<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended November 30, 1996 Commission File No.: 1-14130
MSC INDUSTRIAL DIRECT CO., INC.
(Exact name of registrant as specified in its charter)
New York 11-3289165
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
151 Sunnyside Blvd.
Plainview, NY 11803-1592
(Address of principal executive offices, including zip code)
(516) 349-7100
(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
Shares of Common Stock, par value $.001, outstanding as of January 9, 1997:
Class A - 14,836,082 Class B - 18,975,000
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
ITEM 1. Consolidated Financial Statements (Note 1)
Consolidated Balance Sheets -
November 30, 1996 and August 31, 1996 3
Consolidated Statements of Income -
Thirteen weeks ended November 30, 1996
and December 2, 1995 4
Consolidated Statement of Shareholders' Equity -
Thirteen weeks ended November 30, 1996 5
Consolidated Statements of Cash Flows -
Thirteen weeks ended November 30, 1996
and December 2, 1995 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. Consolidated Financial Statements
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(in thousands, except share data) November 30, August 31,
1996 1996
------------ ----------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,069 $ 1,679
Accounts receivable, net of allowance for doubtful accounts
of $1,444 and $1,319, respectively 49,081 41,042
Inventories 158,740 152,620
Due from officers, employees and affiliated companies 989 1,052
Prepaid expenses and other current assets 757 1,792
Current deferred income tax assets 9,867 9,920
Prepaid Federal income tax payments 4,512 4,512
------------ ------------
Total current assets 235,015 212,617
------------ ------------
Property, Plant and Equipment, net 43,530 38,989
------------ ------------
Other Assets:
Goodwill 9,175 8,224
Other 4,737 5,654
------------ ------------
13,912 13,878
------------ ------------
$ 292,457 $ 265,484
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 8,448 $ 13,270
Accrued liabilities 31,453 31,568
Income taxes payable 3,748 1,508
Current portion of long-term debt 51 2,486
------------ ------------
Total current liabilities 43,700 48,832
Long-Term Notes Payable 2,731 42,191
Other Long-Term Liabilities 102 110
Deferred Income Tax Liabilities 1,434 1,780
------------ ------------
Total liabilities 47,967 92,913
------------ ------------
Shareholders' Equity:
Class A common stock; $0.001 par value; 100,000,000 shares authorized;
14,831,657 and 8,311,394 shares, respectively, issued and outstanding 15 8
Class B common stock; $0.001 par value; 50,000,000 shares authorized;
18,975,000 and 23,475,000 shares, respectively, issued and outstanding 19 24
Additional paid-in capital 210,455 145,628
Retained earnings 36,432 29,482
------------ ------------
246,921 175,142
Deferred stock compensation (2,431) (2,571)
------------ ------------
Total shareholders' equity 244,490 172,571
------------ ------------
$ 292,457 $ 265,484
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
Page 3
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MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------------------
(in thousands, except per share data) November 30, December 2,
1996 1995
------------- ------------
(Note 1)
<S> <C> <C>
Net Sales $ 92,214 $ 69,681
Cost of Goods Sold 53,947 40,659
------------- ------------
Gross Profit 38,267 29,022
Operating Expenses 26,903 20,256
------------- ------------
Income from Operations 11,364 8,766
------------- ------------
Other Income (Expense):
Interest income 206 2
Interest expense (118) (687)
Other income 33 134
------------- ------------
121 (551)
------------- ------------
Income before Provision for Income Taxes 11,485 8,215
Provision for Income Taxes (Note 3) 4,535 227
------------- ------------
Net Income $ 6,950 $ 7,988
============= ============
Net Income per Common Share (Note 4) $ 0.21
=============
Weighted Average Number of Common Shares Outstanding 33,550
=============
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
Page 4
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
Statement of Consolidated Shareholders' Equity
(unaudited)
<TABLE>
<CAPTION>
(in thousands) Class A Common Stock Class B Common Stock Additional Deferred
-------------------- -------------------- Paid-In Retained Stock
Shares Amount Shares Amount Capital Earnings Compensation Total
-------- -------- -------- -------- ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thirteen weeks ended November 30, 1996:
Balance, August 31, 1996 8,311 $ 8 23,475 $ 24 $ 145,628 $ 29,482 $ (2,571) $ 172,571
Exchange of Class B common stock for
Class A common stock 4,500 5 (4,500) (5) - - - -
Secondary public offering of common stock,
net of costs of offering of $3,306 2,000 2 - - 64,442 - - 64,444
Exercise of common stock options 20 - - - 385 - - 385
Net income - - - - - 6,950 - 6,950
Amortization of deferred stock
compensation - - - - - - 140 140
------- ------ ------- ------ --------- -------- --------- ---------
Balance, November 30, 1996 14,831 $ 15 18,975 $ 19 $ 210,455 $ 36,432 $ (2,431) $ 244,490
======= ====== ======= ====== ========= ======== ========= =========
</TABLE>
The accompanying notes are
an integral part of this consolidated statement.
Page 5
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MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
(in thousands) Thirteen Weeks Ended
--------------------------------
November 30, December 2,
1996 1995
------------- ------------
(Note 1)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 6,950 $ 7,988
---------- ----------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,092 572
Provision for doubtful accounts 255 192
Loss (gain) on disposal of property and equipment - (33)
Changes in operating assets and liabilities:
Accounts receivable (8,294) (4,094)
Inventories (6,120) (4,793)
Prepaid expenses and other current assets 1,088 20
Other assets 917 441
Accounts payable and other current liabilities (2,697) (4,006)
Other long-term liabilities (354) ( 4)
---------- ----------
(14,113) (11,705)
---------- ----------
Net cash used in operating activities (7,163) (3,717)
---------- ----------
Cash Flows from Investing Activities:
Expenditures for property, plant and equipment (5,428) (3,435)
Cash paid for acquisition, net of cash acquired (1,016) -
---------- ----------
Net cash used in investing activities (6,444) (3,435)
---------- ----------
Cash Flows from Financing Activities:
Net proceeds from public offering of common stock 64,444 -
Net proceeds from exercise of stock options 385 -
Long-term borrowings - 47,200
Repayments of long-term debt (41,895) (36,257)
Repayments from affiliates 63 3
Distributions to shareholders - (4,217)
---------- ----------
Net cash provided by financing activities 22,997 6,729
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 9,390 (423)
Cash and Cash Equivalents - beginning of period 1,679 681
---------- ----------
Cash and Cash Equivalents - end of period $ 11,069 $ 258
========== ==========
</TABLE>
The accompanying notes are
an integral part of these consolidated statements.
Page 6
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Notes to Consolidated Financial Statements
(in thousands except per share data)
(unaudited)
1. MSC Industrial Direct Co., Inc. ("MSC" or the "Company") was incorporated
in the State of New York on October 24, 1995, as a holding company for the
purpose of (i) issuing 8,050 shares of Class A Common Stock in an initial
public offering ("IPO") and (ii) issuing 24,000 shares of Class B Common
Stock to the shareholders of Sid Tool Co., Inc. (the "Operating
Subsidiary") in exchange for their then outstanding 30 shares of common
stock of the Operating Subsidiary immediately prior to the effective date
of MSC's IPO.
MSC did not have any significant operating activity from its inception
until December 20, 1995, the closing date of the IPO.
The consolidated financial statements for the thirteen weeks ended December
2, 1995 are those of the operating subsidiary. All references to a year are
to the Company's fiscal year, which ends on the Saturday nearest August 31
of such year.
2. Reference is made to the Notes to Consolidated Financial Statements
contained within the Company's audited financial statements for the year
ended August 31, 1996. 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 on a basis consistent with that of the audited data presented therein.
The results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year.
3. On December 20, 1995, the Company consummated its IPO relating to the offer
and sale of 8,050 shares of Class A Common Stock, 7,525 of which shares
were offered by the Company and 525 of which shares were offered by a
principal shareholder of the Company, at a price of $19.00 per share. These
525 shares were converted to Class A Common Stock from previously issued
Class B Common Stock. Net proceeds received by the Company were
approximately $131,500. As a result of the public offering, the Operating
Subsidiary no longer qualified as a Subchapter "S" corporation, and became
subject to "C" corporation taxation. The provision for income taxes for the
thirteen week period ended December 2, 1995 reflects "S" corporation
taxation. The provision for income taxes for the thirteen week period ended
November 30, 1996 reflects taxation at "C" corporation rates.
On September 25, 1996, the Company completed a secondary offering of 6,500
shares of Class A Common Stock, of which 2,000 shares were sold by the
Company and 4,500 shares were converted from Class B to Class A Common
Stock and sold by existing shareholders. Net proceeds received by the
Company as a result of this offering were approximately $64,444.
Page 7
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4. Net income per common share was computed by dividing the Company's net
income by the weighted average number of common shares outstanding during
the thirteen week period ended November 30, 1996. Pro forma net income for
the thirteen week period ended December 2, 1995 reflects the pro forma
effect of "C" corporation taxation as follows:
Income before provision for income taxes $ 8,215
Pro forma provision for income taxes 3,245
------------
Pro forma net income $ 4,970
============
Pro forma net income per common share $ 0.18
============
Pro forma weighted average number of
common shares outstanding 27,288
============
5. During the third quarter of 1996, the Company announced that it would be
relocating its multi-location Long Island, New York warehouse and
distribution center operation to a new, single-location, Company-owned
facility near Harrisburg, Pennsylvania. The Pennsylvania distribution
center commenced shipping in September 1996, and is expected to be fully
operational in the first half of fiscal 1997. The estimated cost associated
with the relocation of the Company's existing Long Island facilities is
approximately $8,600, which is primarily comprised of personnel relocation
and severance costs, lease abandonment costs, moving and disposal costs,
and this amount has been reflected as a charge to income from operations
for the year ended August 31, 1996. Costs of approximately $1,921,
primarily relating to labor and other costs associated with the move, were
charged against the liability as of November 30, 1996, and the remaining
liability of $6,679 is included in accrued liabilities in the accompanying
consolidated balance sheet as of November 30, 1996.
6. The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes". Under the asset and liability method specified by SFAS No. 109, the
deferred tax amounts included in the balance sheet are determined based on
the differences between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates that will be in effect
when these differences reverse. Differences between assets and liabilities
for financial statement and tax return purposes are principally related to
inventories and certain accrued liabilities. Deferred tax assets and
liabilities were initially established during 1996 due to the Company's
taxation as a "C" Corporation since the closing date of its IPO in December
1995.
7. During March 1995, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed of", was issued by the Financial
Accounting Standards Board ("FASB"). This statement establishes financial
accounting and reporting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. This statement is effective for financial
statements for fiscal years beginning after December 15, 1995 (fiscal 1997
for the Company).
Page 8
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During October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation". This statement establishes financial accounting
and reporting standards for stock-based employee compensation plans. The
provisions of SFAS No. 123 encourage entities to adopt a fair value based
method of accounting for stock compensation plans; however, these
provisions also permit the Company to continue to measure compensation
costs under pre-existing accounting pronouncements. If the fair value based
method of accounting is not adopted, SFAS No. 123 requires pro forma
disclosures of net income and net income per share in the notes to the
financial statements. The accounting requirements of SFAS No. 123 are
effective for transactions entered into in fiscal years that begin
after December 15, 1995. The disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after
December 15, 1995 (fiscal 1997 for the Company), or for an earlier fiscal
year for which SFAS No. 123 is initially adopted for recognizing
compensation cost.
The effect, if any, on the consolidated financial statements, of
implementation of SFAS No. 121 is not expected to be material. The Company
will adopt the provisions of SFAS No. 123 by providing the pro forma
disclosures.
Page 9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
MSC Industrial Direct Co., Inc. ("MSC" or the "Company") was formed in October
1995 as a holding company to hold all of the outstanding capital stock of Sid
Tool Co., Inc. (the "Operating Subsidiary"), which has conducted business since
1941.
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. The Company distributes a full line of industrial products, such as
cutting tools, abrasives, measuring instruments, machine tool accessories,
safety equipment, fasteners, welding supplies and electrical supplies, intended
to satisfy its customers' maintenance, repair and operations ("MRO") supplies
requirements. The Company offers approximately 323,000 stock keeping units
("SKUs") through its 3,560 page master catalog and weekly, monthly and quarterly
specialty and promotional catalogs, newspapers and brochures, which are
supported by three distribution centers and 38 customer service locations. Most
of the Company's products are carried in stock, and orders for these products
are typically fulfilled on the day the order is received.
Results of operations reflect the operations of the Operating Subsidiary only,
for all periods through December 20, 1995, the date of the Company's initial
public offering, and of the Company and its subsidiaries subsequent to that
date. Pro forma net income reflects the pro forma effect of "C" corporation
taxation for the thirteen weeks ended December 2, 1995 at an assumed annual rate
of 39.5%.
The Company is recording an annual non-cash deferred compensation charge of
approximately $0.6 million for fiscal 1996 through fiscal 2000 related to the
issuance of restricted stock to certain employees.
Results of Operations -
Thirteen weeks ended November 30, 1996 and December 2, 1995
Net sales increased by $22.5 million, or 32.3%, to $92.2 million in the first
quarter of 1997 from $69.7 million in the first quarter of 1996. This increase
was attributable to an increase in sales to the Company's existing customers, an
increase in the number of active customers and the effect of acquisitions during
the second half of 1996. The increase in sales to existing customers was derived
primarily from an increase in the number of SKUs offered.
Gross profit increased by $9.3 million, or 31.9%, to $38.3 million in the first
quarter of 1997, from $29.0 million in the first quarter of 1996, primarily
attributable to increased sales. As a percentage of sales, gross profit remained
relatively constant, at 41.5% and 41.6% for the respective periods.
Operating expenses increased by $6.6 million, or 32.8%, to $26.9 million in the
first quarter of 1997, from $20.3 million in the first quarter of 1996. As a
percentage of sales, operating expenses remained relatively constant over these
respective periods at 29.2% and 29.1%.
Page 10
<PAGE>
Net income decreased by $1.0 million, to $7.0 million in the first quarter of
1997 from $8.0 million in the first quarter of 1996. The decrease in net income
is primarily attributable to the taxation at "C" corporation rates during 1997,
partially offset by the aforementioned increase in income from operations.
Liquidity and Capital Resources
The Company's primary capital needs have been to fund (i) the working capital
requirements necessitated by its sales growth and (ii) prior to the
reorganization (see Note 1 to the financial statements), distributions to its
then existing shareholders, primarily to satisfy their tax liabilities resulting
from the previous "S" corporation status of the Operating Subsidiary. The
Company's sources of financing have historically been from operations, bank
borrowings under its $80 million credit facility, subordinated loans from
shareholders, and a portion of the proceeds from the 1996 IPO and 1997 secondary
offering. The Company completed its IPO on December 20, 1995, and outstanding
subordinated debt to shareholders and credit facility debt as of that date were
repaid out of the net proceeds. The Company anticipates that its cash flows from
operations and available lines of credit will be adequate to support its
operations and its growth for the immediate future and for at least the next 24
months.
In March 1996, the Company commenced shipments from its Elkhart, Indiana
distribution center, which provides next day service to most of the midwestern
United States. As a result of the opening of this facility, the Company
significantly increased its inventories to provide for future orders from the
distribution center.
Net cash used in operating activities increased $3.4 million to $7.1 million
from $3.7 million for the thirteen week periods ended November 30, 1996 and
December 2, 1995, respectively, primarily due to purchases of inventory in
connection with the stocking of the Elkhart distribution center and introduction
of new products, as well as a growth in its accounts receivable commensurate
with the Company's growth in sales.
Net cash used in investing activities for the thirteen week periods ended
November 30, 1996 and December, 1995 was approximately $6.4 million and $3.4
million, respectively. The increase represents costs associated with the
construction of the distribution centers in Elkhart, Indiana and Harrisburg,
Pennsylvania as well as the cash paid for acquisitions.
Net cash provided by financing activities during the thirteen week periods ended
November 30, 1996 and December 2, 1995 was approximately $23.0 million and $6.7
million, respectively. The increase of $16.3 million is primarily attributable
to $64.4 million of proceeds received from the Company's secondary public
offering completed in September 1996, as compared with net borrowings of $47.2
million under the Company's credit facility during the first quarter of 1996.
Page 11
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
( a ) No exhibits have been filed during the quarter for which
this report is filed.
( b ) No reports on Form 8-K have been filed during the
quarter for which this report is filed.
Page 12
<PAGE>
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 10, 1997 By: /s/ Mitchell Jacobson
--------------------- --------------------------------------------
Mitchell Jacobson
President and Chief Executive Officer
Dated: January 10, 1997 By: /s/ Shelley M. Boxer
--------------------- --------------------------------------------
Shelley M. Boxer
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-30-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 11,069
<SECURITIES> 0
<RECEIVABLES> 50,525
<ALLOWANCES> (1,444)
<INVENTORY> 158,740
<CURRENT-ASSETS> 235,015
<PP&E> 61,981
<DEPRECIATION> (18,451)
<TOTAL-ASSETS> 292,457
<CURRENT-LIABILITIES> 43,700
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 244,456
<TOTAL-LIABILITY-AND-EQUITY> 292,457
<SALES> 92,214
<TOTAL-REVENUES> 92,214
<CGS> 53,947
<TOTAL-COSTS> 53,947
<OTHER-EXPENSES> 26,903
<LOSS-PROVISION> 255
<INTEREST-EXPENSE> 118
<INCOME-PRETAX> 11,485
<INCOME-TAX> 4,535
<INCOME-CONTINUING> 6,950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,950
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
