Fastenal Company 2011 Form 10-K Summary
Business context and reporting period
Fastenal Company filed its annual report for the fiscal year ended December 31, 2011. The company distributes industrial and construction supplies through 2,585 stores, 14 distribution centers, manufacturing operations, direct sales, and FAST Solutions industrial vending. It employed 15,168 people at year end and reports as a single business segment. Dollar amounts are in thousands except per-share data.
The fourth quarter generated net sales of $697.8 million, pre-tax earnings of $140.8 million, net earnings of $87.5 million, and basic EPS of $0.30.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $2,766.9 million | $2,269.5 million | +21.9% |
| Gross profit | $1,434.2 million | $1,174.8 million | +22.1% |
| Gross margin | 51.8% | 51.8% | Flat |
| Operating income | $574.6 million | $429.7 million | +33.7% |
| Operating margin | 20.8% | 19.0% | +180 basis points |
| Pre-tax earnings | $575.1 million | $430.6 million | +33.6% |
| Net earnings | $357.9 million | $265.4 million | +34.9% |
| Basic and diluted EPS | $1.21 | $0.90 | +34.4% |
| Operating cash flow | $268.5 million | $240.5 million | +11.6% |
| Capital expenditures, net | $116.5 million | $69.1 million | +68.5% |
Operating and administrative expenses declined to 31.1% of sales from 32.8%, producing operating leverage. The effective income tax rate was approximately 37.8%, compared with 38.4% in 2010.
Year-end cash and cash equivalents were $117.7 million, supplemented by $27.2 million of marketable securities. Current assets were $1.236 billion versus current liabilities of $187.8 million. The company had an $8.0 million revolving credit line with no borrowings outstanding. The company also reported a $9.7 million industrial revenue bond balance that was netted under the applicable right-of-offset arrangement; approximately $6.6 million became due on February 1, 2012.
Accounts receivable increased to $338.6 million and inventories to $646.2 million. Operational working capital increased 19.0%, while the annual sales-to-accounts receivable and inventory ratio improved to 2.8:1 from 2.7:1, remaining below management’s stated goal of better than 3.0:1. Stockholders’ equity was $1.459 billion.
Operating cash flow funded capital expenditures and dividends. Financing cash use was $181.8 million, including $191.7 million of dividends. No shares were repurchased in 2011. The annual dividend increased to $0.65 per share from $0.62, and management announced a $0.17 quarterly dividend payable in February 2012.
Material changes versus the prior comparable period
- Sales growth accelerated, driven primarily by higher unit sales at older stores and improving manufacturing and construction markets; foreign currency translation contributed approximately 0.7 percentage points.
- Daily sales at stores open more than two years increased 17.9%, compared with 14.6% in 2010. Manufacturing customer sales increased 20.0% for the year, while non-residential construction customer sales increased 17.1%.
- The company opened 122 stores and closed 28, ending with 2,585 locations versus 2,490 in 2010. Store openings represented an annualized rate of approximately 4.9%, below the originally planned 150 to 200 openings.
- Store profitability improved: fourth-quarter pre-tax earnings as a percentage of sales increased to 20.2% from 18.7% in 2010 and 15.0% in 2009.
- FAST Solutions industrial vending expanded materially. Installed machines increased to 7,453 at year end from 1,925, and sales to customers using vending solutions represented 15.7% of fourth-quarter sales versus 7.5% in the prior year.
- Gross margin remained 51.8% for the year but declined to 51.2% in the fourth quarter from 52.0%, primarily because of product and customer mix, lower vendor incentives, and lower freight utilization.
- Net cash provided by operating activities increased, but working-capital investment and capital expenditures rose substantially as the company expanded inventory, vending equipment, distribution infrastructure, and stores.
Guidance, outlook, commentary, risks, and unusual items
- Management expected to open approximately 100 to 150 stores in 2012, representing approximately 4% to 6% growth, and estimated 2012 net capital expenditures of $99.1 million.
- The “pathway to profit” strategy targets pre-tax earnings of approximately 23% of sales. Management stated that this target could potentially be reached in 2013 with average store sales of approximately $100,000 to $110,000 per month, rather than the original $125,000 target.
- Management expects to fund expansion with operating cash flow, available cash and cash equivalents, and, if necessary, borrowing capacity. There were no material outstanding capital expenditure commitments at year end.
- Key risks include economic weakness in manufacturing and non-residential construction, competitive pricing pressure, volatility in steel and fuel costs, foreign currency exposure, inventory and receivables management, store-opening execution, employee recruitment and retention, distribution or information-system disruptions, and adoption of vending technology.
- The company had approximately $253.6 million of future minimum facility and vehicle lease payments, including $101.8 million due in 2012.
- A California fastener supplier’s lawsuit, which alleged damages of $180 million, had been dismissed on Fastenal’s summary judgment motion. Appeals concerning the judgment and recovery of costs and attorney fees remained pending, but management considered the prospect of a material liability remote.
- No property impairments were recorded during the three years presented. The company adopted a goodwill impairment testing update in 2011 without material effect. A new comprehensive-income presentation standard was scheduled to apply beginning in the first quarter of 2012.
- The independent auditor reported that the consolidated financial statements fairly presented the company’s financial position and results under U.S. GAAP and that internal control over financial reporting was effective as of December 31, 2011.
Most important facts for investors to verify
- Whether sales growth and older-store productivity remain durable if manufacturing or construction activity weakens.
- Whether the pathway-to-profit target of approximately 23% pre-tax margin can be achieved on the revised 2013 timeline.
- Whether FAST Solutions vending installations translate into sustained incremental sales and acceptable returns on the higher capital investment.
- Whether inventory and accounts receivable growth can be managed to restore the sales-to-operational-working-capital ratio above 3.0:1.
- The effect of fuel, steel, freight, product mix, and vendor incentive changes on the 51% to 53% normalized gross-margin range.
- Future lease obligations, distribution-center expansion spending, and the timing of the Winona distribution-center project.
- The status and potential financial impact of the supplier litigation appeals and other contingencies.