Fastenal Company 2022 Q3 Form 10-Q Summary
Business context and reporting period
Fastenal is a North American wholesale distributor of industrial and construction supplies, serving primarily manufacturing and non-residential construction customers through approximately 3,300 in-market locations. The filing covers the quarter and nine months ended September 30, 2022. The financial statements are unaudited and presented in millions, except per-share and share data.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Net sales | $1,802.4 | $1,554.2 | 16.0% |
| Gross profit | $826.5 | $720.2 | 14.8% |
| Gross margin | 45.9% | 46.3% | Down 40 bps |
| Operating income | $379.2 | $318.4 | 19.1% |
| Operating margin | 21.0% | 20.5% | Up 50 bps |
| Net earnings | $284.6 | $243.5 | 16.9% |
| Diluted EPS | $0.50 | $0.42 | 17.4% |
| Operating cash flow | $257.9 | $167.4 | 54.1% |
For the first nine months, sales were $5,285.0, up 18.0%; operating income was $1,120.7, up 22.3%; net earnings were $841.3, up 21.3%; and diluted EPS was $1.46 versus $1.20. Nine-month gross margin was 46.3% versus 46.1%, while operating margin was 21.2% versus 20.5%.
Q3 sales growth reflected higher unit sales, strong industrial capital goods and commodity-related demand, and pricing actions. Manufacturing sales grew at a 22.6% daily sales rate, while non-residential construction grew 5.2% and other markets declined 1.4%. Pricing contributed approximately 550 to 580 basis points to Q3 sales growth. Foreign exchange reduced sales growth by approximately 60 basis points.
Digital and customer-proximity initiatives continued to expand. Q3 FMI sales increased 29.8% to $672.8 and represented 36.9% of sales. Ecommerce daily sales grew 50.2%, and the Digital Footprint represented 49.5% of sales versus 43.7% in the prior-year quarter. Active Onsite locations increased 14.6% year over year to 1,567.
Balance sheet, cash flow, debt, and liquidity
- Cash and cash equivalents were $231.5 at September 30, 2022, compared with $236.2 at December 31, 2021.
- Total assets were $4,627.4, including accounts receivable of $1,110.6 and inventories of $1,678.1. Inventory increased 10.1% from year-end, reflecting customer growth, supply-chain preparation, and inflation.
- Total debt was $555.0, consisting of $150.3 current debt and $404.7 long-term debt, compared with $390.0 at December 31, 2021.
- The company had an $835.0 committed unsecured revolving credit facility, with an accordion option for an additional $365.0. Borrowings outstanding under the facility were $225.0. Letters of credit totaled $36.3.
- The company stated that it was in compliance with the financial and other covenants under its credit facility and master note agreement.
- Nine-month operating cash flow was $639.1 versus $613.7. Working-capital investment reduced cash conversion: accounts receivable increased 17.0% and inventories increased 19.8% year over year, while trade working capital, net, increased 20.0%.
- Nine-month net capital expenditures were $120.9, up 13.0%. The company expects full-year net property and equipment investment of $170.0 to $190.0, reduced from its prior $180.0 to $200.0 range and above 2021 spending of $148.2.
- The company returned $679.0 to shareholders during the first nine months through $534.4 of dividends and $144.6 of share repurchases. It repurchased 3.0 million shares during the period and 2.0 million shares in Q3.
Material changes versus the prior comparable period
- Sales and earnings growth accelerated, supported by pricing, volume growth, and stronger manufacturing demand.
- Q3 gross margin declined because of unfavorable customer and product mix, slightly higher costs relative to pricing, and a $3.4 inventory write-down for certain nitrile gloves. Nine-month gross margin nevertheless improved because the 2021 period included a $7.8 mask inventory write-down.
- Operating expense leverage improved. Q3 operating and administrative expenses declined to 24.8% of sales from 25.9%; nine-month expenses declined to 25.1% from 25.6%.
- Interest expense increased because of higher average debt balances and interest rates. Q3 net interest expense was $3.9 versus $2.3; nine-month net interest expense was $8.9 versus $7.2.
- Foreign currency translation produced a $56.4 nine-month other comprehensive loss, compared with an $8.4 loss in the prior-year period.
- The company amended and restated its revolving credit agreement and master note agreement on September 28, 2022. Floating-rate debt no longer references LIBOR.
Guidance, outlook, commentary, and risks
- Management expected 2022 Onsite signings of 375 to 400, but anticipated landing in the lower half of that range; 294 had been signed year to date.
- Management expected 2022 weighted FASTBin and FASTVend signings of 21,000 to 23,000 MEUs; 16,005 had been signed through nine months.
- The company estimated an ongoing tax rate of approximately 24.5%, absent discrete tax items or broader tax-law changes.
- Steel, fuel, and transportation costs began to decline in Q3, but management cautioned that its long supply chain could delay any cost benefit for several quarters. Energy costs remained elevated versus 2021.
- Key risks include economic downturns, weakness in manufacturing or commercial construction, pricing competition, inflation and commodity costs, foreign exchange, supply-chain disruptions, inventory management, customer credit and collections, labor availability, adoption and execution of Onsite and FMI strategies, cyber-security incidents, tariffs, interest rates, weather, and geopolitical events including the Ukrainian conflict.
- The company disclosed no litigation matters considered probable or reasonably possible to have a material adverse outcome. It also stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether volume growth remains strong after separating the effects of pricing, inflation, and potential normalization of demand.
- Whether declining steel, fuel, and transportation prices eventually improve gross margin, given supply-chain timing and customer mix.
- Whether working-capital growth, particularly inventory and receivables, continues to constrain cash conversion.
- Progress toward the 2022 Onsite and FMI signing targets and the profitability of these growth initiatives.
- Debt balances, floating-rate exposure, covenant compliance, and the effect of higher interest rates on future earnings.
- Execution of the $170.0 to $190.0 capital expenditure plan and the sustainability of dividends and share repurchases.