MSC Industrial Direct Co., Inc. — Fiscal 2012 Form 10-K Summary
Reporting period: Fiscal year ended September 1, 2012, comprising 53 weeks, including a 14-week fourth quarter. Comparisons are primarily with the 52-week fiscal year ended August 27, 2011. MSC distributes metalworking and maintenance, repair and operations products, primarily in the United States, through approximately 600,000 web-listed SKUs, 106 branches, and five customer fulfillment centers.
Financial performance and position
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Net sales | $2,355.9 million | $2,021.8 million | +16.5%; +14.3% on an average-daily-sales basis |
| Gross profit | $1,078.2 million | $940.9 million | +14.6% |
| Gross margin | 45.8% | 46.5% | Down 70 basis points |
| Operating expenses | $666.0 million | $591.2 million | +12.7% |
| Operating income | $412.2 million | $349.8 million | +17.9% |
| Operating margin | 17.5% | 17.3% | Up 20 basis points |
| Net income | $259.0 million | $218.8 million | +18.4% |
| Diluted EPS | $4.09 | $3.43 | +19.2% |
| Cash flow from operations | $234.3 million | $210.0 million | +$24.3 million |
- Fiscal fourth-quarter net sales were $635.3 million, compared with $533.2 million in the prior-year quarter; fourth-quarter net income was $68.9 million versus $59.5 million.
- Fourth-quarter average daily sales increased 10.4% year over year, slower than the 15.0% increase in the third quarter, reflecting weakening manufacturing trends.
- Cash and cash equivalents totaled $168.5 million at year-end, compared with $96.0 million a year earlier. Working capital increased to $749.6 million from $586.2 million, and the current ratio increased to 5.4 from 4.4.
- Total borrowings were approximately $3.2 million, consisting of capital leases and financing obligations. The $200.0 million unsecured revolving credit facility had no borrowings outstanding, apart from immaterial letters of credit, and matures in June 2016. MSC was in compliance with its covenants.
- Net cash used in investing activities was $81.1 million, including $47.7 million of capital expenditures and $33.5 million for acquisitions. Net cash used in financing activities was $80.6 million, including $63.0 million of dividends and $48.1 million of treasury-stock purchases.
- All-in eCommerce sales were $966.0 million, or 41.0% of fiscal 2012 sales, compared with $809.7 million, or 40.1%, in fiscal 2011.
Material changes versus the prior comparable period
- Sales growth benefited from higher volume, the additional fiscal week, prior acquisitions, and improved price realization. Management estimated approximately $249 million of the $334 million sales increase was volume-related, $19 million came from the ATS Industrial Supply acquisition, and $66 million reflected price realization and mix.
- Large Account Customer sales, including government and national accounts, increased by approximately $61 million. Government sales represented approximately 9% of fiscal 2012 revenue but remained constrained by government budget pressures.
- Gross margin declined because of higher product costs, customer and product mix, and lower margins from acquired businesses and vending programs. Competitive pricing pressure limited the ability to pass through cost increases.
- Operating expense leverage improved despite higher payroll, freight, medical, acquisition-related, vending, infrastructure, and extra-week costs. Fiscal 2012 included approximately $1.2 million of expenses related to the planned Davidson, North Carolina headquarters.
- MSC acquired ATS Industrial Supply on January 31, 2012 for cash consideration of approximately $32.2 million. ATS contributed $20.1 million of revenue and $1.6 million of pretax income from acquisition through year-end; acquisition-related expenses were $2.2 million.
- The company repurchased approximately 671,000 shares in the open market for $48.1 million, versus approximately 1.25 million shares for $69.3 million in fiscal 2011. Fiscal 2011 also included a $1.00-per-share special dividend.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2013 operating costs to increase because of higher sales volumes, compensation and fringe-benefit costs, vending and other investment programs, and the Davidson headquarters project.
- Management expected gross margin to improve in the first quarter of fiscal 2013 following a late-fiscal-2012 price increase, although aggressive competition constrained pricing actions.
- Management stated that cash, operating cash flow, and available revolving-credit capacity should fund operations and planned growth for at least the next 12 months.
- MSC planned approximately $37.5 million of capital expenditures for the Davidson facility, of which approximately $4.2 million was spent in fiscal 2012, plus estimated employee relocation costs of $7.0 million to $10.0 million primarily in fiscal 2013 and 2014.
- The planned Columbus, Ohio fulfillment center was expected to require approximately $55 million of capital expenditures, substantially in fiscal 2013 and 2014, with operations expected to begin in fall 2014.
- Manufacturing conditions weakened late in fiscal 2012. The ISM index fell below 50% during the fourth quarter, indicating contraction, and management cited risks from economic uncertainty, the European debt crisis, unemployment, housing weakness, government spending constraints, and potential customer caution.
- Other material risks include competition and pricing pressure, commodity and freight-cost inflation, customer credit losses, supplier or transportation disruptions, information-technology failures or cyberattacks, acquisition integration, government-contract compliance, litigation, and dependence on key personnel.
- Legal proceedings were described as routine, and management did not expect their ultimate resolution to materially affect financial position, results, or liquidity. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Separate the benefit of the 53rd week and acquisition contributions from underlying organic growth; fiscal 2012 average-daily-sales growth was 14.3% versus reported sales growth of 16.5%.
- Track whether the late-year manufacturing slowdown affects sales growth, especially because approximately 75% of business serves manufacturing customers.
- Monitor recovery or further deterioration in gross margin after the late-fiscal-2012 price increase, including the effects of vending, large accounts, product mix, and supplier costs.
- Verify execution, spending, timing, and relocation costs for the Davidson headquarters and Columbus fulfillment center projects.
- Assess working-capital requirements as inventory and receivables grow, and confirm continued availability and covenant compliance under the revolving credit facility.
- Consider shareholder-control and related-party risks: holders of Class B stock controlled approximately 76.8% of combined voting power, and the company leases its Atlanta fulfillment center from an affiliate of principal shareholders.