MSC Industrial Direct Co., Inc. — Fiscal 2011 Form 10-K Summary
Reporting period: Fiscal year ended August 27, 2011, comprising 52 weeks. The filing is an annual report rather than a quarterly filing; fiscal fourth-quarter results are included in the annual and quarterly data.
Business Context
MSC distributes approximately 600,000 metalworking and maintenance, repair and operations products primarily in the United States through 105 branches, five customer fulfillment centers, direct sales, catalogs, and e-commerce. The company serves approximately 320,000 active customers, including manufacturing companies, national accounts, and government agencies. E-commerce sales were $637.3 million, or 31.5% of consolidated sales, compared with 30.2% in fiscal 2010.
Fiscal 2011 benefited from improving manufacturing conditions, market-share gains, pricing actions, higher vendor rebates, and two acquisitions: Rutland Tool & Supply Co. and American Tool Supply, Inc. and its affiliate, American Specialty Grinding Co., Inc.
Financial Performance
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Net sales | $2,021.8 million | $1,692.0 million | +19.5% |
| Gross profit | $940.9 million | $766.9 million | +22.7% |
| Gross margin | 46.5% | 45.3% | +120 basis points |
| Operating expenses | $591.2 million | $525.1 million | +12.6% |
| Operating income | $349.8 million | $241.8 million | +44.6% |
| Operating margin | 17.3% | 14.3% | +300 basis points |
| Net income | $218.8 million | $150.4 million | +45.5% |
| Diluted EPS | $3.43 | $2.37 | +44.7% |
| Effective tax rate | 37.4% | 37.6% | Down 20 basis points |
Fiscal fourth-quarter net sales were $533.2 million, gross profit was $245.4 million, operating income was $93.9 million, and net income was $59.5 million. Fourth-quarter sales increased 15.6% on an average-daily-sales basis versus the comparable fiscal 2010 quarter.
Cash Flow, Liquidity, and Capital Structure
- Cash provided by operating activities was $210.0 million, up from $149.9 million in fiscal 2010.
- Cash used in investing activities was $54.4 million, including $28.9 million for acquisitions and $25.5 million for capital expenditures.
- Cash used in financing activities was $180.8 million, primarily reflecting $119.3 million of dividends, $69.3 million of share repurchases, and $39.4 million of debt repayments, partially offset by equity issuance and tax benefits.
- Cash and cash equivalents were $96.0 million at year-end, compared with $121.2 million in fiscal 2010.
- The company had no borrowings outstanding at August 27, 2011, compared with $39.4 million of debt at the prior year-end.
- Working capital increased to $586.2 million from $486.3 million, and the current ratio increased to 4.4 from 3.6.
- A new $200.0 million unsecured revolving credit facility was entered into on June 8, 2011, maturing in June 2016, with an option to increase capacity by up to $250.0 million subject to lender approval. The company was in compliance with all covenants.
- The company paid regular and special dividends totaling $119.6 million during fiscal 2011 and repurchased approximately 1.2 million Class A shares for approximately $66.6 million.
Material Changes Versus Fiscal 2010
- Sales growth accelerated, driven by stronger manufacturing demand, market-share gains, acquisitions, and improved pricing.
- Gross margin expanded due to price increases, customer and product mix, and higher vendor rebates.
- Operating expenses increased in absolute dollars because of higher payroll, commissions, benefits, freight, and acquisition-related costs, but declined as a percentage of sales from 31.0% to 29.2%.
- Field sales associates increased to 1,051 from 973, while active customers remained approximately 320,000.
- Catalog circulation declined to 18.6 million pieces from 21.7 million as the company shifted toward targeted and online marketing.
- Inventory increased to $344.9 million from $286.0 million and accounts receivable increased to $266.5 million from $221.0 million, reflecting higher sales and working-capital requirements.
- Goodwill increased by $5.7 million as a result of the fiscal 2011 acquisitions. No goodwill or indefinite-lived intangible impairment was recorded.
Outlook, Commentary, Risks, and Unusual Items
- Management expected fiscal 2012 operating costs to increase because of investment programs, higher sales volumes, compensation, and benefits. It planned to hold field sales headcount near current levels through the first quarter of fiscal 2012 and increase hiring beginning in the second quarter, subject to economic conditions.
- Management believed cash, operating cash flow, and available credit would fund operations, capital expenditures, and growth plans for at least the next 12 months.
- Management remained cautiously optimistic because manufacturing indicators had improved, but noted declining ISM trends, government budget constraints, high unemployment, weak housing markets, and geopolitical events as potential demand pressures.
- Fiscal 2011 included a $1.00 per-share special dividend, two acquisitions, approximately $3.5 million of acquisition-related expenses, and substantial share repurchases.
- Key risks include cyclical industrial demand, customer and product mix pressure, vendor price increases, commodity and freight-cost inflation, intense competition, supply-chain and transportation disruptions, dependence on information systems, credit losses, acquisition integration, government-contract compliance, and exposure to key personnel.
- The company had approximately $91.4 million of future operating lease obligations, including $45.9 million owed to related-party affiliates. Management stated that the related-party leases approximated fair market value.
- Various lawsuits and claims were pending, but management did not expect them to materially affect financial position, results of operations, or liquidity.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Most Important Facts to Verify
- Whether manufacturing demand and the ISM trend support continued sales growth after the fiscal 2011 recovery.
- The sustainability of the 46.5% gross margin after pricing actions, vendor rebates, commodity inflation, and growth in lower-margin large accounts.
- Working-capital efficiency, particularly inventory and receivables growth relative to sales.
- The contribution and integration progress of the Rutland and ATS/ASG acquisitions.
- The cash-flow impact and sustainability of dividends and share repurchases, including the fiscal 2011 special dividend.
- Compliance with the new credit facility’s leverage and interest-coverage covenants if borrowing resumes.
- Potential effects of government spending constraints, customer credit deterioration, supply-chain disruption, and related-party lease commitments.