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 and non-residential construction customers in North America. This unaudited report covers the three months ended March 31, 2013, compared with the same period in 2012.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $806.3 million | $768.9 million | +4.9% |
| Gross profit | $421.9 million | $394.2 million | +7.0% |
| Gross margin | 52.3% | 51.3% | +100 bps |
| Operating income | $174.8 million | $161.0 million | +8.5% |
| Operating margin | 21.7% | 20.9% | +80 bps |
| Net earnings | $109.0 million | $100.2 million | +8.8% |
| Diluted EPS | $0.37 | $0.34 | +8.8% |
| Operating cash flow | $160.2 million | $132.2 million | +21.2% |
| Capital expenditures | $55.5 million | $28.2 million | +96.8% |
Cash and cash equivalents were $159.2 million at March 31, 2013, compared with $79.6 million at December 31, 2012. Trade receivables were $418.7 million and inventories were $700.5 million. Total assets were $1.95 billion and stockholders’ equity was $1.64 billion.
The company had no borrowings outstanding under its $125 million credit facility at March 31, 2013, although one undrawn letter of credit totaling $29.3 million was outstanding. The company borrowed and repaid $20.0 million during the quarter. Net cash used in financing activities was $25.9 million, including $29.7 million of dividends.
Material changes versus the prior comparable period
- Sales growth slowed materially from the 20.0% increase reported in Q1 2012 to 4.9% in Q1 2013; sales growth on a daily basis was 6.5%, reflecting one fewer business day.
- Manufacturing customer daily sales increased 7.0%, while non-residential construction customer daily sales increased 2.9%.
- Fastener sales increased only 1.7%, while non-fastener sales increased 10.8%. Fasteners represented 43.0% of sales, down from 45.5%.
- Gross margin improved to 52.3%, primarily due to better pricing execution supported by a new price guidance system and improved freight utilization.
- Operating and administrative expenses increased 6.2% and rose to 30.7% of sales from 30.3%. Occupancy costs were pressured by increased industrial vending equipment, distribution infrastructure investment, and higher utilities.
- Operating cash flow increased despite slower sales growth, supported by higher profitability, slower working-capital growth, a $14.9 million inventory reduction during the quarter, and favorable income-tax timing.
- Capital expenditures nearly doubled, driven principally by industrial vending and distribution automation investments.
- Store locations increased to 2,660 from 2,611 a year earlier, while average FTE headcount increased 1.4% year over year.
Outlook, management commentary, risks and unusual items
- Management expected to open approximately 65 to 80 stores during 2013, or approximately 2.5% to 3.0% growth.
- Management established an internal goal of signing 30,000 industrial vending machines in 2013. During Q1, 5,728 machines were signed, cumulative installed machines reached 25,447, and 27.5% of total sales were to customers using vending machines.
- Management expects a normal gross margin range of 51% to 53% and believes its “pathway to profit” strategy can support a 23% pre-tax earnings margin with average monthly store sales of approximately $100,000 to $110,000.
- Management cited economic policy uncertainty, weather, a weak manufacturing environment, and weakness in non-residential construction as restraints on sales. It believed customer activity slowed from January through March.
- Principal risks include economic weakness, cyclical manufacturing and construction demand, commodity steel and fuel prices, competitive pricing pressure, foreign currency movements, execution of the industrial vending strategy, recruiting and retaining qualified personnel, and the ability to sustain margin improvements.
- There were no material litigation matters considered probable or reasonably estimable. Management reported no material change in risk factors and concluded that disclosure controls were effective.
- The board declared a $0.20-per-share dividend on April 9, 2013, payable May 30, 2013. The filing states that quarterly dividends are expected to continue, subject to board approval and future financial needs.
- The company had approximately $49.4 million of vehicle lease residual-value guarantees; management considered the likelihood of funding these obligations remote, other than a $0.1 million disposal reserve.
Investor verification points
- Verify whether the slowdown in daily sales growth, particularly in fasteners and construction, continued beyond Q1 2013.
- Assess whether industrial vending machine signings, installed-machine growth, and customer sales growth justify the elevated capital and occupancy investments.
- Monitor gross margin performance within management’s 51%–53% expected range and the sustainability of pricing improvements.
- Review the return on increased capital expenditures for distribution automation, vending equipment, stores, and infrastructure.
- Track receivables, inventories, and working-capital requirements as sales and the vending business expand.
- Consider exposure to manufacturing and construction cycles, steel and fuel prices, foreign exchange, competitive pricing, and employee availability.
- Confirm future dividend declarations, credit-facility availability, and any changes in unrecognized tax benefits or lease-related obligations.