Fastenal Company 2010 Form 10-K Summary
Business context and reporting period
Fastenal distributes industrial and construction supplies through company-owned or leased stores, primarily serving manufacturing and non-residential construction customers. The filing covers the fiscal year ended December 31, 2010, with quarterly comparisons to 2009 and annual comparisons to 2008. At year-end, Fastenal operated 2,490 stores, 14 distribution centers, and employed 13,285 people.
- Approximately 50% of business historically related to manufacturing and 20% to 25% to non-residential construction.
- United States revenue was $2,067.9 million, Canada revenue was $145.1 million, and other foreign revenue was $56.5 million.
- No customer represented more than 10% of consolidated sales, and no supplier represented more than 5% of purchases.
Financial performance and key metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $2,269.5 million | $1,930.3 million | 17.6% |
| Gross profit | $1,174.8 million | $983.4 million | 19.5% |
| Gross margin | 51.8% | 50.9% | Up 0.9 percentage points |
| Operating income | $429.7 million | $295.8 million | 45.3% |
| Operating margin | 19.0% | 15.3% | Up 3.7 percentage points |
| Earnings before taxes | $430.6 million | $297.5 million | 44.8% |
| Net earnings | $265.4 million | $184.4 million | 43.9% |
| Basic and diluted EPS | $1.80 | $1.24 | 45.2% |
| Cash flow from operations | $240.5 million | $306.1 million | Down $65.6 million |
| Net capital expenditures | $69.1 million | $47.7 million | Up $21.5 million |
| Dividends paid | $182.8 million | $106.9 million | Up $75.9 million |
Fourth-quarter 2010 net sales were $573.8 million, gross profit was $298.6 million, pretax earnings were $107.1 million, net earnings were $65.2 million, and basic EPS was $0.44. Fourth-quarter gross margin was 52.0%, compared with 49.9% in the fourth quarter of 2009.
- Cash and cash equivalents were $143.7 million, and current marketable securities were $26.1 million at year-end.
- Trade receivables were $270.1 million and inventories were $557.4 million, compared with $214.2 million and $508.4 million, respectively, in 2009.
- Total assets were $1,468.3 million and stockholders’ equity was $1,282.5 million.
- No borrowings were outstanding under the company’s $8.0 million line of credit. The filing presents no material conventional long-term debt; an industrial revenue bond balance of $9.7 million was netted under a right-of-offset arrangement.
- The annual sales-to-accounts-receivable-and-inventory ratio was 2.7:1 at both year-end 2010 and 2009, below management’s goal of greater than 3.0:1.
Material changes versus prior comparable periods
- Sales recovered sharply from the 2009 recessionary decline, driven mainly by higher unit volumes at older stores. Stores open more than two years posted 14.6% daily-sales growth in 2010 versus a 19.5% decline in 2009.
- Manufacturing-customer daily sales increased 22.4% for 2010, while non-residential construction sales declined 0.3% for the year but improved to 10.3% growth in the fourth quarter.
- Gross margin recovered from 50.9% to 51.8% as deflationary pressure eased and vendor incentives and organizational purchasing benefits improved. The company noted that stronger industrial-production sales, which carry lower gross margins, constrained margin improvement in the second half.
- Operating and administrative expenses declined to 32.8% of sales from 35.6%, producing substantial operating leverage. Payroll costs increased 16.7%, while health-care costs declined 9.0% from the unusually high 2009 level.
- Store count increased 5.1% during 2010 to 2,490 locations; 127 stores were opened and seven were closed. Store personnel FTEs increased 8.6% year over year in the fourth quarter, and non-store selling personnel FTEs increased 19.3%.
- Operating cash flow declined despite higher earnings because receivables increased 26.1% and inventories increased 9.6% to support sales growth, larger accounts, international business, and new-store expansion.
- Annual dividends increased to $1.24 per share from $0.72. No shares were repurchased in 2010, compared with $41.1 million of repurchases in 2009.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected to open 150 to 200 stores in 2011, representing approximately 6% to 8% growth, and estimated 2011 net capital expenditures of $86.5 million.
- Under the “pathway to profit” strategy, management believed its 23% pretax-margin objective could be achieved by 2013 with average store sales of approximately $100,000 to $110,000 per month, rather than the previously stated $125,000 target.
- Management expected to fund expansion through operating cash flow, available cash, and, if necessary, borrowing capacity. No material capital-expenditure commitments were outstanding at year-end, although approximately $36 million of property and equipment commitments existed.
- New stores generally require 10 to 12 months to reach their first profitable month, and profitability may take longer in weak economic conditions. Of 29 stores opened in the first quarter of 2010, 14 were profitable in the fourth quarter.
- Principal risks include economic weakness in manufacturing and construction, competitive pricing pressure, commodity and fuel-cost volatility, inability to recruit qualified sales personnel, execution risk in the pathway-to-profit strategy, inventory and working-capital inefficiency, foreign currency exposure, supply-chain disruptions, information-system failures, and foreign-market risks.
- Fastenal settled a Department of Justice dispute concerning a discontinued GSA contract for $6.25 million in the fourth quarter. The company continued to believe it had complied with the contract in all material respects.
- A California supplier lawsuit alleged damages of $180 million relating to an alleged exclusive distribution arrangement. Fastenal characterized the potential for material liability as remote, but stated that the case remained at an early stage.
- The company reported effective disclosure controls and effective internal control over financial reporting. The independent auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether the strong 2010 recovery in older-store sales and manufacturing demand is sustainable.
- Progress toward improving inventory and receivables efficiency above the 3.0:1 annual sales ratio goal.
- Execution of the 150-to-200-store 2011 expansion plan and the profitability ramp of new locations.
- Whether gross-margin improvement can continue despite lower-margin industrial-production growth, competitive pricing, and commodity-cost changes.
- Cash conversion, capital-expenditure requirements, dividend sustainability, and the effect of higher working-capital needs on liquidity.
- Resolution and final financial impact of the supplier litigation and any remaining governmental or legal contingencies.
- Whether management’s revised pathway-to-profit target of 23% pretax earnings with $100,000 to $110,000 average monthly store sales is achieved on the stated timetable.