Fastenal Company — FY2019 Form 10-K Summary
Business context and reporting period
Fastenal distributes industrial and construction supplies, primarily to manufacturing and non-residential construction customers, through branches, Onsite locations, industrial vending, FMI, digital solutions, and national accounts. This Form 10-K covers the fiscal year ended December 31, 2019, with comparative fiscal-year information for 2018 and 2017. Dollar amounts are in millions except per-share data.
- At year-end, Fastenal operated 3,228 in-market locations in 25 countries, including 2,114 public branches and 1,114 Onsite locations.
- Employees totaled 21,948, and industrial vending devices generating product revenue totaled 89,937.
- National accounts represented 53.6% of sales, compared with 50.7% in 2018.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $5,333.7 | $4,965.1 | 7.4% |
| Gross profit | $2,515.4 | $2,398.9 | 4.9% |
| Gross margin | 47.2% | 48.3% | (110) bps |
| Operating income | $1,057.2 | $999.2 | 5.8% |
| Operating margin | 19.8% | 20.1% | (30) bps |
| Net earnings | $790.9 | $751.9 | 5.2% |
| Diluted EPS | $1.38 | $1.31 | 5.2% |
| Cash flow from operations | $842.7 | $674.2 | 25.0% |
| Net capital expenditures | $239.8 | $166.8 | 43.8% |
Fourth-quarter 2019 net sales were $1,276.9, net earnings were $178.7, and diluted EPS was $0.31, compared with fourth-quarter 2018 sales of $1,231.6, net earnings of $168.8, and diluted EPS of $0.29.
- Cash and cash equivalents were $174.9 at December 31, 2019, compared with $167.2 at year-end 2018.
- Accounts receivable increased to $741.8 and inventories increased to $1,366.4, up 3.9% and 6.9%, respectively.
- Total debt was $345.0, down from $500.0, consisting of $210.0 under the revolving credit facility and $135.0 of senior unsecured notes.
- The company had a $700.0 revolving credit facility, with $36.3 of outstanding letters of credit, and was in compliance with applicable covenants.
- Dividends paid totaled $498.6, or $0.87 per share. No common shares were repurchased during 2019.
Material changes versus the prior comparable period
- Sales growth slowed from 13.1% in 2018 to 7.4% in 2019, with daily sales growth declining during the year as manufacturing and industrial demand weakened.
- Fourth-quarter daily sales growth was 1.0%, compared with 14.5% in fourth-quarter 2018.
- Fastener sales growth slowed to 5.5% from 11.2%; fasteners declined to 34.2% of sales from 34.9%. Safety supplies increased to 17.9% of sales from 17.2%.
- Gross margin contracted because of product and customer mix, increased national-account and Onsite activity, lower freight recovery, and product-cost inflation and tariffs.
- Operating and administrative expenses grew more slowly than sales, improving the expense ratio to approximately 27.3% from 28.2%.
- Public branches declined by 113 to 2,114, while Onsite locations increased by 220 to 1,114. Total in-market locations increased 3.4%.
- Vending devices increased 10.8% to 89,937, although annual device signings decreased 1.0% to 21,857.
- Operating cash flow improved substantially as working-capital investment was less burdensome than in 2018, while capital expenditures increased well above the prior year.
- Effective tax rate increased to 24.2% from 23.8%; 2018 included approximately $7.1 of discrete tax benefits.
Guidance, outlook, commentary, risks, and unusual items
- Management expected 2020 net capital expenditures of $180.0 to $205.0, compared with $239.8 in 2019.
- Management anticipated signing 375 to 400 new Onsite locations and 22,000 to 24,000 new industrial vending devices in 2020.
- Management described demand as weakening through 2019, particularly among customers exposed to manufacturing, components, capital goods, and heavy equipment.
- Tariffs and inflation increased product costs. Pricing, re-sourcing, and tariff-exemption efforts were mostly effective in offsetting the impact, but margin pressure was greater in the first half of 2019.
- Key risks include economic cyclicality, manufacturing and construction weakness, competitive pricing, customer and product mix, tariffs and foreign sourcing, labor availability, cyber-security and information-system disruptions, foreign currency exposure, and execution of the Onsite, vending, national-account, international, and digital growth strategies.
- Loans under the revolving facility bear floating interest rates based on LIBOR plus 0.95%; management estimated that a one-percentage-point increase in LIBOR would have increased 2019 interest expense by approximately $3.2.
- The company adopted the new operating-lease standard on January 1, 2019, recording approximately $227.5 of right-of-use assets and $228.3 of lease liabilities, with an immaterial impact on earnings and operating cash flow.
- No litigation matters were considered probable or reasonably possible to have a material adverse outcome as of year-end.
- The independent auditor issued an unqualified opinion and concluded that internal control over financial reporting was effective. Inventory quantities and related information systems were identified as a critical audit matter.
Important facts for investors to verify
- Whether the slowdown in monthly and end-market sales continued after year-end, particularly in manufacturing and non-residential construction.
- Whether product/customer mix and national-account growth continue to pressure gross margin.
- Progress toward the 2020 Onsite and industrial-vending targets and the profitability of those channels.
- Capital-expenditure requirements, operating cash conversion, inventory growth, and future borrowing needs.
- Exposure to tariffs, Asian sourcing concentration, commodity prices, and foreign-currency movements.
- Liquidity and refinancing capacity ahead of debt maturities in 2021, 2022, and 2024, including exposure to floating LIBOR-based debt.
- The sustainability of dividend payments and any future share-repurchase activity.