MSC Industrial Direct Annual Report 2013

FY2013 Annual Report · MSC Industrial Direct
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MSC Industrial Direct Co., Inc.    |   75 Maxess Road    |   Melville, New York 11747    |   (516) 812-2000    |   www.mscdirect.com    |   NYSE listed: MSM

Dear Shareholders

2013 Corporate Information

T

his past year, industry consolidation continued and manufacturers of all sizes focused on  
reducing costs associated with maintenance, repair and operations (MRO) product purchases.  
With over $150 billion in MRO spending across thousands of distributors in the U.S., Canada  
and Mexico, manufacturers see a significant opportunity to tighten their MRO supply chains.

For MSC, this trend is creating tremendous opportunity to deliver 
MRO cost-saving solutions that the vast majority of other distributors 
simply do not have the ability to deliver. With one of the broadest 
MRO portfolios, advanced e-Commerce and sophisticated inventory 
management services and solutions, MSC stands well-positioned for 
share gain and profitable growth. 

In fiscal year 2013, which had 52 weeks versus 53 weeks in fiscal 
2012, MSC net sales increased 4.3% to $2.46 billion from $2.36 billion 
in fiscal 2012. Operating income for fiscal 2013 was $385.5 million, or 
15.7% of net sales, compared to $412.2 million, or 17.5% of net sales, 
in fiscal 2012. Net income for the year was $238.0 million, a decrease 
of 8.1% from net income of $259.0 million a year ago. Diluted earnings 
per share for fiscal 2013 were $3.75 compared to $4.09 a year ago, a 
decrease of 8.3%.

All of our fiscal 2013 income measures were impacted by 
investments in infrastructure and growth initiatives to build the 
foundation for future expansion. We also converted 137% of net income 
into operating cash flow and continued to pay an attractive and rising 
quarterly dividend. We will continue investing in our future and over time, 
we see the business achieving operating margins in the high-teens.
Overall, fiscal 2013 was a very difficult economic environment 
marked by declining metalworking spend and a moderate ISM metric. 
Our performance reflects our focus on doing what we do best: 
delivering the products, solutions and expertise customers need to 
keep their businesses thriving by reducing their costs, increasing 
productivity on their shop floors and accelerating their time to value. 
We continued to invest in our solutions and services, our customer 
relationships, and the technology and infrastructure essential to support 
growth and further enhance our reputation as a trusted partner to our 
customers’ businesses. As a result, we continued to gain share despite 
market conditions.

Inventory Management Solutions   As companies try to manage MRO 
costs, we offer inventory management solutions, including advanced 
vending, our patent-pending vendor managed inventory service, a 
customer managed inventory program, e-Procurement and our supply 
chain expertise. Customers who use our solutions are saving millions 
of dollars while streamlining their processes. In addition, the deepened 
relationships we develop through these engagements offer opportunities 
to capture more revenues from products these customers do not already 
buy from MSC. 

In April of 2013, we extended our inventory management solutions 

with the acquisition of Barnes Distribution North America (BDNA). 
This acquisition expanded our product offering in fasteners and other 
high gross margin consumable products that are most often serviced 
through vendor managed inventory. It also extends our business into 
new end markets, including natural resources and transportation, 
and our geographic reach into Canada. The integration of our two 
businesses is well under way and on track to deliver our goals. As our 
industry continues to consolidate, we will carefully consider additional 
opportunities to acquire companies that fit with our culture and expand 
our business into markets and offerings our customers want.

e-Commerce   We invested significantly in our digital properties in 
fiscal 2013 to make it easy for customers to find and buy what they 
need, and we are already seeing the results. Orders through our 
website and various electronic portals during the year represented 
44% of total company revenue (excluding BDNA), an increase of 3% 
from last year. Customers are increasing efficiency and transaction 

Note: Please see “Forward-Looking Statements” on page 1 of the 

accompanying Annual Report on Form 10-K.

accuracy by ordering online, and they are becoming more comfortable 
purchasing this way. We plan to continue offering the value-added online 
services that help customers streamline the ordering process, increase 
productivity and reduce costs.

Trusted Brands   We now offer more than 1 million product SKUs to 
our customers from more than 3,000 suppliers, including top brands 
such as Kennametal, 3M, Norton, Kimberly-Clark, SECO, OSG, Stanley 
Black & Decker, Parker Hannifin and Newell Rubbermaid, as well as an 
expanding line of our own exclusive brands. We will continue to offer 
the expertise and the products with the latest technology our customers 
need to be productive. We want to make it easy for our customers, many 
of whom are reducing their number of suppliers, to find and buy the 
brands they trust from MSC. 

Efficient, Scalable Infrastructure   To meet our future growth 
objectives, we also opened our second Customer Support Center in 
Davidson, N.C., this past summer on time and on budget. We are also on 
track to open a new Customer Fulfillment Center in 2014 in Columbus, 
Ohio. Both expansions incorporate the latest technology to keep 
processes streamlined and communications efficient. They also allow  
us to be nearer to our customers to better serve their growing needs.

Best Team in the Industry   One of our strongest assets continues to 
be our team of more than 6,000 associates who are constantly looking 
for ways to serve customers faster and better. This is translating into 
smarter uses of technology from our fulfillment centers to our front 
office. We are adopting systems to communicate and collaborate more 
effectively with each other as we continue to grow. This is critical to 
maintaining the MSC culture, which is founded on integrity, teamwork, 
respect for the individual, a passion for greatness and service to the 
community. Indeed, we continue to use our time, talent and resources  
to help others in the communities where we live and work. 

What’s Next   When I stepped into the role of CEO in January 2013,  
I knew I had big shoes to fill. I also knew I had an excellent foundation 
on which to keep building our business. As we move forward, our 
balance sheet and cash flow remain strong, our customers are loyal 
and our supplier relationships are solid. We will continue to invest in 
our infrastructure and growth initiatives in fiscal 2014 to strengthen 
our foundation to support the next phase of our growth and serve our 
customers even better. We have the talent and the strategy to grow to 
a $4 billion business over the next several years while in pursuit of our 
mission to be the best industrial distributor in the world as measured 
by our stakeholders. Our job now is to execute with determination and 
excellence to deliver on our goals and the potential of MSC.

Board Of Directors

Jonathan Byrnes*  
Roger Fradin*  
Erik Gershwind  
Louise Goeser*  
Mitchell Jacobson  
Denis Kelly*  
Philip Peller*  
David Sandler  

Senior Lecturer  
President and Chief Executive Officer 
President and Chief Executive Officer 
President and Chief Executive Officer 
Non-Executive Chairman of the Board   MSC Industrial Direct Co., Inc. 
Managing Partner  
Independent Director  
Executive Vice Chairman of the Board   MSC Industrial Direct Co., Inc.

Scura Paley LLC
Retired Partner, Arthur Andersen LLP

Massachusetts Institute of Technology
Automation & Control Solutions Division of Honeywell International Inc.
MSC Industrial Direct Co., Inc.
Grupo Siemens S.A. de C.V. (Siemens Mesoamérica)

*Member of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee

Executive Officers

David Sandler  
Erik Gershwind  
Jeffrey Kaczka  
Thomas Cox  
Douglas Jones  
Eileen McGuire  
Steve Armstrong  
Charles Bonomo  
Christopher Davanzo 

Executive Vice Chairman of the Board
President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Executive Vice President, Sales
Executive Vice President, Global Supply Chain Operations
Executive Vice President, Human Resources 
Senior Vice President, General Counsel and Corporate Secretary
Senior Vice President and Chief Information Officer
Vice President, Finance and Corporate Controller

Corporate Information

Annual Meeting
The 2014 Annual Meeting of Shareholders 
will be held at:  
Hilton Long Island/Huntington  
598 Broad Hollow Road 
Melville, NY 11747  
on Thursday, January 16, 2014 at 9 a.m.

Company Headquarters
MSC Industrial Direct Co., Inc.  
75 Maxess Road  
Melville, New York 11747  
(516) 812-2000

Investor Relations Contact
John Chironna  
MSC Industrial Direct Co., Inc.  
(704) 987-5231

Copies of our Annual Report on  
Form 10-K for the fiscal year ended 
August 31, 2013 are available without 
charge, upon request.

Independent Registered Public 
Accounting Firm
Ernst & Young LLP  
Jericho, New York

Legal Counsel
Curtis, Mallet-Prevost, Colt & Mosle LLP  
New York, New York

Registrar and Transfer Agent 
Computershare Trust Company, N.A.  
PO Box 43078
Providence, Rhode Island 02940-3078

Common Stock Listed
MSC Industrial Direct Co., Inc.’s  
Class A common stock is traded  
on the New York Stock Exchange  
under the symbol “MSM.”

Dividend Policy
The Company has instituted a policy 
of regular quarterly cash dividends to 
shareholders. Currently, the quarterly 
dividend rate is $0.33 per share,  
or $1.32 per share annually.

Thank you for your continued support.
Respectfully, 

Visit the Company’s website on the
Internet at www.mscdirect.com

Erik Gershwind 
President and Chief Executive Officer

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
(cid:2)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the ﬁscal year ended August 31, 2013
OR

□

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

to
Commission ﬁle number 1-14130

MSC INDUSTRIAL DIRECT CO., INC.

(Exact Name of Registrant as Speciﬁed in Its Charter)

New York
(State or Other Jurisdiction of Incorporation or Organization)

11-3289165
(I.R.S. Employer Identiﬁcation No.)

75 Maxess Road, Melville, New York
(Address of Principal Executive Offices)

11747
(Zip Code)

(516) 812-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Class A Common Stock, par value $.001

The New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as deﬁned in Rule 405 of the Securities

Act. Yes (cid:2) No (cid:4)

Indicate by check mark if the registrant is not required to ﬁle reports pursuant to Section 13 or Section 15(d) of the

Act. Yes (cid:4) No (cid:2)

Indicate by check mark whether the registrant (1) has ﬁled all reports required to be ﬁled by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to ﬁle
such reports), and (2) has been subject to such ﬁling requirements for the past 90 days. Yes (cid:2) No (cid:4)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such ﬁles). Yes (cid:2) No (cid:4)

Indicate by check mark if disclosure of delinquent ﬁlers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in deﬁnitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. □

Indicate by check mark whether the registrant is a large accelerated ﬁler, an accelerated ﬁler, a non-accelerated ﬁler, or a smaller

reporting company. See the deﬁnitions of ‘‘large accelerated ﬁler,’’ ‘‘accelerated ﬁler’’ and ‘‘smaller reporting company’’ in
Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated ﬁler (cid:2)

Accelerated ﬁler □

Smaller reporting company □

Non-accelerated ﬁler □
(Do not check if a smaller
reporting company)

Indicate by check mark whether the registrant is a shell company (as deﬁned in Rule 12b-2 of the Exchange Act).

Yes (cid:4) No (cid:2)

The aggregate market value of Class A common stock held by non-affiliates of the registrant as of March 2, 2013 was

approximately $4,073,351,019. As of October 18, 2013, 49,270,912 shares of Class A common stock and 14,140,747 shares of Class
B common stock of the registrant were outstanding.

The registrant’s Proxy Statement for its 2014 annual meeting of stockholders is hereby incorporated by reference into Part III of

this Annual Report on Form 10-K.

DOCUMENTS INCORPORATED BY REFERENCE

MSC INDUSTRIAL DIRECT CO., INC.

TABLE OF CONTENTS

PART I

ITEM 1.

ITEM 1A.

ITEM 1B.

ITEM 2.

ITEM 3.

ITEM 4.

PART II

ITEM 5.

ITEM 6.

ITEM 7.

ITEM 7A.

ITEM 8.

ITEM 9.

ITEM 9A.

ITEM 9B.

PART III

ITEM 10.

ITEM 11.

ITEM 12.

ITEM 13.

FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MINE SAFETY DISCLOSURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . .

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . .

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . .

CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . .

EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . .

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . . . . . . . . . .

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . .

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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PART I.

FORWARD-LOOKING STATEMENTS

Except for historical information contained herein, certain matters included in this Annual Report on
Form 10-K are, or may be deemed to be forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The words ‘‘will,’’ ‘‘may,’’
‘‘designed to,’’ ‘‘believe,’’ ‘‘should,’’ ‘‘anticipate,’’ ‘‘plan,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘estimate’’ and similar
expressions identify forward-looking statements, which speak only as of the date of this annual report.
These forward-looking statements are contained principally under Item 1, ‘‘Business,’’ and under
Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations.’’ Because
these forward-looking statements are subject to risks and uncertainties, actual results could differ materially
from the expectations expressed in the forward-looking statements. Important factors that could cause actual
results to differ materially from the expectations reﬂected in the forward-looking statements include those
described in Item 1A, ‘‘Risk Factors’’ and Item 7, ‘‘Management’s Discussion and Analysis of Financial
Condition and Results of Operations.’’ In addition, new risks emerge from time to time and it is not possible
for management to predict all such risk factors or to assess the impact of such risk factors on our business.
Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking
statements. We undertake no obligation to update or revise these forward-looking statements to reﬂect
subsequent events or circumstances.

ITEM 1.

BUSINESS.

General

MSC Industrial Direct Co., Inc. (together with its subsidiaries, ‘‘MSC,’’ the ‘‘Company,’’ ‘‘we,’’ ‘‘our,’’ or

‘‘us’’) is one of the largest direct marketers and distributors of a broad range of metalworking and
maintenance, repair and operations (‘‘MRO’’) products to customers throughout North America.

In April 2013, we completed the acquisition of the North American distribution business (‘‘BDNA’’) of

Barnes Group Inc. (‘‘Barnes’’), a leading distributor of fasteners and other high margin, low cost consumables
with a broad distribution footprint throughout the U.S. and Canada. BDNA has a strong presence with
customers across manufacturing, government, transportation and natural resources end-markets. The BDNA
business specializes in lowering the total cost of its customers’ inventory management through storeroom
organization and vendor managed inventory. The Business services roughly 31,000 customers with nearly
1,400 associates, including over 650 ﬁeld sales associates, and offers more than 55,000 SKUs of products. The
information contained in this Annual Report on Form 10-K includes the operations of BDNA, unless
otherwise noted. The acquisition has been accounted for as a business purchase pursuant to Accounting
Standards Codiﬁcation Topic 805, ‘‘Business Combinations’’ (‘‘ASC 805’’). The ﬁnancial results of BDNA’s
operations were included in the Company’s consolidated ﬁnancial statements beginning on the acquisition
date, which was April 22, 2013.

We operate primarily in the United States, with customers in all 50 states, through a network of
fourteen customer fulﬁllment centers (ten customer fulﬁllment centers are located within the United States,
one is located in the United Kingdom (the ‘‘U.K.’’), and three are located in Canada) and 105 branch offices
(103 branches are located within the United States, one is located in the U.K. and the other is located in
Mexico). MSC’s primary customer fulﬁllment centers are located in or near Harrisburg, Pennsylvania; Atlanta,
Georgia; Elkhart, Indiana and Reno, Nevada. In addition, we operate 10 smaller customer fulﬁllment centers
in or near Reno, Nevada (2nd location); Hanover Park, Illinois; Dallas, Texas; Elizabethtown, Kentucky;
Edison, New Jersey; Shelbyville, Kentucky; Wednesbury, United Kingdom; Edmonton, Canada; Beamsville,
Canada; and Moncton, Canada. Our experience has been that areas accessible by next-day delivery generate
signiﬁcantly greater sales than areas where next-day delivery is not available. Excluding BDNA, we offer a
nationwide cutoff time of 8:00 P.M. Eastern Time on qualifying orders, which will be delivered to the
customer the next-day at no additional cost over standard MSC ground delivery charges.

Excluding BDNA, we offer approximately 685,000 stock-keeping units (‘‘SKUs’’) through our master

catalogs, weekly, monthly and quarterly specialty and promotional catalogs, brochures and the Internet,

1

including our websites, mscdirect.com, mscmetalworking.com and use-enco.com (the ‘‘MSC Websites’’). Most
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.

Our business strategy is to provide an integrated, lower cost solution to the purchasing, management and
administration of our customers’ MRO needs. We believe we add value to our customers’ purchasing process
by reducing their total costs for MRO supplies, taking into account both the direct cost of products and the
administrative, personnel and ﬁnancial cost of obtaining and maintaining MRO supplies. We reduce our
customers’ costs for their MRO supplies in the following manner:

•

•

•

•

•

our extensive product offerings allow customers to reduce the administrative burden of dealing with
many suppliers for their MRO needs;

we guarantee same-day shipping of our core business products and offer next-day delivery on
qualifying orders placed up until 8:00 P.M. Eastern Time (excluding BDNA), which enables our
customers to reduce their inventory investment and carrying costs;

we consolidate multiple purchases into a single order, provide a single invoice relating to multiple
purchases over varying periods of time and offer direct shipments to speciﬁc departments and
personnel within a single facility or multiple facilities, allowing our customers to reduce
administrative paperwork, costs of shipping and personnel costs related to internal distribution and
purchase order management;

we have extensive eCommerce capabilities that enable our customers to lower their procurement
costs. This includes many features such as sophisticated search and transaction capabilities, access to
real-time inventory, customer speciﬁc pricing, workﬂow management tools, customized reporting and
other features. We can also interface directly with many purchasing portals, such as ARIBA and
Perfect Commerce, in addition to ERP Procurement Solutions, such as Oracle and SAP; and

we offer inventory management solutions with our Vendor Managed Inventory (‘‘VMI’’), Customer
Managed Inventory (‘‘CMI’’) systems and vending solutions, that can lower our customers’
inventory investment, reduce sourcing costs and out-of-stock situations and increase business
efficiency. Orders generated through these inventory management solutions are integrated directly
with mscdirect.com and many third party eProcurement software solutions.

Our customers include a wide range of purchasers of industrial supply products, from individual machine
shops to Fortune 1000 companies, to government agencies such as the General Services Administration (‘‘GSA’’)
and the Department of Defense. Our business focuses on selling relatively higher margin, lower volume products
for which we had an average order size, excluding BDNA, of approximately $403 in ﬁscal 2013. Excluding
BDNA, we have approximately 322,000 active customers (deﬁned as those that have purchased at least one item
during the past 12 months). Our customers select desired products from MSC’s various publications and the MSC
Websites and place their orders by telephone, the MSC Websites, eProcurement platforms or facsimile, and at
times through direct communication with our outside sales associates.

Industry Overview

MSC operates in a large, fragmented industry characterized by multiple channels of distribution. We believe

that there are numerous small retailers, dealerships and distributors that supply a majority of the market. The
distribution channels in the MRO market include retail outlets, small distributorships, national, regional and local
distributors, direct mail suppliers, large warehouse stores and manufacturers’ own sales forces.

Almost every industrial, manufacturing and service business has an ongoing need for MRO supplies. We
believe that, except in the largest industrial plants, inventories for MRO supplies generally are not effectively
managed or monitored, resulting in higher purchasing costs and increased administrative burdens. In addition,
within larger facilities, such items are frequently stored in multiple locations, resulting in excess inventories
and duplicate purchase orders. MRO items are also frequently purchased by multiple personnel in uneconomic
quantities and a substantial portion of most facilities’ MRO supplies are generally ‘‘one-time purchases,’’
resulting in higher purchasing costs and time-consuming administrative efforts by multiple plant personnel.

2

We believe that there are signiﬁcant administrative costs associated with generating and manually placing

a purchase order. Awareness of these high costs and purchasing inefficiencies has been driving large
companies to streamline the purchasing process by utilizing a limited number of suppliers which are able to
provide a broad selection of products, inventory management solutions, eCommerce procurement solutions,
prompt delivery and superior customer service. Customized billing practices and report generation capabilities
tailored to customer objectives are also becoming increasingly important to customers seeking to reduce costs,
allowing such customers to signiﬁcantly reduce the need for purchasing agents and administrative personnel.
We believe that industry trends and economic pressures have caused customers to reduce their supplier base
and move toward more efficient cost saving models, as those offered by premier companies, such as MSC.

Despite the inefficiencies of the traditional MRO purchasing process, long-standing relationships with
local retailers and distributors have generally perpetuated the status quo. Due to limited capital availability,
eCommerce capabilities and operating leverage, smaller suppliers to the industrial market have been
experiencing increasing pressure to consolidate and/or curtail services and certain product lines in order to
remain competitive. We believe that the relative inability of these smaller, more traditional distribution
channels to respond to these changing industry dynamics has created a continuing opportunity for the growth
of larger distributors with the ﬁnancial strength, skills, eCommerce capabilities and resources of larger
distributors such as MSC. As a result of these dynamics, we continue to capture an increased share of sales by
providing lower total purchasing costs, broader product selection and a higher level of service to our
customers.

We provide a low cost solution to the purchasing inefficiencies and high costs described above.
Customers that purchase products from us will generally ﬁnd that their total purchasing costs, including
shipping, inventory investment and carrying costs, administrative costs and internal distribution costs are
reduced. We achieve these reduced costs through the following:

•

•

•

•

•

•

•

•

•

consolidation of multiple sources of supply into fewer suppliers;

consolidation of multiple purchase orders into a single purchase order;

consolidation of multiple invoices into a single invoice;

signiﬁcant reduction in tracking of invoices;

signiﬁcant reduction in stocking decisions;

reduction of purchases for inventory;

reduction in out-of-stock situations for our customers;

eCommerce and eProcurement integration capabilities; and

inventory management solutions including VMI, CMI and vending solutions.

Business Strategy

Our business strategy is to reduce our customers’ total cost for obtaining, using, and maintaining their

MRO supplies with superior customer service and value-added offerings. The strategy includes the following
key elements:

•

•

•

•

•

•

providing a full suite of inventory management solutions, services and skills to reduce the total cost
of procuring, using and disposing of inventory;

providing a broad selection of in-stock products including national industry brands and brands
exclusive to MSC;

providing prompt response, same-day shipping, and next-day delivery;

delivering superior, ‘‘one call does it all’’ customer service and technical support;

providing a unique specialized technical process to optimize our customers’ tooling usage;

using advanced technologies to reduce procurement costs; and

3

•

offering competitive pricing that reﬂects our value offering.

Inventory Management Solutions. Our inventory management solutions approach starts with the

understanding that a proper customer assessment is critical to determining the service or group of services that
will best meet our customers’ needs. Through our associates and their expertise with managing inventory
solutions, we are able to develop and recommend solutions that provide a value driven response. Solution
options, that are customized to address customer size, complexity and processes as well as speciﬁc product,
technical and cost targets, might include one or several of e-Procurement, CMI, VMI, Vending, Crib Control,
or part time or full time On-Site Resources. The success of each customer engagement is optimized by our
world class sourcing, logistics and business systems that provide predictable, reliable and scalable service.

Broad Selection of Products. Our customers are increasingly purchasing from fewer suppliers to reduce

the administrative burden of ordering from multiple sources. We believe that our ability to offer customers a
broad spectrum of industry and private brand and generic MRO products and a ‘‘good-better-best’’ product
selection alternative has been critical to our success. We offer products with varying degrees of brand name
recognition, quality and price, thus permitting the customer to choose the appropriate product based on cost,
quality and the customer’s speciﬁc needs. Excluding BDNA, we offer approximately 685,000 SKUs that are
generally in stock and available for immediate shipment, and we aim to provide a broad range of merchandise
in order to become our customers’ preferred supplier of MRO products.

Same-Day Shipping and Next-Day Delivery. Excluding BDNA, we guarantee same-day shipping of our

in-stock products, which represent most of our product offering. This prompt fulﬁllment and delivery allows
customers to reduce the administrative burden of dealing with many suppliers and reduces their inventory
investment and carrying costs. We fulﬁll our same-day shipment guarantee approximately 99% of the time.
Historically, our results indicate that areas accessible by next-day delivery generate signiﬁcantly greater sales
than areas where next-day delivery is not available. Excluding BDNA, we offer a nationwide cutoff time of
8:00 P.M. Eastern Time on qualifying orders, which will be delivered to the customer the next-day at no
additional cost over standard MSC ground delivery charges.

Superior Customer Service. Customer service is a key element in becoming a customer’s preferred

provider of MRO supplies. Our commitment to customer service is demonstrated by our investment in
sophisticated information systems and extensive training of our associates. Utilizing our proprietary customer
support software, MSC’s in-bound sales representatives implement the ‘‘one call does it all’’ philosophy.
In-bound sales representatives are able to inform customers on a real-time basis of the availability of a
product, recommend substitute products, verify credit information, receive special, custom or manufacturer
direct orders, cross-check inventory items using customer product codes previously entered into our
information systems and arrange or provide technical assistance. We believe that our simple, ‘‘one call does it
all’’ philosophy of fulﬁlling all purchasing needs of a customer through highly trained customer service
representatives, supported by our proprietary information systems, results in greater efficiency for customers
and increased customer satisfaction. To complement our customer service, we seek to ease the administrative
burdens on our customers by offering customized billing services, customer savings reports and other
customized report features, electronic data interchange ordering, eCommerce capabilities, bulk discounts and
stocking of specialty items speciﬁcally requested by customers.

We also offer our customers technical support in our value-added solutions for their diverse procurement
needs, as well as customized one-on-one service through our ﬁeld or telemarketing sales representatives. We
continue to develop our technical support capabilities in order to better serve our customers. Our customers
recognize the value of a distributor that can provide technical support to improve their operations and
productivity. We deliver this support through a ﬁeld-based team of metalworking specialists that provide
on-site technical applications support for our customers. In addition, we have centralized technical support
teams that can provide over the phone and email support to both our sales teams and customers on
metalworking and MRO products and applications.

Commitment to Technological Innovation. We take advantage of technological innovations to support

growth, improve customer service and reduce our operating costs through more effective buying practices,
automated inventory replenishment and efficient order fulﬁllment operations. MSC’s proprietary software
tracks all of the SKUs available on the MSC Websites (excluding BDNA, approximately 685,000 SKUs) and

4

enables the customer and the sales representatives to determine the availability of products in stock on a real-
time basis and to evaluate alternative products and pricing. The MSC Websites contain a searchable online
catalog with electronic ordering capabilities designed to take advantage of the opportunities created by
eCommerce. The MSC Websites offer a broad array of products, services, workﬂow management tools and
related information to meet the needs of customers seeking to reduce process costs through
eCommerce-enabled solutions. Our information systems have been designed to enhance inventory management
and turnover, customer service and cost reduction for both MSC and our customers. In addition to internal and
customer information systems, we continually upgrade our distribution methods and systems to improve
productivity and efficiency. We also provide comprehensive electronic ordering capabilities (‘‘EDI’’ and
‘‘XML’’) to support our customers’ purchase order processing. We continue to invest in inventory management
solutions with our VMI, CMI, and vending solutions. These solutions enable our customers to streamline their
replenishment processes for products and lower their overall procurement costs by maintaining lower
inventory levels at their sites, reducing consumption, and providing product accountability. The vending
solutions also broaden the range of products customers may purchase from MSC, as customers with vending
solutions often choose to also reduce their overall number of vendors. MSC’s vending solutions include
different kinds of machines such as storage lockers or carousels, that can stand alone or be combined with
other machines. They use network or web-based software to enable customers to manage inventory throughout
their production areas.

Advanced Technologies and www.mscdirect.com. We offer advanced technologies that reduce customers’

acquisition costs for MRO supplies. These programs include solutions such as vending, VMI, CMI, eCommerce,
eProcurement, and workﬂow management tools. Industrial vending solutions speciﬁcally are becoming
increasingly valued by our customers as they focus on improving their operations, cost control and vendor
consolidation. These solutions can accommodate a range of products from precision cutting tools to MRO
supplies. We will continue to invest in our vending program in support of our overall growth strategy as well as
our goal to support the identiﬁed needs of our customers. The MSC Websites are available 24 hours a day, seven
days a week, providing personalized real-time inventory availability, superior search capabilities, online bill
payment, delivery tracking status and a number of other enhancements, including work ﬂow management tools.
The user-friendly search engine allows customers to search for SKUs by keyword, part description, competitive
part number, vendor number or brand. We believe the MSC Websites are a key component of our strategy to
reduce customers’ transaction costs and internal requisition time. Many large customer accounts transact business
with MSC using eProcurement solution providers that sell a suite of eCommerce products designed to meet the
needs of businesses seeking reduced procurement costs and increased effectiveness of their MRO/direct materials
ordering process by using Internet-enabled solutions. We have associations with many of these providers,
including ARIBA (now part of SAP), Perfect Commerce, Oracle, and SAP. We continue to evaluate and expand
our eProcurement capabilities, as the needs of our customers grow.

Competitive Pricing. Customers are increasingly evaluating their total cost of procurement of which
pricing is a component. We offer market competitive pricing to our customers reﬂective of the service level
and solutions we provide in reducing the customers overall procurement costs.

Growth Strategy

Our goal is to become the preferred supplier of MRO supplies for businesses throughout North America.
We continue to implement our strategies to gain market share against other suppliers, generate new customers,
increase sales to existing customers, and diversify our customer base by:

•

•

•

•

•

expanding government and national account programs;

expanding our direct sales force and increasing their productivity;

expanding and enhancing our metalworking capabilities to aggressively penetrate customers in heavy
and light manufacturing;

increasing sales from existing customers and generating new customers by offering various
value-added programs designed to reduce our customers’ supply chain costs, including vendor and
customer managed inventory, along with point-of-use vending;

expanding our product lines, including the addition of new products and private brand alternatives;

5

•

•

•

•

improving our direct marketing programs;

enhancing our eCommerce capabilities;

improving our excellent customer support service and technical support capabilities; and

selectively pursuing strategic acquisitions.

Expanding government and national account programs. We have developed government and national

account programs to meet the speciﬁc needs of these types of customers. We believe that signiﬁcant growth
opportunities exist within these types of customers and that they are an integral part of our core growth and
customer diversiﬁcation program. Allocating resources to these customers has allowed us to provide better
support and expand our customer acquisition and penetration activities, as this is a key component in our
overall growth strategy.

Increasing the size and improving the productivity of our direct sales force. We believe that increasing

the size of our sales force, providing high levels of customer service and improving sales force productivity
can have a positive effect on our sales per customer. The focus is to enable our sales force to spend more time
with our customers and provide increased support during the MRO purchasing process thereby capturing more
of their MRO spend. In ﬁscal 2013, our in-bound sales force totaled 1,121 associates. We believe that
continued investment in our sales force enables us to increase our market share, and we will continue to
do so.

Expanding and enhancing our metalworking capabilities to aggressively penetrate customers in heavy

and light manufacturing. Our goal is to become the preferred distributor of choice for our customers’
metalworking needs. We intend to accomplish this through continued expansion of our metalworking sales
team, increased technical support, and enhanced supplier relationships. In addition, we will continue to
develop and introduce value-added solutions, services and products to support the identiﬁed needs of our
customers. Our product focus will include the continued development of high performance metalworking
products marketed under MSC proprietary brand platforms as well as leading industry brands. We will
continue to drive high value product alternatives for our customers. Through this combined focus, we seek to
gain market share with existing customers and attract new customers for metalworking products.

Increasing sales from existing customers and generating new customers with various value-added

In order to increase sales to existing customers and generate new customers, we offer value-added

programs.
programs that reduce customers’ acquisition costs for MRO supplies. Value-added programs include business
needs analysis, inventory management solutions such as vending, VMI, CMI, eCommerce, training, and
workﬂow management tools. Industrial vending solutions speciﬁcally are becoming increasingly valued by our
customers as they focus on improving their operations, cost control and vendor consolidation. These solutions
can accommodate a range of products from precision cutting tools to MRO supplies. We will continue to
invest in our vending program in support of our overall growth strategy as well as our goal to support the
identiﬁed needs of our customers.

Increasing the number of product lines and productive SKUs. We believe that increasing the breadth
and depth of our product offerings and removing non-value-added SKUs is critical to our continued success.
In addition, we are focused on providing our customers with new product alternatives that will help them
achieve their cost savings objectives while meeting their demands for higher quality products. All of the
following SKU metrics exclude BDNA. In ﬁscal 2013, through the MSC catalog, we added approximately
19,500 SKUs and removed approximately 17,400 SKUs. In ﬁscal 2014, in the MSC catalog distributed in
September 2013, we added approximately 18,000 new SKUs and removed approximately 12,250 SKUs.
Approximately 22% of the new SKUs are MSC private brands. SKUs are primarily removed as they are
consolidated to other items providing our customers equal or higher value and are consistent with our margin
expansion initiatives. Our objective is to continuously and signiﬁcantly increase the number of SKUs available
to our customers through our eCommerce, telesales and catalog channels. In ﬁscal year 2013, we added
approximately 90,000 new SKUs to our ordering database bringing MSC’s total active, saleable SKU count to
approximately 1,025,000. In addition, we increased the number of new SKUs available on www.mscdirect.com

6

by approximately 100,000. After the impact of SKU removals, our total SKUs available for order via the web
is approximately 685,000. We expect this SKU expansion plan through our eCommerce channels to continue
throughout ﬁscal 2014.

Improving our direct marketing programs. Through our marketing efforts, we have accumulated an
extensive buyer database and industry expertise within speciﬁc markets. We utilize empirical information from
our marketing database to prospect for new customers and target the circulation of our master catalogs to
those most likely to purchase. We supplement our master catalogs with direct mail, online digital catalogs,
search engine marketing, and email to further increase customer response and product purchases. Industry
speciﬁc expertise is used to target customer growth areas and focus sales and marketing campaigns.

Enhancing eCommerce capabilities. MSC’s Websites are a proprietary business-to-business horizontal

marketplace serving the Metalworking and MRO market and are supported by the complete MSC service
model. All qualiﬁed orders placed online at mscdirect.com are backed by our same-day shipping guarantee,
unless otherwise stated. The MSC Websites utilize the same highly trained sales force and support services as
MSC’s traditional business, emphasizing MSC’s values of placing customers’ needs ﬁrst. The MSC Websites
are available 24 hours a day, seven days a week, providing personalized real-time inventory availability,
superior search capabilities, online bill payment, delivery tracking status and a number of other enhancements,
including work ﬂow management tools. The user-friendly search engine allows customers to search for SKUs
by keyword, part description, competitive part number, vendor number or brand. We believe the MSC
Websites are a key component of our strategy to reduce customers’ transaction costs and internal requisition
time. Most orders move directly from the customers’ desktop to our customer fulﬁllment center ﬂoor,
removing human error, reducing handling costs and speeding up the transaction ﬂow. MSC continues to
evaluate the MSC Websites and solicit customer feedback, making on-going improvements targeted at
ensuring that they remain premier websites in our marketplace. The marketing campaign of the MSC Websites
continues to raise awareness and drive volume to the websites.

Many large customer accounts transact business with MSC using eProcurement solution providers that
sell a suite of eCommerce products designed to meet the needs of businesses seeking reduced procurement
costs and increased effectiveness of their MRO/direct materials ordering process by using Internet-enabled
solutions. We have associations with many of these providers, including ARIBA (now part of SAP), Perfect
Commerce, Oracle, and SAP. We continue to evaluate and expand our eProcurement capabilities, as the needs
of our customers grow.

Improving our excellent customer support service. Our goal is to anticipate our customers’ service
needs. We are continuing to proactively expand the services that we provide and respond and build programs
at customer requests. MSC’s ‘‘one call does it all’’ philosophy continues to be the cornerstone of our service
model even as the complexity of the needs of our customers continues to grow. This focus on our customers’
needs provides a market differentiator, which enables us to retain existing customers and to grow our customer
base. In addition, MSC employs customer comment cards, surveys and other proactive customer outreach
tools to maintain an open line of communication with our customers. The feedback from these contact points
is used to drive change and improvement that enhances the customer experience. We also continue to develop
our technical support capabilities in order to better serve our customers. Our customers recognize the value of
a distributor that can provide technical support to improve their operations and productivity.

Selectively pursuing strategic acquisitions. We actively pursue strategic acquisitions that we believe
will either expand or complement our business in new or existing markets or further enhance the value and
offerings we are able to provide to our existing or future potential customers. The Company completed one
acquisition, BDNA, during ﬁscal year 2013. We believe that the highly fragmented nature of the MRO supply
industry will continue to provide acquisition opportunities. We expect that any future acquisitions will be
ﬁnanced with internally generated funds and/or additional debt.

Products

Our products represent a broad range of MRO products that include cutting tools; measuring instruments;

tooling components; metalworking products; fasteners; ﬂat stock; raw materials; abrasives; machinery hand
and power tools; safety and janitorial supplies; plumbing supplies; materials handling products; power
transmission components; and electrical supplies. We believe that by offering a large number of SKUs, we

7

enable our customers to reduce the number of suppliers they use to meet their MRO needs, thereby reducing
their costs. In this regard, we intend to continue to add new value-adding products to our existing product
categories. Our assortment of products from multiple manufacturers at different price and quality levels,
provides our customers a ‘‘good-better-best’’ product selection alternative. This value proposition provides
similar product offerings with varying degrees of brand recognition, quality and price, which enables our
customers to choose the appropriate product for a speciﬁc application on the most cost-effective basis. MSC
seeks to distinguish itself from its competition by offering name brand, private brand, and generic products, as
well as by offering signiﬁcant depth in its core product lines, while maintaining competitive pricing.

Our in-bound sales representatives and technical support associates are trained to assist customers in

making suitable cost-saving purchases. We believe this approach results in signiﬁcant amounts of repeat
business and is an integral part of our strategy to reduce our customers’ industrial supply costs.

We purchase substantially all of our products directly from approximately 3,000 suppliers, excluding
BDNA. One supplier accounted for approximately 6%, 5%, and 5% of our total purchases in ﬁscal 2013,
ﬁscal 2012, and ﬁscal 2011, respectively.

The BDNA acquisition not only strengthens MSC’s product offering in categories such as fasteners,
ﬁttings, and other maintenance consumables, it also brings best-in-class pre-planned assortments, of those
products, in the package quantities, conﬁgurations, and installations found most desirable by customers.

Customer Fulﬁllment Centers

A signiﬁcant number of our products are carried in stock. Approximately 80% of sales are fulﬁlled from

our customer fulﬁllment centers or branch offices. Certain products, such as specialty or custom items and
some very large orders, are shipped directly from the manufacturer. Our primary customer fulﬁllment centers
are managed via computer-based SKU tracking systems and radio frequency devices that facilitate the location
of speciﬁc stock items to make the selection process more efficient. We have invested signiﬁcant resources in
technology and automation to increase efficiency and reduce costs, and continually monitor our order
fulﬁllment process. We currently utilize fourteen customer fulﬁllment centers for product shipment. Our
primary customer fulﬁllment centers are located in or near Harrisburg, Pennsylvania; Atlanta, Georgia;
Elkhart, Indiana and Reno, Nevada. In addition, we operate 10 smaller customer fulﬁllment centers in or near
Reno, Nevada (2nd location); Hanover Park, Illinois; Dallas, Texas; Elizabethtown, Kentucky; Edison, New
Jersey; Shelbyville, Kentucky; Wednesbury, United Kingdom; Edmonton, Canada; Beamsville, Canada and
Moncton, Canada. During ﬁscal 2013, we began to build a new customer fulﬁllment center in Columbus,
Ohio, in order to support our growth strategy and maintain our signature service model. We expect to
complete construction and begin operation in the fall of 2014. We expect our investment in this facility will
yield high returns as we more efficiently manage and expand our service volume.

Sales and Marketing

Our customers include a broad range of purchasers of industrial supply products, from individual
machine shops, to Fortune 1000 companies, to government agencies. Our core business focuses on selling
relatively higher margin, lower volume products, for which we had an average order size of approximately
$403 in ﬁscal 2013, excluding BDNA. The acquisition of the BDNA business, which participates primarily in
the Fastener and Class C (‘‘Consumables’’) product categories, signiﬁcantly increases MSC’s presence in the
VMI space. VMI involves not only the selling of the maintenance consumables by our associates, but also the
management of appropriate stock levels for the customer, writing the necessary replenishment orders, putting
away the stock, and maintaining a clean and organized inventory area.

We market to small, medium and large companies in a wide range of sectors, including, but not limited

to, durable and non-durable goods manufacturing (which accounted for a substantial portion of our revenue in
ﬁscal 2013), education, government and health care. We also have government and national account programs
designed to address the needs of these customers.

Another focus area for our sales force is the execution of contracts with various federal, state, and local

government agencies. These relationships are for MRO products and are well matched to MSC’s product
breadth and depth. Federal government customers include large and small military bases, veterans’ hospitals,
federal correctional facilities, the United States Postal Service, and the Department of Defense. In addition to

8

the individual state contracts that MSC already has, we are also pursuing and are engaged in a number of
state cooperatives that present MSC an opportunity to leverage a single relationship over numerous states and
agencies.

Our national account program also includes large, Fortune 1000 companies as well as large privately-held

companies, and international companies doing business in the U.S. The MSC value proposition is consistent
with the procurement strategies of these companies as they attempt to reduce their supply base by partnering
with suppliers that can serve their needs nationally and drive costs out of their supply chain while providing
them a higher degree of visibility utilizing eCommerce and inventory management solutions such as
mscdirect.com, VMI, CMI and vending solutions. We have identiﬁed hundreds of additional national account
prospects and have given our sales team tools to ensure we are targeting and implementing programs with the
companies that best ﬁt the MSC model. One of the ways we are doing this is by creating and hosting a series
of executive forums with customers and prospects to discuss the trends and challenges in the manufacturing
supply chain. We believe these opportunities enable us to have productive conversations with customers and
prospects that help strengthen our relationships and position MSC as an industry leader.

Typically, a customer’s industrial supply purchases are managed by several buyers within their
organization responsible for different categories of products. In ﬁscal year 2013, we began to implement
advanced analytics and the ﬁndings from an advanced buyer segmentation study to signiﬁcantly increase the
return on our direct marketing investments designed to acquire new customers and increase our share of
business with current customers. While master catalogs, promotional catalogs and brochures continued to play
an important role in our efforts, we accelerated a shift in our focus to search engine marketing, email
marketing and online advertising in line with changes in our customers’ buying behavior. We use our own
database of over three million contacts together with external mailing lists to target our offline and online
investments to buyers with the highest likelihood to buy from MSC. By applying new analytics and moving
expenditures to more efficient online tactics, we reduced publication circulation while signiﬁcantly increasing
revenue contribution. We continue to produce our catalogs and promotional publications in-house to lower our
costs and ensure the most efficient use of advertising space for our suppliers.

Our sales representatives are highly trained individuals who build relationships with customers, assist
customers in reducing costs, provide technical support, coordinate special orders and shipments with vendors
and update customer account proﬁles in our information systems databases. Our ‘‘one call does it all’’
philosophy is predicated on the ability of the sales representative, utilizing our information systems’
comprehensive databases as a resource, to respond effectively to the customer’s needs. When a customer
places a call to MSC, the sales representative taking the call has immediate access to that customer’s company
and speciﬁc buyer proﬁle, as well as inventory levels by the customer fulﬁllment center on all of the SKUs
offered by MSC. The customer’s proﬁle includes historical and current billing information, historical
purchasing information and plant and industry information.

Our in-bound sales representatives at our call centers undergo an intensive eight-week training course, are
required to attend regular on-site training seminars and workshops, and are monitored and evaluated at regular
intervals. Additionally, the sales representatives are divided into teams that are evaluated monthly and
monitored on a daily basis by team supervisors. Sales representatives receive technical training regarding
various products from vendors and in-house training specialists. We also maintain a separate technical support
group dedicated to answering speciﬁc customer inquiries, assisting customers with the operation of products
and ﬁnding the most efficient solutions to manufacturing problems. We entered into an exclusive agreement
with ToolingU, a company of the Society of Manufacturing Engineers, to create certiﬁed online training for
MSC associates, who are already among the industry’s most highly trained metalworking specialists.

As of August 31, 2013, we had 1,790 ﬁeld sales representatives (including U.K., and Mexico operations
and 667 associates added as a result of the BDNA acquisition) who work out of the branches and generate a
signiﬁcant portion of our sales. They are responsible for increasing sales per customer and servicing existing
customers. The sales representatives accomplish this by communicating our product offering, distribution
capabilities, customer service models and value-added programs directly to the customer. These associates are
a touch-point to the customer and provide the organization with feedback on the competitive landscape and
purchasing trends, which contributes to customer service improvements.

9

Branch Offices

We currently operate 105 branch offices. There are 103 branch offices within the United States located in

41 states, and one location in each of the United Kingdom and Mexico. We have experienced higher sales
growth and market penetration in areas where we have established a branch office and believe our branch
offices are important to the success of our business strategy of obtaining and penetrating new and existing
accounts. There were no branch openings during ﬁscal 2013.

Publications

Our primary reference publications are our master catalogs, which are supported by specialty, and
promotional catalogs and brochures. MSC produces two annual catalogs: the MSC Big Book, which contains
a comprehensive offering across all product lines, and the MSC Metalworking catalog, which is focused on
our metalworking product offering along with a broad range of ancillary products. We use specialty and
promotional publications to target customers in speciﬁc areas, such as metal fabrication, facilities
management, safety and janitorial. We distribute specialty and promotional catalogs and brochures based on
information in our databases and purchased mailing lists of customers whose purchasing history or proﬁle
suggests that they are most likely to purchase according to speciﬁc product categories or product promotions.
Consequently, specialty catalogs offer a more focused selection of products at a lower catalog production cost
and more efficient use of advertising space.

MSC’s in-house marketing staff primarily designs and produces all of our catalogs and brochures. Each
publication contains photographs, detailed product descriptions and a toll-free telephone number and website
address to be used by customers to place a product order. In-house production helps reduce overall expense
and shortens production time, allowing us the ﬂexibility to alter our product offerings and pricing and reﬁne
our catalogs and brochures more quickly.

While the circulation volume has decreased as part of an ongoing strategy to improve direct marketing

productivity and increase overall return on advertising dollars spent, the quantity mailed from year to year
may ﬂuctuate as we develop programs to target greater product penetration at existing customers, acquire new
customers, and develop new industry sectors.

Number of publication titles
. . . . . . . . . . . . . . . . . . . . . . .
Number of publications mailed . . . . . . . . . . . . . . . . . . . . .

Customer Service

August 27,
2011
(52 weeks)
111
18,600,000

Fiscal Years Ended
September 1,
2012
(53 weeks)
100
18,032,000

August 31,
2013
(52 weeks)
95
16,308,000

One of our goals is to make purchasing our products as convenient as possible. Since a large quantity of

customer orders are placed by telephone, the efficient handling of calls is an extremely important aspect of our
business. Order entry and fulﬁllment occurs at each of our branches and our main call centers, mostly located
at our customer fulﬁllment centers. Calls are received by customer service phone representatives who utilize
online terminals to enter customer orders into computerized order processing systems. In general, our
telephone ordering system is ﬂexible and in the event of a local or regional breakdown, it can be re-routed to
alternative locations. When an order is entered into the system, a credit check is performed; if the credit is
approved, the order is generally electronically transmitted to the customer fulﬁllment center closest to the
customer where the order is shipped. We believe that our relationships with all of our freight carriers are
satisfactory. Customers are invoiced for merchandise, shipping and handling promptly after shipment.

Information Systems

Excluding BDNA, our information systems allow centralized management of key functions, including
communication links between customer fulﬁllment centers, inventory and accounts receivable management,
purchasing, pricing, sales and distribution, and the preparation of daily operating control reports that provide
concise and timely information regarding key aspects of our business. These systems enable us to ship to
customers on a same-day basis, respond quickly to order changes, provide a high level of customer service,
achieve cost savings, deliver superior customer service and manage our operations centrally. Our eCommerce

10

environment is built upon a combined platform of our own intellectual property, state of the art software
components from the world’s leading internet technology providers and world class product data. This
powerful combination of resources allows us to deliver an unmatched online shopping experience to our
customers with extremely high levels of reliability and resiliency.

Most of our information systems operate over a wide area network and are real-time information systems
that allow each customer fulﬁllment center and branch office to share information and monitor daily progress
relating to sales activity, credit approval, inventory levels, stock balancing, vendor returns, order fulﬁllment
and other measures of performance. We maintain a sophisticated buying and inventory management system
that monitors all of our SKUs and automatically purchases inventory from vendors for replenishment based
on projected customer ordering models. We also maintain an Electronic Data Interchange (‘‘EDI’’) purchasing
program with our vendors with the objective of allowing us to place orders more efficiently, reduce order
cycle processing time, and increase the accuracy of orders placed.

In addition to developing the proprietary computer software programs for use in the customer service and
distribution operations, we also provide a comprehensive EDI and an Extensible Markup Language (‘‘XML’’)
ordering system to support our customer based purchase order processing. We provide product information and
ordering capabilities on the Internet. We also maintain a proprietary hardware and software platform in support of
our VMI program which allows customers to integrate scanner-accumulated orders directly into our Sales Order
Entry system. Our CMI program allows our customers to simply and effectively replenish inventory, by submitting
orders directly to our website. Our customized vending systems are used by our customers in manufacturing plants
across the U.S. to help them achieve supply chain and shop ﬂoor optimization, through inventory management
and reduced tooling and labor costs. Our VMI, CMI and vending capabilities function directly as front-end
ordering systems for our E-portal based customers. These solutions take advantage of advanced technologies built
upon the latest innovations in wireless and cloud based computing.

Excluding BDNA, our core systems run in a highly distributed computing environment and utilize world

class software and hardware platforms from key partners like IBM, SAP and Oracle. We utilize disaster
recovery techniques and procedures, which are adequate to fulﬁll our needs and are consistent with best
practices in enterprise IT. Our core systems are architected to be highly scalable and sufficient to sustain our
present operations and our anticipated growth for the foreseeable future.

With the advent of advanced mobile technologies such as smart phones and tablets, access to information

and decision making can now be made anytime, anywhere. Recognizing this need, we have deployed
technology to securely manage and maintain access to enterprise information from mobile devices that meet
our security standards. Our sales force is equipped with proprietary mobile technology that allows them to tap
into the power of MSC’s supply chain directly from our customer’s manufacturing plants to make sure that
critical inventory is always on site and available. In addition, we are enhancing our customer web sites and
portals to reﬂect this new mobile reality at a pace in line with customer adoption of mobile technology.

Competition

The MRO supply industry is a large, fragmented industry that is highly competitive. We face competition

from traditional channels of distribution such as retail outlets, small dealerships, regional or national
distributors utilizing direct sales forces, manufacturers of MRO supplies, large warehouse stores and larger
direct mail distributors. We believe that sales of MRO supplies will become more concentrated over the next
few years, which may make MRO supply distribution more competitive. Some of our competitors challenge
us with a large variety of product offerings, ﬁnancial resources, services or a combination of all of these
factors. In the industrial products market, customer purchasing decisions are primarily based on one or more
of the following criteria: price, product selection, product availability, technical support relationship, level of
service and convenience. We believe we compete effectively on all such criteria.

Seasonality

During any given time period we may be impacted by our industrial customers’ plant shutdowns (particularly

during the summer months or our fourth ﬁscal quarter). In ﬁscal years 2013 and 2012, we experienced a
seasonality impact on our sales due to customers’ plant shutdowns, which was offset in ﬁscal 2013 by our
acquisition in the third quarter of BDNA and in ﬁscal 2012 by the extra week in the ﬁscal fourth quarter.

11

Compliance with Health and Safety and Environmental Protection Laws

Our operations are subject to and affected by a variety of federal, state, local and non-U.S. health and

safety and environmental laws and regulations relating to the discharge, treatment, storage, disposal,
investigation and remediation of certain materials, substances and wastes. We continually assess our
compliance status and management of environmental matters in an effort to ensure our operations are in
compliance with all applicable environmental laws and regulations.

Operating and maintenance costs associated with environmental compliance and management of sites are
a normal, recurring part of our operations. With respect to all other matters that may currently be pending, in
the opinion of management, based on our analysis of relevant facts and circumstances, compliance with
applicable environmental laws is not likely to have a material adverse effect upon our capital expenditures,
earnings or competitive position.

Associates

As of August 31, 2013, we employed 6,257 associates (6,133 full-time and 124 part-time associates),
which includes our U.K., Mexico and Canada operations and represents a signiﬁcant increase in associates
since September 1, 2012 as a result of our acquisition of BDNA. No associate is represented by a labor union.
We consider our relationships with associates to be good and have experienced no work stoppages.

Available Information

We ﬁle annual, quarterly and current reports, and other reports and documents with the Securities and
Exchange Commission (the ‘‘SEC’’). The public may read and copy any materials we ﬁle with the SEC at the
SEC’s Public Reference Room at Station Place, 100 F Street, N.E., Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet site that contains reports, proxy and information statements, and other
information regarding issuers that ﬁle electronically with the SEC. The address of that website is
http://www.sec.gov.

The Company’s Internet address is http://www.mscdirect.com. We make available on or through our
investor relations page on our website, free of charge, our Annual Report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and beneﬁcial ownership reports on Forms 3, 4, and 5 and
amendments to those reports as soon as reasonably practicable after this material is electronically ﬁled with or
furnished to the SEC. We also make available, on our website, the charters of the committees of our Board of
Directors and Management’s Code of Ethics, the Code of Business Conduct and Corporate Governance
Guidelines pursuant to SEC requirements and New York Stock Exchange listing standards. Information on our
website does not constitute a part of this Annual Report on Form 10-K.

ITEM 1A.

Risk Factors

In addition to the other information in this Annual Report on Form 10-K, the following factors should be
considered in evaluating the Company and its business. Our future operating results depend upon many factors
and are subject to various risks and uncertainties. The known material risks and uncertainties which may
cause our operating results to vary from anticipated results or which may negatively affect our operating
results and proﬁtability are as follows:

Our business depends heavily on the operating levels of our customers and the economic factors that affect them.

Many of the primary markets for the products and services we sell are subject to cyclical ﬂuctuations that

affect demand for goods and materials that our customers produce. Consequently, demand for our products
and services has been and will continue to be inﬂuenced by most of the same economic factors that affect
demand for and production of our customers’ products.

When, as occurred in the recent economic downturn, customers or prospective customers reduce production

levels because of lower demand or tight credit conditions, their need for our products and services diminishes.
Selling prices and terms of sale come under pressure, adversely affecting the proﬁtability and the durability of
customer relationships. Credit losses increase as well. Volatile economic and credit conditions also make it more
difficult for distributors, as well as customers and suppliers, to forecast and plan future business activities.

12

In addition, as various sectors of our industrial customer base face increased foreign competition, and in
fact lose business to foreign competitors or shift their operations overseas in an effort to reduce expenses, we
may face increased difficulty in growing and maintaining our market share and growth prospects.

We may encounter diffıculties with acquisitions, which could harm our business.

We have completed several acquisitions of businesses, including our acquisition of BDNA completed in
ﬁscal 2013, and we expect to continue to pursue strategic acquisitions that we believe will either expand or
complement our business in new or existing markets or further enhance the value and offerings we are able to
provide to our existing or future potential customers.

Acquisitions involve numerous risks and challenges, including the following:

•

•

•

•

•

•

•

diversion of management’s attention from the normal operation of our business;

potential loss of key associates and customers of the acquired companies;

difficulties managing and integrating operations in geographically dispersed locations;

the potential for deﬁciencies in internal controls at acquired companies;

increases in our expenses and working capital requirements, which reduce our return on invested
capital;

lack of experience operating in the geographic market or industry sector of the acquired business; and

exposure to unanticipated liabilities of acquired companies.

To integrate acquired businesses, we must implement our management information systems, operating

systems and internal controls, and assimilate and manage the personnel of the acquired operations. The
difficulties of this integration may be further complicated by geographic distances. The integration of acquired
businesses may not be successful and could result in disruption to other parts of our business.

Changes in our customer and product mix, or adverse changes to the cost of goods we sell, could cause our
gross margin percentage to ﬂuctuate, or decrease.

From time to time, we have experienced changes in our customer mix and in our product mix. Changes

in our customer mix have resulted from geographic expansion, daily selling activities within current
geographic markets, and targeted selling activities to new customers. Changes in our product mix have
resulted from marketing activities to existing customers and needs communicated to us from existing and
prospective customers as well as from business acquisitions. As our large account customer program sales
grow, we will face continued pressures on maintaining gross margin because these customers receive lower
pricing due to their higher sales volumes. In addition, our recent expansion of our vending program has placed
pressure on our gross margin. There can be no assurance that we will be able to maintain our historical gross
margins. In addition, we may also be subject to price increases from vendors that we may not be able to pass
along to our customers.

We operate in a highly competitive industry.

The MRO supply industry, although consolidating, still remains a large, fragmented industry that is
highly competitive. We face competition from traditional channels of distribution such as retail outlets, small
dealerships, regional or national distributors utilizing direct sales forces, manufacturers of MRO supplies, large
warehouse stores and larger direct mail distributors. We believe that sales of MRO supplies will become more
concentrated over the next few years, which may make the industry more competitive. Our competitors
challenge us with a greater variety of product offerings, ﬁnancial resources, services or a combination of all of
these factors. In addition, we also face the risk of companies which operate primarily outside of our industry
entering our marketplace.

Our industry is consolidating which could cause it to become more competitive.

The business of selling MRO supplies in North America is currently undergoing some consolidation. This

consolidation is being driven by customer needs and supplier capabilities, which could cause the industry to
become more competitive as greater economies of scale are achieved by suppliers.

13

Traditional MRO suppliers are attempting to consolidate the market through internal expansion, through

acquisitions or mergers with other industrial and construction suppliers, or through a combination of both.
This consolidation allows suppliers to improve efficiency and spread ﬁxed costs over a greater number of
sales, and to achieve other beneﬁts derived from economies of scale.

Customers are increasingly aware of the total costs of fulﬁllment, and of their need to have consistent

sources of supply at multiple locations. Consistent sources of supply provide not just reliable product
quantities, but also consistent pricing, quality, and service capabilities. We believe these customer needs could
result in fewer suppliers as the industry consolidates, and as the remaining suppliers become larger and
capable of being a consistent source of supply.

The trend of our industry toward consolidation could make it more difficult for us to maintain our
operating margins. There can be no assurance that we will be able to take advantage of the trend or that we
can do so effectively.

Volatility in commodity and energy prices may adversely affect operating margins.

In times of commodity and energy price increases, we may be subject to price increases from our

vendors and freight carriers that we may be unable to pass along to our customers. Raw material costs used in
our vendors’ products (steel, tungsten, etc.) and energy costs may increase, which may result in increased
production costs for our vendors. The fuel costs of our independent freight companies have been volatile. Our
vendors and independent freight carriers typically look to pass increased costs along to us through price
increases. When we are forced to accept these price increases, we may not be able to pass them along to our
customers, resulting in lower operating margins.

As a United States government contractor, we are subject to certain laws and regulations which may increase
our costs of doing business and which subject us to certain compliance requirements and potential liabilities.

As a supplier to the United States government, we must comply with certain laws and regulations,

including the Trade Agreements Act, the Buy American Act and the Federal Acquisition Regulation, relating to
the formation, administration and performance of United States government contracts. These laws and
regulations affect how we do business with government customers, and in some instances, impose added
compliance and other costs on our business. From time to time, we are subject to governmental or regulatory
inquiries or audits relating to our compliance with these laws and regulations. A violation of speciﬁc laws and
regulations could result in the imposition of ﬁnes and penalties or the termination of our United States
government contracts and could harm our reputation and cause our business to suffer.

Our business is exposed to the credit risk of our customers which could adversely affect our operating results.

We perform periodic credit evaluations of our customers’ ﬁnancial condition and collateral is generally

not required. Receivables are generally due within thirty days. We evaluate the collectability of accounts
receivable based on numerous factors, including past transaction history with customers and their credit
worthiness and we provide a reserve for accounts that we believe to be uncollectible. A signiﬁcant
deterioration in the economy could have an adverse effect on the servicing of these accounts receivable, which
could result in longer payment cycles, increased collection costs and defaults.

The risk of cancellation or rescheduling of orders may cause our operating results to ﬂuctuate.

The cancellation or rescheduling of orders may cause our operating results to ﬂuctuate. Although we

strive to maintain ongoing relationships with our customers, there is an ongoing risk that orders may be
cancelled or rescheduled due to ﬂuctuations in our customers’ business needs or purchasing budgets, including
changes in national and local government budgets. Additionally, although our customer base is diverse,
ranging from individual machine shops to Fortune 1000 companies and large governmental agencies, the
cancellation or rescheduling of signiﬁcant orders by larger customers may still have a material adverse effect
on our operating results from time to time.

Work stoppages and other disruptions, including those due to extreme weather conditions, at transportation
centers or shipping ports may adversely affect our ability to obtain inventory and make deliveries to our
customers.

Our ability to provide same-day shipping and next-day delivery of our core business products is an
integral component of our overall business strategy. Disruptions at transportation centers or shipping ports, due

14

to labor stoppages or severe weather conditions affect both our ability to maintain core products in inventory
and deliver products to our customers on a timely basis, which may in turn adversely affect our customer
relationships and results of operations. In addition, severe weather conditions could adversely affect demand
for our products in particularly hard hit regions.

The terms of our credit facility impose operating and ﬁnancial restrictions on us, which may limit our ability
to respond to changing business and economic conditions.

We currently have a $650.0 million unsecured term loan and revolving loan credit facility, with the right

to increase the aggregate amount available to be borrowed by an additional $200.0 million, in $50.0 million
increments, subject to lending group approval. The term loan facility matures on, and the revolving loan
facility is, available through April 22, 2018. We are subject to various operating and ﬁnancial covenants under
the credit facility which restrict our ability to, among other things, incur additional indebtedness, make
particular types of investments, incur certain types of liens, engage in fundamental corporate changes, enter
into transactions with affiliates or make substantial asset sales. Any failure to comply with these covenants
may constitute a breach under the credit facility, which could result in the acceleration of all or a substantial
portion of any outstanding indebtedness and termination of revolving credit commitments under the facility.
Our inability to maintain our credit facility could materially adversely affect our liquidity and our business.

Disruptions of our information systems could adversely affect us.

We believe that our information technology (‘‘IT’’) systems are an integral part of our business and
growth strategies. We depend upon our IT systems to help process orders, to manage inventory and accounts
receivable collections, to purchase, sell and ship products efficiently and on a timely basis, to maintain
cost-effective operations, to operate our website and to help provide superior service to our customers. Our IT
systems may be vulnerable to damage or disruption caused by circumstances beyond our control, such as
catastrophic events, power outages, natural disasters, computer system or network failures, computer viruses,
physical or electronic break-ins, and cyber-attacks. The failure of our IT systems to perform as we anticipate
could disrupt our business and could result in transaction errors, loss of data, processing inefficiencies,
downtime, litigation, substantial remediation costs (including potential liability for stolen assets or information
and the costs of repairing system damage), and the loss of sales and customers. Any one or more of these
consequences could have a material adverse effect on our business, ﬁnancial condition and results of
operations.

Our success is dependent on certain key personnel.

Our success depends largely on the efforts and abilities of certain key senior management. The loss of the

services of one or more of such key personnel could have a material adverse effect on our business and ﬁnancial
results. We do not maintain any key-man insurance policies with respect to any of our executive officers.

Our business depends on our ability to retain and to attract qualiﬁed sales and customer service personnel.

There are signiﬁcant costs associated with hiring and training sales and customer service professionals.
We greatly beneﬁt from having associates who are familiar with the products we sell and their applications, as
well as with our customer and supplier relationships. We could be adversely affected by a shortage of
available skilled workers or the loss of a signiﬁcant number of our sales or customer service professionals.

The loss of key suppliers or supply chain disruptions could adversely affect our operating results.

We believe that our ability to offer a combination of well-known brand name products and competitively
priced private brand products is an important factor in attracting and retaining customers. Our ability to offer a
wide range of products and services is dependent on obtaining adequate product supply and services from our key
suppliers. The loss of, or a substantial decrease in the availability of products or services from key suppliers at
competitive prices, or the loss of a key brand could cause our revenues and proﬁtability to decrease. In addition,
supply interruptions could arise due to transportation disruptions, labor disputes or other factors beyond our
control. Disruptions in our supply chain could result in a decrease in revenues and proﬁtability.

Opening or expanding our customer fulﬁllment centers or customer service centers exposes us to risks of
delays and may affect our operating results.

In the future, as part of our long term strategic planning, we may open new customer fulﬁllment centers to

improve our efficiency, geographic distribution and market penetration and intend to make, as we have in the past,

15

capital improvements and operational enhancements to certain of our existing customer fulﬁllment centers.
Moving or opening customer fulﬁllment centers and effecting such improvements requires a substantial capital
investment, including expenditures for real estate and construction, and opening new customer fulﬁllment centers
requires a substantial investment in inventory. In addition, the opening of new customer fulﬁllment centers will
have an adverse impact on distribution expenses as a percentage of sales, inventory turnover and return on
investment in the periods prior to and for some time following the commencement of operations of each new
customer fulﬁllment center. Additionally, until sales volumes mature at new customer fulﬁllment centers, operating
expenses as a percentage of sales may be adversely impacted. Further, substantial or unanticipated delays in the
commencement of operations at new customer fulﬁllment centers could have a material adverse effect on our
geographic expansion and may impact results of operations.

In order to support our growth strategy and maintain our signature service model as we grow, during
ﬁscal year 2013, we began to build a new customer fulﬁllment center in Columbus, Ohio. We expect to invest
approximately $55.0 million in capital expenditures which includes the purchase of the land and costs to
construct and outﬁt the facility in Columbus. We spent approximately $6.4 million in capital expenditures on
the fulﬁllment center in ﬁscal 2013 and the remaining expenditures are expected to be spent in ﬁscal 2014.
We expect to complete construction and begin operation in the fall of 2014.

An interruption of operations at our headquarters or customer fulﬁllment centers could adversely impact our
business.

Our business depends on maintaining operations at our co-located headquarters and customer fulﬁllment

centers. A serious, prolonged interruption due to power outage, telecommunications outage, terrorist attack,
earthquake, hurricane, ﬁre, ﬂood or other natural disaster, or other interruption could have a material adverse
effect on our business and ﬁnancial results.

We are subject to litigation risk due to the nature of our business, which may have a material adverse effect
on our business.

From time to time, we are involved in lawsuits or other legal proceedings that arise from business
transactions. These may, for example, relate to product liability claims, commercial disputes, or employment
matters. In addition, we could face claims over other matters, such as claims arising from our status as a
government contractor or corporate or securities law matters. The defense and ultimate outcome of lawsuits or
other legal proceedings may result in higher operating expenses, which could have a material adverse effect
on our business, ﬁnancial condition, or results of operations.

We are subject to environmental, health and safety laws and regulations.

We are subject to federal, state, local, foreign and provincial environmental, health and safety laws and
regulations. Fines and penalties may be imposed for non-compliance with applicable environmental, health and
safety requirements and the failure to have or to comply with the terms and conditions of required permits. The
failure by us to comply with applicable environmental, health and safety requirements could result in ﬁnes,
penalties, enforcement actions, third party claims for property damage and personal injury, requirements to clean
up property or to pay for the costs of cleanup, or regulatory or judicial orders requiring corrective measures,
which could have a material adverse effect on our business, ﬁnancial condition, or results of operations.

We will need to begin disclosing our use of ’conﬂict minerals’ in certain of the products we distribute, which
will impose costs on us and could raise reputational and other risks.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC established disclosure

requirements regarding the use of certain minerals, known as ’conﬂict minerals’, that are mined from the
Democratic Republic of the Congo and adjoining countries. There are costs associated with complying with
these disclosure requirements, including costs to determine which of our products are subject to the rules and
the source of any ’conﬂict minerals’ used in those products. In addition, these rules could adversely affect the
sourcing, pricing and availability of materials used in the manufacture of certain of our products. Also, we
may face reputational challenges if we determine that certain of our products contain minerals not determined
to be conﬂict free or if we are unable to sufficiently verify the origins for all conﬂict minerals used in our
products through the procedures we implement.

16

Goodwill and indeﬁnite life intangible assets recorded as a result of our acquisitions could become impaired.

As of August 31, 2013, our combined goodwill and indeﬁnite life intangible assets amounted to
$645.0 million. To the extent we do not generate sufficient cash ﬂows to recover the net amount of any
investments in goodwill and other indeﬁnite life intangible assets recorded, the investment could be considered
impaired and subject to write-off. We expect to record further goodwill and other indeﬁnite life intangible
assets as a result of future acquisitions we may complete. Future amortization of such assets or impairments,
if any, of goodwill or indeﬁnite life intangible assets would adversely affect our results of operations in any
given period.

Our common stock price may be volatile.

We believe factors such as ﬂuctuations in our operating results or the operating results of our

competitors, changes in economic conditions in the market sectors in which our customers operate, notably the
durable and non-durable goods manufacturing industry, which accounted for a substantial portion of our
revenue for ﬁscal year 2013 and ﬁscal year 2012, and changes in general market conditions, could cause the
market price of our Class A common stock to ﬂuctuate substantially.

Our principal shareholders exercise signiﬁcant control over us.

We have two classes of common stock. Our Class A common stock has one vote per share and our
Class B common stock has ten votes per share. As of October 18, 2013, the Chairman of our Board of
Directors, his sister, certain of their family members including our President and Chief Executive Officer, and
related trusts collectively owned 100% of the outstanding shares of our Class B common stock and
approximately 1.5% of the outstanding shares of our Class A common stock, giving them control over
approximately 74.5% of the combined voting power of our Class A common stock and our Class B common
stock. Consequently, such shareholders will be in a position to elect all of the directors of the Company and to
determine the outcome of any matter submitted to a vote of the Company’s shareholders for approval,
including amendments to our certiﬁcate of incorporation and our amended and restated by-laws, any proposed
merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. Because
this concentrated control could discourage others from initiating any potential merger, takeover or other
change of control transaction that may otherwise be beneﬁcial to our business, the market price of our Class A
common stock could be adversely affected.

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.

PROPERTIES.

We have customer fulﬁllment centers in or near the following locations:

Location
Atlanta, Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Elkhart, Indiana. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Harrisburg, Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . .
Reno, Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wednesbury, United Kingdom . . . . . . . . . . . . . . . . . . . . .
Reno, Nevada (BDNA location). . . . . . . . . . . . . . . . . . . .
Hanover Park, Illinois (BDNA location) . . . . . . . . . . . . . .
Dallas, Texas (BDNA location) . . . . . . . . . . . . . . . . . . . .
Elizabethtown, Kentucky (BDNA location) . . . . . . . . . . . .
Edison, New Jersey (BDNA location) . . . . . . . . . . . . . . . .
Edmonton, Canada (BDNA location) . . . . . . . . . . . . . . . .
Beamsville, Canada (BDNA location) . . . . . . . . . . . . . . . .
Moncton, Canada (BDNA location) . . . . . . . . . . . . . . . . .
Shelbyville, Kentucky (BDNA location) . . . . . . . . . . . . . .

Approx.
Sq. Ft.
721,000
545,000
637,000
419,000
75,000
70,000
112,000
103,000
212,000
89,000
32,000
110,000
16,000
110,000

Operational
Date
1990
1996
1997
1999
1998
2001
2003
2003
1971
1989
2007
2004
1981
1973

Leased/
Owned
Leased(1)
Owned
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Owned
Owned

17

(1) The related party lease for this facility expires on July 1, 2030. This facility was expanded during ﬁscal

2010.

We maintain 103 branch offices within the United States located in 41 states and one location in each of
the United Kingdom and Mexico. The branches range in size from 1,000 to 40,000 square feet. The leases for
these branch offices will expire at various periods between October 2013 and December 2020. The aggregate
annual lease payments on these branches and the leased customer fulﬁllment centers in ﬁscal 2013 were
approximately $13.2 million.

We maintain our co-located headquarters at a 170,000 square foot facility that we own in Melville,
New York and an 180,000 square foot facility that we own in Davidson, North Carolina. In addition, we
maintain office space in a 50,000 square foot facility that we lease in Southﬁeld, Michigan and a 138,000
square foot facility that we lease in Cleveland, Ohio. We believe that our existing facilities are adequate for
our current needs and, together with the new facilities discussed below, will be adequate for the foreseeable
future; we also expect that suitable additional space will be available as needed.

During the fourth quarter of ﬁscal year 2013, we opened the co-located headquarters in Davidson, North

Carolina, in addition to our current location in Melville, New York in order to support our growth strategy.

On July 30, 2012, we announced plans to build a new customer fulﬁllment center in Columbus, Ohio, in

order to support our growth strategy and maintain our signature service model as we grow. We purchased
70 acres of land in Columbus, and broke ground on an approximately 400,000 square foot facility during
ﬁscal year 2013. We expect to complete construction and begin operation in the fall of 2014.

In an effort to further optimize our networks and help deliver on the value of the acquisition of BDNA,

we will be transitioning a select number of BDNA customer fulﬁllment centers to our primary customer
fulﬁllment centers over the course of the next 18 months in order to improve our operational efficiency and
value to our customers.

ITEM 3.

LEGAL PROCEEDINGS.

There are various claims, lawsuits, and pending actions against the Company incidental to the operation

of its business. Although the outcome of these matters is currently not determinable, management does not
expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s
consolidated ﬁnancial position, results of operations, or liquidity.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

18

PART II.

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

MSC’s Class A common stock is traded on the New York Stock Exchange (the ‘‘NYSE’’) under the

symbol ‘‘MSM.’’ MSC’s Class B common stock is not traded in any public market.

The following table sets forth the range of the high and low sales prices as reported by the NYSE and

cash dividends per share for the period from August 28, 2011 to August 31, 2013:

Fiscal Year Ended August 31, 2013
First Quarter − December 1, 2012 . . . . . . . . . . . . . . . . .
Second Quarter − March 2, 2013 . . . . . . . . . . . . . . . . . .
Third Quarter − June 1, 2013 . . . . . . . . . . . . . . . . . . . .
Fourth Quarter − August 31, 2013 . . . . . . . . . . . . . . . . .

Fiscal Year Ended September 1, 2012
First Quarter − November 26, 2011 . . . . . . . . . . . . . . . .
Second Quarter − February 25, 2012 . . . . . . . . . . . . . . .
Third Quarter − May 26, 2012 . . . . . . . . . . . . . . . . . . . .
Fourth Quarter − September 1, 2012 . . . . . . . . . . . . . . . .

Price of Class A
Common Stock
Low
High
$67.18
$74.60
70.30
86.54
76.33
87.79
76.00
84.62

Price of Class A
Common Stock
Low
High
$56.13
$70.56
63.97
80.74
68.31
84.27
61.90
74.12

Dividend Per Share
Common Stock
Class A & Class B
$0.30
0.30
0.30
0.30

Dividend Per Share
Common Stock
Class A & Class B
$0.25
0.25
0.25
0.25

On July 10, 2003, our Board of Directors instituted a policy of paying regular quarterly cash dividends to
our shareholders. The Company paid a total annual cash dividend of $1.20 and $1.00 per share for ﬁscal 2013
and ﬁscal 2012, respectively. This policy is reviewed periodically by the Board of Directors.

On October 24, 2013, our Board of Directors declared a quarterly cash dividend of $0.33 per share
payable on November 20, 2013 to shareholders of record at the close of business on November 6, 2013. The
dividend will result in a payout of approximately $20.9 million, based on the number of shares outstanding at
October 24, 2013.

On October 18, 2013, the last reported sales price for MSC’s Class A common stock on the NYSE was

$80.67 per share. The approximate number of holders of record of MSC’s Class A common stock as of
October 18, 2013 was 539. The number of holders of record of MSC’s Class B common stock as of
October 18, 2013 was 40.

Purchases of Equity Securities

The following table sets forth repurchases by the Company of its outstanding shares of Class A common

stock, during the quarter ended August 31, 2013:

Period
06/02/13 − 07/01/13 . . . . .
07/02/13 − 08/01/13 . . . . .
08/02/13 − 08/31/13 . . . . .
. . . . . . . . . . . . . . .
Total

Total
Number of
Shares
Purchased(1)

—
1,280
195
1,475

Average
Price Paid
Per Share(2)
$ —
79.38
80.06
$79.47

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(3)
—
—
—
—

Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or
Programs
4,383,970
4,383,970
4,383,970

(1) During the three months ended August 31, 2013, 1,475 shares of our common stock were purchased

by the Company as payment to satisfy our associate’s tax withholding liability associated with our
share-based compensation program and are included in the total number of shares purchased.

(2) Activity is reported on a trade date basis and includes commission paid.

19

(3) During ﬁscal 1999, our Board of Directors established the MSC Stock Repurchase Plan, which we refer

to as the ‘‘Repurchase Plan’’. The total number of shares of our Class A common stock initially
authorized for future repurchase was set at 5,000,000 shares. On January 8, 2008, our Board of Directors
reaffirmed and replenished the Repurchase Plan and set the total number of shares of Class A common
stock authorized for future repurchase at 7,000,000 shares. On October 21, 2011, the Board of Directors
reaffirmed and replenished the Repurchase Plan and set the total number of shares of Class A common
stock authorized for future repurchase at 5,000,000 shares. As of August 31, 2013, the maximum number
of shares that may yet be repurchased under the Repurchase Plan was 4,383,970 shares. There is no
expiration date for the Repurchase Plan.

Performance Graph

The following stock price performance graph and accompanying information is not deemed to be
‘‘soliciting material’’ or to be ‘‘ﬁled’’ with the SEC, nor shall such information be incorporated by reference
into any ﬁlings under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934,
as amended, which we refer to as the Exchange Act, or be subject to the liabilities of Section 18 of the
Exchange Act, regardless of any general incorporation language in any such ﬁling.

The following graph compares the cumulative total return on an investment in our common stock with
the cumulative total return of an investment in each of the S&P Midcap 400 Index and The Dow Jones US
Business Support Services Index. The graph assumes $100 invested at the closing price of our Class A
common stock on the New York Stock Exchange and each index on August 30, 2008 and assumes that all
dividends paid on such securities during the applicable ﬁscal years were reinvested. Indices are calculated on
a month-end basis. The comparisons in this table are based on historical data and are not intended to forecast
or to be indicative of the possible future performance of our Class A common stock.

Cumulative Total Stockholder Return
for the Period from August 30, 2008 through August 31, 2013

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among MSC Industrial Direct Co., Inc., the S&P Midcap 400 Index,
and the Dow Jones US Business Support Services Index

$180

$160

$140

$120

$100

$80

$60

$40

$20

$0
8/30/08

8/29/09

8/28/10

8/27/11

9/1/12

8/31/13

MSC Industrial Direct Co., Inc.

S&P Midcap 400

Dow Jones US Business Support Services

*

$100 invested on 8/30/08 in stock or 8/31/08 in index, including reinvestment of dividends. Indexes
calculated on month-end basis.
Copyright(cid:5) 2013 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

20

MSC Industrial Direct Co., Inc.
. . . . . . . . . .
S&P Midcap 400 . . . . . . . . . . . . . . . . . . . . .
Dow Jones US Business Support Services . . . .

*

Source: Research Data Group, Inc.

ITEM 6.

SELECTED FINANCIAL DATA.

8/30/08
100.00
100.00
100.00

8/29/09
80.28
81.83
79.35

8/28/10
94.14
91.54
81.16

8/27/11
124.29
112.50
104.77

9/1/12
148.09
126.84
124.49

8/31/13
165.04
156.91
158.35

The following selected ﬁnancial information is qualiﬁed by reference to, and should be read in

conjunction with, the Company’s consolidated ﬁnancial statements and the notes thereto, and ‘‘Management’s
Discussion and Analysis of Financial Condition and Results of Operations’’ contained elsewhere herein. The
selected consolidated income statement data for the ﬁscal years ended August 27, 2011, September 1, 2012
and August 31, 2013 and the selected consolidated balance sheet data as of September 1, 2012 and August 31,
2013 are derived from MSC’s audited consolidated ﬁnancial statements which are included elsewhere herein.
The selected consolidated income statement data for the ﬁscal years ended August 29, 2009 and August 28,
2010 and the selected consolidated balance sheet data as of August 29, 2009, August 28, 2010, and August 27,
2011 are derived from MSC’s audited consolidated ﬁnancial statements not included herein.

share(3)

. . . . . . . . . . . . . . . . . . .

$

0.80

$

0.82

$

1.88

$

1.00

$

1.20

Consolidated Income Statement Data:

Net sales . . . . . . . . . . . . . . . . . . . . .
Gross proﬁt. . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . .
Net income per common share:

Basic(2) . . . . . . . . . . . . . . . . . . . . .
Diluted(2). . . . . . . . . . . . . . . . . . . .

Weighted average common shares

outstanding:
Basic(2) . . . . . . . . . . . . . . . . . . . . .
Diluted(2). . . . . . . . . . . . . . . . . . . .
Cash dividends declared per common

Consolidated Balance Sheet Data (at

period end):
Working capital . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . .
Short-term debt including capital lease

and ﬁnancing obligations . . . . . . . . .

Long-term debt including capital lease

obligations, net of current maturities . .

Deferred income taxes and tax

uncertainties. . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . .

Selected Operating Data:(1), (4)

Active customers . . . . . . . . . . . . . . . .
Approximate Number of SKUs . . . . . . .
Orders entered . . . . . . . . . . . . . . . . . .
Number of publications mailed . . . . . . .
Number of publication titles (not in

thousands) . . . . . . . . . . . . . . . . . . .

August 29,
2009
(52 weeks)

Fiscal Years Ended
September 1,
August 27,
August 28,
2012
2011
2010
(53 weeks)
(52 weeks)
(52 weeks)
(In thousands, except per share data)

August 31,
2013
(52 weeks)

$1,489,518
687,845
483,127
204,718
76,818
125,122

$1,692,041
766,939
525,120
241,819
90,455
150,373

$2,021,792
940,925
591,160
349,765
130,544
218,786

$2,355,918
1,078,203
665,987
412,216
153,111
259,031

$2,457,649
1,118,516
732,990
385,526
145,434
237,995

2.01
1.99

2.39
2.37

3.45
3.43

4.12
4.09

3.77
3.75

61,798
62,362

62,438
62,930

62,902
63,324

62,434
62,803

62,695
63,011

$ 426,876
1,157,547

$ 486,251
1,153,323

$ 586,232
1,244,423

$ 749,596
1,444,876

$ 679,910
1,943,003

154,105

39,361

—

—

1,007

2,189

14,184

241,566

—

63,158
899,880

79,109
993,112

85,061
1,187,111

97,475
1,390,383

320
600
5,309
21,700

110

320
600
5,784
18,600

325
600
6,150
18,032

322
685
5,957
16,308

111

100

95

39,365

56,808
805,536

343
600
5,034
28,600

120

21

(1) See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations —

(2)

General.’’
In the ﬁrst quarter of ﬁscal 2010, the Company adopted authoritative guidance on ‘‘Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities.’’ As a result, net
income per share was calculated under the new accounting guidance for ﬁscal 2010 and prior period net
income per share data presented has been adjusted retrospectively.
In the ﬁrst quarter of ﬁscal 2011, the Company paid a special cash dividend of $1.00 per share.

(3)
(4) Selected Operating Data excludes BDNA.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

General

Our goal is to become the preferred supplier of MRO supplies for businesses throughout North America.

We continue to implement our strategies to gain market share against other suppliers and generate new
customers, increase sales to existing customers and diversify our customer base.

We offer approximately 685,000 stock-keeping units (“SKUs”), excluding BDNA, through our master
catalogs; weekly, monthly and quarterly specialty and promotional catalogs; newspapers; brochures; and the
Internet, including our websites, MSCDirect.com, MSCMetalworking.com and Use-Enco.com (the “MSC
Websites”). We service our customers from 14 customer fulﬁllment centers and 105 branch offices. We employ
one of the industry’s largest sales forces. Most 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. Excluding BDNA, we offer a nationwide
cutoff time of 8:00 PM Eastern Time on qualifying orders for customers in the contiguous United States, which
will be delivered to customers the next day at no additional cost over standard MSC ground delivery charges.

We experienced a slower sales growth rate for the ﬁscal year ended August 31, 2013, as compared to the
2012 ﬁscal year. For the ﬁscal years ended August 31, 2013 and September 1, 2012, net sales increased 4.3%
(6.4% on an average daily sales basis) and 16.5% (14.3% on an average daily sales basis), respectively, over
the 2012 and 2011 ﬁscal years. Fiscal year 2013 contained 52 weeks versus 53 weeks in ﬁscal year 2012. As
discussed below, during the ﬁscal third quarter of 2013, we acquired substantially all of the assets and
assumed certain liabilities of the North American distribution business (‘‘BDNA’’) of Barnes Group Inc.
(‘‘Barnes’’). BDNA contributed $108.4 million of net sales for the ﬁscal year ended August 31, 2013. Our
ﬁnancial results for ﬁscal years 2013 and 2012 reﬂect execution of our growth strategies, including
acquisitions, to increase revenues. We have also invested in our business by increasing our sales force,
increasing our investment in vending solutions, making technology investments to improve our electronic
procurement tools, and making productivity and infrastructure investments. These investments, combined with
our strong balance sheet, extensive product assortment, high in-stock levels, same day shipping, and high
levels of execution, have increased our competitive advantage over smaller distributors.

Key manufacturing measurements, such as the Institute for Supply Management (‘‘ISM’’) index, began to
decline during our ﬁscal fourth quarter of 2012 and evidenced a contracting manufacturing sector environment
by the end of our ﬁscal ﬁrst quarter of 2013. However, throughout the remainder of ﬁscal year 2013, the trend
stabilized into a range at around the 50.0% level, and began to increase in July 2013 to 55.4%, with the most
recent ISM index in September 2013 of 56.2%. During this time, we experienced a disconnect between the
ISM index and the core metalworking manufacturing sector that is more reﬂective of our business
environment. In particular, metalworking related indices continued contracting during ﬁscal year 2013. This
rate of contraction slowed during our ﬁscal fourth quarter.

Our sales growth in ﬁscal year 2013 was impacted by the instability in the overall manufacturing sector

as well as by continued weakness in the metalworking manufacturing sector, which comprises our core
business. We will continue to monitor the current economic conditions for its impact on our customers and
markets and continue to assess both risks and opportunities that may affect our business. See the discussion
below describing recent ﬂuctuations in economic indicators and the possible impact on our future sales and
margins.

22

We continue to focus on expanding our Large Account Customer business, which consists of our

government and national account customers and has become an important component of our overall customer
mix, revenue base, and planned business expansion. Servicing this Large Account Customer business is more
complex as we look to provide customer speciﬁc solutions as our Larger Account Customers continue to focus
on ways to drive costs out of their businesses. By expanding this business, which involves customers with
multiple locations and high volume MRO needs, we have diversiﬁed our customer base beyond small and
mid-sized customers. However, sales to Federal and state government agencies continue to be constrained by
the government spending environment. In addition to our focus on our Large Account Customer business, we
continue to plan for increasing the number of sales associates in existing markets and new markets. However,
we will manage the timing of sales force increases based on the economic conditions at the time. We have
increased the number of ﬁeld sales associates to 1,790 (including U.K., and Mexico operations and 667
associates added as a result of the BDNA acquisition) at August 31, 2013 compared to 1,095 (including U.K.
and Mexico operations) at September 1, 2012.

Our gross proﬁt margin decreased in ﬁscal year 2013 to 45.5% from 45.8% in ﬁscal 2012. The decrease
in gross margin was primarily driven by increases in product costs, changes in customer and product mix and
lower gross margins from our vending program, partially offset by higher gross margins from BDNA. Our
gross proﬁt margin decreased in ﬁscal 2012 to 45.8% from 46.5% in ﬁscal year 2011. This was driven by
increases in product costs, changes in customer and product mix, and lower gross margins from acquired
businesses and our vending program.

Operating expenses increased 10.1% and 12.7% in ﬁscal years 2013 and 2012, respectively, as compared
to ﬁscal years 2012 and 2011. This increase is primarily a result of additional operating expenses incurred as a
result of the acquired BDNA operations as well as non-recurring transaction and integration costs associated
with the acquisition. We incurred operating expenses of approximately $11.6 million in ﬁscal year 2013
related to non-recurring transaction and integration costs. Excluding BDNA, operating expenses increased as a
result of increased payroll and payroll related costs, costs associated with our investment programs, and costs
related to the establishment of our new co-located headquarters in Davidson, North Carolina. We incurred
non-recurring operating expenses of approximately $4.3 million and $1.2 million in ﬁscal years 2013 and
2012, respectively, related to the establishment of our new co-located headquarters in Davidson, North
Carolina.

The increase in payroll and payroll related costs in ﬁscal year 2013, as compared to ﬁscal year 2012 is

primarily a result of the additional expenses incurred as a result of the BDNA acquisition, additional sales
associate headcount and increased fringe beneﬁt costs. The increase in payroll and payroll related costs in
ﬁscal year 2012, as compared to ﬁscal year 2011 is also primarily a result of the additional sales associate
headcount and increased fringe beneﬁt costs. Medical costs of our self-insured group health plan increased in
ﬁscal years 2013 and 2012 as compared to the prior years as a result of an increase in the number of
participants in the plan as well as an increase in the number of medical claims ﬁled by participants. In ﬁscal
year 2013 as compared to ﬁscal year 2012, the average cost per claim also increased.

Our income from operations as a percentage of net sales decreased to 15.7% for ﬁscal year 2013 from
17.5% for ﬁscal year 2012 as a result of increased operating expenses as discussed above. Our income from
operations as a percentage of net sales increased to 17.5% for ﬁscal year 2012 from 17.3% for ﬁscal year
2011 as a result of beneﬁts realized from increases in productivity investments and leveraging existing
infrastructure, partially offset by the decline in our gross proﬁt margin.

We expect operating costs to continue to increase throughout ﬁscal year 2014 as compared to ﬁscal year

2013 due to increased expenses related to inclusion of a full year of BDNA operations, non-recurring
integration costs and restructuring charges, increased compensation expenses and fringe beneﬁts costs, and
increased costs associated with executing on our vending and other investment programs. In addition we
expect increased costs associated with our co-located headquarters in Davidson, North Carolina and we also
expect to incur operating costs associated with the establishment of our new customer fulﬁllment center in
Columbus, Ohio. We will continue to opportunistically seek additional growth opportunities that will help

23

position us for future expansion. We believe that cash ﬂows from operations, available cash and funds
available under our revolving credit facility will be adequate to support our operations and growth plans for
the next twelve months.

During ﬁscal year 2013, we decreased direct mail advertising levels compared to ﬁscal year 2012 levels.
Excluding BDNA, the number of active customers (deﬁned as those that have made at least one purchase in
the last 12 months) at August 31, 2013 was approximately 322,000, which remained relatively consistent with
ﬁscal 2012 and ﬁscal 2011 levels. In ﬁscal year 2013, we continued our practice of reducing direct marketing
activities with customers who did not generate a positive return on investment.

The ISM index, which measures the economic activity of the U.S. manufacturing sector, is important to

our planning because it historically has been an indicator of our manufacturing customers’ activity.
A substantial portion of our revenues came from sales in the manufacturing sector during ﬁscal year 2013,
including certain national account customers. An ISM index reading below 50.0% generally indicates that the
manufacturing sector is expected to contract. Conversely, an ISM index reading above 50.0% generally
indicates that the manufacturing sector is expected to expand. The ISM index was 56.2% for the month of
September 2013 and averaged 52.0% during our ﬁscal year 2013. Details released with the most recent index
indicate that economic activity in the manufacturing sector related to new orders, production, and employment
are growing, while supplier deliveries are contracting from the previous month. Although the most recent
measurement trend indicates that the manufacturing sector is expanding, there remains uncertainty relating to
the current economic environment. Moreover, as discussed above, we have experienced continued contraction
in our core metalworking manufacturing sector. Continued concerns relating to macroeconomic factors may
continue to inﬂuence our customers to be more cautious in their purchases of MSC’s products. In addition, the
recent federal government shutdown in October 2013 and uncertainty regarding the ongoing debates related to
the U.S. budget and debt ceiling could adversely impact our future revenues and proﬁtability. In particular,
growth in sales to governmental agencies continues to be constrained by the government spending
environment. Sales to our government accounts represented approximately 8% and 9%, respectively, of our
total sales for the ﬁscal years ended August 31, 2013 and September 1, 2012.

We are continuing to take advantage of our strong balance sheet, which enables us to maintain or extend

credit to our credit worthy customers and maintain optimal inventory and service levels to meet customer
demands during these challenging economic conditions, while many of our smaller competitors in our
fragmented industry continue to have difficulties in offering competitive service levels. We also believe that
customers will continue to seek cost reductions and shorter cycle times from their suppliers. Our business
model focuses on providing overall procurement cost reduction and just-in-time delivery to meet our
customers’ needs. 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 drive cost
reduction throughout our business through cost saving strategies and increased leverage from our existing
infrastructure, and continue to provide additional procurement cost savings solutions to our customers through
technology such as our CMI, VMI, and vending programs.

On April 22, 2013, we acquired substantially all of the assets and assumed certain liabilities of BDNA,
pursuant to the terms of the Asset Purchase Agreement, dated February 22, 2013, between us and Barnes. In
connection with the acquisition, the total cash consideration we paid to Barnes was $547.3 million which is
net of a post-closing working capital adjustment in the amount of $1.4 million that we received in September
2013. The acquisition was funded in part with borrowings under our new unsecured credit facility, which was
closed simultaneously with the acquisition, and the remainder was funded from available cash reserves.
BDNA is a leading distributor of fasteners and other high margin, low cost consumables with a broad
distribution footprint throughout the U.S. and Canada. BDNA has a strong presence with customers across
manufacturing, government, transportation and natural resources end-markets. BDNA specializes in lowering
the total cost of their customers’ inventory management through storeroom organization and vendor managed
inventory. With this acquisition, we add a highly complementary provider of fasteners and other high margin
consumable products and services (often referred to as ‘‘Class C’’ items) with an experienced ﬁeld sales force
and VMI solution. With the integration of the two businesses, we will have the opportunity to bring our MRO
offering to BDNA’s customers, and BDNA’s Class C offering and VMI system to our customers.

24

As a result of the BDNA acquisition, we incurred non-recurring transaction and integration costs and
restructuring charges associated with associate severance costs, stay bonuses and the impairment of long-lived
assets due to the closure of facilities. For the ﬁscal year ended August 31, 2013, these costs amounted to
$11.6 million. These costs are estimated to be between approximately $15.0 million and $20.0 million in
ﬁscal year 2014.

Results of Operations

Net Sales

Fiscal Years Ended

August 31,
2013

September 1,
2012

Net Sales . . . . . . . . . . . .

$2,457,649

$2,355,918

September 1,
Percentage
Change
2012
(Dollars in thousands)
4.3%

$2,355,918

Fiscal Years Ended
August 27,
2011

Percentage
Change

$2,021,792

16.5%

Net sales increased 4.3% (6.4% on an average daily sales basis), or approximately $101.7 million for the
ﬁscal year ended 2013. The ﬁscal 2013 year contained 52 weeks versus 53 weeks in ﬁscal 2012. We estimate
that this $101.7 million increase in net sales is comprised of $108.4 million from the BDNA operations, which
we acquired in April 2013 and $31.8 million from improved price realization, which includes the effects of
price increases, discounting, changes in sales and product mix, and other items. This increase is offset by one
less sales week in the ﬁscal year 2013 and lower sales volume. Of the $101.7 million increase in net sales,
our government and national account programs (‘‘Large Account Customer’’) increased by approximately
$4.3 million and there was an increase in our remaining business of approximately $97.4 million.

Net sales increased 16.5% (14.3% on an average daily sales basis), or approximately $334 million for the
ﬁscal year ended 2012. The ﬁscal 2012 year contained 53 weeks versus 52 weeks in ﬁscal 2011. We estimate
that of this $334 million increase in net sales, an increase of approximately $249 million is volume related,
including the impact of the extra week and the impact of the acquisitions of American Tool Supply, Inc. and
its affiliate, American Specialty Grinding Co., Inc. in July 2011, which are not currently identiﬁable, as they
have been fully integrated. In addition, approximately $19 million of the increase in sales is related to the
acquisition of ATS Industrial Supply, Inc. in January 2012, and the remaining $66 million reﬂects improved
price realization, which includes the effects of price increases, discounting, changes in sales and product mix,
and other items. Of the $334 million increase in net sales, our Large Account Customer increased by
approximately $61 million and there was an increase in our remaining business of approximately $273
million.

The table below shows the pattern to the change in our ﬁscal quarterly and annual average daily sales

from the same periods in the prior ﬁscal year:

Average Daily Sales Percentage Change — Total Company

Fiscal Periods
2013 vs. 2012 . . . . . . . . . . . . . . . . .
2012 vs. 2011 . . . . . . . . . . . . . . . . .

Thirteen
Week Period
Ended
Fiscal Q4(1)
12.7%
10.4%

Thirteen
Week Period
Ended
Fiscal Q3
5.7%
15.0%

(unaudited)
Thirteen
Week Period
Ended
Fiscal Q2
1.2%
16.5%

Thirteen
Week Period
Ended
Fiscal Q1
5.8%
15.4%

Fiscal Year
Ended

6.4%
14.3%

(1) The fourth quarter of ﬁscal 2012 contained fourteen weeks.

25

Excluding BDNA operations, the trends noted above can be further analyzed by customer type.

Approximately 76% of our business is with manufacturing customers and our non-manufacturing customers
represent approximately 24% of our business. BDNA operations are excluded from the tables below until we
have annual comparative information. The tables below show the pattern to the change in our ﬁscal quarterly
and annual average daily sales by customer type from the same periods in the prior ﬁscal year:

Average Daily Sales Percentage Change — Manufacturing Customers
(unaudited and excluding BDNA)

Fiscal Periods
2013 vs. 2012 . . . . . . . . . . . . . . . . .
2012 vs. 2011 . . . . . . . . . . . . . . . . .

Thirteen
Week Period
Ended
Fiscal Q4(1)
0.0%
11.9%

Thirteen
Week Period
Ended
Fiscal Q3
(0.3)%
17.8%

Thirteen
Week Period
Ended
Fiscal Q2
1.3%
19.4%

Thirteen
Week Period
Ended
Fiscal Q1
6.2%
19.8%

Fiscal Year
Ended

1.6%
17.1%

(1) The fourth quarter of ﬁscal 2012 contained fourteen weeks.

Average Daily Sales Percentage Change — Non-Manufacturing Customers
(unaudited and excluding BDNA)

Fiscal Periods
2013 vs. 2012 . . . . . . . . . . . . . . . . .
2012 vs. 2011 . . . . . . . . . . . . . . . . .

Thirteen
Week Period
Ended
Fiscal Q4(1)
1.0%
7.9%

Thirteen
Week Period
Ended
Fiscal Q3
0.9%
7.4%

Thirteen
Week Period
Ended
Fiscal Q2
0.4%
9.2%

Thirteen
Week Period
Ended
Fiscal Q1
4.9%
4.1%

Fiscal Year
Ended
1.7%
7.3%

(1) The fourth quarter of ﬁscal 2012 contained fourteen weeks.

Exclusive of BDNA operations and customers in the U.K., average order size increased to approximately

$403 in ﬁscal 2013 as compared to $392 in ﬁscal 2012. We believe that our ability to transact business with
our customers through various electronic portals and directly through the MSC Websites gives us a
competitive advantage over smaller suppliers. Sales made through our eCommerce platforms, including sales
made through the MSC Websites, Electronic Data Interchange systems, VMI systems, Extensible Markup
Language ordering based systems, vending machine systems, hosted systems and other electronic portals, but
excluding BDNA, were $1,034.7 million in ﬁscal 2013, representing 44.0% of consolidated net sales,
compared to $965.3 million in ﬁscal 2012, representing 41.0% of consolidated net sales.

We grew our ﬁeld sales associate headcount to 1,790 associates at August 31, 2013, an increase of

approximately 63.5% from 1,095 associates at September 1, 2012. Included in the sales force numbers in
ﬁscal year 2013 is 667 ﬁeld sales associates added as a result of the BDNA acquisition. There were no branch
openings during ﬁscal 2013. Field sales associate headcount also increased 4.2% to 1,095 associates at
September 1, 2012 from 1,051 associates at August 27, 2011. These increases support our strategy to acquire
new accounts and expand existing accounts across all customer types. We plan to continue to increase our
ﬁeld sales associate headcount through the end of the ﬁrst quarter of ﬁscal 2014. We will continue to manage
the timing of ﬁeld sales associate increases and branch openings based on economic conditions and our
selected mix of growth investments.

Gross Proﬁt

Fiscal Years Ended

August 31,
2013

September 1,
2012

Fiscal Years Ended

Percentage
Change
(Dollars in thousands)

September 1,
2012

August 27,
2011

Percentage
Change

Gross Proﬁt
. . . . . . . .
Gross Proﬁt Margin. . . .

$1,118,516

$1,078,203

3.7%

$1,078,203

$940,925

14.6%

45.5%

45.8%

45.8%

46.5%

26

Gross proﬁt margin decreased in ﬁscal 2013 primarily as a result of increased costs of our products,
changes in customer and product mix, and the temporary impact of lower gross proﬁt margins from our
vending programs. This was partially offset by higher gross margins from BDNA operations. We expect gross
margins to increase in the ﬁrst quarter of ﬁscal 2014 from ﬁscal year 2013 levels as a result of the mix of
products BDNA brings to the Company in addition to a price increase in the later part of ﬁscal 2013 in
conjunction with the release of our 2013 catalogs. However, price increases are constrained as we continue to
experience aggressive pricing pressure from our competition.

Gross proﬁt margin decreased in ﬁscal 2012 primarily as a result of increased costs of our products,
changes in customer and product mix, and the temporary impact of lower gross proﬁt margins from acquired
businesses and our vending programs.

Operating Expenses

Fiscal Years Ended

Fiscal Years Ended

August 31,
2013

September 1,
2012

Percentage
Change
(Dollars in thousands)

September 1,
2012

August 27,
2011

Percentage
Change

Operating Expenses . . . . . . .
Percentage of Net Sales . . . .

$732,990

$665,987

10.1%

$665,987

$591,160

12.7%

29.8%

28.3%

28.3%

29.2%

The increase in operating expenses as a percentage of net sales for ﬁscal year 2013 as compared to the
2012 ﬁscal year was primarily a result of additional operating expenses incurred as a result of the acquired
BDNA operations as well as for non-recurring transaction and integration costs associated with the acquisition.
The decrease in operating expenses as a percentage of net sales for ﬁscal year 2012 as compared to the 2011
ﬁscal year was primarily a result of productivity gains and the allocation of ﬁxed expenses over a larger
revenue base.

The increase in operating expenses in dollars for ﬁscal 2013, as compared to ﬁscal 2012, was primarily a

result of additional operating expenses incurred as a result of the acquired BDNA operations as well as non-
recurring transaction and integration costs associated with the acquisition. BDNA’s operating expenses
accounted for approximately $52.1 million of total operating expenses for ﬁscal 2013. Approximately
$11.6 million of expenses related to non-recurring transaction and integration costs associated with the BDNA
acquisition were also included in operating expenses for ﬁscal 2013. Excluding BDNA, operating expenses
increased primarily due to an increase in payroll and payroll related costs, costs associated with the
establishment of our new co-located headquarters in Davidson, North Carolina of approximately $4.3 million,
and costs associated with our vending program. These costs were offset by the one less week in ﬁscal 2013,
the Company’s cost containment initiatives and the reduction in the annual bonus expense accrual as the ﬁscal
2013 bonus payout is expected to be at lower levels than ﬁscal 2012 due to the Company’s ﬁscal 2013
performance relating to the current economic conditions.

The increase in operating expenses in dollars for ﬁscal 2012, as compared to ﬁscal 2011, was primarily a

result of increases in payroll and payroll related costs, freight, other costs associated with our investment
programs which included costs associated with our infrastructure investments, acquisition-related operating
expenses, as well as additional costs associated with the extra week in ﬁscal 2012. In addition, we incurred
operating expenses of approximately $1.2 million in ﬁscal 2012 related to the establishment of our new
co-located headquarters in Davidson, North Carolina.

Payroll and payroll related costs represented approximately 54.0%, 54.8%, and 55.2%, of total operating
expenses in ﬁscal 2013, ﬁscal 2012, and ﬁscal 2011, respectively. Included in these costs are salary, incentive
compensation, fringe beneﬁts, and sales commission. These costs increased in ﬁscal 2013 as compared to
ﬁscal 2012 as a result of increased costs associated with the acquired BDNA operations, increased fringe
beneﬁt costs, and an increase in our staffing levels primarily related to sales associates, other program
development and volume related positions to support our growth initiatives as well as signiﬁcant investments
in vending programs. These costs increased in ﬁscal 2012 as compared to ﬁscal 2011 as a result of increased
fringe beneﬁt costs and an increase in our staffing levels primarily related to sales associates, other program
development and volume related positions to support our growth initiatives as well as signiﬁcant investments
in vending programs.

27

Payroll and payroll related costs decreased as a percentage of operating expenses for ﬁscal year 2013 as
compared to ﬁscal year 2012 as a result of lower commissions and the reduction in the annual bonus expense
accrual as discussed above and as a result of increased other operating expenses due to the factors discussed
above. Payroll and payroll related costs decreased as a percentage of operating expenses for ﬁscal year 2012
as compared to ﬁscal year 2011 primarily as a result of increased operating expenses due to the other factors
discussed above.

We experienced an increase in the medical costs of our self-insured group health plan in ﬁscal 2013 as
compared to ﬁscal 2012. This is a result of an increased number of participants in the plan including increased
participants as a result of the BDNA acquisition and an increase in the number of medical claims. The number
of medical claims ﬁled increased 5.0% in ﬁscal 2013 as compared to ﬁscal 2012, which is driven by increased
associate participation in the plan. The average cost per claim increased by 3.5% in ﬁscal 2013 as compared
to ﬁscal 2012. The number of medical claims ﬁled increased 9.4% in ﬁscal 2012 as compared to ﬁscal 2011,
which is driven by increased associate participation in the plan. The average cost per claim increased by 6.8%
in ﬁscal 2012 as compared to ﬁscal 2011. While it is uncertain as to whether the medical costs will continue
to increase in ﬁscal 2014, medical cost inﬂation continues to rise as does the size of our insured population.

Freight expense was approximately $105.2 million, $102.6 million, and $92.4 million in ﬁscal 2013,
ﬁscal 2012, and ﬁscal 2011, respectively. The primary drivers of the increase in freight expense dollars in
ﬁscal 2013 compared to ﬁscal 2012 were increased sales from the acquired BDNA business, offset by lower
rates negotiated with freight carriers and a decrease in the number of packages shipped. The increase in
freight expense in ﬁscal 2012 as compared to ﬁscal 2011 was primarily a result of increased sales volume.

Income from Operations

August 31,
2013

Fiscal Years Ended
September 1,
2012

Income from Operations . . . . .
Percentage of Net Sales . . . . .

$385,526

$412,216

15.7%

17.5%

September 1,
Percentage
Change
2012
(Dollars in thousands)
(6.5)%

$412,216

Fiscal Years Ended
August 27,
2011

Percentage
Change

$349,765

17.9%

17.5%

17.3%

Income from operations for ﬁscal 2013 was $385.5 million, a decrease of $26.7 million, or 6.5% as
compared to ﬁscal 2012, and as a percentage of net sales, decreased to 15.7% in ﬁscal 2013 from 17.5% in
ﬁscal 2012. The dollar decrease in income from operations was primarily attributable to the increase in
operating expenses as described above. Income from operations as a percentage of net sales decreased in ﬁscal
2013 as compared to ﬁscal 2012 due to the decrease in the gross proﬁt margin and increase in operating
expenses as a percentage of sales as discussed above.

Income from operations for ﬁscal 2012 was $412.2 million, an increase of $62.5 million, or 17.9% as
compared to ﬁscal 2011, and as a percentage of net sales, increased to 17.5% in ﬁscal 2012 from 17.3% in ﬁscal
2011. The dollar increase in income from operations for ﬁscal 2012 was primarily attributable to the increase in
net sales and gross proﬁt, offset in part by the increase in operating expenses as described above. For ﬁscal 2012
compared to ﬁscal 2011, income from operations as a percentage of net sales increased due to the distribution of
expenses over a larger revenue base, partially offset by the decrease in the gross proﬁt margin.

Interest Expense

August 31,
2013

Fiscal Years Ended
September 1,
2012

Interest Expense . . . . . . . . . .

$(2,164)

$(241)

September 1,
Percentage
Change
2012
(Dollars in thousands)
797.9%

$(241)

Fiscal Years Ended
August 27,
2011

Percentage
Change

$(258)

(6.6%)

The increase in interest expense for ﬁscal 2013 compared to ﬁscal 2012 was primarily due to our

borrowings under our New Credit Facility entered into in connection with the acquisition of BDNA. We
incurred interest expense on the outstanding balance of the term loan and revolving loan facility during ﬁscal
2013. We did not have any outstanding borrowings under our old credit facility as of September 1, 2012 or at
any time during the ﬁscal year ended September 1, 2012.

28

Provision for Income Taxes

August 31,
2013

Fiscal Years Ended
September 1,
2012

Provision for Income Taxes
. .
Effective Tax Rate . . . . . . . . .

$145,434

$153,111

37.9%

37.2%

September 1,
Percentage
Change
2012
(Dollars in thousands)
(5.0)%

$153,111

Fiscal Years Ended
August 27,
2011

Percentage
Change

$130,544

17.3%

37.2%

37.4%

Our ﬁscal 2013 effective tax rate was 37.9% as compared to 37.2% in ﬁscal 2012. Our ﬁscal 2012 effective
tax rate was 37.2% as compared to 37.4% in ﬁscal 2011. These ﬂuctuations resulted from changes in the tax laws
and regulations in the various jurisdictions in which we operate and favorable settlements of state tax audits.

Net Income

August 31,
2013

Fiscal Years Ended
September 1,
2012

Percentage
Change

September 1,
2012

Fiscal Years Ended
August 27,
2011

Percentage
Change

(Dollars in thousands, except per share data)

Net Income . . . . . . . . . . . . .
Diluted Earnings Per Share . . .

$237,995
3.75
$

$259,031
4.09
$

(8.1)%
(8.3)%

$259,031
4.09
$

$218,786
3.43
$

18.4%
19.2%

The factors which affected net income and diluted earnings per share for ﬁscal 2013 and ﬁscal 2012 as

compared to prior periods have been discussed above. We repurchased approximately 0.1 million and
0.7 million shares of our Class A common stock in ﬁscal years 2013 and 2012, respectively.

Liquidity and Capital Resources

As of August 31, 2013, we held $55.9 million in cash and cash equivalent funds consisting primarily of

money market deposit accounts. We maintain a substantial portion of our cash, and invest our cash
equivalents, with well-known ﬁnancial institutions. Historically, our primary capital needs have been to fund
our working capital requirements necessitated by our sales growth, the costs of acquisitions, adding new
products, facilities expansions, investments in vending solutions, technology investments, and productivity
investments. Cash generated from operations, together with borrowings under credit facilities have been used
to fund these needs, to repurchase shares of our Class A common stock, and to pay dividends. At August 31,
2013, total borrowings outstanding, representing amounts due under the credit facility (discussed below) and
all capital leases and ﬁnancing arrangements, were approximately $255.8 million. At September 1, 2012, total
borrowings outstanding, representing amounts due under all capital leases and ﬁnancing arrangements, were
approximately $3.2 million.

On April 22, 2013, in connection with the acquisition of BDNA, we entered into a new $650.0 million

credit facility (the ‘‘New Credit Facility’’). The New Credit Facility, which matures on April 22, 2018,
provides for a ﬁve-year unsecured revolving loan facility in the aggregate amount of $400.0 million and a
ﬁve-year unsecured term loan facility in the aggregate amount of $250.0 million. The New Credit Facility
replaced our $200.0 million former credit facility dated June 8, 2011.

The New Credit Facility also permits us, at our request, and upon the satisfaction of certain conditions, to

add one or more incremental term loan facilities and/or increase the revolving loan commitments in an
aggregate amount not to exceed $200.0 million. Subject to certain limitations, each such incremental term loan
facility or revolving commitment increase will be on terms as agreed to by us, the Administrative Agent and
the lenders providing such ﬁnancing.

Borrowings under the New Credit Facility bear interest, at our option either, at (i) the LIBOR (London

Interbank Offered Rate) rate plus the applicable margin for LIBOR loans ranging from 1.00% to 1.375%,
based on our consolidated leverage ratio; or (ii) the greatest of (a) the Administrative Agent’s prime rate in
effect on such day, (b) the federal funds effective rate in effect on such day, plus 0.50% and (c) the LIBOR
rate that would be calculated as of such day in respect of a proposed LIBOR loan with a one-month interest
period, plus 1.00%, plus, in the case of each of clauses (a) through (c), an applicable margin ranging from
0.00% to 0.375%, based on our consolidated leverage ratio. Based on the interest period we select, interest

29

may be payable every one, two, three or six months. Interest is reset at the end of each interest period. We
currently elect to have loans under the New Credit Facility bear interest based on LIBOR with one-month
interest periods.

We are required to pay a quarterly undrawn fee ranging from 0.10% to 0.20% per annum on the

unutilized portion of the New Credit Facility based on our consolidated leverage ratio. We are also required to
pay quarterly letter of credit usage fees ranging between 1.00% to 1.375% (based on our consolidated
leverage ratio) on the amount of the daily average outstanding letters of credit, and a quarterly fronting fee of
0.125% per annum on the undrawn and unexpired amount of each letter of credit.

The New Credit Facility contains customary restrictive covenants which are subject to a number of

signiﬁcant exceptions and limitations. The New Credit Facility also requires that we maintain a maximum
consolidated leverage ratio of total indebtedness to EBITDA (earnings before interest expense, taxes,
depreciation and amortization) of no more than 3.00 to 1.00, and a minimum consolidated interest coverage
ratio of EBITDA to total interest expense of at least 3.00 to 1.00, during the term of the New Credit Facility.
Borrowings under the New Credit Facility are guaranteed by certain of our subsidiaries.

We ﬁnanced $370.0 million of the BDNA purchase price with the proceeds of the unsecured term loan
facility and a portion of the unsecured revolving loan facility. The remaining balance of the revolving loan
facility is available for working capital purposes. During ﬁscal 2013, we repaid the remaining outstanding
balance of $120.0 million on the revolving loan facility. As of August 31, 2013, there were $250.0 million of
borrowings outstanding under the term loan facility of the New Credit Facility, of which $12.5 million
represents current maturities. As of September 1, 2012, no borrowings were outstanding under the former
credit facility. At each of those dates, we were in compliance with the operating and ﬁnancial covenants of the
New Credit Facility and the former credit facility.

Net cash provided by operating activities for the ﬁscal years ended August 31, 2013 and September 1,

2012 was $325.4 million and $234.3 million, respectively. There are various increases and decreases
contributing to this change. A decrease in the change in inventories contributed to the majority of the increase
in net cash provided by operating activities. The decline in the change in inventories is a result of the recent
decline in our sales growth rate.

Net cash provided by operating activities for the ﬁscal years ended September 1, 2012 and August 27,
2011 was $234.3 million and $210.0 million, respectively. The increase of approximately $24.3 million in net
cash provided from operations resulted primarily from an increase in net income and a smaller increase in the
change in accounts payable and accrued liabilities over the prior ﬁscal year. The smaller increase in the
change in accounts payable and accrued liabilities over the prior ﬁscal year is a result of timing differences
with vendor payments as well as a lower accrual in ﬁscal 2012 related to payroll and incentive compensation.

Working capital was $679.9 million at August 31, 2013, compared to $749.6 million at September 1, 2012.

At these dates, the ratios of current assets to current liabilities were 4.2 and 5.4, respectively. The decrease in
working capital and the current ratio is primarily related to the cash paid of $178.8 for the acquisition of BDNA
and the borrowings made under the New Credit Facility in connection with the acquisition.

Net cash used in investing activities for the ﬁscal years ended August 31, 2013 and September 1, 2012

was $638.0 million and $81.1 million, respectively. The increase of approximately $556.9 million in net cash
used in investing activities resulted from an increase in cash used in business acquisitions and an increase in
expenditures for property, plant and equipment. Approximately $548.8 million was used for the acquisition of
BDNA for ﬁscal 2013 compared to approximately $32.2 million used for the acquisition of ATS Industrial
Supply Co., Inc. for ﬁscal 2012. The increase of approximately $41.6 million in expenditures for property,
plant, and equipment for ﬁscal 2013 as compared to the prior ﬁscal year, was primarily due to increased
investments in our vending solutions as well as investments in capital expenditures to construct and outﬁt the
facilities in Davidson, North Carolina and Columbus, Ohio, which are discussed below.

Net cash used in investing activities for the ﬁscal years ended September 1, 2012 and August 27, 2011
was $81.1 million and $54.4 million, respectively. The increase of approximately $26.7 million in net cash
used in investing activities resulted primarily from an increase in the expenditures for property, plant, and
equipment. The increase in the purchase of property, plant, and equipment in ﬁscal 2012 as compared to ﬁscal

30

2011 was primarily due to increased investments in our vending solutions as well as the purchase of land in
Davidson, North Carolina. In addition, cash used in business acquisitions increased by approximately
$4.5 million in ﬁscal 2012 as compared to 2011 resulting from the acquisition of ATS Industrial Supply, Inc.
in ﬁscal 2012.

Net cash provided by ﬁnancing activities for the ﬁscal year ended August 31, 2013 was $200.1 million as
compared to net cash used in ﬁnancing activities of $80.6 million for the ﬁscal year ended September 1, 2012.
The major component contributing to the source of cash for ﬁscal 2013 were borrowings of $370.0 million
under the New Credit Facility, which was entered into in connection with the acquisition of BDNA, offset by
repayments on the revolving credit facility of the New Credit Facility of $120.0 million. The other component
contributing to the source of cash for ﬁscal 2013 were net proceeds received from the exercise of the
Company’s Class A common stock options in the amount of $21.7 million. Net cash provided by ﬁnancing
activities was partially offset by cash dividends paid of $75.9 million. The major components contributing to
the use of cash for ﬁscal 2012 were the repurchase of shares of Class A common stock of $48.1 million and
the cash dividends paid of $63.0 million, partially offset by the net proceeds received from the exercise of the
Company’s Class A common stock options in the amount of $22.4 million.

Net cash used in ﬁnancing activities for the ﬁscal years ended September 1, 2012 and August 27, 2011

was $80.6 million and $180.8 million, respectively. In ﬁscal year 2011, the Company made a special cash
dividend payment in November 2010 of approximately $63.3 million and paid down its outstanding balance
on the revolving credit line commitments of $39.4 million.

Our Board of Directors has established the MSC Stock Repurchase Plan (the ‘‘Repurchase Plan’’). The
Repurchase Plan allows the Company to repurchase shares at any time and in any increments it deems appropriate
in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. On October 21, 2011,
our Board of Directors reaffirmed and replenished the Repurchase Plan so that the total number of shares of Class
A common stock authorized for future repurchase was 5.0 million shares. We did not repurchase any of our Class
A common stock in the open market in ﬁscal year 2013. We repurchased approximately 0.6 million shares of our
Class A common stock in the open market for approximately $44.4 million in ﬁscal year 2012. This amount does
not include shares withheld in satisfaction of associate tax withholding obligations relating to restricted share
awards. Any future repurchases will depend on a variety of factors, including price and market conditions. We
reissued approximately 53,000 and 52,000 shares of treasury stock during ﬁscal year 2013 and ﬁscal year 2012,
respectively, to fund our Associate Stock Purchase Plan.

Our Board of Directors instituted a policy of paying regular quarterly cash dividends to shareholders.

This policy is reviewed periodically by our Board of Directors. We paid cash dividends to shareholders
totaling $75.9 million, $63.0 million and $119.3 million, in ﬁscal 2013, ﬁscal 2012, and ﬁscal 2011
respectively. Fiscal 2011 included a special dividend of $1.00 per share paid on November 16, 2010.

On October 24, 2013, our Board of Directors declared a dividend of $0.33 per share payable on
November 20, 2013 to shareholders of record at the close of business on November 6, 2013. The dividend
will result in a payout of approximately $20.9 million, based on the number of shares outstanding at
October 24, 2013.

As a distributor, our use of capital is largely for working capital to support our revenue base. Capital

commitments for property, plant and equipment generally are limited to information technology assets,
warehouse equipment, office furniture and ﬁxtures, building and leasehold improvements, construction and
expansion, and vending machines. Therefore, the amount of cash consumed or generated by operations other
than from net earnings will primarily be due to changes in working capital as a result of the rate of increases
or decreases in sales. In periods when sales are increasing, as in ﬁscal 2012, the expanded working capital
needs are funded primarily by cash from operations. In addition to our working capital needs, in ﬁscal 2013,
we returned $75.9 million to shareholders in the form of cash dividends.

31

In accordance with the construction of our co-located corporate headquarters in Davidson, North

Carolina, completed in ﬁscal 2013, we spent approximately $31.9 million and $4.2 million in ﬁscal years 2013
and 2012, respectively, in capital expenditures, which included the purchase of the land and costs to construct
and outﬁt the facility in Davidson. In addition, we incurred approximately $4.3 million in non-recurring costs
associated with the establishment of our new co-located headquarters.

In accordance with our plans to build a new customer fulﬁllment center in Columbus, Ohio we expect to

invest approximately $55.0 million in capital expenditures which includes the purchase of the land and costs
to construct and outﬁt the facility in Columbus, of which we spent approximately $6.4 million in ﬁscal year
2013. We expect to complete construction and begin operation in late 2014.

In connection with the BDNA acquisition, we expect to incur non-recurring transaction and integration

costs and restructuring charges associated with associate severance costs, stay bonuses and the impairment of
long-lived assets due to the closure of facilities which are estimated to be between $25.0 million and $30.0
million, with the majority to be incurred in ﬁscal 2013 and ﬁscal 2014. For ﬁscal 2013, these costs amounted
to $11.6 million.

We believe based on our current business plan that our existing cash, cash equivalents, funds available
under our revolving credit facility, and cash ﬂow from operations will be sufficient to fund our planned capital
expenditures and operating cash requirements for at least the next 12 months.

Contractual Obligations

We are affiliated with one real estate entity (the ‘‘Affiliate’’), which leased property to us as of
August 31, 2013 and September 1, 2012. The Affiliate is owned by our principal shareholders (Mitchell
Jacobson, our Chairman, and his sister Marjorie Gershwind Fiverson, and by their family related trusts). In
addition, Erik Gershwind, our President and Chief Executive Officer, served as an officer and director of the
affiliated real estate entity during ﬁscal 2013. Effective November 1, 2010, we relocated from the branch office
owned by another affiliated real estate entity and currently lease only our Atlanta Customer Fulﬁllment Center
from the Affiliate. We paid rent under an operating lease to the Affiliate of approximately $2.3 million,
$2.3 million, and $2.2 million for ﬁscal years 2013, 2012, and 2011, respectively, in connection with our
occupancy of our Atlanta Customer Fulﬁllment Center. In the opinion of our management, based on its market
research, the lease with the Affiliate is on terms which approximated fair market value at its inception.

The following table summarizes our contractual obligations at August 31, 2013 (in thousands):

Contractual Obligations
Operating lease obligations with non Affiliates(1)
Operating lease obligations with Affiliates(1)
Capital lease obligations and ﬁnancing obligations

Total

. . . . $ 56,324
41,358

. . . . . . .

Less than
1 year
$20,466
2,296

1 − 3
years

$25,951 $
4,664

3 − 5
years
8,069
4,725

More than
5 years
$ 1,838
29,673

with non Affiliates(2) . . . . . . . . . . . . . . . . . . . . . .
5,809
250,000
Maturities of New Credit Facility . . . . . . . . . . . . . .
Total contractual obligations . . . . . . . . . . . . . . . . . . $353,491

1,723
12,500
$36,985

—
2,086
187,500
50,000
$82,701 $200,294

2,000
—
$33,511

(1) Certain of our operations are conducted on leased premises, one of which is leased from the Affiliate, as
described above. These leases (most of which require us to provide for the payment of real estate taxes,
insurance and other operating costs) are for varying periods, the longest extending to the year 2030. In
addition, we are obligated under certain equipment and automobile operating leases, which expire on
varying dates through 2018.

(2) During the ﬁscal year ended August 31, 2013, the Company entered into various capital leases and
ﬁnancing obligations for certain information technology equipment, which expire on varying dates
through 2016.

(3) The Company has recorded a noncurrent liability of $4.7 million for tax uncertainties and interest for the
ﬁscal year ended August 31, 2013. This amount is excluded from the table above, as the Company
cannot make reliable estimates of these cash ﬂows by period. See Note 8 to the Consolidated Financial
Statements.

32

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements.

Critical Accounting Estimates

We make estimates, judgments and assumptions in determining the amounts reported in the 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. Our signiﬁcant accounting policies are described in the notes to the consolidated ﬁnancial statements.
The accounting policies described below are impacted by our critical accounting estimates.

Allowance for Doubtful Accounts

We perform periodic credit evaluations of our customers’ ﬁnancial condition and collateral is generally

not required. The Company considers several factors to estimate the allowance for uncollectible accounts
receivable including the age of the receivables and the historical ratio of actual write-offs to the age of the
receivables. The analyses performed also take into consideration economic conditions that may have an impact
on a speciﬁc industry, group of customers or a speciﬁc customer. Based on our analysis of actual historical
write-offs of uncollectible accounts receivable, the Company’s estimates and assumptions have been materially
accurate in regards to the valuation of its allowance for doubtful accounts. For ﬁscal years 2013, 2012 and
2011, actual results did not vary materially from estimated amounts.

Inventory Valuation Reserve

We establish inventory valuation reserves for shrinkage and slow moving or obsolete inventory.

Provisions for inventory shrinkage are based on historical experience to account for unmeasured usage or loss.

Inventories consist of merchandise held for resale and are stated at the lower of weighted average cost or

market. We evaluate the recoverability of our slow-moving or obsolete inventories at least quarterly. We
estimate the recoverable cost of such inventory by product type while considering factors such as its age,
historic and current demand trends, the physical condition of the inventory, as well as assumptions regarding
future demand. Our ability to recover our cost for slow moving or obsolete inventory can be affected by such
factors as general market conditions, future customer demand and relationships with suppliers.

Goodwill and Intangible Assets

The purchase price of an acquired company is allocated between intangible assets and the net tangible
assets of the acquired business with the residual of the purchase price recorded as goodwill. The determination
of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can
include, but are not limited to, the cash ﬂows that an asset is expected to generate in the future and the
appropriate weighted average cost of capital.

At August 31, 2013, our goodwill totaled $630.3 million and our identiﬁable intangible assets, net totaled

$155.3 million. The Company annually reviews goodwill and intangible assets that have indeﬁnite lives for
impairment in its ﬁscal fourth quarter and when events or changes in circumstances indicate the carrying value
of these assets might exceed their current fair values. Goodwill is tested for impairment at the reporting unit
level by ﬁrst performing a qualitative assessment to determine whether it is more likely than not that the fair
value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative
assessment, then the reporting unit’s carrying value is compared to its fair value. Goodwill is considered
impaired if the carrying value of the reporting unit exceeds its fair value. We conducted our annual
impairment test of goodwill and intangibles in the ﬁscal fourth quarters of 2013 and 2012. The results of these
tests indicated that based on the qualitative assessment of goodwill and quantitative assessment of intangible
assets that have indeﬁnite lives, it was not likely that the fair values are less than the carrying amount.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of

events that have been included in the ﬁnancial statements or tax returns. Under this method, deferred tax

33

assets and liabilities are determined based on the differences between the ﬁnancial reporting and tax basis of
assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to
reverse. The tax balances and income tax expense recognized by the Company are based on management’s
interpretations of the tax laws of multiple jurisdictions. Income tax expense reﬂects the Company’s best
estimates and assumptions regarding, among other items, the level of future taxable income, interpretation of
tax laws and uncertain tax positions.

Other

Other signiﬁcant accounting policies, not involving the same level of measurement uncertainties as those

discussed above, are nevertheless important to an understanding of the ﬁnancial statements. Policies such as
revenue recognition, depreciation, intangibles, long-lived assets and warranties require judgments on complex
matters that are often subject to multiple external sources of authoritative guidance such as the FASB and the
Securities and Exchange Commission (the ‘‘SEC’’). Possible changes in estimates or assumptions associated
with these policies are not expected to have a material effect on the ﬁnancial condition or results of operations
of the Company. More information on these additional accounting policies can be found in Note 2 to the
Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

Recognizing assets and liabilities arising from lease contracts on the balance sheet

In May 2013, the Financial Accounting Standards Board (‘‘FASB’’) reissued an exposure draft on lease

accounting that would require entities to recognize assets and liabilities arising from lease contracts on the
balance sheet. The proposed exposure draft states that lessees and lessors should apply a ‘‘right-of-use model’’
in accounting for all leases. Under the proposed model, lessees would recognize an asset for the right to use
the leased asset, and a liability for the obligation to make rental payments over the lease term. When
measuring the asset and liability, variable lease payments are excluded whereas renewal options that provide a
signiﬁcant economic incentive upon renewal would be included. The lease expense from real estate based
leases would continue to be recorded under a straight line approach, but other leases not related to real estate
would be expensed using an effective interest method that would accelerate lease expense. Comments were
due by September 13, 2013. A ﬁnal standard is currently expected to be issued in 2014 and would be effective
no earlier than annual reporting periods beginning on January 1, 2017 (ﬁscal 2018 for the Company). The
Company is currently assessing the impact that the adoption of the guidance would have on its ﬁnancial
position, results of operations and cash ﬂows.

Reclassiﬁcation Adjustments out of Accumulated Other Comprehensive Income

In February 2013, the FASB issued an accounting standard which requires an entity to provide

information about the amounts reclassiﬁed out of accumulated other comprehensive income by component. In
addition, an entity is required to present, either on the face of the statement where net income is presented or
in the notes, signiﬁcant amounts reclassiﬁed out of accumulated other comprehensive income by the respective
line items of net income but only if the amount reclassiﬁed is required under U.S. GAAP to be reclassiﬁed to
net income in its entirety in the same reporting period. For other amounts that are not required under
U.S. GAAP to be reclassiﬁed in their entirety to net income, an entity is required to cross-reference to other
disclosures required under U.S. GAAP that provide additional detail about those amounts. This guidance is
effective for periods beginning after December 15, 2012. The adoption of this new guidance did not have any
impact on the Company’s ﬁnancial position, results of operations or cash ﬂows.

Testing Indeﬁnite-lived Intangible Assets for Impairment

In July 2012, the FASB issued an accounting standard update that allows an entity the option to

ﬁrst assess qualitative factors to determine whether the existence of events and circumstances indicates that it
is not more likely than not that the indeﬁnite-lived intangible asset is impaired. An entity no longer will be
required to perform the quantitative impairment test of indeﬁnite-lived intangible assets if, after it assesses the
totality of events and circumstances, the entity concludes that it is not more likely than not that the indeﬁnite-
lived intangible asset is impaired. The guidance is effective for annual and interim impairment tests performed
for ﬁscal years beginning after September 15, 2012. The Company does not anticipate that the adoption of the
guidance will have any impact on its ﬁnancial position, results of operations or cash ﬂows.

34

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risks

On April 22, 2013, in connection with the acquisition of BDNA, we entered into a new $650.0 million

credit facility (the ‘‘New Credit Facility’’). The New Credit Facility, which matures on April 22, 2018,
provides for a ﬁve-year unsecured revolving loan facility in the aggregate amount of $400.0 million and a
ﬁve-year unsecured term loan facility in the aggregate amount of $250.0 million. The New Credit Facility
replaced our previous $200.0 million Credit Agreement, dated June 8, 2011.

Borrowings under the New Credit Facility bear interest, at our option either, at (i) the LIBOR (London
Interbank Offered Rate) rate plus the applicable margin for LIBOR loans ranging from 1.00% to 1.375%, based
on the Company’s consolidated leverage ratio; or (ii) the greatest of (a) the Administrative Agent’s prime rate in
effect on such day, (b) the federal funds effective rate in effect on such day, plus 0.50% and (c) the LIBOR rate
that would be calculated as of such day in respect of a proposed LIBOR loan with a one-month interest period,
plus 1.00%, plus, in the case of each of clauses (a) through (c), an applicable margin ranging from 0.00% to
0.375%, based on our consolidated leverage ratio. The Company is also required to pay quarterly letter of credit
usage fees ranging between 1.00% to 1.375% (based on our consolidated leverage ratio) on the amount of the
daily average outstanding letters of credit, and a quarterly fronting fee of 0.125% per annum on the undrawn and
unexpired amount of each letter of credit. Based on the interest period we select, interest may be payable every
one, two, three or six months. Interest is reset at the end of each interest period. We currently elect to have loans
under the New Credit Facility bear interest based on LIBOR with one-month interest periods. The applicable
borrowing rate for us for any borrowings outstanding under the New Credit Facility at August 31, 2013 was
1.19%, which represents LIBOR plus 1.0%.

The New Credit Facility contains customary restrictive covenants which are subject to a number of

signiﬁcant exceptions and limitations. The New Credit Facility also requires that we maintain a maximum
consolidated leverage ratio of total indebtedness to EBITDA (earnings before interest expense, taxes,
depreciation and amortization) of no more than 3.00 to 1.00, and a minimum consolidated interest coverage
ratio of EBITDA to total interest expense of at least 3.00 to 1.00, during the term of the New Credit Facility.
Borrowings under the New Credit Facility are guaranteed by certain of our subsidiaries.

As of August 31, 2013, there were $250.0 million of borrowings outstanding under the term loan facility
of the New Credit Facility, of which $12.5 million represents current maturities. At August 31, 2013, we were
in compliance with the operating and ﬁnancial covenants of the New Credit Facility.

Borrowings under our New Credit Facility are subject to ﬂuctuations in the interest rate, which have a
corresponding effect on our interest expense. A 100 basis point increase or decrease in interest rates would not
have a signiﬁcant impact on future earnings under our current capital structure. We have monitored and will
continue to monitor our exposure to interest rate ﬂuctuations.

In addition, our interest income is most sensitive to changes in the general level of interest rates. In this

regard, changes in interest rates affect the interest earned on our cash and cash equivalents.

We do not currently use interest rate derivative instruments to manage exposure to interest rate changes.

Foreign Currency Risks

Approximately 97% of our sales are denominated in U.S. dollars and are primarily from customers in the

United States. As a result, currency ﬂuctuations are currently not material to our operating results. To the
extent that we engage in more signiﬁcant international sales in the future, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products less competitive in international markets.
We have monitored and will continue to monitor our exposure to currency ﬂuctuations.

35

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM . . . . . . . . . . . . . . .

CONSOLIDATED BALANCE SHEETS AT AUGUST 31, 2013 AND SEPTEMBER 1, 2012 . . . . .

CONSOLIDATED STATEMENTS OF INCOME FOR THE FISCAL YEARS ENDED

AUGUST 31, 2013, SEPTEMBER 1, 2012 AND AUGUST 27, 2011 . . . . . . . . . . . . . . . . . . . .

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE FISCAL YEARS

ENDED AUGUST 31, 2013, SEPTEMBER 1, 2012 AND AUGUST 27, 2011 . . . . . . . . . . . . . .

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE FISCAL YEARS

ENDED AUGUST 31, 2013, SEPTEMBER 1, 2012 AND AUGUST 27, 2011 . . . . . . . . . . . . . .

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED

AUGUST 31, 2013, SEPTEMBER 1, 2012 AND AUGUST 27, 2011 . . . . . . . . . . . . . . . . . . . .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . .

PAGE

37

38

39

40

41

42

43

36

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of MSC Industrial Direct Co., Inc.

We have audited the accompanying consolidated balance sheets of MSC Industrial Direct Co., Inc. and
Subsidiaries (the “Company”) as of August 31, 2013 and September 1, 2012, and the related consolidated
statements of income, comprehensive income, shareholders’ equity, and cash ﬂows for each of the three ﬁscal
years in the period ended August 31, 2013. Our audits also included the ﬁnancial statement schedule listed in
the Index at Item 15(a). These ﬁnancial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these ﬁnancial statements and schedule based on
our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the ﬁnancial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An
audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as
well as evaluating the overall ﬁnancial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the ﬁnancial statements referred to above present fairly, in all material respects, the
consolidated ﬁnancial position of MSC Industrial Direct Co., Inc. and Subsidiaries at August 31, 2013 and
September 1, 2012, and the consolidated results of their operations and their cash ﬂows for each of the three
ﬁscal years in the period ended August 31, 2013, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related ﬁnancial statement schedule, when considered in relation to the
basic ﬁnancial statements taken as a whole, presents fairly in all material respects the information set forth
therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), MSC Industrial Direct Co., Inc. and Subsidiaries’ internal control over ﬁnancial reporting as
of August 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated
October 30, 2013 expressed an unqualiﬁed opinion thereon.

/s/ Ernst & Young LLP

Jericho, New York
October 30, 2013

37

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

August 31,
2013

September 1,
2012

CURRENT ASSETS:

ASSETS

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts of $7,523 and

$6,934, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Property, plant and equipment, net
Goodwill
Identiﬁable intangibles, net
Other assets

$

55,876

$ 168,453

345,366
419,012
35,464
37,771
893,489
251,536
630,318
155,324
12,336
$1,943,003

297,215
393,412
29,313
31,718
920,111
174,597
289,124
51,212
9,832
$1,444,876

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:

Current maturities of long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities
Long-term debt, net of current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes and tax uncertainties . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

14,184
113,636
85,759
213,579
241,566
97,475
552,620

$

1,007
96,640
72,868
170,515
2,189
85,061
257,765

COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY

Preferred stock; $0.001 par value; 5,000,000 shares authorized; none issued

and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Class A common stock (one vote per share); $0.001 par value;

100,000,000 shares authorized; 54,634,259 and 52,581,838 shares issued,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Class B common stock (ten votes per share); $0.001 par value; 50,000,000

shares authorized; 14,140,747 and 15,560,294 shares issued and
outstanding, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class A treasury stock, at cost, 5,340,587 and 5,342,091 shares, respectively . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

55

—

53

14
528,770
1,132,868
(4,427)
(266,897)
1,390,383
$1,943,003

16
483,682
970,965
(2,443)
(265,162)
1,187,111
$1,444,876

See accompanying notes to consolidated ﬁnancial statements.

38

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except net income per share data)

NET SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
COST OF GOODS SOLD . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross proﬁt

OTHER (EXPENSE) INCOME:

August 31,
2013
(52 weeks)
$2,457,649
1,339,133
1,118,516
732,990
385,526

For The Fiscal Years Ended
September 1,
2012
(53 weeks)
$2,355,918
1,277,715
1,078,203
665,987
412,216

August 27,
2011
(52 weeks)
$2,021,792
1,080,867
940,925
591,160
349,765

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other — expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before provision for income taxes . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2,164)
117
(50)
(2,097)
383,429
145,434
$ 237,995

(241)
196
(29)
(74)
412,142
153,111
$ 259,031

(258)
58
(235)
(435)
349,330
130,544
$ 218,786

PER SHARE INFORMATION:

Net income per common share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
$

3.77
3.75

$
$

4.12
4.09

$
$

3.45
3.43

Weighted average shares used in computing net income per

common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

62,695
63,011

62,434
62,803

62,902
63,324

See accompanying notes to consolidated ﬁnancial statements.

39

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

Net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

For The Fiscal Years Ended
September 1,
2012
(53 weeks)
$259,031
(358)
$258,673

August 31,
2013
(52 weeks)
$237,995
(1,984)
$236,011

August 27,
2011
(52 weeks)
$218,786
575
$219,361

See accompanying notes to consolidated ﬁnancial statements.

40

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE FISCAL YEARS ENDED AUGUST 31, 2013 (52 weeks),
SEPTEMBER 1, 2012 (53 weeks), AND AUGUST 27, 2011 (52 weeks)
(In thousands)

.

.

.

.

.

.

.

.

BALANCE, August 28, 2010

Class A common stock .

.
Exchange of Class B common stock for
.

.
Exercise of common stock options, including
.

.
Common stock issued under associate stock
.
.

income tax beneﬁts of $6,973 .

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

stock .

cancellation .

purchase plan .

.
.
Grant of restricted common stock, net of
.
.
.
.
Stock-based compensation .
Purchase of treasury stock .
.
Cash dividends paid on Class A common
. .
.
Cash dividends paid on Class B common
. .
.
.
.
Issuance of dividend equivalent units .
Net income .
.
.
.
.
Foreign currency translation adjustment .
.

stock .

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

BALANCE, August 27, 2011

Class A common stock .

Exchange of Class B common stock for
.

.
Exercise of common stock options, including
.

.
Common stock issued under associate stock
.
.

income tax beneﬁts of $5,376.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

stock .

cancellation .

purchase plan .

.
.
Grant of restricted common stock, net of
.
.
.
.
Stock-based compensation .
Purchase of treasury stock .
.
Cash dividends paid on Class A common
. .
.
Cash dividends paid on Class B common
. .
.
.
Issuance of dividend equivalent units .
.
.
.
.
.
Net income .
Foreign currency translation adjustment .
.

stock .

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

BALANCE, September 1, 2012 .

Class A common stock .

Exchange of Class B common stock for
.

.
Exercise of common stock options, including
.

.
Common stock issued under associate stock
.
.

income tax beneﬁts of $5,621 .

purchase plan .

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

stock .

cancellation .

.
.
Grant of restricted common stock, net of
.
.
.
.
Stock-based compensation .
Purchase of treasury stock .
.
Cash dividends paid on Class A common
. .
.
Cash dividends paid on Class B common
. .
.
.
.
Issuance of dividend equivalent units .
Net income .
.
.
.
.
Foreign currency translation adjustment .
.

stock .

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

BALANCE, August 31, 2013

.

.
.
.

.

.
.
.
.
.

.

.
.
.

.

.
.
.
.
.

.

.
.
.

.

.
.
.
.
.

.
.
.

.

.
.
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.
.
.

.

.
.
.
.
.

.
.
.

.

.
.
.
.
.

Class A
Common Stock

Shares Amount
48,380

$48

1,525

1,060

—

158
—
—

—

—
—
—
—
51,123

840

538

—

81
—
—

—

—
—
—
—
52,582

1,419

504

—

129
—
—

—

—
—
—
—
54,634

2

1

—

—
—
—

—

—
—
—
—
$51

1

1

—

—
—
—

—

—
—
—
—
$53

2

—

—

—
—
—

—

—
—
—
—
$55

.

.

.

.

.
.
.

.

.
.
.
.
.

.

.

.

.
.
.

.

.
.
.
.
.

.

.

.

.
.
.

.

.
.
.
.
.

Class B

Common Stock Additional
Retained
Paid-In
Capital
Earnings
$378,315 $ 675,968

Shares Amount
17,925

$18

Accumulated
Other
Comprehensive
Loss
$(2,660)

Class A
Treasury Stock
Amount
at cost

Shares
3,528 $(151,809) $ 899,880

Total

(1,525)

(2)

—

—

—

—
—
—

—

—
—
—
—
16,400

(840)

—

—

—
—
—

—

—
—
—
—
15,560

—

—

—
—
—

—

—
—
—
—
$16

—

—

—

—
—
—

—

—
—
—
—
$16

—

—

—
—
—

—

—
—
—
—
14,141

—

—

—
—
—

—

—
—
—
—
$14

—

—

—

—
—
—

—

—

—

—
—
—

44,655

949

—
14,768
—

—

(86,234)

—

—

—

—
—
—

—

—

—

—

—

—

44,656

(53)

2,034

2,983

—
—
1,248

—
—
(69,279)

—
14,768
(69,279)

—

—

(86,234)

—
348
—
—

(33,023)
(348)
218,786
—
$439,035 $ 775,149

—
—
—
575
$(2,085)

—
—
—
—

(33,023)
—
—
—
— 218,786
575
—
4,723 $(219,054) $ 993,112

—

27,797

1,397

—
15,262
—

—

—

—

—
—
—

—

(46,926)

—

—

—

—
—
—

—

—

—

—

—

1

27,798

(52)

1,990

3,387

—
—
671

—

—
—
(48,098)

—
15,262
(48,098)

—

(46,926)

—
191
—
—

(16,098)
(191)
259,031
—
$483,682 $ 970,965

—
—
—
(358)
$(2,443)

—
—
—
—

(16,098)
—
—
—
— 259,031
(358)
—
5,342 $(265,162) $1,187,111

27,285

1,747

—
15,824
—

—

(58,245)

—

—

—

—
—
—

—

—

—

—

—

—

27,285

(53)

2,038

3,785

—
—
52

—

—
—
(3,773)

—
15,824
(3,773)

—

(58,245)

—
232
—
—

(17,615)
(232)
237,995
—
$528,770 $1,132,868

—
—
—
(1,984)
$(4,427)

—
—
—
—

(17,615)
—
—
—
— 237,995
(1,984)
—
5,341 $(266,897) $1,390,383

(1,419)

(2)

—

See accompanying notes to consolidated ﬁnancial statements.

41

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED AUGUST 31, 2013, SEPTEMBER 1, 2012 AND AUGUST 27, 2011
(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by

operating activities:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of property, plant and equipment . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes and tax uncertainties . . . . . . . . . . . . . . .
Excess tax beneﬁts from stock-based compensation. . . . . . . . . . .
Write-off of deferred ﬁnancing costs on previous

credit facility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Changes in operating assets and liabilities, net of amounts

associated with business acquired:

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . .
Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . .

CASH FLOWS FROM INVESTING ACTIVITIES:

Expenditures for property, plant and equipment . . . . . . . . . . . . .
Cash used in business acquisitions, net of cash received. . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . .

(89,252)
(548,769)
(638,021)

CASH FLOWS FROM FINANCING ACTIVITIES:

Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on capital lease and ﬁnancing obligations . . . . . . . . . .
Excess tax beneﬁts from stock-based compensation. . . . . . . . . . .
Proceeds from sale of Class A common stock in connection with

associate stock purchase plan . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of Class A common stock options . . . . . .
Borrowings under the ﬁnancing obligation . . . . . . . . . . . . . . . .
Borrowings under Credit Facility . . . . . . . . . . . . . . . . . . . . . .
Credit facility ﬁnancing costs . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of notes payable and revolving loans under the Credit

Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) in ﬁnancing activities . . . . . . . . .
Effect of foreign exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, beginning of year . . . . . . . . .
CASH AND CASH EQUIVALENTS, end of year . . . . . . . . . . . . .

SUPPLEMENTAL DISCLOSURES OF CASH FLOW

INFORMATION:
Cash paid during the year for income taxes . . . . . . . . . . . . . . . .
Cash paid during the year for interest. . . . . . . . . . . . . . . . . . . .

August 31,
2013
(52 weeks)

For The Fiscal Years Ended
September 1,
2012
(53 weeks)

August 27,
2011
(52 weeks)

$ 237,995

$259,031

$ 218,786

49,479
15,824
941
3,499
6,360
(6,040)

594

(15,630)
23,409
(1,619)
(1,784)
12,409
87,442
325,437

(3,773)
(75,860)
(1,300)
6,040

3,785
21,664
1,417
370,000
(1,912)

(120,000)
200,061
(54)
(112,577)
168,453
$ 55,876

34,723
15,262
1,129
3,560
2,765
(4,888)

—

(30,213)
(45,306)
(6,598)
1,268
3,551
(24,747)
234,284

(47,691)
(33,451)
(81,142)

(48,098)
(63,024)
(1,385)
4,888

3,387
22,422
1,192
—
—

—
(80,618)
(30)
72,494
95,959
$168,453

29,159
14,768
116
2,733
15,270
(7,356)

—

(38,304)
(46,895)
(1,782)
2,019
21,448
(8,824)
209,962

(25,479)
(28,948)
(54,427)

(69,279)
(119,257)
—
7,356

2,983
37,683
—
—
(938)

(39,361)
(180,813)
46
(25,232)
121,191
$ 95,959

$ 130,342
1,281
$

$145,651
55
$

$ 109,001
93
$

See accompanying notes to consolidated ﬁnancial statements.

42

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

1. BUSINESS

MSC Industrial Direct Co., Inc. (together with its subsidiaries, the ‘‘Company’’ or ‘‘MSC’’) is a

distributor of metalworking and maintenance, repair and operations (‘‘MRO’’) supplies with co-located
headquarters in Melville, New York and Davidson, North Carolina. The Company has additional office support
centers in Southﬁeld, Michigan and Cleveland, Ohio and serves primarily domestic markets through its
distribution network of 105 branch offices and 14 customer fulﬁllment centers.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated ﬁnancial statements include the accounts of MSC and its subsidiaries, all

of which are wholly owned. All intercompany balances and transactions have been eliminated in
consolidation.

The Company acquired substantially all of the assets and assumed certain liabilities of the North

American distribution business (‘‘BDNA’’) of Barnes Group Inc. (‘‘Barnes’’) on April 22, 2013. The results of
BDNA are included in the current period since the date of acquisition.

Fiscal Year
The Company’s ﬁscal year is on a 52 or 53 week basis, ending on the Saturday closest to August 31st of

each year. The ﬁnancial statements for ﬁscal years 2013 and 2011 contain activity for 52 weeks. Fiscal year
2012 is a 53-week period with the extra week occurring in the Company’s ﬁscal fourth quarter. Unless the
context requires otherwise, references to years contained herein pertain to the Company’s ﬁscal year.

Use of Estimates

The preparation of ﬁnancial statements, in conformity with accounting principles generally accepted in
the United States, requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the ﬁnancial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates and assumptions used in preparing the accompanying consolidated ﬁnancial statements.

Cash and Cash Equivalents

The Company considers all short-term, highly liquid investments with maturities of three months or less

at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which
approximates fair value.

Concentrations of Credit Risk

The Company’s mix of receivables is diverse, with approximately 322,000 active customer accounts
(customers that have made at least one purchase in the last 12 months and excluding BDNA) at August 31,
2013. The Company sells its products primarily to end-users. The Company’s customer base represents many
diverse industries primarily concentrated in the United States. The Company performs periodic credit
evaluations of its customers’ ﬁnancial condition and collateral is generally not required. Receivables are
generally due within 30 days. The Company evaluates the collectability of accounts receivable based on
numerous factors, including past transaction history with customers and their credit worthiness and provides a
reserve for accounts that are potentially uncollectible.

The Company’s cash and cash equivalents include deposits with commercial banks and investments in
money market funds. The Company maintains the majority of its cash and invests its cash equivalents with
high quality ﬁnancial institutions. Deposits held with banks may exceed insurance limits. While MSC
monitors the creditworthiness of these commercial banks and ﬁnancial institutions, a crisis in the United States
ﬁnancial systems could limit access to funds and/or result in a loss of principal. The terms of these deposits
and investments provide that all monies are available to the Company upon demand.

43

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)

Allowance for Doubtful Accounts

The Company establishes reserves for customer accounts that are deemed uncollectible. The method used

to estimate the allowances is based on several factors, including the age of the receivables and the historical
ratio of actual write-offs to the age of the receivables. These analyses also take into consideration economic
conditions that may have an impact on a speciﬁc industry, group of customers or a speciﬁc customer. While
the Company has a broad customer base, representing many diverse industries primarily in all regions of the
United States, a general economic downturn could result in higher than expected defaults, and therefore, the
need to revise estimates for bad debts.

Inventory Valuation

Inventories consist of merchandise held for resale and are stated at the lower of weighted average cost or

market. The Company evaluates the recoverability of our slow-moving or obsolete inventories quarterly. The
Company estimates the recoverable cost of such inventory by product type while considering such factors as
its age, historic and current demand trends, the physical condition of the inventory, as well as assumptions
regarding future demand. The Company’s ability to recover its cost for slow moving or obsolete inventory can
be affected by such factors as general market conditions, future customer demand, and relationships with
suppliers. Substantially all of the Company’s inventories have demonstrated long shelf lives, are not highly
susceptible to obsolescence, and are eligible for return under various supplier return programs.

Property, Plant and Equipment

Property, plant and equipment and capitalized computer software are stated at cost less accumulated
depreciation. Expenditures for maintenance and repairs are charged to expense as incurred; costs of major
renewals and improvements are capitalized. At the time property and equipment are retired or otherwise
disposed of, the cost and accumulated depreciation are eliminated from the asset and accumulated depreciation
accounts and the proﬁt or loss on such disposition is reﬂected in income.

Depreciation and amortization of property, plant and equipment are computed for ﬁnancial reporting

purposes on the straight-line method based on the estimated useful lives of the assets. Leasehold
improvements are amortized over either their respective lease terms or their estimated lives, whichever is
shorter. Estimated useful lives range from ﬁve to forty years for leasehold improvements and buildings and
three to twenty years for furniture, ﬁxtures, and equipment.

Capitalized computer software costs are amortized using the straight-line method over the estimated
useful life. These costs include purchased software packages, payments to vendors and consultants for the
development, implementation or modiﬁcation of purchased software packages for Company use, and payroll
and related costs for employees associated with internal-use software projects. Capitalized computer software
costs are included within property, plant and equipment on the Company’s Consolidated Balance Sheets.

Goodwill and Other Intangible Assets

The Company’s business acquisitions typically result in the recording of goodwill and other intangible assets,

which affect the amount of amortization expense and possibly impairment write-downs that the Company may
incur in future periods. Goodwill represents the excess of the purchase price paid over the fair value of the net
assets acquired in connection with business acquisitions. The Company annually reviews goodwill and intangible
assets that have indeﬁnite lives for impairment in its ﬁscal fourth quarter and when events or changes in
circumstances indicate the carrying values of these assets might exceed their current fair values. Goodwill
impairment is assessed based on the FASB’s new accounting guidance, which allows an entity to ﬁrst assess
qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment
test. The Company no longer is required under the new guidance to calculate the fair value of a reporting unit
unless it determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than
its carrying amount. Goodwill increased $341,194 in ﬁscal 2013, related to the acquisition of BDNA, net of
foreign currency translation adjustments. Based on the qualitative assessment performed by the Company in its

44

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)

ﬁscal fourth quarter, there was no indicator of impairment of goodwill for ﬁscal years 2013, 2012 and 2011.
Based on the quantitative assessment of intangible assets that have indeﬁnite lives performed by the Company in
its ﬁscal fourth quarter, there was no indicator of impairment of intangible assets that have indeﬁnite lives for
ﬁscal years 2013, 2012 and 2011.

The change in the carrying amount of goodwill is as follows:

Balance as of September 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BDNA acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of August 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$289,124
342,000
(806)
$630,318

The components of the Company’s other intangible assets for the ﬁscal years ended August 31, 2013 and

September 1, 2012 are as follows:

Customer Relationships . . . . . . . . . . . . .
Non-Compete Agreements . . . . . . . . . . .
Contract Rights . . . . . . . . . . . . . . . . . .
Trademark . . . . . . . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Total

Weighted
Average
Useful Life
(in years)
5 − 18
2 − 3
10
1 − 5
Indeﬁnite

For the Fiscal Years Ended

August 31, 2013

September 1, 2012

Gross
Carrying
Amount
$175,160
1,348
23,100
3,380
14,681
$217,669

Accumulated
Amortization
$(43,998)
(881)
(16,748)
(718)
—
$(62,345)

Gross
Carrying
Amount
$ 68,160
1,348
23,100
480
7,055
$100,143

Accumulated
Amortization
$(33,826)
(395)
(14,437)
(273)
—
$(48,931)

For ﬁscal year 2013, the Company recorded approximately $117,400 of acquired intangible assets,
consisting primarily of customer relationships and $126 relating to the registration and application of new
trademarks, for ﬁscal year 2012 the Company recorded approximately $12,808 of acquired intangible assets,
consisting primarily of customer relationships and $143 relating to the registration and application of new
trademarks. The Company’s amortizable intangible assets are recorded on a straight-line basis, including
customer relationships, as it approximates customer attrition patterns and best estimates the use pattern of the
asset. Amortization expense of the Company’s intangible assets was $13,059, $10,047, and $7,689 for the
ﬁscal years ended 2013, 2012, and 2011, respectively. Estimated amortization expense for each of the ﬁve
succeeding ﬁscal years is as follows:

Fiscal Year
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$16,888
16,696
14,421
8,033
7,734

Impairment of Long-Lived Assets

The Company periodically evaluates the net realizable value of long-lived assets, including deﬁnite lived

intangible assets, property and equipment, and deferred catalog costs, relying on a number of factors,
including operating results, business plans, economic projections, and anticipated future cash ﬂows.
Impairment is assessed by evaluating the estimated undiscounted cash ﬂows over the asset’s remaining life. If
estimated cash ﬂows are insufficient to recover the investment, an impairment loss is recognized. No
impairment loss was required to be recorded by the Company during ﬁscal years 2013, 2012 and 2011.

45

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)

Deferred Catalog Costs

The costs of producing and distributing the Company’s principal catalogs are deferred ($6,406 and $7,355

at August 31, 2013 and September 1, 2012, respectively) and included in other assets in the Company’s
consolidated balance sheets. These costs are charged to expense over the period that the catalogs remain the
most current source of sales, which is typically one year or less. The costs associated with brochures and
catalog supplements are charged to expense as distributed. The total amount of advertising costs, net of
co-operative advertising income from vendor sponsored programs, included in operating expenses in the
consolidated statements of income, was approximately $11,505, $14,090 and $14,219 during the ﬁscal years
2013, 2012, and 2011, respectively.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has

occurred or services have been rendered, the sales price is ﬁxed or determinable, and collectability is
reasonably assured. In most cases, these conditions are met when the product is shipped to the customer or
services have been rendered. The Company reports its sales net of the amount of actual sales returns and the
amount of reserves established for anticipated sales returns based upon historical return rates. Sales tax
collected from customers is excluded from net sales in the accompanying consolidated statement of income.

Vendor Consideration

The Company records cash consideration received for advertising costs incurred to sell the vendor’s
products as a reduction of the Company’s advertising costs and is reﬂected in operating expenses in the
consolidated statements of income. In addition, the Company receives volume rebates from certain vendors
based on contractual arrangements with such vendors. Rebates received from these vendors are recognized as
a reduction to the cost of goods sold in the consolidated statements of income when the inventory is sold.

Product Warranties

The Company generally offers a maximum one-year warranty, including parts and labor, for some of its
machinery products. The speciﬁc terms and conditions of those warranties vary depending upon the product
sold. The Company may be able to recoup some of these costs through product warranties it holds with its
original equipment manufacturers, which typically range from thirty to ninety days. In general, many of the
Company’s general merchandise products are covered by third party original equipment manufacturers’
warranties. The Company’s warranty expense has been minimal.

Shipping and Handling Costs

The Company includes shipping and handling fees billed to customers in net sales and shipping and
handling costs associated with outbound freight in operating expenses in the accompanying consolidated
statements of income. The shipping and handling costs in operating expenses were approximately $105,150,
$102,550, and $92,442 during ﬁscal years 2013, 2012, and 2011, respectively.

Self-Insurance

The Company has a self-insured group health plan. The Company is responsible for all covered claims to

a maximum liability of $500 per participant during a September 1 plan year. Beneﬁts paid in excess of $500
are reimbursed to the plan under the Company’s stop loss policy pursuant to an arrangement in effect through
the end of August 2013. Effective September 1, 2013, the maximum liability was increased to $550
participant. The Company estimates its reserve for all unpaid medical claims including those incurred but not
reported based on historical analysis of claim trends, reporting and processing lag times and medical costs,
adjusted as necessary based on management’s reasoned judgment. Group health plan expense for ﬁscal 2013,
2012 and 2011 was approximately $48,249, $43,988, and $37,429, respectively.

Stock Based Compensation

In accordance with Accounting Standards Codiﬁcation (‘‘ASC’’) Topic 718, ‘‘Compensation — Stock

Compensation’’ (‘‘ASC 718’’), the Company estimates the fair value of share-based payment awards on the

46

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)

date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected
to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statements
of Income. The Company uses the Black-Scholes option pricing model to determine the grant date fair value
and recognizes compensation expense on a straight-line basis over the associate’s vesting period or to the
associate’s retirement eligible date, if earlier.

The stock-based compensation expense related to stock option plans and the Associate Stock Purchase

Plan included in operating expenses for ﬁscal 2013, 2012 and 2011 were $5,387, $5,656 and $5,900,
respectively. Tax beneﬁts related to this expense for ﬁscal 2013, 2012 and 2011 were $1,951, $2,061 and
$2,156, respectively. The Company grants Non-Qualiﬁed Stock Options, which allow the tax beneﬁt to be
recorded as options are expensed.

The stock-based compensation expense related to nonvested restricted stock awards included in operating

expenses was $8,309, $7,448 and $7,053 for the ﬁscal years 2013, 2012, and 2011 respectively. The
stock-based compensation expense related to a restricted stock unit award included in operating expenses was
$2,128 and $2,158 for the ﬁscal years 2013 and 2012 respectively.

Related Party Transactions

The Company is currently affiliated with one real estate entity (the ‘‘Affiliate’’). The Affiliate is owned

primarily by two of our principal shareholders (Mitchell Jacobson, our Chairman, and his sister, Marjorie
Gershwind Fiverson). In addition, Erik Gershwind, our President and Chief Executive Officer, served as an
officer and director of the affiliated real estate entity during ﬁscal 2013. The Company leases a customer
fulﬁllment center located near Atlanta, Georgia from its Affiliate. Monthly rental payments range from
approximately $191 to $218 over the remaining lease term. See Note 13 for a discussion of leases.

Fair Value of Financial Instruments

The carrying values of the Company’s ﬁnancial instruments, including cash, receivables, accounts payable

and accrued liabilities approximate fair value because of the short maturity of these instruments. In addition,
based on borrowing rates currently available to the Company for borrowings with similar terms, the carrying
values of the Company’s capital lease obligations also approximate fair value. The fair value of the
Company’s long-term debt, including current maturities are estimated based on quoted market prices for the
same or similar issues or on current rates offered to the Company for debt of the same remaining maturities.
Under this method, the Company’s fair value of any long-term obligations was not signiﬁcantly different than
the carrying values at August 31, 2013 and September 1, 2012.

Foreign Currency

The local currency is the functional currency for all of MSC’s operations outside the United States.
Assets and liabilities of these operations are translated to U.S. dollars at the exchange rate in effect at the end
of each period. Income statement accounts are translated at the average exchange rate prevailing during the
period. Translation adjustments arising from the use of differing exchange rates from period to period are
included as a component of other comprehensive income within shareholders’ equity. Gains and losses from
foreign currency transactions are included in net income for the period.

Income Taxes

The Company has established deferred income tax assets and liabilities for temporary differences between
the ﬁnancial reporting bases and the income tax bases of its assets and liabilities at enacted tax rates expected
to be in effect when such assets or liabilities are realized or settled pursuant to the provisions of ASC Topic
740, ‘‘Income Taxes’’ (‘‘ASC 740’’), which prescribes a comprehensive model for the ﬁnancial statement
recognition, measurement, classiﬁcation, and disclosure of uncertain tax positions. For those beneﬁts to be
recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing
authorities. The amounts of unrecognized tax beneﬁts, exclusive of interest and penalties that would affect the
effective tax rate were $4,494 and $5,376 as of August 31, 2013 and September 1, 2012, respectively.

47

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)

Geographic Regions

The Company’s sales and assets are predominantly generated from United States locations. Sales and
assets related to the United Kingdom (the ‘‘U.K.’’), Mexico and Canada branches are not signiﬁcant to the
Company’s total operations. For ﬁscal 2013, the U.K., Mexico and Canadian operations represented
approximately 3% of the Company’s consolidated net sales.

Segment Reporting

The Company utilizes the management approach for segment disclosure, which designates the internal
organization that is used by management for making operating decisions and assessing performance as the
source of our reportable segments. The Company’s results of operations are reviewed by the Chief Executive
Officer on a consolidated basis and the Company operates in only one segment. Substantially all of the
Company’s revenues and long-lived assets are in the United States.

New Accounting Pronouncements

Recognizing assets and liabilities arising from lease contracts on the balance sheet

In May 2013, the Financial Accounting Standards Board (‘‘FASB’’) reissued an exposure draft on lease
accounting that would require entities to recognize assets and liabilities arising from lease contracts on the balance
sheet. The proposed exposure draft states that lessees and lessors should apply a ‘‘right-of-use model’’ in accounting
for all leases. Under the proposed model, lessees would recognize an asset for the right to use the leased asset, and a
liability for the obligation to make rental payments over the lease term. When measuring the asset and liability,
variable lease payments are excluded whereas renewal options that provide a signiﬁcant economic incentive upon
renewal would be included. The lease expense from real estate based leases would continue to be recorded under a
straight line approach, but other leases not related to real estate would be expensed using an effective interest method
that would accelerate lease expense. Comments were due by September 13, 2013. A ﬁnal standard is currently
expected to be issued in 2014 and would be effective no earlier than annual reporting periods beginning on January 1,
2017 (ﬁscal 2018 for the Company). The Company is currently assessing the impact that the adoption of the guidance
will have on its ﬁnancial position, results of operations and cash ﬂows.

Reclassiﬁcation Adjustments out of Accumulated Other Comprehensive Income

In February 2013, the FASB issued an accounting standard which requires an entity to provide

information about the amounts reclassiﬁed out of accumulated other comprehensive income by component. In
addition, an entity is required to present, either on the face of the statement where net income is presented or
in the notes, signiﬁcant amounts reclassiﬁed out of accumulated other comprehensive income by the respective
line items of net income but only if the amount reclassiﬁed is required under U.S. GAAP to be reclassiﬁed to
net income in its entirety in the same reporting period. For other amounts that are not required under
U.S. GAAP to be reclassiﬁed in their entirety to net income, an entity is required to cross-reference to other
disclosures required under U.S. GAAP that provide additional detail about those amounts. This guidance is
effective for periods beginning after December 15, 2012. The adoption of this new guidance did not have any
impact on the Company’s ﬁnancial position, results of operations or cash ﬂows.

Testing Indeﬁnite-lived Intangible Assets for Impairment

In July 2012, the FASB issued an accounting standard update that allows an entity the option to

ﬁrst assess qualitative factors to determine whether the existence of events and circumstances indicates that it
is not more likely than not that the indeﬁnite-lived intangible asset is impaired. An entity no longer will be
required to perform the quantitative impairment test of indeﬁnite-lived intangible assets if, after it assesses the
totality of events and circumstances, the entity concludes that it is not more likely than not that the indeﬁnite-
lived intangible asset is impaired. The guidance is effective for annual and interim impairment tests performed
for ﬁscal years beginning after September 15, 2012. The Company does not anticipate that the adoption of the
guidance will have any impact on its ﬁnancial position, results of operations or cash ﬂows.

48

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

3. FAIR VALUE

Fair value accounting standards deﬁne fair value as the price that would be received to sell an asset or

paid to transfer a liability in an orderly transaction between market participants at the measurement date. The
following fair value hierarchy prioritizes the inputs used to measure fair value into three levels, with Level 1
being of the highest priority. The three levels of inputs used to measure fair value are as follows:

Level 1 — Observable inputs that reﬂect quoted prices (unadjusted) for identical assets or liabilities in

active markets.

Level 2 — Include other inputs that are directly or indirectly observable in the marketplace.

Level 3 — Unobservable inputs which are supported by little or no market activity.

As of August 31, 2013 and September 1, 2012, the Company measured cash equivalents consisting of
money market funds at fair value on a recurring basis for which market prices are readily available (Level 1)
and that invest primarily in United States government and government agency securities and municipal bond
securities, which aggregated $2,529 and $104,529, respectively.

The Company’s ﬁnancial instruments, other than those presented in the disclosure above, include cash,

receivables, accounts payable, and accrued liabilities. Management believes the carrying amount of the
aforementioned ﬁnancial instruments is a reasonable estimate of fair value as of August 31, 2013 and
September 1, 2012 due to the short-term maturity of these items.

In connection with the construction of the Company’s new customer fulﬁllment center in Columbus,

Ohio, the Company entered into an arrangement with the Columbus-Franklin County Finance Authority
(‘‘Finance Authority’’) which provides savings on state and local sales taxes imposed on construction
materials to entities that ﬁnance the transactions through them. This arrangement consists of the Finance
Authority issuing taxable bonds to ﬁnance the structure and site improvements of the Company’s customer
fulﬁllment center. At August 31, 2013, the taxable bonds were approximately $2,000. The taxable bonds are
classiﬁed as available for sale securities in accordance with ASC Topic 320. The securities are recorded at fair
value in the Consolidated Balance Sheet. The fair values of these securities are based on observable inputs in
non-active markets, which are therefore classiﬁed as Level 2 in the hierarchy. The Company did not record
any signiﬁcant gains or losses on these securities during ﬁscal year 2013. The outstanding principal amount of
each bond bears interest at the rate of 2.4% a year. Interest is payable on a semiannual basis in arrears on
each interest payment date.

In addition, based on borrowing rates currently available to the Company for borrowings with similar terms,

the carrying values of the Company’s capital lease obligations also approximate fair value. The fair value of the
Company’s long-term debt, including current maturities are estimated based on quoted market prices for the same
or similar issues or on current rates offered to the Company for debt of the same remaining maturities. The
carrying amount of the Company’s debt at August 31, 2013, approximates its fair value.

During the ﬁscal years ended August 31, 2013 and September 1, 2012, the Company had no signiﬁcant

measurements of non-ﬁnancial assets or liabilities at fair value on a non-recurring basis subsequent to their
initial recognition.

4. NET INCOME PER SHARE

In June 2008, the FASB issued amendments to ASC Topic 260, ‘‘Earnings Per Share’’ (‘‘ASC 260’’),
which the Company adopted at the beginning of its 2010 ﬁscal year. The Company’s non-vested restricted
stock awards contain non-forfeitable rights to dividends and meet the criteria of a participating security as
deﬁned by ASC 260. Under the two-class method, net income per share is computed by dividing net income
allocated to common shareholders by the weighted average number of common shares outstanding for the
period. In applying the two-class method, net income is allocated to both common shares and participating

49

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

4. NET INCOME PER SHARE − (continued)

securities based on their respective weighted average shares outstanding for the period. Prior period net
income per share data presented has been adjusted retrospectively.

The following table sets forth the computation of basic and diluted net income per common share under

the two-class method for the ﬁscal years ended August 31, 2013, September 1, 2012 and August 27, 2011,
respectively:

Net income as reported . . . . . . . . . . . . . . . . . . . . . .

Less: Distributed net income available to

For the Fiscal Years Ended
September 1,
2012
(53 weeks)
$259,031

August 31,
2013
(52 weeks)
$237,995

August 27,
2011
(52 weeks)
$218,786

participating securities . . . . . . . . . . . . . . . . . . .

(492)

(351)

Less: Undistributed net income available to

participating securities . . . . . . . . . . . . . . . . . . .

(1,289)

(1,758)

(932)

(948)

Numerator for basic net income per share:
Undistributed and distributed net income available to

common shareholders . . . . . . . . . . . . . . . . . . . . .
Add: Undistributed net income allocated to

$236,214

$256,922

$216,906

participating securities . . . . . . . . . . . . . . . . . . .

1,289

1,758

Less: Undistributed net income reallocated to

participating securities . . . . . . . . . . . . . . . . . . .

(1,283)

(1,748)

948

(942)

Numerator for diluted net income per share:
Undistributed and distributed net income available to

common shareholders . . . . . . . . . . . . . . . . . . . . .

$236,220

$256,932

$216,912

Denominator:
Weighted average shares outstanding for basic net

income per share . . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive securities . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding for diluted net

62,695
316

62,434
369

62,902
422

income per share . . . . . . . . . . . . . . . . . . . . . . . .

63,011

62,803

63,324

Net income per share Two-Class Method:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
$

3.77
3.75

$
$

4.12
4.09

$
$

3.45
3.43

Shares subject to antidilutive stock options (5 shares at August 27, 2011) were not included in the

computation of diluted earnings per share.

5. BUSINESS COMBINATIONS

On April 22, 2013, the Company acquired substantially all of the assets and assumed certain liabilities of
the North American distribution business (‘‘BDNA’’) of Barnes Group Inc. (‘‘Barnes’’), pursuant to the terms
of the Asset Purchase Agreement, dated February 22, 2013, between the Company and Barnes. In connection
with the acquisition, the total cash consideration the Company paid to Barnes was $547,335 which is net of a
post-closing working capital adjustment in the amount of $1,434 that was received by the Company in
September 2013. The acquisition was funded by borrowings under the Company’s new unsecured credit
facility (described in Note 10 below), which was closed simultaneously with the acquisition, and the
remaining portion of the purchase price was funded from available cash reserves.

50

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

5. BUSINESS COMBINATIONS − (continued)

BDNA is a leading distributor of fasteners and other high margin, low cost consumables with a broad
distribution footprint throughout the U.S. and Canada. BDNA has a strong presence with customers across
manufacturing, government, transportation and natural resources end-markets. BDNA specializes in lowering
the total cost of their customers’ inventory management through storeroom organization and vendor managed
inventory. With this acquisition, the Company adds a highly complementary provider of fasteners and other
high margin consumable products and services (often referred to as ‘‘Class C’’ items) with an experienced
ﬁeld sales force and Vendor Managed Inventory solution (‘‘VMI’’). With the integration of the two businesses,
the Company will have the opportunity to bring its maintenance, repair and operations (‘‘MRO’’) offering to
BDNA’s customers, and BDNA’s Class C offering and VMI system to the Company’s customers. In addition,
the acquisition extends the Company’s presence into Canada and in new end markets such as mining,
transportation and oil and gas.

The acquisition of BDNA was accounted for as a business purchase pursuant to ASC Topic 805,

‘‘Business Combinations’’ (‘‘ASC 805’’). Non-recurring transaction and integration costs totaling $11,590 are
included in operating expenses of the Company’s consolidated statement of income for the ﬁscal year ended
August 31, 2013. As required by ASC 805-20, the Company allocated the purchase price to assets and
liabilities based on their estimated fair value at the acquisition date.

The following table summarizes the amounts of identiﬁed assets acquired and liabilities assumed based

on the estimated fair value at the acquisition date:

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Assets Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 49,378
36,407
3,161
117,400
342,000
19,165
98
$567,609
19,611
663
20,274
$547,335

Acquired intangible assets with a fair value of $117,400 consisted of customer relationships of $107,000 with

a useful life of 18 years, an indeﬁnite lived tradename of $7,500, and a tradename of $2,900 with a useful life of
5 years. The goodwill amount of $342,000 represents the excess of the purchase price over the fair value of the
net tangible and intangible assets acquired. The primary items that generated the goodwill were the premiums paid
by the Company for the right to control the business acquired and the expected synergies from the result of
adding a highly complementary provider of fasteners and other high margin consumable products and services
with an experienced ﬁeld sales force and VMI solution. In addition, the acquisition extends the Company’s
presence into Canada and other new end markets. This goodwill will not be amortized and will be tested for
impairment at least annually. All of the goodwill recognized as a result of the BDNA acquisition is expected to be
deductible for tax purposes and will be amortized for tax purposes over 15 years.

The amount of revenue and earnings from BDNA, exclusive of non-recurring costs, included in the
condensed consolidated statements of income for the ﬁscal year ended August 31, 2013 is $108,376 and
$4,474, respectively.

The following unaudited pro forma ﬁnancial information for the ﬁscal year ended August 31, 2013, and

September 1, 2012 represent the combined results of the Company’s operations as if the acquisition of BDNA

51

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

5. BUSINESS COMBINATIONS − (continued)

had occurred on August 28, 2011. The unaudited pro forma ﬁnancial information does not necessarily reﬂect
the results of operations that would have occurred had the Company constituted a single entity during such
periods presented.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Sales
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

For the Fiscal Year Ended

August 31,
2013
$2,642,720
242,966

September 1,
2012
$2,664,086
260,895

Net income per share Two-class method:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

3.85

3.83

$

$

4.14

4.12

Included in the unaudited pro forma net income are adjustments for acquisition-related expenses directly
attributable to the acquisition, which are not expected to have a continuing impact on the combined results of
the Company’s operations, amortization of identiﬁable intangible assets recognized from the BDNA
acquisition, interest expense incurred as a result of the New Credit Facility, increased cost of sales related to
the step-up of inventory and changes to income tax expense as a result of the combined results. None of the
pro forma adjustments are considered material in relation to the overall unaudited pro forma ﬁnancial
information presented.

On January 31, 2012, the Company acquired certain assets and assumed certain liabilities of ATS
Industrial Supply, Inc. (“ATS Industrial”), which is a leading metalworking and MRO industrial distributor in
the Rocky Mountain region. The cash purchase price for the acquisition was $32,204. On July 18, 2011, the
Company also acquired 100% of the shares of American Tool Supply, Inc. (“ATS”) and its affiliate, American
Specialty Grinding Co., Inc. (“ASG”), which specializes in custom made tools and re-sharpening services. The
total purchase consideration, net of approximately $942 of cash acquired, aggregating $28,948, related to the
Company’s business combinations completed during ﬁscal 2011. The Company recorded a post-closing
working capital adjustment in the amount of $1,247, which was recorded to goodwill as of August 27, 2011
and was paid by the Company in October 2011. These acquisitions were accounted for as a business purchase
pursuant to ASC 805.

The results of operations for ATS Industrial, ATS, and ASG have been included in our consolidated

ﬁnancial statements from the date of acquisitions. The ﬁnancial results of these acquisitions are considered
immaterial for purposes of pro forma ﬁnancial disclosures and are not included in the table above.

6. RESTRUCTURING AND OTHER CHARGES

As a result of the BDNA acquisition, the Company expects to incur restructuring charges associated with
associate severance costs, stay bonuses and the impairment of long-lived assets due to the closure of facilities.
The aggregated liabilities included in ‘‘Accrued liabilities’’ in the consolidated balance sheet relating to the
restructuring activities as of August 31, 2013 and activity for the ﬁscal year ended August 31, 2013 consisted
of the following:

. . . . . . . . . . . . . . . . . . . . . . .
Charged to operating expenses
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued restructuring balance, August 31, 2013 . . . . . . . . . . . .

Workforce
Reductions
$3,079
619
$2,460

Facility
Closings
—

$—

Total
$3,079
619
$2,460

Non-recurring transaction, integration costs and restructuring charges associated with the BDNA

acquisition are estimated to be between approximately $15,000 and $20,000 in ﬁscal year 2014.

52

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

7. PROPERTY, PLANT AND EQUIPMENT

The following is a summary of property, plant and equipment and the estimated useful lives used in the

computation of depreciation and amortization:

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building and improvements . . . . . . . . . . . . . . . .

Leasehold improvements . . . . . . . . . . . . . . . . . .
Furniture, ﬁxtures and equipment. . . . . . . . . . . . .
Automobiles . . . . . . . . . . . . . . . . . . . . . . . . .
Computer systems, equipment and software . . . . . .

Less: accumulated depreciation and amortization . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number of Years
—
40
The lesser of
lease term or 31.5
3 − 20
5
3 − 5

August 31,
2013
$ 20,471
123,675

4,971
131,981
435
225,788
507,321
255,785
$251,536

September 1,
2012
$ 16,039
81,266

3,993
120,724
447
174,349
396,818
222,221
$174,597

The amount of capitalized interest, net of accumulated amortization, included in property, plant and

equipment was $931 and $973 at August 31, 2013 and September 1, 2012, respectively.

Depreciation expense was $36,169, $24,676 and $21,470 for the ﬁscal years ended August 31, 2013,

September 1, 2012, and August 27, 2011, respectively.

8. INCOME TAXES

The provision for income taxes is comprised of the following:

August 31,
2013

For the Fiscal Years Ended
September 1,
2012

August 27,
2011

Current:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$119,470
18,629
138,099

7,403
(68)
7,335
$145,434

$128,640
18,421
147,061

4,797
1,253
6,050
$153,111

$ 99,034
15,986
115,020

15,385
139
15,524
$130,544

Signiﬁcant components of deferred tax assets and liabilities are as follows:

Deferred tax liabilities:

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred catalog costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred tax assets:

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net Deferred Tax Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

August 31,
2013

September 1,
2012

$(46,339)
(1,730)
(44,751)
(92,820)

2,254
7,345
1,509
10,888
9,983
5,792
37,771
$(55,049)

$(41,812)
(1,779)
(35,841)
(79,432)

2,030
5,703
1,272
9,981
7,027
5,705
31,718
$(47,714)

53

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

8. INCOME TAXES − (continued)

Reconciliation of the statutory Federal income tax rate to the Company’s effective tax rate is as follows:

U.S. Federal statutory rate . . . . . . . . . . . . . . . . . . .
State income taxes, net of Federal beneﬁt . . . . . . . . .
Other, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax rate . . . . . . . . . . . . . . . . . . . .

August 31,
2013
35.0%
3.0
(0.1)
37.9%

For the Fiscal Years Ended
September 1,
2012
35.0%
2.7
(0.5)
37.2%

August 27,
2011
35.0%
2.8
(0.4)
37.4%

The aggregate changes in the balance of gross unrecognized tax beneﬁts during ﬁscal 2013 and 2012

were as follows:

Beginning Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .
Additions for tax positions relating to current year
. . . . . . . . . . . . . .
Additions for tax positions relating to prior years
Reductions for tax positions relating to prior years
. . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapse of statute of limitations
Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

August 31,
2013
$ 7,811
2,516
—
(936)
(120)
(1,079)
$ 8,192

September 1,
2012
$11,393
2,294
74
(1,540)
(1,144)
(3,266)
$ 7,811

Included in the balance of unrecognized tax beneﬁts at August 31, 2013 is $976 related to tax positions

for which it is reasonably possible that the total amounts could signiﬁcantly change during the next
twelve months. This amount represents a decrease in unrecognized tax beneﬁts comprised primarily of items
related to expiring statutes in state jurisdictions.

The Company recognizes interest expense and penalties in the provision for income taxes. The ﬁscal

2013 and 2012 provisions include interest and penalties of $92 and $79 respectively. The Company has
accrued $159 and $253 for interest and penalties as of August 31, 2013 and September 1, 2012, respectively.

With limited exceptions, the Company is no longer subject to Federal income tax examinations and state

jurisdictions through ﬁscal 2009.

9. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

Accrued payroll, bonus and fringe
. . . . . . . . . . . . . . . . . . . . . . . .
Accrued advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued sales, property and income taxes
. . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued other
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total accrued liabilities

August 31,
2013
$36,119
3,424
9,513
36,703
$85,759

September 1,
2012
$38,644
3,168
10,759
20,297
$72,868

54

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

10. DEBT AND CAPITAL LEASE OBLIGATIONS

Credit Facility

On April 22, 2013, in connection with the acquisition of BDNA, the Company entered into a new
$650,000 credit facility (the ‘‘New Credit Facility’’). The New Credit Facility, which matures on April 22,
2018, provides for a ﬁve-year unsecured revolving loan facility in the aggregate amount of $400,000 and a
ﬁve-year unsecured term loan facility in the aggregate amount of $250,000. The New Credit Facility replaced
the Company’s $200,000 credit facility (the ‘‘Former Credit Facility’’), dated June 8, 2011.

The New Credit Facility also permits the Company, at its request, and upon the satisfaction of certain

conditions, to add one or more incremental term loan facilities and/or increase the revolving loan
commitments in an aggregate amount not to exceed $200,000. Subject to certain limitations, each such
incremental term loan facility or revolving commitment increase will be on terms as agreed to by the
Company, the Administrative Agent and the lenders providing such ﬁnancing.

Borrowings under the New Credit Facility bear interest, at the Company’s option, either at (i) the LIBOR

(London Interbank Offered Rate) rate plus the applicable margin for LIBOR loans ranging from 1.00% to
1.375%, based on the Company’s consolidated leverage ratio; or (ii) the greatest of (a) the Administrative
Agent’s prime rate in effect on such day, (b) the federal funds effective rate in effect on such day, plus 0.50%
and (c) the LIBOR rate that would be calculated as of such day in respect of a proposed LIBOR loan with a
one-month interest period, plus 1.00%, plus, in the case of each of clauses (a) through (c), an applicable
margin ranging from 0.00% to 0.375%, based on the Company’s consolidated leverage ratio. The Company is
required to pay a quarterly undrawn fee ranging from 0.10% to 0.20% per annum on the unutilized portion of
the New Credit Facility based on the Company’s consolidated leverage ratio. The Company is also required to
pay quarterly letter of credit usage fees ranging between 1.00% to 1.375% (based on the Company’s
consolidated leverage ratio) on the amount of the daily average outstanding letters of credit, and a quarterly
fronting fee of 0.125% per annum on the undrawn and unexpired amount of each letter of credit. The
applicable borrowing rate for the Company for any borrowings outstanding under the New Credit Facility at
August 31, 2013 was 1.19%, which represents LIBOR plus 1.0%. Based on the interest period the Company
selects, interest may be payable every one, two, three or six months. Interest is reset at the end of each
interest period. The Company currently elects to have loans under the New Credit Facility bear interest based
on LIBOR with one-month interest periods.

The New Credit Facility contains customary restrictive covenants which are subject to a number of

signiﬁcant exceptions and limitations. The New Credit Facility also requires that the Company maintain a
maximum consolidated leverage ratio of total indebtedness to EBITDA (earnings before interest expense,
taxes, depreciation and amortization) of no more than 3.00 to 1.00, and a minimum consolidated interest
coverage ratio of EBITDA to total interest expense of at least 3.00 to 1.00, during the term of the New Credit
Facility. Borrowings under the New Credit Facility are guaranteed by certain of the Company’s subsidiaries.

The Company ﬁnanced $370,000 of the BDNA purchase price with the proceeds of the unsecured term

loan facility and a portion of the unsecured revolving loan facility. The remaining balance of the revolving
loan facility is available for working capital purposes, if necessary. During the ﬁscal year ended August 31,
2013, the Company repaid $120,000 of the revolving loan facility, reducing the outstanding balance of the
revolver to $0.

As of August 31, 2013, there were $250,000 of borrowings outstanding under the term loan facility of

the New Credit Facility and none outstanding under the revolving credit facility, of which $12,500 represents
current maturities. As of September 1, 2012, no borrowings were outstanding under the Former Credit Facility.
At each of those dates, the Company was in compliance with the operating and ﬁnancial covenants of the
New Credit Facility and the Former Credit Facility.

55

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

10. DEBT AND CAPITAL LEASE OBLIGATIONS − (continued)

Maturities of the New Credit Facility as of August 31, 2013 are as follows:

Fiscal Year
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total

Maturities of
New Credit Facility
$ 12,500
25,000
25,000
50,000
137,500
$250,000

Capital Lease and Financing Obligations

From time to time, the Company enters into capital leases and ﬁnancing arrangements to purchase certain

equipment. The equipment acquired from these vendors is paid over a speciﬁed period of time based on the
terms agreed upon. During the ﬁscal year ended August 31, 2013, the Company entered into various capital
leases and ﬁnancing obligations for certain information technology equipment totaling $1,854. In connection
with the construction of the Company’s new customer fulﬁllment center in Columbus, Ohio, the Company
entered into an arrangement with the Columbus-Franklin County Finance Authority (“Finance Authority”)
which provides savings on state and local sales taxes imposed on construction materials to entities that ﬁnance
the transactions through them. This arrangement consists of the Finance Authority issuing taxable bonds to
ﬁnance the structure and site improvements of the Company’s customer fulﬁllment center. The Finance
Authority holds the title to the building and entered into a long-term lease with the Company. The lease has a
20-year term with a prepayment option without penalty between 7 and 20 years. At the end of the lease term,
the building’s title is transferred to the Company for a nominal amount when the principal of and interest on
the bonds have been fully paid. The lease has been classiﬁed as a capital lease in accordance with ASC Topic
840. At August 31, 2013, the capital lease obligation was approximately $2,000.

During the ﬁscal year ended September 1, 2012, the Company entered into various capital leases and

ﬁnancing obligations for certain information technology equipment totaling $4,582.

The amount due under all capital leases and ﬁnancing arrangements at August 31, 2013 was

approximately $5,750, of which $1,684 represents current maturities. The net book value of the property and
equipment acquired under these capital leases and ﬁnancing agreements at August 31, 2013 was approximately
$5,594. Amortization expense of property and equipment acquired under these capital leases and ﬁnancing
arrangements was approximately $176 for the ﬁscal year ended 2013.

At August 31, 2013, approximate future minimum payments under capital leases and ﬁnancing

arrangements are as follows:

Fiscal Year
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less: amount representing interest . . . . . . . . . . . . . . . . . . . . . . . . . .
Present value of minimum lease payments. . . . . . . . . . . . . . . . . . . . .
Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long term capital leases and ﬁnancing arrangements. . . . . . . . . . . . . .

Payments under capital leases
and ﬁnancing arrangements
$1,723
1,660
426
—
$3,809

59
$3,750
1,684
$2,066

56

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

11. SHAREHOLDERS’ EQUITY

Treasury Stock Purchases

During ﬁscal 1999, the Board of Directors established the MSC Stock Repurchase Plan (the ‘‘Repurchase

Plan’’). On October 21, 2011, the Board of Directors reaffirmed and replenished the Repurchase Plan so that
the total number of shares of Class A common stock authorized for future repurchase was 5,000 shares. As of
August 31, 2013, the maximum number of shares that may yet be repurchased under the Repurchase Plan was
4,384 shares. The Repurchase Plan allows the Company to repurchase shares at any time and in any
increments it deems appropriate in accordance with Rule 10b-18 under the Securities Exchange Act of 1934,
as amended. During ﬁscal 2013 and ﬁscal 2012, the Company repurchased 52 shares and 671 shares,
respectively, of its Class A common stock for $3,773 and $48,098, respectively. The Company accounts for
treasury stock under the cost method, using the ﬁrst-in, ﬁrst-out ﬂow assumption, and includes treasury stock
as a component of stockholders’ equity in the accompanying consolidated ﬁnancial statements.

The Company reissued approximately 53 and 52 shares of treasury stock during ﬁscal 2013 and ﬁscal

2012, respectively, to fund the Associate Stock Purchase Plan (See Note 12).

Common Stock

Each holder of the Company’s Class A common stock is entitled to one vote for each share held of
record on the applicable record date on all matters presented to a vote of shareholders, including the election
of directors. The holders of Class B common stock are entitled to ten votes per share on the applicable record
date and are entitled to vote, together with the holders of the Class A common stock, on all matters which are
subject to shareholder approval. Holders of Class A common stock and Class B common stock have no
cumulative voting rights or preemptive rights to purchase or subscribe for any stock or other securities and
there are no redemption or sinking fund provisions with respect to such stock.

The holders of the Company’s Class B common stock have the right to convert their shares of Class B
common stock into shares of Class A common stock at their election and on a one-to-one basis, and all shares
of Class B common stock convert into shares of Class A common stock on a one to-one basis upon the sale or
transfer of such shares of Class B common stock to any person who is not a member of the Jacobson or
Gershwind families or any trust not established principally for members of the Jacobson or Gershwind
families or to any person who is not an executor, administrator or personal representative of an estate of a
member of the Jacobson or Gershwind families.

Preferred Stock

The Company has authorized 5,000 shares of preferred stock. The Company’s Board of Directors has the

authority to issue the shares of preferred stock. Shares of preferred stock may have priority over the
Company’s Class A common stock and Class B common stock with respect to dividend or liquidation rights,
or both. As of August 31, 2013, there were no shares of preferred stock issued or outstanding.

Cash Dividend

On July 10, 2003, the Board of Directors instituted a policy of regular quarterly cash dividends to

shareholders. This policy is reviewed regularly by the Board of Directors.

On October 24, 2013, the Board of Directors declared a quarterly cash dividend of $0.33 per share
payable on November 20, 2013 to shareholders of record at the close of business on November 6, 2013. The
dividend will result in a payout of approximately $20,920, based on the number of shares outstanding at
October 24, 2013.

57

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

12. ASSOCIATE BENEFIT PLANS

Stock Compensation Plans

2005 Omnibus Incentive Plan

The Company’s 2005 Omnibus Incentive Plan, which is shareholder-approved and scheduled to terminate

on January 3, 2016, was established to grant stock options, restricted stock, performance shares and other
equity and performance-based cash compensation awards to its associates for which 6,200 shares of common
stock to be issued under the Plan have been registered under the Securities Act of 1933, as amended. The
Company believes that such awards serve to align the interests of its associates with those of its shareholders.

Stock Options

A summary of the status of the Company’s stock options at August 31, 2013, September 1, 2012 and
August 27, 2011 and changes during the ﬁscal years then ended is presented in the table and narrative below:

Outstanding − beginning of year . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Cancelled/forfeited . . . . . . . . . . . . . . . . .
Outstanding − end of year. . . . . . . . . . . . . .
Exercisable − end of year . . . . . . . . . . . . . .
Weighted average fair value of options

2013

2012

2011

Weighted
Average
Exercise
Price
$49.79
69.52
42.97
62.43
$58.30
$48.78

Weighted
Average
Exercise
Price
$44.17
66.69
41.65
50.39
$49.79
$42.68

Weighted
Average
Exercise
Price
$38.76
54.67
35.56
14.26
$44.17
$39.46

Shares
2,394
364
(1,060)
(1)
1,697
584

Shares
1,697
308
(538)
(90)
1,377
505

Shares
1,377
360
(504)
(9)
1,224
385

granted . . . . . . . . . . . . . . . . . . . . . . . . .

$15.33

$17.67

$ 14.48

The total intrinsic value of options exercised during the ﬁscal years ended August 31, 2013, September 1,

2012 and August 27, 2011 was $16,402, $16,185, and $28,520, respectively. As of August 31, 2013, the total
intrinsic value of options exercisable was $10,478 and the total intrinsic value of options outstanding was
$21,658. The unrecognized share-based compensation cost related to stock option expense at August 31, 2013
was $8,028 and will be recognized over a weighted average of 1.7 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option

pricing model with the following assumptions:

Expected life (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2013
3.8
0.55%
32.9%
1.70%

2012
4.8
1.0%
35.2%
1.70%

2011
4.8
1.1%
35.1%
1.70%

The risk-free interest rate represents the United States Treasury Bond constant maturity yield

approximating the expected option life of stock options granted during the period. The expected option life
represents the period of time that the stock options granted during the period are expected to be outstanding,
based on the mid-point between the weighted time-to-vesting and the contractual expiration date of the option.
The expected volatility is based on the historical market price volatility of the Company’s common stock for
the expected term of the options.

58

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

12. ASSOCIATE BENEFIT PLANS − (continued)

The following table summarizes information about stock options outstanding and exercisable at

August 31, 2013:

Number of
Options
Outstanding
at August 31,
2013
87
222
281
634
1,224

Weighted
Average
Remaining
Contractual
Life
2.0
3.0
3.7
5.7
4.5

Weighted
Average
Exercise
Price
$37.08
43.80
53.82
68.28
$58.30

Number of
Options
Exercisable
at August 31,
2013
87
110
127
61
385

Weighted
Average
Remaining
Contractual
Life
2.0
2.8
3.2
5.1
3.1

Weighted
Average
Exercise
Price
$37.08
43.43
52.76
66.69
$48.78

Intrinsic
Value
$ 3,373
7,163
6,226
4,896
$21,658

Intrinsic
Value
$ 3,373
3,587
2,947
571
$10,478

Range of Exercise Prices
$23.41 − $38.07 . . . . . . . . . .
38.08 − 44.17 . . . . . . . . . . .
44.18 − 65.76 . . . . . . . . . . .
65.77 − 73.71 . . . . . . . . . . .

Restricted Stock Awards

A summary of the activity of the nonvested restricted stock awards granted under the 2005 Omnibus

Incentive Plan for the ﬁscal year ended August 31, 2013 is as follows:

Nonvested at September 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited/Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at August 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted
Average Grant
Date Fair
Value
$52.37
70.37
45.23
58.90
$59.47

Shares
535
141
(159)
(12)
505

The fair value of shares vested during the ﬁscal year ended August 31, 2013 and September 1, 2012 was

$7,175 and $6,804, respectively.

The unrecognized compensation cost related to the nonvested restricted stock awards at August 31, 2013

is $16,188 and will be recognized over a weighted-average period of 2.1 years.

Restricted Stock Units

A summary of the Company’s non-vested restricted stock unit award activity including dividend

equivalent units for the ﬁscal year ended August 31, 2013 is as follows:

Non-vested restricted stock unit awards at

September 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled/forfeited . . . . . . . . . . . . . . . . . . . . . . . .

Non-vested restricted stock unit awards at

August 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . .

2013

2012

Weighted
Average
Grant Date
Fair Value

$54.90
76.20
—
—

$55.32

Shares

189
3
—
—

192

Weighted
Average
Grant Date
Fair Value

$54.68
70.78
—
—

$54.90

Shares

192
4
—
—

196

The unrecognized compensation cost related to the RSUs at August 31, 2013 was $3,956 and is expected

to be recognized over a period of 2.2 years.

59

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

12. ASSOCIATE BENEFIT PLANS − (continued)

Associate Stock Purchase Plan

The Company has established a qualiﬁed Associate Stock Purchase Plan, the terms of which allow for
qualiﬁed associates (as deﬁned in the Associate Stock Purchase Plan) to participate in the purchase of up to a
maximum of 5 shares of the Company’s Class A common stock at a price equal to 90% of the closing price at
the end of each stock purchase period. On January 4, 2005, shareholders of the Company approved a
300 share increase to the Associate Stock Purchase Plan. On January 7, 2009, the shareholders of the
Company approved an increase to the authorized but unissued shares of the Class A common stock of the
Company reserved for sale under the Associate Stock Purchase Plan from 800 to 1,150 shares. As of
August 31, 2013, approximately 160 shares remain reserved for issuance under this plan. Associates purchased
approximately 53 and 52 shares of common stock during ﬁscal 2013 and 2012 at an average per share price
of $70.55 and $64.71, respectively.

Savings Plan

The Company maintains a deﬁned contribution plan with both a proﬁt sharing feature and a 401(k)
feature which covers all associates who have completed at least one month of service with the Company. For
ﬁscal 2013, 2012, and 2011, the Company contributed $5,243, $4,738 and $4,036, respectively, to the plan.
The Company contributions are discretionary.

13. COMMITMENTS AND CONTINGENCIES

Leases

Certain of the operations of the Company are conducted on leased premises, one of which is leased from

entities affiliated with Mitchell Jacobson, the Company’s Chairman, and Marjorie Gershwind Fiverson,
Mr. Jacobson’s sister. In addition, Erik Gershwind, our President and Chief Executive Officer, served as an
officer and director of the affiliated real estate entity during ﬁscal 2013. The leases (most of which require the
Company to provide for the payment of real estate taxes, insurance and other operating costs) are for varying
periods, the longest extending to the year 2030. Some of the leased premises contain multiple renewal
provisions, exercisable at the Company’s option, as well as escalation clauses. In addition, the Company is
obligated under certain equipment and automobile operating leases, which expire on varying dates through
2018. At August 31, 2013, approximate minimum annual rentals on such leases are as follows:

Fiscal Year
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total

Total
(Including
Related Party
Commitments)
$22,762
17,365
13,250
8,587
4,207
31,511
$97,682

Related Party
Commitments
$ 2,296
2,314
2,350
2,353
2,372
29,673
$41,358

Total rental expense (exclusive of real estate taxes, insurance and other operating costs) for all operating

leases for ﬁscal 2013, 2012 and 2011 was approximately $13,243, $11,271 and $10,716, respectively,
including approximately $2,293, $2,258 and $2,247, respectively, paid to related parties.

In the opinion of the Company’s management, the lease with related parties is on terms which

approximate fair market value.

60

MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)

14. LEGAL PROCEEDINGS

There are various claims, lawsuits, and pending actions against the Company incidental to the operation

of its business. Although the outcome of these matters is currently not determinable, management does not
expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s
consolidated ﬁnancial position, results of operations, or liquidity.

15. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

The following table sets forth unaudited ﬁnancial data for each of the Company’s last eight ﬁscal

quarters.

Consolidated Income Statement Data:
.
.
.
.
.
.

.
.
Net sales .
Gross proﬁt .
.
Income from operations .
.
Net income .

.
.
.
.

.
.
.
.

.
.
.
.

.
.
.
.

.
.
.
.

.
.

.
.

.
.

.
.

.
.

.

.

.

.

.

.

Fiscal Year Ended August 31, 2013

Fiscal Year Ended September 1, 2012

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

(Unaudited)

. $577,491
265,089
.
102,352
.
63,187
.

$569,462
256,369
90,576
56,079

$636,923
289,513
100,246
62,354

$673,773
307,545
92,352
56,375

$545,703
252,133
96,824
59,837

$562,974
259,460
96,527
60,068

$611,970
279,583
110,859
70,211

$635,271
287,027
108,006
68,915

Net income per share:
.
Basic .
.
.
Diluted .

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

.
.

1.01
1.00

0.89
0.88

0.99
0.98

0.89
0.89

0.95
0.95

0.95
0.95

1.11
1.10

1.10
1.09

61

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s management, including the

Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness
of the Company’s disclosure controls and procedures (as deﬁned in Rule 13a-15(e) under the Exchange Act)
as of August 31, 2013. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer concluded that, as of August 31, 2013, such disclosure controls and procedures were effective in
ensuring that information required to be disclosed by the Company in reports that it ﬁles or submits under the
Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the
time periods speciﬁed in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and
communicated to our management, including our principal executive officer and principal ﬁnancial officer, as
appropriate to allow timely decisions regarding required disclosure. The scope of the Company’s assessment
of the effectiveness of its disclosure controls and procedures does not include any disclosure controls and
procedures of BDNA, which was acquired on April 22, 2013, that are also part of BDNA’s internal controls
over ﬁnancial reporting. This exclusion is in accordance with the SEC’s general guidance that a recently
acquired business may be omitted from the scope of the assessment in the year of acquisition. BDNA
accounted for approximately $552.8 million and $520.4 million of total and net assets, respectively (of which
$459.4 million represents goodwill and intangible assets included within the scope of the assessment), as of
August 31, 2013 and $108.4 million and $4.5 million of revenues and net income, respectively, for the year
then ended.

Management’s Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over ﬁnancial

reporting as deﬁned in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The
Company’s internal control over ﬁnancial reporting is designed to provide reasonable assurance regarding the
reliability of ﬁnancial reporting and the preparation of ﬁnancial statements for external purposes in accordance
with generally accepted accounting principles. The Company’s internal control over ﬁnancial reporting
includes those policies and procedures that:

(i)

(ii)

(iii)

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reﬂect the
transactions and dispositions of the Company’s assets;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of
ﬁnancial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the Company are being made only in accordance with authorizations of the
Company’s management and directors; and

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Company’s assets that could have a material effect on the ﬁnancial
statements.

Because of its inherent limitations, internal control over ﬁnancial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over ﬁnancial reporting as of

August 31, 2013. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework
(1992 Framework).

In the third quarter of ﬁscal year 2013, the Company completed its acquisition of BDNA, which
represented approximately $552.8 million and $520.4 million of total assets and net assets, respectively (of

62

which $459.4 million represents goodwill and intangible assets included within the scope of the assessment),
as of August 31, 2013 and $108.4 million and $4.5 million of revenues and net income respectively, for the
year then ended. As the acquisition occurred in the third quarter of ﬁscal year 2013, the scope of
management’s assessment of the effectiveness of internal control over ﬁnancial reporting does not include
BDNA. This exclusion is in accordance with the SEC’s general guidance that a recently acquired business
may be omitted from the scope of the assessment in the year of acquisition.

Based on this assessment, management determined that the Company (excluding BDNA as discussed

above) maintained effective internal control over ﬁnancial reporting as of August 31, 2013.

Attestation Report of the Independent Registered Public Accounting Firm

The effectiveness of the Company’s internal control over ﬁnancial reporting as of August 31, 2013 has

been audited by Ernst & Young LLP, an independent registered public accounting ﬁrm, as stated in their
report which appears in this Item under the heading ‘‘Report of Independent Registered Public Accounting
Firm.’’

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over ﬁnancial reporting that occurred during

the quarter ended August 31, 2013 that have materially affected, or are reasonably likely to materially affect,
its internal control over ﬁnancial reporting.

63

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of MSC Industrial Direct Co., Inc.

We have audited MSC Industrial Direct Co., Inc. and Subsidiaries’ (the “Company”) internal control over ﬁnancial
reporting as of August 31, 2013, based on criteria established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO
criteria). The Company’s management is responsible for maintaining effective internal control over ﬁnancial
reporting, and for its assessment of the effectiveness of internal control over ﬁnancial reporting included in the
accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over ﬁnancial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over ﬁnancial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over ﬁnancial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company’s internal control over ﬁnancial reporting is a process designed to provide reasonable assurance
regarding the reliability of ﬁnancial reporting and the preparation of ﬁnancial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over ﬁnancial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reﬂect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of ﬁnancial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the ﬁnancial statements.

Because of its inherent limitations, internal control over ﬁnancial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

As indicated in the accompanying Management’s Annual Report on Internal Control over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over ﬁnancial reporting did not
include the internal controls of Barnes Distribution North America (“BDNA”), which is included in the 2013
consolidated ﬁnancial statements of the Company and constituted approximately $552.8 million and $520.4 million of
total and net assets, respectively (of which $459.4 million represents goodwill and intangible assets included within the
scope of the assessment), as of August 31, 2013 and $108.4 million and $4.5 million of revenues and net income,
respectively, for the year then ended. Our audit of internal control over ﬁnancial reporting of the Company also did not
include an evaluation of the internal control over ﬁnancial reporting of BDNA.

In our opinion, the Company maintained, in all material respects, effective internal control over ﬁnancial reporting
as of August 31, 2013, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of the Company as of August 31, 2013 and September 1, 2012
and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash ﬂows for
each of the three ﬁscal years in the period ended August 31, 2013 of the Company and our report dated October
30, 2013 expressed an unqualiﬁed opinion thereon.

/s/ Ernst & Young LLP

Jericho, New York
October 30, 2013

64

ITEM 9B.

OTHER INFORMATION.

None.

PART III.

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Information called for by Item 10 is set forth under the headings ‘‘Election of Directors’’ and ‘‘Corporate

Governance’’ in the Company’s Proxy Statement for the annual meeting of shareholders to be held in
January 2014, or the 2013 Proxy Statement, which is incorporated herein by this reference.

ITEM 11.

EXECUTIVE COMPENSATION.

Information called for by Item 11 is set forth under the headings ‘‘Executive Compensation’’, ‘‘Corporate
Governance — Compensation Committee.’’ ‘‘Compensation Committee Report’’ and ‘‘Director Compensation’’
in the 2013 Proxy Statement, which is incorporated herein by this reference.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Information called for by Item 12 is set forth under the headings ‘‘Security Ownership of Certain
Beneﬁcial Owners and Management’’ and ‘‘Equity Compensation Plan Information’’ in the 2013 Proxy
Statement, which is incorporated herein by this reference.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.

Information called for by Item 13 is set forth under the heading ‘‘Certain Relationships and Related
Person Transactions’’ and ‘‘Corporate Governance’’ in the 2013 Proxy Statement, which is incorporated herein
by this reference.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Information called for by Item 14 is set forth under the heading ‘‘Ratiﬁcation of Appointment of
Independent Registered Public Accounting Firm’’ in the 2013 Proxy Statement, which is incorporated herein
by this reference.

65

PART IV.

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)(1) Index to Financial Statements

Financial statements ﬁled as a part of this report are listed on the ‘‘Index to Consolidated Financial

Statements’’ at page 36 herein.

(a)(2) Financial Statement Schedules

For the three ﬁscal years ended August 31, 2013.

Schedule II — Valuation and Qualifying Accounts

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page
S-1

All other schedules have been omitted because the information is not applicable or is presented in the

Consolidated Financial Statements or Notes thereto.

(a)(3) Exhibits

Exhibits are ﬁled with this report or incorporated by reference to the Exhibit Index immediately

preceding the exhibits attached to this Annual Report on Form 10-K.

66

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the

Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

MSC INDUSTRIAL DIRECT CO., INC.

By: /s/ ERIK GERSHWIND

Erik Gershwind
Chief Executive Offıcer
(Principal Executive Offıcer)

Dated: October 30, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below

by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/s/ MITCHELL JACOBSON
Mitchell Jacobson

/s/ DAVID SANDLER
David Sandler

/s/ ERIK GERSHWIND
Erik Gershwind

/s/ JEFFREY KACZKA
Jeffrey Kaczka

/s/ JONATHAN BYRNES
Jonathan Byrnes

/s/ ROGER FRADIN
Roger Fradin

/s/ LOUISE GOESER
Louise Goeser

/s/ DENIS KELLY
Denis Kelly

/s/ PHILIP PELLER
Philip Peller

Chairman of the Board of Directors

October 30, 2013

Executive Vice Chairman of the Board of
Directors

October 30, 2013

President and Chief Executive Officer and
Director (Principal Executive Officer)

October 30, 2013

October 30, 2013

October 30, 2013

October 30, 2013

October 30, 2013

October 30, 2013

October 30, 2013

Executive Vice President and Chief
Financial Officer (Principal Financial
Officer and Principal Accounting Officer)

Director

Director

Director

Director

Director

67

[This page intentionally left blank.] 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

Description
Deducted from asset accounts:
For the ﬁscal year ended August 27, 2011

Balance at
Beginning of
Year

Charged to
Costs and
Expenses

Charged to
Other
Accounts

Deductions(2)

Balance at
End of Year

Allowance for doubtful accounts(1) . . . . . .

$5,489

$2,733

$—

$2,038

$6,184

Deducted from asset accounts:
For the ﬁscal year ended September 1, 2012

Allowance for doubtful accounts(1) . . . . . .

$6,184

$3,560

$—

$2,810

$6,934

Deducted from asset accounts:
For the ﬁscal year ended August 31, 2013

Allowance for doubtful accounts(1) . . . . . .

$6,934

$3,499

$—

$2,910

$7,523

Included in accounts receivable.

(1)
(2) Comprised of uncollected accounts charged against the allowance.

S-1

[This page intentionally left blank.] 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit No.
2.01

2.02

3.01
3.02

4.01
10.01

10.02

10.03

10.04

10.05

10.06

10.07

10.08

10.09

EXHIBIT INDEX

Description

Stock Purchase Agreement by and among JLK Direct Distribution, Inc., Kennametal Inc.,
MSC Industrial Direct Co., Inc. and MSC Acquisition Corp. VI dated as of March 15, 2006
(incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K ﬁled
with the Commission on March 16, 2006) (SEC File No. 001-14130).
Asset Purchase Agreement, dated February 22, 2013, between MSC Industrial Direct Co., Inc.
and Barnes Group Inc. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current
Report on Form 8-K ﬁled with the SEC on February 26, 2013) (SEC File No. 001-14130).
Certiﬁcate of Incorporation of the Registrant.*
Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.1 of the
Registrant’s Current Report on Form 8-K, ﬁled with the Commission on October 26, 2012)
(SEC File No. 001-14130).
Specimen Class A Common Stock Certiﬁcate.*
MSC Industrial Direct Co., Inc. 2001 Stock Option Plan, as amended through December 20,
2012 (incorporated by reference to Exhibit 10.03 to the Registrant’s Quarterly Report on
Form 10-Q ﬁled with the Commission on January 10, 2013) (SEC File No. 001-14130).†
Change in Control Agreement by and between the Registrant and Thomas Cox, dated as of
December 27, 2005 (incorporated by reference to Exhibit 10.6 to the Registrant’s
Quarterly Report on Form 10-Q ﬁled with the Commission on January 5, 2006) (SEC File
No. 001-14130).†
Change in Control Agreement by and between the Registrant and Erik David Gershwind, dated
as of December 27, 2005 (incorporated by reference to Exhibit 10.7 to the Registrant’s
Quarterly Report on Form 10-Q ﬁled with the Commission on January 5, 2006) (SEC File
No. 001-14130).†
Change in Control Agreement by and between the Registrant and Eileen McGuire, dated as
of December 27, 2005 (incorporated by reference to Exhibit 10.8 to the Registrant’s
Quarterly Report on Form 10-Q ﬁled with the Commission on January 5, 2006) (SEC File
No. 001-14130).†
Change in Control Agreement by and between the Registrant and Douglas E. Jones, dated as
of December 27, 2005 (incorporated by reference to Exhibit 10.9 to the Registrant’s
Quarterly Report on Form 10-Q ﬁled with the Commission on January 5, 2006) (SEC File
No. 001-14130).†
Change in Control Agreement by and between the Registrant and Charles Bonomo, dated as of
July 31, 2007 (incorporated by reference to Exhibit 10.36 to the Registrant’s Annual Report on
Form 10-K ﬁled with the Commission on October 31, 2007) (SEC File No. 001-14130).†
Agreement of Lease, dated as of July 13, 1989, by and between Mitchmar Atlanta Properties,
Inc. and Sid Tool Co., Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K ﬁled with the Commission on April 7, 2008) (SEC File No. 001-14130).
First Amendment to Lease, dated as of August 10, 1996, by and between Mitchmar Atlanta
Properties, Inc. and Sid Tool Co., Inc. (incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K ﬁled with the Commission on April 7, 2008) (SEC File
No. 001-14130).
Second Amendment to Lease, dated as of May 7, 2003, by and between Mitchmar Atlanta
Properties, Inc. and Sid Tool Co., Inc. (incorporated by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K ﬁled with the Commission on April 7, 2008) (SEC File
No. 001-14130).

II-1

Exhibit No.
10.10

10.11

10.12

10.13

10.14

10.15

10.16

10.17

10.18

10.19

10.20

10.21

Description

Third Amendment to Lease Agreement, dated as of November 11, 2003, by and between
Mitchmar Atlanta Properties, Inc. and Sid Tool Co., Inc. (incorporated by reference to
Exhibit 10.4 to the Registrant’s Current Report on Form 8-K ﬁled with the Commission on
April 7, 2008) (SEC File No. 001-14130).
Fourth Amendment of Lease Agreement, dated as of March 17, 2007, by and between Mitchmar
Atlanta Properties, Inc. and Sid Tool Co., Inc. (incorporated by reference to Exhibit 10.5 to the
Registrant’s Current Report on Form 8-K ﬁled with the Commission on April 7, 2008) (SEC File
No. 001-14130).
Fifth Amendment of Lease Agreement, dated as of March 25, 2008, by and between Mitchmar
Atlanta Properties, Inc. and Sid Tool Co., Inc. (incorporated by reference to Exhibit 10.6 to the
Registrant’s Current Report on Form 8-K ﬁled with the Commission on April 7, 2008) (SEC File
No. 001-14130).
Change in Control Agreement by and between the Registrant and Steve Armstrong, dated as of
October 16, 2008 (incorporated by reference to Exhibit 10.47 to the Registrant’s Annual Report
on Form 10-K ﬁled with the Commission on October 28, 2008) (SEC File No. 001-14130).†
Change in Control Agreement by and between the Registrant and Jeffrey Kaczka, dated
November 11, 2011 (incorporated by reference to Exhibit 10.01 to the Registrant’s Current
Report on Form 8-K ﬁled with the Commission on November 17, 2011) (SEC File
No. 001-14130).†
Change in Control Agreement by and between the Registrant and Christopher Davanzo, dated
November 11, 2011 (incorporated by reference to Exhibit 10.02 to the Registrant’s Quarterly
Report on Form 10-Q ﬁled with the Commission on January 5, 2012) (SEC File
No. 001-14130).†
Amendment to Change in Control Agreement by and between the Registrant and Thomas Cox,
dated December 17, 2007 (incorporated by reference to Exhibit 10.4 to the Registrant’s
Quarterly Report on Form 10-Q ﬁled with the Commission on January 8, 2009) (SEC File
No. 001-14130).†
Amendment to Change in Control Agreement by and between the Registrant and Erik David
Gershwind, dated December 17, 2007 (incorporated by reference to Exhibit 10.5 to the
Registrant’s Quarterly Report on Form 10-Q ﬁled with the Commission on January 8, 2009)
(SEC File No. 001-14130).†
Amendment to Change in Control Agreement by and between the Registrant and Eileen
McGuire, dated December 14, 2007 (incorporated by reference to Exhibit 10.6 to the Registrant’s
Quarterly Report on Form 10-Q ﬁled with the Commission on January 8, 2009) (SEC File
No. 001-14130).†
Amendment to Change in Control Agreement by and between the Registrant and Douglas E.
Jones, dated December 18, 2007 (incorporated by reference to Exhibit 10.7 to the Registrant’s
Quarterly Report on Form 10-Q ﬁled with the Commission on January 8, 2009) (SEC File
No. 001-14130).†
Amendment No. 1 to Change in Control Agreement by and between the Registrant and Jeffrey
Kaczka, dated December 22, 2011 (incorporated by reference to Exhibit 10.02 to the Registrant’s
Current Report on Form 8-K ﬁled with the Commission on December 28, 2011) (SEC File
No. 001-14130).†
Amendment No. 1 to Change in Control Agreement by and between the Registrant and Steve
Armstrong, dated December 22, 2011 (incorporated by reference to Exhibit 10.09 to the
Registrant’s Quarterly Report on Form 10-Q ﬁled with the Commission on January 5, 2012)
(SEC File No. 001-14130).†

II-2

Exhibit No.
10.22

10.23

10.24

10.25

10.26

10.27

10.28

10.29

10.30

10.31

10.32

10.33

10.34

Description
Amendment No. 1 to Change in Control Agreement by and between the Registrant and Charles
Bonomo, dated December 22, 2011 (incorporated by reference to Exhibit 10.10 to the
Registrant’s Quarterly Report on Form 10-Q ﬁled with the Commission on January 5, 2012)
(SEC File No. 001-14130).†
Amendment No. 1 to Change in Control Agreement by and between the Registrant and
Christopher Davanzo, dated December 22, 2011 (incorporated by reference to Exhibit 10.11 to
the Registrant’s Quarterly Report on Form 10-Q ﬁled with the Commission on January 5, 2012)
(SEC File No. 001-14130).†
Amendment No. 2 to Change in Control Agreement by and between the Registrant and Erik
Gershwind, dated December 22, 2011 (incorporated by reference to Exhibit 10.01 to the
Registrant’s Current Report on Form 8-K ﬁled with the Commission on December 28, 2011)
(SEC File No. 001-14130).†
Amendment No. 2 to Change in Control Agreement by and between the Registrant and Thomas
Cox, dated December 22, 2011 (incorporated by reference to Exhibit 10.03 to the Registrant’s
Current Report on Form 8-K ﬁled with the Commission on December 28, 2011) (SEC File
No. 001-14130).†
Amendment No. 2 to Change in Control Agreement by and between the Registrant and Eileen
McGuire, dated December 22, 2011 (incorporated by reference to Exhibit 10.07 to the
Registrant’s Quarterly Report on Form 10-Q ﬁled with the Commission on January 5, 2012)
(SEC File No. 001-14130).†
Amendment No. 2 to Change in Control Agreement by and between the Registrant and Douglas
Jones, dated December 22, 2011 (incorporated by reference to Exhibit 10.08 to the Registrant’s
Quarterly Report on Form 10-Q ﬁled with the Commission on January 5, 2012) (SEC File
No. 001-14130).†
Amendment No. 2 to Change in Control Agreement by and between the Registrant and Steve
Armstrong, dated November 29, 2012 (incorporated by reference to Exhibit 10.01 to the
Registrant’s Quarterly Report on Form 10-Q ﬁled with the Commission on January 10, 2013)
(SEC File No. 001-14130). †
MSC Industrial Direct Co., Inc. Amended and Restated Associate Stock Purchase Plan, as
amended and restated through December 20, 2012 (incorporated by reference to Exhibit 10.04 to
the Registrant’s Quarterly Report on Form 10-Q ﬁled with the Commission on January 10, 2013)
(SEC File No. 001-14130).†
Executive Incentive Compensation Recoupment Policy (incorporated by reference to Exhibit 10.3
to the Registrant’s Quarterly Report on Form 10-Q ﬁled with the Commission on January 7,
2010) (SEC File No. 001-14130).†
Restricted Stock Unit Agreement awarded to David Sandler, dated October 19, 2010
(incorporated by reference to Exhibit 10.01 to the Registrant’s Current Report on Form 8-K ﬁled
with the Commission on October 21, 2010) (SEC File No. 001-14130).†
Second Amended and Restated Agreement dated October 19, 2010 between the Registrant and
David Sandler (incorporated by reference to Exhibit 10.02 to the Registrant’s Current Report on
Form 8-K ﬁled with the Commission on October 21, 2010) (SEC File No. 001-14130).†
Summary of Outside Directors’ Compensation (incorporated by reference to Exhibit 10.03 to the
Registrant’s Quarterly Report on Form 10-Q ﬁled with the Commission on January 5, 2012)
(SEC File No. 001-14130).†
MSC Industrial Direct Co., Inc. 2005 Omnibus Incentive Plan, as amended through
December 20, 2012 (incorporated by reference to Exhibit 10.02 of the Registrant’s
Quarterly Report on Form 10-Q ﬁled with the Commission on January 10, 2013) (SEC File
No. 001-14130).

II-3

Exhibit No.
10.35

10.36

10.37

10.38

10.39

10.40

21.01
23.01
31.1

31.2

32.1

32.2

Description
Form of Non-Qualiﬁed Stock Option Agreement under the MSC Industrial Direct Co., Inc. 2005
Omnibus Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly
Report on Form 10-Q ﬁled with the Commission on April 7, 2011) (SEC File No. 001-14130).†
Form of Restricted Stock Award under the MSC Industrial Direct Co., Inc. 2005 Omnibus
Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on
Form 10-Q ﬁled with the Commission on April 7, 2011) (SEC File No. 001-14130).†
Jeffrey Kaczka Offer Letter, effective March 29, 2011 (incorporated by reference to Exhibit 10.01
to the Registrant’s Current Report on Form 8-K ﬁled with the Commission on March 30, 2011)
(SEC File No. 001-14130).†
MSC Industrial Direct Relocation Policy (incorporated by reference to Exhibit 10.02 to the
Registrant’s Current Report on Form 8-K ﬁled with the Commission on March 30, 2011) (SEC
File No. 001-14130).†
Relocation Reimbursement Agreement & Policy Acknowledgment (incorporated by reference to
Exhibit 10.03 to the Registrant’s Current Report on Form 8-K ﬁled with the Commission on
March 30, 2011) (SEC File No. 001-14130).†
Credit Agreement, dated as of April 22, 2013, by and among MSC Industrial Direct Co., Inc., the
several banks and other ﬁnancial institutions or entities from time to time parties thereto, and
JPMorgan Chase Bank, N.A., as administrative agent, (incorporated by reference to Exhibit 10.1
to the Registrant’s Current Report on Form 8-K ﬁled with the Commission on April 23, 2013)
(SEC File No. 001-14130).
List of Subsidiaries.**
Consent of Ernst & Young LLP.**
Chief Executive Officer’s Certiﬁcate, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.**
Chief Financial Officer’s Certiﬁcate, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.**
Certiﬁcation of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.***
Certiﬁcation of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.***
XBRL Instance Document.**

101.INS
101.SCH XBRL Taxonomy Extension Schema Document.**
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.**
101.DEF XBRL Taxonomy Extension Deﬁnition Linkbase Document.**
101.LAB XBRL Taxonomy Extension Label Linkbase Document.**
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.**

*

**
***
†

Filed as an Exhibit to the Registrant’s Registration Statement on Form S-1, Registration Statement
No. 33-98832, as amended.
Filed herewith.
Furnished herewith.
Management contract, compensatory plan or arrangement.

II-4

SUBSIDIARIES OF MSC INDUSTRIAL DIRECT CO., INC.

CORPORATION
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sid Tool Co., Inc.
Primeline International, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MSC Services Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Swiss Precision Instruments, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enco Manufacturing Co., Inc.
J&L America, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MSC Acquisition Corp VI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MSC Contract Management, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MSC Foreign Properties Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
American Specialty Grinding Co., Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MSC Acquisition Corp VII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mission Real Estate Acquisition Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply S DE RL DE CV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MSC Industrial Supply ULC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EXHIBIT 21.01

STATE OF
INCORPORATION
New York
New York
New York
California
New York
Michigan
New York
New York
Delaware
Massachusetts
New York
Delaware
Mexico
Canada

EXHIBIT 23.01

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements:

(1) Registration Statement (Form S-8 No. 333-48901), pertaining to the MSC Industrial Direct 401(k)

Plan;

(2) Registration Statement (Form S-8 No. 333-84124), pertaining to the 2001 Stock Option Plan;

(3) Registration Statement (Form S-8 No. 333-70293), pertaining to the Associate Stock Purchase Plan;

(4) Registration Statement (Form S-8 No. 333-130899), pertaining to the 2005 Omnibus Equity Plan;

(5) Registration Statement (Form S-8 No. 333-156850), pertaining to the MSC Industrial Direct Co.,

Inc. Amended and Restated Associate Stock Purchase Plan; and

(6) Registration Statement (Form S-8 No. 333-164362), pertaining to the 2005 Omnibus Equity Plan

of our reports dated October 30, 2013, with respect to the consolidated ﬁnancial statements and schedule of
MSC Industrial Direct Co., Inc. and Subsidiaries and the effectiveness of internal control over ﬁnancial
reporting of MSC Industrial Direct Co., Inc. and Subsidiaries, included in this Annual Report (Form 10-K) of
MSC Industrial Direct Co., Inc. for the year ended August 31, 2013.

/s/ Ernst & Young LLP

Jericho, New York
October 30, 2013

EXHIBIT 31.1

I, Erik Gershwind, certify that:

CERTIFICATIONS

1.

I have reviewed this Annual Report on Form 10-K of MSC Industrial Direct Co., Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the ﬁnancial statements, and other ﬁnancial information included in this report,

fairly present in all material respects the ﬁnancial condition, results of operations and cash ﬂows of the
registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as deﬁned in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over ﬁnancial reporting (as deﬁned in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

(b) Designed such internal control over ﬁnancial reporting, or caused such internal control over ﬁnancial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of ﬁnancial reporting and the preparation of ﬁnancial statements for external purposes in
accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any changes in the registrant’s internal control over ﬁnancial reporting that

occurred during the registrant’s most recent ﬁscal quarter (the registrant’s fourth ﬁscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over ﬁnancial reporting; and

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over ﬁnancial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):

(a) All signiﬁcant deﬁciencies and material weaknesses in the design or operation of internal control

over ﬁnancial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report ﬁnancial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a

signiﬁcant role in the registrant’s internal control over ﬁnancial reporting.

Date: October 30, 2013

/s/ ERIK GERSHWIND
Erik Gershwind
President and Chief Executive Offıcer
(Principal Executive Offıcer)

EXHIBIT 31.2

I, Jeffrey Kaczka, certify that:

CERTIFICATIONS

1.

I have reviewed this Annual Report on Form 10-K of MSC Industrial Direct Co., Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the ﬁnancial statements, and other ﬁnancial information included in this report,

fairly present in all material respects the ﬁnancial condition, results of operations and cash ﬂows of the
registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as deﬁned in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over ﬁnancial reporting (as deﬁned in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

(b) Designed such internal control over ﬁnancial reporting, or caused such internal control over ﬁnancial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of ﬁnancial reporting and the preparation of ﬁnancial statements for external purposes in
accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any changes in the registrant’s internal control over ﬁnancial reporting that

occurred during the registrant’s most recent ﬁscal quarter (the registrant’s fourth ﬁscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over ﬁnancial reporting; and

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over ﬁnancial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):

(a) All signiﬁcant deﬁciencies and material weaknesses in the design or operation of internal control

over ﬁnancial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report ﬁnancial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a

signiﬁcant role in the registrant’s internal control over ﬁnancial reporting.

Date: October 30, 2013

/s/ JEFFREY KACZKA
Jeffrey Kaczka
Executive Vice President and Chief Financial Offıcer
(Principal Financial Offıcer)

EXHIBIT 32.1

CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of MSC Industrial Direct Co., Inc. (the
‘‘Company’’) for the ﬁscal year ended August 31, 2013, as ﬁled with the Securities and Exchange
Commission on the date hereof (the ‘‘Report’’), I, Erik Gershwind, Chief Executive Officer of the Company,
certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

(2)

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and

the information contained in the Report fairly presents, in all material respects, the ﬁnancial
condition and results of operations of the Company.

Date: October 30, 2013

/s/ ERIK GERSHWIND
Erik Gershwind
President and Chief Executive Offıcer
(Principal Executive Offıcer)

A signed original of this written statement required by Section 906 has been provided to MSC Industrial

Direct Co., Inc. and will be retained by it and furnished to the Securities and Exchange Commission or its
staff upon request.

EXHIBIT 32.2

CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of MSC Industrial Direct Co., Inc. (the
‘‘Company’’) for the ﬁscal year ended August 31, 2013, as ﬁled with the Securities and Exchange
Commission on the date hereof (the ‘‘Report’’), I, Jeffrey Kaczka, Chief Financial Officer of the Company,
certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

(2)

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and

the information contained in the Report fairly presents, in all material respects, the ﬁnancial
condition and results of operations of the Company.

Date: October 30, 2013

/s/ JEFFREY KACZKA
Jeffrey Kaczka
Chief Financial Offıcer
(Principal Financial Offıcer)

A signed original of this written statement required by Section 906 has been provided to MSC Industrial

Direct Co., Inc. and will be retained by it and furnished to the Securities and Exchange Commission or its
staff upon request.

Dear Shareholders

2013 Corporate Information

T

his past year, industry consolidation continued and manufacturers of all sizes focused on  
reducing costs associated with maintenance, repair and operations (MRO) product purchases.  
With over $150 billion in MRO spending across thousands of distributors in the U.S., Canada  
and Mexico, manufacturers see a significant opportunity to tighten their MRO supply chains.

For MSC, this trend is creating tremendous opportunity to deliver 
MRO cost-saving solutions that the vast majority of other distributors 
simply do not have the ability to deliver. With one of the broadest 
MRO portfolios, advanced e-Commerce and sophisticated inventory 
management services and solutions, MSC stands well-positioned for 
share gain and profitable growth. 

In fiscal year 2013, which had 52 weeks versus 53 weeks in fiscal 
2012, MSC net sales increased 4.3% to $2.46 billion from $2.36 billion 
in fiscal 2012. Operating income for fiscal 2013 was $385.5 million, or 
15.7% of net sales, compared to $412.2 million, or 17.5% of net sales, 
in fiscal 2012. Net income for the year was $238.0 million, a decrease 
of 8.1% from net income of $259.0 million a year ago. Diluted earnings 
per share for fiscal 2013 were $3.75 compared to $4.09 a year ago, a 
decrease of 8.3%.

All of our fiscal 2013 income measures were impacted by 
investments in infrastructure and growth initiatives to build the 
foundation for future expansion. We also converted 137% of net income 
into operating cash flow and continued to pay an attractive and rising 
quarterly dividend. We will continue investing in our future and over time, 
we see the business achieving operating margins in the high-teens.
Overall, fiscal 2013 was a very difficult economic environment 
marked by declining metalworking spend and a moderate ISM metric. 
Our performance reflects our focus on doing what we do best: 
delivering the products, solutions and expertise customers need to 
keep their businesses thriving by reducing their costs, increasing 
productivity on their shop floors and accelerating their time to value. 
We continued to invest in our solutions and services, our customer 
relationships, and the technology and infrastructure essential to support 
growth and further enhance our reputation as a trusted partner to our 
customers’ businesses. As a result, we continued to gain share despite 
market conditions.

Inventory Management Solutions   As companies try to manage MRO 
costs, we offer inventory management solutions, including advanced 
vending, our patent-pending vendor managed inventory service, a 
customer managed inventory program, e-Procurement and our supply 
chain expertise. Customers who use our solutions are saving millions 
of dollars while streamlining their processes. In addition, the deepened 
relationships we develop through these engagements offer opportunities 
to capture more revenues from products these customers do not already 
buy from MSC. 

In April of 2013, we extended our inventory management solutions 

with the acquisition of Barnes Distribution North America (BDNA). 
This acquisition expanded our product offering in fasteners and other 
high gross margin consumable products that are most often serviced 
through vendor managed inventory. It also extends our business into 
new end markets, including natural resources and transportation, 
and our geographic reach into Canada. The integration of our two 
businesses is well under way and on track to deliver our goals. As our 
industry continues to consolidate, we will carefully consider additional 
opportunities to acquire companies that fit with our culture and expand 
our business into markets and offerings our customers want.

e-Commerce   We invested significantly in our digital properties in 
fiscal 2013 to make it easy for customers to find and buy what they 
need, and we are already seeing the results. Orders through our 
website and various electronic portals during the year represented 
44% of total company revenue (excluding BDNA), an increase of 3% 
from last year. Customers are increasing efficiency and transaction 

Note: Please see “Forward-Looking Statements” on page 1 of the 

accompanying Annual Report on Form 10-K.

accuracy by ordering online, and they are becoming more comfortable 
purchasing this way. We plan to continue offering the value-added online 
services that help customers streamline the ordering process, increase 
productivity and reduce costs.

Trusted Brands   We now offer more than 1 million product SKUs to 
our customers from more than 3,000 suppliers, including top brands 
such as Kennametal, 3M, Norton, Kimberly-Clark, SECO, OSG, Stanley 
Black & Decker, Parker Hannifin and Newell Rubbermaid, as well as an 
expanding line of our own exclusive brands. We will continue to offer 
the expertise and the products with the latest technology our customers 
need to be productive. We want to make it easy for our customers, many 
of whom are reducing their number of suppliers, to find and buy the 
brands they trust from MSC. 

Efficient, Scalable Infrastructure   To meet our future growth 
objectives, we also opened our second Customer Support Center in 
Davidson, N.C., this past summer on time and on budget. We are also on 
track to open a new Customer Fulfillment Center in 2014 in Columbus, 
Ohio. Both expansions incorporate the latest technology to keep 
processes streamlined and communications efficient. They also allow  
us to be nearer to our customers to better serve their growing needs.

Best Team in the Industry   One of our strongest assets continues to 
be our team of more than 6,000 associates who are constantly looking 
for ways to serve customers faster and better. This is translating into 
smarter uses of technology from our fulfillment centers to our front 
office. We are adopting systems to communicate and collaborate more 
effectively with each other as we continue to grow. This is critical to 
maintaining the MSC culture, which is founded on integrity, teamwork, 
respect for the individual, a passion for greatness and service to the 
community. Indeed, we continue to use our time, talent and resources  
to help others in the communities where we live and work. 

What’s Next   When I stepped into the role of CEO in January 2013,  
I knew I had big shoes to fill. I also knew I had an excellent foundation 
on which to keep building our business. As we move forward, our 
balance sheet and cash flow remain strong, our customers are loyal 
and our supplier relationships are solid. We will continue to invest in 
our infrastructure and growth initiatives in fiscal 2014 to strengthen 
our foundation to support the next phase of our growth and serve our 
customers even better. We have the talent and the strategy to grow to 
a $4 billion business over the next several years while in pursuit of our 
mission to be the best industrial distributor in the world as measured 
by our stakeholders. Our job now is to execute with determination and 
excellence to deliver on our goals and the potential of MSC.

Board Of Directors

Jonathan Byrnes*  
Roger Fradin*  
Erik Gershwind  
Louise Goeser*  
Mitchell Jacobson  
Denis Kelly*  
Philip Peller*  
David Sandler  

Senior Lecturer  
President and Chief Executive Officer 
President and Chief Executive Officer 
President and Chief Executive Officer 
Non-Executive Chairman of the Board   MSC Industrial Direct Co., Inc. 
Managing Partner  
Independent Director  
Executive Vice Chairman of the Board   MSC Industrial Direct Co., Inc.

Scura Paley LLC
Retired Partner, Arthur Andersen LLP

Massachusetts Institute of Technology
Automation & Control Solutions Division of Honeywell International Inc.
MSC Industrial Direct Co., Inc.
Grupo Siemens S.A. de C.V. (Siemens Mesoamérica)

*Member of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee

Executive Officers

David Sandler  
Erik Gershwind  
Jeffrey Kaczka  
Thomas Cox  
Douglas Jones  
Eileen McGuire  
Steve Armstrong  
Charles Bonomo  
Christopher Davanzo 

Executive Vice Chairman of the Board
President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Executive Vice President, Sales
Executive Vice President, Global Supply Chain Operations
Executive Vice President, Human Resources 
Senior Vice President, General Counsel and Corporate Secretary
Senior Vice President and Chief Information Officer
Vice President, Finance and Corporate Controller

Corporate Information

Annual Meeting
The 2014 Annual Meeting of Shareholders 
will be held at:  
Hilton Long Island/Huntington  
598 Broad Hollow Road 
Melville, NY 11747  
on Thursday, January 16, 2014 at 9 a.m.

Company Headquarters
MSC Industrial Direct Co., Inc.  
75 Maxess Road  
Melville, New York 11747  
(516) 812-2000

Investor Relations Contact
John Chironna  
MSC Industrial Direct Co., Inc.  
(704) 987-5231

Copies of our Annual Report on  
Form 10-K for the fiscal year ended 
August 31, 2013 are available without 
charge, upon request.

Independent Registered Public 
Accounting Firm
Ernst & Young LLP  
Jericho, New York

Legal Counsel
Curtis, Mallet-Prevost, Colt & Mosle LLP  
New York, New York

Registrar and Transfer Agent 
Computershare Trust Company, N.A.  
PO Box 43078
Providence, Rhode Island 02940-3078

Common Stock Listed
MSC Industrial Direct Co., Inc.’s  
Class A common stock is traded  
on the New York Stock Exchange  
under the symbol “MSM.”

Dividend Policy
The Company has instituted a policy 
of regular quarterly cash dividends to 
shareholders. Currently, the quarterly 
dividend rate is $0.33 per share,  
or $1.32 per share annually.

Thank you for your continued support.
Respectfully, 

Visit the Company’s website on the
Internet at www.mscdirect.com

Erik Gershwind 
President and Chief Executive Officer

MSC Industrial Direct Co., Inc.    |   75 Maxess Road    |   Melville, New York 11747    |   (516) 812-2000    |   www.mscdirect.com    |   NYSE listed: MSM