Item 7. Management’s Discussion and Analysis
ITEM 7. 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 consolidated financial statements and should be read in conjunction with those consolidated financial statements. This section of this 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-date comparisons between 2020 and 2019 that are not included in this Form 10-K, can be found in 'Management's Discussion and Analysis of Financial Condition and Results of Operations' in Part II, Item 7 of our annual report on Form 10-K for the fiscal year ended December 31, 2020. Italicized discussions throughout Item 7 of this Form 10-K indicate discussions of financial condition and results of operations in 2020.
Business and Operational Overview
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 are 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.
It is helpful to appreciate several aspects of our marketplace: (1) It's big. We estimate the North American marketplace for industrial supplies is in excess of $140 billion per year (and we have expanded beyond North America) and no company has a significant portion of this market. (2) Many of the products we sell are individually inexpensive, but the cost and time to manage, procure, and transport these products can be quite meaningful. (3) Purchasing professionals often expend disproportionate effort managing the high stock keeping unit (SKU) count of low-volume, low value MRO supplies which is better allocated to their higher volume, higher value OEM supplies. (4) Many customers prefer to reduce their number of suppliers to simplify their business, while also utilizing various technologies and models (including our local branches when they need something quickly or unexpectedly) to improve availability and reduce waste. (5) We believe the markets are efficient. In our view, this means that companies that grow market share are those that develop differentiated capabilities that provide the greatest value to the customer.
Our approach to addressing these aspects of our marketplace is captured in our motto Where Industry Meets Innovation ™ . The concept of growth is simple: find more customers every day and increase our activity with them. However, execution is hard work. First, we recruit service-minded individuals to support customers and empower them to operate in a decentralized fashion to maximize their flexibility to solve customer problems. We support these customer-facing resources with a supply chain capability that is speedy, efficient, and cost-effective. This has formed the foundation of our high-touch model since inception. Second, we invest in, develop, and deploy capabilities that allow us to illuminate and provide greater control over a customer's supply chain. These capabilities range from service models that take advantage of our local presence and/or our ability to more efficiently manage complex procurement needs, to hardware and software technologies that promote actionable data capture, improve operating efficiencies and reduce supply chain risk. Third, we strive to generate strong profits, which produce the cash flow necessary to support our growth, our product and technology development, and the needs of our customers.
The ultimate aim of this 'high-tech, high-touch' approach to gaining market share is to allow us to get closer to our customers, going so far as to be right to the point of consumption within customers' facilities. Marrying our presence, capabilities and technologies deepens our relationships and our understanding of our customers' day-to-day opportunities and obstacles. This, in turn, enhances our ability to provide innovative and comprehensive solutions to our customers' challenges. By doing these things every day, Fastenal remains a growth-centric organization.
Impact of COVID-19 on Our Business
In the second quarter of 2020, the impacts of the COVID-19 pandemic on our business were dramatic in two respects. First, local and national actions taken, such as stay-at-home mandates, reduced business activity sharply as many customers either closed their locations or operated at significantly diminished capacity. This effect was illustrated in a significant decline in sales for our fastener products. Second, social actions taken to mitigate the effects of the pandemic produced significant demand for personal protection equipment (PPE) and sanitation products, generating significant sales of such products not only to certain traditional customers but also to state and local government entities as well as front line responders. This effect was illustrated by a significant increase in sales for our safety products. During that period, improved sales of PPE and sanitation products
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more than offset the general economic weakness. These dynamics affected our business throughout the second quarter of 2020, but the effects were greatest in April, with sequential improvements in May and June as business restrictions gradually eased.
The pandemic continued to have a significant impact on our business in the third and fourth quarters of 2020. The marketplace broadly, and Fastenal specifically, continued to operate with certain modifications to balance re-opening with employee and customer safety. However, most of the markets in which we operate began to normalize in the second half of 2020. This improved the outlook of the manufacturing and construction customers that support our traditional branch and Onsite business and moderated the level of demand for PPE and sanitation products that we experienced at the onset of the pandemic. The sequential gains in economic activity that we experienced in the latter part of the second quarter of 2020 continued through the third and fourth quarters of 2020.
In 2021, we saw several distinct business patterns, which mostly persisted throughout the period. First, economic normalization continued, resulting in strong demand from our traditional manufacturing and non-residential construction customers. Second, the pandemic continued, with ebbs and flows in infections during the year. This resulted in businesses, including Fastenal, continuing to take steps to promote workforce and customer health and safety. However, in contrast to the early part of 2020, the pandemic was not primarily responsible for plant shutdowns or production cuts; companies navigated the pandemic mostly without curtailing operations. Third, this combination of strong demand coupled with ongoing adaptations to the pandemic resulted in a number of stresses accompanying economic growth: supply chain disruption, labor force constraints, and product and shipping inflation. As a result, while the economic backdrop was solid throughout 2021, satisfying customer demand was challenged by difficulty in procuring materials, retaining sufficient part- and full-time labor to service existing customers and acquire new ones, and offsetting inflation. We exited 2021 with each of those dynamics still largely intact.
At the height of the pandemic, and consistent with broader social trends, we took steps to safeguard the health of our employees and customers. This included closing facilities to outside personnel, adjusting work schedules, spaces and technologies to allow for social distancing, providing ample PPE and cleaning supplies, and having formal mitigation policies in the event of infection. These precautions allowed our operations to continue to function effectively. At the end of 2021, our operations were operating mostly normally, although we continue to practice social distancing within our facilities, make PPE and cleaning supplies available, and follow our mitigation policies when an infection is identified. The pandemic has not precipitated any issues with our internal controls, financial health, or liquidity, with substantially all of our $700.0 bank revolver available for use.
There remains significant uncertainty concerning the duration of the COVID-19 pandemic as well as the severity of any future infection surges. As a result, future events deriving from COVID-19 may negatively impact sales and gross margin due to, among other things: limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell; an inability 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. 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 s ales increased $363.4, or 6.4%, in 2021 relative to 2020. Our gross profit increased $209.5, or 8.2%, in 2021 relative to 2020, and as a percentage of net sales increased to 46.2% in 2021 from 45.5% in 2020. Our operating income increased $75.6, or 6.6%, in 2021 relative to 2020, and as a percentage of net sales increased to 20.3% in 2021 from 20.2% in 2020.
Our net earnings in 2021 were $925.0, an increase of 7.7% when compared to 2020. Our diluted net earnings per share were $1.60 in 2021 compared to $1.49 in 2020, an increase of 7.4%.
The year 2021 was marked by a number of trends. Favorably, we experienced strong demand from our traditional manufacturing and non-residential construction customers. Unfavorably, we experienced disruption in supply chains and labor markets, exacerbated by periodic surges in COVID-19 infections, as well as significant inflation in product and transportation costs. While these variables do present challenges with respect to having sufficient product availability, and cost of service, at this point the impact of COVID-19 is primarily indirect through its influence on cyclical factors. The primary exception is in our ability to market our growth drivers, as many of our customers were focused on short-term crisis management over long-term strategic planning. As a result, the environment was not conducive to achieving the level of signings we would have
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expected under normal business conditions. These dynamics produced signings of 274 new Onsite customer locations and 19,311 weighted FASTBin/FASTVend signings in 2021.
The table below summarizes our absolute and full-time equivalent (FTE; based on 40 hours per week) employee headcount, our investments in in-market locations (defined as the sum of the total number of branch locations and the total number of active Onsite locations), and weighted FMI at the end of the periods presented and the percentage change compared to the end of the prior period.
Q4
2021 Q4
2020 Twelve-month
% Change
In-market locations - absolute employee headcount
12,464 12,680 -1.7 %
In-market locations - FTE employee headcount 11,337 11,260 0.7 %
Total absolute employee headcount 20,507 20,365 0.7 %
Total FTE employee headcount 18,370 17,836 3.0 %
Number of branch locations 1,793 2,003 -10.5 %
Number of active Onsite locations 1,416 1,265 11.9 %
Number of in-market locations 3,209 3,268 -1.8 %
Weighted FMI devices (MEU installed count) (1)
92,874 83,951 10.6 %
(1) This number excludes approximately 12,000 non-weighted devices that are part of our locker lease program.
During the last twelve months, we increased o ur total FTE employee headc ount by 534. This reflects an increase in our in-market and non-in-market selling FTE employee headcount of 230 to support growth in the marketplace and sales initiatives targeting customer acquisition. We had an increase in our distribution center FTE employee headcount of 149 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 155 that relates primarily to personnel investments in information technology and operational support, such as purchasing and product development.
We opened two branches in the fourth quarter of 2021 and closed 68 branches, net of conversions. We activated 65 Onsite locations in the fourth quarter of 2021 and closed 16, net of conversions. In 2021, we opened ten branches and closed 220, net of conversions. In 2021, we activated 242 Onsite locations and closed 91, net of conversions. In any period, the number of closings tend to reflect both normal churn in our business, whether due to redefinin g 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 n etwork 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 consolidated statements of earnings information (as a percentage of net sales) for the periods ended December 31:
2021 2020 2019
Net sales 100.0 % 100.0 % 100.0 %
Gross profit 46.2 % 45.5 % 47.2 %
Operating and administrative expenses 26.0 % 25.3 % 27.3 %
Operating income 20.3 % 20.2 % 19.8 %
Net interest expense -0.2 % -0.2 % -0.3 %
Earnings before income taxes 20.1 % 20.1 % 19.6 %
Note – Amounts may not foot due to rounding difference.
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Net Sales
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. The table below sets forth net sales and daily sales for the periods ended December 31, and changes in such sales from the prior period to the more recent period:
2021 2020 2019
Net sales $ 6,010.9 5,647.3 5,333.7
Percentage change 6.4 % 5.9 % 7.4 %
Business days 253 255 254
Daily sales $ 23.8 22.1 21.0
Percentage change 7.3 % 5.5 % 7.4 %
Daily sales impact of currency fluctuations 0.6 % -0.1 % -0.3 %
Daily sales impact of acquisitions 0.0 % 0.0 % 0.1 %
The increase in net sales noted above for 2021 was due to higher unit sales of industrial products to traditional manufacturing and construction customers and higher pricing, only partly offset by lower pandemic-related PPE sales as the prior year's demand surge did not recur.
Higher unit sales in 2021 were a result of strong economic activity which increased demand for our products to our traditional manufacturing and construction customers. Although economic strength was fairly consistent throughout the year, our growth patterns were not, primarily due to comparisons related to the timing of pandemic-related PPE sales in the previous year. For instance, our daily sales growth in the first half of 2021 was 2.5%. Our cyclical product categories substantially outperformed this, as exemplified by fastener daily sales growth of 15.4% in the first half of 2021. However, this was mostly offset by the absence of significant spending for PPE that occurred in the previous period, which is best illustrated by safety products' daily sales decline of 20.2% in first half of 2021. By contrast, our daily sales growth in the second half of 2021 was a much stronger 12.3%. Our cyclical product categories continued to outperform with fastener daily sales having grown 22.2% in the second half of 2021. While certain products and markets within our business continued to face difficult PPE comparisons, they were not as severe as what had been experienced in the first half of 2021, which allowed our safety products to post daily growth of 0.3% in the second half of 2021.
Our growth drivers also returned to contributing meaningfully to higher unit sales in 2021, due to strong business activity within our customer base and, to a lesser degree, a higher installed base of FMI devices. Our number of active Onsites increased 11.9%, for instance, while Onsite daily sales growth was 20.6%. Similarly, our installed base of FMI MEUs increased 10.6%, while FMI daily sales growth was 41.0%.
While demand was strong throughout 2021, the year experienced certain disruptions. The first were supply chain constraints, as the rapid recovery in demand resulted in shortages in production and shipping capacity. The second was labor shortages, which were particularly acute in the market for part-time employees. The third was the ongoing COVID-19 pandemic, which continued to produce periodic surges in infection rates. While businesses largely managed through these events as opposed to stopping production, the instability it created in worker availability exacerbated the pre-existing supply chain and labor challenges. The fourth was inflation in material costs, overseas and domestic transportation expenses, and labor wage rates. We believe the most significant impact of these disruptions was on our growth driver signings. We signed 274 Onsites in 2021, above the prior year (223 signings) but well below our goal at the start of 2021 of 375 to 400 units. Similarly, we signed 19,311 FMI MEUs, above the prior year (16,503 MEUs), but well below our goal at the start of the year of 23,000 to 25,000 MEUs. We believe many of our customers were diverting significant energy to managing the effects of supply chain, labor, COVID-19, and inflation in the short term, and it lengthened the sales cycle for our supply chain solutions.
Price contributed 200 to 230 basis points to our net sales growth in 2021. We instituted a number of pricing events during 2021 as a means of mitigating rising product and transportation costs. As these events fell more heavily into the second half of the year, price contributed an increasing amount through the period, with price in the fourth quarter of 2021 contributing 440 to 470 basis points to net sales growth.
Higher unit sales in 2020 were heavily influenced by actions taken by governments and businesses around the world to address COVID-19, which influenced the period in a couple of ways. First, by virtue of our ability to source and transport PPE, we were able to supply the needs of governments, first responders, and businesses as they worked to mitigate the effects of the pandemic on our communities and normalize business activity under more stringent safety protocols. This generated significant PPE sales through the year. We believe the best proxies for this trend was daily sales growth of our safety products of 51.0% and daily sales growth to our government and healthcare customers of 129.7%. Second, we managed the effects of business closures, disruption in labor forces and supply chains, and a reduction in general business activity that was a by-product of the responses of governments and businesses to the pandemic. The impact of this is best illustrated by several metrics. For
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instance, United States Industrial Production, which is published by the Federal Reserve, decreased 7.1% in 2020. Based on the large proportion of our sales that are derived from the United States, we believe United States Industrial Production is a good proxy for the state of our marketplace and that the significant decline in this metric is consistent with the weakness we experienced in our traditional manufacturing and construction markets. This was also reflected in the daily sales of fasteners, which is our most cyclical product line. Daily sales of fasteners declined 7.2% in 2020. Although traditional manufacturing and construction business activity has gradually, but steadily, improved from depressed second quarter of 2020 levels, it did remain negative through the year. Taking these two variables together, higher unit sales of PPE more than offset the decline in unit sales in our traditional manufacturing and construction business, resulting in higher net unit sales in 2020.
Our growth drivers did not contribute meaningfully to higher unit sales in 2020, which we believe is largely a function of difficulties gaining access to customers and facilities due to social distancing and safety guidelines in response to COVID-19. We signed 16,417 industrial vending devices during 2020, a decrease of 24.9% from 2019. This did increase our installed base to 95,733 devices at the end of 2020, an increase of 6.4% over 2019, but this increase was not sufficient to offset reduced throughput per device. As a result, sales through our vending devices declined at a low single-digit rate during 2020. We activated 257 new Onsite locations in 2020, a decrease of 17.6% over 2019. This allowed us to increase our active sites to 1,265 at the end of 2020, an increase of 13.6% over 2019, but this increase was not sufficient to offset significant sales declines in our older, more established Onsite locations. As a result, sales through our Onsite locations declined at a low single-digit rate during 2020. We did experience growth in our National Account customers of 6.7% in 2020 compared to 2019, though this was due to the sale of PPE to customers navigating the challenges of operating during a pandemic.
Sales by Product Line
The approximate mix of sales from fasteners, safety supplies, and all other product lines was as follows:
2021 2020 2019
Fasteners 33.3% 29.9% 34.2%
Safety supplies 21.2% 25.5% 17.9%
Other product lines 45.5% 44.6% 47.9%
The shifts in product mix over the last two years reflect the impact of the pandemic. In 2020, actions taken by governments and businesses to address COVID-19 caused a significant decline in economic activity that produced sales declines in our cyclical products, such as fasteners, but increased demand for PPE and produced sales growth in our safety products. The effect was to reduce our mix of sales coming from fasteners and other product lines while increasing the mix of sales coming from safety products. In 2021, these dynamics reversed with economic recovery generating strong growth in our cyclical product lines while the absence of surge sales and stabilization in the supply chain for PPE restrained growth in safety products. The effect was to increase our mix of sales coming from fasteners and other product lines while reducing the mix of sales coming from safety products.
Our product categories did not fully revert to pre-pandemic levels in 2021, as our mix of safety products in 2021 of 21.2% remained meaningfully above our mix of safety products in 2019 of 17.9%. In the short term, the pandemic has created heightened safety and sanitation protocols relative to the pre-pandemic period, and the increased use of related products as a result has increased our mix of safety products sales.
Shifts in product mix in 2020 largely reflects the factors that impacted our sales growth in the period. Specifically, strong demand for PPE generated strong sales growth in our safety products, while weak trends in underlying conditions affected our traditional manufacturing and construction customers resulting in a sales decline in our fastener products. The effect on other products was relatively muted, as certain lines benefited from pandemic-related demand (such as janitorial products), while others were negatively impacted by underlying demand (such as metal cutting and material handling).
Annual Sales Changes, Sequential Trends, and End Market Performance
This section focuses on three distinct views of our business – annual sales changes by month, sequential trends, and end market performance. The first discussion regarding sales changes by month provides a good mechanical view of our business. The second discussion provides a framework for understanding the sequential trends (that is, comparing a month to the immediately preceding month, and also looking at the cumulative change from an earlier benchmark month) in our business. Finally, we believe the third discussion regarding end market performance provides insight into activities with our various types of customers.
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Annual Sales Changes, by Month
During the months noted below, all of our selling locations, when combined, had daily sales growth (contraction) rates of (compared to the same month in the preceding year):
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
2021 6.5 % 1.5 % 7.5 % 1.2 % -3.2 % 1.7 % 9.7 % 9.0 % 11.1 % 14.1 % 13.2 % 16.5 %
2020 3.6 % 4.7 % 0.2 % 6.7 % 14.8 % 9.5 % 2.6 % 2.5 % 2.2 % 4.1 % 6.8 % 9.3 %
2019 13.3 % 10.5 % 12.7 % 7.4 % 9.5 % 7.0 % 6.1 % 6.3 % 5.8 % 4.3 % 5.7 % 1.0 %
Sequential Trends
We find it helpful to think about the monthly sequential changes in our business using the analogy of climbing a stairway – This stairway has several predictable landings where there is a pause in the sequential gain (i.e. April, July, and October to December), but generally speaking, climbs from January to October. The October landing then establishes the benchmark for the start of the next year.
History has identified these landings in our business cycle. They generally relate to months where certain holidays impair business days and/or seasons impact certain end markets, particularly non-residential construction. The first landing centers on Easter and the Good Friday holiday that precedes it, which in any given year can fall in March or April, the second landing centers on July 4th, and the third landing centers on the approach of winter with its seasonal impact on primarily our non-residential construction business and with the Christmas/New Year holidays. The holidays we noted impact the trends because they either move from month-to-month or because they move around during the week.
The table below shows the pattern to the sequential change in our daily sales. The line labeled 'Benchmark' is a historical average of our sequential daily sales change for the trailing five year average (2015-2019). We have excluded 2020 from the average as the effects of the pandemic created unusual sequential patterns that we do not consider representative of normal trends. We believe this time frame serves to show the historical pattern and could serve as a benchmark for current performance. The '2021', '2020', and '2019' lines represent our actual sequential daily sales changes. The '21Delta', '20Delta', and '19Delta' lines indicate the difference between the 'Benchmark' and the actual results in the respective year. Under normal circumstances, the sequential trends shown below are directly linked to fluctuations in our end markets. Further, in any given month it is possible to get significant deviation from the benchmark. However, we do not believe that fully explains the exaggerated delta between the sequential rates of change and the benchmark from March 2020 to July 2020. We believe deviation of this duration and order of magnitude is uncharacteristic in our business and is related to the dramatic impacts of the pandemic in that period.
It is important to note that these benchmarks are historical averages. In a year where demand is strong, our daily sales growth rates will tend to have more months that exceed the benchmark than fall below it. In a year where demand is weak, we will tend to have more months that fall short of the benchmark than exceed it. In both cases, there is a random element that makes it difficult to know how any single month will perform.
Jan. (1)
Feb. Mar. Apr. May June July Aug. Sept. Oct. Cumulative Change from Jan. to Oct.
Benchmark (2)
-1.0 % 1.2 % 3.1 % 0.1 % 1.7 % 1.8 % -3.4 % 3.3 % 2.2 % -2.5 % 7.5 %
2021 0.9 % -2.3 % 5.6 % -2.2 % 5.6 % 1.6 % -3.4 % 3.1 % 4.8 % 0.0 % 13.0 %
21Delta 1.9 % -3.5 % 2.5 % -2.3 % 3.9 % -0.2 % 0.0 % -0.2 % 2.6 % 2.5 % 5.5 %
2020 -1.3 % 2.5 % -0.3 % 3.9 % 10.4 % -3.3 % -10.5 % 3.8 % 2.9 % -2.6 % 5.5 %
20Delta -0.3 % 1.3 % -3.4 % 3.8 % 8.7 % -5.1 % -7.0 % 0.5 % 0.6 % -0.1 % -2.0 %
2019 -0.5 % 1.4 % 4.2 % -2.4 % 2.5 % 1.4 % -4.4 % 3.9 % 3.1 % -4.4 % 4.9 %
19Delta 0.4 % 0.2 % 1.1 % -2.5 % 0.8 % -0.4 % -1.0 % 0.6 % 0.9 % -1.9 % -2.6 %
(1) The January figures represent the percentage change from the previous October, whereas the remaining figures represent the percentage change from the previous month.
(2) The benchmark for each month is the average of the previous five years for that month (excluding the impact of the March 2017 Mansco acquisition). Surge sales associated with COVID-19 make sequential averages in 2020 unrepresentative. As a result, the 2021 benchmark uses a preceding five-year average that excludes 2020.
Note – Amounts may not foot due to rounding difference.
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A graph of the sequential daily sales change patterns discussed above, starting with a base of '100' in the previous October and ending with the next October, would be as follows:
End Market Performance
We estimate approximately 65% of our business has historically been with customers engaged in some type of manufacturing, a significant subset of which finds its way into the heavy equipment market. The daily sales growth (contraction) rates to these manufacturing customers, when compared to the same period in the prior year, were as follows:
Daily sales growth - manufacturing customers Q1 Q2 Q3 Q4 Annual
2021 5.6 % 24.5 % 20.8 % 23.8 % 18.4 %
2020 3.0 % -9.4 % -4.7 % 1.7 % -2.5 %
2019 13.4 % 9.1 % 7.7 % 5.1 % 8.8 %
Our manufacturing business consists of two subsets: the industrial production business (this is business where we supply products that become part of the finished goods produced by our customers and is sometimes referred to as OEM - original equipment manufacturing) and the maintenance portion (this is business where we supply products that maintain the facility or the equipment of our customers engaged in manufacturing and is sometimes referred to as MRO - maintenance, repair, and operations). The industrial business is more fastener centered, while the maintenance portion is represented by all product categories.
The best way to understand the change in our industrial production business is to examine the results in our fastener product line (which, under normal business conditions, represents 30% to 35% of our business) which is heavily influenced by changes in our business with heavy equipment manufacturers. From a company perspective, daily sales growth (contraction) rates of fasteners, when compared to the same period in the prior year, were as follows (note: this information includes all end markets):
Daily sales growth - fasteners Q1 Q2 Q3 Q4 Annual
2021 4.0 % 28.4 % 20.2 % 24.2 % 18.8 %
2020 -2.6 % -16.4 % -6.9 % -2.3 % -7.2 %
2019 11.8 % 5.5 % 3.0 % 1.8 % 5.5 %
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By contrast, the best way to understand the change in the maintenance portion of the manufacturing business is to examine the results in our non-fastener product lines. From a company perspective, daily sales growth rates of non-fasteners, when compared to the same period in the prior year, were as follows (note: this information includes all end markets):
Daily sales growth - non-fasteners Q1 Q2 Q3 Q4 Annual
2021 6.1 % -10.8 % 5.1 % 9.6 % 1.9 %
2020 6.0 % 25.6 % 7.8 % 11.2 % 12.7 %
2019 12.7 % 9.5 % 8.0 % 5.1 % 8.8 %
Two product lines, safety and janitorial, accounted for approximately 44% of total non-fastener sales in 2021. As previously disclosed, COVID-19 generated outsized growth in these two product categories in 2020 and the subsequent stabilization of the supply chain resulted in a reduction in orders and sales performance in 2021 that was well below what might normally be expected given the health of the industrial economy. As a result, the change in our non-fastener lines in 2021 and 2020 did not provide as much insight into the trends of our traditional manufacturing and construction customers as is typically the case. Still, we have sold non-fastener products through multiple cycles that do not include a pandemic and believe we can make several observations. Generally speaking, our non-fastener business is not immune to the impact of industrial cycles. However, we would typically expect it to outperform our fastener business in any cycle. This reflects three things: the non-fastener market is larger than the fastener market, we are underpenetrated in the non-fastener market relative to the fastener market, and industrial vending lends itself to sales of non-fastener products. This dynamic is visible in 2019 results.
Our non-residential construction and reseller customers have historically represented 20% to 25% of our business, though in 2021 it was slightly below the bottom of this range as our industrial customers led our sales recovery. The daily sales growth (contraction) rates to these customers, when compared to the same period in the prior year, were as follows:
Daily sales growth - non-residential construction and reseller customers Q1 Q2 Q3 Q4 Annual
2021 -6.7 % 3.5 % 7.0 % 10.3 % 3.3 %
2020 -1.2 % -10.0 % -11.5 % -8.3 % -7.8 %
2019 12.1 % 6.0 % 0.6 % 0.7 % 4.7 %
Our non-residential construction and reseller business is heavily influenced by manufacturing, oil and gas, and infrastructure spending. In 2021, improving economic business conditions, high prices for commodities such as metals and energy, and tightening facilities utilization produced improving growth rates throughout the year. In 2020 and 2019, the poor and slowing production environment, respectively and as described above, and the accompanying worsening trends for commodities such as metals and energy, caused the growth in our non-residential construction and reseller customers to slow. In 2020, this was exacerbated by project suspensions as many states and regions shut down activity in an effort to control the pandemic.
Gross Profit
The gross profit percentage during each period was as follows:
Q1 Q2 Q3 Q4 Annual
2021 45.4 % 46.5 % 46.3 % 46.5 % 46.2 %
2020 46.6 % 44.5 % 45.3 % 45.6 % 45.5 %
2019 47.7 % 46.9 % 47.2 % 46.9 % 47.2 %
Our gross profit, as a percentage of net sales, was 46.2% in 2021 and 45.5% in 2020. The gross profit percentage for 2021 increased by 70 basis points based on higher product margins, primarily for safety products and overhead/organizational leverage related to higher volumes.
During 2021, our gross profit percentage increased when compared to the prior year. This was largely due to three factors. (1) We were able to leverage overhead/organizational expenses, absorbing certain fixed and period costs related to cyclical strength in our traditional manufacturing and construction markets. (2) An improvement in product margins, particularly for safety products. In response to the pandemic in 2020, we experienced a substantial surge in demand for COVID-related safety supplies, such that these products accounted for approximately 47% of total safety product sales in 2020, up from approximately 25% of total safety product sales in 2019. As these products tended to carry a lower gross margin than non-COVID-related products, their substantial expansion in our safety product mix in 2020 caused a decline in the gross profit percentage of our safety product line. In 2021, we experienced higher demand for non-COVID-related products as the industrial economy improved and lower demand for COVID-related products as the supply chain steadied. This caused our mix of lower margin COVID-related products to decline to approximately 31% of total safety product sales, improving our overall safety product margin. (3) Our net rebates were favorable. As supply chains normalized and demand improved, we purchased more
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products through our traditional partners increasing our supplier rebates. At the same time, customer rebates moderated as spending from several key customers that purchased significant COVID-related products declined.
These variables were only partly offset by a $7.8 write-down of masks in the first quarter of 2021. The impact of price/cost was neutral to 2021, as we were able to lift prices in response to higher costs for products and transportation services. The net impact of product and customer mix was also neutral to 2021, as the benefit of relatively stronger fastener sales to product mix was negatively impacted by relatively stronger growth from larger and Onsite customers.
During 2020, our gross profit percentage decreased when compared to the prior year. This decrease was primarily caused by three variables. (1) A decline in product margin for safety and other products, which itself reflects several trends. First, in the second quarter of 2020 in order to procure supplies we utilized unfamiliar supply chains and prioritized speed of acquisition over efficiency, resulting in lower margins. Second, in the third and fourth quarters of 2020 certain pandemic related products became oversupplied, and profits on our inventory fell (masks) while other products were in such short supply that cost rose (gloves). We mitigated these effects as the year progressed, but did not eliminate them. Third, mix within these categories had a negative impact on margin, as in general COVID-related products had lower margins and increased in the mix. (2) A change in product mix. Fasteners are our largest and highest gross profit margin product line due to the high transaction cost surrounding the sourcing and supply of the product for customers. Our fastener product line declined to 29.9% of sales in 2020 from 34.2% of sales in 2019. (3) Overhead and organizational expenses. This includes the negative impact that reduced sales for certain product lines has on vendor rebates, clearance efforts to remove older and slower moving inventory, and the deleverage of certain fixed and period costs related to cyclical weakness in our traditional manufacturing and construction markets. These three adverse variables were partly offset by a better cost profile for our captive fleet. We operate our own fleet of trucks for moving product between suppliers, our distribution centers, and our in-market locations. We believe this provides us a competitive advantage in terms of our ability to move product efficiently and quickly, but there is a cost to supporting and maintaining these assets. During periods of economic weakness, it can become more difficult to charge freight to offset these costs and/or the relatively stable cost profile of these assets could result in deleverage. We successfully mitigated these challenges in 2020 by reducing movement and labor costs.
Operating and Administrative Expenses
Our operating and administrative expenses, as a percentage of net sales, increased by approximately 70 basis points to 26.0% in 2021 from 25.3% in 2020. Employee-related expenses, as a percentage of net sales, increased by approximately 80 basis points. Occupancy-related expenses, as a percentage of net sales, decreased by approximately 10 basis points. All other operating and administrative expenses, as a percentage of net sales, was largely unchanged in 2021 from 2020. Our operating and administrative expenses, as a percentage of net sales, improved to 25.3% in 2020 from 27.3% in 2019. This improvement was a function of the growth in employee-related, occupancy-related, and all other operating and administrative expenses being more modest than the growth in sales. Employee-related expenses improved the ratio of operating and administrative expenses as a percentage of sales by 140 to 145 basis points in 2020 from 2019. Occupancy-related expenses improved the ratio of operating and administrative expenses as a percentage of sales by 25 to 30 basis points in 2020 from 2019. All other operating and administrative expenses improved the ratio of operating and administrative expenses as a percentage of sales by 40 to 45 basis points in 2020 from 2019.
The growth (contraction) in employee-rela ted, occupancy-related, and al l other operating and administrative expenses (including the gain on sales of property and equipment) compared to the same periods in the preceding year, is outlined in the table below.
Approximate Percentage of Total Operating and Administrative Expenses Twelve-month Period
2021 2020 2019
Employee-related expenses 70% 11.6 % -2.0 % 5.1 %
Occupancy-related expenses 15% to 20% 3.9 % 0.3 % 2.8 %
All other operating and administrative expenses 10% to 15% 4.9 % -7.2 % 1.5 %
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.
Our employee-related expenses increased in 2021 from 2020. This was related to: improvement in our sales and profitability generating significantly higher bonuses and commissions; higher health insurance costs as e mployees became comfortable again in seeking non-COVID-related health care; an increase in our profit sharing contribution; and higher full-time and part-time wages producing an increase in base pay . Our employee-related expenses decreased in 2020 from 2019. This was related to: a decrease in FTE headcount and related base wages and employment taxes related to efforts to reduce costs given weak demand in our traditional manufacturing and construction markets; lower bonuses and commissions given weak demand in our traditional manufacturing and construction markets; and reduced costs associated with the Fastenal School of Business as
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training shifted from in-person to online. This was only partly offset by an increase in our profit sharing contribution and health care costs.
The table below summarizes the percentage change in our FTE headcount at the end of the periods presented compared to the end of the prior period:
Twelve-month Period
2021 2020 2019
In-market locations (branches & Onsites) 0.7 % -8.0 % 0.2 %
Non-in-market selling (1)
8.0 % 5.4 % 5.3 %
Selling subtotal 1.7 % -6.2 % 0.8 %
Distribution/Transportation 5.8 % -10.5 % 2.2 %
Manufacturing 2.0 % -9.9 % -2.7 %
Administration (2)
9.8 % 8.7 % 8.5 %
Non-selling subtotal 6.5 % -5.2 % 3.1 %
Total 3.0 % -6.0 % 1.4 %
(1) Our non-in-market selling employee count has grown in recent years due to an increased focus on resources to support our growth drivers, particularly Onsite and national account growth.
(2) Administrative primarily includes our Sales Support, Information Technology, Finance and Accounting, Human Resources, and senior leadership roles and functions. Our administrative employee count has also grown in recent years due to increased personnel investments in information technology and operational support, such as purchasing and product development.
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).
Our occupancy-related expenses increased in 2021 from 2020. This was related to: the timing of development costs related to equipment utilized as part of our FMI suite of technologies; depreciation related to a higher installed base of FMI devices; and higher facility costs, with higher costs for non-branch facilities and utilities being only partly offset by slightly lower costs for branch facilities from branch closings. Our occupancy-related expenses increased slightly in 2020 from 2019. This was primarily due to higher depreciation related to facility expansions completed in 2019, partly offset by lower utility costs in our branches.
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 increased in 2021 from 2020. This was related to: higher spending on information technology; higher spending on travel, meals, and supplies as business activity recovered from the COVID-related travel restrictions of 2020; and higher costs for legal settlements. These elements were partly offset by lower bad debt expenses and lower general insurance costs. Combined, all other operating and administrative expenses decreased in 2020 from 2019. This was related to: lower selling-related freight expenses due to reduced travel as a result of COVID-related restrictions, the rationalization of our branch fleet, and significantly reduced travel and meal expenses due to reduced travel as a result of COVID-related restrictions. This was partly offset by higher spending on information technology.
Net Interest Expense
Our net interest expense was $9.6 in 2021 compared to $9.1 in 2020, and $13.6 in 2019. This was related to: lower interest income, as the special dividend paid in December 2020 resulted in lower interest-earning cash balances in 2021; slightly higher interest expense which was the net result of slightly higher average interest rates and slightly lower average debt. During the year, we repaid one tranche under our Master Note Agreement, reducing the balance from $405.0 to $390.0. However, in the fourth quarter of 2021 we increased our balance outstanding under our revolver by $25.0 to support working capital growth. The decrease in 2020, when compared to 2019, was due to a slightly lower average debt balance paired with substantially lower interest rates. During the year, we increased the debt held under our Master Note Agreement to $405.0 as a means of fixing a portion of our debt and freeing up borrowing capacity under our revolver.
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Income Taxes
We recorded income tax expense of $282.8 in 2021, or 23.4% of earnings before income taxes. Our effective tax rate reflects an $8.7 reduction in income tax expense due to discrete items mainly relating to benefits associated with the exercise of stock options and changes in the reserve for uncertain tax positions.
We recorded income tax expense of $273.6 in 2020, or 24.2% of earnings before income taxes. Our income tax expense was reduced by $5.3 due to discrete items mainly relating to benefits associated with the exercise of stock options and changes in the reserve for uncertain tax positions.
Net Earnings
Net earnings, net earnings per share (EPS), the percentage change in net earnings, and the percentage change in EPS, were as follows:
Dollar Amounts 2021 2020 2019
Net earnings $ 925.0 859.1 790.9
Basic EPS 1.61 1.50 1.38
Diluted EPS 1.60 1.49 1.38
Percentage Change 2021 2020 2019
Net earnings 7.7 % 8.6 % 5.2 %
Basic EPS 7.5 % 8.5 % 5.3 %
Diluted EPS 7.4 % 8.4 % 5.2 %
2021 2020 2019
Tax Rate 23.4 % 24.2 % 24.2 %
During 2021, net earnings increased, primarily due to stronger sales translating into higher pre-tax profits, as well as a lower income tax rate. In 2020, net earnings increased, primarily due to stronger sales and higher operating profits, and were only partly offset by an increase in income tax expense. The increase in basic and diluted earnings per share also reflected the purchase of our shares of common stock.
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Results of Operations (Comparison to 2019 Periods)
Given the unusual nature of our marketplace during 2021 and 2020 due to the COVID-19 pandemic, we believe that a comparison of certain results of operations during the year and fourth 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 and year. The table below provides such a comparison:
Twelve-month Period Three-month Period
2021 2019 Change 2021 2019 Change
Net sales $ 6,010.9 5,333.7 12.7 % $ 1,531.8 1,276.9 20.0 %
Business days 253 254 62 63
Daily sales $ 23.8 21.0 13.1 % $ 24.7 20.3 21.9 %
Gross profit $ 2,777.2 2,515.4 10.4 % $ 712.9 598.4 19.1 %
% of net sales 46.2 % 47.2 % 46.5 % 46.9 %
Operating and administrative expenses $ 1,559.8 1,458.2 7.0 % $ 412.0 359.5 14.6 %
% of net sales 26.0 % 27.3 % 26.9 % 28.2 %
Operating income $ 1,217.4 1,057.2 15.2 % $ 300.9 238.9 25.9 %
% of net sales 20.3 % 19.8 % 19.6 % 18.7 %
Earnings before income taxes $ 1,207.8 1,043.7 15.7 % $ 298.5 236.4 26.3 %
% of net sales 20.1 % 19.6 % 19.5 % 18.5 %
Net earnings $ 925.0 790.9 17.0 % $ 231.2 178.7 29.4 %
Diluted net earnings per share $ 1.60 1.38 16.4 % $ 0.40 0.31 28.9 %
Liquidity and Capital Resources
Net Cash Provided by Operating Activities
Net cash provided by operating activities in dollars and as a percentage of net earnings were as follows:
2021 2020 2019
Net cash provided $ 770.1 1,101.8 842.7
% of net earnings 83.3 % 128.3 % 106.5 %
In 2021, the decrease in our operating cash flow as a percentage of net earnings is due to significant growth in working capital as we support growth in our customers' operations as well as, in the case of inventory, significant product inflation. This was only slightly mitigated by ongoing efforts to improve the efficiency of our working capital and contrasts sharply with 2020 when weaker demand from our customers resulted in working capital being a net source of operating cash. In 2020, the increase in our operating cash flow as a percentage of net earnings was due to working capital assets and liabilities being a modest source of cash in 2020, as opposed to a significant use of cash in 2019. This includes the deferral o f $30.0 in payroll taxes resulting from the CARES Act and a timing-related higher accounts payable balance.
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Trade Working Capital Assets
Trade working capital assets are highlighted below. The annual dollar change and the annual percentage change were as follows:
Dollar change 2021 2020
Accounts receivable, net $ 130.8 27.6
Inventories 186.1 (28.9)
Trade working capital $ 316.9 (1.2)
Accounts payable 26.1 14.2
Trade working capital, net 290.8 (15.4)
Annual percentage change 2021 2020
Accounts receivable, net 17.0 % 3.7 %
Inventories 13.9 % (2.1) %
Trade working capital 15.0 % (0.1) %
Accounts payable 12.6 % 7.3 %
Trade working capital, net 15.3 % (0.8) %
Note – Amounts may not foot due to rounding difference.
In 2021, the annual growth in net accounts receivable reflected several factors. First, our receivables are expanding as a result of improved business activity and resulting growth in our customers' sales. Second, in response to the COVID-19 pandemic, customers that traditionally have shorter payment terms represented a smaller proportion of our sales mix at the end of 2021 than was the case at the end of 2020. In 2020, the annual growth in net accounts receivable reflected growth in sales, mitigated by the substantial increase in sales to government customers, which tended to have shorter payment terms in 2020, and strong collections at year end.
Our inventory balances over time will respond to business activity, though various factors produce a looser relationship to our monthly sales patterns than we tend to experience in accounts receivable. One reason for this is cyclical. We source significant quantities of product from overseas, and the lead time involved in procuring these products is typically longer than the visibility we have into future monthly sales patterns. As a result, trends in our inventory will often lag trends in economic conditions. A second reason is our growth drivers, including our FMI offerings, Onsite channel, and international expansion, all of which tend to require significant investments in inventory. In 2021, our inventories increased, reflecting significant inflation in the value of stocked parts, and the addition of inventory to support the growth of our manufacturing and construction customers as they expand production to meet improved business activity, and deeper inventory stocking due to disruption in supply chains. In 2020, our inventories decreased, reflecting a number of factors, including reduced stocking needs on the part of our traditional manufacturing and construction customers due to weak business activity, reduced vending and Onsite signings, and good execution on initiatives aimed at improving our inventory balances. This was partly offset by COVID-related PPE balances that we added in the second quarter of 2020 and declined over the second half of 2020, but we had no such PPE inventory in the preceding year.
In 2021, the annual growth in accounts payable reflected product purchases increasing to support the improvement in business activity at our manufacturing and construction customers. In 2020, the annual growth in accounts payable reflected primarily the timing of certain payments that slipped out of the fourth quarter of 2020 and into the first quarter of 2021.
The approximate percentage mix of inventory stocked at our selling locations versus our distribution center and manufacturing locations was as follows at year end:
2021 2020 2019
Selling locations 57 % 59 % 60 %
Distribution center and manufacturing locations 43 % 41 % 40 %
Total 100 % 100 % 100 %
Lease Obligations
We have facilities, equipment, and vehicles leased under operating leases. A discussion of our lease obligations is contained in Note 8 of the Notes to Consolidated Financial Statements.
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Net Cash Used in Investing Activities
Net cash used in investing activities in dollars and as a percentage of net earnings were as follows:
2021 2020 2019
Net cash used $ 148.5 281.7 239.7
% of net earnings 16.1 % 32.8 % 30.3 %
The changes in net cash used in investing activities in 2021 was primarily related to the absence of an acquisition, in contrast to the $125.0 spent in 2020 for the purchase of certain assets of Apex Industrial Technologies LLC (Apex), as well as lower net capital expenditures. The changes in net cash used in investing activities in 2020 were primarily related to an increase of $125.0 for the purchase of certain assets of Apex, which was partly offset by changes in our net capital expenditures.
Property and equipment expenditures typically consist primarily of: (1) purchases related to industrial vending, (2) purchases of property and equipment related to expansion of and enhancements to distribution centers, (3) spending on software and hardware for our information processing systems, (4) the addition of fleet vehicles, (5) expansion, improvement or investment in certain owned or leased branch properties, and (6) the addition of manufacturing and warehouse equipment. Disposals of property and equipment consisted of the planned disposition of certain pick-up trucks, distribution vehicles, and trailers in the normal course of business.
Set forth below is a recap of our 2021, 2020, and 2019 net capital expenditures in dollars and as a percentage of net sales and net earnings:
2021 2020 2019
Manufacturing, warehouse and packaging equipment, industrial vending equipment, and facilities $ 70.3 91.5 172.7
Shelving and related supplies for in-market location openings and for product expansion at existing in-market locations 11.0 15.7 12.3
Data processing software and equipment 28.0 31.4 31.1
Real estate and improvements to branch locations 37.9 16.1 8.9
Vehicles 9.4 13.4 21.4
Purchases of property and equipment 156.6 168.1 246.4
Proceeds from sale of property and equipment (8.4) (10.6) (6.6)
Net capital expenditures 148.2 157.5 239.8
% of net sales 2.5 % 2.8 % 4.5 %
% of net earnings 16.0 % 18.3 % 30.3 %
Our net capital expenditures decreased in 2021, when compared to 2020. We had higher spending on an office building construction project in Winona, Minnesota intended to support growth in our business. This was more than offset by reduced spending in other areas. We saw a significant decline in spending on FMI equipment due to slower hardware signings, lower vending equipment costs following the March 2020 acquisition of certain industrial vending assets of Apex, and an increase in the refurbishment and redeployment of FMI hardware as an alternative to buying new devices. We also had lower capital investment in our hub properties following a period of heavier investment in 2018 and 2019, and reduced spending on selling-related vehicles as challenges in the supply chain reduced availability. Our net capital expenditures decreased in 2020, when compared to 2019. We reduced capital spending expectations early in 2020 across most tracked categories as financial uncertainty related to the pandemic response emerged. The decline relates to lower spending on facility capacity and equipment following our investments in 2019, lower spending for vending devices as a result of our acquisition of certain assets of Apex and lower signings, lower spending on our captive fleet, and lower spending for manufacturing equipment.
We expect our net capital expenditures in 2022 to be within a range of $180.0 to $200.0. This increase from 2021 reflects an increase in spending on FMI equipment in anticipation of higher signings, an increase in spending on hub properties to reflect upgrades to and investments in automation as well as facilities upgrades, and an increase in manufacturing capacity to support demand and expand capabilities. This is partly offset by the absence of spending on our Winona construction project, which was completed in 2021.
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Net Cash Used in Financing Activities
Net cash used in financing activities in dollars and as a percentage of net earnings were as follows:
2021 2020 2019
Net cash used $ 627.1 754.4 595.1
% of net earnings 67.8 % 87.8 % 75.2 %
The fluctuations in net cash used in financing activities are due to changes in the level of our dividend payments and in the level of common stock purchases. These amounts were partially offset by the exercise of stock options and net payments (proceeds) from debt obligations. These items in dollars and as a percentage of earnings were as follows:
2021 2020 2019
Dividends paid $ 643.7 803.4 498.6
% of net earnings 69.6 % 93.5 % 63.0 %
Common stock purchases — 52.0 —
% of net earnings — % 6.1 % — %
Total returned to shareholders $ 643.7 855.4 498.6
% of net earnings 69.6 % 99.6 % 63.0 %
Proceeds from the exercise of stock options $ (31.6) (41.0) (58.5)
% of net earnings -3.4 % -4.8 % -7.4 %
Cash payments (proceeds), net $ 15.0 (60.0) 155.0
% of net earnings 1.6 % -7.0 % 19.6 %
Net cash used $ 627.1 754.4 595.1
% of net earnings 67.8 % 87.8 % 75.2 %
Stock Purchases
In 2021, we did not purchase any shares of our common stock. In 2020, we pu rchased 1,600,000 shares of our common stock at an average price of approximately $32.54. In 20 19, we did not purchase any shares of our common stock.
Dividends
We declared a quarterly dividend of $0.31 per sh are on January 18, 2022 . In 2021, we paid aggregate annual dividends per sha re of $1.12. In 2020, we paid aggregate annual dividends per share of $1.40, which included $1.00 in regular quarterly dividends and a $0.40 special dividend paid in December 2020 as a result of our high cash balances and favorable financial outlook.
Debt
In order to fund the considerable cash needed to expand our industrial vending business, expand capacity and increase the use of automation in our distribution centers, pay dividends, and, in 2020, to purchase our common stock, pre-pay vendors to secure access to critical products during the pandemic, and acquire certain assets of Apex, we have borrowed under our Credit Facility and our Master Note Agreement in recent periods.
Our borrowings under the Credit Facility and Master Note Agreement peaked during each quarter of 2021 and 2020 as follows:
Peak borrowings 2021 2020
First quarter $ 485.0 470.0
Second quarter 430.0 640.0
Third quarter 455.0 445.0
Fourth quarter 470.0 495.0
As of December 31, 2021, we had $25.0 outstanding under the Credit Facility and had contingent obligations from letters of credit outstanding under the Credit Facility in an aggregate face amount of $36.3. As of December 31, 2021, we had loans outstanding under the Master Note Agreement of $365.0. Descriptions of our Credit Facility and Master Note Agreement are contained in Note 9 of the Notes to Consolidated Financial Statements.
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Material Cash Requirements
Our material cash requirements for known contractual obligations include capital expenditures, debt, and lease obligations, each of which are discussed in more detail earlier in this section. We believe that net cash provided by operating activities will be adequate to meet our liquidity and capital needs for these items in the short-term over the next 12 months and also in the long-term beyond the next 12 months. We also have cash requirements for purchase orders and contracts for the purchase of inventory and other goods and services, which are based on current distribution needs and are fulfilled by our suppliers within short time horizons. We do not have significant agreements for the purchase of inventory or other goods or services specifying minimum order quantities. In addition, we may have liabilities for uncertain tax positions but we do not believe any of these liabilities will be material. A discussion of income taxes is contained in Note 7 of the Notes to Consolidated Financial Statements.
Unremitted Foreign Earnings
Approximately $178.5 of cash and cash equivalents are held by non-U.S. subsidiaries. These funds may create foreign currency translation gains or losses depending on the functional currency of the entity holding the cash. We have considered the financial requirements of each foreign subsidiary and our parent company and will continue to reinvest these funds to support our expansion activities outside the U.S., even after taking into consideration the deemed repatriation and transition tax under the Tax Act. The income tax impact of repatriating cash associated with investments in foreign subsidiaries is discussed in Note 7 of the Notes to Consolidated Financial Statements.
Effects of Inflation
In 2021, we experienced significant increases in the cost of metals (especially steel), energy, and transportation costs (especially overseas containers and shipping). These inflationary trends meaningfully increased the cost of many of the products we purchase. We were able to mitigate the adverse effects of higher costs on our gross profit percentage in 2021 by increasing prices, seeking alternative sources for products and services, and consolidating spend for products and services. While the effects of inflation in 2021 was broad-based, we did experience deflation for certain COVID-related products that had inflated in 2020 when the supply chain was disrupted. This did require us to write down the value of these products in 2021, which negatively impacted our gross profit percentage in the first quarter of 2021 and, to a lesser extent, throughout the balance of the year. In 2020, we experienced changing price levels for COVID-related supplies, with inflation for certain products that were in short supply (e.g., nitrile gloves) and deflation for certain products that became oversupplied (e.g., disposable masks). These were event-specific circumstances related to the pandemic. As it related to the non-COVID environment, we experienced stable product costs through 2020 relative to 2019.
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements in conformity with U.S. GAAP, we must make decisions that impact the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgments based on our understanding and analysis of relevant circumstances, historical experience, and actuarial valuations. Actual amounts could differ from those estimated at the time the consolidated financial statements are prepared.
Our most significant accounting policies, including Revenue Recognition and Inventories, are described in Note 1 of the Notes to Consolidated Financial Statements. Some of those significant accounting policies require us to make difficult, subjective, or complex judgments, or estimates. An accounting estimate is considered to be critical if it meets both of the following criteria: (i) the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made, and (ii) different estimates reasonably could have been used, or changes in the estimate that are reasonably likely to occur from period to period may have a material impact on the presentation of our financial condition, changes in financial condition, or results of operations. Our most critical accounting estimates include the following:
Allowance for Credit Losses – This reserve is for accounts receivable balances that are potentially uncollectible. The allowance for credit losses is based on an income statement approach which adjusts the ending balance sheet to take into consideration expected losses over the contractual lives of the receivables, considering factors such as historical data as a basis for future expected losses. If business or economic conditions change, our estimates and assumptions may be adjusted as deemed appropriate. Historically, actual required reserves have not varied materially from estimated amounts.
Inventory valuation – Adjustments to the valuation of inventory are based on an analysis of inventory trends including reviews of inventory levels, sales information, and the on-hand quantities relative to the sales history for the product. Our methodology for estimating whether adjustments are necessary is continually evaluated for factors including significant changes in product demand, market conditions, condition of the inventory, or liquidation value. If business or economic conditions change, our
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estimates and assumptions may be adjusted as deemed appropriate. Historically, actual required adjustments have not varied materially from estimated amounts.
General insurance reserves – These reserves are for general claims related to workers' compensation, property and casualty losses, and other general liability self-insured losses. The reserves are based on an analysis of reported claims and claims incurred but not yet reported related to our historical claim trends. We perform ongoing reviews of our insured and uninsured risks and use this information to establish appropriate reserve levels. We analyze historical trends, claims experience, and loss development patterns to ensure the appropriate loss development factors are applied to the incurred costs associated with the claims made. Historically, actual required reserves have not varied materially from estimated amounts.
New Accounting Pronouncements
A description of new accounting pronouncements is contained in Note 1 of the Notes to Consolidated Financial Statements.
Geographic Information
Information regarding our revenues and long-lived assets by geographic area is contained in Note 2 and Note 3 of the Notes to Consolidated Financial Statements. Risks related to our foreign operations are described earlier in this Form 10-K under the heading 'Forward-Looking Statements' and 'Item 1A. Risk Factors'.
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