MSC Industrial Direct Co., Inc. — Fiscal 2018 First-Quarter Form 10-Q
Business Context and Reporting Period
MSC is a North American distributor of metalworking and maintenance, repair and operations products and services, offering approximately 1.56 million active SKUs through eCommerce, catalogs, inventory-management solutions, call centers and branches. The filing covers the thirteen weeks ended December 2, 2017, compared with the thirteen weeks ended December 3, 2016. Fiscal 2018 is a 52-week year ending September 1, 2018.
Financial Performance and Position
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $768.6 million | $686.3 million | 12.0% increase |
| Gross profit | $335.1 million | $308.7 million | 8.5% increase |
| Gross margin | 43.6% | 45.0% | Down 140 bps |
| Operating income | $99.3 million | $90.6 million | 9.6% increase |
| Operating margin | 12.9% | 13.2% | Down 30 bps |
| Net income | $59.6 million | $54.3 million | 9.8% increase |
| Diluted EPS | $1.05 | $0.96 | Increase |
| Operating cash flow | $82.0 million | $76.0 million | Increase |
Cash and cash equivalents were $20.3 million at December 2, 2017. Total debt was $492.7 million, including $291.0 million drawn on the revolving credit facility, $175.0 million of private-placement senior notes and capital lease and financing obligations. Net debt was $472.4 million, down $44.5 million from September 2, 2017. The company had approximately $294.0 million of unused credit-facility capacity, reduced by outstanding letters of credit, and stated that available cash, operating cash flow and borrowing capacity should fund planned needs for at least the next 12 months.
Working capital was $491.4 million and the current ratio was 1.9 at quarter-end. Accounts receivable were $479.4 million and inventories were $469.4 million. Days sales outstanding, excluding DECO, increased to 57.5 from 52.5 in the prior-year comparable period; inventory turnover, excluding DECO, was 3.5 versus 3.3.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected approximately $53.7 million of higher volume excluding DECO, $29.7 million from the DECO acquisition completed in July 2017, and $1.2 million of foreign-exchange benefit, partly offset by approximately $2.3 million of pricing and mix reductions.
- Sales to government and national-account customers increased approximately $33.0 million; other customer sales increased approximately $49.3 million.
- DECO reduced gross margin by approximately 90 basis points. Lower margins also reflected customer and product mix, pricing changes and growth in vending and large-account sales.
- Operating expenses increased 8.1% to $235.8 million, primarily due to payroll, commissions, freight, DECO-related costs and non-recurring integration expenses. DECO accounted for approximately $5.9 million of operating expenses, including integration costs.
- Operating cash flow increased to $82.0 million. Investing cash use declined to $9.8 million, including $9.0 million of capital expenditures and a $0.7 million post-closing DECO working-capital adjustment. Financing cash use declined to $68.1 million, principally reflecting $41.0 million of net debt repayment and $27.1 million of dividends.
- eCommerce platforms represented 59.8% of consolidated sales, compared with 59.6% in the prior-year quarter.
Outlook, Commentary, Risks and Unusual Items
Management described the manufacturing environment as expanding. The Metalworking Business Index averaged 56.4 during the quarter versus a trailing 12-month average of 55.3, and the December reading was 56.2. Management expects days sales outstanding to improve slightly during fiscal 2018 and continues to pursue profitable sales growth, cost reductions, customer acquisition, technology initiatives, vending programs and strategic acquisitions.
The Tax Cuts and Jobs Act, enacted December 22, 2017, reduces the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. MSC expected a net one-time favorable tax impact of approximately $38 million to $40 million in fiscal 2018 second-quarter income from revaluing deferred tax liabilities, subject to further analysis and second-quarter results. The filing does not provide fiscal-year revenue or earnings guidance.
The board declared a quarterly dividend of $0.58 per share payable January 30, 2018, and authorized an additional 2.0 million shares under the repurchase plan, bringing authorized future repurchases to approximately 2.8 million shares. During the quarter, 50,960 shares were withheld for employee tax obligations; the filing also reports $4.0 million of treasury-stock repurchases in the equity and cash-flow disclosures.
Key risks include economic and manufacturing-cycle conditions, customer and product mix, competition and pricing pressure, commodity and energy-price volatility, customer credit risk, order cancellations, supply-chain or business interruptions, cybersecurity and information-system failures, key-personnel retention, trade-policy changes, regulatory compliance, litigation, goodwill impairment, acquisition integration and financial restrictions on borrowings. The company was in compliance with its debt covenants at quarter-end. Management does not expect pending legal matters to have a material adverse effect.
Investor Verification Checklist
- Verify the sustainability of 12.0% sales growth and the contribution from DECO versus organic volume.
- Monitor whether gross-margin pressure from DECO, large accounts, vending and pricing mix persists.
- Assess the effect and final accounting of the estimated $38 million to $40 million tax benefit in fiscal 2018 second quarter.
- Track receivables, days sales outstanding and working-capital requirements as large-account sales grow.
- Review debt reduction, interest-rate exposure, available revolver capacity and compliance with the 3.00-to-1.00 leverage and 3.00-to-1.00 interest-coverage covenants.
- Evaluate DECO integration costs and the acquisition’s effect on margins and operating expenses.
- Confirm the timing and amount of the $0.58 dividend and the expanded share-repurchase authorization.