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 Commission File No.: 1-14130
ended Commission file number: 1-14130
November 27, 1999February 26, 2000
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 JanuaryApril 7, 2000, 33,919,48934,049,863 shares of Class A Common Stock and
34,138,778 shares of Class B Common Stock of the registrant were outstanding.
MSC INDUSTRIAL DIRECT CO., INC.
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
November 27, 1999February 26, 2000 and August 28, 1999 3
Consolidated Statements of Income -
Thirteen and twenty-six weeks ended NovemberFebruary 26, 2000 and
February 27, 1999 and November 28, 1998 4
Consolidated Statement of Shareholders' Equity -
ThirteenTwenty-six weeks ended November 27, 1999February 26, 2000 5
Consolidated Statements of Cash Flows -
ThirteenTwenty-six weeks ended November 27,1999February 26, 2000 and November 28, 1998February 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 1413
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Balance Sheets
(in thousands, except share data) November 27,February 26, August 28,
2000 1999
1999
----------- ------------- ----
(unaudited) (audited)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 4,0293,607 $ 2,725
Accounts receivable, net of allowance for doubtful
accounts of $5,705$5,764 and $5,799, respectively 98,171104,838 90,007
Inventories 246,268257,966 225,542
Due from officers, employees and affiliated companies 368360 499
Prepaid expenses and other current assets 3,8384,202 3,891
Current deferred income taxes 4,7913,942 5,379
--------- ---------
Total current assets 357,465374,915 328,043
--------- ---------
Investment in unconsolidated affiliate (Note 6) 2,207 --
Investments, at cost (Note 7) 5,000 --
Property, Plantplant and Equipment,equipment, net 107,940110,486 106,750
--------- ---------
Other Assets:
Goodwill 66,63966,197 67,080
Other 10,502assets 8,836 12,511
--------- ---------
77,141 79,591
--------- ---------
$ 542,546567,641 $ 514,384
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 19,30514,881 $ 23,510
Accrued liabilities 60,59558,141 56,979
Current portion of notes payable 7,314296 306
--------- ---------
Total current liabilities 87,21473,318 80,795
Long-term notes payable 79,940105,339 69,468
Other long-term liabilities 43 43
Deferred income tax liabilities 8,8637,784 8,451
--------- ---------
Total liabilities 176,060186,484 158,757
--------- ---------
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; 33,914,04833,975,408
and 33,902,048 shares issued, 32,773,04832,834,408 and 32,761,048 shares outstanding, 34 34
respectively
Class B common stock; $0.001 par value; 50,000,000 shares authorized;
34,138,778 shares issued and outstanding 34 34
Additional paid-in capital 217,240218,193 216,977
Retained earnings 172,178185,791 161,687
Treasury stock, at cost; 1,141,000 shares of Class A
(22,452) (22,452)
common stock held (22,452) (22,452)
Deferred stock compensation (548)(443) (653)
--------- ---------
Total shareholders' equity 366,486381,157 355,627
--------- ---------
$ 542,546567,641 $ 514,384
========= =========
The accompanying notes are an integral part
of these consolidated balance sheets.
Page 3
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Income
(unaudited)
Thirteen Weeks Ended --------------------------Twenty-Six Weeks Ended
------------------------- -------------------------
(in thousands, except per share data) NovemberFebruary 26, February 27, November 28,February 26, February 27,
2000 1999 19982000 1999
----------- ----------- ----------- -----------
Net sales $ 182,761198,233 $ 155,451160,518 $ 380,994 $ 315,969
Cost of goods sold 111,541 91,690122,060 94,361 233,601 186,051
--------- --------- --------- ---------
Gross profit 71,220 63,76176,173 66,157 147,393 129,918
Operating expenses 52,781 43,92051,727 40,681 104,508 84,601
--------- --------- --------- ---------
Income from operations 18,439 19,84124,446 25,476 42,885 45,317
--------- --------- --------- ---------
Other Income (Expense):
Interest income 12 254 33 16 58
Interest expense (1,089) (89)(1,398) (613) (2,487) (702)
Equity in loss of unconsolidated
affiliate (Note 6) (465) -- (465) --
Other income, net 65 15862 164 127 322
--------- --------- (1,012) 94--------- ---------
(1,797) (416) (2,809) (322)
--------- --------- --------- ---------
Income before provision
for income taxes 17,427 19,93522,649 25,060 40,076 44,995
Provision for income taxes 6,936 7,8759,036 9,899 15,972 17,774
--------- --------- --------- ---------
Net income $ 10,49113,613 $ 12,06015,161 $ 24,104 $ 27,221
========= ========= ========= =========
Per Share Information (Note 2):
Net income per common share:
Basic $ 0.160.20 $ 0.180.23 $ 0.36 $ 0.41
========= ========= ========= =========
Diluted $ 0.160.20 $ 0.180.22 $ 0.36 $ 0.40
========= ========= ========= =========
Common shares used in computing
per share amounts (Note 2):
Basic 67,086 67,11267,110 66,751 67,098 66,930
========= ========= ========= =========
Diluted 67,303 68,53168,063 69,026 67,736 68,899
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
Page 4
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statement of Shareholders' Equity
(unaudited)
Class A Class B Treasury Stock
(in thousands) -------------- -------------- Additional ------------------
Common Stock Common Stock Additional Treasury Stock
--------------- --------------- Paid-In Retained ----------------------Amount at
Shares Amount Shares Amount Capital Earnings Shares Amount at Cost
------ ------ ------ ------ ------- -------- ------ --------------
Thirteen----
Twenty-six weeks ended November 27, 1999:February 26, 2000:
- -----------------------------------------
Balance, August 28, 1999 33,902 $34 34,139 $34 $216,977 $161,687 1,141 $(22,452)
Exercise of common stock options, including
12related tax benefits 73 -- -- -- 2631,216 -- -- --
related tax benefits
Net income -- -- -- -- -- 10,49124,104 -- --
Amortization of deferred stock compensation -- -- -- -- -- -- -- --
------ --- ------ --- -------- -------- ----- --------
Balance, November 27, 1999 33,914February 26, 2000 33,975 $34 34,139 $34 $217,240 $172,178$218,193 $185,791 1,141 $(22,452)
====== === ====== === ======== ======== ===== ========
(in thousands) Deferred
Stock
Compensation Total
------------ -----
ThirteenTwenty-six weeks ended November 27, 1999:February 26, 2000:
- -----------------------------------------
Balance, August 28, 1999 $(653) $355,627
Exercise of common stock options, including
-- 263
related tax benefits -- 1,216
Net income -- 10,49124,104
Amortization of deferred stock compensation 105 105210 210
----- --------
Balance, November 27, 1999 $(548) $366,486February 26, 2000 $(443) $381,157
===== ========
The accompanying notes are an integral part of these consolidated statements.
Page 5
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Cash Flows
(unaudited)
Thirteen(in thousands) Twenty - Six Weeks Ended
--------------------------
(in thousands, except per share data) NovemberFebruary 26, February 27,
November 28,2000 1999
1998
----------- --------------- ----
Cash Flows from Operating Activities:
Net income $ 10,49124,104 $ 12,06027,221
--------- ---------
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Equity in loss of unconsolidated affiliate 465 --
Depreciation and amortization 3,068 2,0816,443 4,459
Amortization of deferred stock compensation 105 105210 210
Provision for doubtful accounts 479 7291,264 1,335
Deferred income taxes 1,000 (513)770 947
Changes in operating assets and liabilities, net of effect from
acquisitions:
Accounts receivable (8,643) (9,361)(16,096) (10,241)
Inventories (20,726) (5,812)(32,424) (21,528)
Prepaid expenses and other current assets 53 283(309) 239
Other assets 2,009 2,0353,675 3,817
Accounts payable and accrued liabilities (589) 9,308(7,125) (1,156)
--------- ---------
(23,244) (1,145)(43,127) (21,918)
--------- ---------
Net cash (used in) provided by operating activities (12,753) 10,915(19,023) 5,303
--------- ---------
Cash Flows from Investing Activities:
Expenditures for property, plant and equipment (3,817) (13,324)(9,296) (25,983)
Cash paid for acquisitions, net of cash acquired -- (6,000)(12,882)
Cash paid for investments (7,672) --
--------- ---------
Net cash used in investing activities (3,817) (19,324)(16,968) (38,865)
--------- ---------
Cash Flows from Financing Activities:
Purchase of treasury stock -- (22,150)
Net proceeds from exercise of common stock options 263 368873 1,953
Net proceeds from notes payable 17,480 24,85335,861 49,579
Net advances to affiliates 131 34139 103
--------- ---------
Net cash provided by financing activities 17,874 3,10536,873 29,485
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,304 (5,304)882 (4,077)
Cash and cash equivalents - beginning of period 2,725 8,630
--------- ---------
Cash and cash equivalents - end of period $ 4,0293,607 $ 3,3264,553
========= =========
Supplemental Disclosure:
Cash paid for interest 2,500 700
Cash paid for income taxes 11,100 15,200
The accompanying notes are an integral part of these consolidated statements.
Page 6
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 28, 1999. 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.
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
Thirteen Weeks Ended
-------------------------
November 27, November 28,
1999 1998
-------------------------
Net income for EPS
Computation $10,491 $12,060
======= =======
Basic EPS:
Weighted average
Common shares 67,086 67,112
======= =======
Basic EPS $ 0.16 $ 0.18
======= =======
Diluted EPS:
Weighted average
Common shares 67,086 67,112
Shares issuable from
Assumed
Thirteen Weeks Ended Twenty-Six Weeks Ended
------------------------- -------------------------
February 26, February 27, February 26, February 27,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net income for EPS
Computation $13,613 $15,161 $24,104 $27,221
========= ========= ========= =========
Basic EPS:
Weighted average
common shares 67,110 66,751 67,098 66,930
========= ========= ========= =========
Basic EPS $0.20 $0.23 $0.36 $0.41
========= ========= ========= =========
Diluted EPS:
Weighted average
common shares 67,110 66,751 67,098 66,930
Shares issuable from
assumed conversion of
common stock equivalents 953 2,275 638 1,969
--------- --------- --------- ---------
Weighted average common
and common equivalent shares 68,063 69,026 67,736 68,899
========= ========= ========= =========
Diluted EPS $0.20 $0.22 $0.36 $0.40
========= ========= ========= =========
3. The Company follows the provisions of
Common stock equivalents 217 1,419
------- -------
Weighted average common
Shares and common stock
equivalents 67,303 68,531
======= =======
Diluted EPS $ 0.16 $ 0.18
======= =======
3. In fiscal 1999, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income," which establishes new rules for the reporting of
comprehensive income and its components. The adoption of this statement
had no impact on the Company's net income or shareholders' equity. For the
first quarterhalf of fiscal 1999 and fiscal 2000, the Company's operations did
not give rise to items includable in comprehensive income which were not
already included in net income. Therefore, the Company's comprehensive
income is the same as its net income for all periods presented.
4. In fiscal 1999,The Company follows the Company adoptedprovisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Pursuant to this
pronouncement, the reportable operating segments are determined based on
the Company's management approach. The management approach, as defined by
SFAS No. 131, is based on the way that the chief Page 8
operating decision maker
organizes the segments within an enterprise for making operating decisions
and assessing performance. The Company's results of operations are
reviewed by the chief operating decision maker on a consolidated basis and
the Company operates in only one segment.
Page 8
5. In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities".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 use of
derivative instruments.
6. In February, 2000, the Company made an investment of approximately $2.7
million in a non-controlling combination of voting and non-voting equity
securities in an internet joint venture. The Company will account for this
investment under the equity method, whereby the Company will recognize its
allocable share of the earnings or losses of this venture in its statement
of operations as "equity in loss of unconsolidated affiliate." The
Company's share of net loss of unconsolidated affiliates was $0.5 million
for the thirteen and twenty-six weeks ended February 26, 2000.
7. During the second quarter of fiscal 2000, the Company invested
approximately $5.0 million in two internet commerce companies. The
Company's interest in each company is less than 5% and, accordingly, is
accounted for under the cost method. The Company's carrying value of these
investments approximates fair value at February 26, 2000.
Page 9
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. 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 4,211 page master catalog offers over 400,000 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
100 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. More recently, the Company began to explore ways to offer its products
for sale over the internet, both through internal initiatives, and through
participation in joint ventures and investments in or associations with third
party e-commerce initiatives.
Results of Operations -
Thirteen weeks ended NovemberFebruary 26, 2000 and February 27, 1999 and November 28, 1998
Net sales increased by $27.3$37.7 million, or 17.6%23.5%, to $182.8$198.2 million in the second
quarter of fiscal 2000 from $160.5 million in the second quarter of fiscal 1999.
This increase was primarily attributable to an increase in sales to the
Company's existing customers, and an increase in the 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 $10.0 million, or 15.1%, to $76.2 million in the
second quarter of fiscal 2000 from $66.2 million in the second quarter of fiscal
1999. As a percentage of sales,
Page 10
gross profit decreased from 41.2% to 38.4%. The dollar increase in gross profit
was primarily attributable to increased sales. The decrease in gross profit as a
percentage of net sales resulted primarily from the mix of products being sold,
the introduction of new products which have lower margins than certain products
which the Company has sold in the past, increased promotional selling, lower
selling prices on selected items, and lower margins realized from customers and
product lines gained through the Company's acquisitions.
Operating expenses increased by $11.0 million, or 27.0%, to $51.7 million in the
second quarter of fiscal 2000 from $40.7 million in the second quarter of fiscal
1999. As a percentage of net sales, operating expenses increased from 25.3% to
26.1%. The increase was primarily attributable to increased sales volume which
required additional staffing and support, new distribution center opening and
operating costs, increased depreciation costs resulting from the previous year's
large capital expenditures, and expenditures for future growth initiatives,
including increased expenses related to internal internet initiatives.
Income from operations decreased by $1.1 million, or 4.3%, to $24.4 million in
the second quarter of fiscal 2000 from $25.5 million in the second quarter of
fiscal 1999. The decrease was primarily attributable to an increase in operating
expenses and a decrease in gross profit as a percentage of net sales., offset by
an increase in net sales.
Interest expense increased by $0.8 million to $1.4 million in the second quarter
of fiscal 2000 from $0.6 million in the first quarter of fiscal 1999. The
increase was primarily attributable to higher long-term notes payable borrowings
and higher interest rates under the Company's revolving credit agreement. The
funds were used primarily for inventory purchases for the Company's new
distribution center, increasing inventory to support higher sales volume,
expenditures for property, plant, and equipment, and higher net working capital
requirements.
Equity in loss of unconsolidated affiliate of approximately $0.5 million relates
to the Company's equity method investment, which was made in the second quarter
of fiscal 2000.
Provision for income taxes and net income: The effective tax rate was
approximately 39.9 percent for the second quarter of fiscal 2000 as compared to
39.5 percent in the prior year. Net income decreased by $1.6 million, or 10.5%,
to $13.6 million in the second quarter of fiscal 2000 from $155.5$15.2 million in the
first quarter of fiscal 1999. This decrease was primarily the result of
previously mentioned increases in operating expenses, interest expense and
income taxes, offset by increases in sales and gross profit.
Results of Operations -
Twenty-six weeks ended February 26, 2000 and February 27, 1999
Net sales increased by $65.0 million, or 20.6%, to $381.0 million during the
first half of fiscal 2000 from $316.0 million in the first half of fiscal 1999.
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 induring fiscal 1999. 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.
Page 10
Gross profit increased by $7.4$17.5 million, or 11.6%13.5%, to $71.2$147.4 million during the
first half of fiscal 2000 from $129.9 million in the first quarterhalf of fiscal 2000 from $63.8 million in the first quarter of fiscal 1999.
The dollar increase in gross profit was1999,
primarily attributable to increased sales. As a percentage of sales, gross
profit decreased from 41.0%41.1% to 39.0%38.7%. The decrease in gross profit as a
percentage decreaseof net sales resulted primarily from the mix of products being sold,
the introduction of new products which have lower margins than certain products
which the Company has sold in the past, increased promotional selling, lower
selling prices on selected
Page 11
items, and
as a result of lower margins realized from customers and product lines addedgained
through the Company's acquisitions.
Operating expenses increased by $8.9$19.9 million, or 20.3%23.5%, to $52.8$104.5 million
during the first half of fiscal 2000 from $84.6 million in the first quarter of fiscal 2000 from $43.9 million in the first quarterhalf of
fiscal 1999. As a percentage of sales, operating expenses increased from 28.3%26.8%
to 28.9%27.4%. The increase was primarily attributable to increased sales volume
which required additional staffing and support, new distribution center opening
and operating costs, and higherincreased depreciation costs resulting from the previous
year's large capital expenditures, and expenditures for property, plant and
equipment.future growth
initiatives, including increased expenses related to internal internet
initiatives.
Income from operations decreased by $1.4$2.4 million, or 7.1%5.3%, to $18.4$42.9 million
during the first half of fiscal 2000 from $45.3 million in the first quarter of fiscal 2000 from $19.8 million in the first quarterhalf of
fiscal 1999. The decrease was primarily attributable to an increase in operating
expenses and a decrease in gross profit as a percentage of net sales, offset by
an increase in sales and gross profit.net sales.
Interest expense increased by $1.0$1.8 million to $1.1$2.5 million in the first quarterhalf of
fiscal 2000 from $.1$0.7 million in the first quarterhalf of fiscal 1999. The increase was
primarily attributable to higher long-term notes payable borrowings and higher
interest rates under the Company's revolving credit agreement. The funds were
used primarily for inventory purchases for the Company's new distribution
center.center, increasing inventory to support higher sales volume, expenditures for
property, plant, and equipment, and higher net working capital requirements.
Equity in loss of unconsolidated affiliate of approximately $0.5 million relates
to the Company's equity method investment, which was made in the second quarter
of fiscal 2000.
Provision for income taxes and net income: The effective tax rate was
39.8approximately 39.9 percent for the first quarterhalf of fiscal 2000 as compared to 39.5
percent in the prior year. Net income decreased by $1.6$3.1 million, or 13.2%11.4%, to
$10.5$24.1 million in the first quarterhalf of fiscal 2000 from $12.1$27.2 million in the first
quarterhalf of fiscal 1999. This decrease was primarily the result of previously
mentioned increases in operating expenses, interest expense and income taxes,
offset by increases in sales and gross profit.
Liquidity and Capital Resources
The Company's primary use of capital has been to fund theits working capital
requirements necessitated by its sales growth, adding new products, and
acquisitions and facilities expansions. The Company's sources of financing have
primarily been from operations, supplemented by bank borrowings under its
revolving credit facility,
andfacility.
During the second quarter of fiscal 2000, the Company entered into a portion of the proceeds from a fiscal 1997 public offering of Class A
common stock.new credit
agreement with its lenders. Under the terms of the credit facility, weagreement, the maximum
borrowings have availableincreased from $80.0 million of unsecured revolving credit to
maximum borrowings of up to $80.0$160.0 million. The credit agreement allows the Company
maximum borrowings of $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 (8.50%(8.75% at November 27, 1999)February 26,
2000) or, alternatively, at the bankers' acceptance rate or LIBOR rate plus
margins, which vary from 0.45%0.65% to 0.75%1.25% per annum. Our credit facility contains
certain covenants limiting mergers, use of proceeds, indebtedness, liens,
investments, sale of assets, acquisitions, and acquisitions.issuance of dividends. Our credit
facility also contains certain financial covenants which require MSC to maintain
a minimum net worth, quick ratio, of
current assets to current liabilities, ratio of liabilities to effective net worth,
maximum cash flow coverage ratio, minimum interest coverage ratio and positive
net income, to refrain from
capital expenditures in excess of certain amounts and to limit the issuance of
Page 11
dividends.income. As of November 27, 1999,February 26, 2000, the Company was in compliance with all
financial covenants. As of February 26, 2000, the Company had approximately
$78.0$103.5 million in outstanding borrowings under the
Page 12
credit facility. Available borrowings at February 26, 2000 are $56.5 million,
all of which were available under the revolving credit agreement.
Net cash used in operating activities was $19.0 million for the 1326 week period
ended November 27,
1999 was $12.8 millionFebruary 26, 2000 and the net cash provided by operating activities was $5.3
million for the 1326 week period ended November 28, 1998 was $10.9 million.February 27, 1999. The decreasechange of
approximately $24.3 million in net cash provided byfrom operations to net cash
used in operations resulted from increases in inventory commensurate with the
Company's sales growth, the introduction of new products, and inventory
for the Company's new distribution center, and an increase in accounts payable.higher net working
capital requirements.
Net cash used in investing activities for the 1326 week periods ended NovemberFebruary 26,
2000 and February 27, 1999 and November 28, 1998 was $3.8$17.0 million and $19.3$38.9 million, respectively.
The net usage of cash in the first three monthshalf of fiscal 2000 was primarily
attributable to expenditures for property, plant and equipment.equipment and cash paid for
investments in internal internet initiatives. The net usage of cash in the first
three monthshalf of fiscal 1999 was primarily attributable to cash paid for construction of
the Company's new Corporate headquarters, expenditures related to the construction of a
new distribution center and cash paid for an acquisition.
Net cash provided by financing activities was $17.9 million and $3.1 million for
the 13 week periods ended November 27, 1999 and November 28, 1998, respectively.acquisitions.
Net cash provided by financing activities for the first three months of fiscal26 week periods ended February
26, 2000 reflected proceeds received from notes payable. Netand February 27, 1999 was $36.9 million and 29.5 million, respectively.
The net cash provided by financing activities for the first three monthshalf of fiscal 2000
was primarily attributable to proceeds received from notes payable. The net cash
provided by financing activities for the first half of fiscal 1999 was primarily
attributable to proceeds received from notes payable, offset by the purchase in
the open market of approximately 997,000 shares of Class A common stock, of
which approximately 31,000 shares were subsequently reissued under the 1998
Associate Stock Purchase Plan.stock.
The Company believes that cash flow from operations and revolving credit
agreement will be sufficient to fund future growth initiatives and meet planned
capital expenditure needs in the near future. The
company is currently in the process of evaluating and expanding its loan
arrangements to provide additional sources of capital for future investment
spending.
Year 2000 Compliance Plan
Year 2000 Problem. The Year 2000 problem arises from the historic use of
only two digits (rather than four) for the designation of a year in date
information within computer programs. If not corrected, any of our equipment or
software programs that perform time sensitive calculations may incorrectly
identify the year `00' as 1900 instead of 2000, or not recognize it at all. This
could result in miscalculations or a major failure of certain systems. We may
also be vulnerable to the Year 2000 problems of our customers, suppliers and
service vendors and of other companies with which we conduct business (e.g.,
utility companies, shippers and telecommunications companies).
Year 2000 Compliance Plan. During calendar years 1997 and 1998, we
developed and began to implement a Year 2000 compliance plan using internal and
external resources in an effort to ensure that our business is not interrupted
by the Year 2000 problem. MSC's Year 2000 compliance plan is broken into four
components:
1. Renovating internal systems and applications. Our internal systems
and applications include Order Entry, Purchasing and Warehouse
Management. The applications used in the Order Entry system have
been re-written and were phased into MSC's call
Page 12
center and branch locations. This process was completed by May 1999.
The applications for the Purchasing and Warehouse Management systems
have been modified and our Year 2000 compliance work was completed
in August 1999. Many of our applications are already Year 2000
compliant as they were written using a compliant code generator.
2. Ensuring compliance of peripheral third party systems. We use a
number of third party package systems to supplement our internally
developed programs. Major systems in this area are our Financial and
Inventory Replenishment systems. Our Financial systems have been
replaced with a new package and are running on this software. The
Inventory Replenishment system has been tested as Year 2000
compliant. All of our material hardware, including our AS/400
computers, telephone systems, networks, PCs, security systems and
time clocks at all MSC locations have been tested as Year 2000
compliant.
3. Ensuring Year 2000 compliance by external companies that conduct
business with MSC. In 1999, we contacted all of our major customers,
suppliers and vendors to inquire about Year 2000 compliance. We did
not receive responses from all those contacted, but those who
responded did not indicate any problems. In addition, in 1999 we
conducted tests to determine whether those business partners with
which we currently conduct business electronically are year 2000
compliant. Our tests revealed no problems.
4. Implementing standards and conducting testing in an effort to ensure
that MSC's existing and future systems are Year 2000 compliant. All
new systems, whether hardware or software, are tested before
implementation in an effort to ensure Year 2000 compliance.
Cost of Compliance. We believe that the total cost of our Year 2000
compliance plan will be $1.2 million not including the replacement of the
Financial system. These costs are expensed as incurred and, to date, we have
incurred approximately $1.0 million of such expenses. The Financial systems
replacement is a separate project which cost approximately $6.0 million and has
been capitalized.
Risks. As of the date of this report, we have not experienced any
difficulties associated with the Year 2000 problem that would have a material
adverse effect on our systems or operations. Although we believe our own systems
to be Year 2000 compliant, there can be no assurance that during the course of
the calendar year 2000, we will not experience a disruption that would have a
material adverse effect on our financial condition or results of operation or
that our system will work properly in conjunction with the systems of any
business partner. In addition, we continue to bear the risk of a material
adverse affect if any of our business partners has not appropriately addressed
its own Year 2000 compliance issues. Although we believe that our major
customers are Year 2000 compliant, there can be no assurance at this time that
such other companies have achieved Year 2000 compliance or that any conversions
by such companies to become Year 2000 compliant will be compatible with our
computer systems. The inability of our principal suppliers, service vendors or
customers to be Year 2000 compliant could have a material adverse effect on our
financial condition or results of operation.
Page 13
Contingency Plans. We have arranged for alternative methods of placing
purchase orders and for the stockpiling of certain inventory items in the event
that our suppliers are not Year 2000 compliant. We do not have any other
contingency plans with respect to other problems that could arise in our
business as a result of the Year 2000 problem. Any of these could have a
material adverse effect on our financial condition or results of operation.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's principal financial instrument is long-term notes payable under an
unsecured revolving 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 Company has
an $80.0agreement
allows the company maximum borrowings of $160.0 million, of which $110.0 million
is a revolving credit line of whichagreement and the remaining $50.0 million is a term loan.
At February 26, 2000 approximately $78.0$103.5 million was outstanding at November 27, 1999.under the
revolving credit agreement. The agreement bears interest at the bank's base rate
(8.50%(8.75% at November 27, 1999)February 26, 2000), or, alternatively, at the bankers acceptance rate
or LIBOR rate plus margins, which vary from 0.45%0.65% to 0.75%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 year-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$1.0 million in interest that year. The Company does not utilize
derivative financial instruments to hedge against changes in interest rates or
for any other purpose.
Our comprehensive program to address Year 2000 issues was successful in that our
business activities continued without disruption through the days before and
after January 1, 2000. In terms of supply chain readiness, on the basis of the
information available to us, we do not expect disruptions caused by the failures
of third parties to remediate their Year 2000 issues. Costs related to the Year
2000 program were not significant.
Page 1413
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On January 7, 2000 the Company held its 2000 Annual Meeting of Shareholders (the
"Meeting"). In connection with the Meeting, the Company solicited proxies from
its shareholders pursuant to Regulation 14 of the Securities Exchange Act of
1934.
At the Meeting, the Company's shareholders elected as directors Sidney Jacobson,
Mitchell Jacobson, James Schroeder, Shelley Boxer, Denis Kelly, Raymond Langton,
Roger Fradin and David Sandler.
In addition, the shareholders approved an amendment to the Company's 1998 Stock
Option Plan and ratified the selection by the Board of Directors of Arthur
Andersen LLP as independent certified public accountants of the Company for
fiscal year 2000.
The following tables summarize the votes cast at the meeting on the matters
brought before the shareholders:
1. Election of Directors
Nominee Votes Votes Votes Broker
Name For Against Withheld Non-Votes
Sidney Jacobson 54,792,771 3,944,875 0 0
Mitchell Jacobson 56,921,097 1,816,549 0 0
James Schroeder 56,921,089 1,816,557 0 0
Shelley Boxer 56,921,089 1,816,557 0 0
Denis Kelly 56,916,985 1,820,661 0 0
Raymond Langton 56,915,089 1,822,557 0 0
Roger Fradin 56,916,858 1,820,788 0 0
David Sandler 56,921,104 1,816,542 0 0
2. Approval of the amendment to the Company's 1998 Stock Option Plan
Votes Votes Votes Broker
For Against Withheld Non-Votes
51,067,000 7,627,284 43,362 0
Page 14
3. Ratification of Arthur Andersen LLP as independent certified public
accountants of the Company for fiscal year 2000.
Votes Votes Votes Broker
For Against Withheld Non-Votes
58,694,533 14,815 28,298 0
Item 6. Exhibits and Reports on Form 8-K
Exhibits:(a) Exhibits
10 Credit Agreement, dated as of February 1, 2000 between the
Registrant and the banks named therein.
27 Financial data schedule for the quarter ended November 27, 1999.February 26,
2000.
(b) Reports on Form 8-K:8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
Page 15
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 11,April 10, 2000 By: /s/ Mitchell Jacobson
-------------------------------------- -----------------------------------------
President and Chief Executive Officer
Dated: January 11,April 10, 2000 By: /s/ Shelley M. Boxer
-------------------------------------- -----------------------------------------
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 16
EXHIBIT INDEX
Exhibit Description
- ------- -----------
10. Credit Agreement, dated as of February 1, 2000 between the Registrant and
the banks named therein (the "Credit Agreement").
27. Financial data schedule for the quarter ended February 26, 2000.
SCHEDULE
The schedules and exhibits to the Credit Agreement are omitted pursuant to
Regulation S-K. This schedule contains summary information extracted from the
schedules and exhibits to the Credit Agreement and is qualified by its entirety
by reference to such schedules and exhibits. Capitalized terms used herein
without definition shall have the respective meanings assigned to such terms in
the Credit Agreement.
Exhibits
Exhibit A-1
Form of Revolving Credit Note
Exhibit A-2
Form of Term Note
Exhibit B-1
Form of Bid Request
Exhibit B-2
Form of Bid
Exhibit B-3
Form of Bid Acceptance/Rejection
Exhibit C
Form of Subsidiary Guaranty
Exhibit D
Form of Opinion of Borrower's Counsel
Exhibit E-1
Form of Notice of Borrowing
Exhibit E-2
Form of Notice of Conversion/Continuation
Schedules
Schedule 7.1
Lists any of the exceptions to the Borrower's due incorporation, good standing,
due qualification and compliance with law. [None.]
Schedule 7.2
Lists any of the exceptions to the Borrower's power and authority to execute,
deliver and perform the Facility Documents and any conflicts with law. [None.]
Schedule 7.4
Lists any pending or threatened litigation against the Borrower or any of its
Subsidiaries. [None.]
Schedule 7.8
Lists any unfunded vested liabilities and welfare plan coverage for terminated
employees of the Borrower, its Subsidiaries or its Affiliates. [None.]
Schedule 7.9
Lists all Material Subsidiaries of the Borrower.
Schedule 7.10
Lists all material credit agreements, indentures, purchase agreements,
guaranties, Capital Leases and other investments, agreements and arrangements in
effect on the date of the Credit Agreement providing for or evidencing
extensions of credit to the Borrower or its Subsidiaries.
Schedule 7.16
Lists any partnerships in which the Borrower or any of its Subsidiaries is a
partner. [None.]
Schedule 7.17
Lists any Forfeiture Proceedings pending or threatened against the Borrower or
any of its Subsidiaries. [None.]
Schedule 7.21
Lists all names and trade styles that the Borrower and its Material Subsidiaries
have been known under or transacted business during the five years prior to the
Effective Date.
Schedule 7.25
Lists any environmental matters. [None.]