MSC Industrial Direct Co., Inc. — Fiscal 2013 Second-Quarter Form 10-Q
Business Context and Reporting Period
MSC distributes approximately 600,000 metalworking and maintenance, repair and operations products through catalogs, websites, electronic procurement platforms, five fulfillment centers, 106 branch offices and a large sales force. The filing covers the thirteen and twenty-six weeks ended March 2, 2013, compared with February 25, 2012. Fiscal 2013 is a 52-week year ending August 31, 2013.
Key Financial Metrics
| Metric | Q2 FY2013 | Q2 FY2012 | YTD FY2013 | YTD FY2012 |
|---|---|---|---|---|
| Net sales | $569.5 million | $563.0 million | $1,147.0 million | $1,108.7 million |
| Gross profit | $256.4 million | $259.5 million | $521.5 million | $511.6 million |
| Gross margin | 45.0% | 46.1% | 45.5% | 46.1% |
| Income from operations | $90.6 million | $96.5 million | $192.9 million | $193.4 million |
| Operating margin | 15.9% | 17.1% | 16.8% | 17.4% |
| Net income | $56.1 million | $60.1 million | $119.3 million | $119.9 million |
| Diluted EPS | $0.88 | $0.95 | $1.88 | $1.89 |
For the twenty-six weeks ended March 2, 2013, operating cash flow was $135.0 million, capital expenditures were $40.3 million, cash dividends paid were $37.9 million and net cash increased by $75.5 million. Cash and cash equivalents were $243.9 million at March 2, 2013, compared with $168.5 million at September 1, 2012.
Total liabilities were $232.1 million and shareholders’ equity was $1.295 billion at March 2, 2013. Total borrowings consisted primarily of approximately $3.3 million of capital lease and financing obligations. The $200.0 million unsecured revolving credit facility had no borrowings outstanding other than immaterial letters of credit, and the company was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Q2 sales increased 1.2%; year-to-date sales increased 3.5%. Management attributed the year-to-date increase primarily to improved price realization, while volume growth remained limited by weakness in core metalworking manufacturing.
- Q2 gross profit declined 1.2% despite higher sales, and gross margin decreased 110 basis points to 45.0%. Year-to-date gross margin decreased 60 basis points to 45.5%.
- Operating expenses increased 1.8% in Q2 and 3.2% year to date, reflecting payroll growth, investment programs, headquarters-related costs and BDNA acquisition transaction expenses.
- Q2 operating income declined 6.2% and net income declined 6.6%; year-to-date operating income declined 0.2% and net income declined 0.5%.
- Operating cash flow increased substantially from $74.1 million to $135.0 million year to date, aided by inventory-related working-capital changes.
- Electronic-platform sales increased to $494.7 million, or 43.1% of year-to-date sales, from $447.2 million, or 40.3%, in the prior-year period.
- The quarterly dividend increased to $0.30 per share from $0.25 per share. The company paid $37.9 million in dividends during the first 26 weeks.
Guidance, Outlook, Risks and Unusual Items
Management reported that the manufacturing environment had stabilized above the 50.0% ISM expansion threshold, with the March 2013 ISM reading at 51.3%, but continued weakness and uncertainty remained. Government sales represented approximately 9.0% of year-to-date revenue and were constrained by the government-spending environment.
The company expects operating costs to remain higher during fiscal 2013 because of compensation, vending and other investment programs and the Davidson, North Carolina headquarters project. Estimated non-recurring headquarters costs are $7.0 million to $10.0 million, principally in fiscal 2013 and 2014; approximately $1.5 million was incurred year to date. The company also recorded approximately $1.6 million of BDNA acquisition transaction costs during the first 26 weeks.
On February 22, 2013, MSC agreed to acquire substantially all assets and certain liabilities of Barnes Group’s North American distribution business for $550.0 million, subject to working-capital and EBITDA-related adjustments, regulatory approval and other closing conditions. Closing was expected in fiscal Q3. The transaction was expected to be financed with available cash and new credit and term-loan borrowings. Expected transaction and integration costs were $25.0 million to $30.0 million, primarily in fiscal 2013 and 2014.
MSC expects approximately $37.5 million of capital investment for its Davidson customer service center and approximately $55.0 million for a new Columbus, Ohio fulfillment center. Management stated that cash, operating cash flow and available credit should fund planned operations and investments for at least the next twelve months.
Principal risks include economic and manufacturing weakness, customer and product-mix changes, acquisition integration, competition, commodity and energy-price volatility, customer credit risk, order cancellations, supply-chain or business interruptions, information-system dependence, key-personnel retention and delays in facility expansion. Pending legal matters were not expected to have a material adverse effect.
Facts Investors Should Verify
- Closing terms, financing, leverage impact and integration performance of the $550.0 million BDNA acquisition.
- Whether gross-margin pressure from product costs, customer mix, acquired businesses and vending programs reverses or persists.
- Actual headquarters, Columbus facility and other capital expenditures compared with the stated plans.
- Sales trends following the manufacturing-sector slowdown and the effect of government-spending constraints.
- Realization of expected operating leverage from e-commerce, sales-force expansion, vending and productivity initiatives.
- Future dividend and share-repurchase activity, including the approximately 4.384 million shares remaining under the repurchase authorization.