Fastenal Company: Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
Fastenal Company is a North American distributor of industrial and construction supplies serving primarily manufacturing and non-residential construction customers through branches, Onsite locations, and industrial vending devices. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $1,367.0 million | $1,309.3 million | 4.4% increase |
| Gross profit | $636.8 million | $624.7 million | 1.9% increase |
| Gross margin | 46.6% | 47.7% | Down 110 basis points |
| Operating income | $271.3 million | $261.4 million | 3.8% increase |
| Operating margin | 19.9% | 20.0% | Down 10 basis points |
| Net earnings | $202.6 million | $194.1 million | 4.4% increase |
| Diluted EPS | $0.35 | $0.34 | 4.0% increase |
| Cash flow from operations | $241.1 million | $204.9 million | 17.7% increase |
Daily sales increased 2.8%, including an additional selling day in 2020. Sales growth reflected market-share gains from industrial vending and Onsite locations, pricing actions, and increased demand for safety products late in the quarter. Foreign currency reduced reported sales by approximately $2.3 million.
At March 31, 2020, cash and cash equivalents were $160.7 million, compared with $174.9 million at December 31, 2019. Total current assets were $2,464.3 million and total current liabilities were $580.4 million, implying current assets of approximately 4.2 times current liabilities. Trade receivables were $833.9 million and inventories were $1,345.5 million.
Total debt increased to $455.0 million from $345.0 million at December 31, 2019, including $320.0 million outstanding under a $700.0 million unsecured revolving credit facility. The company reported compliance with its debt covenants. Outstanding letters of credit were $36.3 million. Net cash decreased $14.2 million during the quarter to $160.7 million.
Cash used in investing activities was $171.7 million, including $125.0 million paid for the Apex Industrial Technologies asset acquisition and $48.8 million of property and equipment purchases. Cash used in financing activities was $78.2 million, including $143.6 million of dividends, $52.0 million of share repurchases, and net debt proceeds of $110.0 million.
Material Changes Versus the Prior Comparable Period
- Sales increased 4.4%, but gross margin declined 110 basis points because fastener sales declined 2.6% on a daily-sales basis while lower-margin safety-product sales increased 18.4%.
- March daily-sales growth slowed to 0.2% as COVID-19 restrictions affected customer activity, branch access, and Onsite locations.
- Safety-product sales increased 31.0% in March, while fastener sales declined 10.1%.
- Operating and administrative expenses increased in dollars but declined as a percentage of sales to approximately 26.8% from 27.8%, reflecting relatively lower growth in employee-related and other operating costs.
- Net interest expense declined to $2.1 million from $3.9 million due to lower average interest rates and debt balances during the period.
- Operating cash flow increased to $241.1 million from $204.9 million, primarily because of less working-capital investment and higher earnings.
- The company purchased 1.6 million shares for approximately $52.0 million at an average price of $32.54 per share; 3.2 million shares remained authorized for repurchase at March 31, 2020.
- The installed industrial vending-device count increased 10.4% year over year to 92,124, and active Onsite locations increased 24.8% to 1,179.
Guidance, Outlook, Risks, and Unusual Items
Management reduced expected 2020 net capital expenditures to $155.0 million–$180.0 million, from a prior range of $180.0 million–$205.0 million and 2019 spending of $239.8 million. The reduction reflects deferred building projects, lower expected vending signings, and a more uncertain business environment.
Management expects the ongoing tax rate, absent discrete items, to remain approximately 24.5%–25.0%. No specific revenue or earnings guidance was provided.
COVID-19 created significant uncertainty. Branches remained operational but public access was restricted, and many Onsite locations were closed or operating at reduced capacity. Management expects the pandemic could adversely affect sales, gross margins, staffing, supply availability, deliveries, customer collections, liquidity, and capital resources. The company stated that the future financial impact could be material and cannot reasonably be estimated.
On March 30, 2020, Fastenal acquired selected Apex assets for $125.0 million in cash, funded with available cash and revolving-credit borrowings. Approximately $123.8 million was allocated to identifiable intangible assets with an estimated weighted-average amortization period of 19.1 years.
Other risks include weaker manufacturing and construction demand, product and customer mix changes, pricing pressure, supply-chain disruption, foreign-currency movements, interest-rate exposure, inventory and receivables management, competition in vending and Onsite operations, cybersecurity, and the ability to maintain liquidity during the pandemic. No litigation matters were considered probable or reasonably possible to have a material adverse outcome as of March 31, 2020.
Important Facts for Investors to Verify
- Whether COVID-19 caused sustained declines in daily sales, particularly in manufacturing, construction, and fasteners, and whether safety-product demand remained elevated.
- The effect of product and customer mix on gross margin and whether margins recover as business conditions normalize.
- Revolving-credit borrowings, covenant compliance, interest-rate exposure, and available liquidity following the Apex acquisition and pandemic-related actions.
- Actual 2020 capital expenditures versus the revised $155.0 million–$180.0 million range.
- Receivables aging, customer collections, inventory levels, and potential credit-loss effects under the newly adopted expected-credit-loss standard.
- Integration, commercial benefits, and amortization impact of the Apex asset acquisition.
- The sustainability of dividends and share repurchases given pandemic uncertainty and increased debt.