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What changed in MSC INDUSTRIAL DIRECT CO INC's 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of MSC INDUSTRIAL DIRECT CO INC's 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+300 added−282 removedSource: 10-K (2023-10-25) vs 10-K (2022-10-20)

Top changes in MSC INDUSTRIAL DIRECT CO INC's 2024 10-K

300 paragraphs added · 282 removed · 217 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

87 edited+20 added−10 removed32 unchanged
Biggest changeWe can also interface directly with many purchasing portals; our “Better MRO” digital platform delivers knowledge and insights to our customers that assist their associates and their business operations; our collaboration efforts with key supplier partners and their research and development teams deliver value and productivity on the plant floor; our inventory management solutions enable our customers to carry less inventory and still significantly limit s ituations when critical items are out of stock; our proprietary software solution, called Ap Op ® (Application Optimization), enables our metalworking specialists to document productivity savings for customers for a range of applications, including grinding, milling, turning, threading, sawing, hole-making, metalworking fluids and other manufacturing process improvements; and 3 our exclusive service, MSC MillMax ® , focuses on maximizing milling productivity and lowering cost by reducing the milling optimization process to a fraction of the time.
Biggest changeWe can also interface directly with many metalworking applications, marketplaces and purchasing portals; • our “Better MRO” digital platform delivers knowledge and insights to our customers that assist their associates and their business operations; • our collaboration efforts with key supplier partners and their research and development teams deliver value and productivity on the plant floor; • our inventory management solutions enable our customers to carry less inventory and still significantly limit situations when critical items are out of stock; 3 Table of Contents • our proprietary software solution, called Ap Op ® (Application Optimization), enables our metalworking specialists to document productivity savings for customers for a range of applications, including grinding, milling, turning, threading, sawing, hole-making, metalworking fluids and other manufacturing process improvements; • our exclusive service, MSC MillMax ® , focuses on maximizing milling productivity and lowering cost while reducing the milling optimization process to a fraction of the time, which helps customers increase material removal rates, reduce cycle times, improve surface finishes and extend tool life, leading to improved productivity, quality and profits; and • our strategic partnership with MachiningCloud, an industry leader in manufacturing tool data, provides a one-stop solution for manufacturing customers’ machining application needs, and MachiningCloud’s platform and manufacturer-provided data combined with MSC’s vast product offerings and inventory availability, streamline the purchasing process and deliver greater efficiency in customers’ production processes.
Products and Supplier Services Our broad range of MRO products includes cutting tools, measuring instruments, tooling components, metalworking products, fasteners, flat stock, raw materials, abrasives, machinery hand and power tools, safety and janitorial supplies, plumbing supplies, materials handling products, power transmission components and electrical supplies.
Products and Supplier Services Our broad range of metalworking and MRO products includes cutting tools, measuring instruments, tooling components, metalworking products, fasteners, flat stock, raw materials, abrasives, machinery hand and power tools, safety and janitorial supplies, plumbing supplies, materials handling products, power transmission components and electrical supplies.
When an order enters the system, a credit check is performed; if the credit is approved, the order is usually transmitted to the customer fulfillment center closest to the customer. Customers are invoiced for merchandise, shipping and handling promptly after shipment.
When an order enters the system, a credit check is performed; if the credit is approved, the order is usually transmitted to the customer fulfillment center closest to the customer. Customers are invoiced for merchandise and shipping and handling promptly after shipment.
Associates are given access to health plan resources, disease management, tobacco cessation, parental support, stress management and weight loss programs. In addition, MSC provides retirement savings, paid holidays and time off, educational assistance and income protection benefits, as well as a variety of other programs to its associates.
Associates are given access to health plan resources, disease management, tobacco cessation, parental support, stress management and weight loss programs. In addition, MSC provides to its associates retirement savings, paid holidays and time off, educational assistance and income protection benefits, as well as a variety of other programs.
Our extensive network of suppliers provides us access to technical application, safety, training certifications and many other value-added services for our customers. We stand apart from our competitors by offering name brand, exclusive brand, and generic products, depth in our core product lines, and competitive pricing. We purchase substantially all of our products directly from more than 3,000 suppliers.
Our extensive network of suppliers provides us access to technical application, safety, training certifications and many other value-added services for our customers. We stand apart from our competitors by offering brand name, MSC exclusive brand and generic products, depth in our core product lines and competitive pricing. We purchase substantially all of our products directly from more than 3,000 suppliers.
MSC’s broad selection of products enables customers to choose the right combination of price and quality on every purchase to meet their needs. 4 Same-Day Shipping and Next-Day Delivery. We guarantee same-day shipping of our core metalworking and MRO products, enabling customers to reduce supply inventories. We fulfill our same-day shipment guarantee for in-stock products about 99% of the time.
MSC’s broad selection of products enables customers to choose the right combination of price and quality on every purchase to meet their needs. Same-Day Shipping and Next-Day Delivery. We guarantee same-day shipping of our core metalworking and MRO products, enabling customers to reduce supply inventories. We fulfill our same-day shipment guarantee for in-stock products about 99% of the time.
We have identified hundreds of additional national account prospects and have given our sales team tools to ensure we are targeting prospective customers that best fit the MSC model. 7 We have implemented advanced analytics and significantly increased the return on our marketing investments designed to acquire new customers and increase our share of business with current customers.
We have identified hundreds of additional national account prospects and have given our sales team tools to ensure we are targeting prospective customers that best fit the MSC model. We have implemented advanced analytics and significantly increased the return on our marketing investments designed to acquire new customers and increase our share of business with current customers.
We plan to achieve this by utilizing state-of-the-art cloud technologies, developing an industry leading search engine, deploying an integrated digital marketing platform and further enriching our product data. 8 In response to shifts in the labor market, we also look to accelerate automation in our customer fulfillment centers.
We plan to achieve this by utilizing state-of-the-art cloud technologies, developing an industry leading search engine, deploying an integrated digital marketing platform and further enriching our product data. In response to shifts in the labor market, we also look to accelerate automation in our customer fulfillment centers.
The trend of our industry toward consolidation could cause the industry to become more competitive as greater economies of scale are achieved by 9 competitors, or as competitors with new lower-cost business models are able to operate with lower prices and gross profit on products.
The trend of our industry toward consolidation could cause the industry to become more competitive as greater economies of scale are achieved by competitors, or as competitors with new lower-cost business models are able to operate with lower prices and gross profit on products.
We are expanding our efforts to achieve ISO 45001 certification throughout the supply chain network in the coming years. 10 Diversity, Equity and Inclusion MSC is committed to promoting a respectful, diverse workplace, constructive collaboration, innovative creativity, and genuine leadership.
We are expanding our efforts to achieve ISO 45001 certification throughout the supply chain network in the coming years. Diversity, Equity and Inclusion MSC is committed to promoting a respectful, diverse workplace, constructive collaboration, innovative creativity, and genuine leadership.
Our large and growing number of SKUs makes us an increasingly valuable partner to our customers as they look to trim their supplier base. Our assortment from multiple product suppliers and MSC exclusive brands, prices and quality levels enables our customers to select from “good-better-best” options on nearly all of their purchases.
Our large and growing number of SKUs makes us an increasingly valuable partner to our customers as they look to rationalize their supplier base. Our assortment from multiple product suppliers and MSC exclusive brands, prices and quality levels enables our customers to select from “good-better-best” options on nearly all of their purchases.
We carry many of the products we sell in our inventory, so that orders for these in-stock products are processed and fulfilled the day the order is received. We offer next-day delivery nationwide for qualifying orders placed by 8 p.m. Eastern Time (excluding Class C (“Consumables”) category products).
We carry many of the products we sell in our inventory, so that orders for these in-stock products are processed and fulfilled the day the order is received. We offer next-day delivery nationwide for qualifying orders placed by 8 p.m. Eastern Time (excluding Class C Consumables category products).
These solutions take advantage of advanced technologies built upon the latest innovations in eCommerce and wireless and cloud-based computing. Our core business systems run in a highly distributed computing environment and utilize world-class software and hardware platforms from key partners. We utilize disaster recovery techniques and procedures, which are consistent with best practices in enterprise information technology (“IT”).
These solutions take advantage of advanced technologies built upon the latest innovations in E-commerce and wireless and cloud-based computing. Our core business systems run in a highly distributed computing environment and utilize world-class software and hardware platforms from key partners. We utilize disaster recovery techniques and procedures, which are consistent with best practices in enterprise information technology (“IT”).
Health and Safety MSC’s safety vision is to build a culture in which safety is a top priority across all levels of the organization, and that every associate has the right and responsibility to continually seek to prevent injuries and build a safe environment for everyone.
Health and Safety MSC’s safety vision is to build a culture in which safety is a top value across all levels of the organization, and that every associate has the right and responsibility to continually seek to prevent injuries and build a safe environment for everyone.
No single supplier accounted for more than 5% of our total purchases in fiscal year 2022, 2021 or 2020. Customer Fulfillment Centers and Distribution Network We continue to invest in the enhancement of our distribution efficiency and capabilities.
No single supplier accounted for more than 5% of our total purchases in fiscal year 2023, 2022 or 2021. Customer Fulfillment Centers and Distribution Network We continue to invest in the enhancement of our distribution efficiency and capabilities.
When our customers order an in-stock product online or via phone, we ship it the day the order is placed about 99% of the time. We do that through our six customer fulfillment centers, 10 regional inventory centers and 38 warehouses. Some specialty or custom items and very large orders are shipped directly from the manufacturer.
When our customers order an in-stock product online or via phone, we ship it the day the order is placed about 99% of the time. We do that through our six customer fulfillment centers, 10 regional inventory centers and 38 warehouses. Some specialty or custom 7 Table of Contents items and very large orders are shipped directly from the manufacturer.
ITEM 1. B USINESS. General MSC Industrial Direct Co., Inc. (together with its wholly owned subsidiaries and entities in which it maintains a controlling financial interest, “MSC,” “MSC Industrial,” the “Company,” “we,” “us” or “our”) is a leading North American distributor of a broad range of metalworking and maintenance, repair and operations (“MRO”) products and services.
ITEM 1. BUSINESS. General MSC Industrial Direct Co., Inc. (together with its wholly owned subsidiaries and entities in which it maintains a controlling financial interest, “MSC,” “MSC Industrial,” the “Company,” “we,” “us” or “our”) is a leading North American distributor of a broad range of metalworking and maintenance, repair and operations (“MRO”) products and services.
Our leadership team is highly engage d through our Safety Leadership System in identifying trends in our incidents throughout the network and working collaboratively with our Safety Professionals to effectively reduce incidents involving our associates and to make MSC one of the safest places to work.
Our leadership team is highly engaged through our Safety Leadership System in identifying trends in our incidents throughout the network and working collaboratively with our safety professionals to effectively reduce incidents involving our associates and to make MSC one of the safest places to work.
We continually assess our compliance status and management of environmental matters to ensure that our operations are compliant with all applicable environmental laws and regulations. Operating and maintenance costs associated with environmental compliance and management of sites are a normal and recurring part of our operations.
We continually assess our compliance status and management of environmental matters to ensure that our operations are compliant with all applicable environmental laws and regulations. 10 Table of Contents Operating and maintenance costs associated with environmental compliance and management of sites are a normal and recurring part of our operations.
We offer next-day delivery nationwide for qualifying orders placed by 8 p.m. Eastern Time (excluding Consumables category products). We know that our customers value this service, and areas accessible by next-day delivery generate significantly greater sales for MSC than areas where next-day delivery is not available. Superior Customer Service.
We offer next-day delivery nationwide for qualifying orders placed by 8 p.m. Eastern Time (excluding Class C Consumables sales channel products). We know that our customers value this service, and areas accessible by next-day delivery generate significantly greater sales for MSC than areas where next-day delivery is not available. Superior Customer Service.
Expanding programs for public sector and national account customers . Our government programs are focused on becoming an industry leader and trusted advisor to key public sector end customers. Although MSC has been providing metalworking and MRO supplies to the commercial sector for more than 80 years, we recognize the importance of diversifying into the public sector.
Expanding programs for our public sector and national account customers . Our public sector program is focused on becoming an industry leader and trusted advisor to key public sector end customers. Although MSC has been providing metalworking and MRO supplies to the commercial sector for more than 80 years, we recognize the importance of diversifying into the public sector.
Through our technical metalworking expertise and inventory management and other supply chain solutions, our team of approximately 7,000 associates helps to keep our customers’ manufacturing operations up and running and to improve their efficiency, productivity and profitability.
Through our technical metalworking expertise and inventory management and other supply chain solutions, our team of more than 7,000 associates helps to keep our customers’ manufacturing operations up and running and to improve their efficiency, productivity and profitability.
Our commitment to customer service starts with our many associates who share their deep expertise and knowledge of metalworking and MRO products to help our customers achieve greater success. We invest in sophisticated information systems and provide extensive training to empower our associates to better support our customers.
Our commitment to customer service starts with our many associates who share their deep expertise and knowledge of metalworking, MRO, Class C Consumables and OEM products to help our customers achieve greater success. We invest in sophisticated information systems and provide extensive training to empower our associates to better support our customers.
In calendar year 2021, the Company’s Occupational Safety and Health Administration (“OSHA”) Total Recordable Incident Rate was 1.09 and the Company’s OSHA Lost Time Incident Rate was 0.62 based upon the number of incidents per 100 associates (or per 200,000 work hours).
In calendar year 2022, the Company’s Occupational Safety and Health Administration (“OSHA”) Total Recordable Incident Rate was 1.72 and the Company’s OSHA Lost Time Incident Rate was 0.62 based upon the number of incidents per 100 associates (or per 200,000 work hours).
Our customer fulfillment centers are located in or near Harrisburg, Pennsylvania; Atlanta, Georgia; Elkhart, Indiana; Reno, Nevada; Columbus, Ohio; and Hanover Park, Illinois in the United States.
Our customer fulfillment centers are located in or near Harrisburg, Pennsylvania; Atlanta, Georgia; Elkhart, Indiana; Columbus, Ohio; Reno, Nevada; and Hanover Park, Illinois.
In addition, our systems enable data visibility for faster decision making, which drives operational efficiency and supports a flexible remote workforce across the globe. Our eCommerce environment is currently being upgraded and enhanced with a focus on delivering an exceptional online customer experience.
In addition, our systems enable data visibility for faster decision making, which drives operational efficiency and supports a flexible remote workforce across the globe. Our E-commerce environment is continually being upgraded and enhanced with a focus on delivering an exceptional online customer experience.
We believe that our sales force investment has played a critical role in the overall success of the Company’s revenue performance. Our sales force, focusing on a more complex and high-touch role, drives value for our customers by enabling them to achieve higher levels of growth, profitability and productivity.
We believe that our sales force investment has played a critical role in the overall success of the Company’s revenue performance. Our sales force, focusing on a more complex and high-touch role, drives value for our customers by enabling them to achieve higher levels of growth, profitability and productivity. Increasing the number of product lines and productive SKUs.
As a result, we strategically adjust our customer pricing to maintain competitiveness, while capturing the value of our comprehensive services. Growth Strategy Our growth strategy includes a number of initiatives to gain market share and complete the repositioning of MSC from being a spot-buy supplier to a mission-critical partner to our customers.
As a result, we strategically adjust our customer pricing to maintain competitiveness, while capturing the value of our comprehensive services. 5 Table of Contents Growth Strategy Our growth strategy includes a number of initiatives to gain market share and reposition MSC from being a spot-buy supplier to a mission-critical partner to our customers.
We have individual state and local contracts and have been awarded partnerships with several state co-operatives. Our national account program includes Fortune 1000 companies, large privately held companies, and international companies primarily doing business in North America.
We have individual state and local contracts, as well as contracts through partnerships with several state co-operatives. Our national account program includes Fortune 1000 companies, large privately held companies, and international companies primarily doing business in North America.
MSC vending machines use network or web-based software to enable customers to gain inventory visibility, save time and drive profitability. Digital Technologies and the MSC Website. The MSC website provides personalized real-time inventory availability, online bill payment, delivery tracking status, and other enhancements, including work-flow management tools.
MSC vending machines use network or web-based software to enable customers to gain inventory visibility, save time and drive profitability. Digital Technologies and the MSC Website. The MSC website contains a searchable online catalog with electronic ordering capabilities and provides personalized real-time inventory availability, online bill payment, delivery tracking status and other enhancements, including work-flow management tools.
In addition, new entrants in the MRO supply industry could increase competition. We believe that sales of MRO supplies will become more concentrated over the next several years, which may make MRO supply distribution more competitive. Some of our competitors challenge us with a greater variety of product offerings, greater financial resources, additional services, or a combination of these factors.
We believe that sales of MRO supplies will become more concentrated over the next several years, which may make MRO supply distribution more competitive. Some of our competitors challenge us with a greater variety of product offerings, greater financial resources, additional services, or a combination of these factors.
These programs align with the ever-evolving buying behavior of our customers and are designed to maximize marketing productivity and return on marketing dollars spent. While digital is our primary means of marketing, we leverage master catalogs, specialty and promotional catalogs, and brochures where appropriate.
These programs align with the ever-evolving buying behavior of our customers and are designed to maximize marketing 8 Table of Contents productivity and return on marketing dollars spent. While digital is our primary means of marketing, we leverage catalogs, sales collateral and promotional brochures where appropriate.
We offer approximately 2.1 million active, saleable stock-keeping units (“SKUs”) through our catalogs; our brochures; our eCommerce channels, including our website, mscdirect.com (the “MSC website”); our inventory management solutions; and our customer care centers, customer fulfillment centers, regional inventory centers and warehouses .
We offer approximately 2.4 million active, saleable stock-keeping units (“SKUs”) through our catalogs; our brochures; our E-commerce channels, including our website, https://www.mscdirect.com (the “MSC website”); our inventory management solutions; and our customer care centers, customer fulfillment centers, regional inventory centers and warehouses.
We do this in several ways: our experienced team includes customer care representatives, metalworking specialists, safety specialists, fluid connector specialists, inventory management specialists, in-plant and technical support teams and experienced sales associates focused on driving our customers’ success by reducing their operational costs; our robust systems and transactional data enable us to provide insights to our customers to help them take cost out of their supply chains and operations; our extensive product inventory enables customers to deal with fewer suppliers, streamlining their purchasing work and reducing their administrative costs; our timely shipping enables our customers to reduce their inventory investment and carrying costs; our purchasing process consolidates multiple purchases into a single order, providing a single invoice for multiple purchases over time and offering direct shipments to specific departments and personnel at one or more facilities.
We do this in a variety of ways: • our experienced team includes customer care representatives, metalworking specialists, safety specialists, fluid connector specialists, inventory management specialists, in-plant and technical support teams and experienced sales associates focused on driving our customers’ success by reducing their operational costs; • our robust systems and transactional data enable us to provide insights to our customers to help them take costs out of their supply chains and operations; • our extensive product inventory enables our customers to deal with fewer suppliers, streamlining their purchasing work and reducing their administrative costs; • our timely shipping enables our customers to reduce their inventory investment and carrying costs; • our purchasing process consolidates multiple purchases into a single order, providing a single invoice for multiple purchases over time and offering direct shipments to specific departments and personnel at one or more facilities, which reduces our customers’ administrative costs; • our extensive E-commerce capabilities provide sophisticated search and transaction capabilities, access to real-time inventory, customer-specific pricing, workflow management tools, customized reporting and other features.
We also make available, on our website, the charters of the committees of our Board of Directors, the Code of Ethics, the Code of Business Conduct and the Corporate Governance Guidelines pursuant to SEC requirements and New York Stock Exchange (“NYSE”) listing standards. Information on our website does not constitute a part of this Report.
We also make available, on our website, the charters of the committees of our Board of Directors, the Code of Ethics, the Code of Business Conduct and the Corporate Governance Guidelines pursuant to SEC requirements and New York Stock Exchange (“NYSE”) listing standards.
Human Capital Resources As of September 3, 2022, we employed 6,994 associates worldwide, of which approximately 6,765 were full-time and 229 were part-time. No associate is represented by a labor union. Approximately 90% of our workforce is based in the United States. MSC has not experienced any major work stoppages and considers associate relations to be good.
Human Capital Resources As of September 2, 2023, we employed 7,377 associates worldwide, of which approximately 7,131 were full-time and 246 were part-time. No associate is represented by a labor union. Approximately 90% of our workforce is based in the United States. MSC has not experienced any major work stoppages and considers associate relations to be good.
Customer care phone representatives enter non-digital orders into computerized order processing systems. In the event of a local or regional situation, our communications system will reroute customer exchanges to an alternative location.
Order entry and fulfillment occurs at our main customer care centers, mostly located at our customer fulfillment centers. Customer care phone representatives enter non-digital orders into computerized order processing systems. In the event of a local or regional situation, our communications system will reroute customer exchanges to an alternative location.
The average training hours completed by MSC associates in fiscal year 2022 increased more than 10% year over year to over 17 hours per individual. Additionally, MSC’s tuition assistance program covers educational costs and provides eligible associates the financial assistance to obtain a graduate or undergraduate degree while working. Available Information The Company’s internet address is www.mscdirect.com .
The average training hours completed by MSC associates in fiscal year 2023 increased nearly 18% year over year to over 20 hours per individual. Additionally, MSC’s tuition assistance program covers educational costs and provides eligible associates the financial assistance to obtain a graduate or undergraduate degree while working. Available Information The Company’s website is https://www.mscdirect.com .
We see opportunity for additional growth in the public sector. 5 We provide customized national account programs for larger customers, often on an enterprise-wide basis. These national account customers value our ability to support their procurement needs electronically to reduce their transactional costs.
We provide customized national account programs for larger customers, often on an enterprise-wide basis. These national account customers value our ability to support their procurement needs electronically to reduce their transactional costs.
In fiscal year 2019, we introduced a patented robotic packing solution, and, in fiscal year 2023, we expect to be deploying advanced robotic picking technology to several customer fulfillment centers.
In fiscal year 2019, we introduced a patented robotic packing solution, and we are in the process of deploying advanced robotic picking technology to several customer fulfillment centers.
VMI involves not only the selling of the maintenance Consumables by our associates, but also the management of appropriate stock levels for the customer, fulfilling replenishment orders, putting away the stock, and maintaining a clean and organized inventory area. MSC’s public sector customers include federal agencies, state governments, and healthcare providers.
VMI involves not only selling the Class C Consumables, but also managing appropriate stock levels for the customer, fulfilling replenishment orders, putting away the stock, and maintaining a clean and organized inventory area. MSC’s public sector customers include governments and their instrumentalities such as federal agencies, state governments, and public sector healthcare providers.
The majority of our efforts are focused on search engine marketing, email marketing and online advertising to address changes in our customers’ buying behavior and we utilize master catalogs and direct mail on a selective basis. We use our own database of over four million contacts together with external information to target buyers with the highest likelihood to buy.
The majority of our efforts are focused on search engine marketing, email marketing and online advertising to align with our customers’ buying behavior. We utilize traditional marketing methods, such as catalogs and direct mail, on a selective basis. We use our own contact database together with external information to target buyers with the highest likelihood to buy.
Similar to our customer fulfillment centers, these warehouses primarily handle the stocking and fulfillment of inventory. However, in some cases, these locations also operate as subsidiary headquarters and provide office space for sales associates. Sales and Marketing We serve individual machine shops, Fortune 1000 companies, government agencies and manufacturers of all sizes.
However, in some cases, these locations also operate as subsidiary headquarters and provide office space for sales associates. Sales and Marketing We serve individual machine shops, Fortune 1000 companies, government agencies and manufacturers of all sizes.
Customers want a full range of product options, even as they look to reduce the number of suppliers they partner with. We provide “good-better-best” alternatives, comprising a spectrum of brand name, MSC exclusive brand and generic MRO products.
Our world-class sourcing, logistics and business systems provide predictable, reliable and scalable service. Broad Selection of Products. Customers want a full range of product options, even as they look to reduce the number of suppliers they partner with. We provide “good-better-best” alternatives, comprising a spectrum of brand name, MSC exclusive brand and generic MRO products.
We use specialty and promotional publications to target customers in specific areas, such as metal fabrication, facilities management, and safety and janitorial. Specialty and promotional catalogs, targeted to our best prospects, offer a more focused selection of products. Customer Service One of our goals is to make purchasing our products as convenient and effortless as possible.
We use these methods to target customers in specific areas, such as metal fabrication, facilities management, and safety and janitorial, with a more focused selection of products or solutions. Customer Service One of our goals is to make purchasing our products as convenient and effortless as possible.
We provide technical support and one-on-one service through our field sales specialists and our centralized tech team representatives. We have a dedicated team of more than 120 metalworking specialists who work with customers to improve their manufacturing processes and efficiency, as well as a technical support team that provides assistance to our sales teams and customers via phone and email.
We have a dedicated team of more than 150 metalworking and specialty sales experts who work with customers to improve their manufacturing processes and efficiency, as well as a technical support team that provides assistance to our sales teams and customers via phone and email.
We manage our primary customer fulfillment centers via computer - based SKU tracking systems and radio frequency devices that locate specific stock items to make the selection process more efficient. Our warehouses are predominantly from our acquired subsidiaries and 13 are new to MSC as a result of the fiscal year 2022 acquisitions.
We manage our primary customer fulfillment centers via computer-based SKU tracking systems and radio frequency devices that locate specific stock items to make the selection process more efficient. Our warehouses are predominantly from our acquired subsidiaries . Similar to our customer fulfillment centers, these warehouses primarily handle the stocking and fulfillment of inventory.
We make available on or through our investor relations page on our website, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after this material is electronically filed with or furnished to the SEC.
We make available, free of charge, on or through the investor relations portion of our website, https://investor.mscdirect.com , our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to these reports, as well as proxy statements and other information, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC.
We are continuing to implement additional functionality aimed at enhancing the engagement and personalization of the customer experience regardless of the contact method chosen. Competition The MRO supply industry is a large, fragmented industry that is highly competitive.
We are continuing to implement additional functionality aimed at enhancing the engagement and personalization of the customer experience regardless of the contact method chosen.
National, regional and local distributors, retail outlets, small distributorships, online distributors, direct mail suppliers, large warehouse stores and manufacturers’ own sales forces all serve MRO customers. MSC differentiates itself in the industry by being a leading distributor of metalworking products. We have continued to expand technical support and enhance supplier relationships, especially with our metalworking products.
Industry Overview MSC operates in a large, fragmented industry comprised of national, regional and local distributors, retail outlets, small distributorships, online distributors, direct mail suppliers, large warehouse stores and manufacturers’ own sales forces serving MRO customers. MSC differentiates itself in the industry by being a leading distributor of metalworking products.
Our sales representatives are equipped with proprietary mobile technology that allows them to tap into MSC’s supply chain d irectly from our customers’ manufacturing plants and make sure that critical inventory is always on site and available.
Recent cloud migrations include commercial off-the-shelf enterprise systems as well as our E-commerce infrastructure. Our sales representatives are equipped with proprietary mobile technology that allows them to tap into MSC’s supply chain directly from our customers’ manufacturing plants and make sure that critical inventory is always on site and available.
Our virtual customer care hubs continue to play an integral role in obtaining new accounts and penetrating existing ones. Digital and Traditional Marketing Our primary method of presenting products and solutions is the MSC website and our digital marketing programs, which include tactics such as search engine marketing, email marketing, social media and online advertising.
Digital and Traditional Marketing Our primary method of presenting products and solutions is the MSC website and our digital marketing programs, which include tactics such as search engine marketing, email marketing, social media and online advertising.
We also leverage the depth and breadth of MSC’s product portfolio within our Consumables category sales channel. We plan to continue adding SKUs in fiscal year 2023. Improving our marketing programs. MSC has built an extensive buyer database, which we harness via both human and artificial intelligence to target our marketing to the best prospects.
We plan to continue adding SKUs in fiscal year 2024. Improving our marketing programs. MSC has built an extensive buyer database, which we harness via both human and artificial intelligence to target our marketing to the best prospects. We supplement the efforts of our sales force through the use of digital and traditional marketing tactics.
By working to anticipate our customers’ needs, we strive to exceed our customers’ expectations. This focus on our customers’ needs enables us to achieve our goal to stand apart in the market. We use customer comment cards, surveys and other customer outreach tools, using their feedback to improve the overall customer experience. Selectively pursuing strategic acquisitions and investments.
This focus on our customers’ needs enables us to achieve our goal to stand apart in the market. We use customer comment cards, surveys and other customer outreach tools, using their feedback to improve the overall customer experience. Intellectual Property We conduct business under various trademarks and service marks.
Over the next few years, we will also be upgrading and migrating many of our systems to take advantage of the flexibility and controls offered by cloud computing platforms while downsizing our on-premise data center footprint. Recent cloud migrations include commercial off-the-shelf enterprise systems as well as our eCommerce infrastructure.
We believe that our current systems and practice of implementing regular updates are adequate to support our current needs. Over the next few years, we will also be upgrading and migrating many of our systems to take advantage of the flexibility and controls offered by cloud computing platforms while downsizing our on-premise data center footprint.
We offer: customized billing; customer savings reports; electronic data interchange ordering; eCommerce capabilities; bulk discounts; and stocking of specialty items requested by customers. Commitment to Technological Innovation. We embrace technological innovations to support our growth, improve customer service and reduce our operating costs. The innovations make our buying practices more effective, improve our automated inventory replenishment and streamline order fulfillment.
We offer: customized billing; customer savings reports; electronic data interchange ordering; E-commerce capabilities; bulk discounts; and stocking of specialty items requested by customers. Commitment to Technological Innovation. We embrace technological innovations to support our customers, which in turn propels our growth, improves our customer service and reduces our operating costs.
Their challenge represents MSC’s opportunity. We improve purchasing efficiency and reduce costs for our customers because our offerings enable our customers to consolidate suppliers, purchase orders and invoices, and reduce inventory tracking, stocking decisions, purchases and out-of-stock situations.
We improve purchasing efficiency and reduce costs for our customers because our offerings enable our customers to consolidate suppliers, purchase orders and invoices, and reduce inventory tracking, stocking decisions, purchases and out-of-stock situations. In addition, through Vendor Managed Inventory (“VMI”), Customer Managed Inventory (“CMI”) and vending solutions, we empower our customers to utilize sophisticated inventory management solutions.
With many of our associates shifting to a remote work model beginning in fiscal year 2020, we deployed secure home computing assets and implemented collaboration software to enable interconnected teams and scalable video conferencing for large virtual gatherings. We believe that our current systems and practice of implementing regular updates are adequate to support our current needs.
With many of our associates shifting to a remote work model beginning in fiscal year 2020, we deployed secure home computing assets and implemented collaboration software to 9 Table of Contents enable interconnected teams and scalable video conferencing for large virtual gatherings. Our focus in fiscal year 2024 onwards will be to optimize the hybrid associate work experience.
The user-friendly search engine allows customers to find SKUs by keyword, part description, competitive part number, vendor number or brand. The MSC website is a key component of our strategy to reduce our customers’ transaction costs and delivery time. Competitive Pricing. Customers increasingly evaluate their total procurement cost, of which our industrial supplies are an important component.
The user-friendly search engine on the MSC website allows customers to find SKUs by keyword, part description, competitive part number, vendor number or brand. Information can also be found detailing MSC’s in-plant and other inventory management solutions. The MSC website is a key component of our strategy to reduce our customers’ transaction costs and delivery time. Competitive Pricing.
Depending on the customer’s size and needs, we customize options to address complexity and processes, as well as specific products, technical issues and cost targets. The options include eProcurement, CMI, VMI, vending, tool crib control or in-plant solutions. Our world-class sourcing, logistics and business systems provide predictable, reliable and scalable service. Broad Selection of Products.
Our approach starts with a thorough customer assessment. Our expert associates develop and recommend solutions that provide exceptional value to the customer. Depending on the customer’s size and needs, we customize options to address complexity and processes, as well as specific products, technical issues and cost targets. The options include eProcurement, VMI, CMI, vending, tool crib control or in-plant solutions.
We endeavor to save our customers money when they partner with us for their metalworking and MRO product needs. We focus on building strong partnerships with our customers to help them improve their productivity and growth.
We focus on building strong partnerships with our customers to help them improve their productivity, profitability and growth.
Our associates share their deep expertise and knowledge of metalworking and MRO products to help our customers achieve their goals. Nearly every industrial and service business has an ongoing need for MRO supplies. These businesses, with the exception of the largest industrial plants, often do not have the resources to manage and monitor their MRO inventories effectively.
We have continued to expand technical support and enhance supplier relationships, especially with our metalworking products. Our associates share their deep expertise and knowledge of metalworking and MRO products to help our customers achieve their goals. Nearly every industrial and service business has an ongoing need for MRO supplies.
Customers submit approximately 62% of their orders digitally through our technology platforms (the MSC website, vending machines and eProcurement). The remaining orders are primarily placed via telephone, email and fax. The efficient handling of orders is a critical aspect of our business. Order entry and fulfillment occurs at our main customer care centers, mostly located at our customer fulfillment centers.
During the fiscal year ended September 2, 2023, customers submitted approximately 61.1% of their orders digitally through our E-commerce platforms (the MSC website, vending machines and eProcurement). The remaining orders are primarily placed via telephone, email and fax. The efficient handling of orders is a critical aspect of our business.
MSC continues to evaluate the MSC website and solicit customer feedback, making on-going improvements to ensure that it remains a premier website in our marketplace. ​ The MSC website provides advanced features, such as order approval (workflow) and purchase order control, that our customers interact with in order to derive business value beyond merely placing an order.
The MSC website provides advanced features, such as order approval (workflow) and purchase order control, that our customers interact with in order to derive business value beyond merely placing an order. Many large customer accounts transact business with MSC using eProcurement solution providers that sell a suite of E-commerce products.
We maintain a separate technical support group dedicated to answering customer inquiries and assisting our customers with product operation information and finding the most efficient solutions to manufacturing problems. Virtual Customer Care Hubs As part of our enhanced customer support model implemented in fiscal year 2021, we transitioned from our branch office network to virtual customer care hubs.
We also provide our sales associates with technical training by our in-house specialists and product vendors. We maintain a separate technical support group dedicated to answering customer inquiries and assisting our customers with product operation information and finding the most efficient solutions to manufacturing problems.
The majority of products sold are third-party manufactured products; however, SKUs sold under MSC private label brands approximate 14% of net sales. We are increasing the breadth and depth of our product offerings and pruning non-value-added SKUs. In fiscal year 2022, we added approximately 190,000 SKUs, net of SKU removals, to our active, saleable SKU count.
We are increasing the breadth and depth of our product offerings and pruning non-value-added SKUs. In fiscal year 2023, we added approximately 240,000 SKUs, net of SKU removals, to our active, saleable SKU count. We also leverage the depth and breadth of MSC’s product portfolio within our Class C Consumables sales channel.
These metalworking specialists are customer-facing and work side-by-side with our customers. We utilize our Ap Op ® proprietary software to capture the application data and to deliver documented cost savings to our customers. Our exclusive service, MSC MillMax ® , focuses on maximizing milling productivity and lowering cost by reducing the milling optimization process to a fraction of the time.
These metalworking and specialty sales experts are customer-facing and work side-by-side with our customers to perform onsite need analysis and to identify productivity improvement opportunities. We utilize our Ap Op ® proprietary software to capture the application data and to deliver documented cost savings to our customers.
We face competition from traditional channels of distribution, such as retail outlets, small dealerships, regional and national distributors utilizing direct sales forces, manufacturers of MRO supplies, large warehouse stores and larger direct mail distributors. We also face substantial competition in the online distribution space that competes with price transparency and includes both traditional distributors and non-traditional, web-based eCommerce competitors.
Competition The MRO supply industry is a large, fragmented industry that is highly competitive. We face competition from traditional channels of distribution, such as retail outlets, dealers and wholesalers, regional and national distributors utilizing direct sales forces, manufacturers of MRO supplies, large warehouse stores and large direct mail distributors.
We also file for and obtain patents and use confidentiality and other agreements with customers, associates, consultants and others in order to protect our proprietary information. Although we do not believe our operations are substantially dependent upon any of our intellectual property, we consider our intellectual property to be valuable to our business.
Although we do not believe our operations are substantially dependent upon any of our intellectual property, we consider our intellectual property to be valuable to our business.
With some of our recent acquisitions, such as AIS and Tower Fasteners, we have increased our presence in the fastener and Consumables product categories and significantly increased our presence in the VMI space.
With some of our recent acquisitions, such as All Integrated Solutions, Inc. and Tower Fasteners, LLC (“Tower Fasteners”), we have increased our presence in the OEM fasteners, hardware and components business. We have also significantly increased our presence in the VMI space within the Class C Consumables sales channel.
When a customer places a call to MSC, the sales representative on the other end of the line has immediate access to that customer’s company and specific buyer profile, which includes billing and purchasing track records, and plant and industry information. Meanwhile, the sales representative has access to inventory levels on every SKU we carry.
Our marketing approach centers on the ability of our sales representatives, armed with our comprehensive databases as a resource, to respond effectively to the customers’ needs. When a customer interacts with MSC, the sales representative has immediate access to that customer’s company and specific buyer profile, which includes billing and purchasing track records, and plant and industry information.
They spend more than necessary to purchase and track their supplies, providing an opportunity for MSC to serve as their one-stop MRO product supplier. Even the larger facilities often store their supplies in multiple locations, so they often carry excess inventories and duplicate purchase orders.
These businesses, with the exception of the largest industrial plants, often do not have the resources to manage and monitor their MRO inventories effectively. They spend more than necessary to purchase and track their supplies, providing an opportunity for MSC to serve as their one-stop MRO product supplier.
Increasing the size and improving the productivity of our direct sales force. We have invested resources to give our sales representatives more time with our customers and provide increased support during the MRO purchasing process. At September 3, 2022, our field sales and service associate headcount was 2,536.
We have invested resources to give our sales representatives more time with our customers and have provided increased support to drive customer productivity improvements and deliver a personalized experience for our customers. At September 2, 2023, our field sales and service associate headcount was 2,572.
We operate a sophisticated network of six customer fulfillment centers, 10 regional inventory centers and 38 warehouses (36 in North America and two in Europe). Of these warehouses, 13 are new to MSC as a result of the fiscal year 2022 acquisitions.
We operate a sophisticated network of six customer fulfillment centers, 10 regional inventory centers 38 warehouses (36 in North America and two in Europe) and four manufacturing locations, including two locations acquired in the January 2023 acquisition of Buckeye and Tru-Edge (each, as defined below).
The success of our Safety Leadership System was additionally validated through the completion and re-certification to the ISO 45001 Standard in our Columbus, Ohio customer fulfillment center in calendar year 2020.
The Company’s rates fall well below the Total Recordable Incident Rate and the Lost Time Incident Rate of the North American Industry Classification System, which were 2.10 and 0.70, respectively. The success of our Safety Leadership System was additionally validated through the completion and re-certification to the ISO 45001 Standard in our Columbus, Ohio customer fulfillment center in November 2022.
MSC is a leader in the highly fragmented industrial distribution market with significant opportunities for organic and acquisitive growth. We selectively pursue strategic acquisitions that deepen our metalworking expertise, extend our capabilities into strategic adjacencies, such as Original Equipment Manufacturer (“OEM”) fasteners, and expand our markets in North America.
We have associations with many of these providers and continue to evaluate and expand our eProcurement capabilities. Selectively pursuing strategic acquisitions and investments. MSC is a leader in the highly fragmented industrial distribution market with significant opportunities for organic and acquisitive growth.
Our associates at our customer care centers undergo an intensive seven-week training course, followed up by regular training seminars and workshops. We monitor and evaluate our sales associates at regular intervals and provide our sales associates with technical training by our in-house specialists and product vendors.
Meanwhile, the sales representative has access to inventory levels on every SKU we carry. Our associates at our customer care centers undergo an intensive seven-week training course, followed up by regular training seminars and workshops. We monitor and evaluate our sales associates at regular intervals through quality monitoring, customer satisfaction surveys and net promoter score feedback.
Leveraging our expertise, knowledge and experience with metalworking products will continue to be a key tenet of our business and growth strategy. Our customer-focused culture and high-touch engagement model drives value for our customers and results in deep customer relationships. Our strategy includes the following key elements: Technical Expertise and Support.
Our customer-focused culture and high-touch engagement model drive value for our customers and result in deep customer relationships. Our business strategy includes the following key elements: Technical Expertise and Support. We provide technical support and one-on-one service through our field sales specialists and our centralized tech team representatives.
In many organizations, multiple people often acquire the same item in small quantities via expensive, one-off purchases, resulting in higher purchasing costs and administrative efforts to keep track of supplies. With limited capital availability and limited eCommerce capabilities and operating leverage, smaller industrial distributors are under increasing pressure to consolidate and/or curtail services and product lines to remain competitive.
Even the larger facilities often store their supplies in multiple locations, so they often carry excess inventories and duplicate purchase orders. In many organizations, multiple people often acquire the same item in small quantities via expensive, one-off purchases, resulting in higher purchasing costs and administrative efforts to keep track of supplies.
Our customers can choose among many convenient ways to place orders: the MSC website, eProcurement platforms, customer care centers or direct communication with our telesales and outside sales associates. We believe our value-added solutions approach to driving our customers’ success serves to differentiate MSC from traditional transaction-focused distributors.
Our customers can choose among many convenient ways to place orders: the MSC website, eProcurement platforms, inventory management solutions (including in-plant and vending solutions), customer care centers and direct communication with our telesales and outside sales associates. Additionally, MSC’s robust sourcing capabilities and vast supplier base allow us to further satisfy our customers’ needs outside of our current product offerings.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeAny or all of these factors may impact us, our customers, and their demand for our products, and all of these factors may be exacerbated by an increase in the rate of COVID-19 infections, or any government restrictions put in place as a result of an increase in COVID-19 infections.
Biggest changeWe have also been affected by macroeconomic conditions specific to the principal end markets that we serve, including as the result of work stoppages and organized labor activity. Any or all of these factors may impact us, our customers, and their demand for our products.
Traditional MRO suppliers are attempting to consolidate the market through internal expansion, acquisitions or mergers with other industrial suppliers, or a combination of both. This consolidation allows suppliers to improve efficiency and spread fixed costs over a greater number of sales, and to achieve other benefits derived from economies of scale.
Traditional MRO suppliers are attempting to consolidate the market through internal expansion or acquisitions or mergers with other industrial suppliers, or a combination of both. This consolidation allows suppliers to improve efficiency and spread fixed costs over a greater number of sales, and to achieve other benefits derived from economies of scale.
Disruptions at transportation centers or shipping ports, including global and domestic locations, due to third-party work stoppages or labor shortages or severe weather conditions affect both our ability to maintain core products in inventory and deliver products to our customers on a timely basis, which may in turn adversely affect our customer relationships and results of operations.
Disruptions at transportation centers or shipping ports, including global and domestic locations, due to third-party work stoppages or labor shortages or severe weather conditions affect both our ability to maintain core products in inventory and to deliver products to our customers on a timely basis, which may in turn adversely affect our customer relationships and results of operations.
Changes to trade policies or trade relationships, including the imposition of significant restrictions, quotas, duties, tariffs, or moratoriums on economic activity with certain countries or regions, whether because of amendments to or elimination of existing trade agreements, the imposition of new or modified trade tariffs, or other governmental orders or sanctions, could have an adverse effect on our business.
Changes to trade policies or trade relationships, including the imposition of significant restrictions, quotas, duties, tariffs or moratoriums on economic activity with certain countries or regions, whether because of amendments to or the elimination of existing trade agreements or the imposition of new or modified trade tariffs or other governmental orders or sanctions, could have an adverse effect on our business.
Any material cyber-attack or failure of our IT systems to perform as we anticipate could disrupt our business and operations, result in transaction errors, loss of data, processing inefficiencies, downtime, litigation, government investigation or fines, substantial remediation costs (including potential liability for stolen assets or information and the costs of repairing system damage), the loss of sales and customers, and damage our reputation.
Any material cyber-attack or failure of our IT systems to perform as we anticipate could disrupt our business and operations, result in transaction errors, the loss of data, processing inefficiencies, downtime, litigation, government investigation or fines, substantial remediation costs (including potential liability for stolen assets or information and the costs of repairing system damage), and the loss of sales and customers, and damage our reputation.
Acquisitions and other strategic transactions present numerous risks and challenges, which could harm our business, including: diversion of management’s attention from the normal operation of our business; potential loss of key associates and customers of the acquired companies; difficulties managing and integrating operations in geographically dispersed locations; the potential for deficiencies in internal controls at the acquired companies; increases in our expenses and working capital requirements, which reduce our return on invested capital; lack of experience operating in the geographic market or industry sector of the acquired companies; and exposure to unanticipated liabilities of the acquired companies.
Acquisitions and other strategic transactions present numerous risks and challenges, which could harm our business, including: • the diversion of management’s attention from the normal operation of our business; • the potential loss of key associates and customers of the acquired companies; • difficulties managing and integrating operations in geographically dispersed locations; • the potential for deficiencies in internal controls at the acquired companies; • increases in our expenses and working capital requirements, which reduce our return on invested capital; • the lack of experience operating in the geographic market or industry sector of the acquired companies; and • the exposure to unanticipated liabilities of the acquired companies.
An increasing number of our customers have adopted, or may adopt, procurement policies that include social and environmental responsibility provisions that their suppliers should comply with, or they may seek to include such provisions in their procurement terms and conditions. This corporate social and environmental responsibility influence is expanding to other 18 stakeholders such as investors, suppliers, associates and communities.
An increasing number of our customers have adopted, or may adopt, procurement policies that include social and environmental responsibility provisions that their suppliers should comply with, or they may seek to include such provisions in their procurement terms and conditions. This corporate social and environmental responsibility influence is expanding to other stakeholders such as investors, suppliers, associates and communities.
To the extent we do not generate sufficient cash flows to recover the net amount of any investments in goodwill and other indefinite-lived intangible assets recorded, the investment could be considered impaired and subject to write-off. We expect to record further goodwill and other indefinite-lived intangible assets as a result of future acquisitions we may complete.
To the extent we do not generate sufficient cash flows to recover the net amount of any investment in goodwill and other indefinite-lived intangible assets recorded, the investment could be considered impaired and subject to write-off. We expect to record further goodwill and other indefinite-lived intangible assets as a result of future acquisitions we may complete.
Disruptions in our supply chain due to events outside of our control, including natural and human-induced disasters, earthquakes, storms, hurricanes, floods, fires, droughts, tornados and other extreme weather, widespread contagious diseases or viruses such as COVID-19, geopolitical events, such as war, economic sanctions, civil unrest, rioting or terrorist attacks in the United States or countries in which we operate, in which our key suppliers are located or through which products we sell are transported or distributed, transportation disruptions, labor actions, raw material shortages, inadequate manufacturing capacity or utilization to meet demand, actions by governments and central banks that impact the flow of international goods, and the imposition of other trade limitations, prohibitions or sanctions that increase the costs of domestic and international trade and transportation, could restrict our ability to obtain products that our customers demand or to meet delivery expectations, which could adversely impact our business, operating results and financial position.
Disruptions in our supply chain due to events outside of our control, including natural and human-induced disasters, earthquakes, storms, hurricanes, floods, fires, droughts, tornados and other extreme weather, widespread contagious diseases or viruses, geopolitical events, such as war, economic sanctions, civil unrest, rioting or terrorist attacks in the United States or countries in which we operate, in which our key suppliers are located or through which products we sell are transported or distributed, transportation disruptions, labor disputes or shortages, raw material shortages, inadequate manufacturing capacity or utilization to meet demand, actions by governments and central banks that impact the flow of international goods, and the imposition of other trade limitations, prohibitions or sanctions that increase the costs of domestic and international trade and transportation, could restrict our ability to obtain products that our customers demand or to meet delivery expectations, which could adversely impact our business, operating results and financial position.
Any failure to comply with these covenants 16 may constitute a breach under the credit facilities and senior notes, which could result in the acceleration of all or a substantial portion of any outstanding indebtedness and the termination of revolving credit commitments.
Any failure to comply with these covenants may constitute a breach under the credit facilities and senior notes, which could result in the acceleration of all or a substantial portion of any outstanding indebtedness and the termination of revolving credit commitments.
In times of commodity, energy and labor price increases, we may be subject to price increases from our suppliers and independent freight carriers that we may be unable to pass along to our customers.
In times of commodity, energy and labor price increases, we may be subject to price increases from our suppliers and independent freight carriers that we are unable to pass along to our customers.
As a result, we are increasingly dependent upon our IT systems to operate our business and our ability to effectively manage our business depends on the security, reliability and adequacy of our IT systems.
As a result, we are dependent upon our IT systems to operate our business and our ability to effectively manage our business depends on the security, reliability and adequacy of our IT systems.
We may also be subject to price increases from our suppliers and independent freight carriers that we may not be able to pass along to our customers, particularly in periods of high inflation. Volatility in commodity, energy and labor prices may adversely affect operating margins.
We may also be subject to price increases from our suppliers and independent freight carriers that we may not be able to pass along to our customers, particularly in periods of high or rapid inflation. Volatility in commodity, energy and labor prices may adversely affect operating margins.
The failure by us to comply with applicable environmental, health and safety requirements could result in fines, penalties, enforcement actions, third-party claims for property damage and personal injury, requirements to clean up property or to pay for the costs of cleanup, or regulatory or judicial orders requiring corrective measures, which could have a material adverse effect on our business, financial condition or results of operatio ns.
The failure by us to comply with applicable environmental, health and safety requirements could result in fines, penalties, enforcement actions, third-party claims for property damage and personal injury, requirements to clean up property or to pay for the costs of cleanup, or regulatory or judicial orders requiring corrective measures, which could have a material adverse effect on our business, financial condition or results of operations.
We believe factors such as fluctuations in our operating results or the operating results of our competitors, changes in economic conditions in the market sectors in which our customers operate, notably the durable and non-durable goods manufacturing industry , which accounts for a substantial portion of our revenues, and changes in general market conditions, including as a result of inflation, rising interest rates, a surge in COVID-19 infections and geopolitical events could cause the market price of our Class A Common Stock to fluctuate substantially.
We believe factors such as fluctuations in our operating results or the operating results of our competitors, changes in economic conditions in the market sectors in which our customers operate, notably the durable and non-durable goods manufacturing industry, which accounts for a substantial portion of our revenues, and changes in general market conditions, including as a result of inflation, rising interest rates and geopolitical events, could cause the market price of our Class A Common Stock to fluctuate substantially.
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, such as PPE products, ordered from manufacturers .
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 ordered from manufacturers.
Our self-insurance accruals are determined on an actuarial basis, based on historical claims experience and an estimate of claims incurred but not yet reported and other relevant factors . While we believe our estimation process is well designed, every estimation process is inherently subject to limitations.
Our healthcare insurance program accruals are determined on an actuarial basis, based on historical claims experience and an estimate of claims incurred but not yet reported and other relevant factors . While we believe our estimation process is well designed, every estimation process is inherently subject to limitations.
In addition to increases in commodity, energy and labor prices, decreases in those costs, particularly if severe, could also adversely impact us by creating deflation in selling prices, which could cause our gross profit margin to deteriorate, or by negatively impacting customers in certain industries, which could cause our sales to those customers to decline. 12 Inflation impacts the costs at which we can procure products and our ability to increase prices at which we sell to customers over time.
In addition to increases in commodity, energy and labor prices, decreases in those costs, particularly if severe, could also adversely impact us by creating deflation in selling prices, which could cause our gross profit margin to deteriorate, or by negatively impacting customers in certain industries, which could cause our sales to those customers to decline. 13 Table of Contents Inflation impacts the costs at which we can procure products and our ability to increase prices at which we sell to customers over time.
For a description of these facilities and senior notes, please see Note 9, “Debt” in the Notes to Consolidated Financial Statements.
For a description of these facilities and senior notes, please see Note 10, “Debt” in the Notes to Consolidated Financial Statements.
Changes in our customer and product mix, or adverse changes to the cost of goods we sell, could cause our gross margin percentage to fluctuate, or decrease. From time to time, we have experienced changes in our customer mix and in our product mix.
Changes in our customer and product mix, or adverse changes to the cost of goods we sell, could cause our gross margin percentage to fluctuate or decrease. From time to time, we experience changes in our customer mix and in our product mix.
ITEM 1A. RISK FACTORS. In addition to the other information in this Report, the following factors should be considered in evaluating the Company and its business. Our future operating results depend upon many factors and are subject to various risks and uncertainties.
ITEM 1A. RISK FACTORS. In addition to the other information in this Report, the following factors should be considered in evaluating the Company and its business. Our future operating results depend upon many factors and are subject to various risks and 12 Table of Contents uncertainties.
We believe that sales of MRO supplies will become more concentrated over the next several years, which may make MRO supply distribution more competitive. Some of our competitors challenge us with a greater variety of product offerings, greater financial resources, additional services, or a combination of these factors.
We believe that sales of MRO supplies will continue to concentrate over the next several years, which may make MRO supply distribution more competitive. Some of our competitors challenge us with a greater variety of product offerings, greater financial resources, additional services, or a combination of these factors.
There can be no assurance that these actions will achieve their intended benefits. As a U.S. government contractor, we are subject to certain laws and regulations which may increase our costs of doing business and which subject us to certain compliance requirements and potential liabilities.
There can be no assurance that these actions will achieve their intended benefits. As a supplier to the U.S. government and public sector, we are subject to certain laws and regulations which may increase our costs of doing business and which subject us to certain compliance requirements and potential liabilities.
As our national account and government customer program sales grow, we will face continued pressures on maintaining gross margin because these customers receive lower pricing due to their higher level of purchases from us. In addition, our continued expansion of our vending program and other eCommerce platforms has placed pressure on our gross margin.
As our national account and government customer program sales grow, we will face continued pressures on maintaining gross margin because these customers receive lower pricing due to their higher level of purchases from us. In addition, our continued expansion of our vending program and other E-commerce platforms places pressure on our gross margin.
Changes in our customer mix have resulted from geographic expansion, daily selling activities within current geographic markets, and targeted selling activities to new customers. Changes in our product mix have resulted from marketing activities to existing customers and needs communicated to us from existing and prospective customers as well as from business acquisitions.
Changes in our customer mix have resulted from various factors, such as geographic expansion, daily selling activities within current geographic markets, and targeted selling activities to new customers. Changes in our product mix have also resulted from various factors, such as marketing activities to existing customers, needs communicated to us from existing and prospective customers and business acquisitions.
In addition, the failure by us to take action or otherwise comply with the policies of our customers may negatively impact our customer relationships or reputation, which may adversely impact our business and results of operations. Our common stock price may be volatile.
In addition, the failure by us to take action or otherwise comply with the policies of our customers may negatively impact our customer relationships or reputation, which may adversely impact our business and results of operations.
Work stoppages, labor shortages or other disruptions, including those due to extreme weather conditions and in response to the COVID-19 pandemic, at transportation centers, shipping ports, our headquarters or our customer fulfillment centers may adversely affect our ability to obtain inventory and make deliveries to our customers.
Work stoppages, labor shortages or other disruptions, including those due to extreme weather conditions, at transportation centers, shipping ports, our headquarters or our customer fulfillment centers may adversely affect our ability to obtain inventory and make deliveries to our customers.
Raw material costs used in our suppliers’ products (steel, tungsten, etc.), and energy and labor costs may increase, which may result in increased production costs for our suppliers. The fuel costs of our independent freight carriers have been volatile. Our suppliers and independent freight carriers typically look to pass increased costs along to us through price increases.
Raw material costs used in our suppliers’ products (steel, tungsten, etc.) and energy and labor costs may increase, which may result in increased production costs for our suppliers that they pass along to us. The fuel costs of our independent freight carriers have been volatile.
A significant deterioration in the economy or the financial condition of our customers, including as a result of higher inflation and fluctuations in interest rates, a surge in COVID-19 infections, geopolitical events, or macroeconomic events, could have an adverse effect on collecting our accounts receivable, including longer payment cycles, increased collection costs and defaults. 13 Failure to accurately forecast customer demand could lead to excess inventories or inventory shortages, which could result in decreased operating margins, reduced cash flows and harm to our business.
A significant deterioration in the economy or the financial condition of our customers, including as a result of higher inflation and fluctuations in interest rates, geopolitical events or macroeconomic events, could have an adverse effect on our ability to collect our accounts receivable, including longer payment cycles and increased collection costs and defaults. 14 Table of Contents Failure to accurately forecast customer demand and timely purchase inventory could lead to excess inventories or inventory shortages, which could result in decreased operating margins, reduced cash flows and harm to our business.
Goodwill and other indefinite-lived intangible assets recorded as a result of our acquisitions could become impaired . As of September 3, 2022, our combined goodwill and other indefinite-lived intangible assets amounted to $722.9 million.
Goodwill and other indefinite-lived intangible assets recorded as a result of our acquisitions could become impaired . As of September 2, 2023, our combined goodwill and other indefinite-lived intangible assets amounted to $729.3 million.
New privacy security laws and regulations, including the United Kingdom’s Data Protection Act 2018 (DPA), 17 the European Union General Data Protection Regulation 2016 (GDPR) that became effective May 2018, the California Consumer Protection Act that became effective on January 1, 2020, and other similar state privacy laws , pose increasingly complex compliance challenges, which may increase compliance costs, and any failure to comply with data privacy laws and regulations could result in significant penalties.
New privacy security laws and regulations, including the United Kingdom’s Data Protection Act 2018 (DPA), the European Union General Data Protection Regulation 2016 (GDPR) that became effective May 2018, the California Consumer Protection Act that became effective on January 1, 2020, and other similar state privacy laws, pose increasingly complex compliance challenges, which may increase compliance costs, and any failure to comply with data privacy laws and regulations could result in significant penalties. 18 Table of Contents Disruptions or breaches of our IT systems, or violations of data privacy laws, could adversely affect us.
In order to operate more efficiently, control costs, and improve profitability, we incurred approximately $15.8 million in restructuring and other costs in fiscal year 2022, primarily consisting of consulting-related costs associated with the optimization of the Company’s operations, associate severance and separation costs, and equity award acceleration costs.
In order to operate more efficiently, control costs and improve profitability, we incurred approximately $7.9 million in restructuring and other costs in fiscal year 2023, primarily consisting of consulting-related costs and associate severance and separation costs associated with the optimization of the Company’s operations and profitability improvement .
As a supplier to the U.S. government, we must comply with certain laws and regulations, including the Trade Agreements Act, the Buy American Act and the Federal Acquisition Regulation, relating to the formation, administration and performance of U.S. government contracts.
As a supplier to the U.S. government and public sector, which currently represents approximately 10% of total Company revenue, we must comply with certain laws and regulations, including the Trade Agreements Act, the Buy American Act and the Federal Acquisition Regulation, relating to the formation, administration and performance of U.S. government contracts.
Fluctuations in the frequency, magnitude or number of claims make it difficult to predict the ultimate cost of claims and may lead to future adjustments of reported results of operations which, depending on the magnitude of such adjustments, may significantly affect our reported results or negatively affect the reliability of our reported results. 15 An interruption of operations at our headquarters or customer fulfillment centers could adversely impact our business .
Fluctuations in the frequency, magnitude or number of claims make it difficult to predict the ultimate cost of claims and may lead to future adjustments of reported results of operations which, depending on the magnitude of such adjustments, may significantly affect our reported results or negatively affect the reliability of our reported results.
We are subject to environmental, health and safety laws and regulations. We are subject to federal, state, local, foreign and provincial environmental, health and safety laws and regulations. Fines and penalties may be imposed for non-compliance with applicable environmental, health and safety requirements and the failure to have or to comply with the terms and conditions of required permits.
Fines and penalties may be imposed for non-compliance with applicable environmental, health and safety requirements and the failure to have or to comply with the terms and conditions of required permits.
To integrate acquired businesses, we must implement our management information systems, operating systems and internal controls, and assimilate and manage the personnel of the acquired operations. The difficulties of this integration may be further complicated by geographic distances. The integration of acquired businesses may not be successful and could result in disruption to other parts of our business.
To integrate acquired businesses, we must implement our management information systems, operating systems and internal controls, and assimilate and manage the personnel of the acquired operations. The difficulties of this 19 Table of Contents integration may be further complicated by geographic distances.
We believe that our IT systems are an integral part of our business and growth strategies. In particular, the COVID-19 pandemic has caused us to modify our business practices, including requiring many of our office-based associates to work from home.
Risks Related to Information Technology Maintaining our IT systems and complying with data privacy laws may incur significant, recurring costs. We believe that our IT systems are an integral part of our business and growth strategies. In particular, the COVID-19 pandemic caused us to modify our business practices, including requiring many of our office-based associates to work from home.
When we are forced to accept these price increases, we may not be able to pass them along to our customers, resulting in lower margins.
Our suppliers and independent freight carriers typically look to pass increased costs along to us through price increases. When we are forced to accept these price increases, we may not be able to pass them along to our customers, resulting in lower margins.
Additionally, climate change may present additional physical risks to our operations and lead to an increased frequency of unusual or extreme weather conditions, which could disrupt our supply chain or harm or disrupt our operations or those of our customers or suppliers. Our principal shareholders exercise significant control over us. We have two classes of common stock.
Furthermore, climate change may present additional physical risks to our operations and lead to an increased frequency of unusual or extreme weather conditions, which could disrupt our supply chain or harm or disrupt our operations or those of our customers or suppliers.
Our business depends on maintaining operations at our co-located headquarters and customer fulfillment centers. A serious, prolonged interruption due to power outage, telecommunications outage, cyber-attack, terrorist attack, earthquake, storm, hurricane, flood, fire, drought, tornado and other extreme weather, pandemic or other interruption could have a material adverse effect on our business and financial results.
A serious, prolonged interruption due to power outage, telecommunications outage, cyber-attack, terrorist attack, 16 Table of Contents earthquake, storm, hurricane, flood, fire, drought, tornado and other extreme weather, widespread contagious disease or virus or other interruption could have a material adverse effect on our business and financial results.
Many of the primary markets for the products and services we sell are subject to cyclical fluctuations that affect demand for goods and materials that our customers produce.
Many of the primary markets for the products and services we sell are subject to cyclical fluctuations that affect demand for goods and materials that our customers produce. Consequently, demand for our products and services has been, and will continue to be, influenced by most of the same economic factors that affect demand for and production of our customers’ products.
With respect to uncommitted facilities, lenders may cease making loans or demand payment of outstanding loans, which may overly restrict our ability to conduct our business successfully and adversely impact our liquidity and financial position. Uncertainty about the future of LIBOR may adversely affect our business and financial results.
With respect to uncommitted facilities, lenders may cease making loans or demand payment of outstanding loans, which may overly restrict our ability to conduct our business successfully and adversely impact our liquidity and financial position. 17 Table of Contents Risks Related to the Reclassification The Reclassification may not achieve the desired benefits for us or our shareholders.
The loss of key suppliers or contractors or key brands or supply chain disruptions could adversely affect our operating results. We believe that our ability to offer a combination of well-known brand name products and competitively priced exclusive brand products is an important factor in attracting and retaining customers.
We believe that our ability to offer a combination of well-known brand name products and competitively priced exclusive brand products is an important factor in attracting and retaining customers. Our ability to offer a wide range of products and services is dependent on obtaining adequate product supply and services from our key suppliers and contractors.
The loss of, or a substantial decrease in, the availability of products or services from key suppliers or contractors at competitive prices, or the loss of a key brand, could cause our revenues and profitability to decrease. In addition, supply chain disruptions could continue to arise due to transportation interruptions and labor disputes or shortages.
The loss of, or a substantial decrease in, the availability of products or services from key suppliers or contractors at competitive prices, or the loss of a key brand, could cause our revenues and profitability to decrease. 15 Table of Contents Supply chain disruptions could adversely impact our business, operating results and financial position.
In addition, we could face claims over other matters, such as claims arising from our status as a government contractor, intellectual property matters, or corporate or securities law matters.
Due to the nature of our business, these proceedings may, for example, relate to product liability claims, commercial disputes or employment matters. In addition, we could face claims over other matters, such as claims arising from our status as a government contractor, intellectual property matters, or corporate or securities law matters.
We greatly benefit from having associates who are familiar with the products we sell and their applications, as well as associates, and in particular metalworking specialists, who can provide technical support to our customers. Qualified individuals of the requisite caliber and number needed to fill these positions may be difficult to hire and retain in sufficient numbers.
Our business depends on our ability to attract, train and retain qualified sales and customer service personnel and metalworking specialists. We greatly benefit from having associates who are familiar with the products we sell and their applications, as well as associates, and in particular metalworking specialists, who can provide technical support to our customers.
We do not maintain any key-man insurance policies with respect to any of our executive officers. We are subject to litigation risk due to the nature of our business, which may have a material adverse effect on our business .
The loss or disruption of the services of one or more of such key personnel could have a material adverse effect on our business and financial results. We do not maintain any key-man insurance policies with respect to any of our executive officers.
Selling prices and terms of sale with our customers come under pressure, which may adversely affect the profitability and the durability of customer relationships. Credit losses increase as well.
When, as occurs in economic downturns, current or prospective customers reduce production levels because of lower demand or tight credit conditions, their need for our products and services diminishes. Selling prices and terms of sale with our customers come under pressure, which may adversely affect the profitability and the durability of customer relationships. Credit losses increase as well.
Additionally, hiring and retaining such qualified individuals may be adversely impacted by global and domestic economic uncertainty, and increased competition for such qualified individuals . If we are unable to hire and retain associates capable of providing a high level of customer service and technical support, our operational capabilities and ability to provide differentiated services may be adversely affected.
If we are unable to hire and retain associates capable of providing a high level of customer service and technical support, our operational capabilities and ability to provide differentiated services may be adversely affected. The loss of key suppliers or contractors or key brands could adversely affect our operating results.
From time to time, we are involved in lawsuits or other legal proceedings that arise from business transactions or the operation of our business. Due to the nature of our business, these proceedings may, for example, relate to product liability claims, commercial disputes or employment matters.
We are subject to litigation risk due to the nature of our business, which may have a material adverse effect on our business . From time to time, we are involved in lawsuits or other legal proceedings that arise from business transactions or the operation of our business.
In addition, severe weather conditions, including winter storms, could adversely affect demand for our products in particularly hard-hit regions and impact our sales and/or our ability to deliver our products.
In addition, severe weather conditions and work stoppages affecting the end markets we serve could adversely affect demand for our products in particularly hard-hit regions and impact our sales and/or our ability to deliver our products. Our business depends on our ability to attract, train and retain qualified sales and customer service personnel and metalworking and specialty sales specialists .
If any of them experience a cyber-attack or other cyber incident, this could adversely impact their operations, which may in turn impact or adversely affect our operations. Regulatory authorities have increased their focus on how companies collect, process, use, store, share and transmit personal data.
If any of them experience a cyber-attack or other cyber incident, this could adversely impact their operations, which may in turn impact or adversely affect our operations. General Risk Factors Our success is dependent on certain key management personnel. Our success depends largely on the efforts and abilities of certain key members of our senior management.
Removed
Consequently, demand for our products and services has been, and will continue to be, influenced by most of the same economic factors that affect demand for and production of our customers’ products. 11 When, as occurs in economic downturns, current or prospective customers reduce production levels because of lower demand or tight credit conditions, their need for our products and services diminishes.
Added
Qualified individuals of the requisite caliber and number needed to fill these positions may be difficult to hire and retain in sufficient numbers. Additionally, hiring and retaining such qualified individuals may be adversely impacted by global and domestic economic uncertainty, and increased competition for such qualified individuals .
Removed
Our results of operations have been adversely affected in the past, and may in the future be adversely impacted, by the COVID-19 pandemic. The COVID-19 pandemic has led to periods of significant volatility, uncertainty and economic disruption since its onset.
Added
An interruption of operations at our headquarters or customer fulfillment centers could adversely impact our business . Our business depends on maintaining operations at our co-located headquarters and customer fulfillment centers.
Removed
The COVID-19 pandemic has had impacts on our business, operations, financial results and financial condition in the past and the future impacts and consequences of the pandemic will depend on numerous evolving factors which are uncertain and cannot be predicted, including, but not limited to: the scope, duration and severity of the pandemic, including the possibility of further surges or variants of COVID-19; governmental, business and individuals’ actions taken in response; the effect on our customers and customers’ demand for our services and products; the effect on our suppliers and disruptions to the global supply chain, especially with respect to freight and labor availability; disruptions to our ability to sell and provide our services and products; disruptions to our operations resulting from the illness of any of our associates, including associates at our customer fulfillment centers; the macroeconomic environment, including periods of high inflation; the ability of our customers to pay for our services and products; and any closures of our and our suppliers’ and customers’ facilities.
Added
The long-term impacts of the Reclassification are still unknown, and the Reclassification may not result in an increase in shareholder value or improve the liquidity and marketability of our equity. If the Reclassification is not viewed favorably by members of the investment community, it may impair the value of our Class A Common Stock and limit its liquidity and marketability.
Removed
Any of these factors could amplify the other risks and uncertainties described herein and could materially adversely affect our business, operations, financial results and financial condition. The future impacts of the COVID-19 pandemic may be difficult to predict and may affect us differently than we have previously experienced.
Added
Furthermore, securities markets worldwide have experienced significant price and volume fluctuations in recent years. This market volatility, as well as general economic, market or political conditions, could cause a reduction in the market price and liquidity of shares of our Class A Common Stock.
Removed
Additionally, further or new implementation of shelter-in-place orders, social distancing orders, quarantines, port closures, increased border controls or closures, and other travel restrictions or government actions in response to COVID-19 may affect both our ability to maintain core products in inventory and to deliver products to our customers on a timely basis, which may in turn adversely affect our customer relationships and results of operations.
Added
Our principal shareholders own a significant amount of our voting stock and have rights to nominate directors to our Board of Directors, and their interests may differ from those of our other shareholders.
Removed
Our business depends on our ability to attract, train and retain qualified sales and customer service personnel and metalworking specialists . Our business depends on our ability to attract, train and retain qualified sales and customer service personnel and metalworking specialists.
Added
So long as the Jacobson / Gershwind Family Shareholders (as defined below), collectively, have beneficial or record ownership of at least 10% of the issued and outstanding shares of Class A Common Stock, our Board of Directors will, subject to the procedures and limitations set forth in the Reclassification Agreement (as defined below), nominate two individuals designated by the Jacobson / Gershwind Family Shareholders for election to the Board of Directors at any annual meeting of our shareholders at which directors are to be elected.
Removed
Our ability to offer a wide range of products and services is dependent on obtaining adequate product supply and services from our key suppliers and contractors.
Added
So long as the Jacobson / Gershwind Family Shareholders, collectively, have beneficial or record ownership of less than 10% but 5% or more of the issued and outstanding shares of Class A Common Stock, our Board of Directors will, subject to the procedures and limitations set forth in the Reclassification Agreement, nominate one individual designated by the Jacobson / Gershwind Family Shareholders for election to the Board of Directors at any annual meeting of our shareholders at which directors are to be elected.
Removed
Our supply chain 14 has also been and may continue to be impacted by the COVID-19 pandemic, especially with respect to freight and labor availability, and may be impacted by other factors outside of our control, including macro-economic events, trade restrictions, political crises, other public health emergencies, or natural or environmental occurrences.
Added
The amount of Class A Common Stock currently held by the Jacobson / Gershwind Family Shareholders, together with the foregoing director nomination rights, provide the Jacobson / Gershwind Family Shareholders with significant continued influence over our decisions.
Removed
Disruptions in our supply chain could result in a decrease in revenues and profitability. Supply chain disruptions could adversely impact our business, operating results and financial position.
Added
The interests of the Jacobson / Gershwind Family Shareholders with respect to matters potentially or actually involving or affecting us and our other shareholders, such as future acquisitions, financings and other corporate opportunities and attempts to acquire us, may differ from, or conflict with, the interests of our other shareholders.
Removed
For example, the outbreak of the COVID-19 pandemic and governmental actions taken in response disrupted, and may in the future disrupt, our operations and the operations of our suppliers, customers and companies who facilitate deliveries to our customers.
Added
We have made and continue to make investments in technology to protect our systems, computers, software, data and networks from attacks, damage or unauthorized access.
Removed
Our Class A Common Stock has one vote per share and our Class B Common Stock has 10 votes per share.
Added
We also have implemented numerous security protocols in order to strengthen security, and we maintain a customary cyber insurance policy, but there can be no assurance that breaches will not occur in the future or be covered by our insurance policy. The costs of maintaining adequate cybersecurity safeguards for our IT systems may be significant and recurring as technology progresses.
Removed
As of October 3, 2022, the Non-Executive Chairman of our Board of Directors, his sister, certain of their family members, including our President and Chief Executive Officer, and related trusts collectively owned 100% of the outstanding shares of our Class B Common Stock and approximately 3.5% of the outstanding shares of our Class A Common Stock, giving them control over approximately 65.9% of the combined voting power of our Class A Common Stock and our Class B Common Stock.
Added
In addition to incurring continual costs to maintain cybersecurity, we also incur significant, recurring costs to comply with data privacy laws. Regulatory authorities have increased their focus on how companies collect, process, use, store, share and transmit personal data.
Removed
Consequently, such shareholders will be able to elect all of the directors of the Company and to determine the outcome of any matter submitted to a vote of the Company’s shareholders for approval, including amendments to our certificate of incorporation and our second amended and restated by-laws, any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions.
Added
The integration of acquired businesses may not be successful and could result in disruption to other parts of our business. We are subject to environmental, health and safety laws and regulations. We are subject to federal, state, local, foreign and provincial environmental, health and safety laws and regulations.
Removed
Because this concentrated control could discourage others from initiating any potential merger, takeover or other change of control transaction that may otherwise be beneficial to our shareholders, the market price of our Class A Common Stock may be adversely affected.
Added
Our Third Amended and Restated By-Laws contain choice-of-forum provisions for certain claims against us, which could increase the costs of bringing a claim or limit the ability of a shareholder to bring a claim in a judicial forum viewed by a shareholder as favorable.

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Item 2. Properties

Properties — owned and leased real estate

4 edited+3 added−2 removed0 unchanged
Biggest changeWe also maintain 10 regional inventory centers, all of which are located in the United States, which vary in size from approximately 7,000 to 22,000 square feet. Most of these warehouses and regional inventory centers are leased. These leases will expire at various periods, with the longest extending to fiscal year 2031.
Biggest changeW e also maintain 10 regional inventory centers, all of which are located in the United States, which vary in size from approximately 7,000 to 58,000 square feet. Most of these warehouses, regional inventory centers and manufacturing locations are leased. These leases are for varying periods, with the longest extending to fiscal year 2031.
Date Owned Harrisburg, Pennsylvania 821,000 1997 Owned Atlanta, Georgia 721,000 1990 Owned Elkhart, Indiana 545,000 1996 Owned Columbus, Ohio 468,000 2014 Owned Reno, Nevada 419,000 1999 Owned Hanover Park, Illinois 288,000 2003 Leased We maintain 38 warehouses, of which 36 are located in North America and two are located in Europe.
Operational Date Leased/ Owned Harrisburg, Pennsylvania 821,000 1997 Owned Atlanta, Georgia 721,000 1990 Owned Elkhart, Indiana 545,000 1996 Owned Columbus, Ohio 468,000 2014 Owned Reno, Nevada 419,000 1999 Owned Hanover Park, Illinois 288,000 2003 Leased We maintain 38 warehouses, of which 36 are located in North America and two are l ocated in Europe.
ITEM 2. P ROPERTIES. We have customer fulfillment centers in or near the following locations: Approx. Operational Leased/ Location Sq. Ft.
ITEM 2. PROPERTIES. We have customer fulfillment centers in or near the following locations: Location Approx. Sq. Ft.
This count includes locations which were previously referred to as either branches or customer fulfillment centers. Of these locations, 13 are new to MSC as a result of the fiscal year 2022 acquisitions. Our warehouses range in size from approximately 1,000 to 110,000 square feet.
This count includes locations which were previously referred to as either branches or customer fulfillment centers. Of these locations, two are new to MSC as a result of the acquisition of Buckeye and Tru-Edge during fiscal year 2023. Our warehouses range in size from approximat ely 1,000 to 110,000 square feet.
Removed
The aggregate annual lease payments on the leased warehouses, regional inventory centers and customer fulfillment centers in fiscal year 2022 were approximately $9.6 million. During fiscal year 2021 , the Company announced plans to relocate its Long Island Customer Service Center (“CSC”) to a smaller facility in Melville, New York.
Added
We also maintain four manufacturing locations, two of which were acquired as part of the Buckeye and Tru-Edge acquisition during fiscal year 2023 . These manufacturing locations range in size from approximately 2,000 to 23,000 square feet.
Removed
In connection with the announcement, we signed a 10-year lease to occupy approximately 26,000 square feet in an office building in Melville, New York, which commenced in September 2021. The Company subsequently entered into a Purchase and Sale Agreement to sell the Long Island CSC, which closed during the fourth quarter of fiscal year 2022.
Added
The aggregate annual lease payments on the leased customer fulfillment centers, warehouses, regional inventory centers and manufacturing locations in fiscal year 2023 were approximatel y $12.3 million. ITEM 3. LEGAL PROCEEDINGS. For information related to legal proceedings, see the discussion under the caption “Legal Proceedings” in Note 16, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements. ITEM 4.
Added
MINE SAFETY DISCLOSURES. Not applicable. 21 Table of Contents PART II.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

8 edited+1 added−1 removed4 unchanged
Biggest changeAs of September 3, 2022, the maximum number of shares of the Company’s Class A Common Stock that may yet be repurchased under the Share Repurchase Program was 4,700,000 shares. ‎ 21 Performance Graph The following stock price performance graph and accompanying information is not deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any filings under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, or be subject to the liabilities of Section 18 of the Exchange Act, regardless of any general incorporation language in any such filing.
Biggest changePerformance Graph The following stock price performance graph and accompanying information is not deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any filings under the Securities Act or the Exchange Act or be subject to the liabilities of Section 18 of the Exchange Act, regardless of any general incorporation language in any such filing.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. MSC’s Class A Common Stock is traded on the NYSE under the symbol “MSM.” MSC’s Class B Common Stock is not traded in any public market. In 2003, our Board of Directors instituted a policy of paying regular quarterly cash dividends to our shareholders.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. MSC’s Class A Common Stock is traded on the NYSE under the symbol “MSM.” In 2003, our Board of Directors instituted a policy of paying regular quarterly cash dividends to our shareholders.
The graph assumes $100 invested at the closing price of our Class A Common Stock on the NYSE and each index on September 2, 2017 and assumes that all dividends paid on such securities during the applicable fiscal years were reinvested. Indices are calculated on a month-end basis.
The graph assumes that $100 was invested at the closing price of our Class A Common Stock on the NYSE and each index on September 1, 2018 and assumes that all dividends paid on such securities during the applicable fiscal years 22 Table of Contents were reinvested. Indices are calculated on a month-end basis.
The approximate number of holders of record of MSC’s Class A Common Stock as of October 3, 2022 was 532. The number of holders of record of MSC’s Class B Common Stock as of October 3, 2022 was 19.
The approximate number of holders of record of MSC’s Class A Common Stock as of October 6, 2023 was 546.
The Company paid aggregate annual regular cash dividends of $3.00 per share in fiscal year 2022. The Company paid aggregate annual cash dividends of $6.50 per share in fiscal year 2021 , consisting of a special cash dividend of $3.50 per share and total quarterly regular cash dividends of $3.00 per share.
The Company paid aggregate annual regular cash dividends of $3.16 per share in fiscal year 2023 and $3.00 per share in fiscal year 2022.
Purchases of Equity Securities The following table sets forth repurchases by the Company of its outstanding shares of Class A Common Stock, which are listed on the NYSE, during the quarter ended September 3, 2022: Period Total Number of Shares Purchased (1) Average Price Paid Per Share (2) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (3) 5/29/22-6/28/22 338 $ 76.72 — 5,000,000 6/29/22-7/29/22 301,630 $ 73.74 300,000 4,700,000 7/30/22-9/3/22 1,780 $ 78.91 — 4,700,000 Total 303,748 300,000 ________________________ (1) During the quarter ended September 3, 2022, 3,748 shares of our Class A Common Stock were withheld by the Company as payment to satisfy our associates’ tax withholding liability associated with our share-based compensation program and are included in the total number of shares purchased.
Purchases of Equity Securities The following table sets forth repurchases by the Company of its outstanding shares of Class A Common Stock, which are listed on the NYSE, during the quarter ended September 2, 2023: Period Total Number of Shares Purchased (1) Average Price Paid Per Share (2) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (3) 6/4/2023-7/4/2023 2,214 $ 95.51 — 4,369,279 7/5/2023-8/3/2023 129,596 $ 96.00 129,500 4,239,779 8/4/2023-9/2/2023 516,236 $ 100.81 515,756 3,724,023 Total 648,046 645,256 ____________________ (1) During the quarter ended September 2, 2023, 2,790 shares of our Class A Common Stock were withheld by the Company as payment to satisfy our associates’ tax withholding liability associated with our share-based compensation program and are included in the total number of shares purchased.
On October 11, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.79 per share, payable on November 29, 2022 to shareholders of record at the close of business on November 15, 2022. The dividend will result in a payout of approximately $44.1 million, based on the number of shares outstanding at October 3, 2022.
On October 11, 2023, the Company’s Board of Directors declared a regular cash dividend of $0.83 per share, payable on November 28, 2023 to shareholders of record at the close of business on November 14, 2023. The dividend is expected to result in aggregate payments of $47.5 million, based on the number of shares outstanding at October 6, 2023.
Cumulative Total Shareholder Return for the Period from September 2, 2017 through September 3, 2022 9/2/2017 9/1/2018 8/31/2019 8/29/2020 8/28/2021 9/3/2022 MSC Industrial Direct Co., Inc. 100.00 126.78 103.68 114.30 158.01 150.90 S&P Midcap 400 Index 100.00 119.51 111.83 117.74 169.54 148.88 Dow Jones US Industrial Supplier Index 100.00 150.09 129.41 180.18 221.57 218.89 ITEM 6. [RESERVED]. ‎ 22
Cumulative Total Shareholder Return for the Period from September 1, 2018 through September 2, 2023 *$100 invested on 9/1/2018 in stock or index, including reinvestment of dividends 9/1/2018 8/31/2019 8/29/2020 8/28/2021 9/3/2022 9/2/2023 MSC Industrial Direct Co., Inc. 100.00 81.78 90.16 124.63 119.03 159.78 S&P Midcap 400 Index 100.00 93.57 98.52 141.86 124.58 141.38 Dow Jones US Industrial Supplier Index 100.00 86.23 120.05 147.62 145.84 185.72
Removed
There is no expiration date for the Share Repurchase Program.
Added
There is no expiration date for the Share Repurchase Program. As of September 2, 2023, the maximum number of shares of the Company’s Class A Common Stock that may yet be repurchased under the Share Repurchase Program was 3,724,023 shares.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

60 edited+37 added−29 removed18 unchanged
Biggest changeWe 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 Ended September 3, 2022 Compared to the Fiscal Year Ended August 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.
Biggest changeSee “Impact of Economic Trends” above. 27 Table of Contents Results of Operations Fiscal Year Ended September 2, 2023 Compared to the Fiscal Year Ended September 3, 2022 The table below summarizes the Company’s results of operations both in dollars (in thousands) and as a percentage of net sales for the periods indicated: Fiscal Years Ended September 2, 2023 (52 weeks) September 3, 2022 (53 weeks) Change $ % $ % $ % Net sales $ 4,009,282 100.0 % $ 3,691,893 100.0 % $ 317,389 8.6 % Cost of goods sold 2,366,317 59.0 % 2,133,645 57.8 % 232,672 10.9 % Gross profit 1,642,965 41.0 % 1,558,248 42.2 % 84,717 5.4 % Operating expenses 1,151,295 28.7 % 1,083,862 29.4 % 67,433 6.2 % Restructuring and other costs 7,937 0.2 % 15,805 0.4 % (7,868) (49.8) % Gain on sale of property — — % (10,132) (0.3) % 10,132 N/A (1) Income from operations 483,733 12.1 % 468,713 12.7 % 15,020 3.2 % Total other expense (27,577) (0.7) % (17,581) (0.5) % (9,996) 56.9 % Income before provision for income taxes 456,156 11.4 % 451,132 12.2 % 5,024 1.1 % Provision for income taxes 113,049 2.8 % 110,650 3.0 % 2,399 2.2 % Net income 343,107 8.6 % 340,482 9.2 % 2,625 0.8 % Less: Net (loss) income attributable to noncontrolling interest (126) 0.0 % 696 0.0 % (822) (118.1) % Net income attributable to MSC Industrial $ 343,233 8.6 % $ 339,786 9.2 % $ 3,447 1.0 % (1) N/A is Not Applicable.
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.
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 the physical condition of the inventory. We write-down inventories for shrinkage and slow-moving or obsolete inventory.
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.
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 Class A Common Stock from time to time, and to pay dividends to our shareholders.
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.
We will seek to continue to achieve cost reductions throughout our business through cost-savings 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 VMI, CMI and vending programs.
Historically, our primary financing needs have been to fund our working capital requirements 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.
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.
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.
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, interpretations of tax laws and uncertain tax positions.
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.
We help our customers drive greater productivity, profitability and growth with approximately 2.4 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.
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.
See Note 11, “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.
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.
During 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.
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 believe, based on our current business plan, that our existing cash, financial resources and cash flow from operations will be sufficient to fund anticipated capital expenditures and operating cash requirements for at least the next 12 months.
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.
Our experienced team of more than 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.
The chart below displays a two-year comparison of our net sales from fiscal year 2021 through fiscal year 2022: (1) Pricing and other is comprised of changes in customer and product mix, discounting and other items.
The chart below displays a two-year comparison of our net sales from fiscal year 2022 through fiscal year 2023: (1) Pricing and other is comprised of changes in customer and product mix, discounting and other items.
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.
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, with 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 2029.
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.
To realize growth, one of our Mission Critical initiatives, 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.
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.
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 Customer Service Center in Melville, New York.
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.
Capital Expenditures We continue to invest in sales productivity initiatives, E-commerce and vending platforms, customer fulfillment centers and distribution network, and other infrastructure and technology.
Recently Issued Accounting Pronouncements Refer to Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements . ‎ 32
Recently Adopted Accounting Pronouncements Refer to Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.
See Note 10, “Leases” in the Notes to Consolidated Financial Statements for additional information on our operating lease arrangements. (2) As of September 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 11, “Leases” in the Notes to Consolidated Financial Statements for additional information on our operating lease arrangements. (2) As of September 2, 2023, the Company had entered into various finance leases for certain IT equipment, which expire on varying dates through fiscal year 2026.
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.
See Note 8, “Income Taxes” in the Notes to Consolidated Financial Statements. 33 Table of Contents 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 Consolidated Financial Statements.
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.
As of September 2, 2023, total borrowings outstanding, representing amounts due under our credit facilities and notes, as well as all finance leases and financing arrangements, were $454.3 million, net of unamortized debt issuance costs of $1.0 million, as compared to total borrowings outstanding of $794.6 million, net of unamortized debt issuance costs of $1.4 million, as of September 3, 2022.
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 .
These leases are for varying periods, with the longest extending to fi scal year 2031. In ad dition, we are obligated under certain equipment and automobile operating and finance leases, which expire on varying dates through fiscal ye ar 2029. From time to time, we enter into financing arrangements with vendors to purchase certain information technology equipment or software.
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.
We offer approximately 2.4 million active, saleable SKUs through our catalogs; our brochures; our E-commerce 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, 38 warehouses and four manufacturing locations.
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.
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 Reclassification required significant cash outlays during fiscal year 2023.
Our field sales and service associate headcount was 2,536 at September 3, 2022 compared to 2,398 at August 28, 2021 and 2,263 at August 29, 2020.
Our field sales and service associate headcount was 2,572 at September 2, 2023 compared to 2,536 at September 3, 2022 and 2,398 at August 28, 2021.
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.
These disruptions and conditions have contributed to an inflationary environment which, while falling, remains elevated and 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.
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.
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 adopted accounting standard related to current expected credit losses.
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 the Financial Accounting Standards Board and the SEC.
Policies such as revenue recognition, depreciation, intangibles, long-lived assets and warranties require judgments on complex matters that are often 34 Table of Contents subject to multiple external sources of authoritative guidance such as the Financial Accounting Standards Board and the SEC.
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.
The table below summarizes certain information regarding the Company’s operations: Fiscal Years Ended September 2, 2023 September 3, 2022 (Dollars in thousands) Working Capital (1) $ 668,077 $ 817,679 Current Ratio (2) 2.0 2.1 Days’ Sales Outstanding (3) 36.5 65.3 Inventory Turnover (4) 3.2 3.2 (1) Working Capital is calculated as current assets less current liabilities.
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.
Restructuring and other costs primarily consist of consulting-related costs and associate severance and separation costs associated with the optimization of the Company’s operations and profitability improvement.
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 $ 246,183 $ 224,462 Net cash used in investing activities (94,493) (75,746) Net cash used in financing activities (148,140) (233,747) Effect of foreign exchange rate changes on cash and cash equivalents (549) 356 Net increase (decrease) in cash and cash equivalents $ 3,001 $ (84,675) Operating Activities Net cash provided by operating activities for fiscal years 2022 and 2021 was $246.2 million and $224.5 million, respectively.
The table below summarizes information regarding the Company’s cash flows for the periods indicated: Fiscal Years Ended September 2, 2023 September 3, 2022 (In thousands) Net cash provided by operating activities $ 699,582 $ 246,183 Net cash used in investing activities (112,675) (94,493) Net cash used in financing activities (580,400) (148,140) Effect of foreign exchange rate changes on cash and cash equivalents 8 (549) Net increase in cash and cash equivalents $ 6,515 $ 3,001 31 Table of Contents Operating Activities Net cash provided by operating activities for fiscal years 2023 and 2022 was $699.6 million and $246.2 million, respectively.
As of September 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.
As of September 2, 2023, the Company had recorded a non-current liability of $5.3 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.
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.
As a result of recent high inflation and periodic supply chain disruptions, the Company continues to implement price realization strategies in response to increased costs the Company faces and has invested in improved warehouse automation to mitigate the effects of labor inflation.
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.
Operating Expenses Operating expenses increased 6.2% to $1,151.3 million in fiscal year 2023, as compared to $1,083.9 million in fiscal year 2022. Operating expenses were 28.7% of fiscal year 2023 net sales, as compared to 29.4% for fiscal year 2022.
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.
Sales made through our E-commerce platforms, including sales made through EDI systems, VMI systems, Extensible Markup Language ordering-based systems, vending, hosted systems and other electronic portals, represented 61.1% of consolidated net sales for fiscal year 2023, compared to 61.7% of consolidated net sales for fiscal year 2022.
Net Sales Net sales increased 13.8%, or $448.7 million, from the prior fiscal year.
Net Sales Net s ales increased 8.6%, or $317.4 million, from the prior fiscal year.
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.
Such disruptions and conditions have impacted, and may continue to impact in the future, the Company’s business, financial condition and results of operations.
Private Placement Debt and Shelf Facility Agreements In July 2016, we completed the issuance and sale of unsecured senior notes. In January 2018, we entered into two note purchase and private shelf facility agreements (together, the “Shelf Facility Agreements”). In June 2018 and March 2020, we entered into additional note purchase agreements.
See Note 10, “Debt” in the Notes to Consolidated Financial Statements for more information about these balances. Private Placement Debt and Shelf Facility Agreements In July 2016, we completed the issuance and sale of unsecured senior notes. In January 2018, we entered into two note purchase and private shelf facility agreements.
Future Liquidity Outlook Our future contractual obligations as of September 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.
Future Liquidity Outlook As of September 2, 2023, our future contractual obligations were as follows (in thousands): Contractual Obligations Fiscal Year 2024 Thereafter Undiscounted operating lease obligations (1) $ 23,422 $ 49,529 Undiscounted finance lease obligations, net of interest (2) 275 237 Maturities of long-term debt obligations, net of interest (3) 50,000 224,750 Estimated interest on long-term debt (4) 9,638 18,659 Total contractual obligations $ 83,335 $ 293,175 (1) Certain of our operations are conducted on leased premises.
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.
The $317.4 million increase in net sales was comprised of $160.5 million from improved pricing, inclusive of changes in customer and product mix, discounting and other items, $136.0 million of higher sales volume and $113.5 million of net sales from recent acquisitions, partially offset by $92.6 million in sales attributable to six fewer selling days during fiscal year 2023.
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.
The components contributing to the use of cash for fiscal year 2023 were primarily the following: • $176.7 million of regular cash dividends paid during fiscal year 2023 compared to $167.4 million of regular cash dividends paid during fiscal year 2022; • net payments under our credit facilities, private placement debt and shelf facility agreements of $340.0 million during fiscal year 2023 compared to net borrowings of $9.5 million during fiscal year 2022; • $95.8 million in aggregate repurchases of Class A Common Stock during fiscal year 2023 compared to $27.4 million in aggregate repurchases of Class A Common Stock during fiscal year 2022; and • proceeds from the exercise of Class A Common Stock options of $28.7 million during fiscal year 2023 compared to $34.7 million during fiscal year 2022. 32 Table of Contents Debt Credit Facilities In April 2017, the Company entered into a $600.0 million revolving credit facility, which was subsequently amended and extended in August 2021.
O f the $448.7 million increase in net sales during the fiscal year ended September 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) 2022 vs. 2021 Fiscal Period Thirteen-Week Period Ended Fiscal Q1 Thirteen-Week Period Ended Fiscal Q2 Thirteen-Week Period Ended Fiscal Q3 Fourteen-Week Period Ended Fiscal Q4 Fiscal Year Ended 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 Change 14.0% Manufacturing Customers Percent of Total Net Sales 70% Non-Manufacturing Customers ADS Percent Change 3.9% Non-Manufacturing Customers Percent of Total Net Sales 30% (1) ADS is calculated using number of business days in the United States for the periods indicated.
Of the $317.4 million increase in net sales during the fiscal year ended September 2, 2023, national account customer sales increased by $123.0 million, sales to our public sector customers increased by $122.1 million and sales to our core and other customers increased by $72.3 million. 28 Table of Contents The table below shows, among other things, the annual 2023 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) 2023 Fiscal Period Thirteen-Week Period Ended Fiscal Q1 Thirteen-Week Period Ended Fiscal Q2 Thirteen-Week Period Ended Fiscal Q3 Thirteen-Week Period Ended Fiscal Q4 Fiscal Year Ended Net Sales (in thousands) $ 957,745 $ 961,632 $ 1,054,464 $ 1,035,441 $ 4,009,282 Sales Days 62 63 64 63 252 ADS (1) (in millions) $ 15.4 $ 15.3 $ 16.5 $ 16.4 $ 15.9 Total Company ADS Percent Change (2) 12.9 % 11.5 % 11.7 % 9.3 % 11.2 % Manufacturing Customers ADS Percent Change (2) 7.5 % Manufacturing Customers Percent of Total Net Sales 68 % Non-Manufacturing Customers ADS Percent Change (2) 19.7 % Non-Manufacturing Customers Percent of Total Net Sales 32 % (1) ADS is calculated using the number of business days in the United States for the periods indicated.
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.
Impact of Economic Trends The United States economy has experienced and continues to experience disruptions in the supply of certain products and services and tight conditions in the labor market.
See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about our credit facilities. As of September 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 through October 3, 2022 on its revolving credit facility.
As of September 2, 2023, the Company also had three uncommitted credit facilities, totaling $203.0 million of aggregate maximum uncommitted availability. See Note 10, “Debt” in the Notes to Consolidated Financial Statements for more information about our credit facilities. As of September 2, 2023, we were in compliance with the operating and financial covenants of our credit facilities.
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 September 3, 2022, we had $43.5 million in cash and cash equivalents, substantially all with well-known financial institutions.
Liquidity and Capital Resources September 2, 2023 September 3, 2022 $ Change (In thousands) Total debt $ 454,326 $ 794,592 $ (340,266) Less: Cash and cash equivalents 50,052 43,537 6,515 Net debt $ 404,274 $ 751,055 $ (346,781) Equity $ 1,492,582 $ 1,362,283 $ 130,299 As of September 2, 2023, we had $50.1 million in cash and cash equivalents, substantially all with well-known financial institutions.
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 $7.3 million for fiscal year 2022, as compared to $3.6 million for fiscal year 2021.
The primary drivers of the increase in freight expense were increased sales volume and higher fuel-related charges. Fuel-related surcharges began to taper off during the second half of fiscal year 2023. Depreciation and amortization was $74.7 million for fiscal year 2023, as compared to $69.9 million for fiscal year 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.
Income from Operations Income from operations increased 3.2% to $483.7 million in fiscal year 2023, as compared to $468.7 million in fiscal year 2022. Income from operations as a percentage of net sales decreased to 12.1% in fiscal year 2023, as compared to 12.7% 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.
Provision for Income Taxes Our effective tax rate for fiscal year 2023 was 24.8%, as compared to 24.5% for fiscal year 2022.
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.
The decrease in total borrowings outstanding was driven by higher net payments under our credit facilities, private placement notes and shelf facility agreements. Debt payments were primarily funded through the RPA entered into during fiscal year 2023. See Note 10, “Debt” in the Notes to Consolidated Financial Statements for more information about these balances.
The use of cash for fiscal year 2022 included expenditures for property, plant and equipment and the acquisitions of Engman-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.
The use of cash for fiscal years 2023 and 2022 also included cash outflows due to acquisitions, Buckeye and Tru-Edge in fiscal year 2023 and Engman-Taylor Company, Inc. and Tower Fasteners in fiscal year 2022. In fiscal year 2022, investing outflows were partially offset by the net proceeds received from the sale of the Company’s Long Island Customer Service Center.
Net Income The factors which affected net income for fiscal year 2022, as compared to the prior fiscal year, have been discussed above.
See Note 8, “Income Taxes” in the Notes to Consolidated Financial Statements for further information. 30 Table of Contents Net Income The factors which affected net income for fiscal year 2023, as compared to the prior fiscal year, have been discussed above.
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.
Through statistical analysis, we have found that trends in our customers’ activity have correlated to changes in the IP Index. 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.
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.
Payroll and payroll-related costs, which include salary, incentive compensation, sales commission, and fringe benefit costs, increased by $22.9 million for fiscal year 2023.
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.
The Company believes the technical expertise and value-added services provided by Tru-Edge will support its effort to drive cost savings for its customers. 26 Table of Contents 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.
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.
Subsequent to fiscal year 2023, the Company made additional payments of $15.0 million through October 6, 2023 on its revolving credit facility. The current unused balance of $559.7 million from the revolving credit facility, which is reduced by outstanding letters of credit, is available for working capital purposes if necessary.
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 over the three months ended September 2, 2023 and the average for the three- and 12-month periods ended September 2, 2023 were as follows: Period IP Index June 102.3 July 103.3 August 103.3 Fiscal Year 2023 Q4 Average 103.0 12-month average 102.8 The average IP Index for the 12 months ended September 2, 2023 of 102.8 increased from the adjusted average from the prior fiscal year of 101.8, which indicated growth in manufacturing during fiscal year 2023.
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 .
The decline in operating expenses as a percentage of net sales was related to our cost savings programs and productivity improvements resulting from our Mission Critical initiatives. 29 Table of Contents Payroll and payroll-related costs were approximately 56.1% of total operating expenses for fiscal year 2023, as compared to approximately 57.5% for fiscal year 2022.
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.
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.
(2) Fiscal year 2022 includes a 53 rd week during the reporting period, including the net sales of acquisitions during the 53 rd 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. In June 2022, we acquired Engman-Taylor for aggregate consideration of $24.8 million. In July 2022, the sale of our Long Island CSC closed, resulting in a gain on sale of $10.1 million. In August 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.
Proceeds from the RPA were primarily utilized to pay down debt on our credit facilities. • We repurchased $95.8 million of MSC’s Class A Common Stock, par value $0.001 per share (“Class A Common Stock”), compared to $27.4 million in fiscal year 2022. • We paid out an aggregate $176.7 million in regular cash dividends, compared to an aggregate $167.4 million in regular cash dividends in fiscal year 2022. • In January 2023, we acquired Buckeye and Tru-Edge for aggregate consideration of $22.4 million, which includes cash paid of $20.5 million and the fair value of contingent consideration to be paid out of $2.3 million, net of a post-closing working capital adjustment in the amount of $0.4 million received from the sellers. • We incurred $7.9 million in restructuring and other costs compared to $15.8 million in fiscal year 2022.
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.
Financing Activities Net cash used in financing activities for fiscal years 2023 and 2022 was $580.4 million and $148.1 million, respectively.
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.
Restructuring and other costs primarily consist of consulting-related costs and associate severance and separation costs associated with the optimization of the Company’s operations and profitability improvement. See Note 14, “Restructuring and Other Costs” in the Notes to Consolidated Financial Statements for additional information.
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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.
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(2) Fiscal years 2023 and 2022 had 252 and 258 sales days, respectively. 24 Table of Contents Highlights Highlights during fiscal year 2023 include the following: • We generated $699.6 million of cash from operations compared to $246.2 million in fiscal year 2022.
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Relocation and Sale of Long Island CSC In December 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 in Melville, New York, which commenced in September 2021.
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The increase was primarily from the $300.0 million Receivables Purchase Agreement (the “RPA”) entered into during fiscal year 2023. • We had net payments of $340.0 million on our credit facilities, private placement debt and shelf facility agreements compared to net borrowings of $9.5 million in fiscal year 2022.
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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.
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While Mission Critical was tied to three-year financial targets ending in fiscal year 2023, the key focus areas of Mission Critical, including profitable growth, an improved operating model, and technological improvement, remain critical and ever-evolving initiatives at the Company. Maintaining a continuous improvement mindset remains a key tenet of our strategy going forward.
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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.
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The category line review process initiated in the second quarter of fiscal year 2023 continues to progress and shows early signs of improvements in supply chain efficiency, customer experience and supplier engagement.
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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.
Added
Furthermore, in light of disruptions to availability and increased or uncertain shipping times, the Company is maintaining higher purchasing levels than it did prior to its fiscal year 2020 in order to ensure sufficient inventory supply to meet customer demand. 25 Table of Contents Reclassification On January 31, 2023, the Board of Directors of the Company (the “Board”) received a proposal (the “Proposal”) from the Company’s controlling shareholders, the Jacobson / Gershwind family, to exchange each of their shares of Class B Common Stock, par value $0.001 per share (“Class B Common Stock” and, together with Class A Common Stock, “Common Stock”), for shares of Class A Common Stock, reclassify the Class B Common Stock and the Class A Common Stock into a single class of common stock and eliminate the current dual-class share structure (the “Reclassification”).
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Acquisitions of Engman-Taylor and Tower Fasteners In June 2022, the Company acquired certain assets and assumed certain liabilities of Engman-Taylor, a Menomonee 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.
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The Board formed a Special Committee composed entirely of independent and disinterested directors to evaluate the Proposal, which was advised by independent financial and legal advisors.
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In August 2022, the Company acquired 100% of the outstanding equity of Tower Fasteners, a Holtsville, 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.
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On June 21, 2023, the Company announced that it had reached an agreement with the Jacobson / Gershwind family with respect to the Reclassification, in support of which, the Company entered into a Reclassification Agreement, dated as of June 20, 2023 (the “Reclassification Agreement”), with Mitchell Jacobson, Erik Gershwind, other members of the Jacobson / Gershwind family and certain entities affiliated with the Jacobson / Gershwind family (collectively, the “Jacobson / Gershwind Family Shareholders”).
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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.
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In October 2023, we completed the Reclassification as contemplated by the Reclassification Agreement.
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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.
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Pursuant to the Reclassification, each share of Class B Common Stock issued and outstanding immediately prior to the time that the Company’s Amended and Restated Certificate of Incorporation was duly filed with the Secretary of State of the State of New York was reclassified, exchanged and converted into 1.225 shares of Class A Common Stock.
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Growth in the IP index from month to month indicates growth in the manufacturing, mining and utilities industries.
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The issuance of Class A Common Stock in connection with the Reclassification was registered under the Securities Act pursuant to the Registration Statement on Form S‐4.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeWe will continue to actively assess the related opportunities and risks involved in this transition. Borrowings under our committed and uncommitted credit facilities are subject to fluctuations in the interest rate, which have a corresponding effect on our interest expense.
Biggest changeBorrowings under our committed and uncommitted credit facilities are subject to fluctuations in the interest rate, which have a corresponding effect on our interest expense. We are also exposed to interest rate risk arising from market rate adjustments as they pertain to the RPA. Future sales of our finance receivables may be affected by changes in market rates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Interest Rate Risks We are exposed to interest rate risk on our variable-rate debt. During fiscal year 2021, the Company entered into two uncommitted credit facilities and amended its existing uncommitted credit facility entered into during fiscal year 2020. Additionally, the Company amended its committed credit facility during fiscal year 2021.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Interest Rate Risks We are exposed to interest rate risk on our variable rate debt. During fiscal year 2023, the Company extended its three uncommitted credit facilities. Additionally, the Company amended its committed credit facility during fiscal year 2023.
A 100-basis point increase or decrease in interest rates would impact our interest costs by approximately $4.7 million under our current capital structure. We have monitored and will continue to monitor our exposure to interest rate fluctuations. In addition, our interest income is most sensitive to changes in the general level of interest rates.
A 100-basis point increase or decrease in interest rates would impact our interest costs and fees incurred associated with the RPA by approximately $5.1 million under our current capital structure. We have monitored and will continue to monitor our exposure to interest rate fluctuations.
As a result, currency fluctuations are currently not material to our operating results. To the extent that we engage in more significant international sales in the future, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets.
To the extent that we engage in more significant international sales in the future, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets. We have monitored and will continue to monitor our exposure to currency fluctuations. 35 Table of Contents
Our amended revolving credit facility also provides for the transition from LIBOR to SOFR and is expected to transition during fiscal year 2023. As SOFR is a relatively new reference rate with a limited history, there may or may not be more volatility than other reference rates such as LIBOR, which may result in increased borrowing costs for the Company.
As SOFR is a relatively new reference rate with a limited history, there may or may not be more volatility than other reference rates such as LIBOR, which may result in increased borrowing costs for the Company. We will continue to actively assess the related opportunities and risks involved in this transition.
In this regard, changes in interest rates affect the interest earned on our cash. We do not currently use interest rate derivative instruments to manage exposure to interest rate changes. Foreign Currency Risks Approximately 95% of our sales are denominated in U.S. dollars and are primarily from customers in the United States.
In addition, our interest income is most sensitive to changes in the general level of interest rates. In this regard, changes in interest rates affect the interest earned on our cash. We do not currently use interest rate derivative instruments to manage exposure to interest rate changes.
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See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about the credit facilities. In July 2017 , the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR, with full discontinuation by June 2023. The U.S.
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See Note 10, “Debt” in the Notes to Consolidated Financial Statements for more information about the credit facilities. During fiscal years 2022 and 2023, we amended our committed and uncommitted credit facilities by replacing the London InterBank Offered Rate (“LIBOR”) with the Secured Overnight Financing Rate (“SOFR”) as the primary reference rate.
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Federal Reserve has chosen SOFR as the preferred alternate rate to LIBOR for use in derivatives and other financial contracts currently indexed to LIBOR. During fiscal year 2022, we amended our uncommitted credit facilities to allow for SOFR as the primary reference rate as a replacement for LIBOR.
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Foreign Currency Risks Approximately 95% of our sales are denominated in U.S. dollars and are primarily from customers in the United States. As a result, currency fluctuations are currently not material to our operating results.
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We have monitored and will continue to monitor our exposure to currency fluctuations. 33

Other MSM 10-K year-over-year comparisons