MSC Industrial Direct Co., Inc. Reports Fiscal 2007 Third Quarter Results

MSC INDUSTRIAL DIRECT CO., INC. (NYSE: MSM), "MSC or the Company,” one of the premier distributors of MRO supplies to industrial customers throughout the United States, today reported financial results for its third quarter of fiscal 2007 ended May 26, 2007. The financial results of J&L America, Inc. ("J&L”) prior to June 8, 2006 are not included in the consolidated statement of income or consolidated statement of cash flows for the fiscal 2006 periods in the attached tables. For the third quarter of fiscal 2007, net sales were $431.1 million, compared with $329.8 million in the third quarter of fiscal 2006, an increase of 30.7%. Sales from the J&L acquisition accounted for approximately 74.0% of the overall sales growth in the quarter. Net income in the third quarter of fiscal 2007 increased 23.6% to $45.8 million, compared with net income of $37.0 million for the third quarter of fiscal 2006. The Company reported diluted earnings per share of $0.69, an increase of 27.8% over diluted earnings per share of $0.54 in the prior year period. For the first nine months of fiscal 2007, net sales rose 32.8% to $1.24 billion, from $931.7 million in the first nine months of fiscal 2006. J&L represented approximately 72.0% of this growth. Net income for the first nine months of fiscal 2007 totaled $126.6 million compared to $102.3 million a year ago, an increase of 23.7%. For the fiscal 2007 nine-month period, the Company reported diluted earnings per share of $1.89, an increase of 26.0% over diluted earnings per share of $1.50 in the year-ago period. Included in the Company’s results for the first nine months of fiscal 2007 are pre-tax charges totaling $4.8 million, or $0.04 per diluted share on an after-tax basis, for costs related to the integration of the J&L acquisition. "Our results in the third quarter continue to reflect our strong operational and financial execution throughout fiscal 2007,” stated David Sandler, President and Chief Executive Officer. "Despite the softness seen in the industrial economy in recent periods, we maintained our focus on providing our customers with a compelling value proposition that allows them to reduce their operating costs and enhance their efficiency, while maintaining the level of customer service they have come to expect from MSC. We also continued our careful focus on operating expense controls and gross margin execution, which resulted in better than expected operating margins during the period. The net result was continued solid growth of our business and performance that met or exceeded all key metrics.” "The successful integration of the J&L acquisition continued during the third quarter, and we remain on track to meet our goal of $20 million in annual savings related to this acquisition,” continued Mr. Sandler. "We have now successfully completed the migration of J&L to the MSC computer system, and J&L orders are now being seamlessly processed and shipped from MSC customer fulfillment centers. This was a large and very complicated task, and its successful conclusion is a testament to the quality and commitment of everyone involved with the project. I am very proud of how well our organization performed during the integration of J&L, and wish to extend my congratulations to the entire team.” "Our financial performance continued to be excellent in the third quarter,” said Chuck Boehlke, Executive Vice President and Chief Financial Officer. "Our strong operational execution allowed us to grow sales by 30.7%, while our focus on expense management resulted in higher than expected operating margins of 17.5%, which includes $1.5 million in J&L integration costs, as well as $1.9 million in additional amortization expense during the third quarter related to the J&L acquisition. Our results for the quarter also benefited from the successful implementation of efficient tax planning strategies, which reduced our tax rate in the period to 37.1% from 38.6% a year ago. Earnings per diluted share for the third quarter of fiscal 2007 exceeded the midpoint of our guidance by $0.04 per share. Approximately $0.02 per share was derived from improved operating margins and reduced interest expense. The balance was due to improved tax efficiency. The quarter was also strong from a cash flow perspective, as consolidated free cash flow (see Note 1) was $44.9 million, an improvement of nearly $10 million over year-ago levels. We leveraged this strong cash flow performance to continue investing in the business, while also strengthening our balance sheet by paying down debt levels and returning capital to shareholders through dividend payments and our stock repurchase program.” Mr. Sandler concluded, "We are especially pleased with our financial performance, despite the prevalent softness of the industry reflected in seven months of weak ISM index reports. Although market conditions have not changed, the two most recent ISM index reports show more optimism in the market. We are not currently seeing that optimism reflected in our ordering rates from customers, however, history shows that if the trend in the ISM continues, we should see improving business conditions in the upcoming months. Accordingly, based on current market conditions, we expect consolidated net sales for the fourth quarter of fiscal 2007 to be between $442.0 million and $448.0 million and diluted earnings per share to be between $0.67 and $0.69, including a charge of approximately $0.02 per diluted share for costs related to the integration of the J&L acquisition.” The management of MSC will host a conference call today at 11:00 a.m. Eastern Time to review the Company’s results for the third quarter of fiscal 2007, and to comment on current operations. The call may be accessed via the Internet at: http://www.mscdirect.com. Note 1 – Free cash flow is defined as net cash provided by operating activities less expenditures for property, plant and equipment. Net cash flow provided by operating activities during the third quarter of fiscal 2007 was $44.9 million. Expenditures for property, plant and equipment in the third quarter of fiscal 2007 were $6.7 million. Management considers free cash flow to be an important indicator of the Company’s financial strength and the ability to generate liquidity because it reflects cash generated from operations that can be used for strategic initiatives, dividends, debt repayment and repurchases of the Company’s stock. About MSC Industrial Direct MSC Industrial Direct is one of the premier distributors of Metalworking and Maintenance, Repair and Operation (MRO) supplies to industrial customers throughout the United States. MSC distributes in excess of 500,000 industrial products from more than 2,100 suppliers to approximately 348,000 customers. In-stock availability is approximately 99%, with next day, standard ground delivery to the majority of the industrial United States. MSC reaches its customers through a combination of over 30 million direct-mail catalogs and CD-ROMs, approximately 95 branch sales offices, 780 sales people, the Internet and associations with some of the world's most prominent B2B e-commerce portals. For more information, visit the Company's Web site at http://www.mscdirect.com. CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Statements in this Press Release may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Any statements contained herein which are not statements of historical facts and that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future shall be deemed to be forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events, actual results and performance, financial and otherwise, could differ materially from those set forth in or contemplated by the forward-looking statements herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The inclusion of any statement in this release does not constitute an admission by MSC or any other person that the events or circumstances described in such statement are material. Factors that could cause actual results to differ materially from those in forward-looking statements include, without limitation, the Company’s ability to timely and efficiently integrate the J&L business acquired in June 2006 and realize the anticipated synergies from this transaction, changing customer and product mixes, changing market conditions, industry consolidations, competition, general economic conditions in the markets in which the Company operates, rising commodity and energy prices, risk of cancellation or rescheduling of orders, work stoppages or other business interruptions (including those due to extreme weather conditions) at transportation centers or shipping ports, the risk of war, terrorism and similar hostilities, dependence on the Company’s information systems and on key personnel, the outcome of potential government or regulatory proceedings or future litigation relating to pending or future claims, inquiries or audits, and various other risk factors listed from time to time in the Company's SEC reports. MSC INDUSTRIAL DIRECT CO., INC. Condensed Consolidated Balance Sheets (In thousands) (Unaudited)   May 26, 2007 (Unaudited) August 26, 2006 ASSETS Current Assets: Cash and cash equivalents $ 9,892  $ 7,718  Accounts receivable, net of allowance for doubtful accounts 196,295  185,734  Inventories 317,153  298,391  Prepaid expenses and other current assets 19,874  21,341  Deferred income taxes   19,786    14,289  Total current assets   563,000    527,473    Property, plant and equipment, net 127,323  122,100  Goodwill 272,806  271,652  Identifiable intangibles, net 72,753  76,292  Other assets   8,819    16,781  Total Assets $ 1,044,701  $ 1,014,298    LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Current maturities of long-term notes payable $ 48,221  $ 7,843  Accounts payable 58,925  56,877  Accrued liabilities   62,728    88,007  Total current liabilities 169,874  152,727  Long-term notes payable 152,490  192,986  Deferred income tax liabilities   32,101    29,312  Total liabilities   354,465    375,025  Shareholders’ Equity: Preferred Stock --  --  Class A common stock 58  57  Class B common stock 19  19  Additional paid-in capital 396,129  379,630  Retained earnings 574,231  477,305  Other comprehensive income 517  27  Class A treasury stock, at cost   (280,718)   (217,765) Total shareholders’ equity   690,236    639,273  Total Liabilities and Shareholders’ Equity $ 1,044,701  $ 1,014,298  MSC INDUSTRIAL DIRECT CO., INC. Condensed Consolidated Statements of Income (In thousands, except per share data) (Unaudited)   Thirteen Weeks Ended Thirty-Nine Weeks Ended May 26, 2007 May 27, 2006 May 26, 2007 May 27, 2006 Net sales $ 431,057  $ 329,817  $ 1,237,687  $ 931,650  Cost of goods sold   231,752    173,812    665,090    491,345  Gross profit 199,305  156,005  572,597  440,305  Operating expenses   123,896    96,977    358,413    275,671  Income from operations   75,409    59,028    214,184    164,634  Other (Expense) Income: Interest expense (3,125) (7) (9,667) (21) Interest income 271  1,250  708  3,185  Other (expense) income, net   238    56    205    207  Total other (expense) income   (2,616)   1,299    (8,754)   3,371  Income before provision for income taxes 72,793  60,327  205,430  168,005  Provision for income taxes   27,028    23,309    78,862    65,723  Net income $ 45,765  $ 37,018  $ 126,568  $ 102,282  Per Share Information: Net income per common share: Basic $ 0.70  $ 0.55  $ 1.92  $ 1.53  Diluted $ 0.69  $ 0.54  $ 1.89  $ 1.50  Weighted average shares used in computing net income per common share Basic   65,418    67,076    65,834    66,743  Diluted   66,740    68,730    67,079    68,283  Cash dividends declared per common share $ 0.18  $ 0.14  $ 0.46  $ 0.40  MSC INDUSTRIAL DIRECT CO., INC. Consolidated Statements of Cash Flows (In thousands) (Unaudited)   Thirty-Nine Weeks Ended May 26, 2007 May 27, 2006   Cash Flows from Operating Activities:   Net income $ 126,568  $ 102,282  Adjustments to reconcile net income to net cash provided by operating activities:   Depreciation and amortization 19,246  9,398  Gain on sale of securities --  (858) Stock-based compensation 6,230  7,282  Loss on disposal of property, plant and equipment 153  --  Provision for doubtful accounts 3,262  1,824  Deferred income taxes (2,708) (1,565) Amortization of bond premiums --  201  Reclassification of excess tax benefits from stock-based compensation (3,397) (7,402)   Changes in operating assets and liabilities: Accounts receivable (13,823) (20,592) Inventories (18,762) (23,201) Prepaid expenses and other current assets 1,957  (1,607) Other assets 7,825  6,602  Accounts payable and accrued liabilities   (1,237)   18,343    Total adjustments   (1,254)   (11,575)   Net cash provided by operating activities   125,314    90,707    Cash Flows from Investing Activities: Proceeds from sales of investments in available-for-sale securities --  153,426  Purchases of investments in available-for-sale securities --  (132,131) Business acquisition (12,734) --  Expenditures for property, plant and equipment   (21,420)   (15,848)   Net cash (used in) provided by investing activities   (34,154)   5,447    Cash Flows from Financing Activities: Purchase of treasury stock (70,407) --  Payment of cash dividends (30,418) (26,851) Reclassification of excess tax benefits from stock-based compensation 3,397  7,402  Proceeds from sale of Class A common stock in connection with associate stock purchase plan 2,096  1,728  Proceeds from exercise of Class A common stock options 6,464  13,681  Repayments of notes payable   (118)   (114)   Net cash used in financing activities   (88,986)   (4,154) Net increase in cash and cash equivalents 2,174  92,000  Cash and cash equivalents – beginning of period   7,718    41,020  Cash and cash equivalents – end of period $ 9,892  $ 133,020  Supplemental Disclosure of Cash Flow Information: Cash paid for income taxes $ 80,042  $ 58,512  Cash paid for interest $ 9,195  $ 21