Fastenal Company — Form 10-Q Summary
Business context and reporting period
Fastenal distributes industrial and construction supplies through approximately 3,000 in-market locations, primarily serving manufacturing and non-residential construction customers. This unaudited filing covers the quarter and six months ended June 30, 2018, with comparisons to the corresponding 2017 periods.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $1,267.9 million | $1,121.5 million | $2,453.7 million | $2,169.2 million |
| Gross profit | $617.7 million | $558.5 million | $1,195.3 million | $1,076.5 million |
| Gross margin | 48.7% | 49.8% | 48.7% | 49.6% |
| Operating income | $269.0 million | $237.5 million | $503.5 million | $450.0 million |
| Operating margin | 21.2% | 21.2% | 20.5% | 20.7% |
| Net earnings | $211.2 million | $148.9 million | $385.5 million | $283.1 million |
| Diluted EPS | $0.74 | $0.52 | $1.34 | $0.98 |
| Operating cash flow | Not separately provided | Not separately provided | $311.6 million | $293.3 million |
At June 30, 2018, cash and cash equivalents were $135.5 million, compared with $116.9 million at December 31, 2017. Total debt was $425.0 million, including $290.0 million outstanding under a $700.0 million unsecured revolving credit facility. The company reported compliance with debt covenants and had $36.3 million of outstanding letters of credit.
Current assets were $2,140.7 million versus current liabilities of $381.0 million. Accounts receivable were $733.7 million and inventories were $1,163.4 million. Stockholders’ equity was $2,226.6 million.
Six-month cash flow included $53.9 million of net investing outflows and $237.5 million of net financing outflows. Capital expenditures were $60.6 million gross, offset by $6.8 million of property-sale proceeds. Dividends paid were $212.7 million and share repurchases were $40.4 million.
Material changes versus the prior comparable period
- Q2 net sales increased 13.1%; six-month net sales also increased 13.1%, driven primarily by higher unit sales and, to a lesser extent, pricing intended to offset inflation.
- Q2 net earnings increased 41.9%, and six-month net earnings increased 36.2%. Management attributed a significant portion of the improvement to the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act and discrete tax benefits.
- Gross margin declined 110 basis points in Q2 and 90 basis points for the first six months. Management cited product and customer mix, slower fastener growth, and higher freight, fuel, driver, and other transportation costs.
- Operating margin was stable in Q2 despite the lower gross margin, while the six-month operating margin declined modestly. Operating and administrative expenses benefited from leverage in employee-related, occupancy-related, and corporate costs.
- Accounts receivable increased 19.6% and inventories increased 11.4% from June 30, 2017, reflecting sales growth, stronger international and national-account activity, longer payment terms, and inventory needed to support demand.
- Net cash provided by operations increased to $311.6 million from $293.3 million, although operating cash flow represented 80.8% of net earnings versus 103.6% in the prior-year period.
- The company expanded growth initiatives: active Onsite locations increased to 761 from 486, and installed industrial vending devices increased to 76,069 from 66,577. Public branch locations declined to 2,290 from 2,451.
Guidance, outlook, risks, and unusual items
- Management expects its ongoing tax rate to be approximately 24.5% to 25.0%. The first-half tax rate was 22.6%, including approximately $8.4 million of discrete tax benefits; management estimated that tax effects benefited first-half EPS by approximately $0.24 and Q2 EPS by approximately $0.15.
- The company increased expected 2018 net spending on property and equipment by $9.0 million to $158.0 million, or approximately 40.4% above 2017, primarily due to strong industrial-vending demand.
- Management expects to continue evaluating pricing actions to offset marketplace inflation. Pricing contributed an estimated 50 to 100 basis points to sales growth in both Q2 and the first half.
- Key risks include economic weakness in manufacturing or commercial construction, competitive pricing pressure, product and customer mix changes, inflation in steel and other inputs, fuel and transportation costs, foreign-exchange movements, interest-rate increases, receivable collection and inventory forecasting, execution of vending and Onsite initiatives, hiring and retention, cybersecurity, product liability, and changes in tax law.
- A 1 percentage-point increase in LIBOR would have increased first-half 2018 interest expense by approximately $1.5 million. The company does not historically use interest-rate swaps for its floating-rate borrowings.
- The company expects adoption of the new lease standard on January 1, 2019, to materially increase reported assets and liabilities, although the ultimate effect remained under evaluation.
- No litigation matters were considered probable or reasonably possible to have a material adverse outcome at June 30, 2018. The company reported no material changes in risk factors or internal control over financial reporting.
- The board declared a $0.40-per-share cash dividend on July 10, 2018, payable August 22, 2018.
Facts investors should verify
- Whether sales growth and pricing actions continue to offset product inflation, freight, fuel, and other cost pressures.
- Whether gross-margin erosion from product mix, customer mix, and transportation costs stabilizes or worsens.
- The sustainability of earnings growth after the Tax Act benefits and approximately $8.4 million of discrete tax benefits.
- Working-capital trends, particularly the faster growth of receivables and inventories relative to earnings and operating cash flow.
- Returns on the increased capital spending and continued expansion of industrial vending and Onsite locations.
- Interest-rate exposure under the revolving credit facility and debt maturities, including the facility’s March 2020 expiration.
- The final balance-sheet impact of adopting the lease standard in 2019 and any subsequent changes to Tax Act estimates.