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 November 25, 2000
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 5, 2001, 35,648,184 shares of Class A Common Stock and
33,478,778 shares of Class B Common Stock of the registrant were outstanding.
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
November 25, 2000 and August 26, 2000 3
Consolidated Statements of Income -
Thirteen weeks ended November 25, 2000 and November 27, 1999 4
Consolidated Statement of Shareholders' Equity -
Thirteen weeks ended November 25, 2000 5
Consolidated Statements of Cash Flows -
Thirteen weeks ended November 25, 2000 and November 27, 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
November 25, August 26,
2000 2000
--------- ---------
(In thousands, except share data) (Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,833 $ 3,209
Accounts receivable, net of allowance for doubtful
accounts of $4,006 and $3,779, respectively 103,982 98,837
Inventories 274,614 264,494
Prepaid expenses and other current assets 4,315 4,190
Current deferred income taxes 3,926 4,484
--------- ---------
Total current assets 391,670 375,214
--------- ---------
Investments, at cost 10,834 8,982
--------- ---------
Property, Plant and Equipment, net 117,090 116,378
--------- ---------
Other Assets:
Goodwill 64,675 65,115
Other 13,708 15,285
--------- ---------
78,383 80,400
--------- ---------
$ 597,977 $ 580,974
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 28,639 $ 30,245
Accrued liabilities 41,063 48,032
Current portion of long term notes payable 233 244
--------- ---------
Total current liabilities 69,935 78,521
Long-term notes payable 79,498 68,398
Deferred income tax liabilities 12,331 12,386
--------- ---------
Total liabilities 161,764 159,305
--------- ---------
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; 35,335,269 and 35,290,231 shares issued, 34,279,269
and 34,217,231 shares outstanding, respectively 35 35
Class B common stock; $0.001 par value; 50,000,000 shares authorized;
33,738,778 shares issued and outstanding 34 34
Additional paid-in capital 229,975 229,297
Retained earnings 227,000 213,591
Treasury stock, at cost, 1,056,000 and 1,073,000 shares, respectively (20,745) (21,079)
Deferred stock compensation (86) (209)
--------- ---------
Total shareholders' equity 436,213 421,669
--------- ---------
$ 597,977 $ 580,974
========= =========
</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
--------------------
November 25, November 27,
(In thousands, except per share data) 2000 1999
--------- ---------
<S> <C> <C>
Net sales $ 211,107 $ 182,761
Cost of goods sold 128,598 111,541
--------- ---------
Gross profit 82,509 71,220
Operating expenses 58,779 52,781
--------- ---------
Income from operations 23,730 18,439
--------- ---------
Other Income (Expense):
Interest income 8 12
Interest expense (1,242) (1,089)
Other income, net 12 65
--------- ---------
(1,222) (1,012)
--------- ---------
Income before provision for income taxes 22,508 17,427
Provision for income taxes 9,003 6,936
--------- ---------
Net income $ 13,505 $ 10,491
========= =========
Per Share Information (Note 2):
Net income per common share:
Basic $ 0.20 $ 0.16
========= =========
Diluted $ 0.20 $ 0.16
========= =========
Common shares used in computing per share amounts (Note 2):
Basic 67,958 67,086
========= =========
Diluted 68,913 67,303
========= =========
</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 Additional
(In thousands) Common Stock Common Stock Paid-In Retained
Shares Amount Shares Amount Capital Earnings
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Thirteen weeks ended November 25, 2000:
Balance, August 26, 2000 35,290 $ 35 33,739 $ 34 $ 229,297 $ 213,591
Common stock issued under associate stock
purchase plan -- -- -- -- -- (96)
Amortization of deferred stock compensation -- -- -- -- -- --
Exercise of common stock options, including
income tax benefits 45 -- -- -- 678 --
Net income
-- -- -- -- -- 13,505
--------- --------- --------- --------- --------- ---------
Balance, November 25, 2000 35,335 $ 35 33,739 $ 34 $ 229,975 $ 227,000
========= ========= ========= ========= ========= =========
<CAPTION>
Treasury Stock Deferred
(In thousands) --------------------------- Stock
Shares Amount at Cost Compensation Total
--------- -------------- ------------ ---------
<S> <C> <C> <C> <C>
Thirteen weeks ended November 25, 2000:
Balance, August 26, 2000 1,073 $ (21,079) $ (209) $ 421,669
Common stock issued under associate stock
purchase plan (17) 334 -- 238
Amortization of deferred stock compensation -- -- 123 123
Exercise of common stock options, including
income tax benefits -- -- -- 678
Net income
-- -- -- 13,505
--------- --------- --------- ---------
Balance, November 25, 2000 1,056 $ (20,745) $ (86) $ 436,213
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
Page 5
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(In thousands) Thirteen Weeks Ended
------------------------------
November 25, November 27,
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 13,505 $ 10,491
-------- --------
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,992 3,068
Amortization of deferred stock compensation 122 105
Provision for doubtful accounts 513 479
Deferred income taxes 503 1,000
Changes in operating assets and liabilities,
net of effect from acquisitions:
Accounts receivable (5,658) (8,643)
Inventories (10,120) (20,726)
Prepaid expenses and other current assets (125) 53
Other assets 1,577 2,009
Accounts payable and accrued liabilities (8,315) (589)
-------- --------
(17,511) (23,244)
-------- --------
Net cash used in operating activities (4,006) (12,753)
-------- --------
Cash Flows from Investing Activities:
Expenditures for property, plant and equipment (4,264) (3,817)
Cash paid for investment in affiliates (1,852) --
-------- --------
Net cash used in investing activities (6,116) (3,817)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from associate stock purchase plan 238 --
Net proceeds from exercise of common stock options 419 263
Net proceeds from notes payable 11,089 17,480
Net advances to affiliates -- 131
-------- --------
Net cash provided by financing activities 11,746 17,874
-------- --------
Net increase in cash and cash equivalents 1,624 1,304
Cash and cash equivalents - beginning of period 3,209 2,725
-------- --------
Cash and cash equivalents - end of period $ 4,833 $ 4,029
Supplemental Disclosure:
Cash paid for interest 1,242 933
Cash paid for income taxes 456 754
</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
MSC's annual report on Form 10-K for the year ended August 26, 2000. 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 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
-----------------------------
November 25, November 27,
2000 1999
-----------------------------
Net income for EPS
Computation $13,505 $10,491
======= =======
Basic EPS:
Weighted average
Common shares 67,958 67,086
======= =======
Basic EPS $ 0.20 $ 0.16
======= =======
Diluted EPS:
Weighted average
Common shares 67,958 67,086
Shares issuable from
Assumed conversion of
Common stock equivalents 955 217
------- -------
Weighted average common
Shares and common stock
equivalents 68,913 67,303
======= =======
Diluted EPS $ 0.20 $ 0.16
======= =======
3. Certain prior year balances have been reclassified to conform with current
year presentation.
4. In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133, as amended by SFAS
No. 137, is effective for all fiscal years beginning after June 15, 2000
and will not require retroactive restatement of prior period financial
statements. This statement requires the recognition of all derivative
instruments as either assets or liabilities in the balance sheet measured
at fair value. Derivative instruments will be recognized as gains or
losses in the period of change. If certain conditions are met where the
derivative instrument has been designated as a fair value hedge, the hedge
items may also be marked to market through earnings, thus creating an
offset. If the derivative is designed and qualifies as a cash flow hedge,
the changes in fair value of the derivative instrument may be recorded in
comprehensive income. The Company does not presently make material use of
derivative
Page 8
<PAGE>
instruments. The Company adopted this statement in fiscal 2001, and the
impact of adoption was not material.
5. In September 2000, the EITF reached a consensus with respect to EITF Issue
No. 00-10, "Accounting for Shipping and Handling Revenues and Costs." The
purpose of this issue discussion was to clarify the classification of
shipping and handling revenues and costs. The consensus reached was that
all shipping and handling billed to customers is revenue.
Further, a consensus was reached that the classification of shipping and
handling costs is an accounting policy decision that should be disclosed
pursuant to Accounting Principles Board Opinion No. 22, "Disclosures of
Accounting Policies." The Company may adopt a policy of including shipping
and handling costs in cost of sales. If shipping costs are significant and
are not included in cost of sales, a company should disclose both the
amount(s) of such costs and the line item(s) on the income statement that
included them.
This standard will require a restatement of prior periods for changes in
classification. The Company currently nets its shipping and handling
revenue with the related costs and includes the residual amount as selling
expense. This consensus is effective for the Company beginning with the
fourth quarter of fiscal 2001. The Company is in the process of
quantifying the impact of its adoption, which will not change reported
income from operations or net income.
Page 9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 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 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. We distribute 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 4,480 page master catalog offers over 450,000 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 four distribution centers and approximately 90
branch offices. 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 November 25, 2000 and November 27, 1999
Net sales increased by $28.3 million, or 15.5%, to $211.1 million in the first
quarter of fiscal 2001 from $182.8 million in the first quarter of fiscal 2000.
This increase was primarily attributable to an increase in sales to the
Company's existing customers and an increase in the
Page 10
<PAGE>
number of active customers. 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 $11.3 million, or 15.9%, to $82.5 million in the first
quarter of fiscal 2001 from $71.2 million in the first quarter of fiscal 2000.
The dollar increase in gross profit was primarily attributable to increased
sales. As a percentage of sales, gross profit remained constant at approximately
39%.
Operating expenses increased by $6.0 million, or 11.4%, to $58.8 million in the
first quarter of fiscal 2001 from $52.8 million in the first quarter of fiscal
2000. As a percentage of sales, operating expenses decreased from 28.9% to
27.8%. The decrease was primarily attributable to leveraging fixed costs over a
larger revenue base. The dollar increase was primarily attributable to increased
sales volume which required additional staffing and support, increased
advertising costs, and higher depreciation costs from expenditures for property,
plant and equipment.
Income from operations increased by $5.3 million, or 28.8%, to $23.7 million in
the first quarter of fiscal 2001 from $18.4 million in the first quarter of
fiscal 2000. The increase was primarily attributable to increased sales and the
dollar amount increase in gross profit, offset in part by an increase in
operating expenses.
Interest expense increased by $0.1 million to $1.2 million in the first quarter
of fiscal 2001 from $1.1 million in the first quarter of fiscal 2000. The
increase was primarily attributable to higher long-term notes payable borrowings
and higher interest rates under the Company's revolving credit agreement.
Provision for income taxes and net income: The effective tax rate was 40.0
percent for the first quarter of fiscal 2001 as compared to 39.8% in the prior
year. Net income increased by $3.0 million, or 28.6%, to $13.5 million in the
first quarter of fiscal 2001 from $10.5 million in the first quarter of fiscal
2000. This increase was primarily the result of previously mentioned increases
in sales and the dollar amount increase in gross profit offset in part by an
increase in operating expenses necessary in order to support the increase in
volume and to invest in future growth.
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 immediate future and for at least the next 24 months.
Under the terms of the credit facility, the maximum permitted borrowings are
$160.0 million ($110.0 million under an unsecured revolving credit agreement and
$50.0 million as a term loan). Interest on amounts borrowed may be paid at a
rate per annum equal to the bank's base rate (9.5% at November 25, 2000) 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. This credit facility contains certain
covenants limiting mergers, use of proceeds, indebtedness, liens, investments,
sales of assets, acquisitions, and
Page 11
<PAGE>
issuance of dividends. This credit facility also contains certain standard
financial covenants. As of November 25, 2000, the Company was in compliance with
all financial covenants. As of November 25, 2000, the Company had approximately
$78.8 million in outstanding borrowings under the credit facility. Available
borrowings at November 25, 2000 are $81.2 million, all of which were available
under the revolving credit agreement.
Net cash used in operating activities for the 13 week periods ended November 25,
2000 and November 27, 1999 was $4.0 million and $12.8 million respectively. The
favorable net change of approximately $8.8 million in net cash used in
operations resulted from higher net income and improved net working capital
requirements.
Net cash used in investing activities for the 13 week periods ended November 25,
2000 and November 27, 1999 was $6.1 million and $3.8 million, respectively. The
net usage of cash in the first three months of fiscal 2001 and fiscal 2000 was
primarily attributable to expenditures for property, plant and equipment.
Net cash provided by financing activities was $11.7 million and $17.9 million
for the 13 week periods ended November 25, 2000 and November 27, 1999,
respectively. Net cash provided by financing activities for the first three
months of fiscal 2001 and fiscal 2000 primarily reflected proceeds received from
notes payable.
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.
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 $160.0 million, of which $110.0 million is a revolving
credit agreement and the remaining $50.0 million is a term loan. At November 25,
2000, approximately $78.8 million was outstanding under the credit agreement.
Available borrowings at November 25, 2000 are $81.2 million, all of which were
available under the revolving credit agreement. The agreement bears interest at
the bank's base rate (9.5% at November 25, 2000), 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. If the principal amounts under the Company's credit agreement
remained at this quarter-end level for an entire year and the prime rate
increased or decreased, respectively, by 1%, then the Company would pay or save,
respectively, an additional $0.8 million in interest that year. The Company does
not make material use of derivative financial instruments to hedge against
changes in interest rates or for any other purpose.
Page 12
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
27 Financial data schedule for the quarter ended November 25, 2000.
Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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: January 6, 2001 By: /s/ Mitchell Jacobson
----------------------- -------------------------------------
President and Chief Executive Officer
Dated: January 6, 2001 By: /s/ Charles Boehlke
----------------------- -------------------------------------
Senior Vice President and
Chief Financial Officer
Page 14
