UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM
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(Mark One) |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | |
OR | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For transition period from to
Commission File No.:
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(Exact name of registrant as specified in its charter)
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(Registrant’s telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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 No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer o | Non-accelerated filer o
| Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No
As of March 16, 2020,
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 of Part I and Item 1 of Part II of this Report, as well as within this Report generally. The words “believes,” “anticipates,” “thinks,” “expects,” “estimates,” “plans,” “intends,” and similar expressions are intended to identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Report with the Securities and Exchange Commission (the “SEC”). These forward-looking statements are subject to risks and uncertainties, including, without limitation, those discussed in this section and Items 2 and 3 of Part I, as well as in Part II, Item 1A, “Risk Factors” of this Report, and in Part I, Item 1A, “Risk Factors” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019. In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements. These risks and uncertainties include, but are not limited to the following, many of which are, and will be, amplified by the COVID-19 pandemic:
the impact of the COVID-19 pandemic on our sales, operations and supply chain;
general economic conditions in the markets in which the Company operates;
changing customer and product mixes;
competition, including the adoption by competitors of aggressive pricing strategies and sales methods;
industry consolidation and other changes in the industrial distribution sector;
retention of key personnel;
volatility in commodity and energy prices;
the outcome of government or regulatory proceedings or future litigation;
credit risk of our customers;
risk of customer cancellation or rescheduling of orders;
work stoppages or other business interruptions (including those due to extreme weather conditions) at transportation centers, shipping ports, our headquarters or our customer fulfillment centers;
disruptions or breaches of our information systems, or violations of data privacy laws;
retention of qualified sales and customer service personnel and metalworking specialists;
risk of loss of key suppliers, key brands or supply chain disruptions;
changes to trade policies, including the impact from significant restrictions or tariffs;
risks related to opening or expanding our customer fulfillment centers;
litigation risk due to the nature of our business;
risks associated with the integration of acquired businesses or other strategic transactions;
financial restrictions on outstanding borrowings;
interest rate uncertainty due to LIBOR reform;
failure to comply with applicable environmental, health and safety laws and regulations;
goodwill and intangible assets recorded resulting from our acquisitions could be impaired;
our common stock price may be volatile; and
our principal shareholders exercise significant control over us.
MSC INDUSTRIAL DIRECT CO., INC.
INDEX
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Item 1. |
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| Condensed Consolidated Balance Sheets as of February 29, 2020 and August 31, 2019 | 4 |
| 5 | |
| 6 | |
| 7 | |
| 8 | |
| 9 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 |
Item 3. | 31 | |
Item 4. | 31 | |
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Item 1. | 31 | |
Item 1A. | 32 | |
Item 2. | 32 | |
Item 3. | 33 | |
Item 4. | 33 | |
Item 5. | 33 | |
Item 6. | 34 | |
35 |
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
MSC INDUSTRIAL DIRECT CO., INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
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| February 29, |
| August 31, | ||
| 2020 |
| 2019 | ||
| (Unaudited) |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents | $ | |
| $ | |
Accounts receivable, net of allowance for doubtful accounts of $ |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Goodwill |
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Identifiable intangibles, net |
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Operating lease assets |
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Other assets |
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Total assets | $ | |
| $ | |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current Liabilities: |
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Current portion of long-term debt including obligations under finance leases | $ | |
| $ | |
Current portion of operating lease liabilities |
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Accounts payable |
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Accrued expenses and other current liabilities |
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Total current liabilities |
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Long-term debt including obligations under finance leases |
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Noncurrent operating lease liabilities |
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Deferred income taxes and tax uncertainties |
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Total liabilities |
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Commitments and Contingencies |
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Shareholders’ Equity: |
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MSC Industrial Shareholders’ Equity: |
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Preferred stock; $ |
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Class A common stock ( |
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Class B common stock ( |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Class A treasury stock, at cost, |
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Total MSC Industrial shareholders’ equity |
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Noncontrolling interest |
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Total shareholders' equity |
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Total liabilities and shareholders’ equity | $ | |
| $ | |
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See accompanying Notes to Condensed Consolidated Financial Statements. | |||||
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MSC INDUSTRIAL DIRECT CO., INC.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
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| Thirteen Weeks Ended |
| Twenty-Six Weeks Ended | ||||||||
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| February 29, |
| March 2, |
| February 29, |
| March 2, | ||||
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| 2019 |
| 2020 |
| 2019 | ||||
Net sales |
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| $ | |
| $ |
| $ | | |
Cost of goods sold |
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Gross profit |
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Operating expenses |
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Income from operations |
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Other income (expense): |
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Interest expense |
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Interest income |
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Other (expense) income, net |
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Total other expense |
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Income before provision for income taxes |
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Provision for income taxes |
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Net income |
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Less: Net income attributable to noncontrolling interest |
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Net income attributable to MSC Industrial |
| $ | |
| $ | |
| $ | |
| $ | |
Per share data attributable to MSC Industrial: |
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Net income per common share: |
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Basic |
| $ | |
| $ | |
| $ | |
| $ | |
Diluted |
| $ | |
| $ | |
| $ | |
| $ | |
Weighted average shares used in computing net income per common share: |
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Basic |
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Diluted |
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See accompanying Notes to Condensed Consolidated Financial Statements. |
MSC INDUSTRIAL DIRECT CO., INC.
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
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| Thirteen Weeks Ended |
| Twenty-Six Weeks Ended | ||||||||
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| February 29, |
| March 2, |
| February 29, |
| March 2, | ||||
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| 2019 |
| 2020 |
| 2019 | ||||
Net income, as reported |
| $ | |
| $ | |
| $ | |
| $ | |
Other comprehensive income, net of tax: |
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Foreign currency translation adjustments |
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Comprehensive income (1) |
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Comprehensive income attributable to noncontrolling interest: |
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Net income |
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Foreign currency translation adjustments |
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Comprehensive income attributable to MSC Industrial |
| $ | |
| $ | |
| $ | |
| $ | |
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(1) | ||||||||||||
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See accompanying Notes to Condensed Consolidated Financial Statements. |
MSC INDUSTRIAL DIRECT CO., INC.
Condensed Consolidated Statements of Shareholders’ Equity
(In thousands)
(Unaudited)
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| Thirteen Weeks Ended |
| Twenty-Six Weeks Ended |
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| February 29, |
| March 2, |
| February 29, |
| March 2, |
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| 2019 |
| 2020 |
| 2019 |
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Class A Common Stock |
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Beginning Balance |
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| $ | |
| $ | |
| $ | |
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Repurchase and retirement of Class A common stock |
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Associate Incentive Plans |
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| — |
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Ending Balance |
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Class B Common Stock |
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Beginning Balance |
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Ending Balance |
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Additional Paid-in-Capital |
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Beginning Balance |
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Associate Incentive Plans |
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Repurchase and retirement of Class A common stock |
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Ending Balance |
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Retained Earnings |
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Beginning Balance |
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Net Income |
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Repurchase and retirement of Class A common stock |
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Cash dividends declared on Class A common stock |
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Cash dividends declared on Class B common stock |
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Dividend equivalents declared, net of cancellations |
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Ending Balance |
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Accumulated Other Comprehensive Loss |
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Beginning Balance |
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Foreign Currency Translation Adjustment |
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Ending Balance |
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Treasury Stock |
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Beginning Balance |
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Associate Incentive Plans |
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Repurchases of Class A common stock |
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Ending Balance |
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Total Shareholders' Equity Attributable to MSC Industrial |
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Noncontrolling Interest |
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Beginning Balance |
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Issuance of Noncontrolling Interest in MSC Mexico |
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Capital Contributions |
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Foreign Currency Translation Adjustment |
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Net Income |
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Ending Balance |
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Total Shareholders' Equity |
| $ | |
| $ | |
| $ | |
| $ | |
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Dividends declared per Class A Common share |
| $ | |
| $ | |
| $ | |
| $ | |
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Dividends declared per Class B Common share |
| $ | |
| $ | |
| $ | |
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See accompanying Notes to Condensed Consolidated Financial Statements. |
MSC INDUSTRIAL DIRECT CO., INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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| Twenty-Six Weeks Ended | ||||
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| February 29, |
| March 2, | ||
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| 2020 |
| 2019 | ||
Cash Flows from Operating Activities: |
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Net income |
| $ | |
| $ | |
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Non-cash operating lease cost |
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Stock-based compensation |
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Loss on disposal of property, plant, and equipment |
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Provision for doubtful accounts |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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| ( |
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Inventories |
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Prepaid expenses and other current assets |
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Operating lease liabilities |
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| — |
Other assets |
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Accounts payable and accrued liabilities |
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Total adjustments |
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Net cash provided by operating activities |
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Cash Flows from Investing Activities: |
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Expenditures for property, plant and equipment |
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Cash used in business acquisitions, net of cash acquired |
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Net cash used in investing activities |
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Cash Flows from Financing Activities: |
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Repurchases of common stock |
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Payments of regular cash dividends |
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Payments of special cash dividends |
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Proceeds from sale of Class A common stock in connection with associate stock purchase plan |
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Proceeds from exercise of Class A common stock options |
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Borrowings under the revolving credit facilities |
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Contributions from non-controlling interest |
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Payments under the revolving credit facilities |
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Other, net |
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Net cash used in financing activities |
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Effect of foreign exchange rate changes on cash and cash equivalents |
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Net increase (decrease) in cash and cash equivalents |
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Cash and cash equivalents—beginning of period |
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Cash and cash equivalents—end of period |
| $ | |
| $ | |
Supplemental Disclosure of Cash Flow Information: |
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Cash paid for income taxes |
| $ | |
| $ | |
Cash paid for interest |
| $ | |
| $ | |
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See accompanying Notes to Condensed Consolidated Financial Statements. | ||||||
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MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by the management of MSC Industrial Direct Co., Inc. (together with its wholly owned subsidiaries and entities in which it maintains a controlling financial interest, the “Company”) and in the opinion of management include all normal recurring material adjustments necessary to present fairly the Company’s financial position as of February 29, 2020 and August 31, 2019, the results of operations for the thirteen and twenty-six weeks ended February 29, 2020 and March 2, 2019, and cash flows for the twenty-six weeks ended February 29, 2020 and March 2, 2019. The August 31, 2019 financial information was derived from the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2019.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the SEC. The Company, however, believes that the disclosures contained in this report comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934 for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended August 31, 2019.
The Company’s fiscal year ends on the Saturday closest to August 31 of each year. Unless the context requires otherwise, references to years contained herein pertain to the Company’s fiscal year. The Company’s 2020 fiscal year will be a 52-week accounting period that will end on August 29, 2020 and its 2019 fiscal year was a 52-week accounting period that ended on August 31, 2019.
The Condensed Consolidated Financial Statements include the accounts of MSC Industrial Direct Co., Inc., its wholly owned subsidiaries and entities in which it maintains a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.
Effective September 1, 2019, the Company adopted 2016-02, Leases (Topic 842) as subsequently amended. This is a comprehensive new standard that amends various aspects of existing accounting guidance for leases, including the recognition of a right-of-use asset and a lease liability on the balance sheet and disclosing key information about leasing arrangements. The Company utilized the optional transition method set forth in Accounting Standard Update (“ASU”) 2018-11 that allows entities to initially apply the new lease accounting standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Therefore, the adoption did not require restatement of prior periods. In addition, the Company elected the transition package of practical expedients permitted within the standard, which allowed it to carry forward the historical lease classification for arrangements that commenced prior to the effective date.
As a result of the adoption of ASC 842 on September 1, 2019, the Company recorded both operating lease assets of $
In June 2016, the Financial Accounting Standards Board (“FASB”) issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for financial statement periods beginning
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
after December 15, 2019. The new standard is effective for the Company for its fiscal year 2021. The Company is currently evaluating the standard to determine the impact, if any, of adoption to its consolidated financial statements.
Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the Company’s financial position, results of operations or cash flows.
Revenue Recognition
Net sales include product revenue and shipping and handling charges, net of estimated sales returns and any related sales incentives. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. All revenue is recognized when the Company satisfies its performance obligations under the contract, and invoicing occurs at approximately the same point in time. The Company recognizes revenue once the customer obtains control of the products. The Company’s product sales have standard payment terms that do not exceed
Consideration Payable to a Customer
The Company offers customers sales incentives, which primarily consist of volume rebates, and upfront sign-on payments. These volume rebates and payments are not in exchange for a distinct good or service and result in a reduction of net sales from the goods transferred to the customer at the later of when the related revenue is recognized or when the Company promises to pay the consideration. The Company estimates its volume rebate accruals and records its sign-on payments based on various factors, including contract terms, historical experience, and performance levels. Total accrued sales incentives, primarily related to volume rebates, were $
Contract Assets and Liabilities
The Company records a contract asset when it has a right to payment from a customer that is conditioned on events other than the passage of time. The Company records a contract liability when customers prepay but the Company has not yet satisfied its performance obligation. The Company did
Disaggregation of Revenue
The Company operates in
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
The following tables presents the Company's percentage of net sales by customer end-market for the thirteen and twenty-six-week periods ended February 29, 2020 and March 2, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Thirteen Weeks Ended |
| Thirteen Weeks Ended | ||
|
| February 29, 2020 |
| March 2, 2019 | ||
Manufacturing Heavy |
| % |
| % | ||
Manufacturing Light |
| % |
| % | ||
Government |
| % |
| % | ||
Retail/Wholesale |
| % |
| % | ||
Commercial Services |
| % |
| % | ||
Other (1) |
| % |
| % | ||
Total net sales |
| | % |
| | % |
__________________________
(1)The other category primarily includes individual customer and small business net sales not assigned to a specific industry classification.
|
|
|
|
|
|
|
|
| Twenty-Six Weeks Ended |
| Twenty-Six Weeks Ended | ||
|
| February 29, 2020 |
| March 2, 2019 | ||
Manufacturing Heavy |
| % |
| % | ||
Manufacturing Light |
| % |
| % | ||
Government |
| % |
| % | ||
Retail/Wholesale |
| % |
| % | ||
Commercial Services |
| % |
| % | ||
Other (1) |
| % |
| % | ||
Total net sales |
| | % |
| | % |
__________________________
(1)
The Company’s net sales originating from the following geographic areas were as follows for the thirteen and twenty-six-week periods ended February 29, 2020 and March 2, 2019:
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Thirteen Weeks Ended |
| Thirteen Weeks Ended | ||||||||
|
| February 29, 2020 |
| March 2, 2019 | ||||||||
United States |
| $ | |
| % |
| $ | |
| % | ||
UK |
|
| |
| % |
|
| |
| % | ||
Canada |
|
| |
| % |
|
| |
| % | ||
Mexico |
|
|
| % |
|
| |
| < | % | ||
Total net sales |
| $ | |
| % |
| $ | |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Twenty-Six Weeks Ended |
| Twenty-Six Weeks Ended | ||||||||
|
| February 29, 2020 |
| March 2, 2019 | ||||||||
United States |
| $ | |
| % |
| $ | |
| % | ||
UK |
|
| |
| % |
|
| |
| % | ||
Canada |
|
| |
| % |
|
| |
| % | ||
Mexico |
|
| |
| % |
|
| |
| < | % | |
Total net sales |
| $ | |
| % |
| $ | |
| % |
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
The Company’s non-vested restricted share awards contain non-forfeitable rights to dividends and meet the criteria of a participating security as defined by ASC Topic 260, “Earnings Per Share”. Under the two-class method, net income per share is computed by dividing net income allocated to common shareholders by the weighted average number of common 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. Effective in fiscal 2016, the Company discontinued its granting of restricted share awards.
The following table sets forth the computation of basic and diluted net income per common share under the two-class method for the thirteen and twenty-six weeks ended February 29, 2020 and March 2, 2019, respectively:
|
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|
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|
|
|
|
|
|
|
| Thirteen Weeks Ended |
| Twenty-Six Weeks Ended | ||||||||
|
| February 29, |
| March 2, |
| February 29, |
| March 2, | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Net income attributable to MSC Industrial as reported |
| $ | |
| $ | |
| $ | |
| $ | |
Less: Distributed net income available to participating securities |
|
| — |
|
| ( |
|
| ( |
|
| ( |
Less: Undistributed net income available to participating securities |
|
| — |
|
| ( |
|
| — |
|
| ( |
Numerator for basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed and distributed net income available to common shareholders |
| $ | |
| $ | |
| $ | |
| $ | |
Add: Undistributed net income allocated to participating securities |
|
| — |
|
| |
|
| — |
|
| |
Less: Undistributed net income reallocated to participating securities |
|
| — |
|
| ( |
|
| — |
|
| ( |
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed and distributed net income available to common shareholders |
| $ | |
| $ | |
| $ | |
| $ | |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic net income per share |
|
| |
|
| |
|
| |
|
| |
Effect of dilutive securities |
|
| |
|
| |
|
| |
|
| |
Weighted average shares outstanding for diluted net income per share |
|
| |
|
| |
|
| |
|
| |
Net income per share Two-class method: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | |
| $ | |
| $ | |
| $ | |
Diluted |
| $ | |
| $ | |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities |
|
| |
|
| |
|
| |
|
| |
Potentially dilutive securities attributable to outstanding stock options, restricted stock units, and performance share units are excluded from the calculation of diluted earnings per share where the combined exercise price and average unamortized fair value are greater than the average market price of MSC common stock, and therefore their inclusion would be anti-dilutive.
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
The Company accounts for all share-based payments in accordance with ASC Topic 718, “Compensation—Stock Compensation,” as subsequently amended. Stock-based compensation expense included in operating expenses for the thirteen and twenty-six-week periods ended February 29, 2020 and March 2, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Thirteen Weeks Ended |
| Twenty-Six Weeks Ended | ||||||||
|
| February 29, |
| March 2, |
| February 29, |
| March 2, | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
|
| (Dollars in thousands) | ||||||||||
Stock options |
| $ | |
| $ | |
| $ | |
| $ | |
Restricted share awards |
|
| ( |
|
| |
|
| |
|
| |
Restricted stock units |
|
| |
|
| |
|
| |
|
| |
Performance share units |
|
|
|
| — |
|
| |
|
| — | |
Associate Stock Purchase Plan |
|
| |
|
| |
|
| |
|
| |
Total |
|
| |
|
| |
|
| |
|
| |
Deferred income tax benefit |
|
| ( |
|
| ( |
|
| ( |
|
| ( |
Stock-based compensation expense, net |
| $ | |
| $ | |
| $ | |
| $ | |
Stock Options
The Company discontinued its grants of stock options in fiscal 2020. For the thirteen and twenty-six-week periods ended March 2, 2019, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
|
|
|
|
| Thirteen and Twenty-Six Weeks Ended | ||
|
| March 2, | |
|
| 2019 | |
Expected life (in years) |
| |
|
Risk-free interest rate |
| | % |
Expected volatility |
| | % |
Expected dividend yield |
| | % |
Weighted-average grant-date fair value |
| $ |
|
A summary of the Company’s stock option activity for the twenty-six-week period ended February 29, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
| Options |
| Weighted-Average Exercise Price per Share |
| Weighted-Average Remaining Contractual Term (in years) |
| Aggregate Intrinsic Value | ||
Outstanding on August 31, 2019 | |
| $ | |
|
|
|
|
|
Granted | — |
|
| — |
|
|
|
|
|
Exercised | ( |
|
| |
|
|
|
|
|
Canceled/Forfeited | ( |
|
| |
|
|
|
|
|
Outstanding on February 29, 2020 | |
| $ | |
| |
| $ | |
Exercisable on February 29, 2020 | |
| $ | |
| |
| $ | |
The unrecognized share-based compensation cost related to stock option expense at February 29, 2020 was $
Performance Share Units
Beginning in fiscal 2020, the Company grants performance share units (“PSU”) as part of its long-term stock-based
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
compensation program. PSUs cliff vest after a
The following table summarizes all transactions related to PSUs under the Company’s 2015 Omnibus Incentive Plan (based on target award amounts) for the twenty-six weeks ended February 29, 2020:
|
|
|
|
|
| Shares |
| Weighted-Average Grant-Date Fair Value | |
Non-vested PSUs at August 31, 2019 |
|
| $ |
|
Granted | |
|
| |
Vested | — |
|
| — |
Canceled/Forfeited | ( |
|
| |
Non-vested PSUs at February 29, 2020 (1) | |
| $ | |
(1) |
The fair value of each PSU is the closing stock price on the NYSE of the Company’s Class A common stock on the date of grant. Upon vesting, subject to achievement of performance goals, a portion of the PSU award may be withheld to satisfy the statutory income tax withholding obligation. The remaining PSUs will be settled in shares of the Company’s Class A common stock when vested. These awards accrue dividend equivalents on the underlying PSUs (in the form of additional stock units) based on dividends declared on the Company’s Class A common stock and these dividend equivalents are paid out in unrestricted common stock on the vesting dates of the underlying PSUs, subject to the same performance vesting requirements. The unrecognized share-based compensation cost related to the PSUs at February 29, 2020 was $
Restricted Share Awards
A summary of the non-vested restricted share award (“RSA”) activity under the Company’s 2005 Omnibus Incentive Plan and 2015 Omnibus Incentive Plan for the twenty-six-week period ended February 29, 2020 is as follows:
|
|
|
|
|
| Shares |
| Weighted-Average Grant-Date Fair Value | |
Non-vested RSAs at August 31, 2019 | |
| $ | |
Granted | — |
|
| — |
Vested | ( |
|
| |
Canceled/Forfeited | ( |
|
| |
Non-vested RSAs at February 29, 2020 | |
| $ | |
The fair value of each RSA is the closing stock price on the NYSE of the Company’s Class A common stock on the date of grant. Upon vesting, a portion of the RSA award may be withheld to satisfy the statutory income tax withholding obligation. The remaining RSAs will be settled in shares of the Company’s Class A common stock when vested. The unrecognized share-based compensation cost related to RSAs at February 29, 2020 was minimal and the remaining RSAs will vest in March 2020.
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Restricted Stock Units
A summary of the Company’s non-vested Restricted Stock Unit (“RSU”) award activity under the Company’s 2015 Omnibus Incentive Plan for the twenty-six-week period ended February 29, 2020 is as follows:
|
|
|
|
|
| Shares |
| Weighted-Average Grant-Date Fair Value | |
Non-vested RSUs at August 31, 2019 | |
| $ | |
Granted | |
|
| |
Vested | ( |
|
| |
Canceled/Forfeited | ( |
|
| |
Non-vested RSUs at February 29, 2020 (1) | |
| $ | |
(1) Excludes approximately |
The fair value of each RSU is the closing stock price on the NYSE of the Company’s Class A common stock on the date of grant. Upon vesting, a portion of the RSU award may be withheld to satisfy the statutory income tax withholding obligation. The remaining RSUs will be settled in shares of the Company’s Class A common stock when vested. These awards accrue dividend equivalents on the underlying RSUs (in the form of additional stock units) based on dividends declared on the Company’s Class A common stock and these dividend equivalents are paid out in unrestricted common stock on the vesting dates of the underlying RSUs. The unrecognized share-based compensation cost related to the RSUs at February 29, 2020 was $
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. |
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, and outstanding indebtedness. The Company uses a market approach to determine the fair value of its debt instruments, utilizing quoted prices in active markets, interest rates and other relevant information generated by market transactions involving similar instruments. Therefore, the inputs used to measure the fair value of the Company's debt instruments are classified as Level 2 within the fair value hierarchy. The reported carrying amounts of the Company’s financial instruments approximated their fair values as of February 29, 2020 and August 31, 2019.
During the twenty-six-week periods ended February 29, 2020 and March 2, 2019, the Company had
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Debt at February 29, 2020 and August 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
| February 29, |
| August 31, | ||
|
| 2020 |
| 2019 | ||
|
| (Dollars in thousands) | ||||
Uncommitted bank facilities |
| $ | |
| $ | |
Private Placement Debt: |
|
|
|
|
|
|
|
|
| |
|
| |
|
|
| |
|
| |
|
|
| |
|
| |
Revolving Credit Facility |
|
| |
|
| - |
Shelf Facility Agreements |
|
| |
|
| |
Financing arrangements |
|
| |
|
| |
Less: unamortized debt issuance costs |
|
| ( |
|
| ( |
Total debt, excluding obligations under finance leases |
| $ | |
| $ | |
Less: current portion(1) |
|
| ( |
|
| ( |
Total long-term debt, excluding obligations under finance leases |
| $ | |
| $ | |
__________________________
(1)
Revolving Credit Facility and Uncommitted Credit Facilities
The Company has a $
During the first quarter of fiscal 2019, the Company entered into
During the second quarter of fiscal 2020, the Company entered into an additional uncommitted credit facility (“New Uncommitted Credit Facility”), totaling $
An event of default under the Company’s Committed Facility is an event of default under the Amended Uncommitted Facilities and the New Uncommitted Credit Facility. The interest rate on the Amended Uncommitted Facilities and the New Uncommitted Credit Facility is based on LIBOR or the bank’s cost of funds or as otherwise agreed upon by the applicable bank and the Company. The $
During the twenty-six-week period ended February 29, 2020, the Company borrowed $
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Shelf Facility Agreements
In January 2018, the Company entered into Note Purchase and Private Shelf Agreements with Metropolitan Life Insurance Company (“Met Life Note Purchase Agreement”) and PGIM, Inc. (“Prudential Note Purchase Agreement” and together with the Met Life Note Purchase Agreement, the “Shelf Facility Agreements”). The Met Life Note Purchase Agreement provides for an uncommitted facility for the issuance and sale of up to an aggregate total of $
The Prudential Note Purchase Agreement provides for an uncommitted facility for the issuance and sale of up to an aggregate total of $
Each of the credit facilities, Private Placement Debt, and Shelf Facility Agreements imposes 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
Financing Arrangements
From time to time, the Company enters into financing arrangements with vendors to purchase certain information technology equipment or software. The equipment or software acquired from these vendors is paid for over a specified period of time based on the terms agreed upon. During the twenty-six-week period ended February 29, 2020, the Company entered into financing arrangements related to certain IT equipment and software totaling $
The Company's lease portfolio includes certain real estate (branch offices and customer fulfillment centers), automobiles, and other equipment. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. Operating leases are recorded on the balance sheet with operating lease assets representing the right to use the underlying asset for the lease term and lease liabilities representing the obligation to make lease payments arising from the lease. For real estate leases, the Company has elected the practical expedient which allows lease components and non-lease components, such as common area maintenance, to be grouped as a single lease component. The Company has also elected the practical expedient which allows leases with an initial term of twelve months or less to be excluded from the balance sheet.
The Company does not guarantee any residual value in its lease agreements, there are no material restrictions or covenants imposed by lease arrangements, and there are no lease transactions with related parties. Real estate leases typically include one or more options to extend the lease. The Company regularly evaluates the renewal options, and when it is reasonably certain of exercise, the Company includes the renewal period in its lease term. The automobile leases contain variable lease payments based on inception and subsequent interest rate fluctuations. For the thirteen and twenty-six-week periods ended February 29, 2020, the variable lease cost was insignificant. When readily determinable, the Company uses the interest rate implicit in its leases to discount lease payments. When the implicit rate is not readily determinable, as is the case with substantially all of the real estate leases, the Company utilizes the incremental borrowing rate. The incremental borrowing rate for a lease is the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. The rate for each lease was determined using primarily the Company’s credit spread, the lease term, and currency.
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
The components of lease cost for the thirteen and twenty-six weeks ended February 29, 2020 were as follows:
|
|
|
|
|
|
|
|
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||
|
| February 29, 2020 | February 29, 2020 | |||
|
| (Dollars in thousands) | ||||
Operating lease cost |
| $ | |
| $ | |
Short-term lease cost |
|
| |
|
| |
Finance lease cost: |
|
|
|
|
|
|
Amortization of leased assets |
|
| |
|
| |
Interest on leased liabilities |
|
| |
|
| |
Total Lease Cost |
| $ | |
| $ | |
Supplemental balance sheet information relating to operating and finance leases is as follows:
|
|
|
|
|
|
|
|
| February 29, |
|
| August 31, | |
| Classification | 2020 |
|
| 2019 | |
Assets |
| (Dollars in thousands) | ||||
Operating lease assets | Operating lease assets | $ | |
| $ | - |
Finance lease assets (1) | Property, plant, and equipment, net |
| |
|
| |
Total leased assets |
| $ | |
| $ | |
Liabilities |
|
|
|
|
|
|
Current |
|
|
|
|
|
|
Operating | Current portion of operating lease liabilities | $ | |
| $ | - |
Finance | Current portion of long-term debt including obligations under finance leases |
| |
|
| |
Noncurrent |
|
|
|
|
|
|
Operating | Noncurrent operating lease liabilities |
| |
|
| - |
Finance | Long-term debt including obligations under finance leases |
| |
|
| |
Total lease liabilities |
| $ | |
| $ | |
(1) |
|
|
|
|
|
| February 29, | |
|
| 2020 | |
Weighted average remaining lease term (years) |
|
|
|
Operating Leases |
|
| |
Finance Leases |
| |
|
Weighted average discount rate |
|
|
|
Operating Leases |
| % | |
Finance Leases |
| % |
The following sets forth supplemental cash flow information related to operating and finance leases:
|
|
|
|
|
| Twenty-Six Weeks Ended | |
|
| February 29, 2020 | |
|
| (Dollars in thousands) | |
Operating Cash Outflows from Operating Leases |
| $ | |
Operating Cash Outflows from Finance Leases |
|
| |
Financing Cash Outflows from Finance Leases |
|
| |
Leased assets obtained in exchange for new lease liabilities: |
|
|
|
Operating Leases |
| $ | |
Finance Leases |
|
| |
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
As of February 29, 2020, future lease payments were as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal Year (Dollars in thousands) |
| Operating Leases |
| Finance Leases |
| Total | |||
2020 (excluding six months) |
| $ | |
| $ | |
| $ | |
2021 |
|
| |
|
| |
|
| |
2022 |
|
| |
|
| |
|
| |
2023 |
|
| |
|
| |
|
| |
2024 |
|
| |
|
| |
|
| |
Thereafter |
|
| |
|
| |
|
| |
Total Lease Payments |
|
| |
|
| |
|
| |
Less: Imputed Interest |
|
| |
|
| |
|
| |
Present Value of Lease Liabilities (1) |
| $ | |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
|
|
(1) |
As of February 29, 2020, the Company's future lease obligations which have not yet commenced are immaterial.
Prior Period Disclosures
As a result of the adoption of ASC 842, Leases, on September 1, 2019, the Company is required to present future minimum lease payments for operating and finance lease obligations having initial or remaining non-cancelable lease terms in excess of one year. These future minimum lease payments were previously disclosed in the Company’s 2019 Annual Report on Form 10-K and accounted for under previous lease guidance. Commitments as of August 31, 2019 were as follows:
|
|
|
|
|
|
|
|
| August 31, 2019 | ||||
Fiscal Year |
| Operating Leases |
| Capitalized Lease Obligations | ||
2020 |
| $ | |
| $ | |
2021 |
|
| |
|
| |
2022 |
|
| |
|
| |
2023 |
|
| |
|
| |
2024 |
|
| |
|
| |
Thereafter |
|
| |
|
| - |
Total minimum lease payments |
| $ | |
| $ | |
Less: interest |
|
|
|
|
| |
Present value of minimum lease payments |
|
|
|
| $ | |
Less: current maturities |
|
|
|
|
| |
Present value of minimum lease payments less current maturities |
|
|
|
| $ | |
Common Stock Repurchases and Treasury Stock
During the thirteen and twenty-six-week periods ended February 29, 2020, the Company repurchased
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
As part of the Company’s ongoing Stock Repurchase Plan, the total number of shares of Class A common stock authorized for future repurchase by the Board of Directors was
The Company reissued
Dividends on Common Stock
The Company paid cash dividends of $
On March 31, 2020, the Board of Directors declared a quarterly cash dividend of $
Consulting Related Costs
Beginning in the second quarter of fiscal 2020, the Company engaged consultants to assist in reviewing optimization of the Company’s operations. The Company incurred $
Severance and Separation Benefits
Beginning in fiscal 2019 and through the first quarter of fiscal 2020, the Company identified opportunities for improvements in its workforce realignment, strategy, and staffing, and increased its focus on performance management, to ensure it has the right skillsets and number of associates to execute its long-term vision. As such, the Company extended voluntary and involuntary severance and separation benefits to certain associates.
The severance and separation cost liability balance was $
In December 2019, the Company paid a post-closing working capital adjustment in accordance with the February 2019 acquisition of certain assets of TAC Insumos Industriales, S. de R.L. de C.V. and certain of its affiliates (together, “TAC ”). This adjustment increased the purchase price paid by $
The Company generally offers a maximum
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
During the twenty-six-week period ended February 29, 2020, there were
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.
The recent outbreak of the novel coronavirus COVID-19, which was declared a pandemic by the World Health Organization on March 11, 2020, has led to adverse impacts on the U.S. and global economies and created uncertainty regarding potential impacts to the Company’s supply chain, operations, and customer demand. The COVID-19 pandemic has impacted and could further impact the Company’s operations and the operations of the Company’s suppliers and vendors as a result of quarantines, facility closures, and travel and logistics restrictions. The extent to which the COVID-19 pandemic impacts the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the duration, spread, severity, and impact of the COVID-19 pandemic, the effects of the COVID-19 pandemic on the Company’s customers, suppliers, and vendors and the remedial actions and stimulus measures adopted by local and federal governments, and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, the Company may continue to experience adverse impacts to its business as a result of any economic recession or depression that has occurred or may occur in the future. Therefore, the Company cannot reasonably estimate the impact at this time. See Item 2., Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), specifically the “Recent Developments and Highlights” and “Liquidity and Capital Resources” sections, for further discussion.
In March 2020, the Company completed the issuance and sale of $
As of February 29, 2020, the Company’s existing cash and cash equivalents on-hand were $
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is intended to update the information contained in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2019 and presumes that readers have access to, and will have read, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in such Annual Report on Form 10-K.
Overview
MSC Industrial Direct Co., Inc. (together with its subsidiaries, “MSC,” the “Company,” “we,” “our,” or “us”) is a leading North American distributor of a broad range of MRO products and services. We help our customers drive greater productivity, profitability and growth with more than 1.7 million products, inventory management and other supply chain solutions, and deep expertise from more than 75 years of working with customers across industries. We continue to implement our strategies to gain market share, generate new customers, increase sales to existing customers, and diversify our customer base.
We offer approximately 1,755,000 active, saleable stock-keeping units through our catalogs; brochures; eCommerce channels, including our website, mscdirect.com (“MSC website”); our inventory management solutions; and call-centers and branches. We service our customers from twelve customer fulfillment centers (eight are located within the United States which includes five primary customer fulfillment centers, one is located in the United Kingdom, and three are in Canada) and 99 branch offices. Many of our products are carried in stock, and orders for these in-stock products are typically fulfilled the day on which the order is received.
Our business model focuses on providing overall procurement cost reduction and just-in-time delivery to meet our customers’ needs. We focus on offering inventory, process and procurement solutions that reduce MRO supply chain costs and improve plant floor productivity for our customers. We will seek to continue to achieve cost reduction throughout our business through cost-saving strategies and increased leverage from our existing infrastructure. Furthermore, we will continue to provide additional procurement cost-saving solutions to our customers through technology such as our Customer Managed Inventory, Vendor Managed Inventory (“VMI”), and vending programs.
Our field sales and service associate headcount was 2,356 at February 29, 2020, compared to 2,433 at March 2, 2019. Recently, we have migrated our sales force from one designed to sell a spot buy value proposition to one prepared to deliver upon the new, more complex and high-touch role to drive value for our customers.
Recent Developments and Highlights
Highlights during the two fiscal quarters ended February 29, 2020 include the following:
We generated $155.8 million of cash from operations, compared to $98.6 million for the same period in the prior fiscal year.
We paid out $360.8 million in cash dividends, comprised of special and regular cash dividends of approximately $277.6 million and $83.2 million, respectively, compared to regular cash dividends of $69.6 million in the same period in the prior fiscal year.
We incurred $4.5 million in restructuring and other related costs, comprised of $2.1 million in consulting costs related to the optimization of the Company’s operations and $2.4 million in severance and separation benefits charges and other related costs associated primarily with sales workforce realignment.
Impact of COVID-19 on Our Business
The COVID-19 pandemic has resulted and will continue to result in significant economic disruption and has and will adversely affect our business. As of the date of this filing, significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. The following events related to the COVID-19 pandemic have resulted and will result in lost or delayed revenue to our company: limitations on the ability of manufacturers to manufacture the products we sell; limitations on the ability of our suppliers to obtain the products we sell or to meet delivery requirements and commitments; limitations on the ability of our associates to perform their work due to illness caused by the pandemic or local, state or federal orders requiring associates to remain at home; limitations on the ability of UPS, LTL carriers and others carriers to deliver our packages to customers; limitations on the ability of our customers to conduct their business and purchase our products and services; disruptions to our customers’ supply chains or purchasing patterns; and limitations on the ability of our customers to pay us on a timely basis.
We are experiencing disruptions in our business as we implement modifications to associate travel, associate work locations and cancellation of events, among other modifications. Certain states have issued executive orders requiring all workers to remain at home, unless their work is critical, essential or life-sustaining. We believe that, based on the various standards published to date, the work our associates perform is critical, essential and life-sustaining. We are reducing spending more broadly across the company, only proceeding with operating and capital spending that is critical. We have ceased all hiring and reduced discretionary expenses. Looking ahead, we have developed contingency plans to reduce costs further if the situation deteriorates. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our associates, customers, suppliers and shareholders. As a result, at the time of this filing, we are unable to determine or predict the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources.
Our Strategy
Our objective is to continue to grow sales profitably while offering our customers highly technical and high-touch solutions to solve their most complex challenges on the plant floor. We continue to pursue strategic acquisitions that expand or complement our business in new and existing markets or further enhance the value and offerings we provide.
Business Environment
We utilize various indices when evaluating the level of our business activity. Approximately 70% of our revenues came from sales in the manufacturing sector during the second quarter of our fiscal year 2020. Through statistical analysis, we have found that trends in our customers’ activity have correlated to changes in the Metalworking Business Index (“MBI”). The MBI is a sentiment index developed from a monthly survey of the U.S. metalworking industry, focusing on durable goods manufacturing. For the MBI, a value below 50.0 generally indicates contraction and a value above 50.0 generally indicates expansion. The MBI index over the last three months and for the past twelve-month period ending February 2020 were as follows:
|
|
|
Period |
| MBI |
December |
| 48.2 |
January |
| 50.2 |
February |
| 50.2 |
|
|
|
Fiscal 2020 Q2 average |
| 49.5 |
12-month average |
| 50.0 |
The MBI fiscal 2020 second quarter average trended below 50.0. The most recent March MBI reading of 41.0 is indicative of contraction. The steep March decline stems from the economic disruptions of the COVID-19 pandemic. See “Impact of COVID-19 on Our Business” above. We will continue to monitor economic conditions for their impact on our customers and markets and continue to assess business risks and opportunities.
Thirteen-Week Period Ended February 29, 2020 Compared to the Thirteen-Week Period Ended March 2, 2019
The table below summarizes the Company’s results of operations both in dollars (in thousands) and as a percentage of net sales for the periods indicated:
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| Thirteen Weeks Ended |
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| |||||||||||
|
| February 29, 2020 |
| March 2, 2019 |
| Change | ||||||||||||
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|
|
|
|
| $ |
|
| % |
|
| $ |
|
| % |
|
| $ |
|
| % |
Net sales |
| $ | 786,094 |
|
| 100.0% |
| $ | 823,004 |
|
| 100.0% |
| $ | (36,910) |
|
| (4.5)% |
Cost of goods sold |
|
| 455,042 |
|
| 57.9% |
|
| 471,190 |
|
| 57.3% |
|
| (16,148) |
|
| (3.4)% |
Gross profit |
|
| 331,052 |
|
| 42.1% |
|
| 351,814 |
|
| 42.7% |
|
| (20,762) |
|
| (5.9)% |
Operating expenses |
|
| 253,382 |
|
| 32.2% |
|
| 255,833 |
|
| 31.1% |
|
| (2,451) |
|
| (1.0)% |
Income from operations |
|
| 77,670 |
|
| 9.9% |
|
| 95,981 |
|
| 11.7% |
|
| (18,311) |
|
| (19.1)% |
Total other expense |
|
| (3,497) |
|
| (0.4)% |
|
| (4,612) |
|
| (0.6)% |
|
| 1,115 |
|
| (24.2)% |
Income before provision for income taxes |
|
| 74,173 |
|
| 9.4% |
|
| 91,369 |
|
| 11.1% |
|
| (17,196) |
|
| (18.8)% |
Provision for income taxes |
|
| 18,617 |
|
| 2.4% |
|
| 22,939 |
|
| 2.8% |
|
| (4,322) |
|
| (18.8)% |
Net income |
|
| 55,556 |
|
| 7.1% |
|
| 68,430 |
|
| 8.3% |
|
| (12,874) |
|
| (18.8)% |
Less: Net income attributable to noncontrolling interest |
|
| 56 |
|
| 0.0% |
|
| 6 |
|
| 0.0% |
|
| 50 |
|
| 833.3% |
Net income attributable to MSC Industrial |
| $ | 55,500 |
|
| 7.1% |
| $ | 68,424 |
|
| 8.3% |
| $ | (12,924) |
|
| (18.9)% |
Net Sales
Net sales decreased 4.5% or $36.9 million for the thirteen-week period ended February 29, 2020, as compared to the thirteen-week period ended March 2, 2019. We estimate that this $36.9 million decrease in net sales is comprised of (i) $48.5 million of lower sales volume, excluding MSC Mexico operations; partially offset by (ii) $7.5 million of net sales from MSC Mexico, which commenced operations in February 2019; (iii) $3.8 million from improved pricing, inclusive of changes in customer and product mix, discounting and other items; and (iv) $0.3 million of favorable foreign exchange impact. Of the above $36.9 million decrease in net sales, sales to our government and national account programs (“Large Account Customers”) decreased by $18.2 million and sales other than to our Large Account Customers decreased by $18.7 million, which includes $7.5 million of net sales from MSC Mexico partially offsetting the decrease.
The table below shows the change in our average daily sales by total company and by customer type for the thirteen- week period ended February 29, 2020 compared to the same period in the prior fiscal year:
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|
Average Daily Sales Percentage Change | ||||||
(unaudited) | ||||||
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2020 vs. 2019 Fiscal Period |
| Thirteen Week Period Ended Fiscal Q2 |
| % of Total Business | ||
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Total Company |
| (2.9) | % |
|
|
|
Manufacturing Customers |
| (3.7) | % |
| 70 | % |
Non-Manufacturing Customers |
| (1.0) | % |
| 30 | % |
We believe that our ability to transact business with our customers through various electronic portals and directly through the MSC website gives us a competitive advantage over smaller suppliers. Sales made through our eCommerce platforms, including sales made through Electronic Data Interchange (“EDI”) systems, VMI systems, Extensible Markup Language ordering-based systems, vending, hosted systems and other electronic portals, represented 60.9% of consolidated net sales for the thirteen-week period ended February 29, 2020, compared to 60.0% of consolidated net sales for the same period in the prior fiscal year. These percentages of consolidated net sales do not include eCommerce sales from the acquisition of AIS and from MSC Mexico operations.
Gross Profit
Gross profit margin was 42.1% for the thirteen-week period ended February 29, 2020 as compared to 42.7% for the same period in the prior fiscal year. The decline was primarily the result of increased product costs and changes in our customer and product mix. In addition, 30 basis points of the decline resulted from MSC Mexico operations which
commenced in the last month of the fiscal second quarter of 2019.
Operating Expenses
Operating expenses decreased 1.0% to $253.4 million for the thirteen-week period ended February 29, 2020, as compared to $255.8 million for the same period in the prior fiscal year. Operating expenses were 32.2% of net sales for the thirteen-week period ended February 29, 2020, as compared to 31.1% for the thirteen-week period ended March 2, 2019. The decrease in operating expense dollars was primarily attributable to lower freight and payroll and payroll related costs, partially offset by higher operating expenses for MSC Mexico and the consulting costs discussed below.
Freight expense was $31.8 million for the thirteen-week period ended February 29, 2020, as compared to $34.2 million for the same period in the prior fiscal year. The primary driver of this decrease was lower sales and improved pricing on freight related charges.
Payroll and payroll-related costs were 56.4% of total operating expenses for both of the thirteen-week periods ended February 29, 2020 and March 2, 2019. Payroll and payroll-related costs decreased by $1.4 million for the thirteen-week period ended February 29, 2020, as compared to the same period in the prior fiscal year from the recent workforce realignment strategy implemented towards the end of fiscal 2019 and lower sales volume. Included in payroll and payroll-related costs are salary, incentive compensation, sales commission, and fringe benefit costs. All of these costs, with the exception of the incentive accrual, decreased for the thirteen-week period ended February 29, 2020, as compared to the same period in the prior fiscal year.
For the thirteen-week period ended February 29, 2020, we incurred approximately $2.1 million in consulting costs related to the optimization of the Company’s operations, which contributed to the increase in operating expenses as a percentage of net sales as compared to the same period in the prior fiscal year. In addition, the operations of MSC Mexico which commenced in our second quarter of fiscal 2019 accounted for $1.4 million in incremental costs for the thirteen-week period ended February 29, 2020, as compared to the same period in the prior fiscal year.
Income from Operations
Income from operations decreased 19.1% to $77.7 million for the thirteen-week period ended February 29, 2020, as compared to $96.0 million for the same period in the prior fiscal year. This was primarily attributable to a decrease in net sales and gross profit, partially offset by a decrease in operating expenses as described above. Income from operations as a percentage of net sales decreased to 9.9% for the thirteen-week period ended February 29, 2020, from 11.7% for the same period in the prior fiscal year, primarily as the result of the decrease in gross profit margin and an increase in operating expenses as a percentage of net sales, mentioned above.
Provision for Income Taxes
The effective tax rate for the thirteen-week period ended February 29, 2020 was 25.1% as compared to 25.1% for the same period in the prior fiscal year.
Net Income
The factors which affected net income for the thirteen-week period ended February 29, 2020, as compared to the same period in the previous fiscal year, have been discussed above.
Twenty-Six-Week Period Ended February 29, 2020 Compared to the Twenty-Six-Week Period Ended March 2, 2019
The table below summarizes the Company’s results of operations both in dollars (in thousands) and as a percentage of net sales for the periods indicated:
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| Twenty-Six Weeks Ended |
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| |||||||||||
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| February 29, 2020 |
| March 2, 2019 |
| Change | ||||||||||||
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|
|
| $ |
|
| % |
|
| $ |
|
| % |
|
| $ |
|
| % |
Net sales |
| $ | 1,609,695 |
|
| 100.0% |
| $ | 1,654,601 |
|
| 100.0% |
| $ | (44,906) |
|
| (2.7)% |
Cost of goods sold |
|
| 931,447 |
|
| 57.9% |
|
| 944,802 |
|
| 57.1% |
|
| (13,355) |
|
| (1.4)% |
Gross profit |
|
| 678,248 |
|
| 42.1% |
|
| 709,799 |
|
| 42.9% |
|
| (31,551) |
|
| (4.4)% |
Operating expenses |
|
| 510,280 |
|
| 31.7% |
|
| 510,818 |
|
| 30.9% |
|
| (538) |
|
| (0.1)% |
Income from operations |
|
| 167,968 |
|
| 10.4% |
|
| 198,981 |
|
| 12.0% |
|
| (31,013) |
|
| (15.6)% |
Total other expense |
|
| (6,537) |
|
| (0.4)% |
|
| (8,504) |
|
| (0.5)% |
|
| 1,967 |
|
| (23.1)% |
Income before provision for income taxes |
|
| 161,431 |
|
| 10.0% |
|
| 190,477 |
|
| 11.5% |
|
| (29,046) |
|
| (15.2)% |
Provision for income taxes |
|
| 40,423 |
|
| 2.5% |
|
| 47,815 |
|
| 2.9% |
|
| (7,392) |
|
| (15.5)% |
Net income |
|
| 121,008 |
|
| 7.5% |
|
| 142,662 |
|
| 8.6% |
|
| (21,654) |
|
| (15.2)% |
Less: Net income attributable to noncontrolling interest |
|
| 90 |
|
| 0.0% |
|
| 6 |
|
| 0.0% |
|
| 84 |
|
| 1400.0% |
Net income attributable to MSC Industrial |
| $ | 120,918 |
|
| 7.5% |
| $ | 142,656 |
|
| 8.6% |
| $ | (21,738) |
|
| (15.2)% |
Net Sales
Net sales decreased 2.7% or $44.9 million for the twenty-six-week period ended February 29, 2020, as compared to the twenty-six-week period ended March 2, 2019. We estimate that this $44.9 million decrease in net sales is comprised of (i) approximately $73.3 million of lower sales volume, excluding MSC Mexico operations; (ii) $0.2 million of unfavorable foreign exchange impact; partially offset by (iii) $17.5 million of net sales from MSC Mexico, which commenced operations in February 2019; and (iv) approximately $11.1 million from improved pricing, inclusive of changes in customer and product mix, discounting and other items. Of the above $44.9 million decrease in net sales, sales to our Large Account Customers decreased by approximately $20.0 million and sales other than to our Large Account Customers decreased by approximately $24.9 million, which includes $17.5 million of net sales from MSC Mexico partially offsetting the decrease.
The table below shows the change in our average daily sales by total company and by customer type for the twenty-six-week period ended February 29, 2020 compared to the same period in the prior fiscal year:
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|
|
Average Daily Sales Percentage Change | ||||||
(unaudited) | ||||||
|
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|
2020 vs. 2019 Fiscal Period |
| Twenty-Six-Week Period Ended Fiscal Q2 |
| % of Total Business | ||
|
|
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|
|
Total Company |
| (1.9) | % |
|
|
|
Manufacturing Customers |
| (2.4) | % |
| 70 | % |
Non-Manufacturing Customers |
| (0.6) | % |
| 30 | % |
We believe that our ability to transact business with our customers through various electronic portals and directly through the MSC website gives us a competitive advantage over smaller suppliers. Sales made through our eCommerce platforms, including sales made through EDI systems, VMI systems, Extensible Markup Language ordering-based systems, vending, hosted systems and other electronic portals, represented 60.8% of consolidated net sales for the twenty-six-week period ended February 29, 2020, compared to 60.1% of consolidated net sales for the same period in the prior fiscal year. These percentages of consolidated net sales do not include eCommerce sales from the acquisitions of AIS and from MSC Mexico operations.
Gross Profit
Gross profit margin was 42.1% for the twenty-six-week period ended February 29, 2020 as compared to 42.9% for the same period in the prior fiscal year. The decline was primarily the result of increased product costs and changes in our customer and product mix. In addition, 30 basis points of the decline resulted from MSC Mexico operations which
commenced in the fiscal second quarter of 2019.
Operating Expenses
Operating expenses decreased 0.1% to $510.3 million for the twenty-six-week period ended February 29, 2020, as compared to $510.8 million for the same period in the prior fiscal year. Operating expenses were 31.7% of net sales for the twenty-six-week period ended February 29, 2020, as compared to 30.9% for the twenty-six-week period ended March 2, 2019. The decrease in operating expense dollars was comprised primarily of lower freight and other volume related costs, partially offset by an increase in depreciation and amortization and by the severance and separation costs and consulting costs discussed below and higher operating expenses for MSC Mexico.
Freight expense was approximately $65.3 million for the twenty-six-week period ended February 29, 2020, as compared to $68.4 million for the same period in the prior fiscal year. The primary driver of this decrease was lower sales and improved pricing on freight related charges.
Depreciation and amortization increased by $2.2 million for the twenty-six-week period ended February 29, 2020, as compared to the same period in the prior fiscal year. The primary driver of this increase was greater investment in capital projects related to information technology, which generally have shorter useful lives.
Payroll and payroll-related costs were approximately 56.2% of total operating expenses for both the twenty-six-week periods ended February 29, 2020 and March 2, 2019. Payroll and payroll-related costs decreased by $0.5 million for the twenty-six-week period ended February 29, 2020, as compared to the same period in the prior fiscal year. Included in payroll and payroll-related costs are salary, incentive compensation, sales commission, and fringe benefit costs. All of these costs, with the exception of the incentive accrual, decreased for the twenty-six-week period ended February 29, 2020, as compared to the same period in the prior fiscal year.
For the twenty-six-week period ended February 29, 2020, we incurred approximately $2.1 million in consulting costs related to the optimization of the Company’s operations and approximately $2.4 million in severance and separation related costs, which contributed to the increase in operating expenses as a percentage of net sales as compared to the same period in the prior fiscal year. In addition, the operations of MSC Mexico which commenced in our second quarter of fiscal 2019 accounted for $3.4 million in incremental costs for the twenty-six-week period ended February 29, 2020, as compared to the same period in the prior fiscal year.
Income from Operations
Income from operations decreased 15.6% to $168.0 million for the twenty-six-week period ended February 29, 2020, as compared to $199.0 million for the same period in the prior fiscal year. This was primarily attributable to the decrease in net sales and gross profit. Income from operations as a percentage of net sales decreased to 10.4% for the twenty-six-week period ended February 29, 2020, from 12.0% for the same period in the prior fiscal year, primarily as the result of the decrease in the gross profit margin and an increase in operating expenses as a percentage of net sales as mentioned above.
Provision for Income Taxes
The effective tax rate for the twenty-six-week period ended February 29, 2020 was 25.0% as compared to 25.1% for the same period in the prior fiscal year. We expect our full-year tax rate for fiscal 2020 to be in the 25.0% to 25.5% range.
Net Income
The factors which affected net income for the twenty-six-week period ended February 29, 2020, as compared to the same period in the previous fiscal year, have been discussed above.
Liquidity and Capital Resources
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| February 29, |
| August 31, |
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| |||
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| 2020 |
| 2019 |
| $ Change | |||
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| (Dollars in thousands) | |||||||
Total debt, including obligations under finance leases |
| $ | 677,893 |
| $ | 441,884 |
| $ | 236,009 |
Less: Cash and cash equivalents |
|
| (44,867) |
|
| (32,286) |
|
| (12,581) |
Net debt, including obligations under finance leases |
| $ | 633,026 |
| $ | 409,598 |
| $ | 223,428 |
Equity |
| $ | 1,262,813 |
| $ | 1,483,879 |
| $ | (221,066) |
As of February 29, 2020, we held $44.9 million in cash and cash equivalents, substantially all with well-known financial institutions. Historically, our primary financing needs have been to fund our working capital requirements necessitated by our sales growth and the costs of acquisitions, new products, new facilities, facility expansions, investments in vending solutions, technology investments, and productivity investments. Cash generated from operations, together with borrowings under our credit facilities, Private Placement Debt, and Shelf Facility Agreements, has been used to fund these needs, to repurchase shares of our Class A common stock, and to pay dividends. As of February 29, 2020, total borrowings outstanding, representing amounts due under our credit facilities, Private Placement Debt, and Shelf Facility Agreements, as well as all finance leases and financing arrangements, were $677.9 million, net of unamortized debt issuance costs of $1.0 million. As of August 31, 2019, total borrowings outstanding, representing amounts due under our credit facilities, Private Placement Debt, and Shelf Facility Agreements, as well as all capital leases and financing arrangements, were $441.9 million, net of unamortized debt issuance costs of $1.2 million. See Note 6 “Debt” and Note 7, “Leases” in the Notes to the unaudited Condensed Consolidated Financial Statements for more information about these balances.
In March 2020, the Company completed the issuance and sale of $50.0 million aggregate principal amount of 2.40% Series 2019A Notes, due March 5, 2024 associated with the Met Life Note Purchase Agreement. In addition, in March 2020, the Company completed the issuance and sale of an additional $50.0 million aggregate principal amount of 2.60% Senior Notes, due March 5, 2027 associated with private placement debt. In March 2020, the Company repaid $100.0 million on the Committed Facility, which was funded by the two $50.0 million note issuances discussed above. As a precautionary measure, to increase the Company’s cash position and preserve financial flexibility in light of current uncertainty resulting from the COVID-19 outbreak, the Company borrowed an additional $300.0 million on its Committed Facility. The current unused balance of $295.9 million from the Committed Facility, which is reduced by outstanding letters of credit, is available for working capital purposes if necessary. Further, in April 2020, borrowings under two of the Company’s Amended Uncommitted Facilities were not renewed, and the Company repaid $134.0 million outstanding under such facilities; the Company borrowed an additional $34.0 million under two other Amended Uncommitted Facilities, and the Company has an outstanding balance of $188.6 million under the Amended Uncommitted Facilities and the New Uncommitted Credit Facility, all or a portion of which balance is subject to repayment at the end of the then current interest period (currently thirty days) if the respective lenders do not renew the loans. Lenders under the uncommitted facilities, which have an aggregate uncommitted availability of $415.0 million, are not obligated to lend to the Company under such facilities. See Note 14, “Subsequent Events” in the Notes to the unaudited Condensed Consolidated Financial Statements for more information about these transactions.
We believe, based on our current business plan, that our existing cash, funds available under our Committed Facility, and cash flow from operations will be sufficient to fund necessary capital expenditures and operating cash requirements for at least the next twelve months. The Company further believes that its financial resources, along with managing discretionary expenses, will allow it to manage the anticipated impact of COVID-19 on the Company's business operations for the foreseeable future which will include reduced sales and net income levels for the Company. We are reducing spending more broadly across the company, only proceeding with operating and capital spending that is critical. We have ceased all hiring and reduced discretionary expenses. Looking ahead, we have developed contingency plans to reduce costs further if the situation deteriorates. The challenges posed by COVID-19 on the Company's business are evolving rapidly. Consequently, the Company will continue to evaluate its financial position in light of future developments, particularly those relating to COVID-19.
The table below summarizes information regarding the Company’s liquidity and capital resources:
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| Twenty-Six Weeks Ended | ||||
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| February 29, |
| March 2, | ||
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| 2020 |
| 2019 | ||
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| (Dollars in thousands) | ||||
Net cash provided by operating activities |
| $ | 155,815 |
| $ | 98,578 |
Net cash used in investing activities |
|
| (28,023) |
|
| (34,781) |
Net cash used in financing activities |
|
| (115,422) |
|
| (78,870) |
Effect of foreign exchange rate changes on cash and cash equivalents |
|
| 211 |
|
| 23 |
Net increase (decrease) in cash and cash equivalents |
| $ | 12,581 |
| $ | (15,050) |
Operating Activities
Net cash provided by operating activities for the twenty-six-week periods ended February 29, 2020 and March 2, 2019 was $155.8 million and $98.6 million, respectively. There are various increases and decreases contributing to this change. A decrease in the change in inventories and a smaller increase in the change in accounts receivable, partially offset by a decrease in net income contributed to most of the increase in net cash provided by operating activities.
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| February 29, |
| August 31, |
| March 2, | |||
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| 2020 |
| 2019 |
| 2019 | |||
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| (Dollars in thousands) | |||||||
Working Capital |
| $ | 517,989 |
| $ | 752,696 |
| $ | 676,012 |
Current Ratio |
|
| 1.7 |
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| 2.7 |
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| 2.2 |
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Days Sales Outstanding |
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| 56.2 |
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| 56.8 |
|
| 54.5 |
Inventory Turnover |
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| 3.4 |
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| 3.5 |
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| 3.6 |
The decreases in working capital and the current ratio as of February 29, 2020 compared to March 2, 2019 is primarily due to an increase in our current debt outstanding, primarily related to the special dividend paid of $277.6 million during the twenty-six-week period ended February 29, 2020.
The increase in days sales outstanding as compared to the same period in the prior year is primarily due to a receivables portfolio consisting of a greater percentage of our national account program sales, which are typically at longer terms. Inventory turns (calculated using a thirteen-point average inventory balance) remained relatively consistent with the prior year periods displayed.
Investing Activities
Net cash used in investing activities for the twenty-six-week periods ended February 29, 2020 and March 2, 2019 was $28.0 million and $34.8 million, respectively. The use of cash for both periods consisted of expenditures for property, plant, and equipment and the acquisition of certain assets of TAC.
Financing Activities
Net cash used in financing activities for the twenty-six-week periods ended February 29, 2020 and March 2, 2019 was $115.4 million and $78.9 million, respectively. The major components contributing to the use of cash for the twenty-six-week period ended February 29, 2020 were dividends paid of $360.8 million and net borrowings on all credit facilities of $233.6 million. This was partially offset by proceeds from the exercise of common stock options of $13.4 million. The major components contributing to the use of cash for the twenty-six-week period ended March 2, 2019 were dividends paid of $69.6 million, net borrowings on all credit facilities of $57.0 million, and repurchases of our common stock of $84.4 million. This was partially offset by proceeds from the exercise of common stock options of $14.5 million.
Contractual Obligations
Information regarding our long-term debt payments, operating lease payments, financing lease payments and other commitments is provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on our Form 10-K for the fiscal year ended August 31, 2019. As of February 29, 2020, there have been no material changes outside the ordinary course of business in our contractual obligations and commitments
since August 31, 2019. See Note 14, “Subsequent Events” in the Notes to the unaudited Condensed Consolidated Financial Statements for information about subsequent transactions.
Long-term Debt
Credit Facilities
In April 2017, the Company entered into a $600.0 million Committed Facility. As of February 29, 2020, the Company also had six uncommitted facilities, totaling $415.0 million of maximum uncommitted availability. See Note 6 “Debt” in the Notes to the unaudited Condensed Consolidated Financial Statements for more information about the credit facilities. As of February 29, 2020, we were in compliance with the operating and financial covenants of the credit facilities. The current unused balance of $295.9 million from the Committed Facility, which is reduced by outstanding letters of credit, is available for working capital purposes if necessary. See Note 6 “Debt” and Note 14, “Subsequent Events” in the Notes to the unaudited Condensed Consolidated Financial Statements for more information about these balances and subsequent transactions.
Private Placement Debt and Shelf Facility Agreements
In July 2016, we completed the issuance and sale of unsecured senior notes. In January 2018, we entered into two Note Purchase and Private Shelf Agreements. In June 2018, we entered into an additional Note Purchase Agreement. See Note 6 “Debt” and Note 14, “Subsequent Events” in the Notes to the unaudited Condensed Consolidated Financial Statements for more information about these and subsequent transactions.
Financing Arrangements
From time to time, we enter into financing arrangements. See Note 6 “Debt” in the Notes to the unaudited Condensed Consolidated Financial Statements for more information about our financing arrangements.
Leases
As of February 29, 2020, certain of our operations are conducted on leased premises. These leases are for varying periods, the longest extending to fiscal 2031. In addition, we are obligated under certain equipment and automobile operating leases, which expire on varying dates through fiscal 2025. See Note 7 “Leases” in the Notes to the unaudited Condensed Consolidated Financial Statements for more information about our finance and operating leases.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Critical Accounting Estimates
On an ongoing basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition, inventory valuation, allowance for doubtful accounts, warranty reserves, contingencies and litigation, income taxes, accounting for goodwill and long-lived assets, stock-based compensation, and business combinations. We make estimates, judgments and assumptions in determining the amounts reported in the Condensed Consolidated Financial Statements and accompanying Notes. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The estimates are used to form the basis for making judgments about the carrying values of assets and liabilities and the amount of revenues and expenses reported that are not readily apparent from other sources. Actual results may differ from these estimates.
There have been no material changes outside the ordinary course of business in the Company’s Critical Accounting Policies, as disclosed in its Annual Report on Form 10-K for the fiscal year ended August 31, 2019.
Recently Issued Accounting Standards
See Note 1 “Basis of Presentation” in the Notes to the unaudited Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding our exposure to certain market risks, see “Interest Rate Risks” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”, in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019. Except as described in Management’s Discussion and Analysis of Financial Condition and Results of Operations above, there have been no significant changes in our financial instrument portfolio or interest rate risk since our August 31, 2019 fiscal year-end.
In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (AARC) has proposed that the Secured Overnight Financing Rate (SOFR) is the rate that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts currently indexed to LIBOR. AARC has proposed a paced market transition plan to SOFR from LIBOR. We are currently evaluating the impact of the transition from LIBOR as an interest rate benchmark to other potential alternative reference rates, including SOFR. We do not currently have material contracts, with the exception of our credit facilities, that are indexed to LIBOR. We will continue to actively assess the related opportunities and risks involved in this transition.
Item 4. Controls and Procedures
Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, with the participation of the Chief Executive Officer and Interim Chief Financial Officer, as well as other key members of our management, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is (i) accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
No changes occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act) during the fiscal quarter ended February 29, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are various claims, lawsuits, and pending actions against the Company incidental to the operation of its business. Although the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
Item 1A. Risk Factors
In addition to the other information set forth in this Report, you should carefully consider the risks and the uncertainties discussed in Part I, “Item 1A, Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be not material also may materially and adversely affect our business, financial condition and/or operating results. We are including the following additional risk factor, which updates the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019. In addition, many of the risk factors in Part I. Item IA. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019 will be amplified by the following additional risk factor:
Our results of operations have been and will in the future be adversely impacted by the COVID-19 pandemic, and the duration and extent to which it will impact our results of operations remains uncertain.
The global spread of COVID-19 has created significant volatility and uncertainty and economic disruption. The extent to which the COVID-19 pandemic impacts our business, operations, financial results and financial condition will depend on numerous evolving factors which are uncertain and cannot be predicted, including: the duration and scope of the pandemic; governmental, business and individuals’ actions taken in response; the effect on our customers and customers’ demand for our services and products; the effect on our suppliers and disruptions to the global supply chain; our ability to sell and provide our services and products, including as a result of travel restrictions and people working from home; disruptions to our operations resulting from the illness of any of our associates, including associates at our fulfillment centers; restrictions or disruptions to transportation, including reduced availability of ground or air transport; the ability of our customers to pay for our services and products; and any closures of our and our suppliers’ and customers’ facilities. These effects of the COVID-19 pandemic have resulted and will result in lost or delayed revenue to us, and we have been experiencing disruptions to our business as we implement modifications to associate travel, associate work locations and cancellation of events, among other modifications. In addition, the impact of COVID-19 on macroeconomic conditions may impact the proper functioning of financial and capital markets, foreign currency exchange rates, commodity and energy prices, and interest rates. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future. Any of these events could amplify the other risks and uncertainties described in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019 and could materially adversely affect our business, financial condition, results of operations and/or stock price.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth repurchases by the Company of its outstanding shares of Class A common stock during the thirteen-week period ended February 29, 2020:
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Period |
| Total Number of Shares Purchased(1) |
| Average Price Paid Per Share(2) |
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(3) |
| Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |
12/1/19-12/31/19 |
| 2,041 |
| $ | 74.95 |
| — |
| 1,157,038 |
1/1/20-1/31/20 |
| 59 |
|
| 75.70 |
| — |
| 1,157,038 |
2/1/20-2/29/20 |
| 594 |
|
| 67.72 |
| — |
| 1,157,038 |
Total |
| 2,694 |
| $ | 73.90 |
| — |
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|
__________________________
(1)During the thirteen weeks ended February 29, 2020, 2,694 shares of our common stock were withheld by the Company as payment to satisfy our associates’ tax withholding liability associated with our share-based compensation program and are included in the total number of shares purchased.
(2)Activity is reported on a trade date basis.
(3)During fiscal year 1999, the Board of Directors established the MSC Stock Repurchase Plan, which we refer to as the “Repurchase Plan.” The total number of shares of our Class A common stock initially authorized for future repurchase was set at 5,000,000 shares. On January 8, 2008, and on October 21, 2011, the Board of Directors reaffirmed and replenished the Repurchase Plan. Most recently, on January 9, 2018, the Board of Directors authorized the repurchase of an additional 2,000,000 shares of Class A common stock under the Company’s ongoing Repurchase Plan. As of February 29, 2020, the maximum number of shares that may yet be repurchased under the Repurchase Plan was 1,157,038 shares. There is no expiration date for this program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
EXHIBIT INDEX
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Exhibit No. | Exhibit |
Chief Executive Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
Chief Financial Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
101.INS | XBRL Instance Document.* |
101.SCH | XBRL Taxonomy Extension Schema Document.* |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document.* |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document.* |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document.* |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document.* |
104
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).* |
We have not filed as exhibits certain instruments defining the rights of holders of certain long-term debt of the Company, pursuant to Item 601(b)(4)(iii) of Regulation S-K promulgated under the Exchange Act, because the amount of debt authorized under each such instrument does not exceed 10 percent of the total assets of the Company’s and its consolidated subsidiaries. By this filing, the Company agrees to furnish a copy of any such instrument to the SEC upon request. |
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* | Filed herewith. |
** | Furnished herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| MSC Industrial Direct Co., Inc. (Registrant)
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Dated: April 8, 2020 | By: | /s/ ERIK GERSHWIND President and Chief Executive Officer
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Dated: April 8, 2020 | By: | /s/ GREG CLARK Vice President and Interim Chief Financial Officer |
EXHIBIT 10.1
This Board Adviser Agreement (the “Agreement”) is made effective as of January 29, 2020 (the “Effective Date”) by MSC Industrial Direct Co., Inc., a New York corporation (the “Company”), and Roger Fradin (the “Adviser”).
RECITALS
WHEREAS, the Adviser served as a member of the Company’s Board of Directors (the “Board”) and did not stand for re-election at the Company’s 2020 Annual Meeting of Shareholders; and
WHEREAS, the Board desires to obtain the advice and counsel of the Adviser regarding the Company’s business and strategy and the industrial distribution sector, including insight relating to the Company’s customer base; and
WHEREAS, the Board would like to engage the Adviser to act as an adviser to the Board, and the Adviser is willing to provide advice and services to the Board on the terms and conditions of this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Service as an Adviser. The Adviser shall serve as an adviser to the members of the Board and senior management on a non-exclusive basis for the term of this Agreement. The Adviser shall perform services hereunder as an independent contractor and not as an employee, agent, joint venturer or partner of the Company. The Adviser shall have no power or authority to act for, represent or bind the Company or its affiliates in any manner whatsoever, except as may be expressly agreed on each occasion, in writing, by the Company and the Adviser. The Adviser agrees to take no action that expresses that the Adviser has such power or authority, and the Adviser shall use reasonable efforts to not take any action that would imply to a reasonable person that the Adviser has such power or authority.
2. Duties. During the term of this Agreement, the Adviser will use his commercially reasonable efforts to provide advice and counsel to the members of the Board and senior management as may be reasonably requested from time to time by the Board or the Chief Executive Officer of the Company, including advising on the Company’s business and strategy and the industrial distribution sector, including insight relating to the Company’s customer base. At the Board’s request, the Adviser shall attend and participate in Board meetings, in his capacity as an adviser and without any right to vote on matters submitted to a vote of the Board. In addition, the Adviser shall be available upon reasonable advance notice to provide telephonic guidance and consultation to members of the Board and the Company’s Chief Executive Officer. The Adviser will report directly to the Board or the Company’s Chief Executive Officer in the course of performing the Adviser’s duties, unless otherwise expressly directed by the Board.
3. Term. The term of this Agreement will begin on the Effective Date and will continue for a period of 12 months after the Effective Date. The term shall renew automatically for consecutive 12-month periods, unless either party provides notice of intent not to renew in writing to the other party at least 30 days prior to the applicable renewal date. Either party may terminate this Agreement upon giving the other party 30 days’ prior written notice of such termination. In the event this Agreement is terminated by either party, the Company shall pay pro rata fees and unpaid expenses through the termination date to the Adviser promptly thereafter.
4. Compensation. As compensation for the Adviser’s services under this Agreement, the Company shall pay to the Adviser (i) a cash retainer fee of $55,000, payable quarterly in arrears and (ii) an additional fee of $2,000 for each Board meeting attended. In addition, the Adviser shall receive an annual grant of restricted stock units (“RSUs”) on the Effective Date and each renewal date with a grant date value of $120,000, which RSUs will vest one-half on the first anniversary of the grant date, and one-half on the second anniversary of the grant date. The
RSUs will be granted under and subject to the provisions of the Company’s omnibus incentive plan and the Company’s standard form of award instrument.
5. Expenses. The Company agrees to promptly reimburse the Adviser for reasonable out-of-pocket expenses incurred in connection with the Adviser’s services, provided that the Adviser shall provide appropriate documentation of all expenses, all in accordance with the Company’s standard practices.
6. Indemnification. In the performance of services, the Adviser shall be obligated to act only in good faith, and shall not be liable to the Company for errors in judgment that are not the result of intentional misconduct. The Company agrees to indemnify and hold harmless the Adviser from and against any and all losses, claims, expenses, damages or liabilities, joint or several, (including the costs of any investigation and all reasonable attorneys’ fees and costs) to which the Adviser may become subject or incurred by the Adviser, to the fullest extent lawful, in connection with any pending or threatened litigation, legal claim or proceeding arising out of or in connection with the services rendered by the Adviser under this Agreement; provided, however, that the foregoing indemnity shall not apply to any such losses, claims, related expenses, damages or liabilities arising out of the Adviser’s intentional misconduct, fraud, or material breach of this Agreement. The terms and provisions of this Section 6 shall survive termination or expiration of this Agreement.
7. Confidential Information.
7.1 As used in this Agreement, “Confidential Information” means any and all confidential or proprietary technical, trade and business information furnished, in any medium, or disclosed in any form or method, including orally, by the Company to the Adviser during Adviser’s employment with the Company or during the term of this Agreement, or discovered by the Adviser through any means, including observation, including, but not limited to, information about the Company’s employees, officers, directors, suppliers, customers, affiliates, businesses and business relationships; financial data, financial projections, business plans, capabilities, trade secrets, and such other information normally understood to be confidential or otherwise designated as such in writing by the Company, as well as information discerned from, based on or relating to any of the foregoing which may be prepared or created by the Adviser. Confidential Information shall not include:
(i) information that is publicly available as of the date of this Agreement; or
(ii) information that subsequently becomes publicly available or generally known in the industry through no fault of the Adviser, provided that such information shall be deemed Confidential Information until such time as it becomes publicly available or generally known.
7.2 The Adviser shall retain all Confidential Information in confidence and shall comply with any and all procedures adopted from time to time to protect and preserve the confidentiality of any Confidential Information. The Adviser shall not at any time, during or after the term of this Agreement, directly or indirectly, divulge, use or permit the use of any Confidential Information, except as required by the Adviser’s services under this Agreement. Adviser agrees to employ reasonable steps to protect Confidential Information from unauthorized or inadvertent disclosure. Upon expiration or termination of this Agreement and upon the Company’s request during the term of this Agreement, the Adviser shall promptly destroy, or return at the Company’s option and expense, any and all tangible Confidential Information (whether written or electronic) to the Company, including all copies, abstracts or derivatives thereof.
7.3 The Adviser recognizes that the Company has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on the Company’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. The Adviser agrees that, during the term of this Agreement and thereafter, the Adviser owes the Company and such third parties a duty to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation or to use it except as necessary in carrying out the services for the Company under this Agreement consistent with the Company’s agreement with such third party.
2
7.4 The terms and provisions of this Section 7 shall survive termination or expiration of this Agreement.
8. Restrictions on Trading in the Company’ Stock. The Adviser acknowledges and agrees that he will be subject to the provisions of the Company’s Insider Trading Policy, as in effect from time to time (the “Insider Trading Policy”), and will be a “Covered Person” as defined in the Insider Trading Policy. In addition, the Adviser acknowledges and agrees that he will be subject to the Blackout Periods applicable to Designated Insiders under the Insider Trading Policy and pre-clearance of trades required of designated insiders under the Insider Trading Policy. The Adviser further acknowledges and agrees that the foregoing restrictions will apply to his Family Members/Controlled Entities, as such term is defined in the Insider Trading Policy.
9. Publicity. The Company shall have the right to use the name, biography and photo of the Adviser on the Company’s website, marketing and advertising materials during the term of this Agreement.
10. Other Relationships. The Company acknowledges that the Adviser may serve as an officer or director of other companies. During the term of this Agreement, the Adviser shall provide the Company with prior written notice of any changes in the Adviser’s affiliations and of any changes in circumstances that could raise a potential conflict of interest as provided in the Company’s Code of Business Conduct.
11. Authority; No Conflicts. Each party respectively represents and warrants that it or he has all requisite power and authority to enter into this Agreement and that the execution, delivery and performance of this Agreement does not and will not result in any violation of, be in conflict with, or constitute a default under any agreement or other instrument to which such party is bound.
12. Notices. All notices and all other communications hereunder shall be in writing and shall be deemed given if delivered personally or sent by registered or certified mail, postage prepaid (return receipt requested), sent by facsimile (receipt of which is confirmed) or sent by a nationally recognized overnight courier (receipt of which is confirmed) to a party at the following addresses (or at such other address for a party as shall be specified by like notice):
If to the Adviser: the address set forth on the signature page.
If to the Company:
MSC Industrial Direct Co., Inc.
75 Maxess Road
Melville, New York 11747
Attn: General Counsel
Facsimile: (516) 812-1175
Each such notice or other communication shall be effective at the time of receipt if delivered personally or sent by facsimile (with receipt confirmed) or nationally recognized overnight courier (with receipt confirmed), or three (3) business days after being mailed, registered or certified mail, postage prepaid, return receipt requested.
13. Parties in Interest. This Agreement is made solely for the benefit of the Adviser and the Company. No other person shall acquire or have any right under or by virtue of this Agreement.
14. Entire Agreement; Amendments; Severability; Counterparts; Construction of Agreement. This Agreement constitutes the entire agreement and understanding of the parties, and supersedes any and all previous agreements and understandings, whether oral or written, between the parties with respect to the matters set forth in this Agreement. No provision of this Agreement may be amended, modified or waived, except in a writing signed by the parties. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision, and if any restriction in this Agreement is found by a court to be unreasonable or unenforceable, then such court may amend or modify the restriction so it can be enforced to the fullest extent permitted by law. This Agreement may be executed by electronic signature in any number of counterparts, each of
3
which together shall constitute one and the same instrument. No provision of this Agreement shall be construed against either party as the drafter thereof. The titles of the Sections of this Agreement are for convenience of reference only and in no way define, limit, extend, or describe the scope of this Agreement or the intent of any of its provisions.
15. Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of New York, without giving effect to conflict of law principles. Any legal action or other legal proceeding relating to this Agreement or the enforcement of any provision of this Agreement will be brought or otherwise commenced in any state or federal court sitting in the Borough of Manhattan of the City of New York. Each party hereto agrees to the entry of an order to enforce any resolution, settlement, order or award made pursuant to this Section 15 by the state and federal courts sitting in the Borough of Manhattan of the City of New York and in connection therewith hereby irrevocably waives, and agrees not to assert by way of motion, defense, or otherwise, in any such action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the action or proceeding is brought in an inconvenient forum, that the venue of the action is improper, or that this Agreement or the transactions contemplated by this Agreement may not be enforced in or by any of the above-named courts.
[Signatures follow on next page]
4
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
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MSC INDUSTRIAL DIRECT CO., INC. |
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By: |
/s/ Steve Armstrong |
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Name: |
Steve Armstrong |
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Title: |
Senior Vice President, General Counsel and Corporate Secretary |
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/s/ Roger Fradin |
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Roger Fradin |
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75 Juniper Drive |
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Atherton, CA 94027 |
5
EXHIBIT 31.1
CERTIFICATION
I, Erik Gershwind, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of MSC Industrial Direct Co., Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: April 8, 2020
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/s/ ERIK GERSHWIND |
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Erik Gershwind President and Chief Executive Officer |
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(Principal Executive Officer) |
CERTIFICATION
I, Greg Clark, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of MSC Industrial Direct Co., Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: April 8, 2020
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/s/ GREG CLARK |
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Greg Clark Vice President and Interim Chief Financial Officer |
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(Principal Financial Officer) |
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES‑OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of MSC Industrial Direct Co., Inc. (the “Company”) for the fiscal quarter ended February 29, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Erik Gershwind, Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that:
(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 8, 2020
By: |
/s/ ERIK GERSHWIND |
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Name: |
Erik Gershwind |
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A signed original of this written statement required by Section 906 has been provided to MSC Industrial Direct Co., Inc. and will be retained by it and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES‑OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of MSC Industrial Direct Co., Inc. (the “Company”) for the fiscal quarter ended February 29, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Greg Clark, Interim Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that:
(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 8, 2020
By: |
/s/ GREG CLARK |
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Name: |
Greg Clark |
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A signed original of this written statement required by Section 906 has been provided to MSC Industrial Direct Co., Inc. and will be retained by it and furnished to the Securities and Exchange Commission or its staff upon request.
Business Combination (Details) $ in Thousands |
6 Months Ended |
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Feb. 29, 2020
USD ($)
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TAC [Member] | |
Business Acquisition [Line Items] | |
Post-closing working capital adjustment paid out | $ 2,286 |
Stock-Based Compensation (Schedule Of Option Grant Fair Value Assumptions) (Details) |
6 Months Ended |
---|---|
Mar. 02, 2019
$ / shares
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Stock-Based Compensation [Abstract] | |
Expected life (in years) | 4 years |
Risk-free interest rate | 2.98% |
Expected volatility | 23.13% |
Expected dividend yield | 2.70% |
Weighted-average grant-date fair value | $ 14.05 |
Condensed Consolidated Statements Of Shareholders' Equity - USD ($) $ in Thousands |
Class A Common Stock [Member]
Common Stock [Member]
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Class A Common Stock [Member]
Retained Earnings [Member]
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Class A Common Stock [Member]
Treasury Stock [Member]
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Class A Common Stock [Member] |
Class B Common Stock [Member]
Common Stock [Member]
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Class B Common Stock [Member]
Retained Earnings [Member]
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Class B Common Stock [Member] |
Additional Paid-In-Capital [Member] |
Retained Earnings [Member] |
Accumulated Other Comprehensive Loss [Member] |
Treasury Stock [Member] |
Total Shareholders' Equity Attributable to MSC Industrial [Member] |
Noncontrolling Interest [Member] |
Total |
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Balance, Value at Sep. 01, 2018 | $ 55 | $ 10 | $ 657,749 | $ 1,325,822 | $ (19,634) | $ (576,748) | ||||||||
Issuance of Noncontrolling Interest in MSC Mexico | $ 4,637 | |||||||||||||
Capital Contributions | 1,022 | |||||||||||||
Foreign Currency Translation Adjustment | (603) | (63) | $ (666) | |||||||||||
Net Income | 142,656 | 6 | 142,656 | |||||||||||
Repurchase and retirement of common stock, Value | (1) | (11,887) | (48,439) | |||||||||||
Associate Incentive Plans | 24,185 | 1,243 | ||||||||||||
Repurchases of common stock, Value | $ (24,098) | |||||||||||||
Cash dividends on common stock | $ (56,707) | $ (12,844) | ||||||||||||
Dividend equivalents declared, net of cancellations | (516) | |||||||||||||
Balance, Value at Mar. 02, 2019 | 54 | 10 | 670,047 | 1,349,972 | (20,237) | (599,603) | $ 1,400,243 | 5,602 | 1,405,845 | |||||
Dividends declared per common share | $ 1.26 | $ 1.26 | ||||||||||||
Balance, Value at Dec. 01, 2018 | 54 | 10 | 660,185 | 1,316,489 | (20,975) | (579,451) | ||||||||
Issuance of Noncontrolling Interest in MSC Mexico | 4,637 | |||||||||||||
Capital Contributions | 1,022 | |||||||||||||
Foreign Currency Translation Adjustment | 738 | (63) | 675 | |||||||||||
Net Income | 68,424 | 6 | 68,424 | |||||||||||
Repurchase and retirement of common stock, Value | ||||||||||||||
Associate Incentive Plans | 9,862 | 746 | ||||||||||||
Repurchases of common stock, Value | (20,898) | |||||||||||||
Cash dividends on common stock | (28,271) | (6,422) | ||||||||||||
Dividend equivalents declared, net of cancellations | (248) | |||||||||||||
Balance, Value at Mar. 02, 2019 | 54 | 10 | 670,047 | 1,349,972 | (20,237) | (599,603) | 1,400,243 | 5,602 | 1,405,845 | |||||
Dividends declared per common share | 0.63 | 0.63 | ||||||||||||
Balance, Value at Aug. 31, 2019 | 46 | 10 | 659,226 | 946,651 | (22,776) | (104,607) | 5,329 | 1,483,879 | ||||||
Foreign Currency Translation Adjustment | 723 | 95 | 818 | |||||||||||
Net Income | 120,918 | 90 | 120,918 | |||||||||||
Repurchase and retirement of common stock, Value | ||||||||||||||
Associate Incentive Plans | 1 | 22,431 | 2,057 | |||||||||||
Repurchases of common stock, Value | (3,208) | |||||||||||||
Cash dividends on common stock | (294,923) | (65,892) | ||||||||||||
Dividend equivalents declared, net of cancellations | (3,358) | |||||||||||||
Balance, Value at Feb. 29, 2020 | 47 | 10 | 681,657 | 703,396 | (22,053) | (105,758) | 1,257,299 | 5,514 | 1,262,813 | |||||
Dividends declared per common share | 6.50 | 6.50 | ||||||||||||
Balance, Value at Nov. 30, 2019 | 46 | 10 | 668,668 | 970,139 | (21,310) | (106,690) | 5,503 | |||||||
Foreign Currency Translation Adjustment | (743) | (45) | (788) | |||||||||||
Net Income | 55,500 | 56 | 55,500 | |||||||||||
Repurchase and retirement of common stock, Value | ||||||||||||||
Associate Incentive Plans | 1 | 12,989 | 1,131 | |||||||||||
Repurchases of common stock, Value | $ (199) | |||||||||||||
Cash dividends on common stock | $ (261,032) | $ (58,247) | ||||||||||||
Dividend equivalents declared, net of cancellations | (2,964) | |||||||||||||
Balance, Value at Feb. 29, 2020 | $ 47 | $ 10 | $ 681,657 | $ 703,396 | $ (22,053) | $ (105,758) | $ 1,257,299 | $ 5,514 | $ 1,262,813 | |||||
Dividends declared per common share | $ 5.75 | $ 5.75 |
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands |
6 Months Ended | |
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Feb. 29, 2020 |
Aug. 31, 2019 |
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Accounts receivable, allowance for doubtful accounts | $ 18,577 | $ 17,088 |
Preferred stock, par value | $ 0.001 | $ 0.001 |
Preferred stock, shares authorized | 5,000,000 | 5,000,000 |
Preferred stock, shares issued | 0 | 0 |
Preferred stock, shares outstanding | 0 | 0 |
Class A treasury stock, at cost, shares | 1,258,157 | 1,248,944 |
Class A Common Stock [Member] | ||
Common stock, votes per share | one | |
Common stock, par value | $ 0.001 | $ 0.001 |
Common stock, shares authorized | 100,000,000 | 100,000,000 |
Common stock, shares issued | 46,685,151 | 46,277,284 |
Class B Common Stock [Member] | ||
Common stock, votes per share | ten | |
Common stock, par value | $ 0.001 | $ 0.001 |
Common stock, shares authorized | 50,000,000 | 50,000,000 |
Common stock, shares issued | 10,129,856 | 10,193,348 |
Common stock, shares outstanding | 10,129,856 | 10,193,348 |
Stock-Based Compensation |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Stock-Based Compensation [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-Based Compensation | Note 4. Stock-Based Compensation
The Company accounts for all share-based payments in accordance with ASC Topic 718, “Compensation—Stock Compensation,” as subsequently amended. Stock-based compensation expense included in operating expenses for the thirteen and twenty-six-week periods ended February 29, 2020 and March 2, 2019 was as follows:
Stock Options
The Company discontinued its grants of stock options in fiscal 2020. For the thirteen and twenty-six-week periods ended March 2, 2019, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
A summary of the Company’s stock option activity for the twenty-six-week period ended February 29, 2020 is as follows:
The unrecognized share-based compensation cost related to stock option expense at February 29, 2020 was $5,436 and will be recognized over a weighted average period of 1.9 years. The total intrinsic value of options exercised, which represents the difference between the exercise price and market value of common stock measured at each individual exercise date, during the twenty-six-week periods ended February 29, 2020 and March 2, 2019 was $2,574 and $1,617, respectively.
Performance Share Units
Beginning in fiscal 2020, the Company grants performance share units (“PSU”) as part of its long-term stock-based compensation program. PSUs cliff vest after a three year performance period based on achievement of specific performance goals. Based on the extent to which the targets are achieved, vested shares may range from zero to 200 percent of the target award amount.
The following table summarizes all transactions related to PSUs under the Company’s 2015 Omnibus Incentive Plan (based on target award amounts) for the twenty-six weeks ended February 29, 2020:
The fair value of each PSU is the closing stock price on the NYSE of the Company’s Class A common stock on the date of grant. Upon vesting, subject to achievement of performance goals, a portion of the PSU award may be withheld to satisfy the statutory income tax withholding obligation. The remaining PSUs will be settled in shares of the Company’s Class A common stock when vested. These awards accrue dividend equivalents on the underlying PSUs (in the form of additional stock units) based on dividends declared on the Company’s Class A common stock and these dividend equivalents are paid out in unrestricted common stock on the vesting dates of the underlying PSUs, subject to the same performance vesting requirements. The unrecognized share-based compensation cost related to the PSUs at February 29, 2020 was $1,908 and is expected to be recognized over a period of 2.7 years.
Restricted Share Awards
A summary of the non-vested restricted share award (“RSA”) activity under the Company’s 2005 Omnibus Incentive Plan and 2015 Omnibus Incentive Plan for the twenty-six-week period ended February 29, 2020 is as follows:
The fair value of each RSA is the closing stock price on the NYSE of the Company’s Class A common stock on the date of grant. Upon vesting, a portion of the RSA award may be withheld to satisfy the statutory income tax withholding obligation. The remaining RSAs will be settled in shares of the Company’s Class A common stock when vested. The unrecognized share-based compensation cost related to RSAs at February 29, 2020 was minimal and the remaining RSAs will vest in March 2020.
Restricted Stock Units
A summary of the Company’s non-vested Restricted Stock Unit (“RSU”) award activity under the Company’s 2015 Omnibus Incentive Plan for the twenty-six-week period ended February 29, 2020 is as follows:
The fair value of each RSU is the closing stock price on the NYSE of the Company’s Class A common stock on the date of grant. Upon vesting, a portion of the RSU award may be withheld to satisfy the statutory income tax withholding obligation. The remaining RSUs will be settled in shares of the Company’s Class A common stock when vested. These awards accrue dividend equivalents on the underlying RSUs (in the form of additional stock units) based on dividends declared on the Company’s Class A common stock and these dividend equivalents are paid out in unrestricted common stock on the vesting dates of the underlying RSUs. The unrecognized share-based compensation cost related to the RSUs at February 29, 2020 was $32,969 and is expected to be recognized over a weighted average period of 3.2 years. |
Shareholders' Equity |
6 Months Ended |
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Feb. 29, 2020 | |
Shareholders' Equity [Abstract] | |
Shareholders' Equity | Note 8. Shareholders’ Equity
Common Stock Repurchases and Treasury Stock
During the thirteen and twenty-six-week periods ended February 29, 2020, the Company repurchased 3 and 44 shares of its Class A common stock for $199 and $3,208, respectively. All of these shares were repurchased by the Company to satisfy the Company’s associates’ tax withholdings liability associated with its share-based compensation program and are reflected at cost as treasury stock in the accompanying Condensed Consolidated Financial Statements for the thirteen and twenty-six-week periods ended February 29, 2020. During the thirteen and twenty-six-week periods ended March 2, 2019, the Company repurchased 275 and 1,053 shares of its Class A common stock for $20,898 and $84,425, respectively. From these totals, 275 and 315 shares were not retired and the amounts of $20,898 and $24,098 are reflected at cost as treasury stock in the accompanying Condensed Consolidated Financial Statements for the thirteen and twenty-six weeks ended March 2, 2019, respectively.
As part of the Company’s ongoing Stock Repurchase Plan, the total number of shares of Class A common stock authorized for future repurchase by the Board of Directors was 1,157 at February 29, 2020.
The Company reissued 19 and 35 shares of treasury stock during the thirteen and twenty-six-week periods ended February 29, 2020, respectively, and reissued 20 and 33 shares of treasury stock during the thirteen and twenty-six-week periods ended March 2, 2019, respectively, to fund the Associate Stock Purchase Plan.
Dividends on Common Stock
The Company paid cash dividends of $360,815 for the twenty-six weeks ended February 29, 2020 which consisted of a special cash dividend of approximately $277,634 at $5.00 per share and regular cash dividends of approximately $83,181 at $1.50 per share. For the twenty-six weeks ended March 2, 2019, the Company paid cash dividends of $69,551 at $1.26 per share.
On March 31, 2020, the Board of Directors declared a quarterly cash dividend of $0.75 per share payable on April 28, 2020 to shareholders of record at the close of business on April 14, 2020. The dividend will result in a payout of approximately $41,668, based on the number of shares outstanding at March 16, 2020. |
Income Taxes |
6 Months Ended |
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Feb. 29, 2020 | |
Income Taxes [Abstract] | |
Income Taxes | Note 12. Income Taxes
During the twenty-six-week period ended February 29, 2020, there were no material changes in unrecognized tax benefits. |
Revenue (Tables) |
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Revenue [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Disaggregation Of Revenue |
__________________________ (1)The other category primarily includes individual customer and small business net sales not assigned to a specific industry classification.
__________________________ (1)The other category primarily includes individual customer and small business net sales not assigned to a specific industry classification.
The Company’s net sales originating from the following geographic areas were as follows for the thirteen and twenty-six-week periods ended February 29, 2020 and March 2, 2019:
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Leases (Tables) |
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Feb. 29, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Leases [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Components Of Lease Expense |
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Supplemental Balance Sheet Information |
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Supplemental Cash Flow Information |
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Schedule Of Future Lease Payments |
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Schedule Of Future Lease Payments Under Prior Standard |
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Restructuring and Other Related Costs (Details) $ in Thousands |
3 Months Ended | 6 Months Ended | |
---|---|---|---|
Feb. 29, 2020
USD ($)
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Feb. 29, 2020
USD ($)
employee
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Aug. 31, 2019
USD ($)
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Restructuring and Other Related Costs [Abstract] | |||
Consulting fees associated with optimization | $ 2,132 | ||
Number of associates with accrued severance benefits | employee | 125 | ||
Severance and separation benefit charges | $ 2,377 | ||
Stock compensation expense, accelerated vesting | 87 | ||
Cash payments | 7,955 | ||
Severance and separation benefit balance | $ 379 | $ 379 | $ 6,044 |
Leases (Supplemental Cash Flow Information) (Details) $ in Thousands |
6 Months Ended |
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Feb. 29, 2020
USD ($)
| |
Leases [Abstract] | |
Operating Cash Outflows from Operating Leases | $ 12,188 |
Operating Cash Outflows from Finance Leases | 55 |
Financing Cash Outflows from Finance Leases | 504 |
Leased assets obtained in exchange for new operating lease liabilities | 9,817 |
Leased assets obtained in exchange for new finance lease liabilities | $ 1,973 |
Debt (Financing Arrangements) (Narrative) (Details) $ in Thousands |
6 Months Ended |
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Feb. 29, 2020
USD ($)
| |
Capital Leased Assets [Line Items] | |
Borrowings under financing obligations | $ 1,164 |
IT Equipment And Software [Member] | |
Capital Leased Assets [Line Items] | |
Property, plant and equipment, gross | 1,328 |
Accumulated amortization | $ 343 |
Basis Of Presentation (Details) - USD ($) $ in Thousands |
Feb. 29, 2020 |
Sep. 01, 2019 |
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---|---|---|---|---|
New Accounting Pronouncements or Change in Accounting Principle [Line Items] | ||||
Operating lease assets | $ 60,064 | |||
Operating lease liabilities | [1] | $ 59,706 | ||
Restatement Adjustment [Member] | Accounting Standards Update 2016-02 [Member] | ||||
New Accounting Pronouncements or Change in Accounting Principle [Line Items] | ||||
Operating lease assets | $ 61,212 | |||
Operating lease liabilities | $ 60,730 | |||
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Legal Proceedings |
6 Months Ended |
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Feb. 29, 2020 | |
Legal Proceedings [Abstract] | |
Legal Proceedings | Note 13. 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. |
Net Income Per Share (Tables) |
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Feb. 29, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Income Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basic And Diluted Net Income Per Common Share Under The Two-Class Method |
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Leases (Supplemental Balance Sheet Information) (Details) - USD ($) $ in Thousands |
Feb. 29, 2020 |
Aug. 31, 2019 |
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---|---|---|---|---|---|---|---|
Leases [Abstract] | |||||||
Operating lease assets | $ 60,064 | ||||||
Finance lease assets | [1] | 4,280 | $ 2,958 | ||||
Total leased assets | 64,344 | 2,958 | |||||
Current operating lease liabilities | 21,587 | ||||||
Current finance lease liabilities | 1,244 | 765 | |||||
Noncurrent operating lease liabilities | 38,119 | ||||||
Noncurrent finance lease liabilities | 3,104 | 2,206 | |||||
Total lease liabilities | $ 64,054 | [2] | 2,971 | ||||
Weighted average remaining lease term (years), Operating leases | 4 years | ||||||
Weighted average remaining lease term (years), Finance leases | 3 years 4 months 24 days | ||||||
Weighted average discount rate, Operating leases | 3.50% | ||||||
Weighted average discount rate, Finance leases | 2.60% | ||||||
Finance lease right of use assets, Accumulated amortization | $ 793 | $ 1,398 | |||||
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Debt (Shelf Facility Agreements) (Narrative) (Details) |
6 Months Ended |
---|---|
Feb. 29, 2020
USD ($)
| |
Line of Credit Facility [Line Items] | |
Maximum consolidated leverage ratio of total indebtedness to EBITDA | 3.00 |
Maximum consolidated leverage ratio of total indebtedness to EBITDA after material acquisition | 3.50 |
Minimum consolidated interest coverage ratio of EBITDA to total interest expense | 3.00 |
Series 2018A Notes [Member] | |
Line of Credit Facility [Line Items] | |
Principal amount | $ 20,000,000 |
Interest rate | 3.22% |
Maturity date | Jun. 11, 2020 |
Series 2018B Notes [Member] | |
Line of Credit Facility [Line Items] | |
Principal amount | $ 20,000,000 |
Interest rate | 3.42% |
Maturity date | Jun. 11, 2021 |
Senior Notes Due January 2023 [Member] | |
Line of Credit Facility [Line Items] | |
Principal amount | $ 50,000,000 |
Interest rate | 3.04% |
Maturity date | Jan. 12, 2023 |
Met Life Note Purchase Agreement [Member] | |
Line of Credit Facility [Line Items] | |
Credit facility, maximum borrowing capacity | $ 250,000,000 |
Remaining borrowing capacity | 210,000,000 |
Prudential Note Purchase Agreement [Member] | |
Line of Credit Facility [Line Items] | |
Credit facility, maximum borrowing capacity | 250,000,000 |
Remaining borrowing capacity | $ 200,000,000 |
Shareholders' Equity (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
Mar. 31, 2020 |
Feb. 29, 2020 |
Mar. 02, 2019 |
Feb. 29, 2020 |
Mar. 02, 2019 |
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Components Of Shareholders Equity [Line Items] | |||||
Treasury stock reissued to fund plan, shares | 19 | 20 | 35 | 33 | |
Cash dividends paid per common share | $ 1.26 | ||||
Cash dividends paid | $ 360,815 | $ 69,551 | |||
Subsequent Event [Member] | |||||
Components Of Shareholders Equity [Line Items] | |||||
Dividends payable per share | $ 0.75 | ||||
Dividend payable date | Apr. 28, 2020 | ||||
Dividends record date | Apr. 14, 2020 | ||||
Dividend payable amount | $ 41,668 | ||||
Regular Dividends [Member] | |||||
Components Of Shareholders Equity [Line Items] | |||||
Cash dividends paid per common share | $ 1.50 | ||||
Cash dividends paid | $ 83,181 | ||||
Special Dividends [Member] | |||||
Components Of Shareholders Equity [Line Items] | |||||
Cash dividends paid per common share | $ 5.00 | ||||
Cash dividends paid | $ 277,634 | ||||
Class A Common Stock [Member] | |||||
Components Of Shareholders Equity [Line Items] | |||||
Common stock shares repurchased | 3 | 275 | 44 | 315 | |
Treasury stock repurchased, and treasury stock repurchased and retired, shares | 275 | 1,053 | |||
Treasury stock repurchased, and treasury stock repurchased and retired, amount | $ 20,898 | $ 84,425 | |||
Number of shares authorized for repurchase | 1,157 | 1,157 | |||
Treasury Stock [Member] | Class A Common Stock [Member] | |||||
Components Of Shareholders Equity [Line Items] | |||||
Purchase of treasury stock | $ 199 | $ 20,898 | $ 3,208 | $ 24,098 |
Product Warranties (Details) |
6 Months Ended |
---|---|
Feb. 29, 2020 | |
Minimum [Member] | |
Product warranties with original equipment manufacturers | 30 days |
Maximum [Member] | |
Warranty period | 1 year |
Product warranties with original equipment manufacturers | 90 days |
Stock-Based Compensation (Schedule Of Stock-Based Compensation Expense) (Details) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Feb. 29, 2020 |
Mar. 02, 2019 |
Feb. 29, 2020 |
Mar. 02, 2019 |
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Share-based Payment Arrangement, Expensed and Capitalized, Amount [Line Items] | ||||
Stock-based compensation | $ 4,017 | $ 3,904 | $ 8,178 | $ 8,078 |
Deferred income tax benefit | (1,008) | (980) | (2,048) | (2,028) |
Stock-based compensation expense, net | 3,009 | 2,924 | 6,130 | 6,050 |
Stock Options [Member] | ||||
Share-based Payment Arrangement, Expensed and Capitalized, Amount [Line Items] | ||||
Stock-based compensation | 754 | 1,121 | 1,729 | 2,326 |
Restricted Share Awards [Member] | ||||
Share-based Payment Arrangement, Expensed and Capitalized, Amount [Line Items] | ||||
Stock-based compensation | (21) | 338 | 184 | 870 |
Restricted Stock Units [Member] | ||||
Share-based Payment Arrangement, Expensed and Capitalized, Amount [Line Items] | ||||
Stock-based compensation | 3,039 | 2,364 | 5,915 | 4,729 |
Performance Share Units [Member] | ||||
Share-based Payment Arrangement, Expensed and Capitalized, Amount [Line Items] | ||||
Stock-based compensation | 168 | 214 | ||
Associate Stock Purchase Plan [Member] | ||||
Share-based Payment Arrangement, Expensed and Capitalized, Amount [Line Items] | ||||
Stock-based compensation | $ 77 | $ 81 | $ 136 | $ 153 |
Condensed Consolidated Statements Of Comprehensive Income (Parenthetical) - USD ($) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Feb. 29, 2020 |
Mar. 02, 2019 |
Feb. 29, 2020 |
Mar. 02, 2019 |
|
Condensed Consolidated Statements Of Comprehensive Income [Abstract] | ||||
Other comprehensive income, taxes | $ 0 | $ 0 | $ 0 | $ 0 |
Revenue (Narrative) (Details) |
6 Months Ended | 12 Months Ended |
---|---|---|
Feb. 29, 2020
USD ($)
segment
|
Aug. 31, 2019
USD ($)
|
|
Accrued sales returns | $ 5,592,000 | $ 5,432,000 |
Accrued sales incentives | 18,843,000 | 14,770,000 |
Prepaid sales incentives | 4,031,000 | 2,788,000 |
Performance obligation | 0 | 0 |
Contract assets | 0 | 0 |
Contract liabilities | $ 0 | $ 0 |
Number of operating segments | segment | 1 | |
Number of reportable segments | segment | 1 | |
Maximum [Member] | ||
Payment term | 1 year |
Condensed Consolidated Balance Sheets - USD ($) $ in Thousands |
Feb. 29, 2020 |
Aug. 31, 2019 |
---|---|---|
Current Assets: | ||
Cash and cash equivalents | $ 44,867 | $ 32,286 |
Accounts receivable, net of allowance for doubtful accounts of $18,577 and $17,088, respectively | 536,902 | 541,091 |
Inventories | 556,402 | 559,136 |
Prepaid expenses and other current assets | 74,376 | 67,099 |
Total current assets | 1,212,547 | 1,199,612 |
Property, plant and equipment, net | 311,267 | 310,854 |
Goodwill | 677,039 | 677,266 |
Identifiable intangibles, net | 110,644 | 116,668 |
Operating lease assets | 60,064 | |
Other assets | 5,472 | 6,837 |
Total assets | 2,377,033 | 2,311,237 |
Current Liabilities: | ||
Current portion of long-term debt including obligations under finance leases | 410,360 | 175,453 |
Current portion of operating lease liabilities | 21,587 | |
Accounts payable | 155,304 | 160,110 |
Accrued expenses and other current liabilities | 107,307 | 111,353 |
Total current liabilities | 694,558 | 446,916 |
Long-term debt including obligations under finance leases | 267,533 | 266,431 |
Noncurrent operating lease liabilities | 38,119 | |
Deferred income taxes and tax uncertainties | 114,010 | 114,011 |
Total liabilities | 1,114,220 | 827,358 |
Commitments and Contingencies | ||
Shareholders’ Equity: | ||
Preferred stock; $0.001 par value; 5,000,000 shares authorized; none issued and outstanding | ||
Additional paid-in capital | 681,657 | 659,226 |
Retained earnings | 703,396 | 946,651 |
Accumulated other comprehensive loss | (22,053) | (22,776) |
Class A treasury stock, at cost, 1,258,157 and 1,248,944 shares, respectively | (105,758) | (104,607) |
Total MSC Industrial shareholders’ equity | 1,257,299 | 1,478,550 |
Noncontrolling interest | 5,514 | 5,329 |
Total shareholders' equity | 1,262,813 | 1,483,879 |
Total liabilities and shareholders' equity | 2,377,033 | 2,311,237 |
Class A Common Stock [Member] | ||
Shareholders’ Equity: | ||
Common stock | 47 | 46 |
Class B Common Stock [Member] | ||
Shareholders’ Equity: | ||
Common stock | $ 10 | $ 10 |
Fair Value (Details) - USD ($) |
3 Months Ended | 6 Months Ended | ||||
---|---|---|---|---|---|---|
Feb. 29, 2020 |
Nov. 30, 2019 |
Mar. 02, 2019 |
Dec. 01, 2018 |
Feb. 29, 2020 |
Mar. 02, 2019 |
|
Fair Value [Abstract] | ||||||
Fair value remeasurement of non-financial assets on non-recurring basis | $ 0 | $ 0 | $ 0 | $ 0 | ||
Fair value remeasurement of non-financial liabilities on non-recurring basis | $ 0 | $ 0 |
Fair Value |
6 Months Ended | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Feb. 29, 2020 | |||||||||||||
Fair Value [Abstract] | |||||||||||||
Fair Value | Note 5. 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:
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, and outstanding indebtedness. The Company uses a market approach to determine the fair value of its debt instruments, utilizing quoted prices in active markets, interest rates and other relevant information generated by market transactions involving similar instruments. Therefore, the inputs used to measure the fair value of the Company's debt instruments are classified as Level 2 within the fair value hierarchy. The reported carrying amounts of the Company’s financial instruments approximated their fair values as of February 29, 2020 and August 31, 2019.
During the twenty-six-week periods ended February 29, 2020 and March 2, 2019, the Company had no remeasurements of non-financial assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition. |
Restructuring And Other Related Costs |
6 Months Ended |
---|---|
Feb. 29, 2020 | |
Restructuring and Other Related Costs [Abstract] | |
Restructuring and Other Related Costs | Note 9. Restructuring and Other Related Costs
Consulting Related Costs
Beginning in the second quarter of fiscal 2020, the Company engaged consultants to assist in reviewing optimization of the Company’s operations. The Company incurred $2,132 in consulting fees for the thirteen weeks ended February 29, 2020. These costs are included within operating expenses in the Consolidated Statements of Income.
Severance and Separation Benefits
Beginning in fiscal 2019 and through the first quarter of fiscal 2020, the Company identified opportunities for improvements in its workforce realignment, strategy, and staffing, and increased its focus on performance management, to ensure it has the right skillsets and number of associates to execute its long-term vision. As such, the Company extended voluntary and involuntary severance and separation benefits to certain associates.
The severance and separation cost liability balance was $6,044 at August 31, 2019. During the twenty-six-week period ended February 29, 2020, the Company accrued severance and separation benefits charges and other related costs for approximately 125 associates of $2,377, which included $87 of stock-based compensation expense from the acceleration of equity award vestings. These costs are included within operating expenses in the Consolidated Statements of Income. In addition, $7,955 of charges were paid out during the twenty-six-week period ended February 29, 2020, resulting in a severance and separation cost liability balance of $379 at February 29, 2020. |
Basis Of Presentation (Policy) |
6 Months Ended |
---|---|
Feb. 29, 2020 | |
Basis Of Presentation [Abstract] | |
Principles Of Consolidation | Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of MSC Industrial Direct Co., Inc., its wholly owned subsidiaries and entities in which it maintains a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. |
Recently Adopted Accounting Pronouncements | Recently Adopted Accounting Pronouncements
Effective September 1, 2019, the Company adopted 2016-02, Leases (Topic 842) as subsequently amended. This is a comprehensive new standard that amends various aspects of existing accounting guidance for leases, including the recognition of a right-of-use asset and a lease liability on the balance sheet and disclosing key information about leasing arrangements. The Company utilized the optional transition method set forth in Accounting Standard Update (“ASU”) 2018-11 that allows entities to initially apply the new lease accounting standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Therefore, the adoption did not require restatement of prior periods. In addition, the Company elected the transition package of practical expedients permitted within the standard, which allowed it to carry forward the historical lease classification for arrangements that commenced prior to the effective date.
As a result of the adoption of ASC 842 on September 1, 2019, the Company recorded both operating lease assets of $61,212 and operating lease liabilities of $60,730. The adoption of ASC 842 had an immaterial impact on the Company’s Condensed Consolidated Statement of Income and Condensed Consolidated Statement of Cash Flows. The adoption of this standard also resulted in a change in the naming convention for leases classified historically as capital leases. These leases are now referred to as finance leases. See Note 7 “Leases” for additional qualitative and quantitative information about the Company's leases. |
Accounting Pronouncements Not Yet Adopted | Accounting Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for financial statement periods beginning after December 15, 2019. The new standard is effective for the Company for its fiscal year 2021. The Company is currently evaluating the standard to determine the impact, if any, of adoption to its consolidated financial statements.
Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the Company’s financial position, results of operations or cash flows. |
Debt (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Feb. 29, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Debt |
__________________________ (1)Net of unamortized debt issuance costs expected to be amortized in the next twelve months.
|
Leases (Schedule Of Future Lease Payments) (Details) - USD ($) $ in Thousands |
Feb. 29, 2020 |
Aug. 31, 2019 |
|||
---|---|---|---|---|---|
Operating Leases | |||||
2020 (excluding six months) | $ 12,804 | ||||
2021 | 22,176 | ||||
2022 | 13,883 | ||||
2023 | 7,485 | ||||
2024 | 5,110 | ||||
Thereafter | 7,274 | ||||
Total Lease Payments | 68,732 | ||||
Less: Imputed Interest | 9,026 | ||||
Present Value of Lease Liabilities | [1] | 59,706 | |||
Finance Leases | |||||
2020 (excluding six months) | 687 | ||||
2021 | 1,375 | ||||
2022 | 1,344 | ||||
2023 | 1,018 | ||||
2024 | 152 | ||||
Thereafter | 3 | ||||
Total Lease Payments | 4,579 | ||||
Less: Imputed Interest | 231 | ||||
Present Value of Lease Liabilities | [1] | 4,348 | |||
Total | |||||
2020 (excluding six months) | 13,491 | ||||
2021 | 23,551 | ||||
2022 | 15,227 | ||||
2023 | 8,503 | ||||
2024 | 5,262 | ||||
Thereafter | 7,277 | ||||
Total Lease Payments | 73,311 | ||||
Less: Imputed Interest | 9,257 | ||||
Total lease liabilities | 64,054 | [1] | $ 2,971 | ||
Current portion of operating lease liabilities | 21,587 | ||||
Current finance lease liabilities | $ 1,244 | $ 765 | |||
|
Debt (Schedule Of Debt) (Details) - USD ($) |
6 Months Ended | |||
---|---|---|---|---|
Feb. 29, 2020 |
Aug. 31, 2019 |
|||
Debt Instrument [Line Items] | ||||
Financing arrangements | $ 903,000 | $ 82,000 | ||
Less: unamortized debt issuance costs | (958,000) | (1,169,000) | ||
Total debt, excluding obligations under finance leases | 673,545,000 | 438,913,000 | ||
Less: current portion | [1] | (409,116,000) | (174,688,000) | |
Total long-term debt, excluding obligations under finance leases | 264,429,000 | 264,225,000 | ||
Committed Bank Facility [Member] | ||||
Debt Instrument [Line Items] | ||||
Credit facility | $ 100,000,000 | 0 | ||
Maturity date | Apr. 14, 2022 | |||
Uncommitted Bank Facilities [Member] | ||||
Debt Instrument [Line Items] | ||||
Credit facility | $ 288,600,000 | 155,000,000 | ||
Shelf Facility Agreement [Member] | ||||
Debt Instrument [Line Items] | ||||
Shelf Facility | 90,000,000 | 90,000,000 | ||
Senior Notes Series A [Member] | Private Placement Debt [Member] | ||||
Debt Instrument [Line Items] | ||||
Principal amount | $ 75,000,000 | 75,000,000 | ||
Interest rate | 2.65% | |||
Maturity date | Jul. 28, 2023 | |||
Senior Notes Series B [Member] | Private Placement Debt [Member] | ||||
Debt Instrument [Line Items] | ||||
Principal amount | $ 100,000,000 | 100,000,000 | ||
Interest rate | 2.90% | |||
Maturity date | Jul. 28, 2026 | |||
Senior Notes Due June 11, 2025 [Member] | Private Placement Debt [Member] | ||||
Debt Instrument [Line Items] | ||||
Principal amount | $ 20,000,000 | $ 20,000,000 | ||
Interest rate | 3.79% | |||
Maturity date | Jun. 11, 2025 | |||
|
Subsequent Events (Details) |
1 Months Ended | 6 Months Ended | ||||
---|---|---|---|---|---|---|
Apr. 07, 2020
USD ($)
agreement
|
Mar. 31, 2020
USD ($)
|
Feb. 29, 2020
USD ($)
|
Mar. 02, 2019
USD ($)
|
Aug. 31, 2019
USD ($)
|
Sep. 01, 2018
USD ($)
|
|
Subsequent Event [Line Items] | ||||||
Cash and cash equivalents | $ 44,867,000 | $ 31,167,000 | $ 32,286,000 | $ 46,217,000 | ||
Borrowings under the revolving credit facilities | 389,600,000 | 326,000,000 | ||||
Proceeds from lines of credit | $ 389,600,000 | $ 326,000,000 | ||||
Committed Bank Facility [Member] | ||||||
Subsequent Event [Line Items] | ||||||
Maturity date | Apr. 14, 2022 | |||||
Remaining borrowing capacity | $ 495,850,000 | |||||
Outstanding balance | 100,000,000 | 0 | ||||
Committed Bank Facility [Member] | Subsequent Event [Member] | ||||||
Subsequent Event [Line Items] | ||||||
Remaining borrowing capacity | $ 295,850,000 | |||||
Payments under revolving loans from credit facility | 100,000,000 | |||||
Borrowings under the revolving credit facilities | 300,000,000 | |||||
Proceeds from lines of credit | 300,000,000 | |||||
Uncommitted Bank Facilities [Member] | ||||||
Subsequent Event [Line Items] | ||||||
Outstanding balance | 288,600,000 | $ 155,000,000 | ||||
Uncommitted Bank Facilities [Member] | Subsequent Event [Member] | ||||||
Subsequent Event [Line Items] | ||||||
Remaining borrowing capacity | $ 415,000,000 | |||||
Amended Uncommitted Facilities [Member] | ||||||
Subsequent Event [Line Items] | ||||||
Outstanding balance | 288,000,000 | |||||
Amended Uncommitted Facilities [Member] | Subsequent Event [Member] | ||||||
Subsequent Event [Line Items] | ||||||
Payments under revolving loans from credit facility | 134,000,000 | |||||
Borrowings under the revolving credit facilities | $ 34,000,000 | |||||
Number of debt agreements terminated | agreement | 2 | |||||
Proceeds from lines of credit | $ 34,000,000 | |||||
Number of debt agreements borrowed from during the period | agreement | 2 | |||||
Outstanding balance | $ 188,600,000 | |||||
Debt agreement, interest period | 30 days | |||||
Series 2019A Notes, 2.40%, Due March 5, 2024 [Member] | Met Life Note Purchase Agreement [Member] | Subsequent Event [Member] | ||||||
Subsequent Event [Line Items] | ||||||
Principal amount | $ 50,000,000 | |||||
Interest rate | 2.40% | |||||
Maturity date | Mar. 05, 2024 | |||||
Senior Notes, 2.60%, Due March 5, 2027 [Member] | Met Life Note Purchase Agreement [Member] | Subsequent Event [Member] | ||||||
Subsequent Event [Line Items] | ||||||
Principal amount | $ 50,000,000 | |||||
Interest rate | 2.60% | |||||
Maturity date | Mar. 05, 2027 | |||||
Met Life Note Purchase Agreement [Member] | ||||||
Subsequent Event [Line Items] | ||||||
Remaining borrowing capacity | 210,000,000 | |||||
Prudential Note Purchase Agreement [Member] | ||||||
Subsequent Event [Line Items] | ||||||
Remaining borrowing capacity | $ 200,000,000 |
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