Fastenal Company — Q3 2018 Form 10-Q Summary
Business Context and Reporting Period
Fastenal is a North American distributor of industrial and construction supplies serving primarily manufacturing and non-residential construction customers through more than 3,000 in-market locations. The filing covers the three and nine months ended September 30, 2018; financial statements are unaudited.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $1,279.8 million | $1,132.8 million | $3,733.5 million | $3,302.0 million |
| Gross profit | $615.8 million | $555.9 million | $1,811.1 million | $1,632.4 million |
| Gross margin | 48.1% | 49.1% | 48.5% | 49.4% |
| Operating income | $262.3 million | $228.5 million | $765.8 million | $678.5 million |
| Operating margin | 20.5% | 20.2% | 20.5% | 20.5% |
| Net earnings | $197.6 million | $143.1 million | $583.1 million | $426.2 million |
| Diluted EPS | $0.69 | $0.50 | $2.03 | $1.48 |
Q3 sales increased 13.0%, operating income increased 14.8%, net earnings increased 38.1%, and diluted EPS increased 38.0%. Nine-month sales increased 13.1% and net earnings increased 36.8%.
- Net cash provided by operating activities was $496.2 million for the first nine months, compared with $455.9 million in the prior-year period.
- Net cash used in investing activities was $98.9 million, including $97.1 million of capital expenditures and $3.7 million paid for acquisitions.
- Net cash used in financing activities was $381.6 million, including $327.5 million of dividends, $40.4 million of share repurchases, and a net $25.0 million reduction in debt.
- Cash and cash equivalents totaled $129.7 million at September 30, 2018, compared with $116.9 million at December 31, 2017.
- Total debt was $390.0 million, consisting primarily of $255.0 million outstanding under a $700.0 million unsecured revolving facility and $135.0 million of senior unsecured notes. The company reported compliance with applicable covenants.
- Total assets were $3,193.9 million and stockholders’ equity was $2,315.6 million at September 30, 2018.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by higher unit volumes, stronger market demand, growth in national accounts, industrial vending and Onsite locations, and, to a lesser extent, pricing actions.
- Gross margin declined 100 basis points in both Q3 and the first nine months, reflecting product and customer mix, higher freight and transportation costs, and product inflation that outpaced pricing actions.
- Operating margin improved in Q3 because operating and administrative expenses grew more slowly than sales. Employee-related costs still increased due to higher bonuses and commissions, headcount growth, and wage inflation.
- The effective tax rate fell to 23.8% in Q3 and 23.0% for the first nine months, versus 36.7% and 36.6%, respectively, in 2017. The Tax Cuts and Jobs Act provided a lower ongoing tax rate and discrete benefits of approximately $1.9 million in Q3 and $10.3 million year to date.
- Accounts receivable increased to $772.5 million and inventories to $1,194.7 million at September 30, 2018, with working capital growth absorbing cash. Receivables increased 22.2% and inventories 14.1% from September 30, 2017.
- Fastenal signed 5,877 industrial vending devices and 88 new Onsite locations in Q3. At quarter-end, it had 78,706 installed vending devices and 828 active Onsite locations.
Guidance, Outlook, Risks and Unusual Items
- Management expected the ongoing tax rate to be approximately 24.5% to 25.0%; reported 2018 results also include Tax Act-related discrete benefits.
- Management reduced expected 2018 net capital spending to approximately $152.0 million from $158.0 million, still an increase of $39.5 million, or 35.1%, from 2017.
- A September 2018 U.S. tariff round covering an additional $200 billion of Chinese imports affected a meaningful number of Fastenal products. The tariff was scheduled to increase from 10% to 25% at the start of 2019. The company was evaluating alternative sourcing, product substitution, and pricing responses.
- Steel, fuel, energy, freight, foreign currency, interest rates, customer demand, pricing competition, inventory management, and adoption of vending and Onsite models are significant operating risks.
- A one-percentage-point increase in LIBOR would have increased interest expense by approximately $2.2 million for the first nine months of 2018.
- Fastenal expects to adopt the new lease accounting standard on January 1, 2019 and anticipates a material increase in reported assets and liabilities, although the financial effect was still under evaluation.
- Operating-lease residual value guarantees totaled approximately $83.0 million; management considered the likelihood of funding to be remote, with only an immaterial accrual recorded.
- No litigation matters were considered probable or reasonably possible to have a material adverse outcome as of September 30, 2018.
Investor Verification Checklist
- Verify whether sales growth and customer demand remain strong after adjusting for pricing, acquisitions, currency, and market conditions.
- Monitor gross-margin recovery amid tariffs, steel and product inflation, freight costs, and customer/product mix.
- Assess whether working-capital growth in receivables and inventory is converting into cash flow at the expected rate.
- Reconcile earnings growth excluding the Tax Act’s lower tax rate and discrete benefits.
- Confirm the impact of the 2019 lease standard on assets, liabilities, leverage and disclosures.
- Track execution and returns from industrial vending, Onsite locations, national accounts, branch changes and planned capital spending.
- Review debt maturities, LIBOR exposure, covenant compliance and available revolver capacity.