BUILDING
BETTER
2016 ANNUAL REPORT
BUILDING BETTER
With a 75-year history of driving innovation in metalworking and maintenance,
repair and operations (MRO) product distribution and services, MSC continues to
expand its role well beyond selling industrial supplies.
We help our customers drive greater productivity, profitability and growth with more than one million
products, inventory management and other supply chain solutions, and deep expertise across indus-
OPERATING INCOME (IN MILLIONS)
NET SALES (IN BILLIONS)
tries. Our experienced team of more than 6,000 associates is dedicated to working side by side with
3.00
our customers to help drive results for their businesses—from keeping operations running efficiently
400
today to continuously rethinking, retooling and optimizing for a more productive tomorrow.
375
2.75
2.50
2.25
2.00
Financial Highlights
2014
2015
2016
350
325
300
2014
2015
2016
NET SALES (IN BILLIONS)
DILUTED EARNINGS PER SHARE
OPERATING INCOME (IN MILLIONS)
CASH FLOW FROM
OPERATIONS (IN MILLIONS)
3.8
$3.00
$2.75
3.7
3.6
$2.50
$2.25
500
$400
400
300
200
$375
$350
100
$325
3.5
$2.00
2014
2014
2015
2015
2016
2016
0
$300
2014
2014
2015
2015
2016
2016
DILUTED EARNINGS
PER SHARE
CASH FLOW FROM
OPERATIONS (IN MILLIONS)
$3.80
$3.70
$3.60
$500
$400
$300
$200
$100
$3.50
2014
2015
2016
0
2014
2015
2016
Dear Shareholders,
Since our humble beginning in 1941 when my grandfa-
ther Sid Jacobson founded MSC, our focus has been
on enabling our customers to drive greater productivity,
profitability and growth. Our business has transformed
dramatically over the years as we have evolved to
address the changing needs of our customers and the
markets that we serve. Today, we continue to build
on our rich history, affirming our commitment to our
customers, suppliers, shareholders, associates and the
communities in which we live and work. Our vision,
however, remains the same—to drive results for our
customers’ businesses, from keeping operations running
efficiently today to continuously rethinking, retooling
and optimizing for a more productive tomorrow.
In fiscal 2016, we continued to execute against our key
Erik Gershwind, President and Chief Executive Officer
priorities, delivering a diversified, high-quality range of
resources, portfolio and infrastructure required to
products, services and solutions to our customers. Our
address the ever-evolving needs of our customers.
ability to partner with our customers and help them
maximize their returns on spend and enhance supply
chain efficiencies has become increasingly important
and central to our success, particularly given the chal-
lenged macroeconomic backdrop of recent years.
Efficient, rapid distribution of the products that our
customers need to keep their businesses running is
core to our business, as is delivering expertise in
streamlining procurement and optimizing inventory
management. We continue to grow into these exciting
Over the past year, we generated results reflective of
opportunities, leveraging the market-leading experience
solid execution and our commitment to operational
of our team to not only meet this need, but also to
excellence despite the ongoing headwinds of an
anticipate emerging demands and shape the trends of
extremely difficult demand environment and soft pric-
tomorrow. We are proud of the success that we have
ing, which have been primarily driven by the ongoing
had in enhancing our e-commerce platforms, expanding
effects of low oil prices and the strong U.S. dollar on
our vending network, and leveraging new technologies
the manufacturing economy. Against the backdrop
to streamline distribution.
of these challenges, our performance in fiscal 2016
was highlighted by the following developments: First,
we continued our share gains, building on our leader-
ship position in metalworking, as well as developing a
leadership position in our Class C inventory business.
Second, we achieved sustained gross margin stabiliza-
tion even in the face of a very soft price environment.
Third, we realized significant benefits from our pro-
ductivity initiatives and strong expense controls, lean-
ing out our cost structure and significantly improving
the leverage in our business model. Also, we did not
Our customers recognize the advantage of working
with an industry leader such as MSC as we enable our
customers to drive efficiency and productivity across
their businesses. Our solutions approach is core to a
value proposition at MSC that smaller competitors
simply cannot match. This focus has served us well in
strengthening our customer relationships across our
history, and is continuing to pay dividends as others
turn to us for the same support. In this way, we will
propel our performance when industry growth returns.
take our eye off the future and the exciting growth
In addition to investing in our product and service
opportunities that we see ahead. We continued to
offering to support our customers, we continue work-
invest in our growth programs and foster the talent,
ing to deliver attractive returns for our shareholders.
MSC Industrial Supply Co. 1
Our actions to stabilize gross margins and reduce
Looking back on fiscal 2016, we would like to thank
operating costs enabled us to slightly improve our
our customers for looking to our team at MSC to help
Operating Margin to 13.1% despite the significant head-
drive their growth and our partners for working closely
wind of lower sales. This year marked our thirteenth
with us to provide the best solutions and products
year of distributing quarterly dividends, with dividend
available in the market. We also would like to recog-
growth every year. In all, we distributed a total of $106
nize our associates who have worked tirelessly this
million in dividends over the full fiscal year 2016 and
year to serve our customers, deliver share gains, and
we repurchased a total of 5.3 million shares primarily
lead our ongoing drive to operational excellence. The
through the Dutch tender completed in the third quarter.
changes that our people are making to our business
Between dividends and share buybacks, we returned
continue to strengthen our position in the markets
nearly $500 million to our shareholders in fiscal 2016
that we serve. As we look to the future, it is the drive,
and we remain committed to a balanced capital allo-
ingenuity and expertise of our associates that give us
cation strategy going forward.
great confidence. Finally, we thank our shareholders
In fiscal 2017, we will remain diligent in managing those
for supporting our vision for the Company.
levers under our control to drive profitability and pro-
Respectfully,
mote efficiency and productivity across the business.
Even as we confront ongoing softness in pricing and
demand against the backdrop of challenged end mar-
kets, we are confident in our position and ability to
Erik Gershwind
achieve growth when conditions improve.
President and Chief Executive Officer
BUILDING PRODUCTIVE
PARTNERSHIPS
We’re only successful when our key stakeholders win. That’s why we’re
focused on building productive partnerships that lift others to new heights.
Our associates share their rich expertise and insight not only to keep our customers’ manufacturing
operations up and running, but to improve their efficiency and performance. Whether it’s a small shop
that needs smart business solutions to help them compete, a mid-sized business looking to improve pro-
ductivity, or a large company working to reduce total cost of ownership, we partner to solve their toughest
MRO and operational challenges. We also are dedicated to driving the growth and success of our supplier
partners, developing and enabling our talented associates so they can realize their full potential, and
improving the quality of life for others in the many communities where we operate. As we do these
things, we contribute to a successful industrial economy. Sound like we’re more than an industrial
supply company? We strive to be, but it’s more meaningful to hear what some of our stakeholders say
about partnering with MSC:
2 2o16 Annual Report
“MSC helps us win races.”
Mark Bringle
Director, Technical Sponsorship
& Marketing
Joe Gibbs Racing
Joe Gibbs Racing (JGR) is one of the winningest teams in NASCAR with four NASCAR champion-
ships over the past two decades. JGR builds its cars from the ground up each week, with 90 per-
cent of the parts manufactured in-house. That’s cutting a lot of metal, so getting the part right
every time is critical to winning races. JGR relies on MSC’s metalworking experts to be part of
its crew, providing the right products and technical support. MSC also has helped JGR reduce
its on-site inventory and costs through customized vending and inventory management solutions.
“ MSC is right here by our side providing product and technical support—and a compet-
itive edge to help us win races.”
Longer-Lasting Tools…
and Relationships
Chuck Byrnes
Vice President, Kennametal Inc. &
President, Industrial Segment
Providing manufacturing customers with the right industrial supplies and solutions is often
about having relationships with top suppliers. As Kennametal’s top metalworking distributor,
MSC has worked hand-in-glove with Kennametal to deliver big cost savings to customers for
years. In one case, MSC and Kennametal analyzed a customer’s processes and recommended
an entirely new tool design customized to the client’s exacting needs. The new design reduced
tool wear, improved cutting rates and resulted in tooling savings of more than $175,000 annu-
ally. The MSC-Kennametal team also staged a half-day training seminar to ensure the customer
received optimum performance from the new tool design.
“MSC has taken our relationship from good to great.”
MSC Industrial Supply Co. 3
The Opportunity to
Learn and Grow
Mika Cardwell
Product Manager
MSC Industrial Supply Co.
MSC’s goal is to attract, develop and retain a talented team of associates inspired by our pur-
pose of providing greater value to our stakeholders. For Mika Cardwell, a nine-year MSC associ-
ate, that means honing her interpersonal skills and business expertise so she can improve
relationships with the suppliers she partners with to drive success every day. Highly committed
to her personal development, Mika takes advantage of the many formal and informal learning
opportunities through MSC University and has completed a number of courses. Her personal
performance and achievements resulted in her recently being promoted to product manager.
“At MSC, I have the opportunity to learn, take risks and develop my career.”
Investing in Our
Communities
Theresa A. Regnante
President & CEO
United Way of Long Island
Anthony grew up in a single-parent home with three siblings where physical and mental abuse
was commonplace. With few positive role models in his life, he went down the wrong path, was
arrested and incarcerated. Today, Anthony’s life is full of promise. He has a trade and a career as
a steelworker after graduating from United Way of Long Island’s YouthBuild program. He comes
home each day to his wife and family and has set goals to further his education, buy a home and
own his own business. Anthony is one of 300 young people, all with similar positive outcomes,
who MSC has helped through $250,000 in contributions to United Way of Long Island. MSC’s
philosophy of investing in well-run organizations pays long-term dividends in our communities.
“ MSC’s support has been critical to transforming the lives of young people and
their futures.”
4 2o16 Annual Report
2016 FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-K
_______________________________________________________
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
For the fiscal year ended September 3, 2016
OR
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)
75 Maxess Road, Melville, New York
(Address of Principal Executive Offices)
11-3289165
(I.R.S. Employer
Identification No.)
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
Class A Common Stock, par value $.001
Name of Each Exchange on Which Registered
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 No
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 No
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 No
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 No
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
Accelerated filer
Non-accelerated filer
(Do not check if a smaller
reporting company)
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 No
The aggregate market value of Class A common stock held by non-affiliates of the registrant as of February 27, 2016 was approximately
$3,297,929,466. As of October 17, 2016, 44,647,764 shares of Class A common stock and 11,933,233 shares of Class B common stock of the registrant were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant’s Proxy Statement for its 2017 annual meeting of shareholders is hereby incorporated by reference into Part III of this Annual
Report on Form 10-K.
MSC INDUSTRIAL DIRECT CO., INC.
TABLE OF CONTENTS
PART I
FORWARD-LOOKING STATEMENTS
ITEM 1.
BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
PROPERTIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6.
SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
ITEM 13. 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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FORWARD-LOOKING STATEMENTS
PART I.
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 a
leading North American distributor of metalworking and maintenance, repair and operations (“MRO”) products and services.
With a 75-year history of driving innovation in industrial product distribution, we help solve our manufacturing
customers’ metalworking, MRO and operational challenges. Our team of more than 6,000 associates brings deep expertise
and insight to not only keep our customers’ manufacturing operations up and running, but also improve their efficiency,
productivity and profitability through our technical metalworking expertise and inventory management and other supply
chain solutions.
We serve a broad range of customers throughout the United States, Canada and the United Kingdom, from
individual machine shops, to Fortune 100 manufacturing companies, to government agencies such as the General Services
Administration and the Department of Defense. We operate a sophisticated network of 12 customer fulfillment centers (eight
in the United States, three in Canada and one in the United Kingdom) and 85 branch offices (84 in the United States and one
in the U.K.) Our primary customer fulfillment centers are located in or near Harrisburg, PA; Atlanta, GA; Elkhart, IN; Reno,
NV; and Columbus, OH. In addition, we operate seven smaller customer fulfillment centers in or near Hanover Park, IL;
Dallas, TX; Shelbyville, KY (repackaging and replenishment center); Wednesbury, U.K.; Edmonton, Alberta; Beamsville,
Canada; and Moncton, Canada.
We offer more than 1 million stock-keeping units (SKUs) through our website, mscdirect.com, as well as through
our 4,500-plus page master catalog, known throughout the MRO industry as “The Big Book” and a variety of specialty and
promotional catalogs, brochures and flyers. We carry many of the products we sell in our inventory, so orders for these in-
stock products are processed and fulfilled the day the order is received. We offer next-day delivery nationwide for qualifying
orders placed by 8 p.m. Eastern Time (excluding our Class C Solutions Group (“CCSG”) business).
Exclusive of U.K. operations, more than 360,000 active customers purchased at least one item during the past
12 months from MSC. Our customers can choose among many convenient ways to place orders: mscdirect.com,
eProcurement platforms, call centers or direct communication with our outside sales associates.
We endeavor to save our customers money when they partner with us for their MRO and metalworking product
needs. We do this in multiple ways:
•
our experienced team of more than 6,000 associates includes customer care team members, metalworking
specialists and technical support teams, and sales associates focused on driving our customers’ success by
reducing their operational costs;
1
•
•
•
our robust systems and transactional data enable us to provide insights to our customers to help them take cost
out of their supply chains and operations;
our extensive product inventory enables customers to deal with fewer suppliers, streamlining their purchasing
work and reducing their administrative costs;
timely shipping enables our customers to reduce their inventory investment and carrying costs;
• we simplify the purchasing process by consolidating multiple purchases into a single order, providing a single
invoice for multiple purchases over time, and offering direct shipments to specific departments and people at
one or more facilities. This reduces our customers’ administrative costs;
• we provide extensive eCommerce capabilities: 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
• with MSC’s inventory management solutions, our customers can carry less inventory and still dramatically
reduce situations when a critical item is out of stock.
Industry Overview
MSC operates in a large, fragmented industry. National, regional and local distributors, retail outlets, small
distributorships, online distributors, direct mail suppliers, large warehouse stores and manufacturers’ own sales forces all
serve MRO customers.
Nearly every industrial and service business has an ongoing need for MRO supplies. These businesses, with the
exception of the largest industrial plants, often do not have the resources to manage and monitor their MRO inventories
effectively. They spend more than necessary to purchase and track their supplies, providing an opportunity for MSC to serve
as their one-stop MRO product supplier.
Even the larger facilities often store their supplies in multiple locations, so they often carry excess inventories and
duplicate purchase orders. In many organizations, multiple people often acquire the same item in small quantities via
expensive, one-off purchases, resulting in higher purchasing costs and administrative efforts to keep track of supplies.
With limited capital availability, and limited eCommerce capabilities and operating leverage, smaller suppliers to
the industrial market are under increasing pressure to consolidate and/or curtail services and product lines to remain
competitive. Their challenge represents MSC’s opportunity. Market surveys validate that we continue to capture increased
market share by providing lower total purchasing costs, broader product selection and a higher level of service to our
customers.
We improve purchasing efficiency and reduce costs for our customers because they can consolidate suppliers,
purchase orders and invoices, reduce inventory tracking, stocking decisions, purchases and out-of-stock situations, and adopt
sophisticated inventory management solutions, including Vendor Managed Inventory (“VMI”), Customer Managed
Inventory (“CMI”) and vending solutions.
Business Strategy
MSC’s business strategy is based on helping our customers become more productive and profitable by reducing
their total cost for obtaining, using and maintaining MRO supplies. Our strategy includes the following key elements:
Inventory Management Solutions. Our approach starts with a thorough customer assessment. Our expert associates
develop and recommend solutions that provide exceptional value to the customer. Depending on the customer’s size and
needs, we customize options to address complexity and processes, as well as specific product, technical issues and cost
targets. The options might include eProcurement, CMI, VMI, vending, tool crib control, or part-time or full-time on-site
resources. Our world-class sourcing, logistics and business systems provide predictable, reliable and scalable service.
Broad Selection of Products. Customers want a full range of product options, even as they look to reduce the
number of suppliers they partner with. We provide “good-better-best” alternatives, comprising a spectrum of brand name,
2
MSC exclusive brand and generic MRO products. MSC’s broad selection of products enables customers to choose the right
combination of price and quality on every purchase to meet their needs.
Same-Day Shipping and Next-Day Delivery. We guarantee same-day shipping of our core metalworking and MRO
products, enabling customers to reduce supply inventories. We fulfill our same-day shipment guarantee about 99% of the
time. We know that our customers value this service, because areas accessible by next-day delivery tend to generate
significantly greater sales for MSC than areas where next-day delivery is not available.
Superior Customer Service. Our commitment to customer service starts with our over 6,000 associates who share
their deep expertise and knowledge of metalworking and MRO products to help our customers achieve greater success. We
invest in sophisticated information systems and provide extensive training for our associates so they can better support our
customers. Using our proprietary customer support software, our in-bound sales representatives can inform customers on a
real-time basis of product availability; recommend substitute products; verify credit information; receive special, custom or
manufacturer direct orders; cross-check inventory items using previously entered customer product codes; and arrange or
provide technical assistance. We offer customized billing; customer savings reports; electronic data interchange ordering;
eCommerce capabilities; bulk discounts; and stocking of specialty items requested by customers.
Technical Support. We provide technical support and one-on-one service through our field and customer care center
representatives. We have a dedicated team of nearly 100 metalworking specialists, who work with customers to improve
their manufacturing processes and efficiency, as well as a technical support team that provides assistance to our sales teams
and customers via phone and email. Our customers recognize the value of a distributor that can provide technical support to
improve their operations and productivity.
Commitment to Technological Innovation. We embrace technological innovations to support our growth, improve
customer service and reduce our operating costs. The innovations make our buying practices more effective, improve our
automated inventory replenishment and streamline order fulfillment. MSC’s proprietary software helps our customers and
sales representatives determine the availability of products in stock in real time and evaluate alternative products and pricing.
Our website, mscdirect.com (“MSC website”) contains a searchable online catalog with electronic ordering capabilities. The
MSC website also offers an array of services, workflow management tools and related information. Our information systems
help improve turnover and customer service while cutting costs.
We also continually upgrade our distribution methods and systems and provide comprehensive electronic ordering
capabilities (“EDI” and “XML”) to support our customers’ purchase order processing. We continue to invest in our VMI,
CMI and vending solutions that streamline customer replenishment and trim our customers’ inventories. Our vending
solutions include different kinds of machines, such as storage lockers or carousels, which can stand alone or be combined
with other machines. MSC vending machines use network or web-based software to enable customers to gain inventory
visibility, save time and drive profitability.
Advanced Technologies and www.mscdirect.com. The MSC website is 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 other enhancements, including work-flow management tools. The user-friendly search engine allows
customers to find SKUs by keyword, part description, competitive part number, vendor number or brand. The MSC website
is a key component of our strategy to reduce customers’ transaction costs and delivery time.
Competitive Pricing. Customers increasingly evaluate their total cost of ownership of industrial supplies and
recognize that price is an important aspect of their procurement costs. We make sure our pricing is competitive while
reflecting the value that we bring through our comprehensive service.
Growth Strategy
We continue to show share gains as indicated by growth rates from the markets we serve. Our growth strategy
includes a number of strategies to continue to gain market share.
Expanding and enhancing our metalworking capabilities to aggressively penetrate customers in heavy and light
manufacturing. MSC is a leading distributor of metalworking products in the United States. We have continued to expand
our metalworking sales team, increase technical support and enhance supplier relationships. We are developing high-
performance metalworking products marketed under MSC exclusive brands, providing high-value product alternatives for
our customers. Our metalworking field specialists and centralized technical support team members have diverse backgrounds
in machining, programming, management and engineering. They help our customers select the right tool for the job from our
deep supplier base.
3
Expanding programs for government and national account customers. Although MSC has been providing MRO
and metalworking supplies to the commercial sector for 75 years, we have more recently focused on potential government
customers and have a large, growing contract business with numerous federal, state, and local/education agencies. We also
are attracting government contractor customers and the U.S. Postal Service. We have developed customized government and
national account programs. Even with our recent success, we see plenty of opportunity for additional growth.
We provide customized national account programs for larger customers, often as enterprise-wide engagements.
These national account customers value our ability to support their procurement needs electronically to reduce their
transactional costs. Our dedicated national account managers and operations experts provide supply chain solutions that
reduce these customers’ total costs of ownership through increased visibility into their MRO purchases and improved
management. We demonstrate these savings through detailed reporting at both the enterprise and site level.
Increasing the size and improving the productivity of our direct sales force. We have invested resources to give
our sales representatives more time with our customers and provide increased support during the MRO purchasing process.
Our field sales and service associate headcount was 2,370 and our in-bound sales representative headcount was 1,079 at
September 3, 2016. We believe that our sales force investment has played a critical role in boosting our market share.
Increasing sales from existing customers and generating new customers with various value-added programs. Our
value-added programs include business needs analysis, inventory management solutions and workflow management tools.
Our customers particularly value our industrial vending solutions that can accommodate a range of products from precision
cutting tools to MRO supplies.
Increasing the number of product lines and productive SKUs. We are increasing the breadth and depth of our
product offerings and pruning non-value-added SKUs. In fiscal year 2016, we added approximately 150,000 SKUs, net of
SKU removals, to our searchable database on www.mscdirect.com. This increase brought MSC’s total, active, saleable SKU
count to approximately 1,500,000 SKUs. We plan to continue adding online SKUs in fiscal 2017.
The most recent MSC catalog issued in October 2016 merchandises approximately 500,000 core metalworking and
MRO products, which are included in the SKU totals above. Approximately 18% of these SKUs are MSC exclusive brands.
We have also begun to leverage the depth and breadth of MSC’s product portfolio within our CCSG sales channel and have
extended full access of MSC catalog SKUs to the CCSG sales team.
Improving our marketing programs. MSC has built an extensive buyer database, which we use to prospect for new
customers. We deliver our master catalogs to the best prospects. We supplement our master catalogs with direct mail, digital
and search engine marketing, and email. Our industry-specific expertise allows us to focus our outreach on the most
promising growth areas.
Enhancing eCommerce capabilities. MSC’s website is a proprietary, business-to-business, horizontal marketplace
serving the metalworking and MRO market. All qualified orders placed online at mscdirect.com are backed by our same-day
shipping guarantee, unless otherwise stated. The MSC website utilizes the same highly trained sales force and support
services as MSC’s traditional business, so our customers enjoy added convenience without sacrificing customized service.
MSC’s website is a key component of our strategy to reduce customers’ transaction costs and internal requisition time. Most
orders move directly from the customer’s 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 website and solicit customer
feedback, making on-going improvements to ensure that the MSC website remains a premier website in our marketplace. In
June 2016, Internet Retailer magazine recognized MSC as the “B2B eCommerce Player of the Year,” citing MSC’s online
purchasing experience for customers as a factor for the award. Internet Retailer also ranked MSC as the 30th largest e-retailer
based on annual revenue generated from online sales, growth over the previous five years, and key metrics such as customer
conversion rates and average order value by category. Our marketing campaigns continue to raise awareness and drive
volume to the MSC website. In addition, many large customer accounts transact business with MSC using eProcurement
solution providers that sell a suite of eCommerce products. We have associations with many of these providers and continue
to evaluate and expand our eProcurement capabilities.
Improving our excellent customer support service. MSC consistently receives high customer satisfaction ratings,
according to customer surveys. We don’t just strive to meet our customers’ service needs, we work to anticipate them. This
focus on our customers’ needs makes us stand apart in the market. We use customer comment cards, surveys and other
customer outreach tools, using their feedback to drive the next generation of improvements to the customer experience.
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Selectively pursuing strategic acquisitions. We actively pursue strategic acquisitions that expand or complement
our business in new and existing markets or further enhance the value and offerings we provide. We completed our
acquisition of Barnes Distribution North America, which we now call CCSG, in fiscal year 2013. We believe 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 broad range of MRO products includes 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. Our large and
growing number of SKUs makes us an increasingly valuable partner to our customers as they look to trim their supplier base.
Our assortment from multiple product suppliers, prices and quality levels enables our customers to select from “good-better-
best” options on nearly all their purchases. We stand apart from our competitors by offering name brand, exclusive brand,
and generic products; depth in our core product lines; and competitive pricing.
We purchase substantially all of our products directly from approximately 3,000 suppliers. No single supplier
accounted for more than 6% of our total purchases in fiscal 2016, fiscal 2015, or fiscal 2014.
Customer Fulfillment Centers
A significant number of our products are carried in stock. Approximately 79% of sales are fulfilled from our 12
customer fulfillment centers and 85 branch offices. Some specialty or custom items and very large orders are shipped directly
from the manufacturer. We manage our primary customer fulfillment centers via computer-based SKU tracking systems and
radio frequency devices that locate specific stock items to make the selection process more efficient.
Sales and Marketing
We serve individual machine shops, Fortune 100 companies, government agencies and manufacturers of all sizes.
We focus on relatively higher-margin, lower-volume products. With the addition of our CCSG business, we have increased
our presence in the fastener and Class C (“Consumables”) product categories and significantly increased our 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 serve durable and non-durable goods manufacturing (which accounted for a substantial portion of our revenue in
fiscal 2016), education, and health care markets, among others. We also have government and national account programs
designed to address the needs of these customers.
Federal government customers include large and small military bases, Veterans Affairs hospitals, federal
correctional facilities, the U.S. Postal Service and the Department of Defense. We have individual state contracts but also are
engaged in several state cooperatives.
Our national account program also includes Fortune 1000 companies, large privately held companies, and
international companies doing business in the United States. We have identified hundreds of additional national account
prospects and have given our sales team tools to ensure we are targeting prospective customers that best fit the MSC model.
We have implemented advanced analytics and significantly increased 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 continue to play an important role in our efforts, we accelerated a shift to search engine
marketing, email marketing and online advertising to address changes in our customers’ buying behavior. We use our own
database of over 3 million contacts together with external mailing lists to target 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.
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 approach is based on the ability of the sales representative, armed with our
comprehensive databases as a resource, to respond effectively to the customer’s needs. When a customer places a call to
MSC, the sales representative on the other end of the line has immediate access to that customer’s company and specific
5
buyer profile, which includes billing and purchasing track records and plant and industry information. Meanwhile, the sales
representative has access to inventory levels on every SKU we carry.
Our in-bound sales representatives at our customer care centers undergo an intensive seven-week training course,
followed up by regular on-site training seminars and workshops. They are monitored and evaluated at regular intervals, and
they receive technical training from our in-house specialists and product vendors. We maintain a separate technical support
group dedicated to answering customer inquiries, assisting them with product operation and finding the most efficient
solutions to manufacturing problems.
As of September 3, 2016, we had 2,370 field sales and service associates working throughout North America and the
U.K. Our field sales representatives are responsible for increasing sales per customer and servicing existing accounts. They
are a touch point with the customer and provide MSC with feedback on the competitive landscape and purchasing trends.
Branch Offices
We operate 85 branch offices. There are 84 branch offices within the United States located in 39 states, and one
location in the U.K. We have experienced higher sales growth and market penetration in areas around our branch offices and
believe they play an integral role in obtaining new accounts and penetrating existing ones. During fiscal 2016, we were able
to consolidate some branch offices that were relatively close in proximity in order to gain leverage, operational effectiveness
and cost savings. There were no new branch openings during fiscal 2016.
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. We use specialty and promotional publications to target
customers in specific areas, such as metal fabrication, facilities management, safety and janitorial. Specialty and promotional
catalogs, targeted to our best prospects, offer a more focused selection of products at a lower catalog production cost and
more efficient use of advertising space.
We periodically balance ongoing strategies to improve direct marketing productivity and increase return on
advertising dollars spent against programs to increase revenue and lifetime value. As such, our mailing volume will fluctuate
from year to year.
September 3,
2016
(53 weeks)
94
16,851,194
Fiscal Years Ended (1)
August 29,
2015
(52 weeks)
98
18,265,589
August 30,
2014
(52 weeks)
101
18,152,000
Number of publication titles
Number of publications mailed
(1) Excludes U.K. operations.
Customer Service
One of our goals is to make purchasing our products as convenient as possible. Customers submit more than 50% of
our orders digitally through our technology platform (website, vending machines, and eProcurement). The remaining orders
are placed via telephone, fax and mail. The efficient handling of orders is a critical aspect of our business. Order entry and
fulfillment occurs at each of our branches and our main customer care centers, mostly located at our customer fulfillment
centers. Customer care phone representatives enter orders into computerized order processing systems. In the event of a local
or regional breakdown, a call can usually be re-routed to an alternative location. When an order enters the system, a credit
check is performed; if the credit is approved, the order is usually transmitted to the customer fulfillment center closest to the
customer. Customers are invoiced for merchandise, shipping and handling promptly after shipment.
Information Systems
Our information systems enable us to centralize management of key functions, including communication links
between customer fulfillment centers, inventory and accounts receivable, purchasing, pricing, sales and distribution, and the
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preparation of daily operating control reports. These systems help us ship on a same-day basis, respond quickly to order
changes, provide a high level of customer service, and reduce costs. Our eCommerce environment is built upon a combined
platform of our own intellectual property, state-of-the-art software from the world’s leading internet technology providers
and world-class product data. This powerful combination of resources helps us deliver a superior online shopping experience
with extremely high levels of reliability.
Most of our information systems operate in real time over a wide area network, letting each customer fulfillment
center and branch office share information and monitor daily progress on sales activity, credit approval, inventory levels,
stock balancing, vendor returns, order fulfillment and other performance measures. 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 to boost order placement efficiency, reduce order cycle processing time, and increase
order accuracy.
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 Extensible Markup Language (“XML”) ordering system
to support our customer-based purchase order processing. We also maintain a proprietary hardware and software platform to
support our VMI program, which allows customers to integrate scanner-accumulated orders directly into our Sales Order
Entry system and website. Our CMI program enables customers to simply and effectively replenish inventory by submitting
orders directly to our website. Our customized vending systems are used by customers in manufacturing plants across the
United States 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.
Our core business systems run in a highly distributed computing environment and utilize world-class software and
hardware platforms from key partners. We utilize disaster recovery techniques and procedures, which are consistent with
best practices in enterprise IT. Given such a distributed IT environment, we regularly review and upgrade our systems. We
believe that our current systems and practice of implementing regular updates are adequate to support our current needs. In
fiscal 2016, we initiated the upgrade of our core financial systems, including the receivables, payables, treasury, fixed assets
and general ledger.
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
representatives are equipped with proprietary mobile technology that allows them to tap into MSC’s supply chain directly
from our customers’ manufacturing plants and make sure that critical inventory is always on site and available. In addition,
we are enhancing our customer websites 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 also face
emerging competitors primarily in the online distribution space that compete with price transparency. 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 based primarily 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 addition, we may be impacted by weather-related disruptions.
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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 to ensure that 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
and 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 September 3, 2016, we employed 6,462 associates, which includes our U.K. and Canada operations. 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 www.sec.gov.
The Company’s Internet address is 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 latest 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.
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.
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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 continued 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.
We also face emerging competitors participating primarily in the online distribution space that compete with price
transparency. Increased competition from online retailers (particularly those major internet providers who can offer a wide
range of products and rapid delivery), and the adoption by competitors of aggressive pricing strategies and sales methods,
could cause us to lose market share or reduce our prices, adversely affecting our sales, margins and profitability.
Our industry is consolidating which could adversely affect our business and financial results.
The business of selling MRO supplies in North America is currently undergoing some consolidation. This
consolidation is being driven by customer needs. 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.
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.
The trend of our industry toward consolidation could cause the industry to become more competitive as greater
economies of scale are achieved by competitors, or as competitors with new lower cost business models are able to operate
with lower prices and gross profit on products. These trends may adversely affect our sales, margins and profitability.
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.
In addition to increases in commodity and energy prices, decreases in those costs, particularly if severe, could also
adversely impact us by creating deflation in selling prices, which could cause our gross profit margin to deteriorate, or by
negatively impacting customers in certain industries, which could cause our sales to those customers to decline.
9
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 creditworthiness 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 100
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 metalworking and MRO products is an
integral component of our overall business strategy. Disruptions at transportation centers or shipping ports, due 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, including winter storms, could adversely affect demand for our products in particularly
hard hit regions and impact our sales.
The terms of our credit facility and senior notes 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. In addition, we have outstanding $175.0 million aggregate principal amount of senior notes. The
term loan facility matures on, and the revolving loan facility is available through April 22, 2018. The senior notes mature in
July 2023 ($75.0 million) and July 2026 ($100.0 million). We are subject to various operating and financial covenants under
the credit facility and senior notes 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 and senior notes, 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 manage financial reporting, to purchase, sell and ship products efficiently and on a timely basis, to maintain cost-effective
operations, to operate our websites 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
10
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. In addition, changes to
our information systems could disrupt our business operations. Any one or more of these consequences could have a material
adverse effect on our business, financial condition and results of operations.
An inability to successfully manage the upgrade of our core financial systems could adversely affect our operations and
operating results.
We are in the process of upgrading our core financial systems. This upgrade will affect many of our existing
operating and financial systems. This is an important undertaking both financially and from a management and personnel
perspective. Should the upgrade not be implemented successfully and within budget, or if the system does not perform in a
satisfactory manner, it could be disruptive and adversely affect our operations and results of operations, including our ability
to report accurate and timely financial results.
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
exclusive 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 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, 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 would 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.
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.
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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, intellectual property
matters, 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 may encounter difficulties with acquisitions, which could harm our business.
We have completed several acquisitions of businesses 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.
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.
Goodwill and indefinite-lived intangible assets recorded as a result of our acquisitions could become impaired.
As of September 3, 2016, our combined goodwill and indefinite-lived intangible assets amounted to $638.2 million.
To the extent we do not generate sufficient cash flows to recover the net amount of any investments in goodwill and other
indefinite-lived intangible assets recorded, the investment could be considered impaired and subject to write-off. We expect
to record further goodwill and other indefinite-lived intangible assets as a result of future acquisitions we may complete.
Future amortization of such assets or impairments, if any, of goodwill or indefinite-lived 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
12
manufacturing industry, which accounted for a substantial portion of our revenue for fiscal year 2016, fiscal year 2015 and
fiscal year 2014, 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 17, 2016, 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 2.5% of the outstanding shares of our Class A common
stock, giving them control over approximately 73.4% 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 shareholders, 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
Columbus, Ohio
Hanover Park, Illinois
Dallas, Texas
Edmonton, Canada
Beamsville, Canada
Moncton, Canada
Shelbyville, Kentucky(2)
Approx.
Sq. Ft.
721,000
545,000
821,000
419,000
75,000
468,000
182,000
135,000
32,000
85,000
16,000
110,000
Operational
Date
1990
1996
1997
1999
1998
2014
2003
2003
2007
2004
1981
1973
Leased/
Owned
Owned (1)
Owned
Owned
Owned
Leased
Owned
Leased
Leased
Leased
Owned
Owned
Owned
(1) The Customer Fulfillment Center which had been previously leased from a related party was purchased in August 2016.
(2) Repackaging and replenishment center.
We maintain 84 branch offices within the United States located in 39 states and one branch office located in the
U.K. The branches range in size from 1,800 to 25,000 square feet. The leases for these branch offices will expire at various
periods between September 2016 and August 2026. The aggregate annual lease payments on these branch offices and the
leased customer fulfillment centers in fiscal 2016 were approximately $12.4 million.
We maintain our co-located headquarters at a 170,000 square foot facility that we own in Melville, New York and a
162,000 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. We believe that our existing facilities are adequate for our current
needs and will be adequate for the foreseeable future; we also expect that suitable additional space will be available as
needed.
In order to support our growth strategy and maintain our signature service model as we grow, we recently built a
new customer fulfillment center in Columbus, Ohio. We began operations on September 30, 2014.
13
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.
14
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 31, 2014 to September 3, 2016:
Fiscal Year Ended September 3, 2016
First Quarter – November 28, 2015
Second Quarter – February 27, 2016
Third Quarter – May 28, 2016
Fourth Quarter – September 3, 2016
Fiscal Year Ended August 29, 2015
First Quarter – November 29, 2014
Second Quarter – February 28, 2015
Third Quarter – May 30, 2015
Fourth Quarter – August 29, 2015
$
$
Price of Class A Common Stock
High
Low
$
68.18
70.86
78.35
75.99
$
58.17
54.19
68.34
67.74
Dividend Per Share
Common Stock
Class A & Class B
0.43
0.43
0.43
0.43
Price of Class A Common Stock
High
Low
$
91.91
83.03
74.13
72.40
$
77.52
72.92
68.16
64.50
Dividend Per Share
Common Stock
Class A & Class B(1)
3.40
0.40
0.40
0.40
(1) In the first quarter of fiscal 2015, the Company paid a special cash dividend of $3.00 per share.
In 2003, our Board of Directors instituted a policy of paying regular quarterly cash dividends to our shareholders.
The Company paid total annual cash dividends of $1.72 and $4.60 per share for fiscal 2016 and fiscal 2015, respectively.
This policy is reviewed periodically by the Board of Directors.
On October 27, 2016, the Board of Directors declared a quarterly cash dividend of $0.45 per share, payable on
November 29, 2016 to shareholders of record at the close of business on November 15, 2016. The dividend will result in a
payout of approximately $25.5 million, based on the number of shares outstanding at October 17, 2016.
On October 17, 2016, the last reported sales price for MSC’s Class A common stock on the NYSE was $72.72 per
share. The approximate number of holders of record of MSC’s Class A common stock as of October 17, 2016 was 647. The
number of holders of record of MSC’s Class B common stock as of October 17, 2016 was 61.
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 September 3, 2016:
Period
05/29/16-06/28/16
06/29/16-07/28/16
07/29/16-09/03/16
Total
Total Number of Shares
Purchased(1)
Average Price Paid Per
Share(2)
145
130
5,008,635
5,008,910
$
$
75.66
71.88
72.50
72.50
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
1,444,034
1,444,034
1,444,034
15
(1) During the three months ended September 3, 2016, 35,582 shares of our Class A 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. In addition, 4,973,328 shares of our Class A common
stock purchased pursuant to the tender offer and stock purchase described below also are included in the table.
(2) Activity is reported on a trade date basis.
(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 September 3, 2016, the maximum
number of shares that may yet be repurchased under the Repurchase Plan was 1,444,034 shares. There is no expiration
date for the Repurchase Plan.
In August 2016, the Company completed its “modified Dutch auction” tender offer and purchased 3,821,279 shares
of the Company’s Class A common stock that were validly tendered and not validly withdrawn at a price of $72.50 per
share. The Company also completed its stock purchase of an aggregate of 1,152,049 shares of its Class A common stock
from certain of its Class B shareholders at a purchase price of $72.50 per share. See Note 9 “Shareholders’ Equity” in the
Notes to the Consolidated Financial Statements for more information about the tender offer and the stock purchase.
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 Industrial Supplier
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 27, 2011 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.
16
Cumulative Total Stockholder Return
for the Period from August 27, 2011 through September 3, 2016
MSC Industrial Direct Co., Inc.
S&P Midcap 400
Dow Jones US Industrial Supplier
8/27/2011
100.00
100.00
100.00
9/1/2012
119.15
118.05
131.32
8/31/2013
8/30/2014
8/29/2015
132.79
146.04
148.55
159.93
179.99
154.22
126.82
181.19
128.43
9/3/2016
143.06
204.02
137.42
ITEM 6. SELECTED FINANCIAL DATA.
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 September 3, 2016, August 29, 2015 and August 30, 2014 and the selected consolidated balance
sheet data as of September 3, 2016 and August 29, 2015 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 31,
2013 and September 1, 2012, and the selected consolidated balance sheet data as of August 30, 2014, August 31, 2013, and
September 1, 2012 are derived from MSC’s audited consolidated financial statements not included herein.
17
Fiscal Years Ended
September 3,
2016
(53 weeks)
August 29,
2015
(52 weeks)
August 30,
2014
(52 weeks)
(In thousands, except per share data)
August 31,
2013
(52 weeks)
September 1,
2012
(53 weeks)
Consolidated Income Statement Data:
Net sales
Gross profit
Operating expenses
Income from operations
Income taxes
Net income
Net income per common share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
Cash dividends declared per common share(3)
Consolidated Balance Sheet Data (at period end):
Working capital(4)
Total assets(4)
Short-term debt including capital lease and
financing obligations(4)
Long-term debt including capital lease obligations,
net of current maturities(4)
Deferred income taxes and tax uncertainties
Shareholders’ equity
Selected Operating Data:(1), (2)
Active customers(5), (6)
Approximate Number of SKUs
Orders shipped(5)
Number of publications mailed(5)
Number of publication titles (not in thousands)(5)
$ 2,863,505 $ 2,910,379 $ 2,787,122 $ 2,457,649 $ 2,355,918
1,118,516 1,078,203
665,987
412,216
153,111
259,031
1,286,256
903,072
383,184
143,458
236,067
1,288,858
912,898
375,960
140,515
231,216
1,316,575
937,046
379,529
141,833
231,308
732,990
385,526
145,434
237,995
3.78
3.77
3.75
3.74
3.78
3.76
3.77
3.75
4.12
4.09
60,908
61,076
61,292
61,487
62,026
62,339
62,695
63,011
$
1.72 $
4.60 $
1.32 $
1.20 $
62,434
62,803
1.00
$
502,889 $
610,089 $
652,601 $
2,064,951
2,100,186
2,059,377
680,292 $
749,784
1,941,232 1,444,172
267,050
213,165
96,479
13,802
819
339,772
148,201
1,098,376
214,119
131,210
1,332,870
239,215
112,785
1,398,563
240,177
97,475
1,673
85,061
1,390,383 1,187,111
366
1,150
6,861
16,851
94
366
1,000
6,626
18,266
98
364
850
6,630
18,152
101
322
685
5,957
16,308
95
325
600
6,150
18,032
100
(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—General.”
(2) CCSG data is included in Selected Operating Data beginning in fiscal 2014.
(3) In the first quarter of fiscal 2015, the Company paid a special cash dividend of $3.00 per share.
(4) Prior periods have been adjusted to reflect the adoption of Accounting Standards Update (“ASU”) No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30). See Note 2 to the Consolidated Financial
Statements.
(5) Excludes U.K. operations.
(6) Defined as customers that have made at least one purchase in the last twelve months.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Overview
MSC Industrial Direct Co., Inc. (together with its subsidiaries, “MSC,” the “Company,” “we,” “our,” or “us”) is a
leading North American distributor of a broad range of metalworking and maintenance, repair, and operations (“MRO”)
products and services. We help our customers drive greater productivity, profitability and growth with more than one million
products, inventory management and other supply chain solutions, and deep expertise from 75 years of working with
customers across industries. We continue to implement our strategies to gain market share, generate new customers, increase
sales to existing customers, and diversify our customer base.
18
Our experienced team of over 6,000 associates works with our customers to help drive results for their businesses,
from keeping operations running efficiently today to continuously rethinking, retooling, and optimizing for a more productive
tomorrow. We offer approximately 1,150,000 stock-keeping units (“SKUs”) through our master catalogs; weekly, monthly
and quarterly specialty and promotional catalogs; brochures; and the Internet, including our website, mscdirect.com (the
“MSC website”). We service our customers from 12 customer fulfillment centers (eight customer fulfillment centers are
located within the United States which includes five primary customer fulfillment centers, one is located in the United
Kingdom (the “U.K.”), and three are located in Canada) and 85 branch offices. Many of our products are carried in stock, and
orders for these in-stock products are typically fulfilled the day on which the order is received.
Our field sales and service associate headcount was 2,370 at September 3, 2016, compared to 2,377 at August 29,
2015 and 2,301 at August 30, 2014. Beginning in fiscal 2016, we have adjusted this headcount metric in the current and prior
years disclosed to include both field sales associates and service personnel. We believe this better reflects our company as a
sales and service organization given our increased concentration in inventory management solutions, including Vendor
Managed Inventory (“VMI”) systems and vending machine systems. Prior year numbers have been restated to conform to the
fiscal 2016 presentation. We will continue to manage our sales and service headcount based on economic conditions and
our business plans.
The waterfall chart below displays a three-year comparison of our net sales:
(1) Pricing includes changes in customer and product mix, discounting and other items.
(2) Fiscal 2016 includes a 53rd week during the reporting period.
Business Environment
We utilize various indices when evaluating the level of our business activity. Approximately 68% of our revenues
came from sales in the manufacturing sector (53% heavy manufacturing and 15% light manufacturing) in our fiscal year
2016, including certain national account customers. Through statistical analysis, we have found the strongest
correlation between our customers’ activity and the Metalworking Business Index (“MBI”). The MBI measures the economic
activity of the metalworking industry, focusing only on durable goods manufacturing. Another index we previously used was
19
the Institute for Supply Management’s Purchasing Manager’s Index (“PMI”). However, recent analysis has
shown only a small correlation between the PMI and our net sales. For both indices, a value below 50.0 generally indicates
contraction and a value above 50.0 generally indicates expansion. The MBI and PMI indices over each of the last three
months of our fiscal year and the averages for our fiscal 2016 fourth quarter and full fiscal year 2016 were as follows:
Period
June
July
August
Fiscal 2016 Q4 average
Fiscal 2016 full year average
MBI
44.4
45.3
48.7
46.1
45.4
PMI
53.2
52.6
49.4
51.7
50.2
The MBI has increased steadily throughout our fourth quarter, rising from 44.4 to 48.7. This implies a continued,
but slower contraction in the metalworking manufacturing environment. Details released with the September MBI of 48.4
indicate contraction for the eighteenth consecutive month, including contraction in new orders and backlog.
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.
Results of Operations
Fiscal Year Ended September 3, 2016 Compared to the Fiscal Year Ended August 29, 2015
The table below summarizes the Company’s results of operations both in dollars (in thousands) and as a percentage
of net sales for the periods indicated:
Fiscal Years Ended
September 3, 2016
(53 weeks)
$
2,863,505
1,574,647
1,288,858
912,898
375,960
(4,229)
371,731
140,515
231,216
$
$
%
100.0%
55.0%
45.0%
31.9%
13.1%
(0.1)%
13.0%
4.9%
8.1%
August 29, 2015
(52 weeks)
$
%
$
$
2,910,379
1,593,804
1,316,575
937,046
379,529
(6,388)
373,141
141,833
231,308
100.0%
54.8%
45.2%
32.2%
13.0%
(0.2)%
12.8%
4.9%
7.9%
$
$
Change
$
(46,874)
(19,157)
(27,717)
(24,148)
(3,569)
2,159
(1,410)
(1,318)
(92)
%
(1.6)%
(1.2)%
(2.1)%
(2.6)%
(0.9)%
(33.8)%
(0.4)%
(0.9)%
(0.0)%
Net sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Total other expense
Income before provision for income
Provision for income taxes
Net income
Net Sales
Net sales decreased 1.6% or approximately $46.9 million, for the fiscal year ended 2016. We estimate that this
decrease in net sales is comprised of: (i) approximately $82.0 million of lower sales volume; (ii) approximately $13.6 million
from pricing, which includes changes in customer and product mix, discounting and other items; (iii) approximately $7.3
million from unfavorable foreign currency fluctuations; partially offset by (iv) approximately $56.0 million in sales
attributable to an extra week in fiscal 2016. Of the total decrease in net sales, sales other than to our government and national
account programs (“Large Account Customers”) decreased by approximately $72.2 million, partially offset by an increase of
sales to our Large Account Customers of approximately $25.3 million.
The table below shows the change in our fiscal quarterly and annual 2016 average daily sales by total company and
by customer type compared to the same periods in the prior fiscal year:
20
Average Daily Sales Percentage Change
(unaudited)
Thirteen
Week Period
Ended Fiscal
Q1
Thirteen
Week Period
Ended Fiscal
Q2
Thirteen
Week Period
Ended Fiscal
Q3
Fourteen
Week Period
Ended Fiscal
Q4
Fiscal Year
Ended
% of Total
Business
(3.3) %
(4.9) %
1.3 %
(3.2) %
(5.6) %
2.6 %
(3.9) %
(6.8) %
2.6 %
(3.6) %
(6.1) %
3.3 %
(3.5) %
(5.8) %
2.5 %
68 %
32 %
2016 vs. 2015 Fiscal Period
Total Company
Manufacturing Customers(1)
Non-Manufacturing Customers(1)
(1) Excludes U.K. operations.
Exclusive of customers in the U.K., average order size decreased to approximately $412 in fiscal 2016 as compared
to $417 in fiscal 2015.
We believe that our ability to transact business with our customers through various electronic portals and directly
through the MSC website gives us a competitive advantage over smaller suppliers. Sales made through our eCommerce
platforms, including sales made through Electronic Data Interchange (“EDI”) systems, VMI systems, Extensible Markup
Language ordering based systems, vending machine systems, hosted systems and other electronic portals, represented 58.2%
of consolidated net sales in fiscal 2016, compared to 55.6% of consolidated net sales in fiscal 2015. This increase
was primarily associated with the MSC website, EDI, and vending machine systems.
Gross Profit
Gross profit margin was 45.0% in fiscal 2016 as compared to 45.2% in fiscal 2015. The decline was primarily a
result of changes in pricing and customer mix.
Operating Expenses
Operating expenses decreased 2.6% to $912.9 million in fiscal 2016, as compared to $937.0 million in fiscal 2015
despite having a 53rd week in fiscal 2016. This decrease was primarily the result of cost savings initiatives implemented
throughout the full fiscal 2016, including lower payroll costs and discretionary spending. As a result, spending on items such
as outside personnel, advertising, professional fees, and travel and entertainment expenses decreased compared to fiscal 2015.
While lower volume did contribute a portion of the operating expense reduction, volume related expenses such as freight
reduced faster than sales. These decreases were partially offset by increases in medical costs. Also, approximately $1.1
million of expenses related to non-recurring integration costs and restructuring charges associated with the CCSG acquisition
and approximately $3.4 million of executive separation costs were included in operating expenses for fiscal year 2015.
Operating expenses represented approximately 31.9% of net sales in fiscal 2016, as compared to approximately
32.2% in fiscal 2015, respectively. Excluding the reduction in non-recurring charges discussed above, operating expenses as
a percentage of net sales in fiscal 2016 remained below the prior fiscal year level. This is due to the cost savings initiatives
mentioned above.
Payroll and payroll related costs represented approximately 55.0% of total operating expenses in fiscal 2016, as
compared to approximately 53.3% in fiscal 2015. Included in these costs are salary, incentive compensation, sales
commission and fringe benefit costs. An increase in fringe benefit costs was the main driver for the increase in payroll and
payroll related costs in fiscal 2016 as compared to fiscal 2015. Effective January 1, 2016, the Company transitioned from a
self-insured plan to a fully insured private healthcare exchange. As a result of associates anticipating this transition, the
Company experienced increased medical costs towards the end of calendar year 2015. These increases were offset by lower
payroll costs, including sales commissions and overtime costs.
Freight expense was approximately $118.2 million in fiscal 2016, as compared to $123.9 million in fiscal 2015. The
primary driver of this decrease was decreased sales.
21
Income from Operations
Income from operations decreased 0.9% to $376.0 million in fiscal 2016, as compared to $379.5 million in fiscal
2015. This decrease was primarily attributable to a decrease in gross profit, offset in part by a decrease in operating expenses
described above. Income from operations as a percentage of net sales increased to 13.1% in fiscal 2016 as compared to 13.0%
for the prior fiscal year primarily due to a decrease in operating expenses as discussed above, partially offset by a decrease in
gross margin.
Other Expense
The decrease in other expense in fiscal 2016 compared to fiscal 2015 was primarily due to decreases in interest
expense resulting from lower Credit Facility balances during the first three quarters of fiscal 2016.
Provision for Income Taxes
Our fiscal 2016 effective tax rate was 37.8% as compared to 38.0% in fiscal 2015. This fluctuation resulted from
changes in the tax laws, income allocation and regulations in the various jurisdictions in which we operate and expiring
statutes of limitations.
Net Income
The factors which affected net income for fiscal 2016 as compared to the prior period have been discussed above.
Fiscal Year Ended August 29, 2015 Compared to the Fiscal Year Ended August 30, 2014
The table below summarizes the Company’s results of operations both in dollars (in thousands) and as a percentage
of net sales for the periods indicated:
Fiscal Years Ended
August 29, 2015
(52 weeks)
$
2,910,379
1,593,804
1,316,575
937,046
379,529
(6,388)
373,141
141,833
231,308
$
$
%
100.0%
54.8%
45.2%
32.2%
13.0%
(0.2)%
12.8%
4.9%
7.9%
August 30, 2014
(52 weeks)
$
%
$
$
2,787,122
1,500,866
1,286,256
903,072
383,184
(3,659)
379,525
143,458
236,067
100.0%
53.9%
46.1%
32.4%
13.7%
(0.1)%
13.6%
5.1%
8.5%
$
$
Change
$
123,257
92,938
30,319
33,974
(3,655)
(2,729)
(6,384)
(1,625)
(4,759)
%
4.4%
6.2%
2.4%
3.8%
(1.0)%
74.6%
(1.7)%
(1.1)%
(2.0)%
Net sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Total other expense
Income before provision for income
Provision for income taxes
Net income
Net Sales
Net sales increased 4.4%, or approximately $123.3 million, for the fiscal year ended 2015. We estimate that this
$123.3 million increase in net sales is comprised of: (i) approximately $135.1 million of higher sales volume; partially offset
by (ii) $3.7 million from pricing, which includes changes in customer and product mix, discounting and other items; and (iii)
approximately $8.1 million from unfavorable foreign currency fluctuations. Of the above $123.3 million increase in net sales,
our Large Account Customers increased by approximately $108.0 million and there was an increase in our remaining
business of approximately $15.3 million.
The table below shows the change in our fiscal quarterly and annual 2015 average daily sales by total company and
by customer type compared to the same periods in the prior fiscal year:
22
Average Daily Sales Percentage Change
(unaudited)
Thirteen
Week Period
Ended Fiscal
Q1
Thirteen
Week Period
Ended Fiscal
Q2
Thirteen
Week Period
Ended Fiscal
Q3
Thirteen
Week Period
Ended Fiscal
Q4
Fiscal Year
Ended
% of Total
Business
7.8 %
4.8 %
15.6 %
6.8 %
4.1 %
14.0 %
3.5 %
1.2 %
10.1 %
0.1 %
(1.8) %
5.4 %
4.4 %
2.0 %
11.0 %
70 %
30 %
2015 vs. 2014 Fiscal Period
Total Company
Manufacturing Customers(1)
Non-Manufacturing Customers(1)
(1) Excludes U.K. operations.
Exclusive of customers in the U.K., average order size increased to approximately $417 in fiscal 2015 as compared
to $409 in fiscal 2014.
Sales made through our eCommerce platforms represented 55.6% of consolidated net sales in fiscal 2015, compared
to 48.0% of consolidated net sales in fiscal 2014. This increase was primarily associated with the MSC website, EDI, and
vending machine systems.
Gross Profit
Gross profit margin was 45.2% in fiscal 2015 as compared to 46.1% in fiscal 2014. The decline in gross profit
margin was primarily a result of increases in product costs, changes in pricing, customer and product mix and growth in our
vending program sales.
Operating Expenses
Operating expenses increased 3.8% to $937.0 million in fiscal 2015, as compared to $903.1 million in fiscal
2014. The increase is primarily the result of increased payroll and payroll related costs to support our increased revenues,
increased depreciation expense associated primarily with our infrastructure and other growth investments, and increased
advertising costs related to additional advertising activities. This increase was partially offset by a decrease in the incentive
compensation accrual, in addition to decreases in non-recurring integration costs and restructuring charges associated with
the CCSG acquisition and in relocation expenses associated with the establishment of our co-located headquarters in
Davidson, North Carolina. Approximately $1.1 million and $11.8 million of expenses related to non-recurring integration
costs and restructuring charges associated with the CCSG acquisition were included in operating expenses in fiscal years
2015 and 2014, respectively. Approximately $3.4 million and $3.0 million of executive separation costs were included in
operating expenses for fiscal years 2015 and 2014, respectively. In addition, approximately $2.6 million of expenses
associated with the establishment of our co-located headquarters in Davidson, North Carolina were included in operating
expenses in fiscal 2014.
Operating expenses represented approximately 32.2% of net sales in fiscal 2015, as compared to approximately
32.4% in fiscal 2014. Excluding the reduction in the non-recurring charges discussed above, operating expenses as a
percentage of net sales in fiscal 2015 increased as compared to the prior fiscal year.
Payroll and payroll related costs represented approximately 53.3% of total operating expenses in fiscal 2015, as
compared to approximately 53.5% in fiscal 2014. Included in these costs are salary, incentive compensation, sales
commission and fringe benefit costs. Salary, incentive compensation and sales commission increased in fiscal 2015 as
compared to the prior fiscal year, primarily due to an increase in salaries as a result of an increase in our staffing levels
primarily related to sales associates and other program development and volume related positions to support our growth
initiatives as well as significant investments in vending programs. Fringe benefit costs increased as a result of increased
medical costs of our self-insured group health plan. There was an increase in the number of participants in the plan as a result
of the increases in headcount discussed above, which resulted in an increase in the number of medical claims filed. The
number of medical claims filed increased 7.0% in fiscal 2015 as compared to fiscal 2014. In addition, the average cost per
claim increased by 5.3% in fiscal 2015 as compared to fiscal 2014. These increases were partially offset by a decrease in the
incentive compensation accrual.
23
Freight expense was approximately $123.9 million in fiscal 2015, as compared to $119.8 million in fiscal 2014. The
primary driver of this increase was increased sales.
Income from Operations
Income from operations decreased 1.0% to $379.5 million in fiscal 2015, as compared to $383.2 million in fiscal
2014. The decrease was primarily attributable to the increase in operating expenses described above, offset in part by an
increase in gross profit. Income from operations as a percentage of net sales decreased to 13.0% in fiscal 2015 as compared to
13.7% for fiscal 2014 primarily due to a decrease in the gross profit margin as discussed above.
Other Expense
The increase in other expense in fiscal 2015 compared to fiscal 2014 was primarily due to increases in interest
expense due to borrowings under our Credit Facility in fiscal 2015.
Provision for Income Taxes
Our fiscal 2015 effective tax rate was 38.0% as compared to 37.8% in fiscal 2014. This fluctuation resulted from
changes in the tax laws, income allocation and regulations in the various jurisdictions in which we operate and expiring
statutes of limitations.
Net Income
The factors which affected net income for fiscal 2015 as compared to the prior period have been discussed above.
Liquidity and Capital Resources
Total debt
Less: Cash and cash equivalents
Net debt
Equity
September 3,
2016
August 29,
2015
$
$
$
606,822
(52,890)
553,932
1,098,376
$
$
$
427,284
(38,267)
389,017
1,332,870
$
$
$
$ Change
179,538
(14,623)
164,915
(234,494)
As of September 3, 2016, we held $52.9 million in cash, substantially all 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, new facilities, facility 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 September 3, 2016, total borrowings outstanding, representing amounts due under the Credit Facility and Private
Placement Debt (discussed below), as well as all capital leases and financing arrangements, were approximately $607.8
million. At August 29, 2015, total borrowings outstanding, representing amounts due under the Credit Facility and all capital
leases and financing arrangements, were approximately $428.3 million.
As a distributor, maintaining adequate working capital to meet our customer needs is paramount. For the fiscal year
ended September 3, 2016, working capital management was the main contributor to the increase in the generation of cash
flow. Our cash flow from operations is generally utilized to meet capital expenditure commitments for property, plant and
equipment which typically consist of 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 mostly
due to the rate of increases or decreases in sales.
We believe, based on our current business plan, that our existing cash, 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.
We are continuing to take advantage of our strong balance sheet, which enables us to maintain optimal inventory
and service levels to meet customer demands, while many of our smaller competitors in our fragmented industry continue to
24
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
Customer Managed Inventory (“CMI”), VMI, and vending programs.
The table below summarizes information regarding the Company’s liquidity and capital resources:
September 3,
2016
Fiscal Years Ended
August 29,
2015
August 30,
2014
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Effect of foreign exchange rate changes on cash and cash
equivalents
Net increase (decrease) in cash and cash equivalents
$
$
$
$
$
401,103
(87,930)
(298,368)
(Amounts in thousands)
249,791
$
(51,405)
$
(207,045)
$
(182)
14,623
$
$
(228)
(8,887)
$
$
$
$
$
272,406
(94,206)
(187,039)
117
(8,722)
Tender Offer and Stock Purchase
In August 2016, the Company completed its “modified Dutch auction” tender offer and purchased 3.8 million shares
of the Company’s Class A common stock that were validly tendered and not validly withdrawn at a price of $72.50 per
share. The Company also completed its stock purchase of an aggregate of 1.2 million shares of its Class A common stock
certain of its Class B shareholders at a purchase price of $72.50 per share. See Note 9 “Shareholders’ Equity” in the Notes to
the Consolidated Financial Statements for more information about the tender offer and the stock purchase.
Operating Activities
Net cash provided by operating activities for the fiscal years ended September 3, 2016 and August 29, 2015 was
$401.1 million and $249.8 million, respectively. There are various increases and decreases contributing to this change.
Decreases in inventories and accounts receivable as a result of decreased sales volume contributed to the majority of the
increase in net cash provided by operating activities.
Net cash provided by operating activities for the fiscal years ended August 29, 2015 and August 30,
2014 was $249.8 million and $272.4 million, respectively. There are various increases and decreases contributing to this
change. An increase in inventories to support increased sales volume contributed to the majority of the decrease in net cash
provided by operating activities.
September 3,
2016
Fiscal Years Ended
August 29,
2015
August 30,
2014
Working Capital
Current Ratio
$
502,889
2.1
(Dollars in thousands)
610,089
$
2.4
$
652,601
3.1
The decrease in working capital and the current ratio at September 3, 2016 compared to August 29, 2015 is
primarily related to the decreases in inventories, as well as additional borrowings under the revolving loan facility in fiscal
2016. The decrease in working capital and the current ratio at August 29, 2015 compared to August 30, 2014 is primarily
25
related to the additional borrowings under the revolving loan facility in fiscal 2015, partially offset by the increase in
inventories.
Investing Activities
Net cash used in investing activities for the fiscal years ended September 3, 2016 and August 29, 2015 was
$87.9 million and $51.4 million, respectively. The increase in net cash used in investing activities resulted primarily from
cash used of approximately $33.7 million for the purchase of the Atlanta Customer Fulfillment Center (“Atlanta CFC”) and
the real property on which the Atlanta CFC is situated.
Net cash used in investing activities for the fiscal years ended August 29, 2015 and August 30, 2014 was $51.4
million and $94.2 million, respectively. The decrease in net cash used in investing activities resulted primarily from cash
used of approximately $25.0 million for investment in available for sale securities during fiscal 2014, relating to the
Columbus-Franklin County Finance Authority arrangement to construct our new customer fulfillment center in Columbus,
Ohio. In addition, cash used for expenditures for property, plant, and equipment decreased primarily due to the outfit of this
new customer fulfillment center, which occurred principally in fiscal 2014.
Financing Activities
Net cash used in financing activities for the fiscal years ended September 3, 2016 and August 29, 2015 was $298.4
million and $207.0 million, respectively. The major components contributing to the use of cash for fiscal 2016 were
repurchases of shares of Class A common stock of $383.8 million, mostly related to our tender offer and stock purchase
referenced above, repayments on the Credit Facility of $301.0 million related to both the revolving loan facility and term loan
facility, and cash dividends paid of $105.8 million. This was partially offset by borrowings under the revolving loan facility
and Private Placement Debt in the amount of $305.0 million and $175.0 million, respectively.
Net cash used in financing activities for the fiscal years ended August 29, 2015 and August 30, 2014 was $207.0
million and $187.0 million, respectively. The major components contributing to the use of cash for fiscal 2015 were cash
dividends paid of $284.2 million, repayments on the Credit Facility of $243.0 million related to both the revolving loan
facility and term loan, and the repurchase of shares of Class A common stock of $33.4 million. This was partially offset by
borrowings under the revolving loan facility in the amount of $336.0 million.
Long-term Debt
Credit Facility
In April 2013, in connection with the acquisition of CCSG, we entered into a $650.0 million credit facility (the
“Credit Facility”). See Note 8 “Debt and Capital Lease Obligations” in the Notes to the Consolidated Financial Statements
for more information about the Credit Facility.
During fiscal 2016, we borrowed $305.0 million under the revolving loan facility and repaid $276.0 million of the
revolving loan facility and $25.0 million of the term loan facility. As of September 3, 2016, there were $187.5 million and
$217.0 million of borrowings outstanding under the term loan facility and the revolving credit facility, respectively, of which
$267.0 million represents current maturities. As of August 29, 2015, there were $212.5 million and $188.0 million of
borrowings outstanding under the term loan facility and the revolving credit facility, respectively, of which $213.0 million
represents current maturities.
At September 3, 2016, we were in compliance with the operating and financial covenants of the Credit Facility. The
Company repaid borrowings of $66.0 million under the revolving loan facility and $12.5 million under the term loan facility
in September and October 2016. The current unused balance of $249.0 million of the revolving loan facility is available for
working capital purposes, if necessary.
Private Placement Debt
In July 2016, in connection with our tender offer and stock purchase, we completed the issuance and sale of
unsecured senior notes. See Note 8 “Debt and Capital Lease Obligations” in the Notes to the Consolidated Financial
Statements for more information about this transaction.
26
Capital Expenditures
Infrastructure Investments
In August 2016, we purchased the Atlanta CFC and the real property on which the Atlanta CFC is situated for a
purchase price of $33.7 million. The Atlanta CFC had previously been leased since 1989. See Note 2 “Summary of
Significant Accounting Policies” in the Notes to the Consolidated Financial Statements for more information about this
transaction.
In connection with our new customer fulfillment center in Columbus, Ohio, we spent approximately $3.3 million in
fiscal 2015 for costs to outfit the facility. We completed construction and began operations on September 30, 2014.
Upgrade of Core Financial Systems
In fiscal 2016, we initiated the upgrade of our core financial systems, including the receivables, payables, treasury,
fixed assets and general ledger. Capital expenditures relating to this project were approximately $6.6 million in fiscal 2016.
We expect to incur capital expenditures between $11.0 million and $13.0 million in fiscal 2017. We expect to complete this
project in Spring 2017.
Related Party Transactions
Atlanta CFC Purchase
In August 2016, the Company’s subsidiary, Sid Tool Co., Inc. completed a transaction with Mitchmar Atlanta
Properties, Inc. to purchase the Company’s Atlanta Customer Fulfillment Center (“Atlanta CFC”) and the real property on
which the Atlanta CFC is situated for a purchase price of $33.7 million. See Note 2 “Summary of Significant Accounting
Policies” in the Notes to the Consolidated Financial Statements for more information about this transaction.
Stock Purchase Agreement
In August 2016, the Company entered into a stock purchase agreement with the holders of the Company’s Class B
common stock. See Note 2 “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial
Statements for more information about the stock purchase.
Contractual Obligations
The following table summarizes our contractual obligations at September 3, 2016 (in thousands):
Contractual Obligations
Operating lease obligations(1)
Capital lease obligations and financing obligations, net of
interest(2)
Maturities of long-term debt obligations, net of interest
Estimated interest on debt, capital lease and financing
obligations(3)
Total contractual obligations
Total
32,031 $
$
Less than 1
year
12,081 $ 13,353 $
1 – 3 years
3 – 5 years
5,168 $
More than 5
years
1,429
28,268
579,500
471
690
267,000 137,500
27,107
—
— 175,000
48,210
7,927
11,816
9,992
18,475
$ 688,009 $ 287,479 $ 163,359 $
42,267 $ 194,904
(1) Certain of our operations are conducted on leased premises. 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
fiscal year 2026. In addition, we are obligated under certain equipment and automobile operating leases, which expire on
varying dates through fiscal 2020.
(2) As of September 3, 2016, the Company has entered into various capital leases and financing obligations for certain
information technology equipment, which expire on varying dates through fiscal 2020. In addition, included in this table
is the long-term capital lease with the Columbus-Franklin County Finance Authority entered into in connection with the
construction of the Company’s customer fulfillment center in Columbus, Ohio.
(3) Assumed interest rate of 1.52% through the maturity date which was the applicable borrowing rate for the Company for
any borrowings outstanding under the Credit Facility at September 3, 2016. Fixed interest rates of 2.65% and 2.90%
were used through the maturity dates on the Private Placement Debt.
27
The Company has recorded a non-current liability of $4.7 million for tax uncertainties and interest for the fiscal year
ended September 3, 2016. This amount is excluded from the table above, as the Company cannot make reliable estimates of
these cash flows by period. See Note 6 to the Consolidated Financial Statements.
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 2016, 2015 and 2014, 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. The analysis
includes inventory levels, sales information, inventory count adjustments, and the on-hand quantities relative to the sales
history for the product.
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 Indefinite-Lived 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 September 3, 2016, our goodwill totaled $624.1 million and our indefinite-lived intangible assets totaled $14.1
million. The Company annually reviews goodwill at the reporting unit level 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 and indefinite-lived intangible assets are tested for impairment by first
evaluating qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit and
indefinite-lived intangible assets are less than their carrying values. If it is concluded that this is the case, it is necessary to
perform the currently prescribed quantitative impairment test. Otherwise, the quantitative impairment test is not required. We
conducted our qualitative assessment of goodwill and intangibles in the fiscal fourth quarters of 2016 and 2015. The results
of the assessments indicated that based on the qualitative assessment of goodwill and intangible assets that have indefinite
lives, it was not likely that the fair values are less than the carrying amounts.
28
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 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 Financial Accounting Standards Board (the “FASB”) and 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
Refer to Note 2 to the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risks
In April 2013, in connection with the acquisition of CCSG, we entered into a $650.0 million credit facility (the
“Credit Facility”). See Note 8 “Debt and Capital Lease Obligations” in the Notes to the Consolidated Financial Statements
for more information about the Credit Facility.
Borrowings under our 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 impact our interest costs by
approximately $2.7 million 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.
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.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 3, 2016 AND AUGUST 29, 2015
CONSOLIDATED STATEMENTS OF INCOME FOR THE FISCAL YEARS ENDED SEPTEMBER 3, 2016,
AUGUST 29, 2015 AND AUGUST 30, 2014
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE FISCAL YEARS ENDED
SEPTEMBER 3, 2016, AUGUST 29, 2015 AND AUGUST 30, 2014
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE FISCAL YEARS ENDED
SEPTEMBER 3, 2016, AUGUST 29, 2015 AND AUGUST 30, 2014
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED SEPTEMBER 3,
2016, AUGUST 29, 2015 AND AUGUST 30, 2014
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
31
32
33
34
35
37
38
30
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 September 3, 2016 and August 29, 2015, 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 September
3, 2016. 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 September 3, 2016 and August 29, 2015, and the consolidated
results of their operations and their cash flows for each of the three fiscal years in the period ended September 3, 2016, 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 September 3, 2016, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 Framework) and our report dated November 1, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Jericho, New York
November 1, 2016
31
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
CURRENT ASSETS:
ASSETS
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $12,353
and $11,312, respectively
Inventories
Prepaid expenses and other current assets
Deferred income taxes
Total current assets
Property, plant and equipment, net
Goodwill
Identifiable intangibles, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Revolving credit note
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
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
September 3,
2016
August 29,
2015
$
52,890
$
38,267
392,463
444,221
45,290
46,627
981,491
320,544
624,081
105,307
33,528
2,064,951
217,000
50,050
110,601
100,951
478,602
339,772
148,201
966,575
$
$
403,468
506,631
39,067
44,643
1,032,076
291,156
623,626
119,805
33,523
2,100,186
188,000
25,165
114,328
94,494
421,987
214,119
131,210
767,316
$
$
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; 52,992,682 and 56,400,070 shares issued, respectively
Class B common stock (ten votes per share); $0.001 par value; 50,000,000
shares authorized; 11,933,233 and 13,295,747 shares issued and outstanding,
respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Class A treasury stock, at cost, 8,344,514 and 8,037,696 shares, respectively
Total shareholders’ equity
Total liabilities and shareholders’ equity
—
53
—
56
12
584,017
1,040,148
(19,098)
(506,756)
1,098,376
2,064,951
$
13
604,905
1,232,381
(17,252)
(487,233)
1,332,870
2,100,186
$
See accompanying notes to consolidated financial statements.
32
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
Gross profit
OPERATING EXPENSES
Income from operations
OTHER INCOME (EXPENSE):
Interest expense
Interest income
Other income (expense), net
Total other expense
Income before provision for income taxes
Provision for income taxes
Net income
PER SHARE INFORMATION:
Net income per common share:
Basic
Diluted
Weighted average shares used in computing net income
per common share:
Basic
Diluted
September 3,
2016
(53 weeks)
For the Fiscal Years Ended
August 29,
2015
(52 weeks)
August 30,
2014
(52 weeks)
$
$
$
2,863,505
1,574,647
1,288,858
912,898
375,960
2,910,379
1,593,804
1,316,575
937,046
379,529
2,787,122
1,500,866
1,286,256
903,072
383,184
(5,807)
654
924
(4,229)
371,731
140,515
231,216
3.78
3.77
$
$
$
(6,340)
771
(819)
(6,388)
373,141
141,833
231,308
3.75
3.74
$
$
$
(3,874)
414
(199)
(3,659)
379,525
143,458
236,067
3.78
3.76
$
$
$
60,908
61,076
61,292
61,487
62,026
62,339
See accompanying notes to consolidated financial statements.
33
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
September 3,
2016
(53 weeks)
For the Fiscal Years Ended
August 29,
2015
(52 weeks)
August 30,
2014
(52 weeks)
Net income, as reported
Foreign currency translation adjustments
Comprehensive income
$
$
231,216
(1,846)
229,370
$
$
231,308 $
(12,198)
219,110 $
236,067
(627)
235,440
See accompanying notes to consolidated financial statements.
34
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE FISCAL YEARS ENDED SEPTEMBER 3, 2016 (53 weeks), AUGUST 29, 2015 (52 weeks), AND AUGUST 30, 2014 (52 weeks),
(In thousands)
BALANCE at August 31, 2013
Exchange of Class B common stock
for Class A common stock
Exercise of common stock options,
including income tax benefits of
$5,573
Common stock issued under associate
stock purchase plan
Issuance of restricted common stock,
net of cancellations
Shares issued from restricted stock units,
including dividend equivalent units
Stock-based compensation
Purchase of treasury stock
Cash dividends paid on Class A
common stock
Cash dividends paid on Class B
common stock
Dividend equivalent units declared
Foreign currency translation adjustment
Net income
BALANCE at August 30, 2014
Exercise of common stock options,
including income tax benefits of
$3,299
Common stock issued under associate
stock purchase plan
Issuance of restricted common stock,
net of cancellations
Shares issued from restricted stock units,
including dividend equivalent units
Stock-based compensation
Class A Common Stock
Class B Common Stock
Shares
54,634
Amount
$
55
Shares
14,141
Amount
$
14
Additional
Paid-In
Capital
Retained
Earnings
$ 528,770 $ 1,132,868
Accumulated
Other
Class A Treasury Stock
Comprehensive
Loss
Shares
(4,427) 5,341
$
Amount at
Cost
Total
$ (266,897) $ 1,390,383
845
1
(845)
(1)
—
—
—
—
—
—
402
—
99
—
—
—
—
—
—
—
—
55,980
$
185
—
97
138
—
—
—
—
—
—
—
—
—
—
—
—
56
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
13,296
$
—
—
—
—
—
—
—
—
—
—
13
—
26,020
1,992
—
260
16,688
—
—
—
—
—
—
—
—
(64,393)
—
—
—
—
(18,214)
(260)
—
236,067
$ 573,730 $ 1,286,068
$
—
—
—
—
—
—
—
—
—
26,020
(54)
2,006
3,998
—
—
—
2,370
—
—
—
(191,359)
—
260
16,688
(191,359)
—
—
(64,393)
—
—
(627)
—
—
—
—
—
(5,054) 7,657
—
—
—
—
(18,214)
(260)
(627)
236,067
$ (456,250) $ 1,398,563
—
—
—
—
—
—
14,418
1,854
—
708
14,195
—
—
—
—
35
—
—
—
—
—
—
—
—
—
—
—
—
14,418
(63)
2,431
4,285
—
—
—
—
—
—
—
708
14,195
Purchase of treasury stock
Cash dividends paid on Class A
common stock
Cash dividends paid on Class B
common stock
Dividend equivalent units declared
Foreign currency translation adjustment
Net income
BALANCE at August 29, 2015
Exchange of Class B common stock
for Class A common stock
Exercise of common stock options,
including income tax benefits of
$830
Common stock issued under associate
stock purchase plan
Issuance of restricted common stock,
net of cancellations
Shares issued from restricted stock units,
including dividend equivalent units
Stock-based compensation
Purchase of treasury stock
Retirement of treasury stock
Cash dividends paid on Class A
common stock
Cash dividends paid on Class B
common stock
Dividend equivalent units declared
Foreign currency translation adjustment
Net income
BALANCE at September 3, 2016
—
—
—
—
—
—
56,400
$
—
—
—
—
—
—
56
—
—
—
—
—
—
13,296
$
—
—
—
—
—
—
13
—
—
—
(223,071)
—
—
444
(33,414)
(33,414)
—
—
(223,071)
—
—
—
—
(61,160)
(764)
—
231,308
$ 604,905 $ 1,232,381
$
—
—
—
—
—
—
(17,252) 8,038
(12,198)
—
—
—
—
—
(61,160)
(764)
(12,198)
231,308
$ (487,233) $ 1,332,870
1,363
1
(1,363)
(1)
—
—
—
—
—
—
144
1
—
—
(15)
—
74
—
—
(4,973)
—
—
—
(5)
—
—
—
—
—
—
—
—
—
—
—
—
52,993
$
—
—
—
—
—
53
—
—
—
—
11,933
$
—
—
—
—
—
—
—
—
—
—
—
12
8,239
1,649
—
147
13,985
—
(44,908)
—
—
—
—
—
—
(317,240)
—
—
—
—
—
—
—
—
8,240
(64)
2,435
4,084
—
—
—
5,344
(4,973)
—
—
—
(384,111)
362,153
—
147
13,985
(384,111)
—
—
(83,000)
—
—
—
(83,000)
—
—
—
—
(22,778)
(431)
—
231,216
$ 584,017 $ 1,040,148
$
—
—
(1,846)
—
—
—
—
—
(19,098) 8,345
—
—
—
—
(22,778)
(431)
(1,846)
231,216
$ (506,756) $ 1,098,376
See accompanying notes to consolidated financial statements.
36
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 3, 2016, AUGUST 29, 2015 AND AUGUST 30, 2014
(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
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
Investment in available for sale securities
Cash used in business acquisitions, net of cash received
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock
Payments of regular cash dividends
Payment of special cash dividend
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 financing obligations
Borrowings under Credit Facility
Proceeds from Private Placement Loan
Private Placement Loan financing costs
Payment of notes payable and revolving credit note under the Credit
Facility
Net cash used in financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
CASH AND CASH EQUIVALENTS, beginning of the year
CASH AND CASH EQUIVALENTS, end of the year
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
$
Cash paid for income taxes
Cash paid for interest
$
$
127,965
4,986
See accompanying notes to consolidated financial statements.
37
September 3,
2016
(53 weeks)
For the Fiscal Years Ended
August 29,
2015
(52 weeks)
August 30,
2014
(52 weeks)
$
231,216
$
231,308
$
236,067
71,930
13,985
752
6,997
15,007
(1,536)
69,729
14,195
1,453
6,665
15,035
(3,956)
64,946
16,688
2,361
4,629
11,829
(5,480)
2,595
61,047
(6,303)
142
5,271
169,887
401,103
(87,930)
—
—
(87,930)
(383,798)
(105,778)
—
(1,090)
1,536
4,084
7,410
453
305,000
175,000
(185)
(301,000)
(298,368)
(182)
14,623
38,267
52,890
(29,347)
(59,008)
1,268
(1,354)
3,803
18,483
249,791
(51,405)
—
—
(51,405)
(33,414)
(98,828)
(185,403)
(2,290)
3,956
4,285
11,119
530
336,000
—
—
(41,460)
(30,342)
(6,319)
1,857
17,630
36,339
272,406
(70,617)
(25,023)
1,434
(94,206)
(191,359)
(82,607)
—
(1,851)
5,480
3,998
20,447
1,353
135,000
—
—
(243,000)
(207,045)
(228)
(8,887)
47,154
38,267
122,988
5,843
$
$
$
(77,500)
(187,039)
117
(8,722)
55,876
47,154
128,558
3,087
$
$
$
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 an additional office support center in Southfield, Michigan and serves
primarily domestic markets through its distribution network of 85 branch offices and 12 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.
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 year 2016 contain activity for 53 weeks while 2015 and 2014 contain activity for 52
weeks. 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 366,000 active customer accounts (customers that
have made at least one purchase in the last 12 months) at September 3, 2016 (excluding U.K. operations). 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 creditworthiness and
provides a reserve for accounts that are potentially uncollectible.
The Company’s cash include deposits with commercial banks. The terms of these deposits and investments provide
that all monies are available to the Company upon demand. The Company maintains the majority of its cash 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.
38
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 and are not highly susceptible to obsolescence. In addition, many of the Company’s inventories are eligible for
return under various supplier rebate 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 three 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. Goodwill increased $455 in fiscal 2016, related to foreign currency translation adjustments. 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 and indefinite-lived intangible assets are tested for impairment by first evaluating qualitative factors to
determine whether it is more likely than not that the fair value of the reporting unit and indefinite-lived intangible assets are
less than their carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed
quantitative impairment test. Otherwise, the quantitative impairment test is not required. Based on the qualitative assessment
of goodwill performed by the Company in its respective fiscal fourth quarters, there was no indicator of impairment of
goodwill for fiscal years 2016, 2015 and 2014. Based on the qualitative assessment of intangible assets that have indefinite
lives performed by the Company in its fiscal fourth quarters of 2016 and 2015 and the quantitative assessment performed by
the Company in its fiscal fourth quarter of 2014, there were no indicators of impairment of intangible assets that have
indefinite lives.
39
The components of the Company’s other intangible assets for the fiscal years ended September 3, 2016 and August
29, 2015 are as follows:
For the Fiscal Years Ended
September 3, 2016
August 29, 2015
Customer Relationships
Contract Rights
Trademark
Trademarks
Total
Weighted Average Useful
Life (in years)
5 - 18
10
1 - 5
Indefinite
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$
$
175,160 $
23,100
3,613
14,132
216,005 $
(85,316) $
(23,100)
(2,282)
—
(110,698) $
175,160 $
23,100
2,900
15,130
216,290 $
(73,508)
(21,368)
(1,609)
—
(96,485)
For fiscal years 2016 and 2015 the Company recorded approximately $112 and $212 of intangible assets,
respectively, consisting of the registration and application of new trademarks. During fiscal 2016, approximately $397 in
gross intangible assets, and any related accumulated amortization, were written off related to trademarks that are no longer
being utilized. 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 $14,478, $16,580, and $16,851 during fiscal years 2016, 2015, and 2014,
respectively. Estimated amortization expense for each of the five succeeding fiscal years is as follows:
Fiscal Year
2017
2018
2019
2020
2021
$8,006
7,804
7,338
6,485
5,799
Impairment of Long-Lived Assets
The Company periodically evaluates the net realizable value of long-lived assets, including definite lived intangible
assets and property and equipment, 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 2016, 2015 and 2014.
Deferred Catalog Costs
The costs of producing and distributing the Company’s principal catalogs are deferred ($5,174 and $4,948 at
September 3, 2016 and August 29, 2015, 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 from the date the catalogs are mailed. 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
$19,242, $24,101 and $20,799 during the fiscal years 2016, 2015, and 2014, 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
statements of income.
40
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 $118,174, $123,900, and $119,796 during fiscal years 2016,
2015, and 2014, 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 date of grant. The
value of awards that are ultimately expected to vest is recognized as an expense over the requisite service periods. The fair
value of our restricted stock awards and units is based on the closing market price of our common stock on the date of grant.
We estimated the fair value of stock options granted using a Black-Scholes option-pricing model. This model requires us to
make estimates and assumptions with respect to the expected term of the option, the expected volatility of the price of our
common stock and the expected forfeiture rate. The fair value is then amortized on a straight-line basis over the requisite
service periods of the awards, which is generally the vesting period.
The expected term is based on the historical exercise behavior of grantees, as well as the contractual life of the
option grants. The expected volatility factor is based on the volatility of the Company's common stock for a period equal to
the expected term of the stock option. In addition, forfeitures of share-based awards are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate
pre-vesting option and restricted stock award and unit forfeitures and record stock-based compensation expense only for
those awards that are expected to vest.
Treasury Stock
The Company accounts for treasury stock under the cost method, using the first-in, first-out flow assumption, and is
included in “Class A treasury stock, at cost” on the accompanying consolidated balance sheets. When the Company reissues
treasury stock, the gains are recorded in additional paid-in capital (“APIC”), while the losses are recorded to APIC to the
extent that the previous net gains on the reissuance of treasury stock are available to offset the losses. If the loss is larger
than the previous gains available, then the loss is recorded to retained earnings. When treasury stock is retired, the par value
of the repurchased shares is deducted from common stock and the excess repurchase price over par is deducted by allocation
to both APIC and retained earnings. The amount allocated to APIC is calculated as the original cost of APIC per share
outstanding using the first-in, first-out flow assumption and is applied to the number of shares repurchased. Any remaining
amount is allocated to retained earnings.
41
Related Party Transactions
Atlanta CFC Purchase
In August 2016, the Company’s subsidiary, Sid Tool Co., Inc. (“Sid Tool”) completed a transaction with Mitchmar
Atlanta Properties, Inc. (“Mitchmar”) to purchase our Atlanta CFC and the real property on which the Atlanta CFC is situated
for a purchase price of $33,650. Sid Tool had leased the Atlanta CFC from Mitchmar since 1989. Mitchmar is owned by
Mitchell Jacobson, the Company’s Chairman, and his sister, Marjorie Gershwind Fiverson, and two family related trusts, and
the beneficiaries of one of such trusts include the children of Erik Gershwind, the Company’s Chief Executive Officer. The
purchase price was determined by an independent appraisal process, as provided in the lease agreement for the Atlanta
facility.
The transaction was approved by the Company’s Board of Directors upon the recommendation of a special
committee of independent directors which was responsible for evaluating the terms of the transaction. Both the Company’s
Board of Directors and the special committee determined that the transaction was in the best interests of the Company and its
shareholders. The special committee was advised by independent counsel in connection with its evaluation and negotiation
of the terms of the transaction and the purchase agreement.
We paid rent under an operating lease to Mitchmar of approximately $2,110, $2,318 and $2,297, respectively, for
fiscal years 2016, 2015 and 2014 in connection with our occupancy of our Atlanta CFC.
Stock Purchase Agreement
In July 2016, the Company entered into an agreement (the “Stock Purchase Agreement”) with Mitchell Jacobson,
the Company’s Chairman, his sister, Marjorie Gershwind Fiverson, Erik Gershwind, the Company’s President and Chief
Executive Officer, and two other beneficial owners (collectively, the “Sellers”) of the Company’s Class B common
stock. Pursuant to the Stock Purchase Agreement, each Seller agreed to sell or cause to be sold by trusts or other entities on
whose behalf such Seller acted, and the Company agreed to purchase, an aggregate number of shares of Class A common
stock, at the price per share to be paid by the Company in the Company’s “modified Dutch auction” tender offer commenced
on July 7, 2016, such that the Sellers’ aggregate percentage ownership and voting power in the Company would remain
substantially the same as prior to the tender offer. The Sellers also agreed not to participate in the tender offer. The Stock
Purchase Agreement was approved by the Nominating and Corporate Governance Committee of the Company’s Board of
Directors, as well as by the disinterested members of the Company’s Board of Directors. On August 19, 2016, pursuant to
the Stock Purchase Agreement, the Company purchased an aggregate of 1,152 shares of its Class A common stock from the
Sellers and/or such trusts or other entities at a purchase price of $72.50 per share, for an aggregate purchase price of
approximately $83,524. The purchase price per share paid to the sellers pursuant to the Stock Purchase Agreement was equal
to the purchase price per share paid to shareholders whose shares were purchased in the Company’s tender offer.
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 taxable bonds are estimated based on
observable inputs in non-active markets. Under this method, the Company’s fair value of the taxable bonds was not
significantly different than the carrying value at September 3, 2016 and August 29, 2015. The fair values 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 September 3, 2016 and August 29,
2015.
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.
42
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 $4,432 and $4,693 as of September 3, 2016 and August 29, 2015,
respectively.
Comprehensive Income
Comprehensive income consists of consolidated net income and foreign currency translation adjustments. Foreign
currency translation adjustments included in comprehensive income were not tax effected as investments in international
affiliates are deemed to be permanent.
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.”) and Canada branches are not significant to the Company’s total operations. For fiscal
2016, U.K. 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. We do not disclose revenue information by product category as it is impracticable to do so as a result of our numerous
product offerings and the way our business is managed.
Recently Adopted Accounting Pronouncements
Presentation of Debt Issuance Costs
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30), which requires that debt issuance costs
related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that
debt liability. For public business entities, the ASU is effective for financial statements issued for fiscal years beginning after
December 15, 2015, and interim periods within those fiscal years. Entities should apply the new guidance on a retrospective
basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of
applying the new guidance. The FASB allowed early adoption of this standard, and therefore, the Company adopted ASU
2015-03 during the fourth quarter of fiscal 2016. As a result of adopting this standard on a retrospective basis, $1,020 of debt
issuance costs that were previously presented in long-term other assets as of August 29, 2015 are now included within current
maturities of long-term debt and long-term debt, net of current maturities.
Accounting Pronouncements Not Yet Adopted
Share-based Payments
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting,
which includes provisions intended to simplify various aspects related to how share-based payments are accounted for and
presented in the financial statements. This ASU is effective for annual reporting periods beginning after December 15, 2016,
and interim periods within that reporting period. Early adoption is permitted. The new standard is effective for the Company
for its fiscal 2018 first quarter. The Company is currently evaluating the impact the adoption of the pronouncement may
have on its financial position, results of operations or cash flows.
43
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and
comparability by providing additional information to users of financial statements regarding an entity's leasing activities.
ASU 2016-02 requires reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all
lease arrangements. ASU 2016-02 is effective for annual reporting periods, and interim periods therein, beginning after
December 15, 2018. The new standard is effective for the Company for its fiscal 2020 first quarter. The guidance will be
applied on a modified retrospective basis beginning with the earliest period presented. The Company is currently evaluating
this standard to determine the impact of adoption on its consolidated financial statements.
Deferred Taxes
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. This
update requires an entity to classify deferred tax liabilities and assets as non-current within a classified balance sheet. ASU
2015-17 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016. This
update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented.
Early application is permitted. The new standard is effective for the Company for its fiscal 2018 first quarter. The Company
does not expect adoption of ASU 2015-17 to have a material impact on its financial position, results of operations or cash
flows.
Simplifying the Measurement of Inventory
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330), which
requires an entity to measure inventory at the lower of cost or net realizable value, which consists of the estimated selling
prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. For
public entities, the updated guidance is effective for fiscal years beginning after December 15, 2016, including interim
periods within those fiscal years. The guidance is to be applied prospectively with earlier application permitted as of the
beginning of an interim or annual reporting period. The new standard is effective for the Company for its fiscal 2018 first
quarter. The Company does not expect adoption of ASU 2015-11 to have a material impact on its financial position, results of
operations or cash flows.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which
requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or
services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes
effective. The new standard is effective for the Company for its fiscal 2019 first quarter. Early application is permitted. The
standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the
effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has neither
selected a transition method, nor determined the impact that the adoption of the pronouncement may have on its financial
position, results of operations or cash flows.
Reclassifications
Certain prior year amounts have been reclassified to conform to the fiscal 2016 presentation. These reclassifications
did not have a material impact on the presentation of the consolidated financial statements. See “Recently Adopted
Accounting Pronouncements” above regarding the impact of our adoption of ASU 2015-03 upon the classification of debt
issuance costs in our consolidated balance sheets.
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.
44
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 September 3, 2016 and August 29, 2015, the Company did not have any cash equivalents.
In connection with the construction of the Company’s customer fulfillment center in Columbus, Ohio, the Company
entered into an arrangement during fiscal 2013 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. Under this arrangement, the Finance Authority issued taxable bonds to finance the structure and
site improvements of the Company’s customer fulfillment center. The bonds ($27,022 at both September 3, 2016 and August
29, 2015) are classified as available for sale securities in accordance with ASC Topic 320. The securities are recorded at fair
value in Other Assets 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 gains or
losses on these securities during fiscal year 2016. The outstanding principal amount of each bond bears interest at the rate
of 2.4% per 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, is 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 September 3, 2016, approximates its fair value.
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 September 3, 2016 and August 29, 2015 due to the short-term maturity
of these items.
During the fiscal years ended September 3, 2016 and August 29, 2015, the Company had no 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
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, “Earnings Per Share”. 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 securities based on their respective weighted average shares outstanding for the period.
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 September 3, 2016, August 29, 2015 and August 30, 2014, respectively:
September 3,
2016
(53 weeks)
For the Fiscal Years Ended
August 29,
2015
(52 weeks)
August 30,
2014
(52 weeks)
Net income as reported
Less: Distributed net income available to participating securities
Less: Undistributed net income available to participating securities
$
231,216 $
(308)
(601)
231,308 $
(1,350)
—
236,067
(481)
(1,146)
Numerator for basic net income per share:
Undistributed and distributed net income available to common shareholders
$
230,307 $
229,958 $
234,440
Add: Undistributed net income allocated to participating securities
Less: Undistributed net income reallocated to participating securities
601
(600)
—
—
1,146
(1,140)
45
Numerator for diluted net income per share:
Undistributed and distributed net income available to common shareholders $
230,308 $
229,958 $
234,446
Denominator:
Weighted average shares outstanding for basic net income per share
Effect of dilutive securities
Weighted average shares outstanding for diluted net income per share
60,908
168
61,076
61,292
195
61,487
62,026
313
62,339
Net income per share Two-class method:
Basic
Diluted
$
$
3.78 $
3.77 $
3.75 $
3.74 $
3.78
3.76
Antidilutive stock options of 843 and 678 were not included in the computation of diluted earnings per share for the
fiscal years ended September 3, 2016 and August 29, 2015. There were no antidilutive stock options included in the
computation of diluted earnings per share for the fiscal year ended August 30, 2014.
5. 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
Computer systems, equipment and software
Number of Years
—
3 - 40
$
The lesser of lease term or 31.5
3 - 20
3 - 5
Less: accumulated depreciation and amortization
Total
$
September 3,
2016
August 29,
2015
$
27,205
178,828
2,551
172,347
317,096
698,027
377,483
320,544 $
20,783
150,870
4,384
165,589
289,873
631,499
340,343
291,156
The amount of capitalized interest, net of accumulated amortization, included in property, plant and equipment was
$796 and $847 at September 3, 2016 and August 29, 2015, respectively.
Depreciation expense was $57,052, $52,799 and $47,729 for the fiscal years ended September 3, 2016, August 29,
2015, and August 30, 2014, respectively.
6. INCOME TAXES
The provision for income taxes is comprised of the following:
Current:
Federal
State and local
Deferred:
Federal
State and local
Total
September 3,
2016
For the Fiscal Years Ended
August 29,
2015
August 30,
2014
$
$
109,699
15,621
125,320
13,993
1,202
15,195
140,515
$
$
46
109,575
17,339
126,914
13,987
932
14,919
141,833
$
$
115,186
16,528
131,714
10,369
1,375
11,744
143,458
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
$
September 3,
2016
August 29,
2015
(53,580) $
(1,347)
(88,607)
(143,534)
4,089
9,995
1,710
9,813
11,933
9,087
46,627
(96,907) $
(51,204)
(1,155)
(73,996)
(126,355)
3,807
9,036
2,409
9,831
11,788
7,772
44,643
(81,712)
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
September 3,
2016
35.0 %
3.0
(0.2)
37.8 %
For the Fiscal Years Ended
August 29,
2015
35.0 %
3.1
(0.1)
38.0 %
August 30,
2014
35.0 %
3.1
(0.3)
37.8 %
The aggregate changes in the balance of gross unrecognized tax benefits during fiscal 2016 and 2015 were as
follows:
Beginning Balance
Additions for tax positions relating to current year
Additions for tax positions relating to prior years
Settlements
Lapse of statute of limitations
Ending Balance
September 3,
2016
August 29,
2015
$
$
10,333
2,745
—
(174)
(2,294)
10,610
$
$
9,350
2,617
104
(41)
(1,697)
10,333
Included in the balance of unrecognized tax benefits at September 3, 2016 is $1,039 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 of limitations in
state jurisdictions.
The Company recognizes interest expense and penalties in the provision for income taxes. The fiscal years 2016,
2015 and 2014 provisions include interest and penalties of $6, $19 and $0, respectively. The Company has accrued $235 and
$163 for interest and penalties as of September 3, 2016 and August 29, 2015, respectively.
With limited exceptions, the Company is no longer subject to Federal income tax examinations through fiscal 2013
and state income tax examinations through fiscal 2012.
47
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
Accrued payroll and fringe
Accrued bonus
Accrued sales, property and income taxes
Accrued sales rebates and returns
Accrued other
Total accrued liabilities
September 3,
2016
August 29,
2015
$
$
31,416
12,728
13,541
14,206
29,060
100,951
$
$
25,597
12,820
12,259
13,394
30,424
94,494
8. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt at September 3, 2016 and August 29, 2015 consisted of the following:
Credit Facility:
Revolver
Term loan
Private Placement Debt:
Senior notes, series A
Senior notes, series B
Capital lease and financing obligations
Less: unamortized debt issuance costs
Total debt
Less: current maturities of long-term debt(1)
Long-term debt
September 3,
August 29,
2016
2015
$
217,000 $
187,500
188,000
212,500
75,000
100,000
28,268
(946)
606,822 $
(267,050)
339,772 $
-
-
27,804
(1,020)
427,284
(213,165)
214,119
$
$
(1) Net of unamortized debt issuance costs expected to be amortized in the next twelve months.
Credit Facility
In April 2013, in connection with the acquisition of its Class C Solutions Group, the Company entered into a new
$650,000 credit facility (the “Credit Facility”). The Credit Facility, which matures in April 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 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 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 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
48
undrawn and unexpired amount of each letter of credit. The applicable borrowing rate for the Company for any borrowings
outstanding under the Credit Facility at September 3, 2016 was 1.52%, which represented LIBOR plus 1.00%. 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 Credit Facility bear interest based on LIBOR with
one-month interest periods.
The Credit Facility contains several restrictive covenants including the requirement that the Company maintain a
maximum consolidated leverage ratio of total indebtedness to EBITDA 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 Credit
Facility. Borrowings under the Credit Facility are guaranteed by certain of the Company’s subsidiaries.
During fiscal 2016, the Company borrowed $305,000 under the revolving loan facility and repaid $276,000 and
$25,000 of the revolving loan facility and term loan facility, respectively. During fiscal 2015, the Company borrowed
$336,000 under the revolving loan facility and repaid $218,000 and $25,000 of the revolving loan facility and term loan
facility, respectively.
At September 3, 2016 and August 29, 2015, the Company was in compliance with the operating and financial
covenants of the Credit Facility.
Private Placement Debt
In July 2016, in connection with the Company’s “modified Dutch auction” tender offer, the Company completed the
issuance and sale of the following unsecured senior notes (collectively “Private Placement Debt”):
•
•
$75,000 aggregate principal amount of 2.65% Senior Notes, Series A, due July 28, 2023 (“Senior notes,
series A”); and
$100,000 aggregate principal amount of 2.90% Senior Notes, Series B, due July 28, 2026 (“Senior notes,
series B”)
The Private Placement Debt is due, in full, on the stated maturity dates. Interest is payable semi-annually at the
fixed stated interest rates. The Private Placement Debt contains several restrictive covenants including the requirement that
the Company maintain a maximum consolidated leverage ratio of total indebtedness to EBITDA (earnings before interest
expense, taxes, depreciation, amortization and stock based compensation) 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 Private
Placement Debt. At September 3, 2016, the Company was in compliance with the operating and financial covenants of the
Private Placement Debt.
Maturities of debt, excluding capital lease and financing obligations, as of September 3, 2016 are as follows:
Fiscal Year
2017
2018
2019
2020
2021
Thereafter
Total
Maturities of
Debt
267,000
137,500
—
—
—
175,000
579,500
$
$
49
Capital Lease and Financing Obligations
In connection with the construction of the Company’s customer fulfillment center in Columbus, Ohio, 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 September 3, 2016 and August 29, 2015,
the capital lease obligation was approximately $27,022. Under this arrangement, the Finance Authority has issued taxable
bonds to finance the structure and site improvements of the Company’s customer fulfillment center in the amount of
$27,022 outstanding at both September 3, 2016 and August 29, 2015.
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 September 3, 2016, the Company entered into a capital lease and various financing
obligations for certain information technology equipment totaling $1,321 and $453, respectively. During the fiscal year ended
August 29, 2015, the Company entered into various capital leases and financing obligations for certain information
technology equipment totaling $530.
The gross amount of property and equipment acquired under these capital leases and financing agreements at
September 3, 2016 and August 29, 2015 was approximately $30,298 and $32,535, respectively. Related accumulated
amortization totaled $2,878 and $4,815 as of September 3, 2016 and August 29, 2015, respectively. Amortization expense of
property and equipment acquired under these capital leases and financing arrangements was approximately $2,073 for the
fiscal year ended 2016.
At September 3, 2016, approximate future minimum payments under capital leases and financing arrangements are
as follows:
Fiscal Year
2017
2018
2019
2020
Total minimum lease payments
Less: amount representing interest
Present value of minimum lease payments
Less: current portion
Long-term capital leases and financing arrangements
9. SHAREHOLDERS’ EQUITY
Treasury Stock Purchases
Payments under capital leases and
financing arrangements
$
$
$
$
1,120
993
993
27,324
30,430
2,162
28,268
471
27,797
In July 2016, the Company commenced a tender offer to purchase for cash up to $300,000 in value of shares of its
Class A common stock through a “modified Dutch auction” tender offer at a price per share of not less than $66.00 and not
greater than $72.50 (the “Tender Offer”). In addition, the Company entered into a stock purchase agreement with the holders
of the Company’s Class B common stock (the “Class B Holders”) to purchase (the “Stock Purchase”) from the Class B
Holders a pro rata number of shares at the price per share to be paid by the Company in the Tender Offer, such that the Class
B Holders’ percentage ownership and voting power in the Company would remain substantially the same as prior to the
Tender Offer. The Class B Holders also agreed not to participate in the Tender Offer.
In August 2016, the Company completed the Tender Offer and purchased 3,821 shares of the Company’s Class A
common stock that were validly tendered and not validly withdrawn at a price of $72.50 per share. The Company also
completed the Stock Purchase of an aggregate of 1,152 shares of its Class A common stock from the Class B Holders at a
50
purchase price of $72.50 per share. In total, as a result of the Tender Offer and Stock Purchase, the Company purchased
4,973 shares at a price of $72.50 per share for an aggregate cost of $360,566, excluding fees and expenses. The Company
incurred costs of $1,587 in connection with the Tender Offer and Stock Purchase resulting in a total cost of $362,153, or
$72.82 per share for the shares repurchased, which were recorded to treasury stock. The Company retired all 4,973 shares
purchased as a result of the Tender Offer and Stock Purchase.
During fiscal 1999, the Board of Directors established the MSC Stock Repurchase Plan (the “Repurchase Plan”). In
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 September 3, 2016, the maximum number of shares
that may yet be repurchased under the Repurchase Plan was 1,444 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 2016 and 2015, the Company repurchased 5,344 shares and 444
shares, respectively, of its Class A common stock for $384,111 and $33,414, respectively. 72 and 112 of these shares were
repurchased by the Company to satisfy the Company’s associates’ tax withholding liability associated with its share-based
compensation program during fiscal 2016 and 2015, respectively. Shares of the Company’s common stock purchased
pursuant to the Tender Offer and the Stock Purchase, as well as shares purchased to satisfy the Company’s associates’ tax
withholding liability associated with its share-based compensation program did not reduce the number of shares that may be
repurchased under the Repurchase Plan.
The Company reissued 64 and 63 shares of treasury stock during fiscal 2016 and 2015, respectively, to fund the
Associate Stock Purchase Plan (See Note 10).
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 September 3, 2016, there were no
shares of preferred stock issued or outstanding.
Cash Dividend
In 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 27, 2016, the Board of Directors declared a quarterly cash dividend of $0.45 per share, payable on
November 29, 2016 to shareholders of record at the close of business on November 15, 2016. The dividend will result in a
payout of approximately $25,461 based on the number of shares outstanding at October 17, 2016.
51
10. ASSOCIATE BENEFIT PLANS
The Company accounts for all share-based payments in accordance with ASC 718. Stock-based compensation
expense included in operating expenses for the fiscal years ended September 3, 2016, August 29, 2015 and August 30, 2014
was as follows:
September 3,
2016
For the Fiscal Years Ended
August 29,
2015
August 30,
2014
$
$
$
4,382
6,112
3,205
286
13,985
(5,206)
8,779 $
4,614 $
8,139
1,105
337
14,195
(5,266)
8,929 $
5,324
8,898
2,167
299
16,688
(6,227)
10,461
Stock options
Restricted share awards
Restricted stock units
Associate Stock Purchase Plan
Total
Deferred income tax benefit
Stock-based compensation expense, net
Stock Compensation Plans
2015 Omnibus Incentive Plan
At the Company’s annual meeting of shareholders held on January 15, 2015, the shareholders approved the MSC
Industrial Direct Co., Inc. 2015 Omnibus Incentive Plan (“2015 Omnibus Plan”). The 2015 Omnibus Plan replaced the
Company’s 2005 Omnibus Incentive Plan (the “Prior Plan”) and beginning January 15, 2015, all awards are granted under
the 2015 Omnibus Plan. Awards under the 2015 Omnibus Plan may be made in the form of stock options, stock appreciation
rights, restricted stock, restricted stock units, other share-based awards, and performance cash, performance shares or
performance units. All outstanding awards under the Prior Plan will continue to be governed by the terms of the Prior Plan.
Upon approval of the 2015 Omnibus Plan, the maximum aggregate number of shares of common stock authorized to be
issued under the 2015 Omnibus Plan was 5,217 shares, of which 4,911 authorized shares of common stock were remaining as
of September 3, 2016.
Stock Options
A summary of the status of the Company’s stock options at September 3, 2016 and changes during the fiscal year
then ended is presented in the table and narrative below:
Outstanding - beginning of year
Granted
Exercised
Canceled/Forfeited
Outstanding - end of year
Exercisable - end of year
2016
Shares
1,274
$
586
(144)
(71)
1,645
626
$
$
Weighted-Average
Exercise Price
73.10
58.90
51.47
74.68
69.86
71.78
The total intrinsic value of options exercised during the fiscal years ended September 3, 2016, August 29, 2015 and
August 30, 2014 was $3,129, $3,390, and $13,988, respectively. The unrecognized share-based compensation cost related to
stock option expense at September 3, 2016 was $7,088 and will be recognized over a weighted average of 2.4 years.
52
Stock option awards outstanding under the Company’s incentive plans have been granted at exercise prices that are
equal to the market value of its common stock on the date of grant. Such options generally vest over a period four years and
expire at seven years after the grant date. The Company recognizes compensation expense ratably over the vesting period, net
of estimated forfeitures. The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock
options granted, which requires the input of both subjective and objective assumptions as follows:
Expected Term — The estimate of expected term is based on the historical exercise behavior of grantees, as well as the
contractual life of the option grants.
Expected Volatility — The expected volatility factor is based on the volatility of the Company's common stock for a period
equal to the expected term of the stock option.
Risk-free Interest Rate — The risk-free interest rate is determined using the implied yield for a traded zero-coupon
U.S. Treasury bond with a term equal to the expected term of the stock option.
Expected Dividend Yield — The expected dividend yield is based on the Company's historical practice of paying quarterly
dividends on its common stock.
The Company’s weighted-average assumptions used to estimate the fair value of stock options granted during the
fiscal years ended September 3, 2016, August 29, 2015 and August 30, 2014 were as follows:
Expected life (in years)
Risk-free interest rate
Expected volatility
Expected dividend yield
Weighted-Average Grant-Date Fair Value
2016
3.9
1.09 %
21.8 %
2.40 %
8.03
$
2015
3.9
1.09 %
24.5 %
1.70 %
14.06
$
2014
3.9
0.93 %
26.6 %
1.70 %
14.98
$
The following table summarizes information about stock options outstanding and exercisable at September 3, 2016:
Range of Exercise Prices
$ 54.52 – $ 58.90
58.91 – 69.46
69.47 – 81.76
81.77 – 83.03
Number of
Options
Outstanding at
September 3,
2016
Weighted-
Average
Remaining
Contractual
Life
Weighted-
Average
Exercise
Price
Number of
Options
Exercisable at
September 3,
2016
Weighted-
Average
Remaining
Contractual
Life
Weighted-
Average
Exercise
Price
Intrinsic
Value
Intrinsic
Value
643
364
288
350
1,645
5.5 $
2.7
4.1
5.1
4.6 $
58.38 $ 10,166
2,153
68.26
3
81.61
—
83.02
69.86 $ 12,322
77
309
148
92
626
1.1 $
2.6
4.1
5.1
3.2 $
54.52 $
68.04
81.55
83.02
71.78 $
1,515
1,892
2
—
3,409
Restricted Stock Awards
A summary of the non-vested restricted share awards (“RSA”) granted under the Company’s incentive plans for the
fiscal year ended September 3, 2016 is as follows:
Non-vested restricted share awards at the beginning of the year
Granted
Vested
53
2016
Shares
$
391
1
(111)
Weighted-
Average Grant-
Date Fair Value
75.39
62.31
67.34
Canceled/Forfeited
Non-vested restricted share awards at the end of the year
(16)
265
$
78.55
78.58
The fair value of each RSA is the closing stock price on the New York Stock Exchange of the Company’s Class A
common stock on the date of grant. Upon vesting, a portion of the RSA may be withheld to satisfy the minimum statutory
withholding taxes. The remaining RSAs will be settled in shares of the Company’s Class A common stock after the vesting
period.
The fair value of shares vested during the fiscal years ended September 3, 2016, August 29, 2015 and August 30,
2014 was $7,518, $8,107 and $14,214, respectively.
The unrecognized compensation cost related to the non-vested RSAs at September 3, 2016 is $9,284 and will be
recognized over a weighted-average period of 2.2 years.
Restricted Stock Units
A summary of the Company’s non-vested restricted stock unit (“RSU”) award activity for the fiscal year ended
September 3, 2016 is as follows:
Non-vested restricted stock unit awards at the beginning of the year
Granted
Vested
Canceled/Forfeited
Non-vested restricted stock unit awards at the end of the year
2016
Shares
Weighted-Average
Grant-Date Fair
Value
62
207
(63)
(8)
198
$
$
55.09
58.83
54.69
58.81
58.98
The fair value of each RSU is the closing stock price on the New York Stock Exchange of the Company’s Class A
common stock on the date of grant. Upon vesting, a portion of the RSU award may be withheld to satisfy the minimum
statutory withholding taxes. The remaining RSUs will be settled in shares of the Company’s Class A common stock after the
vesting period. These awards accrue dividend equivalents on outstanding units (in the form of additional stock units) based
on dividends declared on the Company’s Class A common stock and these additional RSUs are subject to the same vesting
periods as the RSUs in the underlying award. The dividend equivalents are not included in the RSU table above.
The unrecognized compensation cost related to the RSUs at September 3, 2016 was $8,448 and is expected to be
recognized over a period of 3.9 years.
Associate Stock Purchase Plan
The Company has established a qualified Associate Stock Purchase Plan, the terms of which allow for eligible
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 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. On
January 15, 2015, 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 1,150 to 1,500 shares. As of
September 3, 2016, approximately 239 shares remain reserved for issuance under this plan. Associates purchased
approximately 64 and 63 shares of common stock during fiscal 2016 and 2015 at an average per share price of $61.87 and
$66.96, respectively.
54
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 years 2016, 2015, and
2014, the Company contributed $6,594, $6,665 and $6,174, respectively, to the plan. The Company contributions are
discretionary.
11. COMMITMENTS AND CONTINGENCIES
Leases
Certain of the operations of the Company are conducted on leased premises. 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 fiscal year 2026. 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 fiscal 2020. At September 3, 2016, approximate
minimum annual rentals on all such leases are as follows:
Fiscal Year
2017
2018
2019
2020
2021
Thereafter
Total
$
$
Total Rental Payments
12,081
7,456
5,897
3,308
1,860
1,429
32,031
Total rental expense (exclusive of real estate taxes, insurance and other operating costs) for all operating leases for
fiscal years 2016, 2015 and 2014 was approximately $13,428, $14,504 and $16,329, respectively, including approximately
$1,044, $2,401 and $2,297, respectively, paid to a related party. As a result of the purchase of our Atlanta CFC, which was
previously leased with a related party, rental expense was partially offset by the release of a deferred rent liability during
fiscal 2016. See Note 2 “Summary of Significant Accounting Policies” for more information about this transaction.
12. 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.
55
13. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following table sets forth unaudited financial data for each of the Company’s last eight fiscal quarters.
Fiscal Year Ended September 3, 2016
Fiscal Year Ended August 29, 2015
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(Unaudited)
Consolidated Income Statement
Data:
Net sales
Gross profit
Income from operations
Net income
Net income per share:
Basic
Diluted
$
706,819 $
318,972
90,388
55,029
684,117 $
308,791
80,542
49,525
727,495 $
327,028
105,784
64,816
745,074 $
334,067
99,246
61,846
731,091 $
330,149
93,971
57,417
706,400 $
320,874
85,874
51,527
745,483 $
338,417
104,244
63,342
727,405
327,135
95,440
59,022
0.89
0.89
0.81
0.80
1.06
1.05
1.03
1.02
0.92
0.91
0.84
0.83
1.03
1.03
0.96
0.96
56
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 September 3, 2016. Based on that
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 3, 2016,
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.
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)
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
(iii)
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 September
3, 2016. 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 (2013 Framework).
Based on this assessment, management determined that the Company maintained effective internal control over
financial reporting as of September 3, 2016.
Attestation Report of the Independent Registered Public Accounting Firm
The effectiveness of the Company’s internal control over financial reporting as of September 3, 2016 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.”
57
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 September 3, 2016 that have materially affected, or are reasonably likely to materially affect, its internal control over
financial reporting. In fiscal 2016, the Company initiated the upgrade of its core financial systems including the receivables,
payables, treasury, fixed assets and general ledger and expects to complete these implementations in fiscal 2017. Changes in
the Company’s key business applications and financial processes as a result of the continuing implementation of its core
financial systems and other business systems are being evaluated by management. The Company is designing processes and
internal controls to address changes in the Company’s internal control over financial reporting as a result of the core financial
systems implementation. This ongoing implementation presents risks to maintain adequate internal controls over financial
reporting.
58
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 September 3, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 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.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
September 3, 2016, 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 September 3, 2016 and August 29, 2015 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 September 3, 2016 of the Company and our report dated November 1, 2016 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Jericho, New York
November 1, 2016
59
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 2017, or the
2016 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 2016
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 2016 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 2016 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 2016 Proxy Statement, which is incorporated herein by this reference.
60
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Index to Financial Statements
PART IV.
Financial statements filed as a part of this report are listed on the “Index to Consolidated Financial Statements” at page 30
herein.
(a)(2) Financial Statement Schedules
For the three fiscal years ended September 3, 2016.
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.
61
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 Officer
(Principal Executive Officer)
Dated: November 1, 2016
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
Chairman of the Board of Directors
November 1, 2016
/s/ ERIK GERSHWIND
Erik Gershwind
President and Chief Executive Officer
and Director (Principal Executive Officer)
November 1, 2016
/s/ RUSTOM JILLA
Rustom Jilla
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ JONATHAN BYRNES
Jonathan Byrnes
/s/ ROGER FRADIN
Roger Fradin
/s/ LOUISE GOESER
Louise Goeser
/s/ MICHAEL KAUFMANN
Michael Kaufmann
/s/ DENIS KELLY
Denis Kelly
/s/ STEVEN PALADINO
Steven Paladino
/s/ PHILIP PELLER
Philip Peller
Director
Director
Director
Director
Director
Director
Director
62
November 1, 2016
November 1, 2016
November 1, 2016
November 1, 2016
November 1, 2016
November 1, 2016
November 1, 2016
November 1, 2016
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 30, 2014
Allowance for doubtful accounts(1)
Deducted from asset accounts:
For the fiscal year ended August 29, 2015
Allowance for doubtful accounts(1)
Deducted from asset accounts:
For the fiscal year ended September 3, 2016
Allowance for doubtful accounts(1)
Balance at
Beginning of
Year
Charged to
Costs and
Expenses
Charged to
Other
Accounts
Deductions(2)
Balance at
End of Year
$
7,523 $
4,629 $
— $
2,842 $
9,310
$
9,310 $
6,665 $
— $
4,663 $
11,312
$
11,312 $
6,997 $
— $
5,956 $
12,353
(1) Included in accounts receivable.
(2) Comprised of uncollected accounts charged against the allowance.
S-1
Exhibit
No.
EXHIBIT INDEX
Description
2.01 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 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 16, 2006) (SEC File
No. 001-14130).
2.02 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).
3.01 Certificate of Incorporation of the Registrant.*
3.02 Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s
Current Report on Form 8-K, filed with the SEC on October 26, 2012) (SEC File No. 001-14130).
4.01 Specimen Class A Common Stock Certificate.*
4.02 Note Purchase Agreement, dated July 28, 2016, by and among MSC Industrial Direct Co., Inc. and the
purchasers named therein (incorporated by reference to Exhibit (b)(2) to the Registrant’s Schedule TO-I/A
filed with the SEC on July 28, 2016) (SEC File No. 005-44935).
4.03 Form of Form of 2.65% Senior Note, Series A, due July 28, 2023 (included in Exhibit 4.02).
4.04 Form of Form of 2.90% Senior Note, Series B, due July 28, 2026 (included in Exhibit 4.02).
10.01 Amended and Restated Change in Control Agreement, dated December 3, 2014 between MSC Industrial
Direct Co., Inc. and Erik Gershwind (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed with the SEC on December 3, 2014) (SEC File No. 001-14130).†
10.02 Amended and Restated Change in Control Agreement, dated December 3, 2014 between MSC Industrial
Direct Co., Inc. and Douglas Jones (incorporated by reference to Exhibit 10.3 to the Registrant’s Current
Report on Form 8-K filed with the SEC on December 3, 2014) (SEC File No. 001-14130).†
10.03 Amended and Restated Change in Control Agreement, dated December 3, 2014 between MSC Industrial
10.04
Direct Co., Inc. and Steve Armstrong (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly
Report on Form 10-Q filed with the SEC on April 9, 2015) (SEC File No. 001-14130).†
Amended and Restated Change in Control Agreement, dated December 3, 2014 between MSC Industrial
Direct Co., Inc. and Charles Bonomo (incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly
Report on Form 10-Q filed with the SEC on April 9, 2015) (SEC File No. 001-14130).†
10.05 Change in Control Agreement, dated December 3, 2014 between MSC Industrial Direct Co., Inc. and Kari
Heerdt (incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q filed
with the SEC on April 9, 2015) (SEC File No. 001-14130).†
10.06 Amended and Restated Change in Control Agreement, dated December 3, 2014 between MSC Industrial
Direct Co., Inc. and Christopher Davanzo (incorporated by reference to Exhibit 10.10 to the Registrant’s
Quarterly Report on Form 10-Q filed with the SEC on April 9, 2015) (SEC File No. 001-14130).†
10.07 Change in Control Agreement, dated September 24, 2015 between MSC Industrial Direct Co., Inc. and
Rustom Jilla (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed
with the SEC on September 24, 2015) (SEC File No. 001-14130).†
10.08 Amended and Restated Change in Control Agreement, dated December 3, 2014 between MSC Industrial
Direct Co., Inc. and Gregory Polli (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly
Report on Form 10-Q filed with the SEC on April 6, 2016) (SEC File No. 001-14130).†
10.09 Change in Control Agreement, dated March 31, 2016 between MSC Industrial Direct Co., Inc. and Steven
Baruch (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed
with the SEC on April 6, 2016) (SEC File No. 001-14130).†
10.10 Change in Control Agreement, dated March 31, 2016 between MSC Industrial Direct Co., Inc. and David
Wright (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed
with the SEC on April 6, 2016) (SEC File No. 001-14130).†
10.11 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 SEC on April 7, 2008) (SEC File No. 001-14130).
10.12 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 SEC on April 7, 2008) (SEC File No. 001-14130).
II-1
Exhibit
No.
10.13 Second Amendment to Lease, dated as of May 7, 2003, by and between Mitchmar Atlanta Properties, Inc. and
Description
Sid Tool Co., Inc. (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K
filed with the SEC on April 7, 2008) (SEC File No. 001-14130).
10.14 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 SEC on April 7, 2008) (SEC File No. 001-14130).
10.15 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 SEC on April 7, 2008) (SEC File No. 001-14130).
10.16 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 SEC on April 7, 2008) (SEC File No. 001-14130).
10.17 MSC Industrial Direct Co., Inc. Amended and Restated Associate Stock Purchase Plan (incorporated by
reference to Exhibit 4.04 to the Registrant’s Registration Statement on Form S-8 (333-201523) filed with the
SEC on January 15, 2015).†
10.18 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 SEC on January 7, 2010) (SEC File No. 001-
14130).†
10.19 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 SEC on October 21,
2010) (SEC File No. 001-14130).†
10.20 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 SEC
on October 21, 2010) (SEC File No. 001-14130).†
10.21 Summary of Non-Executive Directors’ Compensation (incorporated by reference to Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q filed with the SEC on January 7, 2016) (SEC File No. 001-
14130).†
10.22 MSC Industrial Direct Co., Inc. 2005 Omnibus Incentive Plan, as amended through November 13, 2014
(incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q filed with the
SEC on January 8, 2015) (SEC File No. 001-14130).†
10.23 MSC Industrial Direct Co., Inc. 2015 Omnibus Incentive Plan (incorporated by reference to Exhibit 99.01 to
the Registrant’s Registration Statement on Form S-8 (333-201522) filed with the SEC on January 15, 2015).†
10.24 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 SEC on April 7, 2011) (SEC File No. 001-14130).†
10.25 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
SEC on April 7, 2011) (SEC File No. 001-14130).†
10.26 Form of Non-Qualified Stock Option Agreement under the MSC Industrial Direct Co., Inc. 2015
Omnibus Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on
Form 10-Q filed with the SEC on January 7, 2016) (SEC File No. 001-14130).†
10.27
Form of Restricted Stock Unit Agreement under the MSC Industrial Direct Co., Inc. 2015 Omnibus
Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q
filed with the SEC on January 7, 2016) (SEC File No. 001-14130).†
10.28 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 SEC on March 30, 2011) (SEC File No. 001-14130).†
10.29 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 SEC on March 30, 2011) (SEC File No. 001-
14130).†
10.30
Form of Director and Executive Officer Indemnification Agreement (incorporated by reference to Exhibit 10.1
to the Registrant’s Current Report on Form 8-K filed with the SEC on January 25, 2016).†
II-2
Exhibit
No.
10.31
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 SEC on April 23, 2013) (SEC File No. 001-14130).
Description
10.32
Stock Purchase Agreement, dated July 5, 2016, between MSC Industrial Direct Co., Inc. and the persons listed
on Schedule I thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-
K filed with the SEC on July 6, 2016) (SEC File No. 001
14130).
10.33 Agreement for Purchase and Sale of Real Property, dated as of July 1, 2016, by and between Sid Tool Co.,
Inc., and Mitchmar Atlanta Properties, Inc. (incorporated by reference to Exhibit (d)(2) to the Registrant’s
Schedule TO-I filed with the SEC on July 7, 2016) (SEC File No. 005-44935).
‐
21.01 List of Subsidiaries.**
23.01 Consent of Ernst & Young LLP.**
31.1 Chief Executive Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
31.2 Chief Financial Officer’s Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
32.1 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.***
32.2 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.***
101.INS XBRL Instance Document.**
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-3
SUBSIDIARIES OF MSC INDUSTRIAL DIRECT CO., INC.
CORPORATION
Sid Tool Co., Inc.
Primeline International, Inc.
MSC Services Corp.
Swiss Precision Instruments Inc.
Enco Manufacturing Company, 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
MSC Industrial Supply ULC
MSC Acquisition Corp III
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
Canada
New York
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;
EXHIBIT 23.01
(2) Registration Statement (Form S-8 No. 333-70293), pertaining to the Associate Stock Purchase Plan;
(3) Registration Statement (Form S-8 No. 333-130899 and Form S-8 No. 333-164362), pertaining to the 2005
Omnibus Incentive Plan;
(4) Registration Statement (Form S-8 No. 333-156850 and Form S-8 No. 333-201523), pertaining to the MSC
Industrial Direct Co., Inc. Amended and Restated Associate Stock Purchase Plan; and
(5) Registration Statement (Form S-8 No. 333-201522), pertaining to the 2015 Omnibus Incentive Plan
of our reports dated November 1, 2016, 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 September 3, 2016.
/s/ Ernst & Young LLP
Jericho, New York
November 1, 2016
CERTIFICATIONS
EXHIBIT 31.1
I, Erik Gershwind, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of MSC Industrial Direct Co., Inc.;
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;
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;
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)
(b)
(c)
(d)
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;
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;
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
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)
(b)
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
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: November 1, 2016
/s/ ERIK GERSHWIND
Erik Gershwind
President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
I, Rustom Jilla, certify that:
CERTIFICATIONS
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of MSC Industrial Direct Co., Inc.;
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;
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;
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)
(b)
(c)
(d)
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;
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;
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
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)
(b)
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
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: November 1, 2016
/s/ RUSTOM JILLA
Rustom Jilla
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report on Form 10-K of MSC Industrial Direct Co., Inc. (the “Company”)
for the fiscal year ended September 3, 2016, 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: November 1, 2016
/s/ ERIK GERSHWIND
Erik Gershwind
President and Chief Executive Officer
(Principal Executive Officer)
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.
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report on Form 10-K of MSC Industrial Direct Co., Inc. (the “Company”)
for the fiscal year ended September 3, 2016, as filed with the Securities and Exchange Commission on the date
hereof (the “Report”), I, Rustom Jilla, 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: November 1, 2016
/s/ RUSTOM JILLA
Rustom Jilla
Chief Financial Officer
(Principal Financial Officer)
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.
CORPORATE
INFORMATION
Board of Directors
Jonathan Byrnes
Roger Fradin
Erik Gershwind
Louise Goeser
Mitchell Jacobson
Michael Kaufmann
Denis Kelly
Steven Paladino
Philip Peller
Senior Lecturer
Vice Chairman
President and Chief Executive Officer
President and Chief Executive Officer
Non-Executive Chairman of the Board
Chief Financial Officer
Managing Partner
Executive Vice President and Chief Financial Officer Henry Schein, Inc.
Independent Director
Scura Paley LLC
Cardinal Health, Inc.
Honeywell International Inc.
MSC Industrial Supply Co.
MSC Industrial Supply Co.
Retired Partner, Arthur Andersen LLP
Massachusetts Institute of Technology
Grupo Siemens S.A. de C.V. (Siemens Mesoamerica)
Executive Officers
Erik Gershwind
Rustom Jilla
Douglas Jones
President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Executive Vice President and Chief Supply Chain Officer
Steve Armstrong
Senior Vice President, General Counsel and Corporate Secretary
Steven Baruch
Senior Vice President and Chief Strategy & Marketing Officer
Charles Bonomo
Senior Vice President and Chief Information Officer
Christopher Davanzo
Senior Vice President, Finance and Corporate Controller
Kari Heerdt
Gregory Polli
David Wright
Senior Vice President and Chief People Officer
Senior Vice President, Product Management
Senior Vice President, Sales
Corporate Information
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A
ANNUAL MEETING
The 2017 Annual Meeting of
Shareholders will be held at:
INVESTOR RELATIONS CONTACT
REGISTRAR AND TRANSFER AGENT
John Chironna
MSC Industrial Supply Co.
Computershare Trust Company, N.A.
c/o Computershare Investor Services
Hilton Long Island/Huntington
(704) 987-5231
P.O. Box 30202
598 Broad Hollow Road
Melville, New York 11747
Copies of our Annual Report on
Form 10-K for the fiscal year ended
College Station, Texas 77842-9909
on Thursday, January 26, 2017 at 9 a.m.
September 3, 2016 are available
COMMON STOCK LISTED
COMPANY HEADQUARTERS
MSC Industrial Supply Co.
75 Maxess Road
Melville, New York 11747
MSC Industrial Supply Co.
525 Harbour Place Drive
Davidson, North Carolina 28036
WEBSITE
www.mscdirect.com
without charge, upon request.
MSC Industrial Supply Co.’s Class A
INDEPENDENT REGISTERED PUBLIC
New York Stock Exchange under
common stock is traded on the
ACCOUNTING FIRM
Ernst & Young LLP
Jericho, New York
LEGAL COUNSEL
Curtis, Mallet-Prevost, Colt & Mosle LLP
New York, New York
the symbol “MSM.”
DIVIDEND POLICY
The Company has instituted a policy
of regular quarterly cash dividends to
shareholders. Currently, the quarterly
dividend rate is $0.45 per share, or
$1.80 per share annually.
MSC INDUSTRIAL SUPPLY CO.
75 Maxess Road
Melville, New York 11747
516.812.2000
www.mscdirect.com
NYSE listed: MSM