UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-Q
__________________________________________
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(Mark One) |
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 3, 2018 |
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OR |
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For transition period from to
Commission File No.: 1-14130
__________________________________________
MSC INDUSTRIAL DIRECT CO., INC.
(Exact name of registrant as specified in its charter)
__________________________________________
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New York |
11-3289165 |
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75 Maxess Road, Melville, New York |
11747 |
(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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ |
Accelerated filer ☐ |
Non‑accelerated filer ☐ reporting company) |
Smaller reporting company ☐ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of March 26, 2018, 45,858,307 shares of Class A common stock and 10,623,951 shares of Class B common stock of the registrant were outstanding.
SAFE HARBOR STATEMENT
This Quarterly Report on Form 10-Q (the “Report”) contains forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing such forward‑looking statements may be found in Items 2 and 3 of Part I and Item 1 of Part II of this Report, as well as within this Report generally. The words “believes,” “anticipates,” “thinks,” “expects,” “estimates,” “plans,” “intends,” and similar expressions are intended to identify forward‑looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward‑looking statements. We undertake no obligation to publicly disclose any revisions to these forward‑looking statements to reflect events or circumstances occurring subsequent to filing this Report with the Securities and Exchange Commission (the “SEC”). These forward‑looking statements are subject to risks and uncertainties, including, without limitation, those discussed in this section and Items 2 and 3 of Part I, as well as in Part II, Item 1A, “Risk Factors” of this Report, and in Part I, Item 1A, “Risk Factors” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended September 2, 2017. In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Accordingly, future results may differ materially from historical results or from those discussed or implied by these forward‑looking statements. Given these risks and uncertainties, the reader should not place undue reliance on these forward‑looking statements. These risks and uncertainties include, but are not limited to:
· |
general economic conditions in the markets in which the Company operates; |
· |
changing customer and product mixes; |
· |
competition, including the adoption by competitors of aggressive pricing strategies and sales methods; |
· |
industry consolidation and other changes in the industrial distribution sector; |
· |
volatility in commodity and energy prices; |
· |
the outcome of government or regulatory proceedings or future litigation; |
· |
credit risk of our customers; |
· |
risk of cancellation or rescheduling of customer orders; |
· |
work stoppages or other business interruptions (including those due to extreme weather conditions) at transportation centers, shipping ports, our headquarters or our customer fulfillment centers; |
· |
dependence on our information systems and the risks of business disruptions arising from changes to our information systems and disruptions due to catastrophic events, power outages, natural disasters, computer system or network failures, computer viruses, physical or electronic break-ins and cyberattacks; |
· |
retention of key personnel; |
· |
risk of loss of key suppliers, key brands or supply chain disruptions; |
· |
risks associated with changes to trade policies; |
· |
failure to comply with applicable environmental, health and safety laws and regulations; |
· |
goodwill and intangible assets recorded resulting from our acquisitions could be impaired; |
· |
risks associated with the integration of acquired businesses or other strategic transactions; and |
· |
financial restrictions on outstanding borrowings. |
2
MSC INDUSTRIAL DIRECT CO., INC.
INDEX
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Page |
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Item 1. |
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Condensed Consolidated Balance Sheets as of March 3, 2018 and September 2, 2017 |
4 |
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5 | |
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6 | |
|
7 | |
|
8 | |
|
9 | |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
18 |
Item 3. |
26 | |
Item 4. |
26 | |
Item 1. |
26 | |
Item 1A. |
26 | |
Item 2. |
27 | |
Item 3. |
27 | |
Item 4. |
27 | |
Item 5. |
27 | |
Item 6. |
28 | |
29 |
3
Item 1. Condensed Consolidated Financial Statements
MSC INDUSTRIAL DIRECT CO., INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
|
|||||
|
March 3, |
September 2, |
|||
|
2018 |
2017 |
|||
|
(Unaudited) |
||||
ASSETS |
|||||
Current Assets: |
|||||
Cash and cash equivalents |
$ |
31,608 |
$ |
16,083 | |
Accounts receivable, net of allowance for doubtful accounts of $13,456 and $13,278, respectively |
|
501,067 |
|
|
471,795 |
Inventories |
498,987 | 464,959 | |||
Prepaid expenses and other current assets |
56,253 | 52,742 | |||
Total current assets |
1,087,915 | 1,005,579 | |||
Property, plant and equipment, net |
308,124 | 316,305 | |||
Goodwill |
633,405 | 633,728 | |||
Identifiable intangibles, net |
105,306 | 110,429 | |||
Other assets |
30,472 | 32,871 | |||
Total assets |
$ |
2,165,222 |
$ |
2,098,912 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|||||
Current Liabilities: |
|||||
Short-term debt |
$ |
260,347 |
$ |
331,986 | |
Accounts payable |
133,688 | 121,266 | |||
Accrued liabilities |
100,400 | 104,473 | |||
Total current liabilities |
494,435 | 557,725 | |||
Long-term debt |
250,896 | 200,991 | |||
Deferred income taxes and tax uncertainties |
73,856 | 115,056 | |||
Total liabilities |
819,187 | 873,772 | |||
Commitments and Contingencies |
|||||
Shareholders’ Equity: |
|||||
Preferred stock; $0.001 par value; 5,000,000 shares authorized; none issued and outstanding |
|
— |
|
|
— |
Class A common stock (one vote per share); $0.001 par value; 100,000,000 shares authorized; 55,050,160 and 53,513,806 shares issued, respectively |
|
55 |
|
|
54 |
Class B common stock (ten votes per share); $0.001 par value; 50,000,000 shares authorized; 10,623,951 and 11,850,636 shares issued and outstanding, respectively |
|
11 |
|
|
12 |
Additional paid-in capital |
652,440 | 626,995 | |||
Retained earnings |
1,285,681 | 1,168,812 | |||
Accumulated other comprehensive loss |
(18,079) | (17,263) | |||
Class A treasury stock, at cost, 9,191,853 and 8,972,729 shares, respectively |
(574,073) | (553,470) | |||
Total shareholders’ equity |
1,346,035 | 1,225,140 | |||
Total liabilities and shareholders’ equity |
$ |
2,165,222 |
$ |
2,098,912 | |
|
|||||
See accompanying notes to condensed consolidated financial statements. |
|||||
|
4
MSC INDUSTRIAL DIRECT CO., INC.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
|
|||||||||||||
|
Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
|||||||||||
|
March 3, |
March 4, |
March 3, |
March 4, |
|||||||||
|
2018 |
2017 |
2018 |
2017 |
|||||||||
Net sales |
$ |
768,987 |
$ |
703,780 |
$ |
1,537,548 |
$ |
1,390,051 | |||||
Cost of goods sold |
431,764 | 389,218 | 865,256 | 766,754 | |||||||||
Gross profit |
337,223 | 314,562 | 672,292 | 623,297 | |||||||||
Operating expenses |
239,120 | 227,917 | 474,911 | 446,052 | |||||||||
Income from operations |
98,103 | 86,645 | 197,381 | 177,245 | |||||||||
Other (expense) income: |
|||||||||||||
Interest expense |
(3,550) | (2,950) | (6,787) | (5,884) | |||||||||
Interest income |
213 | 164 | 376 | 327 | |||||||||
Other (expense) income, net |
77 | (54) | (331) | (338) | |||||||||
Total other expense |
(3,260) | (2,840) | (6,742) | (5,895) | |||||||||
Income before provision for income taxes |
94,843 | 83,805 | 190,639 | 171,350 | |||||||||
(Benefit) provision for income taxes |
(22,709) | 30,246 | 13,502 | 63,503 | |||||||||
Net income |
$ |
117,552 |
$ |
53,559 |
$ |
177,137 |
$ |
107,847 | |||||
Per share information: |
|||||||||||||
Net income per common share: |
|||||||||||||
Basic |
$ |
2.08 |
$ |
0.94 |
$ |
3.14 |
$ |
1.90 | |||||
Diluted |
$ |
2.06 |
$ |
0.93 |
$ |
3.12 |
$ |
1.89 | |||||
Weighted average shares used in computing net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
56,439 | 56,620 | 56,363 | 56,500 | |||||||||
Diluted |
56,892 | 57,213 | 56,698 | 56,910 | |||||||||
Cash dividends declared per common share |
$ |
0.58 |
$ |
0.45 |
$ |
1.06 |
$ |
0.90 | |||||
|
|||||||||||||
See accompanying notes to condensed consolidated financial statements. |
5
MSC INDUSTRIAL DIRECT CO., INC.
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
|
Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
||||||||||
|
March 3, |
March 4, |
March 3, |
March 4, |
||||||||
|
2018 |
2017 |
2018 |
2017 |
||||||||
Net income, as reported |
$ |
117,552 |
$ |
53,559 |
$ |
177,137 |
$ |
107,847 | ||||
Foreign currency translation adjustments |
27 | (701) | (816) | (2,248) | ||||||||
Comprehensive income |
$ |
117,579 |
$ |
52,858 |
$ |
176,321 |
$ |
105,599 | ||||
|
||||||||||||
See accompanying notes to condensed consolidated financial statements. |
6
MSC INDUSTRIAL DIRECT CO., INC.
Condensed Consolidated Statement of Shareholders’ Equity
Twenty-Six Weeks Ended March 3, 2018
(In thousands)
(Unaudited)
|
|
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|
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|
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|
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Class A |
|
Class B |
|
Additional |
|
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|
|
Accumulated |
|
Class A |
|
|
|
|||||||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Paid-In Capital |
|
Retained |
|
Comprehensive |
|
Shares |
|
Amount |
|
Total |
|||||||
Balance at September 2, 2017 |
|
53,514 |
|
$ |
54 |
|
11,851 |
|
$ |
12 |
|
$ |
626,995 |
|
$ |
1,168,812 |
|
$ |
(17,263) |
|
8,973 |
|
$ |
(553,470) |
|
$ |
1,225,140 |
Exchange of Class B common stock for Class A common stock |
|
1,227 |
|
|
1 |
|
(1,227) |
|
|
(1) |
|
|
— |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
Exercise of common stock options |
|
232 |
|
|
— |
|
— |
|
|
— |
|
|
16,393 |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
16,393 |
Common stock issued under associate stock purchase plan |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
1,251 |
|
|
— |
|
|
— |
|
(30) |
|
|
1,125 |
|
|
2,376 |
Issuance of restricted common stock, net of cancellations |
|
(3) |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
Shares issued upon vesting of restricted stock units, including dividend equivalent units |
|
80 |
|
|
— |
|
— |
|
|
— |
|
|
212 |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
212 |
Stock-based compensation |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
7,589 |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
7,589 |
Repurchases of common stock |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
249 |
|
|
(21,728) |
|
|
(21,728) |
Net income |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
177,137 |
|
|
— |
|
— |
|
|
— |
|
|
177,137 |
Cash dividends on Class A common stock |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
(47,687) |
|
|
— |
|
— |
|
|
— |
|
|
(47,687) |
Cash dividends on Class B common stock |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
(12,186) |
|
|
— |
|
— |
|
|
— |
|
|
(12,186) |
Dividend equivalent units declared, net of cancellations |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
(395) |
|
|
— |
|
— |
|
|
— |
|
|
(395) |
Foreign currency translation adjustment |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(816) |
|
— |
|
|
— |
|
|
(816) |
Balance at March 3, 2018 |
|
55,050 |
|
$ |
55 |
|
10,624 |
|
$ |
11 |
|
$ |
652,440 |
|
$ |
1,285,681 |
|
$ |
(18,079) |
|
9,192 |
|
$ |
(574,073) |
|
$ |
1,346,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
|
See accompanying notes to condensed consolidated financial statements. |
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7
MSC INDUSTRIAL DIRECT CO., INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended |
||||
|
|
March 3, |
|
March 4, |
||
|
|
2018 |
|
2017 |
||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
Net income |
|
$ |
177,137 |
|
$ |
107,847 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
|
31,307 |
|
|
30,815 |
Stock-based compensation |
|
|
7,589 |
|
|
6,925 |
Loss on disposal of property, plant, and equipment |
|
|
178 |
|
|
333 |
Provision for doubtful accounts |
|
|
3,407 |
|
|
3,415 |
Deferred income taxes and tax uncertainties |
|
|
(41,199) |
|
|
— |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
|
(32,461) |
|
|
(41,680) |
Inventories |
|
|
(33,648) |
|
|
(21,289) |
Prepaid expenses and other current assets |
|
|
(3,457) |
|
|
(343) |
Other assets |
|
|
2,330 |
|
|
1,056 |
Accounts payable and accrued liabilities |
|
|
7,004 |
|
|
9,577 |
Total adjustments |
|
|
(58,950) |
|
|
(11,191) |
Net cash provided by operating activities |
|
|
118,187 |
|
|
96,656 |
Cash Flows from Investing Activities: |
|
|
|
|
|
|
Expenditures for property, plant and equipment |
|
|
(17,261) |
|
|
(25,508) |
Cash used in business acquisition |
|
|
(738) |
|
|
— |
Net cash used in investing activities |
|
|
(17,999) |
|
|
(25,508) |
Cash Flows from Financing Activities: |
|
|
|
|
|
|
Repurchases of common stock |
|
|
(21,728) |
|
|
(3,377) |
Payments of cash dividends |
|
|
(59,873) |
|
|
(51,010) |
Proceeds from sale of Class A common stock in connection with associate stock purchase plan |
|
|
2,376 |
|
|
2,196 |
Proceeds from exercise of Class A common stock options |
|
|
16,393 |
|
|
21,933 |
Borrowings under Credit Facility |
|
|
74,000 |
|
|
78,000 |
Borrowings under Shelf Facility Agreement |
|
|
50,000 |
|
|
— |
Payments of notes payable and revolving credit note under the Credit Facility |
|
|
(146,000) |
|
|
(136,000) |
Other, net |
|
|
71 |
|
|
(36) |
Net cash used in financing activities |
|
|
(84,761) |
|
|
(88,294) |
Effect of foreign exchange rate changes on cash and cash equivalents |
|
|
98 |
|
|
(142) |
Net increase (decrease) in cash and cash equivalents |
|
|
15,525 |
|
|
(17,288) |
Cash and cash equivalents—beginning of period |
|
|
16,083 |
|
|
52,890 |
Cash and cash equivalents—end of period |
|
$ |
31,608 |
|
$ |
35,602 |
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
50,279 |
|
$ |
58,737 |
Cash paid for interest |
|
$ |
6,553 |
|
$ |
5,524 |
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements. |
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8
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
The accompanying condensed consolidated financial statements include MSC Industrial Direct Co., Inc. (“MSC”) and all its subsidiaries (hereinafter referred to collectively as the “Company”). All intercompany balances and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (including normal recurring adjustments) have been included. Operating results for the thirteen and twenty-six-week periods ended March 3, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending September 1, 2018. For further information, refer to the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 2, 2017.
The Company’s fiscal year ends on the Saturday closest to August 31 of each year. Unless the context requires otherwise, references to years contained herein pertain to the Company’s fiscal year. The Company’s 2018 fiscal year will be a 52-week accounting period that will end on September 1, 2018 and its 2017 fiscal year was a 52-week accounting period that ended on September 2, 2017.
Recently Adopted Accounting Pronouncements
Simplifying the Measurement of Inventory
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330), which requires an entity to measure inventory at the lower of cost and net realizable value, which consists of the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For public entities, the updated guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The guidance is to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company adopted ASU 2015-11 during the first quarter of fiscal 2018 and the adoption did not have any impact on its consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
Income Statement - Reporting Comprehensive Income
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). This ASU provides guidance on a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for the effect of the tax rate change resulting from the Tax Cuts and Jobs Act (H.R.1) (the "Tax Reform Act"). The amendments eliminate the stranded tax effects resulting from the Tax Reform Act and will improve the usefulness of information reported to financial statement users. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. This ASU is effective for the Company in the first quarter of fiscal 2020. The Company is currently evaluating this standard which is not expected to have a material impact on its consolidated financial statements.
Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 in the goodwill impairment test that required an entity to calculate the implied fair value of goodwill. An entity will now apply a one-step quantitative test and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 will be applied prospectively and is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019. The new standard is effective for the Company for its fiscal 2021 fourth quarter goodwill impairment test. Early adoption is permitted for annual and interim goodwill impairment
9
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
Business Combinations
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations – Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition of a business to assist entities with evaluating when a set of transferred assets and activities is considered a business. The amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard is effective for the Company for its fiscal year 2019, with early adoption permitted. The amendments are to be applied prospectively to business combinations that occur after the effective date.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability by providing additional information to users of financial statements regarding an entity’s leasing activities. ASU 2016-02 requires reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. ASU 2016-02 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2018. The new standard is effective for the Company for its fiscal year 2020. The guidance will be applied on a modified retrospective basis beginning with the earliest period presented. The Company is currently evaluating this standard to determine the impact of adoption on its consolidated financial statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company for its fiscal year 2019. Early adoption is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. To date, the Company has performed a preliminary detailed review of key contracts and compared historical accounting policies and practices to the new standard. While the Company is still evaluating this standard, it is not expected that this standard will have a material impact on the Company’s consolidated financial statements. The Company will continue to evaluate ASU 2014-09 and other amendments and related interpretive guidance through the date of adoption. The Company expects to adopt ASU 2014-09 under the modified retrospective approach in the first quarter of fiscal 2019.
Reclassification
Certain items have been reclassified from the prior year to conform to the current year presentation.
Note 2. Net Income per Share
The Company’s non-vested restricted stock awards contain non-forfeitable rights to dividends and meet the criteria of a participating security as defined by Accounting Standards Codification (“ASC”) Topic 260, “Earnings Per Share”. Under the two-class method, net income per share is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, net income is allocated to both common shares and participating securities based on their respective weighted average shares outstanding for the period. The following table sets forth the computation of basic and diluted net income per common share under the two-class method for the thirteen and twenty-six weeks ended March 3, 2018 and March 4, 2017, respectively:
10
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
Twenty-Six Weeks Ended |
||||||||
|
|
March 3, |
|
March 4, |
|
March 3, |
|
March 4, |
||||
|
|
2018 |
|
2017 |
|
2018 |
|
2017 |
||||
Net income as reported |
|
$ |
117,552 |
|
$ |
53,559 |
|
$ |
177,137 |
|
$ |
107,847 |
Less: Distributed net income available to participating securities |
|
|
(22) |
|
|
(36) |
|
|
(59) |
|
|
(113) |
Less: Undistributed net income available to participating securities |
|
|
(105) |
|
|
(84) |
|
|
(197) |
|
|
(199) |
Numerator for basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed and distributed net income available to common shareholders |
|
$ |
117,425 |
|
$ |
53,439 |
|
$ |
176,881 |
|
$ |
107,535 |
Add: Undistributed net income allocated to participating securities |
|
|
105 |
|
|
84 |
|
|
197 |
|
|
199 |
Less: Undistributed net income reallocated to participating securities |
|
|
(104) |
|
|
(83) |
|
|
(196) |
|
|
(197) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed and distributed net income available to common shareholders |
|
$ |
117,426 |
|
$ |
53,440 |
|
$ |
176,882 |
|
$ |
107,537 |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic net income per share |
|
|
56,439 |
|
|
56,620 |
|
|
56,363 |
|
|
56,500 |
Effect of dilutive securities |
|
|
453 |
|
|
593 |
|
|
335 |
|
|
410 |
Weighted average shares outstanding for diluted net income per share |
|
|
56,892 |
|
|
57,213 |
|
|
56,698 |
|
|
56,910 |
Net income per share Two-class method: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.08 |
|
$ |
0.94 |
|
$ |
3.14 |
|
$ |
1.90 |
Diluted |
|
$ |
2.06 |
|
$ |
0.93 |
|
$ |
3.12 |
|
$ |
1.89 |
There were no antidilutive stock options included in the computation of diluted earnings per share for the thirteen and twenty-six-week periods ended March 3, 2018 and March 4, 2017, respectively.
Note 3. Stock-Based Compensation
The Company accounts for all share-based payments in accordance with ASC Topic 718, "Compensation—Stock Compensation" ("ASC 718"). Stock‑based compensation expense included in operating expenses for the thirteen and twenty-six-week periods ended March 3, 2018 and March 4, 2017 was as follows:
|
Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
||||||||||
|
March 3, |
March 4, |
March 3, |
March 4, |
||||||||
|
2018 |
2017 |
2018 |
2017 |
||||||||
Stock options |
$ |
1,128 |
$ |
1,075 |
$ |
2,322 |
$ |
2,187 | ||||
Restricted share awards |
670 | 1,012 | 1,572 | 2,334 | ||||||||
Restricted stock units |
1,821 | 1,233 | 3,575 | 2,275 | ||||||||
Associate Stock Purchase Plan |
76 | 67 | 120 | 129 | ||||||||
Total |
3,695 | 3,387 | 7,589 | 6,925 | ||||||||
Deferred income tax benefit |
(1,083) | (1,288) | (2,224) | (2,632) | ||||||||
Stock-based compensation expense, net |
$ |
2,612 |
$ |
2,099 |
$ |
5,365 |
$ |
4,293 |
11
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Stock options
The fair value of each option grant is estimated on the date of grant using the Black‑Scholes option pricing model with the following assumptions:
|
Twenty-Six Weeks Ended |
|||||
|
March 3, |
March 4, |
||||
|
2018 |
2017 |
||||
Expected life (in years) |
4.0 | 4.1 | ||||
Risk-free interest rate |
1.87 |
% |
1.16 |
% |
||
Expected volatility |
22.13 |
% |
20.50 |
% |
||
Expected dividend yield |
2.30 |
% |
2.40 |
% |
||
Weighted-average grant-date fair value |
$12.25 | $9.29 |
A summary of the Company’s stock option activity for the twenty-six-week period ended March 3, 2018 is as follows:
|
Options |
|
Weighted-Average Exercise Price per Share |
|
Weighted-Average Remaining Contractual Term (in years) |
|
Aggregate Intrinsic Value |
||
Outstanding on September 2, 2017 |
1,743 |
$ |
70.88 | ||||||
Granted |
436 | 79.60 | |||||||
Exercised |
(232) | 70.80 | |||||||
Canceled/Forfeited |
(31) | 72.68 | |||||||
Outstanding on March 3, 2018 |
1,916 |
$ |
72.85 | 4.8 |
$ |
26,947 | |||
Exercisable on March 3, 2018 |
764 |
$ |
73.60 | 3.6 |
$ |
10,167 |
The unrecognized share‑based compensation cost related to stock option expense at March 3, 2018 was $9,912 and will be recognized over a weighted average period of 2.6 years. The total intrinsic value of options exercised, which represents the difference between the exercise price and market value of common stock measured at each individual exercise date, during the twenty-six-week periods ended March 3, 2018 and March 4, 2017 was $5,283 and $9,100, respectively.
Restricted share awards
A summary of the non‑vested restricted share award (“RSA”) activity under the Company’s 2005 Omnibus Incentive Plan and 2015 Omnibus Incentive Plan for the twenty-six-week period ended March 3, 2018 is as follows:
|
Shares |
|
Weighted-Average Grant-Date Fair Value |
|
Non-vested restricted share awards at September 2, 2017 |
160 |
$ |
80.49 | |
Granted |
— |
— |
||
Vested |
(88) | 79.36 | ||
Canceled/Forfeited |
(3) | 82.27 | ||
Non-vested restricted share awards at March 3, 2018 |
69 |
$ |
81.75 |
The fair value of each RSA is the closing stock price on the New York Stock Exchange of the Company’s Class A common stock on the date of grant. Upon vesting, a portion of the RSA award may be withheld to satisfy the statutory income tax withholding obligation. The remaining RSAs will be settled in shares of the Company’s Class A common stock when vested. The unrecognized compensation cost related to RSAs at March 3, 2018 was $3,259 and will be recognized over a weighted average period of 1.4 years.
12
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
Restricted stock units
A summary of the Company’s non-vested Restricted Stock Unit (“RSU”) award activity for the twenty-six-week period ended March 3, 2018 is as follows:
|
Shares |
|
Weighted-Average Grant-Date Fair Value |
|
Non-vested restricted stock unit awards at September 2, 2017 |
313 |
$ |
66.66 | |
Granted |
166 | 81.00 | ||
Vested |
(78) | 66.60 | ||
Canceled/Forfeited |
(13) | 71.56 | ||
Non-vested restricted stock unit awards at March 3, 2018 |
388 |
$ |
72.65 |
The fair value of each RSU is the closing stock price on the New York Stock Exchange of the Company’s Class A common stock on the date of grant. Upon vesting, a portion of the RSU award may be withheld to satisfy the statutory income tax withholding obligation. The remaining RSUs will be settled in shares of the Company’s Class A common stock when vested. These awards accrue dividend equivalents on outstanding units (in the form of additional stock units) based on dividends declared on the Company’s Class A common stock and these dividend equivalents convert to unrestricted common stock on the vesting dates of the underlying RSUs. The dividend equivalents are not included in the RSU table above. The unrecognized compensation cost related to the RSUs at March 3, 2018 was $22,955 and is expected to be recognized over a weighted average period of 3.7 years.
Note 4. Fair Value
Fair value accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value into three levels, with Level 1 being of the highest priority. The three levels of inputs used to measure fair value are as follows:
|
Level 1— |
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|
Level 2— |
Include other inputs that are directly or indirectly observable in the marketplace. |
|
Level 3— |
Unobservable inputs which are supported by little or no market activity. |
In connection with the construction of the Company’s customer fulfillment center in Columbus, Ohio, the Company entered into an arrangement during fiscal 2013 with the Columbus-Franklin County Finance Authority (“Finance Authority”) which provides savings on state and local sales taxes imposed on construction materials purchased by entities that finance the transactions through them. Under this arrangement, the Finance Authority issued taxable bonds to finance the structure and site improvements of the Company’s customer fulfillment center. The bonds ($27,025 outstanding at both March 3, 2018 and September 2, 2017) are classified as available for sale securities in accordance with ASC Topic 320. The securities are recorded at fair value in Other Assets in the Condensed Consolidated Balance Sheet. The fair values of these securities are based on observable inputs in non-active markets, which are therefore classified as Level 2 in the hierarchy. The Company did not record any gains or losses on these securities during the thirteen and twenty-six-week periods ended March 3, 2018. The outstanding principal amount of each bond bears interest at the rate of 2.4% per year. Interest is payable on a semiannual basis in arrears on each interest payment date.
In addition, based on borrowing rates currently available to the Company for borrowings with similar terms, the carrying values of the Company’s capital lease obligations also approximate fair value. The fair value of the Company’s short-term and long-term debt is estimated based on quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. The carrying amount of the Company’s debt at March 3, 2018 approximates its fair value.
The Company’s financial instruments, other than those presented in the disclosure above, include cash, receivables, accounts payable, and accrued liabilities. Management believes the carrying amount of the aforementioned financial
13
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
instruments is a reasonable estimate of fair value as of March 3, 2018 and September 2, 2017 due to the short-term maturity of these items.
During the twenty-six weeks ended March 3, 2018 and March 4, 2017, the Company had no remeasurements of non-financial assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition.
Note 5. Debt and Capital Lease Obligations
Debt at March 3, 2018 and September 2, 2017 consisted of the following:
|
March 3, |
September 2, |
||||
|
2018 |
2017 |
||||
|
(Dollars in thousands) |
|||||
Revolving Credit Facility |
$ |
260,000 |
$ |
332,000 | ||
Private Placement Debt: |
||||||
Senior notes, series A |
75,000 | 75,000 | ||||
Senior notes, series B |
100,000 | 100,000 | ||||
Shelf Facility Agreement |
50,000 |
- |
||||
Capital lease and financing obligations |
28,017 | 27,829 | ||||
Subtotal |
$ |
513,017 |
$ |
534,829 | ||
Less: unamortized debt issuance costs |
(1,774) | (1,852) | ||||
Total debt |
$ |
511,243 |
$ |
532,977 | ||
Less: short-term debt(1) |
(260,347) | (331,986) | ||||
Long-term debt |
$ |
250,896 |
$ |
200,991 |
____________________
(1) |
Net of unamortized debt issuance costs expected to be amortized in the next twelve months. |
Credit Facility
In April 2017, the Company entered into a $600,000 credit facility (the “Credit Facility”). The Credit Facility, which matures on April 14, 2022, provides for a five-year unsecured revolving loan facility in the aggregate amount of $600,000.
The Credit Facility permits up to $50,000 to be used to fund letters of credit. The Credit Facility also permits the Company to request one or more incremental term loan facilities and/or increase the revolving loan commitments in an aggregate amount not to exceed $300,000. Subject to certain limitations, each such incremental term loan facility or revolving commitment increase will be on terms as agreed to by the Company, the Administrative Agent and the lenders providing such financing.
Borrowings under the Credit Facility bear interest, at the Company’s option, either at (i) the LIBOR (London Interbank Offered Rate) rate plus the applicable margin for LIBOR loans ranging from 1.00% to 1.375%, based on the Company’s consolidated leverage ratio; or (ii) the greatest of (a) the Administrative Agent’s prime rate in effect on such day, (b) the federal funds effective rate in effect on such day, plus 0.50%, and (c) the LIBOR rate that would be calculated as of such day in respect of a proposed LIBOR loan with a one-month interest period, plus 1.00%, plus, in the case of each of clauses (a) through (c), an applicable margin ranging from 0.00% to 0.375%, based on the Company’s consolidated leverage ratio. The Company is required to pay a quarterly undrawn fee ranging from 0.10% to 0.20% per annum on the unutilized portion of the Credit Facility, based on the Company’s consolidated leverage ratio. The Company is also required to pay quarterly letter of credit usage fees ranging between 1.00% to 1.375% (based on the Company’s consolidated leverage ratio) on the amount of the daily average outstanding letters of credit, and a quarterly fronting fee of 0.125% per annum on the undrawn and unexpired amount of each letter of credit. The weighted average applicable borrowing rate for the Company for any borrowings outstanding under the Credit Facility at March 3, 2018 was 2.75% which represents LIBOR plus 1.125%. Based on the interest period the Company selects, interest may be payable every one, two, or three months. Interest is reset at the end of each interest period. The Company currently elects to have loans under the Credit Facility bear interest based on LIBOR with one-month interest periods.
14
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
During the twenty-six-week period ended March 3, 2018, the Company borrowed $74,000 and repaid $146,000 under the revolving loan facility.
Private Placement Debt
In July 2016, in connection with the Company’s “modified Dutch auction” tender offer, the Company completed the issuance and sale of the following unsecured senior notes (collectively “Private Placement Debt”):
· |
$75,000 aggregate principal amount of 2.65% Senior Notes, Series A, due July 28, 2023 (“Senior notes, series A”); and |
· |
$100,000 aggregate principal amount of 2.90% Senior Notes, Series B, due July 28, 2026 (“Senior notes, series B”). |
The Private Placement Debt is due, in full, on the stated maturity dates. Interest is payable semiannually at the fixed stated interest rates.
Shelf Facility Agreements
In January 2018, the Company entered into Note Purchase and Private Shelf Agreements with Metropolitan Life Insurance Company (“Met Life Note Purchase Agreement”) and PGIM, Inc. (“Prudential Note Purchase Agreement” and together with the Met Life Note Purchase Agreement, the “Shelf Facility Agreements”).
The Met Life Note Purchase Agreement provides for an uncommitted facility for the issuance and sale of up to an aggregate total of $250,000 of senior notes, at either fixed or floating rates. As of March 3, 2018, the Company has not issued any notes under the Met Life Note Purchase Agreement.
The Prudential Note Purchase Agreement provides for an uncommitted facility for the issuance and sale of up to an aggregate total of $250,000 of senior notes, at a fixed rate. In January 2018, the Company completed the issuance and sale of $50,000 aggregate principal amount of 3.04% per annum and payable semiannually Senior Notes due January 12, 2023 under the Prudential Note Purchase Agreement in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. The proceeds from the issuance and sale of the Prudential Senior Notes have been used to pay a portion of the revolving loans outstanding under the Credit Facility. As of March 3, 2018, the aggregate availability under the Prudential Note Purchase Agreement is $200,000.
Each of the Credit Facility, Private Placement Debt, and Shelf Facility Agreements contain several restrictive covenants including the requirement that the Company maintain a maximum consolidated leverage ratio of total indebtedness to EBITDA (earnings before interest expense, taxes, depreciation, amortization and stock-based compensation) of no more than 3.00 to 1.00 (or, at the election of the Company after it consummates a material acquisition, a four-quarter temporary increase to 3.50 to 1.00), and a minimum consolidated interest coverage ratio of EBITDA to total interest expense of at least 3.00 to 1.00, during the terms of the Credit Facility, Private Placement Debt and Shelf Facility Agreements.
At March 3, 2018, the Company was in compliance with the operating and financial covenants of the Credit Facility, Private Placement Debt, and Shelf Facility Agreements.
Capital Lease and Financing Obligations
In connection with the construction of the Company’s customer fulfillment center in Columbus, Ohio, the Finance Authority holds the title to the building and entered into a long-term lease with the Company. The lease has a 20-year term with a prepayment option without penalty between 7 and 20 years. At the end of the lease term, the building’s title is transferred to the Company for a nominal amount when the principal of and interest on the bonds have been fully paid. The lease has been classified as a capital lease in accordance with ASC Topic 840. At March 3, 2018 and September 2, 2017, the capital lease obligation was approximately $27,025.
15
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
From time to time, the Company enters into capital leases and financing arrangements with vendors to purchase certain IT equipment or software. The equipment or software acquired from these vendors is paid over a specified period of time based on the terms agreed upon. During the twenty-six-week period ended March 3, 2018, the Company entered into a financing obligation for certain software totaling $721. The gross amount of property and equipment acquired under this financing obligation and its accumulated amortization at March 3, 2018 was approximately $721 and $301, respectively.
Note 6. Shareholders’ Equity
The Company paid cash dividends of $1.06 per common share totaling $59,873 for the twenty-six weeks ended March 3, 2018. For the twenty-six weeks ended March 4, 2017, the Company paid cash dividends of $0.90 per common share totaling $51,010. On April 5, 2018, the Board of Directors declared a quarterly cash dividend of $0.58 per share payable on May 1, 2018 to shareholders of record at the close of business on April 17, 2018. The dividend will result in a payout of approximately $32,760, based on the number of shares outstanding at March 26, 2018.
The Board of Directors established the MSC Stock Repurchase Plan (the “Repurchase Plan”) which allows the Company to repurchase shares at any time and in such amounts as it deems appropriate in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. During the twenty-six-week period ended March 3, 2018, the Company repurchased 249 shares of its Class A common stock for $21,728, which is reflected at cost as treasury stock in the accompanying condensed consolidated financial statements. Of these shares, 53 shares were repurchased by the Company to satisfy the Company’s associates’ tax withholding liability associated with its share-based compensation program. On January 9, 2018, the Board of Directors authorized the repurchase of an additional 2,000 shares of Class A common stock under the Company’s ongoing Repurchase Plan, increasing the total number of shares of Class A common stock authorized for future repurchase to approximately 2,600 shares at March 3, 2018.
Note 7. Product Warranties
The Company generally offers a maximum one-year warranty, including parts and labor, for some of its machinery products. The specific terms and conditions of those warranties vary depending upon the product sold. The Company may be able to recoup some of these costs through product warranties it holds with its original equipment manufacturers, which typically range from thirty to ninety days. In general, many of the Company’s general merchandise products are covered by third-party original equipment manufacturers’ warranties. The Company’s warranty expense for the thirteen and twenty-six-week periods ended March 3, 2018 and March 4, 2017 was minimal.
Note 8. Income Taxes
On December 22, 2017, the Tax Reform Act was enacted. The Tax Reform Act made significant changes to U.S. federal income tax laws including permanently lowering the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. As the Company has a fiscal August year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory rate of 25.7% for the fiscal year ending September 1, 2018. The Company’s statutory federal tax rate will be 21.0% for fiscal years 2019 and beyond. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118, which allows a company to report provisional numbers related to the Tax Reform Act and adjust those amounts during a measurement period not to extend beyond one year. For the thirteen and twenty-six-week periods ended March 3, 2018, the Company recorded a one-time provisional net tax benefit of $41,199 due to the revaluation of its net deferred tax liabilities primarily related to the lower federal corporate tax rate, partially offset by the lower federal benefit for state taxes and the change from a worldwide tax system to a territorial tax system. In addition, applying the reduced effective tax rate of 29.3%, including state taxes and which excludes discrete items, to our first and second fiscal quarter earnings resulted in a $16,929 reduction to tax expense.
The amounts recorded are provisional and are subject to change due to further interpretations of the Tax Reform Act, legislative action to address questions that arise because of the Tax Reform Act, and/or any updates or changes to estimates the Company has utilized to calculate the impacts, such as return to accrual adjustments and/or changes to current year earnings estimates and the Company’s ongoing analysis of the Tax Reform Act.
16
MSC INDUSTRIAL DIRECT CO., INC.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts and shares in thousands, except per share data)
(Unaudited)
During the twenty-six-week period ended March 3, 2018, there were no material changes in unrecognized tax benefits.
Note 9. Legal Proceedings
There are various claims, lawsuits, and pending actions against the Company incidental to the operation of its business. Although the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.
17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is intended to update the information contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 2, 2017 and presumes that readers have access to, and will have read, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in such Annual Report on Form 10-K.
Overview
MSC Industrial Direct Co., Inc. (together with its subsidiaries, “MSC,” the “Company,” “we,” “our,” or “us”) is a leading North American distributor of a broad range of metalworking and maintenance, repair, and operations (“MRO”) products and services. We help our customers drive greater productivity, profitability and growth with more than 1.6 million products, inventory management and other supply chain solutions, and deep expertise from more than 75 years of working with customers across industries. We continue to implement our strategies to gain market share, generate new customers, increase sales to existing customers, and diversify our customer base.
We offer approximately 1,601,000 active, saleable stock-keeping units (“SKUs”) through our catalogs; brochures; eCommerce channels, including our website, mscdirect.com (“MSC website”); our inventory management solutions; and call-centers and branches. We service our customers from 12 customer fulfillment centers (eight customer fulfillment centers are located within the United States which includes five primary customer fulfillment centers, one is located in the United Kingdom (the “U.K.”), and three are in Canada) and 93 branch offices. Many of our products are carried in stock, and orders for these in-stock products are typically fulfilled the day on which the order is received.
Our business model focuses on providing overall procurement cost reduction and just-in-time delivery to meet our customers’ needs. We focus on offering inventory, process and procurement solutions that reduce MRO supply chain costs and improve plant floor productivity for our customers. We will seek to continue to achieve cost reduction throughout our business through cost-saving strategies and increased leverage from our existing infrastructure, and continue to provide additional procurement cost-savings solutions to our customers through technology such as our Customer Managed Inventory (“CMI”), Vendor Managed Inventory (“VMI”), and vending programs.
Our field sales and service associate headcount was 2,285 at March 3, 2018, compared to 2,352 at March 4, 2017. We will continue to manage our sales and service headcount based on economic conditions and our business plans.
Recent Developments
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). The Tax Reform Act transitions the U.S. tax system to a new territorial system and lowers the statutory federal corporate income tax rate from 35% to 21%. The reduction of the statutory federal corporate tax rate to 21% became effective on January 1, 2018. In fiscal 2018, we expect our U.S. blended federal statutory income tax rate to be approximately 25.7%, which will be reduced to 21.0% in fiscal 2019 and thereafter.
As a result of the Tax Reform Act, we recorded a reduction to tax expense of approximately $16.9 million on our Consolidated Condensed Statements of Operations for the thirteen and twenty-six-week periods ended March 3, 2018 after applying the reduced blended effective tax rate of 29.3%, including state taxes and which excludes discrete items. We revalued our net deferred tax liabilities primarily related to the lower federal corporate tax rate, partially offset by the lower federal benefit for state taxes and the change from a worldwide tax system to a territorial tax system as of the effective date of the Tax Reform Act. The net deferred tax liabilities revaluation resulted in a one-time tax provisional benefit estimated to be approximately $41.2 million and was recorded during the thirteen and twenty-six-week periods ended March 3, 2018. The amounts recorded are provisional and are subject to change due to further interpretations of the Tax Reform Act, legislative action to address questions that arise because of the Tax Reform Act, and/or any updates or changes to estimates the Company has utilized to calculate the impacts, such as return to accrual adjustments and/or changes to current year earnings estimates and the Company’s ongoing analysis of the Tax Reform Act.
Our Strategy
Our objective is to continue to grow sales profitably while helping our customers become more productive and profitable by reducing their total cost for purchasing, using and maintaining MRO supplies. We continue to pursue strategic acquisitions that expand or complement our business in new and existing markets or further enhance the value and offerings we provide.
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Business Environment
We utilize various indices when evaluating the level of our business activity. Approximately 68% of our revenues came from sales in the manufacturing sector during the second quarter of our fiscal year 2018, including certain national account customers. Through statistical analysis, we have found that trends in our customers’ activity has correlated to changes in the Metalworking Business Index (“MBI”). The MBI is a sentiment index developed from a monthly survey of the US metalworking industry, focusing on durable goods manufacturing. We have experienced the highest correlation between our sales trends and the MBI by using the rolling 12-month MBI average on a four-month lag basis. For the MBI, a value below 50.0 generally indicates contraction and a value above 50.0 generally indicates expansion. The MBI index over the last three months and for the past 12-month period was as follows:
Period |
MBI |
|
December |
56.2 |
|
January |
59.1 |
|
February |
61.3 |
|
|
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Fiscal 2018 Q2 average |
58.9 |
|
12-month average |
56.7 |
The MBI improved throughout the quarter, reaching a record high of 61.3 in February. The trailing 12-month average also climbed to 56.7. Details released with the February MBI indicate an expanding metalworking environment, supported by growth in new orders, production, backlog, and supplier deliveries. The most recent March MBI reading of 59.5 displays continued expansion, representing the 15th consecutive month above 50.0. We will continue to monitor the current economic conditions for its impact on our customers and markets and continue to assess both risks and opportunities that may affect our business.
Thirteen-Week Period Ended March 3, 2018 Compared to the Thirteen-Week Period Ended March 4, 2017
The table below summarizes the Company’s results of operations both in dollars (in thousands) and as a percentage of net sales for the periods indicated:
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Thirteen Weeks Ended |
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|
March 3, 2018 |
March 4, 2017 |
Change |
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$ |
% |
$ |
% |
$ |
% |
||||||||||||
Net sales |
$ |
768,987 | 100.0% |
$ |
703,780 | 100.0% |
$ |
65,207 | 9.3% | |||||||||
Cost of goods sold |
431,764 | 56.1% | 389,218 | 55.3% | 42,546 | 10.9% | ||||||||||||
Gross profit |
337,223 | 43.9% | 314,562 | 44.7% | 22,661 | 7.2% | ||||||||||||
Operating expenses |
239,120 | 31.1% | 227,917 | 32.4% | 11,203 | 4.9% | ||||||||||||
Income from operations |
98,103 | 12.8% | 86,645 | 12.3% | 11,458 | 13.2% | ||||||||||||
Total other expense |
(3,260) |
(0.4)% |
(2,840) |
(0.4)% |
(420) | 14.8% | ||||||||||||
Income before provision for income taxes |
94,843 | 12.3% | 83,805 | 11.9% | 11,038 | 13.2% | ||||||||||||
(Benefit) Provision for income taxes |
(22,709) |
(3.0)% |
30,246 | 4.3% | (52,955) |
(175.1)% |
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Net income |
$ |
117,552 | 15.3% |
$ |
53,559 | 7.6% |
$ |
63,993 | 119.5% |
Net Sales
Net sales increased 9.3% or approximately $65.2 million for the thirteen-week period ended March 3, 2018, as compared to the thirteen-week period ended March 4, 2017. We estimate that this $65.2 million increase in net sales is comprised of (i) approximately $30.9 million of higher sales volume, excluding DECO operations; (ii) approximately $29.9 million from DECO operations, which we acquired in July 2017; (iii) approximately $1.8 million from foreign exchange impact; and (iv) approximately $2.6 million from improved pricing, inclusive of changes in customer and product mix, discounting and other items. Of the above $65.2 million increase in net sales, sales to our government and national account programs (“Large Account Customers”) increased by approximately $20.2 million and sales other than to our Large Account Customers increased by approximately $45.0 million, which includes the $29.9 million from DECO.
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The table below shows the change in our average daily sales by total company and by customer type for the thirteen- week period ended March 3, 2018 compared to the same period in the prior fiscal year: