Fastenal Company 2021 Q3 Form 10-Q Summary
Business context and reporting period
Fastenal Company distributes industrial and construction supplies through more than 3,200 in-market locations, including branches, Onsite locations, and digital inventory solutions. The filing covers the quarter and nine months ended September 30, 2021, compared primarily with the corresponding 2020 periods.
Management stated that economic activity and customer access were recovering from the pandemic, with results increasingly reflecting traditional manufacturing and construction demand rather than COVID-19-related PPE and sanitation sales. Supply-chain disruptions, labor shortages, inflation, and elevated COVID-19 infections continued to affect operations and sales-cycle timing.
Financial results and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $1,554.2 million, up 10.0% | $4,479.0 million, up 4.4% |
| Gross profit | $720.2 million; 46.3% margin | $2,064.3 million; 46.1% margin |
| Operating income | $318.4 million; 20.5% margin | $916.5 million; 20.5% margin |
| Net earnings | $243.5 million, up 9.9% | $693.8 million, up 4.7% |
| Diluted EPS | $0.42, versus $0.38 | $1.20, versus $1.15 |
| Operating cash flow | Not separately provided in the filing summary | $613.7 million, versus $780.8 million |
Gross margin increased from 45.3% to 46.3% in the quarter and from 45.4% to 46.1% for the nine months. Management attributed the improvement primarily to product mix, stronger customer and supplier rebates, organizational leverage, and improved safety-product margins. Pricing actions largely offset higher product, transportation, and shipping costs.
Operating and administrative expenses were $401.8 million in the quarter and $1,147.8 million for the nine months. As a percentage of sales, expenses increased to 25.9% from 24.8% in the quarter and to 25.6% from 25.0% for the nine months, primarily due to employee-related costs, incentive compensation, healthcare costs, travel, fuel, and technology spending.
Liquidity, cash flow, debt, and capital allocation
- Cash and cash equivalents were $250.5 million at September 30, 2021, compared with $245.7 million at December 31, 2020.
- Operating cash flow was $613.7 million for the first nine months, down 21.4% year over year, primarily because of increased accounts receivable and inventory requirements, plus payment of approximately $30.0 million of payroll taxes deferred in 2020.
- Net cash used in investing activities was $107.0 million, including $114.7 million of property and equipment purchases. There were no acquisition payments in 2021, compared with $125.0 million for the Apex industrial vending asset acquisition in 2020.
- Net cash used in financing activities was $498.2 million, including $482.6 million of dividends. No common stock was repurchased during the first nine months of 2021.
- Total debt was $365.0 million, consisting of $35.0 million current debt and $330.0 million long-term debt, down from $405.0 million at December 31, 2020.
- The company had a $700.0 million unsecured revolving credit facility with no borrowings outstanding and $36.3 million of outstanding letters of credit. Management reported compliance with applicable debt covenants.
- Net capital expenditures for 2021 were expected to be $155.0 million to $175.0 million, reduced from the prior expectation of $170.0 million to $200.0 million.
Material changes versus the prior comparable period
- Quarterly sales growth accelerated to 10.0%, while nine-month sales growth was 4.4%. Fastener daily sales increased 20.2% in the quarter and 17.1% for the nine months, indicating strong underlying industrial demand.
- Safety-product daily sales declined 15.0% for the nine months as pandemic-related PPE demand normalized. Government-customer sales declined 39.6% and represented 4.9% of sales, versus 8.5% in the prior-year period.
- Manufacturing-customer daily sales increased 16.7% for the nine months, while non-residential construction-customer daily sales increased 2.9%.
- FMI revenue increased 37.9% to $1,398.0 million for the nine months and represented 30.9% of sales. E-commerce daily sales increased 44.1% for the nine months.
- The company had 1,367 active Onsite locations at September 30, up 10.6% year over year, and 90,493 weighted FMI devices installed, up 10.0%.
- During the quarter, the company opened one branch and closed 63 branches, net of conversions; it activated 67 Onsite locations and closed 23, net of conversions.
- Accounts receivable increased 13.8% and inventory increased 4.4% over the prior-year quarter-end, reflecting stronger activity, longer customer payment terms, inventory investment, and product-cost inflation.
Guidance, outlook, risks, and unusual items
- Management expected 2021 Onsite signings of approximately 285 to 325 locations, reduced from the prior range of 300 to 350.
- Expected 2021 weighted FASTVend and FASTBin signings were reduced to 20,500 to 22,000 machine-equivalent units from the prior range of 23,000 to 25,000.
- Management expected an ongoing tax rate of approximately 24.5%, absent discrete tax items or broader tax-law changes.
- Further pricing actions could be required in the fourth quarter to address product-cost and transportation inflation.
- COVID-19 variants, supplier or customer disruptions, labor shortages, logistics constraints, customer credit conditions, and restricted access to customer facilities could adversely affect sales, margins, liquidity, and the timing of Onsite and FMI growth.
- The company recorded a $7.8 million write-down of 3-ply mask inventory in the first quarter of 2021. It also paid approximately $30.0 million of payroll taxes in the third quarter that had been deferred under the CARES Act.
- Residual-value guarantees on certain vehicle leases totaled approximately $88.6 million, although management considered the likelihood of funding to be remote.
- Management reported no litigation matters considered probable or reasonably possible to have a material adverse outcome and no material subsequent events other than the declared quarterly dividend.
- The board declared a $0.28-per-share quarterly dividend payable November 23, 2021. The company retained authorization to repurchase up to 3.2 million shares but made no repurchases during the quarter.
Most important facts for investors to verify
- Whether manufacturing-led demand and fastener growth continue after comparisons become less favorable and pandemic-related sales fully normalize.
- Whether pricing actions continue to offset steel, freight, fuel, labor, and other inflationary pressures without weakening demand or gross margin.
- Whether Onsite and FMI signings recover from the reduced 2021 outlook and translate into sustainable revenue growth.
- Whether elevated receivables and inventory convert into cash as expected, given the decline in operating cash flow.
- Whether COVID-19 developments, supply-chain disruptions, labor availability, and customer-facility access further affect operations and sales cycles.
- The company’s ability to fund dividends, capital expenditures, and other shareholder returns while maintaining its current cash and debt profile.