FASTENAL CO 10-Q

ITEM 1 — FINANCIAL STATEMENTS FASTENAL COMPANY AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Amounts in millions except share information) (Unaudited) Assets June 30, 2022 December 31, 2021 Current assets: Cash and cash equivalents $ 247.9 236.2 Trade accounts receivable, net of allowance for credit losses of $ 11.1 and $ 12.0 , respectively 1,103.9 900.2 Inventories 1,665.2 1,523.6 Prepaid income taxes 6.5 8.5 Other current assets 129.2 188.1 Total current assets 3,152.7 2,856.6 Property and equipment, net 1,008.7 1,019.2 Operating lease right-of-use assets 254.8 242.3 Other assets 176.1 180.9 Total assets $ 4,592.3 4,299.0 Liabilities and Stockholders' Equity Current liabilities: Current portion of debt $ 195.0 60.0 Accounts payable 291.8 233.1 Accrued expenses 268.7 298.3 Current portion of operating lease liabilities 93.5 90.8 Total current liabilities 849.0 682.2 Long-term debt 310.0 330.0 Operating lease liabilities 165.5 156.0 Deferred income taxes 89.1 88.6 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, 574,676,079 and 575,464,682 shares issued and outstanding, respectively 5.8 5.8 Additional paid-in capital 55.7 96.2 Retained earnings 3,171.6 2,970.9 Accumulated other comprehensive loss ( 54.4 ) ( 30.7 ) Total stockholders' equity 3,178.7 3,042.2 Total liabilities and stockholders' equity $ 4,592.3 4,299.0 See accompanying Notes to Condensed Consolidated Financial Statements. 1 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (Amounts in millions except earnings per share) (Unaudited) (Unaudited) Six Months Ended June 30, Three Months Ended June 30, 2022 2021 2022 2021 Net sales $ 3,482.6 2,924.7 $ 1,778.6 1,507.7 Cost of sales 1,861.7 1,580.6 951.0 807.0 Gross profit 1,620.9 1,344.1 827.6 700.7 Operating and administrative expenses 879.5 746.0 444.2 382.9 Operating income 741.4 598.1 383.4 317.8 Interest income 0.1 0.0 0.1 0.0 Interest expense ( 5.0 ) ( 5.0 ) ( 2.8 ) ( 2.6 ) Earnings before income taxes 736.5 593.1 380.7 315.2 Income tax expense 179.8 142.8 93.6 75.5 Net earnings $ 556.7 450.3 $ 287.1 239.7 Basic net earnings per share $ 0.97 0.78 $ 0.50 0.42 Diluted net earnings per share $ 0.96 0.78 $ 0.50 0.42 Basic weighted average shares outstanding 575.5 574.5 575.5 574.6 Diluted weighted average shares outstanding 577.5 576.8 577.4 577.0 See accompanying Notes to Condensed Consolidated Financial Statements. 2 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Amounts in millions) (Unaudited) (Unaudited) Six Months Ended June 30, Three Months Ended June 30, 2022 2021 2022 2021 Net earnings $ 556.7 450.3 $ 287.1 239.7 Other comprehensive (loss) income, net of tax: Foreign currency translation adjustments (net of tax of $ 0.0 in 2022 and 2021) ( 23.7 ) 2.4 ( 26.0 ) 6.8 Comprehensive income $ 533.0 452.7 $ 261.1 246.5 See accompanying Notes to Condensed Consolidated Financial Statements. 3 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Stockholders' Equity (Amounts in millions except per share information) (Unaudited) (Unaudited) Six Months Ended June 30, Three Months Ended June 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 59.1 101.6 67.2 Stock options exercised 5.8 13.6 1.9 7.0 Purchases of common stock ( 49.3 ) — ( 49.3 ) — Stock-based compensation 3.0 2.9 1.5 1.4 Balance at end of period 55.7 75.6 55.7 75.6 Retained earnings Balance at beginning of period 2,970.9 2,689.6 3,063.0 2,739.4 Net earnings 556.7 450.3 287.1 239.7 Dividends paid in cash ( 356.9 ) ( 321.6 ) ( 178.5 ) ( 160.8 ) Translation adjustment upon merger of foreign subsidiary 0.9 — — — Balance at end of period 3,171.6 2,818.3 3,171.6 2,818.3 Accumulated other comprehensive (loss) income Balance at beginning of period ( 30.7 ) ( 21.2 ) ( 28.4 ) ( 25.6 ) Other comprehensive (loss) income ( 23.7 ) 2.4 ( 26.0 ) 6.8 Balance at end of period ( 54.4 ) ( 18.8 ) ( 54.4 ) ( 18.8 ) Total stockholders' equity $ 3,178.7 2,880.8 $ 3,178.7 2,880.8 Cash dividends paid per share of common stock $ 0.62 $ 0.56 $ 0.31 $ 0.28 See accompanying Notes to Condensed Consolidated Financial Statements. 4 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Amounts in millions) (Unaudited) (Unaudited) Six Months Ended June 30, Three Months Ended June 30, 2022 2021 2022 2021 Cash flows from operating activities: Net earnings $ 556.7 450.3 $ 287.1 239.7 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation of property and equipment 82.4 78.9 41.2 39.6 Loss (gain) on sale of property and equipment 2.3 ( 1.3 ) ( 1.2 ) ( 0.7 ) Bad debt expense 0.4 ( 0.1 ) 0.7 0.0 Deferred income taxes 0.5 0.7 ( 0.5 ) 0.4 Stock-based compensation 3.0 2.9 1.5 1.4 Amortization of intangible assets 5.4 5.4 2.7 2.7 Changes in operating assets and liabilities: Trade accounts receivable ( 209.3 ) ( 138.0 ) ( 39.4 ) ( 55.9 ) Inventories ( 150.6 ) 10.6 ( 74.2 ) ( 20.5 ) Other current assets 58.9 ( 6.4 ) ( 1.8 ) ( 22.7 ) Accounts payable 58.7 29.1 1.9 21.0 Accrued expenses ( 29.6 ) 5.8 0.5 12.1 Income taxes 2.0 8.1 ( 67.6 ) ( 45.8 ) Other 0.4 0.3 0.3 0.2 Net cash provided by operating activities 381.2 446.3 151.2 171.5 Cash flows from investing activities: Purchases of property and equipment ( 83.0 ) ( 67.3 ) ( 47.5 ) ( 34.6 ) Proceeds from sale of property and equipment 6.5 5.8 4.1 3.1 Other ( 0.6 ) 0.1 ( 0.5 ) 0.0 Net cash used in investing activities ( 77.1 ) ( 61.4 ) ( 43.9 ) ( 31.5 ) Cash flows from financing activities: Proceeds from debt obligations 695.0 165.0 460.0 55.0 Payments against debt obligations ( 580.0 ) ( 165.0 ) ( 320.0 ) ( 55.0 ) Proceeds from exercise of stock options 5.8 13.6 1.9 7.0 Purchases of common stock ( 49.3 ) — ( 49.3 ) — Payments of dividends ( 356.9 ) ( 321.6 ) ( 178.5 ) ( 160.8 ) Net cash used in financing activities ( 285.4 ) ( 308.0 ) ( 85.9 ) ( 153.8 ) Effect of exchange rate changes on cash and cash equivalents ( 7.0 ) ( 0.8 ) ( 7.7 ) 1.7 Net increase (decrease) in cash and cash equivalents 11.7 76.1 13.7 ( 12.1 ) Cash and cash equivalents at beginning of period 236.2 245.7 234.2 333.9 Cash and cash equivalents at end of period $ 247.9 321.8 $ 247.9 321.8 Supplemental information: Cash paid for interest $ 5.0 5.0 $ 2.7 2.6 Net cash paid for income taxes $ 175.4 132.7 $ 160.2 120.3 Leased assets obtained in exchange for new operating lease liabilities $ 55.6 65.6 $ 31.7 34.7 See accompanying Notes to Condensed Consolidated Financial Statements. 5 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Amounts in millions except share and per share information and where otherwise noted) June 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, or lease agreements that reference LIBOR or another reference rate expected to be discontinued. We are currently evaluating the impact of the new guidance on our condensed consolidated financial statements; however, we have determined that, of our current debt commitments as outlined in detail in Note 6 'Debt Commitments', only the obligations described under Unsecured Revolving Credit Facility in Note 6 would be impacted by ASU 2020-04. Our Senior Unsecured Promissory Notes Payable described in Note 6 each have fixed interest rates. (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. 6 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Amounts in millions except share and per share information and where otherwise noted) June 30, 2022 and 2021 (Unaudited) Disaggregation of Revenue Our revenues related to the following geographic areas were as follows for the periods ended June 30: Six-month Period Three-month Period 2022 2021 2022 2021 United States $ 2,928.4 2,446.1 $ 1,496.7 1,258.2 Canada and Mexico 438.4 368.9 225.0 192.0 North America 3,366.8 2,815.0 1,721.7 1,450.2 All other foreign countries 115.8 109.7 56.9 57.5 Total revenues $ 3,482.6 2,924.7 $ 1,778.6 1,507.7 The percentages of our sales by end market were as follows for the periods ended June 30: Six-month Period Three-month Period 2022 2021 2022 2021 Manufacturing 71.5 % 68.5 % 71.8 % 68.9 % Non-residential construction 10.5 % 11.1 % 10.7 % 11.4 % Other 18.0 % 20.4 % 17.5 % 19.7 % 100.0 % 100.0 % 100.0 % 100.0 % The percentages of our sales by product line were as follows for the periods ended June 30: Six-month Period Three-month Period Type Introduced 2022 2021 2022 2021 Fasteners (1) 1967 34.4 % 33.1 % 34.6 % 33.6 % Tools 1993 8.2 % 8.6 % 8.2 % 8.6 % Cutting tools 1996 5.0 % 5.0 % 5.0 % 5.1 % Hydraulics & pneumatics 1996 6.6 % 6.4 % 6.7 % 6.4 % Material handling 1996 5.7 % 5.5 % 5.7 % 5.6 % Janitorial supplies 1996 7.9 % 8.2 % 8.0 % 7.9 % Electrical supplies 1997 4.3 % 4.4 % 4.3 % 4.4 % Welding supplies 1997 3.8 % 3.8 % 3.8 % 3.8 % Safety supplies 1999 20.7 % 21.3 % 20.3 % 21.0 % Other 3.4 % 3.7 % 3.4 % 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 July 12, 2022, our board of directors declared a quarterly dividend of $ 0.31 per share of common stock to be paid in cash on August 24, 2022 to shareholders of record at the close of business on July 27, 2022. Since 2011, we have paid quarterly cash dividends, and in 2020, we paid a special cash dividend late in the year. Our board of directors currently intends to continue paying quarterly cash dividends, provided that any 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. 7 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Amounts in millions except share and per share information and where otherwise noted) June 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 $ 0.28 Total $ 0.93 $ 1.12 Stock Options The following tables summarize the details of options granted under our stock option plans that were outstanding as of June 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 June 30, 2022 Date of Grant Options Outstanding Options Exercisable January 3, 2022 713,438 $ 62.00 $ 61.980 695,864 53,355 January 4, 2021 741,510 $ 48.00 $ 47.650 682,763 26,643 January 2, 2020 902,263 $ 38.00 $ 37.230 790,286 269,666 January 2, 2019 1,316,924 $ 26.00 $ 25.705 949,422 415,262 January 2, 2018 1,087,936 $ 27.50 $ 27.270 705,640 430,316 January 3, 2017 1,529,578 $ 23.50 $ 23.475 695,072 534,092 April 19, 2016 1,690,880 $ 23.00 $ 22.870 506,553 381,923 April 21, 2015 1,786,440 $ 21.00 $ 20.630 373,316 294,134 April 22, 2014 1,910,000 $ 28.00 $ 25.265 167,840 167,840 Total 11,678,969 5,566,756 2,573,231 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. 8 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Amounts in millions except share and per share information and where otherwise noted) June 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 six-month periods ended June 30, 2022 and 2021 was $ 3.0 and $ 2.9 , respectively, and the second quarter of 2022 and 2021 was $ 1.5 and $ 1.4 , respectively. Unrecognized stock-based compensation expense related to outstanding unvested stock options as of June 30, 2022 was $ 17.2 and is expected to be recognized over a weighted average period of 4.39 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: Six-month Period Three-month Period Reconciliation 2022 2021 2022 2021 Basic weighted average shares outstanding 575,510,253 574,465,377 575,462,097 574,592,653 Weighted shares assumed upon exercise of stock options 1,998,786 2,289,356 1,940,124 2,359,005 Diluted weighted average shares outstanding 577,509,039 576,754,733 577,402,221 576,951,658 Six-month Period Three-month Period Summary of Anti-dilutive Options Excluded 2022 2021 2022 2021 Options to purchase shares of common stock 1,350,936 688,058 1,354,464 696,951 Weighted average exercise prices of options $ 55.20 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 six-month period ended June 30, 2022, includes $ 0.9 of historical cumulative translation upon the merger of a foreign subsidiary recognized in March of 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 2016 in the case of foreign, state, and local examinations. During the first six months of 2022, there were no material changes in unrecognized tax benefits. (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 $ 82.4 . We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote. 9 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Amounts in millions except share and per share information and where otherwise noted) June 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 June 30, 2022 Debt Outstanding Maturity Date June 30, 2022 December 31, 2021 Unsecured revolving credit facility 2.74 % November 30, 2023 $ 140.0 25.0 Senior unsecured promissory notes payable, Series B 2.45 % July 20, 2022 35.0 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 505.0 390.0 Less: Current portion of debt ( 195.0 ) ( 60.0 ) Long-term debt $ 310.0 330.0 Outstanding letters of credit under unsecured revolving credit facility - contingent obligation $ 36.3 36.3 Unsecured Revolving Credit Facility We have a $ 700.0 committed unsecured revolving credit facility (Credit Facility). 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 LIBOR for interest periods of various lengths selected by us, 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 $ 365.0 as of June 30, 2022. Our aggregate borrowing capacity under the Master Note Agreement is $ 600.0 ; 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 June 30, 2022, there were no litigation matters that we consider to be probable or reasonably possible to have a material adverse outcome. 10 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Amounts in millions except share and per share information and where otherwise noted) June 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'. 11 Table of Contents