MSC Industrial Direct
Annual Report 2019

Plain-text annual report

SOLVING MANUFACTURING’S MISSION-CRITICAL CHALLENGES SOLVING MANUFACTURING’S MISSION-CRITICAL CHALLENGES 2019 ANNUAL REPORT 2019 ANNUAL REPORT SOLVING MANUFACTURING’S MISSION-CRITICAL CHALLENGES NET SALES (IN BILLIONS) $3.50 $3.25 $3.00 $2.75 $2.50 2017 2018 2019 DILUTED EARNINGS PER SHARE $6.00 $5.00 $4.00 $3.00 With more than 75 years of experience in metalworking and maintenance, $2.00 2017 2018 2019 repair and operations supplies and services, our dedicated team of 6,500 associates brings deep expertise and insights to help manufacturers solve mission-critical challenges on the plant floor. From small shops in need of smart business solutions to compete to mid-sized businesses looking to improve productivity to large manufacturers wanting to reduce total cost of ownership, we help our customers solve their most complex inventory management and operational challenges to improve their growth, OPERATING INCOME (IN MILLIONS) $425 $400 $375 $350 $325 $300 2017 2018 2019 CASH FLOW FROM OPERATIONS (IN MILLIONS) $400 $300 $200 $100 2019 ANNUAL REPORT efficiency and profitability. $0 2017 2018 2019 DEAR SHAREHOLDERS Over the last several years, MSC has undergone significant changes to better capitalize on the disruptive trends in the manufacturing industry. By expanding our technological capabilities, driving increased innovation and improving our sales effectiveness, we have repositioned our company as a mission-critical partner for our customers. MSC faced a soft macroenvironment during fiscal year 2019 with industrial demand steadily decelerating as market conditions turned contractionary. The overhang of trade and tariff uncertainties, compounded by decelerating global macroeconomic growth, weighed on the pricing environment as well. Despite these headwinds, we posted average daily sales growth of 5.8 percent year-over-year. During the year, we maintained our focus on transforming our go-to-market strategy from a one-size-fits-all approach to a segmented and specialized strategy that is better equipped to market our innovative value proposition where we are offering our customers highly technical and high-touch solutions to solve their most complex challenges on the plant floor. This shift in focus has realigned our fundamental priorities and is allowing us to better serve our customers, improving their efficiency and profitability, and enhancing their position in the markets they serve. As we continued to transform our business, we also took actions to reshape and resize the organization to deliver on our potential. Additionally, we sought to deepen our supplier relationships to drive improved profitability. We received a great response from our partners and look forward to expanding their market share through this program. Finally, we maintained our expense controls and took measures to improve our productivity and performance. These changes are paying off quickly, and I would like to thank our dedicated team of associates who worked hard to deliver on these initiatives. Moving forward, we will continue to focus on streamlining our cost structure and transforming our operating model to be leaner, more agile and more effective. Our disciplined approach to capital allocation and commitment to returning capital to our shareholders was evidenced during the year as well. We significantly increased our quarterly dividend per share by 19 percent to $0.75, repurchased $85 million in shares, and maintained our low leverage. Our balance sheet remains very healthy and we generated strong free cash flow during the fiscal year. In terms of our priorities moving forward, we continue to focus our investments internally and have heightened our hurdle rate for acquisitions, particularly as we are laser-focused on organic growth initiatives. Should industrial demand remain at current levels or deteriorate further, MSC is well-positioned to benefit as we have in the past. In industrial distribution, local and regional distributors that make up much of our market pull back on inventory, credit, people and investment when industrial demand deteriorates. This creates an opportunity for us to capture market share, while forging new relationships and implementing new supplier programs. It also means that our free cash flow is likely to rise as we historically produce stronger free cash flow during periods of weak industrial demand as our net working capital typically declines. In closing, I’d like to thank each of our stakeholders for their ongoing support of our company. Our recent progress, as well our productivity initiatives, are the beginning – not the end – of our journey towards fulfilling our mission to be the best industrial distributor in the world. Respectfully, Erik Gershwind President and Chief Executive Officer Note: Please see “Forward-Looking Statements” on page 1 of the accompanying Annual Report on Form 10-K. “By expanding our technological capabilities, driving increased innovation and improving our sales effectiveness, we have repositioned our company as a mission-critical partner for our customers.” FORM 10K [This Page Intentionally Left Blank] UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________________________ FORM 10-K __________________________________ (Mark One) (cid:95)(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended August 31, 2019 OR (cid:134)(cid:134) 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 Trading Symbol(s) MSM 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 (cid:95)(cid:95) No (cid:134) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:134) No (cid:95) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:95) No (cid:134) Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes (cid:95) No (cid:134) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 (cid:95) Accelerated filer (cid:134) Non-accelerated filer (cid:134)(cid:134) Smaller reporting company (cid:134) Emerging growth company (cid:134) 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. (cid:134) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:134) No (cid:95) The aggregate market value of Class A common stock held by non-affiliates of the registrant as of March 2, 2019 was approximately $3,729,824,871. As of October 1, 2019, 45,044,755 shares of Class A common stock and 10,193,348 shares of Class B common stock of the registrant were outstanding. The registrant’s Proxy Statement for its 2020 annual meeting of shareholders is hereby incorporated by reference into Part III of this Annual Report on Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE (This page intentionally left blank)(cid:3) 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 14 14 14 14 15 17 18 29 30 59 59 62 62 62 62 62 62 63 63 67 i (This page intentionally left blank)(cid:3) FORWARD-LOOKING STATEMENTS PART I. Except for historical information contained herein, certain matters included in this Annual Report on Form 10-K are, or may be deemed to be, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The words “will,” “may,” “designed to,” “believe,” “should,” “anticipate,” “plan,” “expect,” “intend,” “estimate” and similar expressions identify forward-looking statements, which speak only as of the date of this annual report. These forward-looking statements are contained principally under Item 1, “Business,” and under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Because these forward-looking statements are subject to risks and uncertainties, actual results could differ materially from the expectations expressed in the forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include those described in Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition, new risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risk factors on our business. Given these risks and uncertainties, the reader should not place undue reliance on these forward-looking statements. We undertake no obligation to update or revise these forward-looking statements to reflect subsequent events or circumstances. ITEM 1. BUSINESS. General MSC Industrial Direct Co., Inc. (together with its subsidiaries, “MSC,” the “Company,” “we,” “our,” or “us”) is a leading North American distributor of metalworking and maintenance, repair and operations (“MRO”) products and services. With a history of driving innovation in industrial product distribution for more than 75 years, 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 6,700 associates keeps our customers’ manufacturing operations up and running and improves their efficiency, productivity and profitability. We serve a broad range of customers throughout the United States, Canada, Mexico, and the United Kingdom, from individual machine shops to Fortune 100 manufacturing companies to government agencies such as the United States General Services Administration and the United States 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 99 branch offices (98 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 1.7 million active, saleable stock-keeping units (“SKUs”) through our eCommerce channels, including our website, mscdirect.com (“MSC website”); our inventory management solutions; catalogs and brochures; 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 Standard Time (excluding Class C (“Consumables”) 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 believe that our value-added solutions approach to driving our customers’ success serves to differentiate MSC from traditional transaction-focused distributors. We endeavor to save our customers money when they partner with us for their MRO and metalworking product needs. We focus on building strong partnerships with our customers to help them improve their productivity and growth. We do this in several ways: (cid:120) (cid:120) our experienced team includes customer care team members, metalworking specialists, safety specialists, inventory management specialists, technical support teams, and experienced 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 (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) 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; our inventory management solutions enable our customers to carry less inventory and still dramatically reduce situations when a critical item is out of stock; and our proprietary software solution, called Ap Op (Application Optimization), enables our metalworking specialists to document productivity savings for customers for a range of applications, including grinding, milling, turning, threading, sawing, hole-making, metalworking fluids and other manufacturing process improvements. 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. 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 customer-focused culture and high-touch engagement model drives value for our customers and results in deep customer relationships. 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 products, technical issues and cost targets. The options 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. 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 2 Consumables category products). We know that our customers value this service, and areas accessible by next-day delivery 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 6,700 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 more than 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. These metalworking specialists are customer-facing and work side-by-side with our customers. We utilize our Application Optimization proprietary software to capture the application data and deliver documented cost savings to our customers. 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 (www.mscdirect.com) provides 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 Our growth strategy includes a number of initiatives to continue to gain market share. These include the following: 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 continuing to develop 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 continue to focus on government customers and have a large, contract business with numerous federal, state, and local education agencies. We have developed customized government and national account programs. We see opportunity for additional growth in this area. 3 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 by providing these customers with 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. At August 31, 2019, our field sales and service associate headcount was 2,414 and our in-bound sales representative headcount was 953. We believe that our sales force investment has played a critical role in maintaining 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 1.7 million 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 2019, we added approximately 70,000 SKUs, net of SKU removals, to our active, saleable SKU count. We plan to continue adding SKUs in fiscal 2020. The most recent MSC catalog issued in August 2019 merchandises approximately 500,000 core metalworking and MRO products, which are included in the SKU totals above. Approximately 14% of these SKUs are MSC exclusive brands. We also leverage the depth and breadth of MSC’s product portfolio within our Consumables category sales channel. Improving our marketing programs. MSC has built an extensive buyer database, which we harness via both human and artificial intelligence to target our marketing to the best prospects. We supplement the efforts of our sales force through the use of digital marketing and direct mail. 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. The 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. The MSC website provides advanced features, such as order approval (workflow) and purchase order control, that our customers interact with in order to derive business value beyond merely placing an order. 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 enables us to achieve our goal to 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. MSC is a leader in the highly fragmented industrial distribution market with significant opportunities for organic and acquisitive growth. We actively pursue strategic acquisitions that deepen our metalworking expertise, extend our capabilities into strategic adjacencies, and expand our markets in North America. On February 1, 2019, two subsidiaries of the Company, MSC IndustrialSupply, S. de R.L. de C.V. and MSC Import Export LLC (together, “MSC Mexico”), completed the acquisition of certain assets of TAC Insumos Industriales, S. de R.L. de C.V. and certain of its affiliates (together, “TAC”). The Company holds a 75% interest in each of the MSC Mexico entities. The acquisition provides the Company with the opportunity to further expand its business throughout North America. In April 2018, MSC completed the acquisition of All Integrated Solutions, Inc. (“AIS”). AIS is a leading value-added distributor of industrial fasteners and components, MRO supplies and assembly tools based in Franksville, Wisconsin. AIS delivers 4 production fasteners and custom tool and fastener solutions for use in the assembly of manufactured commercial and consumer products. AIS provides a solid growth platform for expansion in the production fasteners market, complementing our robust Consumables fastener and VMI solutions. Intellectual Property We conduct business under various trademarks and service marks. We protect these trademarks by maintaining registrations in the U.S., Canada, and elsewhere. We also file for and obtain patents and use confidentiality and other agreements with customers, associates, consultants and others in order to protect our proprietary information. Although we do not believe our operations are substantially dependent upon any of our intellectual property, we consider our intellectual property to be valuable to our business. 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 and MSC exclusive brands, 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 our products directly from approximately 3,000 suppliers. No single supplier accounted for more than 6% of our total purchases in fiscal 2019, fiscal 2018, or fiscal 2017. Customer Fulfillment Centers We have been enhancing our distribution efficiency and capabilities for decades. When our customers order an in- stock product online or via phone, we ship it the day the order is placed 99% of the time. We do that through our 12 customer fulfillment centers and 99 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 our acquisitions of Barnes Distribution North America in fiscal 2013 and AIS in fiscal 2018, we have increased our presence in the fastener and 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 the U.S. Postal Service, the Department of Defense, large and small military bases, Veterans Affairs hospitals, and federal correctional facilities. We have individual state contracts but also are engaged with several state cooperatives. Our national account program also includes Fortune 500 companies, large privately held companies, and international companies primarily doing business in North America. 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 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 a role in our efforts, the majority of our efforts are focused on search engine marketing, email marketing and online advertising to address changes in our customers’ buying behavior. We use our own database of over three million contacts together with external information to target buyers with the highest likelihood to buy. Our sales representatives are highly trained and experienced individuals who build relationships with customers, assist customers in reducing costs, provide and coordinate technical support, coordinate special orders and shipments with 5 vendors, and update customer account profiles in our information systems databases. Our marketing approach centers on the ability of our sales representatives, armed with our comprehensive databases as a resource, to respond effectively to the customers’ 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. Branch Offices We operate 99 branch offices, including seven branch offices added with the acquisition of AIS in April 2018. There are 98 branch offices within the United States located in 42 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. 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. 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 platforms (website, vending machines, and eProcurement). The remaining orders are primarily 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 across our business. These systems help us to ship on a same-day basis, respond quickly to order changes, provide a high level of customer service, and manage our operational costs. In 2019, we incorporated further robotic-driven automation into our fulfillment centers. Our eCommerce environment is built upon a combined platform of our own intellectual property and state-of-the-art software from the world’s leading internet technology providers and is powered by world-class product data. This powerful combination of resources helps us deliver a superior online shopping experience with world-class 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 approvals, inventory levels, stock balancing, vendor returns, order fulfillment and other key performance measures. We maintain a sophisticated buying and inventory management system that monitors all our SKUs and automatically purchases inventory from vendors for replenishment, based on proprietary forecasting models. We also maintain an Electronic Data Interchange (“EDI”) 6 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. As part of our commitment to creating services that fuel the potential of our customers, we develop and maintain a suite of proprietary VMI digital solutions. These VMI solutions allow our customers to focus on their core business, while MSC manages their inventory ordering, fulfillment and replenishment. Our various VMI solutions are customizable to meet both simple and complex customer needs. Our scanning solutions integrate scanner accumulated orders directly into our Sales Order Entry system and website. Our CMI enables customers to simply and effectively replenish inventory by submitting orders directly to our website. Our customized vending solutions are used by customers in manufacturing plants across the United States to help them achieve supply chain and shop floor optimization, through inventory optimization and reduced tooling and labor costs. All of our digital solutions 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 eCommerce and 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 information technology (“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. We recently went live on our upgraded core financial systems and new Human Resources platform. 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 are powered via state-of-the-art telephony, case management and workforce optimization platforms. The features within the platform create a seamless environment equipped with advanced applications that assist our associates in optimizing our customers’ 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 and national distributors utilizing direct sales forces; manufacturers of MRO supplies; large warehouse stores; and larger direct mail distributors. We also face substantial competition in the online distribution space that competes with price transparency. In addition, new entrants in the MRO supply industry could increase competition. 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, greater financial resources, additional services, or a combination 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, 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. 7 Compliance with Health and Safety and Environmental Protection Laws Our operations are subject to and affected by a variety of federal, state, local and non-U.S. health and safety and environmental laws and regulations relating to the discharge, treatment, storage, disposal, investigation and remediation of certain materials, substances and wastes. We continually assess our compliance status and management of environmental matters to ensure that our operations are compliant 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 August 31, 2019, we employed 6,700 full- and part-time associates. 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 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, and current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after this material is electronically filed with or furnished to the Securities and Exchange Commission (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 (“NYSE”) 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, including general economic conditions. 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, current 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 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 8 customers receive lower pricing due to their higher level of purchases from us. In addition, our continued expansion of our vending program and other eCommerce 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 and 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, greater financial resources, additional services, or a combination of these factors. In addition, we also face the risk of companies which operate primarily outside of our industry entering our marketplace. Our industry is evolving at an accelerated pace. If we do not have the agility and flexibility to effectively respond to this accelerated pace of industry changes, our strategy could be put at risk resulting in a loss of market share. We also face substantial competition in the online distribution space that competes 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 evolving and consolidating, which could adversely affect our business and financial results. The business of selling MRO supplies in North America is currently evolving and undergoing 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 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. 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, or violations of data privacy laws, could adversely affect us. We believe that our 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, and physical or electronic break-ins. In addition, our IT systems may be vulnerable to cyberattacks, which are rapidly evolving and becoming increasingly sophisticated. Despite our efforts to ensure the integrity of our IT systems, as cyber-attacks evolve and become more difficult to detect and successfully defend against, one or more cyber-attacks might defeat the measures that we take to anticipate, detect, avoid or mitigate these threats. These cyber-attacks and any unauthorized access or disclosure of our information could compromise and expose sensitive information and damage our reputation. Cyber-attacks could also cause us to incur significant remediation costs, disrupt our operations and divert management attention and key IT resources. Any material cyber-attack or failure of our IT systems to perform as we anticipate could disrupt our business and operations, 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), the loss of sales and customers, and damage our reputation. 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. Additionally, our suppliers and customers also rely upon IT systems to operate their respective 10 businesses. If any of them experience a cyber-attack or other cyber incident, this could adversely impact their operations, which may in turn impact or adversely affect our operations. In addition, regulatory authorities have increased their focus on how companies collect, process, use, store, share and transmit personal data. New privacy security laws and regulations, including the United Kingdom’s Data Protection Act 2018 (DPA), the European Union General Data Protection Regulation 2016 (GDPR) that became effective May 2018, the California Consumer Protection Act, which will become effective on January 1, 2020 and other similar state privacy laws, pose increasingly complex compliance challenges, which may increase compliance costs, and any failure to comply with data privacy laws and regulations could result in significant penalties. Our business depends on our ability to retain and to attract qualified sales and customer service personnel and metalworking specialists. Our business depends on our ability to attract, train, and retain 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 associates, and in particular metalworking specialists, who can provide technical support to our customers. Qualified individuals of the requisite caliber and number needed to fill these positions may be difficult to hire and retain in sufficient numbers. If we are unable to hire and retain associates capable of providing a high level of customer service and technical support, our operational capabilities and ability to provide differentiated services may be adversely affected. 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. Trade policies could make sourcing products from overseas more difficult and/or costlier as well as negatively affect the markets we sell into. Any changes to trade policies, including the imposition of significant restrictions, quotas, duties or tariffs, whether because of amendments to or elimination of existing trade agreements, or the imposition of new or modified trade tariffs, could have an adverse effect on our business. For example, between July 2018 and May 2019, the U.S. government imposed tariffs ranging between 10% and 25% on specified product lists totaling approximately $250.0 billion of Chinese imports, with the U.S. government ultimately raising the tariff rate on all of the $250.0 billion in imports to 25%. In response, China imposed or proposed new or higher tariffs on U.S. products. The U.S. government also announced the imposition of a 15% tariff on an additional $300.0 billion of Chinese imports effective September 1, 2019 for certain specified products and December 15, 2019 for the remaining specified products. China has taken additional retaliatory actions, including an increase in tariffs applied to U.S. products effective September 1, 2019. The U.S. government had announced its intention to increase the tariff rate on approximately $250.0 billion in Chinese imports to 30% on October 15, 2019. China had also threatened further retaliatory actions, including additional tariff increases later in 2019. On October 11, 2019, following negotiations between the Trump Administration and China’s trade delegation, the two sides agreed on the substance of a “Phase One” trade deal after which the U.S. announced it was suspending its plan to increase tariffs on $250.0 billion of Chinese imports from 25% to 30% in exchange for China’s verbal agreement to substantially increase its purchase of U.S. agricultural goods and make some concessions on intellectual property issues. The exact terms of the Phase One deal remain vague and are supposed to be written out over the following weeks. According to U.S. Treasury Secretary Mnuchin, the aim is for President Trump and Chinese President Xi Jinping to sign a formal agreement at the APEC Summit in mid- November. Notably, the substance of Phase One currently covers only a limited scope of issues, and neither removes existing tariffs on Chinese goods nor cancels U.S. tariffs on Chinese goods set to go into effect in December 2019. It remains uncertain whether this informal, verbal agreement will ultimately lead to an official trade deal which removes the recently imposed tariffs altogether. Additionally, in November 2018, the U.S. reached an agreement with Canada and Mexico on the United States- Mexico-Canada Trade Agreement (“USMCA”), which is proposed to replace the existing North American Free Trade Agreement among those countries. Among other things, the USMCA, as proposed, includes revised country of origin rules and labor provisions for the protection of workers. 11 These changes and other changes to trade policy and trade relationships could adversely affect our ability to secure sufficient products to service our customers and/or result in increased product costs that we may not be able to pass on to our customers, resulting in lower margins. Additionally, these changes could adversely affect our foreign sales. 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 operating 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. 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. 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. We are subject to litigation risk due to the nature of our business, which may have a material adverse effect on our business. From time to time, we are involved in lawsuits or other legal proceedings that arise from business transactions. These may, for example, relate to product liability claims, commercial disputes, or employment matters. In addition, we could face claims over other matters, such as claims arising from our status as a government contractor, intellectual property matters, or corporate or securities law matters. The defense and ultimate outcome of lawsuits or other legal proceedings may result in higher operating expenses, which could have a material adverse effect on our business, financial condition, or results of operations. We may encounter difficulties with acquisitions 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. 12 The terms of our credit facilities 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 credit facilities and outstanding senior notes. For a description of these facilities and senior notes, please see Note 9 “Debt and Capital Lease Obligations” in the Notes to the Consolidated Financial Statements. We are subject to various operating and financial covenants under the credit facilities 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 facilities 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. Our inability to maintain our revolving credit facility could materially adversely affect our liquidity and our business. Uncertainty about the future of the London Interbank Offer Rate may adversely affect our business and financial results. Borrowings under our credit facilities use the London Interbank Offering Rate (“LIBOR”) as a benchmark for establishing the applicable interest rate. LIBOR is the subject of recent regulatory guidance and proposals for reform, which may cause LIBOR to cease to be used entirely or to perform differently than in the past. The consequences of these developments with respect to LIBOR cannot be entirely predicted but could result in an increase in the cost of our variable rate indebtedness causing a negative impact on our financial position, liquidity and results of operations. We are subject to environmental, health and safety laws and regulations. We are subject to federal, state, local, foreign and provincial environmental, health and safety laws and regulations. Fines and penalties may be imposed for non-compliance with applicable environmental, health and safety requirements and the failure to have or to comply with the terms and conditions of required permits. The failure by us to comply with applicable environmental, health and safety requirements could result in fines, penalties, enforcement actions, third-party claims for property damage and personal injury, requirements to clean up property or to pay for the costs of cleanup, or regulatory or judicial orders requiring corrective measures, which could have a material adverse effect on our business, financial condition, or results of operations. Goodwill and indefinite-lived intangible assets recorded as a result of our acquisitions could become impaired. As of August 31, 2019, our combined goodwill and indefinite-lived intangible assets amounted to $690.2 million. To the extent we do not generate sufficient cash flows to recover the net amount of any investments in goodwill and other indefinite-lived intangible assets recorded, the investment could be considered impaired and subject to write-off. We expect to record further goodwill and other indefinite-lived intangible assets as a result of future acquisitions we may complete. Future amortization of such assets or impairments, if any, of goodwill or indefinite-lived intangible assets would adversely affect our results of operations in any given period. Our common stock price may be volatile. We believe factors such as fluctuations in our operating results or the operating results of our competitors, changes in economic conditions in the market sectors in which our customers operate, notably the durable and non-durable goods manufacturing industry, which accounted for a substantial portion of our revenue for fiscal year 2019, fiscal year 2018 and fiscal year 2017, 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 10 votes per share. As of October 1, 2019, 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 2.3% of the outstanding shares of our Class A common stock, giving them control over approximately 70.0% of the combined voting power of our Class A common stock and our Class B common stock. Consequently, such shareholders will be able to elect all 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 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. 13 ITEM 1B. UNRESOLVED STAFF COMMENTS. None. ITEM 2. PROPERTIES. We have customer fulfillment centers in or near the following locations: Location Harrisburg, Pennsylvania Atlanta, Georgia Elkhart, Indiana Columbus, Ohio Reno, Nevada Hanover Park, Illinois Dallas, Texas Shelbyville, Kentucky(1) Beamsville, Canada Wednesbury, United Kingdom Edmonton, Canada Moncton, Canada __________________________ (1) Repackaging and replenishment center. Approx. Sq. Ft. 821,000 721,000 545,000 468,000 419,000 182,000 135,000 110,000 85,000 75,000 40,500 16,000 Operational Date 1997 1990 1996 2014 1999 2003 2003 1973 2004 1998 2007 1981 Leased/ Owned Owned Owned Owned Owned Owned Leased Leased Owned Owned Leased Leased Owned We maintain 98 branch offices within the United States located in 42 states and one branch office located in the U.K. The branches range in size from 1,800 to 72,000 square feet. Most of these branch offices are leased. These leases will expire at various periods, the longest extending to fiscal 2031. The aggregate annual lease payments on leased branch offices and the leased customer fulfillment centers in fiscal 2019 were approximately $12.8 million. We maintain our co-located headquarters at a 170,000 square foot facility that we own in Melville, New York and a 162,000 square foot facility that we own in Davidson, North Carolina. In addition, we maintain office space in a 50,000 square foot facility that we lease in Southfield, Michigan. We believe that our existing facilities are adequate for our current needs and will be adequate for the foreseeable future; we also expect that suitable additional space will be available as needed. 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 NYSE under the symbol “MSM.” MSC’s Class B common stock is not traded in any public market. 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 $2.64 and $2.22 per share for fiscal 2019 and fiscal 2018, respectively. This policy is reviewed periodically by the Board of Directors. On October 17, 2019, the Board of Directors declared a quarterly cash dividend of $0.75 per share, payable on November 26, 2019 to shareholders of record at the close of business on November 12, 2019. The dividend will result in a payout of approximately $41.9 million, based on the number of shares outstanding at October 1, 2019. The approximate number of holders of record of MSC’s Class A common stock as of October 1, 2019 was 550. The number of holders of record of MSC’s Class B common stock as of October 1, 2019 was 29. Purchases of Equity Securities The following table sets forth repurchases by the Company of its outstanding shares of Class A common stock during the quarter ended August 31, 2019: Period 6/2/19-7/1/19 7/2/19-8/1/19 8/2/19-8/31/19 Total __________________________ Total Number of Shares Purchased(1) Average Price Paid Per Share(2) 485 672 914 2,071 $ $ 71.72 71.31 67.83 69.89 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(3) — — — — Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs 1,157,038 1,157,038 1,157,038 (1) During the three months ended August 31, 2019, 2,071 shares of our common stock were withheld by the Company as payment to satisfy our associates’ 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. (3) During fiscal 1999, our Board of Directors established the MSC Stock Repurchase Plan, which we refer to as the Repurchase Plan. The total number of shares of our Class A common stock initially authorized for future repurchase was set at 5,000,000 shares. On January 8, 2008, our Board of Directors reaffirmed and replenished the Repurchase Plan and set the total number of shares of Class A common stock authorized for future repurchase at 7,000,000 shares. On October 21, 2011, the Board of Directors reaffirmed and replenished the Repurchase Plan and set the total number of shares of Class A common stock authorized for future repurchase at 5,000,000 shares. As of August 31, 2019, the maximum number of shares that may yet be repurchased under the Repurchase Plan was 1,157,038 shares. There is no expiration date for this program. 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 NYSE and each index on August 30, 2014 and assumes that all dividends paid on such securities during the applicable fiscal years were reinvested. 15 Indices are calculated on a month-end basis. The comparisons in this table are based on historical data and are not intended to forecast or to be indicative of the possible future performance of our Class A common stock. Cumulative Total Stockholder Return for the Period from August 30, 2014 through August 31, 2019 MSC Industrial Direct Co., Inc. S&P Midcap 400 Dow Jones US Industrial Supplier 8/30/2014 8/29/2015 9/3/2016 9/2/2017 100.00 100.00 100.00 79.29 100.67 83.28 89.45 113.35 89.10 85.21 126.74 76.40 9/1/2018 108.03 151.47 114.66 8/31/2019 88.35 141.74 98.87 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 August 31, 2019, September 1, 2018 and September 2, 2017 and the selected consolidated balance sheet data as of August 31, 2019 and September 1, 2018 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 September 3, 2016, and August 29, 2015, and the selected consolidated balance sheet data as of September 2, 2017, September 3, 2016, and August 29, 2015 are derived from MSC’s audited consolidated financial statements not included herein. Fiscal Years Ended August 31, 2019 (52 weeks) September 1, 2018 (52 weeks) September 2, 2017 (52 weeks) (In thousands, except per share data) September 3, 2016 (53 weeks) August 29, 2015 (52 weeks)) Consolidated Income Statement Data: Net sales Gross profit Operating expenses(4) Income from operations Income taxes Net income attributable to MSC Industrial 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 Total assets 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(3) Shareholders’ equity __________________________ $ 3,363,817 $ 3,203,878 $ 2,887,744 $ 2,863,505 $ 2,910,379 1,288,858 1,316,575 937,046 379,529 141,833 231,308 1,432,043 1,032,047 399,996 94,332 288,865 1,286,247 907,247 379,000 136,561 231,431 1,392,961 972,408 420,553 76,966 329,223 912,898 375,960 140,515 231,216 5.23 5.20 5.84 5.80 4.08 4.05 3.78 3.77 3.75 3.74 55,245 55,508 56,355 56,707 56,591 56,971 60,908 61,076 $ 2.64 $ 2.22 $ 1.80 $ 1.72 $ 61,292 61,487 4.60 $ 752,696 $ 656,984 $ 447,854 $ 2,311,237 2,288,727 2,098,912 502,889 $ 610,089 2,064,951 2,100,186 175,453 224,097 331,986 267,050 213,165 266,431 114,011 1,483,879 311,236 99,714 1,387,254 200,991 115,056 1,225,140 339,772 148,201 214,119 131,210 1,098,376 1,332,870 (1) In the first quarter of fiscal 2015, the Company paid a special cash dividend of $3.00 per share. (2) Fiscal 2015 has been reclassified to reflect the adoption of Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30). (3) In fiscal 2018, the Company recorded a net tax benefit of $40,464 due to the revaluation of its net deferred tax liabilities primarily related to the lower federal corporate tax rate, partially offset by the lower federal benefit for state taxes and the change from a worldwide tax system to a territorial tax system. (4) In fiscal 2019, the Company recorded $6,725 of severance and separation benefits charges and other related costs associated with workforce reduction and increased performance management. 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 MRO products and services. We help our customers drive greater productivity, profitability and growth with approximately 1.7 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 6,700 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 1.7 million active 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 in the United States which includes five primary customer fulfillment centers, one is located in the U.K., and three are located in Canada) and 99 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 business model focuses on providing overall procurement cost reduction and just-in-time delivery to meet our customers’ needs. We focus on offering inventory, process and procurement solutions that reduce MRO supply chain costs and improve plant floor productivity for our customers. We will seek to continue to achieve cost reductions throughout our business through cost-saving strategies and increased leverage from our existing infrastructure, and continue to provide additional procurement cost-savings solutions to our customers through technology such as our CMI, VMI, and vending programs. Our field sales and service associate headcount was 2,414 at August 31, 2019, compared to 2,383 at September 1, 2018 and 2,411 at September 2, 2017. We have migrated our sales force from one designed to sell a spot buy value proposition to one prepared to deliver upon the new, more complex and high-touch role that we play driving value for our customers by enabling them to achieve higher levels of growth, profitability, and productivity. The chart below displays a three-year comparison of our net sales from fiscal 2017 through fiscal 2019: (1) Pricing and other is comprised of changes in customer and product mix, discounting and other items. 18 Recent Developments and Highlights Highlights during our fiscal year ended August 31, 2019 include the following: (cid:120) We generated $328.4 million of cash from operations in fiscal 2019. (cid:120) We paid out $145.7 million in cash dividends, increasing our dividends per share during fiscal 2019. (cid:120) We repurchased 1.1 million shares for $84.6 million. (cid:120) On February 1, 2019, we completed the acquisition of certain assets of TAC Insumos Industriales, S. de R.L. de C.V. and certain of its affiliates (together, “TAC”) for aggregate consideration of $18.5 million (subject to finalizing the post-closing working capital adjustment), of which our 75% portion of the aggregate consideration was $13.9 million. (cid:120) We incurred $6.7 million of severance and separation benefits charges and other related costs in the fourth quarter of fiscal 2019 associated with workforce reduction and increased performance management. 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 70% of our revenues came from sales in the manufacturing sector during the fourth quarter of our fiscal year 2019. Through statistical analysis, we have found that trends in our customers’ activity have correlated to changes in the Metalworking Business Index (“MBI”). The MBI is a sentiment index developed from a monthly survey of the U.S. metalworking industry, focusing on durable goods manufacturing. For the MBI, a value below 50.0 generally indicates contraction and a value above 50.0 generally indicates expansion. The MBI over the 2019 fiscal fourth quarter and fiscal year averages were as follows: Period June July August Fiscal 2019 Q4 average Fiscal 2019 full year average MBI 51.8 47.9 48.3 49.3 53.2 The MBI trended downward during the current fiscal year. August marked the second consecutive month of reading below 50.0, indicating contraction and overall slower growth in the metalworking manufacturing environment. This trend has continued with the release of the September MBI of 48.6. 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 August 31, 2019 Compared to the Fiscal Year Ended September 1, 2018 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: 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 Less: Net income (loss) attributable to noncontrolling interest Fiscal Years Ended August 31, 2019 (52 weeks) $ $ 3,363,817 1,931,774 1,432,043 1,032,047 399,996 (16,867) 383,129 94,332 288,797 % 100.0% $ 57.4% 42.6% 30.7% 11.9% (0.5)% 11.4% 2.8% 8.6% September 1, 2018 (52 weeks) $ % 3,203,878 1,810,917 1,392,961 972,408 420,553 (14,364) 406,189 76,966 329,223 $ 100.0% 56.5% 43.5% 30.4% 13.1% (0.4)% 12.7% 2.4% 10.3% Change $ 159,939 120,857 39,082 59,639 (20,557) (2,503) (23,060) 17,366 (40,426) % 5.0% 6.7% 2.8% 6.1% (4.9)% 17.4% (5.7)% 22.6% (12.3)% (68) 0.0% - 0.0% (68) 0.0% Net income attributable to MSC Industrial $ 288,865 8.6% $ 329,223 10.3% $ (40,358) (12.3)% Net Sales Net sales increased 5.0% or approximately $159.9 million for the fiscal year ended 2019. We estimate that this increase in net sales is comprised of (i) $64.8 million of higher sales volume, excluding AIS and MSC Mexico operations; (ii) $45.2 million from AIS; (iii) $23.2 million from MSC Mexico, which commenced operations in February 2019; and (iv) $31.2 million from improved pricing, inclusive of changes in customer and product mix, discounting and other items; partially offset by (v) $4.5 million from foreign exchange impact. Of the above $159.9 million increase in net sales, sales to our government and national account programs (“Large Account Customers”) increased by $43.1 million and sales other than to our Large Account Customers increased by $116.8 million, which includes $45.2 million and $23.2 million of net sales from AIS and MSC Mexico, respectively. The table below shows the change in our fiscal quarterly and annual 2019 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) 2019 vs. 2018 Fiscal Period Total Company Manufacturing Customers Non-Manufacturing Customers 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 Approx.% of Total Business 8.2 % 8.7 % 6.9 % 8.8 % 8.6 % 9.5 % 4.6 % 5.1 % 3.4 % 2.1 % 2.5 % 1.2 % 5.8 % 6.2 % 5.0 % 70 % 30 % 20 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, XML ordering-based systems, vending, hosted systems and other electronic portals, represented 60.0% of consolidated net sales for the year ended August 31, 2019, compared to 60.1% of consolidated net sales for the year ended September 1, 2018. These percentages of consolidated net sales do not include eCommerce sales from the recent acquisitions of DECO Tool Supply Co. (“DECO”) and AIS, and from MSC Mexico operations. Gross Profit Gross profit margin was 42.6% in fiscal 2019 as compared to 43.5% in fiscal 2018. The decline was primarily the result of increased product costs and changes in our customer and product mix. In addition, 20 basis points of the decline resulted from MSC Mexico operations which commenced in the fiscal second quarter of 2019 and another 10 basis points of the decline came from the AIS business we acquired in the fiscal third quarter of 2018. Operating Expenses Operating expenses increased 6.1% to $1.032 billion in fiscal 2019, as compared to $972.4 million in fiscal 2018. Operating expenses were 30.7% of net sales fiscal 2019, as compared to 30.4% for fiscal 2018. The increase in operating expenses was primarily attributable to an increase in payroll and payroll-related costs and freight costs, associated with higher sales volumes. In addition, we incurred approximately $6.7 million in severance and separation related costs in the fourth quarter of fiscal 2019. Operating expenses also increased due to the acquisition of AIS in our third quarter of fiscal 2018 and from the operations of MSC Mexico which commenced in our second quarter of fiscal 2019. AIS and MSC Mexico operating expenses, including non-recurring acquisition and integration costs, accounted for $19.9 million and $4.6 million, respectively, of total operating expenses for fiscal 2019 and AIS accounted for $7.2 million of total operating expenses for fiscal 2018. Payroll and payroll-related costs, excluding severance and separation charges, were approximately 55.9% of total operating expenses for fiscal 2019, as compared to approximately 56.7% for fiscal 2018. Included in payroll and payroll- related costs are salary, incentive compensation, sales commission, and fringe benefit costs. All of these costs, with the exception of incentive compensation, increased for fiscal 2019, as compared to fiscal 2018, with much of the increase attributable to an increase in salary expenses, primarily related to annual merit increases and an increase in our field sales and service associate headcount. Also contributing to the increase in payroll and payroll-related costs were increased sales commissions due to higher sales volume and increased fringe costs associated with higher medical costs. These increases were partially offset by a decrease in the incentive compensation accrual. Freight expense was approximately $138.2 million for fiscal 2019, as compared to $130.3 million for fiscal 2018. The primary driver of this was increased sales. Income from Operations Income from operations decreased 4.9% to $400.0 million in fiscal 2019, as compared to $420.6 million in fiscal 2018. This was primarily attributable to the increase in operating expenses as described above, partially offset by the increase in net sales and gross profit. Income from operations as a percentage of net sales decreased to 11.9% for fiscal 2019, from 13.1% for fiscal 2018, primarily as the result of the decrease in the gross profit margin mentioned above. Total Other Expense The increase in total other expense in fiscal 2019 compared to fiscal 2018 was primarily driven by higher average interest rates on our revolving credit facility, which is variable rate debt. During fiscal 2018, we increased the proportion of fixed rate debt to counteract an expectation of the rising interest rate environment. 21 Provision for Income Taxes Our effective tax rate for fiscal 2019 was 24.6% as compared to 18.9% in fiscal 2018. The increase in the effective tax rate is primarily a result of the prior fiscal year adjustment of the revaluation of net deferred tax liabilities as of the enactment date of the Tax Cuts and Jobs Act (“TCJA”). During fiscal 2018, the Company recorded a net tax benefit of $40.5 million due to the revaluation of its net deferred tax liabilities primarily related to the lower federal corporate tax rate, partially offset by the lower federal benefit for state taxes and the change from a worldwide tax system to a territorial tax system. See Note 7 “Income Taxes” in the Notes to the Consolidated Financial Statements for further discussion. Net Income The factors which affected net income for fiscal 2019 as compared to the prior period have been discussed above. Fiscal Year Ended September 1, 2018 Compared to the Fiscal Year Ended September 2, 2017 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 1, 2018 (52 weeks) $ % September 2, 2017 (52 weeks) $ % $ $ 3,203,878 1,810,917 1,392,961 972,408 420,553 (14,364) 406,189 76,966 329,223 100.0% $ 56.5% 43.5% 30.4% 13.1% (0.4)% 12.7% 2.4% 10.3% $ 2,887,744 1,601,497 1,286,247 907,247 379,000 (11,008) 367,992 136,561 231,431 100.0% 55.5% 44.5% 31.4% 13.1% (0.4)% 12.7% 4.7% 8.0% $ $ Change $ 316,134 209,420 106,714 65,161 41,553 (3,356) 38,197 (59,595) 97,792 % 10.9% 13.1% 8.3% 7.2% 11.0% 30.5% 10.4% (43.6)% 42.3% 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 10.9%, or approximately $316.1 million, for the fiscal year ended 2018. We estimate that this increase in net sales is comprised of (i) approximately $164.5 million of higher sales volume, excluding DECO and AIS operations; (ii) approximately $113.0 million from DECO, which we acquired in July 2017; (iii) approximately $24.7 million from AIS, which we acquired in April 2018; (iv) approximately $9.1 million in improved pricing, inclusive of changes in customer and product mix, discounting and other items; and (v) approximately $4.8 million from foreign exchange. Of the above $316.1 million increase in net sales, sales to our Large Account Customers increased by approximately $97.3 million and sales other than to our Large Account Customers increased by approximately $218.8 million, which includes the $113.0 million and $24.7 million of net sales from DECO and AIS, respectively. 22 The table below shows the change in our fiscal quarterly and annual 2018 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 Approx. % of Total Business 12.0 % 11.4 % 13.1 % 9.3 % 8.9 % 9.3 % 11.4 % 12.0 % 9.6 % 9.5 % 11.2 % 6.1 % 10.4 % 10.9 % 9.4 % 68 % 32 % 2018 vs. 2017 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 distributors. Sales made through our eCommerce platforms, including sales made through EDI systems, VMI systems, XML ordering-based systems, vending, hosted systems and other electronic portals, represented 60.1% of consolidated net sales in fiscal 2018 and fiscal 2017. These percentages of consolidated net sales do not include eCommerce sales from the acquisitions of DECO and AIS. Gross Profit Gross profit margin was 43.5% in fiscal 2018 as compared to 44.5% in fiscal 2017. The decline was exclusively attributable to the DECO business acquired in the fiscal fourth quarter of 2017 and the AIS business acquired in the fiscal third quarter of 2018. Operating Expenses Operating expenses increased 7.2% to $972.4 million in fiscal 2018, as compared to $907.2 million in fiscal 2017. Operating expenses were 30.4% of net sales for fiscal 2018, compared to 31.4% of net sales for fiscal 2017, with productivity and leverage contributing to this favorable outcome. The increase in operating expenses was primarily attributable to volume- related variable costs, such as an increase in payroll and payroll-related costs and freight costs. Operating expenses also increased due to the acquisitions of DECO in our fourth quarter of fiscal 2017 and AIS in our third quarter of fiscal 2018. DECO and AIS operating expenses, including non-recurring acquisition and integration costs, accounted for approximately $23.1 million and $7.2 million, respectively, of total operating expenses in fiscal 2018. Payroll and payroll-related costs were approximately 56.7% of total operating expenses for fiscal 2018, as compared to approximately 56.0% for fiscal 2017. Included in payroll and payroll-related costs are salary, incentive compensation, sales commission, and fringe benefit costs. Much of the increase in dollars is attributable to an increase in our salary expenses, primarily related to annual merit increases and increased fringe costs associated with higher medical costs. Also contributing to the increase in payroll and payroll-related costs were increased costs associated with the acquired DECO and AIS operations. Freight expense was approximately $130.3 million for fiscal 2018, as compared to $120.0 million for fiscal 2017. The primary driver of this was increased sales. Income from Operations Income from operations increased 11.0% to $420.6 million in fiscal 2018, as compared to $379.0 million in fiscal 2017. This was primarily attributable to the increase in net sales and gross profit, offset in part by the increases in operating expenses as described above. Income from operations as a percentage of net sales remained flat at 13.1% in fiscal 2018 as compared to fiscal 2017. 23 Total Other Income (Expense) The increase in total other expense in fiscal 2018 compared to fiscal 2017 was primarily driven by higher interest rates on our revolving credit facility, which is variable rate debt. We increased the proportion of fixed rate debt to counteract an expectation of the rising interest rate environment. Provision for Income Taxes Our effective tax rate for fiscal 2018 was 18.9% as compared to 37.1% in fiscal 2017. The decrease in the effective tax rate is primarily due to the decrease in the U.S. corporate tax rate from 35% to 21%. During fiscal 2018, the Company recorded a net tax benefit of $40.5 million due to the revaluation of its net deferred tax liabilities primarily related to the lower federal corporate tax rate, partially offset by the lower federal benefit for state taxes and the change from a worldwide tax system to a territorial tax system. See Note 7 “Income Taxes” in the Notes to the Consolidated Financial Statements for further discussion. Net Income The factors which affected net income for fiscal 2018 as compared to the prior period have been discussed above. Liquidity and Capital Resources Total debt Less: Cash and cash equivalents Net debt Equity August 31, 2019 September 1, 2018 $ $ $ 441,884 (32,286) 409,598 1,483,879 $ $ $ 535,333 (46,217) 489,116 1,387,254 $ $ $ $ Change (93,449) 13,931 (79,518) 96,625 As of August 31, 2019, we held $32.3 million in cash, substantially all with well-known financial institutions. Historically, our primary financing needs have been to fund our working capital requirements necessitated by our sales growth and 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, Private Placement Debt, and Shelf Facility Agreements, have been used to fund these needs, to repurchase shares of our Class A common stock, and to pay dividends. At August 31, 2019, total borrowings outstanding, representing amounts due under our credit facilities, Private Placement Debt, and Shelf Facility Agreements, as well as all capital leases and financing arrangements, were $441.9 million, net of unamortized debt issuance costs of $1.2 million. As of September 1, 2018, total borrowings outstanding, representing amounts due under our credit facilities, Private Placement Debt, and Shelf Facility Agreements, as well as all capital leases and financing arrangements, were $535.3 million, net of unamortized debt issuance costs of $1.6 million. We believe, based on our current business plan, that our existing cash, funds available under our credit facilities, 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 cash flows: 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 $ $ $ $ $ August 31, 2019 328,426 (36,373) (305,629) Fiscal Years Ended September 1, 2018 (Amounts in thousands) 339,658 $ (131,919) $ (177,586) $ (355) (13,931) $ $ (19) 30,134 $ $ $ $ $ September 2, 2017 246,841 (88,893) (194,746) (9) (36,807) 24 Operating Activities Net cash provided by operating activities for the fiscal years ended August 31, 2019 and September 1, 2018 was $328.4 million and $339.7 million, respectively. There are various increases and decreases contributing to this change. A smaller increase in the changes in accounts payable and accrued liabilities relating to a decrease in the changes in the payroll and fringe accruals based on the payroll periods, a decrease in net income, after offsetting the income tax benefit recognized from the revaluation of the net deferred tax liabilities as of the enactment date of the TCJA in the prior fiscal year, partially offset by the smaller increase in the changes in accounts receivable, contributed to most of the decrease in net cash provided by operating activities. Net cash provided by operating activities for the fiscal years ended September 1, 2018 and September 2, 2017 was $339.7 million and $246.8 million, respectively. There are various increases and decreases contributing to this change. An increase in net income, excluding the income tax benefit recognized from the revaluation of net deferred tax liabilities as of the enactment date of the TCJA, primarily contributed to the increase in net cash provided by operating activities. In addition, a smaller increase in the change in accounts receivable and a greater increase in the change in accounts payable and accrued liabilities contributed to the overall increase in net cash provided by operating activities. Working Capital Current Ratio Days Sales Outstanding Inventory Turnover August 31, 2019 Fiscal Years Ended September 1, 2018 September 2, 2017 $ 752,696 2.7 (Dollars in thousands) 656,984 $ 2.3 $ 56.8 3.5 55.6 3.7 447,854 1.8 54.0 3.5 The increase in working capital and the current ratio at August 31, 2019 compared to September 1, 2018 and September 2, 2017 is primarily due to an increase in inventories and accounts receivable resulting from an increase in sales, as well as a reduction in our current debt outstanding. The increase in days sales outstanding is primarily due to a receivables portfolio consisting of a greater percentage of our national account program sales, which are typically at longer terms. Inventory turns, calculated using a thirteen-point average inventory balance, remained relatively consistent with the prior year periods displayed. Investing Activities Net cash used in investing activities for the fiscal years ended August 31, 2019 and September 1, 2018 was $36.4 million and $131.9 million, respectively. The use of cash for fiscal 2019 consisted of expenditures for property, plant, and equipment and the acquisition of certain assets of TAC. This was offset by the cash received from the sale of the Finance Authority bonds that were redeemed on May 29, 2019. The use of cash for fiscal 2018 was primarily related to the AIS acquisition. The remainder of the use of cash for investing activities consisted of expenditures for property, plant, and equipment. Net cash used in investing activities for the fiscal years ended September 1, 2018 and September 2, 2017 was $131.9 million and $88.9 million, respectively. The use of cash for fiscal 2018 was primarily related to the AIS acquisition. The remainder of the use of cash for investing activities consisted of expenditures for property, plant, and equipment. The use of cash for fiscal 2017 was attributable to expenditures for property, plant, and equipment, as well as the acquisition of DECO. Financing Activities Net cash used in financing activities for the fiscal years ended August 31, 2019 and September 1, 2018 was $305.6 million and $177.6 million, respectively. The major components contributing to the use of cash for fiscal 2019 were the repurchase of our common stock of $84.6 million, dividends paid of $145.7 million, net payments on all the credit facilities of $69.0 million, and payments on capital lease and financing obligations of $28.4 million primarily related to the lease with the Finance Authority upon the settlement of the bonds. This was partially offset by proceeds from the exercise of common stock options of $15.6 million. The major components contributing to the use of cash for fiscal 2018 were dividends paid of $125.4 million and the repurchase of our common stock of $82.4 million. 25 Net cash used in financing activities for the fiscal years ended September 1, 2018 and September 2, 2017 was $177.6 million and $194.7 million, respectively. The major components contributing to the use of cash for fiscal 2018 were dividends paid of $125.4 million and the repurchase of our common stock of $82.4 million. This was partially offset by proceeds from the exercise of common stock options of $24.2 million. 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. Debt Credit Facilities In April 2017, the Company entered into a $600.0 million Committed Facility. The Company also has six Uncommitted Facilities, totaling $440.0 million of maximum uncommitted availability. See Note 9 “Debt and Capital Lease Obligations” in the Notes to the Consolidated Financial Statements for more information about the credit facilities. As of August 31, 2019, the Company had outstanding borrowings of $155.0 million under the Uncommitted Facilities. The Company made additional payments of $34.0 million through October 1, 2019, resulting in an unused balance of $319.0 million of the Uncommitted Facilities. As of August 31, 2019, we were in compliance with the operating and financial covenants of the credit facilities. The current unused balance of $595.8 million from the Committed Facility, which is reduced by outstanding letters of credit, is available for working capital purposes if necessary. Private Placement Debt and Shelf Facilities In July 2016, we completed the issuance and sale of unsecured senior notes. In January 2018, we entered into two Note Purchase and Private Shelf Agreements. In June 2018, we entered into an additional note purchase agreement. See Note 9 “Debt and Capital Lease Obligations” in the Notes to the Consolidated Financial Statements for more information about these transactions. Capital Lease and Financing Arrangements From time to time, we enter into capital leases and financing arrangements. See Note 9 “Debt and Capital Lease Obligations” in the Notes to the Consolidated Financial Statements for more information about our capital lease and financing arrangements. Operating Leases As of August 31, 2019, certain of our operations are conducted on leased premises. These leases are for varying periods, the longest extending to fiscal 2031. In addition, we are obligated under certain equipment and automobile operating leases, which expire on varying dates through fiscal 2023. Capital Expenditures Upgrade of Core Financial Systems In April 2017, we completed an 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 in fiscal 2017. In addition, we continue to invest in sales productivity initiatives, eCommerce and vending platforms, customer fulfillment centers and distribution network, and in other infrastructure and technology. Related Party Transactions Stock Purchase Agreements In July 2018, 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 agreement. 26 Contractual Obligations The following table summarizes our undiscounted contractual obligations at August 31, 2019 (in thousands): 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 Total contractual obligations __________________________ $ 1 – 3 years Less than 1 year 22,463 $ 27,945 $ More than 5 years 6,023 — 125,000 120,000 6,558 $ 549,006 $ 206,824 $ 64,561 $ 145,040 $ 132,581 Total 65,698 $ 3,053 440,000 40,255 840 175,000 8,521 1,535 20,000 15,081 9,267 $ 678 3 – 5 years 10,095 (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 2031. In addition, we are obligated under certain equipment and automobile operating leases, which expire on varying dates through fiscal 2023. (2) As of August 31, 2019, the Company has entered into various capital leases for certain IT equipment, which expire on varying dates through fiscal 2024. The Company has recorded a non-current liability of $12.2 million for tax uncertainties and interest as of August 31, 2019. This amount is excluded from the table above, as the Company cannot make reliable estimates of these cash flows by period. See Note 7 “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 regarding the valuation of its allowance for doubtful accounts. For fiscal years 2019, 2018 and 2017, 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, historical write-off information, 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- 27 moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand and relationships with suppliers. Goodwill and Indefinite-Lived Intangible Assets The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital. At August 31, 2019, our goodwill totaled $677.3 million and our indefinite-lived intangible assets totaled $13.0 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. We currently operate at a single reporting unit level. 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 a 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 the 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 2019 and 2018. 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 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 a Committed Credit Facility and in the first quarter of fiscal 2019 the Company entered into six Uncommitted Facilities. See Note 9 “Debt and Capital Lease Obligations” in the Notes to the Consolidated Financial Statements for more information about the credit facilities. Borrowings under our Committed and Uncommitted Credit Facilities are subject to fluctuations in the interest rate, which have a corresponding effect on our interest expense. A 100 basis point increase or decrease in interest rates would impact our interest costs by approximately $2.1 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 96% 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 AUGUST 31, 2019 AND SEPTEMBER 1, 2018 CONSOLIDATED STATEMENTS OF INCOME FOR THE FISCAL YEARS ENDED AUGUST 31, 2019, SEPTEMBER 1, 2018, AND SEPTEMBER 2, 2017 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE FISCAL YEARS ENDED AUGUST 31, 2019, SEPTEMBER 1, 2018, AND SEPTEMBER 2, 2017 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE FISCAL YEARS ENDED AUGUST 31, 2019, SEPTEMBER 1, 2018, AND SEPTEMBER 2, 2017 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED AUGUST 31, 2019, SEPTEMBER 1, 2018, AND SEPTEMBER 2, 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PAGE 31 33 34 35 36 37 38 30 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of MSC Industrial Direct Co., Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of MSC Industrial Direct Co., Inc. and subsidiaries (the “Company”) as of August 31, 2019 and September 1, 2018, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended August 31, 2019, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at August 31, 2019 and September 1, 2018, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2019, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of August 31, 2019, 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 24, 2019 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates. Measurement of Inventory Valuation Reserves Description of the Matter As of August 31, 2019, the Company’s net inventory balance was $559.1 million. As described in Note 1 to the consolidated financial statements, the valuation of inventory requires management to make assumptions and judgments about the recoverability of the inventory and its net realizable value. The Company establishes the inventory valuation reserves for shrinkage and slow-moving or obsolete inventory. The analysis of the inventory valuation reserves includes consideration of inventory levels, sales information, historical write-off information and the on-hand quantities relative to the sales history for the product. The Company also considers factors such as the inventory age, historic and current demand trends, and assumptions regarding future demand. Auditing management’s inventory valuation reserves was complex as auditor judgment was necessary in evaluating the amounts that should be reserved based on the assumptions detailed above. 31 How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the inventory reserve process, including controls over the inputs and assumptions described above, that are used in management’s calculation. Our audit procedures to test the adequacy of the inventory valuation reserve included, among others, evaluating the appropriateness of management’s inputs to the inventory valuation reserve calculation, including testing the completeness and accuracy of the data used in management’s calculation such as historical write-off activity, inventory levels and sales history for each class of inventory. We compared actual write-off activity in recent years to the inventory valuation reserve estimated by the Company in prior years to evaluate management’s ability to accurately estimate the reserve. We also audited management’s calculation of the inventory valuation reserve by testing the mathematical accuracy of the Company’s reserve calculation. In addition, we performed inquiries of the Company’s management and obtained documentation to evaluate the Company’s estimate. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2002 Jericho, New York October 24, 2019 32 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 $17,088 and $12,992, respectively Inventories Prepaid expenses and other current assets 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; 46,277,284 and 54,649,158 shares issued, respectively Class B common stock (ten votes per share); $0.001 par value; 50,000,000 shares authorized; 10,193,348 and 10,454,765 shares issued and outstanding, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Class A treasury stock, at cost, 1,248,944 and 9,207,635 shares, respectively Total MSC Industrial shareholders’ equity Noncontrolling interest Total shareholders' equity Total liabilities and shareholders' equity August 31, 2019 September 1, 2018 $ 32,286 $ 46,217 541,091 559,136 67,099 1,199,612 310,854 677,266 116,668 6,837 2,311,237 175,453 160,110 111,353 446,916 266,431 114,011 827,358 $ $ 523,892 518,496 58,902 1,147,507 311,685 674,998 122,724 31,813 2,288,727 224,097 145,133 121,293 490,523 311,236 99,714 901,473 — 46 — 55 10 659,226 946,651 (22,776) (104,607) 1,478,550 5,329 1,483,879 2,311,237 $ 10 657,749 1,325,822 (19,634) (576,748) 1,387,254 — 1,387,254 2,288,727 $ $ $ See accompanying notes to consolidated financial statements. 33 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 Less: Net income (loss) attributable to noncontrolling interest Net income attributable to MSC Industrial PER SHARE INFORMATION: Net income per common share: Basic Diluted Weighted average shares used in computing net income per common share: Basic Diluted August 31, 2019 (52 weeks) For the Fiscal Years Ended September 1, 2018 (52 weeks) September 2, 2017 (52 weeks) $ $ $ 3,363,817 1,931,774 1,432,043 1,032,047 399,996 3,203,878 1,810,917 1,392,961 972,408 420,553 2,887,744 1,601,497 1,286,247 907,247 379,000 (16,890) 518 (495) (16,867) 383,129 94,332 288,797 (68) 288,865 5.23 5.20 $ $ $ (14,463) 647 (548) (14,364) 406,189 76,966 329,223 — 329,223 5.84 5.80 $ $ $ (12,370) 658 704 (11,008) 367,992 136,561 231,431 — 231,431 4.08 4.05 $ $ $ 55,245 55,508 56,355 56,707 56,591 56,971 See accompanying notes to consolidated financial statements. 34 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) August 31, 2019 (52 weeks) For the Fiscal Years Ended September 1, 2018 (52 weeks) September 2, 2017 (52 weeks) Net income, as reported Other comprehensive income, net of tax: Foreign currency translation adjustments Comprehensive income (1) Comprehensive loss attributable to noncontrolling interest: Net loss Foreign currency translation adjustments Comprehensive income attributable to MSC Industrial $ 288,797 $ 329,223 $ 231,431 (3,404) 285,393 (2,371) 326,852 1,835 233,266 68 262 285,723 $ — — 326,852 $ — — 233,266 $ (1) There were no material taxes associated with other comprehensive income during the fiscal years 2019, 2018, and 2017. See accompanying notes to condensed consolidated financial statements. 35 MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE FISCAL YEARS ENDED AUGUST 31, 2019, SEPTEMBER 1, 2018, AND SEPTEMBER 2, 2017 (In thousands) Class A Common Stock Beginning Balance Repurchase and retirement of Class A common stock Retirement of treasury stock Exchange of Class B common stock for Class A common stock Ending Balance Class B Common Stock Beginning Balance Exchange of Class B common stock for Class A common stock Ending Balance Additional Paid-in-Capital Beginning Balance Associate Incentive Plans Repurchase and retirement of Class A common stock Retirement of treasury stock Ending Balance Retained Earnings Beginning Balance Net Income Repurchase and retirement of Class A common stock Retirement of treasury stock Cash dividends declared on Class A common stock Cash dividends declared on Class B common stock Dividend equivalents declared, net of cancellations Ending Balance Accumulated Other Comprehensive Loss Beginning Balance Foreign Currency Translation Adjustment Ending Balance Treasury Stock Beginning Balance Associate Incentive Plans Repurchases of Class A common stock Retirement of treasury stock Ending Balance Total Shareholders' Equity Attributable to MSC Industrial Noncontrolling Interest Beginning Balance Issuance of Noncontrolling Interest in MSC Mexico Capital Contributions Foreign Currency Translation Adjustment Net Income (Loss) Ending Balance For the Fiscal Years Ended August 31, 2019 (52 weeks) September 1, 2018 September 2, 2017 (52 weeks) (52 weeks) $ $ 55 (1) (8) — 46 10 — 10 54 $ (1) — 2 55 12 (2) 10 53 1 — — 54 12 — 12 657,749 34,138 (11,887) (20,774) 659,226 626,995 41,706 (10,952) — 657,749 584,017 42,978 — — 626,995 1,325,822 288,865 (48,439) (472,830) (118,798) (26,911) (1,058) 1,168,812 329,223 (45,984) — (101,000) (24,430) (799) 1,040,148 231,431 — — (80,848) (21,368) (551) 946,651 1,325,822 1,168,812 (19,634) (3,142) (22,776) (17,263) (2,371) (19,634) (19,098) 1,835 (17,263) (576,748) 2,813 (24,284) 493,612 (104,607) 1,478,550 (553,470) 2,154 (25,432) — (576,748) 1,387,254 (506,756) 2,155 (48,869) — (553,470) 1,225,140 — 4,637 1,022 (262) (68) — — — — — — 1,387,254 2.22 2.22 $ $ $ — — — — — — 1,225,140 1.80 1.80 Total Shareholders' Equity Dividends declared per Class A Common share Dividends declared per Class B Common share $ $ $ See accompanying notes to consolidated financial statements. $ $ $ 5,329 1,483,879 2.64 2.64 36  MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED AUGUST 31, 2019, SEPTEMBER 1, 2018, AND SEPTEMBER 2, 2017 (In thousands) For the Fiscal Years Ended August 31, 2019 (52 weeks) September 1, September 2, 2018 (52 weeks) 2017 (52 weeks) $ 288,797 $ 329,223 $ 231,431 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 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 Proceeds from sale of available for sale securities Cash used in business acquisitions, net of cash acquired Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Repurchases of common stock Payments of cash dividends Proceeds from sale of Class A common stock in connection with associate stock purchase plan Proceeds from exercise of Class A common stock options Borrowings under the revolving credit facilities Payments under the revolving credit facilities Contributions from noncontrolling interest Proceeds from long-term debt Payments on capital lease and financing obligations Other, net 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 $ $ $ 65,377 16,283 416 10,763 14,297 63,154 14,934 479 6,938 (19,577) — — 62,980 13,925 678 7,048 13,482 94 (26,948) (32,528) (8,316) (2,064) 2,349 39,629 328,426 (51,773) 27,025 (11,625) (36,373) (49,827) (33,235) (4,865) 1,094 31,340 10,435 339,658 (44,919) — (87,000) (131,919) (72,230) (15,871) (7,428) 548 12,184 15,410 246,841 (46,548) — (42,345) (88,893) (84,611) (145,709) (82,369) (125,430) (49,182) (102,216) 4,600 15,640 382,000 (451,000) 918 — (28,370) 903 (305,629) (355) (13,931) 46,217 32,286 79,334 16,648 $ $ $ 4,461 24,243 242,000 (350,000) — 110,000 (1,066) 575 (177,586) (19) 30,134 16,083 46,217 $ 4,243 26,887 546,000 (618,500) — — (1,175) (803) (194,746) (9) (36,807) 52,890 16,083 100,504 $ 13,448 $ 121,691 11,695 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 leading distributor of metalworking and maintenance, repair and operations (“MRO”) products and services, 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 99 branch offices and 12 customer fulfillment centers. Principles of Consolidation The condensed consolidated financial statements include the accounts of MSC Industrial Direct Co., Inc., its wholly owned subsidiaries and entities in which it maintains a controlling financial interest. All significant 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 2019, 2018, and 2017 contain activity for 52 weeks. Unless the context requires otherwise, references to years contained herein pertain to the Company’s fiscal year. Use of Estimates The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions used in preparing the accompanying consolidated financial statements. Cash and Cash Equivalents The Company considers all short-term, highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value. As of August 31, 2019 and September 1, 2018, the Company did not have any cash equivalents. 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. 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 and considering such factors as its age, historic and current demand trends, the physical condition of the inventory, historical write-off information 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 the Company’s inventories have demonstrated long shelf lives and are not highly susceptible to obsolescence. In addition, many of the Company’s inventory items are eligible for return under various supplier agreements. 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 40 years for leasehold improvements and buildings, three to 10 years for computer systems, equipment and software, and three to 20 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 associates connected 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 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 is less than its 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 assessments of goodwill and intangible assets that have indefinite lives performed by the Company in its respective fiscal fourth quarters, there was no indicator of impairment for fiscal years 2019, 2018 and 2017. 39 The balances and changes in the carrying amount of goodwill are as follows: Balance as of September 2, 2017 AIS Acquisition(1) Post-closing working capital adjustment from acquisition of DECO Tool Supply Co. Foreign currency translation adjustments Balance as of September 1, 2018 TAC acquisition(2) Foreign currency translation adjustments Balance as of August 31, 2019 $ $ $ 633,728 41,939 738 (1,407) 674,998 2,872 (604) 677,266 (1) Acquired All Integrated Solutions, Inc. (“AIS”) in April 2018, including post-closing working capital adjustment of $1,155. (2) Two subsidiaries of the Company, MSC IndustrialSupply, S. de R.L. de C.V. and MSC Import Export LLC (together, “MSC Mexico”), completed the acquisition of certain assets of TAC Insumos Industriales, S. de R.L. de C.V. and certain of its affiliates (together, “TAC”) in February 2019, including post-closing working capital adjustment of $2,286. The Company holds a 75% interest in each of the MSC Mexico entities. See Note 5 “Business Combinations” for further discussion of these acquisitions. The components of the Company’s intangible assets for the fiscal years ended August 31, 2019 and September 1, 2018 are as follows: For the Fiscal Years Ended August 31, 2019 September 1, 2018 Customer Relationships Contract Rights Trademarks Trademarks Total Weighted Average Useful Life (in years) 5 - 18 10 1 - 5 Indefinite Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization $ $ 214,460 $ — 7,691 12,966 235,117 $ (113,319) $ — (5,130) — (118,449) $ 208,260 $ 23,100 6,630 14,134 252,124 $ (101,916) (23,100) (4,384) — (129,400) For the fiscal year ended August 31, 2019, the Company recorded approximately $6,200 of intangible assets, primarily consisting of the acquired customer relationships and trademark from the TAC acquisition. See Note 5 “Business Combinations.” During the fiscal year ended August 31, 2019, approximately $107 in gross intangible assets, and any related accumulated amortization, were written off related to trademarks that are no longer being utilized. In addition, contract rights of $23,100 were written off in fiscal 2019 as they were fully amortized. For the fiscal year ended September 1, 2018, the Company recorded approximately $23,285 of intangible assets consisting of the acquired customer relationships and trademark from the AIS acquisition. During the fiscal year ended September 1, 2018, approximately $129 in gross intangible assets, and any related accumulated amortization, were written off related to trademarks that are no longer being utilized. The Company’s amortizable intangible assets are amortized on a straight-line basis, including customer relationships, based on an approximation of customer attrition patterns and best estimates the use pattern of the asset. Amortization expense of the Company’s intangible assets was $11,746, $10,513, and $8,223 during fiscal years 2019, 2018, and 2017, respectively. Estimated amortization expense for each of the five succeeding fiscal years is as follows: Fiscal Year 2020 2021 2022 2023 2024 $11,528 10,645 10,224 10,080 9,768 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 40 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 2019, 2018 and 2017. Deferred Catalog Costs The costs of producing and distributing the Company’s principal catalogs are deferred ($3,363 and $3,973 at August 31, 2019 and September 1, 2018, 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 $18,812, $15,530 and $16,289 during the fiscal years 2019, 2018, and 2017, respectively. Revenue Recognition Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. The Company’s contracts have a single performance obligation, to deliver products, and are short-term in nature. All revenue is recognized when the Company satisfies its performance obligations under the contract, and invoicing occurs at approximately the same point in time. The Company recognizes revenue once the customer obtains control of the products. The Company’s product sales have standard payment terms that do not exceed one year. The Company considers shipping and handling as activities to fulfill its performance obligation. The Company estimates product returns based on historical return rates. The Company offers customers sales incentives, which primarily consist of volume rebates, and upfront sign-on payments. These volume rebates and payments are not in exchange for a distinct good or service and result in a reduction of net sales from the goods transferred to the customer at the later of when the related revenue is recognized or when the Company promises to pay the consideration. 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 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 certain of its products sold. 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 30 to 90 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 $138,242, $130,340, and $119,979 during fiscal years 2019, 2018, and 2017, respectively. 41 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 estimates 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 records stock-based compensation expense only for those awards that are expected to vest. Share Repurchases and Treasury Stock Repurchased shares may be retired immediately and resume the status of authorized but unissued shares or may be held by the Company as 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. The Company accounts for repurchased shares retired immediately or treasury stock retired under the constructive retirement method. When shares are 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 Stock Purchase Agreements In July 2018, the Company announced that in connection with its existing share repurchase authorization, the Company had entered into a stock purchase agreement with the holders of the Company’s Class B common stock to purchase a pro rata number of shares, such that their aggregate percentage ownership in the Company would remain substantially the same. In August 2018, the Company purchased 45 shares of its Class A common stock from certain of its Class B shareholders at a purchase price of $82.64 per share. In September 2018, the Company purchased 113 shares of its Class A common stock from certain of its Class B shareholders at a purchase price of $84.29 per share. In October 2018, the Company purchased 2 shares of its Class A common stock from certain of its Class B shareholders at a purchase price of $85.00 per share. In November 2018, the Company purchased 123 shares of its Class A common stock from certain of its Class B shareholders at a purchase price of $81.22 per share. See Note 10 “Shareholders’ Equity” in the Notes to the Consolidated Financial Statements for more information about the stock purchases. 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 at September 1, 2018 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 1, 2018. The bonds were redeemed on May 29, 2019 and all funds have been settled as of August 31, 2019. The fair values of the Company’s long-term debt, including current maturities, are estimated based on quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. Under this method, the Company’s fair value of any long-term obligations was not significantly different than the carrying values at August 31, 2019 and September 1, 2018. 42 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. The amounts of unrecognized tax benefits, exclusive of interest and penalties that would affect the effective tax rate, were $11,698 and $9,407 as of August 31, 2019 and September 1, 2018, 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. For fiscal 2019, U.K., Canadian, and Mexico operations represented approximately 4% of the Company’s consolidated net sales. Segment Reporting The Company utilizes the management approach for segment disclosure, which designates the internal organization that is used by management for making operating decisions and assessing performance as the source of our reportable segments. The Company operates 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. The Company does not disclose revenue information by product category as it is impracticable to do so as a result of its numerous product offerings and the manner in which its 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 5 “Business Combinations” for further discussion. Recently Adopted Accounting Pronouncements Revenue from Contracts with Customers Effective September 2, 2018, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12, 2016-20 and 2017-05. These ASUs outline a single comprehensive model for entities to use in the accounting for revenue arising from contracts with customers and supersede most prior revenue recognition guidance, including industry-specific guidance. Revenue continues to be recognized when products are shipped to the customer and the customer obtains control of the products, and the adoption of these ASUs, using the modified retrospective approach, had no impact on the Company’s opening retained earnings. The Company reports its 43 sales net of estimated sales returns and sales incentives. Sales tax collected from customers is excluded from net sales. Additional information and disclosures required by this new standard are contained in Note 2, Revenue. Business Combinations Effective September 2, 2018, the Company adopted ASU 2017-01, which clarifies the definition of a business to assist entities with evaluating when a set of transferred assets and activities is considered a business. This standard was applied to business combinations that occurred beginning September 2, 2018. Disclosure Update and Simplification In August 2018, the SEC amended certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded in SEC Release No. 33-10532, Disclosure Update and Simplification. In addition, the amendments expanded the disclosure requirements on the analysis of shareholders’ equity for interim financial statements. Under the amendments, an analysis of change in each caption of shareholders’ equity presented in the consolidated balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The final rules are effective for all filings made on or after November 5, 2018, with the option for the filer’s first presentation of the changes in shareholders’ equity to be included in its Form 10-Q for the quarter that begins after the effective date of the amendments. The Company has included this new presentation in its consolidated statements of shareholders' equity. Accounting Pronouncements Not Yet Adopted Leases In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), a comprehensive new standard that amends various aspects of existing accounting guidance for leases, including the recognition of a right-of-use asset and a lease liability in the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. During 2018, the FASB issued additional ASUs that address implementation issues and correct or improve certain aspects of the new accounting guidance for leases, including ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements. These ASUs do not change the core principles in the lease accounting standard outlined above. The amendments in ASU 2018-11 provide an optional transition method that allows entities to initially apply the new lease accounting standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods will continue to be in accordance with current lease accounting guidance. Management established a cross-functional team to evaluate and implement the new standard. The team selected a third-party software solution to facilitate the accounting and financial reporting requirements of the new lease accounting standard. Lease data elements have been gathered and migrated to the software solution. Based on current evaluations, the Company expects to recognize additional assets and liabilities upon adoption of Topic 842 ranging from $55,000 to $65,000 to reflect right-of-use assets and lease liabilities as of September 1, 2019. The Company does not expect a material impact to the Company’s consolidated statements of earnings, comprehensive income, shareholders’ equity, or cash flows. Measurement of Credit Losses In June 2016, the FASB issued its final standard on measurement of credit losses on financial instruments. This standard, issued as ASU 2016-13, requires that an entity measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This update is effective for annual financial statement periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for financial statement periods beginning after December 15, 2018. The new standard is effective for the Company for its fiscal year 2021. The Company is currently evaluating this standard to determine the impact, if any, of adoption on its consolidated financial statements. Goodwill Impairment In January 2017, the FASB issued its final standard on simplifying the test for goodwill impairment. This standard, issued as ASU 2017-04, eliminates the second step from the goodwill impairment test and instead requires an entity to 44 perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The new standard is effective for the Company for its fiscal year 2021. Upon adoption, the Company will apply this guidance prospectively to its annual and interim goodwill impairment tests and disclose the change in accounting principle. Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the Company’s consolidated financial statements. Reclassifications Certain of the prior period line items contained in the Consolidated Statement of Shareholders’ Equity were condensed to conform to our current period presentation. The Company combined the “Exercise of common stock options,” the “Common stock issued under associate stock purchase plan,” the “Shares issued upon vesting of restricted stock units, including dividend equivalent units,” the “Stock-based compensation,” and the “Issuance of restricted common stock, net of cancellations” line items into a single line titled “Associate Incentive Plans”. These reclassifications did not affect the total amount of Shareholders’ Equity. 2. REVENUE Revenue Recognition Net sales include product revenue and shipping and handling charges, net of estimated sales returns and any related sales incentives. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. All revenue is recognized when the Company satisfies its performance obligations under the contract, and invoicing occurs at approximately the same point in time. The Company recognizes revenue once the customer obtains control of the products. The Company’s product sales have standard payment terms that do not exceed one year. The Company considers shipping and handling as activities to fulfill its performance obligation. The Company’s contracts have a single performance obligation, to deliver products, and are short-term in nature. The Company estimates product returns based on historical return rates. Total accrued sales returns were $5,432 and $4,832 as of August 31, 2019 and September 1, 2018, respectively, and are reported as Accrued liabilities in the Consolidated Balance Sheets. Sales taxes and value-added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. Consideration Payable to a Customer The Company offers customers sales incentives, which primarily consist of volume rebates, and upfront sign-on payments. These volume rebates and payments are not in exchange for a distinct good or service and result in a reduction of net sales from the goods transferred to the customer at the later of when the related revenue is recognized or when the Company promises to pay the consideration. The Company estimates its volume rebate accruals and records its sign-on payments based on various factors, including contract terms, historical experience, and performance levels. Total accrued sales incentives, primarily related to volume rebates, were $14,770 and $14,000 as of August 31, 2019 and September 1, 2018, respectively, and are included in Accrued liabilities in the Consolidated Balance Sheets. Sign-on payments, not yet recognized as a reduction of revenue, are recorded in Prepaid expenses and other current assets in the Consolidated Balance Sheets and were $2,788 and $2,457 as of August 31, 2019 and September 1, 2018, respectively. Contract Assets and Liabilities The Company records a contract asset when it has a right to payment from a customer that is conditioned on events other than the passage of time. The Company records a contract liability when customers prepay but the Company has not yet satisfied its performance obligation. The Company did not have material unsatisfied performance obligations, contract assets or liabilities as of August 31, 2019 and September 1, 2018. Disaggregation of Revenue The Company operates in one operating and reportable segment as a distributor of MRO products and services. The Company serves a large number of customers in diverse industries, which are subject to different economic and industry factors. The Company's presentation of net sales by customer end-market most reasonably depicts how the nature, amount, 45 timing, and uncertainty of Company revenue and cash flows are affected by economic and industry factors. The Company does not disclose net sales information by product category as it is impracticable to do so as a result of its numerous product offerings and the way its business is managed. The following table presents the Company's percentage of net sales by customer end-market for the year ended August 31, 2019: Manufacturing Heavy Manufacturing Light Government Retail/Wholesale Commercial Services Other (1) Total net sales For the Fiscal Year Ended August 31, 2019 (52 weeks) 48% 22% 8% 6% 4% 12% 100% (1) The other category primarily includes individual customer and small business net sales not assigned to a specific industry classification. The Company’s net sales originating from the following geographic areas were as follows for the year ended August 31, 2019: United States U.K. Canada Mexico Total net sales 3. FAIR VALUE For the Fiscal Year Ended August 31, 2019 (52 weeks) 3,243,026 56,506 41,126 23,159 3,363,817 96 % 2 % 1 % 1 % 100 % $ $ Fair value accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value into three levels, with Level 1 being of the highest priority. The three levels of inputs used to measure fair value are as follows: Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2—Include other inputs that are directly or indirectly observable in the marketplace. Level 3—Unobservable inputs which are supported by little or no market activity. As of August 31, 2019 and September 1, 2018, the Company did not have any cash equivalents. In connection with the construction of the Company’s customer fulfillment center (“CFC”) in Columbus, Ohio, the Company entered into an arrangement during fiscal 2013 with the Columbus-Franklin County Finance Authority (“Finance Authority”) which provided savings on state and local sales taxes imposed on construction materials purchased by entities that finance the transactions through them. Under this arrangement, the Finance Authority issued taxable bonds in the amount of $27,025 to finance the structure and site improvements of the Company’s CFC. The Company purchased these bonds at issuance. The bonds were redeemed in fiscal 2019 and all funds have been settled as of August 31, 2019. The bonds had an outstanding balance of $27,025 at September 1, 2018 and were classified as available for sale securities in accordance with ASC Topic 320. The fair values of these securities were based on observable inputs in non-active markets, which are 46 therefore classified as Level 2 in the hierarchy. The Company did not record any gains or losses on these securities during the year ended August 31, 2019. The Company’s financial instruments, other than those presented in the disclosure above, include cash and cash equivalents, accounts receivable, accounts payable, and outstanding indebtedness. The Company uses a market approach to determine the fair value of its debt instruments, utilizing quoted prices in active markets, interest rates and other relevant information generated by market transactions involving similar instruments. Therefore, the inputs used to measure the fair value of the Company's debt instruments are classified as Level 2 within the fair value hierarchy. The reported carrying amounts of the Company’s financial instruments approximated their fair values as of August 31, 2019 and September 1, 2018. During the years ended August 31, 2019 and September 1, 2018, the Company had no remeasurements of non- financial assets or liabilities at fair value on a non-recurring basis subsequent to their initial recognition. 4. NET INCOME PER SHARE The Company’s non-vested restricted stock awards contain non-forfeitable rights to dividends and meet the criteria of a participating security as defined by ASC Topic 260, “Earnings Per Share.” Under the two-class method, net income per share is computed by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, net income is allocated to both common shares and participating securities based on their respective weighted average shares outstanding for the period. The following table sets forth the computation of basic and diluted net income per common share under the two- class method for the fiscal years ended August 31, 2019, September 1, 2018 and September 2, 2017, respectively: For the Fiscal Years Ended August 31, 2019 (52 weeks) September 1, September 2, 2018 (52 weeks) 2017 (52 weeks) Net income attributable to MSC Industrial as reported $ Less: Distributed net income available to participating securities Less: Undistributed net income available to participating securities 288,865 $ (45) (75) 329,223 $ (89) (291) 231,431 (206) (410) 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 288,745 $ 75 (75) 328,843 $ 291 (290) 230,815 410 (408) Numerator for diluted net income per share: Undistributed and distributed net income available to common shareholders $ 288,745 $ 328,844 $ 230,817 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 55,245 263 55,508 56,355 352 56,707 56,591 380 56,971 Net income per share two-class method: Basic Diluted $ $ 5.23 $ 5.20 $ 5.84 $ 5.80 $ Potentially dilutive securities 1,080 207 4.08 4.05 — Potentially dilutive securities attributable to outstanding stock options and restricted stock units are excluded from the calculation of diluted earnings per share where the combined exercise price and average unamortized fair value are greater than the average market price of MSC common stock, and therefore their inclusion would be anti-dilutive. 47 5. BUSINESS COMBINATIONS Acquisition of certain assets of TAC On February 1, 2019, two subsidiaries of the Company, MSC IndustrialSupply, S. de R.L. de C.V. and MSC Import Export LLC (together, “MSC Mexico”), completed the acquisition of certain assets of TAC Insumos Industriales, S. de R.L. de C.V. and certain of its affiliates (together, “TAC”). The Company holds a 75% interest in each of the MSC Mexico entities. The acquisition provides the Company with the opportunity to further expand its business throughout North America. The portion of the consideration attributable to the Company is $13,911, which includes the Company’s portion of a post-closing working capital adjustment in the amount of $2,286 that is payable to TAC in December 2019 and is subject to finalization. Total cash consideration funded by the Company came from available cash resources and borrowings under its revolving credit facilities (see Note 9 “Debt and Capital Lease Obligations”). The Company also loaned the noncontrolling interest owner $2,850 to fund a portion of its initial capital contributions to MSC Mexico. The acquisition was accounted for as a business acquisition pursuant to ASC 805. As required by ASC 805, the Company allocated the consideration to assets and liabilities based on their estimated fair value at the acquisition date. The Company’s acquisition accounting as of August 31, 2019 is preliminary primarily due to the pending final valuation and any additional working capital adjustments to the purchase price. The following table summarizes the amounts of identified assets acquired based on the estimated fair value at the acquisition date: Inventories Identifiable intangibles Goodwill Total assets acquired Less: Fair Value of Noncontrolling Interest Total MSC Industrial Purchase Price Consideration $ $ $ 9,476 6,200 2,872 18,548 (4,637) 13,911 Acquired intangible assets with a fair value of $6,200 consisted of customer relationships with a useful life of nine years. The goodwill amount of $2,872 represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and noncontrolling interest. The primary items that generated the goodwill were the premiums paid by the Company for the right to control the acquisition of certain assets and benefit from adding a platform to expand the Company’s footprint in Mexico. This goodwill will not be amortized and will be included in the Company’s periodic test for impairment at least annually. Goodwill is deductible for tax purposes. The fair value of the noncontrolling interest was determined utilizing the market approach and consideration of the overall business enterprise value. The amount of revenue and loss before provision for income taxes from MSC Mexico included in the consolidated statements of income was $23,159 and ($393), respectively, for the fiscal year ended August 31, 2019. In addition, the Company incurred non- recurring transaction and integration costs relating to MSC Mexico totaling $202, which are included in the Company’s consolidated statement of income as operating expenses for the fiscal year ended August 31, 2019. Acquisition of AIS On April 30, 2018, the Company acquired 100% of the outstanding shares of privately held All Integrated Solutions, Inc. (“AIS”), which does business under the name AIS. AIS is a leading value-added distributor of industrial fasteners and components, MRO supplies and assembly tools, headquartered in Franksville, Wisconsin. Total cash consideration paid was $87,848, which included a post-closing working capital adjustment in the amount of $1,155, which was paid out in August 2018. The acquisition was funded from available cash resources and borrowings under the Credit Facility. Acquisition of DECO On July 31, 2017, the Company acquired certain assets and assumed certain liabilities of DECO Tool Supply Co. (“DECO”), an industrial supply distributor based in Davenport, Iowa. The cash purchase price for the combined acquisition of the DECO business and real property was $43,083, which included a post-closing working capital adjustment in the amount of $738, which was paid out in October 2017. The acquisitions of AIS, DECO, and TAC were accounted for as business purchases pursuant to ASC 805. The results of operations for AIS, DECO, and TAC have been included in our consolidated financial statements from the respective dates of acquisition. 48 6. 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 Less: accumulated depreciation and amortization Total Number of Years — 3 - 40 The lesser of lease term or 7 3 - 20 3 - 10 August 31, 2019 September 1, 2018 $ 28,134 187,207 3,135 181,150 392,530 792,156 481,302 310,854 $ 28,154 186,208 3,114 185,556 364,050 767,082 455,397 311,685 $ $ The amount of capitalized interest, net of accumulated amortization, included in property, plant and equipment was $677 and $716 at August 31, 2019 and September 1, 2018, respectively. Depreciation expense was $53,243, $52,113 and $54,356 for the fiscal years ended August 31, 2019, September 1, 2018, and September 2, 2017. 7. INCOME TAXES The provision for income taxes is comprised of the following: Current: Federal State and local Deferred: Federal State and local Total August 31, 2019 For the Fiscal Years Ended September 1, 2018 September 2, 2017 $ $ 66,161 16,239 82,400 10,622 1,310 11,932 94,332 $ $ 85,205 16,108 101,313 (27,372) 3,025 (24,347) 76,966 $ $ 108,347 16,059 124,406 10,938 1,217 12,155 136,561 49 Significant components of deferred tax assets and liabilities are as follows: August 31, 2019 September 1, 2018 Deferred tax liabilities: Depreciation Deferred catalog costs Goodwill Intangible amortization Deferred tax assets: Accounts receivable Inventory Deferred compensation Stock-based compensation Intangible amortization Foreign Tax Credit Less: Valuation Allowance Other accrued expenses/reserves $ (40,602) $ (546) (86,707) (143) (127,998) 3,823 6,529 853 5,887 — 2,712 (1,762) 8,164 26,206 Net Deferred Tax Liabilities $ (101,792) $ Reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows: (36,361) (561) (77,023) — (113,945) 2,812 6,163 650 5,329 988 2,712 (1,762) 7,192 24,084 (89,861) U.S. Federal statutory rate State income taxes, net of Federal benefit Revaluation of Net Deferred Tax Liabilities Other, net Effective income tax rate August 31, 2019 21.0 % 3.7 — (0.1) 24.6 % For the Fiscal Years Ended September 1, 2018 25.6 % 3.4 (10.0) (0.1) 18.9 % September 2, 2017 35.0 % 3.0 — (0.9) 37.1 % The aggregate changes in the balance of gross unrecognized tax benefits during fiscal 2019 and 2018 were as follows: Beginning Balance Additions for tax positions relating to current year Additions for tax positions relating to prior years Reductions for tax positions relating to prior years Settlements Lapse of statute of limitations Ending Balance August 31, 2019 September 1, 2018 11,943 2,203 2,201 (409) (1,371) (1,270) 13,297 $ $ 12,641 2,811 1,940 (2,821) — (2,628) 11,943 $ $ Included in the balance of unrecognized tax benefits at August 31, 2019 is $1,134 related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next 12 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 2019, 2018 and 2017 provisions include interest and penalties of $27, $44, and $245, respectively. The Company has accrued $521 and $447 for interest and penalties as of August 31, 2019 and September 1, 2018, respectively. The Company has a foreign tax credit carryover of $2,712 in fiscal year 2018 of which a valuation allowance of $1,762 has been provided. This foreign tax credit carryover expires beginning fiscal year 2024. 50 On December 22, 2017, the TCJA was enacted. The TCJA made significant changes to U.S. federal income tax laws including permanently lowering the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. As the Company has a fiscal August year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory rate of 25.6% for the fiscal year ending September 1, 2018. The Company’s statutory federal tax rate is 21.0% for fiscal years 2019 and beyond. U.S. GAAP required that the impact of tax legislation be recognized in the period in which the law was enacted. In December 2017, the SEC issued Staff Accounting Bulletin No. 118, which allows a company to report provisional numbers related to the TCJA and adjust those amounts during a measurement period not to extend beyond one year. The Company recorded a net tax benefit of $40,464 due to the revaluation of its net deferred tax liabilities primarily related to the lower federal corporate tax rate, partially offset by the lower federal benefit for state taxes and the change from a worldwide tax system to a territorial tax system in fiscal 2018. The amounts recorded are provisional and are subject to change due to further interpretations of the TCJA, legislative action to address questions that arise because of the TCJA, and/or any updates or changes to estimates the Company has utilized to calculate the impacts, such as return to accrual adjustments and/or changes to current year earnings estimates and the Company’s ongoing analysis of the TCJA. The Company is routinely examined by federal and state tax authorities. The Company is currently under examination by the Internal Revenue Service due to a refund claim for a specific tax credit taken on the Federal tax return and as such is subject to examination from fiscal 2013 to present. With limited exceptions, the Company is no longer subject to state income tax examinations prior to fiscal 2014. 8. 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 August 31, 2019 September 1, 2018 38,958 14,132 11,310 20,202 26,751 111,353 $ $ 33,012 25,620 13,380 18,832 30,449 121,293 $ $ 9. DEBT AND CAPITAL LEASE OBLIGATIONS Debt at August 31, 2019 and September 1, 2018 consisted of the following: Revolving Credit Facilities Committed bank facility Uncommitted bank facilities Private Placement Debt: Senior notes, series A Senior notes, series B Senior notes Shelf Facility Agreements Capital lease and financing obligations Less: unamortized debt issuance costs Total debt Less: short-term debt(1) Long-term debt __________________________ August 31, September 1, 2019 2018 $ - $ 155,000 224,000 - 75,000 100,000 20,000 90,000 3,053 (1,169) 441,884 $ (175,453) 266,431 $ 75,000 100,000 20,000 90,000 27,926 (1,593) 535,333 (224,097) 311,236 $ $ (1) Net of unamortized debt issuance costs expected to be amortized in the next 12 months. 51 Revolving Credit Facilities In April 2017, the Company entered into a $600,000 committed credit facility (the “Committed Facility”). The Committed Facility, which matures on April 14, 2022, provides for a five-year unsecured revolving loan facility. The Committed Facility permits up to $50,000 to be used to fund letters of credit. The Committed 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 revolving commitment increase will be on terms as agreed to by the Company, the Administrative Agent and the lenders providing such financing. The interest rate is based on either LIBOR or a base rate, plus in either case a spread based on the Company’s leverage ratio at the end of each fiscal reporting quarter. Based on the interest period the Company selects, interest may be payable every one, two, or three months. Interest is reset at the end of each interest period. The Company currently elects to have loans under the Committed Facility bear interest based on LIBOR with one-month interest periods. During the first quarter of fiscal 2019, the Company entered into six unsecured credit facilities that are uncommitted (the “Uncommitted Facilities”), totaling $440,000 of maximum uncommitted availability. Borrowings under the Uncommitted Facilities are generally due at the end of the applicable agreed interest period, but, in any event, no later than the one-year anniversary of the entrance into the applicable Uncommitted Facility. The Uncommitted Facilities contain limited covenants. An event of default under the Company’s Committed Facility is an event of default under the Uncommitted Facilities. The interest rate on the Uncommitted Facilities is based on LIBOR or the bank’s cost of funds or as otherwise agreed upon by the applicable bank and the Company. The $155,000 outstanding at the end of fiscal 2019 under the Uncommitted Facilities is classified as short-term in the Company’s Condensed Consolidated Balance Sheet. During fiscal 2019, the Company borrowed $382,000 and repaid $451,000 under its revolving credit facilities. As of August 31, 2019 and September 1, 2018, the weighted average interest rates on borrowings under all its revolving credit facilities were 3.01% and 3.20%, respectively. Private Placement Debt In July 2016, the Company completed the issuance and sale of $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; and in June 2018, the Company completed the issuance and sale of $20,000 aggregate principal amount of 3.79% Senior Notes, due June 11, 2025 (collectively “Private Placement Debt”). Interest is payable semiannually at the fixed stated interest rates. Shelf Facility Agreements In January 2018, the Company entered into Note Purchase and Private Shelf Agreements with Metropolitan Life Insurance Company (“Met Life Note Purchase Agreement”) and PGIM, Inc. (“Prudential Note Purchase Agreement” and together with the Met Life Note Purchase Agreement, the “Shelf Facility Agreements”). The Met Life Note Purchase Agreement provides for an uncommitted facility for the issuance and sale of up to an aggregate total of $250,000 of senior notes, at either fixed or floating rates. In June 2018, the Company completed the issuance and sale of $20,000 aggregate principal amount of 3.22% Series 2018A Notes, due June 11, 2020 and $20,000 aggregate principal amount of 3.42% Series 2018B Notes, due June 11, 2021. Interest is payable semiannually at the fixed stated interest rates. As of August 31, 2019, the uncommitted availability under the Met Life Note Purchase Agreement is $210,000. The Prudential Note Purchase Agreement provides for an uncommitted facility for the issuance and sale of up to an aggregate total of $250,000 of senior notes, at a fixed rate. In January 2018, the Company completed the issuance and sale of $50,000 aggregate principal amount of 3.04% Senior Notes due January 12, 2023. Interest is payable semiannually. As of August 31, 2019, the uncommitted availability under the Prudential Note Purchase Agreement is $200,000. Each of the credit facilities, Private Placement Debt, and Shelf Facility Agreements imposes 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 52 increase to 3.50 to 1.00), and a minimum consolidated interest coverage ratio of EBITDA to total interest expense of at least 3.00 to 1.00, during the terms of the credit facilities, Private Placement Debt, and Shelf Facility Agreements. At August 31, 2019 and September 1, 2018, the Company was in compliance with the operating and financial covenants of the Credit Facility, Private Placement Debt, and Shelf Facility Agreements, respectively. Maturities of debt, excluding capital lease and financing obligations, as of August 31, 2019 are as follows: Maturities of Debt Fiscal Year 2020 2021 2022 2023 2024 Thereafter Total $ $ 175,000 20,000 — 125,000 — 120,000 440,000 Capital Lease Obligations In connection with the construction of the Company’s CFC in Columbus, Ohio in fiscal 2013, the Finance Authority originally held the title to the building and entered into a long-term lease with the Company. The lease was classified as a capital lease in accordance with ASC Topic 840 and was terminated and paid in full on May 29, 2019. From time to time, the Company enters into capital leases and financing arrangements with vendors to purchase certain IT equipment or software. The equipment or software acquired from these vendors is paid for over a specified period of time based on the terms agreed upon. During the fiscal year ended August 31, 2019, the Company entered into capital lease and financing obligations related to certain IT equipment and software totaling $3,497. The gross amount of property and equipment acquired under the capital lease obligations at August 31, 2019 was approximately $2,593. There is no related accumulated amortization for these capital leases as of August 31, 2019. At August 31, 2019, the approximate present value of future minimum payments under capital leases and financing arrangements are as follows: Fiscal Year 2020 2021 2022 2023 2024 and beyond Present value of minimum lease payments Less: current portion Long-term capital leases and financing arrangements 10. SHAREHOLDERS’ EQUITY Share Repurchases Payments under capital leases and financing arrangements $ $ $ 840 786 749 578 100 3,053 840 2,213 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 August 31, 2019, the maximum number of shares that may yet be repurchased under the Repurchase Plan was 1,157 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 years 2019 and 2018, the Company repurchased 1,055 shares and 972 shares, respectively, of its Class A common stock for $84,611 and $82,369, respectively. 44 and 54 of these shares were repurchased by the Company to 53 satisfy the Company’s associates’ tax withholding liability associated with its share-based compensation program in fiscal years 2019 and 2018, respectively. The Company retired approximately 8,212 shares of treasury stock during fiscal 2019 that was purchased at a cost of $493,612. In July 2018, the Company announced that in connection with its existing share repurchase authorization, the Company had entered into a stock purchase agreement with the holders of the Company’s Class B common stock to purchase a pro rata number of shares, such that their aggregate percentage ownership in the Company would remain substantially the same. In September 2018, the Company purchased 113 shares of its Class A common stock from certain of its Class B shareholders at a purchase price of $84.29 per share. In October 2018, the Company purchased 2 shares of its Class A common stock from certain of its Class B shareholders at a purchase price of $85.00 per share. In November 2018, the Company purchased 123 shares of its Class A common stock from certain of its Class B shareholders at a purchase price of $81.22 per share. These figures are included in the totals provided in the previous paragraph. All of these shares were immediately retired. Shares of the Company’s common stock purchased pursuant to the stock purchase agreement, as well as shares purchased to satisfy the Company’s associates’ tax withholding liability associated with its share-based compensation program, did not reduce the number of shares that may be repurchased under the Repurchase Plan. The Company reissued 64 and 57 shares of treasury stock during fiscal years 2019 and 2018 to fund the Associate Stock Purchase Plan (see Note 11). 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 10 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 August 31, 2019, 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 17, 2019, the Board of Directors declared a quarterly cash dividend of $0.75 per share, payable on November 26, 2019 to shareholders of record at the close of business on November 12, 2019. The dividend will result in a payout of approximately $41,924, based on the number of shares outstanding at October 1, 2019. 54 11. 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 August 31, 2019, September 1, 2018 and September 2, 2017 was as follows: August 31, 2019 For the Fiscal Years Ended September 1, 2018 September 2, 2017 $ $ $ 4,786 1,552 9,633 312 16,283 (4,006) 12,277 $ 4,534 $ 2,856 7,281 263 14,934 (4,376) 10,558 $ 4,369 4,399 4,872 285 13,925 (5,292) 8,633 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 2,726 authorized shares of common stock were remaining as of August 31, 2019. Stock Options A summary of the status of the Company’s stock options at August 31, 2019 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 Shares 2019 Weighted-Average Exercise Price 1,760 398 (208) (56) 1,894 888 $ $ 72.96 83.21 75.03 78.30 74.73 72.63 The total intrinsic value of options exercised during the fiscal years ended August 31, 2019, September 1, 2018 and September 2, 2017 was $1,882, $7,516, and $9,474, respectively. The unrecognized share-based compensation cost related to stock option expense at August 31, 2019 was $7,697 and will be recognized over a weighted average of 2.1 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: 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. 55 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 August 31, 2019, September 1, 2018, and September 2, 2017 were as follows: 2018 2019 Expected life (in years) Risk-free interest rate Expected volatility Expected dividend yield Weighted-Average Grant-Date Fair Value 4.0 2.98 % 23.1 % 2.70 % 14.05 $ 4.0 1.87 % 22.1 % 2.30 % 12.25 $ $ 2017 4.1 1.16 % 20.5 % 2.40 % 9.29 The following table summarizes information about stock options outstanding and exercisable at August 31, 2019: Range of Exercise Prices $ 58.90 – $ 69.46 69.47 – 72.23 72.24 – 81.76 81.77 – 83.03 Number of Options Outstanding at August 31, 2019 386 433 501 574 1,894 Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price Number of Options Exercisable at August 31, 2019 Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price Intrinsic Value Intrinsic Value 3.1 $ 4.2 4.2 4.7 4.1 $ 59.02 $ 71.33 80.12 83.14 74.73 $ 3,322 — — — 3,322 266 204 214 204 888 3.1 $ 4.2 3.0 2.2 3.1 $ 59.08 $ 71.33 80.81 83.03 72.63 $ 2,277 — — — 2,277 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 August 31, 2019 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 2019 Shares 63 — (41) (1) 21 $ $ Weighted- Average Grant- Date Fair Value 81.98 — 81.95 82.61 82.00 The fair value of each RSA is the closing stock price on the NYSE 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 August 31, 2019, September 1, 2018 and September 2, 2017 was $3,368, $7,222 and $7,357, respectively. The unrecognized compensation cost related to the non-vested RSAs at August 31, 2019 is $266 and will be recognized over a weighted-average period of 0.2 years. 56 Restricted Stock Units A summary of the Company’s non-vested restricted stock unit (“RSU”) award activity for the fiscal year ended August 31, 2019 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 2019 Shares Weighted-Average Grant-Date Fair Value 377 179 (105) (35) 416 $ $ 73.18 82.68 72.97 77.52 76.93 The fair value of each RSU is the closing stock price on the NYSE 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 August 31, 2019 was $23,501 and is expected to be recognized over a period of 2.9 years. Associate Stock Purchase Plan The Company has established a qualified Associate Stock Purchase Plan, the terms of which allow for eligible associates (as defined in the Associate Stock Purchase Plan) to participate in the purchase of up to a maximum of five 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 August 31, 2019, approximately 124 shares remain reserved for issuance under this plan. Associates purchased approximately 64 and 57 shares of common stock during fiscal years 2019 and 2018 at an average per share price of $71.65 and $78.65, 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 2019, 2018, and 2017, the Company contributed $8,439, $7,730 and $7,048, respectively, to the plan. The Company contributions are discretionary. 12. SEVERANCE AND SEPARATION BENEFITS During fiscal 2019, the Company reviewed its operations and identified opportunities for improvements in its workforce strategy and staffing, and increase its focus on performance management, to ensure it has the right skillsets and number of associates to execute its long-term vision. As such, the Company extended voluntary and involuntary severance and separation benefits to certain associates. The amount of severance and separation benefit charges and other related costs were accrued for approximately 150 associates in fiscal 2019 for a total of $6,725, which includes $337 of stock-based compensation expense from the acceleration of equity award vestings. These costs are included within operating expenses in the Consolidated Statement of Income for the fiscal year ended August 31, 2019. Severance and separation benefit charges accrued for in fiscal 2019 were $6,388. Of this $6,388, $344 of these charges were paid out in fiscal 2019, resulting in a severance and separation cost liability balance of $6,044 at August 31, 2019. 57 13. 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 2031. 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 2023. At August 31, 2019, approximate undiscounted minimum annual rentals on all such leases are as follows: Fiscal Year 2020 2021 2022 2023 2024 Thereafter Total $ $ Total Rental Payments 22,463 18,022 9,923 5,184 4,083 6,023 65,698 Total rental expense (exclusive of real estate taxes, insurance and other operating costs) for all operating leases for fiscal years 2019, 2018 and 2017 was approximately $13,753, $12,477 and $12,541, respectively. 14. LEGAL PROCEEDINGS There are various claims, lawsuits, and pending actions against the Company incidental to the operation of its business. Although the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity. 15. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) The following table sets forth unaudited financial data for each of the Company’s last eight fiscal quarters. Fiscal Year Ended August 31, 2019 Fiscal Year Ended September 1, 2018 First Quarter Second Quarter Third Quarter Fourth Quarter(2) First Quarter Second Quarter(1) Third Quarter Fourth Quarter (Unaudited) $ Consolidated Income Statement Data: Net sales Gross profit Income from operations Net income Net income attributable to MSC Industrial Net income per share attributable to MSC Industrial: Basic Diluted 831,597 $ 823,004 $ 866,546 $ 842,670 $ 353,589 357,985 90,514 103,000 66,621 74,232 66,608 74,232 351,814 95,981 68,430 68,424 368,655 110,501 79,514 79,601 768,561 $ 768,987 $ 828,345 $ 837,985 359,668 335,069 107,790 99,278 73,017 59,585 73,017 59,585 337,223 98,103 117,552 117,552 361,001 115,382 79,069 79,069 1.34 1.33 1.24 1.24 1.44 1.44 1.21 1.20 1.06 1.05 2.08 2.06 1.40 1.39 1.30 1.29 (1) (2) In the second quarter of fiscal 2018, the Company recorded a net tax benefit of $41,199 due to the revaluation of its net deferred tax liabilities primarily related to the lower federal corporate tax rate, partially offset by the lower federal benefit for state taxes and the change from a worldwide tax system to a territorial tax system, and a net tax benefit of $16,929 attributable to the lower effective tax rate required to bring our first half into alignment with the expected full-year rate. In the fourth quarter of fiscal 2019, the Company recorded $6,725 of severance and separation benefits charges and other related costs associated with workforce reduction and increased performance management. The net income per share impact from these charges were $0.09 in the fourth quarter of fiscal 2019. 58 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of August 31, 2019. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of August 31, 2019, 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 SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief 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 August 31, 2019. 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 August 31, 2019. Attestation Report of the Independent Registered Public Accounting Firm The effectiveness of the Company’s internal control over financial reporting as of August 31, 2019 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.” 59 Changes in Internal Control Over Financial Reporting There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended August 31, 2019 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. 60 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of MSC Industrial Direct Co., Inc. Opinion on Internal Control Over Financial Reporting We have audited MSC Industrial Direct Co., Inc. and subsidiaries (the “Company”) internal control over financial reporting as of August 31, 2019, 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). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2019, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of August 31, 2019 and September 1, 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended August 31, 2019, and the related notes and schedule and our report dated October 24, 2019 expressed an unqualified opinion thereon. Basis for Opinion 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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. Definition and Limitations of Internal Control Over Financial Reporting 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. /s/Ernst & Young LLP Jericho, New York October 24, 2019 61 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”, “Corporate Governance” and “Executive Officers” in the Company’s Proxy Statement for the annual meeting of shareholders to be held in January 2020, or the 2019 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,” and “Compensation Committee Report” in the 2019 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 2019 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 “Corporate Governance” in the 2019 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 2019 Proxy Statement, which is incorporated herein by this reference. 62 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 August 31, 2019. 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. 63 Exhibit No. EXHIBIT INDEX Description 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 4.05 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). Description of Registrant’s Securities** 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 Change in Control Agreement, dated December 3, 2014 between MSC Industrial Direct Co., Inc. and Kari Heerdt (incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on April 9, 2015) (SEC File No. 001-14130).† 10.06 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).† 10.07 MSC Industrial Direct Co., Inc. Amended and Restated Associate Stock Purchase Plan (incorporated by reference to Exhibit 4.04 to the Registrant’s Registration Statement on Form S-8 (333-201523) filed with the SEC on January 15, 2015).† 10.08 10.09 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 10.12 to the Registrant’s Annual Report on Form 10-K filed with the SEC on October 30, 2018) (SEC File No. 001- 14130).† 10.10 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).† 10.11 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).† 10.12 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).† 10.13 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).† 64 Exhibit No. 10.14 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).† Description 10.15 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).† 10.16 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).† 10.17 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).† 10.18 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).† 10.19 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). † 10.20 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). 10.21 Note Purchase and Private Shelf Agreement, dated as of January 12, 2018, by and between MSC Industrial Direct Co., Inc. and Metropolitan Life Insurance Company and/or one or more of its affiliates or related funds, as purchasers thereunder (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 17, 2018). 10.22 Note Purchase and Private Shelf Agreement, dated as of January 12, 2018, by and between MSC Industrial Direct Co., Inc. and PGIM, Inc. and/or one or more of its affiliates or related funds, as purchasers thereunder (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 17, 2018). 10.23 MSC Industrial Direct Co, Inc. Executive Change in Control Severance Plan (incorporated by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K filed with the SEC on October 30, 2018) (SEC File No. 001-14130).† 65  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. 66 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES MSC INDUSTRIAL DIRECT CO., INC. By: /s/ ERIK GERSHWIND Erik Gershwind Chief Executive Officer (Principal Executive Officer) Dated: October 24, 2019 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. October 24 2019 Signature Title Date /s/ MITCHELL JACOBSON Mitchell Jacobson Chairman of the Board of Directors October 24, 2019 /s/ ERIK GERSHWIND Erik Gershwind President and Chief Executive Officer and Director (Principal Executive Officer) October 24, 2019 /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 67 October 24, 2019 October 24, 2019 October 24, 2019 October 24, 2019 October 24, 2019 October 24, 2019 October 24, 2019 October 24, 2019 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 September 2, 2017 Allowance for doubtful accounts(1) Deducted from asset accounts: For the fiscal year ended September 1, 2018 Allowance for doubtful accounts(1) Deducted from asset accounts: For the fiscal year ended August 31, 2019 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 $ 12,353 $ 7,048 $ — $ 6,123 $ 13,278 $ 13,278 $ 6,938 $ — $ 7,224 $ 12,992 $ 12,992 $ 10,763 $ — $ 6,667 $ 17,088 Included in accounts receivable. (1) (2) Comprised of uncollected accounts charged against the allowance. S-1 [This Page Intentionally Left Blank] [This Page Intentionally Left Blank] CORPORATE CORPORATE INFORMATION INFORMATION BOARD OF DIRECTORS BOARD OF DIRECTORS JONATHAN BYRNES JONATHAN BYRNES ROGER FRADIN ROGER FRADIN ERIK GERSHWIND ERIK GERSHWIND LOUISE GOESER LOUISE GOESER MITCHELL JACOBSON MITCHELL JACOBSON MICHAEL KAUFMANN MICHAEL KAUFMANN DENIS KELLY DENIS KELLY STEVEN PALADINO STEVEN PALADINO PHILIP PELLER PHILIP PELLER Senior Lecturer Senior Lecturer Operating Executive Operating Executive President and Chief Executive Officer President and Chief Executive Officer Chief Executive Officer Chief Executive Officer Non-Executive Chairman of the Board Non-Executive Chairman of the Board Chief Executive Officer Chief Executive Officer Investment Banker Investment Banker Executive Vice President and Chief Financial Officer Executive Vice President and Chief Financial Officer Independent Director Independent Director Massachusetts Institute of Technology Massachusetts Institute of Technology The Carlyle Group The Carlyle Group MSC Industrial Supply Co. MSC Industrial Supply Co. LKG Enterprises LKG Enterprises MSC Industrial Supply Co. MSC Industrial Supply Co. Cardinal Health, Inc. Cardinal Health, Inc. Scura Partners LLC Scura Partners LLC Henry Schein, Inc. Henry Schein, Inc. Retired Partner, Arthur Andersen LLP Retired Partner, Arthur Andersen LLP EXECUTIVE OFFICERS EXECUTIVE OFFICERS ERIK GERSHWIND ERIK GERSHWIND STEVEN BARUCH STEVEN BARUCH RUSTOM JILLA RUSTOM JILLA DOUGLAS JONES DOUGLAS JONES STEVE ARMSTRONG STEVE ARMSTRONG CHARLES BONOMO CHARLES BONOMO KARI HEERDT KARI HEERDT GREGORY POLLI GREGORY POLLI EDWARD MARTIN EDWARD MARTIN President and Chief Executive Officer President and Chief Executive Officer Executive Vice President and Chief Strategy & Marketing Officer Executive Vice President and Chief Strategy & Marketing Officer Executive Vice President and Chief Financial Officer Executive Vice President and Chief Financial Officer Executive Vice President and Chief Supply Chain Officer Executive Vice President and Chief Supply Chain Officer Senior Vice President, General Counsel and Corporate Secretary Senior Vice President, General Counsel and Corporate Secretary Senior Vice President and Chief Information Officer Senior Vice President and Chief Information Officer Senior Vice President, New Business Innovation & Transformation Senior Vice President, New Business Innovation & Transformation Senior Vice President, Supplier Enablement Senior Vice President, Supplier Enablement Senior Vice President, Sales & Customer Success Senior Vice President, Sales & Customer Success CORPORATE INFORMATION CORPORATE INFORMATION ANNUAL MEETING ANNUAL MEETING The 2020 Annual Meeting of The 2020 Annual Meeting of Shareholders will be held at: Shareholders will be held at: Hilton Long Island/Huntington Hilton Long Island/Huntington 598 Broad Hollow Road 598 Broad Hollow Road Melville, New York 11747 Melville, New York 11747 on Wednesday, January 29, 2020 at 9 a.m. on Wednesday, January 29, 2020 at 9 a.m. COMPANY HEADQUARTERS COMPANY HEADQUARTERS MSC Industrial Supply Co. MSC Industrial Supply Co. 75 Maxess Road 75 Maxess Road Melville, New York 11747 Melville, New York 11747 MSC Industrial Supply Co. MSC Industrial Supply Co. 525 Harbour Place Drive 525 Harbour Place Drive Davidson, North Carolina 28036 Davidson, North Carolina 28036 WEBSITE www.mscdirect.com WEBSITE www.mscdirect.com INVESTOR RELATIONS CONTACT INVESTOR RELATIONS CONTACT John Chironna John Chironna MSC Industrial Supply Co. MSC Industrial Supply Co. (704) 987-5231 (704) 987-5231 Copies of our Annual Report on Copies of our Annual Report on Form 10-K for the fiscal year ended Form 10-K for the fiscal year ended August 31, 2019 are available August 31, 2019 are available without charge, upon request. without charge, upon request. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ernst & Young LLP Jericho, New York INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ernst & Young LLP Jericho, New York LEGAL COUNSEL LEGAL COUNSEL Venable LLP Venable LLP New York, New York New York, New York REGISTRAR AND TRANSFER AGENT Proxy Services c/o Computershare Investor Services P.O. Box 505005 Louisville, Kentucky 40233-5005 REGISTRAR AND TRANSFER AGENT Proxy Services c/o Computershare Investor Services P.O. Box 505005 Louisville, Kentucky 40233-5005 COMMON STOCK LISTED COMMON STOCK LISTED MSC Industrial Supply Co.’s Class A MSC Industrial Supply Co.’s Class A common stock is traded on the common stock is traded on the New York Stock Exchange under New York Stock Exchange under the symbol “MSM.” the symbol “MSM.” DIVIDEND POLICY DIVIDEND POLICY The Company has instituted a policy The Company has instituted a policy of regular quarterly cash dividends to of regular quarterly cash dividends to shareholders. Currently, the quarterly shareholders. Currently, the quarterly dividend rate is $0.75 per share, or dividend rate is $0.75 per share, or $3.00 per share annually. $3.00 per share annually. MSC INDUSTRIAL SUPPLY CO. 75 Maxess Road Melville, New York 11747 516.812.2000 www.mscdirect.com NYSE listed: MSM 

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