Results of Operations
The following sets forth condensed consolidated statement of earnings information (as a percentage of net sales) for the periods ended March 31:
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Three-month Period
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2021
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2020
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Net sales
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100.0
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%
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100.0
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%
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Gross profit
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45.4
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%
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46.6
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%
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Operating and administrative expenses
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25.6
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%
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26.7
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%
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Operating income
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19.8
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%
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19.9
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%
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Net interest expense
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-0.2
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%
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-0.2
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%
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Earnings before income taxes
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19.6
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%
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19.7
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%
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Note – Amounts may not foot due to rounding difference.
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Net Sales
The table below sets forth net sales and daily sales for the periods ended March 31, and changes in such sales from the prior period to the more recent period:
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Three-month Period
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2021
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2020
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Net sales
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$
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1,417.0
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1,367.0
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Percentage change
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3.7
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%
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4.4
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%
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Business days
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63
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64
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Daily sales
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$
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22.5
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21.4
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Percentage change
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5.3
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%
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2.8
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%
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Daily sales impact of currency fluctuations
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0.6
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%
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-0.2
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%
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Note – Daily sales are defined as the total net sales for the period divided by the number of business days (in the United States) in the period.
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In the first quarter of 2021, our net sales of $1,417.0 increased $50.0, or 3.7%. Adjusted for one fewer selling day in the first quarter of 2021, our daily sales rate increased 5.3%. This increase is due to improved unit sales across most products, resulting from continued improvement in business activity among our traditional manufacturing and construction customers as well as higher sales of COVID-related PPE to traditional, government, and healthcare customers. These favorable factors were partly offset by severe weather in February 2021, which we believe reduced net and daily sales growth by 50 to 100 basis points in the first quarter of 2021 compared to the first quarter of 2020.
Aside from the general improvement in business conditions through the first quarter of 2021, certain distinct trends emerged related to the timing of onset of the COVID-19 pandemic. In March 2020, and specifically the back half of that month, governments and businesses began to enact policies aimed at mitigating the effects of COVID-19, which also weakened business activity and the performance of our more cyclical product lines, such as fasteners. At the same time, it began to elevate demand for PPE to support medical personnel, first responders, and essential workers, resulting in an increase in demand for
safety and sanitizer products. For these reasons, in March 2020, we experienced meaningful erosion in demand for fastener products and meaningful acceleration in demand for safety and sanitizer products relative to what had been experienced in January and February 2020. In contrast, and reflecting in part the comparisons each product category faced, in March 2021, we experienced meaningful acceleration in demand for fastener products and meaningful deceleration in demand for safety and sanitizer products relative to what had been experienced in January and February 2021. Based on the impact of the pandemic on these product categories and the progression it made through the first half of 2020, it is possible the shift experienced in March of 2021 may become more pronounced in the second quarter of 2021.
The overall impact of product pricing on net sales was 60 to 90 basis points during the first quarter of 2021; this compares to an immaterial impact in the fourth quarter of 2020 and a 30 to 60 basis points impact in the first quarter of 2020. Pressures related to product cost inflation are rising, however, and we anticipate taking pricing actions in the second quarter of 2021 to mitigate these effects. Foreign exchange favorably impacted sales in the first quarter of 2021 by 60 basis points.
From a product standpoint, fastener daily sales increased 4.0% in the first quarter of 2021 from the first quarter of 2020 and accounted for 32.5% of total sales, down from 32.9% of sales in the prior year. The fastener product line tends to have our highest gross profit margin. In contrast, safety daily sales, which includes PPE, grew 14.7% in the first quarter of 2021 from the first quarter of 2020 and accounted for 21.5% of total sales, up from 19.8% of sales in the prior year. Daily sales of other products, which includes sanitizer, increased 2.5% in the first quarter of 2021 from the first quarter of 2020 and accounted for 46.0% of total sales, down from 47.3% of sales in the prior year. 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 5.6% in the first quarter of 2021 from the first quarter of 2020. Daily sales of our non-residential construction customers declined 7.5% in the first quarter of 2021 from the first quarter of 2020, though growth in March specifically was flat versus the prior year period. Sales trends for our traditional manufacturing and construction customers reflected improvement in underlying economic trends. Sales to government customers, which includes health care providers, increased 37.3% and was 5.4% of our sales mix in the first quarter of 2021, up from 4.2% of sales in the first quarter of 2020.
Many of our customers, in response to the pandemic, enacted policies that limited access of outside personnel to their facilities and allowed key decision-makers to work remotely. This has made it more 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 improved in the first quarter of 2021 and trended more favorably through the period, it remains below pre-pandemic levels. This did influence our growth driver performance in the first quarter of 2021:
•We signed 68 new Onsite locations during the first quarter of 2021. Though this is a decline from 85 new Onsite signings in the first quarter of 2020, it also represents the highest rate of quarterly signings since the onset of the pandemic. We had 1,285 active sites on March 31, 2021, which represented an increase of 9.0% from March 31, 2020. Daily sales through our Onsite locations, excluding sales transferred from branches to new Onsites, increased at a mid to high single-digit rate in the first quarter of 2021 over the first quarter of 2020. The increase in sales reflects largely the contributions of our newest Onsites, as sales at our older sites remained down versus the year earlier period, though the rate of decline continued to moderate relative to preceding quarters. We continue to believe the market can support annual signings of 375 to 400 Onsites. However, in light of the level of signings in the first quarter of 2021 and continued lengthening of the sales cycle as a result of COVID-19, we believe Onsite signings in 2021 are more likely to fall between 300 and 350 locations.
•Fastenal Managed Inventory (FMI) is comprised of our FAST Vend (vending devices), FAST Bin (infrared, RFID, and scaled bins), and FAST Stock (scanned bins) offering. Prior to 2021, we reported exclusively on the signings, installations, and sales of FAST Vend. Beginning with this Form 10-Q, and as detailed previously in our 2020 Form 10-K filing, we are disclosing a weighted FMI measure that combines the signings, installations, and sales of FAST Vend and FAST Bin into a standardized machine equivalent unit (MEU) based on the expected output of each type of device. 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 that we plan on using in all future periods.
In the first quarter of 2021, we signed 4,683 weighted FMI devices, largely in line with the 4,692 signed in the first quarter of 2020. On a business day basis, we signed 74 in the first quarter of 2021. Our installed weighted FMI device count on March 31, 2021 was 85,157, an increase of 7.5% over March 31, 2020. FAST Vend represented over 95% of our installed base of weighted devices in the first quarter of 2021, while its proportion of signings was in the mid 80% range. Daily sales through weighted FMI devices increased 9.0% in the first quarter of 2021, and represented 21.2% of net sales. Our goal for weighted FMI device signings in 2021 remains at a range of 23,000 to 25,000 MEUs, though conditions for signings will need to continue to improve beyond the first quarter of 2021 to achieve this range.
Revenues attributed to all of our FMI tools, including FAST Stock, represented 29.0% of sales in the first quarter of 2021.
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. It does not include sales through FMI, though we do consider these to be digital connections between ourselves and our customers. Daily sales through e-commerce grew 35.5% in the first quarter of 2021 over the first quarter of 2020. Revenues attributable to e-commerce represented 12.2% of our total revenues in the period.
Combined, 34.8% of our sales were generated digitally in the first quarter of 2021. We view our digital sales to be a combination of our sales through FMI (FAST Vend, FAST Bin, and FAST Stock) plus that proportion of our e-commerce sales that do not represent billings of FMI services.
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 March 31:
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Three-month Period
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2021
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2020
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Fasteners
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32.5
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%
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32.9
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%
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Safety supplies
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21.5
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%
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19.8
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%
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Other product lines
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46.0
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%
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47.3
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%
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100.0
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%
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100.0
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%
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Gross Profit
In the first quarter of 2021, our gross profit, as a percentage of net sales, declined to 45.4%, or 120 basis points from 46.6% in the first quarter of 2020. We believe the decline in gross profit during this period is attributable to the following items. (1) During the period we wrote-down the value of the 3-ply masks that remain in inventory by $7.8M, reducing our gross profit, as a percentage of net sales, by 50 basis points. From April 2020 to March 2021, we profitably sold roughly $110.0 of these 3-ply masks, a product we sold very little of prior to that period. We continue to have demand for these masks and sell through our inventory. However, the surplus of product that has entered the market has pushed prices below original cost, a condition we anticipate will persist, which in turn slowed sell-through toward the end of the first quarter of 2021. (2) Product and customer mix have adversely affected our gross profit percentage, though the impact is somewhat less in the first quarter of 2021 than what had been experienced in previous quarters. As it relates to customer mix, relatively faster growth to national account and government customers, which tend to have gross profit margins below the company average, versus smaller, locally managed customers, which tend to have gross profit margins above the company average, adversely impacted gross profit, as a percentage of sales, in the first quarter of 2021. As it relates to product mix, from the first quarter of 2020 to the first quarter of 2021, our daily sales of higher profit margin fastener products increased 4.0% while our daily sales of lower gross profit margin non-fastener products grew 6.1%. The relatively narrow gap between the growth of our fastener and non-fastener product lines has produced a relatively modest impact from product mix in the first quarter of 2021. (3) We had lower margins in our fastener and safety product lines. For safety, gross profit margins for non-COVID-related safety products increased, but this was more than offset by the impact of the write-down as well as the ongoing sale of lower gross profit margin PPE products. For fasteners, the gross profit margin was affected by relatively faster growth from larger customers over smaller customers, short-term sales of low-margin product related to customer implementations, and spot market buys of product, which tend to be a necessary but costlier solution to managing lengthening lead times in supply chains.
Operating and Administrative Expenses
Our operating and administrative expenses, as a percentage of net sales, improved to 25.6% in the first quarter of 2021 compared to 26.7% in the first quarter of 2020. In the first quarter of 2021, we experienced modest leverage in each of our employee, occupancy, and general corporate expense categories.
The growth or contraction 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.
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Approximate Percentage of Total Operating and Administrative Expenses
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Three-month Period
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2021
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Employee-related expenses
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70%
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1.8
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%
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Occupancy-related expenses
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15% to 20%
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0.2
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%
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All other operating and administrative expenses
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10% to 15%
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-15.2
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%
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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 quarter of 2021, our employee-related expenses increased when compared to the first quarter of 2020 as a result of higher profit sharing to reflect a more favorable sales and profit outlook and, to a lesser extent, slightly higher incentive compensation. This was partly offset by slightly lower base compensation as a result of lower FTE headcount during the period as part of our efforts to control expenses.
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:
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Change
Since:
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Change
Since:
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Q1
2021
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Q4
2020
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Q4
2020
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Q1
2020
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Q1
2020
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In-market locations (branches & Onsites)
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11,323
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11,260
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0.6
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%
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12,334
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-8.2
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%
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Non-in-market selling
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1,977
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1,923
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2.8
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%
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1,866
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5.9
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%
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Selling subtotal
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13,300
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13,183
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0.9
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%
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14,200
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-6.3
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%
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Distribution/Transportation
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2,695
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2,591
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4.0
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%
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2,992
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-9.9
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%
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Manufacturing
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613
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607
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1.0
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%
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675
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-9.2
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%
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Administration
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1,486
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1,455
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2.1
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%
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1,368
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8.6
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%
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Non-selling subtotal
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4,794
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4,653
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3.0
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%
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5,035
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-4.8
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%
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Total
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18,094
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17,836
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1.4
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%
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19,235
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-5.9
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%
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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 quarter of 2021, our occupancy-related expenses were mostly unchanged when compared to the first quarter of 2020. A modest increase in non-branch facility expenses was largely offset by slightly lower vending repair costs.
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 quarter of 2021 when compared to the first quarter of 2020. We experienced lower costs for selling-related transportation due to tight fleet maintenance expenses and efforts to rationalize our local pick-up fleet. We also continued to experience reduced costs for travel, meals, and supplies, as well as favorable bad debt trends. This was only partly offset by increases in spending on information technology.
Net Interest Expense
Our net interest expense was $2.4 in the first quarter of 2021 and $2.1 in the first quarter of 2020. We experienced higher average debt levels through the period, which were offset by lower interest rates, as compared to the first quarter of 2020.
Income Taxes
We recorded income tax expense of $67.3 in the first quarter of 2021, or 24.2% of earnings before income taxes. Income tax expense was $66.6 in the first quarter of 2020, or 24.7% 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 tax rate in the first quarter of 2021 was below this range largely due to the tax benefits associated with the exercise of stock options.
Net Earnings
Our net earnings during the first quarter of 2021 were $210.6, an increase of 3.9% when compared to the first quarter of 2020. Our diluted net earnings per share during the first quarter of 2021 were $0.37, an increase of 3.7% when compared to the first quarter of 2020.
Liquidity and Capital Resources
Cash flow activity was as follows for the periods ended March 31:
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Three-month Period
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|
2021
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|
2020
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Net cash provided by operating activities
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$
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274.8
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|
|
241.1
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Percentage of net earnings
|
130.5
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%
|
|
119.0
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%
|
Net cash used in investing activities
|
$
|
29.9
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|
|
171.7
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|
Percentage of net earnings
|
14.2
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%
|
|
84.7
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%
|
Net cash used in financing activities
|
$
|
154.2
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|
78.2
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Percentage of net earnings
|
73.2
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%
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|
38.6
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%
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Net Cash Provided by Operating Activities
Net cash provided by operating activities increased in the first quarter of 2021 relative to the first quarter of 2020. The most significant contributor to the increase in our operating cash flow as a percentage of net earnings was relatively more measured growth in working capital compared to the prior period. The impact of improving demand on our customer's working capital needs was mitigated by internal efforts to streamline inventory, a lower rate of growth in the installed base of Onsites and weighted FMI devices, and improved receivables collections.
The dollar and percentage change in accounts receivable, net, inventories, and accounts payable as of March 31, 2021 when compared to March 31, 2020 were as follows:
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March 31
|
Twelve-month Dollar Change
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Twelve-month Percentage Change
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|
|
2021
|
|
2020
|
|
2021
|
|
2021
|
Accounts receivable, net
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|
$
|
851.0
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|
|
833.9
|
|
|
$
|
17.2
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|
|
2.1
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%
|
Inventories
|
|
1,305.3
|
|
|
1,345.5
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|
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(40.2)
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|
|
-3.0
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%
|
Trade working capital
|
|
$
|
2,156.3
|
|
|
2,179.4
|
|
|
$
|
(23.1)
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|
|
-1.1
|
%
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|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
215.1
|
|
|
212.1
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|
|
$
|
2.9
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
Trade working capital, net
|
|
$
|
1,941.3
|
|
|
1,967.2
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|
|
$
|
(26.0)
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|
|
-1.3
|
%
|
|
|
|
|
|
|
|
|
|
Net sales in last two months
|
|
$
|
969.1
|
|
|
904.1
|
|
|
$
|
64.9
|
|
|
7.2
|
%
|
Note - Amounts may not foot due to rounding difference.
The growth in our net accounts receivable as of March 31, 2021 when compared to March 31, 2020 reflects higher sales, partly offset by improvement in collection of past due balances.
The decrease in inventory as of March 31, 2021 when compared to March 31, 2020 was due to several factors: First, further consolidation of our traditional branch count, with 142 closings over the past 12 months. Second, efforts to better match stock to the needs of specific markets, reduce slow- or non-moving inventory, and improve the flow of product through our internal logistics. Third, relatively slow signings in 2020 of Onsites and weighted FMI devices, particularly vending, reduced the rate of growth in our installed base and the inventory that would have been necessary to support it.
The increase in accounts payable as of March 31, 2021 when compared to March 31, 2020 was primarily due to growth in our business.
Net Cash Used in Investing Activities
Net cash used in investing activities decreased in the first quarter of 2021 when compared to the first quarter of 2020. There were two factors behind this decline. First, in the first quarter of 2020 we acquired the industrial vending assets of Apex for $125.0, and that outlay did not occur in the first quarter of 2021. Second, our net capital expenditures (property and equipment net of proceeds from sales) were lower in the first quarter of 2021 compared to in the first quarter 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 quarter of 2021, our net capital expenditures were $30.0, which is a decrease of 35.8% from the first quarter of 2020. Of the factors described above, the largest reason for the decline in net capital expenditures in the first quarter of 2021 was a reduction on spending for vending and bin technology, which is related to both reduced equipment costs as a result of the acquisition of certain assets from Apex and lower equipment needs given the slower signings momentum experienced over the last twelve months.
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 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, higher spending for equipment and facility upgrades, retrofits, and replacement across most tracked categories, and lower anticipated proceeds from asset sales.
Net Cash Used in Financing Activities
Net cash used in financing activities in the first quarter 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 quarter of 2020 consisted of payments of dividends and purchases of our common stock, which were partially offset by proceeds from the exercise of stock options and net proceeds from debt obligations. During the first quarter of 2021, we returned $160.8 to shareholders all in the form of dividends, compared to $195.6 in the first quarter of 2020 in the form of dividends ($143.6) and purchases of our common stock ($52.0). During the first quarter of 2021, we did not purchase any shares of our common stock. During the first quarter 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 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.