01—Abstract
Summary
Summary of the 10-K filed February 9, 2010. Cited figures are marked; the original filing is the authoritative source.
Fastenal's 2009 10-K shows a sharply weaker year driven by the North American industrial and construction downturn.
Net sales fell 17.5% to $1.93 billiona from $2.34 billion, and net earnings dropped 34.1% to $184.4 million, or $1.24 per diluted share, from $279.7 million ($1.88). Gross margin compressed to 50.9% from 52.8%, reflecting steel-driven deflation, aggressive competitive pricing in the first half, and reduced supplier volume rebates. Management cut operating and administrative expenses 12.6% through lower headcount, reduced incentive pay, and a slowdown in new store openings to 2%-5% from the historical 7%-10%, which helped protect profitability in a sharp downturn.
The balance sheet and cash generation remained strong. Operating cash flow was $306.1 millionb, or 166% of net earnings, driven by a $55.8 million (9.9%) reduction in inventory and a lower receivables balance. Capital expenditures fell to $52.5 million from $95.3 million, and Fastenal ended the year with no debt, $164.9 million in cash, and $30.6 million in marketable securities.
Dividends were maintained and raised, with a $0.40c semi-annual dividend declared for early 2010 (up from $0.35 in 2009's first payment), and 1.1 million shares were repurchased in the fourth quarter. Management says the 'Pathway to Profit' strategy is delayed by 24 to 30 months, but it remains intact.
Management expects a return to the 7%-10% store-opening rate in the second half of 2010 and sees daily sales trends improving since the July 2009 trough, with December 2009 daily sales down 8.6% year over year. The company also completed the small Holo-Krome acquisition in December 2009 and disclosed a late-filed, low-materiality supplier exclusivity claim (under $1 milliond in purchases).
02—Key points
Key Highlights
- Net sales declined 17.5% to $1.93 billion in 2009, while net earnings fell 34.1% to $184.4 million ($1.24 diluted EPS) as the industrial and construction downturn hit manufacturing (down 18.8%) and non-residential construction (down 19.4%) customers.
- Gross margin fell 190 basis points to 50.9% due to steel deflation, competitive pricing pressure in the first half of 2009, and reduced supplier volume rebates; management expects margin improvement in 2010.
- Operating and administrative expenses fell 12.6%, with net payroll down 18.3% through lower headcount, reduced incentive pay, and cuts to profit sharing (none paid in 2009 versus $5.2 million in 2008).
- Operating cash flow of $306.1 million (166% of net earnings) was driven by a $55.8 million inventory reduction and lower receivables, and capital expenditures fell 44.9% to $52.5 million; year-end liquidity was strong with no debt and $164.9 million in cash.
- Shareholder returns were maintained: dividends totaled $0.72 per share in 2009, a $0.40 semi-annual dividend was declared for February 2010 (a 14.3% increase over the first 2009 payment), and 1.1 million shares were repurchased at about $37.37 per share.
- Management delayed its 'Pathway to Profit' targets by 24 to 30 months and plans to return store openings to 7%-10% annually in the second half of 2010, with sales-per-store and pre-tax margin goals (to reach $125,000 monthly sales and 23% margin) now pushed out.
- Fastenal's 2,369 stores generated 8% of sales outside the U.S., and the company acquired Holo-Krome socket-cap screw manufacturing assets in December 2009 for $5.0 million cash, with no material expected impact on 2010 sales.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Fastenal Co kept $0.10.
- Revenue$1.93B100.0%
- Cost of revenue−$946.9M49.1%
- Gross profit$983.4M50.9%
- Operating costs−$687.6M35.6%
- Operating income$295.8M15.3%
- Interest, other & tax−$111.4M5.8%
- Net income$184.4M9.6%
Where FY2009 revenue went
$1.93B- Cost of revenue: $946.9M, 49% of revenue
- SG&A: $686.8M, 36% of revenue
- Net income: $184.4M, 9.6% of revenue
- Interest, other & tax: $111.4M, 5.8% of revenue
Kept 9.6% as net incomeNet income $184.4M · 9.6%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 9, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $1.93B$2.34B | −17.5% |
| Cost of Revenue | $946.89M$1.10B | −14.3% |
| Gross Profit | $983.43M$1.24B | −20.4% |
| SG&A Expenses | $686.79M$785.69M | −12.6% |
| Operating Income | $295.79M$450.24M | −34.3% |
| Net Income | $184.36M$279.70M | −34.1% |
| EPS (Basic) | $0.15— | — |
| EPS (Diluted) | $0.15— | — |
| Shares Outstanding (Basic) | 1.19B1.19B | −0.3% |
| Shares Outstanding (Diluted) | 1.19B1.19B | −0.3% |
05—Questions
Frequently Asked Questions
Why did Fastenal's earnings fall so sharply in 2009?
Earnings fell 34.1% because sales dropped 17.5% amid the North American manufacturing and construction slowdown, and gross margin declined 190 basis points to 50.9%. Margin pressure came from steel-price deflation on high-cost inventory bought before the downturn, competitive pricing in the first half, and lower supplier rebates. Operating expense cuts of 12.6% offset part of the decline, but not all of it.
Is Fastenal's balance sheet and dividend safe despite the downturn?
Yes, based on the filing. The company ended 2009 with no debt, $164.9 million in cash, and $30.6 million in marketable securities, and operating cash flow of $306.1 million covered dividends of $106.9 million and capital spending of $52.5 million with room to spare. Management also raised the early-2010 dividend to $0.40 per share, though future payments depend on financial results and board judgment.
When will Fastenal return to its historical store growth and sales trajectory?
Management plans to return to 7%-10% annual store openings in the second half of 2010, after slowing to 2%-5% in 2009. Daily sales have improved sequentially since July 2009, though year-over-year daily sales were still down 8.6% in December 2009. Management says the 'Pathway to Profit' goals of $125,000 average monthly store sales and a 23% pre-tax margin are delayed by 24 to 30 months and cannot be assured even on that revised timeline.
What risks does the filing flag for investors?
Key risks include a prolonged or deeper downturn in manufacturing and commercial construction, further gross margin pressure from price competition or commodity changes, difficulty hiring and retaining outside sales staff, foreign currency exposure (mainly Canadian dollar), and dependence on fuel prices for freight costs. The filing also discloses a February 2010 supplier letter alleging breach of an exclusive distribution arrangement, which management considers remote as a material risk given purchases under $1 million.
06—Continue