Fastenal Company 2017 Form 10-K Summary
Business context and reporting period
Fastenal distributes industrial and construction supplies, primarily to manufacturing and non-residential construction customers. The filing covers the fiscal year ended December 31, 2017, with comparisons to 2016 and 2015. At year-end, Fastenal operated 2,988 in-market locations in 24 countries, including 2,383 public branches and 605 Onsite locations, and employed 20,565 people.
Growth initiatives included national accounts, Onsite customer locations, industrial vending, Fastenal Managed Inventory, e-commerce, and branch inventory expansion. National accounts represented 48.7% of 2017 sales, compared with 47.4% in 2016.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $4,390.5 million | $3,962.0 million | +10.8% |
| Gross profit | $2,163.6 million | $1,964.8 million | +10.1% |
| Gross margin | 49.3% | 49.6% | Down 30 basis points |
| Operating income | $881.8 million | $795.8 million | +10.8% |
| Operating margin | 20.1% | 20.1% | Flat |
| Earnings before taxes | $873.1 million | $789.7 million | +10.6% |
| Net earnings | $578.6 million | $499.4 million | +15.8% |
| Diluted EPS | $2.01 | $1.73 | +16.2% |
| Cash flow from operations | $585.2 million | $519.9 million | +12.6% |
| Net capital expenditures | $112.5 million | $183.0 million | Down $70.5 million |
| Cash and cash equivalents | $116.9 million | $112.7 million | +$4.2 million |
| Total debt | $415.0 million | $390.0 million | +$25.0 million |
Operating cash flow represented 101.1% of net earnings. Accounts receivable increased to $607.8 million and inventories increased to $1,092.9 million, reflecting stronger sales, growth in national accounts and international business, and expansion of the Onsite program.
As of December 31, 2017, Fastenal had $280.0 million drawn under its $700.0 million unsecured revolving credit facility and $135.0 million of senior unsecured notes. Letters of credit totaled $36.3 million. The revolving facility matures March 10, 2020; the senior notes mature from 2021 through 2024. The company stated that it was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales growth accelerated substantially as manufacturing, construction, energy-related, and heavy-equipment demand improved. Daily sales increased 11.3%.
- Fastener daily sales increased 8.4%, compared with a 2.3% decline in 2016. Non-fastener daily sales increased 13.1%.
- Operating margin remained at 20.1% despite higher employee, transportation, information technology, and acquisition-related costs.
- Gross margin declined because fasteners, the company’s highest-margin product line, declined to 35.6% of sales from 36.6%, while national-account and Onsite sales grew faster and generally carry lower margins.
- Public branches declined by 120 to 2,383, while active Onsite locations increased 50.9% to 605. Industrial vending devices producing product revenue increased 13.7% to 71,421.
- Fastenal acquired certain assets and assumed certain liabilities of Manufacturers Supply Company, or Mansco, on March 31, 2017, for total estimated consideration of $59.3 million. Mansco contributed $53.5 million of 2017 sales and $5.5 million of net earnings.
- Net earnings benefited from the Tax Cuts and Jobs Act. Reported 2017 tax expense was $294.5 million, or 33.7% of pretax earnings; excluding the tax reform impact, management estimated tax expense of approximately $318.8 million and net earnings of approximately $554.2 million, or $1.92 diluted EPS.
- Shareholder returns included $369.1 million of dividends and $82.6 million of share repurchases. The annual dividend increased to $1.28 per share from $1.20 in 2016.
Guidance, outlook, commentary, and unusual items
- Management estimated a 2018 effective income tax rate of approximately 24% to 26%, subject to finalization of the Tax Act accounting.
- Management estimated 2018 net capital expenditures of $149.0 million, compared with $112.5 million in 2017, primarily for distribution, manufacturing, vending, technology, facilities, and vehicles.
- Fastenal expected to reach approximately 1,000 Onsite locations and 100,000 total industrial vending devices within the next 12 to 18 months.
- Hurricanes Harvey, Irma, and Maria temporarily disrupted parts of the distribution network and reduced demand and margins in affected regions. Storm-related products also carried lower gross margins.
- Management expects product and customer mix to continue pressuring gross margin, particularly as non-fasteners, national accounts, OEM fasteners, and Onsite sales increase.
- Key risks include cyclical demand, competition and pricing pressure, sourcing and trade-policy changes, steel and fuel costs, foreign currency exposure, labor availability, execution of Onsite and vending strategies, information-system and cybersecurity failures, product liability, and interest-rate increases.
- Operating lease commitments totaled $324.7 million, and total contractual obligations for debt principal, debt interest, and operating leases were $775.2 million.
- The company reported no litigation matters considered probable or reasonably possible to have a material adverse outcome. Management and the auditor concluded that internal control over financial reporting was effective, although Mansco was excluded from the assessment.
Most important facts for investors to verify
- Whether sales growth remains broad-based after the 2017 recovery in manufacturing, construction, energy, and heavy-equipment markets.
- Whether Onsite and vending expansion produces incremental revenue and operating profit rather than primarily shifting sales from traditional branches.
- Whether gross margin continues to decline as fasteners become a smaller share of sales and national-account and Onsite mix increases.
- The final tax accounting and sustainable effective tax rate following the Tax Act measurement period.
- Working-capital efficiency, particularly the growth of accounts receivable and inventories relative to sales and operating cash flow.
- Debt repayment capacity, revolving-credit availability, floating-rate exposure, and the funding requirements for planned capital expenditures, dividends, repurchases, and acquisitions.
- Progress on the Kansas and planned Washington distribution-center projects and the returns from automation and vending investments.
- Potential effects of tariffs, foreign sourcing disruptions, steel prices, fuel costs, labor costs, cybersecurity incidents, and product-liability claims.