01—Abstract
Summary
Summary of the 10-K filed February 6, 2017. Cited figures are marked; the original filing is the authoritative source.
Fastenal (FAST) reported 2016 net sales of $3.96 billiona, up 2.4% from $3.87 billion in 2015, but net earnings fell 3.3% to $499.5 million and diluted EPS fell 2.3% to $1.73.
The decline was driven mainly by gross margin compression: gross margin dropped to 49.6%b from 50.4%, its first annual reading below 50% in ten years, as sales mix shifted away from higher-margin fasteners toward non-fastener products and larger national accounts. Operating and administrative expenses rose to 29.5% of sales from 29.0%, largely from industrial vending equipment, headcount, health care, and IT costs. Operating margin fell to 20.1% from 21.4%.
Management acknowledged it did not manage store occupancy expense well and plans to address it in 2017 and 2018. The balance sheet and cash generation remain solid but more leveraged. Total debt rose to $390 millionc from $365 million, and the company returned $406 million to shareholders through dividends and buybacks, down from $620 million in 2015 when it repurchased 7.1 million shares.
Operating cash flow was $514 milliond. Inventories grew 8.7% and receivables 6.7%, outpacing sales, and capital expenditures were $183 million, mainly for industrial vending machines and distribution automation. Demand indicators were mixed: fastener sales declined 2.3% for the year, non-fastener sales grew 5.0%, and daily sales to vending customers grew in each quarter.
The company also reduced its store count to 2,503 from 2,622 and cut headcount by about 1,100. For investors, the key questions for 2017 are whether gross margin stabilizes, whether management can control occupancy and operating expenses, and whether industrial vending (62,800 installed units, up 13%) and Onsite locations (401, up 52%) can drive growth as the traditional store network matures. The company raised its quarterly dividend to $0.32, and management guided to growing sales and earnings in 2017.
02—Key points
Key Highlights
- Net sales rose 2.4% to $3.96 billion, but net earnings declined 3.3% to $499.5 million and diluted EPS fell 2.3% to $1.73.
- Gross margin fell to 49.6% from 50.4%, the first annual figure below 50% in ten years, driven by unfavorable product and customer mix.
- Operating income margin contracted to 20.1% from 21.4% as operating and administrative expenses rose to 29.5% of sales, led by industrial vending equipment costs.
- Industrial vending installed base grew 13.2% to about 62,800 units and Onsite locations grew 52% to 401, positioning these as the primary growth drivers over traditional store openings.
- Store count fell to 2,503 from 2,622 after 144 closures, and total headcount was reduced by 1,122 to 19,624.
- Total debt increased to $390 million, and free cash flow of $326 million covered dividends of $347 million, while buybacks fell to $59 million from $293 million.
- Quarterly dividend was raised to $0.32 per share, and management expects to continue paying dividends and aims to grow sales and earnings in 2017.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Fastenal Co kept $0.13.
- Revenue$3.96B100.0%
- Cost of revenue−$2.00B50.4%
- Gross profit$1.96B49.6%
- Operating costs−$1.17B29.5%
- Operating income$795.8M20.1%
- Interest, other & tax−$296.4M7.5%
- Net income$499.4M12.6%
Where FY2016 revenue went
$3.96B- Cost of revenue: $2.00B, 50% of revenue
- SG&A: $1.17B, 30% of revenue
- Net income: $499.4M, 13% of revenue
- Interest, other & tax: $296.4M, 7.5% of revenue
Kept 13% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 6, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $3.96B$3.87B | +2.4% |
| Cost of Revenue | $2.00B$1.92B | +4.0% |
| Gross Profit | $1.96B$1.95B | +0.8% |
| SG&A Expenses | $1.17B$1.12B | +4.3% |
| Operating Income | $795.80M$828.80M | −4.0% |
| Interest Expense | $6.50M$3.10M | +109.7% |
| Net Income | $499.40M$516.40M | −3.3% |
| EPS (Basic) | $0.43$0.44 | −2.3% |
| EPS (Diluted) | $0.43$0.44 | −2.3% |
| Shares Outstanding (Basic) | 1.16B1.17B | −0.9% |
| Shares Outstanding (Diluted) | 1.16B1.17B | −1.0% |
05—Questions
Frequently Asked Questions
Why did Fastenal's earnings decline in 2016 even though sales grew?
Sales grew 2.4%, but gross margin fell 80 basis points to 49.6% due to a shift toward non-fastener products and large national accounts, which carry lower margins. Operating and administrative expenses also rose faster than sales, mainly from industrial vending equipment, higher headcount, health care, and IT costs. Together these pushed operating margin down to 20.1% from 21.4%, so net earnings fell 3.3%.
How much cash did Fastenal return to shareholders, and how was it funded?
Fastenal returned $406 million in 2016, comprising $347 million in dividends and $59 million in share repurchases, down sharply from $620 million in 2015. Because operating cash flow of $514 million did not fully cover capital expenditures of $183 million plus shareholder returns, the company increased borrowings. Total debt rose to $390 million at year end, and the company had $305 million drawn on its $700 million Credit Facility.
What is the status of Fastenal's industrial vending and Onsite growth strategy?
Industrial vending grew to about 62,800 installed units, up 13.2%, and daily sales to vending customers grew in every quarter of 2016. Onsite active locations rose 52% to 401, with 176 signed in 2016 against a goal of 200. Management also removed about 9,300 underperforming vending units to improve efficiency, and about 15,000 additional devices were deployed under a locker lease program that does not generate product revenue.
What are the main risks to Fastenal's margins and growth going forward?
Key risks include continued gross margin pressure from mix shifts toward non-fastener products and large customers, and from steel and energy price deflation. Operating expense control is another concern, particularly store occupancy costs, which management acknowledged were poorly managed in 2016. Demand is also soft: fastener sales fell 2.3% in 2016, the top 100 customers' growth ratio weakened to about 1:1, and the business is exposed to industrial production and oil and gas cycles. Trade policy changes affecting sourcing from Asia and a possible increase in lease liabilities from ASU 2016-02 in 2019 are additional considerations.
Is Fastenal still opening new stores, and how does its store strategy differ from before?
Fastenal opened 40 stores in 2016 but closed or consolidated 144, leaving a net reduction to 2,503. Management said traditional store openings are no longer the primary growth driver and that its store count is unlikely to approach the long-term North American potential of about 3,500. Growth is now expected to come from industrial vending, Onsite locations, and national accounts. Management said it will continue to open stores in 2017 where needed to support its network and growth drivers.
06—Continue