PLAN NUMBER: 003
EIN: 11-3289165
MSC INDUSTRIAL DIRECT 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
Participant Accounts
Individual accounts are maintained for each participant in the Plan. Each participant’s account is credited with the participant’s contributions and allocations of (a) the Company’s contributions, if any, and (b) earnings and losses from applicable investment performance, and, if not paid by the Employer, administrative expenses. Pre-tax and Roth contributions are maintained separately for participants.
Forfeitures
Forfeited balances of terminated participants’ non-vested employer contributions are used to pay administrative expenses of the Plan or to reduce future employer discretionary matching contributions and future employer discretionary profit sharing contributions. As of December 31, 2016 and 2015, the amounts of unallocated forfeitures were $93,873 and $13,916, respectively. During the year ended December 31, 2016 and 2015 forfeited non-vested accounts of $188,855 and $292,920, respectively, were used to reduce employer discretionary matching contribution obligations.
Notes Receivable from Participants
The Plan has a loan provision which allows participants to borrow from the Plan. The minimum loan is $1,000, and the maximum loan is generally 50% of a participant’s total vested account balance, not to exceed $50,000. The interest rate is established by the prime rate plus one percent. Interest rates on outstanding loans as of December 31, 2016 and December 31, 2015 ranged from 4.25% to 9.25%, respectively. Interest paid by a participant on an outstanding loan is paid directly into the participant’s account. Principal and interest is paid ratably through payroll deductions. The repayment period cannot exceed five years unless the loan is used to acquire a participant’s principal residence, in which case the repayment period cannot exceed ten years (except for certain of such loans that were rolled over into the Plan from another tax-qualified plan). A participant can have a maximum of two loans outstanding from the Plan at any given time.
Withdrawals
The Plan permits a participant to withdraw participant pre-tax, Roth, vested discretionary matching and vested discretionary profit sharing contributions to the extent necessary to satisfy the participant’s hardship (as defined in the Plan). In addition, the Plan permits participants who have attained age 59-1/2 to make in-service withdrawals from the Plan.
Payment of Benefits
At death, disability, retirement or termination, participants (or their designated beneficiaries) are entitled to receive benefits equal to their vested account balances. In general, participants may elect to defer their distribution or elect to receive vested benefits in the form of a lump-sum distribution, installment payments or a direct rollover to an Individual Retirement Account (“IRA”) or to an eligible retirement plan. However, if a participant’s vested account balance is $5,000 or less, the participant may not defer distribution and may elect to receive a lump sum distribution or a direct rollover to an IRA or an eligible retirement Plan. If no such election is made and the participant’s vested account balance is greater than $1,000, but not more than $5,000, the participant’s vested account balance will be directly rolled over into an IRA established by the Plan Administrator for the participant’s benefit. If the participant’s vested account balance is $1,000 or less and no election is made, the benefit will be paid in a lump sum distribution.
Plan Expenses
Expenses for recordkeeping, investment and other costs are generally paid by the Plan. Fees for accountants, counsel, and other specialists are generally paid by the Company. Certain administrative functions are performed by officers or employees of the Company. No such officer or employee receives compensation from the Plan.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The accounting records and financial statements of the Plan are prepared on the accrual basis in accordance with accounting principles generally accepted in the United States.
PLAN NUMBER: 003
EIN: 11-3289165
MSC INDUSTRIAL DIRECT 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes and supplemental schedule. Actual results could differ from those estimates.
Risks and Uncertainties
The Plan investment options include various investment securities. Market values of investments may decline for a number of reasons, including changes in prevailing market conditions and interest rates, increases in defaults, and credit rating downgrades. Due to the level of risk associated with investment securities, it is at least reasonably possible that changes in the values of investment balances will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the Statements of Net Assets Available for Benefits.
The Plan’s exposure to a concentration of credit risk is limited by the diversification of investments across the participant-directed fund elections. Additionally, the investments with each participant-directed fund election are further diversified into varied financial instruments, with the exception of investments in the Company’s Class A Common Stock and potentially the individual investments in the self-directed brokerage accounts under the Plan. Investment decisions are made, and the resulting risks are borne, exclusively by the Plan participant who directs such decisions.
As of December 31, 2016 and December 31, 2015, approximately 3% and 2%, respectively, of the Plan’s net assets available for benefits were invested in the Class A Common Stock of MSC Industrial Direct Co., Inc. (quoted market prices of $92.39 and $56.27 per share, respectively). As of May 31, 2017, the market price of the MSC Industrial Direct Co., Inc. Class A Common Stock was $83.94 per share.
Investment Valuation and Income Recognition
The investments are stated at fair value as determined by quoted market prices on the last business day of the Plan year, except investment assets in Common Collective trusts, which are valued based on the net asset value as determined by using the estimated fair value of the underlying assets held in the fund.
Purchases and sales of investments are recorded on a trade-date basis. Interest income is recorded on an accrual basis. Dividend income is recorded on the ex-dividend date.
Notes Receivable from Participants
Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest. Delinquent participant loans are recorded as distributions based on the terms of the Plan document.
Benefit Payments
Benefits are recorded upon distribution. As of December 31, 2016 and December 31, 2015, there were $0 and $241,120, respectively, of distributions allocated to accounts of participants who have elected to withdraw from the Plan but have not yet been paid at each of these dates.
Excess Contributions Payable
Amounts payable to participants for contributions in excess of amounts allowed by the Internal Revenue Service are recorded as a liability with a corresponding reduction to contributions. The Plan distributed the 2016 excess contributions to the applicable participants before March 15, 2017.
PLAN NUMBER: 003
EIN: 11-3289165
MSC INDUSTRIAL DIRECT 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
New Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-12, Plan Accounting: Defined Contribution Pension Plans (Topic 962): Plan Investment Disclosures. The amendments remove the requirement to:
| · | | disclose individual investments held that exceed 5% of net assets available for benefits, |
| · | | disclose net appreciation or depreciation in fair value of investments by type of investment held, |
| · | | disaggregate investments reported in the fair value hierarchy table by class of investment, and |
| · | | disclose investment strategy for investments for which fair value is measured using the NAV practical expedient if they are Form 5500 Direct Filing Entities. |
ASU 2015-12 has been adopted for the December 31, 2016 Plan year-end. The retrospective approach requires that applicable items for the prior year also be presented in accordance with ASU 2015-12.
In May 2015, FASB issued ASU2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The amendments remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient (NAV practical expedient). ASU 2015-07 has been adopted for the December 31, 2016, Plan year-end. The retrospective approach requires that an investment for which fair value is measured using a NAV practical expedient be removed from the fair value hierarchy in all periods presented in the financial statements. Accordingly, the investment disclosures in Note 3 have been modified as of December 31, 2015, as well.
3. FAIR VALUE MEASUREMENTS
In accordance with U.S. generally accepted accounting principles, each of the Plan’s fair value measurements is categorized into one of the following three levels based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels are defined as follows:
Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Plan has the ability to access.
Level 2 – Inputs to the valuation methodology include:
| · | | Quoted prices for similar assets or liabilities in active markets; |
| · | | Quoted prices for identical or similar assets or liabilities in inactive markets; |
| · | | Inputs other than quoted prices that are observable for the asset or liability; and |
| · | | Inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Following is a description of the valuation methodologies used for each major class of assets measured at fair value.
Mutual Funds: Valued at the closing price reported on active markets as derived from the net asset value (“NAV”) of shares held by the Plan at year end and are classified as Level 1 investments. There are no restrictions as to the redemption of these investments nor does the Plan have any contractual obligations to further invest in any of the individual mutual funds.
PLAN NUMBER: 003
EIN: 11-3289165
MSC INDUSTRIAL DIRECT 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
Common Collective Trusts: The Common Collective Trust investments include the Stable Value Fund and the Equity Income Trust. Fair value for these investments is determined by the NAV based on the fair value of the underlying funds. The NAV, as provided by the Plan Trustee, is used as a practical expedient to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund less its liabilities. The practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount different than the reported NAV.
Certain events could limit the ability of the Plan to transact at contract value with the issuer. Such events include the following: (1) total or partial Plan termination; (2) changes to the Plan’s prohibition on competing investment options; (3) mergers; (4) spin-offs; (5) lay-offs; (6) early retirement incentive programs; (7) sales or closings of all or part of a participating plan sponsor’s operations; (8) bankruptcy; (9) receivership; or (10) the failure of the trust to qualify for exemption from federal income taxes or any required prohibited transaction exemption under ERISA. The Plan administrator does not believe that the occurrence of any such event, which would limit the Plan’s ability to transact at contract value with participants, is probable.
There are no imposed redemption restrictions nor does the Plan have any contractual obligations to further invest in any of the individual trusts.
MSC Industrial Direct Co., Inc. Class A Common Stock: Valued at the closing price reported on the active market on which the individual securities are traded and are classified as a Level 1 investment.
Self-directed Brokerage: Valued based on the fair market value of the underlying stocks and mutual funds, which are as of the closing price reported on the active markets on which the stocks are traded and the NAV of shares held by the Plan at year end, respectively, and is classified as a Level 1 investment.
The following tables set forth by level, within the fair value hierarchy, the Plan’s assets at fair value as of December 31, 2016 and 2015:
| | | | | | |
Investments at Fair Value as of December 31, 2016 |
| Level 1 | | | Total |
| | | | | | |
Mutual Funds | | 265,100,618 | | | | 265,100,618 |
MSC Industrial Direct Co., Inc. Class A Common Stock | | 11,820,234 | | | | 11,820,234 |
Self-directed Brokerage | | 1,670,148 | | | | 1,670,148 |
| | | | | | |
| $ | 278,591,000 | | | $ | 278,591,000 |
Investments measured at Net Asset Value (NAV)*: | | | | | | |
Common collective trusts | | | | | | 50,615,085 |
Total Investments at Fair Value | | | | | $ | 329,206,085 |
| | | | | | |
Investments at Fair Value as of December 31, 2015 |
| Level 1 | | | Total |
| | | | | | |
Mutual Funds | | 237,343,441 | | | | 237,343,441 |
MSC Industrial Direct Co., Inc. Class A Common Stock | | 7,598,959 | | | | 7,598,959 |
Self-directed Brokerage | | 1,499,621 | | | | 1,499,621 |
| | | | | | |
| $ | 246,442,021 | | | $ | 246,442,021 |
Investments measured at Net Asset Value (NAV)*: | | | | | | |
Common collective trusts | | | | | | 47,156,666 |
Total Investments at Fair Value | | | | | $ | 293,598,687 |
| | | | | | |
PLAN NUMBER: 003
EIN: 11-3289165
MSC INDUSTRIAL DIRECT 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
*Certain investments that are measured at fair value using the net asset per share as a practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on the Statement of Net Assets Available for Benefits.
4. INCOME TAX STATUS
The underlying volume submitter plan has received an advisory letter from the Internal Revenue Service (IRS) dated March 31, 2014, stating that the form of the plan is qualified under Section 401 of the Internal Revenue Code (the Code) and therefore, the related trust is tax-exempt. In accordance with Revenue Procedures 2016-6 and 2015-36, the Plan administrator has determined that it is eligible to and has chosen to rely on the current IRS volume submitter advisory letter. Once qualified, the Plan is required to operate in conformity with the Code to maintain its qualified status. The plan administrator has indicated that it will take the necessary steps, if any, to maintain the Plan’s compliance with the Code.
Accounting principles generally accepted in the United States require the Plan’s management to evaluate uncertain tax positions taken by the Plan. The financial statement effects of a tax position are recognized when the position is more likely than not, based on the technical merits, to be sustained upon examination by the IRS. The Plan administrator has analyzed the tax positions taken by the Plan, and has concluded that as of December 31, 2016, there are no uncertain positions taken or expected to be taken. The Plan has recognized no interest or penalties related to uncertain tax positions. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.
5. RELATED PARTY TRANSACTIONS
Certain Plan investments are shares of mutual funds and trusts managed by T. Rowe Price. T. Rowe Price is the trustee as defined by the Plan and, therefore, these transactions qualify as permitted party-in-interest transactions. These investments represent $261,904,536, or 77% of total net assets available for Plan benefits at fair value at December 31, 2016, and $239,877,576, or 79% of total net assets available for Plan benefits at fair value at December 31, 2015.
Plan investments in shares of Class A Common Stock issued by the Company were $11,820,234, or 3% of total net assets available for Plan benefits at fair value at December 31, 2016, and $7,598,959, or 2% of total net assets available for plan benefits at fair value at December 31, 2015.
T. Rowe Price provides certain administrative services to the Plan pursuant to a Master Plan Services Agreement (“MSA”) between the Company and T. Rowe Price. T. Rowe Price receives revenue from mutual fund and collective trust service providers for services T. Rowe Price provides to the funds. This revenue is used to offset certain amounts owed to T. Rowe Price for its administrative services provided to the Plan. The Plan or the Company may make a payment to T. Rowe Price for administrative expenses not covered by sharing of the excess revenue.
If the revenue received by T. Rowe Price from such mutual fund or collective trust service providers exceeds the amount owed under the MSA, T. Rowe Price remits the excess to the Plan’s trust on a quarterly basis. Such amounts may be applied to pay plan administrative expenses or allocated to the accounts of participants. During 2016, the excess amounts were not material.
6. PLAN TERMINATION
The Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan, subject to the provisions of ERISA. In the event of Plan termination, participants will become 100% vested in their accounts.
7. RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
The following is a reconciliation of net assets available for benefits per the financial statements at December 31, 2016 and 2015 to the Form 5500:
PLAN NUMBER: 003
EIN: 11-3289165
MSC INDUSTRIAL DIRECT 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
| December 31, |
| 2016 | | 2015 |
| | | | | |
Net assets available for benefits per the financial statements | $ | 340,351,158 | | $ | 304,007,197 |
| | | | | |
Adjustment from contract value to fair value for fully benefit-responsive investment contracts | | - | | | 27,504 |
| | | | | |
Less: Amounts allocated to withdrawing participants at end of year | | - | | | (241,120) |
| | | | | |
Net assets available for benefits per the Form 5500 | $ | 340,351,158 | | $ | 303,793,581 |
The following is a reconciliation of contributions received from participants per the financial statements for the year ended December 31, 2016 to the Form 5500:
| | |
| December 31, |
| 2016 |
| | |
Contributions received from participants per the financial statements | $ | 20,108,863 |
| | |
Add: Corrective distributions for the year ended December 31, 2016 | | 462,978 |
| | |
Contributions received from participants per the Form 5500 | $ | 20,571,841 |
The following is a reconciliation of benefits paid to participants per the financial statements for the year ended December 31, 2016 to the Form 5500:
| | |
| December 31, |
| 2016 |
| | |
Benefits paid to participants per the financial statements | $ | 20,280,757 |
| | |
Less: Amounts allocated to withdrawing participants at December 31, 2015 | | (241,120) |
| | |
Less: Amounts transferred from the Plan for the year ended December 31, 2016 | | (72,971) |
| | |
Benefits paid to participants per the Form 5500 | $ | 19,966,666 |
Amounts allocated to withdrawing participants are recorded on the Form 5500 for benefits payments that have been processed and approved for payment prior to year end but not paid as of that date.
The following is a reconciliation of the deductions in net assets available for benefits per the financial statements for the year ended December 31, 2016 to Form 5500:
PLAN NUMBER: 003
EIN: 11-3289165
MSC INDUSTRIAL DIRECT 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
| | |
| December 31, |
| 2016 |
| | |
Total deductions in net assets available for benefits per the financial statements | $ | 20,329,817 |
| | |
Add: Corrective distributions for the year ended December 31, 2016 | | 462,978 |
| | |
Less: Amounts allocated to withdrawing participants at December 31, 2015 | | (241,120) |
| | |
Less: Amounts transferred from the Plan for the year ended December 31, 2016 | | (72,971) |
| | |
Total deductions in net assets available for benefits per the Form 5500 | $ | 20,478,704 |
The following is a reconciliation of the net increase in the net assets available for benefits per the financial statements for the year ended December 31, 2016 to Form 5500:
| | |
| December 31, |
| 2016 |
| | |
Net increase in net assets available for benefits per the financial statements | $ | 36,343,961 |
| | |
Change in adjustment from contract value to fair value for fully benefit-responsive investment contracts | | (27,504) |
| | |
Add: Amounts transferred from the Plan for the year ended December 31, 2016 | | 72,971 |
| | |
Add: Amounts allocated to withdrawing participants at December 31, 2015 | | 241,120 |
| | |
Net increase in net assets available for benefits per the Form 5500 | $ | 36,630,548 |
As a result of the adoption of ASU 2015-12, fully benefit-responsive investment contracts are recorded at contract value for financial statement presentation, eliminating the reconciling item for the Plan year ended December 31, 2016.
8. SUBSEQUENT EVENTS
Effective January 1, 2017, the Plan was amended to modify the vesting provisions for Employer matching contributions for Plan participants actively employed with the Company. Employer matching contributions for these participants will become vested as follows:
| | | |
Completed Years of Service | | Vested Percentage | |
Less than 1 | | 0 | % |
1 but less than 2 | | 33 1/3 | % |
2 but less than 3 | | 66 2/3 | % |
3 or more | | 100 | % |
PLAN NUMBER: 003
EIN: 11-3289165
MSC INDUSTRIAL DIRECT 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
Effective January 19, 2017, an enhanced investment fund lineup was implemented in the Plan. The enhanced fund lineup includes Vanguard Target Date Retirement Funds. These funds typically invest in a broad range of underlying mutual funds that include stocks, bonds, and short-term investments and will replace the T. Rowe Price Balanced Fund as the new qualified default investment alternative. In addition, the Baird Core Plus Bond Fund-Institutional was added as an intermediate-term bond fund.
Effective January 26, 2017, the following funds were removed from the lineup:
| · | | T.Rowe Price Personal Strategy Growth Fund |
| · | | T.Rowe Price Personal Strategy Balanced Fund |
| · | | T.Rowe Price Personal Strategy Income Fund |
| · | | T. Rowe Price Balanced Fund |
Existing balances and future contributions in these eliminated funds will automatically be redirected into the relevant new investment options.
