Fastenal Company — Q1 2022 Form 10-Q Summary
Business context and reporting period
Fastenal is a North American distributor of industrial and construction supplies serving primarily manufacturing and non-residential construction customers through approximately 3,200 in-market locations. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $1,704.1 million | $1,417.0 million | 20.3% increase |
| Gross profit | $793.3 million | $643.4 million | 23.3% increase |
| Gross margin | 46.6% | 45.4% | Up 120 basis points |
| Operating income | $358.0 million | $280.3 million | 27.7% increase |
| Operating margin | 21.0% | 19.8% | Up 120 basis points |
| Net earnings | $269.6 million | $210.6 million | 28.0% increase |
| Diluted EPS | $0.47 | $0.37 | 27.8% increase |
| Operating cash flow | $230.0 million | $274.8 million | 16.3% decrease |
| Capital expenditures, net | $33.1 million | Not clearly provided in the filing text | 10.3% increase stated by management |
Cash and cash equivalents were $234.2 million at March 31, 2022, compared with $236.2 million at December 31, 2021. Total debt was $365.0 million, including $35.0 million current debt and $330.0 million long-term debt. The company had a $700.0 million unsecured revolving credit facility, with no borrowings outstanding and $36.3 million of letters of credit outstanding. Management stated that the company was in compliance with applicable debt covenants.
Working capital increased materially: accounts receivable were $1,071.6 million and inventories were $1,600.8 million at March 31, 2022, up 25.9% and 22.6%, respectively, from March 31, 2021. Cash dividends paid were $178.4 million, or $0.31 per share. The board declared another $0.31-per-share quarterly dividend payable May 25, 2022.
Material changes versus the prior comparable period
- Net daily sales increased 18.4%, after adjusting for one additional selling day in Q1 2022. Management attributed growth to stronger manufacturing and construction activity, favorable pricing, and the absence of adverse weather experienced in Q1 2021.
- Product pricing contributed approximately 580 to 610 basis points to sales growth, compared with 60 to 90 basis points in Q1 2021, primarily reflecting actions to offset product and transportation inflation.
- Manufacturing daily sales increased 23.9%, while non-residential construction daily sales increased 14.1%. Government customer sales decreased 6.2% and represented 4.3% of sales.
- Fastener daily sales increased 24.6%; safety daily sales increased 15.3%; and other product daily sales increased 14.8%.
- Gross margin benefited from the absence of a $7.8 million mask inventory write-down recorded in Q1 2021, improved safety-product margins, and the absence of lower-margin COVID supply commitments. These benefits were partly offset by higher transportation and fuel costs.
- Operating cash flow declined despite higher earnings because growth and inflation required increased investment in receivables and inventory. Inventory increased $295.5 million year over year, and accounts receivable increased $220.6 million.
- Digital and customer-proximity initiatives continued to expand. Active Onsite locations increased 12.1% year over year to 1,440, weighted FASTBin and FASTVend installations increased 10.9% to 94,425, and FMI sales increased 48.4% to $610.5 million.
- The company added employees while rationalizing its physical network. Total FTE headcount increased 4.8% year over year to 18,958; six branches were opened and 39 closed during the quarter, while 57 Onsite locations were activated and 33 closed.
Guidance, outlook, commentary, risks, and unusual items
- Management maintained its 2022 goal of 375 to 400 annual Onsite signings and 23,000 to 25,000 weighted FASTBin and FASTVend device signings. Q1 signings improved but were below the pace needed to achieve the annual device-signing goal.
- Management expects 2022 net capital expenditures of approximately $180 million to $200 million, compared with $148.2 million in 2021, focused on FMI equipment, distribution-center automation and upgrades, information technology, and manufacturing capacity.
- Management expects an ongoing tax rate of approximately 24.5%, absent discrete tax items or broader tax-law changes.
- Key risks include economic weakness, manufacturing or construction downturns, pricing pressure, inflation in fuel, transportation, steel and other inputs, supply-chain and labor constraints, foreign currency movements, customer credit and inventory requirements, competition, cybersecurity incidents, and execution or adoption risks related to FMI and Onsite strategies.
- Nickel-price volatility related to the Ukrainian conflict could affect stainless-steel fastener costs, although stainless-steel fasteners represented less than 5% of sales and the Q1 2022 earnings impact was immaterial. The future impact of energy and fossil-fuel cost increases was described as unclear.
- The company reported no litigation matters considered probable or reasonably possible to have a material adverse outcome. It also reported no material change in internal control over financial reporting and concluded its disclosure controls were effective.
- An immaterial prior-period revision reclassified $2.9 million from additional paid-in capital to common stock in connection with the 2019 stock split. The filing also disclosed a $0.9 million historical foreign-currency translation adjustment recognized in retained earnings upon the merger of a foreign subsidiary.
Important facts for investors to verify
- Whether sales growth remains sustainable after separating unit growth, pricing, favorable weather comparisons, and changes in customer mix.
- Whether higher receivables and inventory convert into cash without increased credit losses, markdowns, or working-capital pressure.
- Whether transportation, fuel, steel, nickel, labor, and other inflationary costs can continue to be passed through without margin erosion.
- Progress toward the 2022 Onsite and FMI signing targets and the financial returns from the expanding digital footprint.
- Execution of the planned $180 million to $200 million capital investment program and its effect on free cash flow and leverage.
- The maturity of the $35.0 million Series B notes in July 2022 and the company’s continuing liquidity and refinancing plans.
- Actual future effects of the Ukrainian conflict, supply-chain disruption, interest-rate changes, foreign currency movements, and broader economic conditions.