Fastenal Company — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. The filing is an annual report, with fourth-quarter data disclosed separately. Dollar amounts are in thousands except per-share data unless otherwise stated.
Business Context
Fastenal distributes industrial and construction supplies primarily through a North American store network, supplemented by in-plant locations, strategic accounts, e-commerce, manufacturing, and FAST Solutions industrial vending. The company operated 2,637 stores and employed 18,417 people at year-end. Approximately 50% of business served manufacturing customers and 20%–25% served non-residential construction customers.
Fasteners represented 40.2% of 2014 sales, down from 42.1% in 2013, while non-fastener products and industrial vending continued to expand. The company opened 24 stores and closed 73 stores, largely consolidating nearby locations.
Key Financial Metrics
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $3,733.5 million | $3,326.1 million | 12.2% increase |
| Gross profit | $1,897.4 million | $1,719.4 million | 10.4% increase |
| Gross margin | 50.8% | 51.7% | Down 0.9 percentage points |
| Operating income | $787.6 million | $712.7 million | 10.5% increase |
| Operating margin | 21.1% | 21.4% | Down 0.3 percentage points |
| Net earnings | $494.2 million | $448.6 million | 10.1% increase |
| Diluted EPS | $1.66 | $1.51 | 9.9% increase |
| Operating cash flow | $499.4 million | $416.1 million | 20.0% increase |
| Net capital expenditures | $183.7 million | $201.6 million | 8.9% decrease |
Net earnings equaled 101.1% of operating cash flow. The effective income tax rate was 37.2%, compared with 37.1% in 2013.
Fourth-Quarter 2014 Results
| Metric | Q4 2014 | Q4 2013 | Change |
|---|---|---|---|
| Net sales | $926.3 million | $813.8 million | 13.8% increase |
| Gross profit | $467.6 million | $411.4 million | 13.7% increase |
| Gross margin | 50.5% | 50.6% | Down 0.1 percentage points |
| Pre-tax earnings | $188.8 million | $157.3 million | 20.1% increase |
| Net earnings | $118.4 million | $99.2 million | 19.3% increase |
| Basic EPS | $0.40 | $0.33 | 21.2% increase |
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $114.5 million at December 31, 2014, versus $58.5 million at year-end 2013.
- Accounts receivable increased to $462.1 million and inventories to $869.2 million. Operational working capital increased 11.1%; the annual sales-to-accounts receivable and inventory ratio was 2.8:1, below management’s approximate 3.0:1 target.
- The company had $90.0 million outstanding under a $230.0 million unsecured revolving credit facility maturing in December 2016. Undrawn letters of credit totaled $37.3 million. The year-end borrowing rate was approximately 1.1%, and the company reported compliance with its financial covenants.
- Total stockholders’ equity was $1.915 billion; total assets were $2.359 billion.
- Operating lease commitments for facilities, equipment, and vehicles totaled $278.4 million, including $116.3 million due in 2015.
Material Changes Versus Prior Period
- Sales growth accelerated to 12.2% from 6.1% in 2013, driven primarily by higher unit sales, improved older-store performance, expanded store staffing and leadership, and stabilization in OEM fasteners.
- Daily sales growth at stores open more than two years increased to 11.5% from 4.4%; manufacturing customer sales grew 12.0% annually versus 6.3% in 2013.
- Fastener sales growth improved to 6.9% from 1.6%, while non-fastener sales grew 17.2% versus 10.1%.
- Gross margin declined because of product and customer mix, increased average store size, fastener mix reduction, and seasonal fourth-quarter pressure. Operating and administrative expenses improved modestly as a percentage of sales, but increased staffing, health care, transportation, utilities, vending equipment, distribution infrastructure, and store-closing accruals limited operating leverage.
- FAST Solutions installed devices increased to 46,855 from 40,775, while machine-equivalent devices increased to 34,529 from 29,262. Customers using industrial vending represented 39.3% of fourth-quarter sales versus 36.6% in the prior-year quarter.
- Net capital expenditures declined as major distribution automation projects were substantially completed in 2013. The company nevertheless continued investing in vending equipment, distribution facilities, technology, and infrastructure.
- Fastenal acquired certain assets of Av-Tech Industries on October 1, 2014, for $5.6 million in cash. The acquisition was not material to 2014 results and was not expected to materially affect 2015 sales.
- The company returned $349.5 million to shareholders through $296.6 million of dividends and $52.9 million of share repurchases. It repurchased 1.2 million shares at an average price of approximately $44.12.
Guidance, Outlook, Risks, and Unusual Items
- Management expected to open approximately 20 to 30 stores in 2015, representing an annual opening rate similar to 2014. Management estimated North American potential of approximately 3,500 stores but emphasized that market potential and store profitability are not assured.
- Estimated 2015 net capital expenditures were $154.5 million, expected to be funded through operating cash flow, available cash, and borrowing capacity.
- Management’s long-term strategy emphasizes higher sales per store, customer service, employee investment, industrial vending, inventory-management programs, and distribution automation rather than rapid store expansion.
- Key risks include economic weakness in manufacturing and non-residential construction, competitive pricing, gross-margin pressure from product and customer mix, foreign currency exposure, steel and fuel costs, labor availability, new-store execution, inventory and receivable growth, supply-chain disruptions, cybersecurity incidents, product liability, and competition in industrial vending.
- Severe winter weather adversely affected January and February 2014 sales, transportation, utilities, and fuel efficiency. Foreign currency movements, primarily the Canadian dollar, reduced 2014 daily sales growth by approximately 0.5%.
- No litigation matters were considered probable or reasonably possible to have a material adverse outcome at year-end. The company reported effective disclosure controls and effective internal control over financial reporting, with an unqualified auditor’s opinion.
- The board declared a quarterly dividend of $0.28 per share payable in February 2015 and increased the remaining share-repurchase authorization to 2.0 million shares.
Investor Verification Checklist
- Verify whether gross margin can return to management’s stated normal range of approximately 51%–52% as product mix, customer mix, and average store size evolve.
- Assess whether elevated inventory and receivables growth can converge with sales growth and return the sales-to-operational-working-capital ratio toward the 3.0:1 target.
- Monitor FAST Solutions installation growth, revenue productivity per device, customer retention, and the effect of vending expansion on capital intensity and margins.
- Evaluate the sustainability of dividends and share repurchases in light of $90.0 million of year-end debt, lease commitments, capital expenditures, and continued growth investments.
- Track manufacturing and non-residential construction demand, foreign exchange effects, steel and fuel prices, competitive pricing, and labor costs.
- Review the full notes for credit-facility covenants, lease obligations, tax uncertainties, insurance reserves, legal contingencies, and the implementation impact of new revenue-recognition guidance.