MSC INDUSTRIAL DIRECT CO., INC. 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 1.9 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 more than 6,300 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 1.9 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 inthe United States which includes five primary customer fulfillment centers, one is located in theU.K. , and three are located inCanada ) and 98 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 2,263 atAugust 29, 2020 , compared to 2,414 atAugust 31, 2019 and 2,383 atSeptember 1, 2018 . 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 2018 through fiscal 2020:
[[Image Removed: Picture 1]](1)Pricing and other is comprised of changes in customer and product mix, discounting and other items.
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Recent Developments and Highlights
Highlights during our fiscal year ended
?We generated
?We paid out$444.2 million in cash dividends, comprised of special and regular cash dividends of approximately$277.6 million and$166.5 million , respectively, compared to regular cash dividends of$145.7 million in the prior fiscal year. ?We incurred$17.0 million in restructuring and other related costs, comprised of$6.6 million in consulting costs related to the optimization of the Company's operations and$10.4 million in severance and separation benefits charges and other related costs associated primarily with sales workforce realignment.
Impact of COVID-19 on Our Business
The COVID-19 pandemic has resulted and will continue to result in significant economic disruption and has and will adversely affect our business. The following events related to the COVID-19 pandemic have resulted and will result in lost or delayed revenue to our company: limitations on the ability of manufacturers to manufacture the products we sell; limitations on the ability of our suppliers to obtain the products we sell or to meet delivery requirements and commitments; limitations on the ability of our associates to perform their work due to illness caused by the pandemic or local, state or federal orders requiring associates to remain at home; limitations on the ability ofUPS , LTL carriers and other carriers to deliver our packages to customers; limitations on the ability of our customers to conduct their business and purchase our products and services; disruptions to our customers' supply chains or purchasing patterns; and limitations on the ability of our customers to pay us on a timely basis. The extent to which the COVID-19 pandemic will continue to impact our business and financial results going forward will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of COVID-19 in the future, future government actions in response to the crisis and the overall impact of the COVID-19 pandemic on the global economy and capital markets, among many other factors, all of which remain highly uncertain and unpredictable. Our number one priority is the health and safety of our associates and their families, our customers, and our other partners. We have taken and will continue to take measures to reduce the risk of infection and to protect our associates and our business, in line with guidelines issued by the authorities in the jurisdictions in which we operate, including state, federal and local governments and theCenter for Disease Control and Prevention . We have restricted non-associate access to our sites, reorganized our workflows where permitted to maximize social distancing, implemented extensive restrictions on associate travel, and utilized remote-working strategies where possible. As we are an essential business, we have continued to operate our customer fulfillment centers, and associates working at those facilities have continued to be on our premises, serving our customers. We have instituted enhanced safety procedures to safeguard their health and safety, including use of additional protective equipment and frequent cleaning of our facilities. We continue to experience disruptions in our business as we have implemented modifications to associate travel and associate work locations and cancelled events, among other modifications. We have reduced spending more broadly across the company, only proceeding with operating and capital spending that is critical. We have ceased substantially all hiring and reduced discretionary expenses. We temporarily reduced senior management and associate compensation. InApril 2020 , we temporarily suspended the employer matching contribution to eligible participants in the Company's 401(k), and the matching contribution was reinstated at the beginning of our fiscal year 2021. We have developed contingency plans to reduce costs further if the situation deteriorates. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by foreign, federal, state and local authorities, or that we determine are in the best interests of our associates, customers, suppliers and shareholders.
Our Strategy
Our 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.
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Business Environment
We utilize various indices when evaluating the level of our business
activity. This includes both the Metalworking Business Index ("MBI") and the
Industrial Production Index ("IP"). Approximately 66% of our revenues came from
sales in the manufacturing sector during the fourth quarter of our fiscal year
2020. Through statistical analysis, we have found that trends in our customers'
activity have correlated to changes in the MBI and IP. 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 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 IP over the 2020
fiscal fourth quarter and fiscal year averages were as follows:
Period MBI IP
June 42.9 97.6
July 46.1 101.7
August 48.6 102.2
Fiscal 2020 Q4 average 45.9 100.5
Fiscal 2020 full year average 45.5 103.8
The MBI trended downward during fiscal 2020. August marked the sixth consecutive
month of readings below 50.0, indicating contraction and overall slower growth
in the metalworking manufacturing environment. Also, August marked the fourth
consecutive month the MBI has increased since its low watermark of 34.4 in
April. These trends have continued with the release of the September MBI of
50.0. IP also trended downward during fiscal 2020, particularly in March through
August. Similar to the MBI, IP has improved steadily since its low watermark of
91.3 in April. We will 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. The recent volatility stems from the economic
disruptions of the COVID-19 pandemic. See "Impact of COVID-19 on Our Business"
above.
To meet anticipated demand for our products, we may purchase products from
manufacturers outside of our typical programs, including payment terms, and in
advance of customer orders, which we hold in inventory and resell to customers.
We are subject to the risk that we may be unable to sell excess products, in
particular PPE products, ordered from manufacturers. Inventory levels in excess
of customer demand due to the difficulty of calibrating demand for such
products, the concentration of demand for a limited number of SKUs, difficulties
in product sourcing, or rapid changes in demand may result in inventory write
downs, and the sale of excess inventory at discounted prices could have an
adverse effect on our operating results, financial condition and cash flows.
Conversely, if we underestimate customer demand for our products or if our
manufacturers fail to supply products, we require at the time we need them, we
may experience inventory shortages. Inventory shortages might delay shipments to
customers and negatively impact customer relationships.
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Results of Operations
Fiscal Year Ended
The table below summarizes the Company's results of operations both in dollars (in thousands) and as a percentage of net sales for the periods indicated:
Fiscal Years Ended
August 29, 2020 August 31, 2019
(52 weeks) (52 weeks) Change
$ % $ % $ %
Net sales $ 3,192,399 100.0% $ 3,363,817 100.0% $ (171,418) (5.1)%
Cost of goods sold 1,849,077 57.9% 1,931,774 57.4% (82,697) (4.3)%
Gross profit 1,343,322 42.1% 1,432,043 42.6% (88,721) (6.2)%
Operating expenses 992,582 31.1% 1,032,047 30.7% (39,465) (3.8)%
Income from operations 350,740 11.0% 399,996 11.9% (49,256) (12.3)%
Total other expense (16,490) (0.5)% (16,867) (0.5)% 377 (2.2)%
Income before provision
for income taxes 334,250 10.5% 383,129 11.4% (48,879) (12.8)%
Provision for income
taxes 82,492 2.6% 94,332 2.8% (11,840) (12.6)%
Net income 251,758 7.9% 288,797 8.6% (37,039) (12.8)%
Less: Net income (loss)
attributable to
noncontrolling interest 641 0.0% (68) 0.0% 709 1042.6%
Net income attributable $ $ $
to MSC Industrial 251,117 7.9% 288,865 8.6% (37,748) (13.1)%
Net Sales
Net sales for fiscal year 2020 decreased 5.1% or $171.4 million from the prior
fiscal year. We estimate that this $171.4 million decrease in net sales is
comprised of (i) approximately $215.7 million of lower sales volume, excluding
MSC Mexico operations; and (ii) $1.0 million of unfavorable foreign exchange
impact; partially offset by (iii) $17.5 million of net sales from MSC Mexico,
which commenced operations in February 2019 ; and (iv) approximately $27.8
million from improved pricing, inclusive of changes in customer and product mix,
discounting and other items. Of the above $171.4 million decrease in net sales,
sales to our government and national account programs ("Large Account
Customers") decreased by $27.8 million and sales other than to our Large Account
Customers decreased by $143.6 million , which includes $17.5 million of net sales
from MSC Mexico partially offsetting the decrease.
The table below shows the change in our fiscal quarterly and annual 2020 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 Thirteen
-Week -Week
Period Thirteen-Week Thirteen-Week Period
Ended Period Ended Period Ended Ended Fiscal Year
2020 vs. 2019 Fiscal Period Fiscal Q1 Fiscal Q2 Fiscal Q3 Fiscal Q4 Ended
Net Sales (in thousands) $ 823,601 $ 786,094 $ 834,972 $ 747,732 $ 3,192,399
Sales Days 62 61 64 64 251
Average Daily Sales (ADS)(1) (in 13.3 12.9 13.0 11.7 12.7
millions) $ $ $ $ $
Total Company ADS Percent Change -1.0% -2.9% -3.6% -12.7% -5.1%
Manufacturing Customers ADS Percent -1.3% -3.7% -17.0% -19.6% -10.6% Change Manufacturing Customers Percent of 70% 70% 59% 65% 66%
Total
Non-Manufacturing Customers ADS -0.3% -1.0% 26.2% 3.4% 7.8% Percent Change Non-Manufacturing Customers Percent 30% 30% 41% 35% 34%
of Total
(1) ADS is calculated using number of business days in the US
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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 59.2% of consolidated net sales for the fiscal year
ended August 29, 2020 , compared to 60.0% of consolidated net sales for the
fiscal year ended August 31, 2019 . This percentage decline is primarily related
to the higher volume of safety and janitorial product sales in the current
fiscal year that were not transacted through our eCommerce platforms. These
percentages of consolidated net sales do not include eCommerce sales from our
AIS and MSC Mexico operations.
Gross Profit
Gross profit margin was 42.1% in fiscal 2020 as compared to 42.6% in fiscal 2019. The decline was primarily the result of increased product costs and changes in our customer and product mix. In addition, 30 basis points of the decline resulted from MSC Mexico operations which commenced in the fiscal second quarter of 2019. Operating Expenses Operating expenses decreased 3.8% to$992.6 million in fiscal 2020, as compared to$1.032 billion in fiscal 2019. Operating expenses were 31.1% of fiscal 2020 net sales, as compared to 30.7% for fiscal 2019. The decrease in operating expenses was primarily attributable to a decrease in payroll and payroll-related costs, freight costs associated with lower sales volumes, and travel and entertainment costs, partially offset by the increases in depreciation and amortization, severance and separation costs, and consulting costs discussed below and higher operating expenses for MSC Mexico. Payroll and payroll-related costs, excluding severance and separation charges, were approximately 55.7% of total operating expenses for fiscal 2020, as compared to approximately 55.9% for fiscal 2019. 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, decreased for fiscal 2020, as compared to fiscal 2019, with much of the decrease attributable to a decrease in salary expenses, primarily related to a decrease in associate headcount. Freight expense was approximately$125.9 million for fiscal 2020, as compared to$138.2 million for fiscal 2019. The primary driver of this was decreased sales volumes. Travel and entertainment expense was$8.0 million for fiscal 2020, as compared to$14.6 million for fiscal 2019. This decrease was due to the Company's travel restrictions in place resulting from the COVID-19 pandemic. Depreciation and amortization was$68.7 million for fiscal 2020, as compared to$65.0 million for fiscal 2019. The primary driver of this increase was a greater investment in capital projects related to information technology and vending solutions, which generally have shorter useful lives. For fiscal 2020, we incurred approximately$6.6 million in consulting costs related to the optimization of the Company's operations and approximately$10.4 million in severance and separation related costs as compared to$6.7 million in severance and separation related costs in fiscal 2019. This contributed to the increase in operating expenses as a percentage of net sales. In addition, the operations of MSC Mexico, which commenced in our second quarter of fiscal 2019, accounted for$6.0 million in incremental costs for fiscal 2020, as compared to the prior fiscal year. Income from Operations Income from operations decreased 12.3% to$350.7 million in fiscal 2020, as compared to$400.0 million in fiscal 2019. This was primarily attributable to the decreases in net sales and gross profit, partially offset by the decrease in operating expenses as described above. Income from operations as a percentage of net sales decreased to 11.0% for fiscal 2020, from 11.9% for fiscal 2019, primarily as the result of the decrease in the gross profit margin and an increase in operating expenses as a percentage of net sales as mentioned above.
Provision for Income Taxes
Our effective tax rate for fiscal 2020 was 24.7% as compared to 24.6% in fiscal 2019. See Note 7 "Income Taxes" in the Notes to the Consolidated Financial Statements for further information.
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Net Income
The factors which affected net income for fiscal 2020 as compared to the prior period have been discussed above.
Fiscal Year Ended
The table below summarizes the Company's results of operations both in dollars (in thousands) and as a percentage of net sales for the periods indicated:
Fiscal Years Ended
August 31, 2019 September 1, 2018
(52 weeks) (52 weeks) Change
$ % $ % $ %
Net sales $ 3,363,817 100.0% $ 3,203,878 100.0% $ 159,939 5.0%
Cost of goods sold 1,931,774 57.4% 1,810,917 56.5% 120,857 6.7%
Gross profit 1,432,043 42.6% 1,392,961 43.5% 39,082 2.8%
Operating expenses 1,032,047 30.7% 972,408 30.4% 59,639 6.1%
Income from operations 399,996 11.9% 420,553 13.1% (20,557) (4.9)%
Total other expense (16,867) (0.5)% (14,364) (0.4)% (2,503) 17.4%
Income before provision
for income taxes 383,129 11.4% 406,189 12.7% (23,060) (5.7)%
Provision for income
taxes 94,332 2.8% 76,966 2.4% 17,366 22.6%
Net income 288,797 8.6% 329,223 10.3% (40,426) (12.3)%Less: Net income (loss) attributable to noncontrolling interest (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 MSCMexico operations; (ii)$45.2 million from AIS; (iii)$23.2 million from MSCMexico , which commenced operations inFebruary 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 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$23.2 million of net sales from AIS and MSC Mexico, respectively. 25 -------------------------------------------------------------------------------- The table below shows the change in our fiscal quarterly and annual 2019 average daily sales by total company and by customer type compared to the same periods in the prior fiscal year: Average Daily Sales Percentage Change (unaudited) Thirteen Thirteen -Week -Week Period Thirteen-Week Thirteen-Week Period Ended Period Ended Period Ended Ended Fiscal Year 2019 vs. 2018 Fiscal Period Fiscal Q1 Fiscal Q2
Fiscal Q3 Fiscal Q4 Ended
Net Sales (in thousands)$ 831,597 $ 823,004 $ 866,546 $ 842,670 $ 3,363,817 Sales Days 62 62 64 63 251 Average Daily Sales (ADS) (in 13.4 13.3 13.6 13.4 13.4 millions) $ $ $ $ $ Total Company ADS Percent Change 8.2% 8.8% 4.6% 2.1% 5.8% Manufacturing Customers ADS Percent 8.7% 8.6% 5.1% 2.5% 6.2%
Change
Manufacturing Customers Percent of 71% 71% 69% 70% 70%
Total
Non-Manufacturing Customers ADS 6.9% 9.5% 3.4% 1.2% 5.0% Percent Change Non-Manufacturing Customers Percent 29% 29% 31% 30% 30%
of Total
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 fiscal year endedAugust 31, 2019 , compared to 60.1% of consolidated net sales for the fiscal year endedSeptember 1, 2018 . These percentages of consolidated net sales do not include eCommerce sales from the acquisitions ofDECO 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 fiscal 2019 net sales, 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. 26
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Freight expense was approximately
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.
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.
Liquidity and Capital Resources
August 29, August 31,
2020 2019 $ Change
(Amounts in thousands)
Total debt $ 619,266 $ 441,884 $ 177,382
Less: Cash and cash equivalents (125,211) (32,286) (92,925)
Net debt $ 494,055 $ 409,598 $ 84,457
Equity $ 1,320,573 $ 1,483,879 $ (163,306)
As of August 29, 2020 , we held $125.2 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 29, 2020 , total
borrowings outstanding, representing amounts due under our credit facilities,
Private Placement Debt, and Shelf Facility Agreements, as well as all finance
leases and financing arrangements, were $619.3 million , net of unamortized debt
issuance costs of $0.8 million . 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 $1.2 million . The Company elected to draw down on the Committed
Facility to increase its cash position as a precautionary measure and to
preserve financial flexibility in consideration of the disruption and
uncertainty surrounding the ongoing COVID-19 pandemic.
We believe, based on our current business plan, that our existing cash, and cash
flow from operations, will be sufficient to fund necessary capital expenditures
and operating cash requirements for at least the next twelve months. The Company
further believes that its financial resources, along with managing discretionary
expenses, will allow it to manage the anticipated impact of COVID-19 on the
Company's business operations for the foreseeable future, which will
include reduced sales and net income levels for the Company. We have reduced
spending more broadly across the Company, only proceeding with operating and
capital spending that is critical. We have ceased substantially all hiring and
reduced
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discretionary expenses. Looking ahead, we have developed contingency plans to reduce costs further if the situation deteriorates. The challenges posed by COVID-19 on the Company's business are evolving rapidly. Consequently, the Company will continue to evaluate its financial position in light of future developments, particularly those relating to COVID-19.
The table below summarizes information regarding the Company's cash flows:
Fiscal Years Ended
August 29, August 31, September 1,
2020 2019 2018
(Amounts in thousands)
Net cash provided by operating
339,658 activities Net cash used in investing$ (49,277) $ (36,373) $ (131,919) activities Net cash used in financing$ (254,618) $ (305,629) $ (177,586) activities Effect of foreign exchange rate changes on cash and cash $ 81$ (355) $
(19)
equivalents
Net increase (decrease) in cash
30,134
and cash equivalents
Operating Activities
Net cash provided by operating activities for the fiscal years ended August 29,
2020 and August 31, 2019 was $396.7 million and $328.4 million , respectively.
There are various increases and decreases contributing to this change. A
decrease in the change in accounts receivable and in inventories resulting from
lower sales volumes, partially offset by a decrease in net income and a decrease
in the change in accounts payable and accrued liabilities contributed to most of
the increase in net cash provided by 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.
Fiscal Years Ended
August 29, August 31, September 1,
2020 2019 2018
(Dollars in thousands)
Working Capital $ 829,037 $ 752,696 $ 656,984
Current Ratio 3.0 2.7 2.3
Days Sales Outstanding 58.2 56.8 55.6
Inventory Turnover 3.3 3.5 3.7
The increase in working capital and the current ratio at
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, decreased resulting from lower sales volumes and increased safety and janitorial inventory levels.
Investing Activities
Net cash used in investing activities for the fiscal years endedAugust 29, 2020 andAugust 31, 2019 was$49.3 million and$36.4 million , respectively. The use of cash for both periods included expenditures for property, plant, and equipment and the acquisition of certain assets of TAC Insumos Industriales,S. de R.L. de C.V. and certain of its affiliates (together, "TAC"). Fiscal 2019 included a source of cash associated with proceeds from the sale ofColumbus-Franklin County Finance Authority bonds of$27.0 million , partially offsetting the uses of cash mentioned above. 28 -------------------------------------------------------------------------------- Net cash used in investing activities for the fiscal years endedAugust 31, 2019 andSeptember 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 onMay 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 in fiscal 2018 consisted of expenditures for property, plant, and equipment. Financing Activities Net cash used in financing activities for the fiscal years endedAugust 29, 2020 andAugust 31, 2019 was$254.6 million and$305.6 million , respectively. The major components contributing to the use of cash for fiscal 2020 were the regular and special dividends paid of$444.2 million and payments under Shelf Facility and Private Placement of$20.0 million . These were partially offset by proceeds from the issuance of long-term debt of$100.0 million and net borrowings under all the credit facilities of$96.2 million . 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 . Net cash used in financing activities for the fiscal years endedAugust 31, 2019 andSeptember 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 .
Debt
Credit Facilities
InApril 2017 , the Company entered into the$600.0 million Committed Facility. The Company also has six Uncommitted Facilities, totaling$415.0 million of maximum uncommitted availability. See Note 9 "Debt" in the Notes to the Consolidated Financial Statements for more information about the credit facilities. As ofAugust 29, 2020 , the Company had outstanding borrowings of$1.2 million under the Uncommitted Facilities and$250.0 million under the Committed Facility. As ofAugust 29, 2020 , we were in compliance with the operating and financial covenants of the credit facilities. The Company made additional payments of$80.0 million throughOctober 1, 2020 on the Committed Facility. The current unused balance of$425.8 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
InJuly 2016 , we completed the issuance and sale of unsecured senior notes. InJanuary 2018 , we entered into two Note Purchase and Private Shelf Agreements. InJune 2018 andMarch 2020 , we entered into additional note purchase agreements. See Note 9 "Debt" in the Notes to the Consolidated Financial Statements for more information about these transactions.
Finance Leases and Financing Arrangements
From time to time, we enter into finance leases and financing arrangements. See Note 10 "Leases" and Note 9 "Debt," respectively, in the Notes to the Consolidated Financial Statements for more information about our finance lease and financing arrangements. Operating Leases
As of
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leases, which expire on varying dates through fiscal 2024. See Note 10 "Leases"
in the Notes to the Consolidated Financial Statements for more information about
our operating lease arrangements.
Capital Expenditures
We continue to invest in sales productivity initiatives, eCommerce and vending platforms, customer fulfillment centers and distribution network, and in other infrastructure and technology.
Contractual Obligations
The following table summarizes our undiscounted contractual obligations at
Less than More than 5
Contractual Obligations Total 1 year 1 - 3 years 3 - 5 years years
Operating lease obligations(1) $ 60,928 $ 23,272 $ 22,659 $ 8,950 $ 6,047
Finance lease obligations(2) 3,892 1,375 2,362 155 -
Maturities of long-term debt, net of 515,000 20,000 275,000 70,000 150,000
interest(3)
Estimated interest on long-term 47,812 10,432 20,763 11,117 5,500
debt(4)
Total contractual obligations $ 627,632 $ 55,079 $
320,784
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(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 2024. See Note 10 in the Notes to the Consolidated Financial Statements for additional information on our operating lease arrangements. (2)As ofAugust 29, 2020 , the Company has entered into various financing leases for certain IT equipment, which expire on varying dates through fiscal 2025. See Note 10 in the Notes to the Consolidated Financial Statements for additional information on our financing 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.
The Company has recorded a non-current liability of$11.6 million for tax uncertainties and interest as ofAugust 29, 2020 . 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. More information on the critical accounting estimates can be found in Note 1 "Business and Summary of Significant Accounting Policies" in the Notes to the Consolidated Financial Statements.
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.
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Inventories
Inventory is reflected at the lower of weighted average cost or market 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.
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. 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.
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 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 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.
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