FASTENAL CO 10-Q

ITEM 1 — FINANCIAL STATEMENTS FASTENAL COMPANY AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Amounts in millions except share and per share information) (Unaudited) Assets September 30, 2024 December 31, 2023 Current assets: Cash and cash equivalents $ 292.2 221.3 Trade accounts receivable, net of allowance for credit losses of $ 4.2 and $ 6.4 , respectively 1,200.6 1,087.6 Inventories 1,559.5 1,522.7 Prepaid income taxes 16.8 17.5 Other current assets 191.4 171.8 Total current assets 3,260.5 3,020.9 Property and equipment, net 1,044.2 1,011.1 Operating lease right-of-use assets 280.7 270.2 Other assets 153.0 160.7 Total assets $ 4,738.4 4,462.9 Liabilities and Stockholders' Equity Current liabilities: Current portion of debt $ 115.0 60.0 Accounts payable 301.7 264.1 Accrued expenses 225.7 241.0 Current portion of operating lease liabilities 99.2 96.2 Total current liabilities 741.6 661.3 Long-term debt 125.0 200.0 Operating lease liabilities 187.6 178.8 Deferred income taxes 75.8 73.0 Other long-term liabilities 11.0 1.0 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, 572,881,159 and 571,982,367 shares issued and outstanding, respectively 5.7 5.7 Additional paid-in capital 73.3 41.0 Retained earnings 3,575.5 3,356.9 Accumulated other comprehensive loss ( 57.1 ) ( 54.8 ) Total stockholders' equity 3,597.4 3,348.8 Total liabilities and stockholders' equity $ 4,738.4 4,462.9 See accompanying Notes to Condensed Consolidated Financial Statements. 1 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Income (Amounts in millions except income per share) (Unaudited) (Unaudited) Nine Months Ended September 30, Three Months Ended September 30, 2024 2023 2024 2023 Net sales $ 5,721.5 5,588.1 $ 1,910.2 1,845.9 Cost of sales 3,137.8 3,033.0 1,051.6 998.3 Gross profit 2,583.7 2,555.1 858.6 847.6 Selling, general, and administrative expenses 1,418.5 1,380.2 470.5 460.9 Operating income 1,165.2 1,174.9 388.1 386.7 Interest income 4.2 1.8 1.3 0.8 Interest expense ( 5.6 ) ( 8.9 ) ( 1.8 ) ( 2.1 ) Income before income taxes 1,163.8 1,167.8 387.6 385.4 Income tax expense 275.3 279.2 89.5 89.9 Net income $ 888.5 888.6 $ 298.1 295.5 Basic net income per share $ 1.55 1.56 $ 0.52 0.52 Diluted net income per share $ 1.55 1.55 $ 0.52 0.52 Basic weighted average shares outstanding 572.6 571.1 572.7 571.4 Diluted weighted average shares outstanding 574.1 572.9 574.2 573.1 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, 2024 2023 2024 2023 Net income $ 888.5 888.6 $ 298.1 295.5 Other comprehensive (loss) income, net of tax: Foreign currency translation adjustments (net of tax of $ 0.0 in 2024 and 2023) ( 2.3 ) ( 6.7 ) 17.4 ( 14.6 ) Comprehensive income $ 886.2 881.9 $ 315.5 280.9 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) (Unaudited) Nine Months Ended September 30, Three Months Ended September 30, 2024 2023 2024 2023 Common stock Balance at beginning of period $ 5.7 5.7 $ 5.7 5.7 Balance at end of period 5.7 5.7 5.7 5.7 Additional paid-in capital Balance at beginning of period 41.0 3.6 63.6 19.9 Stock options exercised 26.3 15.4 7.7 2.9 Stock-based compensation 6.0 5.6 2.0 1.8 Balance at end of period 73.3 24.6 73.3 24.6 Retained earnings Balance at beginning of period 3,356.9 3,218.7 3,500.8 3,412.1 Net income 888.5 888.6 298.1 295.5 Cash dividends paid ( 669.9 ) ( 599.5 ) ( 223.4 ) ( 199.8 ) Balance at end of period 3,575.5 3,507.8 3,575.5 3,507.8 Accumulated other comprehensive (loss) income Balance at beginning of period ( 54.8 ) ( 64.8 ) ( 74.5 ) ( 56.9 ) Other comprehensive (loss) income ( 2.3 ) ( 6.7 ) 17.4 ( 14.6 ) Balance at end of period ( 57.1 ) ( 71.5 ) ( 57.1 ) ( 71.5 ) Total stockholders' equity $ 3,597.4 3,466.6 $ 3,597.4 3,466.6 Cash dividends paid per share of common stock $ 1.17 1.05 $ 0.39 0.35 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, 2024 2023 2024 2023 Cash flows from operating activities: Net income $ 888.5 888.6 $ 298.1 295.5 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 123.0 126.1 41.8 42.1 Gain on sale of property and equipment ( 3.0 ) ( 2.7 ) ( 1.3 ) ( 1.5 ) Bad debt (recoveries) expense ( 0.2 ) 1.4 0.4 1.2 Deferred income taxes 2.8 ( 4.4 ) 1.6 ( 5.0 ) Stock-based compensation 6.0 5.6 2.0 1.8 Amortization of intangible assets 8.0 8.0 2.6 2.6 Changes in operating assets and liabilities: Trade accounts receivable ( 113.5 ) ( 159.5 ) 7.4 ( 4.5 ) Inventories ( 36.2 ) 191.7 ( 48.4 ) 46.1 Other current assets ( 19.6 ) 15.4 ( 26.1 ) ( 8.3 ) Accounts payable 40.3 21.7 9.6 11.8 Accrued expenses ( 14.8 ) ( 4.7 ) 7.7 6.6 Income taxes 0.7 ( 7.2 ) ( 0.3 ) ( 0.6 ) Other 8.5 ( 1.3 ) 1.8 0.3 Net cash provided by operating activities 890.5 1,078.7 296.9 388.1 Cash flows from investing activities: Purchases of property and equipment ( 166.3 ) ( 136.5 ) ( 59.4 ) ( 46.9 ) Proceeds from sale of property and equipment 9.6 8.8 3.6 4.0 Other ( 0.3 ) ( 0.5 ) ( 0.1 ) ( 0.1 ) Net cash used in investing activities ( 157.0 ) ( 128.2 ) ( 55.9 ) ( 43.0 ) Cash flows from financing activities: Proceeds from debt obligations 590.0 790.0 205.0 155.0 Payments against debt obligations ( 610.0 ) ( 1,085.0 ) ( 200.0 ) ( 245.0 ) Proceeds from exercise of stock options 26.3 15.4 7.7 2.9 Cash dividends paid ( 669.9 ) ( 599.5 ) ( 223.4 ) ( 199.8 ) Net cash used in financing activities ( 663.6 ) ( 879.1 ) ( 210.7 ) ( 286.9 ) Effect of exchange rate changes on cash and cash equivalents 1.0 ( 4.0 ) 6.4 ( 4.3 ) Net increase in cash and cash equivalents 70.9 67.4 36.7 53.9 Cash and cash equivalents at beginning of period 221.3 230.1 255.5 243.6 Cash and cash equivalents at end of period $ 292.2 297.5 $ 292.2 297.5 Supplemental information: Cash paid for interest $ 6.0 10.3 $ 1.8 2.1 Net cash paid for income taxes $ 269.4 288.0 $ 87.6 94.3 Leased assets obtained in exchange for new operating lease liabilities $ 75.5 96.3 $ 26.1 32.0 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, 2024 and 2023 (Unaudited) (1) Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Fastenal Company and subsidiaries (collectively referred to as '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, 2023. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Beginning in the first quarter of 2024, references to 'net earnings', 'operating and administrative expenses', and 'earnings before income taxes' have been revised in our condensed consolidated financial statements and financial reports, including this quarterly report on Form 10-Q, to 'net income', 'selling, general, and administrative (SG&A) expenses', and 'income before income taxes', respectively. Recently Issued Accounting Pronouncements In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , which enhances reporting requirements under Topic 280. The enhanced disclosure requirements include: title and position of the Chief Operating Decision Maker (CODM), significant segment expenses provided to the CODM, extending certain annual disclosures to interim periods, clarifying single reportable segment entities must apply Accounting Standards Codification 280 in its entirety, and permitting more than one measure of segment profit or loss to be reported under certain circumstances. This change is effective for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024. This change will apply retrospectively to all periods presented. We are currently evaluating the impact that the adoption of ASU 2023-07 will have on our consolidated financial statements and disclosures and plan to adopt the standard in our 2024 annual report on Form 10-K. In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740) , which establishes new income tax disclosure requirements in addition to modifying and eliminating certain existing requirements. The new guidance requires consistent categorization and greater disaggregation of information in the rate reconciliation, as well as further disaggregation of income taxes paid. This change is effective for annual periods beginning after December 15, 2024. This change will apply on a prospective basis to annual financial statements for periods beginning after the effective date. However, retrospective application in all prior periods presented is permitted. We are currently evaluating the impact that the adoption of ASU 2023-09 will have on our consolidated financial statements and disclosures and we anticipate adoption in our 2025 annual report on Form 10-K. (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. 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, 2024 and 2023 (Unaudited) Disaggregation of Revenue Revenues are attributable to countries based on the selling location from which the sale occurred. Our revenues related to the following geographic areas were as follows for the periods ended September 30: Nine-month Period Three-month Period 2024 2023 2024 2023 United States $ 4,760.2 4,675.0 $ 1,587.2 1,544.6 % of revenues 83.2 % 83.7 % 83.1 % 83.7 % Canada and Mexico 783.7 744.5 264.1 245.7 % of revenues 13.7 % 13.3 % 13.8 % 13.3 % North America 5,543.9 5,419.5 1,851.3 1,790.3 % of revenues 96.9 % 97.0 % 96.9 % 97.0 % All other foreign countries 177.6 168.6 58.9 55.6 % of revenues 3.1 % 3.0 % 3.1 % 3.0 % Total revenues $ 5,721.5 5,588.1 $ 1,910.2 1,845.9 The percentages of our sales by end market were as follows for the periods ended September 30: Nine-month Period Three-month Period 2024 2023 2024 2023 Manufacturing 75.2 % 74.6 % 75.1 % 74.3 % Non-residential construction 8.6 % 9.2 % 8.6 % 9.1 % Other 16.2 % 16.2 % 16.3 % 16.6 % 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 2024 2023 2024 2023 Fasteners (1) 1967 30.9 % 32.8 % 30.2 % 32.1 % Tools 1993 8.5 % 8.5 % 8.4 % 8.5 % Cutting tools 1996 5.3 % 5.3 % 5.3 % 5.2 % Hydraulics & pneumatics 1996 6.8 % 6.7 % 6.8 % 6.7 % Material handling 1996 5.6 % 5.6 % 5.7 % 5.6 % Janitorial supplies 1996 8.7 % 8.3 % 9.0 % 8.5 % Electrical supplies 1997 4.6 % 4.6 % 4.8 % 4.6 % Welding supplies 1997 4.2 % 4.1 % 4.2 % 4.0 % Safety supplies 1999 22.0 % 20.8 % 22.5 % 21.4 % Other 3.4 % 3.3 % 3.1 % 3.4 % 100.0 % 100.0 % 100.0 % 100.0 % (1) The fastener product line represents fasteners and miscellaneous supplies. 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, 2024 and 2023 (Unaudited) (3) Stockholders' Equity Dividends On October 10, 2024, our board of directors declared a quarterly dividend of $ 0.39 per share of common stock to be paid in cash on November 22, 2024 to shareholders of record at the close of business on October 25, 2024. 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: 2024 2023 First quarter $ 0.39 $ 0.35 Second quarter 0.39 0.35 Third quarter 0.39 0.35 Fourth quarter 0.39 0.35 Fourth quarter (special) 0.38 Total $ 1.56 $ 1.78 Stock Options The following tables summarize the details of options granted under our stock option plans that were outstanding as of September 30, 2024, 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 September 30, 2024 Date of Grant Options Outstanding Options Exercisable January 2, 2024 814,912 $ 64.00 $ 63.550 778,985 50,717 January 3, 2023 1,071,943 $ 48.00 $ 47.400 906,427 191,950 January 3, 2022 713,438 $ 62.00 $ 61.980 553,713 213,956 January 4, 2021 741,510 $ 48.00 $ 47.650 514,684 254,438 January 2, 2020 902,263 $ 38.00 $ 37.230 562,833 355,612 January 2, 2019 1,316,924 $ 26.00 $ 25.705 585,625 454,291 January 2, 2018 1,087,936 $ 27.50 $ 27.270 449,406 377,058 January 3, 2017 1,529,578 $ 23.50 $ 23.475 256,174 214,576 April 19, 2016 1,690,880 $ 23.00 $ 22.870 107,026 107,026 Total 9,869,384 4,714,873 2,219,624 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, 2024 and 2023 (Unaudited) 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 2, 2024 3.8 % 5.00 2.2 % 28.44 % $ 15.87 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 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. 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, 2024 and 2023 was $ 6.0 and $ 5.6 , respectively, while the third quarter of 2024 and 2023 was $ 2.0 and $ 1.8 , respectively. Unrecognized stock-based compensation expense related to outstanding unvested stock options as of September 30, 2024 was $ 20.9 and is expected to be recognized over a weighted average period of 4.25 years. Any future changes in estimated forfeitures will impact this amount. Income Per Share The following tables present a reconciliation of the denominators used in the computation of basic and diluted income per share and a summary of the options to purchase shares of common stock which were excluded from the diluted income per share calculation because they were anti-dilutive: Nine-month Period Three-month Period Reconciliation 2024 2023 2024 2023 Basic weighted average shares outstanding 572,551,276 571,145,110 572,735,205 571,368,442 Weighted shares assumed upon exercise of stock options 1,584,650 1,726,310 1,448,456 1,731,267 Diluted weighted average shares outstanding 574,135,926 572,871,420 574,183,661 573,099,709 Nine-month Period Three-month Period Summary of Anti-dilutive Options Excluded 2024 2023 2024 2023 Options to purchase shares of common stock 1,230,831 1,831,551 1,227,996 1,598,463 Weighted average exercise prices of options $ 63.18 53.05 $ 63.19 53.65 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. 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, 2024 and 2023 (Unaudited) (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 2021 in the case of United States federal examinations, and with limited exception, before 2018 in the case of foreign, state, and local examinations. During the first nine months of 2024, 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 $ 134.3 . We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote. (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, 2024 Debt Outstanding Maturity Date September 30, 2024 December 31, 2023 Unsecured revolving credit facility 5.88 % September 28, 2027 $ 40.0 — Senior unsecured promissory notes payable, Series C 3.22 % March 1, 2024 — 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 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 240.0 260.0 Less: Current portion of debt ( 115.0 ) ( 60.0 ) Long-term debt $ 125.0 200.0 Outstanding letters of credit under unsecured revolving credit facility - contingent obligation $ 31.2 32.7 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. 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, 2024 and 2023 (Unaudited) 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 $ 200.0 as of September 30, 2024. 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 2023 annual report on Form 10-K in Note 10 of the Notes to Consolidated Financial Statements. As of September 30, 2024, there were no litigation matters that we consider to be probable or reasonably possible to have a material adverse outcome. (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