Fastenal Company — Fiscal 2021 Form 10-K Summary
Business context and reporting period
Fastenal Company filed its Form 10-K for the fiscal year ended December 31, 2021. The company distributes industrial and construction supplies, primarily to manufacturing and non-residential construction customers, through branches, Onsite locations, Fastenal Managed Inventory (FMI), eCommerce, and digital solutions. Fastenal reported one business segment and operated 3,209 in-market locations in 25 countries with 20,507 employees at year end.
Traditional and international branches represented 61.9% of 2021 sales, while Onsite locations represented 31.6%. National accounts represented 56.6% of sales. The company’s digital footprint, including FMI and qualifying eCommerce sales, represented 42.7% of sales.
Financial performance and key metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $6,010.9 million | $5,647.3 million | 6.4% increase |
| Gross profit | $2,777.2 million | $2,567.8 million | 8.2% increase |
| Gross margin | 46.2% | 45.5% | Up 70 basis points |
| Operating income | $1,217.4 million | $1,141.8 million | 6.6% increase |
| Operating margin | 20.3% | 20.2% | Up 10 basis points |
| Net earnings | $925.0 million | $859.1 million | 7.7% increase |
| Diluted EPS | $1.60 | $1.49 | 7.4% increase |
| Operating cash flow | $770.1 million | $1,101.8 million | Decrease of $331.7 million |
| Net capital expenditures | $148.2 million | $157.5 million | Decrease of $9.3 million |
Operating and administrative expenses increased to $1,559.8 million from $1,426.0 million, or 26.0% of sales versus 25.3% in 2020. Higher employee-related costs, information technology spending, travel, legal settlements, wages, bonuses, and commissions were principal factors.
Cash and cash equivalents were $236.2 million at December 31, 2021, compared with $245.7 million at year end 2020. Inventory increased 13.9% to $1,523.6 million, and net accounts receivable increased 17.0% to $900.2 million. The resulting increase in working capital was the primary reason operating cash flow declined.
Total debt was $390.0 million, consisting of $365.0 million of senior unsecured notes and $25.0 million outstanding under a $700.0 million revolving credit facility. The company also had $36.3 million of outstanding letters of credit. Fastenal stated that it was in compliance with its debt covenants and had substantially all of the revolving facility available.
Fastenal paid $643.7 million in dividends during 2021, or $1.12 per share, and made no common-stock repurchases. The board declared a quarterly dividend of $0.31 per share in January 2022.
Material changes versus comparable periods
- Industrial demand recovered sharply from the COVID-19-related weakness of 2020. Manufacturing sales grew 18.4% on a daily-sales basis, and fastener daily sales increased 18.8%.
- Safety-product sales declined as pandemic-related PPE demand normalized, but safety products remained 21.2% of sales versus 17.9% in 2019.
- Pricing contributed approximately 200 to 230 basis points to 2021 sales growth, including approximately 440 to 470 basis points in the fourth quarter.
- Gross margin improved as product margins, supplier rebates, and operating leverage benefited from the recovery. A $7.8 million mask inventory write-down in the first quarter partially offset the improvement.
- Onsite locations increased 11.9% to 1,416, while branches declined 10.5% to 1,793. The company activated 242 Onsites and closed 91, net of conversions.
- Weighted FMI installations increased 10.6% to 92,874 machine equivalent units. FMI sales increased 39.9% to $1,941.3 million, or 32.0% of sales.
- Growth-driver signings remained below management’s stated potential: 274 new Onsites versus a target of 375 to 400, and 19,311 weighted FMI signings versus a target of 23,000 to 25,000.
- Compared with 2019, 2021 net sales increased 12.7%, operating income increased 15.2%, and net earnings increased 17.0%. Fourth-quarter 2021 sales increased 20.0% versus fourth-quarter 2019.
Guidance, outlook, commentary, risks, and unusual items
Management expected 375 to 400 new Onsite signings and 23,000 to 25,000 weighted FMI signings in 2022, although achieving these targets was expected to require improvement in customer access and decision-making conditions. The company expected 2022 net capital expenditures of $180.0 million to $200.0 million, primarily for FMI equipment, distribution automation and facility upgrades, and manufacturing capacity.
Management described demand as strong but continued to identify supply-chain disruption, labor shortages, inflation in materials, transportation and wages, and COVID-19 variants as significant operating constraints. These factors affected product availability, costs, customer access, and the sales cycle for Onsite and FMI solutions.
Fastenal sources significant products from Asia, including China, creating exposure to tariffs, trade restrictions, shipping disruptions, geopolitical events, and supplier concentration by geography. The company also faces risks from cyclical manufacturing and construction demand, competitive pricing, labor availability, cybersecurity and information systems, product liability, foreign currency, energy and steel prices, and floating-rate debt tied to LIBOR.
The filing reports no litigation matters considered probable or reasonably possible to have a material adverse outcome. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The critical audit matter concerned audit evidence for inventory quantities held at the company’s 3,209 in-market locations.
Important facts for investors to verify
- Whether 2022 demand and pricing can offset ongoing inflation, transportation costs, labor pressure, and potential margin effects from customer and product mix.
- Progress toward the 2022 Onsite and FMI signing targets and whether new signings convert into sustained sales growth and acceptable returns.
- Inventory growth, accounts receivable collection, and operating cash conversion following the significant 2021 working-capital investment.
- Debt maturities, including $35.0 million of notes due in 2022 and $70.0 million due in 2023, along with the transition away from LIBOR for the revolving credit facility.
- The sustainability of gross margin improvement after the normalization of PPE demand and the impact of larger national-account and Onsite sales, which generally carry lower margins.
- Potential effects of COVID-19 developments, supply-chain disruptions, trade policies, tariffs, commodity costs, and foreign exchange movements.