MSC Industrial Direct Co., Inc. — Fiscal 2013 Form 10-K Summary
Business context and reporting period
MSC distributes metalworking and maintenance, repair and operations products primarily in North America through 14 customer fulfillment centers, 105 branches, catalogs, sales representatives and e-commerce channels. The filing covers the 52-week fiscal year ended August 31, 2013, compared with the 53-week fiscal year ended September 1, 2012.
On April 22, 2013, MSC acquired substantially all of Barnes Group’s North American distribution business, referred to as BDNA, for cash consideration of approximately $547.3 million. BDNA’s results are included from the acquisition date.
Key financial metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Net sales | $2.458 billion | $2.356 billion | +4.3% |
| Gross profit | $1.119 billion | $1.078 billion | +3.7% |
| Gross margin | 45.5% | 45.8% | Down 30 basis points |
| Operating income | $385.5 million | $412.2 million | -6.5% |
| Operating margin | 15.7% | 17.5% | Down 180 basis points |
| Net income | $238.0 million | $259.0 million | -8.1% |
| Diluted EPS | $3.75 | $4.09 | -8.3% |
| Cash flow from operations | $325.4 million | $234.3 million | +$91.2 million |
BDNA contributed $108.4 million of sales and $4.5 million of net income, excluding non-recurring costs, during the post-acquisition period. Excluding BDNA, e-commerce and other electronic sales were $1.035 billion, or 44.0% of consolidated sales, compared with 41.0% in fiscal 2012.
Cash and cash equivalents were $55.9 million at year-end, compared with $168.5 million in the prior year. Working capital was $679.9 million, compared with $749.6 million. Total borrowings, including capital leases and financing obligations, were approximately $255.8 million, compared with $3.2 million.
Net cash used in investing activities was $638.0 million, including $548.8 million for acquisitions and $89.3 million for capital expenditures. Net cash provided by financing activities was $200.1 million, including $370.0 million of credit-facility borrowings, partly offset by $120.0 million of revolving-loan repayments and $75.9 million of dividends.
Material changes versus the prior comparable period
- Sales growth slowed materially from fiscal 2012, with average daily sales growth of 6.4% in fiscal 2013 versus 14.3% in fiscal 2012. The shorter fiscal year reduced reported growth.
- BDNA added substantial sales and expanded MSC’s fastener, consumables, vendor-managed inventory, Canadian, transportation, natural resources and other end-market exposure.
- Margins declined because of higher product costs, customer and product mix changes, pricing pressure and lower vending-program margins.
- Operating expenses increased 10.1%, driven by BDNA, sales-force expansion, investment programs, Davidson headquarters costs and approximately $11.6 million of BDNA transaction and integration costs.
- Manufacturing and especially metalworking demand remained weak or contracted during much of fiscal 2013, while government sales were constrained by government spending conditions.
- Field sales associates increased to 1,790 from 1,095, including 667 associates added with BDNA. Active customers excluding BDNA were approximately 322,000, broadly stable with the prior year.
- Annual dividends increased to $1.20 per share from $1.00. The board subsequently declared a $0.33 quarterly dividend payable in November 2013.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2014 operating costs to increase because of a full year of BDNA operations, integration and restructuring, compensation and benefit costs, vending investments, the Davidson headquarters and the Columbus fulfillment center.
- BDNA-related transaction, integration and restructuring costs were estimated at approximately $15 million to $20 million for fiscal 2014; total related costs were expected to be approximately $25 million to $30 million over fiscal 2013 and 2014, with $11.6 million recorded in fiscal 2013.
- Management expected gross margin to improve in the first quarter of fiscal 2014 from fiscal 2013 levels, helped by BDNA product mix and late-fiscal-year price increases, but noted continuing competitive pricing pressure.
- MSC expected to invest approximately $55 million in the Columbus, Ohio fulfillment center, including $6.4 million spent in fiscal 2013, with operations expected to begin in late 2014.
- Management stated that cash, operating cash flow and available revolving-credit capacity should fund operations, planned capital expenditures and other requirements for at least the next 12 months.
- The new unsecured credit facility totals $650 million, including a $250 million term loan and a $400 million revolver, and matures April 22, 2018. Year-end term-loan borrowings were $250 million, with no revolver balance. The facility requires maximum leverage and minimum interest-coverage ratios of 3.00 to 1.00; MSC reported compliance at year-end.
- Principal risks include cyclical manufacturing demand, customer and product mix pressure, vendor and freight-cost inflation, intense industry competition, acquisition integration, credit losses, supply-chain or transportation disruption, information-system and cybersecurity failures, government-contract compliance, impairment of goodwill and intangible assets, and concentrated voting control.
- Goodwill and identifiable intangible assets totaled approximately $785.6 million at year-end. No impairment was identified in fiscal 2013, but future cash-flow shortfalls could result in impairment charges.
- Legal proceedings were described as ordinary-course matters, and management did not expect them to have a material adverse effect. The company had $97.7 million of operating lease commitments, including $41.4 million to related parties, and $250 million of credit-facility maturities.
Most important facts for investors to verify
- Whether BDNA integration produces the expected revenue synergies, margin benefits and cost savings without further material restructuring charges.
- Organic sales trends in the core metalworking and manufacturing markets, separately from acquisition-driven growth.
- Gross-margin recovery, particularly the effects of pricing, customer mix, product costs and vending programs.
- Compliance with the credit facility’s leverage and interest-coverage covenants as debt is amortized and capital spending continues.
- Execution, cost and timing of the Columbus fulfillment center and related network consolidation.
- Potential impairment exposure associated with approximately $630.3 million of goodwill and $155.3 million of identifiable intangible assets.
- Related-party lease arrangements and the effect of concentrated Class B voting control, which represented approximately 74.5% of combined voting power.