Fastenal Company — Form 10-Q Summary
Business Context and Reporting Period
Fastenal distributes industrial and construction supplies through approximately 2,700 company-owned stores, primarily serving manufacturing, maintenance and repair, and non-residential construction customers. This unaudited report covers the three months ended March 31, 2015, with comparison to the three months ended March 31, 2014. Dollar amounts are in thousands except per-share data.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $953,317 | $876,501 | +8.8% |
| Gross profit | $484,050 | $448,478 | +7.9% |
| Gross margin | 50.8% | 51.2% | -40 bps |
| Operating income | $203,771 | $178,851 | +13.9% |
| Operating margin | 21.4% | 20.4% | +100 bps |
| Net earnings | $127,606 | $111,931 | +14.0% |
| Diluted EPS | $0.43 | $0.38 | +13.2% |
| Operating cash flow | $180,105 | $143,298 | +25.7% |
Operating and administrative expenses increased 3.9% but declined to 29.4% of sales from 30.8%. The effective tax rate was approximately 37.3%, compared with 37.4% in the prior-year quarter. Net earnings represented approximately 13.4% of sales versus 12.8% previously.
Cash and cash equivalents totaled $120.8 million at March 31, 2015, compared with $114.5 million at December 31, 2014. Accounts receivable were $521.1 million and inventories were $867.9 million. Capital expenditures were $43.9 million, primarily related to industrial vending, distribution capabilities, stores, technology, vehicles, and equipment.
The company had $125.0 million outstanding under its $230.0 million unsecured revolving credit facility at quarter-end, classified as current because management intended to repay it with cash within twelve months. The company was in compliance with its financial covenants. On April 13, 2015, after quarter-end, the facility was amended to increase commitments to $400.0 million; the letter-of-credit subfacility remained $45.0 million.
Material Changes Versus the Prior Comparable Period
- Net sales growth was 8.8%, supported primarily by higher unit sales. Currency fluctuations, primarily involving the Canadian dollar, reduced reported sales growth by approximately 1.0 percentage point.
- Daily sales growth at stores open more than two years was 8.0%; growth at stores open more than five years was 7.6%.
- Manufacturing customer daily sales increased 6.9%, fastener sales increased 5.5%, non-fastener sales increased 11.7%, and non-residential construction sales increased 6.2%.
- Gross margin declined because of product and customer mix, including a lower fastener mix. Fasteners represented 39.0% of sales versus 40.2% in the prior-year quarter.
- Operating leverage improved profitability. Lower fuel costs contributed to a 20.0% decline in selling transportation costs, partially offsetting higher employee and occupancy expenses.
- Operating cash flow increased $36.8 million. The improvement reflected higher earnings, higher accounts payable, lower other current assets, and income-tax payment timing, partly offset by working-capital investment.
- The company repurchased 2.0 million shares for approximately $81.9 million at an average price of $40.93 per share, compared with 0.2 million shares repurchased for $8.8 million in Q1 2014.
- Quarterly dividends increased to $0.28 per share from $0.25. A further $0.28 per-share dividend was declared on April 13, 2015.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management did not provide formal earnings or revenue guidance. It expected to open approximately 20 stores in 2015, compared with 24 openings in 2014, and closed 13 stores during the first quarter. Management stated that short-term borrowings were expected to continue funding capital expenditures, share repurchases, and dividends during 2015.
Management reported that business weakened during the first quarter, citing economic weakness, particularly among oil and gas customers, weaker manufacturing conditions, poor weather, and a declining PMI Index. Industrial vending remained a strategic growth initiative: 48,545 devices were installed at quarter-end, representing 35,997 machine equivalents, and 40.5% of total sales were to customers using industrial vending.
Principal risks include economic downturns; weakness in manufacturing or commercial construction; pricing and product-mix pressure; foreign exchange movements; steel, fuel, and other commodity costs; adverse weather; inventory and receivables management; competition and adoption risks in industrial vending; hiring and retention of personnel; technology and cybersecurity risks; tax changes; and potential product liability. The filing reported no litigation matters considered probable or reasonably possible to have a material adverse outcome.
Operating lease residual-value guarantees totaled approximately $62.4 million, although management considered the likelihood of a material funding obligation remote. The company had approximately $4.1 million of unrecognized tax-benefit liabilities and did not expect a significant change over the following twelve months.
Facts Investors Should Verify
- Whether sales trends continued to weaken after March, especially in oil and gas, manufacturing, and construction end markets.
- Whether the lower gross margin persists as fastener mix, customer mix, pricing, and deflationary pressures change.
- The pace and returns of industrial-vending installations, including customer sales growth and installation quality.
- Use of the expanded credit facility and the company’s ability to repay short-term debt while funding capital expenditures, dividends, and share repurchases.
- Working-capital efficiency, particularly accounts receivable collection and inventory growth relative to sales.
- The effect of currency movements, fuel prices, steel prices, weather, and broader economic conditions on future results.
- The implementation impact of the revenue-recognition standard scheduled to become effective for the company on January 1, 2017; the filing states that the effect had not yet been determined.