UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from ______ to______ | |
Commission File Number:
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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 |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
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
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No
The aggregate market value of Class A Common Stock held by non-affiliates of the registrant as of February 26, 2021 was approximately $
As of October 1, 2021,
Portions of the registrant’s definitive proxy statement to be filed with the United States Securities and Exchange Commission in connection with the registrant’s 2022 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent described herein.
MSC INDUSTRIAL DIRECT CO., INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED AUGUST 28, 2021
TABLE OF CONTENTS
PART I.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “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 Item 1 of Part I and Item 7 of Part II of this Report, as well as within this Report generally. The words “will,” “may,” “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, discussion of strategy, plans or intentions, statements about management’s assumptions, projections or predictions of future events or market outlook and any other statement other than a statement of present or historical fact are forward-looking statements. We expressly disclaim any obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Report with the United States Securities and Exchange Commission (the “SEC”), except to the extent required by applicable law. These forward-looking statements are subject to risks and uncertainties, including, without limitation, those discussed in Item 1A of Part I and Item 7 of Part II of this Report. In addition, new risks may emerge from time to time and it is not possible for management to predict such risks or to assess the impact of such risks on our business or financial results. 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:
the impact of the COVID-19 pandemic on our sales, operations and supply chain;
general economic conditions in the markets in which we operate, including conditions resulting from the COVID-19 pandemic;
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;
our ability to realize the expected benefits from our investment and strategic plans, including our transition from being a spot buy supplier to a mission-critical partner to our customers;
our ability to realize the expected cost savings and benefits from our restructuring activities and structural cost reductions;
the retention of key personnel;
volatility in commodity and energy prices;
the credit risk of our customers, including changes in credit risk as a result of the COVID-19 pandemic;
the risk of customer cancellation or rescheduling of orders;
difficulties in calibrating customer demand for our products, in particular personal protective equipment or “PPE” products, which could cause an inability to sell excess products ordered from manufacturers resulting in inventory write-downs or could conversely cause inventory shortages of such products;
work stoppages, labor shortages or other business interruptions (including those due to extreme weather conditions or as a result of the COVID-19 pandemic) at transportation centers, shipping ports, our headquarters or our customer fulfillment centers;
disruptions or breaches of our information technology systems, or violations of data privacy laws;
the retention of qualified sales and customer service personnel and metalworking specialists;
the risk of loss of key suppliers or contractors or key brands or supply chain disruptions, including due to import restrictions resulting from the COVID-19 pandemic;
changes to governmental trade policies, including the impact from significant import restrictions or tariffs;
risks related to opening or expanding our customer fulfillment centers;
our ability to estimate the cost of healthcare claims incurred under our self-insurance plan;
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;
our ability to maintain our credit facilities;
the interest rate uncertainty due to the London InterBank Offered Rate (“LIBOR”) reform;
the failure to comply with applicable environmental, health and safety laws and regulations, including government action in response to the COVID-19 pandemic, and other laws applicable to our business;
the outcome of government or regulatory proceedings or future litigation;
goodwill and intangible assets recorded resulting from our acquisitions could be impaired;
our common stock price may be volatile due to factors outside of our control; and
our principal shareholders exercise significant control over us, which may result in our taking actions or failing to take actions which our other shareholders do not prefer.
ITEM 1. BUSINESS.
General
MSC Industrial Direct Co., Inc. (together with its wholly owned subsidiaries and entities in which it maintains a controlling financial interest, “MSC,” “MSC Industrial,” the “Company,” “we,” “us” or “our”) is a leading North American distributor of a broad range of metalworking and maintenance, repair and operations (“MRO”) products and services. With a history of driving innovation in industrial product distribution for more than 80 years, we help solve our manufacturing customers’ metalworking, MRO and operational challenges. Through our technical metalworking expertise and inventory management and other supply chain solutions, our team of more than 6,500 associates helps to keep our customers’ manufacturing operations up and running and to improve their efficiency, productivity and profitability.
We serve a broad range of customers throughout the United States, Canada, Mexico and the United Kingdom, from individual machine shops to Fortune 1000 manufacturing companies to government agencies such as the United States General Services Administration and the United States Department of Defense. We operate a sophisticated network of 11 customer fulfillment centers (seven in the United States, three in Canada and one in the United Kingdom), seven regional inventory centers (all located in the United States), and 28 branch offices (20 in the United States, seven in Mexico and one in the United Kingdom). Of these branch offices, 10 are new to MSC as a result of the fiscal year 2021 acquisitions. Our primary customer fulfillment centers are located in or near Harrisburg, Pennsylvania; Atlanta, Georgia; Elkhart, Indiana; Reno, Nevada; and Columbus, Ohio in the United States. In addition, we operate six smaller customer fulfillment centers in or near Hanover Park, Illinois; and Shelbyville, Kentucky (repackaging and replenishment center) in the United States; Wednesbury, England in the United Kingdom; and Edmonton, Alberta; Beamsville, Ontario; and Moncton, New Brunswick in Canada. As part of our enhanced customer support model, we have recently transitioned from a branch office network to virtual customer care hubs. This transition included the closure of 73 branch offices during fiscal year 2021 and a realignment of certain existing locations from branch offices to regional inventory centers.
We offer approximately 1.9 million active, saleable stock-keeping units (“SKUs”) through our catalogs, our brochures, our eCommerce channels, including our website, mscdirect.com (the “MSC website”), our inventory management solutions, and our call centers, branch offices, customer fulfillment centers and regional inventory centers. We carry many of the products we sell in our inventory, so that orders for these in-stock products are processed and fulfilled the day the order is received. We offer next-day delivery nationwide for qualifying orders placed by 8 p.m. Eastern Time (excluding Class C (“Consumables”) category products). Our customers can choose among many convenient ways to place orders: the MSC website, eProcurement platforms, call centers or direct communication with our outside sales associates.
We believe that our value-added solutions approach to driving our customers’ success serves to differentiate MSC from traditional transaction-focused distributors. We endeavor to save our customers money when they partner with us for their metalworking and MRO product needs. We focus on building strong partnerships with our customers to help them improve their productivity and growth. We do this in several ways:
our experienced team includes customer care team members, metalworking specialists, safety specialists, inventory management specialists, technical support teams and experienced sales associates focused on driving our customers’ success by reducing their operational costs;
our robust systems and transactional data enable us to provide insights to our customers to help them take cost out of their supply chains and operations;
our extensive product inventory enables customers to deal with fewer suppliers, streamlining their purchasing work and reducing their administrative costs;
our timely shipping enables our customers to reduce their inventory investment and carrying costs;
our purchasing process consolidates multiple purchases into a single order, providing a single invoice for multiple purchases over time and offering direct shipments to specific departments and personnel at one or more facilities. This reduces our customers’ administrative costs;
our extensive eCommerce capabilities provide sophisticated search and transaction capabilities, access to real-time inventory, customer-specific pricing, workflow management tools, customized reporting and other features. We can also interface directly with many purchasing portals;
our inventory management solutions enable our customers to carry less inventory and still significantly reduce situations when a critical item is out of stock;
our proprietary software solution, called Ap Op (Application Optimization), enables our metalworking specialists to document productivity savings for customers for a range of applications, including grinding, milling, turning, threading, sawing, hole-making, metalworking fluids and other manufacturing process improvements; and
our exclusive service, MSC Millmax®, focuses on maximizing milling productivity and lowering cost by reducing the milling optimization process to a fraction of the time. MSC Millmax® helps customers increase material removal rates, reduce cycle times, improve surface finishes and extend tool life, leading to improved productivity, quality and cost savings.
Industry Overview
MSC operates in a large, fragmented industry. National, regional and local distributors, retail outlets, small distributorships, online distributors, direct mail suppliers, large warehouse stores and manufacturers’ own sales forces all serve MRO customers.
MSC differentiates itself in the industry by being a leading distributor of metalworking products. We have continued to expand technical support and enhance supplier relationships, especially with our metalworking products. Our associates share their deep expertise and knowledge of metalworking and MRO products to help our customers achieve their goals.
Nearly every industrial and service business has an ongoing need for MRO supplies. These businesses, with the exception of the largest industrial plants, often do not have the resources to manage and monitor their MRO inventories effectively. They spend more than necessary to purchase and track their supplies, providing an opportunity for MSC to serve as their one-stop MRO product supplier. Even the larger facilities often store their supplies in multiple locations, so they often carry excess inventories and duplicate purchase orders. In many organizations, multiple people often acquire the same item in small quantities via expensive, one-off purchases, resulting in higher purchasing costs and administrative efforts to keep track of supplies.
With limited capital availability and limited eCommerce capabilities and operating leverage, smaller industrial distributors are under increasing pressure to consolidate and/or curtail services and product lines to remain competitive. Their challenge represents MSC’s opportunity. We improve purchasing efficiency and reduce costs for our customers because our offerings enable our customers to consolidate suppliers, purchase orders and invoices, and reduce inventory tracking, stocking decisions, purchases and out-of-stock situations. In addition, through Vendor Managed Inventory (“VMI”), Customer Managed Inventory (“CMI”) and vending solutions, we empower our customers to utilize sophisticated inventory management solutions.
Business Strategy
MSC’s business strategy is based on helping our customers become more productive and profitable by reducing their total cost for purchasing, using and maintaining metalworking and MRO supplies. Leveraging our expertise, knowledge and experience with metalworking products will continue to be a key tenet of our business and growth strategy. Our customer-focused culture and high-touch engagement model drives value for our customers and results in deep customer relationships. Our strategy includes the following key elements:
Technical Expertise and Support. We provide technical support and one-on-one service through our field and customer care center representatives. We have a dedicated team of more than 100 metalworking specialists who work with customers to improve their manufacturing processes and efficiency, as well as a technical support team that provides assistance to our sales teams and customers via phone and email. These metalworking specialists are customer-facing and work side-by-side with our customers. We utilize our Application Optimization proprietary software to capture the application data and to deliver documented cost savings to our customers. Our exclusive service, MSC Millmax®, focuses on maximizing milling productivity and lowering cost by reducing the milling optimization process to a fraction of the time. Our customers recognize the value of a distributor that can provide technical support to improve their operations and productivity.
Inventory Management Solutions. Our approach starts with a thorough customer assessment. Our expert associates develop and recommend solutions that provide exceptional value to the customer. Depending on the customer’s size and needs, we customize options to address complexity and processes, as well as specific products, technical issues and cost targets. The options include eProcurement, CMI, VMI, vending, tool crib control or in-plant solutions. Our world-class sourcing, logistics and business systems provide predictable, reliable and scalable service.
Broad Selection of Products. Customers want a full range of product options, even as they look to reduce the number of suppliers they partner with. We provide “good-better-best” alternatives, comprising a spectrum of brand name, MSC exclusive brand and generic MRO products. MSC’s broad selection of products enables customers to choose the right combination of price and quality on every purchase to meet their needs.
Same-Day Shipping and Next-Day Delivery. We guarantee same-day shipping of our core metalworking and MRO products, enabling customers to reduce supply inventories. We fulfill our same-day shipment guarantee for in-stock products about 99% of the time. We offer next-day delivery nationwide for qualifying orders placed by 8 p.m. Eastern Time (excluding Consumables category products). We know that our customers value this service, and areas accessible by next-day delivery generate significantly greater sales for MSC than areas where next-day delivery is not available.
Superior Customer Service. Our commitment to customer service starts with our many associates who share their deep expertise and knowledge of metalworking and MRO products to help our customers achieve greater success. We invest in sophisticated information systems and provide extensive training to empower our associates to better support our customers. Using our proprietary customer support software, our in-bound sales representatives can: inform customers on a real-time basis of product availability; recommend substitute products; verify credit information; receive special, custom or manufacturer direct orders; cross-check inventory items using previously entered customer product codes; and arrange or provide technical assistance. We offer: customized billing; customer savings reports; electronic data interchange ordering; eCommerce capabilities; bulk discounts; and stocking of specialty items requested by customers.
Commitment to Technological Innovation. We embrace technological innovations to support our growth, improve customer service and reduce our operating costs. The innovations make our buying practices more effective, improve our automated inventory replenishment and streamline order fulfillment. MSC’s proprietary software helps our customers and sales representatives determine the availability of products in real time and evaluate alternative products and pricing. The MSC website contains a searchable online catalog with electronic ordering capabilities. The MSC website also offers an array of services, workflow management tools and related information. Our warehouses are automated through the use of advanced systems and robotics platforms that allow us to rapidly process orders for next-day delivery, with greater efficiency.
We also continually upgrade our distribution methods and systems and provide comprehensive electronic ordering capabilities to support our customers’ purchase order processing. We continue to invest in our VMI, CMI and vending solutions that streamline customer replenishment and trim our customers’ inventories. Our vending solutions include different kinds of machines, such as storage lockers or carousels, which can stand alone or be combined with other machines. MSC vending machines use network or web-based software to enable customers to gain inventory visibility, save time and drive profitability.
Digital Technologies and the MSC Website. The MSC website provides personalized real-time inventory availability, superior search capabilities, online bill payment, delivery tracking status, and other enhancements, including work-flow management tools. The user-friendly search engine allows customers to find SKUs by keyword, part description, competitive part number, vendor number or brand. The MSC website is a key component of our strategy to reduce our customers’ transaction costs and delivery time.
Competitive Pricing. Customers increasingly evaluate their total cost of purchasing, using and maintaining industrial supplies and recognize that price is an important aspect of their procurement costs. We make sure our pricing is competitive while reflecting the value that we bring through our comprehensive services.
Growth Strategy
Our growth strategy includes a number of initiatives to gain market share and complete the repositioning of MSC from being a spot buy supplier to a mission-critical partner to our customers. These initiatives include the following:
Expanding and enhancing our metalworking capabilities to aggressively penetrate customers in heavy and light manufacturing. MSC is a leading distributor of metalworking products in North America. We have continued to expand technical support and enhance supplier relationships. We are continuing to develop high-performance metalworking products marketed under MSC exclusive brands, providing high-value product alternatives for our customers. Our metalworking field specialists and centralized technical support team members have diverse backgrounds in machining, programming, management and engineering. They help our customers select the right tool for the job from our deep supplier base and exclusive brands.
Expanding programs for government and national account customers. Although MSC has been providing metalworking and MRO supplies to the commercial sector for more than 80 years, we continue to focus on government customers and have a large contract business with numerous federal, state and local agencies. We have developed customized government and national account programs. We see opportunity for additional growth in this area.
We provide customized national account programs for larger customers, often on an enterprise-wide basis. These national account customers value our ability to support their procurement needs electronically to reduce their transactional
costs. Our dedicated national account managers and operations experts provide supply chain solutions that reduce these customers’ total costs of procurement and ownership through increased visibility into their MRO purchases and improved management. We demonstrate these savings by providing these customers with detailed reporting at both the enterprise and site level.
Increasing the size and improving the productivity of our direct sales force. We have invested resources to give our sales representatives more time with our customers and provide increased support during the MRO purchasing process. At August 28, 2021, our field sales and service associate headcount was 2,398. We believe that our sales force investment has played a critical role in the overall success of the Company’s revenue performance. During fiscal year 2021, the Company announced a transition from the branch office network to virtual customer care hubs. This plan included the reduction of management and other positions within the commercial sales organization. We also 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 that we play, driving value for our customers by enabling them to achieve higher levels of growth, profitability and productivity.
Increasing sales from existing customers and generating new customers with various value-added programs. Our value-added programs include business needs analysis, inventory management solutions and workflow management tools. Our customers particularly value our industrial vending solutions that can accommodate a range of products from precision cutting tools to MRO supplies. We are increasing investments in vending, VMI and our growing in-plant solutions program.
Increasing the number of product lines and productive SKUs. We offer approximately 1.9 million active, saleable SKUs through our eCommerce channels, including the MSC website, inventory management solutions, catalogs, brochures and call centers and branch offices. The majority of products sold are third-party manufactured products; however, SKUs sold under MSC private label brands approximate 15% of net sales. We are increasing the breadth and depth of our product offerings and pruning non-value-added SKUs. In fiscal year 2021, we added approximately 55,000 SKUs, net of SKU removals, to our active, saleable SKU count. We also leverage the depth and breadth of MSC’s product portfolio within our Consumables category sales channel. We plan to continue adding SKUs in fiscal year 2022.
Improving our marketing programs. MSC has built an extensive buyer database, which we harness via both human and artificial intelligence to target our marketing to the best prospects. We supplement the efforts of our sales force through the use of digital and traditional marketing tactics. Our industry-specific expertise allows us to focus our outreach on the most promising growth areas.
Enhancing eCommerce capabilities. The MSC website is a proprietary, business-to-business, horizontal marketplace serving the metalworking and MRO market. The MSC website allows customers to enjoy added convenience without sacrificing customized service. The MSC website is a key component of our strategy to reduce customers’ transaction costs and internal requisition time. MSC continues to evaluate the MSC website and solicit customer feedback, making on-going improvements to ensure that it remains a premier website in our marketplace. The MSC website provides advanced features, such as order approval (workflow) and purchase order control, that our customers interact with in order to derive business value beyond merely placing an order. Many large customer accounts transact business with MSC using eProcurement solution providers that sell a suite of eCommerce products. We have associations with many of these providers and continue to evaluate and expand our eProcurement capabilities.
Improving our excellent customer support service. MSC consistently receives high customer satisfaction ratings, according to customer surveys. By working to anticipate our customers’ requirements, we strive to exceed our customers’ expectations. This focus on our customers’ needs enables us to achieve our goal to stand apart in the market. We use customer comment cards, surveys and other customer outreach tools, using their feedback to improve the overall customer experience.
Selectively pursuing strategic acquisitions and investments. MSC is a leader in the highly fragmented industrial distribution market with significant opportunities for organic and acquisitive growth. We selectively pursue strategic acquisitions that deepen our metalworking expertise, extend our capabilities into strategic adjacencies, and expand our markets in North America. We also seek to target investments in businesses and other ventures which we believe offer opportunities for growth and improved operational performance for our business.
In June 2021, the Company acquired a majority ownership interest in Wm. F. Hurst Co., LLC (“Hurst”), a Wichita, Kansas-based distributor of metalworking tools and supplies. Hurst has deep expertise and relationships in the aerospace industry, which we believe will contribute to the growth of the Company’s metalworking base and serve as a center of excellence for expanding its technical capabilities in the aerospace sector. The Company holds an 80% interest in the business, which will continue to do business under the Wm. F. Hurst brand.
In February 2019, two subsidiaries of the Company, MSC IndustrialSupply, S. de R.L. de C.V. and MSC Import Export LLC (together, “MSC Mexico”), completed the acquisition of certain assets of TAC Insumos Industriales, S. de R.L. de C.V. and certain of its affiliates (together, “TAC”). The Company holds a 75% interest in each of the MSC Mexico entities. In July 2021, MSC Mexico acquired additional assets of TAC in conjunction with the acquisition of its outsourcing and logistics businesses. Following this latest acquisition, the Company retains its 75% interest in MSC Mexico. The acquisition provides the Company with the opportunity to further expand its business throughout North America.
Intellectual Property
We conduct business under various trademarks and service marks. We protect these trademarks by maintaining registrations in the United States, Canada and elsewhere. We also file for and obtain patents and use confidentiality and other agreements with customers, associates, consultants and others in order to protect our proprietary information. Although we do not believe our operations are substantially dependent upon any of our intellectual property, we consider our intellectual property to be valuable to our business.
Products and Supplier Services
Our broad range of MRO products includes cutting tools, measuring instruments, tooling components, metalworking products, fasteners, flat stock, raw materials, abrasives, machinery hand and power tools, safety and janitorial supplies, plumbing supplies, materials handling products, power transmission components and electrical supplies. Our large and growing number of SKUs makes us an increasingly valuable partner to our customers as they look to trim their supplier base. Our assortment from multiple product suppliers and MSC exclusive brands, prices and quality levels enables our customers to select from “good-better-best” options on nearly all of their purchases. Our extensive network of suppliers provides us access to technical application, safety, training certifications and many other value-added services for our customers. We stand apart from our competitors by offering name brand, exclusive brand, and generic products, depth in our core product lines, and competitive pricing.
We purchase substantially all of our products directly from approximately 3,000 suppliers. No single supplier accounted for more than 6% of our total purchases in fiscal year 2021, 2020 or 2019.
Customer Fulfillment Centers
We continue to invest in the enhancement of our distribution efficiency and capabilities. When our customers order an in-stock product online or via phone, we ship it the day the order is placed about 99% of the time. We do that through our 11 customer fulfillment centers, seven regional inventory centers and 28 branch offices. Some specialty or custom items and very large orders are shipped directly from the manufacturer. We manage our primary customer fulfillment centers via computer-based SKU tracking systems and radio frequency devices that locate specific stock items to make the selection process more efficient.
Sales and Marketing
We serve individual machine shops, Fortune 1000 companies, government agencies and manufacturers of all sizes. With our acquisitions of Barnes Distribution North America in fiscal year 2013 and AIS in fiscal year 2018, we have increased our presence in the fastener and Consumables product categories and significantly increased our presence in the VMI space. VMI involves not only the selling of the maintenance Consumables by our associates, but also the management of appropriate stock levels for the customer, fulfilling replenishment orders, putting away the stock, and maintaining a clean and organized inventory area.
MSC’s government customers include both federal agencies and state governments. Federal government customers include the U.S. Postal Service, the Department of Defense, large and small military bases, Veterans Affairs hospitals, and correctional facilities. We have individual state contracts and also are engaged with several state cooperatives.
Our national account program includes Fortune 1000 companies, large privately held companies, and international companies primarily doing business in North America. We have identified hundreds of additional national account prospects and have given our sales team tools to ensure we are targeting prospective customers that best fit the MSC model.
We have implemented advanced analytics and significantly increased the return on our marketing investments designed to acquire new customers and increase our share of business with current customers. The majority of our efforts are focused on search engine marketing, email marketing and online advertising to address changes in our customers’ buying
behavior and we utilize master catalogs and direct mail on a selective basis. We use our own database of over three million contacts together with external information to target buyers with the highest likelihood to buy.
Our sales representatives are highly trained and experienced individuals who build relationships with customers, assist customers in reducing costs, provide and coordinate technical support, coordinate special orders and shipments with vendors, and update customer account profiles in our information systems databases. Our marketing approach centers on the ability of our sales representatives, armed with our comprehensive databases as a resource, to respond effectively to the customers’ needs. When a customer places a call to MSC, the sales representative on the other end of the line has immediate access to that customer’s company and specific buyer profile, which includes billing and purchasing track records, and plant and industry information. Meanwhile, the sales representative has access to inventory levels on every SKU we carry.
Our in-bound sales representatives at our customer care centers undergo an intensive seven-week training course, followed up by regular training seminars and workshops. We monitor and evaluate our sales associates at regular intervals and provide our sales associates with technical training by our in-house specialists and product vendors. We maintain a separate technical support group dedicated to answering customer inquiries and assisting our customers with product operation information and finding the most efficient solutions to manufacturing problems.
Branch Offices
We operate 28 branch offices, of which 20 are located within the United States, seven are located in Mexico and one is located in the United Kingdom. Of these branch offices, 10 are new to MSC as a result of the fiscal year 2021 acquisitions. As part of our enhanced customer support model implemented in fiscal year 2021, we transitioned from the branch office network to virtual customer care hubs. This transition included the closure of 73 branch offices and a reduction of management and other positions within the commercial sales organization. Despite the transition, our virtual customer care hubs continue to play an integral role in obtaining new accounts and penetrating existing ones.
Publications
Our primary method of presenting products and solutions is the MSC website and our digital marketing programs. However, we continue to leverage master catalogs, along with specialty and promotional catalogs and brochures, where appropriate. We use specialty and promotional publications to target customers in specific areas, such as metal fabrication, facilities management and safety and janitorial. Specialty and promotional catalogs, targeted to our best prospects, offer a more focused selection of products. While traditional marketing tactics such as master catalogs, promotional catalogs and brochures continue to play a role in our efforts, our primary forms of marketing are digital platforms, such as search engine marketing, email marketing and online advertising, to align with changes in our customers’ buying behavior and to maximize marketing productivity and return on marketing dollars spent.
Customer Service
One of our goals is to make purchasing our products as convenient as possible. Customers submit approximately 60% of their orders digitally through our technology platforms (the MSC website, vending machines and eProcurement). The remaining orders are primarily placed via telephone, fax and mail. The efficient handling of orders is a critical aspect of our business. Order entry and fulfillment occurs at each of our branch offices and our main customer care centers, mostly located at our customer fulfillment centers. Customer care phone representatives enter non-digital orders into computerized order processing systems. In the event of a local or regional situation, our communications system will reroute customer exchanges to an alternative location. When an order enters the system, a credit check is performed; if the credit is approved, the order is usually transmitted to the customer fulfillment center closest to the customer. Customers are invoiced for merchandise, shipping and handling promptly after shipment.
Information Systems
Our information systems enable us to centralize management of key functions across our business. These systems help us to ship on a same-day basis, respond quickly to order changes, provide a high level of customer service, and manage our operational costs. In fiscal year 2019, we incorporated further robotic-driven automation into our customer fulfillment centers. Our eCommerce environment is built upon a combined platform of our own intellectual property and state-of-the-art software from the world’s leading internet technology providers and is powered by world-class product data. This powerful combination of resources helps us deliver a superior online shopping experience with world-class levels of reliability.
Most of our information systems operate in real time over a wide area network, letting each customer fulfillment center and virtual customer care hub share information and monitor daily progress on sales activity, credit approvals,
inventory levels, stock balancing, vendor returns, order fulfillment and other key performance measures. We maintain a sophisticated buying and inventory management system that monitors all of our SKUs and automatically purchases inventory from vendors for replenishment, based on proprietary forecasting models. We also maintain an Electronic Data Interchange (“EDI”) purchasing program with our vendors to boost order placement efficiency, reduce order cycle processing time, and increase order accuracy.
In addition to developing the proprietary computer software programs for use in the customer service and distribution operations, we also provide a comprehensive EDI and Extensible Markup Language (“XML”) ordering system to support our customer-based purchase order processing.
As part of our commitment to creating services that fuel the potential of our customers, we develop and maintain a suite of proprietary VMI digital solutions. These VMI digital solutions allow our customers to focus on their core business, while MSC manages their inventory ordering, fulfillment and replenishment. Our various VMI digital solutions are customizable to meet both simple and complex customer needs. Our scanning solutions integrate scanner accumulated orders directly into our Sales Order Entry system and the MSC website. Our CMI enables customers to simply and effectively replenish inventory by submitting orders directly to the MSC website. Our customized vending solutions are used by customers in manufacturing plants across the United States to help them achieve supply chain and shop floor optimization, through inventory optimization and reduced tooling and labor costs. All of our digital solutions function directly as front-end ordering systems for our e-Portal-based customers. These solutions take advantage of advanced technologies built upon the latest innovations in eCommerce and wireless and cloud-based computing.
Our core business systems run in a highly distributed computing environment and utilize world-class software and hardware platforms from key partners. We utilize disaster recovery techniques and procedures, which are consistent with best practices in enterprise information technology (“IT”). Our IT associates moved rapidly and effectively to provide nearly the entire Company with remote access in March 2020, when the COVID-19 pandemic began causing significant macroeconomic disruption in the United States. As the COVID-19 pandemic continued in 2020, we shifted permanently to a remote working model for most associates. In addition to deploying secure home computing assets, we implemented collaboration software to enable interconnected teams and scalable video conferencing for large virtual gatherings.
We believe that our current systems and practice of implementing regular updates are adequate to support our current needs. Over the next few years, we will also be upgrading and migrating many of our systems to take advantage of the flexibility and controls offered by cloud computing platforms while downsizing our on premise data center footprint. Recent cloud migrations include commercial off the shelf enterprise systems as well as our eCommerce infrastructure.
Our sales representatives are equipped with proprietary mobile technology that allows them to tap into MSC’s supply chain directly from our customers’ manufacturing plants and make sure that critical inventory is always on site and available. In addition, we are enhancing our customer websites and portals to reflect this new mobile reality at a pace in line with customer adoption of mobile technology.
Our customer care centers and branch offices are powered via state-of-the-art telephony, case management and workforce optimization platforms. The features within the platforms create a seamless environment equipped with advanced applications that assist our associates in optimizing our customers’ experience. The architecture has established a dynamic infrastructure that is scalable both in terms of operations and future capabilities. We are continuing to implement additional functionality aimed at enhancing the engagement and personalization of the customer experience regardless of the contact method chosen.
Competition
The MRO supply industry is a large, fragmented industry that is highly competitive. We face competition from: traditional channels of distribution, such as retail outlets, small dealerships, regional and national distributors utilizing direct sales forces, manufacturers of MRO supplies, large warehouse stores, and larger direct mail distributors. We also face substantial competition in the online distribution space that competes with price transparency and includes both traditional distributors and non-traditional, web-based eCommerce competitors. In addition, new entrants in the MRO supply industry could increase competition. We believe that sales of MRO supplies will become more concentrated over the next several years, which may make MRO supply distribution more competitive. Some of our competitors challenge us with a greater variety of product offerings, greater financial resources, additional services, or a combination of these factors. In the industrial products market, customer purchasing decisions are based primarily on one or more of the following criteria: price, product selection, product availability, technical support relationship, level of service and convenience. We believe we compete effectively on all such criteria. Our industry has seen consolidation in recent years. The trend of our industry toward consolidation could cause the industry to become more competitive as greater economies of scale are achieved by
competitors, or as competitors with new lower-cost business models are able to operate with lower prices and gross profit on products.
Seasonality
During any given time, we may be impacted by our industrial customers’ plant shutdowns, particularly during the summer months (our fiscal fourth quarter), as well as the winter months for the Christmas and New Year holiday period (our fiscal second quarter). In addition, we may be impacted by weather-related disruptions and the COVID-19 pandemic.
Compliance with Health and Safety and Environmental Protection Laws
Our operations are subject to and affected by a variety of federal, state, local and non-U.S. health and safety and environmental laws and regulations relating to the discharge, treatment, storage, disposal, investigation and remediation of certain materials, substances and wastes. We continually assess our compliance status and management of environmental matters to ensure that our operations are compliant with all applicable environmental laws and regulations.
Operating and maintenance costs associated with environmental compliance and management of sites are a normal and recurring part of our operations. With respect to all other matters that may currently be pending, in the opinion of management, based on our analysis of relevant facts and circumstances, compliance with applicable environmental laws is not likely to have a material adverse effect upon our capital expenditures, earnings or competitive position.
Human Capital Resources
As of August 28, 2021, we employed 6,571 associates worldwide, of which approximately 6,372 were full-time and 199 were part-time. No associate is represented by a labor union. Approximately 90% of our workforce is based in the United Sates and approximately 10% is based outside of the United States. MSC has not experienced any major work stoppages and considers associate relations to be good.
Our goal is to attract, develop and retain a talented team of associates inspired by our greater purpose of fueling the potential of our stakeholders. We believe a career at MSC includes:
Purpose – MSC helps to fuel the industrial economy, propel our stakeholders’ success, and contribute to our customers’ growth.
People and Respect – MSC cares about people. We strive to offer a positive work environment, with people you like and leaders you can respect.
Health and Well-being – MSC offers many available options for our associates and their families to be healthy and plan for the future.
Rewards and Recognition – Appreciation for our associates’ contributions and the opportunity to share financially and intrinsically in MSC’s success.
Growth – The opportunity to learn, take risks and develop a career.
At MSC, we refer to our workforce as our team of “associates,” rather than employees, because we believe that our associates have a stake in our success. We rely on each other to be as dedicated to MSC as MSC is dedicated to each associate. This is a critical part of our expectations of our associates and a unique part of our culture.
Health and Safety
MSC’s safety vision is to build a culture in which safety is a top priority across all levels of the organization, and that every associate has the right and responsibility to continually seek to prevent injuries and build a safe environment for everyone. Our leadership team is highly engaged through our Safety Leadership System in identifying trends in our incidents throughout the network and working collaboratively with our Safety Professionals to effectively reduce incidents involving our associates and to make MSC one of the safest places to work.
Our work over the last three calendar years has resulted in a 48.4% reduction in Occupational Safety and Health Administration (“OSHA”) recordable injuries throughout MSC. In calendar year 2020, the Company’s OSHA Total Recordable Incident Rate was 1.01 and the Company’s OSHA Lost Time Incident Rate was 0.48 based upon the number of incidents per 100 associates (or per 200,000 work hours). The Company’s rates fall well below the Total Recordable Incident Rate and the Lost Time Incident Rate of the North American Industry Classification System, which were 2.20 and 0.70, respectively. The success of our Safety Leadership System was additionally validated through the completion and re-
certification to the ISO 45001 Standard in our Columbus, Ohio customer fulfillment center. We are expanding our efforts to achieve ISO 45001 certification throughout the supply chain network in the coming years.
Our number one priority is the health and safety of our associates and their families, our customers, and our other partners. We have taken and will continue to take measures to reduce the risk of COVID-19 infection and to protect our associates and our business, in line with guidelines issued by the authorities in the jurisdictions in which we operate, including federal, state and local governments and the Centers for Disease Control and Prevention. We have instituted enhanced safety procedures to safeguard the health and safety of our associates, including the use of additional PPE and the frequent cleaning of our facilities. We have restricted non-associate access to our sites, reorganized our workflows where permitted to maximize social distancing, implemented extensive restrictions on associate travel, and utilized remote working strategies where possible.
Diversity, Equity and Inclusion
MSC is committed to promoting a respectful, diverse workplace, constructive collaboration, innovative creativity, and genuine leadership. We believe that our culture and our business benefit greatly from the rich combination of experience, creativity and perspective that our diverse workforce provides. Our associates' differences – the individual characteristics, work styles, beliefs and backgrounds – make us strong and equip us to better serve our customers. Because we are dedicated to an environment of equal opportunity, we partner with several outreach organizations that help us in our recruitment efforts such as: Hiring our Heroes, minority-owned organizations, women-owned organizations, local and state workforce services, and vocational rehab centers.
Talent Acquisition and Development
MSC focuses on creating opportunities for associate growth, development and training education, offering a comprehensive talent program that continues throughout an associate’s career. MSC believes that its future success is highly dependent upon the Company’s continued ability to attract, retain and motivate associates. As part of its efforts in these areas, the Company offers competitive compensation and benefits to meet the diverse needs of team members and support their health and well-being, financial future and work-life balance. Associates are given access to health plan resources, disease management, tobacco cessation, parental support, stress management and weight loss programs. In addition, MSC provides retirement savings, paid holidays and time off, educational assistance and income protection benefits, as well as a variety of other programs to its associates.
MSC also offers through MSC University various learning and development opportunities in support of associate career growth and success through a variety of offerings, including virtual classrooms and webinars, instructor-led courses, informal work groups, e-learning, books and articles, and more. These opportunities can drive improvement, facilitate career development, provide coaching and mentoring opportunities, and enhance communication skills. Associates were offered 426 types of learnings with 44,099 total hours completed by our associates in fiscal year 2021.
MSC’s tuition assistance program covers educational costs and provides eligible associates the financial assistance to obtain a graduate or undergraduate degree while working. MSC’s partnership with an accredited online university doubled associate participation in fiscal year 2021 by offering a full tuition grant when combined with the tuition assistance program.
Available Information
The Company’s internet address is www.mscdirect.com. We make available on or through our investor relations page on our website, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after this material is electronically filed with or furnished to the SEC. We also make available, on our website, the charters of the committees of our Board of Directors, the Code of Ethics, the Code of Business Conduct and the Corporate Governance Guidelines pursuant to SEC requirements and New York Stock Exchange (“NYSE”) listing standards. Information on our website does not constitute a part of this Report.
ITEM 1A. RISK FACTORS.
In addition to the other information in this Report, the following factors should be considered in evaluating the Company and its business. Our future operating results depend upon many factors and are subject to various risks and uncertainties. The known material risks and uncertainties which may cause our operating results to vary from anticipated results or which may negatively affect our operating results and profitability are as follows:
Risks Relating to Our Business
Our results of operations have been and may in the future be adversely impacted by the ongoing 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, uncertainty and economic disruption. The extent to which the COVID-19 pandemic will impact 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, especially with respect to freight and labor availability; 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 customer fulfillment centers; 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 experienced disruptions to our business as we have implemented modifications to associate travel and associate work locations and cancelled 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. We may continue to experience adverse impacts to our business as the COVID-19 pandemic continues to evolve and as a result of any economic recession or depression that may occur in the future. Any of these events could amplify the other risks and uncertainties described below and could materially adversely affect our business, financial condition, results of operations and/or stock price.
Mandatory COVID-19 vaccination of employees could impact our workforce and have a material adverse effect on our business and results of operations.
On September 9, 2021, President Biden announced a proposed new rule requiring all employers with at least 100 employees to require that their employees be fully vaccinated or tested weekly. The U.S. Department of Labor’s Occupational Safety and Health Administration (“OSHA”) is currently drafting an emergency regulation to carry out this mandate, which is expected to take effect in the coming weeks. At this time, it is unclear, among other things, if the vaccine mandate will apply to all employees or only to employees who work in the office and how compliance will be documented.
As a company with more than 100 employees, it is anticipated that we would be subject to the OSHA regulation concerning COVID-19 vaccination. As a result, on October 13, 2021, we announced a requirement that all of our associates get vaccinated. At this time, it is not possible to predict with certainty the exact impact that the proposed new regulation or the Company’s vaccine requirement will have on us or on our workforce. Our vaccine requirement and the proposed new regulation, if implemented, may result in employee attrition, which could materially adversely affect future revenues and costs, which could have a material adverse effect on our business and results of operations.
Our business depends heavily on the operating levels of our customers and the economic factors that affect them, including general economic conditions.
Many of the primary markets for the products and services we sell are subject to cyclical fluctuations that affect demand for goods and materials that our customers produce. Consequently, demand for our products and services has been and will continue to be influenced by most of the same economic factors that affect demand for and production of our customers’ products.
When, as occurs in economic downturns, current or prospective customers reduce production levels because of lower demand or tight credit conditions, their need for our products and services diminishes. Selling prices and terms of sale with our customers come under pressure, which may adversely affect the profitability and the durability of customer relationships. Credit losses increase as well. Volatile economic and credit conditions also make it more difficult for distributors, as well as customers and suppliers, to forecast and plan future business activities.
In addition, as various sectors of our industrial customer base face increased foreign competition, and in fact lose business to foreign competitors or shift their operations overseas in an effort to reduce expenses, we may face increased difficulty in growing and maintaining our market share and growth prospects.
Changes in our customer and product mix, or adverse changes to the cost of goods we sell, could cause our gross margin percentage to fluctuate, or decrease.
From time to time, we have experienced changes in our customer mix and in our product mix. Changes in our customer mix have resulted from geographic expansion, daily selling activities within current geographic markets, and targeted selling activities to new customers. Changes in our product mix have resulted from marketing activities to existing customers and needs communicated to us from existing and prospective customers as well as from business acquisitions. As our large account customer program sales grow, we will face continued pressures on maintaining gross margin because these customers receive lower pricing due to their higher level of purchases from us. In addition, our continued expansion of our vending program and other eCommerce platforms has placed pressure on our gross margin. Further, we may also be subject to price increases from vendors that we may not be able to pass along to our customers.
We operate in a highly competitive industry, which is evolving and consolidating, which could adversely affect our business and financial results.
The MRO supply industry, although consolidating, still remains a large, fragmented industry that is highly competitive. We face competition from traditional channels of distribution such as retail outlets, small dealerships, regional and national distributors utilizing direct sales forces, manufacturers of MRO supplies, large warehouse stores and larger direct mail distributors. We believe that sales of MRO supplies will become more concentrated over the next several years, which may make MRO supply distribution more competitive. Some of our competitors challenge us with a greater variety of product offerings, greater financial resources, additional services, or a combination of these factors. In addition, we also face the risk of companies which operate primarily outside of our industry entering our marketplace.
Our industry is evolving at an accelerated pace. If we do not have the agility and flexibility to effectively respond to this accelerated pace of industry changes, our strategy could be put at risk resulting in a loss of market share. We also face substantial competition in the online distribution space that competes with price transparency. Increased competition from online retailers (particularly those major internet providers who can offer a wide range of products and rapid delivery), and the adoption by competitors of aggressive pricing strategies and sales methods, could cause us to lose market share or reduce our prices, adversely affecting our sales, margins and profitability.
Traditional MRO suppliers are attempting to consolidate the market through internal expansion, acquisitions or mergers with other industrial suppliers, or a combination of both. This consolidation allows suppliers to improve efficiency and spread fixed costs over a greater number of sales, and to achieve other benefits derived from economies of scale. The trend of our industry toward consolidation could cause the industry to become more competitive as greater economies of scale are achieved by competitors, or as competitors with new lower-cost business models are able to operate with lower prices and gross profit on products. These trends may adversely affect our sales, margins and profitability.
In order to operate more efficiently, control costs, and improve profitability, the Company has engaged in restructuring activities which began in fiscal year 2019. In fiscal year 2021, we incurred $31.4 million in restructuring costs, consisting of one-time impairment charges for operating lease assets, net of gains related to settlement of lease liabilities, associate severance and separation costs, and other exit-related costs. There can be no assurance that these actions will achieve their intended benefits.
Volatility in commodity and energy prices may adversely affect operating margins.
In times of commodity and energy price increases, we may be subject to price increases from our vendors and freight carriers that we may be unable to pass along to our customers. Raw material costs used in our vendors’ products (steel, tungsten, etc.) and energy costs may increase, which may result in increased production costs for our vendors. The fuel costs of our independent freight companies have been volatile. Our vendors and independent freight carriers typically look to pass increased costs along to us through price increases. When we are forced to accept these price increases, we may not be able to pass them along to our customers, resulting in lower margins.
In addition to increases in commodity and energy prices, decreases in those costs, particularly if severe, could also adversely impact us by creating deflation in selling prices, which could cause our gross profit margin to deteriorate, or by negatively impacting customers in certain industries, which could cause our sales to those customers to decline.
Inflation impacts the costs at which we can procure products and our ability to increase prices at which we sell to customers over time. Prolonged periods of low inflation or deflation could adversely affect our ability to increase the prices at which we sell to customers. Periods of high or rapid inflation may also cause the prices that our vendors and freight carriers
charge to increase rapidly or unpredictably. We may not be able to pass along increased costs due to inflation in full or synchronously to customers, which may result in lower margins or changes in our relationships with customers.
As a U.S. government contractor, we are subject to certain laws and regulations which may increase our costs of doing business and which subject us to certain compliance requirements and potential liabilities.
As a supplier to the U.S. government, we must comply with certain laws and regulations, including the Trade Agreements Act, the Buy American Act and the Federal Acquisition Regulation, relating to the formation, administration and performance of U.S. government contracts. These laws and regulations affect how we do business with government customers and, in some instances, impose added compliance and other costs on our business. From time to time, we are subject to governmental or regulatory inquiries or audits relating to our compliance with these laws and regulations. A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our U.S. government contracts and could harm our reputation and cause our business to suffer.
Our business is exposed to the credit risk of our customers which could adversely affect our operating results.
We perform periodic credit evaluations of our customers’ financial condition, and collateral is generally not required. We evaluate the collectability of accounts receivable based on numerous factors, including past transaction history with customers and their creditworthiness, and we provide a reserve for accounts that we believe to be uncollectible. A significant deterioration in the economy, including as a result of the ongoing COVID-19 pandemic, could have an adverse effect on collecting our accounts receivable, including longer payment cycles, increased collection costs and defaults.
Failure to accurately forecast customer demand could lead to excess inventories or inventory shortages, which could result in decreased operating margins, reduced cash flows and harm to our business.
To meet anticipated demand for our products, we may purchase products from manufacturers outside of our typical programs, including payment terms, and in advance of customer orders, which we hold in inventory and resell to customers. We are subject to the risk that we may be unable to sell excess products, in particular PPE products, ordered from manufacturers. Inventory levels in excess of customer demand due to the difficulty of calibrating demand for such products, the concentration of demand for a limited number of SKUs, difficulties in product sourcing, or rapid changes in demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could have an adverse effect on our operating results, financial condition and cash flows. Conversely, if we underestimate customer demand for our products or if our manufacturers fail to supply products we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers and negatively impact customer relationships.
The risk of cancellation or rescheduling of orders may cause our operating results to fluctuate.
The cancellation or rescheduling of orders may cause our operating results to fluctuate. Although we strive to maintain ongoing relationships with our customers, there is an ongoing risk that orders may be cancelled or rescheduled due to fluctuations in our customers’ business needs or purchasing budgets, including changes in national and local government budgets. Additionally, although our customer base is diverse, ranging from individual machine shops to Fortune 1000 companies and large governmental agencies, the cancellation or rescheduling of significant orders by larger customers may still have a material adverse effect on our operating results from time to time.
Work stoppages, labor shortages or other disruptions, including those due to extreme weather conditions and in response to the COVID-19 pandemic, at transportation centers, shipping ports, our headquarters or our customer fulfillment centers may adversely affect our ability to obtain inventory and make deliveries to our customers.
Our ability to provide same-day shipping and next-day delivery of our core metalworking and MRO products is an integral component of our overall business strategy. Disruptions at transportation centers or shipping ports, including global and domestic locations, due to third-party labor stoppages or severe weather conditions affect both our ability to maintain core products in inventory and deliver products to our customers on a timely basis, which may in turn adversely affect our customer relationships and results of operations. In addition, severe weather conditions, including winter storms, could adversely affect demand for our products in particularly hard-hit regions and impact our sales. Additionally, the implementation of shelter-in-place orders, social distancing orders, quarantines, port closures, increased border controls or closures, and other travel restrictions or government actions in response to the COVID-19 pandemic may affect both our ability to maintain core products in inventory and to deliver products to our customers on a timely basis, which may in turn adversely affect our customer relationships and results of operations.
Our business depends on our ability to attract, train and retain qualified sales and customer service personnel and metalworking specialists.
Our business depends on our ability to attract, train and retain qualified sales and customer service personnel and metalworking specialists. We greatly benefit from having associates who are familiar with the products we sell and their applications, as well as associates, and in particular metalworking specialists, who can provide technical support to our customers. Qualified individuals of the requisite caliber and number needed to fill these positions may be difficult to hire and retain in sufficient numbers. Additionally, hiring and retaining such qualified individuals may be adversely impacted by global economic uncertainty and office closures due to the ongoing COVID-19 pandemic. If we are unable to hire and retain associates capable of providing a high level of customer service and technical support, or if such associates are unable to work effectively or at all due to the COVID-19 pandemic, our operational capabilities and ability to provide differentiated services may be adversely affected.
The loss of key suppliers or contractors or key brands or supply chain disruptions could adversely affect our operating results.
We believe that our ability to offer a combination of well-known brand name products and competitively priced exclusive brand products is an important factor in attracting and retaining customers. Our ability to offer a wide range of products and services is dependent on obtaining adequate product supply and services from our key suppliers and contractors. The loss of or a substantial decrease in the availability of products or services from key suppliers or contractors at competitive prices, or the loss of a key brand, could cause our revenues and profitability to decrease. In addition, supply interruptions could arise due to transportation disruptions and labor disputes. Our supply chain has also been and may continue to be impacted by the COVID-19 pandemic, especially with respect to freight and labor availability, and may be impacted by other factors outside of our control, including macro-economic events, trade restrictions, political crises, other public health emergencies, or natural or environmental occurrences. Disruptions in our supply chain could result in a decrease in revenues and profitability.
Supply chain disruptions could adversely impact our business and operating results.
Disruptions in our supply chain due to events outside of our control, including natural and human induced disasters, earthquakes, storms, hurricanes, floods, fires, droughts, tornados and other extreme weather, widespread contagious diseases or viruses such as COVID-19, geopolitical events, such as war, civil unrest, rioting or terrorist attacks in the United States or countries in which we operate, which our key suppliers are located or through which products we sell are transported or distributed, actions by governments and central banks that impact the flow of international goods, and the imposition of other trade limitations, prohibitions or sanctions that increase the costs of domestic and international trade and transportation, could restrict our ability to obtain products that our customers demand or to meet delivery expectations, which could adversely impact our business and operating results. For example, the outbreak of the COVID-19 pandemic and governmental actions taken in response have disrupted, and may in the future disrupt, our operations and the operations of our suppliers, customers and companies who facilitate deliveries to our customers. Any such disruption or other catastrophic event could cause our distribution channels and networks to become non-operational, adversely impact our ability to obtain or deliver products to our customers in a timely manner, limit our ability to meet customer demand, result in lost sales, increased costs, penalties, order cancellations or contract terminations, or adversely impact our customer relationships. Our ability to fulfill customer orders using same-day shipping and other rapid delivery methods is an integral component of our business strategy upon which our customers rely, and any such disruption could adversely impact our business, operating results and financial position.
Trade policies could make sourcing products from overseas more difficult and/or costlier as well as negatively affect the markets we sell into.
Any changes to trade policies or trade relationships, including the imposition of significant restrictions, quotas, duties or tariffs, whether because of amendments to or elimination of existing trade agreements, or the imposition of new or modified trade tariffs, could have an adverse effect on our business. These changes and other changes to trade policies or trade relationships could adversely affect our ability to secure sufficient products to service our customers and/or result in increased product costs that we may not be able to pass on to our customers, resulting in lower margins. Additionally, these changes could adversely affect our foreign sales. These risks most recently manifested in tariffs, primarily in 2018 and 2019, either directly on products we trade in or indirectly on industries we sell into, between the United States and its trading partners, most notably China, which represents a significant source of product for North America. In addition, we move and source products within North America. Any trading disruption between Canada, the United States and Mexico, or disruption in their respective trading relationships with other nations, could adversely impact our business.
Opening or expanding our customer fulfillment centers exposes us to risks of delays and may affect our operating results.
In the future, as part of our long-term strategic planning, we may open new customer fulfillment centers to improve our efficiency, geographic distribution and market penetration. In addition, we intend to make, as we have in the past, capital improvements and operational enhancements to certain of our existing customer fulfillment centers. Moving or opening customer fulfillment centers and effecting such improvements requires a substantial capital investment, including expenditures for real estate and construction, and opening new customer fulfillment centers requires a substantial investment in inventory. In addition, the opening of new customer fulfillment centers or the expansion of existing customer fulfillment centers would have an adverse impact on operating expenses as a percentage of sales, inventory turnover and return on investment in the periods prior to and for some time following the commencement of operations of each new customer fulfillment center or the completion of such expansions.
We establish insurance-related healthcare reserves based on historical claims experience and actuarial estimates, which could lead to adjustments in the future based on actual claims incurred.
We retain a significant portion of the risk under our healthcare insurance program. In fiscal year 2021, we began self-insuring for costs associated with associates’ health needs, which is limited by stop-loss coverage. Our self-insurance accruals are determined on an actuarial basis, based on historical claims experience and an estimate of claims incurred but not yet reported and other relevant factors. While we believe our estimation process is well designed, every estimation process is inherently subject to limitations. Fluctuations in the frequency or number of claims make it difficult to predict the ultimate cost of claims and may lead to future adjustments of reported results of operations which, depending on the magnitude of such adjustments, may significantly affect our reported results or negatively affect the reliability of our reported results.
An interruption of operations at our headquarters or customer fulfillment centers could adversely impact our business.
Our business depends on maintaining operations at our co-located headquarters and customer fulfillment centers. A serious, prolonged interruption due to power outage, telecommunications outage, terrorist attack, earthquake, hurricane, fire, flood, pandemic or other natural disaster or other interruption could have a material adverse effect on our business and financial results. Additionally, our business could be affected by people working from home due to the COVID-19 pandemic, and we could experience disruptions to our operations resulting from illness of any of our associates, including associates at our customer fulfillment centers.
Goodwill and indefinite-lived intangible assets recorded as a result of our acquisitions could become impaired.
As of August 28, 2021, our combined goodwill and indefinite-lived intangible assets amounted to $705.5 million. To the extent we do not generate sufficient cash flows to recover the net amount of any investments in goodwill and other indefinite-lived intangible assets recorded, the investment could be considered impaired and subject to write-off. We expect to record further goodwill and other indefinite-lived intangible assets as a result of future acquisitions we may complete. Future amortization of such assets or impairments, if any, of goodwill or indefinite-lived intangible assets would adversely affect our results of operations in any given period. If the financial performance of our business was to decline significantly as a result of the COVID-19 pandemic, we could incur a material non-cash charge to our income statement for the impairment of goodwill and other indefinite-lived intangible assets.
Societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers.
Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior on their own as a result of these concerns. We and our customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the impacts to us could be a drop in demand for our products and services, particularly in certain sectors. Our efforts to take these risks into account, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.
Our principal shareholders exercise significant control over us.
We have two classes of common stock. Our Class A Common Stock has one vote per share and our Class B Common Stock has 10 votes per share. As of October 1, 2021, the Chairman of our Board of Directors, his sister, certain of their family members including our President and Chief Executive Officer, and related trusts collectively owned 100% of the
outstanding shares of our Class B Common Stock and approximately 2.9% of the outstanding shares of our Class A Common Stock, giving them control over approximately 65.9% of the combined voting power of our Class A Common Stock and our Class B Common Stock. Consequently, such shareholders will be able to elect all the directors of the Company and to determine the outcome of any matter submitted to a vote of the Company’s shareholders for approval, including amendments to our certificate of incorporation and our second amended and restated by-laws, any proposed merger, consolidation or sale of all or substantially all our assets and other corporate transactions. Because this concentrated control could discourage others from initiating any potential merger, takeover or other change of control transaction that may otherwise be beneficial to our shareholders, the market price of our Class A Common Stock could be adversely affected.
Risks Related to Our Indebtedness
The terms of our credit facilities and senior notes impose operating and financial restrictions on us, which may limit our ability to respond to changing business and economic conditions.
We currently have credit facilities and outstanding senior notes. For a description of these facilities and senior notes, please see Note 9, “Debt” in the Notes to Consolidated Financial Statements. We are subject to various operating and financial covenants under the credit facilities and senior notes which restrict our ability to, among other things, incur additional indebtedness, make particular types of investments, incur certain types of liens, engage in fundamental corporate changes, enter into transactions with affiliates or make substantial asset sales. Any failure to comply with these covenants may constitute a breach under the credit facilities and senior notes, which could result in the acceleration of all or a substantial portion of any outstanding indebtedness and termination of revolving credit commitments.
Our inability to maintain our committed and uncommitted credit facilities could materially adversely affect our liquidity and our business.
Our ability to manage our business and execute our business strategy is dependent, in part, on the continued availability of financing. With respect to committed facilities, lenders may decline to renew or extend credit facilities, or they may require stricter terms and conditions with respect to future facilities, and we may not find these terms and conditions acceptable. With respect to uncommitted facilities, lenders may cease making loans or demand payment of outstanding loans which may overly restrict our ability to conduct our business successfully.
Uncertainty about the future of LIBOR may adversely affect our business and financial results.
Borrowings under our credit facilities currently use LIBOR as a benchmark for establishing the applicable interest rate. LIBOR is the subject of recent regulatory guidance and proposals for reform, which may cause LIBOR to cease to be used entirely or to perform differently than in the past. Regulators and industry groups have recommended alternatives for certain reference rates, such as the Secured Overnight Financing Rate (“SOFR”), but uncertainty remains about what benchmark or benchmarks will replace LIBOR and when that will occur. The consequences of these developments with respect to LIBOR cannot be entirely predicted but could result in an increase in the cost of our variable rate indebtedness causing a negative impact on our financial position, liquidity and results of operations.
General Risk Factors
Disruptions or breaches of our IT systems, or violations of data privacy laws, could adversely affect us.
We believe that our IT systems are an integral part of our business and growth strategies. In particular, the COVID-19 pandemic has caused us to modify our business practices, including requiring many of our office-based associates to work from home. As a result, we are increasingly dependent upon our IT systems to operate our business and our ability to effectively manage our business depends on the security, reliability and adequacy of our IT systems. We also depend upon our IT systems to help process orders, to manage inventory and accounts receivable collections, to manage financial reporting, to purchase, sell and ship products efficiently and on a timely basis, to maintain cost-effective operations, to operate our websites and to help provide superior service to our customers. Our IT systems may be vulnerable to damage or disruption caused by circumstances beyond our control or anticipation, such as catastrophic events, power outages, natural disasters, computer system or network failures, computer viruses, and physical or electronic break-ins. In addition, our IT systems may be vulnerable to cyberattacks, including the use of malicious codes, worms, phishing, spyware, denial of service attacks and ransomware, all of which are rapidly evolving and becoming increasingly sophisticated. Despite our efforts to ensure the integrity of our IT systems, as cyber-attacks evolve and become more difficult to detect and successfully defend against, one or more cyber-attacks might defeat the measures that we take to anticipate, detect, avoid or mitigate these threats. These cyber-attacks and any unauthorized access or disclosure of our information could compromise and expose sensitive
information and damage our reputation. Cyber-attacks could also cause us to incur significant remediation costs, disrupt our operations and divert management attention and key IT resources.
Any material cyber-attack or failure of our IT systems to perform as we anticipate could disrupt our business and operations, result in transaction errors, loss of data, processing inefficiencies, downtime, litigation, substantial remediation costs (including potential liability for stolen assets or information and the costs of repairing system damage), the loss of sales and customers, and damage our reputation. In addition, changes to our IT systems could disrupt our business operations. Any one or more of these consequences could have a material adverse effect on our business, financial condition and results of operations. Additionally, our suppliers and customers also rely upon IT systems to operate their respective businesses. If any of them experience a cyber-attack or other cyber incident, this could adversely impact their operations, which may in turn impact or adversely affect our operations.
In addition, regulatory authorities have increased their focus on how companies collect, process, use, store, share and transmit personal data. New privacy security laws and regulations, including the United Kingdom’s Data Protection Act 2018 (DPA), the European Union General Data Protection Regulation 2016 (GDPR) that became effective May 2018, the California Consumer Protection Act that become effective on January 1, 2020, and other similar state privacy laws, pose increasingly complex compliance challenges, which may increase compliance costs, and any failure to comply with data privacy laws and regulations could result in significant penalties.
Our success is dependent on certain key management personnel.
Our success depends largely on the efforts and abilities of certain key senior management. The loss or disruption of the services of one or more of such key personnel, including as a result of the COVID-19 pandemic, could have a material adverse effect on our business and financial results. We do not maintain any key-man insurance policies with respect to any of our executive officers.
We are subject to litigation risk due to the nature of our business, which may have a material adverse effect on our business.
From time to time, we are involved in lawsuits or other legal proceedings that arise from business transactions or the operation of our business. Due to the nature of our business, these proceedings may, for example, relate to product liability claims, commercial disputes or employment matters. In addition, we could face claims over other matters, such as claims arising from our status as a government contractor, intellectual property matters, or corporate or securities law matters. The defense and ultimate outcome of lawsuits or other legal proceedings may result in higher operating expenses, which could have a material adverse effect on our business, financial condition or results of operations.
We may encounter difficulties with acquisitions and other strategic transactions which could harm our business.
We have completed several acquisitions and we expect to continue to pursue acquisitions and other strategic transactions, such as joint ventures, that we believe will either expand or complement our business in new or existing markets or further enhance the value and offerings we are able to provide to our existing or future potential customers.
Acquisitions and other strategic transactions present numerous risks and challenges, which could harm our business:
diversion of management’s attention from the normal operation of our business;
potential loss of key associates and customers of the acquired companies;
difficulties managing and integrating operations in geographically dispersed locations;
the potential for deficiencies in internal controls at acquired companies;
increases in our expenses and working capital requirements, which reduce our return on invested capital;
lack of experience operating in the geographic market or industry sector of the acquired business; and
exposure to unanticipated liabilities of acquired companies.
To integrate acquired businesses, we must implement our management information systems, operating systems and internal controls, and assimilate and manage the personnel of the acquired operations. The difficulties of this integration may be further complicated by geographic distances, as well as challenges arising from the COVID-19 pandemic. The integration of acquired businesses may not be successful and could result in disruption to other parts of our business.
We are subject to environmental, health and safety laws and regulations.
We are subject to federal, state, local, foreign and provincial environmental, health and safety laws and regulations. Fines and penalties may be imposed for non-compliance with applicable environmental, health and safety requirements and the failure to have or to comply with the terms and conditions of required permits. The failure by us to comply with applicable environmental, health and safety requirements could result in fines, penalties, enforcement actions, third-party claims for property damage and personal injury, requirements to clean up property or to pay for the costs of cleanup, or regulatory or judicial orders requiring corrective measures, which could have a material adverse effect on our business, financial condition or results of operations.
Social and environmental responsibility policies and provisions may be difficult to comply with and may impose costs on us.
There is an increasing focus on corporate social and environmental responsibility in our industry. An increasing number of our customers have adopted, or may adopt, procurement policies that include social and environmental responsibility provisions that their suppliers should comply with, or they may seek to include such provisions in their procurement terms and conditions. This corporate social and environmental responsibility influence is expanding into other stakeholders such as investors, suppliers, associates and communities. We currently voluntarily comply with the sustainability standards set forth by various sustainability initiatives and organizations. These social and environmental responsibility practices, policies, provisions and initiatives are subject to change, can be unpredictable, and may be difficult and expensive for us to comply with. In addition, failure by us to take action or otherwise comply with the policies of our customers may negatively impact our customer relationships or reputation, which may adversely impact our business and results of operations.
Our common stock price may be volatile.
We believe factors such as fluctuations in our operating results or the operating results of our competitors, changes in economic conditions in the market sectors in which our customers operate, notably the durable and non-durable goods manufacturing industry, which accounts for a substantial portion of our revenues, and changes in general market conditions, including as a result of the COVID-19 pandemic, could cause the market price of our Class A Common Stock to fluctuate substantially.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
We have customer fulfillment centers in or near the following locations:
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| Approx. |
| Operational |
| Leased/ |
Location |
| Sq. Ft. |
| Date |
| Owned |
Harrisburg, Pennsylvania |
| 821,000 |
| 1997 |
| Owned |
Atlanta, Georgia |
| 721,000 |
| 1990 |
| Owned |
Elkhart, Indiana |
| 545,000 |
| 1996 |
| Owned |
Columbus, Ohio |
| 468,000 |
| 2014 |
| Owned |
Reno, Nevada |
| 419,000 |
| 1999 |
| Owned |
Hanover Park, Illinois |
| 388,000 |
| 2003 |
| Leased |
Shelbyville, Kentucky(1) |
| 110,000 |
| 1973 |
| Owned |
Beamsville, Ontario, Canada |
| 85,000 |
| 2004 |
| Owned |
Wednesbury, United Kingdom |
| 75,000 |
| 1998 |
| Leased |
Edmonton, Alberta, Canada |
| 40,500 |
| 2007 |
| Leased |
Moncton, New Brunswick, Canada |
| 16,000 |
| 1981 |
| Owned |
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(1) Repackaging and replenishment center.
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We maintain 28 branch offices, of which 20 are located within the United States, seven are located in Mexico and one is located in the United Kingdom. Our branch offices range in size from 1,800 to 97,000 square feet. We also maintain seven regional inventory centers, all of which are located in the United States, which vary in size from 5,000 to 19,200 square feet. Most of these branch offices and regional inventory centers are leased. These leases will expire at various periods, with the longest extending to fiscal year 2031. The aggregate annual lease payments on the leased branch offices, regional inventory centers and customer fulfillment centers in fiscal year 2021 were approximately $11.2 million.
In December 2020, the Company announced plans to relocate its Long Island Customer Service Center (“CSC”) to a smaller facility in Melville, New York. In connection with the announcement, we signed a 10-year lease to occupy approximately 26,000 square feet in an office building in Melville, New York, which commenced in September 2021. During the first quarter of fiscal year 2021, the Company commenced plans to sell its 170,000-square foot Long Island CSC in Melville, New York. The Company subsequently entered into a Purchase and Sale Agreement to sell the Long Island CSC. The Purchase and Sale Agreement is contingent and inclusive of a set period of time provisions for each of the following: property due diligence, site plan approval by the township and site construction permit award by the township. This transaction is currently within the permitting period as outlined within the Purchase and Sale Agreement.
ITEM 3. LEGAL PROCEEDINGS.
For information related to legal proceedings, see the discussion under the caption “Legal Proceedings” in Note 15, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
MSC’s Class A Common Stock is traded on the NYSE under the symbol “MSM.” MSC’s Class B Common Stock is not traded in any public market.
In 2003, our Board of Directors instituted a policy of paying regular quarterly cash dividends to our shareholders. The Company paid aggregate annual cash dividends of $6.50 per share in fiscal year 2021, consisting of a special cash dividend of $3.50 per share and total quarterly regular cash dividends of $3.00 per share. The Company paid total quarterly regular cash dividends of $3.00 per share and a special cash dividend of $5.00 per share in fiscal year 2020. The Company expects its practice of paying quarterly dividends on its common stock will continue, although the payment of future dividends is at the discretion of the Company’s Board of Directors and will depend upon its earnings, capital requirements, financial condition and other factors.
On October 14, 2021, the Board of Directors declared a quarterly cash dividend of $0.75 per share, payable on November 30, 2021 to shareholders of record at the close of business on November 16, 2021. The dividend will result in a payout of approximately $41.6 million, based on the number of shares outstanding at October 1, 2021.
The approximate number of holders of record of MSC’s Class A Common Stock as of October 1, 2021 was 511. The number of holders of record of MSC’s Class B Common Stock as of October 1, 2021 was 17.
Purchases of Equity Securities
The following table sets forth repurchases by the Company of its outstanding shares of Class A Common Stock, which are listed on the NYSE, during the quarter ended August 28, 2021:
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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 |
| Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(3) | |
5/30/21-6/29/21 |
| 230,669 |
| $ | 89.06 |
| 228,695 |
| 421,657 |
6/30/21-7/29/21 |
| 38 |
| $ | 86.45 |
| — |
| 5,000,000 |
7/30/21-8/28/21 |
| 228 |
| $ | 87.83 |
| — |
| 5,000,000 |
Total |
| 230,935 |
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| 228,695 |
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________________________
(1)During the fiscal quarter ended August 28, 2021, 2,240 shares of our Class A 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)On June 29, 2021, the Company’s Board of Directors terminated the MSC Stock Repurchase Plan, which was established during fiscal year 1999, and authorized a new share repurchase program (the “Share Repurchase Program”) to purchase up to 5,000,000 shares of the Company’s Class A Common Stock. There is no expiration date governing the period over which the Company can repurchase shares under the Share Repurchase Program. As of August 28, 2021, the maximum number of shares that may yet be repurchased under the Share Repurchase Program was 5,000,000 shares.
Performance Graph
The following stock price performance graph and accompanying information is not deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any filings under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, or be subject to the liabilities of Section 18 of the Exchange Act, regardless of any general incorporation language in any such filing.
The following graph compares the cumulative total return on an investment in our Class A Common Stock with the cumulative total return on an investment in each of the S&P Midcap 400 Index and the Dow Jones US Industrial Supplier Index.
The graph assumes $100 invested at the closing price of our Class A Common Stock on the NYSE and each index on September 3, 2016 and assumes that all dividends paid on such securities during the applicable fiscal years were reinvested. Indices are calculated on a month-end basis. The comparisons in this table are based on historical data and are not intended to forecast or to be indicative of the possible future performance of our Class A Common Stock.
Cumulative Total Stockholder Return
for the Period from September 3, 2016 through August 28, 2021
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| 9/3/2016 |
| 9/2/2017 |
| 9/1/2018 |
| 8/31/2019 |
| 8/29/2020 |
| 8/28/2021 |
MSC Industrial Direct Co., Inc. |
| 100.00 |
| 95.26 |
| 120.77 |
| 98.77 |
| 108.89 |
| 150.52 |
S&P Midcap 400 Index |
| 100.00 |
| 111.82 |
| 133.63 |
| 125.05 |
| 131.65 |
| 189.57 |
Dow Jones US Industrial Supplier Index |
| 100.00 |
| 85.74 |
| 128.69 |
| 110.96 |
| 154.49 |
| 189.97 |
ITEM 6. [RESERVED].
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
MSC is a leading North American distributor of a broad range of metalworking and MRO products and services. We help our customers drive greater productivity, profitability and growth with approximately 1.9 million products, inventory management and other supply chain solutions, and deep expertise from more than 80 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.
Our experienced team of more than 6,500 associates works with our customers to help drive results for their businesses, from keeping operations running efficiently today to continuously rethinking, retooling and optimizing for a more productive tomorrow. We offer approximately 1.9 million active SKUs through our catalogs; our brochures; our eCommerce channels, including the MSC website; our inventory management solutions; and our call centers, branch offices, customer fulfillment centers and regional inventory centers. We service our customers from 11 customer fulfillment centers (seven customer fulfillment centers are located in the United States which includes five primary customer fulfillment centers, three are located in Canada and one is located in the United Kingdom), seven regional inventory centers and 28 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 reductions throughout our business through cost-saving strategies and increased leverage from our existing infrastructure, and continue to provide additional procurement cost-savings solutions to our customers through technology such as our CMI, VMI and vending programs. Our field sales and service associate headcount was 2,398 at August 28, 2021, compared to 2,263 at August 29, 2020 and 2,414 at August 31, 2019. 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 that we play driving value for our customers by enabling them to achieve higher levels of growth, profitability and productivity.
The chart below displays a two-year comparison of our net sales from fiscal year 2020 through fiscal year 2021:
(1)Pricing and other is comprised of changes in customer and product mix, discounting and other items.
Highlights
Highlights during fiscal year 2021 include the following:
We generated $224.5 million of cash from operations.
We repurchased and immediately retired $67.5 million of MSC Class A Common Stock.
We paid out $362.7 million in cash dividends, comprised of special and regular cash dividends of $195.4 million and $167.3 million, respectively, compared to $444.2 million in cash dividends in fiscal year 2020, comprised of special and regular cash dividends of $277.6 million and $166.5 million, respectively.
In June 2021, we acquired 80% of the outstanding shares of Hurst for aggregate consideration of $15.3 million, which included a post-closing working capital adjustment of $0.1 million paid out in August 2021.
In July 2021, MSC Mexico acquired additional assets of TAC in conjunction with the acquisition of its outsourcing and logistics businesses for aggregate consideration of $8.0 million, which included $6.7 million of cash paid and $1.3 million of contingent consideration. Following this acquisition, the Company retained its 75% interest in MSC Mexico.
We incurred $31.4 million in restructuring costs, comprised of $15.0 million in operating lease asset impairment charges, net of gains related to settlement of lease liabilities, $4.5 million in associate severance and separation costs, $3.3 million in other exit-related costs, primarily related to our sales workforce realignment and enhanced customer support model, and $8.6 million in consulting costs related to the optimization of the Company’s operations.
We incurred a $26.7 million impairment charge relating to the sourcing of nitrile gloves. The Company subsequently recorded $20.8 million of loss recovery related to this PPE prepayment impairment for a net impairment charge of $5.9 million.
We incurred PPE-related inventory write-downs of $30.1 million in the second quarter to reduce the carrying value of certain PPE-related inventory to its estimated net realizable value as a result of increased supply in the market of such products and an expected inability to sell excess safety-related products.
Recent Developments
Progress on Mission Critical
As previously disclosed, we initiated a company-wide project, which we refer to as “Mission Critical,” to accelerate market share capture and improve profitability over the period through fiscal year 2023. Among the Mission Critical initiatives to realize growth, we began and expect to continue investing in our market-leading metalworking business by adding to our metalworking specialist team, introducing value-added services to our customers, expanding our vending, VMI and in-plant solutions programs, building out our sales force, and diversifying our customers and end markets. We also are focused on critical structural cost reductions in order to improve return on invested capital. We anticipate that these cost reductions will be comprised of savings in the areas of sales and service, supply chain and general and administrative expenses, and include initiatives to optimize our distribution center network and real estate footprint, renegotiate supplier contracts, and redesign our talent acquisition and retention approach.
Enhanced Customer Support Model
In January 2021, as part of Mission Critical, we announced an enhanced customer support model, including a transition from the branch office network to virtual customer care hubs. This move is expected to provide personalized support to customers, regardless of their physical location. Along with this transition, we closed 73 branch offices and realigned certain existing locations from branch offices to regional inventory centers during fiscal year 2021. Restructuring associated with this enhanced model included one-time impairment charges for operating lease assets, net of gains related to settlement of lease liabilities, associate severance and separation costs, and other exit-related costs.
Relocation and Pending Sale of Long Island CSC
In December 2020, we announced plans to relocate our Long Island CSC to a smaller facility. In connection with the announcement, we signed a 10-year lease to occupy approximately 26,000 square feet in an office building in Melville, New York, which commenced in September 2021. In furtherance of these plans, we entered into a Purchase and Sale Agreement to
sell our Long Island CSC. This transaction is currently within a permitting period as outlined within the Purchase and Sale Agreement.
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 likely continue to adversely affect our business. The following events related to the COVID-19 pandemic have resulted, and will continue to result, in lost or delayed revenue to the 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 to import products into the United States; limitations on the ability of our associates to perform their work due to illness caused by the pandemic or federal, state or local orders requiring associates to remain at home; limitations on the ability of UPS, LTL carriers and other 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.
To meet anticipated demand for PPE products during the COVID-19 pandemic, the Company used a number of distributors and brokers to source PPE products, including purchasing products from manufacturers outside its typical programs and under non-standard payment terms. In September 2020, we prepaid approximately $26.7 million for the purchase of nitrile gloves to be sourced from manufacturers in Asia and experienced significant delays in obtaining possession of this PPE. We evaluated the potential recoverability of these assets and, as a result, recorded an impairment charge of $26.7 million in the first quarter of fiscal year 2021 to reflect the fact that the Company would not ultimately obtain this PPE or recover its related prepayment. During fiscal year 2021, the Company entered into a legal settlement agreement with a vendor and, as a result, received $20.8 million of loss recovery in its Consolidated Statements of Income related to this PPE prepayment impairment. The Company continues to pursue its legal avenues for recovery of the remaining prepayment. Furthermore, the Company has realized lower product margins as well as inventory write-downs, each as a result of the COVID-19 pandemic, primarily due to the increased supply of competing products from manufacturers and an expected inability to sell excess inventory of safety-related products ordered from manufacturers earlier in the COVID-19 pandemic. The Company incurred PPE-related inventory write-downs of $30.1 million during the second quarter of fiscal year 2021 to reduce the carrying value of certain PPE-related inventory to its estimated net realizable value. The extent to which the COVID-19 pandemic will continue to impact our business, financial condition and results of operations will depend on future developments, which are highly uncertain and depend on, among other things, the duration, spread, severity and impact of the COVID-19 pandemic and the success and speed of vaccination efforts both in the United States and globally, 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 the pace and the extent to which normal economic and operating conditions can resume.
Our number one priority is the health and safety of our associates and their families, our customers, and our other partners. We have taken and will continue to take measures to reduce the risk of infection and to protect our associates and our business, in line with guidelines issued by the authorities in the jurisdictions in which we operate, including federal, state and local governments and the Centers for Disease Control and Prevention. We have instituted enhanced safety procedures to safeguard the health and safety of our associates, including the use of additional protective equipment and the frequent cleaning of our facilities. We have restricted non-associate access to our sites, reorganized our workflows where permitted to maximize social distancing, implemented extensive restrictions on associate travel, and utilized remote working strategies where possible.
We continue to experience limited disruptions in our business as we have implemented modifications to associate travel and associate work locations and in-person events, among other modifications. We have taken many actions to reduce spending more broadly across the Company, including limiting our operating and capital spending on critical items and reducing hiring and discretionary expenses. We have developed contingency plans that we anticipate would reduce costs further if business and financial conditions deteriorate. 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 and local, and foreign authorities, or that we determine are in the best interests of our associates, customers, suppliers and shareholders.
As the impact of the COVID-19 pandemic has begun to abate, and restrictions on business and commercial activity have been lifted, the economy in the United States has experienced acute increases in demand for certain products and services, including the demand for fuel, labor and certain products the Company sells or the inputs for such products. In some cases, this has led to shortages of fuel, labor and certain such products. While such shortages have not yet had a material impact on the Company’s business or results of operations, they may do so in the future and the Company cannot reasonably estimate the future impacts of such shortages at this time.
Our Strategy
Our primary objective is to grow sales profitably while offering our customers highly technical and high-touch solutions to solve their most complex challenges on the plant floor. Our strategy is to complete the transition from being a spot buy supplier to a mission-critical partner to our customers. We will selectively 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, including the Metalworking Business Index (the “MBI”) and the Industrial Production (“IP”) index. Approximately 70% of our revenues came from sales in the manufacturing sector during the fourth quarter of fiscal year 2021. Through statistical analysis, we have found that trends in our customers’ activity have correlated to changes in the MBI and the IP index. 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 IP index measures short-term changes in industrial production. Growth in the IP index from month to month indicates growth in the manufacturing, mining and utilities industries. Note that the composition of the IP index was revised by the Federal Reserve in May 2021 which adjusted, among other factors, the base year with which the IP index is calculated. This resulted in a lower level for the historical index in recent years, however the trend in the index continues to show growth as noted above. The MBI and the IP index over the fourth quarter of fiscal year 2021 and the fourth quarter and fiscal year averages were as follows:
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Period |
| MBI |
| IP Index |
June |
| 63.8 |
| 100.4 |
July |
| 61.2 |
| 101.4 |
August |
| 60.0 |
| 101.3 |
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Fiscal year 2021 Q4 average |
| 61.7 |
| 101.1 |
Fiscal year 2021 full year average |
| 57.4 |
| 98.7 |
During fiscal year 2021, the MBI average exceeded 50.0, which indicated growth in manufacturing during the period, particularly in the second half of the fiscal year. Similarly, the IP index averaged 98.7 during the same period, an improvement from the 2020 revised average of 96.6. We believe the recent trending improvement in the IP index was primarily due to the recovery in economic conditions related to the gradual lifting of government-imposed restrictions on economic activity and the abatement of the COVID-19 pandemic. We will monitor the current economic conditions for its impact on our customers and markets and continue to assess both risks and opportunities that may affect our business. The recent volatility stems from the economic disruptions of the COVID-19 pandemic. See “Impact of COVID-19 on Our Business” above.
Results of Operations
Fiscal Year Ended August 28, 2021 Compared to the Fiscal Year Ended August 29, 2020
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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| Fiscal Years Ended |
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| August 28, 2021 |
| August 29, 2020 |
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| (52 weeks) |
| (52 weeks) |
| Change | ||||||||||||
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| $ |
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| % |
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| $ |
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| % |
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| $ |
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| % |
Net sales |
| $ | 3,243,224 |
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| 100.0% |
| $ | 3,192,399 |
|
| 100.0% |
| $ | 50,825 |
|
| 1.6% |
Cost of goods sold |
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| 1,909,709 |
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| 58.9% |
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| 1,849,077 |
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| 57.9% |
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| 60,632 |
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| 3.3% |
Gross profit |
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| 1,333,515 |
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| 41.1% |
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| 1,343,322 |
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| 42.1% |
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| (9,807) |
|
| (0.7)% |
Operating expenses |
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| 994,468 |
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| 30.7% |
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| 975,553 |
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| 30.6% |
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| 18,915 |
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| 1.9% |
Impairment loss, net |
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| 5,886 |
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| 0.2% |
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| - |
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| 0.0% |
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| 5,886 |
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| N/A(1) |
Restructuring costs |
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| 31,392 |
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| 1.0% |
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| 17,029 |
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| 0.5% |
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| 14,363 |
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| 84.3% |
Income from operations |
|
| 301,769 |
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| 9.3% |
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| 350,740 |
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| 11.0% |
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| (48,971) |
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| (14.0)% |
Total other expense |
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| (13,390) |
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| (0.4)% |
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| (16,490) |
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| (0.5)% |
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| 3,100 |
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| (18.8)% |
Income before provision for income taxes |
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| 288,379 |
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| 8.9% |
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| 334,250 |
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| 10.5% |
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| (45,871) |
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| (13.7)% |
Provision for income taxes |
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| 70,442 |
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| 2.2% |
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| 82,492 |
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| 2.6% |
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| (12,050) |
|
| (14.6)% |
Net income |
|
| 217,937 |
|
| 6.7% |
|
| 251,758 |
|
| 7.9% |
|
| (33,821) |
|
| (13.4)% |
Less: Net income attributable to noncontrolling interest |
|
| 1,030 |
|
| 0.0% |
|
| 641 |
|
| 0.0% |
|
| 389 |
|
| 60.7% |
Net income attributable to MSC Industrial |
| $ | 216,907 |
|
| 6.7% |
| $ | 251,117 |
|
| 7.9% |
| $ | (34,210) |
|
| (13.6)% |
(1) N/A is Not Applicable. |
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Net Sales
Net sales for fiscal year 2021 increased 1.6% or $50.8 million from the prior fiscal year. We estimate that this increase in net sales is comprised of approximately $42.3 million from improved pricing, inclusive of changes in customer and product mix, discounting and other items, $3.7 million of net sales from the fiscal year 2021 acquisitions, and $6.0 million of favorable foreign exchange impact, partially offset by $1.2 million of lower sales volume. Of the above $50.8 million increase in net sales, sales to our government and national account programs (“Large Account Customers”) decreased by $58.7 million and sales other than to our Large Account Customers increased by $109.5 million, which includes $3.7 million of net sales from the fiscal year 2021 acquisitions.
The table below shows the change in our fiscal quarterly and annual 2021 average daily sales by total company and by customer type compared to the same periods in the prior fiscal year:
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Average Daily Sales Percentage Change | |||||||||||||||
(unaudited) | |||||||||||||||
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2021 vs. 2020 Fiscal Period |
| Thirteen-Week Period Ended Fiscal Q1 |
| Thirteen-Week Period Ended Fiscal Q2 |
| Thirteen-Week Period Ended Fiscal Q3 |
| Thirteen-Week Period Ended Fiscal Q4 |
| Fiscal Year Ended | |||||
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|
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Net Sales (in thousands) | $ | 771,904 |
| $ | 773,995 |
| $ | 866,294 |
| $ | 831,031 |
| $ | 3,243,224 |
|
Sales Days |
| 62 |
|
| 61 |
|
| 65 |
|
| 63 |
|
| 251 |
|
Average Daily Sales (“ADS”)(1) (in millions) | $ | 12.5 |
| $ | 12.7 |
| $ | 13.3 |
| $ | 13.2 |
| $ | 12.9 |
|
Total Company ADS Percent Change |
| -6.3% |
|
| -1.5% |
|
| 2.2% |
|
| 12.9% |
|
| 1.6% |
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|
Manufacturing Customers ADS Percent Change |
| -13.5% |
|
| -4.9% |
|
| 18.8% |
|
| 21.8% |
|
| 4.5% |
|
Manufacturing Customers Percent of Total Net Sales |
| 65% |
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| 68% |
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| 69% |
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| 70% |
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| 68% |
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Non-Manufacturing Customers ADS Percent Change |
| 10.8% |
|
| 6.6% |
|
| -21.9% |
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| -3.2% |
|
| -4.0% |
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Non-Manufacturing Customers Percent of Total Net Sales |
| 35% |
|
| 32% |
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| 31% |
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| 30% |
|
| 32% |
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(1) ADS is calculated using the number of business days in the United States. | |||||||||||||||
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, XML ordering-based systems, vending, hosted systems and other electronic portals, represented 60.0% of consolidated net sales for fiscal year 2021, compared to 59.2% of consolidated net sales for fiscal year 2020. This percentage increase was primarily related to the higher volume of safety and janitorial product sales in fiscal year 2020 that were not transacted through our eCommerce platforms. These percentages of consolidated net sales do not include eCommerce sales from our recent acquisitions.
Gross Profit
Gross profit margin was 41.1% in fiscal year 2021 as compared to 42.1% in fiscal year 2020. The Company has realized lower product margins as well as inventory write-downs, each as a result of the COVID-19 pandemic, primarily due to the increased supply of competing products from manufacturers and an expected inability to sell excess inventory of safety-related products ordered from manufacturers earlier in the pandemic. The decline in gross profit margin was primarily the result of PPE-related inventory write-downs of $30.1 million during the second quarter of fiscal year 2021 to reduce the carrying value of certain PPE-related inventory to its estimated net realizable value.
Operating Expenses
Operating expenses increased 1.9% to $994.5 million in fiscal year 2021, as compared to $975.6 million in fiscal year 2020. Operating expenses were 30.7% of fiscal year 2021 net sales, as compared to 30.6% for fiscal year 2020. The increase in operating expenses was primarily attributable to an increase in payroll and payroll-related costs and freight costs associated with higher sales volumes, partially offset by lower travel costs.
Payroll and payroll-related costs, excluding restructuring costs, were approximately 56.9% of total operating expenses for fiscal year 2021, as compared to approximately 56.7% for fiscal year 2020. Payroll and payroll-related costs, which include salary, incentive compensation, sales commission, and fringe benefit costs, increased by $13.1 million for fiscal year 2021, primarily due to higher sales commission and incentive compensation costs.
Freight expense was approximately $133.7 million for fiscal year 2021, as compared to $125.9 million for fiscal year 2020. The primary drivers of this increase were increased freight rates and increased sales volumes.
Travel and entertainment expense was $3.6 million for fiscal year 2021, as compared to $8.0 million for fiscal year 2020. This decrease was due to the Company’s travel restrictions in place resulting from the COVID-19 pandemic.
Impairment Loss, Net
In September 2020, the Company prepaid approximately $26.7 million for the purchase of nitrile gloves to be sourced from manufacturers in Asia and experienced significant delays in obtaining possession of this PPE. The Company evaluated the potential recoverability of these assets and, as a result, recorded an impairment charge of $26.7 million in the first quarter of fiscal year 2021 to reflect the fact that the Company would not ultimately obtain this PPE or recover its related prepayment. During fiscal year 2021, the Company entered into a legal settlement agreement with a vendor and, as a result, received $20.8 million of loss recovery in its Consolidated Statements of Income related to this PPE prepayment impairment. The Company continues to pursue its legal avenues for recovery of the remaining prepayment. We also incurred $1.6 million of legal costs associated with this matter during fiscal year 2021 that are included in Operating expenses.
Restructuring Costs
For fiscal year 2021, we incurred approximately $31.4 million in restructuring costs related to both the optimization of the Company’s operations and the enhancement of our customer support model. These charges include one-time impairment charges for operating lease assets, net of gains related to settlement of lease liabilities, associate severance and separation costs, and other exit-related costs. More specifically, in the second quarter of fiscal year 2021, the Company announced an enhanced customer support model, including a transition from the branch office network to virtual customer care hubs. This transition included the closure of 73 branch offices, all of which were under operating leases. As a result, we recorded an impairment charge of $15.0 million for impacted operating lease assets, net of gains related to settlement of lease liabilities, which is included in Restructuring costs on the Consolidated Statements of Income. See Note 13, “Restructuring Costs” in the Notes to Consolidated Financial Statements for additional information.
Income from Operations
Income from operations decreased 14.0% to $301.8 million in fiscal year 2021, as compared to $350.7 million in fiscal year 2020. This decline was primarily attributable to PPE-related inventory write-downs and the impairment and restructuring charges discussed above.
Provision for Income Taxes
Our effective tax rate for fiscal year 2021 was 24.4% as compared to 24.7% in fiscal year 2020. The decrease in the effective tax rate was primarily due to discrete items relating to a higher tax benefit from stock-based compensation as well as lower non-deductible travel and entertainment expenses. See Note 7, “Income Taxes” in the Notes to Consolidated Financial Statements for further information.
Net Income
The factors which affected net income for fiscal year 2021 as compared to the prior fiscal year have been discussed above.
Liquidity and Capital Resources
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| As of |
| As of |
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| ||
|
| August 28, |
| August 29, |
|
| |||
|
| 2021 |
| 2020 |
| $ Change | |||
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|
|
| (Dollars in thousands) |
|
|
|
Total debt |
| $ | 786,049 |
| $ | 619,266 |
| $ | 166,783 |
Less: Cash and cash equivalents |
|
| 40,536 |
|
| 125,211 |
|
| (84,675) |
Net debt |
| $ | 745,513 |
| $ | 494,055 |
| $ | 251,458 |
Equity |
| $ | 1,161,872 |
| $ | 1,320,573 |
| $ | (158,701) |
As of August 28, 2021, we had $40.5 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 and net proceeds from the private placement notes, have been used to fund these needs, to repurchase shares of our Class A Common Stock from time to time, and to pay dividends to our shareholders. More
recently, we have taken the actions discussed above under “Impact of COVID-19 on Our Business” to improve our business operations, lower costs and preserve financial flexibility through the COVID-19 pandemic.
At August 28, 2021, total borrowings outstanding, representing amounts due under our credit facilities and notes, as well as all finance leases and financing arrangements, were $786.0 million, net of unamortized debt issuance costs of $1.9 million, as compared to total borrowings of $619.3 million, net of unamortized debt issuance costs of $0.8 million, as of August 29, 2020. The increase was primarily driven by borrowings under our uncommitted credit facilities. See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about these balances.
We believe, based on our current business plan, that our existing cash, financial resources and cash flow from operations will be sufficient to fund necessary capital expenditures and operating cash requirements for at least the next 12 months. The Company further believes that its financial resources, along with managing discretionary expenses, will allow it to manage the anticipated impact of the COVID-19 pandemic on the Company's business operations for the foreseeable future, which will include reduced sales and net income levels for the Company. We will continue to evaluate our financial position in light of future developments, particularly those relating to the COVID-19 pandemic, and to take appropriate action as it is warranted.
The table below summarizes information regarding the Company’s cash flows for the periods indicated:
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| Fiscal Years Ended | ||||
|
| August 28, |
| August 29, | ||
|
| 2021 |
| 2020 | ||
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| (Dollars in thousands) | ||||
Net cash provided by operating activities |
| $ | 224,462 |
| $ | 396,739 |
Net cash used in investing activities |
| $ | (75,746) |
| $ | (49,277) |
Net cash used in financing activities |
| $ | (233,747) |
| $ | (254,618) |
Effect of foreign exchange rate changes on cash and cash equivalents |
| $ | 356 |
| $ | 81 |
Net increase (decrease) in cash and cash equivalents |
| $ | (84,675) |
| $ | 92,925 |
Operating Activities
Net cash provided by operating activities for fiscal years 2021 and 2020 was $224.5 million and $396.7 million, respectively. There were various increases and decreases contributing to the decrease in net cash provided by operating activities, including an increase in the change in accounts receivable and inventories primarily attributable to higher sales volume, partially offset by an increase in the change in accounts payable and accrued liabilities.
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| Fiscal Years Ended | ||||
|
| August 28, |
| August 29, | ||
|
| 2021 |
| 2020 | ||
|
| (Dollars in thousands) | ||||
Working Capital (1) |
| $ | 752,317 |
| $ | 829,037 |
Current Ratio (2) |
|
| 2.3 |
|
| 3.0 |
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|
Days’ Sales Outstanding (3) |
|
| 61.1 |
|
| 58.2 |
Inventory Turnover (4) |
|
| 3.4 |
|
| 3.3 |
(1) Working Capital is calculated as current assets less current liabilities.
(2) Current Ratio is calculated by dividing total current assets by total current liabilities.
(3) Days’ Sales Outstanding is calculated by dividing accounts receivable by net sales.
(4) Inventory Turnover is calculated by dividing total cost of goods sold by inventory, using a 13-month average inventory.
The decrease in working capital and the current ratio at August 28, 2021 compared to August 29, 2020 was primarily due to a decrease in cash and cash equivalents and an increase in the current portion of debt, partially offset by an increase in inventories and accounts receivable resulting from higher sales volumes.
The increase in inventories of $81.1 million from August 29, 2020 to August 28, 2021 was due to an increasing sales trend as well as ongoing challenges in the supply chain requiring earlier purchasing to meet customer demand. Higher inventory purchasing levels also drove the $60.6 million increase in accounts payable during this period. Accounts receivable increased $68.6 million due to increased sales levels during the second half of fiscal year 2021.
The increase in days’ sales outstanding as of August 28, 2021 as compared to August 29, 2020 was primarily due to the receivables portfolio consisting of a greater percentage of our national account program sales, which are typically at longer terms, and temporary extended terms for certain customers due to the impact of the COVID-19 pandemic.
Inventory turnover remained consistent with the prior fiscal year periods displayed.
Investing Activities
Net cash used in investing activities for fiscal years 2021 and 2020 was $75.7 million and $49.3 million, respectively. The use of cash for fiscal year 2021 included expenditures for property, plant and equipment and the acquisitions of Hurst and the outsourcing and logistics businesses of TAC. The use of cash for fiscal year 2020 primarily consisted of expenditures for property, plant and equipment.
Financing Activities
Net cash used in financing activities for fiscal years 2021 and 2020 was $233.7 million and $254.6 million, respectively. The major components contributing to the use of cash for fiscal year 2021 were the aggregate repurchases of our Class A Common Stock of $71.3 million, the regular and special dividends paid of $362.7 million, and the payments under Shelf Facility Agreements and Private Placement Debt (as each term is defined below) of $20.0 million. These uses of cash were partially offset by net borrowings under all the credit facilities of $184.3 million and proceeds from the exercise of common stock options of $29.7 million. The major components contributing to the use of cash for fiscal year 2020 were the regular and special dividends paid of $444.2 million and payments under Shelf Facility Agreements and Private Placement Debt of $20.0 million. These uses of cash were partially offset by proceeds from the issuance of long-term debt of $100.0 million and net borrowings under our credit facilities of $96.2 million.
Debt
Credit Facilities
In April 2017, the Company entered into a $600.0 million revolving credit facility which was subsequently amended and extended in August 2021. As of August 28, 2021, the Company also has three uncommitted credit facilities, totaling $208.0 million of maximum uncommitted availability. See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about our credit facilities. As of August 28, 2021, we were in compliance with the operating and financial covenants of our credit facilities.
Subsequent to fiscal year 2021, the Company made additional payments of $34.0 million through October 1, 2021 on its revolving credit facility. The current unused balance of $395.8 million from the revolving credit facility, which is reduced by outstanding letters of credit, is available for working capital purposes if necessary. See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about these balances.
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 and March 2020, we entered into additional note purchase agreements. See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about these transactions.
Financing Arrangements
From time to time, we enter into financing arrangements with vendors to purchase certain IT equipment or software. See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about our financing arrangements.
Leases
As of August 28, 2021, certain of our operations are conducted on leased premises. These leases are for varying periods, the longest extending to fiscal year 2031. In fiscal year 2021, the Company announced an enhanced customer support model, including a transition from the branch office network to virtual customer care hubs. This transition included the closure of 73 branch offices, all of which were under operating leases. Operating lease asset impairment charges, net of gains related to settlement of lease liabilities, are included within Restructuring costs in the Consolidated Statement of Income for fiscal year 2021. In addition, we are obligated under certain equipment and automobile operating and finance leases, which expire on varying dates through fiscal year 2026. See Note 10, “Leases” in the Notes to Consolidated Financial Statements for more information about our finance and operating leases.
Capital Expenditures
We continue to invest in sales productivity initiatives, eCommerce and vending platforms, customer fulfillment centers and distribution network, and other infrastructure and technology.
Future Liquidity Outlook
Our future contractual obligations as of August 28, 2021 (in thousands) are as follows:
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Contractual Obligations |
| 2022 |
| Thereafter | ||
Operating lease obligations(1) |
| $ | 15,420 |
| $ | 39,531 |
Finance lease obligations, net of interest(2) |
|
| 1,353 |
|
| 1,206 |
Maturities of long-term debt obligations, net of interest(3) |
|
| — |
|
| 583,750 |
Estimated interest on long-term debt(4) |
|
| 12,849 |
|
| 39,407 |
Total contractual obligations |
| $ | 29,622 |
| $ | 663,894 |
(1)Certain of our operations are conducted on leased premises. These leases (most of which require us to provide for the payment of real estate taxes, insurance and other operating costs) are for varying periods, the longest extending to fiscal year 2031. In addition, we are obligated under certain equipment and automobile operating leases, which expire on varying dates through fiscal year 2024. See Note 10, “Leases” in the Notes to Consolidated Financial Statements for additional information on our operating lease arrangements.
(2)As of August 28, 2021, the Company has entered into various finance leases for certain IT equipment, which expire on varying dates through fiscal year 2026. See Note 10, “Leases” in the Notes to Consolidated Financial Statements for additional information on our finance lease arrangements.
(3)Excludes debt issuance costs.
(4)Interest payments for long-term debt are based on principal amounts and coupons or contractual rates at fiscal year end.
As of August 28, 2021, the Company had recorded a non-current liability of $5.1 million for tax uncertainties and interest. This amount is excluded from the table above, as the Company cannot make reliable estimates of these cash flows by period. See Note 7, “Income Taxes” in the Notes to Consolidated Financial Statements.
We have not entered into any off-balance sheet arrangements and there are no commitments or obligations (including, but not limited to, guarantees; retained or contingent interests in assets transferred; contractual arrangements that support the credit, liquidity or market risk for transferred assets; or risk related to derivatives or other financial products related to our equity securities), including contingent obligations, with unconsolidated entities or persons that had during the periods presented herein or are reasonably likely to have a material impact on the financial statements.
Critical Accounting Estimates
We make estimates, judgments and assumptions in determining the amounts reported in the 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. Our significant accounting policies are described in the Notes to Consolidated Financial Statements. The accounting policies described below are impacted by our critical accounting estimates. More information on the critical accounting estimates can be found in Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.
Allowance for Credit Losses
We perform periodic credit evaluations of our customers’ financial condition, and collateral is generally not required. The Company considers several factors to estimate the allowance for credit losses in accounts receivable including the age of the receivables and the historical ratio of actual write-offs to the age of the receivables, and also reflects the adoption of the new accounting standard related to current expected credit losses in the most recent fiscal year. See Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements for more information.
Inventories
Inventory is reflected at the lower of weighted average cost or net realizable value considering future demand, market conditions and physical condition of the inventory. We write-down inventories for shrinkage and slow-moving or obsolete inventory. The analysis includes inventory levels, sales information, historical write-down information, and the on-hand quantities relative to the sales history for the product.
Goodwill and Indefinite-Lived Intangible Assets
The purchase price of an acquired company is allocated between the intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital. The Company annually reviews goodwill at the reporting unit level and intangible assets that have indefinite lives for impairment in its fiscal fourth quarter and when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The tax balances and income tax expense recognized by the Company are based on management’s interpretations of the tax laws of multiple jurisdictions. Income tax expense reflects the Company’s best estimates and assumptions regarding, among other items, the level of future taxable income, interpretation of tax laws and uncertain tax positions.
Other
Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. Policies such as revenue recognition, depreciation, intangibles, accruals related to self-insured associate health costs, long-lived assets and warranties require judgments on complex matters that are often subject to multiple external sources of authoritative guidance such as the Financial Accounting Standards Board and the SEC. Possible changes in estimates or assumptions associated with these policies are not expected to have a material effect on the financial condition or results of operations of the Company. More information on these additional accounting policies can be found in Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
Refer to Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risks
We are exposed to interest rate risk on our variable-rate debt. During fiscal year 2021, the Company entered into two uncommitted credit facilities and amended its existing uncommitted credit facility entered into during fiscal year 2020. Additionally, the Company amended its committed credit facility during fiscal year 2021. See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about the credit facilities.
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 (the “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. The 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.
Borrowings under our committed and uncommitted credit facilities are subject to fluctuations in the interest rate, which have a corresponding effect on our interest expense. A 100-basis point increase or decrease in interest rates would impact our interest costs by approximately $2.8 million under our current capital structure. We have monitored and will continue to monitor our exposure to interest rate fluctuations.
In addition, our interest income is most sensitive to changes in the general level of interest rates. In this regard, changes in interest rates affect the interest earned on our cash.
We do not currently use interest rate derivative instruments to manage exposure to interest rate changes.
Foreign Currency Risks
Approximately 94% of our sales are denominated in U.S. dollars and are primarily from customers in the United States. As a result, currency fluctuations are currently not material to our operating results. To the extent that we engage in more significant international sales in the future, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets. We have monitored and will continue to monitor our exposure to currency fluctuations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of MSC Industrial Direct Co., Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of MSC Industrial Direct Co., Inc. (the “Company”) as of August 28, 2021 and August 29, 2020, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended August 28, 2021, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at August 28, 2021 and August 29, 2020, and the results of its operations and its cash flows for each of the three years in the period ended August 28, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of August 28, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated October 20, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.
|
|
| Measurement of Inventory Valuation Reserves
|
Description of the Matter | As of August 28, 2021, the Company’s net inventory balance was $624,169 thousand. As more fully described in Note 1 to the consolidated financial statements, the valuation of inventory requires management to make assumptions and judgments about the recoverability of the inventory and its net realizable value. The Company establishes the inventory valuation reserves for shrinkage and slow-moving or obsolete inventory. The analyses of the required inventory valuation reserves include consideration of inventory levels, sales information, historical write-off information and the on-hand quantities relative to the sales history for the product. The Company also considers factors such as the inventory age, historic and current demand trends, and assumptions regarding future demand. The Company’s analyses also included the impact of COVID-19, and as a result the Company recorded PPE-related inventory write-downs of $30,091 thousand to reduce the carrying value of certain PPE-related inventory to its estimated net realizable value.
Auditing management’s analyses to determine its inventory valuation reserves were complex as auditor judgment was necessary in evaluating the amounts that should be reserved based on the assumptions detailed in the preceding paragraph.
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How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the inventory valuation reserve process, including controls over the inputs and assumptions described above, that are used in management’s calculation.
Our audit procedures to test the adequacy of the inventory valuation reserves included, among others, evaluating the appropriateness of management’s inputs to the inventory valuation reserves calculation which reflects consideration of the impact of COVID-19, including testing the completeness and accuracy of the data used in management’s calculation such as historical write-off activity, inventory levels and sales history for each class of inventory, and third party market data for PPE-related inventory. We compared actual write-off activity in recent years to the inventory valuation reserve estimated by the Company in prior years to evaluate management’s ability to accurately estimate the reserve. We also audited management’s calculation of the inventory valuation reserves by testing the mathematical accuracy of the Company’s reserve calculations. In addition, we performed inquiries of the Company’s management and obtained documentation to evaluate the Company’s estimate. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Jericho, New York
October 20, 2021
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MSC INDUSTRIAL DIRECT CO., INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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| August 28, |
| August 29, | ||
| 2021 |
| 2020 | ||
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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 credit losses 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 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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Other noncurrent liabilities |
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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; $ and outstanding |
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Class A Common Stock ( shares authorized; |
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Class B Common Stock ( shares authorized; |
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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 Consolidated Financial Statements. | |||||
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MSC INDUSTRIAL DIRECT CO., INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except net income per share data)
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| For the Fiscal Years Ended | |||||||
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| August 28, |
| August 29, |
| August 31, | |||
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| 2021 |
| 2020 |
| 2019 | |||
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| (52 weeks) |
| (52 weeks) |
| (52 weeks) | |||
Net sales |
| $ | |
| $ | |
| $ | |
Cost of goods sold |
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Gross profit |
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Operating expenses |
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Impairment loss, net |
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Restructuring costs |
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Income from operations |
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Other income (expense): |
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Interest expense |
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| ( |
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| ( |
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| ( |
Interest income |
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Other income (expense), net |
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| ( |
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| ( |
Total other expense |
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| ( |
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| ( |
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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 (loss) 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 Consolidated Financial Statements. | |||||||||
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MSC INDUSTRIAL DIRECT CO., INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
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| For the Fiscal Years Ended | |||||||
|
| August 28, |
| August 29, |
| August 31, | |||
|
| 2021 |
| 2020 |
| 2019 | |||
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| (52 weeks) |
| (52 weeks) |
| (52 weeks) | |||
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) loss |
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| ( |
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| ( |
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Foreign currency translation adjustments |
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| ( |
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Comprehensive income attributable to MSC Industrial |
| $ | |
| $ | |
| $ | |
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(1) | |||||||||
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See accompanying Notes to Consolidated Financial Statements. | |||||||||
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MSC INDUSTRIAL DIRECT CO., INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
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| For the Fiscal Years Ended |
| |||||||
|
| August 28, |
| August 29, |
| August 31, |
| |||
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| 2021 |
| 2020 |
| 2019 |
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| (52 weeks) |
| (52 weeks) |
| (52 weeks) |
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Class A Common Stock |
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Beginning Balance |
| $ | |
| $ | |
| $ | |
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Repurchase and retirement of Class A Common Stock |
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| ( |
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Retirement of treasury stock |
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| ( |
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Exchange of Class B Common Stock for Class A Common Stock |
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Associate Incentive Plans |
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Ending Balance |
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Class B Common Stock |
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Beginning Balance |
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Exchange of Class B Common Stock for Class A Common Stock |
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| ( |
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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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| ( |
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| ( |
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Retirement of treasury stock |
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| ( |
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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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| ( |
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| ( |
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Retirement of treasury stock |
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| ( |
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Regular cash dividends declared on Class A Common Stock |
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| ( |
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| ( |
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| ( |
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Regular cash dividends declared on Class B Common Stock |
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| ( |
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| ( |
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| ( |
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Special cash dividends declared on Class A Common Stock |
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| ( |
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| ( |
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Special cash dividends declared on Class B Common Stock |
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| ( |
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| ( |
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Dividend equivalents declared, net of cancellations |
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| ( |
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| ( |
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| ( |
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Ending Balance |
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Accumulated Other Comprehensive Loss |
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Beginning Balance |
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| ( |
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| ( |
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| ( |
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Foreign Currency Translation Adjustment |
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| ( |
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Ending Balance |
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| ( |
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| ( |
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| ( |
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Treasury Stock |
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Beginning Balance |
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| ( |
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| ( |
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| ( |
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Associate Incentive Plans |
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Repurchase of Class A Common Stock |
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| ( |
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| ( |
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| ( |
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Retirement of treasury stock |
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Ending Balance |
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| ( |
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| ( |
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| ( |
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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 |
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Capital Contributions |
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Foreign Currency Translation Adjustment |
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| ( |
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| ( |
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Net Income (Loss) |
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| ( |
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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 Consolidated Financial Statements. | ||||||||||
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MSC INDUSTRIAL DIRECT CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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| For the Fiscal Years Ended | |||||||
|
| August 28, |
| August 29, |
| August 31, | |||
|
| 2021 |
| 2020 |
| 2019 | |||
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| (52 weeks) |
| (52 weeks) |
| (52 weeks) | |||
Cash Flows from Operating Activities: |
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Net income |
| $ | |
| $ | |
| $ | |
Adjustments to reconcile net income to net cash provided by operating |
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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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Inventory write-down |
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Operating lease and fixed asset impairment due to restructuring |
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Provision for credit losses |
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Deferred income taxes |
|
| ( |
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Changes in operating assets and liabilities, net of amounts associated |
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Accounts receivable |
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| ( |
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| ( |
Inventories |
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| ( |
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|
| ( |
Prepaid expenses and other current assets |
|
| ( |
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| ( |
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| ( |
Operating lease liabilities |
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| ( |
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| ( |
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Other assets |
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| ( |
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| ( |
Accounts payable and accrued liabilities |
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| ( |
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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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| ( |
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| ( |
Proceeds from sale of available for sale securities |
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Cash used in business acquisitions, net of cash acquired |
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| ( |
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| ( |
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| ( |
Net cash used in investing activities |
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| ( |
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| ( |
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| ( |
Cash Flows from Financing Activities: |
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Repurchases of common stock |
|
| ( |
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| ( |
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| ( |
Payments of regular cash dividends |
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| ( |
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| ( |
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| ( |
Payments of special cash dividends |
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| ( |
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| ( |
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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 credit facilities |
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Payments under credit facilities |
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| ( |
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| ( |
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| ( |
Contributions from noncontrolling interest |
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Proceeds from other long-term debt |
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Payments under Shelf Facility Agreements and Private Placement Debt |
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| ( |
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| ( |
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Payments on finance lease and financing obligations |
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| ( |
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| ( |
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| ( |
Other, net |
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| ( |
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Net cash used in financing activities |
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| ( |
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| ( |
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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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| ( |
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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 |
| $ | |
| $ | |
| $ | |
See accompanying Notes to Consolidated Financial Statements. | |||||||||
MSC INDUSTRIAL DIRECT CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)
MSC Industrial Direct Co., Inc. (together with its wholly owned subsidiaries and entities in which it maintains a controlling financial interest, “MSC,” “MSC Industrial” or the “Company”) is a leading North American distributor of a broad range of metalworking and maintenance, repair and operations (“MRO”) products and services, with co-located headquarters in Melville, New York and Davidson, North Carolina. The Company has an additional office support center in Southfield, Michigan and serves primarily domestic markets through its distribution network of
The 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.
The COVID-19 pandemic has impacted and may 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. During fiscal year 2020, the Company experienced an increase in the volume of its sales of safety-related products. However, the Company has also realized lower product margins as well as inventory write-downs, each as a result of the COVID-19 pandemic, primarily due to the increased supply of competing products from manufacturers and an expected inability to sell excess inventory of safety-related products ordered from manufacturers earlier in the pandemic. During the second quarter of fiscal year 2021, the Company incurred personal protective equipment (“PPE”)-related inventory write-downs of $
As the impact of the COVID-19 pandemic has begun to abate, and restrictions on business and commercial activity have been lifted, the economy in the United States has experienced acute increases in demand for certain products and services, including the demand for fuel, labor and certain products the Company sells or the inputs for such products. In some cases, this has led to shortages of fuel, labor and certain such products. While such shortages have not yet had a material impact on the Company’s business or results of operations, they may do so in the future and the Company cannot reasonably estimate the future impacts of such shortages at this time.
The Company operates on a 52/53-week fiscal year ending on the Saturday closest to August 31st of each year. The financial statements for fiscal years 2021, 2020 and 2019 contain activity for 52 weeks. Unless the context requires otherwise, references to years contained herein pertain to the Company’s fiscal year.
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions used in preparing the accompanying consolidated financial statements.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value.
The Company’s mix of receivables is diverse, selling its products primarily to end-users. The Company’s customer base represents many diverse industries primarily concentrated in the United States. The Company performs periodic credit evaluations of its customers’ financial condition, and collateral is generally not required. The Company evaluates the collectability of accounts receivable based on numerous factors, including past transaction history with customers and their creditworthiness, and the Company provides a reserve for accounts that it believes to be uncollectible.
The Company’s cash includes deposits with commercial banks. The terms of these deposits and investments provide that all monies are available to the Company upon demand. The Company maintains the majority of its cash with high- quality financial institutions. Deposits held with banks may exceed insurance limits. While MSC monitors the creditworthiness of these commercial banks and financial institutions, a crisis in the U.S. financial systems could limit access to funds and/or result in a loss of principal.
The Company establishes reserves for customer accounts that are deemed uncollectible. The allowance for credit losses is based on several factors, including the age of the receivables and the historical ratio of actual write-offs to the age of the receivables, and also reflects the adoption of the new accounting standard related to current expected credit losses in the most recent fiscal year. See “Recently Adopted Accounting Pronouncements.” in this Note 1 for more information. These analyses also take into consideration economic conditions that may have an impact on a specific industry, group of customers or a specific customer. While the Company has a broad customer base, representing many diverse industries primarily in all regions of the United States, a general economic downturn could result in higher than expected defaults and, therefore, the need to revise estimates for bad debts.
Inventories consist of merchandise held for resale and are stated at the lower of weighted average cost or net realizable value. The Company evaluates the recoverability of its slow-moving or obsolete inventories quarterly. The Company estimates the recoverable cost of such inventory by product type and considering such factors as its age, historic and current demand trends, the physical condition of the inventory, historical write-down information as well as assumptions regarding future demand. The Company’s ability to recover its cost for slow-moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand, and relationships with suppliers. Substantially all of the Company’s inventories have demonstrated long shelf lives and are not highly susceptible to obsolescence. In addition, many of the Company’s inventory items are eligible for return under various supplier agreements.
Property, plant and equipment and capitalized computer software are stated at cost less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged to expense as incurred; costs of major renewals and improvements are capitalized. At the time property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the asset and accumulated depreciation accounts and the profit or loss on such disposition is reflected in income.
Depreciation and amortization of property, plant and equipment are computed for financial reporting purposes on the straight-line method based on the estimated useful lives of the assets. Leasehold improvements are amortized over either their respective lease terms or their estimated lives, whichever is shorter. Estimated useful lives range from
Capitalized computer software costs are amortized using the straight-line method over the estimated useful life. These costs include purchased software packages, payments to vendors and consultants for the development, implementation or modification of purchased software packages for Company use, and payroll and related costs for associates connected with
internal-use software projects. Capitalized computer software costs are included within property, plant and equipment on the Company’s Consolidated Balance Sheets.
The Company’s lease portfolio includes certain real estate (branch offices, customer fulfillment centers and regional inventory 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, lease components and non-lease components, such as common area maintenance, are grouped as a single lease component. All leases with an initial term of 12 months or less are not included on the balance sheet. 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.
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 Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in operating expenses on the consolidated statements of income.
The Company’s business acquisitions typically result in the recording of goodwill and other intangible assets, which affect the amount of amortization expense and possibly impairment write-downs that the Company may incur in future periods. Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business acquisitions. The Company annually reviews goodwill and intangible assets that have indefinite lives for impairment in its fiscal fourth quarter and when events or changes in circumstances indicate the carrying values of these assets might exceed their current fair values.
The Company currently operates at a single reporting unit level. Events or circumstances that may result in an impairment review include changes in macroeconomic conditions, industry and market considerations, cost fact events affecting the reporting unit or a sustained decrease in share price. Each year, the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If impairment is indicated in the qualitative assessment or if management elects to initially perform a quantitative assessment of goodwill or intangible assets, the impairment test uses a single step approach. This single step approach compares the carrying value of a reporting unit to its fair value. If the fair value of the reporting unit exceeds its carrying amount, goodwill and intangible assets of the reporting unit are not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit. Based on the qualitative assessments of goodwill and intangible assets that have indefinite lives performed by the Company in its respective fiscal fourth quarters, there was no indicator of impairment for fiscal years 2021, 2020 and 2019.
The balances and changes in the carrying amount of goodwill are as follows:
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Balance as of August 31, 2019 |
| $ | |
Foreign currency translation adjustments |
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Balance as of August 29, 2020 |
| $ | |
Hurst acquisition (1) |
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MSC Mexico acquisition (2) |
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Foreign currency translation adjustments |
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Balance as of August 28, 2021 |
| $ | |
(1)In June 2021, the Company acquired a majority ownership interest in Hurst (as defined in Note 5, “Business Combinations”). The Company holds an
(2)In July 2021, MSC Mexico (as defined in Note 5, “Business Combinations”) acquired additional assets of TAC (as defined in Note 5, “Business Combinations”) in conjunction with the acquisition of its outsourcing and logistics businesses. The Company holds a
See Note 5, “Business Combinations” for further discussion of this acquisition.
The components of the Company’s intangible assets for fiscal years 2021 and 2020 are as follows:
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| For the Fiscal Years Ended | ||||||||||
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| August 28, 2021 |
| August 29, 2020 | ||||||||
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| Weighted Average Useful Life (in years) |
| Gross Carrying Amount |
| Accumulated Amortization |
| Gross Carrying Amount |
| Accumulated Amortization | ||||||
Customer Relationships |
| - |
| $ | |
| $ | ( |
| $ | |
| $ | ( | ||
Non-Compete Agreements |
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| ( |
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Trademarks |
| - |
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| ( |
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| ( | ||
Trademarks |
| Indefinite |
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Total |
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| $ | |
| $ | ( |
| $ | |
| $ | ( |
For fiscal year 2021, the Company recorded approximately $
The Company’s amortizable intangible assets are amortized on a straight-line basis, including customer relationships, based on an approximation of customer attrition patterns and best estimates of the use pattern of the asset. Amortization expense of the Company’s intangible assets was $
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Fiscal Year |
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2022 |
| $ |
2023 |
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2024 |
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2025 |
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2026 |
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The Company periodically evaluates the net realizable value of long-lived assets, including definite-lived intangible assets, operating lease right-of-use assets, and property and equipment, relying on a number of factors, including operating results, business plans, economic projections, and anticipated future cash flows. Impairment is assessed by evaluating the estimated undiscounted cash flows over the asset’s remaining life. If estimated cash flows are insufficient to recover the investment, an impairment loss is recognized. In fiscal year 2021, the Company recorded impairment losses on its operating lease right-of-use assets related to the enhanced customer support model. See Note 13, “Restructuring Costs” for further discussion. No impairment losses were required to be recorded by the Company during fiscal years 2020 and 2019.
Revenue Recognition
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. The Company’s contracts have a single performance obligation, to deliver products, and are short-term in nature. 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 one year. The Company considers shipping and handling as activities to fulfill its performance obligation. The Company estimates product returns based on historical return rates.
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.
Gross Profit
Gross profit primarily represents the difference between the sale price to our customers and the product cost from our suppliers (net of earned rebates and discounts), including the cost of inbound freight. The cost of outbound freight (including internal transfers), purchasing, receiving and warehousing are included in operating expenses.
The Company receives volume rebates from certain vendors based on contractual arrangements with such vendors. Rebates received from these vendors are recognized as a reduction to the cost of goods sold in the consolidated statements of income when the inventory is sold. In addition, the Company records cash consideration received for advertising costs incurred to sell the vendor’s products as a reduction of the Company’s advertising costs and is reflected in operating expenses in the consolidated statements of income. The total amount of advertising costs, net of co-operative advertising income from vendor-sponsored programs, included in operating expenses in the consolidated statements of income was approximately $
The Company generally offers a maximum
The Company includes shipping and handling fees billed to customers in net sales and shipping, and handling costs associated with outbound freight in Operating expenses in the Company’s Consolidated Statements of Income. The shipping and handling costs in Operating expenses were approximately $
In accordance with Accounting Standards Codification (“ASC”) Topic 718, “Compensation — Stock Compensation” (“ASC Topic 718”), the Company estimates the fair value of share-based payment awards on the date of grant. The value of awards that are ultimately expected to vest is recognized as an expense over the requisite service periods. The fair value of the Company’s restricted stock awards, restricted stock units and performance share units is based on the closing market price of the Company’s Class A Common Stock on the date of grant. The Company estimates the fair value of stock options granted using a Black-Scholes option-pricing model. This model requires the Company to make estimates and assumptions with respect to the expected term of the option, the expected volatility of the price of the Company’s Class A Common Stock and the expected forfeiture rate. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
The expected term is based on the historical exercise behavior of grantees, as well as the contractual life of the option grants. The expected volatility factor is based on the volatility of the Company’s Class A Common Stock for a period equal to the expected term of the stock option. In addition, forfeitures of share-based awards are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option and restricted stock award and unit forfeitures and records stock-based compensation expense only for those awards that are expected to vest.
Repurchased shares may be retired immediately and resume the status of authorized but unissued shares or may be held by the Company as treasury stock. The Company accounts for treasury stock under the cost method, using the first-in, first-out flow assumption, and is included in “Class A treasury stock, at cost” on the Consolidated Balance Sheets. When the Company reissues treasury stock, the gains are recorded in additional paid-in capital (“APIC”), while the losses are recorded to APIC to the extent that the previous net gains on the reissuance of treasury stock are available to offset the losses. If the loss is larger than the previous gains available, then the loss is recorded to retained earnings. The Company accounts for repurchased shares retired immediately or treasury stock retired under the constructive retirement method. When shares are
retired, the par value of the repurchased shares is deducted from common stock and the excess repurchase price over par is deducted by allocation to both APIC and retained earnings. The amount allocated to APIC is calculated as the original cost of APIC per share outstanding using the first-in, first-out flow assumption and is applied to the number of shares repurchased. Any remaining amount is allocated to retained earnings.
Fair Value of Financial Instruments
The carrying values of the Company’s financial instruments, including cash and cash equivalents, receivables, accounts payable and accrued liabilities, approximate fair value because of the short maturity of these instruments. In addition, based on borrowing rates currently available to the Company for borrowings with similar terms, the carrying values of the Company’s lease obligations also approximate fair value. The fair values of the Company’s long-term debt, including current maturities, are estimated based on quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. Under this method, the Company’s fair values of any long-term obligations was not significantly different than the carrying values at August 28, 2021 and August 29, 2020.
Foreign Currency
The local currency is the functional currency for all of MSC’s operations outside the United States. Assets and liabilities of these operations are translated to U.S. dollars at the exchange rate in effect at the end of each period. Income statement accounts are translated at the average exchange rate prevailing during the period. Translation adjustments arising from the use of differing exchange rates from period to period are included as a component of other comprehensive income within shareholders’ equity. Gains and losses from foreign currency transactions are included in net income for the period.
Income Taxes
The Company has established deferred income tax assets and liabilities for temporary differences between the financial reporting bases and the income tax bases of its assets and liabilities at enacted tax rates expected to be in effect when such assets or liabilities are realized or settled pursuant to the provisions of ASC Topic 740, “Income Taxes,” which prescribes a comprehensive model for the financial statement recognition, measurement, classification and disclosure of uncertain tax positions. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amounts of unrecognized tax benefits, exclusive of interest and penalties that would affect the effective tax rate, were $
Comprehensive income consists of consolidated net income and foreign currency translation adjustments. Foreign currency translation adjustments included in comprehensive income were not tax-effected as investments in international affiliates are deemed to be permanent.
The Company’s sales and assets are predominantly generated from U.S. locations. For fiscal year 2021, the Company’s operations in the United Kingdom, Canada and Mexico represented approximately
The Company utilizes the management approach for segment disclosure, which designates the internal organization that is used by management for making operating decisions and assessing performance as the source of our reportable segments. The Company operates in
The Company accounts for business combinations in accordance with ASC Topic 805, “Business Combinations” (“ASC Topic 805”). ASC Topic 805 established principles and requirements for recognizing the total consideration
transferred to and the assets acquired, liabilities assumed and any non-controlling interest in the acquired target in a business combination. ASC Topic 805 also provides guidance for recognizing and measuring goodwill acquired in a business combination and requires the acquirer to disclose information that users may need to evaluate and understand the financial impact of the business combination. See Note 5, “Business Combinations” for further discussion.
Measurement of Credit Losses
Effective August 30, 2020, the Company adopted the Financial Accounting Standards Board (the “FASB”) Accounting Standard Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
Goodwill Impairment
Effective August 30, 2020, the Company adopted FASB ASU 2017-04, Intangibles – Goodwill and Other (Topic 350). This standard eliminates the second step from the goodwill impairment test and instead requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
Cloud Computing Arrangements
Effective August 30, 2020, the Company adopted FASB ASU 2018-15: Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. ASU 2018-15 clarifies the requirements for capitalizing implementation costs in cloud computing arrangements and aligns them with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease entities financial reporting burdens as the market transitions from the London InterBank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022.
Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions related to the approach for intraperiod tax allocations, the calculation of income taxes in interim periods, and the recognition of deferred taxes for taxable goodwill. The guidance is effective for fiscal years beginning after December 15, 2020 and for interim periods within those fiscal years, with early adoption permitted. The Company is required to apply this guidance in its fiscal year 2022 interim and annual financial statements. Currently, the Company does not expect this standard to have a material impact on its Consolidated Financial Statements and related disclosures.
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 Consolidated Financial Statements.
Certain prior period Operating expenses were reclassified into Restructuring costs within the Company’s Consolidated Statements of Income to conform to the current period presentation. These reclassifications did not affect income from operations in any period presented.
2. REVENUE
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
The following table presents the Company’s percentage of net sales by customer end-market for fiscal years 2021 and 2020:
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| For the Fiscal Year Ended |
| For the Fiscal Year Ended | |
| August 28, 2021 |
| August 29, 2020 | |
| (52 weeks) |
| (52 weeks) | |
Manufacturing Heavy | % | % | ||
Manufacturing Light | % | % | ||
Government | % | % | ||
Retail/Wholesale | % | % | ||
Commercial Services | % | % | ||
Other (1) | % | % | ||
Total net sales | | % | | % |
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(1) | ||
The Company’s net sales originating from the following geographic areas were as follows for fiscal years 2021 and 2020:
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| For the Fiscal Year Ended |
|
| For the Fiscal Year Ended | ||||||
|
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| August 28, 2021 |
|
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| August 29, 2020 |
| ||||
|
|
| (52 weeks) |
|
|
| (52 weeks) | |||||
United States |
| $ | |
| % |
| $ | |
| % | ||
Mexico |
|
| |
| % |
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| |
| % | ||
United Kingdom |
|
| |
| % |
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| |
| % | ||
Canada |
|
| |
| % |
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| |
| % | ||
Total net sales |
| $ | |
| % |
| $ | |
| % | ||
3. FAIR VALUE
Fair value accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value into three levels, with Level 1 being of the highest priority. The three levels of inputs used to measure fair value are as follows:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Include other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs which are supported by little or no market activity.
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable and outstanding indebtedness. Cash and cash equivalents include investments in a money market fund which are reported at fair value. The fair value of money market funds is determined using quoted prices for identical investments in active markets, which are considered to be Level 1 inputs within the fair value hierarchy. 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 August 28, 2021 and August 29, 2020.
During fiscal years 2021 and 2020, the Company had
Assets Held for Sale
The Company classifies an asset as held for sale when management, having the authority to approve the action, commits to a plan to sell the asset, the sale is probable within one year, and the asset is available for immediate sale in its present condition. The Company also considers whether an active program to locate a buyer has been initiated, whether the asset is marketed actively for sale at a price that is reasonable in relation to its current fair value, and whether actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially measures an asset that is classified as held for sale at the lower of its carrying amount or fair value less costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized until the date of sale. The Company assesses the fair value of an asset less costs to sell each reporting period it remains classified as held for sale and reports any subsequent changes as an adjustment to the carrying amount of the asset, as long as the new carrying amount does not exceed the carrying amount of the asset at the time it was initially classified as held for sale. Assets are not depreciated or amortized while they are classified as held for sale.
In December 2020, the Company announced plans to relocate its Long Island Customer Service Center (“CSC”) to a smaller facility in Melville, New York. In connection with the announcement, the Company signed a
In prior periods, the Company’s non-vested restricted stock awards contained non-forfeitable rights to dividends and met 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. The presentation of basic and diluted earnings per share is required only for each class of common stock and not for participating securities with respect to prior periods. As such, the Company presents basic and diluted earnings per share for its common stock. The dilutive effect of participating securities for prior periods is calculated using the more dilutive of the treasury stock or the two-class method. For fiscal year 2019, the Company determined the two-class method to be the more dilutive. As such, the earnings allocated to common stock shareholders in the basic earnings per share calculation was adjusted for the reallocation of undistributed earnings to participating securities to arrive at the earnings allocated to common stock shareholders for calculating the diluted earnings per share. For fiscal years 2021 and 2020, the Company used the treasury stock method, as the Company discontinued its grants of these participating securities in fiscal year 2015 and the remaining restricted stock awards vested in March 2020.
The following table sets forth the computation of basic and diluted net income per common share under the treasury stock method for fiscal years 2021 and 2020 and under the two-class method for fiscal year 2019:
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| For the Fiscal Years Ended | |||||||
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| August 28, |
| August 29, |
| August 31, | |||
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| 2021 |
| 2020 |
| 2019 | |||
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| (52 weeks) |
| (52 weeks) |
| (52 weeks) | |||
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Numerator: |
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Net income attributable to MSC Industrial as reported |
| $ | |
| $ | |
| $ | |
Less: Distributed net income available to participating securities |
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| ( |
Less: Undistributed net income available to participating securities |
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| ( |
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Numerator for basic net income per share: |
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Undistributed and distributed net income available to common shareholders |
| $ | |
| $ | |
| $ | |
Add: Undistributed net income allocated to participating securities |
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Less: Undistributed net income reallocated to participating securities |
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| ( |
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Numerator for diluted net income per share: |
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Undistributed and distributed net income available to common shareholders |
| $ | |
| $ | |
| $ | |
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Denominator: |
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Weighted-average shares outstanding for basic net income per share |
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Effect of dilutive securities |
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Weighted-average shares outstanding for diluted net income per share |
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Net income per share: |
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Basic |
| $ | |
| $ | |
| $ | |
Diluted |
| $ | |
| $ | |
| $ | |
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Potentially dilutive securities |
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Potentially dilutive securities attributable to outstanding stock options and restricted stock units are excluded from the calculation of diluted net income per share when the combined exercise price and average unamortized fair value are greater than the average market price of the Company’s Class A Common Stock, and therefore their inclusion would be anti-dilutive.
Acquisition of Certain Assets of TAC
In February 2019,
In July 2021, MSC Mexico acquired additional assets of TAC in conjunction with the acquisition of its outsourcing and logistics businesses. Following this acquisition, the Company retains its
This acquisition was accounted for as a business acquisition pursuant to ASC Topic 805. As required by ASC Topic 805, the Company allocated the consideration to assets and liabilities based on their estimated fair value at the acquisition date. The Company’s acquisition accounting as of August 28, 2021 is preliminary primarily due to the pending final valuation and any additional working capital adjustments to the purchase price. The following table summarizes the amounts of identified assets acquired based on the estimated fair value at the acquisition date:
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Accounts receivable |
| $ | |
Identifiable intangibles |
|
| |
Goodwill |
|
| |
Property, plant and equipment |
|
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Total Purchase Price Consideration |
| $ | |
Acquired identifiable intangible assets with a fair value of $
The fair value of the noncontrolling interest was determined utilizing the market approach and consideration of the overall business enterprise value. The amount of revenue and loss before provision for income taxes from MSC Mexico related to its outsourcing and logistics businesses included in the Company’s Consolidated Statements of Income was insignificant for fiscal year 2021. In addition, the Company incurred non-recurring transaction and integration costs relating to MSC Mexico totaling $
Acquisition of Hurst
In June 2021, the Company acquired
Hurst serves customers from offices in Wichita, Kansas, Kansas City, Missouri and Dallas, Texas. The acquisition enhances the Company’s leadership position in metalworking and expands its presence in the aerospace industry. The Company plans to provide Hurst’s customer base access to its product portfolio to support their full metalworking and MRO needs.
This acquisition was accounted for as a business acquisition pursuant to ASC Topic 805. As required by ASC Topic 805, the Company allocated the consideration to assets and liabilities based on their estimated fair value at the acquisition date. The Company’s acquisition accounting as of August 28, 2021 is preliminary primarily due to the pending final valuation and any additional working capital adjustments to the purchase price. The following table summarizes the amounts of identified assets acquired based on the estimated fair value at the acquisition date:
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Cash |
| $ | |
Inventories |
|
| |
Accounts receivable |
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Prepaid expenses and other current assets |
|
| |
Identifiable intangibles |
|
| |
Goodwill |
|
| |
Property, plant and equipment |
|
| |
Total assets acquired |
| $ | |
Accounts payable |
|
| |
Accrued liabilities |
|
| |
Total liabilities assumed |
| $ | |
Net assets acquired |
| $ | |
Less: Fair Value of Noncontrolling Interest |
|
| ( |
Total MSC Industrial Purchase Price Consideration |
| $ | |
Acquired identifiable intangible assets with a fair value of $
The fair value of the noncontrolling interest was determined utilizing the market approach and consideration of the overall business enterprise value. The amount of revenue and loss before provision for income taxes from Hurst included in the Company’s Consolidated Statements of Income was insignificant for fiscal year 2021. In addition, the Company incurred non-recurring transaction and integration costs relating to Hurst totaling $
The following is a summary of property, plant and equipment and the estimated useful lives used in the computation of depreciation and amortization:
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| August 28, |
| August 29, | ||
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| Number of Years |
| 2021 |
| 2020 | ||||
Land |
|
| — |
|
| $ | |
| $ | |
Building and improvements |
| - |
|
| |
|
| | ||
Leasehold improvements |
| The lesser of lease term or |
|
| |
|
| | ||
Furniture, fixtures and equipment |
| - |
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| |
|
| | ||
Computer systems, equipment and software |
| - |
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| |
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Less: accumulated depreciation and amortization |
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Total |
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|
|
|
| $ | |
| $ | |
The components of income before provision for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
| For the Fiscal Years Ended | |||||||
|
| August 28, |
| August 29, |
| August 31, | |||
|
| 2021 |
| 2020 |
| 2019 | |||
Domestic |
| $ | |
| $ | |
| $ | |
Foreign |
|
| |
|
| |
|
| ( |
Total |
| $ | |
| $ | |
| $ | |
The provision for income taxes is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Fiscal Years Ended | |||||||
|
| August 28, |
| August 29, |
| August 31, | |||
|
| 2021 |
| 2020 |
| 2019 | |||
Current: |
|
|
|
|
|
|
|
|
|
Federal |
| $ | |
| $ | |
| $ | |
State and local |
|
| |
|
| |
|
| |
Foreign |
|
| |
|
| |
|
| ( |
|
|
| |
|
| |
|
| |
Deferred: |
|
|
|
|
|
|
|
|
|
Federal |
|
| ( |
|
| |
|
| |
State and local |
|
| ( |
|
| |
|
| |
Foreign |
|
| ( |
|
| ( |
|
|
|
|
|
| ( |
|
| |
|
| |
Total |
| $ | |
| $ | |
| $ | |
Significant components of deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
| August 28, |
| August 29, | ||
|
| 2021 |
| 2020 | ||
Deferred tax liabilities: |
|
|
|
|
|
|
Depreciation |
| $ | ( |
| $ | ( |
Right-of-use assets |
|
| ( |
|
| ( |
Goodwill |
|
| ( |
|
| ( |
Intangible amortization |
|
| ( |
|
| ( |
|
|
| ( |
|
| ( |
Deferred tax assets: |
|
|
|
|
|
|
Accounts receivable |
|
| |
|
| |
Lease liability |
|
| |
|
| |
Inventory |
|
| |
|
| |
Self-insurance liability |
|
| |
|
|
|
Deferred compensation |
|
| |
|
| |
Stock-based compensation |
|
| |
|
| |
Foreign tax credit |
|
| |
|
| |
Less: valuation allowance |
|
| ( |
|
| ( |
Other accrued expenses/reserves |
|
| |
|
| |
|
|
| |
|
| |
Net Deferred Tax Liabilities |
| $ | ( |
| $ | ( |
Reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Fiscal Years Ended | |||||||
|
| August 28, |
| August 29, |
| August 31, | |||
|
| 2021 |
| 2020 |
| 2019 | |||
U.S. federal statutory rate |
| | % |
| | % |
| | % |
State income taxes, net of federal benefit |
| |
|
| |
|
| |
|
Other, net |
| ( |
|
|
|
|
| ( |
|
Effective income tax rate |
| | % |
| | % |
| | % |
The aggregate changes in the balance of gross unrecognized tax benefits during fiscal years 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| August 28, |
| August 29, | ||
|
| 2021 |
| 2020 | ||
Beginning Balance |
| $ | |
| $ | |
Additions for tax positions relating to current year |
|
| |
|
| |
Additions for tax positions relating to prior years |
|
|
|
|
| |
Reductions for tax positions relating to prior years |
|
| ( |
|
| ( |
Settlements |
|
| ( |
|
| ( |
Lapse of statute of limitations |
|
| ( |
|
| ( |
Ending Balance |
| $ | |
| $ | |
Included in the balance of unrecognized tax benefits at August 28, 2021 is $
The Company recognizes interest expense and penalties in the provision for income taxes. The fiscal years 2021, 2020 and 2019 provisions include interest and penalties of $
The Company has a foreign tax credit carryover of $
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which is intended to provide economic relief to those impacted by the COVID-19 pandemic. On March 11, 2021, President Biden signed into law the American Rescue Plan Act (the “ARPA”). The ARPA includes several provisions, such as measures that extend and expand the Employee Retention Credit (the “ERC”) provision, previously enacted under the CARES Act, through December 31, 2021. The Company is reviewing the ERC provision of the CARES Act and of the ARPA to determine eligibility and potential impact.
The CARES Act provides for the deferral of the employer-paid portion of social security payroll taxes. The Company elected to defer the employer-paid portion of social security payroll taxes through December 31, 2020 of $
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
| August 28, |
| August 29, | ||
|
| 2021 |
| 2020 | ||
Accrued payroll and fringe |
| $ | |
| $ | |
Accrued bonus |
|
| |
|
| |
Accrued sales, property and income taxes |
|
| |
|
| |
Accrued sales rebates and returns |
|
| |
|
| |
Accrued restructuring and other related costs |
|
| |
|
| |
Accrued dividend equivalents |
|
| |
|
| |
Accrued other |
|
| |
|
| |
Total accrued liabilities |
| $ | |
| $ | |
Debt at August 28, 2021 and August 29, 2020 consisted of the following:
|
|
|
|
|
|
|
|
|
| August 28, |
| August 29, |
| ||
|
| 2021 |
| 2020 |
| ||
|
|
|
|
|
|
|
|
Amended Revolving Credit Facility |
| $ | |
| $ | |
|
Uncommitted Credit Facilities |
|
| |
|
| |
|
Long-Term Note Payable |
|
| |
|
|
| |
Private Placement Debt: |
|
|
|
|
|
|
|
|
|
| |
|
| |
|
|
|
| |
|
| |
|
|
|
| |
|
| |
|
|
|
| |
|
| |
|
|
|
| |
|
| |
|
|
|
|
|
|
| |
|
|
|
| |
|
| |
|
Financing arrangements |
|
| |
|
| |
|
Less: unamortized debt issuance costs |
|
| ( |
|
| ( |
|
Total debt, excluding obligations under finance leases |
| $ | |
| $ | |
|
Less: current portion |
|
| ( | (2) |
| ( | (3) |
Total long-term debt, excluding obligations under finance leases |
| $ | |
| $ | |
|
(1)Represents private placement debt issued under Shelf Facility Agreements.
(2)Consists of $
(3)Consists of $
Amended Revolving Credit Facility
In April 2017, the Company entered into a $
The Amended Revolving Credit Facility permits up to $
Uncommitted Credit Facilities
During fiscal year 2021, the Company entered into
Because the interest rates on the Uncommitted Credit Facilities are often lower than the interest rates which are available on the Company’s other sources of financing, the Company has used, and intends to use in the future, the Uncommitted Credit Facilities for opportunistic refinancing of the Company’s existing indebtedness. The Company does not presently view the Uncommitted Credit Facilities as sources of incremental debt financing of the Company due to the uncommitted nature of the Uncommitted Credit Facilities, but reserves the right to use the Uncommitted Credit Facilities to incur additional debt where appropriate under the then existing credit market conditions.
The interest rate on the Uncommitted Credit Facilities 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 fiscal year 2021, the Company borrowed an aggregate $
Private Placement Debt
In July 2016, the Company completed the issuance and sale of $
Shelf Facility Agreements
In January 2018, the Company entered into Note Purchase and Private Shelf Agreements with MetLife Investment Advisors, LLC (the “Met Life Note Purchase Agreement”) and PGIM, Inc. (the “Prudential Note Purchase Agreement” and, together with the Met Life Note Purchase Agreement, the “Shelf Facility Agreements”). Each of the MetLife Note Purchase Agreement and the Prudential Note Purchase Agreement provides for an uncommitted facility for the issuance and sale of up to an aggregate total of $
In June 2021, the Company paid $
Covenants
Each of the Credit Facilities, the Private Placement Debt and the 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
Maturities of Long-Term Debt
Maturities of long-term debt, excluding finance leases and financing obligations, as of August 28, 2021 are as follows:
|
|
|
|
|
| Maturities of | |
Fiscal Year |
| Long-Term Debt | |
2022 |
| $ |
|
2023 |
|
| |
2024 |
|
| |
2025 |
|
| |
2026 |
|
| |
Thereafter |
|
| |
Total |
| $ | |
Financing Arrangements
The Company’s lease portfolio includes certain real estate (branch offices, customer fulfillment centers and regional inventory 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 12 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 fiscal years 2021 and 2020, the variable lease cost was a benefit due to low current interest rates. 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.
The components of lease cost for fiscal years 2021 and 2020 were as follows:
|
|
|
|
|
|
|
| For the Fiscal Years Ended | |||||
|
| August 28, 2021 |
| August 29, 2020 | ||
Operating lease cost |
| $ | |
| $ | |
Variable lease benefit |
|
| ( |
|
| ( |
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
| August 28, |
|
| August 29, | ||
|
| Classification |
| 2021 |
|
| 2020 | ||
Assets |
|
|
|
|
|
|
|
|
|
Operating lease assets |
| Operating lease assets |
| $ | | (2) |
| $ | |
Finance lease assets (1) |
| Property, plant and equipment, net |
|
| |
|
|
| |
Total leased assets |
|
|
| $ | |
|
| $ | |
Liabilities |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
Operating |
| Current portion of operating lease liabilities |
| $ | | (2) |
| $ | |
Finance |
| Current portion of debt including obligations under finance leases |
|
| |
|
|
| |
Noncurrent |
|
|
|
|
|
|
|
|
|
Operating |
| Noncurrent operating lease liabilities |
|
| | (2) |
|
| |
Finance |
| Long-term debt including obligations under finance leases |
|
| |
|
|
| |
Total lease liabilities |
|
|
| $ | |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
(1) Finance lease assets are net of accumulated amortization of $ | |||||||||
(2) During fiscal year 2021, the Company recorded an impairment charge of $ | |||||||||
|
|
|
|
|
|
|
| ||||
|
|
| August 28, |
| August 29, | ||||||
|
|
| 2021 |
| 2020 | ||||||
Weighted average remaining lease term (years) |
|
|
|
|
|
|
| ||||
Operating Leases |
|
|
|
|
| ||||||
Finance Leases |
|
|
|
|
| ||||||
Weighted average discount rate |
|
|
|
|
|
|
| ||||
Operating Leases |
|
| % |
| % | ||||||
Finance Leases |
|
| % |
| % | ||||||
The following table sets forth supplemental cash flow information related to operating and finance leases:
|
|
|
|
|
|
|
|
| For the Fiscal Years Ended | ||||
|
| August 28, 2021 |
| August 29, 2020 | ||
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 |
|
| |
|
| |
As of August 28, 2021, future lease payments were as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal Year (1) |
| Operating Leases |
| Finance Leases |
| Total | |||
2022 |
| $ | |
| $ | |
| $ | |
2023 |
|
| |
|
| |
|
| |
2024 |
|
| |
|
| |
|
| |
2025 |
|
| |
|
| |
|
| |
2026 |
|
| |
|
| |
|
| |
Thereafter |
|
| |
|
|
|
|
| |
Total Lease Payments |
|
| |
|
| |
|
| |
Less: Imputed Interest |
|
| |
|
| |
|
| |
Present Value of Lease Liabilities (2) |
| $ | |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
|
|
(1) Future lease payments by fiscal year are based on contractual lease obligations. | |||||||||
(2) Includes the current portion of $ | |||||||||
Share Repurchases
On June 29, 2021, the Company’s Board of Directors terminated the MSC Stock Repurchase Plan, which was established during fiscal year 1999, and authorized a new share repurchase program (the “Share Repurchase Program”) to purchase up to
During fiscal years 2021 and 2020, the Company repurchased
Shares of the Company’s Class A Common Stock purchased pursuant to the stock purchase agreement, as well as shares of the Company’s Class A Common Stock purchased to satisfy the Company’s associates’ tax withholding liability associated with its share-based compensation program, did not reduce the number of shares that may be repurchased under the Share Repurchase Program. The Company reissued
Common Stock
Each holder of the Company’s Class A Common Stock is entitled to
The holders of the Company’s Class B Common Stock have the right to convert their shares of Class B Common Stock into shares of Class A Common Stock at their election and on a one-to-one basis, and all shares of Class B Common Stock convert into shares of Class A Common Stock on a one to-one basis upon the sale or transfer of such shares of Class B Common Stock to any person who is not a member of the Jacobson or Gershwind families or any trust not established principally for members of the Jacobson or Gershwind families or to any person who is not an executor, administrator or personal representative of an estate of a member of the Jacobson or Gershwind families.
Preferred Stock
The Company has authorized
Cash Dividend
In 2003, the Board of Directors instituted a policy of regular quarterly cash dividends to shareholders. This policy is reviewed regularly by the Board of Directors. The Company expects its practice of paying quarterly cash dividends on its common stock will continue, although the payment of future dividends is at the discretion of the Company’s Board of Directors and will depend upon its earnings, capital requirements, financial condition and other factors.
On
The Company accounts for all share-based payments in accordance with ASC Topic 718. Stock-based compensation expense included in Operating expenses for fiscal years 2021, 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
| For the Fiscal Years Ended | |||||||
|
| August 28, |
| August 29, |
| August 31, | |||
|
| 2021 |
| 2020 |
| 2019 | |||
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 |
| $ | |
| $ | |
| $ | |
2015 Omnibus Incentive Plan
At the Company’s annual meeting of shareholders held on January 15, 2015, the shareholders approved the MSC Industrial Direct Co., Inc. 2015 Omnibus Incentive Plan (the “2015 Omnibus Incentive Plan”). The 2015 Omnibus Incentive Plan replaced the MSC Industrial Direct Co., Inc. 2005 Omnibus Incentive Plan (the “Prior Plan”) and, beginning January 15, 2015, all awards are granted under the 2015 Omnibus Incentive Plan. Awards under the 2015 Omnibus Incentive Plan may be made in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, other share-based awards, and performance cash, performance shares or performance units. All outstanding awards under the Prior Plan will continue to be governed by the terms of the Prior Plan. Upon approval of the 2015 Omnibus Incentive Plan, the maximum aggregate number of shares of Class A Common Stock authorized to be issued under the 2015 Omnibus Incentive Plan was
Stock Options
A summary of the status of the Company’s stock options at August 28, 2021 and changes during fiscal year 2021 is presented in the table and narrative below:
|
|
|
|
|
|
|
| 2021 | |||
|
| Shares |
| Weighted-Average Exercise Price | |
Outstanding - beginning of year |
| |
| $ | |
Granted |
|
|
|
|
|
Exercised |
| ( |
|
| |
Canceled/Forfeited |
| ( |
|
| |
Outstanding - end of year |
| |
| $ | |
Exercisable - end of year |
| |
| $ | |
The total intrinsic value of options exercised during fiscal years 2021, 2020 and 2019 was $
Stock option awards outstanding under the Company’s incentive plans have been granted at exercise prices that are equal to the market value of its Class A Common Stock on the date of grant. Such options generally vest over a period of
Expected Term — The estimate of expected term is based on the historical exercise behavior of grantees, as well as the contractual life of the option grants.
Expected Volatility — The expected volatility factor is based on the volatility of the Company’s Class A Common Stock for a period equal to the expected term of the stock option.
Risk-free Interest Rate — The risk-free interest rate is determined using the implied yield for a traded zero-coupon U.S. Treasury bond with a term equal to the expected term of the stock option.
Expected Dividend Yield — The expected dividend yield is based on the Company's historical practice of paying quarterly dividends on its Class A Common Stock.
The Company discontinued its grants of stock options in fiscal year 2020. The Company’s weighted-average assumptions used to estimate the fair value of stock options granted during fiscal year 2019 were as follows:
|
|
|
| |
|
| 2019 | ||
Expected life (in years) |
| |
| |
Risk-free interest rate |
| | % | |
Expected volatility |
| | % | |
Expected dividend yield |
| | % | |
Weighted-Average Grant-Date Fair Value | $ | |
| |
|
|
|
| |
The following table summarizes information about stock options outstanding and exercisable at August 28, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options Outstanding |
| Options Exercisable | ||||||||||||||||
Range of Exercise Prices |
| Number of Options Outstanding at August 28, 2021 |
| Weighted-Average Remaining Contractual Life |
| Weighted-Average Exercise Price |
| Intrinsic Value |
| Number of Options Exercisable at August 28, 2021 |
| Weighted-Average Remaining Contractual Life |
| Weighted-Average Exercise Price |
| Intrinsic Value | ||||
$ |
| |
|
| $ | |
| $ | |
| |
|
| $ | |
| $ | | ||
|
| |
|
|
| |
|
| |
| |
|
|
| |
|
| | ||
|
| |
|
|
| |
|
| |
| |
|
|
| |
|
| | ||
|
| |
|
|
| |
|
| |
| |
|
|
| |
|
| | ||
|
| |
|
| $ | |
| $ | |
| |
|
| $ | |
| $ | | ||
Performance Share Units
Beginning in fiscal year 2020, the Company granted performance share units (“PSUs”) as part of its long-term stock-based compensation program. PSUs cliff vest after a
The following table summarizes all transactions related to PSUs under the 2015 Omnibus Incentive Plan (based on target award amounts) for fiscal year 2021:
|
|
|
|
|
| 2021 | |||
| Shares |
| Weighted-Average Grant-Date Fair Value | |
Non-vested PSUs at the beginning of the year | |
| $ | |
Granted | |
|
| |
Vested |
|
|
|
|
Canceled/Forfeited | ( |
|
| |
Non-vested PSUs at the end of the year (1) | |
| $ | |
(1) Excludes | ||||
The fair value of each PSU is the closing stock price on the New York Stock Exchange (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 shares of the Company’s Class A 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 August 28, 2021 was $
Restricted Stock Units
A summary of the Company’s non-vested restricted stock unit (“RSU”) award activity for fiscal year 2021 is as follows:
|
|
|
|
|
| 2021 | |||
| Shares |
|
| Weighted-Average Grant-Date Fair Value |
Non-vested RSU awards at the beginning of the year | |
| $ | |
Granted | |
|
| |
Vested | ( |
|
| |
Canceled/Forfeited | ( |
|
| |
Non-vested RSU awards at the end of the year (1) | |
| $ | |
(1) Excludes approximately 84 shares of accrued incremental dividend equivalent rights on outstanding RSUs granted under the 2015 Omnibus Incentive Plan. | ||||
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 after the vesting period. These awards accrue dividend equivalents on outstanding units (in the form of additional stock units) based on dividends declared on the Company’s Class A Common Stock and these additional RSUs are subject to the same vesting periods as the RSUs in the underlying award. The dividend equivalents are not included in the RSU table above. The unrecognized compensation cost related to the RSUs at August 28, 2021 was $
Associate Stock Purchase Plan
The Company has established a qualified Associate Stock Purchase Plan, the terms of which allow for eligible associates (as defined in the Associate Stock Purchase Plan) to participate in the purchase of up to a maximum of
Savings Plan
Enhanced Customer Support Model
In fiscal year 2021, the Company announced an enhanced customer support model, including a transition from the branch office network to virtual customer care hubs. Along with this transition, the Company closed
Optimization of Company Operations
Beginning in fiscal year 2019, 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. Beginning in fiscal year 2020, the Company engaged consultants to assist in reviewing the optimization of the Company’s operations. As such, the Company extended voluntary and involuntary
severance and separation benefits to certain associates in fiscal years 2019 through 2021 in order to facilitate its workforce realignment.
The following table summarizes restructuring and other related costs:
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| For the Fiscal Years Ended | ||||
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| August 28, |
| August 29, | ||
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| 2021 |
| 2020 | ||
Operating lease asset impairment loss |
| $ | |
| $ |
|
Settlement of lease liabilities (gain) |
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| ( |
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Other exit-related costs |
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Consulting-related costs |
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Associate severance and separation costs |
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Equity acceleration costs associated with severance |
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Total restructuring and other related costs |
| $ | |
| $ | |
The following table summarizes activity related to liabilities associated with restructuring and other related costs:
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| Consulting-related costs |
| Separation and severance costs |
| Other exit-related costs |
| Total | ||||
Balance at August 31, 2019 |
| $ |
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| $ | |
| $ |
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| $ | |
Additions |
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Payments and other adjustments |
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| ( |
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| ( |
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| ( |
Balance at August 29, 2020 |
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Additions |
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Payments and other adjustments |
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| ( |
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| ( |
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| ( |
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| ( |
Balance at August 28, 2021 |
| $ | |
| $ | |
| $ | |
| $ | |
PPE-Related Inventory Write-Down
The Company has realized lower product margins as well as inventory write-downs, each as a result of the COVID-19 pandemic, primarily due to the increased supply of competing products from manufacturers and an expected inability to sell excess inventory of safety-related products ordered from manufacturers earlier in the COVID-19 pandemic. During the second quarter of fiscal year 2021, the Company incurred PPE-related inventory write-downs of $
Impairment Loss, Net
To meet anticipated demand for PPE products during the COVID-19 pandemic, the Company purchased products from manufacturers outside its typical programs and under non-standard payment terms. Given the high demand for PPE products and related challenges in sourcing PPE products as well as the imperative to quickly obtain products based on customer demand, the Company used a number of distributors and brokers to source PPE products. In September 2020, the Company prepaid approximately $
15. COMMITMENTS AND CONTINGENCIES
Leases Commitments
The Company’s lease portfolio includes certain real estate (branch offices, regional inventory centers and customer fulfillment centers), automobiles and other equipment. Refer to Note 10, “Leases” for more information.
Legal Proceedings
In the ordinary course of business, there are various claims, lawsuits and pending actions against the Company incidental to the operation of its business. Although the outcome of these matters, both individually and in aggregate, 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 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of August 28, 2021. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of August 28, 2021, such disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed 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. The Company’s internal control over financial reporting includes those policies and procedures that:
(i)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of the Company’s assets;
(ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and
(iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of August 28, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013 Framework).
Based on this assessment, management determined that the Company maintained effective internal control over financial reporting as of August 28, 2021.
Attestation Report of the Independent Registered Public Accounting Firm
The effectiveness of the Company’s internal control over financial reporting as of August 28, 2021 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which appears in this Item under the heading “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Control Over Financial Reporting
As a result of COVID-19, many of our associates have been working from home since March 2020. However, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule
13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended August 28, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We are continually monitoring and assessing the impact of the COVID-19 pandemic on our internal controls.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of MSC Industrial Direct Co., Inc.
Opinion on Internal Control Over Financial Reporting
We have audited MSC Industrial Direct Co., Inc. (the “Company”) internal control over financial reporting as of August 28, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 28, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of August 28, 2021 and August 29, 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended August 28, 2021, and the related notes and schedule and our report dated October 20, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Jericho, New York
October 20, 2021
ITEM 9B. OTHER INFORMATION.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information called for by Item 10 is set forth under the headings “Election of Directors,” “Corporate Governance” and “Information About our Executive Officers” in the definitive proxy statement for the Company’s 2022 Annual Meeting of Shareholders (the “Proxy Statement”), which is incorporated herein by this reference.
The Company has adopted a Code of Ethics (the “Code of Ethics”), which is intended to qualify as a “code of ethics” within the meaning of Item 406 of Regulation S-K of the Exchange Act. The Code of Ethics applies to the Company’s principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. The Code of Ethics is available on the Company’s website, www.mscdirect.com.
The Company will disclose information pertaining to any amendment to, or waiver from, the provisions of the Code of Ethics that apply to the Company’s principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions and that relate to any element of the Code of Ethics enumerated in the SEC rules and regulations by posting this information on the Company’s website, www.mscdirect.com. The information on the Company’s website or linked to or from the Company’s website is not incorporated by reference into, and does not constitute a part of, this Report or any other documents the Company files with, or furnishes to, the SEC.
ITEM 11. EXECUTIVE COMPENSATION.
Information called for by Item 11 is set forth under the headings “Compensation Discussion and Analysis,” “Executive Compensation,” “Corporate Governance” and “Compensation Committee Report” in the Proxy Statement, which is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Information called for by Item 12 is set forth under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement, which is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Information called for by Item 13 is set forth under the heading “Corporate Governance” in the Proxy Statement, which is incorporated herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information called for by Item 14 is set forth under the heading “Ratification of the Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement, which is incorporated herein by this reference.
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Index to Financial Statements
Financial statements filed as a part of this Report are listed on the “Index to Consolidated Financial Statements” at page 35 herein.
(a)(2) Financial Statement Schedules
For the three fiscal years ended August 28, 2021.
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| Page |
Schedule II—Valuation and Qualifying Accounts | S-1 |
All other schedules have been omitted because the information is not applicable or is presented in the Consolidated Financial Statements or notes thereto.
(a)(3) Exhibits
Reference is made to Item 15(b) below.
(b) Exhibits
The Exhibit Index, which immediately precedes the signature page, is incorporated by reference into this Report.
(c) Financial Statement Schedules
Reference is made to Item 15(a)(2) above.
ITEM 16. FORM 10-K SUMMARY.
None.
EXHIBIT INDEX
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Exhibit |
| Description |
3.1 |
| Certificate of Incorporation of the Registrant.(P) |
3.2 |
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4.1 |
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4.2 |
| Specimen Class A Common Stock Certificate.(P) |
4.3 |
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4.4 |
| Form of 2.65% Senior Note, Series A, due July 28, 2023 (included in Exhibit 4.3). |
4.5 |
| Form of 2.90% Senior Note, Series B, due July 28, 2026 (included in Exhibit 4.3). |
10.1 |
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10.2 |
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10.3 |
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10.4 |
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10.5 |
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10.6 |
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10.7 |
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10.8 |
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10.9 |
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10.10 |
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Exhibit |
| Description |
10.11 |
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10.12 |
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10.13 |
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10.14 |
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10.15 |
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10.16 |
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10.17 |
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10.18 |
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10.19 |
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10.20 |
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10.21 |
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10.22 |
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10.23 |
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Exhibit |
| Description |
21.1 |
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23.1 |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.INS |
| Inline XBRL Instance Document.* |
101.SCH |
| Inline XBRL Taxonomy Extension Schema Document.* |
101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document.* |
101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document.* |
101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document.* |
101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document.* |
104 |
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).* |
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(P) | Filed as an exhibit to the registrant’s Registration Statement on Form S-1, as amended (File No. 33-98832). This exhibit was originally filed in paper format. Accordingly, a hyperlink has not been provided. |
* | Filed herewith. |
** | Furnished herewith. |
† | Indicates a management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. | |
| By: | /s/ ERIK GERSHWIND Erik Gershwind |
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| Chief Executive Officer |
Dated: October 20, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| Signature |
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| Title |
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/s/ MITCHELL JACOBSON Mitchell Jacobson | Chairman of the Board of Directors | October 20, 2021 | ||||||
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/s/ ERIK GERSHWIND Erik Gershwind | President and Chief Executive Officer
| October 20, 2021 | ||||||
/s/ KRISTEN ACTIS-GRANDE Kristen Actis-Grande | Executive Vice President and Chief (Principal Financial Officer and
| October 20, 2021 | ||||||
/s/ LOUISE GOESER Louise Goeser | Director | October 20, 2021 | ||||||
/s/ MICHAEL KAUFMANN Michael Kaufmann | Director | October 20, 2021 | ||||||
/s/ STEVEN PALADINO Steven Paladino | Director | October 20, 2021 | ||||||
/s/ PHILIP PELLER Philip Peller | Director | October 20, 2021 | ||||||
/s/ RUDINA SESERI Rudina Seseri | Director | October 20, 2021
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SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
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Description |
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| Balance at Beginning of Year |
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| Charged to Costs and Expenses |
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| Charged to Other Accounts |
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| Deductions(2) |
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| Balance at End of Year |
Deducted from asset accounts: |
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For the fiscal year ended August 31, 2019 |
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Allowance for credit losses(1) |
| $ | |
| $ | |
| $ |
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| $ | |
| $ | |
Deducted from asset accounts: |
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For the fiscal year ended August 29, 2020 |
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Allowance for credit losses(1) |
| $ | |
| $ | |
| $ |
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| $ | |
| $ | |
Deducted from asset accounts: |
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For the fiscal year ended August 28, 2021 |
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Allowance for credit losses(1) |
| $ | |
| $ | |
| $ |
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| $ | |
| $ | |
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(1) Included in accounts receivable. |
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(2) Comprised of uncollected accounts charged against the allowance. |
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