Item 2.
Management’s Discussion
and Analysis of Financial Condition and Results of Operations
The
following is intended to update the information contained in the Company’s Annual Report on Form 10-K for the fiscal year ended
August 29, 2015
and presumes that readers have access to, and will have read, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in such Annual Report on Form 10-K.
General
MSC Industrial Direct Co., Inc. (together with its subsidiaries, “MSC,” the “Company,” “we,” “our,” or “us”) is a leading North Americ
an distributor
of
a broad range of
metalworking and maintenance, repair, and operations (“MRO”) products and services.
Our goal is to
help our customers drive greater productivity, profitability and
growth with more than one million products, inventory management and other supply chain solutions, and deep expertise from 75 years of working with customers across industries
. We continue to implement our strategies to gain mark
et share
, generate new customers, increase sales to existing customers, and diversify our customer base.
Our experienced team of
more than 6,500 associates
works with our customers to help drive results for their businesses, from keeping operations running efficiently today to continuously rethinking, retooling, and optimizing for a more productive tomorrow.
We offer approximately
1,075,000
stock-keeping units (“SKUs”) through our master catalogs; weekly, monthly and quarterly specialty and promotional catalogs; brochures; and the Internet, including our websites, mscdirect.com, and use-enco.com (the “MSC Websites”). We service our customers from
12
customer fulfillment centers
(eight customer fulfillment centers are located within the United States which includes five primary customer fulfillment centers, one is located in the United Kingdom (the “U.K.”), and three are located in Canada)
and
95
branch offices. Many of
our products are carried in stock, and orders for these in-stock products are typically fulfilled the day on which the order is received.
Our
field sales
and service associate headcount was
2,316
at
February 27, 2016
,
compared to 2,350 at August 29, 2015 and
2,353
at
February 28, 2015
.
Beginning in fiscal 2016, we have adjusted this headcount metric to include both field sales associates and service personnel. We
believe this better reflects our company
as a sales and service organization given our increased concentration in inventory management solutions, including Vendor Managed Inventory (“VMI”) systems and vending machine systems.
Prior year amounts have been restated to conform to the fiscal 2016 presentation.
We will continue to
manage
our sales and service headcount
based on economic conditions and our selected mix of growth investments.
Business Environment
We utilize various indices when evaluating the level of our business activity.
Approxima
tely
69%
of
our revenues came from sales in the manufacturing sector during
the
first two quarters of our fiscal year 2016
, including certain national account customers. The Institute for Supply Management’s
Purchasing Manager's Index
(“PMI”), which measures the economic activity of the U.S. manufacturing sector, is important to our planning because it historically has been an indicator of our manufacturing customers’ activity. In addition to
the PMI, we
utilize
The Metalworking Business Index (“MBI”). The MBI
measures the economic activity of the metalworking industry, focusing only on durable goods manufacturing. For both indices, a value below 50.0 generally indicates contraction and a value above 50.0 generally indicates expansion. These indices have indicated contraction over the past several months correlating with the overall downturn in the industrial economy as follows:
|
|
|
|
|
Period
|
|
PMI
|
|
MBI
|
December
|
|
48.0
|
|
44.0
|
January
|
|
48.2
|
|
44.4
|
February
|
|
49.5
|
|
46.3
|
|
|
|
|
|
Fiscal 2016 YTD average
|
|
48.9
|
|
44.2
|
12 month average
|
|
50.5
|
|
45.9
|
The PMI
and MBI
evidenced a contracting manufacturing sector environment
over the past fiscal quarter
, although at a slower rate
. Details released with the
March 2016
PMI
of 51.8%
indicate
expansion
in manufacturing for the first time since August 2015, including growth in new orders, production, and pricing.
The
March 2016
MBI
of 49.7
evidenced a
contracting manufacturing sector environment at a slower rate
in relation to
the past fiscal quarter.
New orders, production
, and pricing
changed from contracting to growing during the month
.
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
February 27, 2016
Compared to the Thirteen Week Period Ended
February 28, 2015
The table below summarizes the Company’s results of operations both in dollars (in thousands) and as a percentage of net sales f
or the periods indicated:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Thirteen Weeks Ended
|
|
|
|
|
|
|
|
February 27, 2016
|
|
February 28, 2015
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
Net sales
|
|
$
|
684,117
|
|
|
100.0%
|
|
$
|
706,400
|
|
|
100.0%
|
|
$
|
(22,283)
|
|
|
(3.2)%
|
Cost of goods sold
|
|
|
375,326
|
|
|
54.9%
|
|
|
385,526
|
|
|
54.6%
|
|
|
(10,200)
|
|
|
(2.6)%
|
Gross profit
|
|
|
308,791
|
|
|
45.1%
|
|
|
320,874
|
|
|
45.4%
|
|
|
(12,083)
|
|
|
(3.8)%
|
Operating expenses
|
|
|
228,249
|
|
|
33.4%
|
|
|
235,000
|
|
|
33.3%
|
|
|
(6,751)
|
|
|
(2.9)%
|
Income from operations
|
|
|
80,542
|
|
|
11.8%
|
|
|
85,874
|
|
|
12.2%
|
|
|
(5,332)
|
|
|
(6.2)%
|
Total other expense
|
|
|
(392)
|
|
|
(0.1)%
|
|
|
(2,157)
|
|
|
(0.3)%
|
|
|
1,765
|
|
|
(81.8)%
|
Income before provision for income taxes
|
|
|
80,150
|
|
|
11.7%
|
|
|
83,717
|
|
|
11.9%
|
|
|
(3,567)
|
|
|
(4.3)%
|
Provision for income taxes
|
|
|
30,625
|
|
|
4.5%
|
|
|
32,190
|
|
|
4.6%
|
|
|
(1,565)
|
|
|
(4.9)%
|
Net income
|
|
$
|
49,525
|
|
|
7.2%
|
|
$
|
51,527
|
|
|
7.3%
|
|
$
|
(2,002)
|
|
|
(3.9)%
|
Net Sales
Net sales
decreased
3.2%
or approximately
$22.3
million, for
the thirteen
week period ended
February 27, 2016
.
We estimate that this
$22.3
million
decrease
in net sales is comprised of
(i)
approximately
$18.5
million of
lower
sales volume,
(ii)
approximately
$1.9
million from foreign
exchange impact,
and
(iii)
approximately
$1.9
million from
pricing
,
which includes changes in customer and product mix, discounting and other
items
.
Of the above
$22.3
million
decrease
in net sales, sales
to our Large Account Customers increased by approximately
$3.4
million, offset by a decrease in our remaining business
by approxim
ately
$25.7
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 February 27, 2016 compared to
the same period in the prior fiscal year:
|
|
|
|
|
|
|
Average Daily Sales Percentage Change
|
(unaudited)
|
|
|
|
|
|
|
|
2016 vs. 2015 Fiscal Period
|
|
Thirteen Week Period Ended Fiscal Q2
|
|
% of Total Business
|
|
|
|
|
|
|
|
Total Company
|
|
(3.2)
|
%
|
|
|
|
Manufacturing Customers
(1)
|
|
(5.6)
|
%
|
|
68
|
%
|
Non-Manufacturing Customers
(1)
|
|
2.6
|
%
|
|
32
|
%
|
|
(1)
|
|
Excludes U.K. operations.
|
Exclusive of customers in the U.K., average order si
ze increased
to
approximately
$409
for the thirteen
week period ended
February 27, 2016
as compared to
$407
for the same period in the prior fiscal year.
We believe that our ability to transact business with our customers through various electronic portals and directly through the MSC Websites gives us a competitive advantage over smaller suppliers. Sales made through our eCommerce platforms, including sales made through Electronic Data Interchange
(“EDI”)
systems, VMI systems, Extensible Markup Language ordering based systems, vending machine systems, hosted systems and other electronic portals
(“
eC
ommerce platforms”)
, represented
57.8%
of consolidated net sales for the thirteen week period ended
February 27, 2016
, compared to
55.4%
of consolidated net sales for the same period in the prior fiscal year.
This increase was
primarily associated with
the MSC Websites, EDI,
and vending machine systems.
Gross Profit
Gross
profit
margin
was
45.1%
for
the thirteen week period ended
February 27, 2016
as compared to
45.4%
for the
same
period
in the prior fiscal year
.
The decline was primarily
a result of changes in pricing and
customer and product mix.
Operating Expenses
Operating expenses
decreased
2.9%
to
$228.2
million for
the thirteen week period ended
February 27, 2016
, as compared to
$235.0
million for the same period in the prior fiscal year.
This decrease was primarily the result of cost saving
s initiatives implemented during
the second half of fiscal 2015 and
fiscal 2016,
including freight expense,
lower variable
payroll costs, as well as
the
ongoing monitoring of discretionary spending
.
Freight expense was
approximately
$27.5
million for
the thirteen
week period ended
February 27, 2016
, as compared to approximately
$30.7
million for the thirteen week period ended
February 28, 2015
.
These decreases were partially offset by incr
eases in medic
al costs
and
the
incentive compensation
accrual
.
Operating
expenses
were
33.4%
of net sales for
the
thirteen week period
s
ended
February 27, 2016
compared to 33.3% of net sales for the same period in the prior fiscal year.
Payroll and payroll related costs
increased to
approximately
56.7%
of
total operating expenses for the thirteen week period ended
February 27, 2016
, as compared to approximately
54.0%
for the thirteen week period ended
February 28, 2015
. Included in these costs are salary, incentive compensation, sales commission and fringe benefit costs.
Increases in f
ringe benefit costs
and
the
incentive compensation
accrual
were
the main driver
s
for the increase
in
payroll and payroll related costs for the thirteen week period ended
February 27, 2016
, as compared to the same period in the prior fiscal year
.
Effective January 1, 2016, t
he Company transitioned
from a self-insured plan to a fully insured private healthcare exchange.
As a result of associate
s anticipating
this transition, t
he Company experienced increased medical costs in December 2015.
The incentive compensation accrual increased as the fiscal 2016 bonus payout is expected to be made at higher levels than fiscal 2015.
These increases were partially offset by
lower variable payroll costs, including
sales
salaries
and
commissions.
Income from Operations
I
ncome from operations
decreased
6.2%
to
$80.5
mil
lion for the thirteen week period ended
February 27, 2016
, as compared to
$85.9
million for the same period in the prior fiscal year. This decrease
was primarily attributable to the
decrease
in
gross profit
, offset in part by the
decrease in operating expenses discussed above
.
Income from operations as a percentage of net sales decreased to
11.8%
for
the thirteen week period ended
February 27, 2016
, as compared to
12.2%
for the same period in the prior fiscal year primarily due to a decrease in gross profit margin as discussed above.
Provision for Income Taxes
The effective tax rate for the thirteen week period ended
February 27,
2016
w
as
38.2%
, as
compared to
38.5%
for the same period in the prior fiscal year.
Net Income
The factors which affected net income for the thirteen
week period
ended
February 27, 2016
,
as compared to the same period
in the previous fiscal year, have been discussed above.
Twenty-Six Week Period Ended February 27, 2016 Compared to the Twenty-Six Week Period Ended February 28, 2015
The table below summarizes the Company’s results of operations both in dollars (in thousands) and as a percentage of net sales for the periods indicated:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
|
|
|
|
February 27, 2016
|
|
February 28, 2015
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
Net sales
|
|
$
|
1,390,936
|
|
|
100.0%
|
|
$
|
1,437,491
|
|
|
100.0%
|
|
$
|
(46,555)
|
|
|
(3.2)%
|
Cost of goods sold
|
|
|
763,173
|
|
|
54.9%
|
|
|
786,468
|
|
|
54.7%
|
|
|
(23,295)
|
|
|
(3.0)%
|
Gross profit
|
|
|
627,763
|
|
|
45.1%
|
|
|
651,023
|
|
|
45.3%
|
|
|
(23,260)
|
|
|
(3.6)%
|
Operating expenses
|
|
|
456,833
|
|
|
32.8%
|
|
|
471,178
|
|
|
32.8%
|
|
|
(14,345)
|
|
|
(3.0)%
|
Income from operations
|
|
|
170,930
|
|
|
12.3%
|
|
|
179,845
|
|
|
12.5%
|
|
|
(8,915)
|
|
|
(5.0)%
|
Total other expense
|
|
|
(1,722)
|
|
|
(0.1)%
|
|
|
(2,919)
|
|
|
(0.2)%
|
|
|
1,197
|
|
|
(41.0)%
|
Income before provision for income taxes
|
|
|
169,208
|
|
|
12.2%
|
|
|
176,926
|
|
|
12.3%
|
|
|
(7,718)
|
|
|
(4.4)%
|
Provision for income taxes
|
|
|
64,654
|
|
|
4.6%
|
|
|
67,982
|
|
|
4.7%
|
|
|
(3,328)
|
|
|
(4.9)%
|
Net income
|
|
$
|
104,554
|
|
|
7.5%
|
|
$
|
108,944
|
|
|
7.6%
|
|
$
|
(4,390)
|
|
|
(4.0)%
|
Net Sales
Net sales
decreased
3.2%
or approximately
$46.6
million, for the
twenty-six
week period ended February 27, 2016. We estimate that
this
$46.6
million decrease in net sales is comprised of (i) approximately
$43.0
million of lower sales volume, (ii) approximately
$4.1
million from foreign exchange impact, partially offset by (iii) approximately
$0.5
million
from pricing,
which includes changes in customer and product mix, discounting and ot
her items. Of the above
$46.6
million decrease in net sales, sales to our Large Account Customers increased by approximately
$9.4
million, offset by a decrease in our remaining business by approximately
$56.0
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 February 27, 2016 compared to
the same period in the prior fiscal year:
|
|
|
|
|
|
|
Average Daily Sales Percentage Change
|
(unaudited)
|
|
|
|
|
|
|
|
2016 vs. 2015 Fiscal Period
|
|
Twenty-Six Week Period Ended Fiscal Q2
|
|
% of Total Business
|
|
|
|
|
|
|
|
Total Company
|
|
(3.2)
|
%
|
|
|
|
Manufacturing Customers
(1)
|
|
(5.2)
|
%
|
|
69
|
%
|
Non-Manufacturing Customers
(1)
|
|
1.9
|
%
|
|
31
|
%
|
|
(1)
|
|
Excludes U.K. operations.
|
Exclusive of customers in the U.
K., average order size increased
to
approximately
$413
for the
t
wenty-six
week period ended
February 27, 2016
as compared to
$410
for the same period in the prior fiscal year.
Sales made through our eCommerce platforms
represented
57.4%
of consolidated net sales for the
twenty-six
week period ended
February 27, 2016
, compared to
54.9%
of consolidated net sales for the same period in the prior fiscal year.
This in
crease was primarily associated with
the MSC Websites, EDI, and vending machine systems.
Gross Profit
Gross
profit
margin
was
45.1%
for
the twenty-six
week period ended
February 27, 2016
as compared to
45.3%
for the same period
in the prior fiscal year
.
The decline was primarily
a result of changes in pricing and
customer and product mix.
Operating Expenses
Operating expenses
decreased
3.0%
to
$456.8
million for
the
twenty-six
week period ended
February 27, 2016
, as compared to
$471.2
million for the same period in the prior fis
cal year. This decrease was primarily the result of cost saving
s initiatives implemented during
the second half of fiscal 2015 and
fiscal 2016,
including freight expense,
lower variable
payroll costs
, as well as
the
ongoing monitoring of discretionary spending
. Freight
expense was
approximately
$57.2
million for the
twenty-six
week period ended February 27, 2016
, as compared to approximately
$63.3
million for the
twenty-six
week period ended
February 28, 2015
.
These decreases were partially offset by increases in medical costs
,
the
incentive compensation
accrual
, and the provision for doubtful accounts
.
Operating expenses
were
32.8%
of net sales for both
twenty-six
week period
s
ended
February 27, 2016
and
February 28, 2015
.
Payroll and payroll related costs
increased to
approximately
55.9%
of total
operating expenses for the
twenty-six
week period ended
February 27, 2016
, as compared to approximately
52.9%
for the
twenty-six
week period ended
February 28, 2015
. Included in these costs are salary, incentive compensation, sales commission and fringe benefit costs
.
Increases in f
ringe benefit costs
and
the
incentive compensation
accrual
were the main driver
s
for the increase in payroll and payrol
l related costs for the twenty-six
week period ended February 27, 2016, as compared to the same period in the prior fiscal year. Effective January 1, 2016, t
he Company transitioned
from a self-insured plan to a fully insur
ed private healthcare exchange.
As a result of associates anticipating this transition
, t
he Company experienced increased medical costs in December 2015.
The incentive compensation accrual increased as the fiscal 2016 bonus payout is expected to be made at higher levels than fiscal 2015.
These increases were partially offset by
lower variable payroll costs, including
sales
salaries
and
commissions.
Income from Operations
I
ncome from operations
decreased
5.0%
to
$170.9
million for
the
twenty-six
week period ended
February 27, 2016
, as compared to
$179.8
million for the same period in the prior fiscal
year. This decrease
was primarily attributable to the decrease in gross profit, offset in part by the decrease in operating expenses discussed above.
Income from operations as a percentage of net sales decreased to
12.3%
for the
twenty-six
week period ended
February 27, 2016
,
as compared to
12.5%
for the same period in the prior fiscal year primarily due to a decrease in gross profit margin as discussed above.
Provision for Income Taxes
The effective tax rate for the
twenty-six
week period ended
February 27, 2016
was
38.2%
, as
compared to
38.4%
for the same period in the prior fiscal year.
Net Income
The factors which affected net income for the
twenty-six
week period
ended
February 27, 2016
,
as compared to the same period
in the previous fiscal year, have been discussed above.
Liquidity and Capital Resources
As
of
February 27, 2016
, we held
$24.0
million in cash and cash equivalent funds. We maintain a substantial portion of our cash, and invest our cash equivalents, with well-known financial institutions. Historically, our primary capital needs have been to fund our working capital requirements necessitated by our sales growth, the costs of acquisitions, adding new products,
new facilities, facility
expansions, investments in vending solutions, technology investments, and productivity investments. Cash generated from operations, together with borrowings under credit facilities, have been used to fund these
needs, to repurchase shares of our Class A common stock, and to pay dividends. At
February 27, 2016
, total borrowings outstanding, representing amounts due under the Credit Facility (discussed below) and all capital leases and financing arrange
ments, were approximately
$328.0
million. At
August 29, 2015
, total borrowings outstanding, representing amounts due under
the Credit Facility and
all capital leases and financing arrangements, were approximately
$428.3
million.
As a distributor, our use of capital is largely for working capital to support our revenue base. Capital commitments for property, plant and equipment generally are limited to information technology assets, warehouse equipment, office furniture and fixtures, building and leasehold improvements, construction and expansion, and vending machines. Therefore, the amount of cash consumed or generated by operations other than from net earnings will primarily be due to changes in working capital as a result of the rate of increases or decreases in sales
.
We believe, based on our current business plan, that our existing cash, cash equivalents, funds available under our revolving credit facility, and cash flow from operations will be sufficient to fund our planned capital expenditures and operating cash requirements fo
r at least the next 12 months.
We are continuing to take advantage of our strong balance sheet, which enables us to maintain optimal inventory and service levels to meet customer demands, while many of our smaller competitors in our fragmented industry continue to have difficulties in offering competitive service levels. We also believe that customers will continue to seek cost reductions and shorter cycle times from their suppliers. Our business model focuses on providing overall procurement cost reduction and just-in-time delivery to meet our customers’ needs. We focus on offering inventory, process and procurement solutions that reduce MRO supply chain costs and improve plant floor productivity for our customers. We will seek to continue to drive cost reduction throughout our business through cost saving strategies and increased leverage from our existing infrastructure, and continue to provide additional procurement cost savings solutions to our customers through technology such as our
Customer Managed Inventory (“
CMI
”)
, VMI, and vending programs
.
The table below summarizes information
regarding the Company’s liquidity and capital resources:
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
February 27,
|
|
February 28,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
Net cash provided by operating activities
|
|
$
|
182,980
|
|
$
|
47,607
|
Net cash used in investing activities
|
|
$
|
(26,781)
|
|
$
|
(25,145)
|
Net cash used in financing activities
|
|
$
|
(170,435)
|
|
$
|
(42,009)
|
Effect of foreign exchange rate changes on cash and cash equivalents
|
|
$
|
(71)
|
|
$
|
(182)
|
Net decrease in cash and cash equivalents
|
|
$
|
(14,307)
|
|
$
|
(19,729)
|
Operating Activities
Net cash provided by operating activities for the
twenty-six
week periods ended
February 27, 2016
and
February 28, 2015
was
$183.0
million and
$47.6
million, respectively. There are various increases and decreases contributing to this change.
Decreases
in inventories
and accounts receivable
as a
result of decreased sales volume contributed to the
majority of the
increase
in net cash provided by operating activities.
The table below provides the Company’s working capital and current ratio:
|
|
|
|
|
|
|
|
|
|
|
|
February 27,
|
|
August 29,
|
|
February 28,
|
|
|
2016
|
|
2015
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Working Capital
|
|
$
|
638,981
|
|
$
|
609,739
|
|
$
|
520,630
|
Current Ratio
|
|
|
2.9
|
|
|
2.4
|
|
|
2.0
|
The
increase
in working capital and the current ratio at
February 27, 2016
compared to August 29, 2015 and
February 28, 2015
, is primarily related to the
repayments
under the revolving loan facility
in fiscal 2016, partially offset by the
decreases
in inventories
and accounts receivable
.
Investing Activities
Net cash used in investing activities for the
twenty-six
week periods ended
February 27, 2016
and
February 28, 2015
was
$26.8
million and
$25.1
million, respectively.
This increase is primarily due to capital expenditures related to our customer fulfillment centers
, including the completion of an expansion at our Harrisburg
, PA
facility
.
Financing Activities
Net cash used in financing activities for the
twenty-six
week period
s
ended
February 27, 2016
and
February 28, 2015
was
$170.4
million and
$42.0
million,
respectively.
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
$167.5
million 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.
This was partially offset by borrowings under the revolving loan facility in the amount of
$66.0
million.
The major components contributing to the use of cash for the twenty-six week period ended February 28, 2015 were cash dividends paid of $234.9 million, and repayments on the Credit Facility of $92.5 million related to both the
revolving loan facility and term loan facility
. This was partially offset by borrowings under the revolving loan facility in the amount of $298.0 million.
Long-term Debt and Credit Facilities
In April
2013, in connection with the acquisition of
CCSG
, we ent
ered into a $650.0 million credit f
acility (the “Credit Facility”). The C
redit Facility, which matures in April 2018
, provides for a five-year unsecured revolving loan facility in the aggregate amount of $400.0 million and a five-year unsecured term loan facility in the aggregate amount of $250.0 million.
During the
twenty-six
week period ended
February 27, 2016
, we borrowed
$66.0
million under the revolving loan facility and repaid
$155.0
million of the revolving loan balance
and
$12.5
million of the term loan
. As of
February 27, 2016
, there were
$200.0
million and
$99.0
million of borrowings outstanding under the term loan facility and the revolving credit facility, respectively, of which
$136.5
million represents current maturities. As of
August 29, 2015
, there were
$212.5
million and
$188.0
million of borrowings outstanding under the term loan facility and the revolving credit facility, respectively, of which
$213.0
million represents current maturities.
At
February 27, 2016
, we were in compliance with the operating and financial covenants of the Credit Facili
ty. The
Company repaid borrowings
of
$45.0
million under the revolving loan facility
and $6.3 million under the term loan facility
in
March
2016
. The current unused balance of
$346.0
million of the
revolving loan facility is available for
working capital purposes, if necessary.
Related Party Transactions
We are affiliated with one real estate entity (the “Affiliate”), which leased property to us as of
February 27, 2016
. The Affiliate is owned by our principal shareholders (Mitchell Jacobson, our Chairman, and his sister, Marjorie Gershwind Fiverson, and by their family related trusts). We paid rent under
an operating lease
to the Affiliate for the
twenty-six
weeks
ended
February 27, 2016
of
approximately
$1.2
million, in connection
with our occupancy of our Atlanta Customer Fulfillment Center.
Contractual Obligations
Capital Lease and Financing Arrangements
In connection with the co
nstruction of the Company’s
customer fulfillment center in Columbus, Ohio, the Company entered into a long-term lease with the Columbus-Franklin County Finance Authority. The lease has been classified as a
capital lease in accordance with ASC Topic 840. At
February 27, 2016
, the capital lease obligation was
approximately $27.0 million.
From time to time, we enter into capital leases and financing arrangements to purchase certain equipment. Excluding the Columbus facility capital lease discussed above, we currently have various capital leases and financing obligations for
certain information technology
equipment in
the amount of $
3.5
million, of which
$2.0
million remains
outstanding at
February 27, 2016
. Refer to Note 5 in
our condensed consolidated financial statements.
Operating Leases
As of
February 27, 2016
, certain of our operations are conducted on leased premises, of which one location is leased from an Affiliate (which requires us to provide for the payment of real estate taxes and other operating costs), as noted above.
These leases
are for varying periods, the longest extending to the year
2030
.
In addition, we are obligated under certain equipment and automobile operating leases, which expire on varying dates through
20
20
.
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 and self-insured group health plan 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
August 29, 2015
.
Recently Issued Accounting Standards
See Note 10
to the accompanying
condensed consolidated
financial statements.