MSC INDUSTRIAL DIRECT CO., INC. Overview
MSC is 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 2.1 million products, inventory management and other supply chain solutions, and deep expertise from more than 80 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 approximately 7,000 associates works with our customers to help drive results for their businesses, from keeping operations running efficiently today to continuously rethinking, retooling and optimizing for a more productive tomorrow. We offer approximately 2.1 million active, saleable SKUs through our catalogs; our brochures; our eCommerce channels, including the MSC website; our inventory management solutions; and our customer care centers, customer fulfillment centers, regional inventory centers and warehouses. We service our customers from six customer fulfillment centers, 10 regional inventory centers and 38 warehouses. 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 2,536 atSeptember 3, 2022 compared to 2,398 atAugust 28, 2021 and 2,263 atAugust 29, 2020 . The chart below displays a two-year comparison of our net sales from fiscal year 2021 through fiscal year 2022: [[Image Removed: Picture 1]]
(1)Pricing and other is comprised of changes in customer and product mix, discounting and other items.
(2)Fiscal year 2022 includes a 53rd week during the reporting period, including the net sales of acquisitions during the 53rd week.
23--------------------------------------------------------------------------------
Highlights
Highlights during fiscal year 2022 include the following: ?We generated$246.2 million of cash from operations compared to$224.5 million in fiscal year 2021. ?We repurchased and immediately retired$22.1 million of MSC's Class A Common Stock compared to$67.5 million in fiscal year 2021. ?We paid out$167.4 million in regular cash dividends compared to$362.7 million in cash dividends in fiscal year 2021, comprised of special and regular cash dividends of$195.4 million and$167.3 million , respectively. ?InJune 2022 , we acquiredEngman-Taylor for aggregate consideration of$24.8 million . ?InJuly 2022 , the sale of our Long Island CSC closed, resulting in a gain on sale of$10.1 million . ?InAugust 2022 , we acquired Tower Fasteners for aggregate consideration of$33.9 million , which includes a post-closing working capital adjustment of approximately$1.0 million that is subject to finalization. ?We incurred$15.8 million in restructuring and other costs compared to$31.4 million in fiscal year 2021. Restructuring and other costs primarily consisted of consulting-related costs associated with the optimization of the Company's operations, associate severance and separation costs, and equity award acceleration costs. The prior fiscal year also included operating lease asset impairment charges, net of gains related to settlement of lease liabilities, and other exit-related costs associated with our internal restructuring due to our sales workforce realignment and enhanced customer support model. Recent Developments Progress on Mission Critical As previously disclosed, we initiated a company-wide project, which we refer to as "Mission Critical," to accelerate market share capture and improve profitability over the period through fiscal year 2023. Among the Mission Critical initiatives to realize growth, we began and expect to continue investing in our market-leading metalworking business by adding to our metalworking specialist team, introducing value-added services to our customers, expanding our vending, VMI and in-plant solutions programs, building out our sales force, and diversifying our customers and end-markets. We also are focused on improving profitability through the implementation of various pricing strategies and critical structural cost reductions in order to improve return on invested capital. We anticipate that the cost reductions will be comprised of savings in the areas of sales and service, supply chain and general and administrative expenses, and include initiatives to optimize our distribution center network and real estate footprint, renegotiate supplier contracts, and redesign our talent acquisition and retention approach. Relocation and Sale of Long Island CSC InDecember 2020 , we announced plans to relocate our Long Island CSC to a smaller facility. In connection with the announcement, we signed a 10-year lease to occupy approximately 26,000 square feet in an office building inMelville, New York , which commenced inSeptember 2021 . In furtherance of these plans, we entered into a Purchase and Sale Agreement to sell our Long Island CSC. This transaction closed during the fourth quarter of fiscal year 2022.
Impact of COVID-19 and Other Economic Trends
In recent years, the COVID-19 pandemic has impacted the Company's operations; however, demand from our traditional manufacturing end markets has recovered as most restrictions implemented earlier in the pandemic have been lifted. In conjunction with the lifting of pandemic restrictions and the ensuing economic recovery,the United States experienced and continues to experience disruptions in the supply of certain products and services and disruptions in labor availability. These disruptions have contributed to a highly inflationary environment which has affected the price and, at times, the availability of certain products and services necessary for the Company's operations, including fuel, labor and certain products the Company sells or the inputs for such products. Such disruptions have impacted, and may continue to impact in the future, the Company's business, financial condition and results of operations. These disruptions are also impacting our customers and their ability to conduct their business or purchase our products and services. As a result of recent high inflation, increasing freight, labor and fuel costs, and supply chain disruptions, the Company has implemented price realization strategies in response to increased costs the Company faces. Furthermore, in light of disruptions to availability and increased or uncertain shipping times, the Company is maintaining higher purchasing levels to ensure sufficient inventory supply to meet customer demand. The extent to which the COVID-19 pandemic and the 24 -------------------------------------------------------------------------------- evolving macroeconomic environment will continue to impact the Company's business, financial condition and results of operations is highly uncertain. Acquisitions ofEngman-Taylor and Tower Fasteners InJune 2022 , the Company acquired certain assets and assumed certain liabilities ofEngman-Taylor , aMenomonee Falls, Wisconsin -based distributor of metalworking tools and supplies, for aggregate consideration of$24.8 million .Engman-Taylor will continue to go to market under its current name as an MSC company. InAugust 2022 , the Company acquired 100% of the outstanding equity of Tower Fasteners, aHoltsville, New York -based distributor of OEM fasteners and components, for aggregate consideration of$33.9 million , which includes a post-closing working capital adjustment of approximately$1.0 million that is subject to finalization. The acquisition, which was made through the Company's subsidiary, AIS, complements and expands the Company's presence in the OEM fastener market. Tower Fasteners will continue to go to market under its current name as an MSC company. Our Strategy Our primary objective is to grow sales profitably while offering our customers highly technical and high-touch solutions to solve their most complex challenges on the plant floor. Our strategy is to complete the transition from being a spot-buy supplier to a mission-critical partner to our customers. We will selectively 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, including the Metalworking Business Index (the "MBI") and the Industrial Production ("IP") index. Approximately 70% of our revenues came from sales in the manufacturing sector during the fourth quarter of fiscal year 2022. Through statistical analysis, we have found that trends in our customers' activity have correlated to changes in the MBI and the IP index. The MBI is a sentiment index developed from a monthly survey of theU.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 IP index measures short-term changes in industrial production. Growth in the IP index from month to month indicates growth in the manufacturing, mining and utilities industries. The MBI and the IP index over the fourth quarter of fiscal year 2022 and the fourth quarter and fiscal year averages were as follows: Period MBI IP Index June 54.8 104.2 July 52.0 104.7 August 51.8 104.5 Fiscal year 2022 Q4 average 52.9 104.5 Fiscal year 2022 full year average 58.1 103.0 During fiscal year 2022, the MBI average exceeded 50.0, which indicated growth in manufacturing during the period, albeit declining in recent months. The IP index averaged 103.0 during the same period, an improvement from the 2021 revised average of 98.6. The recent trending in these indices is primarily supported by the recovery in economic conditions related to the gradual lifting of government-imposed restrictions on economic activity and the abatement of the COVID-19 pandemic. See "Impact of COVID-19 and Other Economic Trends" above. Beginning in the second half of calendar year 2021 and continuing throughout calendar year 2022,the United States has experienced supply chain disruptions and significant levels of inflation, which has included higher prices for labor, freight, fuel and the products that the Company sells. The Company has implemented price realization strategies in response to increased costs the Company faces. We will continue to monitor the current economic conditions for the impact on our customers and markets and assess both risks and opportunities that may affect our business and operations. 25 -------------------------------------------------------------------------------- Results of Operations Fiscal Year EndedSeptember 3, 2022 Compared to the Fiscal Year EndedAugust 28, 2021 The table below summarizes the Company's results of operations both in dollars (in thousands) and as a percentage of net sales for the periods indicated: Fiscal Years Ended September 3, 2022 August 28, 2021 (53 weeks) (52 weeks) Change $ % $ % $ % Net sales$ 3,691,893 100.0%$ 3,243,224 100.0%$ 448,669 13.8% Cost of goods sold 2,133,645 57.8% 1,909,709 58.9% 223,936 11.7% Gross profit 1,558,248 42.2% 1,333,515 41.1% 224,733 16.9% Operating expenses 1,083,862 29.4% 994,468 30.7% 89,394 9.0% Impairment loss, net - 0.0% 5,886 0.2% (5,886) (100)% Restructuring and other costs 15,805 0.4% 31,392 1.0% (15,587) (49.7)% Gain on sale of property (10,132) (0.3)% - 0.0% (10,132) N/A(1) Income from operations 468,713 12.7% 301,769 9.3% 166,944 55.3% Total other expense (17,581) (0.5)% (13,390) (0.4)% (4,191) 31.3% Income before provision for income taxes 451,132 12.2% 288,379 8.9% 162,753 56.4% Provision for income taxes 110,650 3.0% 70,442 2.2% 40,208 57.1% Net income 340,482 9.2% 217,937 6.7% 122,545 56.2% Less: Net income attributable to noncontrolling interest 696 0.0% 1,030 0.0% (334) (32.4)% Net income attributable to MSC Industrial$ 339,786 9.2%$ 216,907 6.7%$ 122,879 56.7% (1) N/A is Not Applicable. Net Sales Net sales increased 13.8%, or$448.7 million , from the prior fiscal year. The$448.7 million increase in net sales was comprised of approximately$179.3 million of higher sales volume, approximately$159.4 million from improved pricing, inclusive of changes in customer and product mix, discounting and other items, approximately$77.6 million in sales attributable to an extra week in fiscal year 2022, and approximately$35.4 million of net sales from recent acquisitions, partially offset by approximately$3.0 million of unfavorable foreign exchange impact. Of the$448.7 million increase in net sales during the fiscal year endedSeptember 3, 2022 , national account customer sales increased by approximately$218.1 million , sales to our core and other customers increased by approximately$207.8 million and sales from recent acquisitions were approximately$35.4 million , partially offset by a decrease in our government customer sales by approximately$12.6 million . 26 -------------------------------------------------------------------------------- The table below shows, among other things, the annual 2022 average daily sales ("ADS") by total company and by customer type compared to the same periods in the prior fiscal year: ADS Percentage Change (Unaudited) Thirteen-Week Thirteen-Week Thirteen-Week Fourteen-Week Period Ended Period Ended
Period Ended Period Ended Fiscal Year 2022 vs. 2021 Fiscal Period
Fiscal Q1 Fiscal Q2 Fiscal Q3 Fiscal Q4 Ended
Net Sales (in thousands) $ 848,547 $ 862,522 $ 958,579 $ 1,022,245 $ 3,691,893
Sales Days 62 63 65 68 258
ADS(1) (in millions) $ 13.7 $ 13.7 $ 14.7 $ 15.0 $ 14.3
Total Company ADS Percent Change 9.9% 7.9% 10.7% 14.0% 10.7%
Manufacturing Customers ADS Percent 14.0%
Change
Manufacturing Customers Percent of 70%
Total
Non-Manufacturing Customers ADS 3.9% Percent Change Non-Manufacturing Customers Percent 30%
of Total
(1) ADS is calculated using number of business days in
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 61.7% of consolidated net sales for fiscal year 2022, compared to 60.0% of consolidated net sales for fiscal year 2021. These percentages of consolidated net sales do not include eCommerce sales from our recent acquisitions. Gross Profit Gross profit margin was 42.2% in fiscal year 2022, as compared to 41.1% in fiscal year 2021. The increase in gross profit margin was the result of improved price realization and positive spread between sales price and cost of goods sold. In addition, results for fiscal year endedAugust 28, 2021 include the prior year PPE-related inventory write-downs of$30.1 million , which reduced the carrying value of certain PPE-related inventory to their estimated net realizable value. No such inventory write-downs occurred for the fiscal year endedSeptember 3, 2022 . Operating Expenses Operating expenses increased 9.0% to$1.1 billion in fiscal year 2022, as compared to$994.5 million in fiscal year 2021. Operating expenses were 29.4% of fiscal year 2022 net sales, as compared to 30.7% for fiscal year 2021. 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. Payroll and payroll-related costs were approximately 57.5% of total operating expenses for fiscal year 2022, as compared to approximately 56.9% for fiscal year 2021. Payroll and payroll-related costs, which include salary, incentive compensation, sales commission, and fringe benefit costs, increased by$57.6 million for fiscal year 2022. All of these components of payroll and payroll-related costs increased compared to the prior fiscal year. Freight expense was$155.5 million for fiscal year 2022, as compared to$133.7 million for fiscal year 2021. The primary drivers of this increase were increased sales volume and higher fuel-related charges due to increased commodity costs.
Travel and entertainment expense was
27
--------------------------------------------------------------------------------
Impairment Loss, Net
In September 2020 , the Company prepaid approximately $26.7 million for the
purchase of nitrile gloves to be sourced from manufacturers in Asia and
experienced significant delays in obtaining possession of this PPE. The Company
evaluated the potential recoverability of these assets and, as a result,
recorded an impairment charge of $26.7 million in the first quarter of fiscal
year 2021 to reflect the fact that the Company would not ultimately obtain this
PPE or recover its related prepayment. During fiscal year 2021, the Company
entered into a legal settlement agreement with a vendor and, as a result,
received $20.8 million of loss recovery related to this prepayment, which
resulted in a net impairment charge of $5.9 million for fiscal year 2021. The
Company continues to pursue its legal avenues for recovery of the remaining
loss. We also incurred $1.6 million of legal costs associated with this matter
during fiscal year 2021 that are included in Operating expenses.
Restructuring and Other Costs
For fiscal year 2022, we incurred approximately $15.8 million in restructuring
and other costs related to the optimization of the Company's operations. These
charges primarily consisted of consulting-related costs associated with the
optimization of the Company's operations, associate severance and separation
costs, and equity award acceleration costs. The prior fiscal year also included
operating lease asset impairment charges, net of gains related to settlement of
lease liabilities, and other exit-related costs associated with our internal
restructuring due to our sales workforce realignment and enhanced customer
support model. See Note 13, "Restructuring and Other Costs" in the Notes to
Consolidated Financial Statements for additional information.
Gain on Sale of Property
During fiscal year 2021, the Company entered into a Purchase and Sale Agreement
to sell its 170,000-square foot Long Island CSC in Melville, New York . During
the fourth quarter of fiscal year 2022, the Company disposed of the building
with a sale price of $25.5 million , which resulted in a gain on sale of property
of $10.1 million after the settlement of certain closing costs and fees, which
is included in the Consolidated Statement of Income for the fiscal year ended
September 3, 2022 .
Income from Operations
Income from operations increased 55.3% to $468.7 million in fiscal year 2022, as
compared to $301.8 million in fiscal year 2021. This increase was primarily
attributable to the increase in sales and gross margin as well as impacts of the
prior year impairment loss, PPE-related inventory write-down within gross margin
and impairment charges for operating lease assets within restructuring and other
costs as discussed above, which did not recur in fiscal year 2022.
Provision for Income Taxes
Our effective tax rate for fiscal year 2022 was 24.5%, as compared to 24.4% in
fiscal year 2021. See Note 7, "Income Taxes" in the Notes to Consolidated
Financial Statements for further information.
Net Income
The factors which affected net income for fiscal year 2022, as compared to the
prior fiscal year, have been discussed above.
Liquidity and Capital Resources
As of As of
September 3, August 28,
2022 2021 $ Change
(In thousands)
Total debt $ 794,592 $ 786,049 $ 8,543
Less: Cash and cash equivalents 43,537 40,536 3,001
Net debt $ 751,055 $ 745,513 $ 5,542
Equity $ 1,362,283 $ 1,161,872 $ 200,411 As of
28
--------------------------------------------------------------------------------
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 and net
proceeds from the private placement notes, have been used to fund these needs,
to repurchase shares of the Company's Class A Common Stock from time to time,
and to pay dividends to our shareholders.
As of September 3, 2022 , total borrowings outstanding, representing amounts due
under our credit facilities and notes, as well as all finance leases and
financing arrangements, were $794.6 million , net of unamortized debt issuance
costs of $1.4 million , as compared to total borrowings of $786.0 million , net of
unamortized debt issuance costs of $1.9 million , as of August 28, 2021 . The
increase was driven by higher net borrowings under our committed credit
facility. See Note 9, "Debt" in the Notes to Consolidated Financial Statements
for more information about these balances.
We believe, based on our current business plan, that our existing cash,
financial resources and cash flow from operations will be sufficient to fund
necessary capital expenditures and operating cash requirements for at least the
next 12 months. We will continue to evaluate our financial position in light of
future developments, particularly those relating to changes in macroeconomic
conditions, including variations in foreign currency exchange rates, commodity
and energy prices, labor and supply costs, inflation, and interest rates, and to
take appropriate action as it is warranted.
The table below summarizes information regarding the Company's cash flows for
the periods indicated:
Fiscal Years Ended
September 3 , August 28,
2022 2021
(In thousands)
Net cash provided by operating activities
(94,493) (75,746)
Net cash used in financing activities (148,140)
(233,747)
Effect of foreign exchange rate changes on (549)
356
cash and cash equivalents Net increase (decrease) in cash and cash$ 3,001 $ (84,675) equivalents Operating Activities Net cash provided by operating activities for fiscal years 2022 and 2021 was$246.2 million and$224.5 million , respectively. The increase was primarily due to the following: ?an increase in net income as described above; partially offset by ?an increase in the change in accounts receivable primarily attributable to higher sales volume; and ?a decrease in the change in accounts payable and accrued liabilities due to a greater increase in accounts payable in fiscal year 2021 from fiscal year 2020 levels due to the COVID-19 pandemic that did not repeat in fiscal year 2022. The table below summarizes certain information regarding the Company's operations: Fiscal Years Ended September 3, August 28, 2022 2021 (Dollars in thousands) Working Capital (1)$ 817,679 $ 752,317 Current Ratio (2) 2.1 2.3 Days' Sales Outstanding (3) 65.3 61.1 Inventory Turnover (4) 3.2 3.4 (1) Working Capital is calculated as current assets less current liabilities. (2) Current Ratio is calculated by dividing total current assets by total current liabilities. (3) Days' Sales Outstanding is calculated by dividing accounts receivable by net sales, using trailing two months sales data. (4) Inventory Turnover is calculated by dividing total cost of goods sold by inventory, using a 13-month trailing average inventory. Working capital increased compared toAugust 28, 2021 while the current ratio declined slightly. The increase in working capital presented in the table above was primarily due to increases in both accounts receivable and inventories, partially offset by an increase in the current portion of debt and accounts payable. The current ratio declined slightly, primarily due to the increase in the current portion of debt. 29 -------------------------------------------------------------------------------- The increase in inventories of$91.5 million fromAugust 28, 2021 toSeptember 3, 2022 was primarily due to an increasing sales trend as well as higher supplier costs and ongoing challenges in the supply chain requiring earlier purchasing to meet customer demand. Higher inventory purchasing levels also drove the$31.0 million increase in accounts payable during this period. Accounts receivable increased$127.2 million due to increased sales levels during fiscal year 2022. These balances were also impacted by fiscal year 2022 acquisitions. See Note 5, "Business Combinations" in the Notes to Consolidated Financial Statements for more information about these acquired balances. The increase in days' sales outstanding as ofSeptember 3, 2022 as compared toAugust 28, 2021 was primarily due to the receivables portfolio consisting of a greater percentage of our national account program sales, which typically have longer payment terms. Inventory turnover as ofSeptember 3, 2022 declined relative toAugust 28, 2021 due to increasing inventory levels as a result of higher supplier costs, ongoing challenges in the supply chain and to meet customer demand. Investing Activities Net cash used in investing activities for fiscal years 2022 and 2021 was$94.5 million and$75.7 million , respectively. The use of cash for fiscal year 2022 included expenditures for property, plant and equipment and the acquisitions ofEngman-Taylor and Tower Fasteners, partially offset by the net proceeds received from the sale of the Long Island CSC. The use of cash for fiscal year 2021 included expenditures for property, plant and equipment and the acquisitions of Wm.F. Hurst Co., LLC and the outsourcing and logistics businesses of TAC Insumos Industriales,S. de R.L. de C.V. and certain of its affiliates. Financing Activities Net cash used in financing activities for fiscal years 2022 and 2021 was$148.1 million and$233.7 million , respectively. The major components contributing to the use of cash for fiscal year 2022 were primarily the following: ?$167.4 million of regular dividends paid during fiscal year 2022 compared to$362.7 million of regular and special dividends paid during fiscal year 2021; ?$27.4 million in aggregate repurchases of our Class A Common Stock during fiscal year 2022 compared to$71.3 million in aggregate repurchases of our Class A Common Stock during fiscal year 2021; ?net borrowings under our credit facilities of$9.5 million during fiscal year 2022 compared to net borrowings of$184.3 million during fiscal year 2021; and ?proceeds from the exercise of common stock options of$34.7 million during fiscal year 2022 compared to$29.7 million in fiscal year 2021. Debt Credit Facilities InApril 2017 , the Company entered into a$600.0 million revolving credit facility which was subsequently amended and extended inAugust 2021 . As ofSeptember 3, 2022 , the Company also had three uncommitted credit facilities, totaling$208.0 million of maximum uncommitted availability. See Note 9, "Debt" in the Notes to Consolidated Financial Statements for more information about our credit facilities. As ofSeptember 3, 2022 , we were in compliance with the operating and financial covenants of our credit facilities. Subsequent to fiscal year 2022, the Company made additional payments of$45.0 million throughOctober 3, 2022 on its revolving credit facility. The current unused balance of$394.7 million from the revolving credit facility, which is reduced by outstanding letters of credit, is available for working capital purposes if necessary. See Note 9, "Debt" in the Notes to Consolidated Financial Statements for more information about these balances. Private Placement Debt and Shelf Facility Agreements InJuly 2016 , we completed the issuance and sale of unsecured senior notes. InJanuary 2018 , we entered into two note purchase and private shelf facility agreements (together, the "Shelf Facility Agreements"). InJune 2018 andMarch 2020 , we entered into additional note purchase agreements. Pursuant to the terms of the Shelf Facility Agreements, no new 30 -------------------------------------------------------------------------------- unsecured senior notes may be issued and sold afterJanuary 12, 2021 . See Note 9, "Debt" in the Notes to Consolidated Financial Statements for more information about these transactions. Leases and Financing Arrangements As ofSeptember 3, 2022 , certain of our operations were conducted on leased premises. These leases are for varying periods, the longest extending to fiscal year 2031. In addition, we are obligated under certain equipment and automobile operating and finance leases, which expire on varying dates through fiscal year 2026. From time to time, we enter into financing arrangements with vendors to purchase certain information technology equipment or software. Capital Expenditures We continue to invest in sales productivity initiatives, eCommerce and vending platforms, customer fulfillment centers and distribution network, and other infrastructure and technology. Future Liquidity Outlook Our future contractual obligations as ofSeptember 3, 2022 (in thousands) are as follows: Contractual Obligations Fiscal Year 2023 Thereafter Undiscounted operating lease obligations(1) $ 20,103$ 50,792 Undiscounted finance lease obligations, net of interest(2) 1,027 179 Maturities of long-term debt obligations, net of interest(3) 125,000 469,750 Estimated interest on long-term debt(4) 17,967 45,016 Total contractual obligations $ 164,097$ 565,737 (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 fiscal year 2031. In addition, we are obligated under certain equipment and automobile operating leases, which expire on varying dates through fiscal year 2025. See Note 10, "Leases" in the Notes to Consolidated Financial Statements for additional information on our operating lease arrangements. (2)As ofSeptember 3, 2022 , the Company has entered into various finance leases for certain IT equipment, which expire on varying dates through fiscal year 2026. See Note 10, "Leases" in the Notes to Consolidated Financial Statements for additional information on our finance lease arrangements. (3)Excludes debt issuance costs. (4)Interest payments for long-term debt are based on principal amounts and coupons or contractual rates at fiscal year-end. As ofSeptember 3, 2022 , the Company had recorded a non-current liability of$8.0 million for tax uncertainties and interest. 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 Consolidated Financial Statements. We have not entered into any off-balance sheet arrangements and there are no commitments or obligations (including, but not limited to, guarantees; retained or contingent interests in assets transferred; contractual arrangements that support the credit, liquidity or market risk for transferred assets; or risk related to derivatives or other financial products related to our equity securities), including contingent obligations, with unconsolidated entities or persons that had during the periods presented herein or are reasonably likely to have a material impact on the financial statements. 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 Consolidated Financial Statements. The accounting policies described below are impacted by our critical accounting estimates. More information on the critical accounting estimates can be found in Note 1, "Business and Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements. Allowance for Credit Losses 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 credit losses in accounts receivable, including the age of the receivables and the historical ratio of actual write-offs to the age of the receivables, and also reflects the 31 -------------------------------------------------------------------------------- adoption of the new accounting standard related to current expected credit losses in the most recent fiscal year. See Note 1, "Business and Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements for more information. Inventories Inventory is reflected at the lower of weighted average cost or net realizable value considering future demand, market conditions and physical condition of the inventory. We write-down inventories for shrinkage and slow-moving or obsolete inventory. The analysis includes inventory levels, sales information, historical write-down information, and the on-hand quantities relative to the sales history for the product.Goodwill and Other Indefinite-Lived Intangible Assets The purchase price of an acquired company is allocated between the 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. 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 values of these assets might exceed their current fair values. 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, accruals related to self-insured associate health costs, long-lived assets and warranties require judgments on complex matters that are often subject to multiple external sources of authoritative guidance such as theFinancial Accounting Standards Board and theSEC . 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 Consolidated Financial Statements. Recently Issued Accounting Pronouncements Refer to Note 1, "Business and Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements. ? 32
--------------------------------------------------------------------------------
© Edgar Online, source
