FASTENAL COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(Amounts in millions except earnings per share)

FASTENAL COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Amounts in millions)

FASTENAL COMPANY AND SUBSIDIARIES

(Amounts in millions except per share information)

FASTENAL COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Amounts in millions)

See accompanying Notes to Condensed Consolidated Financial Statements.

 

(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, 2018.2019. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Recently Adopted Accounting Pronouncements

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 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 March 31:

The percentages of our sales by end market were as follows for the periods ended March 31:

Dividends

On April 10, 2019,13, 2020, our board of directors declared a dividend of $0.43$0.25 per share of common stock to be paid in cash on May 22, 201926, 2020 to shareholders of record at the close of business on April 24, 2019.28, 2020. Since 2011, we have paid quarterly dividends. Our board of directors currently intends to continue paying quarterly 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 dividends either paid previously or declared by our board of directors for future payment on a per share basis:

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 nine 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, 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 three-month periods ended March 31, 20192020 and 20182019 was $1.6 and $1.4,$1.6, respectively. Unrecognized stock-based compensation expense related to outstanding unvested stock options as of March 31, 20192020 was $17.0$16.4 and is expected to be recognized over a weighted average period of 4.284.32 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:

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.

Fastenal files income tax returns in the United States federal jurisdiction, all states, and various local and foreign jurisdictions. With limited exceptions, we are no longer subject to income tax examinations by taxing authorities for taxable years before 2016 in the case of United States federal examinations, and 2014 in the case of foreign, state, and local examinations. During the first quarter of 2019,2020, there were no0 material changes in unrecognized tax benefits.

(5)(6) 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 wasis approximately $85.2.$93.2. We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote. To the extent our fleet contains vehicles we estimate will settle at a gain, such gains on these vehicles will be recognized when we sell the vehicle.

Credit Facility, Notes Payable, Industrial Revenue Bonds, and Commitments

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

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. The commitments under the Credit Facility will expire (and any borrowings outstanding under the Credit Facility will become due and payable) on November 30, 2023. In the next twelve months, we have the ability and intent to repay a portion of the outstanding loans using cash; therefore, we have classified this portion 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 the London Interbank Offered Rate ('LIBOR') for interest periods of various lengths selected by us, plus 0.95%. Based on the interest periods we have chosen, our weighted per annum interest rate at March 31, 20192020 was approximately 3.4%1.9%. 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 $135.0. 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.

The notes currently issued under our Master Note Agreement consist of three3 series. The first is in an aggregate principal amount of $40.0, bears interest at a fixed rate of 2.00% per annum, and is due and payable on July 20, 2021. The second is in an aggregate principal amount of $35.0, bears interest at a fixed rate of 2.45% per annum, and is due and payable on July 20, 2022. The third is in an aggregate principal amount of $60.0, bears interest at a fixed rate of 3.22% per annum, and is due and payable on March 1, 2024. There is no amortization of these notes prior to their maturity date and interest is payable quarterly.

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. Share and per share information in this 10-Q has been adjusted to reflect the two-for-one stock split effective at the close of business on May 22, 2019. 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 3,1003,200 in-market locations. Most of our customers are in the manufacturing and non-residential construction markets. The manufacturing market includes bothproducers who incorporate our products into final goods, called original equipment manufacturersmanufacturing (OEM) and, and/or utilize our supplies in the maintenance, repair, and operationsoperation (MRO). of their facilities and equipment. 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, 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.America (the United States, Canada, and Mexico), though our presence outside of North America continues to grow as well.

The following sets forth condensed consolidated statement of earnings information (as a percentage of net sales) for the periods ended March 31:

The secondfirst source is success within our growth initiatives. OfIn the first quarter of 2020, the most impactful:impactful drivers included:

The shift in business conditions in March also generated more dramatic splits in our product and customer mix. For instance, in the first quarter of 2020 daily sales of fasteners declined 2.6% while daily sales of safety products and remaining non-fastener products grew 18.4% and 1.6%, respectively. In March specifically, daily sales of fasteners declined 10.1% while daily sales of safety products grew 31.0% and daily sales of remaining non-fastener products declined 2.5%. We saw similar patterns in our customer trends. In the first quarter of 2020 daily sales to manufacturing customers increased 3.0% and daily sales to non-residential construction customers declined 0.2%. In March specifically, daily sales to manufacturing and non-residential construction customers declined 1.1% and 7.8%, respectively. Daily sales to state and local government customers, which is not typically disclosed due to its relatively small size in our mix, grew 16.9% in the first quarter of 2019 over the first quarter of 2018.

Sales by Product Line

The approximate mix of sales from our fastener product linefasteners, safety supplies, and from ourall other product lines was as follows for the periods ended March 31:

Gross Profit

OurIn the first quarter of 2020, our gross profit, as a percentage of net sales, wasdeclined to 46.6%, or 110 basis points from 47.7% in the first quarter of 2019 and 48.7% in the first quarter of 2018.2019. We believe the decline in gross profit during this period is primarily due to fourtwo items. First, from(1) From the first quarter of 20182019 to the first quarter of 2019,2020, our daily sales of fastenersfastener products grew 11.8%decreased 2.6% while our daily sales of non-fastener products grew 12.7%6.0%. Fasteners are our largest product line at 34.8% of sales and our highest gross profit margin product line due to the high transaction cost surrounding the sourcing and supply of the product for our customers. Over the same period, larger customers, for which national accounts are a good proxy and whose more focused buying patterns allow us to offer them better pricing, grew faster than smaller customers. Relatively slower growth in the first quarter of 20192020 in our fastener product line (product mix) with relatively faster growth in sales to our largest customers (customer mix) pushed our gross profit margin lower. Second, while we have been successfulDeclines in raising prices, these increases have lagged behind the rise in product costs over the same period, creating a price/cost deficit that pushes our gross profit margin lower. Third, risingpercentage, such as we experienced in the first quarter of 2020, is an expected by-product of the success we are having growing sales through our vending and Onsite growth drivers. (2) Slower growth has resulted in our not leveraging near and intermediate term fixed costs, such as manufacturing, our captive fleet, or our international sourcing operation, as we have in past quarters, as well as period costs flowing through our operation. This is slightly exacerbated by more recent sources of growth, as orders related to transporting products, particularly shipping feescritical supplies such as masks, gloves, and driver wages, causedsanitizer, tend to be direct shipped rather than moved on our freight expensefleet or produced in our facilities.

The factors described above were relevant throughout the first quarter of 2020. As it relates to rise faster thanmix, in March specifically customer mix remained a factor. However, the widening growth differential between higher-margin fastener sales hurtingand lower-margin safety sales produced a greater product mix impact and increased the overall effect of mix on our gross profit margin. We operate our own truck fleet for moving product between suppliers, our distribution centers, and our in-market locations, so rising transportation costs adversely impact our gross profit margin if we are unable to pass these costs to our customers. Fourth, net rebates have not risen at the same rate as sales as we implement inventory control programs and sell through product that we accelerated into the United States from China ahead of a potential tariff increases in the fourth quarter of 2018. This has the effect of reducing our gross profit margin.percentage.

Operating and Administrative Expenses

All other operating and administrative expenses include: (1) selling-related transportation, (2) information technology expenses, (3) net event costs, (4) general corporate expenses, which consists ofincluding legal expenses, general insurance expenses, and travel and

Net Interest Expense

Our net interest expense was $2.1 in the first quarter of 2020 and $3.9 in the first quarter of 2019 and $2.7 in the first quarter of 2018.2019. This increasedecrease was mainly caused by higherlower average interest rates and a higherlower average debt balance during the period.

We recorded income tax expense of $66.6 in the first quarter of 2020, or 24.7% of earnings before income taxes. Income tax expense was $63.4 in the first quarter of 2019, or 24.6% of earnings before income taxes. Income tax

Net Earnings

Cash flow activity was as follows for the periods ended March 31:

Net Cash Used in Investing Activities

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

A description of our legal proceedings, if any, is contained in Note 78 of the Notes to Condensed Consolidated Financial Statements. The description of legal proceedings, if any, in Note 78 is incorporated herein by reference.

Issuer Purchases of Equity Securities

SIGNATURES