MSC Industrial Direct Co., Inc. — Fiscal 2021 First-Quarter Form 10-Q
Reporting period: Thirteen weeks ended November 28, 2020, compared with the thirteen weeks ended November 30, 2019. MSC is a North American distributor of metalworking and maintenance, repair and operations products and services, operating in one reportable segment.
Financial results and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $771.9 million | $823.6 million | Down 6.3% |
| Gross profit | $323.3 million | $347.2 million | Down 6.9% |
| Gross margin | 41.9% | 42.2% | Down 30 basis points |
| Income from operations | $53.9 million | $90.3 million | Down 40.3% |
| Operating margin | 7.0% | 11.0% | Down 400 basis points |
| Net income attributable to MSC | $38.5 million | $65.4 million | Down 41.2% |
| Diluted earnings per share | $0.69 | $1.18 | Down $0.49 |
| Cash flow from operations | $103.2 million | $85.1 million | Up $18.1 million |
| Capital expenditures | $7.9 million | $12.7 million | Down $4.8 million |
Operating expenses declined 5.5% to $242.7 million, but increased to 31.4% of sales from 31.2%. The company reported $26.7 million of impairment expense related to prepaid nitrile-glove purchases. Restructuring and related costs were $4.0 million, including $2.5 million of consulting costs and approximately $1.5 million of severance and related costs.
At November 28, 2020, cash and cash equivalents were $53.1 million, total debt including finance leases was $490.1 million, and net debt was $437.0 million. Debt declined from $619.3 million at August 29, 2020, primarily because the company repaid $130.0 million under its credit facilities during the quarter. The $600.0 million committed revolving facility had $305.8 million of unused availability, reduced for outstanding letters of credit. The company was in compliance with its debt covenants.
Working capital was $634.3 million and the current ratio was 2.2 at November 28, 2020, compared with $829.0 million and 3.0, respectively, at August 29, 2020. The decline primarily reflected the special dividend payable and lower cash balances.
Material changes versus the prior comparable period
- Sales declined $51.7 million, reflecting approximately $62.2 million of lower volume and $0.3 million of unfavorable foreign exchange, partly offset by approximately $10.8 million of improved pricing, customer mix and product mix.
- Manufacturing average daily sales declined 13.5%, while non-manufacturing average daily sales increased 10.8%. Manufacturing represented 65% of sales, down from 70%.
- Government sales increased to 11% of revenue from 7%, primarily from demand for safety and janitorial products.
- Gross margin contracted because of increased product costs and changes in customer and product mix.
- The $26.7 million nitrile-glove impairment was the principal unusual item reducing operating income and margins.
- Cash flow from operations improved despite lower earnings, primarily because of favorable changes in accounts payable and accrued liabilities and inventory-related working capital.
- In November 2020, the board declared a $3.50-per-share special dividend totaling approximately $195.4 million, payable in December. The company subsequently borrowed $170.0 million under its committed facility to fund the payment, increasing committed-facility borrowings to $290.0 million.
Outlook, commentary, risks and unusual items
Management stated that existing cash and operating cash flow are expected to fund capital expenditures and operating requirements for at least the next twelve months. The company expects COVID-19 to continue producing reduced sales and net income levels and has prepared additional cost-reduction contingency plans if conditions deteriorate.
MSC continues its “Mission Critical” program, which includes investments in metalworking specialists, vending, vendor-managed inventory and in-plant solutions, sales-force development, customer and end-market diversification, distribution-network optimization and other structural cost reductions. The Dallas customer fulfillment center was closed in October 2020, with operations shifted to the remaining network.
COVID-19 risks include customer and supplier disruptions, logistics constraints, workforce interruptions, delayed collections, changing demand and difficulty calibrating PPE inventory. Excess PPE could require additional write-downs or discounted sales, while shortages could delay customer shipments.
The company classified its 170,000-square-foot Long Island customer service center as held for sale at November 28, 2020, with approximately $15.2 million of carrying value and no impairment recorded. In December, MSC announced plans to relocate to a smaller approximately 26,000-square-foot facility under a ten-year lease.
Other risks include competition and pricing pressure, commodity and energy-price volatility, customer credit risk, supply-chain disruption, information-security incidents, litigation, acquisition integration, covenant and credit-facility restrictions, LIBOR transition, goodwill impairment and significant control by principal shareholders. Management does not expect existing legal proceedings to have a material adverse effect, although outcomes are not determinable.
Important facts for investors to verify
- Whether PPE demand normalizes and whether further inventory write-downs or margin pressure result.
- The collectability and ultimate recovery associated with the $26.7 million nitrile-glove prepayment and impairment.
- The effect of the $195.4 million special dividend and related borrowing on leverage, interest expense and covenant headroom.
- Progress, costs and proceeds associated with the Long Island customer service center sale and relocation.
- Whether Mission Critical investments and restructuring actions produce the expected sales growth, cost savings and return on invested capital improvements.
- COVID-19 effects on manufacturing customers, suppliers, logistics, receivables and future operating cash flow.
- Future refinancing or repayment requirements, including the committed facility maturity in April 2022 and scheduled private-placement debt maturities.