Fastenal Company 2015 Q3 Form 10-Q Summary
Business context and reporting period
Fastenal is a North American distributor of industrial and construction supplies, serving primarily manufacturing and non-residential construction customers through approximately 2,600 company-owned stores, national accounts, Onsite locations, and FAST Solutions industrial vending. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
Financial performance and key metrics
| Metric | Q3 2015 | Q3 2014 | Change |
|---|---|---|---|
| Net sales | $995.3 million | $980.8 million | +1.5% |
| Gross profit | $502.2 million | $498.7 million | +0.7% |
| Gross margin | 50.5% | 50.8% | -0.3 percentage points |
| Operating income | $220.0 million | $212.9 million | +3.3% |
| Operating margin | 22.1% | 21.7% | +0.4 percentage points |
| Net earnings | $136.5 million | $133.3 million | +2.4% |
| Diluted EPS | $0.47 | $0.45 | +4.4% |
| Metric | First nine months 2015 | First nine months 2014 | Change |
|---|---|---|---|
| Net sales | $2.946 billion | $2.807 billion | +5.0% |
| Gross profit | $1.488 billion | $1.430 billion | +4.1% |
| Gross margin | 50.5% | 50.9% | -0.4 percentage points |
| Operating income | $649.6 million | $598.6 million | +8.5% |
| Operating margin | 22.0% | 21.3% | +0.7 percentage points |
| Net earnings | $404.5 million | $375.8 million | +7.6% |
| Diluted EPS | $1.38 | $1.26 | +9.5% |
First-nine-month operating cash flow was $402.0 million, or 99.4% of net earnings, versus $332.9 million, or 88.6%, in the prior-year period. Capital expenditures were $119.5 million versus $143.5 million. Net cash used in investing activities was $112.8 million, while net cash used in financing activities was $283.4 million, including $273.5 million of common-stock repurchases and $246.0 million of dividends.
Cash and cash equivalents were $111.8 million at September 30, 2015, compared with $114.5 million at December 31, 2014. Total line-of-credit borrowings were $315.0 million, of which $41.5 million was classified as current and $273.5 million as noncurrent. The company had a $500.0 million unsecured revolving facility expiring March 1, 2018, and was in compliance with its covenants. The effective borrowing rate was approximately 1.1% at quarter-end.
Total assets increased to $2.495 billion from $2.359 billion at year-end 2014. Accounts receivable rose to $537.1 million and inventories to $883.2 million. Stockholders’ equity declined to $1.783 billion, primarily reflecting share repurchases, dividends, and foreign-currency translation losses.
Material changes versus the prior comparable period
- Sales growth decelerated materially: Q3 daily sales growth was 1.5%, compared with 14.3% in Q3 2014; September daily sales declined 0.3% year over year.
- Fastener sales contracted 4.4% in Q3 2015, compared with 9.9% growth in Q3 2014. Non-fastener sales grew 5.9%, down from 17.6%.
- Manufacturing customer daily sales growth slowed to 1.1% in Q3 from 13.7% in the prior-year quarter. Non-residential construction customer sales declined 1.7%, versus 9.3% growth in Q3 2014.
- Gross margin declined because of product and customer mix, including the greater relative contribution of lower-margin large-account business and fastener price deflation. Operating margin improved because operating and administrative expenses were tightly managed.
- Operating and administrative expenses increased only 0.1% in Q3 and declined as a percentage of sales to 28.4% from 29.2%. Employee-related expenses declined 2.4%, and selling transportation costs declined 13.0%, partly due to lower fuel costs.
- The company added 1,554 employees during the last twelve months, including 1,315 store employees, while average full-time-equivalent headcount increased 4.6%.
- FAST Solutions installed devices increased 17.4% year over year to 53,547. Sales to customers using industrial vending represented 42.1% of total sales, although daily sales to those customers grew only 4.8%, down from 21.9% in Q3 2014.
- The company repurchased 600,000 shares during Q3 at an average price of $38.44. Total first-nine-month repurchases were 6.6 million shares for $273.5 million of cash.
- Foreign-currency translation losses increased to $32.4 million for the first nine months, compared with $11.0 million in the prior-year period.
Guidance, outlook, commentary, risks, and unusual items
Management described end markets as choppy and cited a significant slowdown among customers connected directly or geographically to the oil and gas industry, a strong U.S. dollar, weak sequential sales trends, and limited stabilization in the existing customer base. Management also noted that the Canadian business grew approximately 6% in local currency in Q3, down from approximately 10% in Q2.
Management planned to increase store-opening activity in 2016, with a preliminary goal of 60 to 75 new stores, compared with approximately 30 stores expected for 2015. The company opened 13 stores and closed 35 stores during the first nine months of 2015 as it consolidated nearby locations.
Management expects capital expenditures relative to net earnings to moderate after several years of heavy investment in distribution automation and industrial vending. It expects current expansion plans to be funded by operating cash flow, cash on hand, and borrowing capacity. The company expects to continue quarterly dividends, subject to board approval and future financial needs; a $0.28-per-share fourth-quarter 2015 dividend was declared on October 12, 2015.
Key risks include weakness in manufacturing and commercial construction, energy-sector exposure, pricing pressure and steel deflation, foreign-exchange movements, fuel and commodity costs, customer and product mix, inventory and receivables management, industrial-vending adoption and competition, hiring and retention, technology and cybersecurity risks, and the ability to control expenses while expanding capacity.
The filing reports no litigation matters considered probable or reasonably possible to have a material adverse outcome. The company stated that disclosure controls were effective and that no material change occurred in internal control over financial reporting. The company is evaluating the impact and transition method for ASC 606, which was then expected to become effective for Fastenal on January 1, 2018.
Important facts for investors to verify
- Whether weak September sales and declining fastener and construction trends continued or stabilized after the reporting date.
- The sustainability of operating-margin gains as store headcount, vending investments, and occupancy costs increase.
- Debt-funded share repurchases and dividends relative to operating cash flow, capital expenditures, and the $500.0 million credit facility.
- Inventory and accounts-receivable growth, working-capital efficiency, and potential exposure to slower end-market demand.
- The effect of foreign currency, steel-price deflation, and oil-and-gas exposure on sales and gross margin.
- Whether FAST Solutions device growth translates into durable sales and profit growth as customer adoption expands.
- Execution of the proposed 60-to-75-store opening plan in 2016 and the financial effects of store closures and consolidation.
- The eventual accounting and disclosure effects of ASC 606.