Fastenal Company — Q2 2020 Form 10-Q Summary
Business context and reporting period
Fastenal distributes industrial and construction supplies through more than 3,200 in-market locations, including branches, Onsite locations, and industrial vending devices. The filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. Results were materially affected by COVID-19, including weaker manufacturing and construction demand and elevated sales of personal protective equipment (PPE) and sanitation products.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,509.0 million | $1,368.4 million | $2,876.0 million | $2,677.7 million |
| Gross profit | $671.6 million | $641.2 million | $1,308.4 million | $1,265.9 million |
| Gross margin | 44.5% | 46.9% | 45.5% | 47.3% |
| Operating income | $316.0 million | $275.0 million | $587.3 million | $536.4 million |
| Operating margin | 20.9% | 20.1% | 20.4% | 20.0% |
| Net earnings | $238.9 million | $204.6 million | $441.5 million | $398.7 million |
| Diluted EPS | $0.42 | $0.36 | $0.77 | $0.69 |
- Q2 sales increased 10.3%; six-month sales increased 7.4%. Management estimated that excluding COVID-related surge sales, Q2 sales would have declined 14% to 17% and six-month sales would have declined 5% to 8%.
- Q2 net earnings increased 16.7%; six-month net earnings increased 10.7%.
- Operating and administrative expenses declined as a percentage of sales to 23.5% in Q2 from 26.8% in the prior-year quarter and to 25.1% for the six months from 27.3%.
- Net cash provided by operating activities was $491.8 million for the six months, versus $333.0 million in 2019. The increase included $111.5 million of deferred income and payroll taxes under the CARES Act.
- Net cash used in investing activities was $208.7 million, including $125.0 million for the Apex Industrial Technologies asset acquisition and $84.9 million of net capital expenditures.
- Cash and cash equivalents were $201.5 million at June 30, 2020, compared with $174.9 million at December 31, 2019.
- Total debt was $405.0 million, all classified as long-term, compared with $345.0 million at December 31, 2019. The company had a $700.0 million unsecured revolving credit facility, substantially all available at quarter-end, subject to covenants; $36.3 million of letters of credit were outstanding.
- Capital spending guidance for 2020 remained $155 million to $180 million, versus $239.8 million in 2019.
Material changes versus the prior comparable period
- Safety supplies increased to 27.3% of six-month sales from 17.4%, while fasteners declined to 29.3% from 34.7%. Safety daily sales increased 68.4%, while fastener daily sales declined 9.6%.
- Government customer sales, including healthcare providers, increased 144.3% and represented 8.4% of six-month sales versus 3.7% in 2019. Manufacturing and non-residential construction daily sales declined 3.2% and 5.4%, respectively.
- The product mix and sourcing of pandemic-related products reduced gross margin. Management cited lower fastener volumes, lower margins on safety and other products purchased through non-traditional supply channels, and limited fixed-cost leverage.
- Employee headcount declined 7.0% year over year to 20,667 at quarter-end; total FTE headcount declined 9.4% to 17,814. Public branches declined to 2,060, while active Onsite locations increased to 1,212.
- Fastenal acquired Apex assets for $125.0 million, primarily intangible assets related to patents, designs, software, licenses, and the vending-equipment supply chain. The identified intangible assets totaled $123.8 million with an approximately 19.4-year weighted average amortization period.
- The company repurchased 1.6 million shares for $52.0 million during the first six months and paid $286.8 million of dividends. The board declared a further $0.25 per-share dividend payable August 25, 2020.
Guidance, outlook, commentary, risks, and unusual items
- Fastenal removed 2020 guidance for industrial vending and Onsite signings in April and had not reinstated it as of the filing date. Signings improved in May and June but remained below pre-pandemic expectations.
- Management stated that restrictions were beginning to ease in some markets, supporting traditional manufacturing and construction demand, while PPE and sanitation demand was moderating. The timing and extent of any recovery remained uncertain.
- Management could not reasonably estimate the duration or total financial impact of COVID-19. Risks include renewed closures or operating restrictions, supplier and carrier disruptions, employee illness, customer credit deterioration, weaker industrial demand, inventory requirements, and reduced PPE demand.
- Management expected an ongoing tax rate, absent discrete items, of 24.5% to 25.0%. The reported six-month and Q2 tax rates were 24.3% and 23.8%, respectively.
- The company deferred $111.5 million of federal and state income and payroll taxes under the CARES Act; approximately $103.9 million was expected to be paid in Q3 2020 and the balance in Q3 2021.
- There were no litigation matters considered probable or reasonably possible to have a material adverse outcome. The filing states that disclosure controls were effective and that no material change occurred in internal control over financial reporting.
Investor verification points
- Verify the sustainability and margin effects of PPE and sanitation surge sales as demand moderates.
- Monitor manufacturing and construction demand, fastener volumes, branch traffic, and the effect of any renewed COVID-19 restrictions.
- Reconcile operating cash flow excluding the temporary CARES Act tax deferral and assess the related Q3 2020 and Q3 2021 cash payments.
- Track inventory levels, particularly PPE and fasteners, and potential obsolescence or working-capital pressure.
- Review the Apex acquisition’s contribution to vending growth, amortization expense, and capital spending.
- Confirm compliance with debt covenants, debt maturities, revolver availability, and the $36.3 million letter-of-credit obligation.
- Assess whether Onsite and vending signings recover to pre-pandemic expectations and whether the company reinstates related guidance.