MSC Industrial Direct Co., Inc. — Fiscal 2021 Second-Quarter Form 10-Q Summary
Business context and reporting period
MSC Industrial is a North American distributor of metalworking and maintenance, repair and operations products and services, offering approximately 1.9 million SKUs through fulfillment centers, digital channels, inventory-management solutions, call centers and customer support locations. The filing covers the 13 weeks and 26 weeks ended February 27, 2021, compared with the corresponding periods ended February 29, 2020.
During the quarter, MSC transitioned from a branch-office model to virtual customer care hubs, closed 73 branch offices and realigned certain locations as regional inventory centers. Management continued its “Mission Critical” strategy, focused on market-share growth, metalworking capabilities, customer solutions and structural cost reductions.
Financial performance and key metrics
| Metric | Q2 FY2021 | Q2 FY2020 | Change |
|---|---|---|---|
| Net sales | $774.0 million | $786.1 million | (1.5%) |
| Gross profit | $294.8 million | $331.1 million | (11.0%) |
| Gross margin | 38.1% | 42.1% | Down 400 bps |
| Income from operations | $28.0 million | $77.7 million | (63.9%) |
| Operating margin | 3.6% | 9.9% | Down 630 bps |
| Net income attributable to MSC | $18.1 million | $55.5 million | (67.4%) |
| Diluted EPS | $0.32 | $1.00 | (68.0%) |
For the 26-week year-to-date period, sales were $1.546 billion, down 4.0%; gross profit was $618.1 million, with a 40.0% gross margin versus 42.1% in the prior-year period; operating income was $81.9 million, with a 5.3% operating margin versus 10.4%; and diluted EPS was $1.01 versus $2.18.
Quarterly sales volume declined approximately $23.2 million, partly offset by approximately $9.5 million of pricing and mix benefits and $1.6 million of favorable foreign exchange. Manufacturing customer average daily sales declined 4.9%, while non-manufacturing customer average daily sales increased 6.6%. Government sales increased to 9% of quarterly revenue from 7% in the prior-year quarter. eCommerce channels represented 59.2% of quarterly sales, compared with 60.9% previously.
Cash flow, debt and liquidity
- Year-to-date operating cash flow was $118.9 million, compared with $155.8 million in the prior-year period.
- Year-to-date capital expenditures were $20.0 million, and cash used in investing activities was $20.0 million.
- Cash used in financing activities was $204.8 million, including $279.0 million of dividend payments, comprising $195.4 million of special dividends and $83.7 million of regular dividends.
- Cash declined to $20.2 million from $125.2 million at fiscal year-end, producing a $105.0 million decrease in cash during the 26-week period.
- Total debt, including finance leases, was $684.4 million versus $619.3 million at August 29, 2020. Net debt increased to $664.1 million from $494.1 million.
- The $600.0 million committed revolving facility had approximately $470.8 million of unused availability, net of letters of credit, at February 27, 2021. Approximately $201.2 million was outstanding under uncommitted credit facilities.
- The company was in compliance with its debt covenants, including a maximum leverage ratio of 3.00-to-1.00 and minimum interest coverage ratio of 3.00-to-1.00.
- Management stated that existing cash, financial resources and operating cash flow should be sufficient to fund capital expenditures and operating requirements for at least the next 12 months.
Material changes versus the prior comparable periods
- COVID-19-related PPE inventory write-downs of $30.1 million reduced gross profit and gross margin because of increased competing supply and expected excess inventory.
- A $26.7 million impairment charge was recorded for a prepaid nitrile-glove purchase that was delayed and may not be received or recovered. MSC is pursuing legal remedies.
- Restructuring costs increased to $21.6 million in the quarter and $25.6 million year to date, including $16.7 million of operating-lease impairments related to closed branches.
- Operating expenses declined 2.5% in the quarter and 4.3% year to date, primarily from lower payroll, travel and entertainment costs and cost-containment actions.
- Accounts receivable increased to $527.2 million from $491.7 million at fiscal year-end, while inventory declined to $532.5 million from $543.1 million.
- Current liabilities increased materially, principally because of higher current debt and accounts payable. The current ratio declined to 2.1 from 3.0 at fiscal year-end.
- MSC began self-insuring health benefits, subject to stop-loss coverage, and recorded an approximately $6.8 million related liability at quarter-end.
Guidance, outlook, commentary and risks
The filing does not provide a quantified earnings or revenue forecast. Management expects continued investment in metalworking specialists, vending, vendor-managed inventory, in-plant solutions and sales-force capabilities, together with structural cost reductions across sales, supply chain, general and administrative functions, distribution centers and real estate.
Management expects the COVID-19 pandemic to continue affecting demand, supply chains, logistics, customer payment patterns, product availability and operating costs. The company specifically identifies risks from excess PPE inventory, further inventory write-downs, shortages, supplier disruptions, customer cancellations, economic weakness, competition, cybersecurity, litigation, debt restrictions, interest-rate and LIBOR transition risk, and goodwill or intangible-asset impairment.
The Long Island Customer Support Center is being relocated to a smaller facility expected to open in the second half of calendar 2021. The existing 170,000-square-foot facility was classified as held for sale at February 27, 2021, with carrying value of approximately $15.2 million; no impairment was recorded because estimated fair value less costs to sell exceeded carrying value.
The board declared a quarterly dividend of $0.75 per share on March 30, 2021, payable April 27, 2021. Management reported that disclosure controls and procedures were effective as of February 27, 2021.
Important facts for investors to verify
- Whether PPE demand and pricing stabilize, and whether additional inventory write-downs or margin pressure occur.
- Potential recovery, timing and legal outcome related to the $26.7 million nitrile-glove prepayment impairment.
- Execution, recurring savings and additional costs associated with closing 73 branches and implementing virtual customer care hubs.
- Liquidity under the committed and uncommitted credit facilities, including refinancing or rollover risk for short-term uncommitted borrowings.
- Ability to sustain dividends while cash balances decline and net debt increases.
- Progress and economics of the Long Island facility sale and relocation.
- Accuracy of self-insured healthcare reserves and possible future adjustments based on actual claims.
- Recovery in manufacturing customer demand and the effect of customer and end-market mix on future margins.