01—Abstract
Summary
Summary of the 10-K filed February 5, 2016. Cited figures are marked; the original filing is the authoritative source.
Fastenal's FY2015 10-K shows a year of slowing growth and margin pressure, even as the company kept investing in its store-based model.
Net sales rose 3.6% to $3.87 billiona, but daily sales growth decelerated sharply through the year, turning negative by late 2015 as oil and gas customers pulled back and the weakness spread to manufacturing and non-residential construction. Net earnings grew 4.5% to $516 million and diluted EPS rose 6.6% to $1.77, helped by operating expense discipline and a 7.1 million-share buyback that reduced the share count. Gross margin fell to 50.4% from 50.8% on customer and product mix shifts and a weak fourth quarter, while operating and administrative expenses improved to 29.0% of sales from 29.8%, leaving operating margin roughly flat at 21.4%.
Management invested through the downturn, adding 2,329 employees (up 12.6%), signing 82 Onsite locations, growing industrial vending to 55,510 devices (up 18.5%), and converting about 800 stores to the CSP 16 same-day inventory format. Store openings were modest, with 41 opened and 50 closed, leaving 2,622 stores at year end. Capital allocation shifted toward shareholder returns: total dividends and buybacks reached $620 millionb, or 120% of net earnings, funded partly by $260 million of net borrowings.
The year-end balance sheet still looks sound, with total debt of $365 millionc against $1.8 billion of equity and operating cash flow of $547 million. For investors, the key questions are whether the sales slowdown reflects a cyclical trough or a structural shift in demand, and whether the rising headcount and inventory investment (CSP 16) will drive returns once industrial activity recovers. The company is also carrying higher leverage to fund buybacks at a time when its gross margin is under pressure, so near-term earnings sensitivity to volume is elevated.
02—Key points
Key Highlights
- Net sales rose 3.6% to $3,869.2 million, but daily sales growth slowed from double digits in early 2015 to negative readings in September through December, with four negative months to close the year.
- Diluted EPS increased 6.6% to $1.77 on net earnings of $516.4 million, supported by a 1.8% lower diluted share count after buying back 7.1 million shares for $293 million.
- Gross profit margin declined to 50.4% from 50.8% due to customer and product mix shifts and a squeeze on discretionary spending in Q4, which drove Q4 gross margin to 49.9%.
- Operating and administrative expenses improved to 29.0% of net sales from 29.8%, holding operating margin flat at 21.4% despite a 12.6% increase in total headcount.
- Total returns to shareholders reached $620 million (120% of net earnings), with dividends of $1.12 per share and $337 million in buybacks over six quarters, partly funded by $350 million drawn on the $700 million revolving credit facility.
- Industrial vending installed base grew 18.5% to 55,510 devices, and 43.9% of net sales came from customers using vending, though fastener sales to vending customers contracted in Q4.
- Management plans 60 to 75 new stores in 2016 and a goal of 200 new Onsite locations, while the company is also rolling out CSP 16 inventory expansion to about 800 stores.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Fastenal Co kept $0.13.
- Revenue$3.87B100.0%
- Cost of revenue−$1.92B49.6%
- Gross profit$1.95B50.4%
- Operating costs−$1.12B28.9%
- Operating income$828.8M21.4%
- Interest, other & tax−$312.4M8.1%
- Net income$516.4M13.3%
Where FY2015 revenue went
$3.87B- Cost of revenue: $1.92B, 50% of revenue
- SG&A: $1.12B, 29% of revenue
- Net income: $516.4M, 13% of revenue
- Interest, other & tax: $312.4M, 8.1% of revenue
Kept 13% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 5, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $3.87B$3.73B | +3.6% |
| Cost of Revenue | $1.92B$1.84B | +4.6% |
| Gross Profit | $1.95B$1.90B | +2.7% |
| SG&A Expenses | $1.12B$1.11B | +1.0% |
| Operating Income | $828.80M$787.59M | +5.2% |
| Interest Expense | $3.10M$915K | +238.8% |
| Net Income | $516.40M$494.15M | +4.5% |
| EPS (Basic) | $0.44$0.42 | +6.0% |
| EPS (Diluted) | $0.44$0.41 | +6.6% |
| Shares Outstanding (Basic) | 1.17B1.19B | −1.7% |
| Shares Outstanding (Diluted) | 1.17B1.19B | −1.8% |
05—Questions
Frequently Asked Questions
Why did Fastenal's sales growth slow so sharply during 2015?
Growth weakened through the year as oil and gas customers cut spending after the collapse in oil prices, and the slowdown spread to other industrial manufacturing and non-residential construction customers. Fastener sales, which are tied to heavy equipment and production, contracted 1.4% for the year and about 6.2% in Q4. Non-fastener growth also slowed, from 17.2% in 2014 to 6.8% in 2015 and only 1.2% in Q4. Management described the Q4 drop as partly driven by customers cutting discretionary purchases of less frequently bought products.
Is the buyback and dividend policy sustainable given the company's cash flow?
In 2015, shareholder returns totaled $620 million, which exceeded net earnings of $516 million and was roughly 114% of free cash flow of $366 million. The gap was funded mainly by borrowing, with net debt rising to $365 million from zero at the end of 2014. Debt remains modest relative to equity of $1.8 billion and the company's operating cash flow of $547 million, so the balance sheet can absorb this in the near term. The sustainability question depends on whether volumes recover, because the company has said it expects capital expenditures to moderate relative to earnings, which would free up cash flow.
What is driving the gross margin decline, and will it continue?
Gross margin fell from 50.8% to 50.4% for the year, mostly because of customer mix (larger accounts buy at lower margins) and product mix (fasteners, the highest-margin line, are shrinking as a share of sales). Management has said the structural gross margin trend tied to the pathway-to-profit strategy will continue over time, and it had previously guided to around 51% in the short term. Q4 2015 was weaker at 49.9% due to lower discretionary spending. Management characterized the Q4 weakness as temporary, but it did not say when it would reverse.
How is Fastenal investing in future growth despite the weaker environment?
The company added 2,329 employees in 2015, with roughly 80% in selling roles, and plans to continue expanding its store and sales footprint. It opened 41 stores and closed 50 in 2015, and it expects to open 60 to 75 stores in 2016. It also set a goal of signing 200 Onsite locations in 2016, up from 82 in 2015, and it is rolling out the CSP 16 format to expand same-day inventory at stores. Investments in distribution automation, including a new automated storage facility under construction in High Point, North Carolina, are expected to moderate as a share of earnings. The main risk is that these investments raise costs before sales recover, which could pressure operating margins if the slowdown persists.
06—Continue