01—Abstract
Summary
Summary of the 10-K filed February 5, 2015. Cited figures are marked; the original filing is the authoritative source.
Fastenal (FAST) closed 2014 with record results: net sales rose 12.2% to $3.73 billiona, net earnings grew 10.1% to $494 million, and diluted EPS reached $1.66.
Growth re-accelerated through the back half of the year, with daily sales growth in the double digits from March onward, driven by store-level selling energy, the expansion of store labor hours and district/regional leadership, and FAST Solutions industrial vending. Vending is becoming a meaningful growth engine: 46,855 devices were installed at year end, up from 40,775, and sales to vending customers grew about 20%b. Margins were the soft spot.
Gross profit as a percentage of sales fell to 50.8%c from 51.7%, driven by customer and product mix, a deliberate push toward larger stores (the 'Pathway to Profit' strategy), and seasonal Q4 pressure. Operating and administrative expenses improved only slightly as a share of sales (29.8% vs. 30.3%), so pre-tax margin slipped to 21.1% from 21.5%. Management acknowledged that miscellaneous expenses rose and that the cost discipline it expects going forward was lacking for much of the year.
Capital spending was heavy but declining from its 2013 peak, and free cash flow rose 44.6% to $310 milliond. Operating cash flow was 101% of net earnings. The company remains conservatively financed but is taking on more leverage: it drew $90 million on its credit facility, which it expects to repay within twelve months, and it has expanded the facility to $230 million.
Management also closed 73 stores in 2014 (per the store table; the text also describes roughly 52 closures in the second half) to consolidate locations, and it increased its buyback authorization to 2 million shares in January 2015. Investors should weigh the strong cash generation and growth runway against the margin pressure from store-size and mix shifts, rising operating costs, and the rising capital intensity of vending and automation.
02—Key points
Key Highlights
- Net sales rose 12.2% to $3.73 billion (vs. $3.33 billion in 2013), with daily sales growth reaching double digits from March 2014 onward and hitting 17.4% in December.
- Gross profit margin declined to 50.8% from 51.7%, reflecting mix shifts toward larger customers and non-fastener products; fasteners fell to about 40% of sales.
- Net earnings grew 10.1% to $494 million; diluted EPS was $1.66, up 9.9%, and pre-tax margin eased to 21.1% from 21.5%.
- FAST Solutions industrial vending expanded to 46,855 installed devices (up from 40,775), with 16,342 devices signed in 2014 and vending customers' sales growing about 20%.
- Free cash flow rose 44.6% to $310 million, with operating cash flow at 101% of net earnings, while net capex fell to $184 million from $202 million as distribution automation projects were completed.
- Shareholder returns increased: dividends paid were $1.00 per share (up 25%), $52.9 million went to buybacks (1.2 million shares), and the board raised the repurchase authorization to 2 million shares in January 2015.
- Management closed 73 stores in 2014 and opened 24, ending with 2,637 locations. It sees North American potential for about 3,500 stores and plans 20-30 openings in 2015.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Fastenal Co kept $0.13.
- Revenue$3.73B100.0%
- Cost of revenue−$1.84B49.2%
- Gross profit$1.90B50.8%
- Operating costs−$1.11B29.7%
- Operating income$787.6M21.1%
- Interest, other & tax−$293.4M7.9%
- Net income$494.1M13.2%
Where FY2014 revenue went
$3.73B- Cost of revenue: $1.84B, 49% of revenue
- SG&A: $1.11B, 30% of revenue
- Net income: $494.1M, 13% of revenue
- Interest, other & tax: $293.4M, 7.9% of revenue
Kept 13% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 5, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $3.73B$3.33B | +12.2% |
| Cost of Revenue | $1.84B$1.61B | +14.3% |
| Gross Profit | $1.90B$1.72B | +10.3% |
| SG&A Expenses | $1.11B$1.01B | +10.3% |
| Operating Income | $787.59M$712.66M | +10.5% |
| Interest Expense | $915K$113K | +709.7% |
| Net Income | $494.15M$448.64M | +10.1% |
| EPS (Basic) | $0.42$0.38 | +10.6% |
| EPS (Diluted) | $0.41$0.38 | +9.9% |
| Shares Outstanding (Basic) | 1.19B1.19B | −0.1% |
| Shares Outstanding (Diluted) | 1.19B1.19B | −0.1% |
05—Questions
Frequently Asked Questions
Why did Fastenal's pre-tax margin decline in 2014 even though sales grew strongly?
Gross margin fell 90 basis points to 50.8%, driven by product and customer mix (fewer fasteners, larger customers in bigger stores) and seasonal Q4 pressure. Operating and administrative expenses improved only marginally as a percentage of sales, from 30.3% to 29.8%, because management added store labor hours, district and regional leaders, and experienced rising miscellaneous expenses. Together these pushed pre-tax margin to 21.1% from 21.5%.
How significant is FAST Solutions (industrial vending) to the business?
It is a growing share of the business. Installed devices rose to 46,855 at year end (about 34,529 machine equivalents), and roughly 39% of December 2014 net sales came from customers using vending solutions, up from about 37% a year earlier. Management describes vending as an extension of the store network and a first-mover advantage, though it also carries rising occupancy costs and capital expenditure.
Is Fastenal's balance sheet still conservative after the 2014 changes?
Largely yes. The company ended the year with $114 million in cash and a $90 million drawn balance on its $230 million unsecured revolver, which it intends to repay within twelve months. Equity was $1.9 billion against total assets of $2.36 billion. Inventory and receivables grew about 11% and the sales-to-AR-and-inventory ratio stayed at 2.8:1 versus a 3.0:1 target, so working-capital efficiency remains a watch item.
What is the outlook for store expansion and capital spending in 2015?
Management expects to open 20 to 30 stores in 2015, a rate similar to 2014's roughly 1% growth, and estimates 2015 net capital expenditures at about $154.5 million, down from $183.7 million in 2014. Growth is expected to come mainly from other drivers, including labor hours (planned to rise 10% to 15%), vending, national accounts, and government sales, rather than from store count.
What are the main risks highlighted in the filing?
Key risks include an economic slowdown in manufacturing and non-residential construction, continued gross margin pressure from the pathway-to-profit strategy and customer mix, currency exposure mainly to the Canadian dollar, competition from large distributors and online retailers, supplier concentration in foreign sourcing (China, Taiwan, South Korea, Mexico), cyber-security incidents, and the risk that the 3,500-store market potential estimate proves too optimistic. The company also notes that its vending advantage could be eroded by competitors.
06—Continue