Fastenal Company 10-Q Summary
Business context and reporting period
Fastenal Company, a North American distributor of industrial and construction supplies operating more than 2,300 company-owned stores, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2009. Its principal customers are in manufacturing, construction, government, and related industries.
Management reported that the global economic downturn continued to pressure demand, particularly in industrial production and non-residential construction. Manufacturing sales declined approximately 23% and non-residential construction sales declined approximately 25% year over year in the third quarter.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $489.3 million, down 21.7% | $1.454 billion, down 19.0% |
| Gross profit | $244.6 million | $745.7 million |
| Gross margin | 50.0%, versus 52.9% | 51.3%, versus 52.6% |
| Operating income | $76.4 million, down 35.0% | $224.8 million, down 35.9% |
| Operating margin | 15.6%, versus 18.8% | 15.5%, versus 19.5% |
| Net earnings | $47.6 million, down 34.7% | $139.8 million, down 35.6% |
| Basic and diluted EPS | $0.32, versus $0.49 | $0.94, versus $1.46 |
Operating and administrative expenses decreased 21.2% in the third quarter and were 34.4% of sales, compared with 34.1% in the prior-year quarter. Payroll costs declined 24.4% year over year, supported by lower commissions, bonuses, hours worked, temporary labor, and profit-sharing expense. The effective income tax rate was approximately 38.1% for the first nine months, compared with 38.2% in 2008.
Operating cash flow was $253.2 million for the first nine months, compared with $173.7 million in 2008, despite lower earnings. Capital expenditures were $40.1 million, compared with $79.0 million, and management revised expected full-year 2009 capital expenditures to approximately $55 million from an earlier estimate of $65 million. Free cash flow supported dividends of $106.9 million, or $0.72 per share, compared with $77.4 million, or $0.52 per share, in 2008.
Cash and cash equivalents totaled $193.7 million at September 30, 2009, compared with $85.9 million at December 31, 2008. Total current assets were $998.1 million and total current liabilities were $138.7 million. Stockholders’ equity was $1.185 billion. The company had an $8 million line of credit expiring July 20, 2010, with no borrowings outstanding at quarter end. The filing does not report other material debt.
Material changes versus the prior comparable period
- Sales declined sharply because of lower unit volume, steel-product deflation, weaker manufacturing and construction demand, and unfavorable Canadian currency translation.
- Same-store daily sales declined 24.2% in the third quarter for stores opened more than two years earlier; the comparable 2008 growth rate was 11.5%.
- Gross margin contracted because deflation reversed prior inflation-related margin benefits, selling prices faced competitive pressure, and vendor volume allowances declined. Management also chose to forego some potential rebates to reduce inventory.
- Operating expenses declined substantially as management reduced headcount, payroll-related costs, transportation costs, and other discretionary spending. Average FTE headcount fell 14.7% year over year to 10,172.
- Accounts receivable declined 22.6% year over year to $239.3 million, and inventories declined 7.4% to $498.1 million. Inventory decreased $66.1 million from December 31, 2008.
- Store growth slowed to 2.3% year over year, with 2,352 stores at September 30, 2009, versus 2,300 a year earlier.
- The company paid higher dividends but made no share repurchases during the first nine months. A new authorization permitted repurchases of up to 2 million shares.
Guidance, outlook, risks, contingencies, and unusual items
- Management intended to stabilize total store headcount and resume a normal 7% to 10% annual store-opening range beginning in January 2010, assuming economic stability. For 2009, store openings were expected to remain in a 2% to 5% range.
- Management described sequential improvement in manufacturing daily sales from May through September, except for July’s holiday effect, but noted continued weakness in non-residential construction.
- The company’s “pathway to profit” strategy remains focused on increasing average store productivity, using a more variable cost structure, and improving working-capital efficiency. The long-term goal was approximately $125,000 of monthly sales per average store.
- Risks include a prolonged economic downturn, further sales deterioration, steel-price deflation, fuel and foreign-currency volatility, inventory and receivables management challenges, difficulty executing the store and sales-force strategy, and pressure on expense control.
- A proposed $10 million settlement of a wage-and-hour class action remained subject to court approval, with payment expected in the fourth quarter of 2009. The related expense was recorded in 2008; management estimated the 2008 third-quarter after-tax impact at slightly more than $0.03 per share.
- Vehicle lease agreements contained residual-value guarantees totaling approximately $14.6 million at expiration. Management considered funding obligations remote, other than a $2.1 million disposal reserve.
- Unrecognized tax benefits were $7.3 million at September 30, 2009, and management did not expect a significant change over the following 12 months.
- The filing states that disclosure controls were effective and that there was no material change in internal control over financial reporting during the quarter.
Facts investors should verify
- Whether the sequential improvement in manufacturing demand continued and whether non-residential construction stabilized.
- Whether gross margins recovered as higher-cost inventory turned over and deflationary pricing pressure eased.
- Progress toward reducing inventory and improving the annual sales-to-receivables-and-inventory ratio above 3.0:1.
- Actual 2009 capital expenditures, store openings, headcount levels, and the timing of any 2010 expansion acceleration.
- Court approval and payment of the $10 million class-action settlement.
- Sustainability of operating cash flow and the increased dividend payout amid materially lower earnings.