MSC Industrial Direct Co., Inc. — Fiscal 2013 First-Quarter 10-Q Summary
Reporting period: Thirteen weeks ended December 1, 2012, compared with thirteen weeks ended November 26, 2011. The filing was dated January 10, 2013. MSC distributes approximately 600,000 metalworking and maintenance, repair and operations products through five fulfillment centers, 106 branches, sales associates, catalogs and electronic channels.
Financial Performance and Position
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $577.5 million | $545.7 million | 5.8% |
| Gross profit | $265.1 million | $252.1 million | 5.1% |
| Gross margin | 45.9% | 46.2% | Down 30 bps |
| Operating expenses | $162.7 million | $155.3 million | 4.8% |
| Operating income | $102.4 million | $96.8 million | 5.7% |
| Operating margin | 17.7% | 17.7% | Flat |
| Net income | $63.2 million | $59.8 million | 5.6% |
| Diluted EPS | $1.00 | $0.95 | 5.3% |
| Effective tax rate | 38.25% | 38.20% | Up 5 bps |
- Net cash provided by operating activities was $89.4 million, compared with $46.2 million in the prior-year quarter.
- Capital expenditures were $17.0 million, versus $8.3 million, primarily reflecting investment in vending solutions and the Davidson, North Carolina facility.
- Net cash used in financing activities was $7.4 million, including $18.9 million of dividends and $3.5 million of treasury-stock purchases, partially offset by $11.0 million of stock-option exercise proceeds.
- Cash and cash equivalents increased to $233.5 million from $168.5 million at September 1, 2012.
- Working capital was $801.6 million, with a current ratio of 5.6.
- Total capital lease and financing obligations were approximately $3.3 million; there were no borrowings under the $200 million unsecured credit facility other than immaterial letters of credit.
- The company was in compliance with its credit-facility covenants and reported no off-balance-sheet arrangements.
Material Changes Versus the Prior Comparable Period
- Sales increased $31.8 million. Management attributed approximately $15.3 million to volume, including approximately $8.0 million from the ATS Industrial Supply acquisition, and approximately $16.5 million to improved price realization, discounting and mix.
- Large-account customer sales increased approximately $11.2 million, while the remaining business increased approximately $20.6 million.
- Manufacturing-customer average daily sales increased 6.2%; non-manufacturing sales increased 4.9%.
- Gross margin declined because of higher product costs, customer and product mix, and temporarily lower margins from acquired businesses and the vending program.
- Operating expenses rose in dollars due to higher payroll, expanded sales staffing, investment programs and approximately $1.3 million of Davidson headquarters-related costs, but declined as a percentage of sales to 28.2% from 28.5%.
- Electronic-platform sales rose to $247.1 million, or 42.8% of consolidated sales, from $219.8 million, or 40.3%.
- Field sales associates increased to 1,093 from 1,056. Average order size, excluding the United Kingdom, increased to approximately $402 from $375.
- The quarterly dividend increased to $0.30 per share from $0.25. The company also declared an accelerated $0.30-per-share dividend payable December 27, 2012, intended to replace the January 2013 quarterly dividend.
Outlook, Commentary, Risks and Unusual Items
- Management expects operating costs to remain higher during fiscal 2013 because of sales growth, compensation, benefits, vending and other investment programs, and Davidson headquarters costs.
- Estimated associate relocation costs related to the Davidson co-location are $7.0 million to $10.0 million, primarily in fiscal 2013 and 2014.
- The company expects approximately $37.5 million of capital investment for the Davidson facility, of which approximately $4.2 million was spent in fiscal 2012 and $3.2 million in the first quarter of fiscal 2013.
- MSC expects approximately $55 million of capital expenditures for a fifth U.S. fulfillment center in Columbus, Ohio, substantially during fiscal 2013 and 2014. Approximately $1.1 million was spent in the first quarter, with operations expected to begin in late summer or early fall 2014.
- Management believes cash, operating cash flow and available revolving-credit capacity will fund operations and planned growth for at least the next 12 months.
- Management cited slower manufacturing-sector growth and volatility in the ISM index, including a reading below 50% in November 2012, as risks to future sales growth. Government sales, representing approximately 9% of revenue, remained constrained by government spending conditions.
- Other identified risks include economic and political conditions, customer and product mix, competition, acquisitions, commodity and energy prices, customer credit, order cancellations, supply-chain disruptions, information systems, key personnel and facility delays.
- Various ordinary-course claims and legal proceedings remain pending; management does not expect a material adverse effect, although outcomes are not currently determinable.
- No material changes occurred in unrecognized tax benefits, market-risk exposures, critical accounting policies or internal controls. Disclosure controls were assessed as effective.
Important Facts for Investors to Verify
- Whether manufacturing-sector activity and MSC’s sales growth remain durable as macroeconomic conditions and ISM readings fluctuate.
- Whether gross-margin pressure from product costs, mix, acquisitions and vending persists or reverses.
- Actual spending, timing and returns associated with the Davidson headquarters and Columbus fulfillment-center projects.
- The magnitude and timing of the estimated $7.0 million to $10.0 million relocation costs and other fiscal 2013 investment expenses.
- Progress in converting electronic-channel, vending and inventory-management investments into sustainable revenue and margin gains.
- The impact of the higher dividend and ongoing share withholding or repurchases on future cash deployment.
- Any changes in credit-facility availability, covenant compliance, customer credit quality or supply-chain conditions.