FASTENAL CO 10-Q

ITEM 1 — FINANCIAL STATEMENTS FASTENAL COMPANY AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Amounts in millions except share information) (Unaudited) Assets March 31, 2023 December 31, 2022 Current assets: Cash and cash equivalents $ 239.8 230.1 Trade accounts receivable, net of allowance for credit losses of $ 6.1 and $ 8.3 , respectively 1,149.8 1,013.2 Inventories 1,651.9 1,708.0 Prepaid income taxes — 8.1 Other current assets 120.0 165.4 Total current assets 3,161.5 3,124.8 Property and equipment, net 1,003.5 1,010.0 Operating lease right-of-use assets 243.8 243.0 Other assets 168.2 170.8 Total assets $ 4,577.0 4,548.6 Liabilities and Stockholders' Equity Current liabilities: Current portion of debt $ 200.0 201.8 Accounts payable 266.8 255.0 Accrued expenses 229.2 241.1 Current portion of operating lease liabilities 91.4 91.9 Income taxes payable 75.8 — Total current liabilities 863.2 789.8 Long-term debt 200.0 353.2 Operating lease liabilities 156.7 155.2 Deferred income taxes 84.0 83.7 Other long-term liabilities 2.5 3.5 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, 571,024,422 and 570,811,674 shares issued and outstanding, respectively 5.7 5.7 Additional paid-in capital 11.4 3.6 Retained earnings 3,314.0 3,218.7 Accumulated other comprehensive loss ( 60.5 ) ( 64.8 ) Total stockholders' equity 3,270.6 3,163.2 Total liabilities and stockholders' equity $ 4,577.0 4,548.6 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) Three Months Ended March 31, 2023 2022 Net sales $ 1,859.1 1,704.1 Cost of sales 1,009.1 910.8 Gross profit 850.0 793.3 Operating and administrative expenses 456.8 435.3 Operating income 393.2 358.0 Interest income 0.4 0.1 Interest expense ( 3.9 ) ( 2.4 ) Earnings before income taxes 389.7 355.7 Income tax expense 94.6 86.1 Net earnings $ 295.1 269.6 Basic net earnings per share $ 0.52 0.47 Diluted net earnings per share $ 0.52 0.47 Basic weighted average shares outstanding 570.9 575.6 Diluted weighted average shares outstanding 572.6 577.6 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) Three Months Ended March 31, 2023 2022 Net earnings $ 295.1 269.6 Other comprehensive income, net of tax: Foreign currency translation adjustments (net of tax of $ 0.0 in 2023 and 2022) 4.3 2.3 Comprehensive income $ 299.4 271.9 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) Three Months Ended March 31, 2023 2022 Common stock Balance at beginning of period $ 5.7 5.8 Balance at end of period 5.7 5.8 Additional paid-in capital Balance at beginning of period 3.6 96.2 Stock options exercised 5.9 3.9 Stock-based compensation 1.9 1.5 Balance at end of period 11.4 101.6 Retained earnings Balance at beginning of period 3,218.7 2,970.9 Net earnings 295.1 269.6 Cash dividends paid ( 199.8 ) ( 178.4 ) Translation adjustment upon merger of foreign subsidiary — 0.9 Balance at end of period 3,314.0 3,063.0 Accumulated other comprehensive income (loss) Balance at beginning of period ( 64.8 ) ( 30.7 ) Other comprehensive income 4.3 2.3 Balance at end of period ( 60.5 ) ( 28.4 ) Total stockholders' equity $ 3,270.6 3,142.0 Cash dividends paid per share of common stock $ 0.35 0.31 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) Three Months Ended March 31, 2023 2022 Cash flows from operating activities: Net earnings $ 295.1 269.6 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation of property and equipment 41.8 41.2 (Gain) loss on sale of property and equipment ( 0.6 ) 3.5 Bad debt recoveries ( 1.4 ) ( 0.3 ) Deferred income taxes 0.3 1.0 Stock-based compensation 1.9 1.5 Amortization of intangible assets 2.7 2.7 Changes in operating assets and liabilities: Trade accounts receivable ( 133.7 ) ( 169.9 ) Inventories 57.7 ( 76.4 ) Other current assets 45.4 60.7 Accounts payable 8.5 56.8 Accrued expenses ( 11.9 ) ( 30.1 ) Income taxes 83.9 69.6 Other ( 1.2 ) 0.1 Net cash provided by operating activities 388.5 230.0 Cash flows from investing activities: Purchases of property and equipment ( 33.7 ) ( 35.5 ) Proceeds from sale of property and equipment 2.8 2.4 Other ( 0.1 ) ( 0.1 ) Net cash used in investing activities ( 31.0 ) ( 33.2 ) Cash flows from financing activities: Proceeds from debt obligations 230.0 235.0 Payments against debt obligations ( 385.0 ) ( 260.0 ) Proceeds from exercise of stock options 5.9 3.9 Cash dividends paid ( 199.8 ) ( 178.4 ) Net cash used in financing activities ( 348.9 ) ( 199.5 ) Effect of exchange rate changes on cash and cash equivalents 1.1 0.7 Net increase (decrease) in cash and cash equivalents 9.7 ( 2.0 ) Cash and cash equivalents at beginning of period 230.1 236.2 Cash and cash equivalents at end of period $ 239.8 234.2 Supplemental information: Cash paid for interest $ 5.1 2.3 Net cash paid for income taxes $ 9.7 15.2 Leased assets obtained in exchange for new operating lease liabilities $ 25.9 23.9 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) March 31, 2023 and 2022 (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, 2022. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Recently Issued Accounting Pronouncements We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements and do not believe that there are any other new pronouncements that have been issued that might have a material impact on our financial position or results of operations. (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 or as 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. Disaggregation of Revenue Our revenues related to the following geographic areas were as follows for the periods ended March 31: Three-month Period 2023 2022 United States $ 1,558.7 1,431.7 % of revenues 83.8 % 84.0 % Canada and Mexico 243.9 213.4 % of revenues 13.1 % 12.5 % North America 1,802.6 1,645.1 % of revenues 96.9 % 96.5 % All other foreign countries 56.5 59.0 % of revenues 3.1 % 3.5 % Total revenues $ 1,859.1 1,704.1 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) March 31, 2023 and 2022 (Unaudited) The percentages of our sales by end market were as follows for the periods ended March 31: Three-month Period 2023 2022 Manufacturing 74.6 % 71.2 % Non-residential construction 9.3 % 10.4 % Other 16.1 % 18.4 % 100.0 % 100.0 % The percentages of our sales by product line were as follows for the periods ended March 31: Three-month Period Type Introduced 2023 2022 Fasteners (1) 1967 33.6 % 34.3 % Tools 1993 8.5 % 8.2 % Cutting tools 1996 5.4 % 5.0 % Hydraulics & pneumatics 1996 6.6 % 6.5 % Material handling 1996 5.6 % 5.6 % Janitorial supplies 1996 8.1 % 7.9 % Electrical supplies 1997 4.6 % 4.4 % Welding supplies 1997 4.0 % 3.7 % Safety supplies 1999 20.4 % 21.0 % Other 3.2 % 3.4 % 100.0 % 100.0 % (1) The fasteners product line represents fasteners and miscellaneous supplies. (3) Stockholders' Equity Dividends On April 12, 2023, our board of directors declared a quarterly dividend of $ 0.35 per share of common stock to be paid in cash on May 25, 2023 to shareholders of record at the close of business on April 27, 2023. 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: 2023 2022 First quarter $ 0.35 $ 0.31 Second quarter $ 0.35 $ 0.31 Third quarter $ 0.31 Fourth quarter $ 0.31 Total $ 0.70 $ 1.24 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) March 31, 2023 and 2022 (Unaudited) Stock Options The following tables summarize the details of options granted under our stock option plans that were outstanding as of March 31, 2023, and the assumptions used to value those grants. All such grants were effective at the close of business on the date of grant. Options Granted Option Exercise Price Closing Stock Price on Date of Grant March 31, 2023 Date of Grant Options Outstanding Options Exercisable January 3, 2023 1,071,943 $ 48.00 $ 47.400 1,062,367 70,562 January 3, 2022 713,438 $ 62.00 $ 61.980 666,921 53,355 January 4, 2021 741,510 $ 48.00 $ 47.650 654,243 244,108 January 2, 2020 902,263 $ 38.00 $ 37.230 744,467 382,024 January 2, 2019 1,316,924 $ 26.00 $ 25.705 900,545 559,781 January 2, 2018 1,087,936 $ 27.50 $ 27.270 658,540 527,626 January 3, 2017 1,529,578 $ 23.50 $ 23.475 651,325 547,059 April 19, 2016 1,690,880 $ 23.00 $ 22.870 478,231 356,861 April 21, 2015 1,786,440 $ 21.00 $ 20.630 322,855 247,151 April 22, 2014 1,910,000 $ 28.00 $ 25.265 30,298 30,298 Total 12,750,912 6,169,792 3,018,825 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, 2023 4.0 % 5.00 2.6 % 29.58 % $ 11.62 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 10 years after the grant date. 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, net of forfeitures, 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. 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) March 31, 2023 and 2022 (Unaudited) 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 three-month periods ended March 31, 2023 and 2022 was $ 1.9 and $ 1.5 , respectively. Unrecognized stock-based compensation expense related to outstanding unvested stock options as of March 31, 2023 was $ 22.3 and is expected to be recognized over a weighted average period of 4.67 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: Three-month Period Reconciliation 2023 2022 Basic weighted average shares outstanding 570,928,848 575,559,161 Weighted shares assumed upon exercise of stock options 1,703,741 2,059,645 Diluted weighted average shares outstanding 572,632,589 577,618,806 Three-month Period Summary of Anti-dilutive Options Excluded 2023 2022 Options to purchase shares of common stock 2,269,908 930,401 Weighted average exercise prices of options $ 52.17 58.40 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. (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 2019 in the case of United States federal examinations, and with limited exception, before 2017 in the case of foreign, state, and local examinations. During the first quarter of 2023, 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 was approximately $ 87.4 . 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) March 31, 2023 and 2022 (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 March 31, 2023 Debt Outstanding Maturity Date March 31, 2023 December 31, 2022 Unsecured revolving credit facility 5.85 % September 28, 2027 $ 70.0 225.0 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 400.0 555.0 Less: Current portion of debt ( 200.0 ) ( 201.8 ) Long-term debt $ 200.0 353.2 Outstanding letters of credit under unsecured revolving credit facility - contingent obligation $ 32.7 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 amount 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 12 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 March 31, 2023. 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 2022 annual report on Form 10-K in Note 10 of the Notes to Consolidated Financial Statements. As of March 31, 2023, 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) March 31, 2023 and 2022 (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