The new standard requires that excess tax benefits and deficiencies resulting from stock-based compensation awards vesting and exercises be recognized in the income statement. Previously, these amounts were recognized in additional paid-in
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
capital. Net excess tax benefits of
$1,803
and
$1,988
for the thirteen and twenty-six-
week periods ending March 4, 2017, respectively, were recognized as a reduction of income tax expense
which resulted in a net income per share benefit of
$0.03
for both periods
. In addition, ASU 2016-09 requires excess tax benefits and deficiencies to be excluded from the assumed future proceeds in the calculation of diluted shares, resulting in an increase in diluted weighted average shares outstanding of
164
and
100
shares for the thirteen and twen
ty-six-
week periods ending March 4, 2017, respectively.
The Company has elected to continue to estimate the number of stock-based awards expected to vest, as permitted by ASU 2016-09, rather than electing to account for forfeitures as they occur.
The standard also requires that
excess tax benefits from share-
based compensation awards be reported as operating activities in the consolidated statements of cash flows. Previously, these cash flows were included in financing activities. We have elected to apply this change on a prospective basis. As a result, we
increased net cash provided by operating activities by
$525
for the twenty-six-
week period ending March 4, 2017, with a corresponding
$525
increase in net cash used by financing activities pertaining to our fiscal first quarter of 2017.
Additionally, ASU 2016-09 requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the consolidated statements of cash flows, which is how the Company has
historically classified these.
Finally, the new guidance will allow an employer with a statutory income tax withholding obligation to withhold shares with a fair value up to the amount of tax owed using the maximum statutory tax rate in the employee’s applicable jurisdiction. The Company will continue to withhold the minimum statutory withholding obligation for outstanding awards.
Adoption of the new standard affected our previously reported fiscal first quarter of 2017 net income per share as follows:
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
December 3, 2016
|
|
|
As Reported
|
|
As Adjusted
|
Condensed Consolidated Statements of Income:
|
|
(in thousands, except per share data)
|
Provision for income taxes
|
|
$
|
33,442
|
|
$
|
33,257
|
Net income
|
|
$
|
54,103
|
|
$
|
54,288
|
Per share information:
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
Basic
|
|
$
|
0.96
|
|
$
|
0.96
|
Diluted
|
|
$
|
0.95
|
|
$
|
0.96
|
Weighted average shares used in computing net income per common share:
|
|
|
|
|
|
|
Basic
|
|
|
56,381
|
|
|
56,381
|
Diluted
|
|
|
56,572
|
|
|
56,608
|
Deferred Taxes
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 was in a net deferred tax liability position in its first quarter of fiscal 2017 which was the time of adoption. Prior periods were not retrospectively adjusted.
Accounting Pronouncements Not Yet Adopted
Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 in the
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
goodwill impairment test that required an entity to calculate the implied fair value of goodwill. An entity will now apply a one-step quantitative test and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 will be applied prospectively and is
effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019
. The new standard is effective for the Company for its fiscal 2021 fourth quarter goodwill impai
rment test. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.
The Company is currently evaluating this standard to determine the impact
, if any,
of adoption on its consolidated financial statements.
Business Combinations
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations – Clarifying the Definition of a Business. ASU 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 amendment should 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 2019 first quarter.
The Company is currently evaluating this standard to determine the impact
, if any,
of adoption on its consolidated financial statements.
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 Jul
y 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 consolidated financial statements.
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 has evaluated the provisions of the new standard and is in the process of assessing its impact on financial statements, information systems, business processes and financial statement disclosures. Based on initial reviews, this standard is not expected to have a material impact on the Company’s con
solidated financial statements.
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 Americ
an 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 mark
et share
, generate new customers, increase sales to existing customers, and diversify our customer base.
Our experienced team
of
over 6,000
associates w
orks 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
1,540,000
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 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 headcoun
t was
2,352
at
March 4, 2017
,
compared to
2,316
at
February 27, 2016
. 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 acti
vity. Approximately 68% o
f
our revenues came from sales in the manufacturing sector during
the
second quarter of our fiscal year 2017
, including certain national account customers.
Thr
ough 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 gener
ally indicates expansion.
The MBI index over the past three months and for the past 12-month period was as follows:
|
|
|
Period
|
|
MBI
|
December
|
|
49.8
|
January
|
|
53.8
|
February
|
|
56.0
|
|
|
|
Fiscal 2017 Q2 average
|
|
53.2
|
12-month average
|
|
48.8
|
The MBI has
continued to increase
st
eadily throughout the first
half
of ou
r fiscal year 2017. With value
s
reaching
over 50
.0 in our fiscal second quarter for the first time since March 2015
, this implies expansion i
n the metalworking
manufacturing
environment
. Details released with the March MBI of 56.4 indicate an expanding metalworking environment, including growth in new orders, production, backlog, and pricing. 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 March 4, 2017 Compared to the Thirteen-Week Period Ended
February 27, 2016
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
|
|
|
|
|
|
|
|
March 4, 2017
|
|
February 27, 2016
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
Net sales
|
|
$
|
703,780
|
|
|
100.0%
|
|
$
|
684,117
|
|
|
100.0%
|
|
$
|
19,663
|
|
|
2.9%
|
Cost of goods sold
|
|
|
389,218
|
|
|
55.3%
|
|
|
375,326
|
|
|
54.9%
|
|
|
13,892
|
|
|
3.7%
|
Gross profit
|
|
|
314,562
|
|
|
44.7%
|
|
|
308,791
|
|
|
45.1%
|
|
|
5,771
|
|
|
1.9%
|
Operating expenses
|
|
|
227,917
|
|
|
32.4%
|
|
|
228,249
|
|
|
33.4%
|
|
|
(332)
|
|
|
(0.1)%
|
Income from operations
|
|
|
86,645
|
|
|
12.3%
|
|
|
80,542
|
|
|
11.8%
|
|
|
6,103
|
|
|
7.6%
|
Total other expense
|
|
|
(2,840)
|
|
|
(0.4)%
|
|
|
(392)
|
|
|
(0.1)%
|
|
|
(2,448)
|
|
|
624.5%
|
Income before provision for income taxes
|
|
|
83,805
|
|
|
11.9%
|
|
|
80,150
|
|
|
11.7%
|
|
|
3,655
|
|
|
4.6%
|
Provision for income taxes
|
|
|
30,246
|
|
|
4.3%
|
|
|
30,625
|
|
|
4.5%
|
|
|
(379)
|
|
|
(1.2)%
|
Net income
|
|
$
|
53,559
|
|
|
7.6%
|
|
$
|
49,525
|
|
|
7.2%
|
|
$
|
4,034
|
|
|
8.1%
|
Net Sales
Net sales
increa
sed
2.9%
or approximately
$19.7
million for the thirteen-week period ended March 4, 2017
,
as compared to the thirteen-week period ended February 27, 2016. We estimate that this
$19.7
million increase
in net sales is comprised of
(i) approximately $30.0
million of higher
sales volume,
partially offset by (
ii) approximately $8.7 million
in reductions from pricing, which include
changes in customer and product m
ix, discounting and other items,
and
(i
i
i) approximately $1.6 milli
on from an unfavorable foreign exchange impact
. Of the above $19.7 million increase in net sales, sales to our government and national account programs (“Large Account Customers”) increased by approximately
$14.2
million and sales other than to our Large Account Customers increased by approximately
$5.5
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 March 4, 2017 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 Q2
|
|
% of Total Business
|
|
|
|
|
|
|
|
Total Company
|
|
2.9
|
%
|
|
|
|
Manufacturing Customers
(1)
|
|
2.6
|
%
|
|
68
|
%
|
Non-Manufacturing Customers
(1)
|
|
4.5
|
%
|
|
32
|
%
|
_____________
|
(1)
|
|
Excludes U.K. operations.
|
We believe that our ability to transact business with our customers through various electronic portal
s 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, Exte
nsible Markup Language ordering-
based systems, vending machine systems, hosted systems and other electronic portals
(“eCommerce platforms”)
, represente
d
59.8%
of
consolidated net sales for the
thirteen-
week period ended
March 4, 2017
, compared to
57.8%
of
consolidated
net sales for the same period in the prior fiscal year.
This increase was primarily associated with the MSC website and vending machine systems.
Gross Profit
Gross
profit
margin
was
44.7%
for
the thirteen-
week period ended
March 4, 2017
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 product and customer mix.
Operating Expenses
Operating expenses
decreased
0.1%
to
$227.9
million for
the thirteen-
week period ended
March 4, 2017
, as compared to
$228.2
million for the same period in the prior fiscal y
ear, yielding approximately 100 basis points of expense leverage on higher net sales.
Operating
expenses
were
32.4%
of net sales for
the thirteen-
week period ended
March 4, 2017
compared to
33.4%
of net sales for the same period in the prior fiscal year.
The increase in volume-related expenses, combined with a larger incentive compensation accrual, was more than offset by lower depreciation and amortization and fringe benefit costs. The decrease in depreciation and amortization is a result of certain intangible assets acquired from our fiscal 2006 J&L acquisition becoming fully amortized during the second half of fiscal 2016.
Payroll and payroll-
related costs
were
approxima
tely
57.2%
of to
tal operating expenses
for the thirteen-
week period ended
March 4, 2017
, as compared to approximat
ely
56.7%
for th
e thirteen-
week period ended
February 27, 2016
.
Included in payroll and payroll-related costs are salary, incentive compensation, sales commission and fringe benefit costs. Increases in salaries, the incentive compensation accrual and sales commissions were the main drivers for the increase in payroll and payroll-related costs for the thirteen-week period ended March 4, 2017, as compared to the same period in the prior year. This was partially offset by the decrease in fringe benefit 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 costs in the second quarter of fiscal 2016.
Income from Operations
I
ncome from operations
increased
7.6%
to
$
86.6
mil
lion for the thirteen-
week period ended
March 4, 2017
, as compared to
$80.5
million for the same period in the prior fisc
al year. This
was primarily
due to the increase in gross profit arising from the increase in net sales.
Inc
ome from operations as a percentage of net sales
increased
to
12.3%
for
the thirteen-
week period ended
March 4, 2017
, as compared to
11.8%
for the same period in the prior fiscal year, primarily the result of the distribution of expenses over a larger revenue base, partiall
y offset by the pricing and mix-
driven gross margin decrease.
Provision for Income Taxes
The effe
ctive tax rate for the thirteen-
week period ended
March 4, 2017
was
36.1%
, as compared to
38.2%
for the same period in the prior fiscal year. The decrease in the effective tax rate is primarily due to the adoption of ASU 2016-09 in the second quarter of fiscal 2017.
See Note 10
“Recently Issued Accounting Standards” in the Notes to the Condensed Consolidated Financial Statements.
Net Income
The factors which affec
ted net income for the thirteen-week period
ended
March 4, 2017
,
as compared to the same period
in the previous fiscal year, have been discussed above.
Twenty-Six-Week Period Ended March 4, 2017 Compared to the Twenty-Six-Week Period Ended
February 27, 2016
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
|
|
|
|
March 4, 2017
|
|
February 27, 2016
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
Net sales
|
|
$
|
1,390,051
|
|
|
100.0%
|
|
$
|
1,390,936
|
|
|
100.0%
|
|
$
|
(885)
|
|
|
(0.1)%
|
Cost of goods sold
|
|
|
766,754
|
|
|
55.2%
|
|
|
763,173
|
|
|
54.9%
|
|
|
3,581
|
|
|
0.5%
|
Gross profit
|
|
|
623,297
|
|
|
44.8%
|
|
|
627,763
|
|
|
45.1%
|
|
|
(4,466)
|
|
|
(0.7)%
|
Operating expenses
|
|
|
446,052
|
|
|
32.1%
|
|
|
456,833
|
|
|
32.8%
|
|
|
(10,781)
|
|
|
(2.4)%
|
Income from operations
|
|
|
177,245
|
|
|
12.7%
|
|
|
170,930
|
|
|
12.3%
|
|
|
6,315
|
|
|
3.7%
|
Total other expense
|
|
|
(5,895)
|
|
|
(0.3)%
|
|
|
(1,722)
|
|
|
(0.1)%
|
|
|
(4,173)
|
|
|
242.3%
|
Income before provision for income taxes
|
|
|
171,350
|
|
|
12.4%
|
|
|
169,208
|
|
|
12.2%
|
|
|
2,142
|
|
|
1.3%
|
Provision for income taxes
|
|
|
63,503
|
|
|
4.6%
|
|
|
64,654
|
|
|
4.6%
|
|
|
(1,151)
|
|
|
(1.8)%
|
Net income
|
|
$
|
107,847
|
|
|
7.8%
|
|
$
|
104,554
|
|
|
7.5%
|
|
$
|
3,293
|
|
|
3.1%
|
Net Sales
N
et sales decreased 0.1% or approximately
$0.9 million for the twenty-six-
week period ended March 4, 2017
, as compared to the twenty-six-
week period ended February 27, 2016. We estimate that this
$0.9
million decrease in net sales is comprised of
(i)
approximately
$17.2
million
in reductions from pricing, which include
changes in customer and product m
ix, discounting and other items and (ii)
approximately
$4.3
million f
rom an unfavorable foreign exchange impact, partially offset by (iii)
approximately
$20.6 million of higher
sales volume. Of the above $0.9 million decrease in net sales, sales to our
Large Account Customers
increased by approximately $7.1 million and sales other than to our Large Account Customers decreased by approximately $8.0 million.
The table below
shows the change in our
average daily sales by total company and by customer type
for the twenty-six-week period ended March 4, 2017 compared to
the same period in the prior fiscal year:
|
|
|
|
|
|
|
Average Daily Sales Percentage Change
|
(unaudited)
|
|
|
|
|
|
|
|
2017 vs. 2016 Fiscal Period
|
|
Twenty-Six-Week Period Ended Fiscal Q2
|
|
% of Total Business
|
|
|
|
|
|
|
|
Total Company
|
|
(0.1)
|
%
|
|
|
|
Manufacturing Customers
(1)
|
|
(0.9)
|
%
|
|
68
|
%
|
Non-Manufacturing Customers
(1)
|
|
2.5
|
%
|
|
32
|
%
|
_____________
|
(1)
|
|
Excludes U.K. operations.
|
Sales made through our eCommerce platforms
represente
d
59.7%
of
consolidated net sales for the
twenty-six-
week period ended
March 4, 2017
, compared to
57.4%
of
consolidated
net sales for the same period in the prior fiscal year.
This increase was primarily associated with the MSC website and vending machine systems.
Gross P
rofi
t
Gross
profit
margin
was
44.8%
for
the twenty-six-
week period ended
March 4, 2017
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 product and customer mix.
Operating Expenses
Operating expenses
decreased
2.4%
to
$446.1
million for
the twenty-six-
week period ended
March 4, 2017
, as compared to
$456.8
million for the same period in the prior fiscal y
ear,
yielding approximately 70 basis points of expense leverage on nearly flat net sales.
Operating
expenses
were
32.1%
of net sales for
the twenty-six-
week period ended
March 4, 2017
compared to
32.8%
of net sales for the same period in the prior fiscal year.
Payroll and payroll-related costs and depreciation and amortization contributed to the decrease in operating expenses. The decrease in depreciation and amortization is a result of certain intangible assets acquired from our fiscal 2006 J&L acquisition becoming fully amortized during the second half of fiscal 2016.
Payroll and payroll-
related costs
were
approxima
tely
56.8%
of to
tal operating expenses
for the twenty-six-
week period ended
March 4, 2017
, as compared to approximat
ely
55.9%
for
the same period in the prior fiscal year
.
However, for the twenty-six-week period ended March 4, 2017, as
compared to the same period in the prior fiscal year, total payroll and payroll-related costs decreased due to lower fringe benefit 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 costs in the first half of fiscal 2016. The decrease was partially offset by higher incentive compensation accruals, salaries and sales commissions.
Income from Operations
I
ncome from operations
increased
3.7%
to
$177.2
mil
lion for the twenty-six-
week period ended
March 4, 2017
, as compared to
$170.9
million for the same period in the prior fisc
al year. This increase was primarily due to lower operating expenses as mentioned above.
As such,
i
nc
ome from operations as a percentage of net sales
increased
to
12.7%
for
the twenty-six-
week period ended
March 4, 2017
, as compared to
12.3%
for the same period in the prior fiscal year.
Provision for Income Taxes
The effe
ctive tax rate for the twenty-six-
week period ended
March 4, 2017
was 37.1%
as compared to 38.2% for the same period in the prior fiscal year. The decrease in the effective tax rate is primarily due to the adoption of ASU 2016-09 in the second quarter of fiscal 2017.
See Note 10
“Recently Issued Accounting Standards” in the Notes to the Condensed Consolidated Financial Statements.
Net Income
The factors which affec
ted net income for the twenty-six-week period
ended
March 4, 2017
,
as compared to the same period
in the previous fiscal year, have been discussed above
.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 4,
|
|
September 3,
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
Total debt
|
|
$
|
549,132
|
|
$
|
606,822
|
|
$
|
(57,690)
|
Less: Cash and cash equivalents
|
|
|
(35,602)
|
|
|
(52,890)
|
|
|
17,288
|
Net debt
|
|
$
|
513,530
|
|
$
|
553,932
|
|
$
|
(40,402)
|
Equity
|
|
$
|
1,180,921
|
|
$
|
1,098,376
|
|
$
|
82,545
|
As of
March 4, 2017
, we held
$35.6
million in cash, substantially all with well-known financial institutions.
Historically, our primary capital needs have been to fund our working capital requirements necessitated by our sales growth, the costs of acquisitions, new products, new facilities, facility expansions, investments in vending solutions, technology investments, and productivity investments. Cash generated from operations, together with borrowings under the Credit Facility and Private Placement Debt, have been used to fund these needs, to repurchase shares of our Class A common stock, and to pay dividends.
At
March 4, 2017
, total borrowings outstanding, representing amounts due under the Credit Facility and Private Placement Debt, as well as all capital leases and financing arrangements, were approximately
$549.1
million, net of
unamortized debt issuance costs of
$0.7
million. At
September 3, 2016
, total borrowings outstanding, representing amounts due under the
Credit Facility and Private Placement Debt, as well as all capital leases and financing arrangements, were approximately
$606.8
million, net of unamortized debt issuance costs of
$0.9
million. We believe, based on our current
business plan, that our existing cash, funds available under our revolving credit facility, and cash flow from operations will be sufficient to fund our planned capital expenditures and operating cash requirements for at least the next 12 months.
We are continuing to take advantage of our strong balance sheet, which enables us to maintain optimal inventory and service levels to meet customer demands, while many of our smaller competitors in our fragmented industry continue to have difficulties in offering competitive service levels. We also believe that customers will continue to seek
overall
cost reductions and shorter cycle times from their suppliers. Our business model focuses on providing overall procurement cost reduction and just-in-time delivery to meet our customers’ needs. We focus on offering inventory, process and procurement solutions that reduce MRO supply chain costs and improve plant floor productivity for our customers. We will seek to continue to drive cost reduction throu
ghout our business through cost-
saving strategies and increased leverage from our existing infrastructure, and continue to prov
ide additional procurement cost-
savings solutions to our customers through technology such as our Customer Managed Inventory (“CMI”), VMI, and vending programs.
The table below summarizes information regarding the Company’s liquidity and capital resources:
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
March 4,
|
|
February 27,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
Net cash provided by operating activities
|
|
$
|
96,656
|
|
$
|
182,980
|
Net cash used in investing activities
|
|
|
(25,508)
|
|
|
(26,781)
|
Net cash used in financing activities
|
|
|
(88,294)
|
|
|
(170,435)
|
Effect of foreign exchange rate changes on cash and cash equivalents
|
|
|
(142)
|
|
|
(71)
|
Net decrease in cash and cash equivalents
|
|
$
|
(17,288)
|
|
$
|
(14,307)
|
Operating Activities
Net cash provided by operating activities for the
twenty-six-
week periods ended
March 4, 2017
and
February 27, 2016
was
$96.7
million and
$183.0
million, respectively. There are various increases and decreases contri
buting to this change.
Increases in inventories
, resulting from
increased sales volume
, as well as the increase in accounts receivable
co
ntributed to the majority of the decrease in net cash provided by operating activities.
The table below provides the Company’s working capital and current ratio:
|
|
|
|
|
|
|
|
|
|
|
|
March 4,
|
|
September 3,
|
|
February 27,
|
|
|
2017
|
|
2016
|
|
2016
(1)
|
|
|
(Dollars in thousands)
|
Working Capital
|
|
$
|
477,865
|
|
$
|
502,889
|
|
$
|
639,355
|
Current Ratio
|
|
|
2.0
|
|
|
2.1
|
|
|
2.9
|
____________________
|
(1)
|
|
Amounts as of February 27, 2016 have been adjusted to reflect the adoption of
ASU No.
2015-03, Simplifying the Presentation of Debt Issuance Costs
(
Subtopic 835-30). The Company adopted this ASU during the fourth quarter of fiscal 2016.
|
The decrease
in working capital and the current ratio at
March 4, 2017
compared to
September 3, 2016
and
February 27, 2016
is
related to the
adoption of ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which resulted in a prospective reclassification of $46.6 million from current deferred income tax assets to long-term liabilities during the first quarter of fiscal 2017. See Note 10 “Recently Issued Accounting Standards” in the Notes to the Condensed Consolidated Financial Statements for more information about this ASU adoption.
Investing Activities
Net cash used in investing activities for the
twenty-six
-
week periods ended
March 4, 2017
and
February 27, 2016
was
$25.5
million and
$26.8
million, respectively.
The use of cash for both periods was attributable to expenditures for property, plant, and equipment.
Financing Activities
Net cash used in financing activities for the
twenty-six-
week periods ended
March 4, 2017
and
February 27, 2016
was
$88.3
million and
$170.4
million, respectively.
The major components contributing to the use of cash for the
twenty-six
-
w
eek period ended
March 4, 2017
were repayments on the Credit Facility of
$58.0
million
, net of borrowings,
related to both the revolving loan
facility and term loan facility and
cash dividends paid of
$51.0 million. This was partially offset by proceeds from the exercise of common stock options of $21.9 million.
The major components contributing to the use of cash for the
twenty-six-
week period ended February 27, 2016 were repayments on the Credit Facility of $101.5 million, net of borrowings, related to both the revolving loan facility and term loan facility, cash dividends paid of $52.9 million, and the repurchase of shares of Class A common stock of $19.2 million.
Long-term Debt
Credit Facility
In April 2013, in connection with the acquisition of CCSG, we entered into a $650.
0 million Credit Facility
.
See Note 5 “Debt and Capital Lease
Obligations”
in the Notes to the Condensed Consolidated Financial Statements for more information about
the Credit Facility.
At March 4, 2017, we were in compliance with the operating and financial covenants of the Credit Facility. The Company had additional repayments
of $20.0 million, net of borrowings, under the revolving loan facility and repayments of $12.5 million under the term loan in March 2017. The current unused balance of $236.0 million o
f the revolving loan facility is available for working capital purposes if necessary.
Private Placement Debt
In July 2016, in connection with our tender offer and stock purchase, we completed the issuance and sale of unsecured senior notes. See Note 5 “Debt and Capital Lease Obligations” in the Notes to the Condensed Consolidated Financial Statements for more information about this transaction.
Capital Expenditures
Upgrade of Core Financial Systems
In
fiscal 2016
,
we initiated the upgrade of our core financial systems, including the receivables, payables
, treasury, fixed assets and general ledger. Capital expenditures relating to this project were approximately
$7.0
million and $6.
6 million in the first two q
uarters of fiscal 2017 and full-
year fiscal 2016, respectively.
We expect to incur additional capital expenditures
between $4.0 million and $5.0 million for the remainder of fiscal 2017
.
We expect to complete this project in Spring 2017.
Contractual Obligations
Capital Lease and Financing Arrangements
From time to time, we enter into capital leases and financing arrangem
ents
.
See Note 5 “Debt and Capital Lease Obligations” in the Notes to the Condensed Consolidated Financial Statements for more information about our capital lease and financing arrangements.
Operating Leases
As of
March 4, 2017
, certain of our operations ar
e conducted on leased premises
. These leases are for varying periods, the longest extending
to fiscal
2026
. In addition, we are obligated under certain equipment and automobile operating leases, which expire on varying dates through fiscal
2021
.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Critical Accounting Estimates
On an ongoing basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition, inventory valuation, allowance for
doubtful accounts, warranty
reserves, contingencies and litigation, income taxes, accounting for goodwill and long-lived assets, stock-based compensation, and business combinations. We make estimates, judgments and assumptions in determining the amounts reported in the condensed consolidated financial statements and accompanying notes. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The estimates are used to form the basis for making judgments about the carrying values of assets and liabilities and the amount of revenues and expenses reported that are not readily apparent from other sources. Actual results may differ from these estimates.
There have been no material changes in the Company’s Critical Accounting Policies, as disclosed in its Annual Report on Form 10-K for the fiscal year ended
September 3, 2016
,
except for the adoption of ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting, and ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes,
which resulted in changes to the condensed consolidated financial statements, including adjustments recorded as of the beginning of fiscal 2017, as described in Note 10
“Recently Issued Accounting Standards”
.
Recently Issued Accounting Standards
See Note 10
“Recently Issued Accounting Standards” in the Notes to the Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our exposures to market risks since
September 3, 2016
. Please refer to the Annual Report on Form 10-K for the fiscal year ended
September 3, 2016
for a complete discussion of our exposures to market risks.
Item 4. C
ontrols
and Procedures
Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reporte
d
within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, as well as other key members of our management, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is (i) accumulated
and communicated to management
as appropriate to allow timely decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
No change occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act) during the fiscal quarter ended
March 4, 2017
that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
As is disclosed in our most recent Form 10-K filing, we are upgrading our core financial systems, which is expected to impact our key business applications and financial processes. The implementation
is expected to occur in the third quarter of f
iscal 2017. The
implementation will affect the
processes that constitute our internal control over financial reporting. The Company is designing processes and internal controls to address changes in the Company’s internal control over financial reporting as a result of the core financial systems implementation. This ongoing implementation presents risks to maintain adequate internal controls over financial reporting.
PART II.
OTHER
INFORMATION
Item 1. 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.
Item 1A. Risk Factors
In addition to the other information set forth in this Report, consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended
September 3, 2016
, which could materially affect our business, financial condition or future results. The risks described in the aforementioned report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be not material also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered
Sales
of Equity Securities and Use of Proceeds
The following table sets forth repurchases by the Company of its outstanding shares of Class A c
ommon stock during the thirteen-
week period ended
March 4, 2017
:
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number of Shares Purchased
(1)
|
|
Average Price Paid Per Share
(2)
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(3)
|
|
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
|
12/4/16 - 1/3/17
|
|
1,713
|
|
$
|
92.94
|
|
—
|
|
1,444,034
|
1/4/17 - 2/3/17
|
|
—
|
|
|
—
|
|
—
|
|
1,444,034
|
2/4/17 - 3/4/17
|
|
507
|
|
|
104.33
|
|
—
|
|
1,444,034
|
Total
|
|
2,220
|
|
$
|
95.54
|
|
—
|
|
|
____________________
|
(1)
|
|
During the thirteen weeks ended
March 4, 2017
,
2,220
shares of our common stock were withheld by the Company as payment to satisfy our associates’ tax withholding liability associated with our share-based compensation program and are included in the total number of shares purchased.
|
|
(2)
|
|
Activity is reported on a trade date basis.
|
|
(3)
|
|
During fiscal year 1999, the Board of Directors established the MSC Stock Repurchase Plan, which we refer to as the “Repurchase Plan.” The total number of shares of our Class A common stock initially authorized for future repurchase was set at 5,000,000 shares. On January 8, 2008, the Board of Directors reaffirmed and replenished the Repurchase Plan and set the total number of shares of Class A common stock authorized for future repurchase at 7,000,000 shares. On October 21, 2011, the Board of Directors reaffirmed and replenished the Repurchase Plan and set the total number of shares of Class A common stock authorized for future repurchase at 5,000,000 shares. As of
March 4, 2017
, the maximum number of shares that may yet be repurchased under the Repurchase Plan was
1,444,034
shares. There is no expiration date for this program.
|
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5.
Other
Information
None.
Item 6. Exhibits
|
|
|
|
|
|
Exhibits:
|
|
31.1
|
Chief Executive Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
31.2
|
Chief Financial Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
|
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
|
101.INS
|
XBRL Instance Document.*
|
101.SCH
|
XBRL Taxonomy Extension Schema Document.*
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document.*
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document.*
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document.*
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document.*
|
________________________________
|
|
*
|
Filed herewith.
|
**
|
Furnished herewith.
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
MSC Industrial Direct Co., Inc.
(Registrant)
|
Dated:
April 6, 2017
|
By:
|
/s/
ERIK GERSHWIND
President and Chief Executive Officer
(Principal Executive Officer)
|
Dated:
April 6, 2017
|
By:
|
/s/ RUSTOM JILLA
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
EXHIBIT INDEX
|
|
Exhibit No.
|
Exhibit
|
31.1
|
Chief Executive Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
31.2
|
Chief Financial Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
|
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
|
101.INS
|
XBRL Instance Document.*
|
101.SCH
|
XBRL Taxonomy Extension Schema Document.*
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document.*
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document.*
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document.*
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document.*
|
|
|
*
|
Filed herewith.
|
**
|
Furnished herewith.
|
.