Dear Shareholders, since I stepped into this role (in mid-October 2015). The Blue Team made the transition easier, but it wasn’t easy. If you recall, some industrial headwinds had started earlier in the year; however, we found our footing by focusing on simple things: take care of our customers’ needs (and find more customers), take care of our fellow Blue Team members (and find more to join the team), watch our expenses with a close eye (but continue to build for the future), expand our investments in technology (we need great technology to support our customers and to become more productive), and enjoy what we do! In 2015, our sales were $3.9 billion. In 2022, our sales approached $7.0 billion. I hope you are proud of every member of the Blue Team – I certainly am.
We achieved successful growth in 2022. Our sales grew 16.1%, and our operating income grew 19.4%. However, behind these headline numbers there’s a deeper story to tell.
From a cash flow perspective, it’s helpful to develop benchmarks and to understand the counter-cyclical nature of our operating cash flow (i.e., the “Net cash provided by operating activities” line in our cash flow statement). We believe the best cash flow benchmark is the relationship of our operating cash flow to our net earnings. For simplicity’s sake, we prefer our annual operating cash flow to be greater than 100% of our net earnings.
For perspective on the cyclicality of our cash flow, let’s take a look at some recent years. In the last seven, our operating cash flow has exceeded 100% of net earnings four times and has fallen short three. The three sub-100% years were 2022 (86.6%), 2021 (83.3%), and 2018 (89.7%).
Our business enjoyed robust growth in 2022 and 2018, and we needed cash to fund working capital. We call this a good problem. Our markets experienced significant inflation and supply chain disruption in 2022 and 2021. These two issues consumed cash by causing our inventory costs to increase and by prompting us to expand the quantity of safety stock on the shelf. Many organizations can simply shrug their shoulders and say, “Sorry, we’re out of stock.” However, we are a supply chain partner to our customers. We don’t know how to shrug our shoulders, but we do know how to operate a reliable supply chain – something we believe is central to our success.
In the final months of 2022, the inflation began to moderate and the reliability of supply chains improved. Our fourth quarter operating cash flow benefitted from this change and grew 93.0% over the same quarter in 2021.
The historical reliability of our strong cash flow generation has allowed us to invest in the business for half a century. It has also allowed us to step forward quickly and decisively to benefit our shareholders on three separate occasions in the past 15 years.
The most recent example was a supplemental dividend declaration late in 2020 – the year COVID-19 rapidly infected our global society. We grew the size of our business, and our operating cash flow, relative to net earnings, hit a 10-year high. The oldest example was a supplemental dividend declaration late in 2008. I suspect most readers recall the global financial crisis. In keeping with the counter-cyclical pattern, in 2009 our operating cash flow, relative to net earnings, also hit a 10-year high. A third supplemental dividend declaration occurred late in 2012; however, let’s credit this dividend to political arguing within the United States government about raising dividend income tax rates.
In short, we have used a strong balance sheet and an ability to generate strong operating cash flow over the years to improve our service to our customers, to create opportunities for our employees, and to provide an attractive return for our shareholders.
To reiterate recent letters, we hope you find this annual report useful in explaining our business, our future, and most importantly, the “something special” that is the culture of the Blue Team. We also hope you take the time to read our Environmental, Social, and Governance (ESG) Report. (See the QR code on the inside cover of this annual report.)
In the interest of full transparency, and similar to the last several years, we felt it helpful to share a section from the Blue Team Report (our internal annual report to employees). The next two pages include the lead-in letter from the current report. And yes, this year’s publication once again includes an article by our retired founder, Bob Kierlin. Bob typically stops in for a weekly visit, and he always has something insightful to share (he’s a very avid reader). On a recent visit, Bob was a bit more comical and suggested his gravestone could include a short quote: “I’d rather be at Fastenal.” Rest assured, Bob’s health is excellent, but we agree with his sentiment.
As stated in prior years, we will always approach things in a simple way at Fastenal: believe in people; stay focused on a common goal (Growth Through Customer Service); and enhance our ability to serve by finding great people, asking them to join, and then giving them a reason to stay.
Good luck in 2023, and thank you for your belief in the Blue Team at Fastenal. Go Blue!
DANIEL L. FLORNESS
President and Chief Executive Officer
Read the original letter here.
