Fastenal Company 2022 Form 10-K Summary
Business context and reporting period
Fastenal Company filed its Form 10-K for the fiscal year ended December 31, 2022. The filing is an annual report rather than a standalone fourth-quarter filing; quarterly information is included where disclosed. Fastenal distributes industrial and construction supplies, primarily to manufacturing and non-residential construction customers, through 3,306 in-market locations in 25 countries and 16 distribution centers. The company employed 22,386 people at year-end.
Manufacturing represented 72.2% of 2022 sales and non-residential construction represented 10.3%. Fasteners accounted for 34.0% of sales, safety supplies for 20.8%, and other product lines for 45.2%. National accounts represented 57.8% of consolidated sales.
Financial and operating metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $6,980.6 million | $6,010.9 million | 16.1% |
| Gross profit | $3,215.8 million | $2,777.2 million | 15.8% |
| Gross margin | 46.1% | 46.2% | Down 10 bps |
| Operating income | $1,453.6 million | $1,217.4 million | 19.4% |
| Operating margin | 20.8% | 20.3% | Up 50 bps |
| Earnings before income taxes | $1,440.0 million | $1,207.8 million | 19.2% |
| Net earnings | $1,086.9 million | $925.0 million | 17.5% |
| Diluted EPS | $1.89 | $1.60 | 17.8% |
| Operating cash flow | $941.0 million | $770.1 million | 22.2% |
| Net capital expenditures | $162.4 million | $148.2 million | 9.6% |
| Cash and equivalents | $230.1 million | $236.2 million | Down $6.1 million |
| Total debt | $555.0 million | $390.0 million | Up $165.0 million |
Operating cash flow represented 86.6% of net earnings. Working capital remained a significant cash use: accounts receivable increased 12.6% to $1,013.2 million and inventories increased 12.1% to $1,708.0 million. Trade working capital, net of accounts payable, increased 12.6% to $2,466.2 million.
Fastenal returned $949.1 million to shareholders through $711.3 million of dividends and $237.8 million of share repurchases. It repurchased 5.0 million shares at an average price of approximately $47.58 per share. The annual dividend was $1.24 per share, compared with $1.12 in 2021.
Material changes versus the prior comparable period
- Sales growth reflected higher unit sales, pricing actions, and healthy manufacturing demand. Pricing contributed approximately 540 to 570 basis points to 2022 sales growth, but the contribution moderated to approximately 350 to 380 basis points in the fourth quarter.
- Daily sales growth slowed from 18.1% in the first half to 13.3% in the second half and 8.0% in December, indicating moderation in demand and more difficult comparisons.
- Manufacturing daily sales increased 21.3% for the year, while fastener daily sales increased 18.1%. Non-fastener daily sales increased 14.2%. Non-residential construction and reseller daily sales increased 5.3% for the year and declined 1.6% in the fourth quarter.
- Operating margin expanded as operating and administrative expenses fell to 25.2% of sales from 26.0%, reflecting operating leverage, lower occupancy expense as a percentage of sales, and efficiency gains from the company’s Digital Footprint.
- Gross margin declined modestly because of faster growth in lower-margin national account and Onsite business, incomplete recovery of higher product costs through pricing, and pressure on certain other product categories. Favorable fastener product mix and lower pandemic-related write-downs partly offset these factors.
- Onsite locations increased to 1,623 from 1,416, while branch locations declined to 1,683 from 1,793. Total in-market locations increased 3.0% to 3,306.
- Weighted FMI devices increased 10.0% to 102,151. FMI sales increased 33.3% to $2,587.3 million and represented 36.7% of sales. The Digital Footprint represented 49.3% of sales.
- Debt increased primarily to fund working capital, capital investment, dividends, and share repurchases. Interest expense increased to $14.3 million from $9.7 million, and the company had $225.0 million outstanding under its revolving credit facility at year-end.
- The effective tax rate increased to 24.5% from 23.4%, primarily due to reduced stock-option tax benefits, higher state income tax expense, and the absence of favorable reserve adjustments recorded in 2021.
Guidance, outlook, commentary, risks, and unusual items
Management described 2022 as a normalization year following pandemic-affected periods. Demand remained generally healthy, but activity moderated during the year. The company expects continued growth from Onsite locations, FMI, international operations, national accounts, and digital solutions.
- Management’s 2023 target is 375 to 400 new Onsite signings. Fastenal signed 356 in 2022, compared with 274 in 2021.
- Management expects 23,000 to 25,000 weighted FMI device signings in 2023. The company signed 20,735 MEUs in 2022, compared with 19,311 in 2021.
- 2023 net capital expenditures are expected to be $210.0 million to $230.0 million, compared with $162.4 million in 2022. Planned spending includes distribution-center automation, a Utah distribution center, branch conversions, information technology, and fleet equipment.
- Management expects operating cash flow to support capital expenditures, debt, lease obligations, and other liquidity needs. The company stated that it was in compliance with debt covenants.
- Key risks include economic cyclicality, weakening manufacturing or construction demand, competitive pricing pressure, product and transportation inflation, overseas sourcing and trade disruption, foreign currency movements, labor availability, supply-chain interruptions, interest-rate increases, cybersecurity and information-system failures, product liability, regulatory compliance, and execution risk related to Onsite and FMI expansion.
- Foreign currency changes reduced reported 2022 sales by $37.5 million, although the estimated earnings effect was immaterial. Management reported that COVID-19 had no meaningful direct impact on 2022 financial results.
- As of December 31, 2022, no litigation matter was considered probable or reasonably possible to have a material adverse outcome. The company reported no material impairments and no material unresolved staff comments.
- The independent auditor, KPMG LLP, issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The critical audit matter involved sufficiency of audit evidence over inventory quantities at in-market locations.
Most important facts for investors to verify
- Whether the late-2022 slowdown in daily sales continues and how manufacturing and non-residential construction demand develop in 2023.
- Whether pricing, product costs, customer mix, and Onsite growth pressure or support gross margin.
- Progress toward the 2023 Onsite signing target of 375 to 400 and FMI signing target of 23,000 to 25,000 MEUs.
- Whether inventory and receivables growth converts into operating cash flow without materially increasing working-capital financing needs.
- Execution of the planned $210.0 million to $230.0 million of 2023 capital expenditures and the associated return on invested capital.
- Refinancing and interest-rate exposure, including the $70.0 million debt maturity in 2023, $60.0 million in 2024, and floating-rate revolving debt.
- The sustainability of shareholder distributions relative to earnings, operating cash flow, debt levels, and capital requirements.
- Exposure to Asian sourcing, tariffs, shipping capacity, supply-chain disruption, cybersecurity incidents, and foreign currency movements.