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 February 28, 1998 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 each class of common stock, outstanding as of April 6, 1998:
Class A common stock - 16,815,220 Class B common stock - 17,071,014
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets -
February 28, 1998 and August 30, 1997 3
Consolidated Statements of Income -
Thirteen and twenty-six weeks ended February 28, 1998
and March 1, 1997 4
Consolidated Statement of Shareholders' Equity -
Twenty-six weeks ended February 28, 1998 5
Consolidated Statements of Cash Flows -
Twenty-six weeks ended February 28, 1998 and March 1, 1997 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 12
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
<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) February 28, August 30,
1998 1997
------------- ---------
ASSETS (unaudited) (audited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 20,233 $ 13,418
Accounts receivable, net of allowance for doubtful
accounts of $2,903 and $2,030, respectively 69,444 55,348
Inventories 155,155 163,003
Due from officers, employees and affiliated companies 1,955 765
Prepaid expenses and other current assets 2,157 2,242
Current deferred income tax assets 10,192 9,237
--------- ---------
Total current assets 259,136 244,013
--------- ---------
Property, plant and equipment, net 61,651 49,658
--------- ---------
Other Assets:
Goodwill 43,740 34,270
Other 5,453 6,893
--------- ---------
49,193 41,163
--------- ---------
$ 369,980 $ 334,834
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 10,091 $ 11,459
Accrued liabilities 56,884 41,997
Current portion of long-term notes payable 170 213
--------- ---------
Total current liabilities 67,145 53,669
Long-term notes payable 2,629 2,744
Other long-term liabilities 42 108
Deferred income tax liabilities 3,270 3,318
--------- ---------
Total liabilities 73,086 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;
16,699,108 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 212,559 211,704
Retained earnings 86,661 65,499
Treasury stock, at cost (887) (499)
Deferred stock compensation (1,473) (1,743)
--------- ---------
Total shareholders' equity 296,894 274,995
--------- ---------
$ 369,980 $ 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)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
February 28, March 1, February 28, March 1,
(in thousands, except per share data) 1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 142,520 $ 104,685 $ 278,129 $ 196,899
Cost of goods sold 84,335 61,975 164,605 115,922
--------- --------- --------- ---------
Gross profit 58,185 42,710 113,524 80,977
Operating expenses 39,342 28,035 79,425 54,938
--------- --------- --------- ---------
Income from operations 18,843 14,675 34,099 26,039
--------- --------- --------- ---------
Other Income (Expense):
Interest income 249 77 502 222
Interest expense (21) (22) (44) (79)
Other income (expense), net 205 (131) 419 (98)
--------- --------- --------- ---------
433 (76) 877 45
--------- --------- --------- ---------
Income before provision for income taxes 19,276 14,599 34,976 26,084
Provision for income taxes 7,614 5,768 13,814 10,303
--------- --------- --------- ---------
Net income $ 11,662 $ 8,831 $ 21,162 $ 15,781
========= ========= ========= =========
Per Share Information:
Net income per common share:
Basic $ 0.34 $ 0.26 $ 0.62 $ 0.47
========= ========= ========= =========
Diluted $ 0.34 $ 0.26 $ 0.62 $ 0.47
========= ========= ========= =========
Common shares used in computing
per share amounts:
Basic 33,868 33,817 33,860 33,520
========= ========= ========= =========
Diluted 34,410 34,139 34,394 33,835
========= ========= ========= =========
</TABLE>
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
(in thousands) Common Stock Common Stock Additional
------------------ ---------------- Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Twenty-six weeks ended February 28, 1998:
Balance, September 1, 1997 16,666 $ 17 17,182 $ 17 $211,704
Exchange of Class B common stock for
Class A common stock 4 -- (4) -- --
Purchase of treasury stock
Exercise of common stock options,
including related tax benefits 29 -- -- -- 855
Net income -- -- -- -- --
Amortization of deferred stock compensation -- -- -- -- --
------ -------- ------ -------- --------
Balance, February 28, 1998 16,699 $ 17 17,178 $ 17 $212,559
====== ======== ====== ======== ========
<CAPTION>
Treasury Stock Deferred
Retained -------------- Stock
Earnings Shares Amount at Cost Compensation Total
-------- ------ -------------- ------------ -----
<S> <C> <C> <C> <C> <C>
Twenty-six weeks ended February 28, 1998:
Balance, September 1, 1997 $ 65,499 14 $ (499) $ (1,743) $274,995
Exchange of Class B common stock for
Class A common stock -- -- -- -- --
Purchase of treasury stock 9 (388) (388)
Exercise of common stock options,
including related tax benefits -- -- -- -- 855
Net income 21,162 -- -- -- 21,162
Amortization of deferred stock compensation -- -- -- 270 270
-------- ------- -------- --------- --------
Balance, February 28, 1998 $ 86,661 23 $ (887) $ (1,473) $296,894
======== ======= ======== ========= ========
</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) Twenty-Six Weeks Ended
----------------------
February 28, March 1,
1998 1997
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 21,162 $ 15,781
-------- --------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,388 2,207
Amortization of deferred stock compensation 270 290
Provision for doubtful accounts 971 519
Deferred income taxes (547) 1,040
Changes in operating assets and liabilities,
net of effect from acquisitions:
Accounts receivable (15,067) (11,192)
Inventories 7,848 5,147
Prepaid expenses and other current assets 85 95
Other assets 1,432 1,190
Accounts payable and accrued liabilities 3,490 (9,462)
Other long-term liabilities (66) (26)
-------- --------
1,804 (10,192)
-------- --------
Net cash provided by operating activities 22,966 5,589
-------- --------
Cash Flows from Investing Activities:
Expenditures for property, plant and equipment (14,814) (8,724)
Cash paid for acquisitions, net of cash acquired -- (27,171)
-------- --------
Net cash used in investing activities (14,814) (35,895)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from public offering of common stock -- 64,444
Purchase of treasury stock (388) --
Net proceeds from exercise of common stock options 399 741
Net proceeds from (repayments of) notes payable (158) (33,954)
Net repayments from (advances to) affiliates (1,190) 336
-------- --------
Net cash (used in) provided by financing activities (1,337) 31,567
-------- --------
Net increase in cash and cash equivalents 6,815 1,261
Cash and cash equivalents - beginning of period 13,418 1,679
-------- --------
Cash and cash equivalents - end of period $ 20,233 $ 2,940
======== ========
</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. ("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 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 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. The Company adopted the Financial Accounting Standards Board Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings per Share, for the
period ended February 28, 1998. 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 diluted effect of common stock equivalents using the treasury stock
method.
A reconciliation between the numerator and denominator of the basic and
diluted EPS calculation is as follows:
Page 7
<PAGE>
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
February 28, March 1, February 28, March 1,
1998 1997 1998 1997
---- ---- ---- ----
Net income for EPS
computation $11,662 $ 8,831 $21,162 $15,781
======= ======= ======= =======
Basic EPS:
Weighted average
common shares 33,868 33,817 33,860 33,520
======= ======= ======= =======
Basic EPS $ 0.34 $ 0.26 $ 0.62 $ 0.47
======= ======= ======= =======
Diluted EPS:
Weighted average
common shares 33,868 33,817 33,860 33,520
Shares issuable from
assumed conversion of
common stock equivalents 542 322 534 315
------- ------- ------- -------
Weighted average common
and common equivalent shares 34,410 34,139 34,394 33,835
======= ======= ======= =======
Diluted EPS $ 0.34 $ 0.26 $ 0.62 $ 0.47
======= ======= ======= =======
Page 8
<PAGE>
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's primary 4,075 page master catalog offers
approximately 332,000 stock keeping units ("SKUs") and is supplemented by
weekly, monthly and quarterly specialty and promotional catalogs, newspapers and
brochures, which are supported by three distribution centers and sixty-three
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.
During the 26 week period ended March 1, 1997, the Company completed the
acquisitions of Brooks Precision Supply, Inc., Dolin Supply Co. Inc., Anderson
Industrial Supply, Inc., and Enco Manufacturing Company, all of which are
engaged in similar businesses to that of MSC.
Results of Operations -
Thirteen weeks ended February 28, 1998 and March 1, 1997
Net sales increased by $37.8 million, or 36.1%, to $142.5 million in the second
quarter of fiscal 1998 from $104.7 million in the second quarter of fiscal 1997.
This increase was primarily 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. 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 $15.5 million, or 36.3%, to $58.2 million in the
second quarter of fiscal 1998 from $42.7 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 remained constant at approximately
40.8% for the respective periods.
Operating expenses increased by $11.3 million, or 40.4%, to $39.3 million in the
second quarter of fiscal 1998 from $28.0 million in the second quarter of fiscal
1997. As a percentage of sales, operating expenses increased from 26.8% to
27.6%. The increase was primarily attributable to increased sales volume which
required additional staffing and support, as well as continuous investment in
branches and other growth programs.
Page 9
<PAGE>
Income from operations increased by $4.1 million, or 27.9%, to $18.8 million in
the second quarter of fiscal 1998 from $14.7 million in the second 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 $2.9 million, or 33.0%, to $11.7 million in the second
quarter of fiscal 1998 from $8.8 million in the second 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.
Results of Operations -
Twenty-six weeks ended February 28, 1998 and March 1, 1997
Net sales increased by $81.2 million, or 41.2%, to $278.1 million during the
first half of fiscal 1998 from $196.9 million in the first half of fiscal 1997.
This increase was primarily 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 $32.5 million, or 40.1%, to $113.5 million during the
first half of fiscal 1998 from $81.0 million in the first half of fiscal 1997,
primarily attributable to increased sales. As a percentage of sales, gross
profit decreased from 41.1% to 40.8%. 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 margin as a percentage of sales from its core business remained
constant.
Operating expenses increased by $24.5 million, or 44.6%, to $79.4 million during
the first half of fiscal 1998 from $54.9 million in the first half of fiscal
1997. As a percentage of sales, operating expenses increased from 27.9% to
28.6%. The increase was primarily attributable to increased sales volume which
required additional staffing and support, as well as continuous investment in
branches and other growth programs.
Income from operations increased by $8.1 million, or 31.2%, to $34.1 million
during the first half of fiscal 1998 from $26.0 million in the first half 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 $5.4 million, or 34.2%, to $21.2 million during the
first half of fiscal 1998 from $15.8 million in the first half 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 use of capital has been to fund the working capital
requirements necessitated by its sales growth, acquisitions and facilities
expansions. The Company's sources of financing have primarily been from
operations, supplemented by bank borrowings under its
Page 10
<PAGE>
revolving credit facility, and a portion of the proceeds from a fiscal 1997
public offering of Class A common stock.
Net cash provided by operating activities for the 26 week periods ended February
28, 1998 and March 1, 1997 was $23.0 million and $5.6 million, respectively. The
increase in net cash provided by operations resulted from higher net income and
lower net working capital requirements.
Net cash used in investing activities for the 26 week periods ended February 28,
1998 and March 1, 1997 was $14.8 million and $35.9 million, respectively. The
net usage of cash in the first half of fiscal 1998 was primarily attributable to
the purchase of a building in Long Island, New York which will begin serving as
the new corporate headquarters in fiscal 1999. The net usage of cash in the
first half of fiscal 1997 was primarily attributable to cash paid for
acquisitions.
Net cash used in financing activities was $1.3 million for the 26 week period
ended February 28, 1998 and net cash provided by financing activities for the 26
week period ended March 1, 1997 was $31.6 million. The change of approximately
$32.9 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.
The Company has an aggressive growth strategy that has involved, and is expected
to continue to involve, the acquisition of companies in similar lines of
business. The Company anticipates that its cash flow from operations and
revolving credit facility will be adequate to support its strategic acquisition
plan in the near future.
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.
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.
Page 11
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
On January 9, 1998 the Company held its 1998 Annual Meeting of Shareholders (the
"Meeting"). In connection with the Meeting, the Company solicited proxies from
its shareholders pursuant to Regulation 14 of the Securities Exchange Act of
1934. (Proxy Statement dated December 8, 1997).
At the Meeting, the Company's shareholders reelected Sidney Jacobson, Mitchell
Jacobson, Melvin Redman, James Schroeder, Shelley Boxer, Denis Kelly and Raymond
Langton.
In addition, the shareholders approved the Company's 1998 Stock Option Plan and
ratified the selection by the Board of Directors of Arthur Andersen LLP as
independent certified public accountants of the Company for the fiscal year
ending August 29, 1998.
The following tables summarize the votes cast at the meeting on the matters
brought before the shareholders:
1. Election of Directors
Nominee Votes Votes Votes Broker
Name For Against Withheld Non-Votes
Sidney Jacobson 113,970,566 0 1,211,267 0
Mitchell Jacobson 113,971,314 0 1,210,519 0
Melvin Redman 113,971,414 0 1,210,619 0
James Schroeder 113,971,314 0 1,210,519 0
Shelley Boxer 113,971,414 0 1,210,619 0
Denis Kelly 113,971,314 0 1,210,519 0
Raymond Langton 113,971,314 0 1,210,519 0
2. Approval of the Company's 1998 Stock Option Plan
Votes Votes Votes Broker
For Against Withheld Non-Votes
107,608,414 6,461,496 13,201 1,100,122
Page 12
<PAGE>
3. Ratification of Arthur Andersen LLP as independent certified public
accountants of the Company for the fiscal year ending August 29, 1998.
Votes Votes Votes Broker
For Against Withheld Non-Votes
115,168,467 6,200 7,266 0
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial data schedule for the quarter ended February 28, 1998.
(b) Reports on Form 8-K
A report on Form 8-K was filed on January 20, 1998 with respect to
Item 5, Other Events.
Page 13
<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: April 7, 1998 By: /s/ Mitchell Jacobson
------------- --------------------------------------------
President and Chief Executive Officer
Dated: April 7, 1998 By: /s/ Shelley M. Boxer
------------- --------------------------------------------
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-28-1998
<PERIOD-START> NOV-30-1997
<PERIOD-END> FEB-28-1998
<CASH> 20,233
<SECURITIES> 0
<RECEIVABLES> 72,347
<ALLOWANCES> 2,903
<INVENTORY> 155,155
<CURRENT-ASSETS> 259,136
<PP&E> 81,564
<DEPRECIATION> 19,913
<TOTAL-ASSETS> 369,980
<CURRENT-LIABILITIES> 67,145
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 296,860
<TOTAL-LIABILITY-AND-EQUITY> 369,980
<SALES> 142,520
<TOTAL-REVENUES> 142,520
<CGS> 84,335
<TOTAL-COSTS> 84,335
<OTHER-EXPENSES> 39,342
<LOSS-PROVISION> 971
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> 19,276
<INCOME-TAX> 7,614
<INCOME-CONTINUING> 11,662
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,662
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
