Fastenal Company — Q2 2009 Form 10-Q Summary
Business context and reporting period
Fastenal distributes industrial and construction supplies through more than 2,300 company-owned stores, primarily serving manufacturing and construction customers in North America. This unaudited Form 10-Q covers the three and six months ended June 30, 2009, with comparisons to the corresponding 2008 periods.
Key financial metrics
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net sales | $474.9 million | $604.2 million | $964.2 million | $1,170.4 million |
| Gross profit | $242.5 million | $317.4 million | $501.2 million | $614.0 million |
| Gross margin | 51.1% | 52.5% | 52.0% | 52.5% |
| Operating income | $69.9 million | $123.3 million | $148.3 million | $233.3 million |
| Operating margin | 14.7% | 20.4% | 15.4% | 19.9% |
| Net earnings | $43.5 million | $76.2 million | $92.2 million | $144.3 million |
| Diluted EPS | $0.29 | $0.51 | $0.62 | $0.97 |
- Six-month sales declined 17.6% and second-quarter sales declined 21.4% year over year. Net earnings declined 36.1% for the six months and 42.8% for the quarter.
- Manufacturing sales contracted approximately 28% in the second quarter, while non-residential construction sales contracted approximately 23%.
- Operating cash flow was $167.6 million in the first six months, up from $114.7 million in 2008, or 181.7% of net earnings versus 79.5%.
- Capital expenditures were $32.6 million, compared with $51.1 million in the prior-year period. Management expected full-year 2009 capital expenditures of approximately $65 million.
- Cash and cash equivalents totaled $173.7 million at June 30, 2009, compared with $85.9 million at December 31, 2008. Total current assets were $989.0 million versus current liabilities of $128.0 million.
- The filing reports no borrowings outstanding under the company’s $8 million line of credit. The balance sheet shows no material debt.
- Accounts receivable were $228.3 million and inventories were $519.1 million at June 30, 2009, compared with $244.9 million and $564.2 million, respectively, at December 31, 2008.
- Dividends paid during the first half totaled $52.0 million, or $0.35 per share. A $0.37 per share dividend was declared July 10, 2009, for payment in the third quarter.
Material changes versus the prior comparable period
- Daily sales for stores open more than two years declined 24.2% in Q2 2009 versus growth of 12.3% in Q2 2008. June 2009 daily sales declined 22.5% year over year.
- Gross margin fell 140 basis points in the quarter and 50 basis points for the first half. Deflationary selling prices, higher-cost inventory purchased in 2008, competitive pricing pressure, and lower vendor volume allowances reduced margins.
- Operating and administrative expenses fell 11.2% year over year in Q2, aided by lower commissions, bonuses, overtime, temporary labor, profit sharing, and fuel costs. Payroll costs declined 18.8%.
- Store count increased 3.4% year over year to 2,350, while average FTE headcount declined 8.8% to 10,421. Store personnel FTE declined 9.2% and distribution/manufacturing FTE declined 13.5%.
- Management slowed 2009 store openings to a 2%–5% range and halted headcount additions except for new or growing stores. It intended to stabilize headcount and potentially resume a 7%–10% annual store-opening range beginning in January 2010, assuming economic stability.
Outlook, risks, contingencies, and unusual items
- Management described the economy as substantially weakening, particularly in industrial production and non-residential construction, while noting sequential improvement in manufacturing daily sales during May and June.
- Key risks include a prolonged economic downturn, further sales declines, difficulty matching inventory purchases to demand, commodity steel and fuel-price changes, foreign-currency movements, and pressure on cash flow and margins.
- The company had approximately $7.3 million of liabilities for unrecognized tax benefits and did not expect a significant change during the following 12 months.
- Vehicle operating leases included approximately $15.5 million of aggregate residual-value guarantees. Management considered funding under the guarantees unlikely, except for a $2.2 million loss-on-disposal reserve.
- A proposed settlement of an employee classification and overtime lawsuit remained subject to court approval. Fastenal agreed to pay $10 million, with payment expected during the second half of 2009; the related expense was recorded in Q3 2008.
- Fastenal authorized repurchases of up to 2 million shares on July 10, 2009, replacing prior authorization. No shares were repurchased during the first half.
- Management stated that disclosure controls were effective and that no material change had occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether manufacturing and construction demand stabilized or deteriorated after June 30, 2009.
- Whether gross-margin pressure from deflation, competitive pricing, and reduced vendor allowances continued.
- Progress toward inventory reduction and the target annual-sales-to-accounts-receivable-and-inventory ratio above 3.0:1.
- Actual 2009 capital expenditures, store openings, headcount levels, and timing of any return to normal expansion rates.
- Court approval and payment status of the $10 million class-action settlement.
- Execution of the $0.37 per share dividend and the newly authorized share-repurchase program.