Fastenal Company 2017 Q2 Form 10-Q Summary
Business Context and Reporting Period
Fastenal is a North American distributor of industrial and construction supplies serving manufacturing, non-residential construction, OEM, MRO, government, and other markets through company-owned branches, Onsite locations, and industrial vending machines. The filing covers the quarter and six months ended June 30, 2017; financial statements are unaudited.
- 2,451 branch locations and 486 active Onsite locations at June 30, 2017.
- 66,577 installed industrial vending machines, up 14.1% from June 30, 2016.
- 20,174 total employees, down 0.7% year over year.
Financial Performance and Key Metrics
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Net sales | $1,121.5 million | $1,014.3 million | $2,169.2 million | $2,001.0 million |
| Gross profit | $558.5 million | $501.6 million | $1,076.5 million | $993.1 million |
| Gross margin | 49.8% | 49.5% | 49.6% | 49.6% |
| Operating income | $237.5 million | $209.2 million | $450.0 million | $410.4 million |
| Operating margin | 21.2% | 20.6% | 20.7% | 20.5% |
| Net earnings | $148.9 million | $131.5 million | $283.1 million | $257.7 million |
| Diluted EPS | $0.52 | $0.45 | $0.98 | $0.89 |
- Q2 sales increased 10.6%; first-half sales increased 8.4%.
- Q2 net earnings increased 13.2%; first-half net earnings increased 9.8%.
- Net cash provided by operating activities was $293.3 million for the first six months, compared with $253.5 million in the prior-year period, equal to 103.6% of net earnings.
- Net capital expenditures were $52.8 million in the first six months. Gross purchases of property and equipment were $57.4 million, and acquisition cash payments were $58.7 million.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $115.1 million at June 30, 2017, compared with $112.7 million at December 31, 2016.
- Total current assets were $1,872.9 million versus $1,720.8 million at year-end 2016. Accounts receivable were $613.5 million and inventories were $1,044.3 million.
- Total debt was $445.0 million, including $305.0 million outstanding under a $700.0 million unsecured revolving credit facility. Long-term debt was $436.2 million.
- The revolving facility expires March 10, 2020. Fastenal reported compliance with applicable debt covenants; borrowings under the facility had a weighted interest rate of approximately 2.2% at quarter-end.
- Letters of credit outstanding were $36.3 million. The company also had an aggregate $83.5 million residual-value guarantee related to certain vehicle leases, although management considered the likelihood of funding the guarantees remote.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected stronger underlying business activity, higher unit sales, growth in national accounts, Onsite operations, industrial vending, and products added through customer service initiatives. Pricing was not a meaningful contributor to sales growth.
- Gross margin benefited from supply-chain initiatives, increased sales of higher-margin Fastenal brands, and purchasing discipline. These benefits were partly offset by product and customer mix and the lower-margin Mansco acquisition.
- Operating expense leverage improved margins despite higher fuel costs, transportation expenses, information technology spending, and stock-based compensation.
- Fastener products represented 36.1% of Q2 sales versus 37.1% in the prior-year quarter; non-fastener products grew faster than fasteners.
- Fastenal acquired certain assets and liabilities of Manufacturers Supply Company, or Mansco, on March 31, 2017, for estimated total consideration of $59.3 million, including $18.4 million of goodwill and $20.1 million of identifiable intangible assets.
- Debt increased by $55.0 million from December 31, 2016, primarily due to a new $60.0 million senior unsecured note issued to fund the Mansco acquisition, partly offset by repayment of other obligations.
- The company repurchased 1.3 million shares during the first six months at an average price of approximately $43.62 per share and received authorization on July 11, 2017, to repurchase up to an additional 5.0 million shares.
Guidance, Outlook, Commentary, and Risks
- Management increased expected 2017 net capital expenditures to approximately $127.0 million from $119.0 million because of higher anticipated supply-chain and information-technology spending.
- Management expected headcount to grow in the second half of 2017 to support Onsite and other growth initiatives. The filing does not provide specific revenue or earnings guidance.
- On July 11, 2017, the board declared a quarterly dividend of $0.32 per share, payable August 23, 2017.
- Fastenal adopted ASU 2016-09 regarding employee share-based payments. The filing stated that the planned January 2018 adoption of the revenue standard was not expected to have a material effect on results, cash flows, or financial position, although disclosures will expand. Lease accounting adoption is planned for January 2019 and is expected to materially increase reported assets and liabilities.
- Key risks include economic weakness in manufacturing or commercial construction, competitive pricing pressure, product and customer mix changes, fuel, steel and other commodity costs, interest-rate and foreign-currency movements, inventory and receivables management, execution of Onsite and vending strategies, branch changes, hiring and retention, cybersecurity, technology dependencies, defective products, and acquisition integration.
- A 1% increase in LIBOR would have increased first-half 2017 interest expense by approximately $1.3 million. No litigation matters were considered probable or reasonably possible to have a material adverse outcome at June 30, 2017.
Important Facts for Investors to Verify
- Whether sales growth and margin performance continue after considering the cyclical manufacturing environment and the changing mix toward non-fastener products and larger customers.
- The contribution, integration progress, and eventual contingent consideration related to Mansco.
- Receivables and inventory growth, which increased faster in aggregate than the company’s sales growth over the twelve months ended June 30, 2017.
- Execution and returns from Onsite locations, industrial vending machines, national accounts, and customer service initiatives.
- The effect of higher planned capital expenditures, fuel and steel prices, and floating-rate debt on future cash flow and margins.
- Future share repurchases and dividends relative to debt reduction, acquisitions, and capital-investment needs.
- The ultimate accounting effects of the upcoming revenue and lease standards, including the expected balance-sheet impact of lease adoption.