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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
| ☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2022, or
| | | | | |
| ☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from __________ to __________
Commission file number 0-16125
FASTENAL COMPANY
(Exact name of registrant as specified in its charter)
| | | | | | | | |
| Minnesota | | 41-0948415 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | | | | |
2001 Theurer Boulevard, Winona, Minnesota | | 55987-1500 |
| (Address of principal executive offices) | | (Zip Code) |
| | | | | | | | |
| (507) 454-5374 | |
| (Registrant's telephone number, including area code) | |
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common stock, par value $.01 per share | FAST | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ý No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | |
| Large Accelerated Filer | | ý | | Accelerated Filer | | ☐ |
| Non-accelerated Filer | | ☐ | | Smaller Reporting Company | | ☐ |
| | | | Emerging Growth Company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of October 12, 2022, there were approximately 572,759,880 shares of the registrant's common stock outstanding.
FASTENAL COMPANY
INDEX
PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
FASTENAL COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in millions except share information)
| | | | | | | | | | | |
| (Unaudited) | | |
| Assets | September 30,
2022 | | December 31,
2021 |
| Current assets: | | | |
| Cash and cash equivalents | $ | 231.5 | | | 236.2 | |
Trade accounts receivable, net of allowance for credit losses of $10.2 and $12.0, respectively | 1,110.6 | | | 900.2 | |
| Inventories | 1,678.1 | | | 1,523.6 | |
| Prepaid income taxes | 3.2 | | | 8.5 | |
| Other current assets | 172.2 | | | 188.1 | |
| Total current assets | 3,195.6 | | | 2,856.6 | |
| | | |
| Property and equipment, net | 1,008.5 | | | 1,019.2 | |
| Operating lease right-of-use assets | 249.8 | | | 242.3 | |
| Other assets | 173.5 | | | 180.9 | |
| | | |
| Total assets | $ | 4,627.4 | | | 4,299.0 | |
| | | |
| Liabilities and Stockholders' Equity | | | |
| Current liabilities: | | | |
| Current portion of debt | $ | 150.3 | | | 60.0 | |
| Accounts payable | 277.2 | | | 233.1 | |
| Accrued expenses | 282.4 | | | 298.3 | |
| Current portion of operating lease liabilities | 92.7 | | | 90.8 | |
| Total current liabilities | 802.6 | | | 682.2 | |
| | | |
| Long-term debt | 404.7 | | | 330.0 | |
| Operating lease liabilities | 161.2 | | | 156.0 | |
| Deferred income taxes | 92.9 | | | 88.6 | |
| Other long-term liabilities | 4.8 | | | — | |
| | | |
| Stockholders' equity: | | | |
Preferred stock: $0.01 par value, 5,000,000 shares authorized, no shares issued or outstanding | — | | | — | |
Common stock: $0.01 par value, 800,000,000 shares authorized, 572,754,406 and 575,464,682 shares issued and outstanding, respectively | 5.8 | | | 5.8 | |
| Additional paid-in capital | 2.8 | | | 96.2 | |
| Retained earnings | 3,239.7 | | | 2,970.9 | |
| Accumulated other comprehensive loss | (87.1) | | | (30.7) | |
| Total stockholders' equity | 3,161.2 | | | 3,042.2 | |
| Total liabilities and stockholders' equity | $ | 4,627.4 | | | 4,299.0 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
FASTENAL COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Amounts in millions except earnings per share)
| | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited) | | (Unaudited) |
| Nine Months Ended
September 30, | | Three Months Ended
September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Net sales | $ | 5,285.0 | | | 4,479.0 | | | $ | 1,802.4 | | | 1,554.2 | |
| | | | | | | |
| Cost of sales | 2,837.6 | | | 2,414.7 | | | 975.9 | | | 834.0 | |
| Gross profit | 2,447.4 | | | 2,064.3 | | | 826.5 | | | 720.2 | |
| | | | | | | |
| Operating and administrative expenses | 1,326.7 | | | 1,147.8 | | | 447.3 | | | 401.8 | |
| Operating income | 1,120.7 | | | 916.5 | | | 379.2 | | | 318.4 | |
| | | | | | | |
| Interest income | 0.4 | | | 0.1 | | | 0.2 | | | 0.1 | |
| Interest expense | (9.3) | | | (7.3) | | | (4.1) | | | (2.4) | |
| | | | | | | |
| Earnings before income taxes | 1,111.8 | | | 909.3 | | | 375.3 | | | 316.1 | |
| | | | | | | |
| Income tax expense | 270.5 | | | 215.5 | | | 90.7 | | | 72.6 | |
| | | | | | | |
| Net earnings | $ | 841.3 | | | 693.8 | | | $ | 284.6 | | | 243.5 | |
| | | | | | | |
| Basic net earnings per share | $ | 1.46 | | | 1.21 | | | $ | 0.50 | | | 0.42 | |
| | | | | | | |
| Diluted net earnings per share | $ | 1.46 | | | 1.20 | | | $ | 0.50 | | | 0.42 | |
| | | | | | | |
| Basic weighted average shares outstanding | 574.7 | | | 574.6 | | | 573.0 | | | 575.0 | |
| | | | | | | |
| Diluted weighted average shares outstanding | 576.6 | | | 576.9 | | | 574.7 | | | 577.3 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
FASTENAL COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited) | | (Unaudited) |
| | Nine Months Ended
September 30, | | Three Months Ended
September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Net earnings | $ | 841.3 | | | 693.8 | | | $ | 284.6 | | | 243.5 | |
| Other comprehensive loss, net of tax: | | | | | | | |
Foreign currency translation adjustments (net of tax of $0.0 in 2022 and 2021) | (56.4) | | | (8.4) | | | (32.7) | | | (10.8) | |
| Comprehensive income | $ | 784.9 | | | 685.4 | | | $ | 251.9 | | | 232.7 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
FASTENAL COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
(Amounts in millions except per share information)
| | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited) | | (Unaudited) |
| Nine Months Ended
September 30, | | Three Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Common stock | | | | | | | |
| Balance at beginning of period | $ | 5.8 | | | 5.7 | | | $ | 5.8 | | | 5.7 | |
| Balance at end of period | 5.8 | | | 5.7 | | | 5.8 | | | 5.7 | |
| Additional paid-in capital | | | | | | | |
| Balance at beginning of period | 96.2 | | | 59.1 | | | 55.7 | | | 75.6 | |
| Stock options exercised | 7.8 | | | 24.4 | | | 2.0 | | | 10.8 | |
| Purchases of common stock | (105.6) | | | — | | | (56.3) | | | — | |
| Stock-based compensation | 4.4 | | | 4.3 | | | 1.4 | | | 1.4 | |
| Balance at end of period | 2.8 | | | 87.8 | | | 2.8 | | | 87.8 | |
| Retained earnings | | | | | | | |
| Balance at beginning of period | 2,970.9 | | | 2,689.6 | | | 3,171.6 | | | 2,818.3 | |
| Net earnings | 841.3 | | | 693.8 | | | 284.6 | | | 243.5 | |
| Dividends paid in cash | (534.4) | | | (482.6) | | | (177.5) | | | (161.0) | |
| Translation adjustment upon merger of foreign subsidiary | 0.9 | | | — | | | — | | | — | |
| Purchases of common stock | (39.0) | | | — | | | (39.0) | | | — | |
| Balance at end of period | 3,239.7 | | | 2,900.8 | | | 3,239.7 | | | 2,900.8 | |
| Accumulated other comprehensive loss | | | | | | | |
| Balance at beginning of period | (30.7) | | | (21.2) | | | (54.4) | | | (18.8) | |
| Other comprehensive loss | (56.4) | | | (8.4) | | | (32.7) | | | (10.8) | |
| Balance at end of period | (87.1) | | | (29.6) | | | (87.1) | | | (29.6) | |
| Total stockholders' equity | $ | 3,161.2 | | | 2,964.7 | | | $ | 3,161.2 | | | 2,964.7 | |
| | | | | | | |
| Cash dividends paid per share of common stock | $ | 0.93 | | | $ | 0.84 | | | $ | 0.31 | | | $ | 0.28 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
FASTENAL COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Amounts in millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited) | | (Unaudited) |
| | Nine Months Ended
September 30, | | Three Months Ended
September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Cash flows from operating activities: | | | | | | | |
| Net earnings | $ | 841.3 | | | 693.8 | | | $ | 284.6 | | | 243.5 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | |
| Depreciation of property and equipment | 123.8 | | | 119.0 | | | 41.4 | | | 40.1 | |
| Loss (gain) on sale of property and equipment | 1.2 | | | (1.1) | | | (1.1) | | | 0.2 | |
| Bad debt expense | (0.9) | | | 0.8 | | | (1.3) | | | 0.9 | |
| Deferred income taxes | 4.3 | | | 2.3 | | | 3.8 | | | 1.6 | |
| Stock-based compensation | 4.4 | | | 4.3 | | | 1.4 | | | 1.4 | |
| Amortization of intangible assets | 8.1 | | | 8.1 | | | 2.7 | | | 2.7 | |
| Changes in operating assets and liabilities: | | | | | | | |
| Trade accounts receivable | (222.9) | | | (182.2) | | | (13.6) | | | (44.2) | |
| Inventories | (176.9) | | | (66.5) | | | (26.3) | | | (77.1) | |
| Other current assets | 15.9 | | | (22.3) | | | (43.0) | | | (15.9) | |
| Accounts payable | 44.1 | | | 49.9 | | | (14.6) | | | 20.8 | |
| Accrued expenses | (15.9) | | | 5.9 | | | 13.7 | | | 0.1 | |
| Income taxes | 5.3 | | | — | | | 3.3 | | | (8.1) | |
| Other | 7.3 | | | 1.7 | | | 6.9 | | | 1.4 | |
| Net cash provided by operating activities | 639.1 | | | 613.7 | | | 257.9 | | | 167.4 | |
| | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Purchases of property and equipment | (131.0) | | | (114.7) | | | (48.0) | | | (47.4) | |
| Proceeds from sale of property and equipment | 10.1 | | | 7.7 | | | 3.6 | | | 1.9 | |
| Other | (0.7) | | | — | | | (0.1) | | | (0.1) | |
| Net cash used in investing activities | (121.6) | | | (107.0) | | | (44.5) | | | (45.6) | |
| | | | | | | |
| Cash flows from financing activities: | | | | | | | |
| Proceeds from debt obligations | 1,390.0 | | | 300.0 | | | 695.0 | | | 135.0 | |
| Payments against debt obligations | (1,225.0) | | | (340.0) | | | (645.0) | | | (175.0) | |
| Proceeds from exercise of stock options | 7.8 | | | 24.4 | | | 2.0 | | | 10.8 | |
| Purchases of common stock | (144.6) | | | — | | | (95.3) | | | — | |
| Payments of dividends | (534.4) | | | (482.6) | | | (177.5) | | | (161.0) | |
| Net cash used in financing activities | (506.2) | | | (498.2) | | | (220.8) | | | (190.2) | |
| | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | (16.0) | | | (3.7) | | | (9.0) | | | (2.9) | |
| | | | | | | |
| Net (decrease) increase in cash and cash equivalents | (4.7) | | | 4.8 | | | (16.4) | | | (71.3) | |
| | | | | | | |
| Cash and cash equivalents at beginning of period | 236.2 | | | 245.7 | | | 247.9 | | | 321.8 | |
| Cash and cash equivalents at end of period | $ | 231.5 | | | 250.5 | | | $ | 231.5 | | | 250.5 | |
| | | | | | | |
| Supplemental information: | | | | | | | |
| Cash paid for interest | $ | 9.2 | | | 7.6 | | | $ | 4.2 | | | 2.6 | |
| Net cash paid for income taxes | $ | 257.3 | | | 210.7 | | | $ | 81.9 | | | 78.0 | |
| Leased assets obtained in exchange for new operating lease liabilities | $ | 74.0 | |
| 83.4 | | | $ | 18.4 | | | 17.8 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in millions except share and per share information and where otherwise noted)
September 30, 2022 and 2021
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Fastenal Company and subsidiaries (collectively referred to as the company, Fastenal, or by terms such as we, our, or us) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. They do not include all information and footnotes required by U.S. GAAP for complete financial statements. However, except as described herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in our consolidated financial statements as of and for the year ended December 31, 2021. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Immaterial Revision
The prior period balances for additional paid-in capital and common stock have been updated in the Condensed Consolidated Statements of Stockholders' Equity to reflect the impact of an immaterial correction which reclassified $2.9 from additional paid-in capital to common stock in connection with the 2019 stock split.
Recently Issued Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to U.S. GAAP on contract modifications, hedging relationships, and other transactions affected by reference rate reform to ease entities' financial reporting burdens as the market transitions from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made, hedging relationships entered into, and other transactions affected by reference rate reform, evaluated on or before December 31, 2022, beginning during the reporting period in which the guidance has been elected. We do not have any receivables, hedging relationships, lease agreements, or debt agreements that reference LIBOR or another reference rate expected to be discontinued. On September 28, 2022, we amended and restated our unsecured revolving credit agreement. At the same time, we also amended our master note agreement. As a result of the various changes made, our floating rate debt no longer references a LIBOR based benchmark rate. Therefore, we will not be electing the optional practical expedients associated with this ASU.
(2) Revenue
Revenue Recognition
Net sales include products and shipping and handling charges, net of estimates for product returns, and any related sales incentives. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue by transferring control of the promised products to the customer, with the majority of revenue recognized at the point in time the customer obtains control of the products. We recognize revenue for shipping and handling charges at the time the products are delivered to or picked up by the customer. We estimate product returns based on historical return rates. Using probability assessments, we estimate sales incentives expected to be paid over the term of the contract. The majority of our contracts have a single performance obligation and are short term in nature. Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. Revenues are attributable to countries based on the selling location from which the sale occurred.
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in millions except share and per share information and where otherwise noted)
September 30, 2022 and 2021
(Unaudited)
Disaggregation of Revenue
Our revenues related to the following geographic areas were as follows for the periods ended September 30:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine-month Period | | Three-month Period |
| 2022 | | 2021 | | 2022 | | 2021 |
| United States | $ | 4,445.1 | | | 3,753.6 | | | $ | 1,516.7 | | | 1,307.5 | |
| Canada and Mexico | 666.5 | | | 558.8 | | | 228.1 | | | 189.9 | |
| North America | 5,111.6 | | | 4,312.4 | | | 1,744.8 | | | 1,497.4 | |
| All other foreign countries | 173.4 | | | 166.6 | | | 57.6 | | | 56.8 | |
| Total revenues | $ | 5,285.0 | | | 4,479.0 | | | $ | 1,802.4 | | | 1,554.2 | |
The percentages of our sales by end market were as follows for the periods ended September 30:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine-month Period | | Three-month Period |
| 2022 | | 2021 | | 2022 | | 2021 |
| Manufacturing | 72.0 | % | | 68.6 | % | | 72.9 | % | | 68.9 | % |
| Non-residential construction | 10.4 | % | | 11.2 | % | | 10.2 | % | | 11.3 | % |
| Other | 17.6 | % | | 20.2 | % | | 16.9 | % | | 19.8 | % |
| 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
The percentages of our sales by product line were as follows for the periods ended September 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine-month Period | | Three-month Period |
| Type | Introduced | 2022 | | 2021 | | 2022 | | 2021 |
Fasteners (1) | 1967 | 34.3 | % | | 33.2 | % | | 34.1 | % | | 33.4 | % |
| Tools | 1993 | 8.3 | % | | 8.6 | % | | 8.4 | % | | 8.5 | % |
| Cutting tools | 1996 | 5.0 | % | | 5.0 | % | | 5.0 | % | | 5.0 | % |
| Hydraulics & pneumatics | 1996 | 6.6 | % | | 6.4 | % | | 6.6 | % | | 6.5 | % |
| Material handling | 1996 | 5.7 | % | | 5.5 | % | | 5.6 | % | | 5.5 | % |
| Janitorial supplies | 1996 | 8.0 | % | | 8.2 | % | | 8.1 | % | | 8.3 | % |
| Electrical supplies | 1997 | 4.4 | % | | 4.3 | % | | 4.5 | % | | 4.3 | % |
| Welding supplies | 1997 | 3.8 | % | | 3.8 | % | | 3.9 | % | | 3.8 | % |
| Safety supplies | 1999 | 20.6 | % | | 21.2 | % | | 20.5 | % | | 21.1 | % |
| Other | | 3.3 | % | | 3.8 | % | | 3.3 | % | | 3.6 | % |
| | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
(1) The fasteners product line represents fasteners and miscellaneous supplies.
(3) Stockholders' Equity
Dividends
On October 12, 2022, our board of directors declared a quarterly dividend of $0.31 per share of common stock to be paid in cash on November 23, 2022 to shareholders of record at the close of business on October 27, 2022. Since 2011, we have paid quarterly cash dividends, and in 2020, we paid a special cash dividend late in the year. Future determination as to payment of dividends will depend on the financial condition and results of operations of the company and such other factors as are deemed relevant by the board of directors.
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in millions except share and per share information and where otherwise noted)
September 30, 2022 and 2021
(Unaudited)
The following table presents the cash dividends either paid previously or declared by our board of directors for future payment on a per share basis:
| | | | | | | | | | | |
| 2022 | | 2021 |
| First quarter | $ | 0.31 | | | $ | 0.28 | |
| Second quarter | $ | 0.31 | | | $ | 0.28 | |
| Third quarter | $ | 0.31 | | | $ | 0.28 | |
| Fourth quarter | $ | 0.31 | | | $ | 0.28 | |
| Total | $ | 1.24 | | | $ | 1.12 | |
Stock Options
The following tables summarize the details of options granted under our stock option plans that were outstanding as of September 30, 2022, and the assumptions used to value these grants. All such grants were effective at the close of business on the date of grant.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options
Granted | | Option Exercise
(Strike) Price | | Closing Stock Price on Date
of Grant | | September 30, 2022 |
| Date of Grant | | | | Options
Outstanding | | Options
Exercisable |
| January 3, 2022 | 713,438 | | | $ | 62.00 | | | $ | 61.980 | | | 689,415 | | | 53,355 | |
| January 4, 2021 | 741,510 | | | $ | 48.00 | | | $ | 47.650 | | | 676,305 | | | 26,643 | |
| January 2, 2020 | 902,263 | | | $ | 38.00 | | | $ | 37.230 | | | 774,842 | | | 266,832 | |
| January 2, 2019 | 1,316,924 | | | $ | 26.00 | | | $ | 25.705 | | | 942,372 | | | 411,536 | |
| January 2, 2018 | 1,087,936 | | | $ | 27.50 | | | $ | 27.270 | | | 693,780 | | | 420,712 | |
| January 3, 2017 | 1,529,578 | | | $ | 23.50 | | | $ | 23.475 | | | 675,420 | | | 516,344 | |
| April 19, 2016 | 1,690,880 | | | $ | 23.00 | | | $ | 22.870 | | | 498,563 | | | 375,563 | |
| April 21, 2015 | 1,786,440 | | | $ | 21.00 | | | $ | 20.630 | | | 363,211 | | | 286,051 | |
| April 22, 2014 | 1,910,000 | | | $ | 28.00 | | | $ | 25.265 | | | 137,868 | | | 137,868 | |
| Total | 11,678,969 | | | | | | | 5,451,776 | | | 2,494,904 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date of Grant | Risk-free
Interest Rate | | Expected Life of
Option in Years | | Expected
Dividend
Yield | | Expected
Stock
Volatility | | Estimated Fair
Value of Stock
Option |
| January 3, 2022 | 1.3 | % | | 5.00 | | 1.7 | % | | 28.52 | % | | $ | 13.68 | |
| January 4, 2021 | 0.4 | % | | 5.00 | | 2.0 | % | | 29.17 | % | | $ | 9.57 | |
| January 2, 2020 | 1.7 | % | | 5.00 | | 2.4 | % | | 25.70 | % | | $ | 6.81 | |
| January 2, 2019 | 2.5 | % | | 5.00 | | 2.9 | % | | 23.96 | % | | $ | 4.40 | |
| January 2, 2018 | 2.2 | % | | 5.00 | | 2.3 | % | | 23.45 | % | | $ | 5.02 | |
| January 3, 2017 | 1.9 | % | | 5.00 | | 2.6 | % | | 24.49 | % | | $ | 4.20 | |
| April 19, 2016 | 1.3 | % | | 5.00 | | 2.6 | % | | 26.34 | % | | $ | 4.09 | |
| April 21, 2015 | 1.3 | % | | 5.00 | | 2.7 | % | | 26.84 | % | | $ | 3.68 | |
| April 22, 2014 | 1.8 | % | | 5.00 | | 2.0 | % | | 28.55 | % | | $ | 4.79 | |
All of the options in the tables above vest and become exercisable over a period of up to eight years. Generally, each option will terminate approximately ten years after the grant date.
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in millions except share and per share information and where otherwise noted)
September 30, 2022 and 2021
(Unaudited)
The fair value of each share-based option is estimated on the date of grant using a Black-Scholes valuation method that uses the assumptions listed above. The risk-free interest rate is based on the U.S. Treasury rate over the expected life of the option at the time of grant. The expected life is the average length of time over which we expect the employee groups will exercise their options, which is based on historical experience with similar grants. The dividend yield is estimated over the expected life of the option based on our current dividend payout, historical dividends paid, and expected future cash dividends. Expected stock volatilities are based on the movement of our stock price over the most recent historical period equivalent to the expected life of the option.
Compensation expense equal to the grant date fair value is recognized for all of these awards over the vesting period. The stock-based compensation expense for the nine-month periods ended September 30, 2022 and 2021 was $4.4 and $4.3, respectively, and the third quarter of 2022 and 2021 was $1.4 and $1.4, respectively. Unrecognized stock-based compensation expense related to outstanding unvested stock options as of September 30, 2022 was $15.8 and is expected to be recognized over a weighted average period of 4.23 years. Any future changes in estimated forfeitures will impact this amount.
Earnings Per Share
The following tables present a reconciliation of the denominators used in the computation of basic and diluted earnings per share and a summary of the options to purchase shares of common stock which were excluded from the diluted earnings per share calculation because they were anti-dilutive:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine-month Period | | Three-month Period |
| Reconciliation | 2022 | | 2021 | | 2022 | | 2021 |
| Basic weighted average shares outstanding | 574,667,188 | | | 574,637,254 | | | 573,019,381 | | | 574,973,196 | |
| Weighted shares assumed upon exercise of stock options | 1,912,011 | | | 2,291,000 | | | 1,724,550 | | | 2,286,643 | |
| Diluted weighted average shares outstanding | 576,579,199 | | | 576,928,254 | | | 574,743,931 | | | 577,259,839 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine-month Period | | Three-month Period |
| Summary of Anti-dilutive Options Excluded | 2022 | | 2021 | | 2022 | | 2021 |
| Options to purchase shares of common stock | 1,343,160 | | | 680,227 | | | 1,340,567 | | | 688,410 | |
| Weighted average exercise prices of options | $ | 55.23 | | | 48.00 | | | $ | 55.22 | | | 48.00 | |
Any dilutive impact summarized above related to periods when the average market price of our stock exceeded the exercise price of the potentially dilutive stock options then outstanding.
Translation Adjustment Upon Merger of Foreign Subsidiary
Retained earnings for the nine-month period ended September 30, 2022, includes $0.9 of historical cumulative translation upon the merger of a foreign subsidiary recognized in March 2022.
(4) Income Taxes
We file income tax returns in the United States federal jurisdiction, all states, and various local and foreign jurisdictions. We are no longer subject to income tax examinations by taxing authorities for taxable years before 2018 in the case of United States federal examinations, and with limited exceptions, before 2017 in the case of foreign, state, and local examinations. During the first nine months of 2022, there were no material changes in unrecognized tax benefits.
During 2020, we deferred approximately $30.0 in payroll taxes as allowed under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), which was signed into law in March 2020 to help businesses navigate COVID-19 related challenges. The deferred payroll taxes were paid during the third quarter of 2021.
(5) Operating Leases
Certain operating leases for pick-up trucks contain residual value guarantee provisions which would generally become due at the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value. The aggregate residual value guarantee related to these leases is approximately $86.6. We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote.
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in millions except share and per share information and where otherwise noted)
September 30, 2022 and 2021
(Unaudited)
(6) Debt Commitments
Credit Facility, Notes Payable, and Commitments
Debt obligations and letters of credit outstanding at the end of each period consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Average Interest Rate at September 30, 2022 | | | | Debt Outstanding |
| | Maturity
Date | | September 30,
2022 | | December 31,
2021 |
| Unsecured revolving credit facility | 3.94 | % | | September 28, 2027 | | $ | 225.0 | | | 25.0 | |
| Senior unsecured promissory notes payable, Series B | 2.45 | % | | July 20, 2022 | | — | | | 35.0 | |
| Senior unsecured promissory notes payable, Series C | 3.22 | % | | March 1, 2024 | | 60.0 | | | 60.0 | |
| Senior unsecured promissory notes payable, Series D | 2.66 | % | | May 15, 2025 | | 75.0 | | | 75.0 | |
| Senior unsecured promissory notes payable, Series E | 2.72 | % | | May 15, 2027 | | 50.0 | | | 50.0 | |
| Senior unsecured promissory notes payable, Series F | 1.69 | % | | June 24, 2023 | | 70.0 | | | 70.0 | |
| Senior unsecured promissory notes payable, Series G | 2.13 | % | | June 24, 2026 | | 25.0 | | | 25.0 | |
| Senior unsecured promissory notes payable, Series H | 2.50 | % | | June 24, 2030 | | 50.0 | | | 50.0 | |
| Total | | | | | 555.0 | | | 390.0 | |
| Less: Current portion of debt | | | | | (150.3) | | | (60.0) | |
| Long-term debt | | | | | $ | 404.7 | | | 330.0 | |
| | | | | | | |
| Outstanding letters of credit under unsecured revolving credit facility - contingent obligation | | | | | $ | 36.3 | | | 36.3 | |
Unsecured Revolving Credit Facility
We have an $835.0 committed unsecured revolving credit facility (Credit Facility) with an uncommitted accordion option to increase the aggregate revolving commitment by an additional $365.0 for a total commitment of $1,200.0. The Credit Facility includes a committed letter of credit subfacility of $55.0. Any borrowings outstanding under the Credit Facility for which we have the ability and intent to pay using cash within the next twelve months will be classified as a current liability. The Credit Facility contains certain financial and other covenants, and our right to borrow under the Credit Facility is conditioned upon, among other things, our compliance with these covenants. We are currently in compliance with these covenants.
Borrowings under the Credit Facility generally bear interest at a rate per annum equal to Daily Simple SOFR plus a 0.10% spread adjustment plus 0.95%. We pay a commitment fee for the unused portion of the Credit Facility. This fee is either 0.10% or 0.125% per annum based on our usage of the Credit Facility.
Senior Unsecured Promissory Notes Payable
We have issued senior unsecured promissory notes under our master note agreement (the Master Note Agreement) in the aggregate principal amount of $330.0 as of September 30, 2022. Our aggregate borrowing capacity under the Master Note Agreement is $900.0; however, none of the institutional investors party to that agreement are committed to purchase notes thereunder. There is no amortization of these notes prior to their maturity date and interest is payable quarterly. The notes currently issued under our Master Note Agreement, including the maturity date and fixed interest rate per annum of each series of note, are contained in the table above. The Master Note Agreement contains certain financial and other covenants and we are currently in compliance with these covenants.
(7) Legal Contingencies
The nature of our potential exposure to legal contingencies is described in our 2021 annual report on Form 10-K in Note 10 of the Notes to Consolidated Financial Statements. As of September 30, 2022, there were no litigation matters that we consider to be probable or reasonably possible to have a material adverse outcome.
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in millions except share and per share information and where otherwise noted)
September 30, 2022 and 2021
(Unaudited)
(8) Subsequent Events
We evaluated all subsequent event activity and concluded that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the Notes to Condensed Consolidated Financial Statements, with the exception of the dividend declaration disclosed in Note 3 'Stockholders' Equity'.
ITEM 2 — MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. References to daily sales rate (DSR) change may reflect either growth (positive) or contraction (negative) for the applicable period.
Business
Fastenal is a North American leader in the wholesale distribution of industrial and construction supplies. We distribute these supplies through a network of approximately 3,300 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 in North 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.
Executive Overview
The following table presents a performance summary of our results of operations for the nine-month and three-month periods ended September 30, 2022 and 2021.
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| | Nine-month Period | | Three-month Period |
| | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| Net sales | $ | 5,285.0 | | | 4,479.0 | | | 18.0 | % | | $ | 1,802.4 | | | 1,554.2 | | | 16.0 | % |
| Business days | 192 | | | 191 | | | | | 64 | | | 64 | | | |
| Daily sales | $ | 27.5 | | | 23.5 | | | 17.4 | % | | $ | 28.2 | | | 24.3 | | | 16.0 | % |
| Gross profit | $ | 2,447.4 | | | 2,064.3 | | | 18.6 | % | | $ | 826.5 | | | 720.2 | | | 14.8 | % |
| % of net sales | 46.3 | % | | 46.1 | % | | | | 45.9 | % | | 46.3 | % | | |
| Operating and administrative expenses | $ | 1,326.7 | | | 1,147.8 | | | 15.6 | % | | $ | 447.3 | | | 401.8 | | | 11.3 | % |
| % of net sales | 25.1 | % | | 25.6 | % | | | | 24.8 | % | | 25.9 | % | | |
| Operating income | $ | 1,120.7 | | | 916.5 | | | 22.3 | % | | $ | 379.2 | | | 318.4 | | | 19.1 | % |
| % of net sales | 21.2 | % | | 20.5 | % | | | | 21.0 | % | | 20.5 | % | | |
| Earnings before income taxes | $ | 1,111.8 | | | 909.3 | | | 22.3 | % | | $ | 375.3 | | | 316.1 | | | 18.7 | % |
| % of net sales | 21.0 | % | | 20.3 | % | | | | 20.8 | % | | 20.3 | % | | |
| Net earnings | $ | 841.3 | | | 693.8 | | | 21.3 | % | | $ | 284.6 | | | 243.5 | | | 16.9 | % |
| Diluted net earnings per share | $ | 1.46 | | | 1.20 | | | 21.3 | % | | $ | 0.50 | | | 0.42 | | | 17.4 | % |
The table below summarizes our total and FTE (based on 40 hours per week) employee headcount, our investments related to in-market locations (defined as the sum of the total number of branch locations and the total number of active Onsite locations), and weighted Fastenal Managed Inventory (FMI) devices 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: | | | Change
Since: | | | Change
Since: |
| Q3
2022 | | Q2
2022 | Q2
2022 | | Q4
2021 | Q4
2021 | | Q3
2021 | Q3
2021 |
In-market locations - absolute employee headcount | 13,243 | | | 13,134 | | 0.8 | % | | 12,464 | | 6.3 | % | | 12,347 | | 7.3 | % |
| In-market locations - FTE employee headcount | 11,897 | | | 12,039 | | -1.2 | % | | 11,337 | | 4.9 | % | | 11,104 | | 7.1 | % |
| Total absolute employee headcount | 22,025 | | | 21,629 | | 1.8 | % | | 20,507 | | 7.4 | % | | 20,231 | | 8.9 | % |
| Total FTE employee headcount | 19,519 | | | 19,523 | | 0.0 | % | | 18,370 | | 6.3 | % | | 17,860 | | 9.3 | % |
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| Number of branch locations | 1,716 | | | 1,737 | | -1.2 | % | | 1,793 | | -4.3 | % | | 1,859 | | -7.7 | % |
| Number of active Onsite locations | 1,567 | | | 1,501 | | 4.4 | % | | 1,416 | | 10.7 | % | | 1,367 | | 14.6 | % |
| Number of in-market locations | 3,283 | | | 3,238 | | 1.4 | % | | 3,209 | | 2.3 | % | | 3,226 | | 1.8 | % |
Weighted FMI devices (MEU installed count) (1) | 99,409 | | | 96,872 | | 2.6 | % | | 92,874 | | 7.0 | % | | 90,493 | | 9.9 | % |
(1) This number excludes approximately 7,500 non-weighted devices that are part of our locker lease program.
During the last twelve months, we increased our total FTE employee headcount by 1,659. This reflects an increase in our in-market and non-in-market selling FTE employee headcount of 1,131 to support growth in the marketplace and sales initiatives targeting customer acquisition. We had an increase in our distribution center FTE employee headcount of 329 to support increasing product throughput at our facilities and to expand our local inventory fulfillment terminals (LIFTs). We had an increase in our remaining FTE employee headcount of 199 that relates primarily to personnel investments in information technology, manufacturing, and operational support, such as purchasing and product development.
We opened three branches in the third quarter of 2022 and closed 24 branches, net of conversions. We activated 92 Onsite locations in the third quarter of 2022 and closed 26, net of conversions. In any period, the number of closings tends 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. 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.
THIRD QUARTER OF 2022 VERSUS THIRD QUARTER OF 2021
Results of Operations
The following table sets forth condensed consolidated statement of earnings information (as a percentage of net sales) for the periods ended September 30:
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| Three-month Period |
| | 2022 | | 2021 |
| Net sales | 100.0 | % | | 100.0 | % |
| Gross profit | 45.9 | % | | 46.3 | % |
| Operating and administrative expenses | 24.8 | % | | 25.9 | % |
| Operating income | 21.0 | % | | 20.5 | % |
| Net interest expense | -0.2 | % | | -0.2 | % |
| Earnings before income taxes | 20.8 | % | | 20.3 | % |
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| Note – Amounts may not foot due to rounding difference. | | | |
Net Sales
The table below sets forth net sales and daily sales for the periods ended September 30, and changes in such sales from the prior period to the more recent period:
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| | Three-month Period |
| | 2022 | | 2021 |
| Net sales | $ | 1,802.4 | | | 1,554.2 | |
| Percentage change |