Fastenal Company — Q3 2012 Form 10-Q Summary
Business context and reporting period
Fastenal distributes industrial and construction supplies, primarily through company-owned stores in North America, serving manufacturing, maintenance, construction, government, agricultural, transportation, and other customers. The filing covers the quarter and nine months ended September 30, 2012. The financial statements are unaudited and prepared under U.S. GAAP for interim reporting.
Key financial metrics
| Metric | Three months ended Sept. 30, 2012 | Year-over-year change | Nine months ended Sept. 30, 2012 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $802.6 million | 10.4% | $2.376 billion | 14.9% |
| Gross profit | $414.4 million | 9.8% | $1.224 billion | 13.6% |
| Gross margin | 51.6% | Down from 51.9% | 51.5% | Down from 52.1% |
| Operating income | $175.7 million | 13.2% | $515.6 million | 18.8% |
| Operating margin | 21.9% | Up from 21.4% | 21.7% | Up from 21.0% |
| Net earnings | $109.3 million | 12.9% | $321.8 million | 19.0% |
| Diluted earnings per share | $0.37 | 12.1% | $1.08 | 18.7% |
Operating and administrative expenses were 29.8% of sales for both the quarter and nine-month period, versus 30.6% and 31.1%, respectively, in the comparable 2011 periods. The effective tax rate was approximately 37.6% for the nine months, compared with 37.7% in 2011.
For the nine months, operating cash flow was $289.1 million, compared with $194.2 million in 2011. Capital expenditures were $88.3 million, producing approximate free cash flow of $200.8 million before proceeds from asset sales. Dividends paid were $156.8 million, compared with $150.4 million in 2011.
At September 30, 2012, cash and cash equivalents were $195.6 million and marketable securities were $27.2 million. Total assets were $1.920 billion, current liabilities were $216.0 million, and stockholders’ equity was $1.664 billion. The company reported no borrowings under its $8 million line of credit, which expires September 20, 2013. The filing does not identify other funded debt.
Material changes versus the prior comparable period
- Sales growth moderated from 22.0% to 14.9% for the nine months and from 20.4% to 10.4% for the third quarter.
- Daily sales growth in the third quarter was 12.2% after adjusting for one fewer business day than in the prior-year quarter. Foreign currency movements reduced nine-month daily sales growth by 0.3%.
- Manufacturing customer daily sales growth was 14.0% in the third quarter, down from 18.3% in the third quarter of 2011. Non-residential construction customer growth was 8.2%, down from 15.8%.
- Fastener sales growth weakened more substantially than non-fastener sales growth. Fasteners represented 43.5% of third-quarter sales, down from 46.5% in 2011.
- Gross margin declined modestly, but operating margin expanded because operating and administrative expenses grew more slowly than sales.
- Accounts receivable increased to $411.0 million and inventories to $675.8 million at September 30, 2012, up 13.8% and 9.3%, respectively, from September 30, 2011. Management noted challenges managing receivables growth associated with international and large-account sales.
- The store network increased to 2,650 locations from 2,566 a year earlier. Average monthly sales per store increased to approximately $88,000 from $83,000.
- FAST Solutions industrial vending installations reached 17,013 at quarter-end, compared with 5,642 at the end of the third quarter of 2011. Customers using vending solutions represented 23.2% of total sales, versus 13.1% a year earlier.
- No shares were repurchased during the first nine months of 2012. The company had authorization to repurchase up to 1.8 million shares.
Outlook, commentary, risks, and unusual items
Management described the 2012 sales environment as increasingly choppy, with slowing manufacturing and construction markets. The company expected to open approximately 85 stores in 2012 and planned approximately 50 to 100 openings in 2013. Management also intended to continue aggressive investment in industrial vending, reinvigorate fastener growth, and improve underperforming locations.
Management considers a normal gross margin range to be 51% to 53% and stated that its “pathway to profit” objective could be achieved with average store sales of approximately $100,000 to $110,000 per month. The company expected to fund expansion primarily through operating cash flow and available cash, with borrowing capacity available to a lesser degree.
Principal risks include weakness in manufacturing or commercial construction, inability to sustain gross-margin or expense improvements, difficulty recruiting and retaining personnel, slower adoption or increased competition in industrial vending, foreign currency movements, steel and fuel price changes, and reduced ability to pass freight costs to customers.
The board declared a quarterly dividend of $0.21 per share on October 10, 2012, payable November 26, 2012. A previously disclosed supplier lawsuit seeking alleged damages of $180 million was concluded in Fastenal’s favor after an appeals court affirmed the relevant orders and issued its mandate on September 13, 2012. The company stated the matter would be omitted from future filings.
Important facts for investors to verify
- Whether slowing daily sales growth, particularly in manufacturing and fasteners, persists into the fourth quarter and 2013.
- Whether industrial vending installations and customer adoption continue to justify the associated operating and capital investment.
- Whether gross margins remain within management’s 51% to 53% expected range despite product mix, currency, steel pricing, and competitive pressures.
- Whether receivables and inventory growth remains aligned with sales growth and does not weaken cash conversion.
- Whether store-opening plans, hiring levels, and expansion spending remain supportable from internally generated cash.
- The effect of fuel prices, foreign exchange rates, and economic conditions in manufacturing and non-residential construction.
- The continuation of quarterly dividends, which remains subject to the board’s future determination and the company’s financial needs.