Fastenal Company — FY2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing is an annual report, not a standalone Q4 filing; Q4 results are presented in the unaudited quarterly data. Dollar amounts are in thousands except per-share data.
Business context
Fastenal distributes industrial and construction supplies through 2,369 stores, 14 distribution centers, manufacturing operations, and support services across North America and selected international markets. The company had 12,045 employees at year-end. Manufacturing and construction customers were materially affected by the economic downturn, particularly industrial production and non-residential construction.
- 2009 store openings totaled 69, compared with 161 in 2008; year-end store count increased 2.5% to 2,369.
- Foreign operations generated approximately 8% of consolidated sales, with Canada representing approximately 72% of foreign sales.
- Fasteners represented 50.0% of 2009 sales, down from 51.2% in 2008.
Financial performance and liquidity
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Net sales | $1,930.3 million | $2,340.4 million | -17.5% |
| Gross profit | $983.4 million | $1,236.1 million | -20.4% |
| Gross margin | 50.9% | 52.8% | -190 bps |
| Operating income | $295.8 million | $450.2 million | -34.3% |
| Operating margin | 15.3% | 19.2% | Approximately -390 bps |
| Net earnings | $184.4 million | $279.7 million | -34.1% |
| Basic and diluted EPS | $1.24 | $1.88 | -34.0% |
| Operating cash flow | $306.1 million | $259.9 million | +17.8% |
| Capital expenditures | $52.5 million | $95.3 million | -44.9% |
Operating cash flow equaled 166.0% of net earnings, compared with 92.9% in 2008. Free cash flow, calculated as operating cash flow less capital expenditures, was approximately $253.5 million.
- Cash and cash equivalents were $164.9 million at year-end, compared with $85.9 million in 2008. Marketable securities totaled $30.6 million.
- Accounts receivable declined 12.6% and inventories declined 9.9%, supporting cash generation and working-capital efficiency.
- Total liabilities were approximately $136.5 million, consisting primarily of current liabilities and deferred taxes. The company had no borrowings outstanding under its $8.0 million line of credit.
- An Industrial Revenue Bond balance of $9.7 million was netted under the company’s right-of-offset arrangement.
- Cash used in financing activities was $148.0 million, including $106.9 million of dividends and $41.1 million for share repurchases.
Material changes versus prior comparable periods
- Sales declined sharply because of the global industrial slowdown. Manufacturing sales contracted 18.8% for the year and 10.1% in Q4; non-residential construction sales contracted 19.4% for the year and 24.7% in Q4.
- Sales at stores open more than two years declined 19.5%; sales at stores open more than five years declined 20.6%.
- Q4 2009 net sales were $476.8 million versus $545.0 million in Q4 2008, while Q4 net earnings were $44.5 million versus $62.5 million. Q4 basic EPS was $0.30 versus $0.42.
- Q4 gross profit margin was approximately 49.9%, compared with approximately 53.4% in Q4 2008, based on quarterly reported figures.
- Operating and administrative expenses declined 12.6% for the year and 13.2% in Q4, reflecting lower payroll, incentive compensation, headcount, and transportation costs.
- Full-time-equivalent headcount declined 10.8% in 2009, while health-care costs increased 24.1% and stock-option expense increased to $3.9 million from $3.2 million.
- The company paid $10.0 million in Q4 2009 to resolve a wage-and-hour class-action settlement; the expense had been recorded in Q3 2008.
Guidance, outlook, risks, and unusual items
- Management expected to resume a 7% to 10% annual store-opening rate in the second half of 2010, after limiting 2009 openings to approximately 2% to 5%.
- Management expected 2010 capital expenditures of approximately $40 million, primarily for manufacturing and warehouse facilities, store improvements, information systems, real estate, and vehicles.
- The “pathway to profit” target of approximately $125,000 in average monthly store sales was expected to be delayed by 24 to 30 months because of the downturn. The filing does not provide a revised target date.
- Management expressed confidence in improving gross margins in 2010 and cited sequential improvement in manufacturing daily sales beginning in May 2009, although non-residential construction remained weak.
- On December 18, 2009, Fastenal acquired certain Holo-Krome assets for $5.0 million in cash. The acquisition had no meaningful 2009 earnings impact and was not expected to materially affect 2010 sales.
- Key risks include prolonged weakness in manufacturing and construction, pricing pressure and deflation, steel and fuel costs, competition, foreign currency exposure, supply-chain disruptions, employee retention, execution of the store-opening strategy, and inventory and receivables estimates.
- A supplier threatened litigation in early 2010 over an alleged exclusive distribution arrangement. Management considered a material adverse impact remote; purchases of the relevant niche product were stated not to exceed $1.0 million over the alleged period.
- Future operating-lease commitments totaled $227.8 million, including $99.2 million due in 2010 and $105.3 million due in 2011–2012.
- The board declared a $0.40-per-share dividend payable in February 2010 and stated that comparable semi-annual dividends were expected, subject to future board decisions and operating results.
Investor verification points
- Verify whether manufacturing and non-residential construction demand recovered sufficiently to support the planned 2010 store-opening acceleration.
- Track gross-margin recovery, particularly the effects of deflation, purchasing volumes, vendor allowances, and competitive pricing.
- Assess whether working-capital improvements were sustainable as sales trends improved and inventory was rebuilt.
- Review cash generation against dividends, share repurchases, lease commitments, and planned capital expenditures.
- Monitor the execution and timing of the delayed “pathway to profit” strategy, including average store sales, staffing, and store-level margins.
- Confirm the resolution and financial impact of the threatened supplier claim and other litigation or self-insurance contingencies.