MSC Industrial Direct Co., Inc. — Fiscal 2022 Second-Quarter Form 10-Q
Reporting period: Quarterly period ended February 26, 2022. The second quarter comprised 13 weeks; year-to-date results cover 26 weeks ended February 26, 2022. Comparisons are to February 27, 2021, unless otherwise noted. MSC distributes metalworking and maintenance, repair and operations products and services, operating as one reportable segment.
Financial Performance and Key Metrics
| Metric | Q2 FY2022 | Q2 FY2021 | Change |
|---|---|---|---|
| Net sales | $862.5 million | $774.0 million | Up 11.4% |
| Gross profit | $366.3 million | $294.8 million | Up 24.3% |
| Gross margin | 42.5% | 38.1% | Up 440 basis points |
| Income from operations | $97.2 million | $28.0 million | Up 246.8% |
| Operating margin | 11.3% | 3.6% | Up 770 basis points |
| Net income attributable to MSC | $69.9 million | $18.1 million | Up 286.7% |
| Diluted EPS | $1.25 | $0.32 | Up $0.93 |
Year to date: Net sales were $1.711 billion, up 10.7%; gross profit was $718.9 million, with a 42.0% gross margin versus 40.0%; operating income was $187.9 million versus $81.9 million; and net income attributable to MSC was $136.0 million versus $56.5 million. Diluted EPS was $2.43 versus $1.01.
Q2 sales growth reflected approximately $51.6 million of higher volume, $32.1 million of improved pricing and mix, and $4.8 million from fiscal 2021 acquisitions. Year-to-date growth included $105.4 million of volume, $49.9 million of pricing and mix, $8.8 million from acquisitions and $1.1 million of favorable foreign exchange, partly offset by lower government customer sales.
Operating expenses increased 8.5% in Q2 and 8.0% year to date, primarily from higher payroll-related and freight costs. Q2 freight expense was $36.6 million versus $32.5 million; year-to-date freight expense was $72.8 million versus $64.3 million. Operating expenses declined as a percentage of sales to 30.8% in Q2 and 30.5% year to date.
Cash Flow, Liquidity and Capital Structure
- Year-to-date operating cash flow was $57.4 million versus $118.9 million in the prior-year period. The decline primarily reflected increased accounts receivable and inventory investment and less favorable accounts payable and accrued-liability changes.
- Capital expenditures were $31.2 million versus $20.0 million, primarily supporting vending programs, Mission Critical projects and infrastructure.
- Cash and cash equivalents were $41.8 million at February 26, 2022, compared with $40.5 million at August 28, 2021.
- Total debt, including finance leases and financing arrangements, was $835.5 million versus $786.0 million at fiscal 2021 year-end. Net debt was $793.7 million versus $745.5 million.
- The $600 million revolving credit facility had $339.6 million of unused availability, reduced by outstanding letters of credit. Three uncommitted facilities had aggregate maximum availability of $208.0 million, with $200.0 million outstanding.
- The company was in compliance with its debt covenants, including a maximum consolidated leverage ratio of 3.00 to 1.00 and minimum interest coverage ratio of 3.00 to 1.00.
- Working capital was $819.6 million and the current ratio was 2.4. Days sales outstanding were 60.9 and inventory turnover was 3.2, compared with 3.4 at both fiscal 2021 year-end and the prior-year quarter.
- The company paid $83.6 million in regular dividends year to date, or $1.50 per common share, versus $279.0 million in regular and special dividends in the prior-year period. A quarterly dividend of $0.75 per share was declared on March 22, 2022.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially due to sales growth, price realization and the absence of significant prior-year COVID-related charges.
- The prior-year Q2 included a $30.1 million PPE inventory write-down; the prior-year year-to-date period also included a $26.7 million impairment loss related to a nitrile-glove prepayment. No comparable charges were recorded in FY2022.
- Restructuring and other costs declined to $3.1 million in Q2 and $8.4 million year to date, from $21.6 million and $25.6 million, respectively. Prior-year costs included $16.7 million of operating lease impairments related to the closure of 73 branch offices.
- Manufacturing demand recovered. Manufacturing customers represented 69% of Q2 sales and generated 8.9% average daily sales growth; year-to-date manufacturing average daily sales increased 12.2%.
- eCommerce, including EDI, VMI, vending and other electronic channels, represented 60.7% of Q2 sales and 60.6% year to date, versus 59.2% and 60.0%, respectively.
- Accounts receivable increased to $619.9 million and inventories to $657.7 million at February 26, 2022, reflecting higher sales, supply-chain challenges and efforts to meet customer demand.
Guidance, Outlook, Commentary and Risks
Management did not provide specific quantitative revenue or earnings guidance in the filing. Management expects existing cash, financial resources and operating cash flow to fund capital expenditures and operating requirements for at least the next 12 months, while acknowledging that future COVID-19 developments could reduce sales and net income.
The Mission Critical program is intended to capture market share and improve profitability through fiscal 2023. Initiatives include expanding metalworking specialists, vending, vendor-managed inventory and in-plant solutions; building the sales force; implementing pricing strategies; optimizing the distribution-center and real-estate footprint; renegotiating supplier contracts; and reducing structural costs.
Demand in traditional manufacturing markets had recovered, but the company continued to experience supply-chain disruption, labor constraints, fuel and other cost inflation, and product availability issues. Management stated that it is pursuing price realization to offset higher costs, but future effects of inflation and COVID-19 remain uncertain.
The Long Island Customer Service Center relocation to a smaller facility was completed through a new 10-year lease beginning in September 2021. The former facility, with a carrying value of approximately $15.3 million, was classified as held for sale and remained subject to a permitting period; no impairment was recorded.
Key disclosed risks include COVID-19 and future variants, economic and manufacturing conditions, inflation and commodity prices, interest-rate and LIBOR-to-SOFR transition risk, supply-chain and labor disruptions, customer credit and order cancellations, excess or insufficient PPE inventory, competition, cybersecurity and data privacy, retention of personnel, acquisitions, covenant and credit-facility availability, litigation, environmental and regulatory compliance, and potential impairment of goodwill and intangible assets.
Ordinary-course legal claims were pending, but management did not expect their resolution to have a material adverse effect on financial position, results of operations or liquidity. Disclosure controls were assessed as effective, with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether price increases and favorable product/customer mix can offset inflation, freight, labor and other operating-cost pressure.
- Whether working-capital expansion and lower operating cash conversion persist as inventory and receivables grow.
- The refinancing and rollover risk associated with $200.0 million of uncommitted credit facilities and debt maturities beginning with $50.0 million of senior notes due January 2023.
- Progress and realized savings from Mission Critical, including sales-force expansion, distribution optimization and restructuring actions.
- The timing and proceeds of the pending sale of the former Long Island Customer Service Center.
- Future effects of COVID-19, supply-chain constraints, labor availability, fuel costs, interest rates and geopolitical or trade developments.
- Whether manufacturing demand remains strong and whether government and non-manufacturing customer trends improve.
- The potential recovery of the remaining loss from the prior nitrile-glove prepayment after the company received $20.8 million under a vendor settlement.