MSC INDUSTRIAL DIRECT CO., INC. The following is intended to update the information contained inMSC Industrial Direct Co., Inc.'s (together with its wholly owned subsidiaries and entities in which it maintains a controlling financial interest, "MSC," "MSC Industrial ," the "Company," "we," "us" or "our") Annual Report on Form 10-K for the fiscal year endedSeptember 3, 2022 and presumes that readers have access to, and will have read, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of Part II of such Annual Report on Form 10-K. Overview MSC is a leading North American distributor of a broad range of metalworking and maintenance, repair and operations ("MRO") products and services. We help our customers drive greater productivity, profitability and growth with inventory management and other supply chain solutions and deep expertise from more than 80 years of working with customers across industries. We offer approximately 2.2 million active, saleable SKUs through our catalogs; our brochures; our eCommerce channels, including our website, www.mscdirect.com (the "MSC website"); our inventory management solutions; and our customer care centers, customer fulfillment centers, regional inventory centers and warehouses. We service our customers from six customer fulfillment centers, 10 regional inventory centers and 38 warehouses. We continue to implement our strategies to gain market share, generate new customers, increase sales to existing customers, and diversify our customer base. Our business model focuses on providing overall procurement cost reduction and just-in-time delivery to meet our customers' needs. Many of our products are carried in stock, and orders for these in-stock products are typically fulfilled the day on which the order is received. We focus on offering inventory, process and procurement solutions that reduce MRO supply chain costs and improve plant floor productivity for our customers. We will seek to continue to achieve cost reductions throughout our business through cost-saving strategies and increased leverage from our existing infrastructure, and to continue to provide additional procurement cost-saving solutions to our customers through technology such as our Electronic Data Interchange ("EDI") systems, vendor-managed inventory ("VMI") systems and vending programs. Our field sales and service associate headcount was 2,545 atDecember 3, 2022 , compared to 2,445 atNovember 27, 2021 . Highlights Highlights during the thirteen-week period endedDecember 3, 2022 include the following: ?We generated$76.0 million of cash from operations, compared to$57.8 million for the same period in the prior fiscal year. ?We had net repayments of$15.0 million on our credit facilities, compared to net repayments of$24.0 million for the same period in the prior fiscal year. ?We paid out an aggregate$44.2 million in regular cash dividends. Due to the timing of the payable date, no cash dividends were paid during the same period in the prior fiscal year. ?We repurchased and immediately retired$14.3 million of MSC's Class A Common Stock, par value$0.001 per share ("Class A Common Stock"). ?We incurred$2.1 million in restructuring and other costs, compared to$5.3 million for the same period in the prior fiscal year. Restructuring and other costs primarily include consulting-related costs associated with the optimization of the Company's operations and associate severance and separation costs. Restructuring and other costs for the same period in the prior fiscal year also include equity award acceleration costs associated with severance and other exit-related costs. Recent Developments Progress on Mission Critical As previously disclosed, we initiated a company-wide project in fiscal year 2020, which we refer to as "Mission Critical," to accelerate market share capture and improve profitability over the period through fiscal year 2023. Among the Mission Critical initiatives to realize growth, we began and expect to continue investing in our market-leading metalworking business by adding to our metalworking specialist team, introducing value-added services to our customers, expanding our vending, VMI and in-plant solutions programs, building out our sales force, and diversifying our customers and end-markets. We also are focusing on improving profitability through the implementation of various pricing strategies and critical 16 -------------------------------------------------------------------------------- structural cost reductions in order to improve return on invested capital. Cost reductions will be comprised of savings in the areas of sales and service, supply chain and general and administrative expenses, and will include initiatives to optimize our distribution center network and real estate footprint, renegotiate supplier contracts, and redesign our talent acquisition and retention approach. Impact of Economic TrendsThe United States economy has experienced and continues to experience disruptions in the supply of certain products and services and tight conditions in the labor market. These disruptions and conditions have contributed to an inflationary environment which, while falling, remains elevated and has affected the price and, at times, the availability of certain products and services necessary for the Company's operations, including fuel, labor and certain products the Company sells or the inputs for such products. Such disruptions and conditions have impacted, and may continue to impact in the future, the Company's business, financial condition and results of operations. As a result of recent high inflation and elevated freight, labor and fuel costs, as well as periodic supply chain disruptions, the Company has implemented price realization strategies in response to increased costs the Company faces. Furthermore, in light of disruptions to availability and increased or uncertain shipping times, the Company is maintaining higher purchasing levels than it did prior to its fiscal year 2020 in order to ensure sufficient inventory supply to meet customer demand. Our Strategy Our primary objective is to grow sales profitably while offering our customers highly technical and high-touch solutions to solve their most complex challenges on the plant floor. Our strategy is to complete the transition from being a spot-buy supplier to a mission-critical partner to our customers. We will selectively pursue strategic acquisitions that expand or complement our business in new and existing markets or further enhance the value and offerings we provide. Business Environment We utilize various indices when evaluating the level of our business activity, including the Industrial Production ("IP") index. Approximately 69% of our revenues came from sales in the manufacturing sector during the thirteen weeks endedDecember 3, 2022 . Through statistical analysis, we have found that trends in our customers' activity have correlated to changes in the IP index. The IP index measures short-term changes in industrial production. Growth in the IP index from month to month indicates growth in the manufacturing, mining and utilities industries. The IP index over the three months endedNovember 2022 and the average for the three- and 12-month periods endedNovember 2022 were as follows: Period IP Index September 104.8 October 104.7 November 104.5 Fiscal year 2023 Q1 average 104.7 12-month average 103.8 The average IP index for the three months endedDecember 3, 2022 of 104.7 improved from the adjusted average from the prior quarter of 104.3, indicating continued growth in key industries and end-markets from the lower levels seen during the COVID-19 pandemic. Beginning in calendar year 2021 and continuing through calendar year 2022,the United States economy has experienced supply chain disruptions and significant levels of inflation, which have included higher prices for labor, freight, fuel and the products that the Company sells. The Company has implemented price realization strategies in response to increased costs the Company faces. We will continue to monitor the current economic conditions for the impact on our customers and markets and assess both risks and opportunities that may affect our business and operations. See "Impact of Economic Trends" above. 17 -------------------------------------------------------------------------------- Thirteen-Week Period EndedDecember 3, 2022 Compared to the Thirteen-Week Period EndedNovember 27, 2021 The table below summarizes the Company's results of operations both in dollars (in thousands) and as a percentage of net sales for the periods indicated: Thirteen Weeks Ended December 3, 2022 November 27, 2021 Change $ % $ % $ % Net sales$ 957,745 100.0%$ 848,547 100.0%$ 109,198 12.9% Cost of goods sold 559,946 58.5% 495,951 58.4% 63,995 12.9% Gross profit 397,799 41.5% 352,596 41.6% 45,203 12.8% Operating expenses 279,695 29.2% 256,581 30.2% 23,114 9.0% Restructuring and other costs 2,094 0.2% 5,283 0.6% (3,189) (60.4)% Income from operations 116,010 12.1% 90,732 10.7% 25,278 27.9% Total other expense (8,159) (0.9)% (4,122) (0.5)% (4,037) 97.9% Income before provision for income taxes 107,851 11.3% 86,610 10.2% 21,241 24.5% Provision for income taxes 26,639 2.8% 20,353 2.4% 6,286 30.9% Net income 81,212 8.5% 66,257 7.8% 14,955 22.6% Less: Net (loss) income attributable to noncontrolling interest (102) 0.0% 190 0.0% (292) (153.7)% Net income attributable to $ MSC Industrial 81,314 8.5%$ 66,067 7.8%$ 15,247 23.1% Net Sales Net sales increased 12.9%, or$109.2 million , to$957.7 million for the thirteen-week period endedDecember 3, 2022 , as compared to$848.5 million for the same period in the prior fiscal year. The$109.2 million increase in net sales was comprised of$56.1 million from improved pricing, inclusive of changes in customer and product mix, discounting and other items,$26.8 million of higher sales volume, and$29.1 million of net sales from fiscal year 2022 acquisitions, partially offset by$2.8 million of unfavorable foreign exchange impact. Of the$109.2 million increase in net sales during the thirteen-week period endedDecember 3, 2022 , national account customer sales increased by$42.2 million , sales to our core and other customers increased by$24.3 million , sales to our government customers increased by$13.6 million and sales from fiscal year 2022 acquisitions were$29.1 million . The table below shows, among other things, the change in our average daily sales ("ADS") by total Company and by customer type for the thirteen-week periods endedDecember 3, 2022 andNovember 27, 2021 , as compared to the same period in the prior fiscal year: ADS Percentage Change Thirteen Weeks Ended December 3, 2022 November 27, 2021 Net Sales (in thousands) $
957,745 $ 848,547 Sales Days 62 62 ADS (1) (in millions) $ 15.4 $ 13.7 Total Company ADS Percent Change 12.9% 9.9% Manufacturing Customers ADS Percent Change (2) 11.1% 14.5% Manufacturing Customers Percent of Total Net Sales (2) 69% 70% Non-Manufacturing Customers ADS Percent Change (2) 17.2% 0.5%
Non-Manufacturing Customers Percent of Total
31% 30%
(1) ADS is calculated using the number of business days in the United States for the periods
indicated.
(2) Includes the effect of a reclassification of end-markets which occurred during the fourth quarter
of fiscal year 2022.
18-------------------------------------------------------------------------------- We believe that our ability to transact business with our customers directly through the MSC website as well as through various other electronic portals gives us a competitive advantage over smaller suppliers. Sales made through our eCommerce platforms, including sales made through EDI systems, VMI systems, Extensible Markup Language ordering-based systems, vending, hosted systems and other electronic portals, represented 61.9% of consolidated net sales for the thirteen-week period endedDecember 3, 2022 , as compared to 60.4% of consolidated net sales for the same period in the prior fiscal year. These percentages of consolidated net sales do not include eCommerce sales from our recent acquisitions. Gross Profit Gross profit of$397.8 million for the thirteen-week period endedDecember 3, 2022 increased$45.2 million , or 12.8%, compared to the same period in the prior fiscal year. Gross profit margin was 41.5% for the thirteen-week period endedDecember 3, 2022 , as compared to 41.6% for the same period in the prior fiscal year. The increase in gross profit was primarily a result of a higher sales level as described above and improved price realization and positive spread between sales price and cost of goods sold. The decline in gross profit margin was primarily attributable to the margins of our recent acquisitions. Operating Expenses Operating expenses increased 9.0%, or$23.1 million , to$279.7 million for the thirteen-week period endedDecember 3, 2022 , as compared to$256.6 million for the same period in the prior fiscal year. Operating expenses were 29.2% of net sales for the thirteen-week period endedDecember 3, 2022 , as compared to 30.2% for the same period in the prior fiscal year. The increase in Operating expenses was primarily attributable to our acquisitions in the fourth quarter of fiscal year 2022 and higher payroll and payroll-related costs, as well as higher freight expense. The decline in Operating expenses as a percentage of net sales was related to our cost savings programs and productivity improvements resulting from our Mission Critical initiatives. Payroll and payroll-related costs for the thirteen-week period endedDecember 3, 2022 were 56.2% of total Operating expenses, as compared to 57.0% for the same period in the prior fiscal year. Payroll and payroll-related costs, which include salary, incentive compensation, sales commission, and fringe benefit costs, increased$11.0 million for the thirteen-week period endedDecember 3, 2022 . The majority of this increase compared to the same period in the prior fiscal year was due to salary and sales commission costs. Freight expense was$40.5 million for the thirteen-week period endedDecember 3, 2022 , as compared to$36.2 million for the same period in the prior fiscal year. The primary drivers of the increase in freight expense were increased sales volume and higher fuel-related charges. Restructuring and Other Costs We incurred$2.1 million in restructuring and other costs for the thirteen-week period endedDecember 3, 2022 , as compared to$5.3 million for the same period in the prior fiscal year. These charges primarily include consulting-related costs associated with the optimization of the Company's operations and associate severance and separation costs. Restructuring and other costs for the same period in the prior fiscal year also include equity award acceleration costs associated with severance and other exit-related costs. See Note 8, "Restructuring and Other Costs" in the Notes to Condensed Consolidated Financial Statements for additional information. Income from Operations Income from operations increased 27.9%, or$25.3 million , to$116.0 million for the thirteen-week period endedDecember 3, 2022 , as compared to$90.7 million for the same period in the prior fiscal year. Income from operations as a percentage of net sales increased to 12.1% for the thirteen-week period endedDecember 3, 2022 , as compared to 10.7% for the same period in the prior fiscal year. This increase was primarily attributable to overall increases in sales and gross margin and an improvement in the ratio of operating expenses to sales during the thirteen-week period endedDecember 3, 2022 . Total Other Expense Total other expense increased 97.9%, or$4.0 million , to$8.2 million for the thirteen-week period endedDecember 3, 2022 , as compared to$4.1 million for the same period in the prior fiscal year. This increase was primarily due to higher interest rates on our credit facilities and a higher average debt balance on our committed credit facility. 19 -------------------------------------------------------------------------------- Provision for Income Taxes The Company's effective tax rate was 24.7% for the thirteen-week period endedDecember 3, 2022 , as compared to 23.5% for the same period in the prior fiscal year. The increase in the effective tax rate was primarily due to a lower tax benefit from stock-based compensation. Net Income The factors which affected net income for the thirteen-week period endedDecember 3, 2022 , as compared to the same period in the prior fiscal year, have been discussed above.
Liquidity and Capital Resources
December 3, September 3,
2022 2022 $ Change
(In thousands)
Total debt $ 780,108 $ 794,592 $ (14,484) Less: Cash and cash equivalents 26,331 43,537 (17,206) Net debt
$ 753,777 $ 751,055 $ 2,722 Equity$ 1,398,420 $ 1,362,283 $ 36,137 As ofDecember 3, 2022 , we had$26.3 million in cash and cash equivalents, substantially all with well-known financial institutions. Historically, our primary financing needs have been to fund our working capital requirements necessitated by our sales growth and the costs of acquisitions, new products, new facilities, facility expansions, investments in vending solutions, technology investments, and productivity investments. Cash generated from operations, together with borrowings under our credit facilities and net proceeds from the private placement notes, have been used to fund these needs, to repurchase shares of Class A Common Stock from time to time, and to pay dividends to our shareholders. As ofDecember 3, 2022 , total borrowings outstanding, representing amounts due under our credit facilities and notes, as well as all finance leases and financing arrangements, were$780.1 million , net of unamortized debt issuance costs of$1.3 million , as compared to total borrowings of$794.6 million , net of unamortized debt issuance costs of$1.4 million , as of the end of fiscal year 2022. The decrease was driven by higher net repayments on our committed credit facility. See Note 6, "Debt" in the Notes to Condensed Consolidated Financial Statements for more information about these balances. We believe, based on our current business plan, that our existing cash, financial resources and cash flow from operations will be sufficient to fund necessary capital expenditures and operating cash requirements for at least the next 12 months. We will continue to evaluate our financial position in light of future developments, particularly those relating to changes in macroeconomic conditions, including variations in foreign currency exchange rates, commodity and energy prices, labor and supply costs, inflation, and interest rates, and to take appropriate action as it is warranted. The table below summarizes certain information regarding the Company's cash flows for the periods indicated: Thirteen Weeks Ended December 3, November 27, 2022 2021 (In thousands) Net cash provided by operating activities$ 76,024 $
57,804
Net cash used in investing activities (25,591)
(15,262)
Net cash used in financing activities (67,950)
(19,794)
Effect of foreign exchange rate changes on cash 311
(409)
and cash equivalents Net (decrease) increase in cash and cash$ (17,206) $
22,339
equivalents
Cash Flows from Operating Activities Net cash provided by operating activities was$76.0 million for the thirteen weeks endedDecember 3, 2022 , compared to$57.8 million for the thirteen weeks endedNovember 27, 2021 . The increase was primarily due to the following: ?an increase in net income as described above; 20 -------------------------------------------------------------------------------- ?a decrease in the change in accounts receivable primarily due to prior fiscal year increases in accounts receivable attributable to changes in prior fiscal year sales volume; ?an increase in the change in accounts payable and accrued liabilities from increased inventory purchases; partially offset by ?an increase in the change in prepaid expenses and other current assets attributable to the receivables related to vendor rebate programs and an increase in the change in inventory. The table below summarizes certain information regarding the Company's operations: December 3, September 3, November 27, 2022 2022 2021 (In thousands) Working Capital (1)$ 831,812 $ 817,679$ 762,133 Current Ratio (2) 2.1 2.1 2.3 Days' Sales Outstanding (3) 64.9 65.3 61.8 Inventory Turnover (4) 3.2 3.2 3.3 (1) Working Capital is calculated as current assets less current liabilities. (2) Current Ratio is calculated by dividing total current assets by total current liabilities. (3) Days' Sales Outstanding is calculated by dividing accounts receivable by net sales, using trailing two months sales data. (4) Inventory Turnover is calculated by dividing total cost of goods sold by inventory, using a 13-month trailing average inventory. Working capital and current ratio as ofDecember 3, 2022 remained consistent when compared toSeptember 3, 2022 . The slight increase in working capital was primarily due to an increase in inventories and receivables related to vendor rebate programs. Working capital as ofDecember 3, 2022 increased compared toNovember 27, 2021 , primarily due to increases in both accounts receivable and inventories. The current ratio as ofDecember 3, 2022 declined slightly compared toNovember 27, 2021 , primarily due to the increase in the current portion of debt. Days' sales outstanding as ofDecember 3, 2022 remained comparable toSeptember 3, 2022 . The increase in days' sales outstanding as ofDecember 3, 2022 compared toNovember 27, 2021 was primarily due to the receivables portfolio consisting of a greater percentage of our national account program sales, which typically have longer payment terms. Inventory turnover as ofDecember 3, 2022 remained comparable to bothSeptember 3, 2022 andNovember 27, 2021 . Cash Flows from Investing Activities Net cash used in investing activities for the thirteen-week periods endedDecember 3, 2022 andNovember 27, 2021 was$25.6 million and$15.3 million , respectively. The use of cash for both periods was primarily due to expenditures for property, plant and equipment mainly related to Mission Critical projects. Cash Flows from Financing Activities Net cash used in financing activities was$68.0 million for the thirteen weeks endedDecember 3, 2022 , compared to$19.8 million for the thirteen weeks endedNovember 27, 2021 , primarily due to the following: ?$44.2 million of regular cash dividends paid during the thirteen weeks endedDecember 3, 2022 , compared to no dividends paid during the thirteen weeks endedNovember 27, 2021 (dividend declared onOctober 14, 2021 was paid onNovember 30, 2021 ); ?net repayments of$15.0 million on our credit facilities during the thirteen weeks endedDecember 3, 2022 , compared to net repayments of$24.0 million on our credit facilities during the thirteen weeks endedNovember 27, 2021 ; and ?$18.5 million in aggregate repurchases of Class A Common Stock during the thirteen weeks endedDecember 3, 2022 , compared to$4.6 million in aggregate repurchases of Class A Common Stock during the thirteen weeks endedNovember 27, 2021 . 21 -------------------------------------------------------------------------------- Capital Expenditures We continue to invest in sales productivity initiatives, eCommerce and vending platforms, customer fulfillment centers and distribution network, and other infrastructure and technology. Debt Credit Facilities InApril 2017 , the Company entered into a$600.0 million revolving credit facility, which was subsequently amended and extended inAugust 2021 . As ofDecember 3, 2022 , the Company also had three uncommitted credit facilities, totaling$208.0 million of aggregate maximum uncommitted availability. See Note 6, "Debt" in the Notes to Condensed Consolidated Financial Statements for more information about our credit facilities. As ofDecember 3, 2022 , we were in compliance with the operating and financial covenants of our credit facilities. The current unused balance of$564.7 million from the revolving credit facility, which is reduced by outstanding letters of credit, is available for working capital purposes if necessary. See Note 6, "Debt" in the Notes to Condensed Consolidated Financial Statements for more information about these balances. Private Placement Debt and Shelf Facility Agreements InJuly 2016 , we completed the issuance and sale of unsecured senior notes. InJanuary 2018 , we entered into two note purchase and private shelf facility agreements (together, the "Shelf Facility Agreements"). InJune 2018 andMarch 2020 , we entered into additional note purchase agreements. Pursuant to the terms of the Shelf Facility Agreements, no new unsecured senior notes were sold afterJanuary 12, 2021 . See Note 6, "Debt" in the Notes to Condensed Consolidated Financial Statements for more information about these transactions. Leases and Financing Arrangements As ofDecember 3, 2022 , certain of our operations were conducted on leased premises. These leases are for varying periods, the longest extending to fiscal year 2031. In addition, we are obligated under certain equipment and automobile operating and finance leases, which expire on varying dates through fiscal year 2026. From time to time, we enter into financing arrangements with vendors to purchase certain information technology equipment or software. Critical Accounting Estimates On an ongoing basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition, inventory valuation, allowance for credit losses, warranty reserves, contingencies and litigation, income taxes, and accounting for goodwill and long-lived assets. We make estimates, judgments and assumptions in determining the amounts reported in the unaudited Condensed Consolidated Financial Statements and accompanying Notes. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The estimates are used to form the basis for making judgments about the carrying values of assets and liabilities and the amount of revenues and expenses reported that are not readily apparent from other sources. Actual results may differ from these estimates. There have been no material changes outside the ordinary course of business in the Company's critical accounting policies, as disclosed in its Annual Report on Form 10-K for the fiscal year endedSeptember 3, 2022 . Recently Issued Accounting Pronouncements See Note 1, "Basis of Presentation" in the Notes to Condensed Consolidated Financial Statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk For information regarding our exposure to certain market risks, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Interest Rate Risks" under Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of Part II of our Annual Report on Form 10-K for the fiscal year endedSeptember 3, 2022 . Except as described in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" 22
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contained elsewhere in this Report, there have been no significant changes in our financial instrument portfolio or interest rate risk since ourSeptember 3, 2022 fiscal year-end. Item 4. Controls and Procedures Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, with the participation of our Chief Executive Officer and our Chief Financial Officer, as well as other key members of our management, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Report, to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is (i) accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act) during the fiscal quarter endedDecember 3, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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