Fastenal Company 10-Q Summary
Business Context and Reporting Period
Fastenal Company is a North American distributor of industrial and construction supplies serving primarily manufacturing and non-residential construction customers through branches, Onsite locations, and digital fulfillment technologies. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022.
- In-market locations: 3,238, including 1,737 branches and 1,501 active Onsite locations.
- Manufacturing represented 71.8% of second-quarter sales; non-residential construction represented 10.7%.
- Manufacturing, non-residential construction, and other markets generated 71.5%, 10.5%, and 18.0% of first-half sales, respectively.
Financial Results and Key Metrics
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Net sales | $1,778.6 million | $1,507.7 million | 18.0% |
| Gross profit | $827.6 million | $700.7 million | 18.1% |
| Gross margin | 46.5% | 46.5% | Flat |
| Operating income | $383.4 million | $317.8 million | 20.7% |
| Operating margin | 21.6% | 21.1% | Up 50 bps |
| Net earnings | $287.1 million | $239.7 million | 19.8% |
| Diluted EPS | $0.50 | $0.42 | 19.0% |
| Operating cash flow | $151.2 million | $171.5 million | Down 11.8% |
| Metric | Six Months 2022 | Six Months 2021 | Change |
|---|---|---|---|
| Net sales | $3,482.6 million | $2,924.7 million | 19.1% |
| Gross profit | $1,620.9 million | $1,344.1 million | 20.6% |
| Gross margin | 46.5% | 46.0% | Up 50 bps |
| Operating income | $741.4 million | $598.1 million | 24.0% |
| Operating margin | 21.3% | 20.5% | Up 80 bps |
| Net earnings | $556.7 million | $450.3 million | 23.6% |
| Diluted EPS | $0.96 | $0.78 | 23.1% |
| Operating cash flow | $381.2 million | $446.3 million | Down 14.6% |
At June 30, 2022, cash and cash equivalents were $247.9 million. Total debt was $505.0 million, consisting of $195.0 million current debt and $310.0 million long-term debt. The company had a $700.0 million unsecured revolving credit facility and was in compliance with its covenants. Letters of credit outstanding totaled $36.3 million.
Capital expenditures were $83.0 million in the first six months, or $76.5 million net of asset-sale proceeds. Management expected full-year 2022 net investment in property and equipment of $180.0 million to $200.0 million. Dividends paid in the first half totaled $356.9 million, and share repurchases totaled $49.3 million for 1.0 million shares.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected stronger underlying demand, higher unit sales, and product pricing actions. Pricing contributed approximately 660 to 690 basis points to second-quarter sales growth and 620 to 650 basis points in the first half.
- Foreign exchange reduced second-quarter sales by approximately 50 basis points and first-half sales by approximately 30 basis points.
- Manufacturing daily sales increased 23.1% in the quarter and 23.5% in the first half; non-residential construction daily sales increased 10.8% and 12.3%, respectively.
- Operating expense leverage improved, with operating and administrative expenses declining to 25.0% of sales in the quarter from 25.4%, and to 25.3% in the first half from 25.5%.
- First-half gross margin benefited partly from the absence of a $7.8 million mask-inventory write-down recorded in the first quarter of 2021.
- Receivables increased 21.5% and inventories increased 25.4% year over year, reflecting business growth, product-cost inflation, deeper stocking, and supply-chain support. The resulting working-capital investment reduced cash conversion.
- Weighted FMI installations increased 10.6% year over year to 96,872. FMI sales increased 36.8% in the quarter and 42.2% in the first half. E-commerce daily sales increased 52.7% in the quarter and 54.0% in the first half.
- Branch rationalization continued: 25 branches were closed net in the quarter, while 81 Onsite locations were activated net of closures. Total FTE headcount increased 7.0% year over year to 19,523.
Guidance, Outlook, Risks, and Unusual Items
- Management reduced its 2022 weighted FASTBin and FASTVend signing goal to 21,000 to 23,000 machine-equivalent units from the prior goal of 23,000 to 25,000. Management continued to target 375 to 400 new Onsite signings for 2022.
- Management expected a recurring tax rate of approximately 24.5%, absent discrete tax items or changes in tax law.
- Fuel, transportation, steel, stainless steel, plastics, and other input costs remained elevated. The company intended to use pricing actions to mitigate inflation, but future effects on earnings were not fully clear.
- Interest-rate exposure exists through the floating-rate revolving credit facility; a one-percentage-point increase in LIBOR would have increased first-half interest expense by approximately $0.3 million.
- Key risks include economic weakness in manufacturing or construction, competitive pricing pressure, supply-chain and labor constraints, customer and product mix changes, foreign-exchange movements, energy and commodity costs, adoption and execution of FMI and Onsite strategies, cybersecurity incidents, customer credit and inventory forecasting, and geopolitical effects including the Ukrainian conflict.
- Management reported no litigation matters considered probable or reasonably possible to have a material adverse outcome. Operating-lease residual-value guarantees totaled approximately $82.4 million, although management considered funding under those guarantees remote.
- The board declared a $0.31-per-share quarterly dividend payable August 24, 2022, and authorized repurchases of up to an additional 8.0 million shares after quarter-end.
Investor Verification Items
- Verify whether sales growth remains supported by unit demand rather than primarily by pricing and inflation pass-through.
- Monitor receivables, inventory, and operating cash flow conversion as working-capital investment remains elevated.
- Assess progress toward the revised FMI signing target and the 375-to-400 Onsite signing objective.
- Review debt maturities, floating-rate exposure, covenant compliance, and the July 2022 maturity of the $35.0 million Series B notes.
- Evaluate the sustainability of gross and operating margins amid fuel, steel, labor, transportation, and supply-chain cost pressures.
- Confirm the effect of continued dividends and authorized share repurchases on liquidity and leverage.