FASTENAL COMPANY The following is management's discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying condensed consolidated financial statements. Dollar amounts are stated in millions except for share and per share amounts and where otherwise noted. Share and per share information in this 10-Q has been adjusted to reflect the two-for-one stock split effective at the close of business onMay 22, 2019 . Throughout this document, percentage and dollar change calculations, which are based on non-rounded dollar values, may not be able to be recalculated using the dollar values in this document due to the rounding of those dollar values. Business Fastenal is a North American leader in the wholesale distribution of industrial and construction supplies. We distribute these supplies through a network of over 3,200 in-market locations. Most of our customers are in the manufacturing and non-residential construction markets. The manufacturing market includes producers who incorporate our products into final goods, called original equipment manufacturing (OEM), and/or utilize our supplies in the maintenance, repair, and operation (MRO) of their facilities and equipment. The non-residential construction market includes general, electrical, plumbing, sheet metal, and road contractors. Other users of our products include farmers, truckers, railroads, oil exploration, production, and refinement companies, mining companies, federal, state, and local governmental entities, schools, and certain retail trades. Geographically, our branches, Onsite locations, and customers are primarily located inNorth America (the United States ,Canada , andMexico ), though our presence outside ofNorth America continues to grow as well. Our motto is Growth through Customer Service®. We are a growth-centric organization focused on identifying 'drivers' that allow us to get closer to our customers and gain market share in what we believe remains a fragmented industrial distribution market. Our growth drivers have evolved and changed, and can be expected to continue to evolve and change, over time. Impact of COVID-19 on Our Business In the second quarter of 2020, the impacts of the COVID-19 pandemic on our business were dramatic in two respects. First, local and national actions taken, such as stay-at-home mandates, reduced business activity sharply as many customers either closed their locations or operated at significantly diminished capacity. This effect was illustrated in a significant decline in sales for our fastener products. Second, social actions taken to mitigate the effects of the pandemic produced significant demand for personal protection equipment ('PPE') and sanitation products, generating significant sales of such products not only to certain traditional customers but also to state and local government entities as well as front line responders. This effect was illustrated by a significant increase in sales for our safety products. During that period, improved sales of PPE and sanitation products more than offset the general economic weakness. These dynamics affected our business throughout the second quarter of 2020, but the effects were greatest in April, with sequential improvements in May and June as business restrictions gradually eased. The pandemic continued to have a significant impact on our business in the third quarter of 2020. The marketplace broadly, and Fastenal specifically, continued to operate with certain modifications to balance re-opening with employee and customer safety. However, most of the markets in which we operate began to normalize in the third quarter of 2020. This improved the outlook of the manufacturing and construction customers that support our traditional branch and Onsite business and moderated the level of demand for PPE and sanitation products that we experienced at the onset of the pandemic. We believe that the sequential gains in economic activity that we experienced in the latter part of the second quarter of 2020 continued through the third quarter of 2020, although the rate of improvement remains gradual and the overall activity level remains below pre-pandemic levels. Consistent with broader social trends, we have taken steps to safeguard the health of our employees. This includes closing branch and corporate facilities to outside personnel, enabling through technology significant work from home capabilities for many employees, and where employees remain in the workplace creating space between work areas, providing ample PPE and cleaning supplies, and having formal policies for mitigation in the event of cases of illness. Due to these precautions, our operations have continued to function effectively, including internal controls over financial reporting. In light of a continued high rate of viral infections that exists as of this date, there remains significant uncertainty concerning the magnitude of the impact and duration of the COVID-19 pandemic. Factors deriving from the COVID-19 response that have or may negatively impact sales and gross margin in the future include, but are not limited to: limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell, or to meet delivery requirements and commitments; limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring employees to remain at home; limitations on the ability of carriers to deliver our products to customers; limitations on the ability of our customers to conduct their business and purchase our products and services; and limitations on the ability of our customers to pay us on a timely basis. With respect to liquidity, we continue to evaluate and limit costs and spending across our organization. This includes reduced headcount, a reduction in discretionary spending, and lower anticipated spending on capital investment projects. As of the end of the third quarter of 2020, we have substantially all of our$700.0 bank revolver available for use in the event that the need arises. 13
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We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, and shareholders. While we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity, or capital resources, we believe that it is important to share where our company stands today, how our response to COVID-19 is progressing, and how our operations and financial condition may change as the fight against COVID-19 progresses. Executive Overview Net sales increased$34.2 , or 2.5%, in the third quarter of 2020 relative to the third quarter of 2019. Our gross profit as a percentage of net sales declined to 45.3% in the third quarter of 2020 from 47.2% in the third quarter of 2019. Our operating income, as a percentage of net sales, increased to 20.5% in the third quarter of 2020 from 20.4% in the third quarter of 2019. Our net earnings during the third quarter of 2020 were$221.5 , an increase of 3.7% when compared to the third quarter of 2019. Our diluted net earnings per share were$0.38 during the third quarter of 2020 compared to$0.37 during the third quarter of 2019, an increase of 3.4%. Our results in the third quarter of 2020 were affected by the impacts of the COVID-19 pandemic throughout the period, though these impacts were generally not as severe as was experienced in the second quarter of 2020. Based on trends in vending dispenses and hub picks during the period, we believe there was gradual sequential improvement in general business activity each month of the quarter. Sales of COVID-related products (masks, shields, sanitizer, etc.) remained elevated in the third quarter of 2020 relative to the third quarter of 2019, but moderated relative to the second quarter of 2020. At the same time, underlying business conditions remained weak, although not as difficult as was experienced in the second quarter of 2020. While signings for Onsites (defined as dedicated sales and service provided from within, or in close proximity to, the customer's facility) and vending devices remain below pre-pandemic levels, our customers are beginning to re-engage in discussions involving our growth drivers as business conditions have begun to normalize. The table below summarizes our total employee headcount, our investments in in-market locations (defined as the sum of the total number of public branch locations and the total number of active Onsite locations), and industrial vending devices at the end of the periods presented and the percentage change compared to the end of the prior periods. Change Change Change Since: Since: Since: Q3 Q2 Q2 Q4 Q4 Q3 Q3 2020 2020 2020 2019 2019 2019 2019 In-market locations - absolute employee headcount 12,708 12,982 -2.1
% 13,977 -9.1 % 14,128 -10.1 % Total absolute employee headcount 20,336 20,667 -1.6 % 21,948 -7.3 % 21,938 -7.3 %
Number of public branch locations 2,033 2,060 -1.3 % 2,114 -3.8 % 2,146 -5.3 % Number of active Onsite locations 1,236 1,212 2.0 % 1,114 11.0 % 1,076 14.9 % Number of in-market locations
3,269 3,272 -0.1 % 3,228 1.3 % 3,222 1.5 %
Industrial vending devices (installed
count) (1) 94,395 92,615 1.9 % 89,937 5.0 % 88,327 6.9 %
Ratio of industrial vending devices to
in-market locations 29:1 28:1 28:1 27:1
(1) This number primarily represents devices which principally dispense product
and produce product revenues, and excludes slightly more than 15,000 devices
that are part of our locker lease program where the devices are principally used
for the check-in/check-out of equipment.
During the last twelve months, we reduced our absolute employee headcount by
1,420 people in our in-market locations and 1,602 people in total. The reduction
in our absolute employee headcount in our in-market and distribution center
locations reflects efforts to control expenses in response to weaker demand. The
decrease in our total absolute employee count is mostly from personnel
reductions in our in-market locations, distribution centers, and manufacturing
operations, and was only partly offset by additions in non-branch selling and
support roles. The latter reflects the addition of certain employees from our
acquisition of the mostly intangible assets of Apex Industrial Technologies LLC ,
our historical vending technology partner, as well as roles to support customer
acquisition and implementation, particularly as it relates to our growth drivers
and to support general corporate functions.
We opened three branches in the third quarter of 2020 and closed 30 branches,
net of conversions. We activated 57 Onsite locations in the third quarter of
2020 and closed 33, net of conversions. The number of closings reflects both
normal churn in our business, whether due to redefining or exiting customer
relationships, the shutting or relocation of a customer facility, or a customer
decision, as well as our ongoing review of underperforming locations. Our
in-market network forms the foundation of
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our business strategy, and we will continue to open or close locations as is
deemed necessary to sustain and improve our network, support our growth drivers,
and manage our operating expenses.
Results of Operations
The following sets forth condensed consolidated statement of earnings
information (as a percentage of net sales) for the periods ended September 30 :
Nine-month Period Three-month Period
2020 2019 2020 2019
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Gross profit 45.4 % 47.3 % 45.3 % 47.2 %
Operating and administrative expenses 25.0 % 27.1 % 24.9 % 26.8 %
Gain on sale of property and equipment 0.0 % 0.0 % -0.1 % 0.0 %
Operating income 20.5 % 20.2 % 20.5 % 20.4 %
Net interest expense -0.2 % -0.3 % -0.2 % -0.3 %
Earnings before income taxes 20.3 % 19.9 % 20.4 % 20.2 %
Note - Amounts may not foot due to rounding
difference.
Net Sales
The table below sets forth net sales and daily sales for the periods ended
September 30 , and changes in such sales from the prior period to the more recent
period:
Nine-month Period Three-month Period
2020 2019 2020 2019
Net sales $ 4,289.3 4,056.8 $ 1,413.3 1,379.1
Percentage change 5.7 % 8.7 % 2.5 % 7.8 %
Business days 192 191 64 64
Daily sales $ 22.3 21.2 $ 22.1 21.5
Percentage change 5.2 % 8.7 % 2.5 % 6.1 %
Daily sales impact of currency fluctuations -0.2 % -0.4 % 0.0 % -0.2 %
Daily sales impact of acquisitions 0.0 % 0.1 % 0.0 % 0.0 %
Note - Daily sales are defined as the total net sales for the period divided by the number of business days (in
In the first nine months of 2020, our net sales of$4,289.3 increased$232.5 , or 5.7%. Adjusted for an extra selling day in the first quarter of 2020, our daily sales rate increased 5.2%. This increase is due to higher sales of PPE and sanitation products to global governments, healthcare providers, and businesses as they have addressed the increase in COVID-19 infections and the need to re-open economies and businesses safely.
The calendar year 2020 to date has been marked by three distinct phases:
•In January and February of 2020, underlying business conditions were sluggish,
an extension of what we experienced at the end of 2019. The Purchasing Managers
Index ('PMI'), published by the Institute for Supply Chain Management , averaged
50.5 during this period, just barely above a reading of 50 that is indicative of
growing demand. However, we were able to grow our daily sales by 4.1% over this
period, due largely to unit sales from our vending and Onsite growth initiatives
and, to a lesser extent, product pricing as a result of pricing actions taken in
mid-2019. These conditions carried into the first part of March.
•Beginning in the second half of March, global governments and businesses began
to respond aggressively to the COVID-19 pandemic, resulting in weaker business
activity. This produced two effects. First, underlying business conditions
turned sharply negative as stay-at-home orders in many of the geographic markets
in which we operate caused businesses to close or operate at significantly
reduced levels. This was captured by the PMI, which averaged 45.7 from April to
June, with readings below 50 being indicative of declining demand. During this
period, sales through our branches to our traditional manufacturing,
construction, and walk-in customers fell, more than offsetting the unit gains we
had experienced in January, February, and early March. This effect was most
pronounced in April, but we did experience some sequential improvement in
business conditions in May and June. This was best illustrated by our daily
sales rate trend of fasteners, which is our most cyclical product category and
which was unaffected by surge activity. In April 2020 , fastener
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daily sales were down 22.5%. In May, the rate of decline moderated to down 15.3%
and in June, it moderated again to down 11.4%. Second, we saw a surge in PPE and
sanitation orders as governments, front line responders, and critical
infrastructure customers sought to protect their employees as they worked to
mitigate the effects of the pandemic. This resulted in a meaningful increase in
our sales of PPE and sanitation products that began late in March and is best
illustrated by daily growth in our safety line in April of 119.7%, in May of
136.3%, and in June of 94.9%. Sales of "surge" product during this period, which
we estimate to have been in a range of $350.0 to $360.0 , more than offset
weakness in our traditional customer base, and our second quarter 2020 daily
sales grew 10.3%.
•We believe the third quarter of 2020 reflects a gradual normalization of
business activity, although still at levels below those that existed in the
first quarter of 2020. The sequential improvements we experienced in May and
June continued throughout the period, albeit at a much more gradual pace as our
manufacturing and non-residential construction customers continued to address
low demand as well as supply chain and labor force challenges. This was again
captured by the PMI, which improved from the second quarter of 2020 to average
55.2 from July to September, as well as our sales of fastener products, the
decline in daily sales of which moderated further to 6.9% in the period. On the
other hand, sales of PPE and sanitizer products, while still elevated relative
to pre-pandemic levels, eased as supply chains and customer purchasing patterns
stabilized. Daily sales of safety products, a good proxy for these trends,
increased 34.4% in the third quarter of 2020. Weak, but improving, activity in
our traditional business and strong, but moderating, sales of pandemic-related
supplies largely offset each other to produce total daily sales growth in the
third quarter of 2020 of 2.5%.
Product pricing was a stable, albeit minimal, contributor throughout the nine
month period and was immaterial in the third quarter of 2020. We estimate the
contribution of price increases to sales growth in the first nine months and
third quarter of 2020 was 30 to 60 basis points and 10 to 40 basis points,
respectively. In the third quarter of 2020 specifically, the impact of pricing
became immaterial as the inflationary environment has become subdued, and we are
now comparing to the price increases that were instituted in the third quarter
of 2019. We estimate the contribution of price increases to sales growth in the
first nine months and third quarter of 2019 was 80 to 110 basis points and 90 to
120 basis points, respectively.
Pandemic-related events also produced significant shifts in the mix of our
business through the first nine months of 2020. This impact was most pronounced
in the second quarter of 2020, but even in the third quarter of 2020, as
business conditions began to normalize, we saw our mix of safety products remain
elevated relative to pre-pandemic levels. From a product standpoint, fastener
daily sales declined 8.7% in the first nine months of 2020 from the first nine
months of 2019 and accounted for 29.7% of total sales, down from 34.3% of sales
in the prior year. Fasteners tend to be our highest margin product line. In
contrast, safety daily sales, which includes PPE, grew 56.5% in the first nine
months of 2020 from the first nine months of 2019 and accounted for 26.1% of
total sales, up from 17.6% of sales in the prior year. Daily sales of other
products, which includes sanitizer, decreased 2.8% in the first nine months of
2020 from the first nine months of 2019 and accounted for 44.2% of total sales,
down from 48.1% of sales in the prior year. Safety and other products tend to
have gross margins below our company average.
From a customer standpoint, daily sales of our manufacturing customers declined
3.7% in the first nine months of 2020 from the first nine months of 2019. Daily
sales of our non-residential construction customers declined 7.5% in the first
nine months of 2020 from the first nine months of 2019. These reflected the
challenging underlying business environment through the period. In contrast,
sales to government customers, which includes health care providers, increased
139.7% and was 8.5% of our sales mix in the first nine months of 2020, up from
3.7% of sales in the first nine months of 2019.
Pandemic-related events also reduced activity around our growth drivers, as
customers shifted their energies to managing short term disruption rather than
long-term strategic planning. For instance:
•We signed 12,961 industrial vending devices during the first nine months of
2020 and 4,680 industrial vending devices during the third quarter of 2020, down
22.4% and 17.5%, respectively, from the year earlier periods. On a business day
basis, we signed 75 in the first quarter of 2020, 54 in the second quarter of
2020, and 73 in the third quarter of 2020, still below our pre-pandemic goal of
100 device signings daily. Our installed device count on September 30, 2020 was
94,395, an increase of 6.9% over September 30, 2019 . Daily sales through our
vending devices declined at a low single-digit pace in the first nine months of
2020 and a low-to-mid single-digit pace in the third quarter of 2020 as lower
revenue per machine more than offset the increase in the installed base in each
period. These device counts do not include slightly more than 15,000 vending
devices deployed as part of a lease locker program.
•We signed 187 new Onsite locations during the first nine months of 2020. This
included 85 signings in the first quarter of 2020, 40 in the second quarter of
2020, and 62 in the third quarter of 2020. We had 1,236 active sites on
September 30, 2020 , which represented an increase of 14.9% from September 30,
2019 . Daily sales through our Onsite locations, excluding sales transferred from
branches to new Onsites, declined at a low single-digit pace in both the first
nine months of 2020 and the third quarter of 2020. Weaker activity resulted in
weaker sales at more mature sites which more than offset the contribution of
newer active locations.
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In April 2020 , we retracted our 2020 signing goals for vending devices and
Onsites based on a marketplace that had begun to weaken sharply and a customer
environment that had begun to divert its energies to near-term challenges over
strategic planning. In the case of both vending devices and Onsites, signings
bottomed in April and have improved since, with signings higher for both vending
devices and Onsites in the third quarter of 2020 than we achieved in the second
quarter of 2020. Further, customers are beginning to re-engage in discussions
involving our growth drivers. However, this improvement remains gradual and
signings remain below our pre-pandemic level of expectations. We view the
favorable long-term outlook for our growth drivers as unchanged relative to
pre-pandemic levels. However, the timing of such normalization remains
uncertain, and as a result we have not re-instituted guidance for vending and
Onsite signings for 2020.
Net sales increased $34.2 , or 2.5%, in the third quarter of 2020 when compared
to the third quarter of 2019. This increase was driven primarily by higher unit
sales of safety products, where volume moderated relative to the pandemic-driven
level of "surge" sales in the second quarter of 2020, but remained elevated
relative to the third quarter of 2019. Re-opening of the economy has been
accompanied by greater demand for PPE, hand sanitizer, and related products,
which more than offset continued softness in underlying business activity owing
to a generally weak industrial marketplace for products unrelated to mitigating
the effects of COVID-19. The impact of product pricing on net sales was
immaterial, as price levels were broadly comparable to those of the third
quarter of 2019.
Sales by Product Line
The approximate mix of sales from fasteners, safety supplies, and all other
product lines was as follows for the periods ended September 30 :
Nine-month Period Three-month Period
2020 2019 2020 2019
Fasteners 29.7 % 34.3 % 30.5 % 33.7 %
Safety supplies 26.1 % 17.6 % 23.8 % 18.2 %
Other product lines 44.2 % 48.1 % 45.7 % 48.1 %
100.0 % 100.0 % 100.0 % 100.0 %
Gross Profit
In the first nine months of 2020, our gross profit, as a percentage of net
sales, declined to 45.4%, or 190 basis points from 47.3% in the first nine
months of 2019. We believe the decline in gross profit during this period is
primarily due to three items. (1) Product and customer mix have adversely
affected our gross profit percentage, the most significant of which is product
mix. From the first nine months of 2019 to the first nine months of 2020, our
daily sales of fastener products decreased 8.7% while our daily sales of
non-fastener products grew 13.2%. Fasteners are our highest gross profit margin
product line due to the high transaction cost surrounding the sourcing and
supply of the product for our customers, and relative weakness from this line
can push our gross profit margin lower. The drag from customer mix has been
relatively minor through the first nine months of 2020, as the disproportionate
impact of pandemic-related shutdowns on Onsite activity has narrowed the growth
rates between our lower margin Onsite and National Account customers and our
higher margin non-National Account customers versus what we had achieved in
prior periods. (2) Our product margins for safety and, to a lesser degree, other
products declined. In the second quarter of 2020, this was due to our purchasing
large volumes of pandemic-related products quickly from non-traditional sources
and non-optimized supply chains. In the third quarter, it is because supply
chains have become flush with these products, creating margin pressure for
pandemic-related products. (3) Organizational factors resulted in us not being
able to leverage near- and intermediate-term fixed costs, such as our
manufacturing operations and captive fleet, as well as period costs flowing
through our operation due to slower growth in the period. Rebates and import
costs also represented a drag to gross profit in the period. These factors were
only slightly offset by lower fuel costs and fleet expense management efforts.
In the third quarter of 2020, our gross profit, as a percentage of net sales,
declined to 45.3% or 190 basis points from 47.2% in the third quarter of 2019.
The decline is primarily attributable to the same factors that influenced the
first nine months, as described in the preceding paragraphs.
Operating and Administrative Expenses
Our operating and administrative expenses (including the gain on sales of
property and equipment), as a percentage of net sales, improved to 25.0% in the
first nine months of 2020 compared to 27.1% in the first nine months of 2019,
and improved to 24.8% in the third quarter of 2020 compared to 26.8% in the
third quarter of 2019. During the first nine months of 2020, we achieved
leverage by generating relatively lower growth in employee-related,
occupancy-related, and all other operating and administrative costs than we
experienced in sales. In the third quarter of 2020, we achieved leverage by
generating relatively lower growth in employee-related and all other operating
and administrative costs than we experienced in sales.
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The growth or contraction in employee-related, occupancy-related, and all other
operating and administrative expenses (including the gain on sales of property
and equipment) compared to the same periods in the preceding year, is outlined
in the table below.
Approximate Percentage of Nine-month Period Three-month Period
Total Operating and
Administrative Expenses 2020 2020
Employee-related expenses 65% to 70% -2.9 % -4.9 %
Occupancy-related expenses 15% to 20% 0.6 % 0.7 %All other operating and administrative expenses 10% to 15%
-4.5 % -13.6 %
Employee-related expenses include: (1) payroll (which includes cash
compensation, stock option expense, and profit sharing), (2) health care, (3)
personnel development, and (4) social taxes. In the first nine months of 2020,
our employee-related expenses decreased when compared to the first nine months
of 2019 as a result of lower average FTE during the period, reduced incentive
pay due mostly to slower sales and earnings growth, and reduced spending on the
Fastenal School of Business as pandemic-related policies eliminated in-person
training programs. In the third quarter of 2020, our employee-related expenses
decreased when compared to the third quarter of 2019, as a result of lower
average FTE during the period and reduced incentive pay due mostly to slower
sales and earnings growth, which was partially offset by an increase in employer
profit sharing expense.
The table below summarizes our FTE headcount at the end of the periods presented
and the percentage change compared to the end of the prior periods:
Change Change Change
Since: Since: Since:
Q3 Q2 Q2 Q4 Q4 Q3 Q3
2020 2020 2020 2019 2019 2019 2019
In-market locations 11,302 11,310 -0.1 % 12,236 -7.6 % 12,417 -9.0 %
Total selling (includes in-market
locations) 13,197 13,186 0.1 % 14,060 -6.1 % 14,226 -7.2 %
Distribution 2,638 2,615 0.9 % 2,895 -8.9 % 2,821 -6.5 %
Manufacturing 618 625 -1.1 % 674 -8.3 % 684 -9.6 %
Administrative 1,409 1,388 1.5 % 1,339 5.2 % 1,329 6.0 %
Total 17,862 17,814 0.3 % 18,968 -5.8 % 19,060 -6.3 %
Occupancy-related expenses include: (1) building rent, depreciation, and utility
costs, (2) equipment related to our branches and distribution locations, and (3)
industrial vending equipment (we view vending equipment, excluding leased locker
equipment, to be an extension of our in-market operations and classify the
depreciation and repair costs as occupancy expense). In the first nine months of
2020, our occupancy-related expenses increased when compared to the first nine
months of 2019. In the third quarter of 2020, our occupancy-related costs
increased when compared to the third quarter of 2019. In both periods, the major
components of our occupancy expense - our distribution centers, branches,
vending device costs and equipment - all had individually very small changes
that collectively produced the slight increases in occupancy expenses during
both periods.
All other operating and administrative expenses include: (1) selling-related
transportation, (2) information technology expenses, (3) net event costs, (4)
general corporate expenses, including legal expenses, general insurance
expenses, and travel and marketing expenses, and (5) gains on sales of property
and equipment. Combined, all other operating and administrative expenses
decreased in the first nine months of 2020 when compared to the first nine
months of 2019. This was primarily a function of lower non-selling
transportation expenses, reduced spending on travel, and generally tight cost
control, only partly offset by slight increases for information technology and
higher net event costs. Combined, all other operating and administrative
expenses decreased in the third quarter of 2020 when compared to the third
quarter of 2019. Lower costs for selling-related transportation due to lower
fuel prices and lower expenses due to minimal travel and tight cost control more
than offset higher spending on information technology.
Net Interest Expense
Our net interest expense was $6.9 in the first nine months of 2020 and $2.5 in
the third quarter of 2020, compared to $11.1 in the first nine months of 2019
and $3.5 in the third quarter of 2019. The decrease in both periods was caused
by lower average interest rates and a lower average debt balance during the
period.
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Income Taxes
We recorded income tax expense of $207.5 in the first nine months of 2020, or
23.8% of earnings before income taxes, and $66.1 in the third quarter of 2020,
or 23.0% of earnings before income taxes. We recorded income tax expense of
$195.1 in the first nine months of 2019, or 24.2% of earnings before income
taxes, and $64.9 in the third quarter of 2019, or 23.3% of earnings before
income taxes. We continue to believe our ongoing tax rate, absent any discrete
tax items, will be in the 24.5% to 25.0% range.
Net Earnings
Our net earnings during the first nine months of 2020 were $663.0 , an increase
of 8.3% when compared to the first nine months of 2019. Our net earnings during
the third quarter of 2020 were $221.5 , an increase of 3.7% when compared to the
third quarter of 2019.
Our diluted net earnings per share during the first nine months of 2020 were
$1.15 , an increase of 8.0% when compared to the first nine months of 2019. Our
diluted net earnings per share during the third quarter of 2020 were $0.38 , an
increase of 3.4% when compared to the third quarter of 2019.
Liquidity and Capital Resources
Cash flow activity was as follows for the periods ended September 30 :
Nine-month Period
2020 2019
Net cash provided by operating activities
117.8 % 96.4 %
Net cash used in investing activities
36.0 % 29.3 %
Net cash used in financing activities
57.9 % 62.8 %
Net Cash Provided by Operating Activities
Net cash provided by operating activities increased in the first nine months of
2020 relative to the first nine months of 2019. The most significant
contributors to the increase in our operating cash flow were an increase in our
net earnings and reduced working capital needs, especially as it relates to
inventory. In contrast to last year, our supply chain for fasteners has caught
up with weak demand. Combined with lower Onsite signings and sales and a general
soft demand environment that traditionally requires less inventory and
receivables on the part of our customers, our working capital needs in the first
nine months of 2020 have been lower than in the first nine months of 2019.
The dollar and percentage change in accounts receivable, net, inventories, and
accounts payable from September 30, 2019 to September 30, 2020 were as follows:
Twelve-month
Percentage
September 30 Twelve-month Dollar Change Change
2020 2019 2020 2020
Accounts receivable, net $ 834.5 817.3 $ 17.3 2.1 %
Inventories 1,342.6 1,354.7 (12.1) -0.9 %
Trade working capital $ 2,177.1 2,172.0 $ 5.2 0.2 %
Accounts payable $ 210.4 215.2 $ (4.8) -2.2 %
Trade working capital, net $ 1,966.7 1,956.7 $ 10.0 0.5 %
Net sales in last two months $ 943.8 921.5 $ 22.3 2.4 %
Note - Amounts may not foot due to rounding difference.
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The growth in our net accounts receivable from September 30, 2019 to September
30, 2020 reflects the growth in our sales.
The decrease in inventory from September 30, 2019 to September 30, 2020 was
primarily due to inventory needs being generally reduced by the low levels of
activity among our customer base and lower-than-expected signings of vending
devices and Onsites.
The decrease in accounts payable from September 30, 2019 to September 30, 2020
was primarily due to the effect of lower customer demand on our purchasing
activity.
Net Cash Used in Investing Activities
Net cash used in investing activities increased from the first nine months of
2019 to the first nine months of 2020. This was due to the acquisition of
certain assets of Apex Industrial Technologies LLC during the first quarter of
2020. This was slightly offset by lower net capital expenditures.
Our capital spending will typically fall into five categories: (1) the addition
of manufacturing and warehouse property and equipment, (2) the purchase of
industrial vending technology, (3) the purchase of software and hardware for our
information processing systems, (4) the addition of fleet vehicles, and (5) the
purchase of signage, shelving, and other fixed assets related to branch and
Onsite locations. Proceeds from the sales of property and equipment, typically
for the planned disposition of pick-up trucks as well as distribution vehicles
and trailers in the normal course of business, are netted against these
purchases and additions. During the first nine months of 2020, our net capital
expenditures were $114.9 , which is a decrease of 35.9% from the first nine
months of 2019. Of the factors described above, lower spending to develop and
expand certain distribution center assets, reduced spend on vending devices
owing to lower signings, and reduced fleet vehicle investment primarily explains
the decline in our net capital expenditures in the first nine months of 2020.
Cash requirements for capital expenditures were satisfied from cash generated
from operations, available cash and cash equivalents, our borrowing capacity,
and the proceeds of disposals. Our expectations for net capital spending in 2020
is unchanged in a range of $155.0 to $180.0 , a decrease from $239.8 in 2019.
This decline reflects anticipated reductions in projects that would develop and
expand certain distribution center assets, reduced fleet vehicle investment, and
lower vending spend due to a reduction in expected signings and, to a lesser
degree, the impact on the cost of our vending equipment following the Apex asset
purchase.
Net Cash Used in Financing Activities
Net cash used in financing activities in the first nine months of 2020 consisted
of payments of dividends and purchases of our common stock, which were partially
offset by net proceeds from debt obligations and from the exercise of stock
options. Net cash used in financing activities in the first nine months of 2019
consisted of payments of dividends and net payments against debt obligations,
which were partially offset by proceeds from the exercise of stock options.
During the first nine months of 2020, we returned $430.2 in dividends to
shareholders, compared to $372.3 in dividends in the first nine months of 2019.
During the first nine months of 2020, we purchased 1,600,000 shares of our
common stock at an average price of approximately $32.54 per share, resulting in
$52.0 of cash used for share repurchase. During the first nine months of 2019,
we did not purchase any shares of our common stock. We currently have authority
to purchase up to 3,200,000 additional shares of our common stock. An overview
of our dividends paid or declared in 2020 and 2019 is contained in Note 4 of the
Notes to Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates - A discussion of our critical
accounting policies and estimates is contained in our 2019 annual report on Form
10-K.
Recently Issued and Adopted Accounting Pronouncements - A description of
recently adopted accounting pronouncements is contained in Note 1 of the Notes
to Condensed Consolidated Financial Statements.
Certain Contractual Obligations - A discussion of the nature and amount of
certain of our contractual obligations is contained in our 2019 annual report on
Form 10-K. That portion of total debt outstanding under our Credit Facility and
notes payable classified as long-term, and the maturity of that debt, is
described earlier in Note 7 of the Notes to Condensed Consolidated Financial
Statements.
Certain Risks and Uncertainties - Certain statements contained in this document
do not relate strictly to historical or current facts. As such, they are
considered 'forward-looking statements' that provide current expectations or
forecasts of future events. These forward-looking statements are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Such statements can be identified by the use of terminology such as
anticipate, believe, should, estimate, expect, intend, may, will, plan, goal,
project, hope, trend, target, opportunity, and similar words or expressions, or
by references to typical outcomes. Any statement that is not a purely historical
fact, including estimates, projections, trends, and the outcome of events that
have not yet occurred, is a forward-looking statement. Our forward-looking
statements generally relate to our
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expectations and beliefs regarding the business environment in which we operate,
our projections of future performance, our perceived marketplace opportunities,
our strategies, goals, mission and vision, and our expectations related to
future capital expenditures, future tax rates, future inventory levels, Onsite
and industrial vending signings, and the impact of price increases and surge
sales on overall sales growth or margin performance. You should understand that
forward-looking statements involve a variety of risks and uncertainties, known
and unknown, and may be affected by inaccurate assumptions. Consequently, no
forward-looking statement can be guaranteed and actual results may vary
materially. Factors that could cause our actual results to differ from those
discussed in the forward-looking statements include, but are not limited to, the
impact of the COVID-19 pandemic, economic downturns, weakness in the
manufacturing or commercial construction industries, competitive pressure on
selling prices, changes in our current mix of products, customers, or geographic
locations, changes in our average branch size, changes in our purchasing
patterns, changes in customer needs, changes in fuel or commodity prices,
inclement weather, changes in foreign currency exchange rates, difficulty in
adapting our business model to different foreign business environments, failure
to accurately predict the market potential of our business strategies or the
impact of surge sales on our overall net sales, the introduction or expansion of
new business strategies, weak acceptance or adoption of our vending or Onsite
business models, increased competition in industrial vending or Onsite,
difficulty in maintaining installation quality as our industrial vending
business expands, the leasing to customers of a significant number of additional
industrial vending devices, the failure to meet our goals and expectations
regarding branch openings, branch closings, or expansion of our industrial
vending or Onsite operations, changes in the implementation objectives of our
business strategies, difficulty in hiring, relocating, training, or retaining
qualified personnel, difficulty in controlling operating expenses, difficulty in
collecting receivables or accurately predicting future inventory needs, dramatic
changes in sales trends, changes in supplier production lead times, changes in
our cash position or our need to make capital expenditures, credit market
volatility, changes in tax law or the impact of any such changes on future tax
rates, changes in tariffs or the impact of any such changes on our financial
results, changes in the availability or price of commercial real estate, changes
in the nature, price, or availability of distribution, supply chain, or other
technology (including software licensed from third parties) and services related
to that technology, cyber-security incidents, potential liability and
reputational damage that can arise if our products are defective, difficulties
measuring the contribution of price increases on sales growth, and other risks
and uncertainties detailed in our filings with the Securities and Exchange
Commission , including our most recent annual and quarterly reports. Each
forward-looking statement speaks only as of the date on which such statement is
made, and we undertake no obligation to update any such statement to reflect
events or circumstances arising after such date.
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