MSC Industrial Direct Co., Inc. — Fiscal 2012 Third-Quarter Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended May 26, 2012, compared with the periods ended May 28, 2011. Fiscal 2012 is a 53-week year ending September 1, 2012. MSC distributes metalworking and MRO products through approximately 600,000 SKUs, five fulfillment centers, 107 branches, sales associates, catalogs, and websites.
Financial performance and position
| Metric | Q3 FY2012 | Q3 FY2011 | Change | FY2012 YTD | FY2011 YTD |
|---|---|---|---|---|---|
| Net sales | $612.0 million | $532.4 million | 15.0% | $1,720.6 million | $1,488.6 million |
| Gross profit | $279.6 million | $251.6 million | 11.1% | $791.2 million | $695.6 million |
| Gross margin | 45.7% | 47.3% | Down 160 bps | 46.0% | 46.7% |
| Operating income | $110.9 million | $98.1 million | 13.0% | $304.2 million | $255.9 million |
| Operating margin | 18.1% | 18.4% | Down 30 bps | 17.7% | 17.2% |
| Net income | $70.2 million | $62.1 million | 13.1% | $190.1 million | $159.3 million |
| Diluted EPS | $1.10 | $0.97 | 13.4% | $3.00 | $2.50 |
Cash flow and liquidity: Year-to-date operating cash flow was $145.2 million, essentially unchanged from $145.3 million in the prior-year period. Investing cash use increased to $62.2 million from $29.6 million, including $33.5 million for acquisitions and $28.8 million for capital expenditures. Financing cash use was $68.0 million, including $48.0 million of share repurchases and $47.3 million of dividends. Cash and cash equivalents were $110.9 million at May 26, 2012, compared with $96.0 million at August 27, 2011.
Balance sheet and debt: Working capital was $700.0 million, compared with $586.2 million at fiscal year-end, and the current ratio was 5.2. Total assets were $1.379 billion and shareholders’ equity was $1.126 billion. Capital lease and financing obligations totaled approximately $3.7 million, including $1.4 million current, versus no such obligations at August 27, 2011. No borrowings were outstanding under the $200.0 million unsecured revolving credit facility, which matures June 8, 2016; the company was in compliance with its covenants.
Dividend and repurchases: The company paid $47.3 million in regular dividends year to date and declared an additional $0.25-per-share dividend payable July 24, 2012. It repurchased 670,000 Class A shares for $48.0 million year to date, with approximately 4.384 million shares remaining authorized under the repurchase plan.
Material changes versus the prior comparable periods
- Sales growth reflected market-share gains, stronger demand, acquisitions, volume growth, and improved price realization. Management estimated that Q3 sales growth included approximately $56 million from volume, $9 million from the ATS Industrial Supply acquisition, and $15 million from price realization.
- Year-to-date sales benefited from the January 2012 ATS acquisition and prior acquisitions, including American Tool Supply and Rutland Tool & Supply.
- Gross margins declined because of higher product costs, customer and product mix, and temporarily lower margins at acquired businesses.
- Operating expenses increased 10.0% in Q3 and 10.8% year to date, driven by payroll, benefits, freight, investment programs, and acquisition-related expenses. Expense leverage improved year to date, increasing the operating margin to 17.7% from 17.2%.
- Sales through MSC websites increased to $214.7 million, or 35.1% of Q3 sales, from $170.0 million, or 31.9%, in the prior-year quarter.
- Manufacturing customers, approximately 75% of business, produced Q3 average daily sales growth of 17.8%; non-manufacturing customer growth was 7.4%. Government sales represented approximately 9% of year-to-date sales and remained constrained by government spending.
Guidance, outlook, risks and unusual items
- Management expected operating costs to continue increasing during the remainder of fiscal 2012 due to sales growth, compensation and benefits, vending and metalworking initiatives, and other investments, while continuing to manage discretionary spending.
- Management stated that cash, operating cash flow, and available revolving-credit capacity should fund operations and planned requirements for at least the next twelve months.
- The May 2012 ISM manufacturing index was 53.5%, above the 50.0% expansion threshold for the 34th consecutive month, although it had eased from April and indicated slower growth. Management cited uncertainty related to the economic environment and the European debt crisis.
- MSC announced plans to co-locate its headquarters in Davidson, North Carolina, and construct a 180,000-square-foot customer service center. Expected capital expenditures were approximately $31.0 million, including approximately $5.0 million in the remainder of fiscal 2012, plus estimated associate relocation costs of $7.0 million to $10.0 million primarily in fiscal 2013 and 2014.
- Risks include macroeconomic and manufacturing-sector weakness, customer and product mix changes, competition, acquisition integration, commodity and energy-price volatility, customer credit risk, order cancellations, supply-chain disruptions, information-system dependence, key-personnel retention, litigation, and regulatory matters.
- The company was subject to federal income-tax examinations for fiscal 2009 and 2010. Various legal claims were pending, but management did not expect a material adverse effect on financial position, results, or liquidity.
- The company adopted updated guidance on comprehensive-income presentation and goodwill impairment testing; management reported no impact on financial position, results, or cash flows.
Investor verification points
- Verify whether gross-margin pressure from product costs, mix, and acquired businesses persisted after the reporting period.
- Assess whether sales growth and manufacturing demand remained above the pace implied by the ISM index and whether government-account weakness intensified.
- Review acquisition integration performance, including ATS Industrial Supply, and the effect of acquired-business margins on consolidated profitability.
- Monitor inventory and receivables growth relative to sales, given the increased working-capital investment.
- Confirm the timing and total cost of the Davidson facility, headquarters co-location, and employee relocation commitments.
- Track share repurchases, dividends, and utilization of the $200.0 million revolving facility, including continued covenant compliance.