MSC Industrial Direct Co., Inc. — Fiscal 2011 Second-Quarter Form 10-Q
Business context and reporting period
MSC is a direct marketer and distributor of approximately 600,000 metalworking and maintenance, repair and operations products, serving U.S. industrial customers through five fulfillment centers, 96 branches, catalogs, and websites. The filing covers the thirteen and twenty-six weeks ended February 26, 2011, compared with the periods ended February 27, 2010.
Financial performance and liquidity
| Metric | 13 weeks ended Feb. 26, 2011 | 13 weeks ended Feb. 27, 2010 | 26 weeks ended Feb. 26, 2011 | 26 weeks ended Feb. 27, 2010 |
|---|---|---|---|---|
| Net sales | $483.4 million | $395.5 million | $956.2 million | $780.3 million |
| Gross profit | $226.3 million | $179.0 million | $444.0 million | $354.7 million |
| Gross margin | 46.8% | 45.3% | 46.4% | 45.5% |
| Operating income | $80.6 million | $49.9 million | $157.7 million | $100.9 million |
| Operating margin | 16.7% | 12.6% | 16.5% | 12.9% |
| Net income | $49.7 million | $30.6 million | $97.2 million | $62.1 million |
| Diluted EPS | $0.78 | $0.48 | $1.53 | $0.98 |
- Operating expenses increased 12.8% year over year in both periods, but declined as a percentage of sales to 30.1% from 32.7% in the quarter and to 29.9% from 32.5% year to date.
- The effective tax rate was 38.33% for the quarter and 38.30% year to date, compared with 38.20% and 38.10%, respectively.
- Net cash provided by operating activities was $80.3 million year to date, compared with $74.3 million in the prior-year period. Capital expenditures were $14.0 million.
- Cash used in investing activities was $25.0 million, including $11.0 million for the Rutland acquisition. Cash used in financing activities was $100.9 million, primarily reflecting $91.2 million of dividends and $39.3 million of debt repayments.
- Cash and cash equivalents were $75.7 million at February 26, 2011, compared with $121.2 million at August 28, 2010. Working capital was $540.3 million and the current ratio was 5.0.
- Total borrowings were approximately $0.1 million at February 26, 2011, versus $39.4 million at August 28, 2010. The $150 million revolving facility had no outstanding balance, and the term loan had been fully repaid.
Material changes versus the prior comparable period
- Sales increased 22.2% in the quarter and 22.5% year to date, driven by improved manufacturing conditions, market-share gains, higher demand, pricing, and the Rutland acquisition.
- Manufacturing-customer average daily sales increased 24.2% in the quarter and 24.7% year to date; non-manufacturing sales increased 11.5% and 14.2%, respectively.
- Gross margin expanded by 150 basis points in the quarter and 90 basis points year to date, primarily from price increases, customer mix, and higher vendor rebates.
- Operating income increased 61.6% in the quarter and 56.3% year to date. Net income increased 62.1% and 56.7%, respectively.
- Website sales rose to $150.8 million, or 31.2% of consolidated sales, from $120.2 million, or 30.4%, in the prior-year quarter. Field sales associates increased to 998 from 949.
- On December 10, 2010, MSC acquired certain Rutland Tool & Supply assets for approximately $11.0 million in cash plus assumed liabilities. The acquisition contributed $6.6 million of quarterly revenue and $0.2 million of pretax income; acquisition-related expenses were $2.2 million year to date.
- The company paid a special $1.00-per-share dividend in addition to regular quarterly dividends of $0.22 per share. A further $0.22-per-share dividend was declared on March 29, 2011.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects operating costs to continue increasing through the remainder of fiscal 2011 because of investment programs, higher sales volumes, compensation, and benefits.
- Management expects existing cash, cash equivalents, and operating cash flow to fund operations and planned capital expenditures for at least the next twelve months.
- The company was in discussions to obtain a new credit facility because its existing unsecured facility expires June 8, 2011.
- Management cited a favorable manufacturing environment, including a March 2011 ISM index reading of 61.2%, but noted uncertainty from economic conditions and events in Japan and the Middle East.
- Key risks include economic and political conditions, customer and product mix, competition, commodity and energy-price volatility, customer credit risk, order cancellations, supply-chain disruptions, dependence on information systems, key-personnel retention, acquisitions, litigation, and regulatory proceedings.
- Routine claims and lawsuits were not expected to have a material adverse effect. A GSA audit concerning Trade Agreements Act compliance was closed without a material adverse effect.
- The company had no off-balance-sheet arrangements and reported no material change in market-risk exposures. Disclosure controls were deemed effective.
Important facts for investors to verify
- Confirm renewal or replacement of the credit facility before its June 8, 2011 expiration.
- Assess whether sales growth, gross-margin expansion, and market-share gains remain sustainable after the favorable year-over-year comparison.
- Monitor working-capital investment, particularly the increases in accounts receivable and inventory, and the resulting cash conversion.
- Evaluate the integration and profitability of the Rutland acquisition, including acquisition-related costs.
- Review the sustainability of dividend payments and share repurchases relative to operating cash flow and liquidity.
- Consider exposure to manufacturing-sector conditions, competitive pricing pressure, commodity inflation, supplier disruptions, and customer credit risk.