-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CuEBRKBb/bYpmMdDQoviBe2lXz8hy4LE2aG4e5bujKYQp6hbesz18Arv+KYc2Txx WIPJ4W3MyS8L84Z5fXauvA== 0000950136-02-002065.txt : 20020712 0000950136-02-002065.hdr.sgml : 20020712 20020711194843 ACCESSION NUMBER: 0000950136-02-002065 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020601 FILED AS OF DATE: 20020712 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MSC INDUSTRIAL DIRECT CO INC CENTRAL INDEX KEY: 0001003078 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 113289165 STATE OF INCORPORATION: NY FISCAL YEAR END: 0902 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14130 FILM NUMBER: 02701434 BUSINESS ADDRESS: STREET 1: 151 SUNNYSIDE BLVD CITY: PLAINVIEW STATE: NY ZIP: 11803 BUSINESS PHONE: 5163497100 MAIL ADDRESS: STREET 1: 151 SUNNYSIDE BLVD CITY: PLAINVIEW STATE: NY ZIP: 11803 10-Q 1 file001.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 1, 2002 Commission File No.: 1-14130 MSC INDUSTRIAL DIRECT CO., INC. (Exact name of registrant as specified in its charter) NEW YORK 11-3289165 (State of incorporation) (I.R.S. Employer Identification No.) 75 MAXESS ROAD MELVILLE, NY 11747 (Address of principal executive offices, including zip code) (516) 812-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of July 9, 2002 36,637,535 shares of Class A Common Stock and 32,137,294 shares of Class B Common Stock of the registrant were outstanding. SAFE HARBOR STATEMENT This Quarterly Report on Form 10-Q (the "Report") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing such forward-looking statements may be found in Items 2 and 3 hereof, as well as within this Report generally. In addition, when used in this Report, the words "believes," "anticipates," "expects," "estimates," "plans," "intends," and similar expressions are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. Factors that may cause these differences include, but are not limited to: o changing market conditions, o competitive and regulatory matters, o general economic conditions in the markets in which the Company operates, o risk of cancellation or rescheduling of orders, o the risk of war, terrorism and similar hostilities, o availability of suitable acquisition opportunities, and o the other matters discussed in the Business Description contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 1, 2001. Consequently, such forward-looking statements should be regarded solely as the Company's current plans, estimates and beliefs. The Company does not undertake any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements. MSC INDUSTRIAL DIRECT CO., INC. INDEX
PART I. FINANCIAL INFORMATION PAGE ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Consolidated Balance Sheets June 1, 2002 and September 1, 2001 3 Consolidated Statements of Income Thirteen and thirty-nine weeks ended June 1, 2002 and May 26, 2001 4 Consolidated Statement of Shareholders' Equity Thirty-nine weeks ended June 1, 2002 5 Consolidated Statements of Cash Flows Thirty-nine weeks ended June 1, 2002 and May 26, 2001 6 Notes to Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16 PART II. OTHER INFORMATION ITEM 5. OTHER EVENTS 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18 SIGNATURES 19
PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MSC INDUSTRIAL DIRECT CO., INC. Consolidated Balance Sheets (In thousands, except share data)
June 1, September 1, 2002 2001 ---- ---- (Unaudited) (Audited) ASSETS ------ Current Assets: Cash and cash equivalents $ 85,844 $ 12,466 Accounts receivable, net of allowance for doubtful accounts of $4,120 and $4,927, respectively 95,221 95,263 Inventories 211,576 233,131 Prepaid expenses and other current assets 7,848 5,728 Deferred income taxes 4,805 5,264 --------------- ------------- Total current assets 405,294 351,852 --------------- ------------- Property, Plant and Equipment, net 114,825 121,149 --------------- ------------- Other Assets: Goodwill 63,354 63,354 Other 9,395 17,553 --------------- ------------- 72,749 80,907 --------------- ------------- Total Assets $ 592,868 $ 553,908 =============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current Liabilities: Accounts payable $ 20,703 $ 25,776 Accrued liabilities 38,456 37,755 Current portion of long-term notes payable 217 214 --------------- ------------- Total current liabilities 59,376 63,745 Long-term notes payable 1,361 1,517 Deferred income tax liability 16,157 16,069 --------------- ------------- Total liabilities 76,894 81,331 --------------- ------------- Shareholders' Equity: Preferred stock; $0.001 par value; 5,000,000 shares authorized; none outstanding - - Class A common stock (one vote per share); $0.001 par value; 100,000,000 shares authorized; 38,546,467 and 36,133,385 shares issued, and 37,607,467 and 35,139,385 shares outstanding, respectively 38 36 Class B common stock (ten votes per share); $0.001 par value; 50,000,000 shares authorized; 32,137,294 and 33,478,778 shares issued and outstanding, respectively 32 34 Additional paid-in capital 252,833 238,314 Retained earnings 281,501 253,704 Class A treasury stock, at cost, 939,000 and 994,000 shares, respectively (18,430) (19,511) --------------- ------------- Total shareholders' equity 515,974 472,577 --------------- ------------- Total Liabilities and Shareholders' Equity $ 592,868 $ 553,908 =============== =============
The accompanying notes are an integral part of these consolidated balance sheets. Page 3 MSC INDUSTRIAL DIRECT CO., INC. Consolidated Statements of Income (In thousands, except per share data) (Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended ----------------------------- ------------------------------ June 1, May 26, June 1, May 26, 2002 2001 2002 2001 Net sales $ 208,592 $ 216,335 $ 592,235 $ 661,308 Cost of goods sold 117,731 122,786 333,565 378,699 ------------- ------------- ------------- -------------- Gross profit 90,861 93,549 258,670 282,609 Operating expenses 72,589 72,158 213,070 212,508 ------------- ------------- ------------- -------------- Income from operations 18,272 21,391 45,600 70,101 ------------- ------------- ------------- -------------- Other income (expense): Interest income (expense), net 320 (778) 686 (3,127) Provision for impairment in carrying value of investments (Note 4) - (10,284) - (10,284) Other income (expense), net (43) 36 54 99 ------------- ------------- ------------- -------------- Total other income (expense) 277 (11,026) 740 (13,312) ------------- ------------- ------------- -------------- Income before provision for income taxes 18,549 10,365 46,340 56,789 Provision for income taxes 7,326 7,883 18,303 26,453 ------------- ------------- ------------- -------------- Net income $ 11,223 $ 2,482 $ 28,037 $ 30,336 ============= ============= ============== ============== Per share information (Note 1): Net income per common share: Basic $ 0.16 $ 0.04 $ 0.41 $ 0.45 ============= ============= ============== ============== Diluted $ 0.16 $ 0.04 $ 0.39 $ 0.44 ============= ============= ============== ============== Weighted average common shares outstanding used in computing per share amounts (Note 1): Basic 69,476 68,264 69,037 68,099 ============= ============= ============== ============== Diluted 72,006 69,615 71,125 69,288 ============= ============= ============== ==============
The accompanying notes are an integral part of these consolidated statements. Page 4 MSC INDUSTRIAL DIRECT CO., INC. Consolidated Statement of Shareholders' Equity Thirty-nine weeks ended June 1, 2002 (In thousands) (Unaudited)
Class A Class B Additional Common Stock Common Stock Paid-In ------------------ ----------------- Shares Amount Shares Amount Capital ------ ------ ------- ------ ---------- Balance at September 1, 2001 36,133 $ 36 33,479 $ 34 $ 238,314 Exchange of Class B common stock for Class 1,342 2 (1,342) (2) - A common stock Common stock issued under associate stock - - - - - purchase plan Exercise of common stock options 1,071 - - - 13,453 Stock option income tax benefit - - - - 1,066 Net income - - - - - ------ ------ ------- ------ ---------- Balance at June 1, 2002 38,546 $ 38 32,137 $ 32 $ 252,833 ====== ====== ======= ====== ========== Class A Retained Treasury Stock ---------------------- Amount at Earnings Shares Cost Total --------- ------ ---------- --------- Balance at September 1, 2001 $ 253,704 994 $ (19,511) $ 472,577 Exchange of Class B common stock for Class - - - - A common stock Common stock issued under associate stock (240) (55) 1,081 841 purchase plan Exercise of common stock options - - - 13,453 Stock option income tax benefit - - - 1,066 Net income 28,037 - - 28,037 --------- ------ ---------- --------- Balance at June 1, 2002 $ 281,501 939 $ (18,430) $ 515,974 ========= ====== ========== =========
The accompanying notes are an integral part of these consolidated statements. Page 5 MSC INDUSTRIAL DIRECT CO., INC. Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Thirty-Nine Weeks Ended --------------------------------------- June 1, May 26, 2002 2001 -------------- -------------- Cash Flows from Operating Activities: Net income $ 28,037 $ 30,336 -------------- -------------- Adjustments to reconcile net income to net cash provided by operating activities: Provision for impairment in carrying value of investments - 10,284 Depreciation and amortization 11,505 12,626 Amortization of deferred stock compensation - 209 Provision for doubtful accounts 1,980 1,526 Deferred income taxes 547 1,723 Stock option income tax benefit 1,066 597 Changes in operating assets and liabilities: Accounts receivable (1,938) 1,856 Inventories 21,555 16,668 Prepaid expenses and other current assets (2,120) 438 Other assets 8,158 5,460 Accounts payable and accrued liabilities (4,372) (18,203) -------------- -------------- Total adjustments 36,381 33,184 -------------- -------------- Net cash provided by operating activities 64,418 63,520 -------------- -------------- Cash Flows from Investing Activities: Expenditures for property, plant and equipment (5,181) (16,267) Cash paid for investment in affiliates - (1,852) -------------- -------------- Net cash used in investing activities (5,181) (18,119) -------------- -------------- Cash Flows from Financing Activities: Proceeds from sale of common stock in connection with associate stock purchase plan 841 827 Proceeds from exercise of common stock options 13,453 3,506 Net repayments of notes payable (153) (23,139) -------------- -------------- Net cash provided by (used in) financing activities 14,141 (18,806) -------------- -------------- Net increase in cash and cash equivalents 73,378 26,595 Cash and cash equivalents - beginning of period 12,466 3,209 -------------- -------------- Cash and cash equivalents - end of period $ 85,844 $ 29,804 ============== ============== Supplemental Disclosure of Cash Flow Information: Cash paid for interest 34 2,564 Cash paid for income taxes 11,329 19,727
The accompanying notes are an integral part of these consolidated statements. Page 6 Notes to Consolidated Financial Statements (In thousands, except per share data) (Unaudited) June 1, 2002 NOTE 1. BASIS OF PRESENTATION MSC Industrial Direct Co., Inc. ("MSC") was incorporated in the State of New York on October 24, 1995. The accompanying consolidated financial statements include MSC and all of its subsidiaries, including its principal operating subsidiary, Sid Tool Co., Inc. and is hereinafter referred to collectively as the "Company." All intercompany balances and transactions have been eliminated in consolidation. The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. Operating results for the thirty-nine weeks ended June 1, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 2002. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 1, 2001. The Company's fiscal year ends on a Saturday close to August 31 of each year. Certain prior period balances have been reclassified to conform with current period's presentation. The Company follows the provisions of the Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No. 128 requires the Company to present basic and diluted earnings per share ("EPS") on the face of the income statement. Basic earnings per common share were computed based on the weighted average number of common shares issued and outstanding during the relevant periods. Diluted earnings per common share were computed based on the weighted average number of common shares issued and outstanding plus additional shares assumed to be outstanding to reflect the diluted effect of common stock equivalents using the treasury stock method. A reconciliation between the numerator and denominator of the basic and diluted EPS calculation is as follows:
Thirteen Weeks Ended Thirty-Nine Weeks Ended -------------------------- ------------------------ June 1, May 26, June 1, May 26, 2002 2001 2002 2001 ---- ---- ---- ---- Net income for EPS Computation $11,223 $2,482 $28,037 $30,336 ======= ======= ======= ======= Basic EPS: Weighted average common shares 69,476 68,264 69,037 68,099 ======= ======= ======= ======= Page 7 Basic EPS $0.16 $0.04 $0.41 $0.45 ======= ======= ======= ======= Diluted EPS: Weighted average Common shares 69,476 68,264 69,037 68,099 Shares issuable from assumed conversion of common stock equivalents 2,530 1,351 2,088 1,189 ------- ------- ------- ------- Weighted average common and common equivalent shares 72,006 69,615 71,125 69,288 ======= ======= ======= ======= Diluted EPS $0.16 $0.04 $0.39 $0.44 ======= ======= ======= =======
NOTE 2. COMPREHENSIVE INCOME The Company complies with the provisions of SFAS No. 130 "Reporting Comprehensive Income," which establishes standards for the reporting of comprehensive income and its components. For the thirteen and thirty-nine weeks ended June 1, 2002 and May 26, 2001, the Company's operations did not give rise to items includable in comprehensive income which were not already included in net income. Accordingly, the Company's comprehensive income is the same as its net income for all periods presented. NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS In July 2000, the Emerging Issue Task Force ("EITF") reached a consensus with respect to EITF issue 00-10, "Accounting for Shipping and Handling Fees and Costs." The purpose of this issue discussion was to clarify the classification of shipping and handling fees and costs. The consensus reached was that all shipping and handling billed to customers is revenue and the cost associated with these revenues should be classified as either cost of sales or, if not cost of sales, as selling, general, and administrative costs, with footnote disclosure as to the classification and amount of these costs. This standard requires a reclassification of prior periods as discussed below. Beginning in fiscal 2001, the Company recorded the amounts billed to customers for shipping and handling in net revenues and classified the costs associated with these revenues in operating expenses. Prior to this standard, the Company had recorded net freight as a component of total operating expenses. The Company has reclassified financial information for all periods presented to give effect to the adoption of this new standard. Shipping and handling costs included in operating expenses were $11.0 million and $11.5 million for the 13 week period ended June 1, 2002 and May 26, 2001, respectively, and $31.0 million and $33.9 million for the 39 week period ended June 1, 2002 and May 26, 2001, respectively. Page 8 In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and other Intangible Assets". SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently, if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The Company has adopted this standard effective September 2, 2001 and has evaluated its intangible asset to identify goodwill separately from other identifiable intangibles. The intangible asset is classified as goodwill with an indefinite life; no other separately identifiable intangibles exist. Intangible assets that will continue to be classified as goodwill or as other intangibles with indefinite lives will no longer be amortized. This resulted in the exclusion of approximately $0.4 million and $1.3 million in amortization expense for the thirteen and thirty-nine week periods ended June 1, 2002, respectively. In accordance with the SFAS No. 142, intangible assets, including purchased goodwill, will be evaluated periodically for impairment. Based upon the results of our transitional impairment testing, there has been no impact on the consolidated financial results related to our intangible assets or purchased goodwill. Page 9 The following table presents pro forma net income and earnings per share data restated to include the retroactive impact of the adoption of SFAS No. 142:
Thirteen Weeks Ended Thirty - Nine Weeks Ended ------------------------------------------ ------------------------------------- June 1, May 26, June 1, May 26, 2002 2001 2002 2001 -------------- -------------- -------------- ------------ Reported net income for EPS computation $11,223 $2,482 $28,037 $30,336 Add back: Goodwill amortization, net of tax - 264 - 792 ------------------------------------------ ------------------------------------- Pro forma net income $11,223 $2,746 $28,037 $31,128 ========================================== ===================================== Basic EPS: Basic EPS before effect of $ 0.16 $ 0.04 $ 0.41 $ 0.45 SFAS No.142 SFAS No. 142 effect, net of tax - - - 0.01 ------------------------------------------ ------------------------------------- Basic EPS after effect of SFAS No. 142 $ 0.16 $ 0.04 $ 0.41 $ 0.46 ========================================== ===================================== Diluted EPS: Diluted EPS before effect $ 0.16 $ 0.04 $ 0.39 $ 0.44 of SFAS No.142 SFAS No. 142 effect, net of tax - - - 0.01 ------------------------------------------ ------------------------------------- Diluted EPS after effect of SFAS No. 142 $ 0.16 $ 0.04 $ 0.39 $ 0.45 ========================================== ===================================== Weighted average common shares: Basic 69,476 68,264 69,037 68,099 ========================================== ===================================== Diluted 72,006 69,615 71,125 69,288 ========================================== =====================================
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of this statement are required to be adopted no later than fiscal years beginning after December 15, 2001. The Company expects to adopt this statement as of September 1, 2002 for the fiscal year ended August 30, 2003, and it does not expect that the adoption will have a material impact on the Company's consolidated financial position or results of operations. NOTE 4. OTHER EVENTS During the third quarter of fiscal 2001, the Company determined that its ability to ultimately recover the value of its investments in four privately held Internet startup companies was Page 10 significantly impaired. The Company's determination was based upon certain economic indicators and specific events and circumstances, including these entities' difficulty in raising additional capital, and the inability of these entities to achieve business plan objectives and planned financial results. Pursuant to the Company's evaluation of the respective carrying amounts of each investment, either the entire cost of the investment or a significant portion thereof was charged against earnings during the third quarter of fiscal 2001. The aggregate amount of the non-cash charge recorded in the statement of income was $10.3 million ($9.9 million, net of tax benefits, or $.14 per diluted share). The provision for income taxes in the third quarter of fiscal year 2001 and for the thirty-nine weeks ended May 26, 2001 was substantially affected by the non-deductibility of a significant portion of the Company's write down of its Internet investments. Accordingly, the Company's effective tax rate in 2001 was significantly higher than it is in the comparable fiscal 2002 periods. NOTE 5. SHAREHOLDERS' EQUITY 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 conversion rights or 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. NOTE 6. SUBSEQUENT EVENT Since June 2, 2002 and through the date of this filing, the Company has repurchased 1,000 shares of the Company's Class A common stock at a total cost of approximately $19.0 million, pursuant to its treasury stock purchase plan, as approved by the Company's Board of Directors. Page 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is intended to update the information contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 1, 2001 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 Form 10-K. This Quarterly Report on Form 10-Q contains or incorporates certain forward- looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. Such forward-looking statements involve known and unknown risks and uncertainties and include, but are not limited to, statements regarding future events and our plans, goals and objectives. Such statements are generally accompanied by words such as "believe," "anticipate," "think," "intend," "estimate," "expect," or similar terms. Our actual results may differ materially from such statements. Factors that could cause or contribute to such differences include, without limitation, changing market conditions, competitive and regulatory matters, general economic conditions in the markets in which the Company operates, risk of cancellation or rescheduling of orders, the risk of war, terrorism and similar hostilities, and the availability of suitable acquisition opportunities. Although the Company believes that the assumptions underlying its forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, the Company cannot make any assurances that the results contemplated in such forward-looking statements will be realized. The inclusion of such forward-looking information should not be regarded as a representation by the Company or any other person that the future events, plans or expectations contemplated by the Company will be achieved. Furthermore, past performance is not necessarily an indicator of future performance. OVERVIEW MSC Industrial Direct Co., Inc. ("MSC") was formed in October 1995 and has conducted business since 1941. MSC and its subsidiaries, including Sid Tool Co., Inc. (the "Operating Subsidiary"), are hereinafter referred to collectively as the "Company." MSC is one of the largest direct marketers of a broad range of industrial products to small and mid-sized industrial customers throughout the United States. We distribute a full line of industrial products intended to satisfy our customers' maintenance, repair and operations ("MRO") supplies requirements. We offer in excess of 500,000 stock-keeping units ("SKUs") through our master catalogs, weekly, monthly and quarterly specialty and promotional catalogs and brochures and service our customers from approximately 90 branch offices and four distribution centers. Most 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. Page 12 RESULTS OF OPERATIONS - THIRTEEN WEEKS ENDED JUNE 1, 2002 AND MAY 26, 2001 NET SALES decreased by $7.7 million, or 3.6%, to $208.6 million in the third quarter of fiscal 2002 from $216.3 million in the third quarter of fiscal 2001. This decrease was primarily the result of one less business day in the third quarter of fiscal 2002 and a decrease in sales to existing customers, most of which are in the manufacturing sector, which continues to be negatively affected by weakness and uncertainty in the industrial sector. Average daily sales declined slightly for the third quarter of fiscal 2002 as compared to the third quarter of fiscal 2001. GROSS PROFIT decreased by $2.6 million, or 2.8%, to $90.9 million in the third quarter of fiscal 2002 from $93.5 million in the third quarter of fiscal 2001. As a percentage of net sales, gross profit increased from 43.2% to 43.6%. The increase in gross profit as a percentage of net sales was the result of a favorable change in product mix, more favorable discounts obtained from vendors, and the success of the Company's efforts to increase gross profit margins with new and existing customers. OPERATING EXPENSES increased by $0.4 million, or 0.6%, to $72.6 million in the third quarter of fiscal 2002 from $72.2 million in the third quarter of fiscal 2001. The slight increase in operating expenses in dollars was a result of an increase in payroll related costs as compared to the third quarter of fiscal 2001. These expenses were offset by cost control initiatives and a decline in volume related expenses. As a percentage of net sales, operating expenses increased from 33.4% to 34.8%, primarily the result of the distribution of fixed expenses over a smaller revenue base. INCOME FROM OPERATIONS decreased by $3.1 million, or 14.5%, to $18.3 million in the third quarter of fiscal 2002 from $21.4 million in the third quarter of fiscal 2001. The decrease was primarily attributable to the decrease in net sales described above, although results were favorably impacted by the increased gross profit margins described above. INTEREST INCOME (EXPENSE), NET. Net interest income was $0.3 million for the third quarter of fiscal 2002 compared to net interest expense of $0.8 million in the third quarter of fiscal 2001. The change from net interest expense to net interest income reflects the Company's repayment of almost all of its outstanding debt during fiscal 2001. As a result, the Company now has net interest income in the third quarter of fiscal 2002, resulting from invested cash. PROVISION FOR IMPAIRMENT IN CARRYING VALUE OF INVESTMENTS in the third quarter of fiscal 2001 of $10.3 million relates to the write-down of the Company's Internet investments. PROVISION FOR INCOME TAXES: The effective tax rate was approximately 39.5% and 76.1% for the third quarter of fiscal 2002 and fiscal 2001, respectively. The effective tax rate in fiscal 2001 is a direct result of limited tax benefits from the Internet investment write-downs. Excluding the effect of this write-down, the effective tax rate would have been 40.0% for fiscal 2001. NET INCOME increased by $8.7 million to $11.2 million in the third quarter of fiscal 2002 from $2.5 million in the third quarter of fiscal 2001. This increase is a direct result of the write-down of the Company's Internet investments in fiscal 2001. Without taking into account the investment write-down, net income would have decreased by $1.2 million or 9.7%, to $11.2 million from $12.4 million. This decrease was primarily the result of decrease in income from operations explained above. Page 13 RESULTS OF OPERATIONS - THIRTY-NINE WEEKS ENDED JUNE 1, 2002 AND MAY 26, 2001 NET SALES decreased by $69.1 million, or 10.4%, to $592.2 million during the first nine months of fiscal 2002 from $661.3 million in the first nine months of fiscal 2001. This decrease was primarily attributable to a decrease in sales to existing customers, most of which are in the manufacturing sector, which have been affected by the recession and continued uncertainty in the industrial sector. The Company believes that the events of September 11, 2001 also had a detrimental effect on the Company's net sales in the first nine months of fiscal 2002; however, that effect cannot be reliably estimated. For the nine months of fiscal 2002 average daily sales declined as compared to the same period last year. GROSS PROFIT decreased by $23.9 million, or 8.5%, to $258.7 million during the first nine months of fiscal 2002 from $282.6 million in the first nine months of fiscal 2001, primarily due to lower net sales. As a percentage of net sales, gross profit increased from 42.7% to 43.7%. The increase in gross profit as a percentage of net sales was the result of modest price increases, a favorable change in product mix, more favorable discounts obtained from vendors, and the success of the Company's efforts to increase gross profit margins with new and existing customers. OPERATING EXPENSES increased by $0.6 million, or 0.3%, to $213.1 million during the first nine months of fiscal 2002 from $212.5 million in the first nine months of fiscal 2001. The slight increase in operating expenses in dollars was a result of the costs associated with the strategic increase (during the latter part of fiscal 2001) in the Company's sales force to take advantage of opportunities to gain market share, as compared to the first nine months of fiscal 2001 and an increase in other payroll related costs as compared to the first nine months of fiscal 2001. These expenses were offset by cost control initiatives and a decline in volume related expenses. As a percentage of net sales, operating expenses increased from 32.1% to 36.0%, primarily as a result of the distribution of fixed expenses over a smaller revenue base. INCOME FROM OPERATIONS decreased by $24.5 million to $45.6 million during the first nine months of fiscal 2002 from $70.1 million in the first nine months of fiscal 2001. The decrease was primarily attributable to the decrease in net sales described above, although results were favorably impacted by the increased gross profit margins described above. INTEREST INCOME (EXPENSE), NET. Net interest income was $0.7 million in the first nine months of fiscal 2002 compared to net interest expense of $3.1 million in the first nine months of fiscal 2001. The change from net interest expense to net interest income reflects the Company's repayment of almost all of its outstanding debt during fiscal 2001. As a result, the Company now has net interest income in the first nine months of fiscal 2002, resulting from invested cash. PROVISION FOR IMPAIRMENT IN CARRYING VALUE OF INVESTMENTS in the third quarter of fiscal 2001 of $10.3 million relates to the write-down of the Company's Internet investments in fiscal 2001. PROVISION FOR INCOME TAXES: The effective tax rate was approximately 39.5% and 46.6% for the first nine months of fiscal 2002 and fiscal 2001, respectively. The decrease in the effective tax rate is a direct result of limited tax benefits from the Internet investment write-downs. Excluding the effect of this write-down, the effective tax rate would have been approximately 40.0% for the first nine months of fiscal 2001. NET INCOME: Net income decreased by $2.3 million, or 7.6%, to $28.0 million in the first nine months of fiscal 2002 from $30.3 million in the first nine months of fiscal 2001. Without taking into account the investment write-down, net income would have decreased by $12.3 million or 30.5%, to $28.0 million from $40.3 million. This decrease was primarily the result of decrease in income from operations explained above, offset in part by the increase in net interest income. Page 14 CRITICAL ACCOUNTING POLICIES A discussion of the critical accounting policies related to accounting estimates is contained in the Company's fiscal 2001 Annual Report on Form 10-K. LIQUIDITY AND CAPITAL RESOURCES Our primary capital needs have been to fund the working capital requirements necessitated by our sales growth, adding new products, and facilities expansions. Our primary sources of financing have been cash from operations, supplemented by bank borrowings under our credit facility. We anticipate cash flows from operations, available cash reserves and available lines of credit will be adequate to support our operations for the next 12 months. Under the terms of the credit facility, the maximum permitted borrowings are $110.0 million under an unsecured revolving credit agreement. Interest on amounts borrowed may be paid at a rate per annum equal to the bank's base rate (4.75% at June 1, 2002) or, alternatively, at the bankers' acceptance rate or LIBOR rate plus margins, which vary from per annum based on the ratio of total liabilities to effective net worth, or bid note rate. This credit facility contains certain covenants limiting mergers, use of proceeds, indebtedness, liens, investments, sales of assets, acquisitions, and payment of dividends. This credit facility also contains certain standard financial covenants. As of June 1, 2002 the Company had no outstanding borrowings under this agreement and was in compliance with all financial covenants. Net cash provided by operating activities for the 39 week periods ended June 1, 2002 and May 26, 2001 was $64.4 million and $63.5 million, respectively. The increase of approximately $0.9 million is primarily attributable to improved net working capital requirements, offset by lower net income excluding the effects of non-cash Internet investment write-downs in the third quarter of fiscal 2001. Net cash used in investing activities for the 39 week periods ended June 1, 2002 and May 26, 2001 was $5.1 million and $18.1 million, respectively. The net usage of cash in the first nine months of fiscal 2002 was primarily attributable to expenditures for property, plant and equipment. The net usage of cash in investing activities in the first nine months of fiscal 2001 was primarily attributable to expenditures for property, plant and equipment and cash paid for investments in Internet technology companies. Net cash provided by financing activities for the 39 week period ended June 1, 2002 was $14.1 million and net cash used in financing activities for the 39 week period ended May 26, 2001 was $18.8 million. Net cash provided by financing activities for the 39 weeks of fiscal 2002 was primarily attributable to proceeds from the exercise of common stock options. The net cash used in financing activities for the 39 weeks of fiscal 2001 was primarily attributable to repayments of notes payable, offset by proceeds received from the exercise of common stock options. The Company believes that cash flow from operations and the revolving credit agreement will be sufficient to fund future growth initiatives and meet planned capital expenditure needs in the near future. During fiscal 2001, the Board of Directors of the Company approved a stock repurchase plan (the "Plan") that would allow for the repurchase of up to 5 million shares of the Company's Class A common stock. The Plan allows the Company to repurchase shares at any time and in any increments it deems appropriate. Since the end of the third quarter of fiscal 2002 and through the date of this filing, the Company has repurchased 1 million shares in the open market at a total cost of approximately $19.0 million. The Company currently anticipates that it may make further repurchases Page 15 based upon market conditions. The Company has adequate cash reserves to fund such future repurchases. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's principal financial instrument is long-term notes payable under a credit agreement. The Company is affected by market risk exposure primarily through the effect of changes in interest rates on amounts payable by the Company under this credit agreement. Changes in these factors cause fluctuations in the Company's consolidated net income and cash flows. The agreement allows the company maximum borrowings of $110.0 million under a revolving credit agreement. At June 1, 2002, the Company had no outstanding borrowings under this agreement and was in compliance with all financial covenants. The agreement bears interest at the bank's base rate (4.75% at June 1, 2002), or, alternatively, at the bankers acceptance rate or LIBOR rate plus margins, which vary from 0.65% to 1.25% per annum based on the ratio of total liabilities to effective net worth, or bid note rate. The Company does not make material use of derivative financial instruments to hedge against changes in interest rates or for any other purpose. Page 16 PART II. OTHER INFORMATION ITEM 5. OTHER EVENTS CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT As previously reported in the Company's Current Report on Form 8-K, filed May 16, 2002, which is incorporated herein by reference, Arthur Andersen LLP have been dismissed as the Company's independent accountants and Ernst & Young LLP have been engaged as the Company's independent accountants. Page 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits: None. Reports on Form 8-K: 1) Current Report on Form 8-K, filed on May 16, 2002; 2) Current Report on Form 8-K/A, filed on May 22, 2002; and 3) Current Report on Form 8-K/A, filed on May 28, 2002. Page 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MSC INDUSTRIAL DIRECT CO., INC. (Registrant) Dated: July 11, 2002 By: /s/ Mitchell Jacobson -------------------------- ---------------------------------------- President and Chief Executive Officer Dated: July 11, 2002 By: /s/ Charles Boehlke -------------------------- ---------------------------------------- Senior Vice President and Chief Financial Officer Page 19 -----END PRIVACY-ENHANCED MESSAGE-----