MSC Industrial Direct Co., Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
MSC is a North American distributor of metalworking and maintenance, repair and operations products and services. It serves industrial, government, commercial and other customers through approximately 1.9 million SKUs, 12 customer fulfillment centers and 98 branch offices. The filing covers the 52-week fiscal year ended August 29, 2020; fiscal fourth-quarter results are also presented. Fiscal 2020 was materially affected by the COVID-19 pandemic.
Key financial metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $3.192 billion | $3.364 billion | Down 5.1% |
| Gross profit | $1.343 billion | $1.432 billion | Down 6.2% |
| Gross margin | 42.1% | 42.6% | Down 50 bps |
| Operating income | $350.7 million | $400.0 million | Down 12.3% |
| Operating margin | 11.0% | 11.9% | Down 90 bps |
| Net income attributable to MSC | $251.1 million | $288.9 million | Down 13.1% |
| Diluted EPS | $4.51 | $5.20 | Down 13.3% |
| Cash flow from operations | $396.7 million | $328.4 million | Up $68.3 million |
| Capital expenditures | $47.0 million | $51.8 million | Down $4.8 million |
Fiscal fourth-quarter net sales were $747.7 million, down 12.7% in average daily sales versus the prior-year quarter. Fourth-quarter operating income was $72.9 million and net income attributable to MSC was $52.5 million. The filing does not present a standalone fourth-quarter cash flow statement.
At year-end, cash and cash equivalents were $125.2 million, working capital was $829.0 million and the current ratio was 3.0. Total debt, including finance lease and financing obligations, was $619.3 million versus $441.9 million in the prior year; net debt was $494.1 million. The company had $250.0 million outstanding under its committed facility and $1.2 million under an uncommitted facility at year-end. Approximately $425.8 million remained available under the committed facility, net of outstanding letters of credit, and the company was in compliance with its debt covenants.
Inventory was $543.1 million, accounts receivable were $491.7 million and shareholders’ equity was $1.321 billion. Inventory turnover declined to 3.3 times from 3.5 times, while days sales outstanding increased to 58.2 from 56.8.
Material changes versus the prior comparable period
- Sales declined primarily because of approximately $215.7 million of lower volume, excluding MSC Mexico, partially offset by $27.8 million of improved pricing and mix and $17.5 million of MSC Mexico revenue.
- Manufacturing customer average daily sales declined 10.6% for the year and 19.6% in the fourth quarter, reflecting the pandemic-driven contraction in industrial activity. Non-manufacturing customer average daily sales increased 7.8% for the year.
- Sales to government and national account customers decreased $27.8 million; sales to other customers decreased $143.6 million.
- Gross margin contracted because of higher product costs and changes in customer and product mix. MSC Mexico reduced fiscal 2020 gross margin by approximately 30 basis points.
- Operating expenses decreased 3.8% to $992.6 million, but increased to 31.1% of sales from 30.7% because sales declined faster than expenses. Lower payroll, freight, travel and entertainment costs were partly offset by higher depreciation, MSC Mexico expenses and restructuring costs.
- The company incurred $17.0 million of restructuring and other related costs, including $6.6 million of consulting costs and $10.4 million of severance and related costs. The filing estimates a $0.23 fiscal-year EPS impact from these charges.
- Cash generation improved despite lower earnings, aided by lower accounts receivable and inventory balances. Financing cash use included $444.2 million of regular and special dividends, partly offset by new debt issuance and borrowings.
- Fiscal 2020 dividends were $8.00 per share, including a $5.00 special dividend, versus $2.64 per share of regular dividends in fiscal 2019. The board subsequently declared a $0.75 quarterly dividend payable in November 2020.
- The company adopted the new lease accounting standard at the beginning of fiscal 2020, recognizing approximately $61.2 million of operating lease assets and $60.7 million of operating lease liabilities without materially affecting income or cash flow.
Guidance, outlook, commentary, risks and unusual items
Management did not provide specific quantitative fiscal 2021 revenue or earnings guidance in the filing. Management expects reduced sales and net income levels as the COVID-19 disruption continues, but believes existing cash, operating cash flow and available financing will fund required capital expenditures and operating needs for at least the next twelve months. The company reduced discretionary spending, substantially halted hiring, temporarily reduced compensation and suspended its 401(k) employer match, which was reinstated at the beginning of fiscal 2021.
- COVID-19 may affect customer demand, manufacturing activity, supplier capacity, transportation, associate availability, collections and the company’s ability to deliver products. The company states that the ultimate impact cannot reasonably be estimated.
- The company increased purchases of safety-related products and PPE. Improved supply or weaker demand could create excess inventory, write-downs and lower margins; shortages could delay customer shipments.
- Dallas customer fulfillment center operations were expected to close and shift to the remaining network on or before December 31, 2020.
- Debt agreements include a maximum consolidated leverage ratio of 3.00-to-1.00, subject to a temporary 3.50-to-1.00 limit after a qualifying material acquisition, and a minimum interest coverage ratio of 3.00-to-1.00.
- Variable-rate borrowings expose the company to interest-rate risk; a 100-basis-point change would affect annual interest costs by approximately $2.2 million under the stated capital structure. LIBOR transition risk remains under evaluation.
- Goodwill and indefinite-lived intangible assets totaled $690.4 million at year-end. No impairment was recorded, but a material deterioration in financial performance could result in a non-cash impairment charge.
- Contractual obligations totaled $627.6 million, including $515.0 million of debt maturities, $60.9 million of operating lease obligations and $47.8 million of estimated debt interest.
- Legal proceedings are ongoing in the ordinary course; management does not expect them to materially affect consolidated financial position, results or liquidity. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether industrial demand and manufacturing customer sales recover after the fiscal fourth-quarter decline.
- Actual fiscal 2021 sales, earnings and cash-flow trends relative to management’s expectation of continued pandemic-related pressure.
- PPE and safety-product inventory levels, subsequent write-downs and the effect on gross margin and cash flow.
- Debt reduction, covenant headroom, committed-facility availability and upcoming maturities beginning with $20.0 million due in fiscal 2021.
- Whether restructuring actions and the planned Dallas facility closure produce the expected cost savings without disrupting service.
- The sustainability of the $0.75 quarterly dividend after the $444.2 million fiscal 2020 cash dividend outflow.
- Potential impairment of the $690.4 million of goodwill and indefinite-lived intangible assets.
- Effects of customer mix, pricing, tariffs, supply-chain disruptions, interest rates and the transition from LIBOR.