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.
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.
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 t
han 6,500 asso
ciates
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 appro
ximately
1,140,000
sto
ck-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
94
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
2,330
at
May 28, 2016
,
compared to 2,350 at August 29, 2015 a
nd
2,334
at
M
ay 30, 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
business plans
.
Business Environment
We utilize various indices when evaluating the level of our business activity.
Approx
imately
69%
of
our revenues came from sales in the manufacturing sector during
the
first three
quarters of our fiscal year 2016
, including certain national account customers.
Through statistical analysis, we’ve found the strongest correlation
is
between customers’ activity and the Metalworking Business Index (“MBI”).
The MBI measures the economic activity of the metalworking industry, focusing only on durable goods manufacturing.
Another index we’ve
previously
used is the Institute for Supply Management’s Purchasing Manager’s Index (“PMI”).
However, r
ecent analysis has shown
only
a
small correlation between the PMI and our
net sales
.
For both indices, a value below 50
.0 generally indicates contraction and a value above 50.0 gener
ally indicates expansion. The
MBI and PMI indices over the past quarter were as follows
:
|
|
|
|
|
Period
|
|
PMI
|
|
MBI
|
March
|
|
51.8
|
|
49.7
|
April
|
|
50.8
|
|
45.9
|
May
|
|
51.3
|
|
45.3
|
|
|
|
|
|
Fiscal 2016 Q3 average
|
|
51.3
|
|
47.0
|
Fiscal 2016 YTD average
|
|
49.7
|
|
45.1
|
12 month average
|
|
50.3
|
|
45.3
|
After an improvement to the MBI in March, April and May readings dropped significantly
to below 46
. This implies a
continued, but elevated
contraction in the metalworking manufacturing environment.
Details released with the May
MBI indicate
contraction for the fourteenth consecutive month, including contraction in new orders and production.
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
May 28, 2016
Compared to the Thirteen Week Period Ended
May 30, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
|
|
|
|
May 28, 2016
|
|
May 30, 2015
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
Net sales
|
|
$
|
727,495
|
|
|
100.0%
|
|
$
|
745,483
|
|
|
100.0%
|
|
$
|
(17,988)
|
|
|
(2.4)%
|
Cost of goods sold
|
|
|
400,467
|
|
|
55.0%
|
|
|
407,066
|
|
|
54.6%
|
|
|
(6,599)
|
|
|
(1.6)%
|
Gross profit
|
|
|
327,028
|
|
|
45.0%
|
|
|
338,417
|
|
|
45.4%
|
|
|
(11,389)
|
|
|
(3.4)%
|
Operating expenses
|
|
|
221,244
|
|
|
30.4%
|
|
|
234,173
|
|
|
31.4%
|
|
|
(12,929)
|
|
|
(5.5)%
|
Income from operations
|
|
|
105,784
|
|
|
14.5%
|
|
|
104,244
|
|
|
14.0%
|
|
|
1,540
|
|
|
1.5%
|
Total other expense
|
|
|
(930)
|
|
|
(0.1)%
|
|
|
(1,631)
|
|
|
(0.2)%
|
|
|
701
|
|
|
(43.0)%
|
Income before provision for income taxes
|
|
|
104,854
|
|
|
14.4%
|
|
|
102,613
|
|
|
13.8%
|
|
|
2,241
|
|
|
2.2%
|
Provision for income taxes
|
|
|
40,038
|
|
|
5.5%
|
|
|
39,271
|
|
|
5.3%
|
|
|
767
|
|
|
2.0%
|
Net income
|
|
$
|
64,816
|
|
|
8.9%
|
|
$
|
63,342
|
|
|
8.5%
|
|
$
|
1,474
|
|
|
2.3%
|
Net Sales
Net sales decreased
2.4%
or approximately
$18.0
million, for the thirteen week period ended
May 28, 2016
.
We estimate that this
$18.0
million
decrease
in net sales is comprised
of
(i)
approximately
$11.4
million of
lower
sales volume,
(ii)
approximately
$1.1
million from foreign
exchange impact,
and
(iii)
approximately
$5.5
million from pricing
, which includes changes in customer and product mix, discounting and other
items.
Of
the above
$18.0
million
decrease
in net sales, sales
other than
t
o our Large Account Customers de
creased by approximately
$19.9
million,
partially
offset by a
n increase
of sales to our Large Account Customers
by approximately
$1.9
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
May 28, 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 Q3
|
|
% of Total Business
|
|
|
|
|
|
|
|
Total Company
|
|
(3.9)
|
%
|
|
|
|
Manufacturing Customers
(1)
|
|
(6.8)
|
%
|
|
68
|
%
|
Non-Manufacturing Customers
(1)
|
|
2.6
|
%
|
|
32
|
%
|
|
(1)
|
|
Excludes U.K. operations.
|
Exclusive of customers in the U.K., average order si
ze
decreased
to approximately
$406
for t
he thirteen
week period ended
May 28, 2016
as compared to
$410
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”)
, represente
d
58.6%
of consolidated net sales for the thirteen week period ended
May 28, 2016
, compared to
56.0%
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
45.0%
for
the thirteen week period ended
May 28, 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
5.5%
to
$221.2
million for
the thirteen week period ended
May 28, 2016
, as compared to
$234.2
million for the same period in the prior fiscal y
ear.
This decrease was primarily the result of
lower payroll and payroll related costs
.
Operating
expenses
were
30.4%
of net sales for
the
thirteen week period ended
May 28, 2016
compared to
31.4%
of net sales for the same period in the prior fiscal year.
Payroll and payroll related costs
decreased
to
approximately
53.4%
of
total operating expenses for the thirteen week period ended
May 28, 2016
, as compared to approximately
54.3%
for the thirteen week period ended
May 30, 2015
. Included in these costs are salary, incentive compensation, sales commission and fringe benefit co
sts.
All of these costs decreased
for the thirteen week period ended
May 28, 2016
, as compared to the same period in the prior fiscal yea
r, with the majority of the
decrease
attributable to the
incentive compensation accrual and fringe benefit costs
.
We decreased the incentive compensation accrual based on
our
actual third quarter performance and
our
fourth quarter expectations
.
Within fringe benefit costs, we experienced lower medical costs
for the thirteen week period ended May 28, 2016, as compared to the same period in the prior fiscal yea
r.
Income from Operations
I
ncome from operations
increased
1.5%
to
$105.8
mil
lion for the thirteen week period ended
May 28, 2016
, as compared to
$104.2
million for the same period in the prior fisc
al year. This increase
was primarily attributable to the
decrease
in
operating expenses as discussed above
, offset in part by the
decrease in
gross profit
.
Inc
ome from operations as a percentage of net sales
increased
to
14.5%
for
the thirteen week period ended
May 28, 2016
, as compared to
14.0%
for the same period in the prior fiscal ye
ar primarily due to a decrease in
operating expenses
as discussed above.
Provision for Income Taxes
The effective tax rate for the thirteen week period ended
May 28, 2016
w
as
38.2%
, as
compared to
38.3%
for the same period in the prior fiscal year.
Net Income
The factors which affected net income for the thirteen
week period
ended
May 28, 2016
,
as compared to the same period
in the previous fiscal year, have been discussed above.
T
hirty-Nine
Week Period Ended
May 28, 2016
Compared to the
Thirty-Nine
Week Period Ended
May 30, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
|
|
|
|
May 28, 2016
|
|
May 30, 2015
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
Net sales
|
|
$
|
2,118,431
|
|
|
100.0%
|
|
$
|
2,182,974
|
|
|
100.0%
|
|
$
|
(64,543)
|
|
|
(3.0)%
|
Cost of goods sold
|
|
|
1,163,640
|
|
|
54.9%
|
|
|
1,193,534
|
|
|
54.7%
|
|
|
(29,894)
|
|
|
(2.5)%
|
Gross profit
|
|
|
954,791
|
|
|
45.1%
|
|
|
989,440
|
|
|
45.3%
|
|
|
(34,649)
|
|
|
(3.5)%
|
Operating expenses
|
|
|
678,077
|
|
|
32.0%
|
|
|
705,351
|
|
|
32.3%
|
|
|
(27,274)
|
|
|
(3.9)%
|
Income from operations
|
|
|
276,714
|
|
|
13.1%
|
|
|
284,089
|
|
|
13.0%
|
|
|
(7,375)
|
|
|
(2.6)%
|
Total other expense
|
|
|
(2,652)
|
|
|
(0.1)%
|
|
|
(4,550)
|
|
|
(0.2)%
|
|
|
1,898
|
|
|
(41.7)%
|
Income before provision for income taxes
|
|
|
274,062
|
|
|
12.9%
|
|
|
279,539
|
|
|
12.8%
|
|
|
(5,477)
|
|
|
(2.0)%
|
Provision for income taxes
|
|
|
104,692
|
|
|
4.9%
|
|
|
107,253
|
|
|
4.9%
|
|
|
(2,561)
|
|
|
(2.4)%
|
Net income
|
|
$
|
169,370
|
|
|
8.0%
|
|
$
|
172,286
|
|
|
7.9%
|
|
$
|
(2,916)
|
|
|
(1.7)%
|
Net Sales
Net sales decreased
3.0%
or approximately
$64.5
million, for the
thirty-nine
week period ended
May 28, 2016
. We estimate that this
$64.5
million decrease in net sales is comprise
d of (i) approximately
$54.3
million of lower sales volume, (ii) approximately
$5.2
million from foreign exchange impact,
and
(iii) approximately
$5.0
million from pricing, which includes changes in customer and product mix, discounting and other items. Of the above
$64.5
million decrease in net sales,
sales
other than
t
o our Large Account Customers de
creased by approximately
$76.3
million,
partially
offset by a
n increase
of sales to our Large Account Customers
by approximately
$11.8
million.
The table below
shows the change in our
average daily sales by total company and by customer type
for the
thirty-nine
week period ended
May 28, 2016
compared to
the same period in the prior fiscal year:
|
|
|
|
|
|
|
Average Daily Sales Percentage Change
|
(unaudited)
|
|
|
|
|
|
|
|
2016 vs. 2015 Fiscal Period
|
|
Thirty-Nine Week Period Ended Fiscal Q3
|
|
% of Total Business
|
|
|
|
|
|
|
|
Total Company
|
|
(3.5)
|
%
|
|
|
|
Manufacturing Customers
(1)
|
|
(5.7)
|
%
|
|
69
|
%
|
Non-Manufacturing Customers
(1)
|
|
1.4
|
%
|
|
31
|
%
|
|
(1)
|
|
Excludes U.K. operations.
|
Exclusive of customers in the U.
K., average order size
de
creased
to approximately
$413
for
the
thirty-nine
week period ended
May 28, 2016
as compared to
$416
for the same period in the prior fiscal year.
Sales made through our eCommerce platforms
re
presented
57.8%
of consolidated net sales for the
thirty-nine
week period ended
May 28, 2016
, compared to
55.3%
of cons
olidated 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
thirty-nine
week period ended
May 28, 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
3.9%
to
$678.1
million for
the
thirty-nine
week period ended
May 28, 2016
, as compared to
$705.4
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
$87.7
million for the
thirty-nine
week period ended
May 28, 2016
, as compared to approximately
$94.0
million for the
thirty-nine
week period ended
May 30, 2015
. These decreases were partially offset by increases in medical costs
.
Operating expenses
were
32.0%
of net sales for
the
thirty-nine
week period ended
May 28, 2016
compared to 32.3% of net sales for the same period in the prior fiscal year.
Payroll and payroll related costs
increased to
approximately
55.1%
of total
operating expenses for the
thirty-nine
week period ended
May 28, 2016
, as compared to approximately
53.4%
for the
thirty-nine
week period ended
May 30, 2015
. Included in these costs are salary, incentive compensation, sales commission and fringe benefit costs.
An increase
in f
ringe benefit costs
was
the main driver for the increase in payroll and payrol
l related costs for the
thirty-nine
week period ended
May 28, 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
, the Company experienced increased medical costs in December 2015.
These increases were
offset by
lower variable payroll costs, including
sales
salaries
and
commissions.
Income from Operations
I
ncome from operations
decreased
2.6%
to
$276.7
million for
the
thirty-nine
week period ended
May 28, 2016
, as compared to
$284.1
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
increased to
13.1%
for
the
thirty-nine
week period ended
May 28, 2016,
as compared to
13.0%
for the same period in the prior fiscal ye
ar primarily due to a decrease in operating expenses as discussed above.
Provision for Income Taxes
The effective tax rate for the
thirty-nine
week period ended
May 28, 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
thirty-nine
week period
ended
May 28, 2016
,
as compared to the same period
in the previous fiscal year, have been discussed above.
Liquidity and Capital Resources
As of May 28, 2016, we held
$32.3
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 May 28, 2016, total borrowings outstanding, representing amounts due under the Credit Facility (discussed below) and all capital leases and financing
arrangements, were approximately $262.5 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, maintaining adequate working capital to meet our customer needs is paramount.
For the thirty-nine week period ended May 28, 2016, working capital management was the main contributor to the generation of cash flow. Our cash flow from operations is generally utilized to meet capital expenditure
commitments for property, plant and equipment which typically consist of 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 mostly due to the rate of increase or decrease 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 for at least the next 12 months.
We are continuing to take advantage of our strong balance sheet, which enables us to maintain optimal inventory and service levels to meet customer demands, while many of our smaller competitors in our fragmented industry continue to have difficulties in offering competitive service levels. We also believe that customers will continue to seek cost reductions and shorter cycle times from their suppliers. Our business model focuses on providing overall procurement cost reduction and just-in-time delivery to meet our customers’ needs. We focus on offering inventory, process and procurement solutions that reduce MRO supply chain costs and improve plant floor productivity for our customers. We will seek to continue to drive cost reduction throughout our business through cost saving strategies and increased leverage from our existing infrastructure, and continue to provide additional procurement cost savings solutions to our customers through technology such as our Customer Managed Inventory (“CMI”), VMI, and vending programs.
The table below summarizes information regarding the Company’s liquidity and capital resources:
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
|
May 28,
|
|
May 30,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
Net cash provided by operating activities
|
|
$
|
285,822
|
|
$
|
162,973
|
Net cash used in investing activities
|
|
$
|
(34,714)
|
|
$
|
(38,176)
|
Net cash used in financing activities
|
|
$
|
(257,013)
|
|
$
|
(146,862)
|
Effect of foreign exchange rate changes on cash and cash equivalents
|
|
$
|
(34)
|
|
$
|
(226)
|
Net decrease in cash and cash equivalents
|
|
$
|
(5,939)
|
|
$
|
(22,291)
|
Proposed Tender Offer and Stock Purchase
On July 6, 2016, the Compa
ny announced its plans to commence a tender offer to purchase for cash up to $
300.0 million
in value of shares of its Class A common stock through a modified “Dutch auction” tender offer at a price per share of not less than $
66.00
and not greater than $
72.50
(the “Proposed
Tender Offer”). The tender offer is expected to commence on or about July 7, 2016 and will remain open for at least 20 business days. In addition, the Company has entered into a stock purchase agreement with the holders of the Company’s Class B common stock (the “Class B Holders”) to purchase (the “Stock Purchase”) from the Class B Holders a pro rata number of shares at the price per share to be paid by the Company in the Proposed Tender Offer, such that the Class B Holders’ percentage ownership
and voting power
in the Company would remain substantially the same as prior to the Proposed Tender Offer. The Class B Holders also have agreed not to participate in the Proposed Tender Offer. The Company expects that it would finance the purchases in the Proposed Tender Offer and Stock Purchase with pr
oceeds from the sale of $175.0 million
in principal amount of unsecured Senior Notes (the “Notes”) to be issued to New York Life
Insurance Company and one or more of its affiliates
and borrowings under the Company’s existing credit facility. The Proposed Tender Offer would be contingent upon, among other customary items, the successful
closing of the sale of the Notes. Shares of the Company’s common stock that would be purchased pursuant to the Tender Offer and the Stock Purchase would not reduce the number of shares that may be repurchased under the Repurchase Plan.
Operating Activities
Net cash provided by operating activities for the thirty-nine week periods ended May 28, 2016 and May 30, 2015 was
$285.8
million and $163.0 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:
|
|
|
|
|
|
|
|
|
|
|
|
May 28,
|
|
August 29,
|
|
May 30,
|
|
|
2016
|
|
2015
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Working Capital
|
|
$
|
680,446
|
|
$
|
609,739
|
|
$
|
565,605
|
Current Ratio
|
|
|
3.3
|
|
|
2.4
|
|
|
2.2
|
The increase in working capital and the current ratio at
May 28, 2016
compared to August 29, 2015 and May 30, 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
thirty-nine
week periods ended
May 28, 2016 and May 30, 2015
was $34.7 million and $38.2 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 thirty-nine week periods ended May 28, 2016 and May 30, 2015 was $257.0 million and $146.9 million, respectively.
The major components contributing to the use of cash for the
thirty-nine week period ended May 28, 2016 were repayments on the Credit Facility of $254.8 million related to both the revolving loan facility and term loan facility, cash dividends paid of $79.4 million, and the repurchase of shares of Class A common stock of $19.4 million. This was partially offset by borrowings under the revolving loan facility in the amount of $88.0 million. The major components contributing to the use of cash for the thirty-nine week period ended May 30, 2015 were cash dividends paid of $259.5 million, and repayments on the Credit Facility of $181.8 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 $306.0 million.
Long-term Debt and Credit Facilities
In April 2013, in connection with the acquisition of CCSG, we entered into a $650.0 million credit facility (the “Credit Facility”). The Credit Facility, which matures in April 2018, provides for a five-year unsecured revolving loan facility in the aggregate amount of $400.0 million and a five-year unsecured term loan facility in the aggregate amount of $250.0 million.
During the thirty-nine week period ended May 28, 2016, we borrowed $88.0 million under the revolving loan facility and repaid $236.0 million of the revolving loan balance and $18.8 million of the term loan. As of May 28, 2016, there were $193.8 million and $40.0 million of borrowings outstanding under the term loan facility and the revolving credit facility, respectively, of which $83.8 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 May 28,
2016, we were in compliance with the operating and financial covenants of the Credit Facility. The Company repaid borrowings of
$40
.0 million under the revolving loan facility and $6.3 million under the term loan facility in
June 2016. The current unused balance of
$400
.0 million of the
revolving loan facility is available for working capital purposes, if necessary.
Related Party Transactions
On July 1, 2016, the Company’s subsidiary, Sid Tool Co., Inc. (“Sid Tool”) entered into an agreement with Mitchmar Atlanta Properties, Inc. (“Mitchmar”) to purchase our
Atlanta Customer Fulfil
l
ment Center (“
Atlanta CFC
”)
and the real property on which the Atlanta CFC is situated, comprised of a fee interest of 66.54 acres and a 696,738 square foot distribution center originally built in 1989, with additions in 1996, 2003 and 2008, for a purchase price of $33.65 million. Sid Tool has leased the Atlanta CFC from Mitchmar since 1989. Mitchmar is owned by Mitchell Jacobson, the Company’s Chairman, and his sister, Marjorie Gershwind Fiverson, and two family related trusts,
and the
beneficiaries
of one of such trusts include
the children of Erik Gershwind, the Company’s Chief Executive Officer. The purchase price was determined by an independent appraisal process, as provided in the lease agreement for the Atlanta facility. The transaction is expected to close in August 2016.
The transaction was approved by the Company’s Board of Directors upon the recommendation of a special committee of independent directors
which was responsible for evaluating the terms of the transaction. Both the Company’s Board of Directors and the special committee
determined that the transaction was in the best interests of the Company and its shareholders. The special committee was
advised by independent counsel in connection with its evaluation and negotiation of the terms of the transaction and the purchase agreement.
Rent expense applicable to the facility was approximately $1.5 million for the thirty-nine weeks ended May 28, 2016.
As a result of the transaction noted above, we are recording accelerated depreciation, partially offset by the release of a deferred rent liability, throughout the remainder of our fiscal 2016
.
Contractual Obligations
Capital Lease and Financing Arrangements
In connection with the construction 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. At May 28, 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 th
e amount of $3.4 million, of which $1.7 million rem
ains outstanding at May 28, 2016. Refer to Note 5 in our condensed consolidated financial statements.
Operating Leases
As of
May 28, 2016
, certain of our operations are conducted on leased premises, of which one location is leased from
Mitchmar
(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 ye
ar 2030. In
addition, we are obligated under certain equipment and automobile operating leases, which expire on varying dates through 2020.
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.