FASTENAL CO quarterly report, Q1 FY2014

Fastenal Company — Form 10-Q Summary

Reporting period: Three months ended March 31, 2014; unaudited interim results. Fastenal distributes industrial and construction supplies through approximately 2,700 company-owned stores, strategic account locations, in-plant operations, and industrial vending programs, primarily in North America.

Financial Performance and Position

Metric	Q1 2014	Q1 2013	Change
Net sales	$876.5 million	$806.3 million	8.7% increase
Gross profit	$448.5 million	$421.9 million	6.3% increase
Gross margin	51.2%	52.3%	Down 110 basis points
Operating income	$178.9 million	$174.8 million	2.3% increase
Operating margin	20.4%	21.7%	Down 130 basis points
Net earnings	$111.9 million	$109.0 million	2.6% increase
Diluted EPS	$0.38	$0.37	2.7% increase
Operating cash flow	$143.3 million	$160.2 million	10.6% decrease

Income before taxes was $178.8 million, and the effective tax rate was approximately 37.4%, compared with 37.8% in the prior-year quarter.
Cash and cash equivalents were $89.0 million at March 31, 2014, versus $58.5 million at December 31, 2013.
Total assets were $2.17 billion and stockholders’ equity was $1.80 billion at quarter-end.
Accounts receivable increased 13.0% year over year to $473.2 million; inventories increased 13.3% to $794.0 million. Operational working capital increased 13.2% to $1.27 billion.
Capital expenditures were $32.6 million, compared with $55.5 million in Q1 2013.
Financing cash outflows were $80.8 million, including $74.2 million of dividends and $8.8 million of share repurchases. The company repurchased 200,000 shares at an average price of $44.24.
The company drew and repaid $140.0 million under its revolving credit facility during the quarter. No borrowings were outstanding at March 31, 2014; undrawn letters of credit totaled $34.4 million.

Material Changes Versus the Prior Comparable Period

Sales growth accelerated to 8.7% from 4.9% in the prior-year quarter, primarily from higher unit sales at older stores and, to a lesser extent, new locations.
Daily sales growth was 6.7% in January, 7.7% in February, and 11.6% in March. Severe winter weather constrained January and February activity, while March benefited from normalized weather and favorable Easter timing.
Stores open more than two years posted 7.4% daily sales growth, compared with 4.8% in Q1 2013; stores open more than five years grew 6.6%, compared with 3.6%.
Non-fastener sales grew more rapidly than fastener sales. Fasteners represented 40.2% of sales versus 43.0% a year earlier; other product lines represented 59.8% versus 57.0%.
Gross margin declined because of product mix, competitive pricing, and related transactional factors, although freight utilization and supplier incentives improved sequentially from Q4 2013.
Operating and administrative expenses were 30.8% of sales versus 30.7%. Employee-related expenses increased 6.4%, occupancy expenses 8.6%, and selling transportation costs 17.5%, with winter driving conditions and higher store staffing affecting transportation costs.
Average full-time-equivalent headcount increased 13.8% year over year to 15,040, while quarter-end store locations increased modestly to 2,683 from 2,660.
Operating cash flow declined as higher receivables and inventory absorbed cash, partially offset by higher earnings and favorable income-tax timing.
Industrial vending remained a major growth initiative: 4,025 devices were signed during the quarter, 42,153 devices were installed at quarter-end, and customers using vending represented 37.8% of total sales, versus 27.5% a year earlier.

Guidance, Outlook, Commentary, and Risks

Management expects 2014 gross margin to remain within its normal 51% to 53% range.
The company opened nine stores during the quarter and expects to open approximately 50 to 70 stores during 2014.
Management expects short-term borrowings may continue during the remainder of 2014 and possibly 2015 to support capital expenditures and dividends, despite the company’s strong cash-generating profile.
Management cited improving light and medium manufacturing activity but continued weakness in heavy machinery manufacturing, particularly markets exposed to mining, military, agriculture, and construction.
Key risks include economic weakness, manufacturing and non-residential construction cyclicality, competitive pricing pressure, product and customer mix changes, severe weather, foreign-exchange volatility, fuel and steel prices, inventory and receivables management, personnel execution, and adoption or installation quality of industrial vending.
No litigation matters were considered probable or reasonably possible to have a material adverse outcome. The filing states that there were no material changes to previously disclosed risk factors.
Effective April 15, 2014, the revolving credit commitment increased from $125 million to $170 million; the letter-of-credit subfacility remained $40 million, and one financial covenant was modified.
The board declared a $0.25 per-share dividend payable May 23, 2014. Management stated that quarterly dividends are expected to continue, subject to the board’s future determination and the company’s financial needs.

Important Facts for Investors to Verify

Whether sales momentum following the weather-related Q1 disruption is sustained, particularly in heavy machinery and non-residential construction.
Whether gross margin remains within the stated 51% to 53% range as pricing competition, product mix, steel prices, and supplier incentives change.
Whether the rapid increase in headcount, industrial vending investment, and distribution automation generates sufficient incremental sales and returns.
Working-capital efficiency, especially the growth of receivables and inventories relative to sales and its impact on operating cash flow.
The timing and amount of short-term borrowings, capital expenditures, dividends, and share repurchases.
Execution of the 50-to-70-store opening plan and the revised $170 million credit facility terms and covenants.