Fastenal Company 2018 Form 10-K Summary
Business Context and Reporting Period
Fastenal Company is a wholesale distributor of industrial and construction supplies, serving primarily manufacturing and non-residential construction customers. The filing covers the fiscal year ended December 31, 2018, with comparative results for 2017 and 2016. The company operated 3,121 in-market locations in 26 countries, including 2,227 public branches and 894 Onsite locations, and employed 21,644 people at year-end.
Fastenal’s principal growth channels were national accounts, Onsite locations, industrial vending, Fastenal Managed Inventory, and digital solutions. National accounts represented 51.2% of 2018 sales, compared with 48.7% in 2017.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $4,965.1 million | $4,390.5 million | 13.1% increase |
| Gross profit | $2,398.9 million | $2,163.6 million | 10.9% increase |
| Gross margin | 48.3% | 49.3% | Down 100 basis points |
| Operating income | $999.2 million | $881.8 million | 13.3% increase |
| Operating margin | 20.1% | 20.1% | Flat |
| Net earnings | $751.9 million | $578.6 million | 29.9% increase |
| Diluted EPS | $2.62 | $2.01 | 30.5% increase |
| Effective tax rate | 23.8% | 33.7% | Down 990 basis points |
| Operating cash flow | $674.2 million | $585.2 million | 15.2% increase |
| Net capital expenditures | $166.8 million | $112.5 million | 48.3% increase |
| Cash and equivalents | $167.2 million | $116.9 million | 43.0% increase |
| Total debt | $500.0 million | $415.0 million | $85.0 million increase |
Fourth-quarter 2018 net sales were $1,231.6 million, gross profit was $587.8 million, net earnings were $168.8 million, and diluted EPS was $0.59. Fourth-quarter gross margin was 47.7%.
Year-end current assets were $2,316.2 million versus current liabilities of $437.4 million. Accounts receivable increased to $714.3 million and inventories increased to $1,278.7 million. Operating cash flow represented 89.7% of net earnings, compared with 101.1% in 2017.
Debt consisted of $365.0 million outstanding under a $700.0 million unsecured revolving credit facility and $135.0 million of fixed-rate senior notes. The company was in compliance with its debt covenants. The revolving facility matures November 30, 2023, and carries a rate based on LIBOR plus 0.95%; the weighted rate at year-end was approximately 3.5%.
Material Changes Versus Prior Comparable Period
- Sales growth accelerated, supported by higher unit volumes, stronger manufacturing and construction demand, selective pricing increases, and continued growth in strategic channels.
- Fastener daily sales increased 11.2%, while non-fastener daily sales increased 14.7%. Fasteners declined to 34.9% of sales from 35.6%, while safety supplies increased to 17.2% from 16.3%.
- Gross margin declined because of customer and product mix, faster growth in lower-margin national account and Onsite business, higher freight and fuel costs, and product cost inflation that outpaced pricing actions.
- Operating margin remained at 20.1% because operating and administrative expenses declined to 28.2% of sales from 29.2%, reflecting operating leverage.
- Net earnings benefited materially from the Tax Cuts and Jobs Act. Excluding the Tax Act’s impact, management reported 2018 net earnings of $625.2 million, or $2.18 diluted EPS, representing increases of 12.8% and 13.3%, respectively, versus 2017 on the comparable basis.
- Onsite locations increased 47.8% to 894, while public branches declined 6.5% to 2,227. The company opened 11 branches, closed 157, and converted 10 branches to non-public locations.
- Product-revenue industrial vending devices increased 13.6% to 81,137. The company signed 22,073 devices in 2018, versus 19,355 in 2017.
- Accounts receivable and inventories increased 17.5% and 17.0%, respectively. Inventory included approximately $12.0 million of additional product accelerated into the United States ahead of potential tariffs.
- Dividends paid increased to $441.9 million from $369.1 million, and share repurchases increased to $103.0 million from $82.6 million.
Guidance, Outlook, Risks, and Unusual Items
- Management anticipated signing 375 to 400 new Onsite locations and 23,000 to 25,000 new industrial vending devices in 2019.
- Expected 2019 net capital expenditures were $195.0 million to $225.0 million, primarily for distribution hub capacity, vending devices, and vehicles.
- Construction began on new distribution centers in Washington and Mississippi, expected to be completed in the fourth and third quarters of 2019, respectively.
- Trade tariffs, particularly on products sourced from China, could increase product costs, disrupt sourcing, reduce margins, or affect customer demand. The 2018 tariff impact was not material, but the ultimate effect was uncertain at filing.
- Key operating risks include cyclical exposure to manufacturing and construction, competitive pricing pressure, product and customer mix deterioration, transportation and commodity cost inflation, foreign currency movements, labor availability, cybersecurity and information-system disruptions, and dependence on selected vending equipment and technology suppliers.
- The company had approximately $118.4 million of cash and cash equivalents held by non-U.S. subsidiaries and approximately $248.0 million of undistributed foreign earnings treated as permanently reinvested.
- Operating lease commitments totaled $309.5 million, including $124.1 million due in 2019. The company expected adoption of the new lease standard on January 1, 2019 to increase both assets and liabilities by approximately $250.0 million.
- No litigation matters were considered probable or reasonably possible to have a material adverse outcome as of December 31, 2018. The independent auditor reported unqualified opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Whether sales growth from Onsite, vending, national accounts, and digital channels can offset the continuing decline in traditional branches without further margin erosion.
- Whether pricing actions can fully recover product, freight, fuel, tariff, and labor cost inflation.
- The sustainability of the 2018 tax-rate benefit and the comparability of future earnings after Tax Act effects normalize.
- Whether working-capital growth, particularly the increase in receivables and inventories, converts into cash at historical rates.
- The effect of higher capital expenditures, debt balances, floating-rate borrowing, dividends, and share repurchases on liquidity and financial flexibility.
- Progress and final costs for the Washington and Mississippi distribution centers and the expected balance-sheet impact of lease accounting adoption.