Fastenal Company — Q1 2021 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 and Onsite locations, primarily serving manufacturing and non-residential construction customers. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Financial Performance and Position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $1,417.0 million | $1,367.0 million | 3.7% |
| Gross profit | $643.4 million | $636.8 million | 1.0% |
| Gross margin | 45.4% | 46.6% | Down 120 bps |
| Operating income | $280.3 million | $271.3 million | 3.3% |
| Operating margin | 19.8% | 19.9% | Down 10 bps |
| Net earnings | $210.6 million | $202.6 million | 3.9% |
| Diluted EPS | $0.37 | $0.35 | 3.7% |
| Cash flow from operations | $274.8 million | $241.1 million | 13.9% |
- Daily sales increased 5.3%, reflecting one fewer business day in Q1 2021; foreign exchange favorably affected daily sales by 0.6%.
- Manufacturing daily sales increased 5.6%, while non-residential construction daily sales declined 7.5%. Government sales increased 37.3% and represented 5.4% of sales.
- Safety product daily sales increased 14.7% and represented 21.5% of sales; fastener daily sales increased 4.0% and represented 32.5%.
- Operating and administrative expenses declined to 25.6% of sales from 26.7%, reflecting expense control, lower transportation costs, reduced travel and favorable bad-debt trends.
- Cash and cash equivalents were $333.9 million at March 31, 2021, compared with $245.7 million at December 31, 2020. Total assets were $4.07 billion.
- Total debt was $405.0 million, including $40.0 million current debt and $365.0 million long-term debt. The $700.0 million revolving credit facility had no borrowings outstanding, with substantially all capacity available; $36.3 million of letters of credit were outstanding.
- Net cash used in investing activities was $29.9 million, including $32.7 million of property and equipment purchases. No acquisition payment occurred in Q1 2021, compared with the $125.0 million Apex asset acquisition payment in Q1 2020.
- Net cash used in financing activities was $154.2 million, primarily reflecting $160.8 million of dividends. No share repurchases occurred in Q1 2021.
Material Changes Versus the Prior Comparable Period
- Sales and earnings improved as manufacturing activity recovered and traditional customer operations normalized, although construction demand remained weaker.
- Gross margin declined primarily because of a $7.8 million write-down of three-ply mask inventory, equivalent to approximately 50 basis points of sales, as market oversupply reduced selling prices and slowed sell-through.
- COVID-related PPE and sanitation demand remained healthy but moderated, while fastener demand accelerated in March 2021. Management indicated these shifts could become more pronounced in Q2 2021.
- Inventory declined $40.2 million, or 3.0%, from March 31, 2020, reflecting branch consolidation, inventory rationalization and slower growth in Onsite and FMI installations.
- Total FTE headcount declined 5.9% year over year to 18,094. Public branches declined to 1,959, while active Onsite locations increased 9.0% to 1,285.
- Weighted FMI devices increased 7.5% to 85,157, and e-commerce daily sales increased 35.5%. Combined digital sales represented 34.8% of total sales.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2021 net capital expenditures of $170.0 million to $200.0 million, compared with $157.5 million in 2020.
- Management maintained a 2021 goal of 23,000 to 25,000 weighted FMI device signings, but stated that conditions must improve to achieve the range.
- Although the long-term market opportunity is estimated at 375 to 400 annual Onsite signings, management expects 2021 signings to be approximately 300 to 350 because of lengthening sales cycles related to COVID-19. The company signed 68 Onsites in Q1 2021 and had 1,285 active sites at quarter-end.
- Product-cost inflation was increasing, and management anticipated pricing actions in Q2 2021. The ongoing tax rate, absent discrete items or tax-law changes, was expected to be 24.5% to 25.0%; Q1 was 24.2%, partly due to tax benefits from stock-option exercises.
- Key risks include the duration and economic effects of COVID-19, supplier and logistics disruptions, manufacturing and construction weakness, pricing and commodity-cost pressure, product and customer mix, foreign exchange, interest rates, cyber-security, inventory forecasting and adoption of Onsite and FMI strategies.
- The company reported no litigation matters considered probable or reasonably possible to have a material adverse outcome. It was in compliance with debt covenants, and disclosure controls and internal control over financial reporting were deemed effective.
- The board declared a quarterly dividend of $0.28 per share payable May 25, 2021. The filing also disclosed approximately $88.1 million of operating-lease residual value guarantees, which management considered unlikely to require funding.
Important Facts for Investors to Verify
- Whether recovering manufacturing demand offsets moderating PPE and sanitation sales in subsequent quarters.
- The pace and profitability of mask inventory sell-through and any additional inventory write-downs.
- Whether pricing actions offset product-cost inflation without materially reducing volumes or demand.
- Progress toward the 2021 FMI signing target and the revised 300-to-350 Onsite signing outlook.
- Execution of the $170.0 million to $200.0 million capital expenditure plan and its effect on free cash flow.
- Debt maturities, including the $40.0 million Series A note due July 2021, and continued availability of the revolving credit facility.
- The effects of COVID-19, supply-chain constraints, commodity prices, weather and customer access on margins and operating performance.