Fastenal Company 2016 Q1 Form 10-Q Summary
Business Context and Reporting Period
Fastenal is a North American distributor of industrial and construction supplies, operating approximately 2,600 company-owned stores and serving manufacturing, maintenance, repair and operations, non-residential construction, government, and other customers. The filing covers the unaudited three months ended March 31, 2016, compared with the three months ended March 31, 2015.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $986.7 million | $953.3 million | 3.5% increase |
| Daily sales | $15.417 million | $15.132 million | 1.9% increase |
| Gross profit | $491.5 million | $484.1 million | 1.5% increase |
| Gross margin | 49.8% | 50.8% | Down 100 basis points |
| Operating income | $201.2 million | $203.8 million | 1.3% decrease |
| Operating margin | 20.4% | 21.4% | Down 100 basis points |
| Net earnings | $126.2 million | $127.6 million | 1.1% decrease |
| Diluted EPS | $0.44 | $0.43 | Increase |
| Cash flow from operations | $161.4 million | $180.1 million | 10.4% decrease |
| Capital expenditures | $29.7 million | $43.9 million | Decrease |
At March 31, 2016, cash and cash equivalents were $150.6 million, compared with $129.0 million at December 31, 2015. Total debt was $370.0 million, including $355.0 million drawn under the $700.0 million unsecured revolving credit facility and a $15.0 million note payable. The company was in compliance with its debt covenants. The weighted interest rate on credit-facility borrowings was approximately 1.4%.
Current assets were $1.767 billion and total assets were $2.643 billion at March 31, 2016. Inventories increased to $965.1 million from $913.3 million at year-end 2015, reflecting working-capital investment and expanded product placement under the CSP 16 initiative.
Material Changes Versus the Prior Comparable Period
- Sales growth slowed substantially, with daily sales increasing 1.9% versus 8.8% in Q1 2015. March daily sales growth was 0.0%, and same-store daily sales for locations open more than two years declined 1.4% in March.
- Fastener daily sales contracted 1.7%, compared with 5.5% growth in Q1 2015. Fasteners represented 37.5% of sales versus 39.0% in the prior-year quarter.
- Non-fastener daily sales grew 4.7%, down from 11.7% in Q1 2015, but remained more resilient than fasteners.
- Manufacturing customer daily sales grew 0.9%, while non-residential construction customer daily sales declined 0.4%.
- Gross margin declined because of customer and product mix, including growth in lower-margin national-account business and a shift toward non-fastener products. Management also cited fastener price deflation.
- Operating and administrative expenses increased 3.5% in dollars but remained 29.4% of sales. Employee-related expenses increased 2.6%, while selling transportation costs decreased 7.2%, primarily because of lower fuel costs.
- Operating cash flow declined due primarily to increased working-capital requirements, including inventory investment. Operating cash flow represented 127.8% of net earnings versus 141.1% in Q1 2015.
- The company repurchased 1.6 million shares for approximately $59.4 million at an average price of $37.15 per share. Approximately 1.3 million shares remained authorized for repurchase at quarter-end.
- Common shares outstanding declined to approximately 288.9 million from 294.0 million at March 31, 2015, reflecting repurchases.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management plans to open 40 to 60 stores in 2016. Seventeen stores opened and 12 stores were closed or consolidated during Q1.
- Management is holding back on headcount additions, except in vending support and information technology, until daily sales growth approaches mid-single-digit levels.
- Management expects 2016 gross margin to range from 49.5% to 50.0%, with an internal goal of returning to 50.0%.
- Industrial vending remained a major growth initiative. Installed devices increased 17.2% year over year to 56,889, and 44.5% of sales were to customers using industrial vending. Vending customer daily sales grew 3.6%, although fastener sales to those customers declined 5.5%.
- The company signed 48 Onsite customer locations in Q1 and had a 2016 goal of 200. It also converted approximately 185 stores to the CSP 16 format, bringing the total to approximately 985 stores.
- Management increased its estimate for 2016 net capital expenditures from approximately $128 million to approximately $197 million, primarily because of a new vending locker lease agreement and stronger vending signings. The company planned to fund part of the increase through a proposed private debt placement; the filing does not provide the final terms or outcome.
- Management described the economic environment as weak. Risks include weakness in manufacturing and construction, energy-sector exposure, pricing pressure and steel deflation, foreign-exchange movements, fuel prices, working-capital growth, inventory forecasting, interest-rate changes, competition and execution risks in industrial vending, cybersecurity, and the ability to recruit and retain personnel.
- Approximately $107 million of cash and cash equivalents were held by non-U.S. subsidiaries. Management stated that most of these funds could be repatriated without significant restrictions, subject to applicable tax considerations.
- The company disclosed approximately $68.5 million of aggregate residual-value guarantees on certain leased pickup trucks, although management considered the likelihood of a material funding obligation remote.
- No litigation matters were considered probable or reasonably possible to have a material adverse outcome. The board declared a $0.30-per-share dividend payable May 24, 2016.
Important Facts for Investors to Verify
- Whether weak manufacturing and construction demand continues to suppress same-store sales and fastener volumes.
- Whether gross margin remains within management’s 49.5% to 50.0% projected range despite mix shifts and price deflation.
- The final structure, timing, and cost of the proposed private debt placement and its effect on leverage and interest expense.
- Whether the planned increase in 2016 capital expenditures produces the expected vending and store-growth returns.
- Inventory growth, receivable collections, and the resulting conversion of earnings into operating cash flow.
- Execution of the 40-to-60-store opening plan, Onsite expansion, CSP 16 conversions, and continued industrial-vending installations.
- Future share repurchases and dividends relative to debt-funded capital allocation.