NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)
1. BUSINESS
MSC Industrial Direct Co., Inc. (together with its subsidiaries, the “Company” or “MSC”) is a distributor of metalworking and maintenance, repair and operations (“MRO”) supplies with co-located headquarters in Melville, New York and Davidson, North Carolina. The Company has an additional office support center in Southfield, Michigan and serves primarily domestic markets through its distribution network of
8
5
branch offices and
12
customer fulfillment centers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of MSC and its subsidiaries, all of which are wholly owned. All intercompany balances and transactions have been eliminated in consolidation.
Fiscal Year
The Company’s fiscal year is on a 52 or 53 week basis, ending on the Saturday closest to August 31
st
of each year. The financial statements for fiscal year 2016 contain activity for 53 weeks while 2015 and 2014 contain activity for 52 weeks. Unless the context requires otherwise, references to years contained herein pertain to the Company’s fiscal year.
Use of Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions used in preparing the accompanying consolidated financial statements.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value.
Concentrations of Credit Risk
The Company’s mix of receivables is diverse, with approximately
366,000
active customer accounts (customers that have made at least
one
purchase in the last 12 months) at September 3, 2016
(excluding U.K. operations). The Company sells its products primarily to end-users. The Company’s customer base represents many diverse industries primarily concentrated in the United States. The Company performs periodic credit evaluations of its customers’ financial condition and collateral is generally not required. Receivables are generally due within 30 days. The Company evaluates the collectability of accounts receivable based on numerous factors, including past transaction history
with customers and their credit
worthiness and provides a reserve for accounts that are potentially uncollectible.
The Co
mpany’s cash
include deposits with commercial banks. The terms of these deposits and investments provide that all monies are available to the Company upon demand.
The Company main
tains the majority of its cash
with high quality financial institutions. Deposits held with banks may exceed insurance limits. While MSC monitors the creditworthiness of these commercial banks and financial institutions, a crisis in the United States financial systems could limit access to funds and/or result in a loss of principal.
Allowance for Doubtful Accounts
The Company establishes reserves for customer accounts that are deemed uncollectible. The method used to estimate the allowances is based on several factors, including the age of the receivables and the historical ratio of actual write-offs to the age of the receivables. These analyses also take into consideration economic conditions that may have an impact on a specific industry, group of customers or a specific customer. While the Company has a broad customer base, representing many diverse industries primarily in all regions of the United States, a general economic downturn could result in higher than expected defaults, and therefore, the need to revise estimates for bad debts.
Inventory Valuation
Inventories consist of merchandise held for resale and are stated at the lower of weighted average cost or market. The Company evaluates the recoverability of our slow-moving or obsolete inventories quarterly. The Company estimates the recoverable cost of such inventory by product type while considering such factors as its age, historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding future demand. The Company’s ability to recover its cost for slow-moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand, and relationships with
suppliers.
Substantially all of the Company’s inventories have demonstrated long shelf lives and are not highly susceptible to obsolescence. In addition, many of the Company’s inventories are eligible for return under various supplier rebate programs.
Property, Plant and Equipment
Property, plant and equipment and capitalized computer software are stated at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred; costs of major renewals and improvements are capitalized. At the time property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the asset and accumulated depreciation accounts and the profit or loss on such disposition is reflected in income.
Depreciation and amortization of property, plant and equipment are computed for financial reporting purposes on the straight-line method based on the estimated useful lives of the assets. Leasehold improvements are amortized over either their respective lease terms or their estimated lives, whichever is shorter. Estimated useful lives range from
three
to
forty
years for leasehold improvements and buildings and
three
to
twenty
years for furniture, fixtures, and equipment.
Capitalized computer software costs are amortized using the straight-line method over the estimated useful life. These costs include purchased software packages, payments to vendors and consultants for the development, implementation or modification of purchased software packages for Company use, and payroll and related costs for employees associated with internal-use software projects. Capitalized computer software costs are included within property, plant and equipment on the Company’s consolidated balance sheets.
Goodwill and Other Intangible Assets
The Company’s business acquisitions typically result in the recording of goodwill and other intangible assets, which affect the amount of amortization expense and possibly impairment write-downs that the Company may incur in future periods. Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in connection with business acquisitions. Goodwill increased
$455
in fiscal 2016, related to foreign currency translation adjustments. The Company annually reviews goodwill and intangible assets that have indefinite lives for impairment in its fiscal fourth quarter and when events or changes in circumstances indicate the carrying values of these assets might exceed their current fair values.
Goodwill and indefinite-lived intangible assets are tested for impairment by first evaluating qualitative factors to determine whether it is more likely than not
that the fair value of the reporting unit
and indefinite-lived int
angible assets are less than their
carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed quantitative impairment test. Otherwise, the quantitative impairment test is not required.
Based on the qualitative assessment of goodwill performed by the Company in its respective fiscal fourth quarters, there was no indicator of impairment of goodwill for fiscal years 2016, 2015 and 2014. Based on the qualitative assessment of intangible assets that have indefinite lives performed by the Company in its fiscal fourth quarters of 2016 and 2015 and the quantitative assessment performed by the Company in its fiscal fourth quarter of 2014, there were no indicators of impairment of intangible assets that have indefinite lives.
The components of the Company’s other intangible assets for the fiscal years ended September 3, 2016 and August 29, 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
|
|
|
|
September 3, 2016
|
|
August 29, 2015
|
|
|
Weighted Average Useful Life (in years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
Customer Relationships
|
|
5
|
-
|
18
|
|
$
|
175,160
|
|
$
|
(85,316)
|
|
$
|
175,160
|
|
$
|
(73,508)
|
Contract Rights
|
|
|
10
|
|
|
|
23,100
|
|
|
(23,100)
|
|
|
23,100
|
|
|
(21,368)
|
Trademark
|
|
1
|
-
|
5
|
|
|
3,613
|
|
|
(2,282)
|
|
|
2,900
|
|
|
(1,609)
|
Trademarks
|
|
Indefinite
|
|
|
14,132
|
|
|
—
|
|
|
15,130
|
|
|
—
|
Total
|
|
|
|
|
|
$
|
216,005
|
|
$
|
(110,698)
|
|
$
|
216,290
|
|
$
|
(96,485)
|
For fiscal years
2016 and 2015
the Company recorded approximately
$112
and
$212
of intangible assets, respectively, consisting of the registration and application of new trademarks. During fiscal 2016, approximately
$397
in
gross
intangible assets
, and any related accumulated amortization,
were written off
related to trademarks that are
no longer being utilized. The Company’s amortizable intangible assets are recorded on a straight-line basis, including customer relationships, as it approximates customer attrition patterns and best estimates the use pattern of the asset. Amortization expense of the Company’s intangible assets was
$14,478
,
$16,580
, and
$16,851
during fiscal years 2016, 2015, and 2014, respectively. Estimated
amortization expense for each of the five succeeding fiscal years is as follows:
|
|
|
|
|
|
Fiscal Year
|
|
|
2017
|
|
$8,006
|
2018
|
|
7,804
|
2019
|
|
7,338
|
2020
|
|
6,485
|
2021
|
|
5,799
|
Impairment of Long-Lived Assets
The Company periodically evaluates the net realizable value of long-lived assets, including definite lived intangible assets and property and equipment, relying on a number of factors, including operating results, business plans, economic projections, and anticipated future cash flows. Impairment is assessed by evaluating the estimated undiscounted cash flows over the asset’s remaining life. If estimated cash flows are insufficient to recover the investment, an impairment loss is recognized.
No
impairment loss was required to be recorded by the Company during fiscal years 2016, 2015 and 2014.
Deferred Catalog Costs
The costs of producing and distributing the Company’s principal catalogs are deferred (
$5,174
and
$4,948
at September 3, 2016 and August 29, 2015, respectively) and included in other assets in the Company’s consolidated balance sheets. These costs are charged to expense over the period that the catalogs remain the most current source of sales, which is typically
one
year or less from the date the catalogs are mailed. The costs associated with brochures and catalog supplements are charged to expense as distributed. The total amount of advertising costs, net of co-operative advertising income from vendor sponsored programs, included in operating expenses in the consolidated statements of income, was approximately
$19,242
,
$24,101
and
$20,799
during the fiscal years 2016, 2015, and 2014, respectively.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. In most cases, these conditions are met when the product is shipped to the customer or services have been rendered. The Company reports its sales net of the amount of actual sales returns and the amount of reserves established for anticipated sales returns based upon historical return rates. Sales tax collected from customers is excluded from net sales in the accompanying consolidated statements of income.
Vendor Consideration
The Company records cash consideration received for advertising costs incurred to sell the vendor’s products as a reduction of the Company’s advertising costs and is reflected in operating expenses in the consolidated statements of income. In addition, the Company receives volume rebates from certain vendors based on contractual arrangements with such vendors. Rebates received from these vendors are recognized as a reduction to the cost of goods sold in the consolidated statements of income when the inventory is sold.
Product Warranties
The Company generally offers a maximum
one
-year warranty, including parts and labor, for some of its machinery products. The specific terms and conditions of those warranties vary depending upon the product sold. The Company may be able to recoup some of these costs through product warranties it holds with its original equipment manufacturers, which typically range from
thirty
to
ninety
days. In general, many of the Company’s general merchandise products are covered by third party original equipment manufacturers’ warranties. The Company’s warranty expense has been minimal.
Shipping and Handling Costs
The Company includes shipping and handling fees billed to customers in net sales and shipping and handling costs associated with outbound freight in operating expenses in the accompanying consolidated statements of income. The shipping and handling costs in operating expenses were approximately
$118,174
,
$123,900
, and
$119,796
during fiscal years 2016, 2015, and 2014, respectively.
Stock-Based Compensation
In accordance with Accounting Standards Codification (“ASC”) Topic 718, “Compensation — Stock Compensation” (“ASC 718”), the Company estimates the fair value of share-based payment awards on the date of grant. The value of awards that are ultimately expected to vest is recognized as an expense over the requisite service periods. The fair value of our restricted stock awards and units is based on the closing market price of our common stock on the date of grant. We estimated the fair value of stock options granted using a Black-Scholes option-pricing model. This model requires us to make estimates and assumptions with respect to the expected term of the option, the expected volatility of the price of our common stock and the expected forfeiture rate. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
The expected term
is based on the historical exercise behavior of grantees, as well as the contractual life of the option grants. The expected volatility factor is based on the volatility of the Company's common stock for a period equal to the expected term of the stock option.
In addition, forfeitures of share-based awards are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option and restricted stock award and unit forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
Treasury Stock
The Company accounts for treasury stock under the cost method, using the first-in, first-out flow assumption, and is included in “Class A treasury stock, at cost” on the accompanying consolidated balance sheets. When the Company reissues treasury stock, the gains are recorded in additional paid-in capital (“APIC”), while the losses are recorded to APIC to the extent that the previous net gains on the reissuance of treasury stock are available to offset the losses. If the loss is larger than the previous gains available, then the loss is recorded to retained earnings. When treasury stock is retired, the par value of the repurchased shares is deducted from common stock and the excess repurchase price over par is deducted by allocation to both APIC and retained earnings. The amount allocated to APIC is calculated as the original cost of APIC per share outstanding using the first-in, first-out flow assumption and is applied to the number of shares repurchased. Any remaining amount is allocated to retained earnings.
Related Party Transactions
Atlanta CFC Purchase
In August 2016, the Company’s subsidiary, Sid Tool Co., Inc. (“Sid Tool”) completed a transaction with Mitchmar Atlanta Properties, Inc. (“Mitchmar”) to purchase our Atlanta CFC and the real property on which the Atlanta CFC is situated for a purchase price of $33,650. Sid Tool had 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 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.
We paid rent under an operating lease to Mitchmar of approximately $2
,110,
$2
,318 and $2,297, respectively,
for fiscal years 2016, 2015 and
2014 in connection with our occupancy of our Atlanta CFC.
Stock Purchase Agreement
In July 2016, the Company entered into an agreement (the “Stock Purchase Agreement”) with Mitchell Jacobson, the Company’s Chairman, his sister, Marjorie Gershwind Fiverson, Erik Gershwind, the Company’s President and Chief Executive Officer, and two other beneficial owners (collectively, the “Sellers”) of the Company’s Class B common stock. Pursuant to the Stock Purchase Agreement, each Seller agreed to sell or cause to be sold by trusts or other entities on whose behalf such Seller acted, and the Company agreed to purchase, an aggregate number of shares of Class A common stock, at the price per share to be paid by the Company in the Company’s “modified Dutch auction” tender offer commenced on July 7, 2016, such that the Sellers’ aggregate percentage ownership and voting power in the Company would remain substantially the same as prior to the tender offer. The Sellers also agreed not to participate in the tender offer. The Stock Purchase Agreement was approved by the Nominating and Corporate Governance Committee of the Company’s Board of Directors, as well as by the disinterested members of the Company’s Board of Directors. On August 19, 2016, pursuant to the Stock Purchase Agreement, the Company purchased an aggregate of 1,152 shares of its Class A common stock from the Sellers and/or such trusts or other entities at a purchase price of $72.50 per share, for an aggregate purchase price of approximately $83,524. The purchase price per share paid to the sellers pursuant to the Stock Purchase Agreement was equal to the purchase price per share paid to shareholders whose shares were purchased in the Company’s tender offer.
Fair Value of Financial Instruments
The carrying values of the Company’s financial instruments, including cash, receivables, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. 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 taxable bonds are estimated based on
observable inputs in non-active markets.
Under this method, the Company’s fair value of the taxable bonds was not significantly different than the carrying value at September 3, 2016 and August 29, 2015.
The fair value
s
of the Company’s long-term debt, including current maturities are 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. Under this method, the Company’s fair value of any long-term obligations was not significantly different than the carrying values at September 3, 2016 and August 29, 2015.
Foreign Currency
The local currency is the functional currency for all of MSC’s operations outside the United States. Assets and liabilities of these operations are translated to U.S. dollars at the exchange rate in effect at the end of each period. Income statement accounts are translated at the average exchange rate prevailing during the period. Translation adjustments arising from the use of differing exchange rates from period to period are included as a component of other comprehensive income within shareholders’ equity. Gains and losses from foreign currency transactions are included in net income for the period.
Income Taxes
The Company has established deferred income tax assets and liabilities for temporary differences between the financial reporting bases and the income tax bases of its assets and liabilities at enacted tax rates expected to be in effect when such assets or liabilities are realized or settled pursuant to the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”), which prescribes a comprehensive model for the financial statement recognition, measurement, classification, and disclosure of uncertain tax positions. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amounts of unrecognized tax benefits, exclusive of interest and penalties that would affect the effective tax rate were
$4,432
and
$4,693
as of September 3, 2016 and August 29, 2015, respectively.
Comprehensive Income
Comprehensive income
consists of consolidated net income and foreign currency translation adjustments. Foreign currency translation adjustments included in comprehensive income were not tax effected as investments in international affiliates are deemed to be permanent.
Geographic Regions
The Company’s sales and assets are predominantly generated from United States locations. Sales and assets related to the United Kingdom (the “U.K.”) and Canada branches are not significant to the Company’s total operations. For fiscal 2016, U.K. and Canadian operations represented approximately
3%
of the Company’s consolidated net sales.
Segment Reporting
The Company utilizes the management approach for segment disclosure, which designates the internal organization that is used by management for making operating decisions and assessing performance as the source of our reportable segments. The Company’s results of operations are reviewed by the Chief Executive Officer on a consolidated basis and the Compa
ny operates in only
one
segment. Substantially all of the Company’s revenues and long-lived assets are in the United States.
We do not disclose revenue information by product category as it is impracticable to do so as a result of our numerous product offerings and the way our business is managed.
Recently Adopted Accounting Pronouncements
Presentation of Debt Issuance Costs
In April 2015, the
Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs
(
Subtopic 835-30), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. For public business entities, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Entities should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The FASB allowed early adoption of this standard, and therefore, the Company adopted ASU 2015-03 during the fourth quarter of fiscal 2016. As a result of adopting this standard on a retrospective basis,
$1,020
of debt issuance costs that were previously presented in long-term other assets as of August 29, 2015 are now included within current maturities of long-term debt and long-term debt, net of current maturities.
Accounting Pronouncements Not Yet Adopted
Share-based Payments
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption is permitted.
The new standard is effective for the Company for its fiscal 2018 first quarter.
The Company is currently evaluating the impact the adoption of the pronouncement may have on its financial position, results of operations or cash flows.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842),
to increase transparency and comparability by providing additional information to users of financial statements regarding an entity's leasing activities. ASU 2016-02 requires reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. ASU 2016-02 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2018. The new standard is effective for the Company for its fiscal 2020 first quarter. The guidance will be applied on a modified retrospective basis beginning with the earliest period presented. The Company is currently evaluating this standard to determine the impact of adoption on its consolidated financial statements.
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. Early application is permitted. The new standard is effective for the Company for its fiscal 2018 first quarter. The Company does not expect adoption of ASU 2015-17 to have a material impact on its financial position, results of operations or cash flows.
Simplifying the Measurement of Inventory
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory
(
Topic 330), which requires an entity to measure inventory at the lower of cost or net realizable value, which consists of the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. For public entities, the updated guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The guidance is to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The new standard is effective for the Company for its fiscal 2018 first quarter. The Company does not expect adoption of ASU 2015-11 to have a material impact on its financial position, results of operations or cash flows.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company for its fiscal 2019 first quarter. Early application is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has neither selected a transition method, nor determined the impact that the adoption of the pronouncement may have on its financial position, results of operations or cash flows.
Reclassifications
Certain prior year amounts have been reclassified to conform to the fiscal 2016 presentation. These reclassifications did not have a material impact on the presentation of the consolidated financial statements. See “Recently Adopted Accounting Pronouncements” above regarding the impact of our adoption of ASU 2015-03 upon the classification of debt iss
uance co
sts in our consolidated balance sheets.
3. FAIR VALUE
Fair value accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value into three levels, with Level 1 being of the highest priority. The three levels of inputs used to measure fair value are as follows:
Level 1
—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2
—Include other inputs that are directly or indirectly observable in the marketplace.
Level 3
—Unobservable inputs which are supported by little or no market activity.
As of
September 3, 2016
and August 29, 2015
,
the Company did
no
t have any cash equivalents.
In connection with the construction of the Company’s customer fulfillment center in Columbus, Ohio, the Company entered into an arrangement during fiscal 2013 with the Columbus-Franklin County Finance Authority (“Finance Authority”) which provides savings on state and local sales taxes imposed on construction materials to entities that finance the transactions through them. Under this arrangement, the Finance Authority issued taxable bonds to finance the structure and site improvements of the Company’s customer fulfillment center. The bonds
(
$27,022
at
both
September 3, 2016
and
August 29, 2015
) 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 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
no
t record any gains or losses on these
securities during fiscal year 2016
. The outstanding principal amount of each bond bears interest at the rate of
2.4%
per year. Interest is payable on a semiannual basis in arrears on each interest payment date.
In addition, based on borrowing rates currently available to the Company for borrowings with similar terms, the carrying values of the Company’s capital lease obligations also approximate fair value. The fair value of the Company’s long-term debt, including current maturities, is estimated based on quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. The carrying amount of the Company’s debt at
September 3, 2016
, approximates its fair value.
The Company’s financial instruments, other than those presented in the disclosure above, include cash, receivables, accounts payable, and accrued liabilities. Management believes the carrying amount of the aforementioned financial instruments is a reasonable estimate of fair value as of
September 3, 2016
and
August 29, 2015
due to the short-term maturity of these items.
During the
fiscal years ended
September 3, 2016
and
August 29, 2015
, the Company had
no
measurements of
no
n-financial assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition.
4
. 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 ASC 260, “
Earnings Per Share”
. Under the two-class method, net income per share is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, net income is allocated to both common shares and participating securities based on their respective weighted average shares outstanding for the period.
The following table sets forth the computation of basic and diluted net income per common share under the two-class method
for the fiscal years ended
September 3, 2016
,
August 29, 2015
and
August 30, 2014
, respectively
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
September 3,
|
|
August 29,
|
|
August 30,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(53 weeks)
|
|
(52 weeks)
|
|
(52 weeks)
|
|
|
|
|
|
|
|
|
|
|
Net income as reported
|
|
$
|
231,216
|
|
$
|
231,308
|
|
$
|
236,067
|
Less: Distributed net income available to participating securities
|
|
|
(308)
|
|
|
(1,350)
|
|
|
(481)
|
Less: Undistributed net income available to participating securities
|
|
|
(601)
|
|
|
—
|
|
|
(1,146)
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic net income per share:
|
|
|
|
|
|
|
|
|
|
Undistributed and distributed net income available to common shareholders
|
|
$
|
230,307
|
|
$
|
229,958
|
|
$
|
234,440
|
Add: Undistributed net income allocated to participating securities
|
|
|
601
|
|
|
—
|
|
|
1,146
|
Less: Undistributed net income reallocated to participating securities
|
|
|
(600)
|
|
|
—
|
|
|
(1,140)
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income per share:
|
|
|
|
|
|
|
|
|
|
Undistributed and distributed net income available to common shareholders
|
|
$
|
230,308
|
|
$
|
229,958
|
|
$
|
234,446
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic net income per share
|
|
|
60,908
|
|
|
61,292
|
|
|
62,026
|
Effect of dilutive securities
|
|
|
168
|
|
|
195
|
|
|
313
|
Weighted average shares outstanding for diluted net income per share
|
|
|
61,076
|
|
|
61,487
|
|
|
62,339
|
|
|
|
|
|
|
|
|
|
|
Net income per share Two-class method:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.78
|
|
$
|
3.75
|
|
$
|
3.78
|
Diluted
|
|
$
|
3.77
|
|
$
|
3.74
|
|
$
|
3.76
|
|
|
|
|
|
|
|
|
|
|
Antidilutive stock options of
843
and
678
were not included in the computation of diluted earnings per share for the fiscal year
s
ended
September 3, 2016
and August 29, 2015
.
There were
no
antidilutive stock options included in the computation of diluted earnings per
share for the fiscal year
ended
August 30, 2014
.
5
. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment and the estimated useful lives used in the computation of depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 3,
|
|
August 29,
|
|
|
Number of Years
|
|
2016
|
|
2015
|
Land
|
|
|
—
|
|
|
$
|
27,205
|
|
$
|
20,783
|
Building and improvements
|
|
3
|
-
|
40
|
|
|
178,828
|
|
|
150,870
|
Leasehold improvements
|
|
The lesser of lease term or
31.5
|
|
|
2,551
|
|
|
4,384
|
Furniture, fixtures and equipment
|
|
3
|
-
|
20
|
|
|
172,347
|
|
|
165,589
|
Computer systems, equipment and software
|
|
3
|
-
|
5
|
|
|
317,096
|
|
|
289,873
|
|
|
|
|
|
|
|
698,027
|
|
|
631,499
|
Less: accumulated depreciation and amortization
|
|
|
|
|
|
|
377,483
|
|
|
340,343
|
Total
|
|
|
|
|
|
$
|
320,544
|
|
$
|
291,156
|
The amount of capitalized interest, net of accumulated amortization, included in property, plant and equipment was
$796
and
$847
at
September 3, 2016
and
August 29, 2015
, respectively.
Depreciation expense was
$57,052
,
$52,799
and
$47,729
for the fiscal years ended
September 3, 2016
,
August 29, 2015
, and
August 30, 2014
, respectively.
6
. INCOME TAXES
The provision for income taxes is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
September 3,
|
|
August 29,
|
|
August 30,
|
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
109,699
|
|
$
|
109,575
|
|
$
|
115,186
|
State and local
|
|
|
15,621
|
|
|
17,339
|
|
|
16,528
|
|
|
|
125,320
|
|
|
126,914
|
|
|
131,714
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
13,993
|
|
|
13,987
|
|
|
10,369
|
State and local
|
|
|
1,202
|
|
|
932
|
|
|
1,375
|
|
|
|
15,195
|
|
|
14,919
|
|
|
11,744
|
Total
|
|
$
|
140,515
|
|
$
|
141,833
|
|
$
|
143,458
|
Significant components of deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 3,
|
|
August 29,
|
|
|
2016
|
|
2015
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Depreciation
|
|
$
|
(53,580)
|
|
$
|
(51,204)
|
Deferred catalog costs
|
|
|
(1,347)
|
|
|
(1,155)
|
Goodwill
|
|
|
(88,607)
|
|
|
(73,996)
|
|
|
|
(143,534)
|
|
|
(126,355)
|
Deferred tax assets:
|
|
|
|
|
|
|
Accounts receivable
|
|
|
4,089
|
|
|
3,807
|
Inventory
|
|
|
9,995
|
|
|
9,036
|
Deferred compensation
|
|
|
1,710
|
|
|
2,409
|
Stock based compensation
|
|
|
9,813
|
|
|
9,831
|
Intangible amortization
|
|
|
11,933
|
|
|
11,788
|
Other
|
|
|
9,087
|
|
|
7,772
|
|
|
|
46,627
|
|
|
44,643
|
Net Deferred Tax Liabilities
|
|
$
|
(96,907)
|
|
$
|
(81,712)
|
Reconciliation of the statutory Federal income tax rate to the Company’s effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
September 3,
|
|
August 29,
|
|
August 30,
|
|
|
2016
|
|
2015
|
|
2014
|
U.S. Federal statutory rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of Federal benefit
|
|
3.0
|
|
|
3.1
|
|
|
3.1
|
|
Other, net
|
|
(0.2)
|
|
|
(0.1)
|
|
|
(0.3)
|
|
Effective income tax rate
|
|
37.8
|
%
|
|
38.0
|
%
|
|
37.8
|
%
|
The aggregate changes in the balance of gross unrecognized tax benefits during fiscal
2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 3,
|
|
August 29,
|
|
|
2016
|
|
2015
|
Beginning Balance
|
|
$
|
10,333
|
|
$
|
9,350
|
Additions for tax positions relating to current year
|
|
|
2,745
|
|
|
2,617
|
Additions for tax positions relating to prior years
|
|
|
—
|
|
|
104
|
Settlements
|
|
|
(174)
|
|
|
(41)
|
Lapse of statute of limitations
|
|
|
(2,294)
|
|
|
(1,697)
|
Ending Balance
|
|
$
|
10,610
|
|
$
|
10,333
|
Included in the balance of unrecognized tax benefits at
September 3, 2016
is
$1,039
related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. This amount represents a decrease in unrecognized tax benefits comprised primarily of items related to expiring statutes of limitations in state jurisdictions.
The Company recognizes interest expense and penalties in the provision for income taxes. The fiscal years
2016
,
2015
and
2014
provisions include interest and penalties of
$6
,
$19
and
$0
, respec
tively. The Company has accrued
$235
and
$163
for interest and penalties as of
September 3, 2016
and
August 29, 2015
, respectively.
With limited exceptions, the Company is no longer subject to
Federal income tax examinations through fi
scal 2013
and state income tax examinations through fiscal
2012
.
7
. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 3,
|
|
August 29,
|
|
|
2016
|
|
2015
|
Accrued payroll and fringe
|
|
$
|
31,416
|
|
$
|
25,597
|
Accrued bonus
|
|
|
12,728
|
|
|
12,820
|
Accrued sales, property and income taxes
|
|
|
13,541
|
|
|
12,259
|
Accrued sales rebates and returns
|
|
|
14,206
|
|
|
13,394
|
Accrued other
|
|
|
29,060
|
|
|
30,424
|
Total accrued liabilities
|
|
$
|
100,951
|
|
$
|
94,494
|
8
. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt at
September 3, 2016
and
August 29, 2015
consisted of the following:
|
|
|
|
|
|
|
|
|
September 3,
|
|
August 29,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Credit Facility:
|
|
|
|
|
|
|
Revolver
|
|
$
|
217,000
|
|
$
|
188,000
|
Term loan
|
|
|
187,500
|
|
|
212,500
|
Private Placement Debt:
|
|
|
|
|
|
|
Senior notes, series A
|
|
|
75,000
|
|
|
-
|
Senior notes, series B
|
|
|
100,000
|
|
|
-
|
Capital lease and financing obligations
|
|
|
28,268
|
|
|
27,804
|
Less: unamortized debt issuance costs
|
|
|
(946)
|
|
|
(1,020)
|
Total debt
|
|
$
|
606,822
|
|
$
|
427,284
|
Less: current maturities of long-term debt
(1)
|
|
|
(267,050)
|
|
|
(213,165)
|
Long-term debt
|
|
$
|
339,772
|
|
$
|
214,119
|
|
(1)
|
|
Net of unamortized debt issuance costs expected to be amortized in the next twelve months.
|
Credit Facility
In April 2013, in connec
tion with the acquisition of its
Class C Solutions Group, the Company entered into a new
$650,000
credit facility (the “Credit Facility”). The Credit Facility, which matures in
April 2018
, provides for a
five
-year unsecured revolving loan facility in the aggregate amount of
$400,000
and a
five
-year unsecured term loan facility in the aggregate amount of
$250,000
.
The Credit Facility also permits the Company, at its request, and upon the satisfaction of certain conditions, to add one or more incremental term loan facilities and/or increase the revolving loan commitments in an aggregate amount not to exceed
$200,000
. Subject to certain limitations, each such incremental term loan facility or revolving commitment increase will be on terms as agreed to by the Company, the Administrative Agent and the lenders providing such financing.
Borrowings under the Credit Facility bear interest, at the Company’s option, either at (i) the LIBOR (London Interbank Offered Rate) rate plus the applicable margin for LIBOR loans ranging from
1.00%
to
1.375%
, based on the Company’s consolidated leverage ratio; or (ii) the greatest of (a) the Administrative Agent’s prime rate in effect on such day, (b) the federal funds effective rate in effect on such day, plus
0.50%
and (c) the LIBOR rate that would be calculated as of such day in respect of a proposed LIBOR loan with a one-month interest period, plus
1.00%
, plus, in the case of each of clauses (a) through (c), an applicable margin ranging from
0.00%
to
0.375%
, based on the Company’s consolidated leverage ratio. The Company is required to pay a quarterly undrawn fee ranging from
0.10%
to
0.20%
per annum on the unutilized portion of the Credit Facility based on the Company’s consolidated leverage ratio. The Company is also required to pay quarterly letter of credit usage fees ranging between
1.00%
to
1.375%
(based on the Company’s consolidated leverage ratio) on the amount of the daily average outstanding letters of credit, and a quarterly fronting fee of
0.125%
per annum on the
undrawn and unexpired amount of each letter of credit. The applicable borrowing rate for the Company for any borrowings outstanding under the Credit Facility at
September 3, 2016
was
1.52%
, which represented LIBOR plus
1.00%
. 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.
The Credit Facility contains several restrictive covenants including the requirement that the Company maintain a maximum consolidated leverage ratio
of total indebtedness to EBITDA
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. Borrowings under the Credit Facility are guaranteed by certain of the Company’s subsidiaries.
During fiscal
2016
, the Company borrowed
$305,000
under the revolving loan facility and repaid
$276,000
and
$25,000
of the revolving loan facility and term loan facility, respectively.
During fiscal
2015
, the Company borrowed
$336,000
under the revolving loan facility and repaid
$218,000
and
$25,000
of the revolving loan facility
and term loan facility, respectively
.
At
September 3, 2016
and
August 29, 2015
, the Company was in compliance with the operating and financial covenants of the Credit Facility.
Private Placement Debt
In July 2016, in connecti
on with the Company’s “modified
Dutch auction” tender offer, the Company completed the issuance and sale of the following unsecured senior notes (collectively “Private Placement Debt”):
|
·
|
|
$75,000
aggregate principal amount of
2.65%
Senior Notes, Series A, due
July 28, 2023
(“Senior notes, series A”); and
|
|
·
|
|
$100,000
aggregate principal amount of
2.90%
Senior Notes, Series B, due
July 28, 2026
(“Senior notes, series B”)
|
The Private Placement Debt is due, in full, on the stated maturity dates. Interest is payable semi-annually at the fixed stated interest rates.
The
Private Placement Debt
contains 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
Private Placement Debt
. At
September 3, 2016
, the Company was in compliance with the operating and financial covenants of the
Private Placement Debt
.
Matu
rities of
debt, excluding capital lease and financing obligations,
as of
September 3, 2016
are as follows:
|
|
|
|
|
|
Maturities of
|
Fiscal Year
|
|
Debt
|
2017
|
|
$
|
267,000
|
2018
|
|
|
137,500
|
2019
|
|
|
—
|
2020
|
|
|
—
|
2021
|
|
|
—
|
Thereafter
|
|
|
175,000
|
Total
|
|
$
|
579,500
|
Capital Lease and Financing Obligations
In connection with the construction of the Company’s customer fulfillment center in Columbus, Ohio, the Finance Authority holds the title to the building and entered into a long-term lease with the Company.
The lease has a
20
-year term with a prepayment option without penalty between
7
and
20
years. At the end of the lease term, the building’s title is transferred to the Company for a nominal amount when the principal of and interest on the bonds have been fully paid. The lease has been classified as a capital lease in accordance with ASC Topic 840.
At
September 3, 2016
and
August 29, 2015
, the capital lease obligation was approximately
$27,022
.
Under this arrangement, the Finance Authority has issued taxable bonds to finance the structure and site improvements of the Company’s customer fulfillment center in the amount of $27,022 outstanding at both September 3, 2016 and August 29, 2015.
From time to time, the Company enters into capital leases and financing arrangements to purchase certain equipment. The equipment acquired from these vendors is paid over a specified period of time based on the terms agreed upon. During the fiscal year ended
September 3, 2016
, the Company
entered into a capital lease and various financing obligations for certain information technology equipment totaling
$1,321
and
$453
,
respectively.
Duri
ng the fiscal year ended
August 29, 2015
, the Company entered into various capital leases and financing obligations for certain information technology equipment totaling
$530
.
The gross amount
of property and equipment acquired under these capital leases and financing agreements at
September 3, 2016
and
August 29, 2015
was approximately
$30,298
and
$32,535
, respectively.
Related accumulated amortization totaled
$2,878
and
$4,815
as of September 3, 2016
and
August 29, 2015
, respectively
.
Amortization expense of property and equipment acquired under these capital leases and financing arrangements was approximately
$2,073
for
the fiscal year ended
2016
.
At
September 3, 2016
, approximate future minimum payments under capital leases and financing arrangements are as follows:
|
|
|
|
Fiscal Year
|
|
Payments under capital leases and financing arrangements
|
2017
|
|
$
|
1,120
|
2018
|
|
|
993
|
2019
|
|
|
993
|
2020
|
|
|
27,324
|
Total minimum lease payments
|
|
$
|
30,430
|
Less: amount representing interest
|
|
|
2,162
|
Present value of minimum lease payments
|
|
$
|
28,268
|
Less: current portion
|
|
|
471
|
Long-term capital leases and financing arrangements
|
|
$
|
27,797
|
9
.
SHAREHOLDERS’ EQUITY
Treasury Stock Purchases
In July 2016, the Company commenced a tender offer to purchase for cash up to
$
300,000
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 “Tender Offer”). In addition, the Company 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 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 Tender Offer. The Class B Holders also agreed not to participate in the Tender Offer.
In August 2016, the Company completed the Tend
er Offer and purchased
3,821
shares
of the Company’s Class A common stock that were validly tendered and not validly withdrawn at a price of
$72.50
per share.
The Company also completed the Stock Purch
ase of an aggregate of 1,152
shares of its Class A common stock from the Class B Holders at a
purchase price of
$72.50
per share. In total, as a result of the Tender Offer and Stock Purchase,
the Company pur
chased
4,973
shares at a price of
$72.50
per share
for an aggregate cost of
$360,566
, excluding f
ees and expenses. Th
e Company incurred costs of
$1,587
in connection with the Tender Offer
and Stock Purchase
res
ulting in a total cost of
$362,153
, or
$72.82
per share for the shares repurchased, which were recorded to treasury stock. The Co
mpany retired all
4,973
shares purchased as a result of the Tender Offer and Stock Purchase.
During fiscal 1999, the Board of Directors established the MSC Stock Repurchase Plan (the “Re
purchase Plan”). In
2011, the Board of Directors reaffirmed and replenished the Repurchase Plan so that the total number of shares of Class A common stock authorized for future repurchase was
5,000
shares. As of
September 3, 2016
, the maximum number of shares that may yet be repurchased under the Repurchase Plan was
1,444
shares. The Repurchase Plan 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 fiscal 2016 and 2015
, the Company repurchased
5,344
shares and
444
shares, respectively, of its Class A common stock f
or
$384,111
and
$33,414
, respectively.
72
and
112
of these shares were repurchased by the Company to satisfy the Company’s associates’ tax withholding liability associated with its share-based com
pensation program during fiscal 2016 and 2015
, respectively.
Shares of the Company’s common stock purchased pursuant to the Tender Offer and the Stock Purchase, as well as shares purchased to
satisfy the Company’s associates’ tax withholding liability
associated with its share-based com
pensation program
did not reduce the number of shares that may be repurchased under the Repurchase Plan.
The
Company reissued
64
and
63
shares
of treasury stock during fiscal
2016 a
nd
2015
, respectively, to fund the Associate Stock Purchase Plan (See Note 1
0
).
Common Stock
Each holder of the Company’s Class A common stock is entitled to
one
vote for each share held of record on the applicable record date on all matters presented to a vote of shareholders, including the election of directors. The holders of Class B common stock are entitled to
ten
votes per share on the applicable record date and are entitled to vote, together with the holders of the Class A common stock, on all matters which are subject to shareholder approval. Holders of Class A common stock and Class B common stock have no cumulative voting rights or preemptive rights to purchase or subscribe for any stock or other securities and there are no redemption or sinking fund provisions with respect to such stock.
The holders of the Company’s Class B common stock have the right to convert their shares of Class B common stock into shares of Class A common stock at their election and on a one-to-one basis, and all shares of Class B common stock convert into shares of Class A common stock on a one to-one basis upon the sale or transfer of such shares of Class B common stock to any person who is not a member of the Jacobson or Gershwind families or any trust not established principally for members of the Jacobson or Gershwind families or to any person who is not an executor, administrator or personal representative of an estate of a member of the Jacobson or Gershwind families.
Preferred Stock
The Company has authorized
5,000
shares of preferred stock. The Company’s Board of Directors has the authority to issue the shares of preferred stock. Shares of preferred stock may have priority over the Company’s Class A common stock and Class B common stock with respect to dividend or liquidation rights, or both. As of
September 3, 2016
, there were
no
shares of preferred stock issued or
outstanding
.
Cash Dividend
In
2003, the Board of Directors instituted a policy of regular quarterly cash dividends to shareholders. This policy is reviewed regularly by the Board of Directors.
On
October 27, 2016
, the Board of Directors declared a quarterly cash dividend of
$0.45
p
er share, payable on
November 29, 2016
to shareholders of record at the
close of business on
November 15, 2016
. The dividend will result in a payout of approximately
$25
,461
based on the number of
shares
outstanding
at
October 17, 2016
.
10
. ASSOCIATE BENEFIT PLANS
The Company accounts for all share-based payments in accordance with ASC 718.
Stock
‑based compensation expense included in operating expenses for the fiscal years ended September 3, 2016, August 29, 2015 and August 30, 2014 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended
|
|
|
September 3,
|
|
August 29,
|
|
August 30,
|
|
|
2016
|
|
2015
|
|
2014
|
Stock options
|
|
$
|
4,382
|
|
$
|
4,614
|
|
$
|
5,324
|
Restricted share awards
|
|
|
6,112
|
|
|
8,139
|
|
|
8,898
|
Restricted stock units
|
|
|
3,205
|
|
|
1,105
|
|
|
2,167
|
Associate Stock Purchase Plan
|
|
|
286
|
|
|
337
|
|
|
299
|
Total
|
|
|
13,985
|
|
|
14,195
|
|
|
16,688
|
Deferred income tax benefit
|
|
|
(5,206)
|
|
|
(5,266)
|
|
|
(6,227)
|
Stock-based compensation expense, net
|
|
$
|
8,779
|
|
$
|
8,929
|
|
$
|
10,461
|
Stock Compensation Plans
2015 Omnibus Incentive Plan
At the Company’s annual meeting of shareholders held on January 15, 2015, the shareholders approved the MSC Industrial Direct Co., Inc. 2015 Omnibus Incentive Plan (“2015 Omnibus Plan”). The 2015 Omnibus Plan replaced the Company’s 2005 Omnibus Incentive Plan (the “Prior Plan”) and beginning January 15, 2015, all awards are granted under the 2015 Omnibus Plan. Awards under the 2015 Omnibus Plan may be made in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, other share-based awards, and performance cash, performance shares or performance units. All outstanding awards under the Prior Plan will continue to be governed by the terms of the Prior Plan. Upon approval of the 2015 Omnibus Plan, the maximum aggregate number of shares of common stock authorized to be issued under the 2015 Omnibus Plan was
5,217
sha
res, of which
4,911
authorized shares of common stock were remaining as of September 3, 2016.
Stock Options
A summary of the status of the Company’s stock options at
September 3, 2016
and changes during the fiscal year then ended is presented in the table and narrative below:
|
|
|
|
|
|
|
|
2016
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
Outstanding - beginning of year
|
|
1,274
|
|
$
|
73.10
|
Granted
|
|
586
|
|
|
58.90
|
Exercised
|
|
(144)
|
|
|
51.47
|
Canceled/Forfeited
|
|
(71)
|
|
|
74.68
|
Outstanding - end of year
|
|
1,645
|
|
$
|
69.86
|
Exercisable - end of year
|
|
626
|
|
$
|
71.78
|
The total intrinsic value of options exercised during the fiscal years ended
September 3, 2016
,
August 29, 2015
and
August 30, 2014
was
$3,129
,
$3,390
, and
$13,988
, respectively. The unrecognized share-based compensation cost related to stock option expense at
September 3, 2016
was
$7,088
and will be recogn
ized over a weighted average of
2.4
years.
S
tock option awards outstan
ding under the Company’s incentive
plans have been granted at exercise prices that are equal to the market value of its common stock on the date of grant. Such options generally vest over a period
four
years and expire at
seven
years
after the grant date. The Company recognizes compensation expense ratably over the vesting period, net of estimated forfeitures. The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options granted, which requires the input of both subjective and objective assumptions as follows:
Expected Term
— The estimate of expected term is based on the historical exercise behavior of grantees, as well as the contractual life of the option grants.
Expected Volatility
— The expected volatility fa
ctor is based on the
volatility of the Company's common stock for a period equal to the expected term of the stock option.
Risk-free Interest Rate
— The risk-free interest rate is determined using the implied yield for a traded zero-coupon U.S. Treasury bond with a term equal to the expected term of the stock option.
Expected Dividend Yield
— The expected dividend yield is based on the Company's historical practice of paying
quarterly
dividends on its common stock.
The Company’s weighted-average assumptions used to estimate the fair value of stock options g
ranted during the fiscal years ended
September 3, 2016
,
August 29, 2015
and
August 30, 2014
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Expected life (in years)
|
|
3.9
|
|
|
3.9
|
|
|
3.9
|
|
Risk-free interest rate
|
|
1.09
|
%
|
|
1.09
|
%
|
|
0.93
|
%
|
Expected volatility
|
|
21.8
|
%
|
|
24.5
|
%
|
|
26.6
|
%
|
Expected dividend yield
|
|
2.40
|
%
|
|
1.70
|
%
|
|
1.70
|
%
|
Weighted-Average Grant-Date Fair Value
|
$
|
8.03
|
|
$
|
14.06
|
|
$
|
14.98
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options outstanding and exercisable at
September 3, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Number of Options Outstanding at September 3, 2016
|
|
Weighted-Average Remaining Contractual Life
|
|
Weighted-Average Exercise Price
|
|
Intrinsic Value
|
|
Number of Options Exercisable at September 3, 2016
|
|
Weighted-Average Remaining Contractual Life
|
|
Weighted-Average Exercise Price
|
|
Intrinsic Value
|
$
54.52
– $
58.90
|
|
643
|
|
5.5
|
|
$
|
58.38
|
|
$
|
10,166
|
|
77
|
|
1.1
|
|
$
|
54.52
|
|
$
|
1,515
|
58.91
–
69.46
|
|
364
|
|
2.7
|
|
|
68.26
|
|
|
2,153
|
|
309
|
|
2.6
|
|
|
68.04
|
|
|
1,892
|
69.47
–
81.76
|
|
288
|
|
4.1
|
|
|
81.61
|
|
|
3
|
|
148
|
|
4.1
|
|
|
81.55
|
|
|
2
|
81.77
–
83.03
|
|
350
|
|
5.1
|
|
|
83.02
|
|
|
—
|
|
92
|
|
5.1
|
|
|
83.02
|
|
|
—
|
|
|
1,645
|
|
4.6
|
|
$
|
69.86
|
|
$
|
12,322
|
|
626
|
|
3.2
|
|
$
|
71.78
|
|
$
|
3,409
|
Restricted Stock Awards
A summary of the non-vested restricted share awards
(“RSA”)
granted under the Company’s incentive plans for the fiscal year ended
September 3, 2016
is as follows:
|
|
|
|
|
|
2016
|
|
Shares
|
|
|
Weighted-Average Grant-Date Fair Value
|
Non-vested restricted share awards at the beginning of the year
|
391
|
|
$
|
75.39
|
Granted
|
1
|
|
|
62.31
|
Vested
|
(111)
|
|
|
67.34
|
Canceled/Forfeited
|
(16)
|
|
|
78.55
|
Non-vested restricted share awards at the end of the year
|
265
|
|
$
|
78.58
|
|
|
|
|
|
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 may be withheld to satisfy the minimum statutory withholding taxes. The remaining RSAs will be settled in shares of the Company’s Class A common stock after the vesting period.
The fair value of shares vested during the fiscal years ended
September 3, 2016
,
August 29, 2015
and
August 30, 2014
was
$7,518
,
$8,107
and
$14,214
, respectively.
The unrecognized compensation cost related to the non-vested RSAs at
September 3, 2016
is
$9,284
and will be recognized over a weighted-average period of
2.2
years.
Restricted Stock Units
A summary of the Company’s non-vested restricted stock unit
(“RSU”)
award activity for the fiscal year ended
September 3, 2016
is as follows:
|
|
|
|
|
|
2016
|
|
Shares
|
|
|
Weighted-Average Grant-Date Fair Value
|
Non-vested restricted stock unit awards at the beginning of the year
|
62
|
|
$
|
55.09
|
Granted
|
207
|
|
|
58.83
|
Vested
|
(63)
|
|
|
54.69
|
Canceled/Forfeited
|
(8)
|
|
|
58.81
|
Non-vested restricted stock unit awards at the end of the year
|
198
|
|
$
|
58.98
|
The fair value of each RSU is the closing stock price on the New York Stock Exchange of the Company’s Class A common stock on the date of grant. Upon vesting, a portion of the RSU award may be withheld to satisfy the minimum statutory withholding taxes. The remaining RSUs will be settled in shares of the Company’s Class A common stock after the vesting period. 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 additional RSUs are subject to the same vesting periods as the RSUs in the underlying award. The dividend equivalents are not included in the RSU table above.
The unrecognized compensation cost related to the RSUs at
September 3, 2016
was
$8,448
and is expected to be recognized over a period of
3.9
years.
Associate Stock Purchase Plan
The Company has established a qualified Associate Stock Purchase Plan, the terms of which allow for eligible associates (as defined in the Associate Stock Purchase Plan) to participate in the purchase of up to a maximum of
5
shares of the Company’s Class A common stock at a price equal to
90%
of the closing price at the end of each stock purchase period. On January 7, 2009, the shareholders of the Company approved an increase to the authorized but unissued shares of the Class A common stock of the Company reserved for sale under the Associate Stock Purchase Plan from
800
to
1,150
shares. On January 15, 2015, the shareholders of the Company approved an increase to the authorized but unissued shares of the Class A common stock of the Company reserved for sale under the Associate Stock Purchase Plan from
1,150
to
1,500
shares. As of
September 3, 2016
, approximately
239
shares remain reserved for issuance under this plan. Associates purchased approximately
64
and
63
shares of common stock during fiscal
2016
and
2015
at an average per share price of
$61.87
and
$66.96
, respectively.
Savings Plan
The Company maintains a defined contribution plan with both a profit sharing feature and a 401(k) feature which covers all associates who have completed at least one month of service with the Company. For fiscal years
2016
,
2015
, and
2014
, the Company contributed
$6,594
,
$6,665
and
$6,174
, respectively, to the plan. The Company contributions are discretionary.
1
1
. COMMITMENTS AND CONTINGENCIES
Leases
Certain of the operations of the Company a
re conducted on leased premises.
The leases (most of which require the Company to provide for th
e payment of real estate taxes, insurance and other operating costs) are for varying periods, the longest extending to the fiscal year
20
26
. Some of the leased premises contain multiple renewal provisions, exercisable at the Company’s option, as well as escalation clauses. In addition, the Company is obligated under certain equipment and automobile operating leases, which expire on varying dates through fiscal
20
20
.
At
September 3, 2016
, approximate minimum annual rentals on all such leases are as follows:
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Total Rental Payments
|
2017
|
|
$
|
12,081
|
2018
|
|
|
7,456
|
2019
|
|
|
5,897
|
2020
|
|
|
3,308
|
2021
|
|
|
1,860
|
Thereafter
|
|
|
1,429
|
Total
|
|
$
|
32,031
|
Total rental expense (exclusive of real estate taxes, insurance and other operating costs) for all operating leases for fiscal years
2016
,
2015
and
2014
was approximat
ely
$13,428
,
$14,504
and
$16,329
, respectively, including approximately
$1,044
,
$2,401
and
$2,297
, respectively, paid to a related party.
As a result of the purchase of our Atlanta CFC, which was previously leased with a related party, rental expense was partially offset by the release of a deferred rent liability during fiscal 2016.
See Note 2 “Summary of Significant Accounting P
olicies” for more information about
this transaction.
12
. 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.
13
. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following table sets forth unaudited financial data for each of the Company’s last eight fiscal quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 3, 2016
|
|
Fiscal Year Ended August 29, 2015
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
Consolidated Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
706,819
|
|
$
|
684,117
|
|
$
|
727,495
|
|
$
|
745,074
|
|
$
|
731,091
|
|
$
|
706,400
|
|
$
|
745,483
|
|
$
|
727,405
|
Gross profit
|
|
318,972
|
|
|
308,791
|
|
|
327,028
|
|
|
334,067
|
|
|
330,149
|
|
|
320,874
|
|
|
338,417
|
|
|
327,135
|
Income from operations
|
|
90,388
|
|
|
80,542
|
|
|
105,784
|
|
|
99,246
|
|
|
93,971
|
|
|
85,874
|
|
|
104,244
|
|
|
95,440
|
Net income
|
|
55,029
|
|
|
49,525
|
|
|
64,816
|
|
|
61,846
|
|
|
57,417
|
|
|
51,527
|
|
|
63,342
|
|
|
59,022
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
0.89
|
|
|
0.81
|
|
|
1.06
|
|
|
1.03
|
|
|
0.92
|
|
|
0.84
|
|
|
1.03
|
|
|
0.96
|
Diluted
|
|
0.89
|
|
|
0.80
|
|
|
1.05
|
|
|
1.02
|
|
|
0.91
|
|
|
0.83
|
|
|
1.03
|
|
|
0.96
|