MSC Industrial Direct Co., Inc. — Fiscal 2016 Form 10-K Summary
Business context and reporting period
MSC is a North American distributor of metalworking and maintenance, repair and operations products and services, serving commercial, manufacturing, government and national-account customers in the United States, Canada and the United Kingdom. The filing covers the 53-week fiscal year ended September 3, 2016, compared primarily with the 52-week fiscal year ended August 29, 2015. Fiscal fourth-quarter results covered 14 weeks.
- Approximately 68% of fiscal 2016 revenue came from manufacturing customers.
- The company operated 12 customer fulfillment centers and 85 branch offices and employed 6,462 associates.
- Active customers totaled approximately 366,000, excluding U.K. operations, and the searchable product offering totaled approximately 1.15 million SKUs in the selected operating data.
Financial performance and key metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Net sales | $2.864 billion | $2.910 billion | (1.6%) |
| Gross profit | $1.289 billion | $1.317 billion | (2.1%) |
| Gross margin | 45.0% | 45.2% | (20 basis points) |
| Operating income | $376.0 million | $379.5 million | (0.9%) |
| Operating margin | 13.1% | 13.0% | +10 basis points |
| Net income | $231.2 million | $231.3 million | Flat |
| Diluted EPS | $3.77 | $3.74 | +0.8% |
| Cash flow from operations | $401.1 million | $249.8 million | +$151.3 million |
Fiscal 2016 fourth-quarter net sales were $745.1 million, gross profit was $334.1 million, operating income was $99.2 million and net income was $61.8 million. Fourth-quarter diluted EPS was $1.02.
- Sales declined because of approximately $82.0 million of lower volume, $13.6 million of pricing and mix pressure, and $7.3 million of unfavorable foreign currency effects, partially offset by approximately $56.0 million from the extra fiscal week.
- Large Account Customer sales increased approximately $25.3 million, while sales to other customers declined approximately $72.2 million.
- eCommerce-related sales increased to 58.2% of consolidated sales from 55.6% in fiscal 2015.
- Operating expenses declined 2.6% to $912.9 million, reflecting cost-savings initiatives, lower payroll and discretionary spending, reduced advertising and professional fees, and lower freight costs.
- The effective tax rate was 37.8%, compared with 38.0% in fiscal 2015.
Liquidity, debt and capital allocation
| Balance-sheet item | September 3, 2016 | August 29, 2015 |
|---|---|---|
| Cash and cash equivalents | $52.9 million | $38.3 million |
| Working capital | $502.9 million | $610.1 million |
| Current ratio | 2.1 | 2.4 |
| Total debt | $606.8 million | $427.3 million |
| Net debt | $553.9 million | $389.0 million |
| Shareholders’ equity | $1.098 billion | $1.333 billion |
- The company generated $401.1 million from operations, used $87.9 million in investing activities and used $298.4 million in financing activities.
- Investing cash use included approximately $33.7 million to purchase the Atlanta customer fulfillment center and related real property.
- Financing uses included $383.8 million of share repurchases and $105.8 million of regular dividends. The company issued $175.0 million of senior notes and borrowed $305.0 million under its credit facility.
- The $650.0 million unsecured credit facility matures in April 2018. At year-end, $217.0 million was outstanding on the revolver and $187.5 million on the term loan; $249.0 million of revolving capacity was reported as available after subsequent repayments.
- The company issued $75.0 million of 2.65% senior notes due 2023 and $100.0 million of 2.90% senior notes due 2026.
- 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, outlook and risks
- Demand remained pressured by contraction in the metalworking manufacturing environment. The fiscal 2016 fourth-quarter Metalworking Business Index averaged 46.1, indicating contraction, although it improved during the quarter.
- Manufacturing-customer average daily sales declined 5.8% for the year, while non-manufacturing-customer average daily sales increased 2.5%.
- The company continued investing in sales coverage, inventory-management solutions, vending, eCommerce and technology. It initiated an upgrade of core financial systems, incurred approximately $6.6 million of related capital expenditures in fiscal 2016, and expected $11.0 million to $13.0 million in fiscal 2017, with completion targeted for spring 2017.
- The Atlanta fulfillment-center purchase was a related-party transaction involving entities owned by members of the Jacobson and Gershwind families. The purchase price was $33.7 million and was approved by a special committee of independent directors and the board.
- Goodwill and indefinite-lived intangible assets totaled approximately $638.2 million. Fiscal 2016 qualitative impairment assessments identified no impairment indicators.
- Key risks include cyclicality in manufacturing demand, competitive and online pricing pressure, customer and product-mix effects on margins, vendor and supply-chain disruptions, government-contract compliance, customer credit exposure, information-system and cybersecurity disruptions, execution of the financial-system upgrade, debt covenants and refinancing needs, litigation, environmental compliance and concentrated voting control.
- The company reported no material off-balance-sheet arrangements. Pending legal matters were not expected by management to materially affect financial position, results or liquidity.
Most important facts for investors to verify
- Whether manufacturing demand and Metalworking Business Index trends recover sufficiently to reverse the fiscal 2016 volume decline.
- Whether cost reductions can offset continued gross-margin pressure from pricing, customer mix, large accounts and vending growth.
- The refinancing or repayment plan for approximately $267.0 million of debt scheduled to mature in fiscal 2017 and the April 2018 credit-facility maturity.
- Execution, cost and internal-control implications of the core financial-system upgrade.
- The sustainability of cash returns after the $383.8 million fiscal 2016 share repurchase program and $105.8 million of regular dividends.
- The terms and governance implications of the related-party Atlanta property purchase and purchases of Class A shares from Class B holders.
- The impact of the company’s dual-class structure, under which principal shareholders controlled approximately 73.4% of combined voting power as of October 17, 2016.