Fastenal Company 2013 Form 10-K Summary
Business context and reporting period
Fastenal is a wholesale distributor of industrial and construction supplies, primarily serving manufacturing and non-residential construction customers through company-owned stores, in-plant locations, direct sales, distribution centers, and FAST Solutions industrial vending. This Form 10-K covers the fiscal year ended December 31, 2013, with comparative information for 2012 and 2011. The filing also provides unaudited fourth-quarter 2013 data.
- 2,687 stores at year-end 2013 versus 2,652 in 2012.
- 17,277 employees at year-end versus 15,145 in 2012.
- Approximately 11% of 2013 sales came from locations outside the United States.
- Fastener products represented 42.1% of sales, down from 44.0% in 2012; safety supplies increased to 11.2% from 9.3%.
Financial results and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $3.326 billion | $3.134 billion | 6.1% |
| Gross profit | $1.719 billion | $1.615 billion | 6.5% |
| Gross margin | 51.7% | 51.5% | +0.2 percentage points |
| Operating income | $712.7 million | $673.7 million | 5.8% |
| Operating margin | 21.4% | 21.5% | -0.1 percentage points |
| Earnings before taxes | $713.5 million | $674.2 million | 5.8% |
| Net earnings | $448.6 million | $420.5 million | 6.7% |
| Basic and diluted EPS | $1.51 | $1.42 | 6.3% |
| Operating cash flow | $416.1 million | $396.3 million | 5.0% |
| Capital expenditures | $201.6 million | $133.9 million | 50.5% |
The effective tax rate was approximately 37.1%, compared with 37.6% in 2012. Management attributed the earnings increase primarily to higher sales, gross-profit expansion, and the lower tax rate.
Fourth-quarter 2013 sales were $813.8 million, gross profit was $411.4 million, pre-tax earnings were $157.3 million, net earnings were $99.2 million, and basic EPS was $0.33. Fourth-quarter gross margin was 50.6%, below 51.6% in the comparable 2012 quarter.
Balance sheet, liquidity, debt, and shareholder returns
- Cash and cash equivalents were $58.5 million at December 31, 2013, compared with $79.6 million a year earlier.
- Accounts receivable were $414.3 million and inventories were $784.1 million, increases of 11.3% and 9.6%, respectively.
- Operational working capital increased $110.9 million, or 10.2%. The annual sales-to-accounts-receivable-and-inventory ratio declined to 2.8:1 from 2.9:1.
- Total assets were $2.076 billion and stockholders’ equity was $1.773 billion.
- Fastenal had no loans outstanding at year-end under its $125 million unsecured revolving credit facility, which expires December 13, 2015. Undrawn letters of credit totaled $34.4 million.
- The company borrowed and repaid $260 million during 2013 to manage interim liquidity needs.
- Cash returned to shareholders totaled $246.5 million, consisting of $237.5 million of dividends and $9.1 million of share repurchases.
- Annual dividends were $0.80 per share in 2013 versus $1.24 in 2012, which included a $0.50 supplemental dividend. A quarterly dividend of $0.25 per share was declared for payment in February 2014.
Material changes versus the prior comparable period
- Sales growth slowed materially to 6.1% from 13.3% in 2012, reflecting weaker manufacturing and non-residential construction activity, adverse weather, holiday timing, and currency headwinds.
- Same-store daily sales growth also moderated: stores open more than two years grew 4.4%, compared with 10.8% in 2012.
- Fastener sales growth was only 1.6% for the year, while non-fastener sales grew 10.1%. Management cited weakness in heavy machinery customers serving mining, military, agricultural, and construction markets.
- Gross margin improved for the full year but declined during the second half, reaching 50.6% in the fourth quarter. Management cited product mix, competitive pricing, weaker supplier incentives, lower freight utilization, and increased store staffing focused on sales growth.
- Operating expenses increased 7.0% and remained approximately 30.3% of sales. Employee-related costs increased 4.6%, occupancy costs increased 11.2%, and selling transportation costs increased 0.8%.
- Capital expenditures increased substantially, primarily because of industrial vending equipment, distribution-center automation, and facility expansion.
- FAST Solutions continued to expand. The company signed 19,305 machine placements in 2013, ended the year with 33,920 equivalent installed machines, and reported that customers with vending machines represented 36.6% of fourth-quarter sales versus 25.8% in the prior-year quarter.
Guidance, outlook, commentary, risks, and unusual items
- Management expected to open approximately 50 to 70 stores in 2014, representing roughly 2% to 3% growth. New stores generally require 10 to 12 months to achieve their first profitable month.
- Management expected a 51% to 53% normal gross-margin range for 2014.
- Estimated 2014 net capital expenditures were $180.7 million, including $147.0 million for manufacturing, warehouse, packaging, industrial vending equipment, and facilities.
- Management continued to emphasize the “pathway to profit” strategy: increasing average store sales, improving product and customer mix, controlling structural costs, and investing in store personnel and industrial vending. Management believed its 23% pre-tax earnings objective could ultimately be achieved with average store sales of approximately $100,000 to $110,000 per month; the fourth-quarter 2013 average was $87,798 and company pre-tax earnings were 19.3% of sales.
- Principal risks include economic weakness in manufacturing and construction, competitive pricing pressure, product and customer mix changes, commodity and energy costs, foreign exchange, execution of store openings, employee recruitment and retention, inventory and receivable management, transportation or distribution disruptions, cybersecurity incidents, product liability, and competition in industrial vending.
- The company identified potential compliance, sourcing, pricing, and reputational costs related to SEC conflict-minerals disclosure requirements beginning in 2014.
- Future operating lease and vehicle commitments totaled $260.9 million, including $109.6 million due in 2014.
- The filing states that no litigation matters were considered probable or reasonably possible to have a material adverse outcome at December 31, 2013.
- There were no recorded long-lived-asset impairments in 2011, 2012, or 2013. The independent auditor issued an unqualified opinion and concluded that internal control over financial reporting was effective.
Investor verification priorities
- Verify whether sales growth and same-store trends improve from the slower 2013 pace, particularly in heavy machinery, manufacturing, and non-residential construction.
- Monitor gross margin against management’s 51% to 53% expected range and assess the effects of fastener deflation, product mix, pricing, supplier incentives, and freight utilization.
- Evaluate returns from the substantial investments in FAST Solutions, distribution automation, facilities, and store personnel.
- Track inventory and accounts receivable growth relative to sales, including progress toward management’s approximately 3.0:1 annual sales-to-AR-and-inventory target.
- Assess whether the planned 50 to 70 store openings achieve profitability within the expected time frame without excessive expense or margin dilution.
- Review liquidity after capital expenditures, dividends, lease commitments, and any future use of the revolving credit facility.
- Consider exposure to economic cyclicality, foreign currency, steel and fuel prices, cybersecurity, product liability, and industry competition.