MSC Reports Fiscal 2018 Second Quarter Results

News provided by

MSC Industrial Supply Co.

Apr 10, 2018, 06:45 ET

MELVILLE, N.Y. and DAVIDSON, N.C., April 10, 2018 /PRNewswire/ --

FISCAL Q2 2018 HIGHLIGHTS

  • Net sales of $769 million, a 9.3% YoY increase, with approximately 430 basis points of acquisitive growth
  • Operating income of $98.1 million, an increase of approximately 13.2% YoY
  • Operating margin of 12.8%, a 50 basis point expansion YoY
  • Diluted EPS of $2.06, which includes one-time tax adjustments, versus $0.93 in the prior year quarter

MSC INDUSTRIAL SUPPLY CO. (NYSE: MSM), "MSC" or the "Company," a premier distributor of Metalworking and Maintenance, Repair and Operations ("MRO") products and services to industrial customers throughout North America, today reported financial results for its fiscal 2018 second quarter ended March 3, 2018.











Financial Highlights1

FY18 Q2

FY17 Q2

Change

FY18 YTD

FY17 YTD

Change

Net Sales

$769.0

$703.8

9.3%

$1,537.5

$1,390.1

10.6%

Operating Income

98.1

86.6

13.2%

197.4

177.2

11.4%

% of Net Sales

12.8%

12.3%


12.8%

12.8%

Net Income

117.6

53.6

119.5%

177.1

107.8

64.2%

Diluted EPS

$2.06

2

$0.93

3

121.5%

$3.12

2

$1.89

3

65.1%

1In millions except per share data or as otherwise noted. 2Based on 56.9 million and 56.7 million diluted shares outstanding for FY18 Q2 and FY18 YTD, respectively.  3 Based on 57.2 million and 56.9 million diluted shares outstanding for FY17 Q2 and FY17 YTD, respectively.

Reported results include a tax benefit attributable to the Tax Cuts and Jobs Act, which has the following components:

  • A provisional benefit of $41.2 million, or $0.72 per diluted share, from the revaluation of the company's tax related balance sheet items; and
  • A benefit of $16.9 million, or $0.30 per diluted share, attributable to the lower effective tax rate required to bring our first half into alignment with the expected full year rate.

Diluted earnings per share for the second quarter of fiscal 2018 excluding the positive impacts of the Tax Cuts and Jobs Act was $1.04 per share, up 11.8% over the prior year.

Erik Gershwind, president and chief executive officer, said, "The manufacturing environment in the second fiscal quarter remained firm, and customer outlook remained positive. The pricing environment also continued to improve, and we implemented a moderate price increase in late January. As a result, we delivered improved gross margins, which along with productivity, resulted in strong incremental margins. We remain focused on growing technical and high-touch areas to create a deeper moat around our business, and while I am pleased with our progress, we have room for further improvement. Strengthening market demand and a better pricing environment, coupled with a continuing focus on driving productivity and our decision to begin growing our sales force, bode well for an even better future."

Rustom Jilla, executive vice president and chief financial officer, added, "Our reported fiscal second quarter average daily sales rose 9.3%, gross margin was 43.9%, operating expenses to sales improved to 31.1%, and operating income rose 13.2%. Excluding the impact of the DECO acquisition, our organic average daily sales growth was 5.0%, our gross margin was flat with the prior year, our operating expenses to sales ratio improved by 90 basis points, and operating income rose 12.8%, demonstrating strong leverage.* We also had another quarter of solid cash generation, with year to date net cash from operations up 22% on the prior year. During the quarter, we repurchased shares and paid out a dividend of 58 cents per share, up 29% from the prior year, indicative of our commitment to allocating capital to enhance total shareholder returns."

* An explanation and reconciliation of non-GAAP financial measures to GAAP financial measures is presented in schedules following this press release

Outlook

The Company expects net sales for the third quarter of fiscal 2018 to be between $820 million and $835 million. At the midpoint, average daily sales are expected to increase roughly 11% compared to last year's third quarter. Excluding DECO, the Company expects net sales for the third quarter of fiscal 2018 to be between $789 million and $803 million, with average daily sales at the midpoint expected to increase roughly 7% compared to last year's third quarter. The Company expects diluted earnings per share for the third quarter of fiscal 2018, including and excluding DECO, to be between $1.37 and $1.43.

Conference Call Information

MSC will host a conference call today at 8:30 a.m. EDT to review the Company's fiscal 2018 second quarter results. The call, accompanying slides, and other operational statistics may be accessed at: http://investor.mscdirect.com. The conference call may also be accessed at 1-877-443-5575 (U.S.), 1-855-669-9657 (Canada) or 1-412-902-6618 (international).

An online archive of the broadcast will be available until April 17, 2018.

The Company's reporting date for fiscal 2018 third quarter results is scheduled for July 11, 2018.

About MSC Industrial Supply Co. MSC Industrial Supply Co. (NYSE:MSM) is a leading North American distributor of metalworking and maintenance, repair, and operations (MRO) products and services. We help our customers drive greater productivity, profitability and growth with more than 1 million products, inventory management and other supply chain solutions, and deep expertise from over 75 years of working with customers across industries.

Our experienced team of approximately 6,500 associates is dedicated to working side by side with our customers to help drive results for their businesses - from keeping operations running efficiently today to continuously rethinking, retooling, and optimizing for a more productive tomorrow.

For more information on MSC, please visit mscdirect.com.

Note Regarding Forward-Looking Statements:  
Statements in this Press Release may constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, that address activities, events or developments that we expect, believe or anticipate will or may occur in the future, including statements about expected future results, expected benefits from our investment and strategic plans, and expected future margins, are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The inclusion of any statement in this release does not constitute an admission by MSC or any other person that the events or circumstances described in such statement are material. Factors that could cause actual results to differ materially from those in forward-looking statements include: general economic conditions in the markets in which we operate, changing customer and product mixes, competition, including the adoption by competitors of aggressive pricing strategies and sales methods, industry consolidation, volatility in commodity and energy prices, the outcome of government or regulatory proceedings or future litigation, credit risk of our customers, risk of cancellation or rescheduling of orders, work stoppages or other business interruptions (including those due to extreme weather conditions) at transportation centers, shipping ports, our headquarters or our customer fulfillment centers, dependence on our information systems and the risk of business disruptions arising from changes to our information systems, disruptions due to computer system or network failures, computer viruses, physical or electronics break-ins and cyber-attacks, retention of key personnel, the loss of key suppliers or supply chain disruptions, risks associated with changes to trade policies, failure to comply with applicable environmental, health and safety laws and regulations, goodwill and intangible assets recorded as a result of our acquisitions could be impaired, risks associated with the integration of acquired businesses or other strategic transactions, and financial restrictions on outstanding borrowings. Additional information concerning these and other risks is described under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the reports on Forms 10-K and 10-Q that we file with the U.S. Securities and Exchange Commission. We assume no obligation to update any of these forward-looking statements.  

MSC INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands)


March 3,

September 2,

2018

2017

ASSETS

(unaudited)


Current Assets:






Cash and cash equivalents

$

31,608

$

16,083

Accounts receivable, net of allowance for doubtful accounts

501,067

471,795

Inventories

498,987

464,959

Prepaid expenses and other current assets


56,253

52,742

Total current assets

1,087,915

1,005,579

Property, plant and equipment, net

308,124

316,305

Goodwill

633,405

633,728

Identifiable intangibles, net

105,306

110,429

Other assets

30,472

32,871

Total assets

$

2,165,222

$

2,098,912






LIABILITIES AND SHAREHOLDERS' EQUITY




Current Liabilities:




Short-term debt

$

260,347

$

331,986

Accounts payable

133,688

121,266

Accrued liabilities

100,400

104,473

Total current liabilities

494,435

557,725

Long-term debt

250,896

200,991

Deferred income taxes and tax uncertainties

73,856

115,056

Total liabilities

819,187

873,772

Commitments and Contingencies




Shareholders' Equity:




Preferred Stock

—

—

Class A common stock

55

54

Class B common stock

11

12

Additional paid-in capital

652,440

626,995

Retained earnings

1,285,681

1,168,812

Accumulated other comprehensive loss

(18,079)

(17,263)

Class A treasury stock, at cost

(574,073)

(553,470)

Total shareholders' equity

1,346,035

1,225,140

Total liabilities and shareholders' equity

$

2,165,222

$

2,098,912

MSC INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)


Thirteen Weeks Ended

Twenty-Six Weeks Ended

March 3,

March 4,

March 3,

March 4,

2018

2017

2018

2017

Net sales

$

768,987

$

703,780

$

1,537,548

$

1,390,051

Cost of goods sold

431,764

389,218

865,256

766,754

Gross profit

337,223

314,562

672,292

623,297

Operating expenses

239,120

227,917

474,911

446,052

Income from operations

98,103

86,645

197,381

177,245

Other (expense) income:










Interest expense

(3,550)

(2,950)

(6,787)

(5,884)

Interest income

213

164

376

327

Other (expense) income, net

77

(54)

(331)

(338)

Total other expense


(3,260)

(2,840)

(6,742)

(5,895)

Income before provision for income taxes

94,843

83,805

190,639

171,350

(Benefit) provision for income taxes

(22,709)

30,246

13,502

63,503

Net income

$

117,552

$

53,559

$

177,137

$

107,847

Per Share Information:










Net income per common share:










Basic

$

2.08

$

0.94

$

3.14

$

1.90

Diluted

$

2.06

$

0.93

$

3.12

$

1.89

Weighted average shares used in computing
   net income per common share:










Basic

56,439

56,620

56,363

56,500

Diluted

56,892

57,213

56,698

56,910

Cash dividends declared per common share

$

0.58

$

0.45

$

1.06

$

0.90

MSC INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)













Thirteen Weeks Ended

Twenty-Six Weeks Ended

March 3,

March 4,

March 3,

March 4,

2018

2017

2018

2017

Net income, as reported

$

117,552

$

53,559

$

177,137

$

107,847

Foreign currency translation adjustments

27

(701)

(816)

(2,248)

Comprehensive income

$

117,579

$

52,858

$

176,321

$

105,599

MSC INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


Twenty-Six Weeks Ended

March 3,

March 4,

2018

2017

Cash Flows from Operating Activities:




Net income

$

177,137

$

107,847

Adjustments to reconcile net income to net cash provided by operating activities:




Depreciation and amortization    


31,307

30,815

Stock-based compensation

7,589

6,925

Loss on disposal of property, plant, and equipment

178

333

Provision for doubtful accounts

3,407

3,415

Deferred income taxes and tax uncertainties

(41,199)

—

Changes in operating assets and liabilities:




Accounts receivable

(32,461)

(41,680)

Inventories

(33,648)

(21,289)

Prepaid expenses and other current assets


(3,457)

(343)

Other assets

2,330

1,056

Accounts payable and accrued liabilities

7,004

9,577

Total adjustments

(58,950)

(11,191)

Net cash provided by operating activities

118,187

96,656

Cash Flows from Investing Activities:




    Expenditures for property, plant and equipment

(17,261)

(25,508)

    Cash used in business acquisition

(738)

—

Net cash used in investing activities

(17,999)

(25,508)

Cash Flows from Financing Activities:




Repurchases of common stock

(21,728)

(3,377)

Payments of cash dividends

(59,873)

(51,010)

Proceeds from sale of Class A common stock in connection with associate stock purchase plan

2,376

2,196

Proceeds from exercise of Class A common stock options

16,393

21,933

Borrowings under Credit Facility


74,000

78,000

Borrowings under Shelf Facility Agreement

50,000

—

Payments of notes payable and revolving credit note under the Credit Facility

(146,000)

(136,000)

Other, net

71

(36)

Net cash used in financing activities

(84,761)

(88,294)

Effect of foreign exchange rate changes on cash and cash equivalents

98

(142)

Net increase (decrease) in cash and cash equivalents

15,525

(17,288)

Cash and cash equivalents – beginning of year

16,083

52,890

Cash and cash equivalents – end of year

$

31,608

$

35,602

Supplemental Disclosure of Cash Flow Information:




Cash paid for income taxes

$

50,279

$

58,737

Cash paid for interest

$

6,553

$

5,524

Non-GAAP Financial Measures

  • Results excluding DECO Tool Supply Co
  • Results excluding (a)provisional one-time tax benefit and (b)adjustment from applying lower YTD rate due to the Tax Cuts and Jobs Act ("TCJA")

To supplement MSC's unaudited selected financial data presented consistent with Generally Accepted Accounting Principles ("GAAP"), the Company discloses certain non-GAAP financial measures, including Non-GAAP net sales, non-GAAP gross profit, non-GAAP income from operations, non-GAAP (benefit) provision for income taxes, non-GAAP net income and non-GAAP diluted earnings per share, that exclude the results of our acquisition of DECO Tool Supply Co. ("DECO") on July 31, 2017. These non-GAAP financial measures also exclude, for the thirteen and twenty-six-week periods ended March 3, 2018, the net estimated impact of the TCJA passed in December 2017, as these items will significantly impact comparability between years. This provisional benefit is an estimate subject to adjustment during a 12-month measurement period.

These non-GAAP measures are not in accordance with or an alternative for GAAP, and may be different from non-GAAP measures used by other companies.  We believe that these non-GAAP measures have limitations in that they do not reflect MSC's results of operations as determined in accordance with GAAP, and that these measures should only be used to evaluate MSC's results of operations in conjunction with the corresponding GAAP measures.  The presentation of this additional information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures.  We compensate for the limitations of non-GAAP financial measures by relying upon GAAP results to gain a complete picture of the Company's performance.

In calculating non-GAAP financial measures, we exclude the results of DECO and the tax benefits attributable to the TCJA to facilitate a review of the Company's operating performance on a period-to-period basis, for comparison with forecasts and strategic plans, and for benchmarking performance externally against competitors. We believe that investors benefit from seeing results "through the eyes" of management in addition to seeing GAAP results. We believe that these non-GAAP measures, when read in conjunction with the Company's GAAP financials, provide useful information to investors by offering:

  • the ability to make more meaningful period-to-period comparisons of the Company's on-going operating results;
  • the ability to better identify trends in the Company's underlying business and perform related trend analyses;
  • a better understanding of how management plans and measures the Company's underlying business; and
  • an easier way to compare the Company's operating results against analyst financial models and operating results of competitors that supplement their GAAP results with non-GAAP financial measures






























MSC INDUSTRIAL SUPPLY CO. AND SUBSIDIARIES

Reconciliation of GAAP and Non-GAAP Information

Thirteen and Twenty-Six Weeks Ended March 3, 2018

(dollars in thousands, except per share data)






























GAAP Measure

Items Affecting Comparability

Non-GAAP Measure

GAAP Measure

Non-GAAP Measure

Net Sales

DECO Tool Supply Co.

Net Sales, excluding DECO

Average Daily Sales Growth

Average Daily Sales Growth,
Excluding DECO

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

$

768,987

$

1,537,548

$

29,955

$

59,637

$

739,032

$

1,477,911

9.3

%

10.6

%

5.0

%

6.3

%






























GAAP Measure

Items Affecting Comparability

Non-GAAP Measure

GAAP Measure

Non-GAAP Measure

Gross Profit

DECO Tool Supply Co.

Gross Profit, excluding DECO

Gross Margin

Gross Margin, excluding
DECO

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

$

337,223

$

672,292

$

6,647

$

13,088

$

330,576

$

659,204

43.9

%

43.7

%

44.7

%

44.6

%

GAAP Measure

Items Affecting Comparability

Non-GAAP Measure

GAAP Measure

Non-GAAP Measure

Operating Expenses

DECO Tool Supply Co.

Operating Expenses, excluding
DECO

Operating Expenses as a percentage
of Net Sales

Operating Expenses as a
percentage of Net Sales,
Excluding DECO

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

$

239,120

$

474,911

$

6,295

$

12,160

$

232,825

$

462,751

31.1

%

30.9

%

31.5

%

31.3

%




























































GAAP Measure

Items Affecting Comparability

Non-GAAP Measure

GAAP Measure

Non-GAAP Measure

Operating Income (Loss)

DECO Tool Supply Co.

Operating Income (Loss),
excluding DECO

Operating Margin

Operating Margin, excluding
DECO

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

$

98,103

$

197,381

$

352

$

928

$

97,751

$

196,453

12.8

%

12.8

%

13.2

%

13.3

%































GAAP Measure

Items Affecting Comparability

Non-GAAP Measure

(Benefit) provision
for income taxes

DECO Tool Supply Co.

Provisional one-time tax benefit

(Benefit) provision for income taxes,
excluding DECO and one-time provisional
benefit

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

$

(22,709)

$

13,502

$

6

$

127

$

41,199

$

41,199

$

18,484

$

54,574























GAAP Measure

Items Affecting Comparability

Non-GAAP Measure

(Benefit) provision
for income taxes

DECO Tool Supply Co.

Provisional one-time tax benefit and
adjustment from applying lower YTD
rate

(Benefit) provision for income taxes,
excluding DECO and one-time provisional
benefit and adjustment from applying lower
YTD rate

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

$

(22,709)

$

13,502

$

6

$

127

$

58,128

$

58,128

$

35,413

$

71,503























GAAP Measure

Items Affecting Comparability

Non-GAAP Measure

Net Income (Loss)

DECO Tool Supply Co.

Provisional one-time tax benefit

Net Income (Loss), excluding DECO
and one-time provisional benefit

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

$

117,552

$

177,137

$

106

$

306

$

41,199

$

41,199

$

76,247

$

135,632























GAAP Measure

Items Affecting Comparability

Non-GAAP Measure

Net Income (Loss)

DECO Tool Supply Co.

Provisional one-time tax benefit and
adjustment from applying lower YTD
rate

Net Income (Loss), excluding DECO and
one-time provisional benefit and adjustment
from applying lower YTD rate

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

$

117,552

$

177,137

$

106

$

306

$

58,128

$

58,128

$

59,318

$

118,703

GAAP Measure

Items Affecting Comparability

Non-GAAP Measure

Diluted Earnings Per Share

DECO Tool Supply Co.

Provisional one-time tax benefit

Diluted Earnings Per Share, excluding
DECO and one-time provisional benefit

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

$

2.06

$

3.12

$

-

$

-

$

0.72

$

0.72

$

1.34

$

2.40























GAAP Measure

Items Affecting Comparability

Non-GAAP Measure

Diluted Earnings Per Share

DECO Tool Supply Co.

Provisional one-time tax benefit and
adjustment from applying lower YTD
rate

Diluted Earnings Per Share, excluding
DECO and one-time provisional benefit and
adjustment from applying lower YTD rate

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

Thirteen
Weeks Ended

Twenty-Six
Weeks Ended

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

March 3, 2018

$

2.06

$

3.12

$

-

$

-

$

1.02

$

1.02

$

1.04

$

2.10

SOURCE MSC Industrial Supply Co.