filings.toolsFastenal 10-Q 2021-09-30
Filed 2021-10-15. 7 sections, 121K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2021, or
| ☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from __________ to __________
Commission file number 0-16125
FASTENAL COMPANY
(Exact name of registrant as specified in its charter)
| Minnesota | 41-0948415 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 2001 Theurer Boulevard, Winona, Minnesota | 55987-1500 | |||||||
| (Address of principal executive offices) | (Zip Code) |
| (507) 454-5374 | ||||||||
| (Registrant's telephone number, including area code) |
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common stock, par value $.01 per share | FAST | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ý No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ý | Accelerated Filer | ☐ | |||||||||||||||||
| Non-accelerated Filer | ☐ | Smaller Reporting Company | ☐ | |||||||||||||||||
| Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of October 11, 2021, there were approximately 575,163,354 shares of the registrant's common stock outstanding.
FASTENAL COMPANY
INDEX
PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
FASTENAL COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in millions except share information)
| (Unaudited) | |||||||||||
| Assets | September 30, 2021 | December 31, 2020 | |||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 250.5 | 245.7 | ||||||||
| Trade accounts receivable, net of allowance for credit losses of $11.1 and $12.3, respectively | 949.4 | 769.4 | |||||||||
| Inventories | 1,401.1 | 1,337.5 | |||||||||
| Prepaid income taxes | 6.7 | 6.7 | |||||||||
| Other current assets | 162.6 | 140.3 | |||||||||
| Total current assets | 2,770.3 | 2,499.6 | |||||||||
| Property and equipment, net | 1,019.2 | 1,030.7 | |||||||||
| Operating lease right-of-use assets | 249.7 | 243.0 | |||||||||
| Other assets | 183.3 | 191.4 | |||||||||
| Total assets | $ | 4,222.5 | 3,964.7 | ||||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of debt | $ | 35.0 | 40.0 | ||||||||
| Accounts payable | 256.9 | 207.0 | |||||||||
| Accrued expenses | 278.0 | 272.1 | |||||||||
| Current portion of operating lease liabilities | 92.6 | 93.6 | |||||||||
| Total current liabilities | 662.5 | 612.7 | |||||||||
| Long-term debt | 330.0 | 365.0 | |||||||||
| Operating lease liabilities | 160.7 | 151.5 | |||||||||
| Deferred income taxes | 104.6 | 102.3 | |||||||||
| Stockholders' equity: | |||||||||||
| Preferred stock: $0.01 par value, 5,000,000 shares authorized, no shares issued or outstanding | — | — | |||||||||
| Common stock: $0.01 par value, 800,000,000 shares authorized, 575,163,289 and 574,159,575 shares issued and outstanding, respectively | 2.9 | 2.9 | |||||||||
| Additional paid-in capital | 90.6 | 61.9 | |||||||||
| Retained earnings | 2,900.8 | 2,689.6 | |||||||||
| Accumulated other comprehensive loss | (29.6) | (21.2) | |||||||||
| Total stockholders' equity | 2,964.7 | 2,733.2 | |||||||||
| Total liabilities and stockholders' equity | $ | 4,222.5 | 3,964.7 |
See accompanying Notes to Condensed Consolidated Financial Statements.
FASTENAL COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Amounts in millions except earnings per share)
| (Unaudited) | (Unaudited) | ||||||||||||||||||||||
| Nine Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net sales | $ | 4,479.0 | 4,289.3 | $ | 1,554.2 | 1,413.3 | |||||||||||||||||
| Cost of sales | 2,414.7 | 2,340.3 | 834.0 | 772.7 | |||||||||||||||||||
| Gross profit | 2,064.3 | 1,949.0 | 720.2 | 640.6 | |||||||||||||||||||
| Operating and administrative expenses | 1,147.8 | 1,071.6 | 401.8 | 350.5 | |||||||||||||||||||
| Operating income | 916.5 | 877.4 | 318.4 | 290.1 | |||||||||||||||||||
| Interest income | 0.1 | 0.3 | 0.1 | 0.1 | |||||||||||||||||||
| Interest expense | (7.3) | (7.2) | (2.4) | (2.6) | |||||||||||||||||||
| Earnings before income taxes | 909.3 | 870.5 | 316.1 | 287.6 | |||||||||||||||||||
| Income tax expense | 215.5 | 207.5 | 72.6 | 66.1 | |||||||||||||||||||
| Net earnings | $ | 693.8 | 663.0 | $ | 243.5 | 221.5 | |||||||||||||||||
| Basic net earnings per share | $ | 1.21 | 1.16 | $ | 0.42 | 0.39 | |||||||||||||||||
| Diluted net earnings per share | $ | 1.20 | 1.15 | $ | 0.42 | 0.38 | |||||||||||||||||
| Basic weighted average shares outstanding | 574.6 | 573.7 | 575.0 | 573.9 | |||||||||||||||||||
| Diluted weighted average shares outstanding | 576.9 | 575.5 | 577.3 | 576.1 |
See accompanying Notes to Condensed Consolidated Financial Statements.
FASTENAL COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Amounts in millions)
| (Unaudited) | (Unaudited) | ||||||||||||||||||||||
| Nine Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net earnings | $ | 693.8 | 663.0 | $ | 243.5 | 221.5 | |||||||||||||||||
| Other comprehensive (loss) income, net of tax: | |||||||||||||||||||||||
| Foreign currency translation adjustments (net of tax of $0.0 in 2021 and 2020) | (8.4) | (3.4) | (10.8) | 11.1 | |||||||||||||||||||
| Comprehensive income | $ | 685.4 | 659.6 | $ | 232.7 | 232.6 |
See accompanying Notes to Condensed Consolidated Financial Statements.
FASTENAL COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
(Amounts in millions except per share information)
| (Unaudited) | (Unaudited) | ||||||||||||||||||||||
| Nine Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Common stock | |||||||||||||||||||||||
| Balance at beginning of period | $ | 2.9 | 2.9 | $ | 2.9 | 2.9 | |||||||||||||||||
| Balance at end of period | 2.9 | 2.9 | 2.9 | 2.9 | |||||||||||||||||||
| Additional paid-in capital | |||||||||||||||||||||||
| Balance at beginning of period | 61.9 | 67.2 | 78.4 | 44.4 | |||||||||||||||||||
| Stock options exercised | 24.4 | 38.3 | 10.8 | 12.0 | |||||||||||||||||||
| Purchases of common stock | — | (52.0) | — | — | |||||||||||||||||||
| Stock-based compensation | 4.3 | 4.3 | 1.4 | 1.4 | |||||||||||||||||||
| Balance at end of period | 90.6 | 57.8 | 90.6 | 57.8 | |||||||||||||||||||
| Retained earnings | |||||||||||||||||||||||
| Balance at beginning of period | 2,689.6 | 2,633.9 | 2,818.3 | 2,788.6 | |||||||||||||||||||
| Net earnings | 693.8 | 663.0 | 243.5 | 221.5 | |||||||||||||||||||
| Dividends paid in cash | (482.6) | (430.2) | (161.0) | (143.4) | |||||||||||||||||||
| Balance at end of period | 2,900.8 | 2,866.7 | 2,900.8 | 2,866.7 | |||||||||||||||||||
| Accumulated other comprehensive (loss) income | |||||||||||||||||||||||
| Balance at beginning of period | (21.2) | (38.4) | (18.8) | (52.9) | |||||||||||||||||||
| Other comprehensive (loss) income | (8.4) | (3.4) | (10.8) | 11.1 | |||||||||||||||||||
| Balance at end of period | (29.6) | (41.8) | (29.6) | (41.8) | |||||||||||||||||||
| Total stockholders' equity | $ | 2,964.7 | 2,885.6 | $ | 2,964.7 | 2,885.6 | |||||||||||||||||
| Cash dividends paid per share of common stock | $ | 0.84 | $ | 0.75 | $ | 0.28 | $ | 0.25 |
See accompanying Notes to Condensed Consolidated Financial Statements.
FASTENAL COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Amounts in millions)
| (Unaudited) | |||||||||||
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings | $ | 693.8 | 663.0 | ||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities, net of acquisition: | |||||||||||
| Depreciation of property and equipment | 119.0 | 114.0 | |||||||||
| Gain on sale of property and equipment | (1.1) | (1.1) | |||||||||
| Bad debt expense | 0.8 | 5.8 | |||||||||
| Deferred income taxes | 2.3 | 3.5 | |||||||||
| Stock-based compensation | 4.3 | 4.3 | |||||||||
| Amortization of intangible assets | 8.1 | 6.4 | |||||||||
| Changes in operating assets and liabilities, net of acquisition: | |||||||||||
| Trade accounts receivable | (182.2) | (98.8) | |||||||||
| Inventories | (66.5) | 22.8 | |||||||||
| Other current assets | (22.3) | 34.2 | |||||||||
| Accounts payable | 49.9 | 17.6 | |||||||||
| Accrued expenses | 5.9 | 6.7 | |||||||||
| Income taxes | — | 2.1 | |||||||||
| Other | 1.7 | 0.3 | |||||||||
| Net cash provided by operating activities | 613.7 | 780.8 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | (114.7) | (123.5) | |||||||||
| Proceeds from sale of property and equipment | 7.7 | 8.6 | |||||||||
| Cash paid for acquisition | — | (125.0) | |||||||||
| Other | — | 1.1 | |||||||||
| Net cash used in investing activities | (107.0) | (238.8) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from debt obligations | 300.0 | 910.0 | |||||||||
| Payments against debt obligations | (340.0) | (850.0) | |||||||||
| Proceeds from exercise of stock options | 24.4 | 38.3 | |||||||||
| Purchases of common stock | — | (52.0) | |||||||||
| Payments of dividends | (482.6) | (430.2) | |||||||||
| Net cash used in financing activities | (498.2) | (383.9) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (3.7) | (1.2) | |||||||||
| Net increase in cash and cash equivalents | 4.8 | 156.9 | |||||||||
| Cash and cash equivalents at beginning of period | 245.7 | 174.9 | |||||||||
| Cash and cash equivalents at end of period | $ | 250.5 | 331.8 | ||||||||
| Supplemental information: | |||||||||||
| Cash paid for interest | $ | 7.6 | 5.9 | ||||||||
| Net cash paid for income taxes | $ | 210.7 | 201.4 | ||||||||
| Leased assets obtained in exchange for new operating lease liabilities | $ | 83.4 | 76.1 |
See accompanying Notes to Condensed Consolidated Financial Statements.
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in millions except share and per share information and where otherwise noted)
September 30, 2021 and 2020
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Fastenal Company and subsidiaries (collectively referred to as the company, Fastenal, or by terms such as we, our, or us) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. They do not include all information and footnotes required by U.S. GAAP for complete financial statements. However, except as described herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in our consolidated financial statements as of and for the year ended December 31, 2020. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Impact of COVID-19
The COVID-19 pandemic has likely influenced various trends the company is currently experiencing. These include supply chain disruptions and labor shortages, the presence of certain pandemic-specific personal protective equipment (PPE) in our inventory (although certain categories such as 3-ply masks are depleting quickly), and a modest shift in our mix to include more safety products and government customers. Evaluating the third quarter of 2021 is challenging given the dramatic impacts of the pandemic on the company in the year-earlier period. However, in contrast to much of the preceding 12 to 18 months, we are currently seeing a narrower impact on our business related directly to the COVID-19 pandemic, as economic activity has recovered and customer and product mix has reverted back to close to pre-pandemic levels. We believe current financial results are more reflective of traditional economic and marketplace dynamics than of pandemic-related issues such as facility restrictions, labor force illness, and PPE demand. The primary exception to this normalization trend is in the signings of our Onsite and Fastenal Managed Inventory (FMI), which have yet to recover to pre-pandemic levels. To the extent that COVID infections increase, as they did through the third quarter of 2021, this can, and is, either directly impacting or indirectly influencing access to customer facilities and decision-makers, and lengthens the sales cycle for certain of our solutions.
However, it is possible the COVID-19 pandemic, particularly in light of variant strains of the virus, could further impact our operations and the operations of our suppliers and vendors as a result of quarantines, facility closures, illnesses, and travel and logistics restrictions. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the resumption of high levels of infection and hospitalization, the resulting impact on our customers, suppliers, and vendors, the remedial actions and stimulus measures adopted by federal, state, and local governments, and to what extent normal economic and operating conditions are impacted. The Company cannot reasonably estimate the future impact at this time.
Recently Issued Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to U.S. GAAP on contract modifications, hedging relationships, and other transactions affected by reference rate reform to ease entities' financial reporting burdens as the market transitions from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made, hedging relationships entered into, and other transactions affected by reference rate reform, evaluated on or before December 31, 2022, beginning during the reporting period in which the guidance has been elected. We are currently evaluating the impact of the new guidance on our condensed consolidated financial statements; however, we have determined that, of our current debt commitments as outlined in detail in Note 6 'Debt Commitments', only the obligations described under Unsecured Revolving Credit Facility in Note 6 would be impacted by ASU 2020-04. Our Senior Unsecured Promissory Notes Payable described in Note 6 each have fixed interest rates.
(2) Revenue
Revenue Recognition
Net sales include products and shipping and handling charges, net of estimates for product returns, and any related sales incentives. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue by transferring the promised products to the customer, with the majority of revenue recognized at the point in time the customer obtains control of the products. We recognize revenue for shipping and handling charges at the time the products are delivered to or picked up
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in millions except share and per share information and where otherwise noted)
September 30, 2021 and 2020
(Unaudited)
by the customer. We estimate product returns based on historical return rates. Using probability assessments, we estimate sales incentives expected to be paid over the term of the contract. The majority of our contracts have a single performance obligation and are short term in nature. Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. Revenues are attributable to countries based on the selling location from which the sale occurred.
Disaggregation of Revenue
Our revenues related to the following geographic areas were as follows for the periods ended September 30:
| Nine-month Period | Three-month Period | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| United States | $ | 3,753.6 | 3,681.6 | $ | 1,307.5 | 1,205.8 | |||||||||||||||||
| Canada and Mexico | 558.8 | 462.3 | 189.9 | 160.5 | |||||||||||||||||||
| North America | 4,312.4 | 4,143.9 | 1,497.4 | 1,366.3 | |||||||||||||||||||
| All other foreign countries | 166.6 | 145.4 | 56.8 | 47.0 | |||||||||||||||||||
| Total revenues | $ | 4,479.0 | 4,289.3 | $ | 1,554.2 | 1,413.3 |
The percentages of our sales by end market were as follows for the periods ended September 30:
| Nine-month Period | Three-month Period | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Manufacturing | 68.6 | % | 61.7 | % | 68.9 | % | 62.7 | % | |||||||||||||||
| Non-residential construction | 11.2 | % | 11.4 | % | 11.3 | % | 11.2 | % | |||||||||||||||
| Other | 20.2 | % | 26.9 | % | 19.8 | % | 26.1 | % | |||||||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
The percentages of our sales by product line were as follows for the periods ended September 30:
| Nine-month Period | Three-month Period | |||||||||||||||||||||||||
| Type | Introduced | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||
| Fasteners(1) | 1967 | 33.2 | % | 29.7 | % | 33.4 | % | 30.5 | % | |||||||||||||||||
| Tools | 1993 | 8.6 | % | 8.1 | % | 8.5 | % | 8.5 | % | |||||||||||||||||
| Cutting tools | 1996 | 5.0 | % | 4.6 | % | 5.0 | % | 4.7 | % | |||||||||||||||||
| Hydraulics & pneumatics | 1996 | 6.4 | % | 5.9 | % | 6.5 | % | 6.1 | % | |||||||||||||||||
| Material handling | 1996 | 5.5 | % | 5.1 | % | 5.5 | % | 5.1 | % | |||||||||||||||||
| Janitorial supplies | 1996 | 8.2 | % | 9.9 | % | 8.3 | % | 10.7 | % | |||||||||||||||||
| Electrical supplies | 1997 | 4.3 | % | 4.1 | % | 4.3 | % | 3.9 | % | |||||||||||||||||
| Welding supplies | 1997 | 3.8 | % | 3.5 | % | 3.8 | % | 3.5 | % | |||||||||||||||||
| Safety supplies | 1999 | 21.2 | % | 26.1 | % | 21.1 | % | 23.8 | % | |||||||||||||||||
| Other | 3.8 | % | 3.0 | % | 3.6 | % | 3.2 | % | ||||||||||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
(1) The fasteners product line represents fasteners and miscellaneous supplies.
(3) Stockholders' Equity
Dividends
On October 11, 2021, our board of directors declared a quarterly dividend of $0.28 per share of common stock to be paid in cash on November 23, 2021 to shareholders of record at the close of business on October 26, 2021. Since 2011, we have paid
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in millions except share and per share information and where otherwise noted)
September 30, 2021 and 2020
(Unaudited)
quarterly cash dividends, and in 2020, we paid a special cash dividend late in the year. Our board of directors currently intends to continue paying quarterly cash dividends, provided that any future determination as to payment of dividends will depend on the financial condition and results of operations of the company and such other factors as are deemed relevant by the board of directors.
The following table presents the cash dividends either paid previously or declared by our board of directors for future payment on a per share basis:
| 2021 | 2020 | ||||||||||
| First quarter | $ | 0.28 | $ | 0.25 | |||||||
| Second quarter | $ | 0.28 | $ | 0.25 | |||||||
| Third quarter | $ | 0.28 | $ | 0.25 | |||||||
| Fourth quarter | $ | 0.28 | $ | 0.25 | |||||||
| Fourth quarter (special) | $ | 0.40 | |||||||||
| Total | $ | 1.12 | $ | 1.40 |
Stock Options
The following tables summarize the details of options granted under our stock option plans that were outstanding as of September 30, 2021, and the assumptions used to value these grants. All such grants were effective at the close of business on the date of grant.
| Options Granted | Option Exercise (Strike) Price | Closing Stock Price on Date of Grant | September 30, 2021 | ||||||||||||||||||||||||||
| Date of Grant | Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||
| January 4, 2021 | 741,510 | $ | 48.00 | $ | 47.650 | 715,053 | 26,643 | ||||||||||||||||||||||
| January 2, 2020 | 902,263 | $ | 38.00 | $ | 37.230 | 848,066 | 24,964 | ||||||||||||||||||||||
| January 2, 2019 | 1,316,924 | $ | 26.00 | $ | 25.705 | 1,035,830 | 285,098 | ||||||||||||||||||||||
| January 2, 2018 | 1,087,936 | $ | 27.50 | $ | 27.270 | 763,921 | 337,067 | ||||||||||||||||||||||
| January 3, 2017 | 1,529,578 | $ | 23.50 | $ | 23.475 | 750,260 | 380,596 | ||||||||||||||||||||||
| April 19, 2016 | 1,690,880 | $ | 23.00 | $ | 22.870 | 693,029 | 498,611 | ||||||||||||||||||||||
| April 21, 2015 | 1,786,440 | $ | 21.00 | $ | 20.630 | 441,398 | 278,570 | ||||||||||||||||||||||
| April 22, 2014 | 1,910,000 | $ | 28.00 | $ | 25.265 | 224,937 | 149,953 | ||||||||||||||||||||||
| April 16, 2013 | 410,000 | $ | 27.00 | $ | 24.625 | 13,696 | 13,696 | ||||||||||||||||||||||
| Total | 11,375,531 | 5,486,190 | 1,995,198 |
| Date of Grant | Risk-free Interest Rate | Expected Life of Option in Years | Expected Dividend Yield | Expected Stock Volatility | Estimated Fair Value of Stock Option | ||||||||||||||||||||||||
| January 4, 2021 | 0.4 | % | 5.00 | 2.0 | % | 29.17 | % | $ | 9.57 | ||||||||||||||||||||
| January 2, 2020 | 1.7 | % | 5.00 | 2.4 | % | 25.70 | % | $ | 6.81 | ||||||||||||||||||||
| January 2, 2019 | 2.5 | % | 5.00 | 2.9 | % | 23.96 | % | $ | 4.40 | ||||||||||||||||||||
| January 2, 2018 | 2.2 | % | 5.00 | 2.3 | % | 23.45 | % | $ | 5.02 | ||||||||||||||||||||
| January 3, 2017 | 1.9 | % | 5.00 | 2.6 | % | 24.49 | % | $ | 4.20 | ||||||||||||||||||||
| April 19, 2016 | 1.3 | % | 5.00 | 2.6 | % | 26.34 | % | $ | 4.09 | ||||||||||||||||||||
| April 21, 2015 | 1.3 | % | 5.00 | 2.7 | % | 26.84 | % | $ | 3.68 | ||||||||||||||||||||
| April 22, 2014 | 1.8 | % | 5.00 | 2.0 | % | 28.55 | % | $ | 4.79 | ||||||||||||||||||||
| April 16, 2013 | 0.7 | % | 5.00 | 1.6 | % | 37.42 | % | $ | 6.33 |
All of the options in the tables above vest and become exercisable over a period of up to eight years. Generally, each option will terminate approximately ten years after the grant date.
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in millions except share and per share information and where otherwise noted)
September 30, 2021 and 2020
(Unaudited)
The fair value of each share-based option is estimated on the date of grant using a Black-Scholes valuation method that uses the assumptions listed above. The risk-free interest rate is based on the U.S. Treasury rate over the expected life of the option at the time of grant. The expected life is the average length of time over which we expect the employee groups will exercise their options, which is based on historical experience with similar grants. The dividend yield is estimated over the expected life of the option based on our current dividend payout, historical dividends paid, and expected future cash dividends. Expected stock volatilities are based on the movement of our stock price over the most recent historical period equivalent to the expected life of the option.
Compensation expense equal to the grant date fair value is recognized for all of these awards over the vesting period. The stock-based compensation expense for the nine-month periods ended September 30, 2021 and 2020 was $4.3 and $4.3, respectively. Unrecognized stock-based compensation expense related to outstanding unvested stock options as of September 30, 2021 was $14.0 and is expected to be recognized over a weighted average period of 4.11 years. Any future changes in estimated forfeitures will impact this amount.
Earnings Per Share
The following tables present a reconciliation of the denominators used in the computation of basic and diluted earnings per share and a summary of the options to purchase shares of common stock which were excluded from the diluted earnings per share calculation because they were anti-dilutive:
| Nine-month Period | Three-month Period | ||||||||||||||||||||||
| Reconciliation | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Basic weighted average shares outstanding | 574,637,254 | 573,673,031 | 574,973,196 | 573,913,929 | |||||||||||||||||||
| Weighted shares assumed upon exercise of stock options | 2,291,000 | 1,797,201 | 2,286,643 | 2,203,402 | |||||||||||||||||||
| Diluted weighted average shares outstanding | 576,928,254 | 575,470,232 | 577,259,839 | 576,117,331 |
| Nine-month Period | Three-month Period | ||||||||||||||||||||||
| Summary of Anti-dilutive Options Excluded | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Options to purchase shares of common stock | 680,227 | 852,728 | 688,410 | — | |||||||||||||||||||
| Weighted average exercise prices of options | $ | 48.00 | 38.00 | $ | 48.00 | — |
Any dilutive impact summarized above related to periods when the average market price of our stock exceeded the exercise price of the potentially dilutive stock options then outstanding.
(4) Income Taxes
We file income tax returns in the United States federal jurisdiction, all states, and various local and foreign jurisdictions. We are no longer subject to income tax examinations by taxing authorities for taxable years before 2017 in the case of United States federal examinations, and with limited exceptions, before 2015 in the case of foreign, state, and local examinations. During the first nine months of 2021, there were no material changes in unrecognized tax benefits.
During 2020, we deferred approximately $30.0 in payroll taxes as allowed under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), which was signed into law in March 2020 to help businesses navigate COVID-19 related challenges. The deferred payroll taxes were paid during the third quarter of 2021.
(5) Operating Leases
Certain operating leases for pick-up trucks contain residual value guarantee provisions which would generally become due at the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value. The aggregate residual value guarantee related to these leases is approximately $88.6. We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote.
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in millions except share and per share information and where otherwise noted)
September 30, 2021 and 2020
(Unaudited)
(6) Debt Commitments
Credit Facility, Notes Payable, and Commitments
Debt obligations and letters of credit outstanding at the end of each period consisted of the following:
| Average Interest Rate at September 30, 2021 | Debt Outstanding | ||||||||||||||||||||||
| Maturity Date | September 30, 2021 | December 31, 2020 | |||||||||||||||||||||
| Unsecured revolving credit facility | 1.03 | % | November 30, 2023 | $ | — | — | |||||||||||||||||
| Senior unsecured promissory notes payable, Series A | 2.00 | % | July 20, 2021 | — | 40.0 | ||||||||||||||||||
| Senior unsecured promissory notes payable, Series B | 2.45 | % | July 20, 2022 | 35.0 | 35.0 | ||||||||||||||||||
| Senior unsecured promissory notes payable, Series C | 3.22 | % | March 1, 2024 | 60.0 | 60.0 | ||||||||||||||||||
| Senior unsecured promissory notes payable, Series D | 2.66 | % | May 15, 2025 | 75.0 | 75.0 | ||||||||||||||||||
| Senior unsecured promissory notes payable, Series E | 2.72 | % | May 15, 2027 | 50.0 | 50.0 | ||||||||||||||||||
| Senior unsecured promissory notes payable, Series F | 1.69 | % | June 24, 2023 | 70.0 | 70.0 | ||||||||||||||||||
| Senior unsecured promissory notes payable, Series G | 2.13 | % | June 24, 2026 | 25.0 | 25.0 | ||||||||||||||||||
| Senior unsecured promissory notes payable, Series H | 2.50 | % | June 24, 2030 | 50.0 | 50.0 | ||||||||||||||||||
| Total | 365.0 | 405.0 | |||||||||||||||||||||
| Less: Current portion of debt | (35.0) | (40.0) | |||||||||||||||||||||
| Long-term debt | $ | 330.0 | 365.0 | ||||||||||||||||||||
| Outstanding letters of credit under unsecured revolving credit facility - contingent obligation | $ | 36.3 | 36.3 |
Unsecured Revolving Credit Facility
We have a $700.0 committed unsecured revolving credit facility (Credit Facility). The Credit Facility includes a committed letter of credit subfacility of $55.0. Any borrowings outstanding under the Credit Facility for which we have the ability and intent to pay using cash within the next twelve months, will be classified as a current liability. The Credit Facility contains certain financial and other covenants, and our right to borrow under the Credit Facility is conditioned upon, among other things, our compliance with these covenants. We are currently in compliance with these covenants.
Borrowings under the Credit Facility generally bear interest at a rate per annum equal to LIBOR for interest periods of various lengths selected by us, plus 0.95%. We pay a commitment fee for the unused portion of the Credit Facility. This fee is either 0.10% or 0.125% per annum based on our usage of the Credit Facility.
Senior Unsecured Promissory Notes Payable
We have issued senior unsecured promissory notes under our master note agreement (the Master Note Agreement) in the aggregate principal amount of $365.0 as of September 30, 2021. Our aggregate borrowing capacity under the Master Note Agreement is $600.0; however, none of the institutional investors party to that agreement are committed to purchase notes thereunder. There is no amortization of these notes prior to their maturity date and interest is payable quarterly. The notes currently issued under our Master Note Agreement, including the maturity date and fixed interest rate per annum of each series of note, are contained in the table above. The Master Note Agreement contains certain financial and other covenants and we are currently in compliance with these covenants.
(7) Legal Contingencies
The nature of our potential exposure to legal contingencies is described in our 2020 annual report on Form 10-K in Note 11 of the Notes to Consolidated Financial Statements. As of September 30, 2021, there were no litigation matters that we consider to be probable or reasonably possible to have a material adverse outcome.
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in millions except share and per share information and where otherwise noted)
September 30, 2021 and 2020
(Unaudited)
(8) Subsequent Events
We evaluated all subsequent event activity and concluded that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the Notes to Condensed Consolidated Financial Statements, with the exception of the dividend declaration disclosed in Note 3 'Stockholders' Equity'.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying condensed consolidated financial statements. Dollar amounts are stated in millions except for share and per share amounts and where otherwise noted. Throughout this document, percentage and dollar change calculations, which are based on non-rounded dollar values, may not be able to be recalculated using the dollar values in this document due to the rounding of those dollar values.
Business
Fastenal is a North American leader in the wholesale distribution of industrial and construction supplies. We distribute these supplies through a network of over 3,200 in-market locations. Most of our customers are in the manufacturing and non-residential construction markets. The manufacturing market includes sales of products for both original equipment manufacturing (OEM), where our products are consumed in the final products of our customers, and manufacturing, repair and operations (MRO), where our products are consumed to support the facilities and ongoing operations of our customers. The non-residential construction market includes general, electrical, plumbing, sheet metal, and road contractors. Other users of our products include farmers, truckers, railroads, oil exploration companies, oil production and refinement companies, mining companies, federal, state, and local governmental entities, schools, and certain retail trades. Geographically, our branches, Onsite locations, and customers are primarily located in North America.
Our motto is Where Industry Meets Innovation**®**. We are a customer and growth-centric organization focused on identifying unique technologies, capabilities, and supply chain solutions that get us closer to our customers and reduce the total cost of their global supply chain. We believe this close-to-the-customer, high touch partnership approach is differentiated in the marketplace and allows us to gain market share in what remains a fragmented industrial distribution market.
Impact of COVID-19 on Our Business
Evaluating the company's financial performance in the third quarter of 2021 requires an appreciation for the variables which impacted financial results in the year earlier period.
In the second quarter of 2020, the COVID-19 pandemic dramatically impacted our business in two respects. First, local and national actions taken to mitigate the spread of the virus reduced business activity sharply, which produced a significant decline in the sale of products, such as fasteners, to our traditional manufacturing and construction customers. Second, social actions taken to mitigate the effects of the pandemic produced significant demand for personal protection equipment (PPE) and sanitation products, generating significant sales of such products to traditional customers, state and local government entities, and front line responders. This effect was illustrated by a significant increase in sales for our safety products. During that period, improved sales of PPE and sanitation products more than offset the general economic weakness.
During this period of time, consistent with broader social trends and in accordance with applicable local and federal regulations, we took steps to safeguard the health of our employees and customers. Such steps included: closing branch and corporate facilities to outside personnel, adjusting work schedules to maximize social distance, creating space between work areas, providing ample PPE and cleaning supplies, creating formal policies for mitigation in the event of cases of illness, utilizing technologies where work duties allowed to enable work from home capabilities, and utilizing technologies such as vending and mobility to create social distancing. These precautions allowed our operations to function effectively.
The pandemic continued to impact our business in the third and fourth quarters of 2020, when the marketplace broadly, and Fastenal specifically, continued to operate with certain modifications to balance re-opening with employee and customer safety. However, most of the markets in which we operate began to normalize in the second half of 2020. In the first half of 2021, the re-opening and recovery of the manufacturing and construction marketplace continued and accelerated, operating restrictions eased, and our ability to engage directly with customers, while not at pre-pandemic levels, improved. This resulted in improving performance in our traditional branch and Onsite business and normalization of our product and customer mix. In general, industrial and construction businesses have learned to navigate COVID-19 while maintaining operations.
In the third quarter of 2021, the COVID-19 pandemic has likely influenced various trends that the company is currently experiencing. These include supply chain disruptions and labor shortages, the presence of certain pandemic-specific personal protective equipment (PPE) in our inventory (although certain categories such as 3-ply masks are depleting quickly), and a modest shift in our mix to include more safety products and government customers. However, in contrast to preceding periods, we are currently seeing less of an impact on our business related directly to the pandemic, as economic activity has recovered, customer access is normalizing, and customer and product mix has reverted back to close to pre-pandemic levels. We believe current financial results are more reflective of traditional economic and marketplace dynamics than of pandemic-related issues such as facility restrictions, labor force illness, and PPE demand. The primary exception to this normalization trend is in the signings of our Onsite and Fastenal Managed Inventory (FMI), which have yet to recover to pre-pandemic levels. To the extent that COVID infections increase, as they did through the third quarter of 2021, this can, and is, either directly impacting or
indirectly influencing access to customer facilities and decision-makers and lengthens the sales cycle for certain of our solutions. Our financial controls over financial reporting functioned effectively throughout the pandemic and continue to do so.
It is possible the COVID-19 pandemic could further impact our operations and the operations of our suppliers and vendors, particularly in light of the potential of variant strains of the virus to cause a resumption of high levels of infection and hospitalization. Should that occur, factors that could negatively impact sales and gross margin in the future include, but are not limited to: limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell, or to meet delivery requirements and commitments; limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring employees to remain at home; limitations on the ability of carriers to deliver our products to customers; limitations on the ability of our customers to conduct their business and purchase our products and services; and limitations on the ability of our customers to pay us on a timely basis.
The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and cannot be reasonably predicted at this time. However, we will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, suppliers, and shareholders. While we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity, or cap
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks from changes in foreign currency exchange rates, commodity steel pricing, commodity energy prices, and interest rates. Changes in these factors cause fluctuations in our earnings and cash flows. We evaluate and manage exposure to these market risks as follows:
Foreign currency exchange rates – Foreign currency fluctuations can affect our net investments, our operations in countries other than the U.S., and earnings denominated in foreign currencies. Historically, our primary exchange rate exposure has been with the Canadian dollar against the United States dollar. We have not historically hedged our foreign currency risk given that exposure to date has not been material. In the first nine months of 2021, changes in foreign currency exchange rates increased our reported net sales by $34.5 with the estimated effect on our net earnings being immaterial.
Commodity steel pricing – We buy and sell various types of steel products; these products consist primarily of different types of threaded fasteners and related hardware. We are exposed to the impacts of commodity steel pricing and our related ability to pass through the impacts to our end customers, though the timing of such exposure can be delayed due to our long supply chain. Through the first nine months of 2021, we have seen the price of commodity steel as reflected in many market indexes increase, which has produced inflation in our steel-based products. Based on our ability to pass these higher costs on, our estimated net earnings exposure for these changes was not material in the first nine months of 2021.
Commodity energy prices – We have market risk for changes in prices of oil, gasoline, diesel fuel, natural gas, and electricity. Rising costs for these commodities can produce higher fuel costs for our hub and field-based vehicles and utility costs for our in-market locations, distribution centers, and manufacturing facilities. Fossil fuels are also often a key feedstock for chemicals and plastics that comprise a key raw material for many products that we sell. We believe that over time these risks are mitigated in part by our ability to pass freight and product costs to our customers, the efficiency of our trucking distribution network, and the ability, over time, to manage our occupancy costs related to the heating and cooling of our facilities through better efficiency. Through the first nine months of 2021, we have seen the price of commodity energy as reflected in many market indexes increase, which has produced an increase in our fuel expenses and inflation in products for which fossil fuels are an input. Based on our ability to pass these higher costs on, our estimated net earnings exposure for these changes was not material in the first nine months of 2021.
Interest rates - Loans under our Credit Facility bear interest at floating rates tied to LIBOR (or, if LIBOR is no longer available, at a replacement rate to be determined by the administrative agent for the Credit Facility and consented to by us). As a result, changes in LIBOR can affect our operating results and liquidity to the extent we do not have effective interest rate swap arrangements in place. We have not historically used interest rate swap arrangements to hedge the variable interest rates under our Credit Facility. A one percentage point increase in LIBOR in the first nine months of 2021 would have resulted in approximately $0.1 of additional interest expense. A description of our Credit Facility is contained in Note 6 of the Notes to Condensed Consolidated Financial Statements.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures – As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(the Securities Exchange Act)). Based on this evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including the principal executive officer and principal financial officer, to allow for timely decisions regarding disclosure.
Changes in Internal Control Over Financial Reporting – There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1 — LEGAL PROCEEDINGS
A description of our legal proceedings, if any, is contained in Note 7 of the Notes to Condensed Consolidated Financial Statements. The description of legal proceedings, if any, in Note 7 is incorporated herein by reference.
Item 1A. RISK FACTORS
The significant factors known to us that could materially adversely affect our business, financial condition, or operating results are described in Item 2 of Part I above and in our most recently filed annual report on Form 10-K under Forward-Looking Statements and Item 1A – Risk Factors.
ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The table below sets forth information regarding purchases of our common stock during the third quarter of 2021:
| (a) | (b) | (c) | (d) | |||||||||||||||||||||||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||||||||||||||||||||||||
| July 1-31, 2021 | 0 | $0.00 | 0 | 3,200,000 | ||||||||||||||||||||||||||||||||||
| August 1-31, 2021 | 0 | $0.00 | 0 | 3,200,000 | ||||||||||||||||||||||||||||||||||
| September 1-30, 2021 | 0 | $0.00 | 0 | 3,200,000 | ||||||||||||||||||||||||||||||||||
| Total | 0 | $0.00 | 0 | 3,200,000 |
| (1) | On July 11, 2017, our board of directors established a new authorization for us to repurchase up to 10,000,000 shares of our common stock. This repurchase program has no expiration date. As of September 30, 2021, we had remaining authority to repurchase 3,200,000 shares under this authorization. |
Item 6. EXHIBITS
INDEX TO EXHIBITS
| Exhibit Number | Description of Document | |||||||
| 3.1 | Restated Articles of Incorporation of Fastenal Company, as amended (incorporated by reference to Exhibit 3.1 to Fastenal Company's Form 8-K dated as of April 22, 2019) | |||||||
| 3.2 | Restated By-Laws of Fastenal Company (incorporated by reference to Exhibit 3.2 to Fastenal Company's Form 8-K dated as of January 17, 2019) | |||||||
| 31 | Certifications under Section 302 of the Sarbanes-Oxley Act of 2002 | |||||||
| 32 | Certification under Section 906 of the Sarbanes-Oxley Act of 2002 | |||||||
| 101 | The following financial statements from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Earnings, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements. | |||||||
| 104 | The cover page from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL. | |||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FASTENAL COMPANY | |||||||||||
| Date: October 15, 2021 | By: | /s/ Holden Lewis | |||||||||
| Holden Lewis | |||||||||||
| Executive Vice President and Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
| Date: October 15, 2021 | By: | /s/ Sheryl A. Lisowski | |||||||||
| Sheryl A. Lisowski | |||||||||||
| Executive Vice President - Chief Accounting Officer and Treasurer | |||||||||||
| (Duly Authorized Officer and Principal Accounting Officer) |