Business Context and Reporting Period
MSC Industrial Direct Co., Inc. is a North American distributor of metalworking and maintenance, repair and operations products and services. The filing covers the thirteen and thirty-nine weeks ended May 29, 2021, representing fiscal 2021 third quarter and year-to-date results, compared with the periods ended May 30, 2020.
The company is transitioning from a spot-buy supplier to a mission-critical partner through metalworking investment, value-added services, eCommerce, vending and vendor-managed inventory programs, customer diversification, and structural cost reductions. It closed 73 branch offices and transitioned toward virtual customer care hubs during the second quarter.
Financial Performance and Position
| Metric | Q3 FY2021 | Q3 FY2020 | Change |
|---|---|---|---|
| Net sales | $866.3 million | $835.0 million | 3.8% increase |
| Gross profit | $366.5 million | $354.0 million | 3.5% increase |
| Gross margin | 42.3% | 42.4% | 10 basis-point decline |
| Income from operations | $128.6 million | $109.9 million | 17.1% increase |
| Operating margin | 14.8% | 13.2% | 160 basis-point increase |
| Net income attributable to MSC | $94.4 million | $77.7 million | 21.5% increase |
| Diluted EPS | $1.68 | $1.40 | 20.0% increase |
| Metric | 39 Weeks FY2021 | 39 Weeks FY2020 | Change |
|---|---|---|---|
| Net sales | $2.412 billion | $2.445 billion | 1.3% decrease |
| Gross profit | $984.5 million | $1.032 billion | 4.6% decrease |
| Gross margin | 40.8% | 42.2% | 140 basis-point decline |
| Income from operations | $210.6 million | $277.8 million | 24.2% decrease |
| Operating margin | 8.7% | 11.4% | 270 basis-point decline |
| Net income attributable to MSC | $151.0 million | $198.6 million | 24.0% decrease |
| Diluted EPS | $2.69 | $3.57 | 24.6% decrease |
Q3 sales growth reflected higher volume, one additional sales day, pricing and favorable foreign exchange. Manufacturing average daily sales increased 18.8%, while non-manufacturing average daily sales declined 21.9%. eCommerce-related sales represented 60.2% of Q3 sales, compared with 55.3% in the prior-year quarter.
Year-to-date sales declined primarily because of lower volume and lower sales to large account customers, partially offset by pricing, an additional sales day and favorable foreign exchange. Year-to-date operating expenses declined 1.0%, but freight expense increased to $100.4 million from $96.7 million.
Cash Flow, Debt and Liquidity
- Year-to-date cash provided by operating activities was $139.4 million, down from $214.9 million.
- Capital expenditures were $37.6 million, compared with $35.9 million in the prior-year period.
- Cash used in financing activities was $200.3 million, versus cash provided of $144.8 million in the prior-year period.
- The company paid $321.1 million of dividends, including $195.4 million of special dividends and $125.7 million of regular dividends.
- The company repurchased and immediately retired approximately $47.1 million of Class A common stock during the period.
- Cash and cash equivalents were $27.4 million at May 29, 2021, down from $125.2 million at August 29, 2020.
- Total debt, including finance leases, was $759.0 million, compared with $619.3 million at fiscal year-end. Net debt was $731.6 million.
- Current liabilities increased materially, primarily because $411.3 million of debt was classified as current. The current ratio declined to 1.7 from 3.0 at August 29, 2020.
- The committed revolving facility had $600.0 million of capacity, with approximately $385.8 million of unused availability after outstanding borrowings and letters of credit. The company was in compliance with its debt covenants.
Management believes existing cash, financial resources and operating cash flow will be sufficient to fund operating requirements and capital expenditures for at least the next 12 months, while acknowledging potential further COVID-19 effects.
Material Changes, Outlook and Unusual Items
- Year-to-date results included a $30.1 million PPE inventory write-down caused by excess safety-product supply and reduced expected realizable value.
- The company recorded a $26.7 million nitrile-glove prepayment impairment in the first quarter and a $20.8 million legal-settlement recovery in Q3, resulting in a net year-to-date impairment charge of $5.9 million. The recovery was received in June 2021, and the company continues to pursue recovery of the remaining prepayment.
- Year-to-date restructuring costs were $26.9 million, including operating-lease impairments and exit costs, consulting costs, severance and related expenses. The company expects the operational optimization project to continue through fiscal 2021.
- COVID-19 continues to create risks involving supplier and logistics disruptions, product demand uncertainty, excess PPE inventory, shortages, labor availability and customer credit. The company cannot reasonably estimate the pandemic’s future impact.
- Management cited improving manufacturing activity but noted that the rate of growth moderated toward the end of the quarter. It also identified emerging shortages of labor, fuel and certain products as potential future risks.
- Beginning in the second quarter, the company became self-insured for health benefits subject to stop-loss coverage and recorded an approximately $8.0 million related liability.
- The Long Island customer service center was classified as held for sale at a carrying value of approximately $15.3 million. The company expects to relocate to a smaller facility before the end of calendar 2021.
- Subsequent to quarter-end, the company acquired an 80% interest in Wm. F. Hurst Co., LLC for approximately $15.2 million, paid $20.0 million on maturing private-placement debt, approved a new authorization to repurchase up to 5.0 million shares, and declared a $0.75 per-share quarterly dividend.
Important Facts for Investors to Verify
- Whether manufacturing-led sales momentum offsets continued weakness in government and other non-manufacturing customer categories.
- The sustainability of the Q3 operating margin improvement after excluding the $20.8 million PPE settlement recovery.
- Remaining PPE inventory exposure and the amount ultimately recoverable from the nitrile-glove prepayment.
- Debt refinancing and liquidity needs, particularly the April 2022 maturity of the $600.0 million revolving credit facility and reliance on uncommitted facilities.
- Execution and realized savings from the branch closures, virtual customer care model and broader Mission Critical restructuring program.
- The continuing effects of COVID-19, supply-chain constraints, labor shortages, freight inflation and product availability on revenue and gross margin.
- The financial and operational contribution of the Wm. F. Hurst acquisition and the scale of future share repurchases and dividends.