Fastenal Company 2015 Form 10-K Summary
Business context and reporting period
Fastenal Company is a wholesale distributor of industrial and construction supplies, serving primarily manufacturing and non-residential construction customers through stores, onsite locations, national accounts, industrial vending, distribution centers, and manufacturing operations. The filing covers the fiscal year ended December 31, 2015, with fourth-quarter information where disclosed. Fastenal operated 2,622 stores and employed 20,746 people at year end.
- Approximately 89% of sales originated from the United States; foreign operations contributed approximately 11% of consolidated sales.
- Fastener products represented 38.3% of 2015 sales, down from 40.2% in 2014; non-fastener products represented approximately 61.7%.
- Industrial vending devices increased to 55,510 at year end, up 18.5% from 46,855, and customers using vending represented 43.9% of fourth-quarter sales.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $3.869 billion | $3.734 billion | +3.6% |
| Gross profit | $1.949 billion | $1.897 billion | +2.7% |
| Gross margin | 50.4% | 50.8% | -40 bps |
| Operating income | $828.8 million | $787.6 million | +5.2% |
| Operating margin | 21.4% | 21.1% | +30 bps |
| Net earnings | $516.4 million | $494.2 million | +4.5% |
| Diluted EPS | $1.77 | $1.66 | +6.6% |
| Net cash from operations | $546.9 million | $499.4 million | +9.5% |
| Net capital expenditures | $145.2 million | $183.7 million | -20.9% |
Fourth-quarter 2015 net sales were $922.8 million, compared with $926.3 million in the prior-year quarter. Fourth-quarter net earnings were $111.9 million, compared with $118.4 million, and diluted EPS was $0.39 versus $0.40. Fourth-quarter gross margin declined to 49.9% from 50.5%.
- 2015 operating and administrative expenses were 29.0% of sales, compared with 29.8% in 2014.
- The effective income tax rate increased to 37.5% from 37.2%, partly due to higher valuation allowances on deferred tax assets and changes in uncertain tax positions.
- Accounts receivable increased 1.4% and inventories increased 5.1%; operational working capital increased 3.8%.
- Cash and cash equivalents were $129.0 million at year end, compared with $114.5 million in 2014.
Liquidity, debt, and capital allocation
- Total debt was $365.0 million at December 31, 2015, including $350.0 million drawn under a $700.0 million unsecured revolving credit facility and a $15.0 million note.
- The revolving facility expires March 1, 2018; borrowings generally bear interest at LIBOR plus 0.95%. The weighted average rate was approximately 1.4% at year end. Fastenal reported compliance with applicable covenants.
- Undrawn letters of credit totaled $36.3 million.
- Dividends paid were $327.1 million, or $1.12 per share, versus $296.6 million, or $1.00 per share, in 2014.
- Fastenal repurchased 7.1 million shares for approximately $293.0 million during 2015. Approximately 2.9 million shares remained authorized for repurchase at year end; an additional 1.6 million shares were purchased after year end.
- Management estimated 2016 net capital expenditures at approximately $128.0 million and expected to fund expansion with operating cash flow, available cash, and borrowing capacity.
Material changes versus the prior comparable period
- Sales growth slowed materially, with daily sales growth of 3.2% in 2015 versus 12.7% in 2014. Currency translation reduced reported sales growth by approximately 1.2 percentage points.
- Fastener sales contracted 1.4% for the year and 6.2% in the fourth quarter, compared with 6.9% annual growth in 2014. Non-fastener sales grew 6.8% for the year but only 1.2% in the fourth quarter.
- Manufacturing customer daily sales growth slowed to 2.3% from 12.0%; non-residential construction customer sales declined 0.2% compared with 7.8% growth in 2014.
- Management attributed the slowdown primarily to reduced activity among oil and gas-related customers, broader industrial weakness, a strong U.S. dollar, price deflation in fasteners, and unusually extended customer plant shutdowns late in the year.
- Fastenal added 2,329 employees, including 1,668 store employees, while reducing store locations by a net 15 to 2,622 through 41 openings and 50 closures or consolidations.
- Net capital expenditures declined as major distribution automation projects neared completion, while investments in vending, store inventory, personnel, and distribution infrastructure continued.
Guidance, outlook, commentary, risks, and unusual items
- Management expected to open 60 to 75 stores in 2016, representing approximately 2% to 3% growth, while continuing to close or consolidate locations as needed.
- Fastenal targeted 200 additional Onsite locations in 2016, described as an aggressive objective.
- Management expected the long-term shift toward larger customers and non-fastener products to pressure gross margin, although operating leverage may offset part of that pressure.
- The company terminated a manufacturing joint venture in Brazil and settled unrelated disputes during the fourth quarter, producing approximately $4 million of additional expense.
- Fastenal acquired certain assets of Fasteners, Inc. on October 31, 2015. The acquisition was not material to 2015 results and was not expected to materially affect 2016 sales.
- Fastenal agreed to acquire certain assets and transition services from Apex Industrial Technologies effective January 2, 2017, for total consideration of $27.0 million, including $12.0 million paid in 2015 and a contingent $15.0 million note.
- Principal risks include economic weakness in manufacturing and construction, energy-sector exposure, competitive pricing, gross-margin pressure, foreign exchange, floating-rate debt, inventory and receivables management, labor availability, execution of vending and Onsite expansion, information-system or cybersecurity failures, product liability, supply-chain disruption, and litigation or regulatory matters.
- The filing reported no legal matters considered probable or reasonably possible to have a material adverse outcome. KPMG issued an unqualified audit opinion and concluded that internal controls over financial reporting were effective.
Important facts for investors to verify
- Whether the late-2015 decline in daily sales and fourth-quarter gross margin was temporary or represents a more persistent weakening in industrial and construction demand.
- The pace and profitability of the planned 2016 store openings, Onsite additions, industrial vending deployments, and CSP 16 inventory expansion.
- Whether the shift toward non-fastener products and larger accounts continues to reduce gross margin faster than operating leverage improves profitability.
- The sustainability of substantial shareholder returns, particularly dividends and repurchases funded partly through increased revolving-credit borrowings.
- Execution, costs, and accounting consequences associated with the Apex transition and the Brazil joint-venture termination.
- Exposure to oil and gas customers, foreign currency movements, steel-price deflation, LIBOR changes, and the March 2018 credit-facility maturity.