Fastenal Company — FY2020 Form 10-K Summary
Business context and reporting period
Fastenal Company filed its Form 10-K for the fiscal year ended December 31, 2020. The company distributes industrial and construction supplies through 3,268 in-market locations in 25 countries, including 2,003 branches and 1,265 Onsite locations. Fastenal employed 20,365 people at year end and reported as a single business segment.
Operations were materially affected by COVID-19. Traditional manufacturing and construction demand weakened, while demand for personal protective equipment, sanitation products, and other safety supplies increased sharply.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $5,647.3 million | $5,333.7 million | 5.9% increase |
| Gross profit | $2,567.8 million | $2,515.4 million | 2.1% increase |
| Gross margin | 45.5% | 47.2% | Down 170 basis points |
| Operating income | $1,141.8 million | $1,057.2 million | 8.0% increase |
| Operating margin | 20.2% | 19.8% | Up 40 basis points |
| Net earnings | $859.1 million | $790.9 million | 8.6% increase |
| Diluted EPS | $1.49 | $1.38 | 8.4% increase |
| Net cash from operations | $1,101.8 million | $842.7 million | 30.7% increase |
Daily sales increased 5.5%. Safety-product daily sales increased 51.0%, and government and healthcare customer sales increased 129.7%. Fastener daily sales declined 7.2%, reflecting weaker industrial and manufacturing activity.
Quarterly 2020 net sales were $1,367.0 million in the first quarter, $1,509.0 million in the second quarter, $1,413.3 million in the third quarter, and $1,358.0 million in the fourth quarter. Fourth-quarter net earnings were $196.1 million, compared with $178.7 million in the fourth quarter of 2019.
Cash flow, capital allocation, debt, and liquidity
- Cash and cash equivalents were $245.7 million at December 31, 2020, compared with $174.9 million at December 31, 2019.
- Net cash used in investing activities was $281.7 million, including $125.0 million for the acquisition of certain Apex Industrial Technologies assets.
- Net capital expenditures were $157.5 million, or 2.8% of sales, compared with $239.8 million in 2019.
- Management expects 2021 net capital expenditures of $170.0 million to $200.0 million.
- Dividends paid were $803.4 million, or $1.40 per share, including a $0.40 special dividend. The board declared a quarterly dividend of $0.28 per share in January 2021.
- Fastenal repurchased 1.6 million shares for $52.0 million during 2020. Repurchase authority remaining at year end was 3.2 million shares.
- Total debt was $405.0 million, consisting of senior unsecured promissory notes. No borrowings were outstanding under the $700.0 million revolving credit facility at year end, although $36.3 million of letters of credit were outstanding.
- Debt principal payments are scheduled to include $40.0 million in 2021, $35.0 million in 2022, $70.0 million in 2023, $60.0 million in 2024, $75.0 million in 2025, and $125.0 million thereafter.
Material changes versus the prior comparable period
- Safety supplies increased to 25.5% of sales from 17.9%, primarily due to COVID-19 PPE demand. Fasteners declined to 29.9% of sales from 34.2%.
- Gross margin contracted because of lower-margin pandemic-related products, unfavorable product mix, emergency sourcing costs, inventory pricing pressure, lower vendor rebates, and deleverage in weaker markets.
- Operating margin improved because employee-related, occupancy-related, and other operating expenses grew more slowly than sales. The company reduced total FTE headcount by 6.0%.
- Public branches declined by 111 to 2,003, while active Onsite locations increased 13.6% to 1,265. Total in-market locations increased 1.2%.
- Industrial vending devices installed increased 6.4% to 95,733, but new device signings declined 24.9% to 16,417. Onsite activations declined to 257 from 362.
- The company acquired Apex assets, including patents, designs, software, licenses, and access to the vending equipment supply chain. The purchase price was $125.0 million, with $123.8 million allocated to identifiable intangible assets.
- National accounts represented 55.0% of sales, compared with 53.6% in 2019. One customer represented 5% of consolidated sales in 2020; no customer reached that threshold in 2019 or 2018.
Guidance, outlook, commentary, and risks
Management expects continued investment in Onsite locations, industrial vending, FAST Bin, digital solutions, national accounts, and international operations. For 2021, the company targeted 375 to 400 new Onsite signings and 23,000 to 25,000 weighted FMI device signings, while noting that COVID-19 could make customer access and execution difficult.
Management stated that traditional markets improved gradually during the second half of 2020, but the duration and financial effects of the pandemic remained uncertain. Favorable PPE demand may not recur, and pandemic-related changes in product mix may continue to pressure gross margin.
- Key risks include economic weakness in manufacturing and non-residential construction, COVID-19-related disruptions, supplier and logistics constraints, foreign sourcing concentration, tariffs and trade-policy changes, commodity and energy-price volatility, and foreign-currency exposure.
- Competition, pricing pressure, changing customer and product mix, and difficulty leveraging operating expenses could reduce margins.
- Industrial vending and Onsite growth may underperform expectations, and the company relies on a limited number of suppliers for certain vending equipment.
- Cybersecurity incidents, information-system failures, data-privacy compliance, defective products, legal claims, and regulatory noncompliance could adversely affect operations or reputation.
- Fastenal reported no litigation matters that it considered probable or reasonably possible to have a material adverse outcome at year end.
- The company maintained effective disclosure controls and effective internal control over financial reporting. The independent auditor issued an unqualified opinion.
Most important facts for investors to verify
- Whether PPE and other pandemic-related safety demand persists or reverses, and the resulting effect on sales, inventory, and gross margin.
- The sustainability of operating-margin expansion after 2020 expense reductions and branch rationalization.
- Progress toward 2021 Onsite and weighted FMI signing targets and the revenue contribution from those programs.
- Cash generation relative to dividends, planned capital expenditures, acquisitions, and share repurchases.
- Debt maturities, revolving-credit availability, covenant compliance, and the effect of the transition away from LIBOR.
- Inventory valuation and obsolescence exposure, particularly for pandemic-related products; inventory was $1,337.5 million at year end.
- Customer concentration, foreign sourcing and trade-policy exposure, and the potential impact of competition or pricing pressure.