SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 1, 2001 Commission file number: 1-14130
MSC INDUSTRIAL DIRECT CO., INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-3289165
(State of incorporation) (IRS Employer
Identification No.)
75 MAXESS ROAD
MELVILLE, NY 11747
(Address of principal executive offices, including zip code)
(516) 812-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
As of January 10, 2002, 36,494,759 shares of Class A Common Stock and
33,478,778 shares of Class B Common Stock of the registrant were outstanding.
MSC INDUSTRIAL DIRECT CO., INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets -
December 1, 2001 and September 1, 2001 3
Consolidated Statements of Income -
Thirteen weeks ended December 1, 2001 and November 25, 2000 4
Consolidated Statement of Shareholders' Equity -
Thirteen weeks ended December 1, 2001 5
Consolidated Statements of Cash Flows -
Thirteen weeks ended December 1, 2001 and November 25, 2000 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
Page 2
PART I. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Balance Sheets
(In thousands, except share data) December 1, September 1,
2001 2001
---- ----
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 37,246 $ 12,466
Accounts receivable, net of allowance for doubtful
accounts of $5,315 and $4,927, respectively 86,979 95,263
Inventories 227,755 233,131
Prepaid expenses and other current assets 7,906 5,728
Deferred income taxes 6,530 5,264
---------- ----------
Total current assets 366,416 351,852
---------- ----------
Property, Plant and Equipment, net 118,871 121,149
---------- ----------
Other Assets:
Goodwill 63,354 63,354
Other 14,582 17,553
---------- ----------
77,936 80,907
---------- ----------
Total Assets $ 563,223 $ 553,908
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 21,980 $ 25,776
Accrued liabilities 39,467 37,755
Current portion of long-term notes payable 211 214
---------- ----------
Total current liabilities 61,658 63,745
Long-term notes payable 1,465 1,517
Deferred income tax liability 15,944 16,069
---------- ----------
Total liabilities 79,067 81,331
---------- ----------
Shareholders' Equity:
Preferred stock; $0.001 par value; 5,000,000 shares authorized; none outstanding - -
Class A common stock; $0.001 par value; 100,000,000 shares authorized; 36,359,385
and 36,133,385 shares issued, 35,384,385 and 35,139,385 shares outstanding, 36 36
respectively
Class B common stock; $0.001 par value; 50,000,000 shares authorized;
33,478,778 shares issued and outstanding 34 34
Additional paid-in capital 241,466 238,314
Retained earnings 261,763 253,704
Treasury stock, at cost, 975,000 and 994,000 shares, respectively (19,143) (19,511)
---------- ----------
Total shareholders' equity 484,156 472,577
---------- ----------
Total Liabilities and Shareholders' Equity $ 563,223 $ 553,908
========== ==========
The accompanying notes are an integral part of these
consolidated balance sheets.
Page 3
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Income
(Unaudited)
Thirteen Weeks
--------------
Ended
(In thousands, except per share data December 1, November 25,
and share data) 2001 2000
----------- ------------
Net sales $ 188,852 $ 221,884
Cost of goods sold 106,373 128,598
----------- ------------
Gross profit 82,479 93,286
Operating expenses 69,217 69,556
----------- ------------
Income from operations 13,262 23,730
----------- ------------
Other Income (Expense):
Interest income (expense), net 139 (1,234)
Other income, net 43 12
----------- ------------
182 (1,222)
----------- ------------
Income before provision for income taxes 13,444 22,508
Provision for income taxes 5,310 9,003
----------- ------------
Net income $ 8,134 $ 13,505
=========== ============
Per Share Information (Note 2):
Net income per common share:
Basic $ 0.12 $ 0.20
=========== ============
Diluted $ 0.12 $ 0.20
=========== ============
Common shares used in computing per share amounts (Note 2):
Basic 68,681 67,958
=========== ============
Diluted 70,362 68,913
=========== ============
The accompanying notes are an integral part of these
consolidated statements.
Page 4
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statement of Shareholders' Equity
(Unaudited)
Class A Class B
------------------- -------------------
(In thousands) Common Stock Common Stock Additional
------------------- ------------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings
-------- -------- -------- -------- ------------ ----------
Thirteen weeks ended December 1, 2001:
Balance, September 1, 2001 36,133 $ 36 33,479 $ 34 $ 238,314 $ 253,704
Common stock issued under associate stock -- -- -- -- -- (75)
purchase plan
Exercise of common stock options, including 226 -- -- -- 3,152 --
income tax benefits
Net income -- -- -- -- -- 8,134
-------- -------- -------- -------- ------------ ----------
Balance, December 1, 2001 36,359 $ 36 33,479 $ 34 $ 241,466 $ 261,763
======== ======== ======== ======== ============ ==========
(In thousands) Treasury Stock
--------------------------
Shares Amount at Cost Total
-------- ---------------- ---------
Thirteen weeks ended December 1, 2001:
Balance, September 1, 2001 994 $ (19,511) $ 472,577
Common stock issued under associate stock (19) 368 293
purchase plan
Exercise of common stock options, including -- -- 3,152
income tax benefits
Net income -- -- 8,134
-------- ---------------- ---------
Balance, December 1, 2001 975 $ (19,143) $ 484,156
======== ================ =========
The accompanying notes are an integral part of these
consolidated statements.
Page 5
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) Thirteen Weeks Ended
-------------------------------------------
December 1, November 25,
2001 2000
----------------- ------------------
Cash Flows from Operating Activities:
Net income $ 8,134 $ 13,505
----------------- ------------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation expense 3,807 3,992
Amortization of deferred stock compensation -- 122
Provision for doubtful accounts 937 513
Deferred income taxes (1,391) 503
Changes in operating assets and liabilities:
Accounts receivable 7,347 (5,658)
Inventories 5,376 (10,120)
Prepaid expenses and other current assets (2,178) (125)
Other assets 2,971 1,577
Accounts payable and accrued liabilities (1,864) (8,315)
----------------- ------------------
Total adjustments 15,005 (17,511)
----------------- ------------------
Net cash provided by (used in) operating activities 23,139 (4,006)
----------------- ------------------
Cash Flows from Investing Activities:
Expenditures for investments -- (1,852)
Expenditures for property, plant and equipment (1,529) (4,264)
----------------- ------------------
Net cash used in investing activities
(1,529) (6,116)
----------------- ------------------
Cash Flows from Financing Activities:
Net proceeds from associate stock purchase plan 293 238
Net proceeds from exercise of common stock options 2,932 419
Net proceeds from (repayments of) notes payable (55) 11,089
----------------- ------------------
Net cash provided by financing activities 3,170 11,746
----------------- ------------------
Net increase in cash and cash equivalents 24,780 1,624
Cash and cash equivalents - beginning of period 12,466 3,209
-----------------
------------------
Cash and cash equivalents - end of period $ 37,246 $ 4,833
Supplemental Disclosure:
Cash paid for interest 10 1,242
Cash paid for income taxes 90 456
The accompanying notes are an integral part of these
consolidated statements.
Page 6
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
1. MSC Industrial Direct Co., Inc. ("MSC") was incorporated in the State of
New York on October 24, 1995. MSC and its subsidiaries, including its
principal operating subsidiary, Sid Tool Co., Inc., are hereinafter
referred to collectively as the "Company."
Reference is made to the Notes to Consolidated Financial Statements
contained within the Company's audited financial statements included in
the Company's annual report on Form 10-K for the year ended September 1,
2001. In the opinion of management, the interim unaudited financial
statements included herein reflect all adjustments necessary, consisting
of normal recurring adjustments, for a fair presentation of such data in
accordance with generally accepted accounting principles. The results of
operations for interim periods are not necessarily indicative of the
results to be expected for a full year.
The Company's fiscal year ends on a Saturday close to August 31 of each
year.
2. The Company follows the provisions of the Financial Accounting Standards
Board Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share". SFAS No. 128 requires the Company to present basic
and diluted earnings per share ("EPS") on the face of the income
statement. Basic earnings per common share were computed based on the
weighted average number of common shares issued and outstanding during the
relevant periods. Diluted earnings per common share were computed based on
the weighted average number of common shares issued and outstanding plus
additional shares assumed to be outstanding to reflect the dilutive effect
of common stock equivalents using the treasury stock method.
Page 7
A reconciliation between the numerator and denominator of the basic and
diluted EPS calculation is as follows:
Thirteen Weeks Ended
--------------------------------
December 1, November 25,
2001 2000
------------- --------------
Net income for EPS
Computation $8,134 $ 13,505
======== =========
Basic EPS:
Weighted average
Common shares 68,681 67,958
======== =========
Basic EPS $ 0.12 $ 0.20
======== =========
Diluted EPS:
Weighted average
Common shares 68,681 67,958
Shares issuable from
Assumed conversion of
Common stock equivalents 1,681 955
-------- ---------
Weighted average common
Shares and common stock
equivalents 70,362 68,913
======== =========
Diluted EPS $ 0.12 $ 0.20
======== =========
3. Certain prior year balances have been reclassified to conform with current
year presentation.
4. In July 2000, the Emerging Issue Task Force ("EITF") reached a consensus
with respect to EITF issue 00-10, "Accounting for Shipping and Handling
Fees and Costs." The purpose of this issue discussion was to clarify the
classification of shipping and handling fees and costs. The consensus
reached was that all shipping and handling billed to customers is revenue
and the cost associated with these revenues should be classified as either
cost of sales or, if not cost of sales, as selling, general, and
administrative costs, with footnote disclosure as to the classification
and amount of these costs. This standard requires a reclassification of
prior periods as discussed below. Beginning in fiscal 2001, the Company
recorded the amounts billed to customers for shipping and handling in net
revenues and classified the costs associated with these revenues in
operating expenses. Prior to this standard, the Company had recorded net
freight as a component of total operating expenses. The Company has
reclassified financial information for all periods presented to give
effect to the adoption of this new standard. Shipping and handling costs
included in operating expenses for 13 week periods ended December 1, 2001
and November 25, 2000 were $9.8 million and $10.8 million, respectively.
Page 8
5. In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" and No. 142, "Goodwill and other
Intangible Assets". SFAS No. 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase
method. Under SFAS No. 142, goodwill and intangible assets with indefinite
lives are no longer amortized but are reviewed annually (or more
frequently, if impairment indicators arise) for impairment. Separable
intangible assets that are not deemed to have indefinite lives will
continue to be amortized over their useful lives (but with no maximum
life).
The Company has adopted this standard effective September 2, 2001 and,
accordingly, those intangible assets that will continue to be classified
as goodwill or as other intangibles with indefinite lives will no longer
be amortized. The Company has evaluated its intangible asset to identify
goodwill separately from other identifiable intangibles. The intangible
asset is classified as goodwill with an indefinite life; no other
separately identifiable intangibles exist. This resulted in the exclusion
of approximately $.5 million in amortization expense for the first quarter
of fiscal 2002. In accordance with the SFAS No. 142, intangible assets,
including purchased goodwill, will be evaluated periodically for
impairment. Based upon the results of our transitional impairment testing,
there will be no material impact on the consolidated financial results
related to our intangible assets or purchased goodwill.
The following table presents pro forma net income and earnings per share
data restated to include the retroactive impact of the adoption of SFAS
No. 142:
Thirteen Weeks Ended
------------------------------
December 1, November 25,
2001 2000
------------------------------
Reported net income for EPS computation $ 8,134 $ 13,505
Add back:
Goodwill amortization, net of tax - 264
------------- -------------
Pro forma net income $ 8,134 $ 13,769
============= =============
Basic EPS:
Basic EPS before SFAS No.142 $ 0.12 $ 0.20
SFAS No. 142 effect, net of tax - -
------------- -------------
Basic EPS after SFAS No. 142 $ 0.12 $ 0.20
============= =============
Diluted EPS:
Diluted EPS before SFAS No.142 $ 0.12 $ 0.20
SFAS No. 142 effect, net of tax - -
------------- -------------
Basic EPS after SFAS No. 142 $ 0.12 $ 0.20
============= =============
Weighted average common shares:
Basic 68,681 67,958
Diluted 70,362 68,913
Page 9
6. In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. The provisions of this statement are required to be
adopted no later than fiscal years beginning after December 31, 2001, with
early adoption encouraged. The adoption of this SFAS No. 144 is not
expected to have a material impact on our consolidated financial
statements.
Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is intended to update the information contained in the Company's
Annual Report on Form 10-K for the fiscal year ended September 1, 2001 and
presumes that readers have access to, and will have read, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in such Form 10-K.
This Quarterly Report on Form 10-Q contains or incorporates certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and the
Company intends that such forward-looking statements be subject to the safe
harbors created thereby. Such forward-looking statements involve known and
unknown risks and uncertainties and include, but are not limited to, statements
regarding future events and our plans, goals and objectives. Such statements are
generally accompanied by words such as "believe," "anticipate," "think,"
"intend," "estimate," "expect," or similar terms. Our actual results may differ
materially from such statements. Factors that could cause or contribute to such
differences include, without limitation, changing market conditions, competitive
and regulatory matters, general economic conditions in the markets in which the
Company operates, the risk of war, terrorism and similar hostilities, and
availability of acquisition opportunities. Although the Company believes that
the assumptions underlying its forward-looking statements are reasonable, any of
the assumptions could prove inaccurate and, therefore, the Company cannot make
any assurances that the results contemplated in such forward-looking statements
will be realized. The inclusion of such forward-looking information should not
be regarded as a representation by the Company or any other person that the
future events, plans or expectations contemplated by the Company will be
achieved. Furthermore, past performance is not necessarily an indicator of
future performance.
OVERVIEW
MSC Industrial Direct Co., Inc. ("MSC") was formed in October 1995 and has
conducted business since 1941. MSC and its subsidiaries, including Sid Tool Co.,
Inc. (the "Operating Subsidiary"), are hereinafter referred to collectively as
the "Company."
MSC is one of the largest direct marketers of a broad range of industrial
products to small and mid-sized industrial customers throughout the United
States. We distribute a full line of industrial products intended to satisfy our
customers' maintenance, repair and operations ("MRO") supplies requirements. We
offer over 500,000 stock-keeping units ("SKUs") through our 4,736 page master
catalog and weekly, monthly and quarterly specialty and promotional catalogs,
newspapers and brochures and service our customers from approximately 90 branch
offices and four distribution centers. Most of our products are carried in
stock, and orders for these in-stock products are typically fulfilled the day on
which the order is received.
Page 11
RESULTS OF OPERATIONS -
THIRTEEN WEEKS ENDED DECEMBER 1, 2001 AND NOVEMBER 25, 2000
NET SALES decreased by $33.0 million, or 14.9%, to $188.9 million in the first
quarter of fiscal 2002 from $221.9 million in the first quarter of fiscal 2001.
This decrease was primarily attributable to a decrease in sales to existing
customers, most of which are in the manufacturing sector, which has been
particularly affected by a continuing recession in the industrial sector. The
Company believes that the events of September 11, 2001 also had a detrimental
effect on the Company's net sales in the first quarter of fiscal 2002; however,
that effect cannot be reliably estimated.
GROSS PROFIT decreased by $10.8 million, or 11.6%, to $82.5 million in the first
quarter of fiscal 2002 from $93.3 million in the first quarter of fiscal 2001,
primarily due to lower net sales as discussed above. As a percentage of net
sales, gross profit increased from 42.0% to 43.7%. The increase in gross profit
as a percentage of net sales was the result of modest price increases, a
favorable change in product mix, more favorable discounts obtained from vendors,
and the success of the Company's efforts to increase margins with new and
existing customers.
OPERATING EXPENSES decreased by $.4 million, or 0.5 %, to $69.2 million in the
first quarter of fiscal 2002 from $69.6 million in the first quarter of fiscal
2001. The slight decrease in operating expenses in dollars was a result of cost
control initiatives and a decline in volume related expenses, offset by the
costs associated with the significant increase (during the latter part of fiscal
2001) in the Company's sales force as compared to the first quarter of fiscal
2001. As a percentage of net sales, operating expenses increased from 31.4% to
36.6%, primarily as a result of the distribution of fixed expenses over a
smaller revenue base, primarily due to economic conditions as discussed above.
INCOME FROM OPERATIONS decreased by $10.4 million, or 43.9%, to $13.3 million in
the first quarter of fiscal 2002 from $23.7 million in the first quarter of
fiscal 2001. The decrease was primarily attributable to the decrease in net
sales described above, although results were favorably impacted by the increased
margins described above.
INTEREST INCOME (EXPENSE). Interest income was $0.1 million for the first
quarter of fiscal 2002 compared to interest expense of $1.2 million for the
first quarter of fiscal 2001. The change from interest expense to net interest
income reflects the Company's repayment of most of its outstanding debt during
fiscal 2001. As a result, the Company now has interest income in the first
quarter of fiscal 2002, resulting from invested cash.
PROVISION FOR INCOME TAXES AND NET INCOME: The effective tax rate was 39.5% and
40.0% for the first quarter of fiscal 2002 and fiscal 2001, respectively. Net
income decreased by $5.4 million, or 40.0%, to $8.1 million in the first quarter
of fiscal 2002 from $13.5 million in the first quarter of fiscal 2001. This
decrease was primarily the result of decreases in income from operations
explained above.
Page 12
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital needs have been to fund the working capital requirements
necessitated by our sales growth, adding new products, and facilities
expansions. Our primary sources of financing have been cash from operations,
supplemented by bank borrowings under our credit facility. We anticipate cash
flows from operations and available lines of credit will be adequate to support
our operations for the next 12 months.
Under the terms of the credit facility, the maximum permitted borrowings are
$110.0 million under an unsecured revolving credit agreement. Interest on
amounts borrowed may be paid at a rate per annum equal to the bank's base rate
(5.0% at December 1, 2001) or, alternatively, at the bankers' acceptance rate or
LIBOR rate plus margins, which vary from per annum based on the ratio of total
liabilities to effective net worth, or bid note rate. This credit facility
contains certain covenants limiting mergers, use of proceeds, indebtedness,
liens, investments, sales of assets, acquisitions, and payment of dividends.
This credit facility also contains certain standard financial covenants. As of
December 1, 2001, the Company had no outstanding borrowings and was in
compliance with all financial covenants.
Net cash provided by operating activities for the 13 week period ended December
1, 2001 was $23.1 million and net cash used in operating activities for the 13
week period ended November 25, 2000 was $4.0 million. The favorable net change
of approximately $27.1 million is primarily attributable to lower inventory
levels, reflecting improved inventory control policies, stocking for lower sales
volumes and a decrease in accounts receivable.
Net cash used in investing activities for the 13 week periods ended December 1,
2001 and November 25, 2000 were $1.5 million and $6.1 million, respectively. The
net usage of cash in the first three months of fiscal 2002 and fiscal 2001 was
primarily attributable to expenditures for property, plant and equipment.
Net cash provided by financing activities for the 13 week periods ended December
1, 2001 and November 25, 2000 were $3.2 million and $11.7 million, respectively.
Net cash provided by financing activities for the first three months of fiscal
2002 was primarily attributable to proceeds from the exercise of common stock
options. The net cash provided by financing activities for the first three
months of fiscal 2001 were proceeds received from borrowings.
The Company believes that cash flow from operations and the revolving credit
agreement will be sufficient to fund future growth initiatives and meet planned
capital expenditure needs in the near future.
The Board of Directors of the Company has approved a stock repurchase plan (the
"Plan") that would allow for the repurchase of up to 5 million shares of the
Company's Class A common stock. The Plan allows the Company to repurchase shares
at any time and in any increments it deems appropriate.
Page 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal financial instrument is long-term notes payable under a
credit agreement. The Company is affected by market risk exposure primarily
through the effect of changes in interest rates on amounts payable by the
Company under this credit agreement. Changes in these factors cause fluctuations
in the Company's net income and cash flows. The agreement allows the company
maximum borrowings of $110.0 million under a revolving credit agreement. At
December 1, 2001, the Company had no outstanding borrowings and was in
compliance with all financial covenants. The agreement bears interest at the
bank's base rate (5.0% at December 1, 2001), or, alternatively, at the bankers
acceptance rate or LIBOR rate plus margins, which vary from 0.65% to 1.25% per
annum based on the ratio of total liabilities to effective net worth, or bid
note rate. The Company does not make material use of derivative financial
instruments to hedge against changes in interest rates or for any other purpose.
Page 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: None.
Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter
for which this report is filed.
Page 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MSC INDUSTRIAL DIRECT CO., INC.
(Registrant)
Dated: January 11, 2002 By: /s/ Mitchell Jacobson
------------------------- -------------------------------------
President and Chief Executive Officer
Dated: January 11, 2002 By: /s/ Charles Boehlke
------------------------- ----------------------------
Senior Vice President and
Chief Financial Officer
Page 16