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 May 30, 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 July 6, 1998:
Class A common stock -- 33,648,984, Class B common stock -- 34,142,028
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
- ------- --------------------- --------
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets -
May 30, 1998 and August 30, 1997 3
Consolidated Statements of Income -
Thirteen and thirty-nine weeks ended
May 30, 1998 and May 31, 1997 4
Consolidated Statement of Shareholders' Equity -
Thirty-nine weeks ended May 30, 1998 5
Consolidated Statements of Cash Flows -
Thirty-nine weeks ended May 30, 1998
and May 31, 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 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
May 30, August 30,
1998 1997
(in thousands, except share data) ---- ----
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 18,137 $ 13,418
Accounts receivable, net of allowance for doubtful
accounts of $3,410 and $2,030, respectively 75,690 55,348
Inventories 157,704 163,003
Due from officers, employees and affiliated companies 687 765
Prepaid expenses and other current assets 2,269 2,242
Current deferred income tax assets 11,812 9,237
--------- ---------
Total current assets 266,299 244,013
--------- ---------
Property, plant and equipment, net 70,718 49,658
--------- ---------
Other Assets:
Goodwill 54,700 34,270
Other 5,254 6,893
--------- ---------
59,954 41,163
--------- ---------
$ 396,971 $ 334,834
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 19,067 $ 11,459
Accrued liabilities 59,464 41,997
Current portion of long-term notes payable 171 213
--------- ---------
Total current liabilities 78,702 53,669
Long-term notes payable 2,650 2,744
Other long-term liabilities 105 108
Deferred income tax liabilities 3,916 3,318
--------- ---------
Total liabilities 85,373 59,839
--------- ---------
Shareholders' Equity:
Preferred stock; $0.001 par value; 5,000,000 shares
authorized; none outstanding -- --
Class A common stock; $0.0005 par value; 100,000,000
shares authorized; 33,635,853 and 33,331,966 shares,
respectively, issued and outstanding 17 17
Class B common stock; $0.0005 par value; 50,000,000
shares authorized; 34,142,028 and 34,364,400 shares,
respectively, issued and outstanding 17 17
Additional paid-in capital 212,921 211,704
Retained earnings 100,898 65,499
Treasury stock, at cost (887) (499)
Deferred stock compensation (1,368) (1,743)
--------- ---------
Total shareholders' equity 311,598 274,995
--------- ---------
$ 396,971 $ 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 Thirty-Nine Weeks Ended
(in thousands, except per May 30, May 31, May 30, May 31,
share data) 1998 1997 1998 1997
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net sales $155,098 $ 123,895 $ 433,227 $ 320,794
Cost of goods sold 91,508 73,452 256,113 189,374
--------- --------- --------- ---------
Gross profit 63,590 50,443 177,114 131,420
Operating expenses 40,677 32,688 120,102 87,626
--------- --------- --------- ---------
Income from operations 22,913 17,755 57,012 43,794
--------- --------- --------- ---------
Other Income (Expense):
Interest income 315 224 816 446
Interest expense (6) (219) (49) (298)
Other income (expense), net 311 276 730 178
--------- --------- --------- ---------
620 281 1,497 326
--------- --------- --------- ---------
Income before provision
for income taxes 23,533 18,036 58,509 44,120
Provision for income taxes 9,296 7,115 23,110 17,418
--------- --------- --------- ---------
Net income $ 14,237 $ 10,921 $ 35,399 $ 26,702
========= ========= ========= =========
Per Share Information (Note 3):
Net income per common share:
Basic $ 0.21 $ 0.16 $ 0.52 $ 0.40
========= ========= ========= =========
Diluted $ 0.21 $ 0.16 $ 0.51 $ 0.39
========= ========= ========= =========
Common shares used in computing
per share amounts (Note 3):
Basic 67,770 67,552 67,739 66,983
========= ========= ========= =========
Diluted 69,215 68,280 68,924 67,860
========= ========= ========= =========
</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 Retained
Shares Amount Shares Amount Capital Earnings
------ ------ ------ ------ --------- --------
Thirty-nine weeks ended
May 30, 1998:
<S> <C> <C> <C> <C> <C> <C>
Balance, September 1, 1997 33,332 $ 17 34,364 $ 17 $ 211,704 $ 65,499
Exchange of Class B common stock
for Class A common stock 222 -- (222) -- -- --
Purchase of treasury stock
Exercise of common stock
options, including related tax
benefits 82 -- -- -- 1,217 --
Net income -- -- -- -- -- 35,399
Amortization of deferred stock
compensation -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance, May 30, 1998 33,636 $ 17 34,142 $ 17 $ 212,921 100,898
========= ========= ========= ========= ========= =========
<CAPTION>
(in thousands) Treasury Stock Deferred
------------------------- Stock
Shares Amount at Cost Compensation Total
------ -------------- ------------ -----
Thirty-nine weeks ended
May 30, 1998:
<S> <C> <C> <C> <C>
Balance, September 1, 1997 28 $ (499) $ (1,743) $ 274,995
Exchange of Class B common stock
for Class A common stock -- -- -- --
Purchase of treasury stock 18 (388) (388)
Exercise of common stock
options, including related tax
benefits -- -- -- 1,217
Net income -- -- -- 35,399
Amortization of deferred stock
compensation -- -- 375 375
--------- --------- --------- ---------
Balance, May 30, 1998 46 $ (887) $ (1,368) 311,598
========= ========= ========= =========
</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)
(in thousands) Thirty-Nine Weeks Ended
-----------------------
May 30, May 31,
1998 1997
--------- ---------
Cash Flows from Operating Activities:
Net income $ 35,399 $ 26,702
--------- ---------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 5,234 3,534
Amortization of deferred stock compensation 375 440
Provision for doubtful accounts 1,525 566
Deferred income taxes (1,521) 3,944
Changes in operating assets and liabilities,
net of effect from acquisitions:
Accounts receivable (13,237) (9,106)
Inventories 9,666 8,594
Prepaid expenses and other current assets 328 2,341
Other assets 1,866 2,181
Accounts payable and accrued liabilities 7,091 (5,038)
Other long-term liabilities (3) (589)
--------- ---------
11,324 6,867
--------- ---------
Net cash provided by operating
activities 46,723 33,569
--------- ---------
Cash Flows from Investing Activities:
Expenditures for property, plant and
equipment (23,290) (11,351)
Cash paid for acquisitions, net of cash
acquired (18,741) (27,771)
--------- ---------
Net cash used in investing activities (42,031) (39,122)
--------- ---------
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 761 814
Net repayments of notes payable (424) (52,638)
Net advances to affiliates 78 441
--------- ---------
Net cash provided by financing
activities 27 13,061
--------- ---------
Net increase in cash and cash equivalents 4,719 7,508
Cash and cash equivalents - beginning of period 13,418 1,679
--------- ---------
Cash and cash equivalents - end of period $ 18,137 $ 9,187
========= =========
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
MSC'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.
The Company's fiscal year ends on the Saturday nearest August 31 of each
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>
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
May 30, May 31, May 30, May 31,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income for EPS
computation $ 14,237 $ 10,921 $ 35,399 $ 26,702
========= ========= ========= =========
Basic EPS:
Weighted average
common shares 67,770 67,552 67,739 66,983
========= ========= ========= =========
Basic EPS $ 0.21 $ 0.16 $ 0.52 $ 0.40
========= ========= ========= =========
Diluted EPS:
Weighted average
common shares 67,770 67,552 67,739 66,983
Shares issuable from
assumed conversion of
common stock equivalents 1,445 728 1,185 877
--------- --------- --------- ---------
Weighted average common
shares and common stock
equivalents 69,215 68,280 68,924 67,860
========= ========= ========= =========
Diluted EPS $ 0.21 $ 0.16 $ 0.51 $ 0.39
========= ========= ========= =========
</TABLE>
3. On April 6, 1998, the Company declared a two-for-one stock split in the
form of a stock dividend, to be distributed May 22, 1998 to shareholders
of record as of April 24, 1998. All information contained in the
accompanying consolidated financial statements has been retroactively
restated to give effect to this stock split for all periods presented.
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 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. The
products are distributed through the Company's three distribution centers and
seventy-nine customer service locations. Most of the products are carried in
stock, and orders for these products are typically fulfilled on the day the
order is received.
Results of Operations -
Thirteen weeks ended May 30, 1998 and May 31, 1997
Net sales increased by $31.2 million, or 25.2%, to $155.1 million in the third
quarter of fiscal 1998 from $123.9 million in the third 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 made in fiscal 1997 and fiscal 1998. 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 $13.2 million, or 26.2%, to $63.6 million in the third
quarter of fiscal 1998 from $50.4 million in the third quarter of fiscal 1997.
The increase in gross profit was primarily attributable to increased sales. As a
percentage of sales, gross profit increased slightly from 40.7% to 41.0%.
Operating expenses increased by $8.0 million, or 24.5%, to $40.7 million in the
third quarter of fiscal 1998 from $32.7 million in the third quarter of fiscal
1997. As a percentage of sales, operating expenses decreased slightly from 26.4%
to 26.2%. The decrease was primarily the result of operating efficiencies and
the distribution of fixed expenses over a larger revenue base, offset in part by
continuous investment in new branches and other growth programs.
Income from operations increased by $5.1 million, or 28.7%, to $22.9 million in
the third quarter of fiscal 1998 from $17.8 million in the third quarter of
fiscal 1997. The increase was primarily attributable to increased sales and
gross profit, offset by an increase in operating expenses.
Page 9
<PAGE>
Net income increased by $3.3 million, or 30.3%, to $14.2 million in the third
quarter of fiscal 1998 from $10.9 million in the third 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.
Results of Operations -
Thirty-nine weeks ended May 30, 1998 and May 31, 1997
Net sales increased by $112.4 million, or 35.0%, to $433.2 million during the
first nine months of fiscal 1998 from $320.8 million in the first nine months 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 in fiscal 1997 and fiscal 1998. 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 $45.7 million, or 34.8%, to $177.1 million during the
first nine months of fiscal 1998 from $131.4 million in the first nine months of
fiscal 1997, primarily attributable to increased sales. As a percentage of
sales, gross profit remained constant at approximately 41.0%.
Operating expenses increased by $32.5 million, or 37.1%, to $120.1 million
during the first nine months of fiscal 1998 from $87.6 million in the first nine
months of fiscal 1997. As a percentage of sales, operating expenses increased
from 27.3% to 27.7%. The increase was primarily attributable to increased sales
volume which required additional staffing and support, as well as continuous
investment in new branches and other growth programs.
Income from operations increased by $13.2 million, or 30.1%, to $57.0 million
during the first nine months of fiscal 1998 from $43.8 million in the first nine
months 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 $8.7 million, or 32.6%, to $35.4 million during the
first nine months of fiscal 1998 from $26.7 million in the first nine months 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.
Page 10
<PAGE>
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 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 39 week periods ended May 30,
1998 and May 31, 1997 was $46.7 million and $33.6 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 39 week periods ended May 30, 1998
and May 31, 1997 was $42.0 million and $39.1 million, respectively. The net
usage of cash in the first nine months of fiscal 1998 was primarily attributable
to cash paid for acquisitions and 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 nine months of fiscal 1997 was primarily
attributable to cash paid for acquisitions.
Net cash provided by financing activities was $27,000 and $13.1 million for the
39 week periods ended May 30, 1998 and May 31, 1997, respectively. The change of
approximately $13.1 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.
The Company has been assessing the impact of the Year 2000 issue on its
information systems for the past few years. In connection with these continuing
assessments, the Company has identified potential deficiencies and is addressing
them. In accordance with accounting rules, costs associated with modifying
existing computer software for Year 2000 will be expensed as incurred. The
Company has a committee to address the potential impact on the material aspects
of the Company's business and to develop a Year 2000 strategy to manage the risk
and prepare contingency plans that may be needed. In addition, the Company is in
the process of evaluating the measures being undertaken by its critical
customers and suppliers to address the Year 2000 issues. Based on the work to
date and assuming the Company's plans, which continue to evolve, are
implemented, the Company believes that the costs associated with its Year 2000
project should not have a material adverse effect on the Company's consolidated
results of operations or financial position.
The foregoing contains certain forward-looking statements which involve risks
and uncertainties (including changing market conditions, competitive and
regulatory matters, general economic conditions in the markets in which the
Company operates, availability of acquisition opportunities, etc.) and,
accordingly, there can be no assurance with regard to such statements.
Page 11
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial data schedule for the quarter ended May 30, 1998.
(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 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: July 6, 1998 By: /s/ Mitchell Jacobson
------------- -------------------------------------------
President and Chief Executive Officer
Dated: July 6, 1998 By: /s/ 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-29-1998
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-30-1998
<CASH> 18,137
<SECURITIES> 0
<RECEIVABLES> 79,100
<ALLOWANCES> 3,410
<INVENTORY> 157,704
<CURRENT-ASSETS> 266,299
<PP&E> 92,012
<DEPRECIATION> 21,294
<TOTAL-ASSETS> 396,971
<CURRENT-LIABILITIES> 78,702
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 311,564
<TOTAL-LIABILITY-AND-EQUITY> 396,971
<SALES> 155,098
<TOTAL-REVENUES> 155,098
<CGS> 91,508
<TOTAL-COSTS> 91,508
<OTHER-EXPENSES> 40,677
<LOSS-PROVISION> 1,525
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> 23,533
<INCOME-TAX> 9,296
<INCOME-CONTINUING> 14,237
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,237
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
