MSC Industrial Direct Co., Inc. — Fiscal 2016 Q1 Form 10-Q Summary
Business context and reporting period
MSC is a North American distributor of metalworking and maintenance, repair and operations products, offering approximately 1.07 million SKUs, inventory-management solutions and supply-chain services. The filing covers the thirteen weeks ended November 28, 2015, compared with the thirteen weeks ended November 29, 2014. Fiscal 2016 is a 53-week year ending September 3, 2016.
The company had more than 6,500 associates, 12 customer fulfillment centers and 97 branch offices. Approximately 69% of fiscal Q1 revenue came from manufacturing customers. eCommerce-related sales represented 57.0% of consolidated sales, up from 54.5% in the prior comparable period.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $706.8 million | $731.1 million | Down 3.3% |
| Gross profit | $319.0 million | $330.1 million | Down 3.4% |
| Gross margin | 45.1% | 45.2% | Down 0.1 percentage point |
| Operating expenses | $228.6 million | $236.2 million | Down 3.2% |
| Income from operations | $90.4 million | $94.0 million | Down 3.8% |
| Operating margin | 12.8% | 12.9% | Down 0.1 percentage point |
| Net income | $55.0 million | $57.4 million | Down 4.2% |
| Diluted EPS | $0.89 | $0.91 | Down $0.02 |
| Net cash from operating activities | $122.1 million | $57.8 million | Up $64.4 million |
The effective tax rate was 38.2%, compared with 38.4% in the prior-year quarter. Comprehensive income was $53.9 million, including a $1.1 million unfavorable foreign-currency translation adjustment.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $37.9 million at November 28, 2015, compared with $38.3 million at August 29, 2015.
- Total debt was $353.7 million, down from $428.3 million at the prior fiscal year-end. Debt included $118.0 million under the revolving facility, $206.3 million under the term loan and $29.4 million of capital lease and financing obligations.
- The $650.0 million unsecured credit facility matures in April 2018 and includes a $400.0 million revolver and a $250.0 million term loan. Approximately $288.0 million of revolver capacity was unused at November 28, 2015.
- The company was in compliance with its debt covenants, including maximum leverage and minimum interest-coverage requirements.
- Working capital was $628.6 million and the current ratio was 2.7 at November 28, 2015, compared with $609.7 million and 2.4 at August 29, 2015.
- Capital expenditures were $15.6 million. Management stated that cash, operating cash flow and available revolver capacity should fund planned capital expenditures and operating requirements for at least the next 12 months.
Material changes versus the prior comparable period
- Sales declined $24.3 million, driven primarily by approximately $24.4 million of lower sales volume and a $2.2 million foreign-exchange impact, partly offset by $2.3 million from pricing and customer/product mix.
- Manufacturing-customer average daily sales declined 4.9%, while non-manufacturing-customer average daily sales increased 1.3%. Large Account Customer sales increased approximately $5.4 million, offset by a $29.7 million decline in the remaining business.
- Operating expenses benefited from lower freight costs, lower sales commissions and cost-saving initiatives. Freight expense declined to approximately $29.7 million from $32.6 million. The prior-year period included approximately $2.7 million of executive separation costs.
- Higher medical costs, including large claims and transition to a fully insured private healthcare exchange effective January 1, 2016, partially offset operating-expense savings.
- Operating cash flow increased substantially because lower sales reduced accounts receivable and inventory requirements.
- Financing cash use increased to $106.9 million from $44.7 million, primarily because the company repaid $111.3 million of credit-facility borrowings and paid $26.4 million of regular dividends. The prior-year period included a $184.2 million special dividend.
- The company repurchased 96,811 Class A shares for approximately $5.8 million, including 31,156 shares withheld for employee tax obligations. Approximately 1.677 million shares remained authorized for repurchase.
Guidance, outlook, commentary and risks
The filing does not provide specific quantitative revenue or earnings guidance. Management expects to continue pursuing market-share gains, customer diversification, cost reduction and growth in customer inventory, vending and other technology-enabled programs.
Management described the operating environment as challenging. The manufacturing PMI transitioned into contraction during the quarter, and the Metalworking Business Index was 43.2 in November 2015, indicating continued contraction in the metalworking industry. Management intends to monitor economic conditions and adjust growth investments accordingly.
- Key risks include economic weakness in manufacturing, competition, changing customer and product mix, commodity and energy-price volatility, customer credit risk and order cancellations.
- Additional risks include supplier or supply-chain disruptions, fulfillment-center expansion delays, business interruptions, information-system failures, cyber-attacks, extreme weather and loss of key personnel.
- Goodwill and intangible assets from acquisitions may be subject to impairment, and the company faces potential regulatory proceedings, litigation and environmental, health and safety compliance risks.
- Various legal claims and proceedings are outstanding, but management does not expect them to have a material adverse effect on financial position, results of operations or liquidity.
- The company reported no off-balance-sheet arrangements and no material changes in market-risk exposure from August 29, 2015.
- The company adopted or evaluated recently issued accounting standards, including revenue recognition, inventory measurement, deferred-tax classification and debt-issuance-cost presentation; management did not expect material effects except that the impact of the new revenue standard had not yet been determined.
Most important facts for investors to verify
- Whether manufacturing-sector contraction and lower sales volume persist and affect future revenue growth.
- The company’s ability to maintain approximately 45% gross margins while managing pricing, mix and commodity pressures.
- Debt maturities, covenant compliance and the availability of the revolver as the April 2018 credit-facility maturity approaches.
- Whether the improvement in operating cash flow is sustainable or primarily reflects temporary working-capital benefits from lower sales.
- The effect of medical-cost trends and the January 2016 transition to a fully insured healthcare exchange on operating expenses.
- Progress and capital requirements for fulfillment-center expansion, technology investments and inventory-management programs.
- Future dividend and share-repurchase activity, including the sustainability of the $0.43 quarterly dividend.
- The eventual accounting and disclosure impact of the pending revenue-recognition standard.