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 consolidated financial statements and should be read in conjunction with those consolidated financial statements. This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons for the current year and the prior year. Discussions of 2020 items can be found in 'Management's Discussion and Analysis of Financial Condition and Results of Operations' in Part II, Item 7 of our annual report on Form 10-K for the fiscal year endedDecember 31, 2021 .
Business and Operational Overview
Fastenal is a North American leader in the wholesale distribution of industrial and construction supplies. We distribute these supplies through a network of approximately 3,300 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 inNorth America , though we continue to grow our non-North American presence as well. It is helpful to appreciate several aspects of our marketplace: First, it is big. We estimate the North American marketplace for industrial supplies is in excess of$140 billion per year (and we have expanded beyondNorth America ) and no company has a significant portion of this market. Second, many of the products we sell are individually inexpensive, but the cost and time to manage, procure, and transport these products can be quite meaningful. Third, many customers prefer to reduce their number of MRO and OEM suppliers to simplify their business, while also utilizing various technologies and models (including our local branches when they need something quickly or unexpectedly) to improve availability and reduce waste. Lastly, we believe the markets are efficient. In our view, this means that companies that grow market share are those that develop differentiated capabilities that provide the greatest value to the customer. Our approach to addressing these aspects of our marketplace is captured in our tagline Where Industry Meets Innovation™. The concept of growth is simple: find more customers every day and increase our activity with them. However, execution is hard work. First, we recruit service-minded individuals to support customers and empower them to operate in a decentralized fashion to maximize their flexibility to solve customer problems. We support these customer-facing resources with a supply chain capability that is speedy, efficient, and cost-effective. This has formed the foundation of our high-touch model since inception. Second, we invest in, develop, and deploy capabilities that allow us to illuminate and provide greater control over a customer's supply chain. These capabilities range from service models that take advantage of our local presence and/or our ability to more efficiently manage complex procurement needs, to hardware and software technologies that promote actionable data capture, improve operating efficiencies and reduce supply chain risk. Third, we strive to generate strong profits, which produce the cash flow necessary to support our growth, our product and technology development, and the needs of our customers. The ultimate aim of this 'high-tech, high-touch' approach to gaining market share is to allow us to get closer to our customers, going so far as to be right to the point of consumption within customers' facilities. Marrying our presence, capabilities and technologies deepens our relationships and our understanding of our customers' day-to-day opportunities and obstacles. This, in turn, enhances our ability to provide innovative and comprehensive solutions to our customers' challenges. By doing these things every day, Fastenal remains a growth-centric organization. 28
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Table of Contents Executive Overview
The following table presents a performance summary of our results of operations
for the periods ended
YOY YOY 2022 2021 Change 2020 Change Net sales$ 6,980.6 6,010.9 16.1 %$ 5,647.3 6.4 % Business days 254 253 255 Daily sales$ 27.5 23.8 15.7 %$ 22.1 7.3 % Gross profit$ 3,215.8 2,777.2 15.8 %$ 2,567.8 8.2 % % of net sales 46.1 % 46.2 % 45.5 % Operating and administrative expenses$ 1,762.2 1,559.8 13.0 %$ 1,426.0 9.4 % % of net sales 25.2 % 26.0 % 25.3 % Operating income$ 1,453.6 1,217.4 19.4 %$ 1,141.8 6.6 % % of net sales 20.8 % 20.3 % 20.2 % Earnings before income taxes$ 1,440.0 1,207.8 19.2 %$ 1,132.7 6.6 % % of net sales 20.6 % 20.1 % 20.1 % Net earnings$ 1,086.9 925.0 17.5 %$ 859.1 7.7 % Diluted net earnings per share$ 1.89 1.60
17.8 %
We would characterize 2022 as reflecting the normalization of the business cycle relative to the pandemic-impacted years of 2020 and 2021. While we did experience some slowing in business activity over the course of the year, customer demand was generally healthy throughout, resulting in good unit growth. Incremental pricing from actions taken at the end of 2021 and the start of 2022 further contributed to our growth, though over the course of the year we saw the inflationary pressures and supply chain constraints that catalyzed our pricing actions largely dissipate. This normalization in business activity also resulted in improved signings of Onsites and FMI devices, which approached pre-pandemic levels. These factors more than offset challenges in our smaller non-North American markets, where the effects of the Russo-Ukrainian War andChina's evolving COVID-19 policies weighed on growth. This growth, combined with improvements to our efficiency stemming from growth in our Digital Footprint and changes to our go-to-market strategies, allowed us to expand our operating margins in the period. The table below summarizes our absolute and full-time equivalent (FTE; based on 40 hours per week) employee headcount, our investments in in-market locations (defined as the sum of the total number of branch locations and the total number of activeOnsite locations), and weighted FMI devices at the end of the periods presented and the percentage change compared to the end of the prior period. Q4 Q4 Twelve-month 2022 2021
% Change In-market locations - absolute employee headcount 13,410 12,464
7.6 % In-market locations - FTE employee headcount 12,017 11,337 6.0 % Total absolute employee headcount 22,386 20,507 9.2 % Total FTE employee headcount (1) 19,854 18,334 8.3 % Number of branch locations 1,683 1,793 -6.1 % Number of active Onsite locations 1,623 1,416 14.6 % Number of in-market locations 3,306 3,209 3.0 %
Weighted FMI devices (MEU installed count) (2) 102,151 92,874
10.0 %
(1) Due to a calculation error, organizational support personnel was overstated by 36 FTE
in the fourth quarter of 2021, with total non-selling FTE and total FTE being
overstated by the same amount. These figures have been corrected in this Form 10-K.
Adjusting for this error, total FTE in 2021 would have been down by an additional 0.2%
for year-to-date growth.
(2) This number excludes approximately 6,500 non-weighted devices that are part of our
locker lease program.
During the last twelve months, we increased our total FTE employee headcount by 1,520. This reflects an increase in our in-market and non-in-market selling FTE employee headcount of 1,063 to support growth in the marketplace and sales initiatives targeting customer acquisition. We had an increase in our distribution center FTE employee headcount of 231 to support increasing product throughput at our facilities and to expand our local inventory fulfillment terminals (LIFTs). We had an 29
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increase in our remaining FTE employee headcount of 226 that relates primarily to personnel investments in information technology, manufacturing, and operational support, such as purchasing and product development.
We opened one branch in the fourth quarter of 2022 and closed 34, net of conversions. We activated 76Onsite locations in the fourth quarter of 2022 and closed 20, net of conversions. In 2022, we opened 12 branches and closed 122, net of conversions. In 2022, we activated 306Onsite locations and closed 99, net of conversions. In any period, the number of closings tends to reflect normal churn in our business, whether due to redefining or exiting customer relationships, the shutting or relocation of customer facilities that host our locations, or a customer decision, as well as our ongoing review of underperforming locations. Our in-market network forms the foundation of our business strategy, and we will continue to open or close locations as is deemed necessary to sustain and improve our network, support our growth drivers, and manage our operating expenses.
CURRENT YEAR RESULTS ENDED 2022
Results of Operations
The following sets forth consolidated statements of earnings information (as a
percentage of net sales) for the periods ended
2022 2021 Net sales 100.0 % 100.0 % Gross profit 46.1 % 46.2 % Operating and administrative expenses 25.2 % 26.0 % Operating income 20.8 % 20.3 % Net interest expense -0.2 % -0.2 % Earnings before income taxes 20.6 % 20.1 %
Note - Amounts may not foot due to rounding difference.
Note - Daily sales are defined as the total net sales for the period divided by the number of business days (inthe United States ) in the period. The table below sets forth net sales and daily sales for the periods endedDecember 31 , and changes in such sales from the prior period to the more recent period: 2022 2021 Net sales$ 6,980.6 6,010.9 Percentage change 16.1 % 6.4 % Business days 254 253 Daily sales$ 27.5 23.8 Percentage change 15.7 % 7.3 %
Daily sales impact of currency fluctuations -0.5 % 0.6 %
The increase in net sales noted above for 2022 was due to higher unit sales of MRO and OEM supplies to traditional manufacturing and construction customers and higher pricing as further set forth below. Higher unit sales in 2022 were a result of healthy economic activity throughout the period, though we did observe some moderation in demand as the year progressed. This moderation in demand, combined with more difficult year-over-year comparisons as the year progressed, produced daily sales growth of 18.1% in the first half of 2022, daily sales growth of 13.3% in the second half of 2022, and daily sales growth of 8.0% inDecember 2022 . Growth was led by our manufacturing customers, with particular strength in markets involved with commodity and capital goods production. Our non-residential construction customers grew on an annual basis, but turned slightly negative in the fourth quarter. We believe the relative underperformance of this customer category reflects deliberate shifts in our branch strategy that de-emphasized walk-in and over-the-counter transactions. We also experienced a normalization in other aspects of the operating environment in 2022, specifically the dissipation or moderation over the course of the year of product and transportation inflation, supply chain disruption, and labor market constraints. This affected two aspects of our growth during the period. First, price contributed 540 to 570 basis points to our net sales growth in 2022. However, as inflationary pressures eased and product availability improved, the need for aggressive pricing actions declined. The absence of such actions combined with more difficult year-over-year comparisons as the year progressed resulted in the contribution from price to net sales growth moderating, from averaging 620 to 650 basis points in the first half of 2022, to averaging 450 to 480 basis points in the second half of 2022 and to averaging 350 to 380 basis points in the fourth quarter of 2022. 30
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Second, as inflationary pressures and supply chain constraints became more predictable and manageable and then largely dissipated, it allowed our customers to shift from short-term business management to long-term strategic planning. This, in turn, provided us more opportunities to engage with customers over our key growth drivers, includingOnsite and FMI. As a result, while we did not reach the signings goals we had set out at the start of the year, we saw a meaningful increase in signings in 2022 over the prior year, and a return to near pre-pandemic levels. We signed 356 Onsites in 2022, below our goal of 375 to 400 units but above the prior year (274 signings). Similarly, we signed 20,735 FMI MEUs, below our goal of 23,000 to 25,000 MEUs but above the prior year (19,311 MEUs). Sales by Product Line The approximate mix of sales from fasteners, safety supplies, and all other product lines was as follows: 2022 2021 Fasteners 34.0% 33.3% Safety supplies 20.8% 21.2% Other product lines 45.2% 45.5% The shifts in product mix in 2022 compared to 2021 largely reflect the reversal of pandemic-related activity combined with the relative growth of our more cyclical fastener line as growth in manufacturing and construction end markets accelerated as the post-pandemic North American economy recovered.
Annual Sales Changes, Sequential Trends, and End Market Performance
This section focuses on three distinct views of our business - annual sales changes by month, sequential trends, and end market performance. The first discussion regarding sales changes by month provides a good mechanical view of our business. The second discussion provides a framework for understanding the sequential trends (that is, comparing a month to the immediately preceding month, and also looking at the cumulative change from an earlier benchmark month) in our business. Finally, we believe the third discussion regarding end market performance provides insight into activities with our various types of customers.
Annual Sales Changes, by Month
During the months noted below, all of our selling locations, when combined, had a DSR change of (compared to the same month in the preceding year):
Jan. Feb. Mar. Apr. May June
July Aug. Sept. Oct. Nov.
18.1 % 16.1 % 13.7 % 13.6 % 10.2 % 8.0 % 2021 6.5 % 1.5 % 7.5 % 1.2 % -3.2 % 1.7 %
9.7 % 9.0 % 11.1 % 14.1 % 13.2 % 16.5 %
Sequential Trends
We find it helpful to think about the monthly sequential changes in our business using the analogy of climbing a stairway - This stairway has several predictable landings where there is a pause in the sequential gain (i.e. April, July, and October to December), but generally speaking, climbs from January to October. The October landing then establishes the benchmark for the start of the next year. History has identified these landings in our business cycle. They generally relate to months where certain holidays impair business days and/or seasons impact certain end markets, particularly non-residential construction. The first landing centers on Easter and theGood Friday holiday that precedes it, which in any given year can fall in March or April, the second landing centers onJuly 4th , and the third landing centers on the approach of winter with its seasonal impact on primarily our non-residential construction business and with the Christmas/New Year holidays. The holidays we noted impact the trends because they either move from month-to-month or because they move around during the week. The table below shows the pattern to the sequential change in our daily sales. The line labeled 'Benchmark' is a historical average of our sequential daily sales change for the trailing five year average that excludes 2020. We have excluded 2020 from the average as the effects of the pandemic created unusual sequential patterns that we do not consider representative of normal trends. We believe this time frame serves to show the historical pattern and could serve as a benchmark. The '2022' and '2021' lines represent our actual sequential daily sales changes. The '22Delta' and '21Delta' lines indicate the difference between the 'Benchmark' and the actual results in the respective year. Under normal circumstances, the sequential trends shown below are directly linked to fluctuations in our end markets. Further, in any given month it is possible to get significant deviation from the benchmark. 31
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It is important to note that these benchmarks are historical averages. In a year where demand is strong, our daily sales growth rates will tend to have more months that exceed the benchmark than fall below it. In a year where demand is weak, we will tend to have more months that fall short of the benchmark than exceed it. In both cases, there is a random element that makes it difficult to know how any single month will perform. Cumulative Change Jan.(1) Feb. Mar. Apr. May June July Aug. Sept. Oct. from Jan. to Oct. Benchmark (2) -0.1 % 0.8 % 3.4 % 0.1 % 2.2 % 1.9 % -3.3 % 3.1 % 3.4 % -2.1 % 9.5 % 2022 1.7 % 3.1 % 3.6 % -1.2 % 3.2 % 0.2 % -1.6 % 1.3 % 2.7 % -0.1 % 11.7 % 22Delta 1.7 % 2.4 % 0.2 % -1.3 % 1.1 % -1.7 % 1.6 % -1.8 % -0.7 % 2.0 % 2.2 % 2021 0.9 % -2.3 % 5.6 % -2.2 % 5.6 % 1.6 % -3.4 % 3.1 % 4.8 % 0.0 % 13.0 % 21Delta 1.0 % -3.0 % 2.2 % -2.3 % 3.4 % -0.3 % -0.2 % 0.0 % 1.5 % 2.1 % 3.5 %
(1) The January figures represent the percentage change from the previous October, whereas
the remaining figures represent the percentage change from the previous month.
(2) The benchmark for each month is the average of the previous five years for that month. As
COVID-19-related surge sales made sequential averages in 2020 unrepresentative, the
benchmark uses a preceding five-year average that excludes 2020. We also exclude the
impact of the 2017 Mansco acquisition.
Note - Amounts may not foot due to rounding difference.
A graph of the sequential daily sales change patterns discussed above, starting with a base of '100' in the previous October and ending with the next October, would be as follows: [[Image Removed: fast-20221231_g2.jpg]] 32
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Table of Contents End Market Performance We estimate approximately 70% of our business is with customers engaged in some type of manufacturing, a significant subset of which finds its way into the heavy equipment market. The DSR change to these manufacturing customers, when compared to the same period in the prior year, was as follows:
DSR change - manufacturing customers Q1 Q2 Q3
Q4 Annual 2022 23.9 % 23.1 % 22.6 % 16.0 % 21.3 % 2021 5.6 % 24.5 % 20.8 % 23.8 % 18.4 % Our manufacturing business consists of two subsets: the industrial production business (this is business where we supply products that become part of the finished goods produced by our customers and is sometimes referred to as OEM - original equipment manufacturing) and the maintenance portion (this is business where we supply products that maintain the facility or the equipment of our customers engaged in manufacturing and is sometimes referred to as MRO - maintenance, repair, and operations). The industrial business is more fastener-centered, while the maintenance portion is represented by all product categories. The best way to understand the change in our industrial production business is to examine the results in our fastener product line (which, under normal business conditions, represents 30% to 35% of our business) which is heavily influenced by changes in our business with heavy equipment manufacturers. From a company perspective, the DSR change of fasteners, when compared to the same period in the prior year, was as follows (note: this information includes all end markets): DSR change - fasteners Q1 Q2 Q3 Q4 Annual 2022 24.6 % 21.2 % 18.2 % 9.1 % 18.1 % 2021 4.0 % 28.4 % 20.2 % 24.2 % 18.8 % By contrast, the best way to understand the change in the maintenance portion of the manufacturing business is to examine the results in our non-fastener product lines. From a company perspective, the DSR change of non-fasteners, when compared to the same period in the prior year, was as follows (note: this information includes all end markets): DSR change - non-fasteners Q1 Q2 Q3 Q4 Annual 2022 15.0 % 16.0 % 14.4 % 11.6 % 14.2 % 2021 6.1 % -10.8 % 5.1 % 9.6 % 1.9 % Two product lines, safety and janitorial, accounted for approximately 44% of total non-fastener sales in 2022. The pattern in 2021, and particularly the second quarter of 2021, was affected by difficult comparisons versus the prior year, when the onset of the COVID-19 pandemic resulted in a surge of safety and janitorial supplies that was not repeated to the same degree in 2022. Setting aside the unique circumstances surrounding the pandemic, our non-fastener business is not immune to the impact of industrial cycles. However, we would typically expect it to outperform our fastener business over the course of a cycle. This reflects three things: the non-fastener market is larger than the fastener market, we are under penetrated in the non-fastener market relative to the fastener market, and industrial vending lends itself to sales of non-fastener products. We estimate approximately 15% to 20% of our business is with customers engaged in non-residential construction and reseller markets. The DSR change to these customers, when compared to the same period in the prior year, was as follows: DSR change - non-residential construction and reseller customers Q1 Q2 Q3 Q4 Annual 2022 10.3 % 8.0 % 4.6 % -1.6 % 5.3 % 2021 -6.7 % 3.5 % 7.0 % 10.3 % 3.3 % Our non-residential construction and reseller business is heavily influenced by manufacturing, oil and gas, and infrastructure spending. In 2022, these markets were healthy, which contributed to growth with these customers. 33
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Table of Contents Gross Profit
The gross profit percentage during each period was as follows:
Q1 Q2 Q3 Q4 Annual 2022 46.6 % 46.5 % 45.9 % 45.3 % 46.1 % 2021 45.4 % 46.5 % 46.3 % 46.5 % 46.2 % Our gross profit, as a percentage of net sales, was 46.1% in 2022 and 46.2% in 2021, a decrease of 10 basis points. This decrease was primarily related to three factors. First, in 2022 we experienced relatively higher growth from our large andOnsite customers, which tend to have a lower gross margin percentage than the business as a whole. This was only partly offset by favorable product mix resulting from relatively higher growth from our fasteners products during the year, which tend to have a higher gross margin percentage than the business as a whole. Second, in the second half of 2022, we did not pass through pricing sufficient to offset higher costs, which resulted in an adverse impact on our gross margin percentage. Third, in the second half of 2022, we experienced lower product margins for certain categories of our other products. We believe slower demand and greater product availability in the marketplace due to supply chain normalization has put some pressure on products that tend to be sold less frequently by our business units. These factors were mostly offset by a reduction in the amount of pandemic-related write-downs and narrower losses to operate our truck fleet related to our strong freight revenue growth leveraging relatively stable fleet costs.
Operating and Administrative Expenses
Our operating and administrative expenses, as a percentage of net sales, decreased by approximately 80 basis points to 25.2% in 2022 from 26.0% in 2021. Employee-related expenses, as a percentage of net sales, decreased by approximately 20 basis points. Occupancy-related expenses, as a percentage of net sales, decreased by approximately 60 basis points. All other operating and administrative expenses, as a percentage of net sales, was unchanged in 2022 from 2021. The percentage change in employee-related, occupancy-related, and all other operating and administrative expenses (including the loss (gain) on sales of property and equipment) compared to the same periods in the preceding year, is outlined in the table below. Approximate Percentage Twelve-month Period of Total Operating and Administrative Expenses 2022 2021 Employee-related expenses 70% to 75% 14.7 % 11.6 % Occupancy-related expenses 15% to 20% 2.6 % 3.9 % All other operating and administrative expenses 10% to 15% 18.5 % 4.9 %
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.
Our employee-related expenses increased in 2022 from 2021. This was related to: higher base pay and employment taxes from higher FTE during the period and moderate wage inflation; an increase in bonuses and commissions resulting from improved sales and profitability; and an increase in our profit sharing contribution. This was partly offset by a decline in health insurance costs, as the use of medical services by employees normalized following the post-pandemic catch-up activity in 2021. 34
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The table below summarizes the percentage change in our FTE headcount at the end of the periods presented compared to the end of the prior period:
Twelve-month
Period
2022
2021
In-market locations (branches & Onsites) 6.0 %
0.7 %
Non-in-market selling (1) 18.4 %
8.0 %
Selling subtotal 7.9 %
1.7 %
Distribution/Transportation 8.4 %
5.8 %
Manufacturing 12.4 %
2.0 %
Organizational support personnel (2) (3) 9.5 % 7.4 % Non-selling subtotal 9.3 % 5.8 % Total 8.3 % 2.8 %
(1) Our non-in-market selling employee count has grown in recent years due to an increased
focus on resources to support our growth drivers, particularly
account growth. (2) Due to a calculation error, organizational support personnel was overstated by 36 FTE
in the fourth quarter of 2021, with total non-selling FTE and total FTE being
overstated by the same amount. These figures have been corrected in this Form 10-K.
Adjusting for this error, total FTE in 2021 would have been down by an additional 0.2%
for year-to-date growth. (3) Organizational support personnel consists of: (1) Sales & Growth Driver Support
personnel (35% to 40% of category), which includes sourcing, purchasing, supply chain,
product development, etc.; (2) Information Technology personnel (30% to 35% of
category); and (3) Administrative Support personnel (25% to 30% of category), which
includes human resources,
management, etc.
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 (we consider the vending equipment, excluding leased locker equipment, to be a logical extension of our in-market operations and classify the depreciation and repair costs as occupancy expenses). Our occupancy-related expenses increased in 2022 from 2021. This was related to: higher costs and depreciation for the maintenance, upgrade and installation of equipment in hub and non-hub facilities; slightly higher depreciation related to a higher installed base of our FMI suite of technologies; and slightly higher facility costs, with higher utility costs being only partly offset by lower rents stemming from branch consolidations. All other operating and administrative 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) the loss (gain) on sales of property and equipment. Combined, all other operating and administrative expenses increased in 2022 from 2021. This was related to: higher costs related to selling-related transportation, including higher fuel costs; higher spending on information technology; higher spending on travel, meals, and supplies; and higher general insurance expense. These elements were only partly offset by lower bad debt expense.
Net Interest Expense
Our net interest expense was$13.6 in 2022 compared to$9.6 in 2021. We carried higher average debt balances in 2022 relative to the prior year, and specifically higher balances of variable rate credit facility debt, as a result of high sustained working capital needs and an increase in share buybacks. We also incurred higher average interest rates during the year due to changes in interest levels in the marketplace.
Income Taxes
We recorded income tax expense of$353.1 in 2022, or 24.5% of earnings before income taxes, compared to$282.8 in 2021, or 23.4% of earnings before income taxes. The increase in our tax rate in 2022 is due primarily to reduced benefits associated with the exercise of stock options, an increase in state income tax expense, and an absence of certain favorable reserve adjustments that benefited 2021. 35
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Table of Contents Net Earnings
Net earnings, net earnings per share (EPS), the percentage change in net earnings, and the percentage change in EPS, were as follows:
Dollar Amounts 2022 2021 Net earnings$ 1,086.9 925.0 Basic EPS 1.89 1.61 Diluted EPS 1.89 1.60 Percentage Change 2022 2021 Net earnings 17.5 % 7.7 % Basic EPS 17.7 % 7.5 % Diluted EPS 17.8 % 7.4 % 2022 2021 Tax Rate 24.5 % 23.4 %
During 2022, net earnings increased, primarily due to higher sales and our ability in the period to grow costs more slowly than we grew sales. This was only slightly offset by a higher income tax rate.
Liquidity and Capital Resources
Net Cash Provided by Operating Activities
Net cash provided by operating activities in dollars and as a percentage of net earnings were as follows: 2022 2021 Net cash provided$ 941.0 770.1 % of net earnings 86.6 % 83.3 %
In 2022, we experienced a slight increase in our operating cash flow as a percentage of net earnings, though this reflects a significant increase in our conversion percentage in the second half of 2022 which more than offset a significant decline in our conversion percentage in the first half of 2022. Taken as a whole, while our working capital needs remained elevated through 2022, they declined slightly on a year-over-year basis whereas our earnings increased on a year-over-year basis.
Trade Working Capital Assets
The following table sets forth the dollar and percentage change in accounts receivable, net, inventories, and accounts payable for the period endedDecember 31 : Twelve-month Twelve-month Dollar Change Percentage Change 2022 2022 2022 Accounts receivable, net$ 1,013.2 113.0 12.6 % Inventories 1,708.0 184.4 12.1 % Trade working capital$ 2,721.2 297.4 12.3 % Accounts payable$ 255.0 21.9 9.4 % Trade working capital, net$ 2,466.2 275.5 12.6 % Net sales in last two months$ 1,091.9 91.7 9.2 %
Note - Amounts may not foot due to rounding difference.
In 2022, the annual growth in net accounts receivable reflected several factors. First, our receivables are expanding due to improved business activity and resulting growth in our customers' sales. Second, we continue to experience a shift in our customer mix due to relatively stronger sales growth from national account customers, which tend to be larger and carry longer payment terms than our non-national account customers. 36
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Our inventory balances over time will respond to business activity, though various factors produce a looser relationship to our monthly sales patterns than we tend to experience in accounts receivable. One reason for this is because it is cyclical. We source significant quantities of product from overseas, and the lead time involved in procuring these products is typically longer than the visibility we have into future monthly sales patterns. As a result, trends in our inventory will often lag trends in economic conditions. A second reason relates to product cost and the length of our supply chain. A significant proportion of our products, particularly fasteners, are sourced fromAsia and transported primarily by ship and rail to our North American network for sale. This requires us to purchase a meaningful quantity of our products months in advance of those products being available for sale in our North American facilities. Product that is in transit is in our inventory but is not available for sales, which can create a lag in our ability to adjust inventory levels or costs in response to rapid changes in economic or cost conditions. A third reason for increases in our inventory balances is our growth drivers, including our FMI offerings, Onsite channel, and international expansion, all of which tend to require significant investments in inventory. In 2022, our inventories increased, reflecting significant inflation in the value of stocked parts, the addition of inventory to support the growth of our manufacturing and construction customers as they expand production to meet improved business activity, deeper inventory stocking due to disruption in supply chains, and our efforts to sustain higher internal fulfillment rates.
In 2022, the annual growth in accounts payable reflected product purchases increasing to support the improvement in business activity at our manufacturing and construction customers.
The approximate percentage mix of inventory stocked at our selling locations versus our distribution center and manufacturing locations was as follows at year end: 2022 2021 Selling locations 58 % 57 % Distribution center and manufacturing locations 42 % 43 % Total 100 % 100 % Lease Obligations
We have facilities, equipment, and vehicles leased under operating leases. A discussion of our lease obligations is contained in Note 8 of the Notes to Consolidated Financial Statements.
Net cash used in investing activities in dollars and as a percentage of net earnings were as follows:
2022 2021 Net cash used$ 163.0 148.5 % of net earnings 15.0 % 16.1 %
The changes in net cash used in investing activities in 2022 was primarily related to higher net capital expenditures.
Property and equipment expenditures typically consist primarily of: (1) purchases related to industrial vending, (2) purchases of property and equipment related to expansion of and enhancements to distribution centers, (3) spending on software and hardware for our information processing systems, (4) the addition of fleet vehicles, (5) expansion, improvement or investment in certain owned or leased branch properties, and (6) the addition of manufacturing and warehouse equipment. Proceeds from the sales of property and equipment, typically for the planned disposition of pick-up trucks as well as distribution vehicles and trailers in the normal course of business, are netted against these purchases and additions. 37
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Set forth below is a recap of our 2022 and 2021 net capital expenditures in dollars and as a percentage of net sales and net earnings:
2022 2021
Manufacturing, warehouse and packaging equipment, industrial vending equipment, and facilities
$ 97.8 70.3
Shelving and related supplies for in-market location openings and for product expansion at existing in-market locations
21.5 11.0 Data processing software and equipment 30.6 28.0 Real estate and improvements to branch locations 12.4 37.9 Vehicles 11.5 9.4 Purchases of property and equipment 173.8 156.6 Proceeds from sale of property and equipment (11.4) (8.4) Net capital expenditures 162.4 148.2 % of net sales 2.3 % 2.5 % % of net earnings 14.9 % 16.0 % Our net capital expenditures increased in 2022, when compared to 2021. The most significant area driving this increase was higher spending on FMI equipment. We had slightly higher property spending, which reflected significant investments in automation and upgrades at our hubs mostly offset by lower spending on a new building in downtownWinona , which was completed in 2021. We had only modest increases related to our vehicle fleet, manufacturing operations, and information technology. Net capital expenditures in 2022 were below our anticipated range of$170.0 to$190.0 due to certain equipment and project delays related to hub projects. We expect our net capital expenditures in 2023 to be within a range of$210.0 to$230.0 . This increase from 2022 reflects: spending on upgrades to and investments in automation at certain hubs; the beginning of construction of a distribution center inUtah ; investment in materials to facilitate our branch conversion projects; higher spending on information technology; and investments in fleet equipment to support our network of heavy trucks.
Net cash used in financing activities in dollars and as a percentage of net earnings were as follows:
2022 2021 Net cash used$ 774.9 627.1 % of net earnings 71.3 % 67.8 % The fluctuations in net cash used in financing activities are due to changes in the level of our dividend payments and in the level of common stock purchases. These amounts were partially offset by the exercise of stock options and net payments (proceeds) from debt obligations. These items in dollars and as a percentage of earnings were as follows: 2022 2021 Cash dividends paid$ 711.3 643.7 % of net earnings 65.4 % 69.6 % Purchases of common stock 237.8 - % of net earnings 21.9 % - % Total returned to shareholders$ 949.1 643.7 % of net earnings 87.3 % 69.6 %
Proceeds from the exercise of stock options
-0.8 % -3.4 % Debt obligations (proceeds) payments, net$ (165.0) 15.0 % of net earnings -15.2 % 1.6 % Net cash used$ 774.9 627.1 % of net earnings 71.3 % 67.8 % 38
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Table of Contents Stock Purchases In 2022, we purchased 5,000,000 shares of our common stock at an average price of approximately$47.58 per share. In 2021, we did not purchase any shares of our common stock. Dividends
We declared a quarterly dividend of
Debt
In order to fund the considerable cash needed to expand our industrial vending business, expand capacity and increase the use of automation in our distribution centers, pay dividends, and, in 2022, to purchase our common stock, we have borrowed under our Credit Facility and our Master Note Agreement in recent periods.
Our borrowings under the Credit Facility and Master Note Agreement peaked during each quarter of 2022 as follows:
Peak borrowings 2022 First quarter$ 525.0 Second quarter 595.0 Third quarter 650.0 Fourth quarter 710.0 As ofDecember 31, 2022 , we had$225.0 outstanding under the Credit Facility and had contingent obligations from letters of credit outstanding under the Credit Facility in an aggregate face amount of$36.3 . As ofDecember 31, 2022 , we had loans outstanding under the Master Note Agreement of$330.0 . Descriptions of our Credit Facility and Master Note Agreement are contained in Note 9 of the Notes to Consolidated Financial Statements.
Material Cash Requirements
Our material cash requirements for known contractual obligations include capital expenditures, debt, and lease obligations, each of which are discussed in more detail earlier in this section. We believe that net cash provided by operating activities will be adequate to meet our liquidity and capital needs for these items in the short-term over the next 12 months and also in the long-term beyond the next 12 months. We also have cash requirements for purchase orders and contracts for the purchase of inventory and other goods and services, which are based on current distribution needs and are fulfilled by our suppliers within short time horizons. We do not have significant agreements for the purchase of inventory or other goods or services specifying minimum order quantities. In addition, we may have liabilities for uncertain tax positions but we do not believe any of these liabilities will be material. A discussion of income taxes is contained in Note 7 of the Notes to Consolidated Financial Statements.
Unremitted Foreign Earnings
Approximately$184.4 of cash and cash equivalents are held by non-U.S. subsidiaries. These funds may create foreign currency translation gains or losses depending on the functional currency of the entity holding the cash. We have considered the financial requirements of each foreign subsidiary and our parent company and will continue to reinvest these funds to support our expansion activities outside theU.S. , even after taking into consideration the deemed repatriation and transition tax under the Tax Cuts and Jobs Act. The income tax impact of repatriating cash associated with investments in foreign subsidiaries is discussed in Note 7 of the Notes to Consolidated Financial Statements.
Effects of Inflation
In 2022, we began to observe easing in inflationary pressures for metals (especially steel), energy, and transportation services (especially overseas containers and shipping). However, this did not translate into a reduction in inflationary pressures on our financial results for two reasons. First, inflationary pressures accelerated through 2021, and many periods in 2022 were comparing to lower cost levels in the preceding year. Second, we have a long supply chain for many products, and it can take several quarters from when inflationary pressures begin to recede for the effect to impact our earnings results. In 2022, we increased prices, sought alternative sources for products and service, and consolidated spend for products and services as a means of mitigating inflation. However, higher product and transportation costs did have a slightly negative effect on our gross margin percentage for the full year. 39
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Table of Contents PRIOR YEAR RESULTS ENDED 2021 Results of Operations
The following sets forth consolidated statements of earnings information (as a
percentage of net sales) for the periods ended
2021 2020 Net sales 100.0 % 100.0 % Gross profit 46.2 % 45.5 % Operating and administrative expenses 26.0 % 25.3 % Operating income 20.3 % 20.2 % Net interest expense -0.2 % -0.2 % Earnings before income taxes 20.1 % 20.1 %
Note - Amounts may not foot due to rounding difference.
Note - Daily sales are defined as the total net sales for the period divided by the number of business days (inthe United States ) in the period. The table below sets forth net sales and daily sales for the periods endedDecember 31 , and changes in such sales from the prior period to the more recent period: 2021 2020 Net sales$ 6,010.9 5,647.3 Percentage change 6.4 % 5.9 % Business days 253 255 Daily sales$ 23.8 22.1 Percentage change 7.3 % 5.5 % Daily sales impact of currency fluctuations 0.6 % -0.1 % The increase in net sales noted above for 2021 was due to higher unit sales of industrial products to traditional manufacturing and construction customers and higher pricing, only partly offset by lower pandemic-related personal protection equipment (PPE) sales as the prior year's demand surge did not recur. Higher unit sales in 2021 were a result of strong economic activity which increased demand for our products to our traditional manufacturing and construction customers. Although economic strength was fairly consistent throughout the year, our growth patterns were not, primarily due to comparisons related to the timing of pandemic-related PPE sales in the previous year. For instance, our daily sales growth in the first half of 2021 was 2.5%. Our cyclical product categories substantially outperformed this, as exemplified by fastener daily sales growth of 15.4% in the first half of 2021. However, this was mostly offset by the absence of significant spending for PPE that occurred in the previous period, which is best illustrated by safety products' daily sales decline of 20.2% in first half of 2021. By contrast, our daily sales growth in the second half of 2021 was a much stronger 12.3%. Our cyclical product categories continued to outperform with fastener daily sales having grown 22.2% in the second half of 2021. While certain products and markets within our business continued to face difficult PPE comparisons, they were not as severe as what had been experienced in the first half of 2021, which allowed our safety products to post daily growth of 0.3% in the second half of 2021. Our growth drivers also returned to contributing meaningfully to higher unit sales in 2021, due to strong business activity within our customer base and, to a lesser degree, a higher installed base of FMI devices. Our number of active Onsites increased 11.9%, for instance, whileOnsite daily sales growth was 20.6%. Similarly, our installed base of FMI MEUs increased 10.6%, while FMI daily sales growth was 41.0%. While demand was strong throughout 2021, the year experienced certain disruptions. The first were supply chain constraints, as the rapid recovery in demand resulted in shortages in production and shipping capacity. The second was labor shortages, which were particularly acute in the market for part-time employees. The third was the ongoing COVID-19 pandemic, which continued to produce periodic surges in infection rates. While businesses largely managed through these events as opposed to stopping production, the instability it created in worker availability exacerbated the pre-existing supply chain and labor challenges. The fourth was inflation in material costs, overseas and domestic transportation expenses, and labor wage rates. We believe the most significant impact of these disruptions was on our growth driver signings. We signed 274 Onsites in 2021, above the prior year (223 signings) but well below our goal at the start of 2021 of 375 to 400 units. Similarly, we signed 19,311 FMI MEUs, above the prior year (16,503 MEUs), but well below our goal at the start of the year of 23,000 to 25,000 MEUs. 40
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We believe many of our customers were diverting significant energy to managing the effects of supply chain, labor, COVID-19, and inflation in the short term, and it lengthened the sales cycle for our supply chain solutions. Price contributed 200 to 230 basis points to our net sales growth in 2021. We instituted a number of pricing events during 2021 as a means of mitigating rising product and transportation costs. As these events fell more heavily into the second half of the year, price contributed an increasing amount through the period, with price in the fourth quarter of 2021 contributing 440 to 470 basis points to net sales growth. Sales by Product Line The approximate mix of sales from fasteners, safety supplies, and all other product lines was as follows: 2021 2020 Fasteners 33.3% 29.9% Safety supplies 21.2% 25.5% Other product lines 45.5% 44.6% The shifts in product mix in 2021 compared to 2020 reflect the impact of the pandemic. In 2020, actions taken by governments and businesses to address COVID-19 caused a significant decline in economic activity that produced sales declines in our cyclical products, such as fasteners, but increased demand for PPE and produced sales growth in our safety products. The effect was to reduce our mix of sales coming from fasteners and other product lines while increasing the mix of sales coming from safety products. In 2021, these dynamics reversed with economic recovery generating strong growth in our cyclical product lines while the absence of surge sales and stabilization in the supply chain for PPE restrained growth in safety products. The effect was to increase our mix of sales coming from fasteners and other product lines while reducing the mix of sales coming from safety products. Our product categories did not fully revert to pre-pandemic levels in 2021, as our mix of safety products in 2021 of 21.2% remained meaningfully above our mix of safety products in 2019 of 17.9%. In the short term, the pandemic created heightened safety and sanitation protocols relative to the pre-pandemic period, and the increased use of related products as a result increased our mix of safety products sales.
Annual Sales Changes, Sequential Trends, and End Market Performance
This section focuses on three distinct views of our business - annual sales changes by month, sequential trends, and end market performance. The first discussion regarding sales changes by month provides a good mechanical view of our business. The second discussion provides a framework for understanding the sequential trends (that is, comparing a month to the immediately preceding month, and also looking at the cumulative change from an earlier benchmark month) in our business. Finally, we believe the third discussion regarding end market performance provides insight into activities with our various types of customers.
Annual Sales Changes, by Month
During the months noted below, all of our selling locations, when combined, had a DSR change of (compared to the same month in the preceding year):
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. 2021 6.5 % 1.5 % 7.5 % 1.2 % -3.2 % 1.7 % 9.7 % 9.0 % 11.1 % 14.1 % 13.2 % 16.5 % 2020 3.6 % 4.7 % 0.2 % 6.7 % 14.8 % 9.5 % 2.6 % 2.5 % 2.2 % 4.1 % 6.8 % 9.3 % Sequential Trends The table below shows the pattern to the sequential change in our daily sales. The line labeled 'Benchmark' is a historical average of our sequential daily sales change for the trailing five year average that excludes 2020. We have excluded 2020 from the average as the effects of the pandemic created unusual sequential patterns that we do not consider representative of normal trends. We believe this time frame serves to show the historical pattern and could serve as a benchmark. The '2021' and '2020' lines represent our actual sequential daily sales changes. The '21Delta' and '20Delta' lines indicate the difference between the 'Benchmark' and the actual results in the respective year. Under normal circumstances, the sequential trends shown below are directly linked to fluctuations in our end markets. Further, in any given month it is possible to get significant deviation from the benchmark. However, we do not believe that fully explains the exaggerated delta between the sequential rates of change and the benchmark fromMarch 2020 toJuly 2020 . We believe deviation of this duration and order of magnitude is uncharacteristic in our business and is related to the dramatic impacts of the pandemic in that period. 41
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It is important to note that these benchmarks are historical averages. In a year where demand is strong, our daily sales growth rates will tend to have more months that exceed the benchmark than fall below it. In a year where demand is weak, we will tend to have more months that fall short of the benchmark than exceed it. In both cases, there is a random element that makes it difficult to know how any single month will perform. Cumulative Change Jan.(1) Feb. Mar. Apr. May June July Aug. Sept. Oct. from Jan. to Oct. Benchmark (2) -1.0 % 1.2 % 3.1 % 0.1 % 1.7 % 1.8 % -3.4 % 3.3 % 2.2 % -2.5 % 7.5 % 2021 0.9 % -2.3 % 5.6 % -2.2 % 5.6 % 1.6 % -3.4 % 3.1 % 4.8 % 0.0 % 13.0 % 21Delta 1.9 % -3.5 % 2.5 % -2.3 % 3.9 % -0.2 % 0.0 % -0.2 % 2.6 % 2.5 % 5.5 % 2020 -1.3 % 2.5 % -0.3 % 3.9 % 10.4 % -3.3 % -10.5 % 3.8 % 2.9 % -2.6 % 5.5 % 20Delta -0.3 % 1.3 % -3.4 % 3.8 % 8.7 % -5.1 % -7.0 % 0.5 % 0.6 % -0.1 % -2.0 %
(1) The January figures represent the percentage change from the previous October, whereas
the remaining figures represent the percentage change from the previous month. (2) The benchmark for each month is the average of the previous five years for that month. As
COVID-19-related surge sales made sequential averages in 2020 unrepresentative, the
benchmark uses a preceding five-year average that excludes 2020. We also exclude the
impact of the 2017 Mansco acquisition.
Note - Amounts may not foot due to rounding difference.
A graph of the sequential daily sales change patterns discussed above, starting with a base of '100' in the previous October and ending with the next October, would be as follows: [[Image Removed: fast-20221231_g3.jpg]] 42
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Table of Contents End Market Performance
The DSR change to our manufacturing customers, when compared to the same period in the prior year, was as follows:
DSR change - manufacturing customers Q1 Q2 Q3
Q4 Annual 2021 5.6 % 24.5 % 20.8 % 23.8 % 18.4 % 2020 3.0 % -9.4 % -4.7 % 1.7 % -2.5 % From a company perspective, the DSR change of fasteners, when compared to the same period in the prior year, was as follows (note: this information includes all end markets): DSR change - fasteners Q1 Q2 Q3 Q4 Annual 2021 4.0 % 28.4 % 20.2 % 24.2 % 18.8 % 2020 -2.6 % -16.4 % -6.9 % -2.3 % -7.2 %
From a company perspective, the DSR change of non-fasteners, when compared to the same period in the prior year, was as follows (note: this information includes all end markets):
DSR change - non-fasteners Q1 Q2 Q3 Q4 Annual 2021 6.1 % -10.8 % 5.1 % 9.6 % 1.9 % 2020 6.0 % 25.6 % 7.8 % 11.2 % 12.7 % Two product lines, safety and janitorial, accounted for approximately 44% of total non-fastener sales in 2021. As previously disclosed, COVID-19 generated outsized growth in these two product categories in 2020 and the subsequent stabilization of the supply chain resulted in a reduction in orders and sales performance in 2021 that was well below what might normally be expected given the health of the industrial economy. As a result, the change in our non-fastener lines in 2021 and 2020 did not provide as much insight into the trends of our traditional manufacturing and construction customers as is typically the case. Still, we have sold non-fastener products through multiple cycles that do not include a pandemic and believe we can make several observations. Generally speaking, our non-fastener business is not immune to the impact of industrial cycles. However, we would typically expect it to outperform our fastener business in any cycle. This reflects three things: the non-fastener market is larger than the fastener market, we are underpenetrated in the non-fastener market relative to the fastener market, and industrial vending lends itself to sales of non-fastener products.
The DSR change to our non-residential construction and reseller customers, when compared to the same period in the prior year, was as follows:
DSR change - non-residential construction and reseller customers Q1 Q2 Q3 Q4 Annual 2021 -6.7 % 3.5 % 7.0 % 10.3 % 3.3 % 2020 -1.2 % -10.0 % -11.5 % -8.3 % -7.8 % Our non-residential construction and reseller business is heavily influenced by manufacturing, oil and gas, and infrastructure spending. In 2021, improving economic business conditions, high prices for commodities such as metals and energy, and tightening facilities utilization produced improving growth rates throughout the year. In 2020, the poor and slowing production environment, respectively and as described above, and the accompanying worsening trends for commodities such as metals and energy, caused the growth in our non-residential construction and reseller customers to slow.
Gross Profit
The gross profit percentage during each period was as follows:
Q1 Q2 Q3 Q4 Annual 2021 45.4 % 46.5 % 46.3 % 46.5 % 46.2 % 2020 46.6 % 44.5 % 45.3 % 45.6 % 45.5 % Our gross profit, as a percentage of net sales, was 46.2% in 2021 and 45.5% in 2020. The gross profit percentage for 2021 increased by 70 basis points based on higher product margins, primarily for safety products and overhead/organizational leverage related to higher volumes. During 2021, our gross profit percentage increased when compared to the prior year. This was largely due to three factors. (1) We were able to leverage overhead/organizational expenses, absorbing certain fixed and period costs related to cyclical strength in our traditional manufacturing and construction markets. (2) An improvement in product margins, particularly for safety products. In response to the pandemic in 2020, we experienced a substantial surge in demand for COVID-related safety supplies, such that these products accounted for approximately 47% of total safety product sales in 2020, up from 43
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approximately 25% of total safety product sales in 2019. As these products tended to carry a lower gross margin than non-COVID-related products, their substantial expansion in our safety product mix in 2020 caused a decline in the gross profit percentage of our safety product line. In 2021, we experienced higher demand for non-COVID-related products as the industrial economy improved and lower demand for COVID-related products as the supply chain steadied. This caused our mix of lower margin COVID-related products to decline to approximately 31% of total safety product sales, improving our overall safety product margin. (3) Our net rebates were favorable in 2021. As supply chains normalized and demand improved, we purchased more products through our traditional partners increasing our supplier rebates. At the same time, customer rebates moderated as spending from several key customers that purchased significant COVID-related products declined. These variables were only partly offset by a$7.8 write-down of masks in the first quarter of 2021. The impact of price/cost was neutral for 2021, as we were able to lift prices in response to higher costs for products and transportation services. The net impact of product and customer mix was also neutral for 2021, as the benefit of relatively stronger fastener sales to product mix was negatively impacted by relatively stronger growth from larger andOnsite customers.
Operating and Administrative Expenses
Our operating and administrative expenses, as a percentage of net sales, increased by approximately 70 basis points to 26.0% in 2021 from 25.3% in 2020. Employee-related expenses, as a percentage of net sales, increased by approximately 80 basis points. Occupancy-related expenses, as a percentage of net sales, decreased by approximately 10 basis points. All other operating and administrative expenses, as a percentage of net sales, was largely unchanged in 2021 from 2020. The percentage change in employee-related, occupancy-related, and all other operating and administrative expenses (including the loss (gain) on sales of property and equipment) compared to the same periods in the preceding year, is outlined in the table below. Approximate Percentage Twelve-month Period of Total Operating and Administrative Expenses 2021 2020 Employee-related expenses 70% 11.6 % -2.0 % Occupancy-related expenses 15% to 20% 3.9 % 0.3 % All other operating and administrative expenses 10% to 15% 4.9 % -7.2 % Our employee-related expenses increased in 2021 from 2020. This was related to: improvement in our sales and profitability generating significantly higher bonuses and commissions; higher health insurance costs as employees became comfortable again in seeking non-COVID-related health care; an increase in our profit sharing contribution; and higher full-time and part-time wages producing an increase in base pay. 44
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The table below summarizes the percentage change in our FTE headcount at the end of the periods presented compared to the end of the prior period:
Twelve-month
Period
2021
2020
In-market locations (branches & Onsites) 0.7 %
-8.0 %
Non-in-market selling (1) 8.0 %
5.4 %
Selling subtotal 1.7 %
-6.2 %
Distribution/Transportation 5.8 %
-10.5 %
Manufacturing 2.0 %
-9.9 %
Organizational support personnel (2) (3) 7.4 %
8.7 % Non-selling subtotal 5.8 % -5.2 % Total 2.8 % -6.0 %
(1) Our non-in-market selling employee count has grown in recent years due to an increased
focus on resources to support our growth drivers, particularly
account growth. (2) Due to a calculation error, organizational support personnel was overstated by 36 FTE
in the fourth quarter of 2021, with total non-selling FTE and total FTE being
overstated by the same amount. These figures have been corrected in this Form 10-K.
Adjusting for this error, total FTE in 2021 would have been down by an additional 0.2%
for year-to-date growth. (3) Organizational support personnel consists of: (1) Sales & Growth Driver Support
personnel (35% to 40% of category), which includes sourcing, purchasing, supply chain,
product development, etc.; (2) Information Technology personnel (30% to 35% of
category); and (3) Administrative Support personnel (25% to 30% of category), which
includes human resources,
management, etc.
Our occupancy-related expenses increased in 2021 from 2020. This was related to: the timing of development costs related to equipment utilized as part of our FMI suite of technologies; depreciation related to a higher installed base of FMI devices; and higher facility costs, with higher costs for non-branch facilities and utilities being only partly offset by slightly lower costs for branch facilities from branch closings. Combined, all other operating and administrative expenses increased in 2021 from 2020. This was related to: higher spending on information technology; higher spending on travel, meals, and supplies as business activity recovered from the COVID-related travel restrictions of 2020; and higher costs for legal settlements. These elements were partly offset by lower bad debt expenses and lower general insurance costs.
Net Interest Expense
Our net interest expense was$9.6 in 2021 compared to$9.1 in 2020. This was related to: lower interest income, as the special dividend paid inDecember 2020 resulted in lower interest-earning cash balances in 2021; slightly higher interest expense which was the net result of slightly higher average interest rates and slightly lower average debt. During 2021, we repaid one tranche under our Master Note Agreement, reducing the balance from$405.0 to$390.0 . However, in the fourth quarter of 2021 we increased our balance outstanding under our revolver by$25.0 to support working capital growth.
Income Taxes
We recorded income tax expense of$282.8 in 2021, or 23.4% of earnings before income taxes, compared to$273.6 in 2020, or 24.2% of earnings before income taxes. Our effective tax rate reflects an$8.7 reduction in income tax expense due to discrete items mainly relating to benefits associated with the exercise of stock options and changes in the reserve for uncertain tax positions. 45
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Table of Contents Net Earnings
Net earnings, net earnings per share (EPS), the percentage change in net earnings, and the percentage change in EPS, were as follows:
Dollar Amounts 2021 2020 Net earnings$ 925.0 859.1 Basic EPS 1.61 1.50 Diluted EPS 1.60 1.49 Percentage Change 2021 2020 Net earnings 7.7 % 8.6 % Basic EPS 7.5 % 8.5 % Diluted EPS 7.4 % 8.4 % 2021 2020 Tax Rate 23.4 % 24.2 %
During 2021, net earnings increased, primarily due to stronger sales translating into higher pre-tax profits, as well as a lower income tax rate.
Liquidity and Capital Resources
Net Cash Provided by Operating Activities
Net cash provided by operating activities in dollars and as a percentage of net earnings were as follows:
2021 2020 Net cash provided$ 770.1 1,101.8 % of net earnings 83.3 % 128.3 % In 2021, the decrease in our operating cash flow as a percentage of net earnings was due to significant growth in working capital as we supported growth in our customers' operations as well as, in the case of inventory, significant product inflation. This was only slightly mitigated by ongoing efforts to improve the efficiency of our working capital and contrasts sharply with 2020 when weaker demand from our customers resulted in working capital being a net source of operating cash.
Trade Working Capital Assets
The following table sets forth the dollar and percentage change in accounts receivable, net, inventories, and accounts payable for the period endedDecember 31 : Twelve-month Twelve-month Dollar Change Percentage Change 2021 2021 2021 Accounts receivable, net$ 900.2 130.8 17.0 % Inventories 1,523.6 186.1 13.9 % Trade working capital$ 2,423.8 316.9 15.0 % Accounts payable$ 233.1 26.1 12.6 % Trade working capital, net$ 2,190.7 290.8 15.3 % Net sales in last two months$ 1,000.1 130.3 15.0 %
Note - Amounts may not foot due to rounding difference.
In 2021, the annual growth in net accounts receivable reflected several factors. First, our receivables were expanding as a result of improved business activity and resulting growth in our customers' sales. Second, in response to the COVID-19 pandemic, customers that traditionally have shorter payment terms represented a smaller proportion of our sales mix at the end of 2021 than was the case at the end of 2020. 46
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Our inventory balances over time will respond to business activity, though various factors produce a looser relationship to our monthly sales patterns than we tend to experience in accounts receivable. One reason for this is cyclical. We source significant quantities of product from overseas, and the lead time involved in procuring these products is typically longer than the visibility we have into future monthly sales patterns. As a result, trends in our inventory will often lag trends in economic conditions. A second reason is our growth drivers, including our FMI offerings, Onsite channel, and international expansion, all of which tend to require significant investments in inventory. In 2021, our inventories increased, reflecting significant inflation in the value of stocked parts, and the addition of inventory to support the growth of our manufacturing and construction customers as they expanded production to meet improved business activity, and deeper inventory stocking due to disruption in supply chains.
In 2021, the annual growth in accounts payable reflected product purchases increasing to support the improvement in business activity at our manufacturing and construction customers.
The approximate percentage mix of inventory stocked at our selling locations versus our distribution center and manufacturing locations was as follows at year end: 2021 2020 Selling locations 57 % 59 %
Distribution center and manufacturing locations 43 % 41 % Total
100 % 100 %
Net cash used in investing activities in dollars and as a percentage of net earnings were as follows:
2021 2020 Net cash used$ 148.5 281.7 % of net earnings 16.1 % 32.8 %
The changes in net cash used in investing activities in 2021 were primarily
related to the absence of an acquisition, in contrast to the
Set forth below is a recap of our 2021 and 2020 net capital expenditures in dollars and as a percentage of net sales and net earnings:
2021 2020
Manufacturing, warehouse and packaging equipment, industrial vending equipment, and facilities
$ 70.3 91.5
Shelving and related supplies for in-market location openings and for product expansion at existing in-market locations
11.0 15.7 Data processing software and equipment 28.0 31.4 Real estate and improvements to branch locations 37.9 16.1 Vehicles 9.4 13.4 Purchases of property and equipment 156.6 168.1 Proceeds from sale of property and equipment (8.4) (10.6) Net capital expenditures 148.2 157.5 % of net sales 2.5 % 2.8 % % of net earnings 16.0 % 18.3 % Our net capital expenditures decreased in 2021, when compared to 2020. We had higher spending on an office building construction project inWinona, Minnesota intended to support growth in our business. This was more than offset by reduced spending in other areas. We saw a significant decline in spending on FMI equipment due to slower hardware signings, lower vending equipment costs following theMarch 2020 acquisition of certain industrial vending assets of Apex, and an increase in the refurbishment and redeployment of FMI hardware as an alternative to buying new devices. We also had lower capital investment in our hub properties following a period of heavier investment in 2018 and 2019, and reduced spending on selling-related vehicles as challenges in the supply chain reduced availability. 47
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Net cash used in financing activities in dollars and as a percentage of net earnings were as follows:
2021 2020 Net cash used$ 627.1 754.4 % of net earnings 67.8 % 87.8 % The fluctuations in net cash used in financing activities were due to changes in the level of our dividend payments and in the level of common stock purchases. These amounts were partially offset by the exercise of stock options and net payments (proceeds) from debt obligations. These items in dollars and as a percentage of earnings were as follows: 2021 2020 Cash dividends paid$ 643.7 803.4 % of net earnings 69.6 % 93.5 % Purchases of common stock - 52.0 % of net earnings - % 6.1 % Total returned to shareholders$ 643.7 855.4 % of net earnings 69.6 % 99.6 %
Proceeds from the exercise of stock options
-3.4 % -4.8 % Debt obligations payments (proceeds), net$ 15.0 (60.0) % of net earnings 1.6 % -7.0 % Net cash used$ 627.1 754.4 % of net earnings 67.8 % 87.8 % Stock Purchases
In 2021, we did not purchase any shares of our common stock. In 2020, we
purchased 1,600,000 shares of our common stock at an average price of
approximately
Dividends
In 2021, we paid aggregate annual dividends per share of$1.12 . In 2020, we paid aggregate annual dividends per share of$1.40 , which included$1.00 in regular quarterly dividends and a$0.40 special dividend paid inDecember 2020 as a result of our high cash balances and favorable financial outlook.
Debt
Our borrowings under the Credit Facility and Master Note Agreement peaked during each quarter of 2021 as follows:
Peak borrowings 2021 First quarter$ 485.0 Second quarter 430.0 Third quarter 455.0 Fourth quarter 470.0 Effects of Inflation In 2021, we experienced significant increases in the cost of metals (especially steel), energy, and transportation (especially overseas containers and shipping). These inflationary trends meaningfully increased the cost of many of the products we purchase. We were able to mitigate the adverse effects of higher costs on our gross profit percentage in 2021 by increasing prices, seeking alternative sources for products and services, and consolidating spend for products and services. While the effects of inflation in 2021 were broad-based, we did experience deflation for certain COVID-related products that had inflated in 2020 when the supply chain was disrupted. This did require us to write down the value of these products in 2021, which negatively impacted our gross profit percentage in the first quarter of 2021 and, to a lesser extent, throughout the balance of the year. 48
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Critical Accounting Estimates
In preparing our consolidated financial statements in conformity withU.S. GAAP, we must make decisions that impact the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgments based on our understanding and analysis of relevant circumstances, historical experience, and actuarial valuations. Actual amounts could differ from those estimated at the time the consolidated financial statements are prepared. Our most significant accounting policies, including Revenue Recognition and Inventories, are described in Note 1 of the Notes to Consolidated Financial Statements. Some of those significant accounting policies require us to make difficult, subjective, or complex judgments, or estimates. An accounting estimate is considered to be critical if it meets both of the following criteria: (i) the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made, and (ii) different estimates reasonably could have been used, or changes in the estimate that are reasonably likely to occur from period to period may have a material impact on the presentation of our financial condition, changes in financial condition, or results of operations. Our most critical accounting estimates include the following: Allowance for Credit Losses - This reserve is for accounts receivable balances that are potentially uncollectible. The allowance for credit losses is based on an income statement approach which adjusts the ending balance sheet to take into consideration expected losses over the contractual lives of the receivables, considering factors such as historical data as a basis for future expected losses. If business or economic conditions change, our estimates and assumptions may be adjusted as deemed appropriate. Historically, actual required reserves have not varied materially from estimated amounts. Inventory valuation - Adjustments to the valuation of inventory are based on an analysis of inventory trends including reviews of inventory levels, sales information, and the on-hand quantities relative to the sales history for the product. Our methodology for estimating whether adjustments are necessary is continually evaluated for factors including significant changes in product demand, market conditions, condition of the inventory, or liquidation value. If business or economic conditions change, our estimates and assumptions may be adjusted as deemed appropriate. Historically, actual required adjustments have not varied materially from estimated amounts. General insurance reserves - These reserves are for general claims related to workers' compensation, property and casualty losses, and other general liability self-insured losses. The reserves are based on an analysis of reported claims and claims incurred but not yet reported related to our historical claim trends. We perform ongoing reviews of our insured and uninsured risks and use this information to establish appropriate reserve levels. We analyze historical trends, claims experience, and loss development patterns to ensure the appropriate loss development factors are applied to the incurred costs associated with the claims made. Historically, actual required reserves have not varied materially from estimated amounts.
Recently Issued and Adopted Accounting Pronouncements
A description of recently issued and adopted accounting pronouncements, if any, is contained in Note 1 of the Notes to Consolidated Financial Statements.
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