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 29, 1997 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 (I.R.S. 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 8, 1998:
Class A - 16,687,526 Class B - 17,178,450
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets -
November 29, 1997 and August 30, 1997 3
Consolidated Statements of Income -
Thirteen weeks ended November 29, 1997 and November 30, 1996 4
Consolidated Statement of Shareholders' Equity -
Thirteen weeks ended November 29, 1997 5
Consolidated Statements of Cash Flows -
Thirteen weeks ended November 29, 1997 and November 30, 1996 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(in thousands, except share data) November 29, August 30,
1997 1997
------------ ----------
ASSETS (unaudited) (audited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 16,064 $ 13,418
Accounts receivable, net of allowance for doubtful accounts
of $2,556 and $2,030, respectively 65,447 55,348
Inventories 161,198 163,003
Due from officers, employees and affiliated companies 678 765
Prepaid expenses and other current assets 2,621 2,242
Current deferred income tax assets 8,542 9,237
--------- ---------
Total current assets 254,550 244,013
--------- ---------
Property, plant and equipment, net 59,181 49,658
--------- ---------
Other Assets:
Goodwill 33,805 34,270
Other 6,563 6,893
--------- ---------
40,368 41,163
--------- ---------
$ 354,099 $ 334,834
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 12,390 $ 11,459
Accrued liabilities 50,429 41,997
Current portion of long-term notes payable 199 213
--------- ---------
Total current liabilities 63,018 53,669
Long-term notes payable 2,703 2,744
Other long-term liabilities 50 108
Deferred income tax liabilities 3,355 3,318
--------- ---------
Total liabilities 69,126 59,839
--------- ---------
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; 16,677,330
and 16,665,983 shares, respectively, issued and outstanding 17 17
Class B common stock; $0.001 par value; 50,000,000 shares authorized;
17,178,450 and 17,182,200 shares, respectively, issued and outstanding 17 17
Additional paid-in capital 212,032 211,704
Retained earnings 74,999 65,499
Treasury stock, at cost (499) (499)
Deferred stock compensation (1,593) (1,743)
--------- ---------
Total shareholders' equity 284,973 274,995
--------- ---------
$ 354,099 $ 334,834
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
Page 3
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Income
(unaudited)
Thirteen Weeks Ended
--------------------
(in thousands, except per share data) November 29, November 30,
1997 1996
------------ ------------
Net sales $ 135,609 $ 92,214
Cost of goods sold 80,270 53,947
--------- --------
Gross profit 55,339 38,267
Operating expenses 40,083 26,903
--------- --------
Income from operations 15,256 11,364
--------- --------
Other Income (Expense):
Interest income 253 145
Interest expense (23) (57)
Other income (expense), net 214 33
--------- --------
444 121
--------- --------
Income before provision for income taxes 15,700 11,485
Provision for income taxes 6,200 4,535
--------- --------
Net income $ 9,500 $ 6,950
========= ========
Net income per common share $ 0.28 $ 0.21
========= ========
Weighted average number of common shares and
common share equivalents outstanding 34,376 33,550
========= ========
The accompanying notes are an integral part of these consolidated
statements.
Page 4
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statement of Shareholders' Equity
(unaudited)
<TABLE>
<CAPTION>
Class A Class B Additional Deferred
(in thousands) Common Stock Common Stock Paid-In Retained Treasury Stock Stock
------------ ------------ ------- -------- -------------- -----
Shares Amount Shares Amount Capital Earnings Shares Amount at Cost Compensation Total
------ ------ ------ ------ ------- -------- ------ -------------- ------------ -----
Thirteen weeks ended November 29, 1997:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 1, 1997 16,666 $17 17,182 $17 $211,704 $65,499 14 $(499) $(1,743) $274,995
Exchange of Class B common stock for
Class A common stock 4 -- (4) -- -- -- -- -- -- --
Exercise of common stock options,
including related tax benefits of $195 7 -- -- -- 328 -- -- -- -- 328
Net income -- -- -- -- -- 9,500 -- -- -- 9,500
Amortization of deferred stock
compensation -- -- -- -- -- -- -- -- 150 150
------ --- ------ --- -------- ------- -- ----- ------- --------
Balance, November 29, 1997 16,677 $17 17,178 $17 $212,032 $74,999 14 $(499) $(1,593) $284,973
====== === ====== === ======== ======= == ===== ======= ========
</TABLE>
The accompanying notes are an integral part of this consolidated
statement.
Page 5
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
(in thousands) Thirteen Weeks Ended
--------------------------
November 29, November 30,
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 9,500 $ 6,950
-------- --------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,584 952
Amortization of deferred stock compensation 150 140
Provision for doubtful accounts 690 255
Deferred income taxes 927 (293)
Changes in operating assets and liabilities, net of effect from
acquisitions:
Accounts receivable (10,789) (8,294)
Inventories 1, 805 (6,120)
Prepaid expenses and other current assets (379) 1,035
Other assets 323 917
Accounts payable and accrued liabilities 9,363 (2,697)
Other long-term liabilities (58) (8)
-------- --------
3,616 (14,113)
-------- --------
Net cash provided by (used in) operating activities 13,116 (7,163)
-------- --------
Cash Flows from Investing Activities:
Expenditures for property, plant and equipment (10,635) (5,428)
Cash paid for acquisition, net of cash acquired -- (1,016)
-------- --------
Net cash used in investing activities (10,635) (6,444)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from public offering of common stock -- 64,444
Net proceeds from exercise of common stock options 133 385
Net proceeds from (repayments of) notes payable (55) (41,895)
Repayments from affiliates 87 63
-------- --------
Net cash provided by financing activities 165 22,997
-------- --------
Net increase in cash and cash equivalents 2,646 9,390
Cash and cash equivalents - beginning of period 13,418 1,679
-------- --------
Cash and cash equivalents - end of period $ 16,064 $ 11,069
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 6
<PAGE>
Notes to Consolidated Financial Statements
(in thousands except per share data)
(unaudited)
1. MSC Industrial Direct Co., Inc. (the "Company") was incorporated in the
State of New York on October 24, 1995.
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 August 30,
1997. 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.
All references to a fiscal year are to the Company's fiscal year which
ends on the Saturday nearest August 31 of such year.
Certain fiscal 1997 balances have been reclassified to conform to the
fiscal 1998 presentation.
2. 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.
3. Net income per common share is based on the weighted average number of
common and common equivalent shares outstanding. Common equivalent shares
include dilutive stock options (using the treasury stock method)
exercisable under the Company's stock option plan. Weighted average shares
outstanding in the first quarter of fiscal 1998 and fiscal 1997 were
34,376 and 33,550, respectively.
4. In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share" ("EPS").
This statement establishes standards for computing and presenting EPS,
replacing the presentation of currently required primary EPS with a
presentation of basic EPS. For entities with complex capital structures,
the statement requires the dual presentation of both basic EPS and diluted
EPS on the face of the consolidated statements of operations. Under this
new standard, basic EPS is computed based on weighted average shares
outstanding and excludes any potential dilution; diluted EPS reflects
potential dilution from the exercise or conversion of securities into
common stock or from other contracts to issue common stock and is similar
to the currently required fully diluted EPS. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods, and earlier application is not permitted. SFAS
No. 128 will be effective, for the Company's purposes, during the second
quarter of fiscal 1998. Once effective, the Company will be required to
Page 7
<PAGE>
restate its EPS data for all periods presented. The Company does not
expect the impact of the application of this statement to be material to
previously reported EPS amounts.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
MSC Industrial Direct Co., Inc. ("MSC") 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 and its
subsidiaries, including the Operating Subsidiary, are hereinafter referred to
collectively as the "Company".
The Company 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 332,000 stock keeping units
("SKUs") through its 4,075 page master catalog and weekly, monthly and quarterly
specialty and promotional catalogs, newspapers and brochures, which are
supported by three distribution centers and sixty 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.
The Company is recording an annual non-cash deferred compensation charge of
approximately $600,000 from fiscal 1996 through the first half of fiscal 2001
related to deferred compensation resulting from the issuance of restricted stock
to certain employees.
Results of Operations -
Thirteen weeks ended November 29, 1997 and November 30, 1996
Net sales increased by $43.4 million, or 47.1%, to $135.6 million in the first
quarter of fiscal 1998 from $92.2 million in the first quarter of fiscal 1997.
This increase was principally 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 made during fiscal 1997. The increase in sales to
existing customers was principally derived from an increase in the number of
SKUs offered as well as from more focused marketing efforts.
Gross profit increased by $17.0 million, or 44.4%, to $55.3 million in the first
quarter of fiscal 1998, from $38.3 million in the first quarter of fiscal 1997.
The increase in gross profit was primarily attributable to increased sales. As a
percentage of sales, gross profit decreased from 41.5% to 40.8% for the
respective periods. The decrease in gross profit as a percentage of sales was
primarily a result of slightly lower margins realized from customers and product
lines gained through the Company's acquisitions. The Company's gross profit as a
percentage of sales from its core business remained constant.
Operating expenses increased by $13.2 million, or 49.1%, to $40.1 million in the
first quarter of fiscal 1998, from $26.9 million in the first quarter of fiscal
1997. As a percentage of sales, operating expenses increased slightly from 29.2%
to 29.6%. The slight increase was primarily attributable to
Page 8
<PAGE>
increased sales volume which required additional staffing and support as well as
continuous investment in branches, which will enhance future growth.
Income from operations increased by $3.9 million, or 34.2%, to $15.3 million in
the first quarter of fiscal 1998 from $11.4 million in the first quarter of
fiscal 1997. The increase was primarily attributable to increased sales and
gross profit offset by an increase in operating expenses.
Net income increased by $2.5 million, or 35.7%, to $9.5 million in the first
quarter of fiscal 1998 from $7.0 million in the first quarter of fiscal 1997.
This increase was primarily the result of previously mentioned increases in
sales and gross profit offset by the increase in operating expenses necessary in
order to support the increase in volume and invest in future growth.
Liquidity and Capital Resources
The Company's primary capital needs have been to fund the working capital
requirements necessitated by its sales growth, acquisitions and facilities
expansions. The Company's sources of financing have been from operations, bank
borrowings under its revolving credit facility, subordinated loans from
shareholders and a portion of the proceeds from the fiscal 1996 initial public
offering and fiscal 1997 public offering.
Net cash provided by operating activities increased $20.3 million to $13.1
million from a net cash usage of $7.2 million for the 13 week periods ended
November 29, 1997 and November 30, 1996, respectively. The net usage of cash in
the first quarter of fiscal 1997 was primarily due to purchases of inventory
related to the introduction of new products, as well as a growth in accounts
receivable commensurate with the Company's growth in sales. In the first quarter
of fiscal 1998, inventory and accounts payable declined reflecting improved
inventory control policies and procedures.
Net cash used in investing activities for the 13 week periods ended November 29,
1997 and November 30, 1996, was approximately $10.6 million and $6.4 million,
respectively. The net usage of cash in the first quarter of fiscal 1998 was
primarily attributable to the purchase of a building in Long Island, New York
which will serve as the new corporate headquarters in fiscal 1998. The net usage
of cash in the first quarter of fiscal 1997 was principally attributable to
capital expenditures related to the completion of the distribution centers and
cash paid for acquisitions.
Net cash provided by financing activities during the 13 week periods ended
November 29, 1997 and November 30, 1996 was approximately $200,000 and $23.0
million, respectively. The change of $22.8 million is primarily attributable to
the difference between the proceeds received from the completion of the
Company's aforementioned public offering completed in fiscal 1997, net of the
existing long-term debt repaid with such proceeds.
In July 1996, the Emerging Issues Task Force of the FASB reached a consensus on
Issue 96-14, "Accounting for the Costs Associated with Modifying Computer
Software for the Year 2000," which requires that costs associated with modifying
computer software for the Year 2000 be expensed as incurred. The Company
believes, based upon its internal reviews and other factors, that future
external and internal costs to be incurred relating to the modification of
internal-use software for the Year 2000 will not have a material effect on the
Company's results of operations or financial position.
Page 9
<PAGE>
The foregoing contains forward looking statements and there can be no assurance
due to changes in local, regional or national economies and the availability of
acquisition opportunities, among other things, that the foregoing shall be the
case.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial data schedule for the quarter ended November 29,
1997.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the
quarter for which this report is filed.
Page 10
<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 12, 1998 By: /s/ Mitchell Jacobson
--------------------------------------------
Mitchell Jacobson
Chairman of the Board of Directors and
Chief Executive Officer
Dated: January 12, 1998 By: /s/ Shelley M. Boxer
--------------------------------------------
Shelley M. Boxer
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-29-1997
<CASH> 16,064
<SECURITIES> 0
<RECEIVABLES> 68,003
<ALLOWANCES> 2,556
<INVENTORY> 161,198
<CURRENT-ASSETS> 254,550
<PP&E> 77,842
<DEPRECIATION> 18,661
<TOTAL-ASSETS> 354,099
<CURRENT-LIABILITIES> 63,018
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 284,939
<TOTAL-LIABILITY-AND-EQUITY> 354,099
<SALES> 135,609
<TOTAL-REVENUES> 135,609
<CGS> 80,270
<TOTAL-COSTS> 80,270
<OTHER-EXPENSES> 40,083
<LOSS-PROVISION> 690
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> 15,700
<INCOME-TAX> 6,200
<INCOME-CONTINUING> 9,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,500
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
