MSC Industrial Direct Co., Inc. — Fiscal 2015 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. The company offers approximately 1 million searchable SKUs, inventory-management solutions, eCommerce and procurement tools, same-day shipping and next-day delivery. It operates primarily in the United States through 12 customer fulfillment centers and 98 branches.
The filing covers the 52-week fiscal year ended August 29, 2015. The comparable fiscal year ended August 30, 2014 also comprised 52 weeks. The filing includes unaudited fourth-quarter results for the 13 weeks ended August 29, 2015.
Key financial metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Net sales | $2.910 billion | $2.787 billion | +4.4% |
| Gross profit | $1.317 billion | $1.286 billion | +2.4% |
| Gross margin | 45.2% | 46.1% | Down 90 bps |
| Operating expenses | $937.0 million | $903.1 million | +3.8% |
| Operating income | $379.5 million | $383.2 million | -1.0% |
| Operating margin | 13.0% | 13.7% | Down 70 bps |
| Net income | $231.3 million | $236.1 million | -2.0% |
| Diluted EPS | $3.74 | $3.76 | -0.5% |
| Net cash from operations | $249.8 million | $272.4 million | Down $22.6 million |
Fiscal fourth-quarter net sales were $727.4 million, gross profit was $327.1 million, operating income was $95.4 million and net income was $59.0 million. Fourth-quarter average daily sales increased 0.1% year over year; manufacturing-customer sales declined 1.8%, while non-manufacturing-customer sales increased 5.4%.
At August 29, 2015, cash and cash equivalents were $38.3 million, working capital was $609.7 million and the current ratio was 2.4, compared with 3.1 in the prior year. Total borrowings, including capital lease and financing obligations, were $428.3 million versus $337.1 million at August 30, 2014. Shareholders’ equity was $1.333 billion.
Material changes versus the prior comparable period
- Sales growth was driven primarily by approximately $135.1 million of higher volume and approximately $108.0 million of growth from government and national-account programs. Unfavorable foreign currency movements reduced sales by approximately $8.1 million.
- Government accounts represented approximately 9% of fiscal 2015 sales, compared with 8% in fiscal 2014.
- eCommerce and other electronic channels represented 55.6% of consolidated sales, compared with 48.0% in fiscal 2014.
- The company added approximately 150,000 searchable SKUs, increasing its online searchable assortment to approximately 1 million and its active saleable SKU count to approximately 1.35 million.
- Gross margin declined because of higher product costs, pricing and customer/product mix changes, and growth in vending-program sales.
- Operating expenses increased due to higher payroll, depreciation and advertising costs, partly offset by lower CCSG integration, restructuring and relocation expenses. Fiscal 2015 included approximately $1.1 million of CCSG integration and restructuring costs and $3.4 million of executive separation costs.
- Cash from operations declined primarily because inventory increased to support sales growth. Inventory rose to $506.6 million from $449.8 million, and accounts receivable rose to $403.5 million from $382.8 million.
- The company paid $284.2 million in cash dividends, including a $3.00 per-share special dividend, and repurchased approximately 444,000 shares for $33.4 million.
- The Columbus, Ohio fulfillment center began operations on September 30, 2014. Fiscal 2015 spending on the facility was approximately $3.3 million, following approximately $49.9 million in fiscal 2014.
Liquidity, debt and capital resources
MSC had a $650.0 million unsecured credit facility maturing in April 2018, consisting of a $400.0 million revolving facility and a $250.0 million term loan. At year-end, borrowings included $188.0 million on the revolver and $212.5 million on the term loan. Approximately $213.0 million of credit-facility borrowings were classified as current maturities. The applicable borrowing rate was 1.33% at year-end.
The facility requires a maximum total-debt-to-EBITDA ratio of 3.00 to 1.00 and a minimum EBITDA-to-interest ratio of 3.00 to 1.00. MSC was in compliance with its covenants at year-end. Management stated that cash, operating cash flow and available revolving capacity were adequate to fund operations and planned capital needs for at least the next 12 months. The company subsequently repaid $65.0 million under the revolver in September and October 2015; the filing reported $277.0 million of unused revolver capacity at the time of disclosure.
Guidance, outlook, risks and unusual items
Management did not provide specific fiscal 2016 revenue or earnings guidance in the filing. It expected operating costs to increase in fiscal 2016 because of the Columbus fulfillment center, higher staffing and compensation, and continued investment in vending and other growth programs. Management planned to continue expanding the sales force, online assortment, government and national-account programs, and inventory-management offerings.
Management cited a weakening manufacturing environment late in fiscal 2015. The Metalworking Business Index was 44.1 in September 2015 and had indicated contraction for six consecutive months. The company also noted pressure from lower commodity prices, reduced export demand and constrained pricing.
- Demand is cyclical and depends heavily on customers’ industrial production levels and broader economic conditions.
- Customer and product mix, large-account pricing, vending growth, vendor price increases and commodity or freight-cost volatility may pressure margins.
- Competition, industry consolidation and online distributors may affect market share and operating margins.
- The company is exposed to customer credit losses, order cancellations, supply-chain disruptions, transportation interruptions, severe weather and information-system or cybersecurity failures.
- The credit facility’s covenants and 2018 maturity create refinancing and liquidity considerations.
- Goodwill and indefinite-lived intangible assets totaled approximately $638.8 million; management’s fiscal 2015 qualitative assessment identified no impairment indicator.
- The company reported various routine claims and lawsuits but did not expect them to have a material adverse effect. It had no off-balance-sheet arrangements.
- MSC leases its Atlanta fulfillment center from an entity owned by principal shareholders. Fiscal 2015 related-party rent was approximately $2.3 million, and remaining related-party lease commitments totaled approximately $36.7 million.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile sales growth with the decline in fourth-quarter manufacturing demand and assess whether non-manufacturing and large-account growth is sustainable.
- Monitor gross-margin recovery, particularly the effects of vending, product mix, pricing and vendor costs.
- Review debt maturities, revolver utilization, covenant compliance and refinancing plans ahead of the April 2018 facility maturity.
- Assess working-capital efficiency, inventory growth and the resulting decline in operating cash flow.
- Evaluate the return on the Columbus fulfillment center, sales-force expansion, eCommerce investments and SKU additions.
- Consider the effect of the $284.2 million dividend distribution and ongoing share repurchases on leverage and liquidity.
- Review manufacturing-sector indicators, government-account concentration, foreign-currency exposure and the risks associated with the company’s controlled voting structure.