Fastenal Company: Q3 2013 Form 10-Q Summary
Business Context and Reporting Period
Fastenal distributes industrial and construction supplies, primarily through approximately 2,700 company-owned stores in North America. Key end markets include manufacturing, maintenance and repair operations, and non-residential construction. The filing covers the unaudited three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Financial Performance and Liquidity
| Metric | Three Months 2013 | Three Months 2012 | Nine Months 2013 | Nine Months 2012 |
|---|---|---|---|---|
| Net sales | $858.4 million | $802.6 million | $2.512 billion | $2.376 billion |
| Net sales growth | 7.0% | 10.4% | 5.7% | 14.9% |
| Gross profit | $443.4 million | $414.4 million | $1.308 billion | $1.224 billion |
| Gross margin | 51.7% | 51.6% | 52.1% | 51.5% |
| Operating income | $188.6 million | $175.7 million | $555.5 million | $515.6 million |
| Operating margin | 22.0% | 21.9% | 22.1% | 21.7% |
| Net earnings | $119.4 million | $109.3 million | $349.4 million | $321.8 million |
| Diluted EPS | $0.40 | $0.37 | $1.17 | $1.08 |
- Nine-month operating cash flow was $315.3 million, compared with $289.1 million in 2012. Third-quarter operating cash flow was $101.4 million, or 85.0% of net earnings.
- Capital expenditures were $145.6 million year to date, up from $88.3 million, principally reflecting industrial vending, distribution automation, technology, fleet, and store investments.
- Cash and cash equivalents were $92.2 million at September 30, 2013, versus $79.6 million at December 31, 2012.
- Accounts receivable increased to $453.7 million and inventories to $756.0 million. Operational working capital increased 11.3% year over year to $1.210 billion.
- The company had no borrowings outstanding at quarter-end under its $125 million credit facility; one $29.3 million letter of credit was outstanding. The company temporarily borrowed and repaid $100 million during the first nine months.
- Year-to-date financing cash outflows included $163.2 million of dividends and $9.1 million of share repurchases. The board declared a $0.25 per-share dividend payable November 22, 2013.
Material Changes Versus the Prior Comparable Period
- Sales growth decelerated materially from 14.9% to 5.7% for the first nine months and from 10.4% to 7.0% in the third quarter. On a daily-sales basis, third-quarter growth was 5.3% after adjusting for one additional business day.
- Growth in older stores slowed: nine-month daily sales growth was 4.0% for stores open more than two years, 3.0% for stores open more than five years, and 1.6% for stores open more than ten years.
- Fastener sales growth was only 1.0% in the third quarter, while non-fastener sales grew 8.9%. Fasteners represented 41.7% of third-quarter sales, down from 43.5% in the prior year.
- Manufacturing customer daily sales grew 4.7% in the third quarter, and non-residential construction customer daily sales grew 3.9%, both substantially below 2012 levels.
- Gross margin improved year over year but declined sequentially from 52.2% in the second quarter to 51.7% in the third quarter. Management attributed most of the sequential decline to transaction margin, product mix, competitive pricing, weaker fastener growth, and lower supplier incentive gross profit.
- Operating and administrative expenses were 29.7% of third-quarter sales versus 29.8% in 2012. Occupancy costs increased, driven substantially by industrial vending equipment, utilities, and distribution infrastructure, while selling transportation costs were essentially flat year to date.
- Industrial vending remained a major growth initiative. The company had 32,248 equivalent machines installed at quarter-end, or 39,180 total machines before equivalency adjustments. Sales to customers using vending represented 33.3% of third-quarter sales, compared with 23.2% in 2012.
- Store locations increased to 2,686 from 2,650 a year earlier, while average monthly sales per store rose to approximately $93,000 from $88,000.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expected to open approximately 55 to 60 stores in 2013 and approximately 50 to 70 stores in 2014.
- Management described a normal gross-profit margin range of 51% to 53% and continued to target its long-term “pathway to profit” objective of approximately 23% pretax earnings, supported by store productivity, gross-margin improvement, and expense discipline.
- Fastenal expected to continue aggressive investment in FAST Solutions industrial vending, distribution automation, store inventory, and additional store and district personnel. More than 15,000 vending machines had been signed during the first nine months of 2013.
- Management cited global economic uncertainty, U.S. economic policy uncertainty, weak manufacturing and non-residential construction activity, and adverse weather as factors limiting sales growth.
- Principal risks include economic and end-market weakness, commodity steel and fuel-price volatility, competitive pricing pressure, foreign exchange exposure, difficulty hiring and retaining sales personnel, slower industrial-vending adoption, execution delays in distribution automation, and failure to sustain margin or expense improvements.
- No material litigation matters were considered probable or reasonably estimable. The company reported no material change in previously disclosed risk factors and stated that its disclosure controls were effective.
- Unrecognized tax benefits were $4.7 million, and management did not expect a significant change during the next 12 months. Operating lease residual value guarantees totaled approximately $48.7 million, although management considered funding risk remote.
Important Facts for Investors to Verify
- Whether slower same-store, manufacturing, construction, and fastener sales growth persists or improves.
- Whether gross margins remain within the stated 51% to 53% range as product mix and competitive pricing evolve.
- The return on substantial investments in industrial vending, distribution automation, inventory, and personnel.
- Working-capital efficiency, particularly the growth of receivables and inventories relative to sales.
- Future capital expenditures, dividend policy, share repurchases, and reliance on operating cash flow to fund expansion.
- The effects of steel prices, fuel costs, foreign exchange rates, and broader economic conditions on margins and cash flow.