2017 ANNUAL REPORT
BUILDING STRONG
PARTNERSHIPS
BUILDING STRONG PARTNERSHIPS
MSC helps manufacturing customers solve their most important challenges on the shop
floor. We boost productivity, accelerate growth and fuel profits. As a leading North
American distributor of metalworking and maintenance, repair and operations products
with 75-plus years of experience across dozens of industries, we partner with our
NET SALES (IN BILLIONS)
customers to drive their success. Every day, our 6,500-plus associates work closely with
OPERATING INCOME (IN MILLIONS)
3.00
them to find ways to improve the efficiency of their operations and the quality of their
400
2.75
2.50
2.25
2.00
products. We combine industry expertise, proprietary data and a strong network of
375
relationships to engineer solutions that drive results.
2015
2016
2017
Financial Highlights
350
325
300
2015
2016
2017
NET SALES (IN BILLIONS)
DILUTED EARNINGS PER SHARE
OPERATING INCOME (IN MILLIONS)
CASH FLOW FROM
OPERATIONS (IN MILLIONS)
4.5
$3.00
4.0
3.5
3.0
$2.75
$2.50
$2.25
2.5
500
$400
400
300
200
$375
$350
$325
100
2.0
$2.00
2015
2015
2016
2016
2017
2017
0
$300
2015
2015
2016
2016
2017
2017
DILUTED EARNINGS
PER SHARE
CASH FLOW FROM
OPERATIONS (IN MILLIONS)
$4.50
$4.00
$3.50
$3.00
$2.50
$500
$400
$300
$200
$100
$2.00
2015
2016
2017
0
2015
2016
2017
Dear Shareholders,
“ As we see it every day
working side by side with
our customers, the more
digital the world becomes,
the more people matter.”
Our focus in fiscal 2017 was on building stronger partnerships with our customers to help them improve
their productivity and growth. Delivering on this commitment has continued to underlie our success and
in fiscal 2017 alone, we saved our customers more than $400 million in documented cost savings. As
we have helped our customers run their operations more efficiently, we also have ensured a more success-
ful and productive tomorrow by continuously rethinking, retooling and optimizing our own business.
Our customers are increasingly benefitting from our deep technical expertise across the industries that
we serve, as well as an expanded product offering, inventory management and other supply chain
management solutions. Our associates get to know the businesses of our customers and understand
their goals, analyzing areas in which they can drive efficiencies and helping drive measurable improve-
ment through a range of solutions to address their particular needs. In metalworking, for example, our
specialists partner with customers every day to optimize their machining operations with measurable
results. Our inventory management solutions also help customers gain the visibility that they need to
manage consumption and control costs. And, of course, we continue to offer one of the widest ranges
of maintenance, repair and operations (MRO) supplies.
Stepping back, over the past several years, the manufacturing economy has experienced a protracted
and difficult environment. Against the backdrop of these challenges, we strengthened our competitive
position with an expanded product offering and value-added business optimization solutions, including
our e-commerce solutions. We also refocused our efforts on achieving greater productivity in our own
business by leaning out our cost structure and retooling many of our systems and processes to better
serve our customers. As we did so, we continued to invest in our growth programs and foster the talent
of our associates who are so vital to the success of our customers and our own business. All of this
significantly improved the leverage in our business and positioned MSC very well for the future.
Looking back over the year, market demand steadily improved as fiscal 2017 progressed and the overall
manufacturing sector returned to growth. Customer feedback has been consistent with this trend of contin-
ued and steady improvement in order volumes, backlogs and general sentiment. Pricing and mix have been
a headwind, but there are some encouraging signs on the horizon that could change that in fiscal 2018. Our
results in fiscal 2017 reflect both of these dynamics, as well as the strong execution of our team. Overall
reported growth in average daily sales was 3.2 percent over fiscal 2016 and we achieved better operating
margins than the prior year as we benefitted from sales growth and our leaner cost structure.
As we contemplate the future, MSC is very well positioned for continued growth, assuming the manufactur-
ing economy maintains its recent momentum. An improvement in the pricing environment would provide
an important tailwind as well. However, as we did during the protracted difficult environment of the recent
past, we will continue our relentless focus on serving the evolving needs of our customers.
We have successfully elevated the role that MSC plays in helping our customers improve their businesses by
driving greater productivity and profitability, and capture opportunities in the market faster and more
effectively. Our “Built to Make You Better” tagline, which we introduced in fiscal 2017, is more than just a
brand platform. It represents our promise to our customers today and tomorrow. The evolving landscape of
manufacturing and its digitization represent a significant opportunity for our customers, and we intend to
be in the middle of it through continued development of our array of e-commerce platforms, and in how our
people enable those platforms to deliver value with technical and industry expertise. Combined with our
entire product offering, this will enable our customers to be even more successful in the digital age. As we
see it every day working side by side with our customers, the more digital the world becomes, the more
people matter.
Our work to strengthen our already industry-leading team is building upon a foundation of a proud heritage
and making our culture even better. When you consider everything that we have accomplished over the last
few years to evolve our business and deepen our partnerships with our customers and suppliers, none of it
would have been possible without the incredible commitment of our associates’ hard work and commit-
ment each and every day. I am incredibly proud of what our associates have accomplished and look forward
excitedly to what we will accomplish together as we continue our journey.
Our longstanding mission is to be the best industrial distributor in the world as measured by our associates,
customers, owners and suppliers. Each of these stakeholders plays a vital role in our collective success
together and, as I reflect on the past and look forward to fiscal 2018 and beyond, I would like to thank each
for their continued support.
Respectfully,
Erik Gershwind
President and Chief Executive Officer
2017 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
For the fiscal year ended September 2, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from
to
Commission file number 1-14130
__________________________________
MSC INDUSTRIAL DIRECT CO., INC.
(Exact Name of Registrant as Specified in Its Charter)
__________________________________
New York
(State or Other Jurisdiction of
Incorporation or Organization)
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, smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer
Accelerated
filer
Non-accelerated filer
(Do not check if a smaller
reporting company)
Smaller reporting
company
Emerging growth
company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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 March 4, 2017 was approximately
$4,574,781,997. As of October 16, 2017, 44,541,074 shares of Class A common stock and 11,850,636 shares of Class B common stock of the registrant were
outstanding.
The registrant’s Proxy Statement for its 2018 annual meeting of shareholders is hereby incorporated by reference into Part III of this Annual
Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
MSC INDUSTRIAL DIRECT CO., INC.
TABLE OF CONTENTS
PART I
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
ITEM 16. FORM 10-K SUMMARY
SIGNATURES
Page
1
1
8
13
13
14
14
15
17
18
29
30
58
58
61
61
61
61
61
61
62
62
66
i
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 more than a 75-year history of driving innovation in industrial product distribution, we help solve our
manufacturing customers’ metalworking, MRO and operational challenges. Through our technical metalworking expertise
and inventory management and other supply chain solutions, our team of more than 6,500 associates keep our customers’
manufacturing operations up and running and improve their efficiency, productivity and profitability.
We serve a broad range of customers throughout the United States, Canada and the United Kingdom (“U.K.”), 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 U.K.) and 93 branch offices (92 in the United States and one in the U.K.).
Our primary customer fulfillment centers are located in or near Harrisburg, Pennsylvania; Atlanta, Georgia; Elkhart, Indiana;
Reno, Nevada; and Columbus, Ohio in the United States. In addition, we operate seven smaller customer fulfillment centers
in or near Hanover Park, Illinois; Dallas, Texas; Shelbyville, Kentucky (repackaging and replenishment center); Wednesbury,
England; Edmonton, Canada; Beamsville, Canada; and Moncton, Canada.
We offer approximately 1,565,000 active, saleable stock-keeping units (“SKUs”) through our
catalogs; brochures; eCommerce channels, including our website, mscdirect.com (“MSC website”); our inventory
management solutions; and call-centers and branches. We carry many of the products we sell in our inventory, so that 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 Class C category products). 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 6,500 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;
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;
1
our extensive product inventory enables customers to deal with fewer suppliers, streamlining their purchasing
work and reducing their administrative costs;
our timely shipping enables our customers to reduce their inventory investment and carrying costs;
our purchasing process consolidates multiple purchases into a single order, providing a single invoice for
multiple purchases over time, and offering direct shipments to specific departments and personnel at one or
more facilities. This reduces our customers’ administrative costs;
our extensive eCommerce capabilities provide 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
our inventory management solutions enable our customers to 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 industrial
distributors 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 our offerings enable our customers to
consolidate suppliers, purchase orders and invoices, and reduce inventory tracking, stocking decisions, purchases and out-of-
stock situations. In addition, through Vendor Managed Inventory (“VMI”), Customer Managed Inventory (“CMI”) and
vending solutions, we empower our customers to utilize sophisticated inventory management solutions.
Business Strategy
MSC’s business strategy is based on helping our customers become more productive and profitable by reducing
their total cost for purchasing, 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,
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.
2
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 offer next-day delivery nationwide for qualifying orders placed by 8 p.m. Eastern Standard Time (Excluding Class
C category products). 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 more than 6,500 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 to empower our associates to 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 real time and evaluate alternative products and pricing. The
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.
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 our customers’ transaction costs and delivery time.
Competitive Pricing. Customers increasingly evaluate their total cost of purchasing, using and maintaining
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 services.
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 and exclusive brands.
Expanding programs for government and national account customers. Although MSC has been providing MRO
and metalworking supplies to the commercial sector for more than 75 years, we have more recently focused on government
3
customers and have a large, growing contract business with numerous federal, state, and local/education agencies. 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 procurement and 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 1,007 at
September 2, 2017. 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 offer approximately 1,565,000 active, saleable
SKUs through our catalogs; brochures; eCommerce channels, including our MSC website; our inventory management
solutions; and call-centers and branches. We are increasing the breadth and depth of our product offerings and pruning non-
value-added SKUs. In fiscal year 2017, we added approximately 65,000 SKUs, net of SKU removals, to our active, saleable
SKU count. We plan to continue adding online SKUs in fiscal 2018.
The most recent MSC catalog issued in September 2017 merchandises approximately 500,000 core metalworking
and MRO products, which are included in the SKU totals above. Approximately 29% of these SKUs are MSC exclusive
brands. We also leverage the depth and breadth of MSC’s product portfolio within our Class C category sales channel.
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. The MSC website is a proprietary, business-to-business, horizontal
marketplace serving the metalworking and MRO market. The MSC website allows customers to enjoy added convenience
without sacrificing customized service. Our MSC 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 it 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. 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.
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. In July 2017, MSC
completed the acquisition of DECO Tool Supply Co. (“DECO”), an industrial supply distributor based in Davenport, Iowa.
DECO brings 190-plus associates across 10 branch offices located primarily in the Midwest. DECO's sales force and branch
footprint complements MSC's coverage in the region. MSC will be able to provide DECO customers access to MSC's product
portfolio to support their full metalworking and MRO needs. The acquisition enhances our metalworking business, because
4
DECO associates bring considerable experience and expertise in metalworking solutions. We believe the highly fragmented
nature of the industrial distribution sector will continue to provide acquisition opportunities.
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 2017, fiscal 2016, or fiscal 2015.
Customer Fulfillment Centers
A significant number of our products are carried in stock. Approximately 77% of sales are fulfilled from our 12
customer fulfillment centers and 93 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 acquisition of Barnes Distribution North America in
fiscal 2013, 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.
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.
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
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. We monitor and evaluate our sales associates at regular
intervals, and provide our sales associates with technical training by our in-house specialists and product vendors. We
maintain a separate technical support group dedicated to answering customer inquiries and assisting our customers with
product operation information and finding the most efficient solutions to manufacturing problems.
5
Branch Offices
We operate 93 branch offices. There are 92 branch offices within the United States located in 40 states, and one
located 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. This includes 10 branch offices
added throughout the Midwest due to the acquisition of DECO in July 2017. Furthermore, during fiscal year 2017, we
consolidated some branch offices that were relatively close in proximity in order to gain leverage, operational efficiencies
and cost savings.
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. While master catalogs, promotional
catalogs and brochures continue to play an important role in our efforts, we continue to experience a shift to search engine
marketing, email marketing and online advertising to address changes in our customers’ buying behavior. As such, our
mailing volume represents:
Fiscal Years Ended (1)
September 2,
2017
(52 weeks)
September 3,
2016
(53 weeks)
73
15,602,818
94
16,851,194
August 29,
2015
(52 weeks)
98
18,265,589
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 60% of
their 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 non-digital 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
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
6
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 2017, we went live on our upgraded core financial systems, including the receivables, payables, treasury, fixed assets
and general ledger. We are continuing to upgrade our systems and plan to make investments as necessary to enhance our
operational effectiveness.
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.
Our customer care centers and branch offices implemented a state-of-the-art phone system and workforce
optimization platform in fiscal 2017. The features within the platform create a seamless environment equipped with
advanced applications that assist our associates in optimizing our customer’s experience. The architecture has established a
dynamic infrastructure that is scalable both in terms of operations and future capabilities. We are continuing to implement
additional functionality aimed at enhancing the engagement and personalization of the customer experience regardless of the
contact method chosen.
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 (our fourth fiscal quarter), as well as the winter months for the Christmas and New Year holiday
period (our fiscal second quarter). In addition, we may be impacted by weather-related disruptions.
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
7
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 2, 2017, we employed 6,563 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 occurs in economic downturns, 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.
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
8
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 level of purchases from MSC. In addition, our continued expansion of
our vending program and other e-commerce platforms 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 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.
Inflation impacts the costs at which we can procure products and our ability to increase prices at which we sell to
customers over time. Prolonged periods of low inflation or deflation could adversely affect our ability to increase the prices at
which we sell to customers.
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.
Our standard receivable terms are generally due within 30 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.
Disruptions or breaches 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 or anticipation, such as catastrophic events, power
outages, natural disasters, computer system or network failures, computer viruses, physical or electronic break-ins, and cyber-
attacks. The failure of our IT systems to perform as we anticipate could disrupt our business and could result in transaction
errors, loss of data, processing inefficiencies, downtime, litigation, substantial remediation costs (including potential liability
for stolen assets or information and the costs of repairing system damage), and the loss of sales and customers. 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.
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.
10
Our business depends on our ability to retain and to attract qualified sales and customer service personnel and metalworking
specialists.
There are significant costs associated with hiring and training sales and customer service professionals and
metalworking specialists. 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 and metalworking
specialists.
The loss of key suppliers or contractors 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 and
contractors. The loss of, or a substantial decrease in the availability of products or services from key suppliers or contractors
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.
New trade policies could make sourcing products from overseas more difficult and/or more costly.
Any changes to trade policies, including the imposition of significant restrictions or tariffs, whether as a result of
amendments to or elimination of existing trade agreements, could adversely affect our ability to secure sufficient products to
service our customers and/or result in increases product costs that we may not be able to pass on to our customers, resulting
in lower margins.
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. In addition, we 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 or the expansion of existing 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 or the completion of such expansions. 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.
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.
11
We may encounter difficulties with acquisitions and other strategic transactions, which could harm our business.
We have completed several acquisitions and we expect to continue to pursue acquisitions and other strategic
transactions, such as joint ventures, 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 and other strategic transactions 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.
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 $600.0 million unsecured revolving loan facility. The facility matures on April 14, 2022. The
facility permits us, subject to approval of the administrative agent and the lenders providing the financing, to request
incremental term loans and revolving commitment increases up to an aggregate amount of $300.0 million, in increments not
less than $50.0 million or the remaining availability. In addition, we have outstanding $175.0 million aggregate principal
amount of senior notes. 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.
At September 2, 2017, we were in compliance with the operating and financial covenants under the credit facility and senior
notes.
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 2, 2017, our combined goodwill and indefinite-lived intangible assets amounted to $647.9 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.
12
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
manufacturing industry, which accounted for a substantial portion of our revenue for fiscal year 2017, fiscal year 2016 and
fiscal year 2015, 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 16, 2017, 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(1)
__________________________
(1) Repackaging and replenishment center.
Approx.
Sq. Ft.
721,000
545,000
821,000
419,000
75,000
468,000
182,000
135,000
40,500
85,000
16,000
110,000
Operational
Date
1990
1996
1997
1999
1998
2014
2003
2003
2007
2004
1981
1973
Leased/
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Leased
Leased
Leased
Owned
Owned
Owned
We maintain 92 branch offices within the United States located in 40 states and one branch office located in the
U.K. The branches range in size from 1,800 to 25,000 square feet. Most of these branch offices are leased. These leases will
expire at various periods between October 2017 and March 2027. We added 10 branch offices, primarily in the Midwest, as a
result of the DECO acquisition that was completed during fiscal 2017, and which are included in the total above. The
aggregate annual lease payments on leased branch offices and the leased customer fulfillment centers in fiscal 2017 were
approximately $11.7 million.
13
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.
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 30, 2015 to September 2, 2017:
Fiscal Year Ended September 2, 2017
First Quarter – December 3, 2016
Second Quarter – March 4, 2017
Third Quarter – June 3, 2017
Fourth Quarter – September 2, 2017
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
$
$
Price of Class A Common Stock
High
Low
$
91.02
105.70
105.29
89.57
69.96
90.20
81.58
65.42
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
0.45
0.45
0.45
0.45
Dividend Per Share
Common Stock
Class A & Class B
0.43
0.43
0.43
0.43
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 $1.80 and $1.72 per share for fiscal 2017 and fiscal 2016, respectively.
This policy is reviewed periodically by the Board of Directors.
On October 24, 2017, the Board of Directors declared a quarterly cash dividend of $0.48 per share, payable on
November 28, 2017 to shareholders of record at the close of business on November 14, 2017. The dividend will result in a
payout of approximately $27.1 million, based on the number of shares outstanding at October 16, 2017.
On October 16, 2017, the last reported sales price for MSC’s Class A common stock on the NYSE was $75.57 per
share. The approximate number of holders of record of MSC’s Class A common stock as of October 16, 2017 was 588. The
number of holders of record of MSC’s Class B common stock as of October 16, 2017 was 57.
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 2, 2017:
Period
06/04/17-07/03/17
07/04/17-08/03/17
08/04/17-09/02/17
Total
__________________________
Total Number of Shares
Purchased(1)
Average Price Paid Per
Share(2)
82
400,103
241,975
642,160
$
$
82.81
72.82
68.75
71.29
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs(3)
—
400,000
241,700
641,700
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
1,444,034
1,044,034
802,334
(1) During the three months ended September 2, 2017, 460 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.
(2) Activity is reported on a trade date basis.
15
(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 2, 2017, the maximum
number of shares that may yet be repurchased under the Repurchase Plan was 802,334 shares. There is no expiration date
for the Repurchase Plan.
Performance Graph
The following stock price performance graph and accompanying information is not deemed to be “soliciting
material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any filings under the
Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, which we refer to as the
Exchange Act, or be subject to the liabilities of Section 18 of the Exchange Act, regardless of any general incorporation
language in any such filing.
The following graph compares the cumulative total return on an investment in our common stock with the
cumulative total return of an investment in each of the S&P Midcap 400 Index and the Dow Jones US 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 September 1, 2012 and assumes that all dividends paid on such securities during the applicable
fiscal years were reinvested. Indices are calculated on a month-end basis. The comparisons in this table are based on
historical data and are not intended to forecast or to be indicative of the possible future performance of our Class A common
stock.
Cumulative Total Stockholder Return
for the Period from September 1, 2012 through September 2, 2017
MSC Industrial Direct Co., Inc.
S&P Midcap 400
Dow Jones US Industrial Supplier
9/1/2012
100.00
100.00
100.00
8/31/2013
111.45
123.71
113.12
8/30/2014
134.22
152.47
117.44
8/29/2015
106.43
153.48
97.80
9/3/2016
120.06
172.82
104.64
9/2/2017
114.37
193.24
89.72
16
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 2, 2017, September 3, 2016 and August 29, 2015 and the selected consolidated balance
sheet data as of September 2, 2017 and September 3, 2016 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 30,
2014, and August 31, 2013, and the selected consolidated balance sheet data as of August 29, 2015, August 30, 2014, and
August 31, 2013 are derived from MSC’s audited consolidated financial statements not included herein.
Fiscal Years Ended
September 2,
2017
(52 weeks)
September 3,
2016
(53 weeks)
August 29,
2015
(52 weeks)
(In thousands, except per share data)
August 30,
2014
(52 weeks)
August 31,
2013
(52 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(1)
Consolidated Balance Sheet Data (at period end):
Working capital(2)
Total assets(2)
Short-term debt including capital lease and
financing obligations(2)
Long-term debt including capital lease obligations,
net of current maturities(2)
Deferred income taxes and tax uncertainties
Shareholders’ equity
__________________________
$ 2,887,744 $ 2,863,505
1,288,858
912,898
375,960
140,515
231,216
1,286,247
907,247
379,000
136,561
231,431
$ 2,910,379 $ 2,787,122
1,286,256
903,072
383,184
143,458
236,067
1,316,575
937,046
379,529
141,833
231,308
$ 2,457,649
1,118,516
732,990
385,526
145,434
237,995
4.08
4.05
3.78
3.77
3.75
3.74
3.78
3.76
56,591
56,971
1.80 $
60,908
61,076
1.72
447,854 $
2,098,912
502,889
2,064,951
$
$
$
$
61,292
61,487
4.60 $
62,026
62,339
1.32
610,089 $
2,100,186
652,601
2,059,377
3.77
3.75
62,695
63,011
1.20
680,292
1,941,232
$
$
331,986
267,050
213,165
96,479
13,802
200,991
115,056
1,225,140
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
1,390,383
(1) In the first quarter of fiscal 2015, the Company paid a special cash dividend of $3.00 per share.
(2) 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 1 to the Consolidated Financial
Statements.
17
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Overview
We are 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 1.5 million products, inventory management and other supply chain solutions, and deep expertise from more than
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.
Our experienced team of over 6,500 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 1,565,000 active, saleable stock-keeping units (“SKUs”) through our
catalogs; brochures; eCommerce channels, including the MSC website; our inventory management solutions; and call-centers
and branches. 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 U.K., and three are
located in Canada) and 93 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 2, 2017, compared to 2,370 at September 3,
2016 and 2,377 at August 29, 2015. We will continue to manage our sales and service headcount based on economic
conditions and our business plans.
The 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 years 2015, 2016, and 2017 had 253, 258, and 252 sales days, respectively.
18
Recent Developments
On July 31, 2017, we acquired certain assets and assumed certain liabilities of DECO, an industrial supply
distributor based in Davenport, Iowa. MSC will be able to provide DECO customers access to MSC's 1.5 million-plus
product portfolio to support their full metalworking and MRO needs.
Our Strategy
Our objective is to continue to grow sales profitably while helping our customers become more productive and
profitable by reducing their total cost for purchasing, using and maintaining MRO supplies. We continue to pursue strategic
acquisitions that expand or complement our business in new and existing markets or further enhance the value and offerings
we provide.
Business Environment
We utilize various indices when evaluating the level of our business activity. Approximately 67% of our revenues
came from sales in the manufacturing sector in our fiscal year 2017, including certain national account customers. Through
statistical analysis, we have found that trends in our customers’ activity is most strongly correlated to changes in the
Metalworking Business Index (“MBI”). The MBI is a sentiment index developed from a monthly survey of the US
metalworking industry, focusing on durable goods manufacturing. We have experienced the highest correlation between our
sales trends and the MBI by using the rolling 12-month MBI average on a four-month lag. For the MBI, a value below 50.0
generally indicates contraction and a value above 50.0 generally indicates expansion. The MBI index over the last three
months of fiscal 2017 and for the past 12-month period was as follows:
Period
June
July
August
Fiscal 2017 Q4 average
Fiscal 2017 full year average
MBI
56.2
55.0
54.7
55.3
53.4
The MBI declined slightly throughout our fiscal fourth quarter, decreasing from 56.2 to 54.7. This implies
continued, but slower growth in the metalworking manufacturing environment. Details released with the September MBI of
56.2 indicate expansion for the ninth consecutive month, including accelerated growth in both new orders and production.
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.
19
Results of Operations
Fiscal Year Ended September 2, 2017 Compared to the Fiscal Year Ended September 3, 2016
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 2, 2017
(52 weeks)
$
%
September 3, 2016
(53 weeks)
$
%
$
$
2,887,744
1,601,497
1,286,247
907,247
379,000
(11,008)
367,992
136,561
231,431
100.0% $ 2,863,505
1,574,647
55.5%
1,288,858
44.5%
912,898
31.4%
375,960
13.1%
(4,229)
(0.4)%
371,731
12.7%
140,515
4.7%
231,216
8.0% $
100.0% $
55.0%
45.0%
31.9%
13.1%
(0.1)%
13.0%
4.9%
8.1% $
Change
$
24,239
26,850
(2,611)
(5,651)
3,040
(6,779)
(3,739)
(3,954)
215
%
0.8%
1.7%
(0.2)%
(0.6)%
0.8%
160.3%
(1.0)%
(2.8)%
0.1%
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 0.8% or approximately $24.2 million, for the fiscal year ended 2017. We estimate that this
increase in net sales is comprised of (i) approximately $113.8 million of higher sales volume; and (ii) approximately
$10.4 million from DECO operations, which we acquired in July 2017; partially offset by (iii) approximately $66.0 million in
lower sales attributable to six fewer days of sales in fiscal 2017 as compared to fiscal 2016; (iv) approximately $27.2 million
in reductions from pricing, resulting from changes in customer and product mix, discounting and other items; and (v)
approximately $6.8 million from an unfavorable foreign exchange impact. Of the total increase in net sales, sales to our
government and national account programs (“Large Account Customers”) increased by approximately $27.4 million and
sales other than to our Large Account Customers decreased by approximately $3.2 million.
The table below shows the change in our fiscal quarterly and annual 2017 average daily sales by total company and
by customer type compared to the same periods in the prior fiscal year:
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
(2.9)%
(4.2)%
0.6 %
2.9 %
2.6 %
4.5 %
3.8 %
2.8 %
6.5 %
9.2 %
8.4 %
10.8 %
3.2 %
2.4 %
5.6 %
67 %
33 %
2017 vs. 2016 Fiscal Period
Total Company
Manufacturing Customers(1)
Non-Manufacturing Customers(1)
__________________________
(1) Excludes U.K. operations.
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 EDI systems, VMI systems, Extensible Markup Language ordering based systems,
vending machine systems, hosted systems and other electronic portals, represented 60.1% of consolidated net sales in fiscal
2017 compared to 58.2% of consolidated net sales in fiscal 2016. This increase was primarily associated with the MSC
website and vending machine systems.
20
Gross Profit
Gross profit margin was 44.5% in fiscal 2017 as compared to 45.0% in fiscal 2016. The decline was primarily a
result of changes in pricing and customer and product mix. We experienced growth in both our vending program and Large
Account Customer sales, which are typically transacted at lower gross margins.
Operating Expenses
Operating expenses decreased 0.6% to $907.2 million in fiscal 2017, as compared to $912.9 million in fiscal 2016.
After removing the impact from the 53rd week, operating expenses are slightly higher than the prior year due to volume-
related expenses, primarily payroll and payroll-related costs. This was offset by the decrease in depreciation and amortization
as a result of certain intangible assets acquired from our fiscal 2006 J&L acquisition becoming fully amortized during the
second half of fiscal 2016. Operating expenses represented approximately 31.4% of net sales in fiscal 2017, as compared to
approximately 31.9% in fiscal 2016.
Payroll and payroll-related costs represented approximately 56.0% of total operating expenses in fiscal 2017, as
compared to approximately 55.0% in fiscal 2016. Salaries, commissions, and the incentive compensation accrual all
increased in fiscal 2017 as compared to fiscal 2016, with the majority of the increase attributable to the incentive
compensation accrual. This increase was partially offset by lower fringe benefit costs. As a result of transitioning from a
self-insured plan to a fully insured private healthcare exchange during the second quarter of fiscal 2016, we experienced large
claims and increased costs in the first half of fiscal 2016 as compared to the comparable period in fiscal 2017.
Income from Operations
Income from operations increased 0.8% to $379.0 million in fiscal 2017, as compared to $376.0 million in fiscal
2016, despite having a 53rd week in fiscal 2016. This increase was due to overall lower operating expenses in fiscal 2017.
Income from operations as a percentage of net sales remained unchanged at 13.1% in fiscal 2017 as compared to fiscal 2016.
Total Other Expense
The increase in total other expense in fiscal 2017 compared to fiscal 2016 was primarily due to an increase in
interest expense related to the Private Placement Debt (as defined below) that was entered into in July 2016 in connection
with our August 2016 self tender offer and related stock purchase.
Provision for Income Taxes
Our fiscal 2017 effective tax rate was 37.1% as compared to 37.8% in fiscal 2016. The decrease in the effective tax
rate is primarily due to the adoption of ASU 2016-09 in the second quarter of fiscal 2017, which requires excess tax benefits
and deficiencies resulting from the vesting and exercises of stock-based compensation awards to be recognized in the income
statement. During fiscal 2017, $1.8 million of net excess tax benefits were recognized as a reduction of income tax expense.
In addition, we applied a research and development tax credit in the amount of $1.8 million resulting from a study completed
during the third quarter of fiscal 2017. These items in total reduced the effective income tax rate for fiscal 2017 by
approximately 100 basis points. We expect our income tax rate for fiscal 2018 to be in the range of 38.0% and 38.5%, which
assumes no significant excess tax benefits or expenses recognized as a result of ASU 2016-09.
Net Income
The factors which affected net income for fiscal 2017 as compared to the prior period have been discussed above.
21
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)
$
%
August 29, 2015
(52 weeks)
$
%
$
$
2,863,505
1,574,647
1,288,858
912,898
375,960
(4,229)
371,731
140,515
231,216
100.0% $ 2,910,379
1,593,804
55.0%
1,316,575
45.0%
937,046
31.9%
379,529
13.1%
(6,388)
(0.1)%
373,141
13.0%
141,833
4.9%
231,308
8.1% $
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; and (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 Large Account
Customers decreased by approximately $72.2 million, partially offset by an increase in 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:
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.
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 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.
22
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. 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.
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.
Total Other Expense
The decrease in total 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.
23
Net Income
The factors which affected net income for fiscal 2016 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 2,
2017
September 3,
2016
$
$
$
532,977
(16,083)
516,894
1,225,140
$
$
$
606,822
(52,890)
553,932
1,098,376
$
$
$
$ Change
(73,845)
36,807
(37,038)
126,764
As of September 2, 2017, we held $16.1 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, new products, new facilities, facility expansions, investments in vending solutions, technology
investments, and productivity investments. Cash generated from operations, together with borrowings under our credit
facilities and Private Placement Debt, have been used to fund these needs, to repurchase shares of our Class A common
stock, and to pay dividends. At September 2, 2017, total borrowings outstanding, representing amounts due under the New
Credit Facility (as defined below) and Private Placement Debt, as well as all capital leases and financing arrangements, were
approximately $533.0 million, net of unamortized debt issuance costs of $1.9 million. At September 3, 2016, total
borrowings outstanding, representing amounts due under our previous credit facility and Private Placement Debt, as well as
all capital leases and financing arrangements, were approximately $606.8 million, net of unamortized debt issuance costs of
$0.9 million. 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.
The table below summarizes information regarding the Company’s liquidity and capital resources:
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
$
$
$
$
$
Operating Activities
Fiscal Years Ended
September 2,
September 3,
2017
2016
August 29,
2015
246,841
(88,893)
(194,746)
(Amounts in thousands)
401,103
$
(87,930)
$
(298,368)
$
(9)
(36,807)
$
$
(182)
14,623
$
$
$
$
$
249,791
(51,405)
(207,045)
(228)
(8,887)
Net cash provided by operating activities for the fiscal years ended September 2, 2017 and September 3, 2016 was
$246.8 million and $401.1 million, respectively. There are various increases and decreases contributing to this change.
Increases in inventories and accounts receivable, resulting from increased sales volume, contributed to the majority of the
decrease in net cash provided by operating activities.
24
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. 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.
September 2,
2017
Fiscal Years Ended
September 3,
2016
August 29,
2015
Working Capital
Current Ratio
Days Sales Outstanding (excluding DECO)
Inventory Turnover (excluding DECO)
$
447,854
1.8
54.0
3.5
(Dollars in thousands)
502,889
$
2.1
$
50.8
3.2
610,089
2.4
50.2
3.2
The decrease in working capital and the current ratio at September 2, 2017 compared to September 3, 2016 is related
to the adoption of ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which resulted in a prospective
reclassification of $46.6 million from current deferred income tax assets to long-term liabilities during the first quarter of
fiscal 2017. See Note 1 “Business and Summary of Significant Accounting Policies” in the Notes to the Consolidated
Financial Statements for more information about this ASU adoption. 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 increase in days sales outstanding (“DSO”) is primarily due to an aging receivables portfolio consisting of a
greater percentage of Large Account Customer sales. We expect our DSO to improve slightly in fiscal 2018 from fiscal 2017
levels. Inventory turns, calculated using a thirteen-point average inventory balance, improved slightly in fiscal 2017 due to
sales volume increasing.
Investing Activities
Net cash used in investing activities for the fiscal years ended September 2, 2017 and September 3, 2016 was
$88.9 million and $87.9 million, respectively. The use of cash for fiscal 2017 is attributable to expenditures for property,
plant, and equipment, as well as the acquisition of DECO. The use of cash for fiscal 2016 is attributable to expenditures for
property, plant, and equipment, as well as 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 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 CFC and the real property on which the Atlanta
CFC is situated.
Financing Activities
Net cash used in financing activities for the fiscal years ended September 2, 2017 and September 3, 2016 was
$194.7 million and $298.4 million, respectively. The major components contributing to the use of cash for fiscal 2017 were
repayments on our credit facilities of $72.5 million, net of borrowings, and cash dividends paid of $102.2 million. 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 August 2016 self tender offer and related stock purchase referenced above, repayments
on our previous 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 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 August 2016 “modified Dutch
auction” tender offer and related stock purchase from certain of our Class B shareholders, repayments on our previous 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
amounts of $305.0 million and $175.0 million, respectively. The major components contributing to the use of cash for fiscal
25
2015 were cash dividends paid of $284.2 million, repayments on our previous 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
New Credit Facility
In April 2017, the Company entered into a new $600 million credit facility (the “New Credit Facility”). See Note 8
“Debt and Capital Lease Obligations” in the Notes to the Consolidated Financial Statements for more information
about the New Credit Facility.
At September 2, 2017, we were in compliance with the operating and financial covenants of the New Credit Facility.
The Company had additional repayments of $60.0 million, net of borrowings, in September and October 2017. The current
unused balance of $325.0 million of the New Credit Facility, which is reduced by outstanding letters of credit, is available for
working capital purposes if necessary.
Private Placement Debt
In July 2016, in connection with our self tender offer and related stock purchase, we completed the issuance and sale
of unsecured senior notes (the “Private Placement Debt”). At September 2, 2017, we were in compliance with the operating
and financial covenants of the Private Placement Debt. See Note 8 “Debt and Capital Lease Obligations” in the Notes to the
Consolidated Financial Statements for more information about this transaction.
Capital Expenditures
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 $10.3 million and
$6.6 million in the fiscal 2017 and fiscal 2016, respectively. This project was completed in April 2017.
In addition, we continue to invest in sales productivity initiatives, eCommerce and vending platforms, CFCs and
distribution network, and in other infrastructure and technology.
Related Party Transactions
Atlanta CFC Infrastructure Investment
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 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 1 “Business and
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 1 “Business and 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 2, 2017 (in thousands):
26
Contractual Obligations
Operating lease obligations(1)
Capital lease obligations, net of interest(2)
Maturities of long-term debt obligations, net of interest
Estimated interest on debt, capital lease obligations
Total contractual obligations
__________________________
Total
$ 34,330
27,829
507,000
39,538
$ 608,697
Less than 1
year
$ 10,829
373
332,000
5,536
$ 348,738
1 – 3 years
$ 14,994 $
27,456
—
10,640
$ 53,090 $
3 – 5 years
6,256
More than 5
years
2,251
$
—
—
— 175,000
13,587
$ 190,838
9,775
16,031
(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 2027. In addition, we are obligated under certain equipment and automobile operating leases, which expire on
varying dates through fiscal 2021.
(2) As of September 2, 2017, the Company has entered into various capital leases 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.
The Company has recorded a non-current liability of $6.0 million for tax uncertainties and interest for the fiscal year
ended September 2, 2017. This amount is excluded from the table above, as the Company cannot make reliable estimates of
these cash flows by period. See Note 6 “Income Taxes” in the Notes 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 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 2017, 2016 and 2015, 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.
27
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 2, 2017, our goodwill totaled $633.7 million and our indefinite-lived intangible assets totaled
$14.2 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. Events or circumstances that may result in an impairment review include
changes in macroeconomic conditions, industry and market considerations, cost fact events affecting the reporting unit or
sustained decrease in share price. Each year, the Company may elect to perform a qualitative assessment to determine
whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If impairment is
indicated in the qualitative assessment, or, if management elects to initially perform a quantitative assessment of goodwill or
intangible assets, the impairment test uses a two-step approach. Step one compares the fair value of a reporting unit with its
carrying amount, including goodwill and intangible assets. If the fair value of the reporting unit exceeds its carrying amount,
goodwill and intangible assets of the reporting unit are not impaired, and the second step of goodwill or intangible asset
impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the
goodwill or intangible asset impairment test is performed to measure the amount of impairment loss (if any). Step two
compares the implied fair value of the reporting unit’s goodwill or intangible assets with the carrying amount of goodwill or
intangible assets. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized
in a business combination, meaning the reporting unit's fair value is allocated to all the assets and liabilities of the reporting
unit (including unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the
fair value of the reporting unit is the price paid to acquire the reporting unit. If the carrying amount of a reporting unit's
goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess.
We conducted our qualitative assessment of goodwill and intangibles in the fiscal fourth quarters of 2017 and 2016.
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.
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 1 “Business and Summary of Significant Accounting Policies” in the Notes to the Consolidated
Financial Statements.
Recently Issued Accounting Pronouncements
Refer to Note 1 “Business and Summary of Significant Accounting Policies” in the Notes to the Consolidated
Financial Statements.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risks
We are exposed to interest rate risk on our variable-rate debt. In April 2017, the Company entered into the New
Credit Facility. See Note 8 “Debt and Capital Lease Obligations” in the Notes to the Consolidated Financial Statements for
more information about the New Credit Facility.
Borrowings under our New Credit Facility are subject to fluctuations in the interest rate, which have a corresponding
effect on our interest expense. A 100 basis point increase or decrease in interest rates would impact our interest costs by
approximately $3.2 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 2, 2017 AND SEPTEMBER 3, 2016
CONSOLIDATED STATEMENTS OF INCOME FOR THE FISCAL YEARS ENDED SEPTEMBER 2, 2017,
SEPTEMBER 3, 2016 AND AUGUST 29, 2015
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE FISCAL YEARS ENDED
SEPTEMBER 2, 2017, SEPTEMBER 3, 2016 AND AUGUST 29, 2015
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE FISCAL YEARS ENDED
SEPTEMBER 2, 2017, SEPTEMBER 3, 2016 AND AUGUST 29, 2015
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED SEPTEMBER 2,
2017, SEPTEMBER 3, 2016 AND AUGUST 29, 2015
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 2, 2017 and September 3, 2016, 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 2, 2017. 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 2, 2017 and September 3, 2016, and the
consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended September 2,
2017, 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 2, 2017, 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 October 31, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Jericho, New York
October 31, 2017
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 $13,278
and $12,353, 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:
Short-term debt
Accounts payable
Accrued liabilities
Total current liabilities
Long-term debt
Deferred income taxes and tax uncertainties
Total liabilities
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock; $0.001 par value; 5,000,000 shares authorized; none issued
and outstanding
Class A common stock (one vote per share); $0.001 par value; 100,000,000
shares authorized; 53,513,806 and 52,992,682 shares issued, respectively
Class B common stock (ten votes per share); $0.001 par value; 50,000,000
shares authorized; 11,850,636 and 11,933,233 shares issued and outstanding,
respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Class A treasury stock, at cost, 8,972,729 and 8,344,514 shares, respectively
Total shareholders’ equity
Total liabilities and shareholders’ equity
September 2,
September 3,
2017
2016
$
16,083
$
52,890
471,795
464,959
52,742
—
1,005,579
316,305
633,728
110,429
32,871
2,098,912
331,986
121,266
104,473
557,725
200,991
115,056
873,772
$
$
392,463
444,221
45,290
46,627
981,491
320,544
624,081
105,307
33,528
2,064,951
267,050
110,601
100,951
478,602
339,772
148,201
966,575
—
54
—
53
12
626,995
1,168,812
(17,263)
(553,470)
1,225,140
2,098,912
$
12
584,017
1,040,148
(19,098)
(506,756)
1,098,376
2,064,951
$
$
$
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
Cash dividends declared per common share
For the Fiscal Years Ended
September 2,
September 3,
August 29,
2017
(52 weeks)
2,887,744
1,601,497
1,286,247
907,247
379,000
(12,370)
658
704
(11,008)
367,992
136,561
231,431
4.08
4.05
56,591
56,971
1.80
$
$
$
$
$
$
$
$
$
$
2016
(53 weeks)
2,863,505
1,574,647
1,288,858
912,898
375,960
(5,807)
654
924
(4,229)
371,731
140,515
231,216
3.78
3.77
2015
(52 weeks)
2,910,379
1,593,804
1,316,575
937,046
379,529
(6,340)
771
(819)
(6,388)
373,141
141,833
231,308
3.75
3.74
$
$
$
$
60,908
61,076
1.72
$
61,292
61,487
4.60
See accompanying notes to consolidated financial statements.
33
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income, as reported
Foreign currency translation adjustments
Comprehensive income
For the Fiscal Years Ended
September 2,
September 3,
August 29,
2017
2016
2015
(52 weeks)
(53 weeks)
(52 weeks)
$
$
231,431
1,835
233,266
$
$
231,216 $
(1,846)
229,370 $
231,308
(12,198)
219,110
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 2, 2017 (52 weeks), SEPTEMBER 3, 2016 (53 weeks), AND AUGUST 29, 2015 (52 weeks)
(In thousands)
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
Repurchases of common 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
Repurchases of common 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
Class A Common Stock Class B Common Stock Additional
Shares
55,980
Amount
$
56
Shares
13,296
Amount
$
13
Paid-In
Capital
$ 573,730 $
Retained
Earnings
1,286,068
Accumulated
Other
Comprehensive
Loss
$
(5,054)
Class A Treasury Stock
Amount at
Cost
Shares
7,657
$ (456,250) $
Total
1,398,563
185
—
97
138
—
—
—
—
—
—
—
$
56,400
1,363
144
—
(15)
74
—
—
(4,973)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
56
1
1
—
—
—
—
—
(5)
—
—
—
—
—
14,418
—
—
1,854
—
—
—
—
—
—
—
—
—
708
14,195
—
—
—
—
—
—
—
—
—
—
(223,071)
—
—
—
—
—
—
—
—
—
14,418
(63)
2,431
4,285
—
—
—
444
—
—
—
(33,414)
—
708
14,195
(33,414)
—
—
(223,071)
—
—
—
—
$
13,296
—
—
—
—
13
—
—
—
—
$ 604,905 $
(61,160)
(764)
—
231,308
1,232,381
$
—
—
(12,198)
—
(17,252)
—
—
—
—
—
—
—
—
$ (487,233) $
8,038
(61,160)
(764)
(12,198)
231,308
1,332,870
(1,363)
(1)
—
—
—
—
8,239
—
—
1,649
—
—
—
—
—
—
—
—
—
—
—
147
13,985
—
(44,908)
—
—
—
—
—
—
(317,240)
—
—
—
(83,000)
—
—
—
—
—
—
(22,778)
(431)
35
—
—
—
—
—
—
—
—
—
8,240
(64)
2,435
4,084
—
—
—
—
—
— 5,344
— (4,973)
—
—
—
—
—
—
—
—
—
(384,111)
362,153
—
147
13,985
(384,111)
—
—
(83,000)
—
—
(22,778)
(431)
Foreign currency translation adjustment
Net income
BALANCE at September 3, 2016
Exchange of Class B common stock
for Class A common stock
Exercise of common stock options
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
Repurchases of common stock
Cash dividends paid on Class A
common stock
Cash dividends paid on Class B
common stock
Dividend equivalent units declared, net of
cancellations
Foreign currency translation adjustment
Net income
BALANCE at September 2, 2017
—
—
$
52,993
82
399
—
(7)
47
—
—
—
—
—
—
—
$
53,514
—
—
53
—
1
—
—
—
—
—
—
—
—
—
—
54
—
—
$
11,933
—
—
12
—
—
$ 584,017 $
—
231,216
1,040,148
$
(1,846)
—
(19,098)
—
—
—
—
$ (506,756) $
8,345
(1,846)
231,216
1,098,376
(82)
—
—
—
—
26,887
—
—
2,088
—
—
—
—
—
—
—
—
—
78
13,925
—
—
—
—
—
—
—
—
—
—
—
(80,848)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
26,888
(57)
2,155
4,243
—
—
—
685
—
—
—
—
—
—
(48,869)
—
78
13,925
(48,869)
—
(80,848)
—
—
(21,368)
(551)
—
—
—
—
—
—
$
11,851
—
—
12
(21,368)
(551)
—
—
—
—
$ 626,995 $
—
231,431
1,168,812
$
1,835
—
(17,263)
—
—
—
—
$ (553,470) $
8,973
1,835
231,431
1,225,140
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 2, 2017, SEPTEMBER 3, 2016 AND AUGUST 29, 2015
(In thousands)
d
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Stock-based compensation
Loss on disposal of property, plant, and equipment
Provision for doubtful accounts
Deferred income taxes and tax uncertainties
Excess tax benefits from stock-based compensation
Write-off of deferred financing costs on previous credit facility
Changes in operating assets and liabilities, net of amounts associated
with business acquired:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Other assets
Accounts payable and accrued liabilities
Total adjustments
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment
Cash used in business acquisition
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
Credit Facility 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
For the Fiscal Years Ended
September 2,
September 3,
August 29,
2017
2016
2015
(52 weeks)
(53 weeks)
(52 weeks)
$
231,431
$
231,216 $
231,308
62,980
13,925
678
7,048
13,482
—
94
(72,230)
(15,871)
(7,428)
548
12,184
15,410
246,841
(46,548)
(42,345)
(88,893)
71,930
13,985
752
6,997
15,007
(1,536)
—
2,595
61,047
(6,303)
142
5,271
169,887
401,103
(87,930)
—
(87,930)
(49,182)
(102,216)
—
(1,175)
—
(383,798)
(105,778)
—
(1,090)
1,536
69,729
14,195
1,453
6,665
15,035
(3,956)
—
(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
—
—
—
4,243
26,887
739
546,000
—
—
(1,542)
(618,500)
(194,746)
(9)
(36,807)
52,890
16,083
121,691
11,695
$
$
$
$
$
$
4,084
7,410
453
305,000
175,000
(185)
—
(301,000)
(298,368)
(182)
14,623
38,267
52,890 $
(243,000)
(207,045)
(228)
(8,887)
47,154
38,267
127,965 $
4,986 $
122,988
5,843
See accompanying notes to consolidated financial statements.
37
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts and shares in thousands, except per share data)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 93 branch offices and 12 customer fulfillment centers.
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 years 2017 and 2015 contain activity for 52 weeks while fiscal year 2016 contains activity
for 53 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, selling 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. Our standard receivable terms
generally provide for payment of invoices 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 includes 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.
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
38
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 its 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 Indefinite-Lived Intangible Assets
The Company’s business acquisitions typically result in the recording of goodwill and other intangible assets, which
affect the amount of amortization expense and possibly impairment write-downs that the Company may incur in future
periods. Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in connection
with business acquisitions. The Company annually reviews goodwill and intangible assets that have indefinite lives for
impairment in its fiscal fourth quarter and when events or changes in circumstances indicate the carrying values of these
assets might exceed their current fair values. Goodwill 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 2017, 2016 and 2015. Based on the qualitative assessment of
intangible assets that have indefinite lives performed by the Company in its fiscal fourth quarters of 2017 and 2016 and the
quantitative assessment performed by the Company in its fiscal fourth quarter of 2015, there were no indicators of
impairment of intangible assets that have indefinite lives.
39
The balances and changes in the carrying amount of goodwill are as follows:
Balance as of August 29, 2015
Foreign currency translation adjustments
Balance as of September 3, 2016
Acquisition(1)
Foreign currency translation adjustments
Balance as of September 2, 2017
__________________________
$
$
623,626
455
624,081
8,318
1,329
633,728
(1) Acquired DECO Tool Supply Co. (“DECO”) in July 2017. See Note 4 “Business Combination” for further discussion
on this transaction.
The components of the Company’s other intangible assets for the fiscal years ended September 2, 2017 and
September 3, 2016 are as follows:
For the Fiscal Years Ended
September 2, 2017
September 3, 2016
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
$
$
187,260
23,100
4,403
14,205
228,968
$
$
(92,381) $
(23,100)
(3,058)
—
(118,539) $
175,160 $
23,100
3,613
14,132
216,005 $
(85,316)
(23,100)
(2,282)
—
(110,698)
For fiscal years 2017 and 2016, the Company recorded approximately $12,980 and $112 of intangible assets,
respectively, consisting of intangible assets acquired through the DECO acquisition and from the registration and application
of new trademarks. See Note 4 “Business Combination” for further discussion. Approximately $17 and $397 in gross
intangible assets, and any related accumulated amortization, were written off related to trademarks that are no longer being
utilized during fiscal years 2017 and 2016, respectively. 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 $8,223, $14,478, and $16,580 during fiscal
years 2017, 2016, and 2015, respectively. Estimated amortization expense for each of the five succeeding fiscal years is as
follows:
Fiscal Year
2018
2019
2020
2021
2022
$9,737
8,559
7,685
7,001
6,986
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 2017, 2016 and 2015.
Deferred Catalog Costs
The costs of producing and distributing the Company’s principal catalogs are deferred ($4,778 and $5,174 at
September 2, 2017 and September 3, 2016, 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
$16,289, $19,242 and $24,101 during the fiscal years 2017, 2016, and 2015, respectively.
40
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. In cases where the
product is shipped directly to the customer, the Company recognizes revenue at the time of shipment primarily on a gross
basis. The Company’s standard shipping terms are FOB shipping point. Sales made through the Company’s eCommerce
platforms, which accounted for 60.1% of our fiscal 2017 revenues, are recognized on the same terms as revenues through
other channels. 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.
Gross Profit
Gross profit primarily represents the difference between the sale price to our customers and the product cost from
our suppliers (net of earned rebates and discounts) including the cost of inbound freight. The cost of outbound freight
(including internal transfers), purchasing, receiving and warehousing are included in operating expenses. The Company’s
gross profit may not be comparable to those of other companies, as other companies may include all of the costs related to
their distribution network in cost of sales.
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 $119,979, $118,174, and $123,900 during fiscal years 2017,
2016, and 2015, 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 the Company’s restricted stock awards and units is based on the closing market price of the Company’s common
stock on the date of grant. The Company estimated the fair value of stock options granted using a Black-Scholes option-
pricing model. This model requires the Company to make estimates and assumptions with respect to the expected term of the
option, the expected volatility of the price of the Company’s 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. The Company uses historical data
to estimate pre-vesting option and restricted stock award and unit forfeitures and record stock-based compensation expense
41
only for those awards that are expected to vest.
In fiscal 2017, the Company adopted Accounting Standards Update (“ASU”) 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.
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.
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 the Atlanta Customer Fulfillment Center (“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.
The Company paid rent under an operating lease to Mitchmar of approximately $2,110 and $2,318, respectively, for
fiscal years 2016 and 2015 in connection with our occupancy of our Atlanta CFC.
Stock Purchase Agreement
In connection with a “modified Dutch auction” tender offer commenced on July 7, 2016, the Company purchased an
aggregate of 1,152 shares of its Class A common stock from 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 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 is 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 2, 2017 and September 3, 2016. 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
42
of any long-term obligations was not significantly different than the carrying values at September 2, 2017 and September 3,
2016.
Foreign Currency
The local currency is the functional currency for all of MSC’s operations outside the United States. Assets and
liabilities of these operations are translated to U.S. dollars at the exchange rate in effect at the end of each period. Income
statement accounts are translated at the average exchange rate prevailing during the period. Translation adjustments arising
from the use of differing exchange rates from period to period are included as a component of other comprehensive income
within shareholders’ equity. Gains and losses from foreign currency transactions are included in net income for the period.
Income Taxes
The Company has established deferred income tax assets and liabilities for temporary differences between the
financial reporting bases and the income tax bases of its assets and liabilities at enacted tax rates expected to be in effect
when such assets or liabilities are realized or settled pursuant to the provisions of ASC Topic 740, “Income Taxes”, 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. In fiscal 2017, the Company adopted ASU 2015-17, “Balance Sheet Classification of
Deferred Taxes”, and reclassified all current deferred taxes and the related valuation allowances to noncurrent positions on
the Consolidated Balance Sheets. The amounts of unrecognized tax benefits, exclusive of interest and penalties that would
affect the effective tax rate, were $5,689 and $4,432 as of September 2, 2017 and September 3, 2016, 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
2017, 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. We operate in one operating and reportable segment as a distributor of metalworking and MRO products and
services. The Company’s chief operating decision maker, its Chief Executive Officer, manages the Company’s operations on
a consolidated basis for purposes of allocating resources. 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.
Business Combinations
The Company accounts for business combinations in accordance with ASC Topic 805, “Business Combinations”
(“ASC 805”). ASC 805 established principles and requirements for recognizing the total consideration transferred to and the
assets acquired, liabilities assumed and any non-controlling interest in the acquired target in a business combination. ASC
805 also provides guidance for recognizing and measuring goodwill acquired in a business combination and requires the
acquirer to disclose information that users may need to evaluate and understand the financial impact of the business
combination. See Note 4 “Business Combination” for further discussion.
Recently Adopted Accounting Pronouncements
Share-based Payments
In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, which includes
43
provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the
financial statements. The Company early adopted ASU 2016-09 in the second quarter of fiscal 2017, which required us to
reflect any adjustments as of September 4, 2016, the beginning of the annual period that includes the interim period of
adoption. Prior fiscal year periods were not retrospectively adjusted.
The new standard requires that excess tax benefits and deficiencies resulting from stock-based compensation awards
vesting and exercises be recognized in the income statement. Previously, these amounts were recognized in additional paid-in
capital. In addition, ASU 2016-09 requires excess tax benefits and deficiencies to be excluded from the assumed future
proceeds in the calculation of diluted shares.
Furthermore, the Company has elected to continue to estimate the number of stock-based awards expected to vest, as
permitted by ASU 2016-09, rather than electing to account for forfeitures as they occur. The standard also requires that
excess tax benefits from share-based compensation awards be reported as operating activities in the consolidated statements
of cash flows. Previously, these cash flows were included in financing activities. The Company elected to apply this change
on a prospective basis. Additionally, ASU 2016-09 requires that employee taxes paid when an employer withholds shares for
tax withholding purposes be reported as financing activities in the consolidated statements of cash flows, which is how the
Company has historically classified these. Finally, the new guidance will allow an employer with a statutory income tax
withholding obligation to withhold shares with a fair value up to the amount of tax owed using the maximum statutory tax
rate in the employee’s applicable jurisdiction. The Company will continue to withhold the minimum statutory withholding
obligation for outstanding awards.
Adoption of the new standard affected our previously reported fiscal first quarter of 2017 net income per share as
follows:
Condensed Consolidated Statements of Income:
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
Deferred Taxes
Thirteen Weeks Ended
December 3, 2016
(unaudited)
As Reported
As Adjusted
(in thousands, except per share data)
$
$
$
$
$
$
$
$
33,442
54,103
0.96
0.95
56,381
56,572
33,257
54,288
0.96
0.96
56,381
56,608
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.
The FASB allowed early adoption of this standard and, therefore, the Company prospectively adopted ASU 2015-17 during
its first quarter of fiscal 2017. As a result of adopting this standard, $46,627 of deferred income taxes that were previously
presented as a current asset are now included within long-term liabilities, as the Company was in a net deferred tax liability
position in its first quarter of fiscal 2017 which was the time of adoption. Prior periods were not retrospectively adjusted.
Presentation of Debt Issuance Costs
In April 2015, the FASB issued 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, this 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
44
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
Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 in the
goodwill impairment test that required an entity to calculate the implied fair value of goodwill. An entity will now apply a
one-step quantitative test and record an impairment charge based on the excess of a reporting unit’s carrying amount over its
fair value. ASU 2017-04 will be applied prospectively and is effective for annual and interim goodwill impairment tests
conducted in fiscal years beginning after December 15, 2019. The new standard is effective for the Company for its fiscal
2021 fourth quarter goodwill impairment test. Early adoption is permitted for annual and interim goodwill impairment
testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on
its consolidated financial statements.
Business Combinations
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations – Clarifying the Definition of a
Business. ASU 2017-01 clarifies the definition of a business to assist entities with evaluating when a set of transferred assets
and activities is considered a business. The amendment is effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. The new standard is effective for the Company for its fiscal 2019 first
quarter, with early adoption permitted. The amendments are to be applied prospectively to business combinations that occur
after the effective date.
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.
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. To date, the Company has
performed a preliminary detailed review of key contracts and compared historical accounting policies and practices to the
new standard. While the Company is still evaluating this standard, it is not expected that this standard will have a material
45
impact on the Company’s consolidated financial statements. The Company will continue to evaluate ASU 2014-09 and other
amendments and related interpretive guidance through the date of adoption. The Company expects to adopt ASU 2014-09
under the modified retrospective approach in the first quarter of fiscal 2019.
Reclassifications
The Company combined the revolving credit note and current maturities of long-term debt into short-term debt for
the prior year in the Consolidated Balance Sheets in order to conform to the current period’s presentation.
2. FAIR VALUE
Fair value accounting standards define fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value
hierarchy prioritizes the inputs used to measure fair value into three levels, with Level 1 being of the highest priority. The
three levels of inputs used to measure fair value are as follows:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active
markets.
Level 2—Include other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs which are supported by little or no market activity.
As of September 2, 2017 and September 3, 2016, 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 ($27,025 at both September 2, 2017 and
September 3, 2016) 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 2017. 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
short-term and long-term debt 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 2, 2017 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 2, 2017 and September 3, 2016 due to the short-term
maturity of these items.
During the fiscal years ended September 2, 2017 and September 3, 2016, the Company had no measurements of
non-financial assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition.
3. 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.
46
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 2, 2017, September 3, 2016 and August 29, 2015, respectively:
For the Fiscal Years Ended
September 2,
September 3,
August 29,
2017
2016
2015
(52 weeks)
(53 weeks)
(52 weeks)
Net income as reported
Less: Distributed net income available to participating securities
Less: Undistributed net income available to participating securities
$
231,431 $
(206)
(410)
231,216 $
(308)
(601)
231,308
(1,350)
—
Numerator for basic net income per share:
Undistributed and distributed net income available to common shareholders $
Add: Undistributed net income allocated to participating securities
Less: Undistributed net income reallocated to participating securities
230,815 $
230,307 $
229,958
410
(408)
601
(600)
—
—
Numerator for diluted net income per share:
Undistributed and distributed net income available to common shareholders $
230,817 $
230,308 $
229,958
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
56,591
380
56,971
60,908
168
61,076
61,292
195
61,487
Net income per share two-class method:
Basic
Diluted
$
$
4.08 $
4.05 $
3.78 $
3.77 $
3.75
3.74
There were no antidilutive stock options included in the computation of diluted earnings per share for the fiscal year
ended September 2, 2017. 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.
4. BUSINESS COMBINATION
On July 31, 2017, the Company acquired certain assets and assumed certain liabilities of DECO, an industrial supply
distributor based in Davenport, Iowa. For the fiscal year ending September 2, 2017, $10,369 of revenue and a $250 loss
before provision for income taxes relating to the acquired DECO business were included in the consolidated statements of
income since the date of acquisition.
The combined acquisition of the DECO business for $38,000 and real property of $4,345 from its affiliates was accounted
for as a business combination pursuant to ASC Topic 805. Acquisition-related expenses totaling $1,002 have been recorded
as operating expenses in the Company’s consolidated statement of income for the fiscal year ending September 2, 2017. As
required by ASC 805-20, the Company allocated the purchase price to assets and liabilities based on their estimated fair value
at the acquisition date. The cash purchase price for the combined acquisition was $42,345.
47
The purchase price allocation is summarized in the following table:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Property, plant and equipment
Goodwill
Identifiable intangibles
Total assets acquired
Total liabilities assumed
Net assets acquired
$
$
$
15,452
4,802
26
6,609
8,318
12,870
48,077
(5,732)
42,345
Acquired intangible assets with a fair value of $12,870 consisted primarily of customer relationships of $12,100
with a useful life of 10 years. The goodwill amount of $8,318 represents the excess of the purchase price over the fair value
of the net tangible and intangible assets acquired. The primary items that generated the goodwill were the premium paid by
the Company for the right to control the business acquired and the expected synergies. This goodwill will not be amortized
and will be tested for impairment at least annually. Goodwill recognized as a result of the DECO acquisition is expected to be
deductible for tax purposes and will be amortized for tax purposes over 15 years. Pro forma information related to the
acquisition is not presented because the impact of the acquisition on the Company’s consolidated results of operations is not
considered to be significant.
In addition, the Company recorded a post-closing working capital adjustment in the amount of $738, which was paid out
to DECO, in October 2017, related to the acquisition closed in fiscal 2017.
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 2,
September 3,
2017
2016
$
28,169
182,032
2,595
178,251
336,685
727,732
411,427
316,305 $
27,205
178,828
2,551
172,347
317,096
698,027
377,483
320,544
The amount of capitalized interest, net of accumulated amortization, included in property, plant and equipment was
$754 and $796 at September 2, 2017 and September 3, 2016, respectively.
Depreciation expense was $54,356, $57,052 and $52,799 for the fiscal years ended September 2, 2017, September 3,
2016, and August 29, 2015, respectively.
48
6. INCOME TAXES
The provision for income taxes is comprised of the following:
Current:
Federal
State and local
Deferred:
Federal
State and local
Total
For the Fiscal Years Ended
September 2,
2017
September 3,
2016
August 29,
2015
$
$
108,347
16,059
124,406
10,938
1,217
12,155
136,561
$
$
109,699
15,621
125,320
13,993
1,202
15,195
140,515
$
$
109,575
17,339
126,914
13,987
932
14,919
141,833
Significant components of deferred tax assets and liabilities are as follows:
September 2,
2017
September 3,
2016
Deferred tax liabilities:
Depreciation
Deferred catalog costs
Goodwill
Deferred tax assets:
Accounts receivable
Inventory
Deferred compensation
Stock-based compensation
Intangible amortization
Other accrued expenses/reserves
$
(56,382) $
(1,079)
(103,218)
(160,679)
4,441
9,794
1,280
9,140
9,517
17,445
51,617
Net Deferred Tax Liabilities
$
(109,062) $
Reconciliation of the statutory Federal income tax rate to the Company’s effective tax rate is as follows:
(53,580)
(1,347)
(88,607)
(143,534)
4,089
9,995
1,710
9,813
11,933
9,087
46,627
(96,907)
U.S. Federal statutory rate
State income taxes, net of Federal benefit
Other, net
Effective income tax rate
For the Fiscal Years Ended
September 2,
September 3,
August 29,
2017
35.0 %
3.0
(0.9)
37.1 %
2016
35.0 %
3.0
(0.2)
37.8 %
2015
35.0 %
3.1
(0.1)
38.0 %
The aggregate changes in the balance of gross unrecognized tax benefits during fiscal 2017 and 2016 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 2,
September 3,
2017
2016
10,610
3,261
1,015
—
(2,245)
12,641
$
$
10,333
2,745
—
(174)
(2,294)
10,610
$
$
49
Included in the balance of unrecognized tax benefits at September 2, 2017 is $1,049 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 2017,
2016 and 2015 provisions include interest and penalties of $245, $6 and $19, respectively. The Company has accrued $305
and $235 for interest and penalties as of September 2, 2017 and September 3, 2016, 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.
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 2,
2017
September 3,
2016
32,151
19,657
12,622
14,458
25,585
104,473
$
$
31,416
12,728
13,541
14,206
29,060
100,951
$
$
8. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt at September 2, 2017 and September 3, 2016 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: short-term debt(1)
Long-term debt
__________________________
September 2,
September 3,
2017
2016
$
332,000 $
-
75,000
100,000
27,829
(1,852)
532,977 $
(331,986)
200,991 $
$
$
217,000
187,500
75,000
100,000
28,268
(946)
606,822
(267,050)
339,772
(1) Net of unamortized debt issuance costs expected to be amortized in the next twelve months.
Credit Facility
In April 2017, the Company entered into a new $600,000 credit facility (the “New Credit Facility”). The New Credit
Facility, which matures on April 14, 2022, provides for a five-year unsecured revolving loan facility in the aggregate amount
of $600,000. The New Credit Facility replaced the Company’s previous $650,000 credit facility (the “Previous Credit
Facility”), dated April 22, 2013.
The New Credit Facility permits up to $50,000 to be used to fund letters of credit. The New Credit Facility also
permits the Company to request one or more incremental term loan facilities and/or increase the revolving loan commitments
in an aggregate amount not to exceed $300,000. Subject to certain limitations, each such incremental term loan facility or
50
revolving commitment increase will be on terms as agreed to by the Company, the Administrative Agent and the lenders
providing such financing.
Borrowings under the New Credit Facility bear interest, at the Company’s option, either at (i) the LIBOR (London
Interbank Offered Rate) rate plus the applicable margin for LIBOR loans ranging from 1.00% to 1.375%, based on the
Company’s consolidated leverage ratio; or (ii) the greatest of (a) the Administrative Agent’s prime rate in effect on such day,
(b) the federal funds effective rate in effect on such day, plus 0.50% and (c) the LIBOR rate that would be calculated as of
such day in respect of a proposed LIBOR loan with a one-month interest period, plus 1.00%, plus, in the case of each of
clauses (a) through (c), an applicable margin ranging from 0.00% to 0.375%, based on the Company’s consolidated leverage
ratio. The Company is required to pay a quarterly undrawn fee ranging from 0.10% to 0.20% per annum on the unutilized
portion of the New Credit Facility, based on the Company’s consolidated leverage ratio. The Company is also required to
pay quarterly letter of credit usage fees ranging between 1.00% to 1.375% (based on the Company’s consolidated leverage
ratio) on the amount of the daily average outstanding letters of credit, and a quarterly fronting fee of 0.125% per annum on
the undrawn and unexpired amount of each letter of credit. The applicable borrowing rate for the Company for any
borrowings outstanding under the New Credit Facility at September 2, 2017 was 2.36%, which represented LIBOR plus
1.125%. Based on the interest period the Company selects, interest may be payable every one, two, three or six months.
Interest is reset at the end of each interest period. The Company currently elects to have loans under the New Credit Facility
bear interest based on LIBOR with one-month interest periods.
During fiscal 2017, the Company borrowed $216,000 under the revolving loan facility and repaid $236,000 and
$37,500 of the revolving loan facility and term loan facility, respectively. In addition, as a result of entering into the New
Credit Facility, the Company borrowed $330,000 under the New Credit Facility and used an additional $16,706 in cash on
hand to pay down and close the $345,000 outstanding balance under the Previous Credit Facility plus the applicable interest
and fees. 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.
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; and
$100,000 aggregate principal amount of 2.90% Senior Notes, Series B, due July 28, 2026.
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 New Credit Facility and Private Placement Debt contain 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 (or, at the election of
the Company after it consummates a material acquisition, a four-quarter temporary increase to 3.50 to1.00), and a minimum
consolidated interest coverage ratio of EBITDA to total interest expense of at least 3.00 to 1.00, during the terms of the New
Credit Facility and Private Placement Debt.
51
At September 2, 2017 and September 3, 2016, the Company was in compliance with the operating and financial
covenants of the New Credit Facility and Private Placement Debt.
Maturities of debt, excluding capital lease and financing obligations, as of September 2, 2017 are as follows:
Fiscal Year
2018
2019
2020
2021
2022
Thereafter
Total
Maturities of
Debt
332,000
—
—
—
—
175,000
507,000
$
$
Capital Lease 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 2, 2017 and September 3, 2016,
the capital lease obligation was approximately $27,025. 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
$27,025 outstanding at both September 2, 2017 and September 3, 2016.
At September 2, 2017, approximate future minimum payments under capital leases and financing arrangements are
as follows:
Fiscal Year
2018
2019
2020
2021
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
$
$
$
$
1,022
993
27,327
—
29,342
1,513
27,829
373
27,456
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
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
52
$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 2, 2017, the maximum number of shares
that may yet be repurchased under the Repurchase Plan was 802 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 2017 and 2016, the Company repurchased 685 shares and 5,344
shares, respectively, of its Class A common stock for $48,869 and $384,111, respectively. 43 and 72 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 2017 and 2016, 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 57 and 64 shares of treasury stock during fiscal 2017 and 2016, 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 for each share held of record 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 2, 2017, 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 24, 2017, the Board of Directors declared a quarterly cash dividend of $0.48 per share, payable on
November 28, 2017 to shareholders of record at the close of business on November 14, 2017. The dividend will result in a
payout of approximately $27,068, based on the number of shares outstanding at October 16, 2017.
53
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 2, 2017, September 3, 2016 and August 29,
2015 was as follows:
For the Fiscal Years Ended
September 2,
September 3,
2017
2016
August 29,
2015
$
$
4,369
4,399
4,872
285
13,925
(5,292)
8,633
$
$
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
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 4,083 authorized shares of common stock were remaining as
of September 2, 2017.
Stock Options
A summary of the status of the Company’s stock options at September 2, 2017 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
2017
Shares
Weighted-Average
Exercise Price
1,645
537
(399)
(40)
1,743
585
$
$
$
69.86
71.33
67.36
70.20
70.88
74.23
The total intrinsic value of options exercised during the fiscal years ended September 2, 2017, September 3, 2016
and August 29, 2015 was $9,474, $3,129, and $3,390, respectively. The unrecognized share-based compensation cost related
to stock option expense at September 2, 2017 was $7,293 and will be recognized over a weighted average of 2.3 years.
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 of 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:
54
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 2, 2017, September 3, 2016 and August 29, 2015 were as follows:
Expected life (in years)
Risk-free interest rate
Expected volatility
Expected dividend yield
Weighted-Average Grant-Date Fair Value
2017
2016
4.1
1.16 %
20.5 %
2.40 %
9.29
$
3.9
1.09 %
21.8 %
2.40 %
8.03
$
2015
3.9
1.09 %
24.5 %
1.70 %
14.06
$
The following table summarizes information about stock options outstanding and exercisable at September 2, 2017:
Range of Exercise Prices
$ 58.90 – $ 66.69
66.70 – 71.33
71.34 – 81.76
81.77 – 83.03
Number of
Options
Outstanding at
September 2,
2017
Weighted-
Average
Remaining
Contractual
Life
Weighted-
Average
Exercise
Price
Number of
Options
Exercisable at
September 2,
2017
Weighted-
Average
Remaining
Contractual
Life
Weighted-
Average
Exercise
Price
Intrinsic
Value
Intrinsic
Value
554
650
236
303
1,743
4.8
5.4
3.1
4.1
4.7
$
59.61
$
5,296
70.96
81.57
83.02
—
—
—
$
70.88
$
5,296
147
128
171
139
585
3.8 $
61.58
$
1,111
2.1
3.1
4.1
3.3 $
69.46
81.51
83.03
—
—
—
74.23
$
1,111
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 2, 2017 is as follows:
Non-vested restricted share awards at the beginning of the year
Granted
Vested
Canceled/Forfeited
Non-vested restricted share awards at the end of the year
2017
Shares
265
—
(98)
(7)
160
$
$
Weighted-
Average Grant-
Date Fair Value
78.58
-
75.24
81.07
80.49
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 2, 2017, September 3, 2016 and August 29,
2015 was $7,357, $7,518 and $8,107, respectively.
55
The unrecognized compensation cost related to the non-vested RSAs at September 2, 2017 is $4,880 and will be
recognized over a weighted-average period of 1.6 years.
Restricted Stock Units
A summary of the Company’s non-vested restricted stock unit (“RSU”) award activity for the fiscal year ended
September 2, 2017 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
2017
Shares
Weighted-Average
Grant-Date Fair
Value
198
174
(45)
(14)
313
$
$
58.98
73.33
59.15
65.21
66.66
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 2, 2017 was $14,859 and is expected to be
recognized over a period of 3.5 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 2, 2017, approximately 182 shares remain reserved for issuance under this plan. Associates purchased
approximately 57 and 64 shares of common stock during fiscal 2017 and 2016 at an average per share price of $74.81 and
$61.87, respectively.
Savings Plan
The Company maintains a defined contribution plan with both a profit sharing feature and a 401(k) feature which
covers all associates who have completed at least one month of service with the Company. For fiscal years 2017, 2016, and
2015, the Company contributed $7,048, $6,594 and $6,665, respectively, to the plan. The Company contributions are
discretionary.
56
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 2027. 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 2021. At September 2, 2017, approximate
minimum annual rentals on all such leases are as follows:
Fiscal Year
2018
2019
2020
2021
2022
Thereafter
Total
$
$
Total Rental Payments
10,829
8,380
6,614
3,706
2,550
2,251
34,330
Total rental expense (exclusive of real estate taxes, insurance and other operating costs) for all operating leases for
fiscal years 2017, 2016 and 2015 was approximately $12,541, $13,428 and $14,504, respectively. This included
approximately $1,044 and $2,401, for fiscal years 2016 and 2015, respectively, of rent expense for the related party lease. 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 1 “Business and 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.
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 2, 2017
Fiscal Year Ended September 3, 2016
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
$
686,271 $
703,780 $
743,923 $
753,770 $
706,819 $
684,117 $
727,495 $
745,074
308,735
314,562
329,500
333,450
318,972
308,791
327,028
334,067
90,600
54,288
86,645
101,776
53,559
62,836
99,979
60,748
90,388
55,029
80,542
105,784
49,525
64,816
99,246
61,846
0.96
0.96
0.94
0.93
1.10
1.09
1.07
1.07
0.89
0.89
0.81
0.80
1.06
1.05
1.03
1.02
57
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 2, 2017. Based on that
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 2, 2017,
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 2, 2017. 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 2, 2017.
Attestation Report of the Independent Registered Public Accounting Firm
The effectiveness of the Company’s internal control over financial reporting as of September 2, 2017 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.”
58
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 2, 2017 that have materially affected, or are reasonably likely to materially affect, its internal control over
financial reporting.
59
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 2, 2017, 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 2, 2017, 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 2, 2017 and September 3, 2016 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 2, 2017 of the Company and our report dated October 31, 2017 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Jericho, New York
October 31, 2017
60
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 2018, or the
2017 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 2017
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 2017 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 2017 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 2017 Proxy Statement, which is incorporated herein by this reference.
61
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 2, 2017.
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
Reference is made to Item 15(b) below.
(b) Exhibits
The Exhibit Index, which immediately precedes the signature page, is incorporated by reference into this Report.
(c) Financial Statement Schedules
Reference is made to Item 15(a)(2) above.
ITEM 16. FORM 10-K SUMMARY
None
62
Exhibit
No.
2.01
EXHIBIT INDEX
Description
Stock Purchase Agreement by and among JLK Direct Distribution, Inc., Kennametal Inc., MSC Industrial
Direct Co., Inc. and MSC Acquisition Corp. VI dated as of March 15, 2006 (incorporated by reference to
Exhibit 2.1 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
3.02
Certificate of Incorporation of the Registrant.*
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
4.02
Specimen Class A Common Stock Certificate.*
Amended and Restated Note Purchase Agreement, dated as of April 14, 2017, by and among MSC Industrial
Direct Co., Inc. and the noteholders named therein (incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed with the SEC on April 18, 2017) (SEC File No. 001-14130).
4.03
4.04
10.01
Form of Form of 2.65% Senior Note, Series A, due July 28, 2023 (included in Exhibit 4.02).
Form of Form of 2.90% Senior Note, Series B, due July 28, 2026 (included in Exhibit 4.02).
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
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).†
10.04
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
10.06
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).†
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
10.09
10.10
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).†
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).†
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).†
63
Exhibit
No.
10.11
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).†
Description
10.12
10.13
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).†
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).†
10.14
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).†
10.15
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).†
10.16
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).†
10.17
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).†
10.18
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).†
10.19
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).†
10.20
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).†
10.21
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).†
10.22
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).†
10.23
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).
10.24
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).
10.25
MSC Executive Severance Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report
on Form 8-K filed with the SEC on October 27, 2016) (SEC File No. 001-14130). †
10.26
Credit Agreement, dated as of April 14, 2017, 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 18, 2017) (SEC File No. 001‐14130).
64
List of Subsidiaries.**
Consent of Ernst & Young LLP.**
Exhibit
No.
21.01
23.01
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
Description
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. Exhibits originally filed in paper.
Filed herewith.
Furnished herewith.
Management contract, compensatory plan or arrangement.
65
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: October 31, 2017
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
October 31, 2017
/s/ ERIK GERSHWIND
Erik Gershwind
President and Chief Executive Officer
and Director (Principal Executive Officer)
October 31, 2017
/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
66
October 31, 2017
October 31, 2017
October 31, 2017
October 31, 2017
October 31, 2017
October 31, 2017
October 31, 2017
October 31, 2017
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 29, 2015
Allowance for doubtful accounts(1)
Deducted from asset accounts:
For the fiscal year ended September 3, 2016
Allowance for doubtful accounts(1)
Deducted from asset accounts:
For the fiscal year ended September 2, 2017
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
$
9,310 $
6,665 $
— $
4,663 $
11,312
$
11,312 $
6,997 $
— $
5,956 $
12,353
$
12,353 $
7,048 $
— $
6,123 $
13,278
(1) Included in accounts receivable.
(2) Comprised of uncollected accounts charged against the allowance.
S-1
CORPORATE
INFORMATION
Board of Directors
Massachusetts Institute of Technology
Jonathan Byrnes
Roger Fradin
Erik Gershwind
Louise Goeser
Mitchell Jacobson
Michael Kaufmann
Denis Kelly
Steven Paladino
Philip Peller
The Carlyle Group
Senior Lecturer
Operating Executive
President and Chief Executive Officer
President and Chief Executive Officer
Non-Executive Chairman of the Board
Chief Financial Officer
(Chief Executive Officer eff. 1/1/18)
Investment Banker
Executive Vice President and Chief Financial Officer Henry Schein, Inc.
Independent Director
Cardinal Health, Inc.
MSC Industrial Supply Co.
MSC Industrial Supply Co.
Scura Paley Securities LLC
Retired Partner, Arthur Andersen LLP
Grupo Siemens S.A. de C.V. (Siemens Mesoamerica)
Executive Officers
Erik Gershwind
Steven Baruch
Rustom Jilla
Douglas Jones
President and Chief Executive Officer
Executive Vice President and Chief Strategy & Marketing 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
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
ANNUAL MEETING
The 2018 Annual Meeting of
Shareholders will be held at:
Hilton Long Island/Huntington
598 Broad Hollow Road
Melville, New York 11747
INVESTOR RELATIONS CONTACT
REGISTRAR AND TRANSFER AGENT
John Chironna
Proxy Services
MSC Industrial Supply Co.
c/o Computershare Investor Services
(704) 987-5231
Copies of our Annual Report on
Form 10-K for the fiscal year ended
P.O. Box 505008
Louisville, Kentucky 40233-9814
on Thursday, January 25, 2018 at 9 a.m.
September 2, 2017 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 $0.48 per share, or
$1.92 per share annually.
MSC INDUSTRIAL SUPPLY CO.
75 Maxess Road
Melville, New York 11747
516.812.2000
www.mscdirect.com
NYSE listed: MSM