MSC Industrial Direct (MSM) - 2022 Q2 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This section disclaims forward-looking statements, highlighting risks from COVID-19, economic conditions, competition, and supply chain disruptions - Forward-looking statements are subject to risks including COVID-19 impact on sales and operations, general economic conditions, and competition[5] - Additional risks encompass strategic plan realization, key personnel retention, commodity price volatility, customer credit risk, and IT/supply chain disruptions[5] Part I. Financial Information Item 1. Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements: balance sheets, income, comprehensive income, equity, and cash flow Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Feb 26, 2022 (Unaudited) | Aug 28, 2021 | | :--------------------------------- | :----------------------- | :------------- | | Total Assets | $2,564,915 | $2,462,115 | | Total Liabilities | $1,329,614 | $1,300,243 | | Total Shareholders' Equity | $1,235,301 | $1,161,872 | | Cash and cash equivalents | $41,754 | $40,536 | | Accounts receivable, net | $619,913 | $560,373 | | Inventories | $657,710 | $624,169 | | Current portion of debt | $251,269 | $202,433 | Condensed Consolidated Statements of Income Condensed Consolidated Statements of Income Highlights (in thousands, except per share data) | Metric | 13 Weeks Ended Feb 26, 2022 | 13 Weeks Ended Feb 27, 2021 | 26 Weeks Ended Feb 26, 2022 | 26 Weeks Ended Feb 27, 2021 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net sales | $862,522 | $773,995 | $1,711,069 | $1,545,899 | | Gross profit | $366,275 | $294,751 | $718,871 | $618,069 | | Income from operations | $97,168 | $28,021 | $187,900 | $81,929 | | Net income attributable to MSC Industrial | $69,931 | $18,085 | $135,998 | $56,539 | | Basic EPS | $1.25 | $0.32 | $2.44 | $1.01 | | Diluted EPS | $1.25 | $0.32 | $2.43 | $1.01 | Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income Highlights (in thousands) | Metric | 13 Weeks Ended Feb 26, 2022 | 13 Weeks Ended Feb 27, 2021 | 26 Weeks Ended Feb 26, 2022 | 26 Weeks Ended Feb 27, 2021 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income, as reported | $70,154 | $18,348 | $136,411 | $57,125 | | Foreign currency translation adjustments | $3,768 | $626 | $(1,224) | $2,822 | | Comprehensive income | $73,922 | $18,974 | $135,187 | $59,947 | | Comprehensive income attributable to MSC Industrial | $72,875 | $18,962 | $134,861 | $59,151 | Condensed Consolidated Statements of Shareholders' Equity Condensed Consolidated Statements of Shareholders' Equity Highlights (in thousands, except per share data) | Metric | 26 Weeks Ended Feb 26, 2022 | 26 Weeks Ended Feb 27, 2021 | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Total Shareholders' Equity Attributable to MSC Industrial (Ending Balance) | $1,223,974 | $1,112,113 | | Total Shareholders' Equity (Ending Balance) | $1,235,301 | $1,118,537 | | Net Income | $135,998 | $56,539 | | Regular cash dividends declared on Class A Common Stock | $(70,605) | $(69,808) | | Special cash dividends declared on Class A Common Stock | — | $(163,511) | | Dividends declared per Class A Common Share | $1.50 | $5.00 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 26 Weeks Ended Feb 26, 2022 | 26 Weeks Ended Feb 27, 2021 | | :--------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $57,421 | $118,934 | | Net cash used in investing activities | $(31,179) | $(19,954) | | Net cash used in financing activities | $(24,916) | $(204,804) | | Net increase (decrease) in cash and cash equivalents | $1,218 | $(104,969) | | Cash and cash equivalents—end of period | $41,754 | $20,242 | Notes to Condensed Consolidated Financial Statements Note 1. Basis of Presentation This note outlines the basis for the unaudited financial statements, fiscal year structure, and ongoing COVID-19 impacts - Unaudited Condensed Consolidated Financial Statements include all normal recurring material adjustments and should be read with the Annual Report on Form 10-K for fiscal year ended August 28, 2021[26][27] - The Company operates on a 52/53-week fiscal year, ending on the Saturday closest to August 31, with fiscal year 2022 being a 53-week year[28] - The COVID-19 pandemic continues to impact operations, supply chains, and labor availability, affecting product prices and availability with uncertain future impacts[30][31] Note 2. Revenue This note details revenue recognition policies and provides a breakdown of net sales by customer end-market and geographic area - Revenue is recognized when performance obligations are satisfied, typically upon customer obtaining control of products, with net sales including product revenue and shipping/handling, net of estimated returns and sales incentives[36] Percentage of Net Sales by Customer End-Market (13 Weeks Ended) | Customer End-Market | Feb 26, 2022 | Feb 27, 2021 | | :------------------ | :----------- | :----------- | | Manufacturing Heavy | 48% | 48% | | Manufacturing Light | 21% | 20% | | Retail/Wholesale | 7% | 7% | | Government | 7% | 9% | | Commercial Services | 4% | 5% | | Other | 13% | 11% | | Total net sales | 100% | 100% | Net Sales by Geographic Area (13 Weeks Ended, in thousands) | Geographic Area | Feb 26, 2022 | % | Feb 27, 2021 | % | | :---------------- | :----------- | :- | :----------- | :- | | United States | $817,026 | 95% | $728,212 | 94% | | Mexico | $20,259 | 2% | $21,802 | 3% | | United Kingdom | $13,546 | 2% | $12,896 | 2% | | Canada | $11,691 | 1% | $11,085 | 1% | | Total net sales | $862,522 | 100% | $773,995 | 100% | Note 3. Net Income per Share This note explains the calculation of basic and diluted net income per share, including the treatment of common stock equivalents - Net income per share is calculated by dividing net income by the weighted-average number of Class A and Class B Common Stock shares outstanding, with diluted EPS including potentially dilutive common stock equivalents using the treasury stock method[46] Net Income Per Common Share (13 & 26 Weeks Ended) | Metric | 13 Weeks Ended Feb 26, 2022 | 13 Weeks Ended Feb 27, 2021 | 26 Weeks Ended Feb 26, 2022 | 26 Weeks Ended Feb 27, 2021 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income attributable to MSC Industrial | $69,931 | $18,085 | $135,998 | $56,539 | | Basic EPS | $1.25 | $0.32 | $2.44 | $1.01 | | Diluted EPS | $1.25 | $0.32 | $2.43 | $1.01 | | Weighted-average shares for diluted EPS | 55,971 | 56,133 | 55,945 | 56,019 | Note 4. Stock-Based Compensation This note details stock-based compensation expense, including stock options, restricted stock units, and performance share units Stock-Based Compensation Expense (in thousands) | Type | 13 Weeks Ended Feb 26, 2022 | 13 Weeks Ended Feb 27, 2021 | 26 Weeks Ended Feb 26, 2022 | 26 Weeks Ended Feb 27, 2021 | | :------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Stock options | $217 | $544 | $805 | $1,221 | | Restricted stock units | $3,306 | $3,819 | $8,009 | $7,118 | | Performance share units | $889 | $345 | $1,197 | $558 | | Associate Stock Purchase Plan | $88 | $48 | $178 | $97 | | Total | $4,500 | $4,756 | $10,189 | $8,994 | | Deferred income tax benefit | $(1,139) | $(1,174) | $(2,476) | $(2,204) | | Net expense | $3,361 | $3,582 | $7,713 | $6,790 | - The Company discontinued stock option grants in fiscal year 2020, with unrecognized stock-based compensation cost of $565 thousand at February 26, 2022, to be recognized over 0.6 years[51] - Unrecognized stock-based compensation cost for PSUs at February 26, 2022, was $5,264 thousand, to be recognized over 2.0 years, and for RSUs, it was $32,032 thousand, to be recognized over 2.9 years[54][58] Note 5. Fair Value This note describes the Company's fair value accounting standards, hierarchy for inputs, and the classification of an asset held for sale - Fair value accounting standards define fair value as the price to sell an asset or transfer a liability in an orderly transaction, using a three-level hierarchy for inputs, with Level 1 for quoted prices in active markets and Level 2 for observable market data[59] - The carrying amounts of the Company's financial instruments approximated their fair values as of February 26, 2022, and February 27, 2021[59] - The Company classified its Long Island Customer Service Center building as held for sale as of February 26, 2022, with a carrying value of approximately $15.3 million, and no impairment charge was recorded[64] Note 6. Debt This note details the Company's debt composition, including revolving credit facilities, private placement debt, and compliance with debt covenants Debt Composition (in thousands) | Debt Type | Feb 26, 2022 | Aug 28, 2021 | | :------------------------------------------ | :----------- | :----------- | | Amended Revolving Credit Facility | $285,000 | $234,000 | | Uncommitted Credit Facilities | $200,000 | $201,500 | | Private Placement Debt (various series) | $295,000 | $295,000 | | Total debt, including obligations under finance leases | $835,451 | $786,049 | | Current portion of debt | $(251,269) | $(202,433) | | Total long-term debt | $584,182 | $583,616 | - The Amended Revolving Credit Facility, maturing August 24, 2026, provides a $600 million unsecured revolving loan facility, with interest rates based on LIBOR or a base rate plus a spread[67] - Uncommitted Credit Facilities total $208 million in aggregate maximum availability, with $200 million outstanding at February 26, 2022, now using SOFR as the benchmark rate[71] - The Company was in compliance with all debt covenants as of February 26, 2022, including a maximum consolidated leverage ratio of 3.00 to 1.00 and a minimum consolidated interest coverage ratio of 3.00 to 1.00[78] Note 7. Shareholders' Equity This note outlines the Company's share repurchase program and details regular and special cash dividends declared - The Board authorized a new Share Repurchase Program on June 29, 2021, to purchase up to 5 million shares of Class A Common Stock, with 5 million shares still available as of February 26, 2022[79][175] Common Stock Repurchases (13 Weeks Ended Feb 26, 2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :---------------- | :--------------------- | :--------------------------- | | 11/28/21-12/28/21 | 4,067 | $83.35 | | 12/29/21-1/27/22 | 334 | $84.32 | | 1/28/22-2/26/22 | 113 | $79.40 | | Total | 4,514 | | - The Company paid aggregate regular cash dividends of $1.50 per common share ($83.6 million) for the twenty-six weeks ended February 26, 2022, compared to a special cash dividend of $3.50 per share ($195.4 million) and regular dividends of $1.50 per share ($83.7 million) in the prior year[82] Note 8. Restructuring and Other Costs This note details the restructuring and other costs incurred, including severance, consulting, and operating lease asset impairment charges - The Company incurred $3.1 million in restructuring and other costs for the thirteen weeks ended February 26, 2022, down from $21.6 million in the prior year, including severance, consulting, and other exit-related expenses[88] - The prior year's costs included $16.7 million in operating lease asset impairment charges related to closing 73 branch offices as part of an enhanced customer support model[88] Restructuring and Other Costs (in thousands) | Cost Type | 13 Weeks Ended Feb 26, 2022 | 13 Weeks Ended Feb 27, 2021 | 26 Weeks Ended Feb 26, 2022 | 26 Weeks Ended Feb 27, 2021 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Operating lease asset impairment loss | $— | $16,736 | $— | $16,736 | | Consulting-related costs | $2,520 | $1,270 | $2,520 | $3,790 | | Associate severance and separation costs | $517 | $2,568 | $4,032 | $3,980 | | Equity award acceleration costs | $— | $196 | $1,729 | $243 | | Other exit-related costs | $97 | $845 | $136 | $845 | | Total restructuring and other costs | $3,134 | $21,615 | $8,417 | $25,594 | Note 9. Asset Impairments This note discusses asset impairment charges, specifically related to PPE-related inventory write-downs and a prepayment for nitrile gloves - No PPE-related inventory write-downs occurred for the thirteen- and twenty-six-week periods ended February 26, 2022, compared to $30.1 million in the prior year due to increased supply and inability to sell excess inventory[89][92] - In fiscal year 2021, the Company recorded a $26.7 million impairment charge for a prepayment for nitrile gloves that were significantly delayed and not obtained, with a $20.8 million loss recovery received later in fiscal year 2021[93] Note 10. Product Warranties This note outlines the Company's product warranty policy and the immateriality of warranty expense for the reported periods - The Company generally offers a maximum one-year warranty for some machinery products, and warranty expense for the reported periods was immaterial[94] Note 11. Income Taxes This note addresses unrecognized tax benefits, the review of Employee Retention Credit provisions, and changes in the effective tax rate - No material changes in unrecognized tax benefits occurred during the twenty-six-week period ended February 26, 2022[95] - The Company is reviewing the Employee Retention Credit (ERC) provisions of the CARES Act and ARPA to determine eligibility and potential impact[96] - The effective tax rate decreased to 24.3% for the twenty-six-week period ended February 26, 2022, from 24.5% in the prior year, primarily due to a higher tax benefit from stock-based compensation[98] Note 12. Legal Proceedings This note states management's expectation that the costs to resolve legal proceedings will not materially affect the Company's financial position - Management does not expect the ultimate costs to resolve various claims, lawsuits, and pending actions in the ordinary course of business to have a material adverse effect on the Company's financial position, results of operations, or liquidity[99] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operations, sales, profitability, strategy, and liquidity for the reported periods Overview This overview describes MSC's business as a distributor of metalworking and MRO products, its business model, and sales force changes - MSC is a leading North American distributor of metalworking and MRO products and services, offering approximately 2.0 million SKUs through various channels including catalogs, eCommerce, and inventory management solutions[102] - The business model focuses on procurement cost reduction and just-in-time delivery, with a strategy to transition from a spot-buy supplier to a mission-critical partner[103][104] - Field sales and service associate headcount increased to 2,448 at February 26, 2022, from 2,301 at February 27, 2021, reflecting a shift towards a more complex, high-touch sales role[104] Highlights This section presents key financial highlights for the twenty-six-week periods, including cash from operations, borrowings, and dividends Financial Highlights (26 Weeks Ended, in millions) | Metric | Feb 26, 2022 | Feb 27, 2021 | | :--------------------------------- | :----------- | :----------- | | Cash from operations | $57.4 | $118.9 | | Net borrowings on credit facilities | $49.5 | $65.0 | | Regular cash dividends paid | $83.6 | $83.7 | | Special cash dividends paid | — | $195.4 | | Restructuring and other costs | $8.4 | $25.6 | Recent Developments This section outlines recent strategic initiatives, including the 'Mission Critical' project, profitability improvements, facility relocation, and demand/supply chain trends - The 'Mission Critical' project aims to accelerate market share capture and improve profitability through investments in metalworking, value-added services, vending/VMI expansion, sales force build-out, and customer diversification[107] - Profitability improvement initiatives include pricing strategies and structural cost reductions in sales, supply chain, and G&A, optimizing distribution and real estate, renegotiating supplier contracts, and redesigning talent acquisition[107] - The Company is relocating its Long Island Customer Service Center to a smaller facility and has entered into an agreement to sell its current 170,000-square-foot facility[108] - Demand from traditional manufacturing end markets has recovered, but supply chain disruptions and labor availability issues persist due to COVID-19, impacting product prices and availability[109] Our Strategy This section describes the Company's primary objective to grow sales profitably by offering technical solutions and pursuing strategic acquisitions - The primary objective is to grow sales profitably by offering highly technical and high-touch solutions to customers, transitioning from a spot-buy supplier to a mission-critical partner[111] - The Company will selectively pursue strategic acquisitions that expand or complement its business in new and existing markets or enhance value and offerings[111] Business Environment This section discusses the Company's revenue sources from the manufacturing sector and monitors key economic indicators like MBI and IP index - Approximately 68% of revenues came from the manufacturing sector during the twenty-six weeks ended February 26, 2022, with the Company monitoring the Metalworking Business Index (MBI) and Industrial Production (IP) index as indicators of business activity[112] MBI and IP Index Trends | Period | MBI | IP Index | | :--------------- | :---- | :------- | | December | 58.3 | 101.6 | | January | 62.5 | 103.0 | | February | 60.6 | 103.6 | | Fiscal Year 2022 Q2 average | 60.5 | 102.7 | | 12-month average | 61.1 | 101.0 | - The MBI average remained above 50.0, indicating manufacturing growth, and the average IP index increased, reflecting economic recovery and abatement of the COVID-19 pandemic, leading to price realization strategies to offset increased costs[113] Thirteen-Week Period Ended February 26, 2022 Compared to the Thirteen-Week Period Ended February 27, 2021 Net Sales (13 Weeks) This section analyzes the net sales performance for the thirteen-week period, highlighting drivers such as volume, pricing, and eCommerce penetration Net Sales Performance (13 Weeks Ended, in thousands) | Metric | Feb 26, 2022 | Feb 27, 2021 | Change ($) | Change (%) | | :------- | :----------- | :----------- | :--------- | :--------- | | Net sales | $862,522 | $773,995 | $88,527 | 11.4% | - The $88.5 million increase in net sales was driven by $51.6 million higher sales volume, $32.1 million from improved pricing, and $4.8 million from fiscal year 2021 acquisitions[114] - National account sales increased by $41.1 million, core and other customers by $47.1 million, partially offset by a $4.5 million decrease in government sales[114] Average Daily Sales (ADS) Percentage Change (13 Weeks Ended) | Customer Type | Feb 26, 2022 | Feb 27, 2021 | | :---------------------------- | :----------- | :----------- | | Total Company ADS Percent Change | 7.9% | -1.5% | | Manufacturing Customers ADS Percent Change | 8.9% | -4.9% | | Non-Manufacturing Customers ADS Percent Change | 5.8% | 6.6% | - eCommerce platforms represented 60.7% of consolidated net sales, up from 59.2% in the prior year, indicating a competitive advantage[118] Gross Profit (13 Weeks) This section examines gross profit performance for the thirteen-week period, focusing on margin changes and the impact of inventory write-downs Gross Profit Performance (13 Weeks Ended, in thousands) | Metric | Feb 26, 2022 | Feb 27, 2021 | Change ($) | Change (%) | | :--------- | :----------- | :----------- | :--------- | :--------- | | Gross profit | $366,275 | $294,751 | $71,524 | 24.3% | | Gross profit margin | 42.5% | 38.1% | | | - The increase in gross profit margin was due to improved price realization and a positive spread between sales price and cost of goods sold, with the prior year including $30.1 million in PPE-related inventory write-downs that did not recur[119] Operating Expenses (13 Weeks) This section analyzes operating expenses for the thirteen-week period, detailing increases primarily due to payroll and freight costs Operating Expenses Performance (13 Weeks Ended, in thousands) | Metric | Feb 26, 2022 | Feb 27, 2021 | Change ($) | Change (%) | | :---------------- | :----------- | :----------- | :--------- | :--------- | | Operating expenses | $265,973 | $245,115 | $20,858 | 8.5% | | % of net sales | 30.8% | 31.7% | | | - The increase in operating expenses was primarily due to higher payroll and payroll-related costs ($13.8 million increase) and higher freight costs ($36.6 million vs. $32.5 million), driven by increased sales volume and fuel charges[120][121][122] Restructuring and Other Costs (13 Weeks) This section details the significant decrease in restructuring and other costs for the thirteen-week period, primarily due to non-recurring impairment charges Restructuring and Other Costs (13 Weeks Ended, in thousands) | Metric | Feb 26, 2022 | Feb 27, 2021 | Change ($) | Change (%) | | :-------------------------- | :----------- | :----------- | :--------- | :--------- | | Restructuring and other costs | $3,134 | $21,615 | $(18,481) | (85.5)% | - The significant decrease was due to the prior year including $16.7 million in operating lease asset impairment charges related to closing 73 branch offices as part of an enhanced customer support model, which did not recur in the current period[123][124] Income from Operations (13 Weeks) This section analyzes the substantial increase in income from operations for the thirteen-week period, driven by higher sales and reduced costs Income from Operations Performance (13 Weeks Ended, in thousands) | Metric | Feb 26, 2022 | Feb 27, 2021 | Change ($) | Change (%) | | :------------------- | :----------- | :----------- | :--------- | :--------- | | Income from operations | $97,168 | $28,021 | $69,147 | 246.8% | | % of net sales | 11.3% | 3.6% | | | - The substantial increase was primarily due to higher sales, the absence of prior year PPE-related inventory write-downs, and lower restructuring-related impairment charges[125] Provision for Income Taxes (13 Weeks) This section details the provision for income taxes for the thirteen-week period, noting a slight increase in the effective tax rate Provision for Income Taxes (13 Weeks Ended, in thousands) | Metric | Feb 26, 2022 | Feb 27, 2021 | Change ($) | Change (%) | | :------------------------ | :----------- | :----------- | :--------- | :--------- | | Provision for income taxes | $23,509 | $6,051 | $17,458 | 288.5% | | Effective tax rate | 25.1% | 24.8% | | | - The effective tax rate increased slightly due to an increase in unfavorable permanent tax items[126] Net Income (13 Weeks) This section highlights the significant increase in net income for the thirteen-week period, driven by sales growth, improved margins, and lower costs Net Income Performance (13 Weeks Ended, in thousands) | Metric | Feb 26, 2022 | Feb 27, 2021 | Change ($) | Change (%) | | :------------------------------------------ | :----------- | :----------- | :--------- | :--------- | | Net income attributable to MSC Industrial | $69,931 | $18,085 | $51,846 | 286.7% | - Net income significantly increased, driven by higher sales, improved gross profit margin (absence of PPE write-downs), and lower restructuring costs compared to the prior year[127][125][119] Twenty-Six-Week Period Ended February 26, 2022 Compared to the Twenty-Six-Week Period Ended February 27, 2021 Net Sales (26 Weeks) This section analyzes the net sales performance for the twenty-six-week period, detailing drivers such as volume, pricing, acquisitions, and foreign exchange Net Sales Performance (26 Weeks Ended, in thousands) | Metric | Feb 26, 2022 | Feb 27, 2021 | Change ($) | Change (%) | | :------- | :----------- | :----------- | :--------- | :--------- | | Net sales | $1,711,069 | $1,545,899 | $165,170 | 10.7% | - The $165.2 million increase in net sales was due to $105.4 million higher sales volume, $49.9 million from improved pricing, $8.8 million from acquisitions, and $1.1 million favorable foreign exchange impact[129] Average Daily Sales (ADS) Percentage Change (26 Weeks Ended) | Customer Type | Feb 26, 2022 | Feb 27, 2021 | | :---------------------------- | :----------- | :----------- | | Total Company ADS Percent Change | 8.9% | -4.0% | | Manufacturing Customers ADS Percent Change | 12.2% | -9.3% | | Non-Manufacturing Customers ADS Percent Change | 2.5% | 9.0% | - eCommerce platforms accounted for 60.6% of consolidated net sales, up from 60.0% in the prior year[132] Gross Profit (26 Weeks) This section examines gross profit performance for the twenty-six-week period, focusing on margin improvements and the absence of prior year write-downs Gross Profit Performance (26 Weeks Ended, in thousands) | Metric | Feb 26, 2022 | Feb 27, 2021 | Change ($) | Change (%) | | :--------- | :----------- | :----------- | :--------- | :--------- | | Gross profit | $718,871 | $618,069 | $100,802 | 16.3% | | Gross profit margin | 42.0% | 40.0% | | | - Gross profit margin increased due to improved price realization and a positive spread between sales price and cost of goods sold, with the prior year including $30.1 million in PPE-related inventory write-downs that did not recur[133] Operating Expenses (26 Weeks) This section analyzes operating expenses for the twenty-six-week period, detailing increases primarily due to higher payroll and freight costs Operating Expenses Performance (26 Weeks Ended, in thousands) | Metric | Feb 26, 2022 | Feb 27, 2021 | Change ($) | Change (%) | | :---------------- | :----------- | :----------- | :--------- | :--------- | | Operating expenses | $522,554 | $483,820 | $38,734 | 8.0% | | % of net sales | 30.5% | 31.3% | | | - The increase was primarily due to higher payroll and payroll-related costs ($25.6 million increase) and higher freight costs ($72.8 million vs. $64.3 million), driven by increased sales volume and fuel charges[134][135][136] Impairment Loss (26 Weeks) This section discusses the absence of impairment loss in the current period compared to a significant charge in the prior year related to nitrile gloves Impairment Loss (26 Weeks Ended, in thousands) | Metric | Feb 26, 2022 | Feb 27, 2021 | Change ($) | Change (%) | | :-------------- | :----------- | :----------- | :--------- | :--------- | | Impairment loss | $— | $26,726 | $(26,726) | (100)% | - No impairment loss was recorded in the current period, while the prior year included a $26.7 million impairment charge for a prepayment for nitrile gloves that were not obtained, with a $20.8 million loss recovery received later in fiscal year 2021[138] Restructuring and Other Costs (26 Weeks) This section details the decrease in restructuring and other costs for the twenty-six-week period, primarily due to non-recurring impairment charges Restructuring and Other Costs (26 Weeks Ended, in thousands) | Metric | Feb 26, 2022 | Feb 27, 2021 | Change ($) | Change (%) | | :-------------------------- | :----------- | :----------- | :--------- | :--------- | | Restructuring and other costs | $8,417 | $25,594 | $(17,177) | (67.1)% | - The decrease was due to the prior year including $16.7 million in operating lease asset impairment charges related to closing 73 branch offices as part of an enhanced customer support model, which did not recur in the current period[139] Income from Operations (26 Weeks) This section analyzes the significant increase in income from operations for the twenty-six-week period, driven by higher sales and reduced costs Income from Operations Performance (26 Weeks Ended, in thousands) | Metric | Feb 26, 2022 | Feb 27, 2021 | Change ($) | Change (%) | | :------------------- | :----------- | :----------- | :--------- | :--------- | | Income from operations | $187,900 | $81,929 | $105,971 | 129.3% | | % of net sales | 11.0% | 5.3% | | | - The significant increase was primarily due to higher sales, the absence of prior year impairment loss and PPE-related inventory write-downs, and lower restructuring costs[140] Provision for Income Taxes (26 Weeks) This section details the provision for income taxes for the twenty-six-week period, noting a slight decrease in the effective tax rate Provision for Income Taxes (26 Weeks Ended, in thousands) | Metric | Feb 26, 2022 | Feb 27, 2021 | Change ($) | Change (%) | | :------------------------ | :----------- | :----------- | :--------- | :--------- | | Provision for income taxes | $43,862 | $18,498 | $25,364 | 137.1% | | Effective tax rate | 24.3% | 24.5% | | | - The effective tax rate decreased slightly due to a higher tax benefit from stock-based compensation[141] Net Income (26 Weeks) This section highlights the significant increase in net income for the twenty-six-week period, driven by sales growth, improved margins, and reduced costs Net Income Performance (26 Weeks Ended, in thousands) | Metric | Feb 26, 2022 | Feb 27, 2021 | Change ($) | Change (%) | | :------------------------------------------ | :----------- | :----------- | :--------- | :--------- | | Net income attributable to MSC Industrial | $135,998 | $56,539 | $79,459 | 140.5% | - Net income significantly increased, driven by higher sales, improved gross profit margin (absence of PPE write-downs), and lower impairment and restructuring costs compared to the prior year[142][140][133] Liquidity and Capital Resources This section discusses the Company's cash position, financing needs, and sufficiency of resources to fund operations and capital expenditures Liquidity and Capital Resources (in thousands) | Metric | Feb 26, 2022 | Aug 28, 2021 | Change ($) | | :------------------------ | :----------- | :----------- | :--------- | | Total debt | $835,451 | $786,049 | $49,402 | | Less: Cash and cash equivalents | $41,754 | $40,536 | $1,218 | | Net debt | $793,697 | $745,513 | $48,184 | | Equity | $1,235,301 | $1,161,872 | $73,429 | - The Company had $41.8 million in cash and cash equivalents as of February 26, 2022, with primary financing needs for working capital, acquisitions, new products, facilities, and technology investments[143] - Management believes existing cash, financial resources, and cash flow from operations will be sufficient to fund capital expenditures and operating cash requirements for at least the next 12 months, even with anticipated impacts from COVID-19[146] Cash Flows from Operating Activities This section analyzes the decrease in net cash provided by operating activities, attributing it to changes in accounts receivable, inventories, and payables Net Cash Provided by Operating Activities (in thousands) | Metric | 26 Weeks Ended Feb 26, 2022 | 26 Weeks Ended Feb 27, 2021 | | :--------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $57,421 | $118,934 | - The decrease in net cash provided by operating activities was primarily due to an increase in accounts receivable and inventories (higher sales volume) and a decrease in the change in accounts payable and accrued liabilities, partially offset by an increase in net income[148] Working Capital and Ratios | Metric | Feb 26, 2022 | Aug 28, 2021 | Feb 27, 2021 | | :------------------ | :----------- | :----------- | :----------- | | Working Capital | $819,641 | $752,317 | $632,139 | | Current Ratio | 2.4 | 2.3 | 2.1 | | Days' Sales Outstanding | 60.9 | 61.1 | 57.4 | | Inventory Turnover | 3.2 | 3.4 | 3.4 | - Working capital and current ratio increased due to higher accounts receivable and inventories, while inventory turnover declined due to increasing inventory levels to meet customer demand and address supply chain challenges[151][154] Cash Flows from Investing Activities This section details the increase in cash used in investing activities, primarily due to higher capital expenditures for vending programs and strategic projects Net Cash Used in Investing Activities (in thousands) | Metric | 26 Weeks Ended Feb 26, 2022 | 26 Weeks Ended Feb 27, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash used in investing activities | $(31,179) | $(19,954) | - Cash used in investing activities increased, primarily due to higher expenditures for property, plant, and equipment related to vending programs and 'Mission Critical' projects[155] Cash Flows from Financing Activities This section analyzes the significant decrease in cash used in financing activities, primarily due to lower special dividends and net borrowings Net Cash Used in Financing Activities (in thousands) | Metric | 26 Weeks Ended Feb 26, 2022 | 26 Weeks Ended Feb 27, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash used in financing activities | $(24,916) | $(204,804) | - The significant decrease in cash used in financing activities was primarily due to lower special dividends paid ($0 in current period vs. $195.4 million in prior year) and lower net borrowings under credit facilities ($49.5 million vs. $65.0 million)[162] Capital Expenditures This section highlights the Company's ongoing investments in sales productivity, eCommerce, vending platforms, and infrastructure - The Company continues to invest in sales productivity initiatives, eCommerce and vending platforms, customer fulfillment centers, distribution network, and other infrastructure and technology[156] Long-Term Debt This section details the Company's long-term debt, including revolving credit facilities, uncommitted credit facilities, private placement debt, and covenant compliance - As of February 26, 2022, the Company had a $600 million revolving credit facility (unused balance of $339.6 million) and three uncommitted credit facilities totaling $208 million, and was in compliance with all debt covenants[157] - The Company has various private placement debt and shelf facility agreements, with no new unsecured senior notes issued after January 12, 2021, under the shelf agreements[158] Leases and Financing Arrangements This section describes the Company's leased premises and equipment, as well as periodic financing arrangements with vendors - Operations are conducted on leased premises, with leases extending to fiscal year 2031, and the Company also has obligations under equipment and automobile operating and finance leases expiring through fiscal year 2026[159] - The Company periodically enters into financing arrangements with vendors for IT equipment or software[160] Critical Accounting Estimates This section states that the Company evaluates critical accounting policies and estimates, with no material changes outside the ordinary course of business - The Company evaluates critical accounting policies and estimates related to revenue recognition, inventory valuation, allowance for credit losses, warranty reserves, contingencies, income taxes, goodwill, and long-lived assets, with no material changes occurring outside the ordinary course of business[163][164] Recently Issued Accounting Standards This section refers to Note 1 for information on recently issued accounting standards and confirms no material impact from ASU 2020-04 - Refer to Note 1, 'Basis of Presentation,' for information on recently issued accounting standards, with the adoption of ASU 2020-04 (Reference Rate Reform) having no material impact[165][34] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the Annual Report on Form 10-K for market risk details, noting no significant changes since the last fiscal year-end - No significant changes in the financial instrument portfolio or interest rate risk have occurred since August 28, 2021, fiscal year-end, other than those discussed in Item 2[166] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and the absence of material changes in internal control over financial reporting - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of February 26, 2022[168] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended February 26, 2022[169] Part II. Other Information Item 1. Legal Proceedings This section reiterates that management does not expect legal proceedings to have a material adverse effect on the Company's financial position - Management does not expect the ultimate costs to resolve ordinary course legal proceedings to have a material adverse effect on the Company's financial position, results of operations, or liquidity[171] Item 1A. Risk Factors This section directs readers to the Annual Report on Form 10-K for a comprehensive discussion of risks that could materially affect the business - Readers should consider the risks and uncertainties discussed in Item 1A, 'Risk Factors' of the Annual Report on Form 10-K for the fiscal year ended August 28, 2021, as these could materially affect the business[172] - Additional unknown or currently immaterial risks may also materially and adversely affect the Company's business, financial condition, and/or operating results[172] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's Class A Common Stock repurchases and the remaining authorization under its share repurchase program Issuer Purchases of Equity Securities (13 Weeks Ended Feb 26, 2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :---------------- | :--------------------- | :--------------------------- | | 11/28/21-12/28/21 | 4,067 | $83.35 | | 12/29/21-1/27/22 | 334 | $84.32 | | 1/28/22-2/26/22 | 113 | $79.40 | | Total | 4,514 | | - 4,514 shares of Class A Common Stock were withheld to satisfy associates' tax withholding liability for stock-based compensation[174] - A new share repurchase program authorized on June 29, 2021, allows for the purchase of up to 5 million shares of Class A Common Stock, with 5 million shares remaining available as of February 26, 2022[175] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including officer certifications and Inline XBRL documents - Exhibits include certifications from the Principal Executive Officer and Principal Financial Officer (31.1, 31.2, 32.1, 32.2) and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[178] Signatures This section contains the signatures of the registrant's authorized officers, certifying the filing of the report - The report was signed by Erik Gershwind (President and CEO) and Kristen Actis-Grande (EVP and CFO) on March 30, 2022[181]