Fastenal Company 2016 Form 10-K Summary
Business context and reporting period
Fastenal Company filed its Form 10-K for the fiscal year ended December 31, 2016. The company distributes industrial and construction supplies, primarily through a store-based network, industrial vending machines, Onsite locations, national accounts, and distribution centers. At year-end, Fastenal operated 2,503 stores in 21 countries, employed 19,624 people, and maintained approximately 62,822 industrial vending machines, excluding approximately 15,000 leased lockers that generated no product revenue.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $3.962 billion | $3.869 billion | +2.4% |
| Gross profit | $1.965 billion | $1.949 billion | +0.8% |
| Gross margin | 49.6% | 50.4% | -80 bps |
| Operating income | $795.8 million | $828.8 million | -4.0% |
| Operating margin | 20.1% | 21.4% | -130 bps |
| Earnings before taxes | $789.7 million | $826.0 million | -4.4% |
| Net earnings | $499.5 million | $516.4 million | -3.3% |
| Diluted EPS | $1.73 | $1.77 | -2.3% |
| Operating cash flow | $514.0 million | $546.9 million | -6.0% |
| Net capital expenditures | $182.9 million | $145.2 million | +26.0% |
Fourth-quarter 2016 sales were $947.9 million, net earnings were $114.8 million, and diluted EPS was $0.40. Fourth-quarter gross margin was 49.8%, compared with 49.9% in the prior-year quarter, while operating margin was 19.3%, compared with 19.4%.
Fastener products represented 36.6% of 2016 sales, down from 38.3% in 2015. Non-fastener sales were more resilient, with daily sales growth of approximately 5.0% for the year, while fastener daily sales declined approximately 2.3%. Safety supplies represented 14.9% of sales, up from 13.9%.
At December 31, 2016, cash and cash equivalents were $112.7 million, accounts receivable were $499.7 million, inventories were $993.0 million, and total assets were $2.669 billion. Operational working capital increased $111.1 million, or 8.0%, primarily reflecting higher inventory and receivables.
Total debt was $390.0 million, consisting primarily of $305.0 million drawn under a $700.0 million unsecured revolving credit facility, $75.0 million of senior unsecured notes, and a $10.0 million asset-purchase note. The credit facility matures March 1, 2018, bears interest based on LIBOR plus 0.95%, and the company was in compliance with its covenants. Outstanding letters of credit totaled $36.3 million.
Fastenal paid $346.6 million in dividends and repurchased $59.4 million of common stock in 2016. The annual dividend increased to $1.20 per share from $1.12 in 2015; a quarterly dividend of $0.32 per share was declared in January 2017.
Material changes versus the prior comparable period
- Sales growth slowed to 2.4% from 3.6% in 2015, reflecting continued weakness in industrial production, heavy manufacturing, energy-related markets, and non-residential construction.
- Profitability declined as product and customer mix shifted toward lower-margin non-fasteners and larger accounts. Operating and administrative expenses increased to 29.5% of sales from 29.0%.
- Store count declined by 119 locations to 2,503. Fastenal opened 40 stores but closed or consolidated 144, primarily locations near another Fastenal store and with leases nearing expiration.
- Industrial vending machines increased 13.2% to 62,822, and active Onsite locations increased 51.9% to 401.
- Employee headcount declined 5.4% to 19,624 at year-end, principally through natural attrition and staffing scrutiny in a soft industrial environment.
- Inventory increased $79.7 million, including investment in the CSP 16 store-inventory initiative, Onsite growth, international sales, and year-end product purchases.
- Capital expenditures increased substantially, mainly due to vending equipment associated with a leased-locker program and distribution-center automation.
- Debt increased from $365.0 million to $390.0 million, while interest expense increased from $3.1 million to $6.5 million.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide a specific consolidated revenue or earnings forecast. Fastenal expects to continue opening stores as needed, while emphasizing industrial vending, Onsite locations, national accounts, CSP 16, sales personnel, and distribution automation as principal growth drivers. Management estimated potential markets of approximately 1.7 million industrial vending machines and more than 15,000 potential Onsite customer locations, but cautioned that these estimates may not be achieved.
Management characterized 2016 business conditions as weak but generally stable. Fourth-quarter daily sales growth improved to 2.7%, although management attributed much of the improvement to an easier comparison rather than a clear recovery in demand. Sales to customers using industrial vending grew faster than total company sales, but the rate of growth moderated as vending penetration increased.
Important risks include economic weakness in manufacturing and construction, cyclical heavy-equipment and energy exposure, product and customer mix pressure on gross margin, competitive pricing, foreign currency and sourcing risks, steel and fuel-price volatility, interest-rate exposure, labor availability, cyber-security and information-system disruptions, product liability, dependence on vending equipment and technology suppliers, and execution risk in the vending, Onsite, national-account, and store-optimization strategies.
Future contractual obligations totaled $727.1 million, including $390.0 million of principal debt, $15.7 million of estimated debt interest, and $321.4 million of operating-lease payments. The company reported no litigation matters considered probable or reasonably possible to have a material adverse outcome. The independent auditor issued an unqualified opinion, and management and the auditor concluded that internal control over financial reporting was effective as of December 31, 2016.
The company expects 2017 net capital expenditures of approximately $119.0 million, compared with $182.9 million in 2016. It plans to fund capital needs with operating cash flow, cash on hand, and available borrowing capacity.
Most important facts for investors to verify
- Whether the industrial economy, fastener demand, heavy manufacturing, and non-residential construction recover or remain weak.
- Whether vending and Onsite growth produces sufficient incremental revenue and profit to offset higher occupancy, technology, inventory, and capital costs.
- Whether gross-margin pressure from non-fasteners and larger customers continues.
- Inventory productivity, receivables collection, and progress toward management’s targeted 3.0:1 annual sales-to-accounts-receivable-and-inventory ratio; the ratio was 2.7:1 at year-end.
- Debt reduction and refinancing plans before the March 2018 credit-facility maturity, including sensitivity to higher LIBOR.
- Execution of the CSP 16 inventory expansion and the effect on working capital and cash conversion.
- Continuation of dividends and share repurchases given the company’s high shareholder-return payout relative to net earnings.
- Implementation effects of new accounting standards, particularly revenue recognition and lease accounting, which were expected to materially increase reported lease assets and liabilities.