Fastenal Reports Steady Q2 as Construction Boom Balances PPE Sales Dip
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The second quarter of 2021 was heavily influenced by these two trends.


Fastenal Company (Nasdaq:FAST), a leader in the wholesale distribution of industrial and construction supplies, has announced its financial results for the quarter ended June 30, 2021. Except for share and per share information, or as otherwise noted below, dollar amounts are stated in millions. Throughout this document, percentage and dollar calculations, which are based on non-rounded dollar values, may not be able to be recalculated using the dollar values included in this document due to the rounding of those dollar values.

Year-Over-Year Quarterly Results of Operations

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 personal protective equipment (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.

The overall impact of product pricing on net sales in the second quarter of 2021 was 80 to 110 basis points. We continue to experience pressure related to product and transportation cost inflation. Pricing actions taken in the first and second quarters of 2021 contributed to the increase in the impact of net pricing on sales in the second quarter of 2021. We will continue to take actions as necessary to mitigate the impact of product and transportation cost inflation in the second half of 2021. The impact of product pricing on net sales was immaterial during the second quarter of 2020.

The absence of pandemic-related impacts produced significant shifts in the product mix of our business in the second quarter of 2021. Fastener daily sales grew 28.4% over the second quarter of 2020, and represented 33.6% of our net sales in the second quarter of 2021; fasteners represented 26.0% and 34.5% of net sales in the second quarter of 2020 and the second quarter of 2019, respectively. Improvement from the second quarter of 2020 reflected higher manufacturing and construction demand. Safety product daily sales declined 38.6% from the second quarter of 2020 and represented 21.0% of our net sales in the second quarter of 2021; safety products represented 34.0% and 17.5% of net sales in the second quarter of 2020 and the second quarter of 2019, respectively. The decline from the second quarter of 2020 reflected the absence of surge-related PPE sales, only partly offset by improvements in manufacturing and construction demand. Other products daily sales grew 12.9% over the second quarter of 2020 and represented 45.4% of our net sales in the second quarter of 2021; other products represented 40.0% and 48.0% of net sales in the second quarter of 2020 and the second quarter of 2019, respectively. Improvement from 2020 reflected higher manufacturing and construction demand, only partly offset by the absence of surge-related sanitation sales.

Daily sales to our national account customers (defined as customer accounts with a multi-site contract) increased 1.4% in the second quarter of 2021 over the second quarter of 2020. Most of our national accounts customers grew in the second quarter of 2021 over the year earlier period, as reflected by our experiencing growth at 71 of our Top 100 national account customers. However, this was mostly offset by the absence in the second quarter of 2021 of large surge-type sales made to a small number of large national account customers in the year earlier period. Revenues attributable to national account customers represented 55.6% of our total revenues in the period. Daily sales to our non-national account customers, which includes government customers, declined 2.4% in the second quarter of 2021 from the second quarter of 2020. This reflects the absence in the second quarter of 2021 of large surge-type sales made primarily to government customers, total sales to which declined 62.5% versus the year earlier period. This was only partly offset by strong growth in our non-government, non-national account customers. Revenues attributable to non-national account customers represented 44.4% of our total revenues in the period.

Our gross profit, as a percentage of net sales, increased 200 basis points to 46.5% in the second quarter of 2021 from 44.5% in the second quarter of 2020. This increase reflects several items. First, product and customer mix favorably impacted our gross profit percentage as a result of the sharp increase in the mix of fastener sales and sharp decrease in non-fastener sales in the second quarter of 2021 relative to the second quarter of 2020. Second, overhead/organizational leverage improved primarily due to stronger business conditions. Third, product margins improved, primarily due to a higher gross profit percentage for our safety products as a result of more favorable customer mix within the safety category. Fourth, 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 second quarter of 2020. These variables were partly offset by higher shipping costs and increased use of external service providers as a means of managing tight product and transportation supply chains.

Our operating income, 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. The 20 basis point increase in operating income percentage experienced in the second quarter of 2021 is due to the 200 basis point increase in gross profit, as a percentage of net sales, only partly offset by an increase in operating and administrative expenses, as a percentage of net sales, which increased 180 basis points to 25.4% in the second quarter of 2021 from 23.6% in the second quarter of 2020. In the second quarter of 2020, we benefited from the proactive reduction in certain expenses, such as part-time labor hours and truck routes, as well as cost reductions that were a natural consequence of the weak COVID-19 economy, such as incentive compensation, travel, healthcare, and fuel. In the second quarter of 2021, we are either comparing against already low numbers or, as a result of a stronger economy, seeing an increase in many of these expenses, which produced the deleveraging of our operating expenses in the period.

Employee-related expenses, which represent approximately 70% of total operating and administrative expenses, increased 11.5% in the second quarter of 2021 compared to the second quarter of 2020. The increase was primarily due to higher incentive compensation as improved business activity lifted branch growth and profitability, as well as a 25.1% increase in health insurance costs as employees and their families were more comfortable seeking health and dental care. Occupancy-related expenses, which represent 15% to 20% of total operating and administrative expenses, increased 4.7% in the second quarter of 2021 compared to the second quarter of 2020. This was primarily due to higher costs for FMI equipment related to an increase in installations and an increase in maintenance and refurbishment. Combined, all other operating and administrative expenses, which represent 10% to 15% of total operating and administrative expenses, decreased 8.8% in the second quarter of 2021 compared to the second quarter of 2020. The performance of this line relates to relatively small changes in a number of general expense categories, including more favorable conditions for net marketing expenses, sales of branch vehicles, and bad debt, which was only partly offset by higher spending for fuel, travel, and information technology.

Our net interest expense was $2.6 in the second quarter of 2021 compared to $2.4 in the second quarter of 2020.

We recorded income tax expense of $75.5 in the second quarter of 2021, or 24.0% of earnings before income taxes. Income tax expense was $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.

Our net earnings during the second quarter of 2021 were $239.7, an increase of 0.4% 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.
2021-07-21

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