MSC Industrial Direct (MSM) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for the quarter ended December 2, 2023, including balance sheets, income, and cash flow statements Condensed Consolidated Balance Sheets As of December 2, 2023, total assets slightly decreased to $2.49 billion, while total liabilities increased to $1.10 billion, leading to a decrease in shareholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 2, 2023 | Sep 2, 2023 | | :--- | :--- | :--- | | Total Assets | $2,493,724 | $2,544,134 | | Cash and cash equivalents | $25,805 | $50,052 | | Accounts receivable, net | $414,280 | $435,421 | | Inventories | $709,362 | $726,521 | | Total Liabilities | $1,095,499 | $1,051,552 | | Current portion of debt | $244,048 | $229,935 | | Long-term debt | $294,430 | $224,391 | | Total Shareholders' Equity | $1,398,225 | $1,492,582 | Condensed Consolidated Statements of Income Net sales slightly decreased to $954.0 million, with gross profit and operating income declining, resulting in net income of $69.4 million and diluted EPS of $1.22 Income Statement Summary (in thousands, except per share data) | Metric | Thirteen Weeks Ended Dec 2, 2023 | Thirteen Weeks Ended Dec 3, 2022 | | :--- | :--- | :--- | | Net sales | $953,969 | $957,745 | | Gross profit | $393,117 | $397,799 | | Income from operations | $101,568 | $116,010 | | Net income attributable to MSC | $69,350 | $81,314 | | Diluted EPS | $1.22 | $1.45 | Condensed Consolidated Statements of Cash Flows Operating cash flow increased to $81.2 million, while significant share repurchases and dividends led to a net decrease in cash from financing activities Cash Flow Summary (in thousands) | Cash Flow Activity | Thirteen Weeks Ended Dec 2, 2023 | Thirteen Weeks Ended Dec 3, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $81,168 | $76,024 | | Net cash used in investing activities | $(18,433) | $(25,591) | | Net cash used in financing activities | $(87,191) | $(67,950) | | Net decrease in cash | $(24,247) | $(17,206) | - Financing activities were highlighted by $132.0 million in Class A Common Stock repurchases and $47.2 million in dividend payments, partially funded by $83.0 million in net borrowings under credit facilities[20] Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, revenue disaggregation, debt structure, shareholder equity changes from stock reclassification, and share repurchases Revenue by Customer End-Market (Thirteen Weeks Ended) | End-Market | Dec 2, 2023 | Dec 3, 2022 | | :--- | :--- | :--- | | Manufacturing Heavy | 47% | 48% | | Manufacturing Light | 21% | 21% | | Public Sector | 9% | 8% | | Other | 23% | 23% | - In fiscal year 2023, the company entered into a Receivables Purchase Agreement (RPA) to sell up to $300 million in receivables, with approximately $300 million sold as of December 2, 2023[53][54] - In October 2023, the company completed a reclassification, converting each Class B stock share into 1.225 shares of Class A Common Stock, simplifying capital structure and altering governance rights[74] - The company repurchased 1.37 million shares of Class A Common Stock for $132.0 million during the thirteen-week period ended December 2, 2023[68] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 FY2024 financial performance, highlighting declining sales, gross margin, and increased operating expenses, alongside liquidity and strategic initiatives Overview and Business Environment The company, a leading MRO distributor, navigates softening demand and the UAW strike while advancing its strategic focus on core customers and productivity - The company's 'Mission Critical' initiative has concluded, with the next phase focusing on growing core customers, OEM fasteners, and driving productivity improvements[91] - The business environment faced headwinds from softening customer demand, high finished goods inventories, and the UAW strike, impacting automotive-related sales[92][93] - The average Industrial Production (IP) Index for the quarter was 102.8, a decrease from 103.3 in the prior fiscal year quarter, indicating declining manufacturing output[97] Results of Operations Q1 FY2024 saw net sales decrease to $954.0 million, with gross profit margin contracting and operating expenses rising, leading to a decline in operating income - Net sales decreased by $3.8 million (0.4%), comprising $29.7 million of lower volume, offset by $15.5 million from improved pricing and $7.8 million from acquisitions[99] - Sales to core and other customers decreased by $30.3 million, while sales to national account customers and public sector customers increased by $17.9 million and $8.6 million, respectively[99] - Operating expenses increased by $10.9 million (3.9%), mainly due to higher payroll costs from increased headcount and professional fees from stock reclassification[104][105] - E-commerce sales represented 63.3% of consolidated net sales, up from 61.9% in the prior-year period[102] Liquidity and Capital Resources The company maintains $25.8 million cash, $538.5 million total debt, and strong operating cash flow, funding significant share repurchases and dividends Financial Position (in thousands) | Metric | Dec 2, 2023 | Sep 2, 2023 | | :--- | :--- | :--- | | Total debt | $538,478 | $454,326 | | Cash and cash equivalents | $25,805 | $50,052 | | Net debt | $512,673 | $404,274 | - Net cash from operating activities increased to $81.2 million from $76.0 million year-over-year, mainly due to favorable changes in accounts receivable and inventories[117] - Financing activities included $132.0 million in share repurchases, $47.2 million in dividends, and net borrowings of $83.0 million[122][124] - The decrease in Days' Sales Outstanding (DSO) was primarily due to the Receivables Purchase Agreement (RPA), which reduced accounts receivable by $300.0 million[118][119] Item 3. Quantitative and Qualitative Disclosures About Market Risk No significant changes occurred in the company's financial instrument portfolio or interest rate risk since fiscal year-end 2023 - There have been no significant changes in the company's market risk exposure, particularly regarding interest rate risk, since the fiscal year-end 2023[129] Item 4. Controls and Procedures Management concluded disclosure controls were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[131] - There were no material changes in internal control over financial reporting during the fiscal quarter ended December 2, 2023[132] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in routine legal proceedings, not expecting a material adverse effect on its financial position or operations - The company does not anticipate that ongoing legal proceedings will have a material adverse effect on its financial condition or results[134] Item 1A. Risk Factors No material changes have occurred in the company's risk factors since the last Annual Report on Form 10-K - No material changes have occurred in the company's risk factors since the last Annual Report on Form 10-K[135] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's repurchase of 1.37 million Class A Common Stock shares during Q1 FY2024, with remaining authorization for 2.44 million shares Issuer Purchases of Equity Securities (Q1 FY2024) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | 9/3/23-10/3/23 | 205,239 | $96.80 | | 10/4/23-11/2/23 | 448,734 | $94.48 | | 11/3/23-12/2/23 | 713,415 | $97.78 | | Total | 1,367,388 | N/A | - As of December 2, 2023, the company has authorization to repurchase an additional 2,443,400 shares of Class A Common Stock under its existing Share Repurchase Plan[137] Item 5. Other Information No directors or officers adopted, modified, or terminated insider trading arrangements during the quarter - No directors or officers adopted, modified, or terminated any insider trading arrangements during the quarter[138] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate documents, compensation plans, and certifications