Fastenal (FAST) 10-Q2024 Q2 Quarterly report

See accompanying Notes to Condensed Consolidated Financial Statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

The accompanying unaudited condensed consolidated financial statements of Fastenal Company and subsidiaries (collectively referred to as '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, 2023. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Beginning in the first quarter of 2024, references to 'net earnings', 'operating and administrative expenses', and 'earnings before income taxes' have been revised in our condensed consolidated financial statements and financial reports, including this quarterly report on Form 10-Q, to 'net income', 'selling, general, and administrative (SG&A) expenses', and 'income before income taxes', respectively.

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 or as we satisfy our performance obligations under the contract. We recognize revenue by transferring control of 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 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. Our revenues related to the following geographic areas were as follows for the periods ended June 30:

The percentages of our sales by end market were as follows for the periods ended June 30:

The percentages of our sales by product line were as follows for the periods ended June 30:

On July 11, 2024, our board of directors declared a quarterly dividend of $0.39 per share of common stock to be paid in cash on August 23, 2024 to shareholders of record at the close of business on July 26, 2024.

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:

The following tables summarize the details of options granted under our stock option plans that were outstanding as of June 30, 2024, and the assumptions used to value those grants. All such grants were effective at the close of business on the date of grant.

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 10 years after the grant date.

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, net of forfeitures, 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 six-month periods ended June 30, 2024 and 2023 was $4.0 and $3.8, respectively, while the second quarter of 2024 and 2023 was $2.0 and $1.9, respectively. Unrecognized stock-based compensation expense related to outstanding unvested stock options as of June 30, 2024 was $22.9 and is expected to be recognized over a weighted average period of 4.43 years. Any future changes in estimated forfeitures will impact this amount.

The following tables present a reconciliation of the denominators used in the computation of basic and diluted income per share and a summary of the options to purchase shares of common stock which were excluded from the diluted income per share calculation because they were anti-dilutive:

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.

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 2020 in the case of United States federal examinations, and with limited exception, before 2018 in the case of foreign, state, and local examinations. During the first six months of 2024, there were no material changes in unrecognized tax benefits.

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 was approximately $125.2. We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote.

Debt obligations and letters of credit outstanding at the end of each period consisted of the following:

We have an $835.0 committed unsecured revolving credit facility (Credit Facility) with an uncommitted accordion option to increase the aggregate revolving commitment by an additional $365.0 for a total amount of $1,200.0. 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 12 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 Daily Simple SOFR plus a 0.10% spread adjustment 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.

We have issued senior unsecured promissory notes under our master note agreement (the Master Note Agreement) in the aggregate principal amount of $200.0 as of June 30, 2024. Our aggregate borrowing capacity under the Master Note Agreement is $900.0; 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.

The nature of our potential exposure to legal contingencies is described in our 2023 annual report on Form 10-K in Note 10 of the Notes to Consolidated Financial Statements. As of June 30, 2024, there were no litigation matters that we consider to be probable or reasonably possible to have a material adverse outcome.

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 and should be read in conjunction with the 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. References to daily sales rate (DSR) change may reflect either growth (positive) or contraction (negative) for the applicable period.

Fastenal is a North American leader in the wholesale distribution of industrial and construction supplies. We distribute these supplies through a network of more than 3,500 in-market locations. Our largest end market is manufacturing. Sales to these customers includes 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. We also service general and commercial contractors in non-residential end markets as well as 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, though we continue to grow our non-North American presence as well.

The table below summarizes our absolute and full time equivalent (FTE; based on 40 hours per week) employee headcount, our investments related to in-market locations (defined as the sum of the total number of branch locations and the total number of active Onsite locations), and weighted Fastenal Managed Inventory (FMI) devices at the end of the periods presented and the percentage change compared to the end of the prior periods.

During the last twelve months, we increased our total FTE employee headcount by 618. This reflects an increase in our total FTE selling and sales support personnel of 393, which is oriented heavily toward supporting expansion of our Onsite locations. We had an increase in our distribution and transportation FTE personnel of 119 to support increased product throughput at our distribution facilities. We had an increase in our remaining FTE personnel of 106 which relates primarily to personnel investments in information technology and business analytics.

The table below summarizes the number of branches opened and closed, net of conversions, as well as the number of Onsites activated and closed, net of conversions during the periods presented.

Our in-market network forms the foundation of our business strategy. In recent years, we have seen a gradual increase in our in-market locations. This has reflected significant growth in Onsites and, to a lesser degree, international branches, which has more than overcome a meaningful decline in our traditional branch network from a strategic rationalization that aligned our physical footprint with changes in our business strategies. Branch closures may occur in the future to reflect normal churn in our business, but the strategic rationalization has concluded. As a result, we expect to see an increase in the rate of in-market location growth as we continue to open Onsites while our traditional branch network remains stable or grows moderately to sustain and improve our North American network, to continue our global expansion beyond North America, and to support our growth drivers.

The following table sets forth condensed consolidated statements of income information (as a percentage of net sales) for the periods ended June 30:

The table below sets forth net sales and daily sales for the periods ended June 30, and changes in such sales from the prior period to the more recent period:

Net sales increased $33.1, or 1.8%, in the second quarter of 2024 when compared to the second quarter of 2023. Both periods had the same number of selling days. Changes in foreign exchange rates negatively affected sales in the second quarter of 2024 and 2023 by approximately 20 and 40 basis points, respectively.

From a product standpoint, we have three categories: fasteners [including fasteners used in original equipment manufacturing (OEM) and maintenance, repair, and operations (MRO)], safety supplies, and other product lines, the latter of which includes eight smaller product categories, such as tools, janitorial supplies, and cutting tools. We continued to experience a divergence in the performance of our fastener versus our non-fastener product lines in the second quarter of 2024, which we believe relates to three factors. First, fasteners are more heavily oriented toward production of final goods than maintenance, which results in greater susceptibility to periods of weaker industrial production. Second, pricing for fasteners has decelerated at a faster pace than non-fastener products. Third, we continued to experience relatively faster growth with warehousing customers due to market share gains, product mix, and easier comparisons. This factor primarily benefited our safety product line. The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows:

From an end market standpoint, we have five categories: heavy manufacturing, other manufacturing, non-residential construction, reseller, and other, the latter of which includes government/education and transportation/warehousing. We continued to experience a modest divergence in the performance of our manufacturing end market versus our non-manufacturing end markets in the second quarter of 2024. This primarily reflects the relative strength we are experiencing with key account customers with significant managed spend where our service model and technology is particularly impactful. This disproportionately benefits manufacturing customers. The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows:

We report our customers in two categories: national accounts, which are customers with significant revenue potential and a national, multi-site contract, and non-national accounts, which include large regional customers, small local customers, and government customers. We continued to experience a significant divergence in the performance of our national account customers versus our non-national account customers, which relates to the relative growth of our sales through Onsite locations and larger, key accounts. The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows:

Our SG&A expenses, as a percentage of net sales, were 24.9% in the second quarter of 2024 versus 24.6% in the second quarter of 2023. Efforts to control growth in operating expenses in the second quarter of 2024 produced a modest 3.0% expansion of total SG&A in the period. Notwithstanding this, growth in net sales was below growth in SG&A, resulting in our deleveraging of costs in the second quarter of 2024.

Employee-related expenses include: (1) payroll (which includes cash compensation, stock option expense, and profit sharing), (2) health care, (3) personnel development, and (4) social taxes.

Occupancy-related expenses include: (1) building rent and depreciation, (2) building utility costs, (3) equipment related to our branches and distribution locations, and (4) industrial vending equipment and bins utilized as part of FMI services (we consider this hardware to be a logical extension of our in-market operations and classify the depreciation and repair costs as occupancy expenses).

In the second quarter of 2024, our occupancy-related expenses increased when compared to the second quarter of 2023. We had moderate increases in branch costs related to general inflation, as well as non-branch expenses from incremental depreciation and other costs associated with hub investments and upgrades. This was mostly offset by lower FMI expense where the roll-off of depreciation on a large number of vending devices that had reached the end of their depreciable lives in the second quarter of 2023 more than offset higher depreciation resulting from growth in bins.

All other SG&A expenses include: (1) selling-related transportation, (2) information technology (IT) expenses, (3) general corporate expenses, which consists of legal expenses, general insurance expenses, travel and marketing expenses, etc., and (4) sales of property and equipment.

Our operating income, as a percentage of net sales, decreased to 20.2% in the second quarter of 2024 from 21.0% in the second quarter of 2023.

We recorded income tax expense of $93.7 in the second quarter of 2024, or 24.2% of income before income taxes. Income tax expense was $94.6 in the second quarter of 2023, or 24.1% of income before income taxes. We believe our ongoing tax rate, absent any discrete tax items or broader changes to tax law, will be approximately 24.5%.

Our net income during the second quarter of 2024 was $292.7, a decrease of 1.8% compared to the second quarter of 2023. Our diluted net income per share was $0.51 in the second quarter of 2024, compared to $0.52 in the second quarter of 2023.

Cash flow activity was as follows for the periods ended June 30:

Net cash provided by operating activities decreased $44.1 in the second quarter of 2024 when compared to the second quarter of 2023. The decrease in operating cash flow, as a percent of net income, reflects our operating assets and liabilities being a more significant use of cash in the second quarter of 2024 than we experienced in the second quarter of 2023. In particular, inventory swung to a modest use of cash in the second quarter of 2024 versus a significant source of cash in the second quarter of 2023. This more than offset modest benefits to cash from other working capital items. For comparison, our five-year average of net cash provided by operating activities as a percent of net income in the second quarter is 78.6%.

The dollar and percentage change in accounts receivable, net, inventories, and accounts payable as of June 30, 2024 when compared to June 30, 2023 were as follows:

Note - Amounts may not foot due to rounding difference.

The increase in our accounts receivable balance in the second quarter of 2024 was primarily attributable to two factors. First, our receivables increased as a result of growth in sales to our customers. Second, we continue to experience a shift in our mix due to relatively stronger growth from national account customers, which tend to carry longer payment terms than our non-national account customers.

The decrease in our inventory balance in the second quarter of 2024 reflects three factors. First, customers are consuming less inventory as they adjust production to address soft demand. Second, we have made progress over the last twelve months to reduce inventory following the normalization of the supply chain after the disruptions experienced in 2022. We responded to that event by deepening inventory to support customer growth, and the process of rightsizing our stock can be protracted given the quantity of imported product we source. Third, we have also experienced modest deflation in our inventory.

The increase in our accounts payable balance in the second quarter of 2024 was primarily attributable to our product purchases increasing to support the growth in our business and to reflect a normalization of purchasing activity versus the year ago period when purchasing was subdued by efforts to rightsize inventory.

During the second quarter of 2024, we returned $223.3 to our shareholders in the form of dividends, compared to the second quarter of 2023 when we returned $199.9 to our shareholders in the form of dividends. We did not repurchase any of our common stock in the second quarter of 2024 or 2023.

We have authority to purchase up to 6,200,000 additional shares of our common stock under the July 12, 2022 authorization. This authorization does not have an expiration date.

Total debt on our balance sheet was $235.0 at the end of the second quarter of 2024, or 6.3% of total capital (the sum of stockholders' equity and total debt). This compares to $350.0, or 9.4% of total capital, at the end of the second quarter of 2023. The reduction in debt in the second quarter of 2024 versus the prior period reflects strong generation of net cash provided by operating activities over the last 12 months in excess of what was necessary to finance net capital expenditures, payment of dividends, and other investing and financing cash needs.

An overview of our cash dividends paid or declared in 2024 and 2023 is contained in Note 3 of the Notes to Condensed Consolidated Financial Statements.

The following table sets forth condensed consolidated statements of income information (as a percentage of net sales) for the periods ended June 30:

The table below sets forth net sales and daily sales for the periods ended June 30, and changes in such sales from the prior period to the more recent period: