# MSC INDUSTRIAL DIRECT CO INC (MSM) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from MSC INDUSTRIAL DIRECT CO INC's 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/1003078/000100307824000107/msm-20240831.htm Accession: 0001003078-24-000107 Filing date: 2024-10-24 Report date: 2024-08-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/MSM/ All MD&A years: /company/MSM/mda/ Previous year: /company/MSM/mda/fy2023/ (FY 2023) Next year: /company/MSM/mda/fy2025/ (FY 2025) 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. 25 Table of Contents 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. 26 Table of Contents 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: [[GREPCENT_TABLE]] [["Period","IP Index"],["June","103.2"],["July","102.6"],["August","102.9"],["Fiscal Year 2024 Q4 Average","102.9"],["12-Month Average","102.7"]] [[/GREPCENT_TABLE]] 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. 27 Table of Contents 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: [[GREPCENT_TABLE]] [["","Fiscal Years Ended"],["","August 31, 2024 (52 weeks)","","September 2, 2023 (52 weeks)","","Change"],["","$","","%","","$","","%","","$","","%"],["Net sales","$","3,820,951","","100.0","%","","$","4,009,282","","100.0","%","","$","(188,331)","","","(4.7)","%"],["Cost of goods sold","2,248,168","","58.8","%","","2,366,317","","59.0","%","","(118,149)","","","(5.0)","%"],["Gross profit","1,572,783","","41.2","%","","1,642,965","","41.0","%","","(70,182)","","","(4.3)","%"],["Operating expenses","1,167,870","","30.6","%","","1,151,295","","28.7","%","","16,575","","","1.4","%"],["Restructuring and other costs","14,526","","0.4","%","","7,937","","0.2","%","","6,589","","","83.0","%"],["Income from operations","390,387","","10.2","%","","483,733","","12.1","%","","(93,346)","","","(19.3)","%"],["Total other expense","(47,638)","","","(1.2)","%","","(27,577)","","","(0.7)","%","","(20,061)","","","72.7","%"],["Income before provision for income taxes","342,749","","9.0","%","","456,156","","11.4","%","","(113,407)","","","(24.9)","%"],["Provision for income taxes","86,792","","2.3","%","","113,049","","2.8","%","","(26,257)","","","(23.2)","%"],["Net income","255,957","","6.7","%","","343,107","","8.6","%","","(87,150)","","","(25.4)","%"],["Less: Net loss attributable to noncontrolling interest","(2,637)","","(0.1)","%","","(126)","","0.0","%","","(2,511)","","","1992.9","%"],["Net income attributable to MSC Industrial","$","258,594","","6.8","%","","$","343,233","","8.6","%","","$","(84,639)","","","(24.7)","%"]] [[/GREPCENT_TABLE]] 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 $17.4 million. 28 Table of Contents The tables below show, among other things, the annual 2024 average daily sales (“ADS”) by total company, by customer end-market and by customer type compared to the same periods in the prior fiscal year: [[GREPCENT_TABLE]] [["ADS Percentage Change by Quarter"],["(Unaudited)"],["2024 Fiscal Period","","Thirteen-Week Period Ended Fiscal Q1","","Thirteen-Week Period Ended Fiscal Q2","","Thirteen-Week Period Ended Fiscal Q3","","Thirteen-Week Period Ended Fiscal Q4","","Fiscal Year Ended August 31, 2024"],["Net Sales (in thousands)","","$","953,969","","$","935,348","","$","979,350","","$","952,284","","$","3,820,951"],["Sales Days","","62","","63","","64","","63","","252"],["ADS (1) (in millions)","","$","15.4","","$","14.8","","$","15.3","","$","15.1","","$","15.2"],["Total Company ADS Percent Change (2)","","(0.4)","%","","(2.7)","%","","(7.1)","%","","(8.0)","%","","(4.7)","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["ADS Percentage Change by End-Market and Customer Type"],["","","Fiscal Year Ended August 31, 2024"],["Manufacturing Customers ADS Percent Change(2)","","(4.3)","%"],["Manufacturing Customers Percent of Total Net Sales","","68","%"],["Non-Manufacturing Customers ADS Percent Change(2)","","(5.4)","%"],["Non-Manufacturing Customers Percent of Total Net Sales","","32","%"],["National Account Customers ADS Percent Change (2)(3)","","1.2","%"],["National Account Customers Percent of Total Net Sales (3)","","37","%"],["Public Sector Customers ADS Percent Change (2)(3)","","(14.9)","%"],["Public Sector Customers Percent of Total Net Sales (3)","","9","%"],["Core and Other Customers ADS Percent Change (2)(3)","","(6.6)","%"],["Core and Other Customers Percent of Total Net Sales (3)","","54","%"]] [[/GREPCENT_TABLE]] (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 29 Table of Contents 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 $6.6 million of Employee Retention Credit funds. See Note 8, “Income Taxes” in the Notes to Consolidated Financial Statements for further information. Provision for Income Taxes Our effective tax rate for fiscal year 2024 was 25.3%, as compared to 24.8% for fiscal year 2023. See Note 8, “Income Taxes” in the Notes to Consolidated Financial Statements for further information. The increase in the effective tax rate was primarily due to non-deductible expenses associated with the Reclassification and derecognition of certain deferred tax assets, partially offset by a higher tax benefit from stock-based compensation and a benefit from federal tax credits. 30 Table of Contents Net Income The factors which affected net income for fiscal year 2024, as compared to the prior fiscal year, have been discussed above. Liquidity and Capital Resources [[GREPCENT_TABLE]] [["","August 31, 2024","","September 2, 2023","","$ Change"],["","","","(In thousands)"],["Total debt","$","508,764","","","$","454,326","","","$","54,438"],["Less: Cash and cash equivalents","29,588","","","50,052","","","(20,464)"],["Net debt","$","479,176","","","$","404,274","","","$","74,902"],["Equity","$","1,401,282","","","$","1,492,582","","","$","(91,300)"]] [[/GREPCENT_TABLE]] 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 $1.0 million, as of September 2, 2023. The increase in total borrowings outstanding was driven by higher net borrowings under our credit facilities, private placement notes and shelf facility agreements. The increase in total borrowings outstanding was driven by higher net borrowings under our credit facilities primarily to fund our recent higher share repurchase volume to offset the share dilution resulting from the Reclassification. See Note 10, “Debt” in the Notes to Consolidated Financial Statements for more information about these balances. We believe, based on our current business plan, that our existing cash, financial resources and cash flow from operations will be sufficient to fund anticipated capital expenditures and operating cash requirements for at least the next 12 months. We will continue to evaluate our financial position in light of future developments and to take appropriate action as it is warranted. The table below summarizes information regarding the Company’s cash flows for the periods indicated: [[GREPCENT_TABLE]] [["","Fiscal Years Ended"],["","August 31, 2024","","September 2, 2023"],["","(In thousands)"],["Net cash provided by operating activities","$","410,696","","$","699,582"],["Net cash used in investing activities","(123,396)","","","(112,675)"],["Net cash used in financing activities","(307,352)","","","(580,400)"],["Effect of foreign exchange rate changes on cash and cash equivalents","(412)","","","8"],["Net (decrease) increase in cash and cash equivalents","$","(20,464)","","","$","6,515"]] [[/GREPCENT_TABLE]] Operating Activities Net cash provided by operating activities for fiscal year 2024 and fiscal year 2023 was $410.7 million and $699.6 million, respectively. The decrease was primarily due to the following: •a decrease in net income, as described above; and 31 Table of Contents •a smaller decrease in the change in accounts receivable primarily attributable to the RPA entered into during the second quarter of fiscal year 2023; partially offset by •a decrease in the change in inventories primarily attributable to lower sales and purchase volume. The table below summarizes certain information regarding the Company’s operations: [[GREPCENT_TABLE]] [["","Fiscal Years Ended"],["","August 31, 2024","","September 2, 2023"],["","(Dollars in thousands)"],["Working Capital (1)","$","582,662","","","$","668,077"],["Current Ratio (2)","2.0","","2.0"],["Days\u2019 Sales Outstanding (3)","37.9","","36.5"],["Inventory Turnover (4)","3.3","","3.2"]] [[/GREPCENT_TABLE]] (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. 32 Table of Contents Debt Credit Facilities In April 2017, the Company entered into a $600.0 million revolving credit facility, which was subsequently amended and extended in August 2021. 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 $50.0 million aggregate principal amount of 5.73% Senior Notes, due April 18, 2027. See Note 10, “Debt” in the Notes to Consolidated Financial Statements for more information about these transactions. Leases and Financing Arrangements As of August 31, 2024, certain of our operations were conducted on leased premises. These leases are for varying periods, with the longest extending to fiscal year 2031. In addition, we are obligated under certain equipment and automobile operating and finance leases, which expire on varying dates through fiscal year 2029. From time to time, we enter into financing arrangements with vendors to purchase certain IT equipment or software. Capital Expenditures We continue to invest in E-commerce and vending platforms, customer fulfillment centers and distribution networks and other infrastructure and technology. Future Liquidity Outlook As of August 31, 2024, our future contractual obligations were as follows (in thousands): [[GREPCENT_TABLE]] [["Contractual Obligations","","Fiscal Year 2025","","Thereafter"],["Undiscounted operating lease obligations (1)","","$","24,293","","","$","40,178"],["Undiscounted finance lease obligations, net of interest (2)","","237","","","491"],["Maturities of long-term debt obligations, net of interest (3)","","20,000","","","278,750"],["Estimated interest on long-term debt (4)","","13,067","","","17,745"],["Total contractual obligations","","$","57,597","","","$","337,164"]] [[/GREPCENT_TABLE]] (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. 33 Table of Contents We have not entered into any off-balance sheet arrangements and there are no commitments or obligations (including, but not limited to, guarantees; retained or contingent interests in assets transferred; contractual arrangements that support the credit, liquidity or market risk for transferred assets; or risk related to derivatives or other financial products related to our equity securities), including contingent obligations, with unconsolidated entities or persons that had during the periods presented herein or are reasonably likely to have a material impact on the Consolidated Financial Statements. 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 34 Table of Contents 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.