SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 2, 2002 Commission file number: 1-14130 MSC INDUSTRIAL DIRECT CO., INC. (Exact name of registrant as specified in its charter) NEW YORK 11-3289165 (State of incorporation) (IRS Employer Identification No.) 75 MAXESS ROAD MELVILLE, NY 11747 (Address of principal executive offices, including zip code) (516) 812-2000 (Registrant's telephone number, including area code) 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 [ X ] No [ ] As of April 4, 2002 37,162,246 shares of Class A Common Stock and 33,203,825 shares of Class B Common Stock of the registrant were outstanding.
MSC INDUSTRIAL DIRECT CO., INC. INDEX <TABLE> <CAPTION> <S> <C> <C> PART I. FINANCIAL INFORMATION PAGE ---- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets - March 2, 2002 and September 1, 2001 3 Consolidated Statements of Income - Thirteen and twenty-six weeks ended March 2, 2002 and February 24, 2001 4 Consolidated Statement of Shareholders' Equity - Twenty-six weeks ended March 2, 2002 5 Consolidated Statements of Cash Flows - Twenty-six weeks ended March 2, 2002 and February 24, 2001 6 Notes to Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17 SIGNATURES 18 </TABLE>
PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS <TABLE> <CAPTION> MSC INDUSTRIAL DIRECT CO., INC. Consolidated Balance Sheets (In thousands, except share data) March 2, September 1, 2002 2001 ---- ---- (Unaudited) (Audited) ASSETS <S> <C> <C> Current Assets: Cash and cash equivalents $ 62,485 $ 12,466 Accounts receivable, net of allowance for doubtful accounts of $5,066 and $4,927, respectively 93,109 95,263 Inventories 210,329 233,131 Prepaid expenses and other current assets 7,747 5,728 Deferred income taxes 4,862 5,264 --------- --------- Total current assets 378,532 351,852 --------- --------- Property, Plant and Equipment, net 117,174 121,149 --------- --------- Other Assets: Goodwill 63,354 63,354 Other 12,333 17,553 --------- --------- 75,687 80,907 --------- --------- Total Assets $ 571,393 $ 553,908 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 23,065 $ 25,776 Accrued liabilities 33,166 37,755 Current portion of long-term notes payable 214 214 --------- --------- Total current liabilities 56,445 63,745 Long-term notes payable 1,413 1,517 Deferred income tax liability 15,709 16,069 --------- --------- Total liabilities 73,567 81,331 --------- --------- Shareholders' Equity: Preferred stock; $0.001 par value; 5,000,000 shares authorized; none outstanding - - Class A common stock; $0.001 par value; 100,000,000 shares authorized; 36,724,744 and 36,133,385 shares issued, 35,770,744 and 35,139,385 shares outstanding, 36 respectively 36 Class B common stock; $0.001 par value; 50,000,000 shares authorized; 33,453,825 and 33,478,778 shares issued and outstanding, respectively 34 34 Additional paid-in capital 246,143 238,314 Retained earnings 270,327 253,704 Treasury stock, at cost, 954,000 and 994,000 shares, respectively (18,714) (19,511) --------- --------- Total shareholders' equity 497,826 472,577 --------- --------- Total Liabilities and Shareholders' Equity $ 571,393 $ 553,908 ========= ========= </TABLE> The accompanying notes are an integral part of these consolidated balance sheets. Page 3
<TABLE> <CAPTION> MSC INDUSTRIAL DIRECT CO., INC. Consolidated Statements of Income (Unaudited) Thirteen Weeks Ended Twenty-Six Weeks Ended ---------------------------------- ---------------------------------- (In thousands, except net income March 2, February 24, March 2, February 24, per share data) 2002 2001 2002 2001 ---------------- -------------- ---------------- --------------- <S> <C> <C> <C> <C> Net sales $ 194,791 $ 223,089 $ 383,643 $ 444,973 Cost of goods sold 109,461 127,315 215,834 255,913 --------- --------- --------- --------- Gross profit 85,330 95,774 167,809 189,060 Operating expenses 71,264 70,794 140,481 140,350 --------- --------- --------- --------- Income from operations 14,066 24,980 27,328 48,710 --------- --------- --------- --------- Other Income (Expense): Interest income (expense), net 227 (1,115) 366 (2,349) Other income, net 54 51 97 63 --------- --------- --------- --------- Total other income (expense) 281 (1,064) 463 (2,286) --------- --------- --------- --------- Income before provision for income taxes 14,347 23,916 27,791 46,424 Provision for income taxes 5,667 9,566 10,977 18,570 --------- --------- --------- --------- Net income $ 8,680 $ 14,350 $ 16,814 $ 27,854 ========= ========= ========= ========= Per Share Information (Note 2): Net income per common share: Basic $ 0.13 $ 0.21 $ 0.24 $ 0.41 ========= ========= ========= ========= Diluted $ 0.12 $ 0.21 $ 0.24 $ 0.40 ========= ========= ========= ========= Common shares used in computing per share amounts (Note 2): Basic 69,012 68,102 68,821 68,030 ========= ========= ========= ========= Diluted 71,429 69,609 70,838 69,233 ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of these consolidated statements. Page 4
MSC INDUSTRIAL DIRECT CO., INC. Consolidated Statement of Shareholders' Equity (Unaudited) <TABLE> <CAPTION> Class A Class B (In thousands) -------------------- --------------- Common Stock Common Stock Additional --------------------- ---------------- Paid-In Retained Shares Amount Shares Amount Capital Earnings --------- ---------- ------- -------- --------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> Twenty-six weeks ended March 2, 2002: Balance, September 1, 2001 36,133 $ 36 33,479 $ 34 $ 238,314 $ 253,704 Exchange of Class B common stock for Class A common stock 25 -- (25) -- -- -- Common stock issued under associate stock -- -- -- -- -- (191) purchase plan Exercise of common stock options, including 567 -- -- -- 7,829 -- income tax benefits Net income -- -- -- -- -- 16,814 --------- ---------- ------- -------- --------------- ------------- Balance, March 2, 2002 36,725 $ 36 33,454 $ 34 $ 246,143 $ 270,327 ========= ========== ======= ======== =============== ============= <CAPTION> (In thousands) Treasury Stock ------------------------ Shares Amount at Cost Total -------- --------------- ----------- <S> <C> <C> <C> <C> Twenty-six weeks ended March 2, 2002: Balance, September 1, 2001 994 $ (19,511) $472,577 Exchange of Class B common stock for Class A common stock -- -- -- Common stock issued under associate stock (40) 797 606 purchase plan Exercise of common stock options, including -- -- 7,829 income tax benefits Net income -- -- 16,814 -------- --------------- ----------- Balance, March 2, 2002 954 $ (18,714) $497,826 ======== =============== =========== </TABLE> The accompanying notes are an integral part of these consolidated statements Page 5
MSC INDUSTRIAL DIRECT CO., INC. Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> (In thousands) Twenty-Six Weeks Ended ------------------------------------------- March 2, February 24, 2002 2001 ----------------- ------------------ <S> <C> <C> Cash Flows from Operating Activities: Net income $ 16,814 $ 27,854 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,648 8,110 Amortization of deferred stock compensation -- 209 Provision for doubtful accounts 1,432 1,028 Deferred income taxes 42 1,728 Changes in operating assets and liabilities: Accounts receivable 722 (9,532) Inventories 22,802 3,022 Prepaid expenses and other current assets (2,019) (219) Other assets 5,220 4,103 Accounts payable and accrued liabilities (6,589) (12,725) ----------------- ------------------ Total adjustments 29,258 (4,276) ----------------- ------------------ Net cash provided by operating activities 46,072 23,578 ----------------- ------------------ Cash Flows from Investing Activities: Expenditures for investments -- (1,852) Expenditures for property, plant and equipment (3,673) (11,068) ----------------- ------------------ Net cash used in investing activities (3,673) (12,920) ----------------- ------------------ Cash Flows from Financing Activities: Net proceeds from associate stock purchase plan 606 238 Net proceeds from exercise of common stock options 7,118 2,214 Net repayments of notes payable (104) (2,828) ----------------- ------------------ Net cash provided by (used in) financing activities 7,620 (376) ----------------- ------------------ Net increase in cash and cash equivalents 50,019 10,282 Cash and cash equivalents - beginning of period 12,466 3,209 ----------------- ------------------ Cash and cash equivalents - end of period $ 62,485 $ 13,491 ================= ================== Supplemental Disclosure: Cash paid for interest 22 2,065 Cash paid for income taxes 7,970 10,073 </TABLE> The accompanying notes are an integral part of these consolidated statements. Page 6
Notes to Consolidated Financial Statements (In thousands, except per share data) (Unaudited) 1. MSC Industrial Direct Co., Inc. ("MSC") was incorporated in the State of New York on October 24, 1995. MSC and its subsidiaries, including its principal operating subsidiary, Sid Tool Co., Inc., are hereinafter referred to collectively as the "Company." Reference is made to the Notes to Consolidated Financial Statements contained within the Company's audited financial statements included in MSC's annual report on Form 10-K for the year ended September 1, 2001. In the opinion of management, the interim unaudited financial statements included herein reflect all adjustments necessary, consisting of normal recurring adjustments, for a fair presentation of such data in accordance with generally accepted accounting principles. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. The Company's fiscal year ends on a Saturday close to August 31 of each year. 2. The Company follows the provisions of the Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS No. 128 requires the Company to present basic and diluted earnings per share ("EPS") on the face of the income statement. Basic earnings per common share were computed based on the weighted average number of common shares issued and outstanding during the relevant periods. Diluted earnings per common share were computed based on the weighted average number of common shares issued and outstanding plus additional shares assumed to be outstanding to reflect the diluted effect of common stock equivalents using the treasury stock method. Page 7
A reconciliation between the numerator and denominator of the basic and diluted EPS calculation is as follows: <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------------------ ------------------------------- March 2, February 24, March 2, February 24, 2002 2001 2002 2001 -------------- -------------- -------------- ------------- <S> <C> <C> <C> <C> Net income for EPS Computation $8,680 $14,350 $16,814 $27,854 ======== ======= ======= ======= Basic EPS: Weighted average Common shares 69,012 68,102 68,821 68,030 ======== ======= ======= ======= Basic EPS $0.13 $0.21 $0.24 $0.41 ======== ======= ======= ======= Diluted EPS: Weighted average Common shares 69,012 68,102 68,821 68,030 Shares issuable from Assumed conversion of Common stock equivalents 2,417 1,507 2,017 1,203 -------- ------- ------- ------- Weighted average common and common equivalent shares 71,429 69,609 70,838 69,233 ======== ======= ======= ======= Diluted EPS $0.12 $0.21 $0.24 $0.40 ======== ======= ======= ======= </TABLE> Page 8
3. Certain prior year balances have been reclassified to conform with current year presentation. 4. In July 2000, the Emerging Issue Task Force ("EITF") reached a consensus with respect to EITF issue 00-10, "Accounting for Shipping and Handling Fees and Costs." The purpose of this issue discussion was to clarify the classification of shipping and handling fees and costs. The consensus reached was that all shipping and handling billed to customers is revenue and the cost associated with these revenues should be classified as either cost of sales or, if not cost of sales, as selling, general, and administrative costs, with footnote disclosure as to the classification and amount of these costs. This standard requires a reclassification of prior periods as discussed below. Beginning in fiscal 2001, the Company recorded the amounts billed to customers for shipping and handling in net revenues and classified the costs associated with these revenues in operating expenses. Prior to this standard, the Company had recorded net freight as a component of total operating expenses. The Company has reclassified financial information for all periods presented to give effect to the adoption of this new standard. Shipping and handling costs included in operating expenses were $10.2 million and $11.6 million for 13 week period ended March 2, 2002 and February 24, 2001, respectively, and $20.0 million and $22.4 million for the 26 week period ended March 2, 2002 and February 24, 2001, respectively. 5. In July 2001, the FASB issued Statements of Financial Accounting Standards No. 141, "Business Combinations" and No. 142, "Goodwill and other Intangible Assets". SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently, if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The Company has adopted this standard effective September 2, 2001 and has evaluated its intangible asset to identify goodwill separately from other identifiable intangibles. The intangible asset is classified as goodwill with an indefinite life; no other separately identifiable intangibles exist. Intangible assets that will continue to be classified as goodwill or as other intangibles with indefinite lives will no longer be amortized. This resulted in the exclusion of approximately $0.5 million and $0.9 million in amortization expense for the 13 and 26 week periods ended March 2, 2002, respectively. In accordance with the SFAS No. 142, intangible assets, including purchased goodwill, will be evaluated periodically for impairment. Based upon the results of our transitional impairment testing, there has been no material impact on the consolidated financial results related to our intangible assets or purchased goodwill. Page 9
The following table presents pro forma net income and earnings per share data restated to include the retroactive impact of the adoption of SFAS No. 142: <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended ---------------------------------- -------------------------------- March 2, February 24, March 2, February 24, 2002 2001 2002 2001 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Reported net income for EPS computation $ 8,680 $ 14,350 $ 16,814 $ 27,854 Add back: Goodwill amortization, net of tax - 264 - 528 ------------- ----------- ------------ ---------- Pro forma net income $ 8,680 $ 14,614 $ 16,814 $ 28,382 ============= =========== ============ ========== Basic EPS: Basic EPS before SFAS $ 0.13 $ 0.21 $ 0.24 $ 0.41 No.142 SFAS No. 142 effect, net of tax - - - 0.01 ------------- ----------- ------------ ---------- Basic EPS after SFAS No. 142 $ 0.13 $ 0.21 $ 0.24 $ 0.42 Diluted EPS: Diluted EPS before SFAS $ 0.12 $ 0.21 $ 0.24 $ 0.40 No.142 SFAS No. 142 effect, net of tax - - - 0.01 ------------- ----------- ------------ ---------- Diluted EPS after SFAS No. 142 $ 0.12 $ 0.21 $ 0.24 $ 0.41 ============= =========== ============ ========== Weighted average common shares: Basic 69,012 68,102 68,821 68,030 Diluted 71,429 69,609 70,838 69,233 </TABLE> 6. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of this statement are required to be adopted no later than fiscal years beginning after December 31, 2001, with early adoption encouraged. The adoption of this SFAS No. 144 is not expected to have a material impact on our consolidated financial statements. Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is intended to update the information contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 1, 2001 and presumes that readers have access to, and will have read, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in such Form 10-K. This Quarterly Report on Form 10-Q contains or incorporates certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. Such forward-looking statements involve known and unknown risks and uncertainties and include, but are not limited to, statements regarding future events and our plans, goals and objectives. Such statements are generally accompanied by words such as "believe," "anticipate," "think," "intend," "estimate," "expect," or similar terms. Our actual results may differ materially from such statements. Factors that could cause or contribute to such differences include, without limitation, changing market conditions, competitive and regulatory matters, general economic conditions in the markets in which the Company operates, the risk of war, terrorism and similar hostilities, and availability of suitable acquisition opportunities. Although the Company believes that the assumptions underlying its forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, the Company cannot make any assurances that the results contemplated in such forward-looking statements will be realized. The inclusion of such forward-looking information should not be regarded as a representation by the Company or any other person that the future events, plans or expectations contemplated by the Company will be achieved. Furthermore, past performance is not necessarily an indicator of future performance. OVERVIEW MSC Industrial Direct Co., Inc. ("MSC") was formed in October 1995 and has conducted business since 1941. MSC and its subsidiaries, including Sid Tool Co., Inc. (the "Operating Subsidiary"), are hereinafter referred to collectively as the "Company." MSC is one of the largest direct marketers of a broad range of industrial products to small and mid-sized industrial customers throughout the United States. We distribute a full line of industrial products intended to satisfy our customers' maintenance, repair and operations ("MRO") supplies requirements. We offer in excess of 500,000 stock-keeping units ("SKUs") through our master catalogs, weekly, monthly and quarterly specialty and promotional catalogs and brochures and service our customers from approximately 90 branch offices and four distribution centers. Most 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. Page 11
RESULTS OF OPERATIONS - THIRTEEN WEEKS ENDED MARCH 2, 2002 AND FEBRUARY 24, 2001 NET SALES decreased by $28.3 million, or 12.7%, to $194.8 million in the second quarter of fiscal 2002 from $223.1 million in the second quarter of fiscal 2001. This decrease was primarily attributable to a decrease in sales to existing customers, most of which are in the manufacturing sector, which have been affected by the recession and continued uncertainty in the industrial sector. GROSS PROFIT decreased by $10.5 million, or 11.0%, to $85.3 million in the second quarter of fiscal 2002 from $95.8 million in the second quarter of fiscal 2001, primarily due to lower net sales as discussed above. As a percentage of net sales, gross profit increased from 42.9% to 43.8%. The increase in gross profit as a percentage of net sales was the result of modest price increases, a favorable change in product mix, more favorable discounts obtained from vendors, and the success of the Company's efforts to increase gross profit margins with new and existing customers. OPERATING EXPENSES increased by $0.5 million, or 0.7%, to $71.3 million in the second quarter of fiscal 2002 from $70.8 million in the second quarter of fiscal 2001. The slight increase in operating expenses in dollars was a result of the costs associated with the strategic increase in the Company's sales force to take advantage of opportunities to gain market share, as well as other payroll related costs as compared to the second quarter of fiscal 2001. These expenses were offset by cost control initiatives and a decline in volume related expenses. As a percentage of net sales, operating expenses increased from 31.7% to 36.6%, primarily as a result of the distribution of fixed expenses over a smaller revenue base. INCOME FROM OPERATIONS decreased by $10.9 million, or 43.6%, to $14.1 million in the second quarter of fiscal 2002 from $25.0 million in the second quarter of fiscal 2001. The decrease was primarily attributable to the decrease in net sales described above, although results were favorably impacted by the increased gross profit margins described above. INTEREST INCOME (EXPENSE), NET. Net interest income was $0.2 million for the second quarter of fiscal 2002 compared to net interest expense of $1.1 million for the second quarter of fiscal 2001. The change from net interest expense to net interest income reflects the Company's repayment of almost all of its outstanding debt during fiscal 2001. As a result, the Company now has net interest income in the second quarter of fiscal 2002, resulting from invested cash. PROVISION FOR INCOME TAXES AND NET INCOME: The effective tax rate was 39.5% for the second quarter of fiscal 2002 as compared to 40.0% in the second quarter of fiscal 2001. Net income decreased by $5.7 million, or 39.6%, to $8.7 million in the second quarter of fiscal 2002 from $14.4 million in the second quarter of fiscal 2001. This decrease was primarily the result of decreases in income from operations explained above. Page 12
RESULTS OF OPERATIONS - TWENTY-SIX WEEKS ENDED MARCH 2, 2002 AND FEBRUARY 24, 2001 NET SALES decreased by $61.4 million, or 13.8%, to $383.6 million during the first half of fiscal 2002 from $445.0 million in the first half of fiscal 2001. This decrease was primarily attributable to a decrease in sales to existing customers, most of which are in the manufacturing sector, which have been affected by the recession and continued uncertainty in the industrial sector. The Company believes that the events of September 11, 2001 also had a detrimental effect on the Company's net sales in the first quarter of fiscal 2002; however, that effect cannot be reliably estimated. GROSS PROFIT decreased by $21.3 million, or 11.3%, to $167.8 million during the first half of fiscal 2002 from $189.1 million in the first half of fiscal 2001, primarily due to lower net sales as discussed above. As a percentage of net sales, gross profit increased from 42.5% to 43.7%. The increase in gross profit as a percentage of net sales was the result of modest price increases, a favorable change in product mix, more favorable discounts obtained from vendors, and the success of the Company's efforts to increase gross profit margins with new and existing customers. OPERATING EXPENSES remained constant at approximately $140.5 million during the first half of fiscal 2002 and the first half of fiscal 2001. The slight increase in operating expenses in dollars was a result of the costs associated with the strategic increase (during the latter part of fiscal 2001) in the Company's sales force to take advantage of opportunities to gain market share, as compared to the first half of fiscal 2001 and an increase in other payroll related costs as compared to the first half of fiscal 2001. These expenses were offset by cost control initiatives and a decline in volume related expenses. As a percentage of net sales, operating expenses increased from 31.5% to 36.6%, primarily as a result of the distribution of fixed expenses over a smaller revenue base. INCOME FROM OPERATIONS decreased by $21.4 million, or 43.9%, to $27.3 million during the first half of fiscal 2002 from $48.7 million in the first half of fiscal 2001. The decrease was primarily attributable to the decrease in net sales described above, although results were favorably impacted by the increased gross profit margins described above. INTEREST INCOME (EXPENSE), NET. Net interest income was $0.4 million for the first half of fiscal 2002 compared to net interest expense of $2.3 million for the first half of fiscal 2001. The change from net interest expense to net interest income reflects the Company's repayment of almost all of its outstanding debt during fiscal 2001. As a result, the Company now has net interest income in the first half of fiscal 2002, resulting from invested cash. PROVISION FOR INCOME TAXES AND NET INCOME: The effective tax rate was approximately 39.5% for the first half of fiscal 2002 as compared to 40.0% in the first half of fiscal 2001. Net income decreased by $11.1 million, or 39.8%, to $16.8 million in the first half of fiscal 2002 from $27.9 million in the first half of fiscal 2001. This decrease was primarily the result of decreases in income from operations explained above. Page 13
LIQUIDITY AND CAPITAL RESOURCES Our primary capital needs have been to fund the working capital requirements necessitated by our sales growth, adding new products, and facilities expansions. Our primary sources of financing have been cash from operations, supplemented by bank borrowings under our credit facility. We anticipate cash flows from operations and available lines of credit will be adequate to support our operations for the next 12 months. Under the terms of the credit facility, the maximum permitted borrowings are $110.0 million under an unsecured revolving credit agreement. Interest on amounts borrowed may be paid at a rate per annum equal to the bank's base rate (4.75% at March 2, 2002) or, alternatively, at the bankers' acceptance rate or LIBOR rate plus margins, which vary from per annum based on the ratio of total liabilities to effective net worth, or bid note rate. This credit facility contains certain covenants limiting mergers, use of proceeds, indebtedness, liens, investments, sales of assets, acquisitions, and payment of dividends. This credit facility also contains certain standard financial covenants. As of March 2, 2002 the Company had no outstanding borrowings under this agreement and was in compliance with all financial covenants. Net cash provided by operating activities for the 26 week period ended March 2, 2002 and February 24, 2001 was $46.1 million and $23.6 million, respectively. The change of approximately $22.5 million is primarily attributable to lower inventory levels, reflecting improved inventory control policies and a decrease in accounts receivable. Net cash used in investing activities for the 26 week periods ended March 2, 2002 and February 24, 2001 was $3.7 million and $12.9 million, respectively. The net usage of cash in the first half of fiscal 2002 and fiscal 2001 was primarily attributable to expenditures for property, plant and equipment. Net cash provided by financing activities for the 26 week period ended March 2, 2002 was $7.6 million and net cash used in financing activities for the 26 week period ended February 24, 2001 was $0.4 million. Net cash provided by financing activities for the first half of fiscal 2002 was primarily attributable to proceeds from the exercise of common stock options. The net cash used in financing activities for the first half of fiscal 2001 was primarily attributable to repayments of notes payable, offset by proceeds received from the exercise of common stock options. The Company believes that cash flow from operations and the revolving credit agreement will be sufficient to fund future growth initiatives and meet planned capital expenditure needs in the near future. The Board of Directors of the Company has approved a stock repurchase plan (the "Plan") that would allow for the repurchase of up to 5 million shares of the Company's Class A common stock. The Plan allows the Company to repurchase shares at any time and in any increments it deems appropriate. Page 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's principal financial instrument is long-term notes payable under a credit agreement. The Company is affected by market risk exposure primarily through the effect of changes in interest rates on amounts payable by the Company under this credit agreement. Changes in these factors cause fluctuations in the Company's net income and cash flows. The agreement allows the company maximum borrowings of $110.0 million under a revolving credit agreement. At March 2, 2002, the Company had no outstanding borrowings under this agreement and was in compliance with all financial covenants. The agreement bears interest at the bank's base rate (4.75% at March 2, 2002), or, alternatively, at the bankers acceptance rate or LIBOR rate plus margins, which vary from 0.65% to 1.25% per annum based on the ratio of total liabilities to effective net worth, or bid note rate. The Company does not make material use of derivative financial instruments to hedge against changes in interest rates or for any other purpose. Page 15
PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On January 4, 2002 the Company held its 2002 Annual Meeting of Shareholders (the "Meeting"). In connection with the Meeting, the Company solicited proxies from its shareholders pursuant to Regulation 14 of the Securities Exchange Act of 1934. At the Meeting, the Company's shareholders elected as directors Mitchell Jacobson, Sidney Jacobson, David Sandler, Charles Boehlke, James Schroeder, Shelley Boxer, Roger Fradin, Denis Kelly, Raymond Langton, and Philip Peller. In addition, the shareholders approved the adoption of the Company's 2001 Stock Option Plan and ratified the selection by the Board of Directors of Arthur Andersen LLP as independent certified public accountants of the Company for fiscal year 2002. The following tables summarize the votes cast at the meeting on the matters brought before the shareholders: 1. Election of Directors Nominee Votes Votes Votes Broker Name For Against Withheld Non-Votes Mitchell Jacobson 298,577,498 8,670,323 0 0 Sidney Jacobson 298,577,247 8,670,574 0 0 David Sandler 298,576,438 8,671,383 0 0 Charles Boehlke 298,732,048 8,515,773 0 0 James Schroeder 298,577,498 8,670,323 0 0 Shelley Boxer 298,577,498 8,670,323 0 0 Roger Fradin 306,786,552 461,269 0 0 Denis Kelly 306,785,693 462,128 0 0 Raymond Langton 306,785,532 462,289 0 0 Philip Peller 306,785,693 462,128 0 0 2. Adoption of the Company's 2001 Stock Option Plan. Votes Votes Votes Broker For Against Withheld Non-Votes 297,506,286 9,731,126 10,409 1,961,895 3. Ratification of Arthur Andersen LLP as independent certified public accountants of the Company for fiscal year 2002. Votes Votes Votes Broker For Against Withheld Non-Votes 299,863,505 5,387,241 35,180 0 Page 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits: None. Reports on Form 8-K: No reports on Form 8-K have been filed during the quarter for which this report is filed. Page 17
SIGNATURES Pursuant to the requirements 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. MSC INDUSTRIAL DIRECT CO., INC. (Registrant) Dated: April 8, 2002 By: /s/ Mitchell Jacobson ----------------------- --------------------------- President and Chief Executive Officer Dated: April 8, 2002 By: /s/ Charles Boehlke ----------------------- ------------------------- Senior Vice President and Chief Financial Officer Page 18