The following is intended to update the information contained in the Company's
Annual Report on Form 10-K for the fiscal year ended
Overview
MSC Industrial Direct Co., Inc. (together with its subsidiaries, "MSC," the "Company," "we," "our," or "us") is a leading North American distributor of a broad range of 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 75 years of working with customers across industries. We continue to implement our strategies to gain market share, generate new customers, increase sales to existing customers, and diversify our customer base. We offer approximately 1,864,000 active, saleable stock-keeping units through our catalogs; brochures; eCommerce channels, including our website, mscdirect.com ("MSC website"); our inventory management solutions; catalogs and brochures; and call-centers and branches. We service our customers from 11 customer fulfillment centers (seven are located withinthe United States which includes five primary customer fulfillment centers, one is located in theUnited Kingdom , and three are inCanada ) and 98 branch offices. We closed ourDallas customer fulfillment center inOctober 2020 and shifted operations to our remaining distribution network.
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. Furthermore, we provide additional procurement cost-saving solutions to our customers through technology such as our CMI, VMI, and vending programs. Our field sales and service associate headcount was 2,313 atNovember 28, 2020 , compared to 2,349 atNovember 30, 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.
Highlights
Highlights during the first fiscal quarter ended
?We generated
?We made net payments of
?We paid out$41.8 million in cash dividends, compared to regular cash dividends of$41.5 million in the same period in the prior fiscal year. Additionally, the Board of Directors declared a special cash dividend of$3.50 per share during the quarter endedNovember 28, 2020 . This special cash dividend was payable onDecember 15, 2020 and resulted in a payout of$195.4 million . We had net borrowings of$170.0 million under our Committed Facility inDecember 2020 after the first fiscal quarter ended to fund the special cash dividend paid in December. ?We incurred$4.0 million in restructuring and other related costs, comprised of$2.5 million in consulting costs related to the optimization of the Company's operations and$1.5 million in severance and separation costs charges and other related costs associated primarily with sales workforce realignment.
?We incurred a
19
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Recent Developments
Relocation and Pending Sale of Long Island CSC
InDecember 2020 , we announced plans to relocate our Long Island Customer Support Center ("CSC") to a smaller facility inMelville, N.Y. We signed a ten-year lease to occupy approximately 26,000 square feet in an office building inMelville, N.Y. and expect to move in late Spring 2021. In furtherance of these plans, we entered into an Agreement of Sale to sell our Long Island CSC. This transaction is currently within an initial due diligence period.
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 adversely affect our business. The following events related to the COVID-19 pandemic have resulted and will result in lost or delayed revenue to our 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 of our associates to perform their work due to illness caused by the pandemic or local, state or federal orders requiring associates to remain at home; limitations on the ability ofUPS , 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. The extent to which the COVID-19 pandemic will continue to impact our business and financial results going forward will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of COVID-19 in the future, future government actions in response to the crisis and the overall impact of the COVID-19 pandemic on the global economy and capital markets, among many other factors, all of which remain highly uncertain and unpredictable. 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 state, federal and local governments and theCenter for Disease Control and Prevention . We have instituted enhanced safety procedures to safeguard their health and safety, including use of additional protective equipment and 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 disruptions in our business as we have implemented modifications to associate travel and associate work locations and cancelled events, among other modifications. We have reduced spending more broadly across the company, only proceeding with operating and capital spending that is critical. We have implemented a reduction in hiring and reduced discretionary expenses. We have developed contingency plans to reduce costs further if the situation deteriorates. 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.
Progress on Mission Critical
As previously disclosed, we initiated a company-wide project to accelerate market share capture and improve profitability over the period through our fiscal 2023, which we refer to as "Mission Critical". Among the Mission Critical initiatives to realize growth, we are 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 onInvested Capital ("ROIC"). These cost reductions are 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.
Our Strategy
Our 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 20 -------------------------------------------------------------------------------- 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. This includes both the Metalworking Business Index ("MBI") and the Industrial Production Index ("IP"). Approximately 65% of our revenues came from sales in the manufacturing sector during the first quarter of our fiscal year 2021. Through statistical analysis, we have found that trends in our customers' activity have correlated to changes in the MBI and IP. The MBI is a sentiment index developed from a monthly survey of theU.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 IP over the three months and for the past 12-month period endingNovember 2020 were as follows: Period MBI IP September 50.0 102.6 October 52.9 103.6 November 50.2 104.0 Fiscal 2021 Q1 average 51.0 103.4 12-month average 46.3 102.4 The fiscal 2021 first quarter MBI average trended above 50.0 indicating growth in manufacturing. Similarly, the IP index increased throughout the quarter, signifying continued improvement since its 12-month low inApril 2020 . 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. To meet anticipated demand for our products during the COVID-19 pandemic, we have been purchasing products from manufacturers outside of our typical programs, including payment terms, and in advance of customer orders, which we hold in inventory and resell to customers. We are subject to the risk that we may be unable to sell excess products, in particular PPE products, ordered from manufacturers. Inventory levels in excess of customer demand due to the difficulty of calibrating demand for such products, the concentration of demand for a limited number of SKUs, difficulties in product sourcing, or rapid changes in demand may result in inventory write downs, and the sale of excess inventory at discounted prices could have an adverse effect on our operating results, financial condition and cash flows. Conversely, if we underestimate customer demand for our products or if we are unable to purchase products we need to meet customer demand, we may experience inventory shortages. Inventory shortages might delay shipments to customers and negatively impact customer relationships.
Impairment Loss
Given the high demand for PPE products and related challenges in sourcing PPE products, we used a number of distributors and brokers to source PPE products. InSeptember 2020 , we prepaid approximately$26.7 million for the purchase of nitrile gloves to be sourced from manufacturers inAsia 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 approximately$26.7 million for the thirteen-week period endedNovember 28, 2020 . 21
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Thirteen-Week Period Ended
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:
Thirteen Weeks Ended November 28, 2020 November 30, 2019 Change $ % $ % $ % Net sales$ 771,904 100.0%$ 823,601 100.0%$ (51,697) (6.3)% Cost of goods sold 448,586 58.1% 476,405 57.8% (27,819) (5.8)% Gross profit 323,318 41.9% 347,196 42.2% (23,878) (6.9)% Operating expenses 242,684 31.4% 256,898 31.2% (14,214) (5.5)% Impairment loss 26,726 3.5% - 0.0% 26,726 100.0% Income from operations 53,908 7.0% 90,298 11.0% (36,390) (40.3)% Total other expense (2,684) (0.3)% (3,040) (0.4)% 356 (11.7)% Income before provision for income taxes 51,224 6.6% 87,258 10.6% (36,034) (41.3)% Provision for income taxes 12,447 1.6% 21,806 2.6% (9,359) (42.9)% Net income 38,777 5.0% 65,452 7.9% (26,675) (40.8)% Less: Net income attributable to noncontrolling interest 323 0.0% 34 0.0% 289 850.0% Net income attributable to $ MSC Industrial 38,454 5.0%$ 65,418 7.9%$ (26,964) (41.2)% Net Sales Net sales decreased 6.3% or$51.7 million for the thirteen-week period endedNovember 28, 2020 , as compared to the thirteen-week period endedNovember 30, 2019 . We estimate that this$51.7 million decrease in net sales is comprised of (i) approximately$62.2 million of lower sales volume; and (ii)$0.3 million of unfavorable foreign exchange impact; partially offset by (iii) approximately$10.8 million from improved pricing, inclusive of changes in customer and product mix, discounting and other items. Of the above$51.7 million decrease in net sales, sales to our government and national account programs ("Large Account Customers") decreased by$13.2 million and sales other than to our Large Account Customers decreased by$38.5 million . Our government net sales increased to 11% from 7% as a percentage of total net sales for the thirteen-week period endedNovember 28, 2020 , as compared to the thirteen-week period endedNovember 30, 2019 . This increase is related to the recent high demand for safety and janitorial products from government customers. The table below shows the change in our average daily sales by total company and by customer type for the thirteen- week period endedNovember 28, 2020 compared to the same period in the prior fiscal year: Average Daily Sales Percentage Change (unaudited) Thirteen Weeks Ended November 28, 2020 November 30, 2019 Net Sales (in thousands)$ 771,904 $ 823,601 Sales Days 62 62
Average Daily Sales (ADS)(1) (in millions)
13.3
Total Company ADS Percent Change -6.3%
-1.0%
Manufacturing Customers ADS Percent Change -13.5%
-1.3%
Manufacturing Customers Percent of Total Net Sales 65% 70% Non-Manufacturing Customers ADS Percent Change 10.8%
-0.3%
Non-Manufacturing Customers Percent of Total Net Sales 35% 30%
(1) ADS is calculated using number of business days in the US
22 -------------------------------------------------------------------------------- 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 Electronic Data Interchange ("EDI") systems, VMI systems, Extensible Markup Language ordering-based systems, vending, hosted systems and other electronic portals, represented 60.7% of consolidated net sales for both the thirteen-week periods endedNovember 28, 2020 andNovember 30, 2019 . These percentages of consolidated net sales do not include eCommerce sales from our AIS business and from MSC Mexico operations.
Gross Profit
Gross profit margin was 41.9% for the thirteen-week period endedNovember 28, 2020 as compared to 42.2% for the same period in the prior fiscal year. The decline was primarily the result of increased product costs and changes in our customer and product mix. Operating Expenses Operating expenses decreased 5.5% to$242.7 million for the thirteen-week period endedNovember 28, 2020 , as compared to$256.9 million for the same period in the prior fiscal year. Operating expenses were 31.4% of net sales for the thirteen-week period endedNovember 28, 2020 , as compared to 31.2% for the thirteen-week period endedNovember 30, 2019 . The decrease in operating expense dollars was primarily attributable to lower costs associated with payroll and payroll-related costs, travel and entertainment costs, freight costs associated with lower sales volumes, and severance and separation costs, partially offset by the increase in consulting costs. Payroll and payroll-related costs for the thirteen-week period endedNovember 28, 2020 were 55.4% of total operating expenses as compared to 56.0% for the same period in the prior fiscal year. Payroll and payroll-related costs decreased by$9.2 million for the thirteen-week period endedNovember 28, 2020 . Included in payroll and payroll-related costs are salary, incentive compensation, sales commission, and fringe benefit costs. All of these costs, with the exception of sales commissions, decreased for the thirteen-week period endedNovember 28, 2020 , as compared to the same period in the prior fiscal year, with much of the decrease attributable to a decrease in salary expenses, primarily related to a decrease in associate headcount. Travel and entertainment expense was$0.7 million for the thirteen-week period endedNovember 28, 2020 , as compared to$3.4 million for the same period in the prior fiscal year. This decrease was due to the Company's travel restrictions in place resulting from the COVID-19 pandemic, as well as our proactive cost containment measures. Freight expense was$31.8 million for the thirteen-week period endedNovember 28, 2020 , as compared to$33.5 million for the same period in the prior fiscal year. The primary driver of this was decreased sales volumes. For the thirteen-week period endedNovember 28, 2020 , we incurred$2.5 million in consulting costs related to the optimization of the Company's operations, and$1.5 million in severance and separation related costs as compared to$2.6 million in severance and separation related costs for the same period in the prior fiscal year. The total increase of$1.4 million in consulting and severance and separation related costs contributed to the increase in operating expenses as a percentage of net sales for the thirteen-week period endedNovember 28, 2020 , as compared to the same period in the prior fiscal year.
Impairment Loss
InSeptember 2020 , we prepaid approximately$26.7 million for the purchase of nitrile gloves to be sourced from manufacturers inAsia 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 for the thirteen-week period endedNovember 28, 2020 .
Income from Operations
Income from operations decreased 40.3% to$53.9 million for the thirteen-week period endedNovember 28, 2020 , as compared to$90.3 million for the same period in the prior fiscal year. This was primarily attributable to the impairment loss described above as well as a decrease in net sales and gross profit, partially offset by a decrease in operating expenses. Income from operations as a percentage of net sales decreased to 7.0% for the thirteen-week period endedNovember 28, 2020 from 11.0% for the same period in the prior fiscal year, primarily as the result of the impairment charge described above as well as the decrease in the gross profit margin and an increase in operating expenses as a percentage of net sales. 23
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Provision for Income Taxes
The effective tax rate for the thirteen-week period endedNovember 28, 2020 was 24.3%, as compared to 25.0% for the same period in the prior fiscal year. The decrease in rate as compared to the same period in the prior fiscal year is primarily due to discrete items during the thirteen-week period endedNovember 28, 2020 relating to the impairment loss as well as a higher tax benefit from stock-based compensation. Net Income
The factors which affected net income for the thirteen-week period ended
Liquidity and Capital Resources
November 28, August 29, 2020 2020 $ Change (Dollars in thousands) Total debt, including$ 490,130 $ 619,266$ (129,136) obligations under finance leases Less: Cash and cash equivalents (53,104) (125,211)
72,107
Net debt, including obligations
(57,029) under finance leases Equity$ 1,130,887 $ 1,320,573 $ (189,686) As ofNovember 28, 2020 , we held$53.1 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, Private Placement Debt, and Shelf Facility Agreements, has been used to fund these needs, to repurchase shares of our Class A common stock, and to pay dividends. More recently, we have taken the actions discussed above under "Impact of COVID-19 on Our Business". As ofNovember 28, 2020 , total borrowings outstanding, representing amounts due under our credit facilities, Private Placement Debt, and Shelf Facility Agreements, as well as all finance leases and financing arrangements, were$490.1 million , net of unamortized debt issuance costs of$0.7 million . As ofAugust 29, 2020 , total borrowings outstanding, representing amounts due under our credit facilities, Private Placement Debt, and Shelf Facility Agreements, as well as all finance leases and financing arrangements, were$619.3 million , net of unamortized debt issuance costs of$0.8 million . See Note 6 "Debt" in the Notes to the unaudited Condensed Consolidated Financial Statements for more information about these balances. InNovember 2020 , our Board of Directors declared a special dividend of$3.50 per share payable onDecember 15, 2020 to shareholders of record at the close of business onDecember 1, 2020 . The special dividend resulted in a payout of approximately$195.4 million . InDecember 2020 , we had net borrowings of$170.0 million under our Committed Facility to fund the special cash dividend paid in December, increasing the outstanding balance on the Committed Facility to$290.0 million . We believe, based on our current business plan, that our existing cash, and cash flow from operations, will be sufficient to fund necessary capital expenditures and operating cash requirements for at least the next twelve months. The Company further believes that its financial resources, along with managing discretionary expenses, will allow us to manage the anticipated further impact of COVID-19 on our business operations for the foreseeable future, which will include reduced sales and net income levels for the Company. We have reduced spending more broadly across the Company, only proceeding with operating and capital spending that is critical. Looking ahead, we have developed contingency plans to reduce costs further if the situation deteriorates. The challenges posed by COVID-19 on our business are evolving rapidly. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19. 24
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The table below summarizes information regarding the Company's liquidity and capital resources: Thirteen Weeks Ended November 28, November 30, 2020 2019 (Dollars in thousands) Net cash provided by operating activities$ 103,230 $
85,112
Net cash used in investing activities (7,893)
(12,689)
Net cash used in financing activities (167,658)
(77,161)
Effect of foreign exchange rate changes on cash 214
230
and cash equivalents Net increase (decrease) in cash and cash$ (72,107) $ (4,508) equivalents Operating Activities Net cash provided by operating activities for the thirteen-week periods endedNovember 28, 2020 andNovember 30, 2019 was$103.2 million and$85.1 million , respectively. There are various increases and decreases contributing to this change. An increase in the change in accounts payable and accrued expenses primarily due to increases in changes in income taxes payable and payroll taxes payable related to the Coronavirus Aid, Relief, and Economic Security Act deferral, partially offset by a decrease in net income as described above contributed to most of the increase in net cash provided by operating activities. November 28, August 29, November 30, 2020 2020 2019 (Dollars in thousands) Working Capital$ 634,329 $ 829,037 $ 766,992 Current Ratio 2.2 3.0 2.9 Days Sales Outstanding 57.7 58.2 59.6 Inventory Turnover 3.3 3.3 3.5 The decrease in working capital as ofNovember 28, 2020 as compared toNovember 30, 2019 , is primarily due to$195.4 million in dividends payable for special cash dividends declared within current liabilities as ofNovember 28, 2020 and a decrease in cash, partially offset by a decrease in current debt. The decrease in days sales outstanding is primarily due to a receivables portfolio consisting of a greater percentage of government customers sales, and a slight decline in national account program days sales outstanding. Inventory turnover (calculated using a thirteen-point average inventory balance) remained consistent with the prior year periods displayed.
Investing Activities
Net cash used in investing activities for the thirteen-week periods ended
Financing Activities
Net cash used in financing activities for the thirteen-week periods endedNovember 28, 2020 andNovember 30, 2019 was$167.7 million and$77.2 million , respectively. The major components contributing to the use of cash for the thirteen-week period endedNovember 28, 2020 were dividends paid of$41.8 million , payments on all credit facilities of$130.0 million , and repurchases of our common stock of$3.2 million . This was partially offset by proceeds from the exercise of common stock options of$5.6 million . The major components contributing to the use of cash for the thirteen-week period endedNovember 30, 2019 were dividends paid of$41.5 million , net payments on all credit facilities of$38.0 million , and repurchases of our common stock of$3.0 million . This was partially offset by proceeds from the exercise of common stock options of$4.5 million . 25
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Contractual Obligations
Information regarding our long-term debt payments, operating lease payments, financing lease payments and other commitments is provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on our Form 10-K for the fiscal year endedAugust 29, 2020 . As ofNovember 28, 2020 , there have been no material changes outside the ordinary course of business in our contractual obligations and commitments sinceAugust 29, 2020 . See Note 12, "Subsequent Events" in the Notes to the unaudited Condensed Consolidated Financial Statements for information about subsequent transactions.
Long-term Debt
Credit Facilities
InApril 2017 , we entered into a$600.0 million Committed Facility. As ofNovember 28, 2020 , the Company also had one Uncommitted Credit Facility, with$5.0 million of maximum uncommitted availability. See Note 6 "Debt" in the Notes to the unaudited Condensed Consolidated Financial Statements for more information about our credit facilities. As ofNovember 28, 2020 , we were in compliance with the operating and financial covenants of our credit facilities. The current unused balance of$305.8 million from the Committed Facility, which is reduced by outstanding letters of credit, is available for working capital purposes if necessary. See Note 6 "Debt" in the Notes to the unaudited Condensed Consolidated Financial Statements for more information about these balances.
Private Placement Debt and Shelf Facility Agreements
InJuly 2016 , we completed the issuance and sale of unsecured senior notes. InJanuary 2018 , we entered into two Note Purchase and Private Shelf Agreements. InJune 2018 andMarch 2020 , we entered into additional Note Purchase Agreements. See Note 6 "Debt" in the Notes to the unaudited Condensed Consolidated Financial Statements for more information about these transactions.
Finance Leases and Financing Arrangements
From time to time, we enter into finance lease and financing arrangements. See Note 6 "Debt," in the Notes to the unaudited Condensed Consolidated Financial Statements for more information about our financing arrangements.
Operating Leases
As of
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Critical Accounting Estimates
On an ongoing basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition, inventory valuation, allowance for doubtful accounts, warranty reserves, contingencies and litigation, income taxes, accounting for goodwill and long-lived assets, stock-based compensation, and business combinations. We make estimates, judgments and assumptions in determining the amounts reported in the Condensed 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. There have been no material changes outside the ordinary course of business in the Company's Critical Accounting Policies, as disclosed in its Annual Report on Form 10-K for the fiscal year endedAugust 29, 2020 . 26
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Recently Issued and Adopted Accounting Standards
See Note 1 "Basis of Presentation" in the Notes to the unaudited Condensed Consolidated Financial Statements.
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