MSC INDUSTRIAL DIRECT CO INC (MSM)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

MSC is a leading North American distributor of a broad range of metalworking and MRO products and services. We help our customers drive greater productivity, profitability and growth with approximately 2.4 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.

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. 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 five customer fulfillment centers, nine regional inventory centers, 42 warehouses and five manufacturing locations. Many of our products are carried in stock, and orders for these in-stock products are typically fulfilled the day on which the order is received.

Our business model focuses on providing overall procurement cost reduction and just-in-time delivery to meet our customers’ needs. We focus on offering inventory, process and procurement solutions that reduce supply chain costs and improve plant floor productivity for our customers. We aim to achieve ongoing cost reductions throughout our business by implementing cost-savings strategies and leveraging our existing infrastructure. Additionally, we will provide our customers with further procurement cost-saving solutions through technologies such as our VMI, CMI and vending programs. Our vending machines in service totaled 27,003 as of August 31, 2024, compared to 24,830 as of September 2, 2023, and our in-plant programs totaled 342 locations as of August 31, 2024, compared to 265 as of September 2, 2023. Our sales force, which focuses 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. Our field sales and service associate headcount was 2,697 at August 31, 2024 compared to 2,572 at September 2, 2023 and 2,536 at September 3, 2022.

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The chart below displays a comparison of our net sales from fiscal year 2023 through fiscal year 2024:

1 Both fiscal years 2024 and 2023 had 252 sales days

2 Pricing and other is comprised of changes in customer and product mix, discounting and other items.

Highlights

Highlights during fiscal year 2024 include the following:

•We generated $410.7 million of cash from operations compared to $699.6 million in fiscal year 2023. The decrease was primarily from the $300.0 million received from the Receivables Purchase Agreement (the “RPA”) entered into during fiscal year 2023, offset by a decline in the inventory balance throughout fiscal year 2024.

•We had net borrowings of $53.5 million on our credit facilities, private placement debt and shelf facility agreements compared to net payments of $340.0 million in fiscal year 2023. Proceeds from the RPA were primarily utilized to pay down debt on our credit facilities in fiscal year 2023.

•We repurchased $187.7 million of Class A Common Stock, excluding excise taxes, compared to $95.8 million in fiscal year 2023. The higher share repurchase volume included shares purchased to offset the share dilution resulting from the Reclassification.

•We paid out an aggregate $187.3 million in regular cash dividends, compared to an aggregate $176.7 million in regular cash dividends in fiscal year 2023.

•We incurred $14.5 million in restructuring and other costs compared to $7.9 million in fiscal year 2023. Restructuring and other costs primarily consisted of voluntary and involuntary associate severance and separation costs and consulting-related costs.

•In the first quarter of fiscal year 2024, we completed the Reclassification. Pursuant to the Reclassification, each issued and outstanding share of Class B Common Stock was reclassified, exchanged and converted into 1.225 shares of Class A Common Stock. See Note 12, “Shareholders’ Equity” in the Notes to Consolidated Financial Statements for additional information.

•We commenced our plan to sell our customer fulfillment center in Columbus, Ohio. The closure is part of our strategic realignment efforts to optimize our supply chain and distribution network and enhance operational efficiency. The related assets classified as held for sale within Property, plant and equipment, net in the Consolidated Balance Sheet as of August 31, 2024 had a carrying value of approximately $31,953.

•We acquired certain intellectual property assets from SMRT and acquired KAR, ApTex and Premier. See Note 6, “Acquisitions” in the Notes to Consolidated Financial Statements for additional information.

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Our Strategy

The first phase of our Company-wide initiative, referred to as “Mission Critical,” focused on market share capture and improved profitability. We successfully executed on the first phase of Mission Critical initiatives at the end of fiscal year 2023, which included solidifying our market-leading metalworking business, with an emphasis on selling our product portfolio, expanding our solutions, improving our digital and E-commerce capabilities and diversifying our customers and end-markets. The next phase of our mission critical journey is anchored in three pillars: (i) maintaining the momentum of the first phase of the mission critical program and our existing growth drivers, (ii) increasing our focus on both core customers and OEM fasteners, and (iii) driving productivity improvements and reducing operating expenses as a percentage of net sales. To accomplish the next phase of our mission critical journey, we will leverage investments in advanced analytics to improve supply chain performance, maintain momentum from our category line reviews and upgrade our digital core to unlock productivity within our order-to-cash and procure-to-pay processes. In fiscal year 2024, we completed our web price realignment initiative, and we are currently in the process of rolling out our E-commerce enhancements.

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. We have experienced success to date as measured by the growth rates of our high-touch programs, such as vending and in-plant programs, and the rate of new customer implementations. Our strategy is to position ourselves as a mission-critical partner to our customers. We will selectively pursue strategic acquisitions that expand or complement our business in new and existing markets or further enhance the value and offerings we provide.

Business Environment

The United States economy has experienced various macroeconomic pressures in recent years including an elevated inflationary environment, sustained high interest rates and general economic and political uncertainty. Such pressures have impacted, and may continue to impact in the future, the Company’s business, financial condition and results of operations.

We utilize various indices when evaluating the level of our business activity, including the Industrial Production (“IP”) Index. Approximately 68% of our revenues came from sales in the manufacturing sector during the quarter and year ended August 31, 2024. 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. The IP Index over the three months ended August 31, 2024 and the average for the three- and 12-month periods ended August 31, 2024 were as follows:

The average IP Index for the 12 months ended August 31, 2024 of 102.7 decreased from the average from the prior fiscal year of 102.8. The IP Index for the fourth fiscal quarter of 2024 of 102.9 decreased compared to both the prior year period of 103.0 and increased slightly compared to the prior quarter of 102.7.

During fiscal year 2024, the Company experienced soft demand for the products and services it offers. This soft demand was felt more acutely in the heavy manufacturing industry, which represented 47% of our revenues during the year ended August 31, 2024. The IP index for the Machinery & Equipment segment indicated a contraction of 1.6% for the fourth quarter of 2024 and a contraction of 3.2% for the 12 months ended August 31, 2024. The subindexes for Primary Metals and Fabricated Metals also indicated a contraction for both the quarter and 12 months ended August 31, 2024. As a result, the demand environment for the Company’s products was softer than the demand environment for the economy as a whole due to the concentration of the Company’s customers in these and other industries, which grew more slowly than the IP index as a whole.

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We will 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.

Results of Operations

Fiscal Year Ended August 31, 2024 Compared to the Fiscal Year Ended September 2, 2023

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:

Net Sales

Net sales in fiscal year 2024 decreased 4.7%, or $188.3 million, from the prior fiscal year. The $188.3 million decrease in net sales was comprised of $239.1 million of lower sales volume, partially offset by $18.5 million from improved pricing, inclusive of changes in customer and product mix, discounting and other, $27.5 million of net sales from recent acquisitions and $4.8 million of favorable foreign exchange impact. Of the $188.3 million decrease in net sales during fiscal year 2024, sales to our core and other customers decreased by $145.7 million, sales to our public sector customers decreased by $60.0 million, inclusive of large, non-repeating public sector orders in the prior year, partially offset by an increase in sales to our national account customers of $17.4 million.

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The tables below show, among other things, the annual 2024 average daily sales (“ADS”) by total company, by customer end-market and by customer type compared to the same periods in the prior fiscal year:

(1)ADS is calculated using the number of business days in the United States for the periods indicated. The Company believes ADS is a key performance indicator because it shows the effectiveness of the Company’s selling performance on a consistent basis between periods.

(2)Percent reflects the change from the 2023 fiscal period to the 2024 fiscal period.

(3)Includes reclassifications of certain customers during fiscal year 2024, primarily between national account customers and core and other customers.

We believe that our ability to transact business with our customers through various electronic portals and directly through the MSC website gives us a competitive advantage over smaller suppliers. Sales made through our E-commerce platforms, including sales made through electronic data interchange systems, VMI systems, Extensible Markup Language ordering-based systems, vending, hosted systems and other electronic portals, represented 63.6% of consolidated net sales for fiscal year 2024, compared to 61.1% of consolidated net sales for fiscal year 2023.

Gross Profit

Gross profit decreased 4.3% to $1,572.8 million in fiscal year 2024, as compared to $1,643.0 million in fiscal year 2023. Gross profit margin was 41.2% in fiscal year 2024, as compared to 41.0% in fiscal year 2023. The decrease in gross profit was primarily a result of lower sales volume as described above, partially offset by gross profits from our recent acquisitions. The increase in gross profit margin was primarily a result of significant public sector sales in the prior fiscal year period that were transacted below our typical public sector margins, which did not repeat in the current fiscal year

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period. This benefit was partially offset by lower gross profit margins from our recent acquisitions and discounting during the launch of our web price realignment initiative, which we believe was temporary and mitigated in the fourth quarter.

Operating Expenses

Operating expenses increased 1.4% to $1,167.9 million in fiscal year 2024, as compared to $1,151.3 million in fiscal year 2023. Operating expenses were 30.6% of fiscal year 2024 net sales, as compared to 28.7% for fiscal year 2023. The increase in operating expenses and operating expenses as a percentage of net sales was primarily attributable to increased payroll costs, primarily due to our annual merit increase and higher associate headcount to support solutions growth and our digital initiatives. These increases were partially offset by lower variable expenses associated with lower sales volume, including lower incentive compensation and freight expense.

Payroll and payroll-related costs were approximately 56.1% of total operating expenses for both fiscal year 2024 and fiscal year 2023. Payroll and payroll-related costs, which include salary, incentive compensation, sales commission, and fringe benefit costs, increased by $9.1 million for fiscal year 2024. The majority of this increase compared to the prior fiscal year was due to increased salary expenses to support our strategic growth investments and our annual merit increase. This increase was partially offset by lower commissions and incentive compensation costs.

Freight expense was $148.5 million for fiscal year 2024, as compared to $156.8 million for fiscal year 2023. The primary driver of the decrease in freight expense was a decrease in sales volume.

Depreciation and amortization was $80.5 million for fiscal year 2024, as compared to $74.7 million for fiscal year 2023. The primary drivers of the increase in depreciation and amortization were increased capital expenditures related to E-commerce and digital initiatives.

Restructuring and Other Costs

We incurred $14.5 million in restructuring and other costs for fiscal year 2024, as compared to $7.9 million for the prior fiscal year. Restructuring and other costs primarily consist of consulting-related costs and associate severance and separation costs associated with the Company’s strategic realignment efforts to optimize its supply chain and distribution network and 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.

Income from Operations

Income from operations decreased 19.3% to $390.4 million in fiscal year 2024, as compared to $483.7 million in fiscal year 2023. Income from operations as a percentage of net sales decreased to 10.2% in fiscal year 2024, as compared to 12.1% in fiscal year 2023. The decrease in income from operations as a percentage of net sales was primarily attributable to, as described above, lower sales volume, a higher level of Restructuring and other costs and an increase in Operating expenses as a percentage of net sales, partially offset by a higher gross profit margin.

Total Other Expense

Total other expense increased 72.7%, or $20.1 million, to $47.6 million for fiscal year 2024, as compared to $27.6 million for the prior fiscal year. The increase was primarily due to higher interest rates on our credit facilities, fees incurred associated with the RPA entered into during the second quarter of fiscal year 2023, partially offset by prior year recognition of $6.6 million of Employee Retention Credit funds. See Note 8, “Income Taxes” in the Notes to Consolidated Financial Statements for further information.

Provision for Income Taxes

Our effective tax rate for fiscal year 2024 was 25.3%, as compared to 24.8% for fiscal year 2023. See Note 8, “Income Taxes” in the Notes to Consolidated Financial Statements for further information. The increase in the effective tax rate was primarily due to non-deductible expenses associated with the Reclassification and derecognition of certain deferred tax assets, partially offset by a higher tax benefit from stock-based compensation and a benefit from federal tax credits.

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Net Income

The factors which affected net income for fiscal year 2024, as compared to the prior fiscal year, have been discussed above.

Liquidity and Capital Resources

As of August 31, 2024, we had $29.6 million in cash and cash equivalents, substantially all with well-known financial institutions. Historically, our primary financing needs have been to fund our working capital requirements necessitated by our sales growth and the costs of acquisitions, new products, new facilities, facility expansions, investments in vending solutions, technology investments, and productivity investments. Cash generated from operations, together with borrowings under our credit facilities 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.

As of August 31, 2024, total borrowings outstanding, representing amounts due under our credit facilities and notes, as well as all finance leases and financing arrangements, were $508.8 million, net of unamortized debt issuance costs of $0.8 million, as compared to total borrowings outstanding of $454.3 million, net of unamortized debt issuance costs of $1.0 million, as of September 2, 2023. The increase in total borrowings outstanding was driven by higher net borrowings under our credit facilities, private placement notes and shelf facility agreements. The increase in total borrowings outstanding was driven by higher net borrowings under our credit facilities primarily to fund our recent higher share repurchase volume to offset the share dilution resulting from the Reclassification. See Note 10, “Debt” in the Notes to Consolidated Financial Statements for more information about these balances.

We believe, based on our current business plan, that our existing cash, financial resources and cash flow from operations will be sufficient to fund anticipated capital expenditures and operating cash requirements for at least the next 12 months. We will continue to evaluate our financial position in light of future developments and to take appropriate action as it is warranted.

The table below summarizes information regarding the Company’s cash flows for the periods indicated:

Operating Activities

Net cash provided by operating activities for fiscal year 2024 and fiscal year 2023 was $410.7 million and $699.6 million, respectively. The decrease was primarily due to the following:

•a decrease in net income, as described above; and

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•a smaller decrease in the change in accounts receivable primarily attributable to the RPA entered into during the second quarter of fiscal year 2023; partially offset by

•a decrease in the change in inventories primarily attributable to lower sales and purchase volume.

The table below summarizes certain information regarding the Company’s operations:

(1)Working Capital is calculated as current assets less current liabilities.

(2)Current Ratio is calculated by dividing total current assets by total current liabilities.

(3)Days’ Sales Outstanding is calculated by dividing accounts receivable by net sales, using trailing two months sales data.

(4)Inventory Turnover is calculated by dividing total cost of goods sold by inventory, using a 13-month trailing average inventory.

Working capital decreased compared to September 2, 2023, primarily due to lower inventory and cash balances, partially offset by lower balances in Accounts Payable and Accrued expenses and other current liabilities. The current ratio remained consistent with the prior year period.

The increase in days’ sales outstanding as of August 31, 2024, as compared to September 2, 2023, was primarily due to the receivables portfolio consisting of a greater percentage of our national account program sales, which typically have longer payment terms.

Inventory turnover as of August 31, 2024 increased compared to September 2, 2023. This improvement in inventory turnover was due to the decline in inventory outpacing the decline in cost of goods sold. Recent lower inventory balances were due to lower purchase volumes, category management efforts and supply chain efficiencies.

Investing Activities

Net cash used in investing activities for fiscal year 2024 and fiscal year 2023 was $123.4 million and $112.7 million, respectively. The use of cash for both fiscal years was primarily due to expenditures for property, plant and equipment mainly related to vending programs and other infrastructure and technology investments. The use of cash also included payments for the acquisitions of KAR, ApTex, Premier and SMRT in fiscal year 2024 and Buckeye Industrial Supply Co. and Tru-Edge Grinding, Inc. in fiscal year 2023.

Financing Activities

Net cash used in financing activities for fiscal year 2024 and fiscal year 2023 was $307.4 million and $580.4 million, respectively.

The components contributing to the use of cash for fiscal year 2024 and fiscal year 2023 were primarily the following:

•$187.3 million of regular cash dividends paid during fiscal year 2024 compared to $176.7 million of regular cash dividends paid during fiscal year 2023;

•$187.7 million in aggregate repurchases of Class A Common Stock during fiscal year 2024 compared to $95.8 million in aggregate repurchases of Class A Common Stock during fiscal year 2023; partially offset by

•net borrowings under our credit facilities, private placement debt and shelf facility agreements of $53.5 million during fiscal year 2024 compared to net payments of $340.0 million during fiscal year 2023.

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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. Subsequent to fiscal year 2024, the Company made additional net payments of $19.0 million through October 4, 2024 on its revolving credit facility. The current unused balance of $538.7 million from the revolving credit facility, which is reduced by outstanding letters of credit, is available for working capital purposes if necessary. As of August 31, 2024, the Company also had three uncommitted credit facilities, totaling $211.0 million of aggregate maximum uncommitted availability. As of August 31, 2024, we were in compliance with the operating and financial covenants of our credit facilities. See Note 10, “Debt” in the Notes to Consolidated Financial Statements for more information about our credit facilities.

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. In June 2018 and March 2020, we entered into additional note purchase agreements. No new notes may be issued pursuant to the Shelf Facility Agreements. In March 2024, the Company paid $50.0 million to satisfy its obligation on the 2.40% Series 2019A Notes, due March 5, 2024, which were the last notes associated with the Shelf Facility Agreements. In April 2024, the Company completed the issuance and sale of $50.0 million aggregate principal amount of 5.73% Senior Notes, due April 18, 2027. See Note 10, “Debt” in the Notes to Consolidated Financial Statements for more information about these transactions.

Leases and Financing Arrangements

As of August 31, 2024, certain of our operations were conducted on leased premises. These leases are for varying periods, with 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 2029.

From time to time, we enter into financing arrangements with vendors to purchase certain IT equipment or software.

Capital Expenditures

We continue to invest in E-commerce and vending platforms, customer fulfillment centers and distribution networks and other infrastructure and technology.

Future Liquidity Outlook

As of August 31, 2024, our future contractual obligations were as follows (in thousands):

(1)Certain of our operations are conducted on leased premises. These leases (many 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. See Note 11, “Leases” in the Notes to Consolidated Financial Statements for additional information on our operating lease arrangements.

(2)As of August 31, 2024, the Company had entered into various finance leases for certain IT equipment, which expire on varying dates through fiscal year 2029. 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.

As of August 31, 2024, the Company had recorded a non-current liability of $4.0 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 8, “Income Taxes” in the Notes to Consolidated Financial Statements.

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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.

Critical Accounting Estimates

We make estimates, judgments and assumptions in determining the amounts reported in the Consolidated Financial Statements and accompanying Notes. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The estimates are used to form the basis for making judgments about the carrying values of assets and liabilities and the amount of revenues and expenses reported that are not readily apparent from other sources. Actual results may differ from these estimates. Our significant accounting policies are described in the Notes to Consolidated Financial Statements. The accounting policies described below are impacted by our critical accounting estimates. More information on the critical accounting estimates can be found in Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

Allowance for Credit Losses

We perform periodic credit evaluations of our customers’ financial condition, and collateral is generally not required. The Company considers several factors to estimate the allowance for credit losses in accounts receivable, including the age of the receivables and the historical ratio of actual write-offs to the age of the receivables, and also reflects the adopted accounting standard related to current expected credit losses. 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. The analysis includes inventory levels, sales information, historical write-down information, and the on-hand quantities relative to the sales history for the product.

Goodwill and Other Indefinite-Lived Intangible Assets

The purchase price of an acquired company is allocated between the intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted-average cost of capital. The Company annually reviews goodwill at the reporting unit level and intangible assets that have indefinite lives for impairment in its fiscal fourth quarter and when events or changes in circumstances indicate the carrying values of these assets might exceed their current fair values.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The tax balances and income tax expense recognized by the Company are based on management’s interpretations of the tax laws of multiple jurisdictions. Income tax expense reflects the Company’s best estimates and assumptions regarding, among other items, the level of future taxable income, interpretations of tax laws and uncertain tax positions.

Other

Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. Policies such as revenue recognition, depreciation, intangibles, long-lived assets and warranties require judgments on complex matters that are often

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subject to multiple external sources of authoritative guidance such as the Financial Accounting Standards Board and the SEC. Possible changes in estimates or assumptions associated with these policies are not expected to have a material effect on the financial condition or results of operations of the Company. More information on these additional accounting policies can be found in Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

Recently Adopted Accounting Pronouncements

Refer to Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

MSC is a leading North American distributor of a broad range of metalworking and MRO products and services. We help our customers drive greater productivity, profitability and growth with approximately 2.4 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.

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. 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. Many of our products are carried in stock, and orders for these in-stock products are typically fulfilled the day on which the order is received.

Our business model focuses on providing overall procurement cost reduction and just-in-time delivery to meet our customers’ needs. We focus on offering inventory, process and procurement solutions that reduce MRO supply chain costs and improve plant floor productivity for our customers. We will seek to continue to achieve cost reductions throughout our business through cost-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. 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.

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.

(2)Fiscal years 2023 and 2022 had 252 and 258 sales days, respectively.

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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. 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. 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. 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.

Recent Developments

Progress on Mission Critical

As previously disclosed, we initiated a Company-wide project, which we refer to as “Mission Critical,” to accelerate market share capture and improve profitability over the period through fiscal year 2023. 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. We also are focused on improving profitability through the implementation of various pricing strategies and critical structural cost reductions in order to improve return on invested capital. We anticipate that the cost reductions will be comprised of savings in the areas of sales and service, supply chain and general and administrative expenses, and include initiatives to optimize our distribution center network and real estate footprint, renegotiate supplier contracts, and redesign our talent acquisition and retention approach. 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.

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. 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. Such disruptions and conditions have impacted, and may continue to impact in the future, the Company’s business, financial condition and results of operations.

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. 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. 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.

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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”). 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.

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”).

In October 2023, we completed the Reclassification as contemplated by the Reclassification Agreement. 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. 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.

As contemplated by the Reclassification Agreement, a number of corporate governance changes were implemented, including the following:

•the Jacobson / Gershwind Family Shareholders have the right to designate two individuals for nomination for election to the Board so long as the Jacobson / Gershwind Family Shareholders own 10% or more of the issued and outstanding shares of Class A Common Stock and to designate one individual for nomination for election to the Board so long as the Jacobson / Gershwind Family Shareholders own less than 10% but more than 5% of the issued and outstanding shares of Class A Common Stock;

•the Jacobson / Gershwind Family Shareholders have each granted an irrevocable proxy authorizing the Company to vote such pro rata portion of shares of Class A Common Stock beneficially owned by the Jacobson / Gershwind Family Shareholders or their permitted transferees in excess of 15% of the issued and outstanding shares of Class A Common Stock in proportion to the votes of other holders (i.e., excluding any Jacobson / Gershwind Family Shareholders and their permitted transferees) entitled to vote and that do in fact vote;

•certain standstill and lock-up provisions for the Jacobson / Gershwind Family Shareholders;

•the transition of the approval standard for certain significant transactions (including mergers, asset sales, share exchanges and dissolution) from a two-thirds supermajority to a majority of the issued and outstanding shares of Class A Common Stock entitled to vote thereon; and

•the transition to a “majority of the votes cast” standard for any election of directors that is not a contested election.

Acquisition of Buckeye and Tru-Edge

In January 2023, the Company acquired certain assets and assumed certain liabilities of Buckeye, an Ohio-based metalworking distributor, and Tru-Edge, an Ohio-based custom tool manufacturer. Buckeye primarily serves the metalworking needs of large manufacturers. MSC Industrial plans to build on Buckeye’s technical, high-touch relationships and value-added services by offering customers access to its extensive product portfolio to support customers’ full metalworking and MRO needs. Tru-Edge brings new capabilities to MSC Industrial, including the design and manufacture of parts from scratch with a strong focus in the automotive and medical markets. The Company expects to drive revenue growth in its existing Midwest manufacturing customer base by leveraging the services provided by Tru-Edge. 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.

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Our Strategy

Our primary objective is to grow sales profitably while offering our customers highly technical and high-touch solutions to solve their most complex challenges on the plant floor. Our strategy is to complete the transition from being a spot-buy supplier to a mission-critical partner to our customers. We will selectively pursue strategic acquisitions that expand or complement our business in new and existing markets or further enhance the value and offerings we provide.

Business Environment

We utilize various indices when evaluating the level of our business activity, including the Industrial Production (“IP”) Index. Approximately 66% and 68% of our revenues came from sales in the manufacturing sector during the quarter and year ended September 2, 2023, respectively. 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. 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:

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. Favorable conditions exist in certain end markets and volume remains stable. Despite improvements in certain areas, economic uncertainty remains driven by higher interest rates and continued elevated levels of inflation. Recently, the United States economy has experienced supply chain disruptions and significant levels of inflation. The Company has implemented price realization strategies in response to increased costs the Company faces. As we see the IP Index continue to fluctuate, we will 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. See “Impact of Economic Trends” above.

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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:

(1)N/A is Not Applicable.

Net Sales

Net sales increased 8.6%, or $317.4 million, from the prior fiscal year. 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. 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.

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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:

(1)ADS is calculated using the number of business days in the United States for the periods indicated. The Company believes ADS is a key performance indicator because it shows the effectiveness of the Company’s selling performance on a consistent basis between periods.

(2)Percent reflects the change from the 2022 fiscal period to the 2023 fiscal period.

We believe that our ability to transact business with our customers through various electronic portals and directly through the MSC website gives us a competitive advantage over smaller suppliers. Sales made through our 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. The decline was primarily attributable to large sales to a public sector customer that did not transact through our E-commerce platforms.

Gross Profit

Gross profit increased 5.4% to $1,643.0 million in fiscal year 2023, as compared to $1,558.2 million in fiscal year 2022. Gross profit margin was 41.0% in fiscal year 2023, as compared to 42.2% in fiscal year 2022. The increase in gross profit was primarily a result of a higher sales level as described above and gross profits from our recent acquisitions. The decrease in gross profit margin was primarily attributable to large sales to a public sector customer during the third and fourth quarters of fiscal year 2023 which were transacted below our typical public sector customer margins, as well as unfavorable customer mix as sales to our national account and public sector customers are growing at higher rates and are typically at lower gross margins than the business as a whole.

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. The increase in operating expenses was primarily attributable to an increase in payroll and payroll-related costs and increased professional fees associated with the Reclassification. 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.

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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. 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. The majority of this increase compared to the prior fiscal year was due to increased salary expenses and fringe benefit costs, including higher insurance-related healthcare reserves due to recent higher healthcare claims, partially offset by a lower incentive compensation accrual.

Freight expense was $156.8 million for fiscal year 2023, as compared to $155.5 million for fiscal year 2022. 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. The primary drivers of the increase in depreciation and amortization were increased capital expenditures related to vending programs and Mission Critical projects.

Professional fee expense was $47.9 million for fiscal year 2023, as compared to $30.3 million for fiscal year 2022. The primary driver of the increase in professional fee expense was fees and other expenses associated with the Reclassification, which included legal and advisory fees, printing and mailing expenses for the associated proxy statement / prospectus, Reimbursable Expenses (as defined in the Reclassification Agreement), and filing and other fees paid to the SEC. See “Reclassification” above for additional information.

Restructuring and Other Costs

We incurred $7.9 million in restructuring and other costs for fiscal year 2023, as compared to $15.8 million for the prior fiscal year. 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.

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. 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.

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. The decrease in income from operations as a percentage of net sales was primarily attributable to a lower gross profit margin and the impact of six fewer selling days during fiscal year 2023, both as described above, partially offset by an improvement in operating expenses as a percentage of net sales from the prior fiscal year and the prior fiscal year gain on sale of property which did not recur during fiscal year 2023.

Total Other Expense

Total other expense increased 56.9%, or $10.0 million, to $27.6 million for fiscal year 2023, as compared to $17.6 million for the prior fiscal year. The increase was primarily due to higher interest rates on our credit facilities and fees incurred associated with the RPA, partially offset by the recognition of $6.6 million of Employee Retention Credit funds. See Note 8, “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. See Note 8, “Income Taxes” in the Notes to Consolidated Financial Statements for further information.

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Net Income

The factors which affected net income for fiscal year 2023, as compared to the prior fiscal year, have been discussed above.

Liquidity and Capital Resources

As of September 2, 2023, we had $50.1 million in cash and cash equivalents, substantially all with well-known financial institutions. Historically, our primary financing needs have been to fund our working capital requirements necessitated by our sales growth and the costs of acquisitions, new products, new facilities, facility expansions, investments in vending solutions, technology investments, and productivity investments. Cash generated from operations, together with borrowings under our credit facilities 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.

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. 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.

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. 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. We incurred $12.4 million of non-recurring costs and expenses for fiscal year 2023 in connection with the Reclassification. Furthermore, we repurchased and immediately retired 645,256 shares of Class A Common Stock for $64.4 million during the fourth quarter of fiscal year 2023. We expect to continue repurchasing shares throughout fiscal year 2024, while considering market volatility and our liquidity and financial position.

The table below summarizes information regarding the Company’s cash flows for the periods indicated:

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Operating Activities

Net cash provided by operating activities for fiscal years 2023 and 2022 was $699.6 million and $246.2 million, respectively. The increase was primarily due to the following:

•a decrease in the change in accounts receivable primarily attributable to the RPA entered into during fiscal year 2023, which resulted in a decline in accounts receivable of $300.0 million; and

•a smaller increase in the change in inventories as compared to the prior fiscal year.

The table below summarizes certain information regarding the Company’s operations:

(1)Working Capital is calculated as current assets less current liabilities.

(2)Current Ratio is calculated by dividing total current assets by total current liabilities.

(3)Days’ Sales Outstanding is calculated by dividing accounts receivable by net sales, using trailing two months sales data.

(4)Inventory Turnover is calculated by dividing total cost of goods sold by inventory, using a 13-month trailing average inventory.

Working capital and the current ratio both decreased compared to September 3, 2022. The decreases were primarily due to a decrease in accounts receivable resulting from the RPA entered into during fiscal year 2023. The RPA reduced the accounts receivable balance by $300.0 million.

The decrease in days’ sales outstanding as of September 2, 2023, as compared to September 3, 2022, was primarily due to the RPA entered into during fiscal year 2023.

Inventory turnover as of September 2, 2023 remained consistent with September 3, 2022.

Investing Activities

Net cash used in investing activities for fiscal years 2023 and 2022 was $112.7 million and $94.5 million, respectively. The use of cash for both fiscal years was primarily due to expenditures for property, plant and equipment mainly related to vending programs and Mission Critical projects. 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.

Financing Activities

Net cash used in financing activities for fiscal years 2023 and 2022 was $580.4 million and $148.1 million, respectively.

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.

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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. 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.

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. 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. 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 transactions. During fiscal year 2023, the Company paid $50.0 million to satisfy its obligation on the 3.04% Senior Notes, due January 12, 2023 and $75.0 million to satisfy its obligation on the 2.65% Senior Notes, Series A, due July 28, 2023.

Leases and Financing Arrangements

As of September 2, 2023, certain of our operations were conducted on leased premises. These leases are for varying periods, with 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 2029.

From time to time, we enter into financing arrangements with vendors to purchase certain information technology equipment or software.

Capital Expenditures

We continue to invest in sales productivity initiatives, E-commerce and vending platforms, customer fulfillment centers and distribution network, and other infrastructure and technology.

Future Liquidity Outlook

As of September 2, 2023, our future contractual obligations were as follows (in thousands):

(1)Certain of our operations are conducted on leased premises. These leases (most of which require us to provide for the payment of real estate taxes, insurance and other operating costs) are for varying periods, 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. 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. 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.

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. See Note 8, “Income Taxes” in the Notes to Consolidated Financial Statements.

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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.

Critical Accounting Estimates

We make estimates, judgments and assumptions in determining the amounts reported in the Consolidated Financial Statements and accompanying Notes. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The estimates are used to form the basis for making judgments about the carrying values of assets and liabilities and the amount of revenues and expenses reported that are not readily apparent from other sources. Actual results may differ from these estimates. Our significant accounting policies are described in the Notes to Consolidated Financial Statements. The accounting policies described below are impacted by our critical accounting estimates. More information on the critical accounting estimates can be found in Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

Allowance for Credit Losses

We perform periodic credit evaluations of our customers’ financial condition, and collateral is generally not required. The Company considers several factors to estimate the allowance for credit losses in accounts receivable, including the age of the receivables and the historical ratio of actual write-offs to the age of the receivables, and also reflects the adopted accounting standard related to current expected credit losses. 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. The analysis includes inventory levels, sales information, historical write-down information, and the on-hand quantities relative to the sales history for the product.

Goodwill and Other Indefinite-Lived Intangible Assets

The purchase price of an acquired company is allocated between the intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted-average cost of capital. The Company annually reviews goodwill at the reporting unit level and intangible assets that have indefinite lives for impairment in its fiscal fourth quarter and when events or changes in circumstances indicate the carrying values of these assets might exceed their current fair values.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The tax balances and income tax expense recognized by the Company are based on management’s interpretations of the tax laws of multiple jurisdictions. Income tax expense reflects the Company’s best estimates and assumptions regarding, among other items, the level of future taxable income, interpretations of tax laws and uncertain tax positions.

Other

Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. Policies such as revenue recognition, depreciation, intangibles, long-lived assets and warranties require judgments on complex matters that are often

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subject to multiple external sources of authoritative guidance such as the Financial Accounting Standards Board and the SEC. Possible changes in estimates or assumptions associated with these policies are not expected to have a material effect on the financial condition or results of operations of the Company. More information on these additional accounting policies can be found in Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

Recently Adopted Accounting Pronouncements

Refer to Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

MSC is a leading North American distributor of a broad range of metalworking and MRO products and services. We help our customers drive greater productivity, profitability and growth with approximately 2.1 million products, inventory management and other supply chain solutions, and deep expertise from more than 80 years of working with customers across industries. We continue to implement our strategies to gain market share, generate new customers, increase sales to existing customers, and diversify our customer base.



Our experienced team of approximately 7,000 associates works with our customers to help drive results for their businesses, from keeping operations running efficiently today to continuously rethinking, retooling and optimizing for a more productive tomorrow. We offer approximately 2.1 million active, saleable SKUs through our catalogs; our brochures; our eCommerce channels, including the MSC website; our inventory management solutions; and our customer care centers, customer fulfillment centers, regional inventory centers and warehouses. We service our customers from six customer fulfillment centers, 10 regional inventory centers and 38 warehouses. Many of our products are carried in stock, and orders for these in-stock products are typically fulfilled the day on which the order is received.

Our business model focuses on providing overall procurement cost reduction and just-in-time delivery to meet our customers’ needs. We focus on offering inventory, process and procurement solutions that reduce MRO supply chain costs and improve plant floor productivity for our customers. We will seek to continue to achieve cost reductions throughout our business through cost-saving strategies and increased leverage from our existing infrastructure, and continue to provide additional procurement cost-savings solutions to our customers through technology such as our CMI, VMI and vending programs. Our field sales and service associate headcount was 2,536 at September 3, 2022 compared to 2,398 at August 28, 2021 and 2,263 at August 29, 2020.

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.

(2)Fiscal year 2022 includes a 53rd week during the reporting period, including the net sales of acquisitions during the 53rd week.

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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. Restructuring and other costs primarily consisted of consulting-related costs associated with the optimization of the Company’s operations, associate severance and separation costs, and equity award acceleration costs. The prior fiscal year also included operating lease asset impairment charges, net of gains related to settlement of lease liabilities, and other exit-related costs associated with our internal restructuring due to our sales workforce realignment and enhanced customer support model.

Recent Developments

Progress on Mission Critical

As previously disclosed, we initiated a company-wide project, which we refer to as “Mission Critical,” to accelerate market share capture and improve profitability over the period through fiscal year 2023. Among the Mission Critical initiatives to realize growth, we began and expect to continue investing in our market-leading metalworking business by adding to our metalworking specialist team, introducing value-added services to our customers, expanding our vending, VMI and in-plant solutions programs, building out our sales force, and diversifying our customers and end-markets. We also are focused on improving profitability through the implementation of various pricing strategies and critical structural cost reductions in order to improve return on invested capital. We anticipate that the cost reductions will be comprised of savings in the areas of sales and service, supply chain and general and administrative expenses, and include initiatives to optimize our distribution center network and real estate footprint, renegotiate supplier contracts, and redesign our talent acquisition and retention approach.

Relocation and Sale of Long Island CSC

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. In furtherance of these plans, we entered into a Purchase and Sale Agreement to sell our Long Island CSC. This transaction closed during the fourth quarter of fiscal year 2022.

Impact of COVID-19 and Other Economic Trends

In recent years, the COVID-19 pandemic has impacted the Company’s operations; however, demand from our traditional manufacturing end markets has recovered as most restrictions implemented earlier in the pandemic have been lifted. In conjunction with the lifting of pandemic restrictions and the ensuing economic recovery, the United States experienced and continues to experience disruptions in the supply of certain products and services and disruptions in labor availability. These disruptions have contributed to a highly inflationary environment which has affected the price and, at times, the availability of certain products and services necessary for the Company’s operations, including fuel, labor and certain products the Company sells or the inputs for such products. Such disruptions have impacted, and may continue to impact in the future, the Company’s business, financial condition and results of operations. These disruptions are also impacting our customers and their ability to conduct their business or purchase our products and services.

As a result of recent high inflation, increasing freight, labor and fuel costs, and supply chain disruptions, the Company has implemented price realization strategies in response to increased costs the Company faces. Furthermore, in light of disruptions to availability and increased or uncertain shipping times, the Company is maintaining higher purchasing levels to ensure sufficient inventory supply to meet customer demand. The extent to which the COVID-19 pandemic and the

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evolving macroeconomic environment will continue to impact the Company’s business, financial condition and results of operations is highly uncertain.

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.

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. The acquisition, which was made through the Company’s subsidiary, AIS, complements and expands the Company’s presence in the OEM fastener market. Tower Fasteners will continue to go to market under its current name as an MSC company.

Our Strategy

Our primary objective is to grow sales profitably while offering our customers highly technical and high-touch solutions to solve their most complex challenges on the plant floor. Our strategy is to complete the transition from being a spot-buy supplier to a mission-critical partner to our customers. We will selectively pursue strategic acquisitions that expand or complement our business in new and existing markets or further enhance the value and offerings we provide.

Business Environment

We utilize various indices when evaluating the level of our business activity, including the Metalworking Business Index (the “MBI”) and the Industrial Production (“IP”) index. Approximately 70% of our revenues came from sales in the manufacturing sector during the fourth quarter of fiscal year 2022. Through statistical analysis, we have found that trends in our customers’ activity have correlated to changes in the MBI and the IP index. The MBI is a sentiment index developed from a monthly survey of the U.S. metalworking industry, focusing on durable goods manufacturing. For the MBI, a value below 50.0 generally indicates contraction and a value above 50.0 generally indicates expansion. The IP index measures short-term changes in industrial production. Growth in the IP index from month to month indicates growth in the manufacturing, mining and utilities industries. The MBI and the IP index over the fourth quarter of fiscal year 2022 and the fourth quarter and fiscal year averages were as follows:

During fiscal year 2022, the MBI average exceeded 50.0, which indicated growth in manufacturing during the period, albeit declining in recent months. The IP index averaged 103.0 during the same period, an improvement from the 2021 revised average of 98.6. The recent trending in these indices is primarily supported by the recovery in economic conditions related to the gradual lifting of government-imposed restrictions on economic activity and the abatement of the COVID-19 pandemic. See “Impact of COVID-19 and Other Economic Trends” above. Beginning in the second half of calendar year 2021 and continuing throughout calendar year 2022, the United States has experienced supply chain disruptions and significant levels of inflation, which has included higher prices for labor, freight, fuel and the products that the Company sells. The Company has implemented price realization strategies in response to increased costs the Company faces. We will continue to monitor the current economic conditions for the impact on our customers and markets and assess both risks and opportunities that may affect our business and operations.

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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:

Net Sales

Net sales increased 13.8%, or $448.7 million, from the prior fiscal year. The $448.7 million increase in net sales was comprised of approximately $179.3 million of higher sales volume, approximately $159.4 million from improved pricing, inclusive of changes in customer and product mix, discounting and other items, approximately $77.6 million in sales attributable to an extra week in fiscal year 2022, and approximately $35.4 million of net sales from recent acquisitions, partially offset by approximately $3.0 million of unfavorable foreign exchange impact. Of the $448.7 million increase in net sales during the fiscal year 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.

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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:

We believe that our ability to transact business with our customers through various electronic portals and directly through the MSC website gives us a competitive advantage over smaller suppliers. Sales made through our eCommerce platforms, including sales made through EDI systems, VMI systems, XML ordering-based systems, vending, hosted systems and other electronic portals, represented 61.7% of consolidated net sales for fiscal year 2022, compared to 60.0% of consolidated net sales for fiscal year 2021. These percentages of consolidated net sales do not include eCommerce sales from our recent acquisitions.

Gross Profit

Gross profit margin was 42.2% in fiscal year 2022, as compared to 41.1% in fiscal year 2021. The increase in gross profit margin was the result of improved price realization and positive spread between sales price and cost of goods sold. In addition, results for fiscal year ended August 28, 2021 include the prior year PPE-related inventory write-downs of $30.1 million, which reduced the carrying value of certain PPE-related inventory to their estimated net realizable value. No such inventory write-downs occurred for the fiscal year ended September 3, 2022.

Operating Expenses

Operating expenses increased 9.0% to $1.1 billion in fiscal year 2022, as compared to $994.5 million in fiscal year 2021. Operating expenses were 29.4% of fiscal year 2022 net sales, as compared to 30.7% for fiscal year 2021. The increase in operating expenses was primarily attributable to an increase in payroll and payroll-related costs and freight costs associated with higher sales volumes.

Payroll and payroll-related costs were approximately 57.5% of total operating expenses for fiscal year 2022, as compared to approximately 56.9% for fiscal year 2021. Payroll and payroll-related costs, which include salary, incentive compensation, sales commission, and fringe benefit costs, increased by $57.6 million for fiscal year 2022. All of these components of payroll and payroll-related costs increased compared to the prior fiscal year.

Freight expense was $155.5 million for fiscal year 2022, as compared to $133.7 million for fiscal year 2021. The primary drivers of this increase were increased sales volume and higher fuel-related charges due to increased commodity costs.

Travel and entertainment expense was $7.3 million for fiscal year 2022, as compared to $3.6 million for fiscal year 2021. This increase was due to the Company’s easing of travel restrictions resulting from the COVID-19 pandemic.

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Impairment Loss, Net

In September 2020, the Company prepaid approximately $26.7 million for the purchase of nitrile gloves to be sourced from manufacturers in Asia and experienced significant delays in obtaining possession of this PPE. The Company evaluated the potential recoverability of these assets and, as a result, recorded an impairment charge of $26.7 million in the first quarter of fiscal year 2021 to reflect the fact that the Company would not ultimately obtain this PPE or recover its related prepayment. During fiscal year 2021, the Company entered into a legal settlement agreement with a vendor and, as a result, received $20.8 million of loss recovery related to this prepayment, which resulted in a net impairment charge of $5.9 million for fiscal year 2021. The Company continues to pursue its legal avenues for recovery of the remaining loss. We also incurred $1.6 million of legal costs associated with this matter during fiscal year 2021 that are included in Operating expenses.

Restructuring and Other Costs

For fiscal year 2022, we incurred approximately $15.8 million in restructuring and other costs related to the optimization of the Company’s operations. These charges primarily consisted of consulting-related costs associated with the optimization of the Company’s operations, associate severance and separation costs, and equity award acceleration costs. The prior fiscal year also included operating lease asset impairment charges, net of gains related to settlement of lease liabilities, and other exit-related costs associated with our internal restructuring due to our sales workforce realignment and enhanced customer support model. See Note 13, “Restructuring and Other Costs” in the Notes to Consolidated Financial Statements for additional information.

Gain on Sale of Property

During fiscal year 2021, the Company entered into a Purchase and Sale Agreement to sell its 170,000-square foot Long Island CSC in Melville, New York. During the fourth quarter of fiscal year 2022, the Company disposed of the building with a sale price of $25.5 million, which resulted in a gain on sale of property of $10.1 million after the settlement of certain closing costs and fees, which is included in the Consolidated Statement of Income for the fiscal year ended September 3, 2022.

Income from Operations

Income from operations increased 55.3% to $468.7 million in fiscal year 2022, as compared to $301.8 million in fiscal year 2021. This increase was primarily attributable to the increase in sales and gross margin as well as impacts of the prior year impairment loss, PPE-related inventory write-down within gross margin and impairment charges for operating lease assets within restructuring and other costs as discussed above, which did not recur in fiscal year 2022.

Provision for Income Taxes

Our effective tax rate for fiscal year 2022 was 24.5%, as compared to 24.4% in fiscal year 2021. See Note 7, “Income Taxes” in the Notes to Consolidated Financial Statements for further information.

Net Income

The factors which affected net income for fiscal year 2022, as compared to the prior fiscal year, have been discussed above.

Liquidity and Capital Resources

As of September 3, 2022, we had $43.5 million in cash and cash equivalents, substantially all with well-known financial institutions. Historically, our primary financing needs have been to fund our working capital requirements

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necessitated by our sales growth and the costs of acquisitions, new products, new facilities, facility expansions, investments in vending solutions, technology investments, and productivity investments. Cash generated from operations, together with borrowings under our credit facilities and net proceeds from the private placement notes, have been used to fund these needs, to repurchase shares of the Company’s Class A Common Stock from time to time, and to pay dividends to our shareholders.

As of September 3, 2022, total borrowings outstanding, representing amounts due under our credit facilities and notes, as well as all finance leases and financing arrangements, were $794.6 million, net of unamortized debt issuance costs of $1.4 million, as compared to total borrowings of $786.0 million, net of unamortized debt issuance costs of $1.9 million, as of August 28, 2021. The increase was driven by higher net borrowings under our committed credit facility. See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about these balances.

We believe, based on our current business plan, that our existing cash, financial resources and cash flow from operations will be sufficient to fund necessary capital expenditures and operating cash requirements for at least the next 12 months. We will continue to evaluate our financial position in light of future developments, particularly those relating to changes in macroeconomic conditions, including variations in foreign currency exchange rates, commodity and energy prices, labor and supply costs, inflation, and interest rates, and to take appropriate action as it is warranted.

The table below summarizes information regarding the Company’s cash flows for the periods indicated:

Operating Activities

Net cash provided by operating activities for fiscal years 2022 and 2021 was $246.2 million and $224.5 million, respectively. The increase was primarily due to the following:

an increase in net income as described above; partially offset by

an increase in the change in accounts receivable primarily attributable to higher sales volume; and

a decrease in the change in accounts payable and accrued liabilities due to a greater increase in accounts payable in fiscal year 2021 from fiscal year 2020 levels due to the COVID-19 pandemic that did not repeat in fiscal year 2022.

The table below summarizes certain information regarding the Company’s operations:

(1) Working Capital is calculated as current assets less current liabilities.

(2) Current Ratio is calculated by dividing total current assets by total current liabilities.

(3) Days’ Sales Outstanding is calculated by dividing accounts receivable by net sales, using trailing two months sales data.

(4) Inventory Turnover is calculated by dividing total cost of goods sold by inventory, using a 13-month trailing average inventory.

Working capital increased compared to August 28, 2021 while the current ratio declined slightly. The increase in working capital presented in the table above was primarily due to increases in both accounts receivable and inventories, partially offset by an increase in the current portion of debt and accounts payable. The current ratio declined slightly, primarily due to the increase in the current portion of debt.

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The increase in inventories of $91.5 million from August 28, 2021 to September 3, 2022 was primarily due to an increasing sales trend as well as higher supplier costs and ongoing challenges in the supply chain requiring earlier purchasing to meet customer demand. Higher inventory purchasing levels also drove the $31.0 million increase in accounts payable during this period. Accounts receivable increased $127.2 million due to increased sales levels during fiscal year 2022. These balances were also impacted by fiscal year 2022 acquisitions. See Note 5, “Business Combinations” in the Notes to Consolidated Financial Statements for more information about these acquired balances.

The increase in days’ sales outstanding as of September 3, 2022 as compared to August 28, 2021 was primarily due to the receivables portfolio consisting of a greater percentage of our national account program sales, which typically have longer payment terms.

Inventory turnover as of September 3, 2022 declined relative to August 28, 2021 due to increasing inventory levels as a result of higher supplier costs, ongoing challenges in the supply chain and to meet customer demand.

Investing Activities

Net cash used in investing activities for fiscal years 2022 and 2021 was $94.5 million and $75.7 million, respectively. The use of cash for fiscal year 2022 included expenditures for property, plant and equipment and the acquisitions 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. Hurst Co., LLC and the outsourcing and logistics businesses of TAC Insumos Industriales, S. de R.L. de C.V. and certain of its affiliates.

Financing Activities

Net cash used in financing activities for fiscal years 2022 and 2021 was $148.1 million and $233.7 million, respectively.

The major components contributing to the use of cash for fiscal year 2022 were primarily the following:

$167.4 million of regular dividends paid during fiscal year 2022 compared to $362.7 million of regular and special dividends paid during fiscal year 2021;

$27.4 million in aggregate repurchases of our Class A Common Stock during fiscal year 2022 compared to $71.3 million in aggregate repurchases of our Class A Common Stock during fiscal year 2021;

net borrowings under our credit facilities of $9.5 million during fiscal year 2022 compared to net borrowings of $184.3 million during fiscal year 2021; and

proceeds from the exercise of common stock options of $34.7 million during fiscal year 2022 compared to $29.7 million in fiscal year 2021.

Debt

Credit Facilities

In April 2017, the Company entered into a $600.0 million revolving credit facility which was subsequently amended and extended in August 2021. As of September 3, 2022, the Company also had three uncommitted credit facilities, totaling $208.0 million of maximum uncommitted availability. See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about our credit facilities. As 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. The current unused balance of $394.7 million from the revolving credit facility, which is reduced by outstanding letters of credit, is available for working capital purposes if necessary.  See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about these balances.

Private Placement Debt and Shelf Facility Agreements

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. Pursuant to the terms of the Shelf Facility Agreements, no new

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unsecured senior notes may be issued and sold after January 12, 2021. See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about these transactions.

Leases and Financing Arrangements

As of September 3, 2022, certain of our operations were conducted on leased premises. These leases are for varying periods, the longest extending to fiscal year 2031. In addition, we are obligated under certain equipment and automobile operating and finance leases, which expire on varying dates through fiscal year 2026.

From time to time, we enter into financing arrangements with vendors to purchase certain information technology equipment or software.

Capital Expenditures

We continue to invest in sales productivity initiatives, eCommerce and vending platforms, customer fulfillment centers and distribution network, and other infrastructure and technology.

Future Liquidity Outlook

Our future contractual obligations as of September 3, 2022 (in thousands) are as follows:

(1)Certain of our operations are conducted on leased premises. These leases (most of which require us to provide for the payment of real estate taxes, insurance and other operating costs) are for varying periods, the longest extending to fiscal year 2031. In addition, we are obligated under certain equipment and automobile operating leases, which expire on varying dates through fiscal year 2025. See Note 10, “Leases” in the Notes to Consolidated Financial Statements for additional information on our operating lease arrangements.

(2)As 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 10, “Leases” in the Notes to Consolidated Financial Statements for additional information on our finance lease arrangements.

(3)Excludes debt issuance costs.

(4)Interest payments for long-term debt are based on principal amounts and coupons or contractual rates at fiscal year-end.

As 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.

We have not entered into any off-balance sheet arrangements and there are no commitments or obligations (including, but not limited to, guarantees; retained or contingent interests in assets transferred; contractual arrangements that support the credit, liquidity or market risk for transferred assets; or risk related to derivatives or other financial products related to our equity securities), including contingent obligations, with unconsolidated entities or persons that had during the periods presented herein or are reasonably likely to have a material impact on the financial statements.

Critical Accounting Estimates

We make estimates, judgments and assumptions in determining the amounts reported in the Consolidated Financial Statements and accompanying notes. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The estimates are used to form the basis for making judgments about the carrying values of assets and liabilities and the amount of revenues and expenses reported that are not readily apparent from other sources. Actual results may differ from these estimates. Our significant accounting policies are described in the Notes to Consolidated Financial Statements. The accounting policies described below are impacted by our critical accounting estimates. More information on the critical accounting estimates can be found in Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

Allowance for Credit Losses

We perform periodic credit evaluations of our customers’ financial condition, and collateral is generally not required. The Company considers several factors to estimate the allowance for credit losses in accounts receivable, including the age of the receivables and the historical ratio of actual write-offs to the age of the receivables, and also reflects the

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adoption of the new accounting standard related to current expected credit losses in the most recent fiscal year. See Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements for more information.

Inventories

Inventory is reflected at the lower of weighted average cost or net realizable value considering future demand, market conditions and physical condition of the inventory. We write-down inventories for shrinkage and slow-moving or obsolete inventory. The analysis includes inventory levels, sales information, historical write-down information, and the on-hand quantities relative to the sales history for the product.

Goodwill and Other Indefinite-Lived Intangible Assets

The purchase price of an acquired company is allocated between the intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital. The Company annually reviews goodwill at the reporting unit level and intangible assets that have indefinite lives for impairment in its fiscal fourth quarter and when events or changes in circumstances indicate the carrying values of these assets might exceed their current fair values.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The tax balances and income tax expense recognized by the Company are based on management’s interpretations of the tax laws of multiple jurisdictions. Income tax expense reflects the Company’s best estimates and assumptions regarding, among other items, the level of future taxable income, interpretation of tax laws and uncertain tax positions.

Other

Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. Policies such as revenue recognition, depreciation, intangibles, accruals related to self-insured associate health costs, long-lived assets and warranties require judgments on complex matters that are often subject to multiple external sources of authoritative guidance such as the Financial Accounting Standards Board and the SEC. Possible changes in estimates or assumptions associated with these policies are not expected to have a material effect on the financial condition or results of operations of the Company. More information on these additional accounting policies can be found in Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

Refer to Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

MSC is a leading North American distributor of a broad range of metalworking and MRO products and services. We help our customers drive greater productivity, profitability and growth with approximately 1.9 million products, inventory management and other supply chain solutions, and deep expertise from more than 80 years of working with customers across industries. We continue to implement our strategies to gain market share, generate new customers, increase sales to existing customers, and diversify our customer base.



Our experienced team of more than 6,500 associates works with our customers to help drive results for their businesses, from keeping operations running efficiently today to continuously rethinking, retooling and optimizing for a more productive tomorrow. We offer approximately 1.9 million active SKUs through our catalogs; our brochures; our eCommerce channels, including the MSC website; our inventory management solutions; and our call centers, branch offices, customer fulfillment centers and regional inventory centers. We service our customers from 11 customer fulfillment centers (seven customer fulfillment centers are located in the United States which includes five primary customer fulfillment centers, three are located in Canada and one is located in the United Kingdom), seven regional inventory centers and 28 branch offices. Many of our products are carried in stock, and orders for these in-stock products are typically fulfilled the day on which the order is received.

Our business model focuses on providing overall procurement cost reduction and just-in-time delivery to meet our customers’ needs. We focus on offering inventory, process and procurement solutions that reduce MRO supply chain costs and improve plant floor productivity for our customers. We will seek to continue to achieve cost reductions throughout our business through cost-saving strategies and increased leverage from our existing infrastructure, and continue to provide additional procurement cost-savings solutions to our customers through technology such as our CMI, VMI and vending programs. Our field sales and service associate headcount was 2,398 at August 28, 2021, compared to 2,263 at August 29, 2020 and 2,414 at August 31, 2019. We have migrated our sales force from one designed to sell a spot buy value proposition to one prepared to deliver upon the new, more complex and high-touch role that we play driving value for our customers by enabling them to achieve higher levels of growth, profitability and productivity.

The chart below displays a two-year comparison of our net sales from fiscal year 2020 through fiscal year 2021:

(1)Pricing and other is comprised of changes in customer and product mix, discounting and other items.

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Highlights

Highlights during fiscal year 2021 include the following:

We generated $224.5 million of cash from operations.

We repurchased and immediately retired $67.5 million of MSC Class A Common Stock.

We paid out $362.7 million in cash dividends, comprised of special and regular cash dividends of $195.4 million and $167.3 million, respectively, compared to $444.2 million in cash dividends in fiscal year 2020, comprised of special and regular cash dividends of $277.6 million and $166.5 million, respectively.

In June 2021, we acquired 80% of the outstanding shares of Hurst for aggregate consideration of $15.3 million, which included a post-closing working capital adjustment of $0.1 million paid out in August 2021.

In July 2021, MSC Mexico acquired additional assets of TAC in conjunction with the acquisition of its outsourcing and logistics businesses for aggregate consideration of $8.0 million, which included $6.7 million of cash paid and $1.3 million of contingent consideration. Following this acquisition, the Company retained its 75% interest in MSC Mexico.

We incurred $31.4 million in restructuring costs, comprised of $15.0 million in operating lease asset impairment charges, net of gains related to settlement of lease liabilities, $4.5 million in associate severance and separation costs, $3.3 million in other exit-related costs, primarily related to our sales workforce realignment and enhanced customer support model, and $8.6 million in consulting costs related to the optimization of the Company’s operations.

We incurred a $26.7 million impairment charge relating to the sourcing of nitrile gloves. The Company subsequently recorded $20.8 million of loss recovery related to this PPE prepayment impairment for a net impairment charge of $5.9 million.

We incurred PPE-related inventory write-downs of $30.1 million in the second quarter to reduce the carrying value of certain PPE-related inventory to its estimated net realizable value as a result of increased supply in the market of such products and an expected inability to sell excess safety-related products.

Recent Developments

Progress on Mission Critical

As previously disclosed, we initiated a company-wide project, which we refer to as “Mission Critical,” to accelerate market share capture and improve profitability over the period through fiscal year 2023. Among the Mission Critical initiatives to realize growth, we began and expect to continue investing in our market-leading metalworking business by adding to our metalworking specialist team, introducing value-added services to our customers, expanding our vending, VMI and in-plant solutions programs, building out our sales force, and diversifying our customers and end markets. We also are focused on critical structural cost reductions in order to improve return on invested capital. We anticipate that these cost reductions will be comprised of savings in the areas of sales and service, supply chain and general and administrative expenses, and include initiatives to optimize our distribution center network and real estate footprint, renegotiate supplier contracts, and redesign our talent acquisition and retention approach.

Enhanced Customer Support Model

In January 2021, as part of Mission Critical, we announced an enhanced customer support model, including a transition from the branch office network to virtual customer care hubs. This move is expected to provide personalized support to customers, regardless of their physical location. Along with this transition, we closed 73 branch offices and realigned certain existing locations from branch offices to regional inventory centers during fiscal year 2021. Restructuring associated with this enhanced model included one-time impairment charges for operating lease assets, net of gains related to settlement of lease liabilities, associate severance and separation costs, and other exit-related costs.

Relocation and Pending 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. In furtherance of these plans, we entered into a Purchase and Sale Agreement to

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sell our Long Island CSC. This transaction is currently within a permitting period as outlined within the Purchase and Sale Agreement.

Impact of COVID-19 on Our Business

The COVID-19 pandemic has resulted, and will continue to result, in significant economic disruption and has and will likely continue to adversely affect our business. The following events related to the COVID-19 pandemic have resulted, and will continue to result, in lost or delayed revenue to the Company: limitations on the ability of manufacturers to manufacture the products we sell; limitations on the ability of our suppliers to obtain the products we sell or to meet delivery requirements and commitments; limitations on the ability to import products into the United States; limitations on the ability of our associates to perform their work due to illness caused by the pandemic or federal, state or local orders requiring associates to remain at home; limitations on the ability of UPS, LTL carriers and other carriers to deliver our packages to customers; limitations on the ability of our customers to conduct their business and purchase our products and services; disruptions to our customers’ supply chains or purchasing patterns; and limitations on the ability of our customers to pay us on a timely basis.

To meet anticipated demand for PPE products during the COVID-19 pandemic, the Company used a number of distributors and brokers to source PPE products, including purchasing products from manufacturers outside its typical programs and under non-standard payment terms. In September 2020, we prepaid approximately $26.7 million for the purchase of nitrile gloves to be sourced from manufacturers in Asia and experienced significant delays in obtaining possession of this PPE. We evaluated the potential recoverability of these assets and, as a result, recorded an impairment charge of $26.7 million in the first quarter of fiscal year 2021 to reflect the fact that the Company would not ultimately obtain this PPE or recover its related prepayment. During fiscal year 2021, the Company entered into a legal settlement agreement with a vendor and, as a result, received $20.8 million of loss recovery in its Consolidated Statements of Income related to this PPE prepayment impairment. The Company continues to pursue its legal avenues for recovery of the remaining prepayment. Furthermore, the Company has realized lower product margins as well as inventory write-downs, each as a result of the COVID-19 pandemic, primarily due to the increased supply of competing products from manufacturers and an expected inability to sell excess inventory of safety-related products ordered from manufacturers earlier in the COVID-19 pandemic. The Company incurred PPE-related inventory write-downs of $30.1 million during the second quarter of fiscal year 2021 to reduce the carrying value of certain PPE-related inventory to its estimated net realizable value. The extent to which the COVID-19 pandemic will continue to impact our business, financial condition and results of operations will depend on future developments, which are highly uncertain and depend on, among other things, the duration, spread, severity and impact of the COVID-19 pandemic and the success and speed of vaccination efforts both in the United States and globally, the effects of the COVID-19 pandemic on the Company’s customers, suppliers and vendors and the remedial actions and stimulus measures adopted by local and federal governments, and the pace and the extent to which normal economic and operating conditions can resume.

Our number one priority is the health and safety of our associates and their families, our customers, and our other partners. We have taken and will continue to take measures to reduce the risk of infection and to protect our associates and our business, in line with guidelines issued by the authorities in the jurisdictions in which we operate, including federal, state and local governments and the Centers for Disease Control and Prevention. We have instituted enhanced safety procedures to safeguard the health and safety of our associates, including the use of additional protective equipment and the frequent cleaning of our facilities. We have restricted non-associate access to our sites, reorganized our workflows where permitted to maximize social distancing, implemented extensive restrictions on associate travel, and utilized remote working strategies where possible.

We continue to experience limited disruptions in our business as we have implemented modifications to associate travel and associate work locations and in-person events, among other modifications. We have taken many actions to reduce spending more broadly across the Company, including limiting our operating and capital spending on critical items and reducing hiring and discretionary expenses. We have developed contingency plans that we anticipate would reduce costs further if business and financial conditions deteriorate. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state and local, and foreign authorities, or that we determine are in the best interests of our associates, customers, suppliers and shareholders.

As the impact of the COVID-19 pandemic has begun to abate, and restrictions on business and commercial activity have been lifted, the economy in the United States has experienced acute increases in demand for certain products and services, including the demand for fuel, labor and certain products the Company sells or the inputs for such products. In some cases, this has led to shortages of fuel, labor and certain such products. While such shortages have not yet had a material impact on the Company’s business or results of operations, they may do so in the future and the Company cannot reasonably estimate the future impacts of such shortages at this time.

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Our Strategy

Our primary objective is to grow sales profitably while offering our customers highly technical and high-touch solutions to solve their most complex challenges on the plant floor. Our strategy is to complete the transition from being a spot buy supplier to a mission-critical partner to our customers. We will selectively pursue strategic acquisitions that expand or complement our business in new and existing markets or further enhance the value and offerings we provide.

Business Environment

We utilize various indices when evaluating the level of our business activity, including the Metalworking Business Index (the “MBI”) and the Industrial Production (“IP”) index. Approximately 70% of our revenues came from sales in the manufacturing sector during the fourth quarter of fiscal year 2021. Through statistical analysis, we have found that trends in our customers’ activity have correlated to changes in the MBI and the IP index. The MBI is a sentiment index developed from a monthly survey of the U.S. metalworking industry, focusing on durable goods manufacturing. For the MBI, a value below 50.0 generally indicates contraction and a value above 50.0 generally indicates expansion. The IP index measures short-term changes in industrial production. Growth in the IP index from month to month indicates growth in the manufacturing, mining and utilities industries. Note that the composition of the IP index was revised by the Federal Reserve in May 2021 which adjusted, among other factors, the base year with which the IP index is calculated. This resulted in a lower level for the historical index in recent years, however the trend in the index continues to show growth as noted above. The MBI and the IP index over the fourth quarter of fiscal year 2021 and the fourth quarter and fiscal year averages were as follows:

During fiscal year 2021, the MBI average exceeded 50.0, which indicated growth in manufacturing during the period, particularly in the second half of the fiscal year. Similarly, the IP index averaged 98.7 during the same period, an improvement from the 2020 revised average of 96.6. We believe the recent trending improvement in the IP index was primarily due to the recovery in economic conditions related to the gradual lifting of government-imposed restrictions on economic activity and the abatement of the COVID-19 pandemic. We will monitor the current economic conditions for its impact on our customers and markets and continue to assess both risks and opportunities that may affect our business. The recent volatility stems from the economic disruptions of the COVID-19 pandemic. See “Impact of COVID-19 on Our Business” above.

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Results of Operations

Fiscal Year Ended August 28, 2021 Compared to the Fiscal Year Ended August 29, 2020

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:

Net Sales

Net sales for fiscal year 2021 increased 1.6% or $50.8 million from the prior fiscal year. We estimate that this increase in net sales is comprised of approximately $42.3 million from improved pricing, inclusive of changes in customer and product mix, discounting and other items, $3.7 million of net sales from the fiscal year 2021 acquisitions, and $6.0 million of favorable foreign exchange impact, partially offset by $1.2 million of lower sales volume. Of the above $50.8 million increase in net sales, sales to our government and national account programs (“Large Account Customers”) decreased by $58.7 million and sales other than to our Large Account Customers increased by $109.5 million, which includes $3.7 million of net sales from the fiscal year 2021 acquisitions.

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The table below shows the change in our fiscal quarterly and annual 2021 average daily sales by total company and by customer type compared to the same periods in the prior fiscal year:

We believe that our ability to transact business with our customers through various electronic portals and directly through the MSC website gives us a competitive advantage over smaller suppliers. Sales made through our eCommerce platforms, including sales made through EDI systems, VMI systems, XML ordering-based systems, vending, hosted systems and other electronic portals, represented 60.0% of consolidated net sales for fiscal year 2021, compared to 59.2% of consolidated net sales for fiscal year 2020. This percentage increase was primarily related to the higher volume of safety and janitorial product sales in fiscal year 2020 that were not transacted through our eCommerce platforms. These percentages of consolidated net sales do not include eCommerce sales from our recent acquisitions.

Gross Profit

Gross profit margin was 41.1% in fiscal year 2021 as compared to 42.1% in fiscal year 2020. The Company has realized lower product margins as well as inventory write-downs, each as a result of the COVID-19 pandemic, primarily due to the increased supply of competing products from manufacturers and an expected inability to sell excess inventory of safety-related products ordered from manufacturers earlier in the pandemic. The decline in gross profit margin was primarily the result of PPE-related inventory write-downs of $30.1 million during the second quarter of fiscal year 2021 to reduce the carrying value of certain PPE-related inventory to its estimated net realizable value.

Operating Expenses

Operating expenses increased 1.9% to $994.5 million in fiscal year 2021, as compared to $975.6 million in fiscal year 2020. Operating expenses were 30.7% of fiscal year 2021 net sales, as compared to 30.6% for fiscal year 2020. 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, partially offset by lower travel costs.

Payroll and payroll-related costs, excluding restructuring costs, were approximately 56.9% of total operating expenses for fiscal year 2021, as compared to approximately 56.7% for fiscal year 2020. Payroll and payroll-related costs, which include salary, incentive compensation, sales commission, and fringe benefit costs, increased by $13.1 million for fiscal year 2021, primarily due to higher sales commission and incentive compensation costs.

Freight expense was approximately $133.7 million for fiscal year 2021, as compared to $125.9 million for fiscal year 2020. The primary drivers of this increase were increased freight rates and increased sales volumes.

Travel and entertainment expense was $3.6 million for fiscal year 2021, as compared to $8.0 million for fiscal year 2020. This decrease was due to the Company’s travel restrictions in place resulting from the COVID-19 pandemic.

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Impairment Loss, Net

In September 2020, the Company prepaid approximately $26.7 million for the purchase of nitrile gloves to be sourced from manufacturers in Asia and experienced significant delays in obtaining possession of this PPE. The Company evaluated the potential recoverability of these assets and, as a result, recorded an impairment charge of $26.7 million in the first quarter of fiscal year 2021 to reflect the fact that the Company would not ultimately obtain this PPE or recover its related prepayment. During fiscal year 2021, the Company entered into a legal settlement agreement with a vendor and, as a result, received $20.8 million of loss recovery in its Consolidated Statements of Income related to this PPE prepayment impairment. The Company continues to pursue its legal avenues for recovery of the remaining prepayment. We also incurred $1.6 million of legal costs associated with this matter during fiscal year 2021 that are included in Operating expenses.

Restructuring Costs

For fiscal year 2021, we incurred approximately $31.4 million in restructuring costs related to both the optimization of the Company’s operations and the enhancement of our customer support model. These charges include one-time impairment charges for operating lease assets, net of gains related to settlement of lease liabilities, associate severance and separation costs, and other exit-related costs. More specifically, in the second quarter of fiscal year 2021, the Company announced an enhanced customer support model, including a transition from the branch office network to virtual customer care hubs. This transition included the closure of 73 branch offices, all of which were under operating leases. As a result, we recorded an impairment charge of $15.0 million for impacted operating lease assets, net of gains related to settlement of lease liabilities, which is included in Restructuring costs on the Consolidated Statements of Income. See Note 13, “Restructuring Costs” in the Notes to Consolidated Financial Statements for additional information.

Income from Operations

Income from operations decreased 14.0% to $301.8 million in fiscal year 2021, as compared to $350.7 million in fiscal year 2020. This decline was primarily attributable to PPE-related inventory write-downs and the impairment and restructuring charges discussed above.

Provision for Income Taxes

Our effective tax rate for fiscal year 2021 was 24.4% as compared to 24.7% in fiscal year 2020. The decrease in the effective tax rate was primarily due to discrete items relating to a higher tax benefit from stock-based compensation as well as lower non-deductible travel and entertainment expenses. See Note 7, “Income Taxes” in the Notes to Consolidated Financial Statements for further information.

Net Income

The factors which affected net income for fiscal year 2021 as compared to the prior fiscal year have been discussed above.

Liquidity and Capital Resources

As of August 28, 2021, we had $40.5 million in cash and cash equivalents, substantially all with well-known financial institutions. Historically, our primary financing needs have been to fund our working capital requirements necessitated by our sales growth and the costs of acquisitions, new products, new facilities, facility expansions, investments in vending solutions, technology investments, and productivity investments. Cash generated from operations, together with borrowings under our credit facilities and net proceeds from the private placement notes, have been used to fund these needs, to repurchase shares of our Class A Common Stock from time to time, and to pay dividends to our shareholders. More

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recently, we have taken the actions discussed above under “Impact of COVID-19 on Our Business” to improve our business operations, lower costs and preserve financial flexibility through the COVID-19 pandemic.

At August 28, 2021, total borrowings outstanding, representing amounts due under our credit facilities and notes, as well as all finance leases and financing arrangements, were $786.0 million, net of unamortized debt issuance costs of $1.9 million, as compared to total borrowings of $619.3 million, net of unamortized debt issuance costs of $0.8 million, as of August 29, 2020. The increase was primarily driven by borrowings under our uncommitted credit facilities. See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about these balances.

We believe, based on our current business plan, that our existing cash, financial resources and cash flow from operations will be sufficient to fund necessary capital expenditures and operating cash requirements for at least the next 12 months. The Company further believes that its financial resources, along with managing discretionary expenses, will allow it to manage the anticipated impact of the COVID-19 pandemic on the Company's business operations for the foreseeable future, which will include reduced sales and net income levels for the Company. We will continue to evaluate our financial position in light of future developments, particularly those relating to the COVID-19 pandemic, and to take appropriate action as it is warranted.

The table below summarizes information regarding the Company’s cash flows for the periods indicated:

Operating Activities

Net cash provided by operating activities for fiscal years 2021 and 2020 was $224.5 million and $396.7 million, respectively. There were various increases and decreases contributing to the decrease in net cash provided by operating activities, including an increase in the change in accounts receivable and inventories primarily attributable to higher sales volume, partially offset by an increase in the change in accounts payable and accrued liabilities.

(1) Working Capital is calculated as current assets less current liabilities.

(2) Current Ratio is calculated by dividing total current assets by total current liabilities.

(3) Days’ Sales Outstanding is calculated by dividing accounts receivable by net sales.

(4) Inventory Turnover is calculated by dividing total cost of goods sold by inventory, using a 13-month average inventory.

The decrease in working capital and the current ratio at August 28, 2021 compared to August 29, 2020 was primarily due to a decrease in cash and cash equivalents and an increase in the current portion of debt, partially offset by an increase in inventories and accounts receivable resulting from higher sales volumes.

The increase in inventories of $81.1 million from August 29, 2020 to August 28, 2021 was due to an increasing sales trend as well as ongoing challenges in the supply chain requiring earlier purchasing to meet customer demand. Higher inventory purchasing levels also drove the $60.6 million increase in accounts payable during this period. Accounts receivable increased $68.6 million due to increased sales levels during the second half of fiscal year 2021.

The increase in days’ sales outstanding as of August 28, 2021 as compared to August 29, 2020 was primarily due to the receivables portfolio consisting of a greater percentage of our national account program sales, which are typically at longer terms, and temporary extended terms for certain customers due to the impact of the COVID-19 pandemic.

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Inventory turnover remained consistent with the prior fiscal year periods displayed.

Investing Activities

Net cash used in investing activities for fiscal years 2021 and 2020 was $75.7 million and $49.3 million, respectively. The use of cash for fiscal year 2021 included expenditures for property, plant and equipment and the acquisitions of Hurst and the outsourcing and logistics businesses of TAC. The use of cash for fiscal year 2020 primarily consisted of expenditures for property, plant and equipment.

Financing Activities

Net cash used in financing activities for fiscal years 2021 and 2020 was $233.7 million and $254.6 million, respectively. The major components contributing to the use of cash for fiscal year 2021 were the aggregate repurchases of our Class A Common Stock of $71.3 million, the regular and special dividends paid of $362.7 million, and the payments under Shelf Facility Agreements and Private Placement Debt (as each term is defined below) of $20.0 million. These uses of cash were partially offset by net borrowings under all the credit facilities of $184.3 million and proceeds from the exercise of common stock options of $29.7 million. The major components contributing to the use of cash for fiscal year 2020 were the regular and special dividends paid of $444.2 million and payments under Shelf Facility Agreements and Private Placement Debt of $20.0 million. These uses of cash were partially offset by proceeds from the issuance of long-term debt of $100.0 million and net borrowings under our credit facilities of $96.2 million.

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. As of August 28, 2021, the Company also has three uncommitted credit facilities, totaling $208.0 million of maximum uncommitted availability. See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about our credit facilities. As of August 28, 2021, we were in compliance with the operating and financial covenants of our credit facilities.

Subsequent to fiscal year 2021, the Company made additional payments of $34.0 million through October 1, 2021 on its revolving credit facility. The current unused balance of $395.8 million from the revolving credit facility, which is reduced by outstanding letters of credit, is available for working capital purposes if necessary.  See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about these balances.

Private Placement Debt and Shelf Facility Agreements

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 agreements. In June 2018 and March 2020, we entered into additional note purchase agreements. See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about these transactions.

Financing Arrangements

From time to time, we enter into financing arrangements with vendors to purchase certain IT equipment or software. See Note 9, “Debt” in the Notes to Consolidated Financial Statements for more information about our financing arrangements.

Leases

As of August 28, 2021, certain of our operations are conducted on leased premises. These leases are for varying periods, the longest extending to fiscal year 2031. In fiscal year 2021, the Company announced an enhanced customer support model, including a transition from the branch office network to virtual customer care hubs. This transition included the closure of 73 branch offices, all of which were under operating leases. Operating lease asset impairment charges, net of gains related to settlement of lease liabilities, are included within Restructuring costs in the Consolidated Statement of Income for fiscal year 2021. In addition, we are obligated under certain equipment and automobile operating and finance leases, which expire on varying dates through fiscal year 2026. See Note 10, “Leases” in the Notes to Consolidated Financial Statements for more information about our finance and operating leases.

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Capital Expenditures

We continue to invest in sales productivity initiatives, eCommerce and vending platforms, customer fulfillment centers and distribution network, and other infrastructure and technology.

Future Liquidity Outlook

Our future contractual obligations as of August 28, 2021 (in thousands) are as follows:

(1)Certain of our operations are conducted on leased premises. These leases (most of which require us to provide for the payment of real estate taxes, insurance and other operating costs) are for varying periods, the longest extending to fiscal year 2031. In addition, we are obligated under certain equipment and automobile operating leases, which expire on varying dates through fiscal year 2024. See Note 10, “Leases” in the Notes to Consolidated Financial Statements for additional information on our operating lease arrangements.

(2)As of August 28, 2021, the Company has entered into various finance leases for certain IT equipment, which expire on varying dates through fiscal year 2026. See Note 10, “Leases” in the Notes to Consolidated Financial Statements for additional information on our finance lease arrangements.

(3)Excludes debt issuance costs.

(4)Interest payments for long-term debt are based on principal amounts and coupons or contractual rates at fiscal year end.

As of August 28, 2021, the Company had recorded a non-current liability of $5.1 million for tax uncertainties and interest. This amount is excluded from the table above, as the Company cannot make reliable estimates of these cash flows by period. See Note 7, “Income Taxes” in the Notes to Consolidated Financial Statements.

We have not entered into any off-balance sheet arrangements and there are no commitments or obligations (including, but not limited to, guarantees; retained or contingent interests in assets transferred; contractual arrangements that support the credit, liquidity or market risk for transferred assets; or risk related to derivatives or other financial products related to our equity securities), including contingent obligations, with unconsolidated entities or persons that had during the periods presented herein or are reasonably likely to have a material impact on the financial statements.

Critical Accounting Estimates

We make estimates, judgments and assumptions in determining the amounts reported in the consolidated financial statements and accompanying notes. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The estimates are used to form the basis for making judgments about the carrying values of assets and liabilities and the amount of revenues and expenses reported that are not readily apparent from other sources. Actual results may differ from these estimates. Our significant accounting policies are described in the Notes to Consolidated Financial Statements. The accounting policies described below are impacted by our critical accounting estimates. More information on the critical accounting estimates can be found in Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

Allowance for Credit Losses

We perform periodic credit evaluations of our customers’ financial condition, and collateral is generally not required. The Company considers several factors to estimate the allowance for credit losses in accounts receivable including the age of the receivables and the historical ratio of actual write-offs to the age of the receivables, and also reflects the adoption of the new accounting standard related to current expected credit losses in the most recent fiscal year. See Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements for more information.

Inventories

Inventory is reflected at the lower of weighted average cost or net realizable value considering future demand, market conditions and physical condition of the inventory. We write-down inventories for shrinkage and slow-moving or obsolete inventory. The analysis includes inventory levels, sales information, historical write-down information, and the on-hand quantities relative to the sales history for the product.

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Goodwill and Indefinite-Lived Intangible Assets

The purchase price of an acquired company is allocated between the intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital. The Company annually reviews goodwill at the reporting unit level and intangible assets that have indefinite lives for impairment in its fiscal fourth quarter and when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The tax balances and income tax expense recognized by the Company are based on management’s interpretations of the tax laws of multiple jurisdictions. Income tax expense reflects the Company’s best estimates and assumptions regarding, among other items, the level of future taxable income, interpretation of tax laws and uncertain tax positions.

Other

Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. Policies such as revenue recognition, depreciation, intangibles, 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. Possible changes in estimates or assumptions associated with these policies are not expected to have a material effect on the financial condition or results of operations of the Company. More information on these additional accounting policies can be found in Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

Refer to Note 1, “Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

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