Fastenal Company — FY2012 Form 10-K Summary
Business context and reporting period
Fastenal distributes industrial and construction supplies through 2,652 stores, in-plant locations, distribution centers, manufacturing operations, and its FAST Solutions industrial-vending platform. The filing covers the fiscal year ended December 31, 2012, with comparisons to 2011 and 2010. The company had 15,145 employees and 14 distribution centers at year-end.
Operations remained primarily North American. The United States generated $2.798 billion of revenue, Canada $218.6 million, and other foreign countries $116.9 million. No customer represented 10% or more of consolidated sales.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $3.134 billion | $2.767 billion | 13.3% |
| Gross profit | $1.615 billion | $1.434 billion | 12.6% |
| Gross margin | 51.5% | 51.8% | Down 30 bps |
| Operating income | $673.7 million | $574.6 million | 17.2% |
| Operating margin | 21.5% | 20.8% | Up 70 bps |
| Net earnings | $420.5 million | $357.9 million | 17.5% |
| Diluted EPS | $1.42 | $1.21 | 17.4% |
| Effective tax rate | 37.6% | 37.8% | Down 20 bps |
| Operating cash flow | $396.3 million | $268.5 million | 47.6% |
| Capital expenditures | $133.9 million | $116.5 million | 14.9% |
| Free cash flow | Approximately $262.4 million | Approximately $152.0 million | Higher |
Fourth-quarter net sales were $757.2 million, gross profit was $390.8 million, pre-tax earnings were $158.2 million, net earnings were $98.7 million, and basic EPS was $0.33.
At December 31, 2012, cash and cash equivalents were $79.6 million, marketable securities were $0.4 million, accounts receivable were $372.2 million, and inventories were $715.4 million. Total assets were $1.816 billion and stockholders’ equity was $1.560 billion.
The filing reports no loans outstanding under the new $125 million unsecured revolving credit facility at year-end. One letter of credit had an undrawn balance of $29.25 million. The company also reported approximately $3.2 million of industrial revenue bond obligations, netted in the financial statements under a right of offset.
Material changes versus prior comparable period
- Sales growth decelerated to 13.3% from 21.9% in 2011. Growth slowed during the year, particularly in the fourth quarter, amid weaker manufacturing and non-residential construction conditions.
- Fastener sales declined to 44.0% of total sales from 46.9%; non-fastener products increased to 56.0% from 53.1%. Safety products, cutting tools, welding supplies, and other product categories contributed to the mix shift.
- Gross margin declined modestly, but operating margin improved because operating and administrative expenses fell to 30.0% of sales from 31.1%. Expense leverage reflected disciplined cost management despite increased employee-related and industrial-vending costs.
- Net earnings grew faster than sales, rising 17.5%, primarily because of operating expense management and a slightly lower effective tax rate.
- Operating cash flow increased substantially to $396.3 million, although accounts receivable and inventory increased $33.6 million and $69.2 million, respectively. The annual sales-to-accounts-receivable-and-inventory ratio improved to 2.9:1 from 2.8:1.
- Capital spending increased, driven principally by industrial-vending equipment, distribution infrastructure, and the Winona distribution-center expansion.
- FAST Solutions expanded materially: 20,162 vending-machine contracts were signed during 2012, cumulative installed machines reached 21,095, and sales to customers using vending machines represented 25.8% of total sales in the fourth quarter.
- The company opened 80 stores during 2012, ending with 2,652 locations versus 2,585 in 2011. Store openings were approximately 3% of the beginning store base, compared with approximately 5% in 2011.
- Cash dividends paid increased to $367.3 million from $191.7 million, including a $0.50 per-share supplemental dividend. No shares were repurchased.
Guidance, outlook, commentary, risks, and unusual items
- Management expected to open 65 to 80 stores in 2013, or approximately 2.5% to 3.0% growth.
- Management estimated 2013 net capital expenditures of approximately $186.5 million, with the largest component related to manufacturing, warehouse, packaging, industrial-vending equipment, and facilities.
- Management established an internal goal of signing 30,000 industrial-vending machines in 2013, an aggressive increase from 20,162 machines signed in 2012.
- The “pathway to profit” strategy targets a 23% pre-tax earnings margin. Management indicated that structural cost reductions could allow this target with average monthly store sales of approximately $100,000 to $110,000, rather than the originally targeted $125,000. Achievement was expected potentially by 2013, but was not assured.
- The company expects a normal gross-margin range of 51% to 53%. Margin remains sensitive to product and customer mix, pricing pressure, steel and other commodity costs, fuel costs, vendor allowances, and freight utilization.
- Management expected smaller quarterly dividends initially in 2013 after the large late-2012 payout. A $0.10-per-share quarterly dividend was declared for payment on March 1, 2013; future dividends depend on economic conditions, free cash flow, tax treatment, and board decisions.
- Major risks include economic weakness in manufacturing and commercial construction, slower same-store sales, execution of the pathway-to-profit strategy, new-store profitability, employee recruitment and retention, competition and pricing pressure, foreign-currency exposure, steel and energy costs, supply-chain disruptions, information-system or cybersecurity failures, product liability, and political or regulatory uncertainty.
- The company disclosed $259.4 million of future facility, equipment, and vehicle lease commitments, including $106.9 million due in 2013.
- No material litigation matters were considered probable or reasonably estimable as of December 31, 2012. The company reported no material asset impairments in the three-year period presented.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2012.
Important facts for investors to verify
- Whether the late-2012 slowdown in manufacturing and non-residential construction continued into 2013, particularly for fasteners and mature stores.
- Progress toward the 2013 goal of 30,000 industrial-vending-machine signings and the profitability and capital intensity of the FAST Solutions rollout.
- Whether operating expense leverage can offset slower sales growth, higher employee costs, fuel prices, and vending-related occupancy expenses.
- Inventory and receivables growth, the sales-to-accounts-receivable-and-inventory ratio, and conversion of earnings into free cash flow.
- Actual 2013 capital expenditures versus the $186.5 million estimate and the company’s use of the $125 million revolving credit facility.
- Dividend policy after the $1.24-per-share 2012 payout, including the ability to sustain or restore quarterly dividends.
- Execution of the 65-to-80-store opening plan and the time required for new stores to reach profitability.
- Exposure to foreign exchange, steel pricing, fuel costs, competitive pricing, cybersecurity, product liability, and potential operating-lease accounting changes.