FASTENAL CO 10-Q

ITEM 1 — FINANCIAL STATEMENTS FASTENAL COMPANY AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Amounts in millions except share information) (Unaudited) Assets September 30, 2022 December 31, 2021 Current assets: Cash and cash equivalents $ 231.5 236.2 Trade accounts receivable, net of allowance for credit losses of $ 10.2 and $ 12.0 , respectively 1,110.6 900.2 Inventories 1,678.1 1,523.6 Prepaid income taxes 3.2 8.5 Other current assets 172.2 188.1 Total current assets 3,195.6 2,856.6 Property and equipment, net 1,008.5 1,019.2 Operating lease right-of-use assets 249.8 242.3 Other assets 173.5 180.9 Total assets $ 4,627.4 4,299.0 Liabilities and Stockholders' Equity Current liabilities: Current portion of debt $ 150.3 60.0 Accounts payable 277.2 233.1 Accrued expenses 282.4 298.3 Current portion of operating lease liabilities 92.7 90.8 Total current liabilities 802.6 682.2 Long-term debt 404.7 330.0 Operating lease liabilities 161.2 156.0 Deferred income taxes 92.9 88.6 Other long-term liabilities 4.8 — Stockholders' equity: Preferred stock: $ 0.01 par value, 5,000,000 shares authorized, no shares issued or outstanding — — Common stock: $ 0.01 par value, 800,000,000 shares authorized, 572,754,406 and 575,464,682 shares issued and outstanding, respectively 5.8 5.8 Additional paid-in capital 2.8 96.2 Retained earnings 3,239.7 2,970.9 Accumulated other comprehensive loss ( 87.1 ) ( 30.7 ) Total stockholders' equity 3,161.2 3,042.2 Total liabilities and stockholders' equity $ 4,627.4 4,299.0 See accompanying Notes to Condensed Consolidated Financial Statements. 1 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (Amounts in millions except earnings per share) (Unaudited) (Unaudited) Nine Months Ended September 30, Three Months Ended September 30, 2022 2021 2022 2021 Net sales $ 5,285.0 4,479.0 $ 1,802.4 1,554.2 Cost of sales 2,837.6 2,414.7 975.9 834.0 Gross profit 2,447.4 2,064.3 826.5 720.2 Operating and administrative expenses 1,326.7 1,147.8 447.3 401.8 Operating income 1,120.7 916.5 379.2 318.4 Interest income 0.4 0.1 0.2 0.1 Interest expense ( 9.3 ) ( 7.3 ) ( 4.1 ) ( 2.4 ) Earnings before income taxes 1,111.8 909.3 375.3 316.1 Income tax expense 270.5 215.5 90.7 72.6 Net earnings $ 841.3 693.8 $ 284.6 243.5 Basic net earnings per share $ 1.46 1.21 $ 0.50 0.42 Diluted net earnings per share $ 1.46 1.20 $ 0.50 0.42 Basic weighted average shares outstanding 574.7 574.6 573.0 575.0 Diluted weighted average shares outstanding 576.6 576.9 574.7 577.3 See accompanying Notes to Condensed Consolidated Financial Statements. 2 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Amounts in millions) (Unaudited) (Unaudited) Nine Months Ended September 30, Three Months Ended September 30, 2022 2021 2022 2021 Net earnings $ 841.3 693.8 $ 284.6 243.5 Other comprehensive loss, net of tax: Foreign currency translation adjustments (net of tax of $ 0.0 in 2022 and 2021) ( 56.4 ) ( 8.4 ) ( 32.7 ) ( 10.8 ) Comprehensive income $ 784.9 685.4 $ 251.9 232.7 See accompanying Notes to Condensed Consolidated Financial Statements. 3 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Stockholders' Equity (Amounts in millions except per share information) (Unaudited) (Unaudited) Nine Months Ended September 30, Three Months Ended September 30, 2022 2021 2022 2021 Common stock Balance at beginning of period $ 5.8 5.7 $ 5.8 5.7 Balance at end of period 5.8 5.7 5.8 5.7 Additional paid-in capital Balance at beginning of period 96.2 59.1 55.7 75.6 Stock options exercised 7.8 24.4 2.0 10.8 Purchases of common stock ( 105.6 ) — ( 56.3 ) — Stock-based compensation 4.4 4.3 1.4 1.4 Balance at end of period 2.8 87.8 2.8 87.8 Retained earnings Balance at beginning of period 2,970.9 2,689.6 3,171.6 2,818.3 Net earnings 841.3 693.8 284.6 243.5 Dividends paid in cash ( 534.4 ) ( 482.6 ) ( 177.5 ) ( 161.0 ) Translation adjustment upon merger of foreign subsidiary 0.9 — — — Purchases of common stock ( 39.0 ) — ( 39.0 ) — Balance at end of period 3,239.7 2,900.8 3,239.7 2,900.8 Accumulated other comprehensive loss Balance at beginning of period ( 30.7 ) ( 21.2 ) ( 54.4 ) ( 18.8 ) Other comprehensive loss ( 56.4 ) ( 8.4 ) ( 32.7 ) ( 10.8 ) Balance at end of period ( 87.1 ) ( 29.6 ) ( 87.1 ) ( 29.6 ) Total stockholders' equity $ 3,161.2 2,964.7 $ 3,161.2 2,964.7 Cash dividends paid per share of common stock $ 0.93 $ 0.84 $ 0.31 $ 0.28 See accompanying Notes to Condensed Consolidated Financial Statements. 4 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Amounts in millions) (Unaudited) (Unaudited) Nine Months Ended September 30, Three Months Ended September 30, 2022 2021 2022 2021 Cash flows from operating activities: Net earnings $ 841.3 693.8 $ 284.6 243.5 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation of property and equipment 123.8 119.0 41.4 40.1 Loss (gain) on sale of property and equipment 1.2 ( 1.1 ) ( 1.1 ) 0.2 Bad debt expense ( 0.9 ) 0.8 ( 1.3 ) 0.9 Deferred income taxes 4.3 2.3 3.8 1.6 Stock-based compensation 4.4 4.3 1.4 1.4 Amortization of intangible assets 8.1 8.1 2.7 2.7 Changes in operating assets and liabilities: Trade accounts receivable ( 222.9 ) ( 182.2 ) ( 13.6 ) ( 44.2 ) Inventories ( 176.9 ) ( 66.5 ) ( 26.3 ) ( 77.1 ) Other current assets 15.9 ( 22.3 ) ( 43.0 ) ( 15.9 ) Accounts payable 44.1 49.9 ( 14.6 ) 20.8 Accrued expenses ( 15.9 ) 5.9 13.7 0.1 Income taxes 5.3 — 3.3 ( 8.1 ) Other 7.3 1.7 6.9 1.4 Net cash provided by operating activities 639.1 613.7 257.9 167.4 Cash flows from investing activities: Purchases of property and equipment ( 131.0 ) ( 114.7 ) ( 48.0 ) ( 47.4 ) Proceeds from sale of property and equipment 10.1 7.7 3.6 1.9 Other ( 0.7 ) — ( 0.1 ) ( 0.1 ) Net cash used in investing activities ( 121.6 ) ( 107.0 ) ( 44.5 ) ( 45.6 ) Cash flows from financing activities: Proceeds from debt obligations 1,390.0 300.0 695.0 135.0 Payments against debt obligations ( 1,225.0 ) ( 340.0 ) ( 645.0 ) ( 175.0 ) Proceeds from exercise of stock options 7.8 24.4 2.0 10.8 Purchases of common stock ( 144.6 ) — ( 95.3 ) — Payments of dividends ( 534.4 ) ( 482.6 ) ( 177.5 ) ( 161.0 ) Net cash used in financing activities ( 506.2 ) ( 498.2 ) ( 220.8 ) ( 190.2 ) Effect of exchange rate changes on cash and cash equivalents ( 16.0 ) ( 3.7 ) ( 9.0 ) ( 2.9 ) Net (decrease) increase in cash and cash equivalents ( 4.7 ) 4.8 ( 16.4 ) ( 71.3 ) Cash and cash equivalents at beginning of period 236.2 245.7 247.9 321.8 Cash and cash equivalents at end of period $ 231.5 250.5 $ 231.5 250.5 Supplemental information: Cash paid for interest $ 9.2 7.6 $ 4.2 2.6 Net cash paid for income taxes $ 257.3 210.7 $ 81.9 78.0 Leased assets obtained in exchange for new operating lease liabilities $ 74.0 83.4 $ 18.4 17.8 See accompanying Notes to Condensed Consolidated Financial Statements. 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) September 30, 2022 and 2021 (Unaudited) (1) Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Fastenal Company and subsidiaries (collectively referred to as the company, Fastenal, or by terms such as we, our, or us) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. They do not include all information and footnotes required by U.S. GAAP for complete financial statements. However, except as described herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in our consolidated financial statements as of and for the year ended December 31, 2021. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Immaterial Revision The prior period balances for additional paid-in capital and common stock have been updated in the Condensed Consolidated Statements of Stockholders' Equity to reflect the impact of an immaterial correction which reclassified $ 2.9 from additional paid-in capital to common stock in connection with the 2019 stock split. Recently Issued Accounting Pronouncements In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides temporary optional expedients and exceptions to U.S. GAAP on contract modifications, hedging relationships, and other transactions affected by reference rate reform to ease entities' financial reporting burdens as the market transitions from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made, hedging relationships entered into, and other transactions affected by reference rate reform, evaluated on or before December 31, 2022, beginning during the reporting period in which the guidance has been elected. We do not have any receivables, hedging relationships, lease agreements, or debt agreements that reference LIBOR or another reference rate expected to be discontinued. On September 28, 2022, we amended and restated our unsecured revolving credit agreement. At the same time, we also amended our master note agreement. As a result of the various changes made, our floating rate debt no longer references a LIBOR based benchmark rate. Therefore, we will not be electing the optional practical expedients associated with this ASU. (2) Revenue Revenue Recognition Net sales include products and shipping and handling charges, net of estimates for product returns, and any related sales incentives. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue by transferring control of the promised products to the customer, with the majority of revenue recognized at the point in time the customer obtains control of the products. We recognize revenue for shipping and handling charges at the time the products are delivered to or picked up by the customer. We estimate product returns based on historical return rates. Using probability assessments, we estimate sales incentives expected to be paid over the term of the contract. The majority of our contracts have a single performance obligation and are short term in nature. Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. Revenues are attributable to countries based on the selling location from which the sale occurred. 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) September 30, 2022 and 2021 (Unaudited) Disaggregation of Revenue Our revenues related to the following geographic areas were as follows for the periods ended September 30: Nine-month Period Three-month Period 2022 2021 2022 2021 United States $ 4,445.1 3,753.6 $ 1,516.7 1,307.5 Canada and Mexico 666.5 558.8 228.1 189.9 North America 5,111.6 4,312.4 1,744.8 1,497.4 All other foreign countries 173.4 166.6 57.6 56.8 Total revenues $ 5,285.0 4,479.0 $ 1,802.4 1,554.2 The percentages of our sales by end market were as follows for the periods ended September 30: Nine-month Period Three-month Period 2022 2021 2022 2021 Manufacturing 72.0 % 68.6 % 72.9 % 68.9 % Non-residential construction 10.4 % 11.2 % 10.2 % 11.3 % Other 17.6 % 20.2 % 16.9 % 19.8 % 100.0 % 100.0 % 100.0 % 100.0 % The percentages of our sales by product line were as follows for the periods ended September 30: Nine-month Period Three-month Period Type Introduced 2022 2021 2022 2021 Fasteners (1) 1967 34.3 % 33.2 % 34.1 % 33.4 % Tools 1993 8.3 % 8.6 % 8.4 % 8.5 % Cutting tools 1996 5.0 % 5.0 % 5.0 % 5.0 % Hydraulics & pneumatics 1996 6.6 % 6.4 % 6.6 % 6.5 % Material handling 1996 5.7 % 5.5 % 5.6 % 5.5 % Janitorial supplies 1996 8.0 % 8.2 % 8.1 % 8.3 % Electrical supplies 1997 4.4 % 4.3 % 4.5 % 4.3 % Welding supplies 1997 3.8 % 3.8 % 3.9 % 3.8 % Safety supplies 1999 20.6 % 21.2 % 20.5 % 21.1 % Other 3.3 % 3.8 % 3.3 % 3.6 % 100.0 % 100.0 % 100.0 % 100.0 % (1) The fasteners product line represents fasteners and miscellaneous supplies. (3) Stockholders' Equity Dividends On October 12, 2022, our board of directors declared a quarterly dividend of $ 0.31 per share of common stock to be paid in cash on November 23, 2022 to shareholders of record at the close of business on October 27, 2022. Since 2011, we have paid quarterly cash dividends, and in 2020, we paid a special cash dividend late in the year. Future determination as to payment of dividends will depend on the financial condition and results of operations of the company and such other factors as are deemed relevant by the board of directors. 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) September 30, 2022 and 2021 (Unaudited) The following table presents the cash dividends either paid previously or declared by our board of directors for future payment on a per share basis: 2022 2021 First quarter $ 0.31 $ 0.28 Second quarter $ 0.31 $ 0.28 Third quarter $ 0.31 $ 0.28 Fourth quarter $ 0.31 $ 0.28 Total $ 1.24 $ 1.12 Stock Options The following tables summarize the details of options granted under our stock option plans that were outstanding as of September 30, 2022, and the assumptions used to value these grants. All such grants were effective at the close of business on the date of grant. Options Granted Option Exercise (Strike) Price Closing Stock Price on Date of Grant September 30, 2022 Date of Grant Options Outstanding Options Exercisable January 3, 2022 713,438 $ 62.00 $ 61.980 689,415 53,355 January 4, 2021 741,510 $ 48.00 $ 47.650 676,305 26,643 January 2, 2020 902,263 $ 38.00 $ 37.230 774,842 266,832 January 2, 2019 1,316,924 $ 26.00 $ 25.705 942,372 411,536 January 2, 2018 1,087,936 $ 27.50 $ 27.270 693,780 420,712 January 3, 2017 1,529,578 $ 23.50 $ 23.475 675,420 516,344 April 19, 2016 1,690,880 $ 23.00 $ 22.870 498,563 375,563 April 21, 2015 1,786,440 $ 21.00 $ 20.630 363,211 286,051 April 22, 2014 1,910,000 $ 28.00 $ 25.265 137,868 137,868 Total 11,678,969 5,451,776 2,494,904 Date of Grant Risk-free Interest Rate Expected Life of Option in Years Expected Dividend Yield Expected Stock Volatility Estimated Fair Value of Stock Option January 3, 2022 1.3 % 5.00 1.7 % 28.52 % $ 13.68 January 4, 2021 0.4 % 5.00 2.0 % 29.17 % $ 9.57 January 2, 2020 1.7 % 5.00 2.4 % 25.70 % $ 6.81 January 2, 2019 2.5 % 5.00 2.9 % 23.96 % $ 4.40 January 2, 2018 2.2 % 5.00 2.3 % 23.45 % $ 5.02 January 3, 2017 1.9 % 5.00 2.6 % 24.49 % $ 4.20 April 19, 2016 1.3 % 5.00 2.6 % 26.34 % $ 4.09 April 21, 2015 1.3 % 5.00 2.7 % 26.84 % $ 3.68 April 22, 2014 1.8 % 5.00 2.0 % 28.55 % $ 4.79 All of the options in the tables above vest and become exercisable over a period of up to eight years . Generally, each option will terminate approximately ten years after the grant date. 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) September 30, 2022 and 2021 (Unaudited) The fair value of each share-based option is estimated on the date of grant using a Black-Scholes valuation method that uses the assumptions listed above. The risk-free interest rate is based on the U.S. Treasury rate over the expected life of the option at the time of grant. The expected life is the average length of time over which we expect the employee groups will exercise their options, which is based on historical experience with similar grants. The dividend yield is estimated over the expected life of the option based on our current dividend payout, historical dividends paid, and expected future cash dividends. Expected stock volatilities are based on the movement of our stock price over the most recent historical period equivalent to the expected life of the option. Compensation expense equal to the grant date fair value is recognized for all of these awards over the vesting period. The stock-based compensation expense for the nine-month periods ended September 30, 2022 and 2021 was $ 4.4 and $ 4.3 , respectively, and the third quarter of 2022 and 2021 was $ 1.4 and $ 1.4 , respectively. Unrecognized stock-based compensation expense related to outstanding unvested stock options as of September 30, 2022 was $ 15.8 and is expected to be recognized over a weighted average period of 4.23 years. Any future changes in estimated forfeitures will impact this amount. Earnings Per Share The following tables present a reconciliation of the denominators used in the computation of basic and diluted earnings per share and a summary of the options to purchase shares of common stock which were excluded from the diluted earnings per share calculation because they were anti-dilutive: Nine-month Period Three-month Period Reconciliation 2022 2021 2022 2021 Basic weighted average shares outstanding 574,667,188 574,637,254 573,019,381 574,973,196 Weighted shares assumed upon exercise of stock options 1,912,011 2,291,000 1,724,550 2,286,643 Diluted weighted average shares outstanding 576,579,199 576,928,254 574,743,931 577,259,839 Nine-month Period Three-month Period Summary of Anti-dilutive Options Excluded 2022 2021 2022 2021 Options to purchase shares of common stock 1,343,160 680,227 1,340,567 688,410 Weighted average exercise prices of options $ 55.23 48.00 $ 55.22 48.00 Any dilutive impact summarized above related to periods when the average market price of our stock exceeded the exercise price of the potentially dilutive stock options then outstanding. Translation Adjustment Upon Merger of Foreign Subsidiary Retained earnings for the nine-month period ended September 30, 2022, includes $ 0.9 of historical cumulative translation upon the merger of a foreign subsidiary recognized in March 2022. (4) Income Taxes We file income tax returns in the United States federal jurisdiction, all states, and various local and foreign jurisdictions. We are no longer subject to income tax examinations by taxing authorities for taxable years before 2018 in the case of United States federal examinations, and with limited exceptions, before 2017 in the case of foreign, state, and local examinations. During the first nine months of 2022, there were no material changes in unrecognized tax benefits. During 2020, we deferred approximately $ 30.0 in payroll taxes as allowed under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), which was signed into law in March 2020 to help businesses navigate COVID-19 related challenges. The deferred payroll taxes were paid during the third quarter of 2021. (5) Operating Leases Certain operating leases for pick-up trucks contain residual value guarantee provisions which would generally become due at the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value. The aggregate residual value guarantee related to these leases is approximately $ 86.6 . We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote. 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) September 30, 2022 and 2021 (Unaudited) (6) Debt Commitments Credit Facility, Notes Payable, and Commitments Debt obligations and letters of credit outstanding at the end of each period consisted of the following: Average Interest Rate at September 30, 2022 Debt Outstanding Maturity Date September 30, 2022 December 31, 2021 Unsecured revolving credit facility 3.94 % September 28, 2027 $ 225.0 25.0 Senior unsecured promissory notes payable, Series B 2.45 % July 20, 2022 — 35.0 Senior unsecured promissory notes payable, Series C 3.22 % March 1, 2024 60.0 60.0 Senior unsecured promissory notes payable, Series D 2.66 % May 15, 2025 75.0 75.0 Senior unsecured promissory notes payable, Series E 2.72 % May 15, 2027 50.0 50.0 Senior unsecured promissory notes payable, Series F 1.69 % June 24, 2023 70.0 70.0 Senior unsecured promissory notes payable, Series G 2.13 % June 24, 2026 25.0 25.0 Senior unsecured promissory notes payable, Series H 2.50 % June 24, 2030 50.0 50.0 Total 555.0 390.0 Less: Current portion of debt ( 150.3 ) ( 60.0 ) Long-term debt $ 404.7 330.0 Outstanding letters of credit under unsecured revolving credit facility - contingent obligation $ 36.3 36.3 Unsecured Revolving Credit Facility We have an $ 835.0 committed unsecured revolving credit facility (Credit Facility) with an uncommitted accordion option to increase the aggregate revolving commitment by an additional $ 365.0 for a total commitment of $ 1,200.0 . The Credit Facility includes a committed letter of credit subfacility of $ 55.0 . Any borrowings outstanding under the Credit Facility for which we have the ability and intent to pay using cash within the next twelve months will be classified as a current liability. The Credit Facility contains certain financial and other covenants, and our right to borrow under the Credit Facility is conditioned upon, among other things, our compliance with these covenants. We are currently in compliance with these covenants. Borrowings under the Credit Facility generally bear interest at a rate per annum equal to Daily Simple SOFR plus a 0.10 % spread adjustment plus 0.95 %. We pay a commitment fee for the unused portion of the Credit Facility. This fee is either 0.10 % or 0.125 % per annum based on our usage of the Credit Facility. Senior Unsecured Promissory Notes Payable We have issued senior unsecured promissory notes under our master note agreement (the Master Note Agreement) in the aggregate principal amount of $ 330.0 as of September 30, 2022. Our aggregate borrowing capacity under the Master Note Agreement is $ 900.0 ; however, none of the institutional investors party to that agreement are committed to purchase notes thereunder. There is no amortization of these notes prior to their maturity date and interest is payable quarterly. The notes currently issued under our Master Note Agreement, including the maturity date and fixed interest rate per annum of each series of note, are contained in the table above. The Master Note Agreement contains certain financial and other covenants and we are currently in compliance with these covenants. (7) Legal Contingencies The nature of our potential exposure to legal contingencies is described in our 2021 annual report on Form 10-K in Note 10 of the Notes to Consolidated Financial Statements. As of September 30, 2022, there were no litigation matters that we consider to be probable or reasonably possible to have a material adverse outcome. 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) September 30, 2022 and 2021 (Unaudited) (8) Subsequent Events We evaluated all subsequent event activity and concluded that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the Notes to Condensed Consolidated Financial Statements, with the exception of the dividend declaration disclosed in Note 3 'Stockholders' Equity'. 11 Table of Contents