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. 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 sales of products for both original equipment manufacturing (OEM), where our products are consumed in the final products of our customers, and manufacturing, repair and operations (MRO), where our products are consumed to support the facilities and ongoing operations of our customers. 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 companies, oil 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 . Our motto is Where Industry Meets Innovation®. We are a customer and growth-centric organization focused on identifying unique technologies, capabilities, and supply chain solutions that get us closer to our customers and reduce the total cost of their global supply chain. We believe this close-to-the-customer, high touch partnership approach is differentiated in the marketplace and allows us to gain market share in what remains a fragmented industrial distribution market. Impact of COVID-19 on Our Business Evaluating the company's financial performance in the second quarter of 2021 requires an appreciation for the variables which impacted financial results in the year earlier period. In the second quarter of 2020, the COVID-19 pandemic dramatically impacted our business in two respects. First, local and national actions taken to mitigate the spread of the virus reduced business activity sharply, which produced a significant decline in the sale of products, such as fasteners, to our traditional manufacturing and construction customers. 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 to traditional customers, state and local government entities, and 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. During this period of time, consistent with broader social trends and in accordance with applicable local and federal regulations, we took steps to safeguard the health of our employees and customers. Such steps included: closing branch and corporate facilities to outside personnel, adjusting work schedules to maximize social distance, creating space between work areas, providing ample PPE and cleaning supplies, creating formal policies for mitigation in the event of cases of illness, utilizing technologies where work duties allowed to enable work from home capabilities, and utilizing technologies such as vending and mobility to create social distancing. These precautions allowed our operations to function effectively. The pandemic continued to impact our business in the third and fourth quarters of 2020, when 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 second half of 2020. In the first quarter of 2021, the re-opening and recovery of the manufacturing and construction marketplace continued and accelerated, operating restrictions eased, and our ability to engage directly with customers, while not at pre-pandemic levels, improved. This resulted in improving performance in our traditional branch andOnsite business and normalization of our product and customer mix. In general, industrial and construction businesses have learned to navigate COVID-19 while maintaining operations. In the second quarter of 2021, the COVID-19 pandemic has likely influenced various trends that the company is currently experiencing. These include supply chain disruptions and labor shortages, the ongoing presence of certain pandemic-specific PPE in our inventory, and a modest but likely sustainable shift in our mix to include more safety products and government customers. However, in contrast to preceding periods, we are currently seeing less of an impact on our business related directly to the pandemic, as economic activity has recovered, customer access is normalizing, and customer and product mix has reverted back to close to pre-pandemic levels. We believe current financial results are more reflective of traditional economic and marketplace dynamics than of pandemic-related issues such as facility restrictions, labor force illness, and PPE demand. While we continue to provide employees supplemental leave to manage any COVID-related issues that arise, make PPE and cleaning supplies broadly available in all of our locations, and require employees to follow local regulations, at this time most operating restrictions related to the pandemic have been removed. Our financial controls over financial reporting functioned effectively throughout the pandemic and continue to do so. 12 -------------------------------------------------------------------------------- Table of Contents It is possible the COVID-19 pandemic could further impact our operations and the operations of our suppliers and vendors, particularly in light of the potential of variant strains of the virus to cause a resumption of high levels of infection and hospitalization. Should that occur, factors that could 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. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and cannot be reasonably predicted at this time. However, 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 decreased$1.3 , or 0.1%, in the second quarter of 2021 relative to the second quarter of 2020. Our gross profit increased$29.1 , or 4.3%, in the second quarter of 2021 relative to the second quarter of 2020, and as a percentage of net sales increased to 46.5% in the second quarter of 2021 from 44.5% in the second quarter of 2020. Our operating income increased$1.7 , or 0.5%, in the second quarter of 2021 relative to the second quarter of 2020, and as a percentage of net sales increased to 21.1% in the second quarter of 2021 from 20.9% in the second quarter of 2020. Our net earnings during the second quarter of 2021 were$239.7 , an increase of 0.4% when compared to the second quarter of 2020. Our diluted net earnings per share were$0.42 during the second quarter of 2021, which was unchanged from$0.42 during the second quarter of 2020. The table below summarizes our total and FTE (based on 40 hours per week) 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 activeOnsite locations), and weighted FMI 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: Q2 Q1 Q1 Q4 Q4 Q2 Q2 2021 2021 2021 2020 2020 2020 2020 In-market locations - absolute employee headcount 12,446 12,683 -1.9
% 12,680 -1.8 % 12,982 -4.1 % In-market locations - FTE employee headcount
11,390 11,323 0.6 % 11,260 1.2 % 11,310 0.7 % Total absolute employee headcount 20,317 20,532 -1.0 % 20,365 -0.2 % 20,667 -1.7 % Total FTE employee headcount
18,253 18,094 0.9 % 17,836 2.3 % 17,814 2.5 %
Number of public branch locations 1,921 1,959 -1.9 % 2,003 -4.1 % 2,060 -6.7 %
Number of active
3,244 3,244 0.0 % 3,268 -0.7 % 3,272 -0.9 %
Ratio of in-market location FTE
headcount to
in-market locations 4:1 3:1 3:1 3:1
Weighted FMI devices (MEU installed
count) (1) 87,567 85,157 2.8 % 83,951 4.3 % 80,124 9.3 % Ratio of weighted FMI devices to in-market locations
27:1 26:1 26:1 24:1
(1) This number excludes approximately 13,000 non-weighted devices that are part
of our locker lease program.
During the last twelve months, we increased our total FTE employee headcount by
439. This reflects an increase in our in-market and non-in-market selling FTE
employee headcount of 225 to support growth in the marketplace and sales
initiatives targeting customer acquisition. We had an increase in our
distribution center FTE employee headcount of 76 to support increasing product
throughput at our facilities. We had an increase in our remaining FTE employee
headcount of 138 that relates primarily to personnel investments in information
technology, purchasing, and product development.
We opened five branches in the second quarter of 2021 and closed 43 branches,
net of conversions. We activated 62 Onsite locations in the second quarter of
2021 and closed 24, net of conversions. In any period, the number of closings
tend to reflect both normal churn in our business, whether due to redefining or
exiting customer relationships, the shutting or relocation of customer
facilities that host our locations, or a customer decision, as well as our
ongoing review of underperforming locations.
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Our in-market network forms the foundation of 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
Six-month Period Three-month Period
2021 2020 2021 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Gross profit 46.0 % 45.5 % 46.5 % 44.5 %
Operating and administrative expenses 25.5 % 25.1 % 25.4 % 23.6 %
Operating income 20.5 % 20.4 % 21.1 % 20.9 %
Net interest expense -0.2 % -0.2 % -0.2 % -0.2 %
Earnings before income taxes 20.3 % 20.3 % 20.9 % 20.8 %
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 June
30 , and changes in such sales from the prior period to the more recent period:
Six-month Period Three-month Period
2021 2020 2021 2020
Net sales $ 2,924.7 2,876.0 $ 1,507.7 1,509.0
Percentage change 1.7 % 7.4 % -0.1 % 10.3 %
Business days 127 128 64 64
Daily sales $ 23.0 22.5 $ 23.6 23.6
Percentage change 2.5 % 6.6 % -0.1 % 10.3 %
Daily sales impact of currency fluctuations 0.9 % -0.3 % 1.2 % -0.4 %
Note - Daily sales are defined as the total net sales for the period divided by the number of business days (in
In the first six months of 2021, our net sales of$2,924.7 increased$48.7 , or 1.7%. Adjusted for one fewer selling day in the first quarter of 2021, our daily sales rate increased 2.5%. This increase is due to improved unit sales across most products to our traditional manufacturing and construction customers, resulting from continued improvement in business activity. This is only partly offset by lower unit sales of pandemic-related PPE and sanitation products to traditional, state and local government, and health care customers. These favorable factors were partly offset by severe weather inFebruary 2021 , which we believe reduced net and daily sales growth by 30 to 50 basis points in the first six months of 2021 compared to the first six months of 2020. Reported growth for the first six months of 2021 underrepresents the underlying market strength our business is experiencing. In the second quarter of 2020, we reported sales growth as significant sales of "surge"-related PPE and sanitizer sales to critical businesses, state and local governments, and healthcare companies more than offset the severe economic weakness experienced by our traditional manufacturing and construction customers. While we have retained incremental sales from some customers that bought from us for the first time in the second quarter of 2021, we have always viewed our surge sales as being specific to that period and unlikely to recur in future periods. With the worst effects of the pandemic on our marketplace having passed as of the second quarter of 2021, these sales did not recur, and their absence meaningfully reduced our growth in the first six months of 2021. This had the effect of masking otherwise very strong growth from our traditional manufacturing and construction customers. Indeed, we believe the best way to understand underlying economic trends is through the performance of our fastener product line, which reflects the economic trends, but not the surge buying that was brought on by the pandemic. Daily sales growth of our fastener product line in the first six months and the second quarter of 2021 was 15.4% and 28.4%, respectively, which we believe is more reflective of the strong underlying market environment we experienced through the period. The overall impact of product pricing on net sales was 70 to 100 basis points during the first six months of 2021 and 80 to 110 basis points during the second quarter of 2021. This increase reflects actions we have taken in the first six months and second quarter of 2021 in response to inflationary pressure that we experienced in product and transportation costs through both 14 -------------------------------------------------------------------------------- Table of Contents periods. These pressures persist in the marketplace and are likely to require further organizational pricing actions in the second half of 2021 in an effort to offset this impact. From a product standpoint, fastener daily sales increased 15.4% in the first six months of 2021 from the first six months of 2020 and accounted for 33.1% of total sales, from 29.3% of sales in the first six months of 2020 and 34.7% of sales in the first six months of 2019. The fastener product line tends to have our highest gross profit margin. In contrast, safety daily sales, which includes PPE, fell 20.2% in the first six months of 2021 from the first six months of 2020 and accounted for 21.3% of total sales, from 27.3% of sales in the first six months of 2020 and 17.4% of sales in the first six months of 2019. Daily sales of other products, which includes sanitizer, increased 7.5% in the first six months of 2021 from the first six months of 2020 and accounted for 45.6% of total sales, from 43.4% of sales in the first six months of 2020 and 47.9% of sales in the first six months of 2019. Safety and other products tend to have gross profit margins below our company average. From a customer standpoint, daily sales to our manufacturing customers increased 14.6% in the first six months of 2021 from the first six months of 2020. Daily sales to our non-residential construction customers declined 0.8% in the first six months of 2021 from the first six months of 2020. Sales trends for our traditional manufacturing and construction customers reflected improvement in underlying economic trends against a relatively easy comparison in the first six months of 2020. Sales to government customers, which includes health care providers, decreased 39.2% and was 5.0% of sales in the first six months of 2021, down from 8.4% of sales in the first six months of 2020. Government customers represented 3.7% of our sales mix prior to the pandemic in 2019, below the level in the first six months of 2021, which may suggest retention of certain customers that bought from us for the first time during the pandemic. However, government customers were significant buyers of surge PPE in the second quarter of 2020, and the absence of those purchases in the second quarter of 2021 produced the significant decline in sales experienced with these customers in the first six months of 2021. During the pandemic, many of our customers enacted policies that limited access of outside personnel to their facilities and key decision-makers. This made it difficult to engage with customers directly in a way that most effectively allows us to promote growth drivers such as FMI (Fastenal Managed Inventory) and Onsites (defined as dedicated sales and service provided from within, or in close proximity to, the customer's facility), or implement agreements that have been signed. While access was not quite at pre-pandemic levels during the first six months of 2021, it improved meaningfully through the period and its ability to negatively influence our growth driver performance is diminishing as a result. •During the first six months of 2021, we signed 155 newOnsite locations. This included 68 signings in the first quarter of 2021 and 87 in the second quarter of 2021. We had 1,323 active sites onJune 30, 2021 , which represented an increase of 9.2% fromJune 30, 2020 . Daily sales through ourOnsite locations, excluding sales transferred from branches to new Onsites, grew at a better than 25% rate in the second quarter of 2021 over the second quarter of 2020. This growth is due to improved demand from ourOnsite customers against relatively easy comparisons, as many customers with Onsites were idled by COVID-19 or operating at significantly reduced utilization in the second quarter of 2020. A lesser contributor to the growth was the increase in our installed base. OurOnsite signings in the second quarter of 2021 were the highest since the pandemic began, and represent further progress toward 375 to 400 annualOnsite signings, which we believe the market will support as market conditions and access to customer facilities and decision makers continue to normalize. We continue to believe signings in 2021 will be between 300 and 350 locations. •Fastenal Managed Inventory (FMI) is comprised of our FASTVend (vending devices), FASTBin (infrared, RFID, and scaled bins), and FASTStock (scanned stocking locations) offering. FASTVend and FASTBin incorporate highly efficient and powerful embedded data tracking and fulfillment processing technologies, whereas FASTStock's fulfillment processing technology is not embedded, but is relatively inexpensive and highly flexible in application. Prior to 2021, we reported exclusively on the signings, installations, and sales of FASTVend. Beginning in the first quarter of 2021, and as detailed previously in our 2020 Form 10-K filing, we began disclosing certain statistics around our FMI offering. The first statistic is a weighted FMI measure which combines the signings and installations of FASTVend and FASTBin in a standardized machine equivalent unit (MEU) based on the expected output of each type of device. We do not include FASTStock in this measurement because scanned stocking locations can take many forms, such as bins, shelves, cabinets, pallets, etc., that cannot be converted into a standardized MEU. The second statistic is revenue through FMI devices which combines the net sales through FASTVend, FASTBin, and FASTStock. A portion of the growth in net sales experienced by FMI, particularly FASTBin and FASTStock, reflects the migration of products from less efficient non-digital stocking locations to more efficient, digital stocking locations. Figures prior to 2021 may differ slightly from those provided in our 2020 Form 10-K filing based on minor changes we made to the conversion of absolute devices to weighted devices. 15 -------------------------------------------------------------------------------- Table of Contents The table below summarizes the signings and installations of, and sales through, our FMI devices. Six-month Period Three-month Period 2021 2020 Change 2021 2020 Change Weighted FASTVend/FASTBin signings (MEUs) 10,526 8,165 28.9 % 5,843 3,473 68.2 % Signings per day 83 64 91 54 Weighted FASTVend/FASTBin installations (MEUs; end of period) 87,567 80,124 9.3 % FASTVend/FASTBin net sales$ 628.7 $ 514.3 22.3 %$ 327.7 $ 233.4 40.4 % % of net sales 21.5 % 17.9 % 21.7 % 15.5 % FASTStock net sales$ 251.0 $ 142.1 76.7 %$ 140.5 $ 56.8 147.5 % % of net sales 8.6 % 4.9 % 9.3 % 3.8 % FMI net sales$ 879.7 $ 656.3 34.0 %$ 468.2 $ 290.1 61.4 % FMI daily sales$ 6.9 $ 5.1 35.1 %$ 7.3 $ 4.5 61.4 % % of net sales 30.1 % 22.8 % 31.1 % 19.2 % Our goal for weighted FASTVend and FASTBin device signings in 2021 remains in a range of 23,000 to 25,000 MEUs. All metrics provided above exclude approximately 13,000 non-weighted vending devices that are part of a leased locker program. •Our e-commerce business includes sales made through an electronic data interface (EDI) with our customers or through the web. Daily sales through e-commerce grew 44.5% in the first six months of 2021 and grew 53.3% in the second quarter of 2021. Revenues attributable to e-commerce represented 13.2% of our total revenues in the second quarter of 2021. We view our digital footprint to be a combination of our sales through FMI (FASTVend, FASTBin, and FASTStock) plus that proportion of our e-commerce sales that do not represent billings of FMI services (collectively, our Digital Footprint). We believe the data that is created through our digital capabilities enhances product visibility, traceability, and control that reduces risk in operations and creates ordering and fulfillment efficiencies for both ourselves and our customers. As a result, we believe our opportunity to grow our business will be enhanced through the continued development and expansion of our digital capabilities. Our Digital Footprint in the second quarter of 2021 represented 41.7% of our sales. We began to provide this figure in the first quarter of 2021, when we reported that our Digital Footprint represented 34.8% of our sales. We identified a calculation error and determined that, using the same approach to calculating our Digital Footprint as we used in the second quarter of 2021, our Digital Footprint represented 39.1% of our sales in the first quarter of 2021. Net sales decreased$1.3 , or 0.1%, in the second quarter of 2021 when compared to the second quarter of 2020. The second quarter of 2021 was heavily influenced by two trends. First, in the second quarter of 2020 we sold significant quantities of PPE and sanitation products as a result of actions taken by governments and businesses around the world to address the onset of the COVID-19 pandemic. In the second quarter of 2021, the ability of governments and businesses to manage the pandemic has improved, as reflected in lower infection and higher vaccination rates. As a result, the "surge"-type volumes that we experienced in the second quarter of 2020 did not recur in the second quarter of 2021. Second, demand from our traditional manufacturing and construction customers in the second quarter of 2021 was significantly stronger than in the year earlier period, when measures to address the pandemic resulted in a sharp and broad drop in economic activity. The net effect on sales of these two trends - reduced sales of surge-related product, but improved manufacturing and construction demand - were mostly offsetting. Sales by Product Line The approximate mix of sales from fasteners, safety supplies, and all other product lines was as follows for the periods endedJune 30 : Six-month Period Three-month Period 2021 2020 2021 2020 Fasteners 33.1 % 29.3 % 33.6 % 26.0 % Safety supplies 21.3 % 27.3 % 21.0 % 34.0 % Other product lines 45.6 % 43.4 % 45.4 % 40.0 % 100.0 % 100.0 % 100.0 % 100.0 % 16
-------------------------------------------------------------------------------- Table of Contents Gross Profit In the first six months of 2021, our gross profit, as a percentage of net sales, improved to 46.0%, or 50 basis points from 45.5% in the first six months of 2020. We believe the increase in gross profit during this period is attributable primarily to three items. (1) Organizational/overhead leverage was favorable primarily due to stronger business conditions. (2) Product and customer mix was a benefit to our gross profit percentage in the first six months of 2021. This was entirely due to product mix, as from the first six months of 2020 to the first six months of 2021 our daily sales of higher profit margin fastener products increased 15.4% while our daily sales of lower gross profit margin non-fastener products grew 7.5%. This was only partly offset by customer mix, which was impacted by the relatively fast growth of our Onsites, which tend to have a gross margin percentage well below the company average. (3) Net rebates were more favorable on a combination of stronger demand increasing our product purchasing activity and lower rebates to certain customers that had significant purchases of PPE product in the first six months of 2021. These positive contributors to our gross profit percentage were partly offset by the$7.8 write-down of the value of our inventory of 3-ply masks in the first quarter of 2021. In the second quarter of 2021, our gross profit, as a percentage of net sales, improved to 46.5%, or 200 basis points from 44.5% in the second quarter of 2020. As was the case in the first six months of 2021, this improvement was driven by product and customer mix, organizational/overhead leverage, and favorable net rebates. We also achieved a higher product margin due to a higher gross profit percentage for our safety products as a result of more favorable customer mix within the safety category. These positive contributors to our gross profit percentage were partly offset by higher freight expense due to higher shipping costs and increased use of external shippers as a means of managing tight product and transportation supply chains. Pricing actions taken during the first six months of 2021 largely matched the product and transportation inflation we experienced in the marketplace, and did not have a material impact on gross profit percentage in either the first six months or the second quarter of 2021. Operating and Administrative Expenses In the first six months of 2021 our operating and administrative expenses, as a percentage of net sales, increased to 25.5% compared to 25.1% in the first six months of 2020. In the second quarter of 2021 our operating and administrative expenses, as a percentage of net sales, increased to 25.4% compared to 23.6% in the second quarter of 2020. In both periods this was primarily a result of our employee-related expenses growing faster than sales, as we did leverage the collective change in occupancy-related and all other operating and administrative expenses. The percentage change in employee-related, occupancy-related, and all other operating and administrative expenses compared to the same periods in the preceding year, is outlined in the table below. Approximate Percentage of Six-month Period Three-month Period Total Operating and Administrative Expenses 2021 2021 Employee-related expenses 70% 6.6 % 11.5 % Occupancy-related expenses 15% to 20% 2.4 % 4.7 % All other operating and administrative expenses 10% to 15% -12.0 % -8.8 % 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 six months of 2021, our employee-related expenses increased when compared to the first six months of 2020 primarily as a result of higher incentive pay stemming from strong growth and profits at our in-market locations, which account for the majority of our incentive dollars, higher profit sharing to reflect a more favorable sales and profit outlook, and a 13.1% increase in our healthcare expenses as employees and their families were more comfortable seeking health and dental care. In the second quarter of 2021, our employee-related expenses increased when compared to the second quarter of 2020, primarily as a result of higher incentive pay stemming from strong growth and profits at our in-market locations, which account for the majority of our incentive dollars, a 25.1% increase in our healthcare expenses, and to a lesser extent an increase in base pay reflecting an increase in the proportion of our employees that are full-time and higher part-time wages. 17 -------------------------------------------------------------------------------- Table of Contents 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: Q2 Q1 Q1 Q4 Q4 Q2 Q2 2021 2021 2021 2020 2020 2020 2020 In-market locations (branches & Onsites) 11,390 11,323 0.6 % 11,260 1.2 % 11,310 0.7 % Non-in-market selling 2,021 1,977 2.2 % 1,923 5.1 % 1,876 7.7 % Selling subtotal 13,411 13,300
0.8 % 13,183 1.7 % 13,186 1.7 % Distribution/Transportation
2,691 2,695 -0.1 % 2,591 3.9 % 2,615 2.9 %
Manufacturing 618 613 0.8 % 607 1.8 % 625 -1.1 %
Administration 1,533 1,486 3.2 % 1,455 5.4 % 1,388 10.4 %
Non-selling subtotal 4,842 4,794 1.0 % 4,653 4.1 % 4,628 4.6 %
Total 18,253 18,094 0.9 % 17,836 2.3 % 17,814 2.5 %
Occupancy-related expenses include: (1) building rent and depreciation, (2)
building utility costs, (3) equipment related to our branches and distribution
locations, and (4) industrial vending equipment (we consider the vending
equipment, excluding leased locker equipment, to be a logical extension of our
in-market operations and classify the depreciation and repair costs as occupancy
expenses).
In the first six months of 2021, our occupancy-related expenses increased when
compared to the first six months of 2020, as a result of modest increases in
both non-branch facility expenses and FMI equipment costs, primarily vending
devices. In the second quarter of 2021, our occupancy-related expenses increased
when compared to the second quarter of 2020, as a result of vending equipment
costs and modest increases in non-branch facility expenses.
All other operating and administrative expenses include: (1) selling-related
transportation, (2) information technology (IT) expenses, (3) general corporate
expenses, which consists of legal expenses, general insurance expenses, travel
and marketing expenses, etc., and (4) the gain on sales of property and
equipment.
Combined, all other operating and administrative expenses decreased in the first
six months of 2021 when compared to the first six months of 2020. Expenses
related to selling transportation decreased, with a favorable demand and pricing
environment in which to market excess branch vehicles more than offsetting
rising fuel expenses. We also experienced more favorable conditions for net
marketing, general insurance, and bad debt expenses. These were partly offset by
higher spending on information technology. Combined, all other operating and
administrative expenses decreased in the second quarter of 2021 when compared to
the second quarter of 2020. The period was impacted by the same variables that
influenced the first six months of 2021.
Net Interest Expense
Our net interest expense was $5.0 and $2.6 in the first six months of 2021 and
the second quarter of 2021, respectively, compared to $4.4 in the first six
months of 2020 and $2.4 in the second quarter of 2020, respectively.
Income Taxes
We recorded income tax expense of $142.8 in the first six months of 2021, or
24.1% of earnings before income taxes, and $75.5 in the second quarter of 2021,
or 24.0% of earnings before income taxes. Income tax expense was $141.4 in the
first six months of 2020, or 24.3% of earnings before income taxes, and $74.8 in
the second quarter of 2020, or 23.8% of earnings before income taxes. We believe
our ongoing tax rate, absent any discrete tax items or broader changes to tax
law, will be in the 24.5% to 25.0% range.
18
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Net Earnings
Our net earnings during the first six months of 2021 were $450.3 , an increase of
2.0% when compared to the first six months of 2020. Our net earnings during the
second quarter of 2021 were $239.7 , an increase of 0.4% when compared to the
second quarter of 2020.
Our diluted net earnings per share during the first six months of 2021 were
$0.78 , an increase of 1.7% when compared to the first six months of 2020. Our
diluted net earnings per share during the second quarter of 2021 were $0.42 ,
which was unchanged from $0.42 during the second quarter of 2020.
Results of Operations (Comparison to 2019 Periods)
Given the unusual nature of our marketplace over the last 15 months due to the
COVID-19 pandemic, we believe that a comparison of net sales, gross profit,
operating and administrative expenses, operating income, net earnings, and
operating cash flow during the first six months and second quarter of 2021 to
the same periods in 2019 provides further insight into sustainable trends and
underlying performance of our business. As discussed earlier in this report,
there were certain aspects of the COVID-19 pandemic that dramatically impacted
our business during 2020. Given this, we believe that a comparison to the 2019
periods is helpful to demonstrate changes in financial condition and our results
of operations during the most recently ended quarter. The table below provides
such a comparison:
Six-month Period Three-month Period
2021 2019 Change 2021 2019 Change
Net sales $ 2,924.7 $ 2,677.7 9.2 % $ 1,507.7 $ 1,368.4 10.2 %
Gross profit $ 1,344.1 $ 1,265.9 6.2 % $ 700.7 $ 641.2 9.3 %
% of net sales 46.0 % 47.3 % 46.5 % 46.9 %
Operating and administrative
expenses $ 746.0 $ 729.5 2.3 % $ 382.9 $ 366.2 4.6 %
% of net sales 25.5 % 27.3 % 25.4 % 26.8 %
Operating income $ 598.1 $ 536.4 11.5 % $ 317.8 $ 275.0 15.5 %
% of net sales 20.5 % 20.0 % 21.1 % 20.1 %
Net earnings $ 450.3 $ 398.7 13.0 % $ 239.7 $ 204.6 17.2 %
Net cash provided by operating
activities $ 446.3 $ 333.0 34.0 % $ 171.5 $ 128.1 33.9 %
% of net earnings 99.1 % 83.5 % 71.6 % 62.6 %
Liquidity and Capital Resources
Cash flow activity was as follows for the periods ended June 30 :
Six-month Period
2021 2020
Net cash provided by operating activities
99.1 % 111.4 %
Net cash used in investing activities
13.6 % 47.3 %
Net cash used in financing activities
68.4 % 57.2 %
Net Cash Provided by Operating Activities
We produced operating cash flow of $446.3 in the first six months of 2021, a
decrease of 9.3% from the first six months of 2020, representing 99.1% of the
period's net earnings versus 111.4% in the first six months of 2020. The decline
in our operating cash flow is due to a resumption of the typical pattern of
making two income tax payments in the second quarter of 2021. In 2020, we did
not make these payments in the second quarter as the federal government passed
legislation in response to the COVID-19 pandemic that allowed companies to defer
these payments into the third quarter. This more than offset a reduction in cash
used to build working capital in the first six months of 2021 versus the first
six months of 2020.
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The dollar and percentage change in accounts receivable, net, inventories, and
accounts payable as of June 30, 2021 when compared to June 30, 2020 were as
follows:
Twelve-month Dollar Twelve-month
June 30 Change Percentage Change
2021 2020 2021 2021
Accounts receivable, net $ 908.9 881.5 $ 27.4 3.1 %
Inventories 1,327.9 1,401.5 (73.6) -5.3 %
Trade working capital $ 2,236.8 2,283.0 $ (46.2) -2.0 %
Accounts payable $ 236.1 194.1 $ 42.0 21.6 %
Trade working capital, net $ 2,000.7 2,088.9 $ (88.2) -4.2 %
Net sales in last two months $ 1,010.6 1,017.6 $ (7.0) -0.7 %
Note - Amounts may not foot due to rounding difference.
Our accounts receivable balance increased due to customer mix, as our mix of
sales shifted away from faster payment surge-related product to sales with more
typical terms.
The decrease in inventory as of June 30, 2021 when compared to June 30, 2020 was
due to several factors. First, in the second quarter of 2020, we built up our
inventory of critical PPE and sanitation supplies in anticipation of the economy
re-opening in the second half of 2020. Given the re-opening, we have reduced
that inventory. Second, the rapid slowdown in the economy in the second quarter
of 2020, including the slowdown or idling of many Onsites, left inventories
artificially high in that period. Third, the current period is being affected by
supply chain disruption, which is limiting our ability to build inventories to
levels that would normally be justified by current economic activity. Fourth, we
have continued to close traditional branches, including 150 over the past 12
months, improve the match of branch stock to the needs of specific markets,
reduce slow or non-moving inventory, and improve the flow of product through our
internal logistics.
We had an increase in accounts payable as of June 30, 2021 when compared to June
30, 2020 . In the second quarter of 2020, our sales growth was from high-demand
surge-related products that required immediate payment, meaning our accounts
payable declined as a result of weaker activity with our traditional suppliers
with a more typical product mix. The increase in our payables balance in the
second quarter of 2021 largely reflects the return to strong growth in our
traditional manufacturing and construction business.
Net Cash Used in Investing Activities
Net cash used in investing activities decreased in the first six months of 2021
when compared to the first six months of 2020. There were two factors behind
this decrease. First, in the first quarter of 2020, we acquired the industrial
vending assets of Apex Industrial Technologies LLC (Apex) for $125.0 . That
outlay did not recur in the first quarter of 2021. Second, our net capital
expenditures (property and equipment net of proceeds from sales) were lower in
the first six months of 2021 compared to in the first six months of 2020.
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 and bin 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 six months of 2021, our net capital
expenditures were $61.5 , which is a decrease of 27.6% from the first six months
of 2020. Of the factors described above, the largest reason for the decline in
net capital expenditures in the first six months of 2021 was lower spending on
FMI devices to reflect a slow recovery in signings and installations following
the pandemic, reduced vending equipment costs following the March 2020
acquisition of the industrial vending assets of Apex, and an increase in the
refurbishment and redeployment of FMI hardware as an alternative to buying new
devices.
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. We continue to expect our net capital
expenditures (property and equipment net of proceeds from sales) in 2021 to be
within a range of $170.0 to $200.0 , an increase from $157.5 in 2020. This
increase relates to increased spending for a non-hub construction project in
Winona to support growth, land
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purchases to support future supply chain investment, an increase in
manufacturing capacity, higher spending for equipment and facility upgrades,
retrofits, and replacement, and lower anticipated proceeds from asset sales.
Net Cash Used in Financing Activities
Net cash used in financing activities in the first six months of 2021 consisted
of payments of dividends, which were partially offset by proceeds from the
exercise of stock options. Net cash used in financing activities in the first
six 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 the exercise of stock options.
During the first six months of 2021, we returned $321.6 to shareholders all in
the form of dividends, compared to $338.8 in the first six months of 2020 in the
form of dividends ($286.8 ) and purchases of our common stock ($52.0 ). During the
first six months of 2021, we did not purchase any shares of our common stock.
During the first six months of 2020, we purchased 1,600,000 shares of our common
stock at an average price of approximately $32.54 per share. We currently have
authority to purchase up to 3,200,000 additional shares of our common stock. An
overview of our cash dividends paid or declared in 2021 and 2020 is contained in
Note 3 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 2020 annual report on Form
10-K.
Recently Issued and Adopted Accounting Pronouncements - A description of
recently adopted accounting pronouncements, if any, 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 2020 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 6 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 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, pricing, Onsite and weighted FMI device
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, the introduction or expansion
of new business strategies, weak acceptance or adoption of our FMI offering or
Onsite business models, increased competition in FMI or Onsite , difficulty in
maintaining installation quality as our FMI business expands, the leasing to
customers of a significant number of additional FMI devices, the failure to meet
our goals and expectations regarding branch openings, branch closings, or
expansion of our FMI offering or Onsite operations, changes in the
implementation objectives of our business strategies, our ability to retain
certain government and other types of customers that bought product from us for
the first time during the pandemic, 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
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Table of Contents 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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