Fastenal Company: Q2 2012 Form 10-Q Summary
Business Context and Reporting Period
Fastenal is a North American wholesale distributor of industrial and construction supplies, operating approximately 2,600 company-owned stores and serving manufacturing, maintenance, construction, government, agricultural, transportation and other customers. The filing covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. The financial statements are unaudited.
Key Financial Metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Net sales | $804.9 million | $701.7 million | $1,573.8 million | $1,342.3 million |
| Gross profit | $415.2 million | $366.2 million | $809.3 million | $699.6 million |
| Gross margin | 51.6% | 52.2% | 51.4% | 52.1% |
| Operating income | $178.9 million | $150.1 million | $339.9 million | $278.8 million |
| Operating margin | 22.2% | 21.4% | 21.6% | 20.8% |
| Net earnings | $112.3 million | $94.1 million | $212.5 million | $173.7 million |
| Diluted EPS | $0.38 | $0.32 | $0.72 | $0.59 |
- Sales increased 14.7% in the second quarter and 17.2% year to date. Growth was primarily driven by higher unit sales, older-store sales growth and, to a lesser degree, new store openings. Currency movements reduced daily sales growth by 0.6% in the quarter and 0.4% year to date.
- Net earnings increased 19.3% in the second quarter and 22.4% year to date. Effective tax rates were approximately 37.5% in the first half of 2012 versus 37.8% in the prior-year period.
- Operating and administrative expenses were 29.4% of sales in the quarter and 29.8% year to date, compared with 30.8% and 31.3%, respectively, in 2011.
- Net cash provided by operating activities was $58.2 million in the second quarter and $190.4 million year to date, equal to 51.9% and 89.6% of net earnings, respectively.
- Capital expenditures were $51.0 million year to date, versus $56.3 million in 2011. Operating cash flow less capital expenditures was approximately $139.5 million.
- Cash and cash equivalents totaled $185.9 million at June 30, 2012, compared with $117.7 million at December 31, 2011. Marketable securities totaled $27.2 million.
- The company reported no borrowings on its $8 million line of credit during the quarter. The line expired August 4, 2012, and management intended to renew it. The filing does not report other debt balances.
- Accounts receivable were $400.0 million and inventories were $662.7 million at June 30, 2012. Combined operational working capital was $1.063 billion, up 10.0% year over year.
Material Changes Versus the Prior Comparable Period
- Sales growth moderated during the quarter: daily sales growth declined from 21.3% in January to 14.0% in June. Same-store daily sales growth for stores open more than two years was 11.8% in the quarter versus 19.4% in the prior-year quarter.
- Manufacturing customer daily sales growth was 15.8% in the second quarter, down from 18.5% in the 2011 quarter. Non-residential construction customer growth was 12.7%, down from 15.8%.
- Fastener sales represented 45.2% of second-quarter sales, down from 47.9% in 2011; other product lines represented 54.8%, up from 52.1%.
- Gross margin declined year over year but improved sequentially from 51.3% in the first quarter. Management attributed the sequential improvement primarily to transactional margin gains, partly offset by weaker foreign-market selling prices.
- Fastenal expanded its store network to 2,635 locations at quarter-end from 2,558 a year earlier. Average monthly sales per store increased to approximately $89,000 from $80,000.
- FAST Solutions industrial vending continued to expand. Machines installed increased to 13,036 from 3,867 a year earlier, and customers using vending solutions accounted for 20.8% of second-quarter sales versus 10.5% in 2011.
- The company paid $100.5 million of dividends during the first half of 2012, compared with $112.0 million in the prior-year period. No shares were repurchased during the first six months.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected approximately 4% store growth for 2012 and intended to fund expansion with operating cash flow, cash on hand and, to a lesser degree, borrowing capacity.
- Management described a normal gross-margin range of 51% to 53%. It stated that the “pathway to profit” objective could be achieved with average store sales of approximately $100,000 to $110,000 per month, versus the earlier $125,000 target.
- Management remained conservative because of weaker sequential sales trends, a slowing manufacturing market, lower Purchasing Managers Index readings and unfavorable currency effects.
- Key risks include economic weakness, volatility in manufacturing and commercial construction, slower store openings, employee recruitment and retention, pressure on gross margins, fuel costs, steel pricing, foreign currency movements, and inability to pass freight costs to customers.
- Operating lease arrangements include approximately $53.0 million of aggregate vehicle residual-value guarantees. Management considered the likelihood of funding these guarantees remote, other than a $0.4 million disposal reserve recorded at June 30, 2012.
- A California fastener supplier lawsuit alleging an exclusive-distribution violation remained on appeal. Fastenal stated that the alleged $180 million claim was unsupported and that the prospect of a material liability was remote.
- Unrecognized tax benefits were $5.3 million at June 30, 2012; management did not expect a significant change during the following 12 months. Unrecognized stock-option compensation expense was $22.9 million, expected to be recognized over a weighted-average period of 5.08 years.
- On July 11, 2012, the board declared a $0.19-per-share dividend payable August 24, 2012. Future dividends remain subject to board approval and financial needs.
Important Facts for Investors to Verify
- Whether the second-quarter slowdown in monthly and same-store sales continued, particularly in manufacturing and industrial production.
- Whether gross margin remains within management’s 51% to 53% expected range despite product mix, currency, fuel and pricing pressures.
- The renewal status and terms of the $8 million line of credit that expired August 4, 2012.
- Cash conversion and working-capital requirements as receivables and inventories continue to grow.
- The economic return, installation pace and customer retention associated with the rapidly expanding FAST Solutions vending program.
- The status and potential financial impact of the pending supplier litigation appeals.
- Whether the declared quarterly dividend policy remains sustainable under weaker market conditions and continued expansion investment.