01—Abstract
Summary
Summary of the 10-K filed February 5, 2018. Cited figures are marked; the original filing is the authoritative source.
Fastenal (FAST) closed 2017 with net sales of $4,390.5 milliona, up 10.8% from $3,962.0 million in 2016, and diluted EPS of $2.01 versus $1.73.
Net earnings rose 15.8% to $578.6 millionb. Pre-tax earnings grew 10.6% to $873.1 million, and operating margin held flat at 20.1%. Gross margin slipped 30 basis points to 49.3%, which management attributes mainly to mix: slower growth in higher-margin fasteners, faster growth in lower-margin national accounts and Onsite business, and the Mansco acquisition.
Results include a net $24.4 millionc discrete tax benefit from the Tax Act, so the effective tax rate fell to 33.7% from 36.8%. Excluding the Tax Act, net earnings would have been about $554.2 million (up 11.0%) and diluted EPS $1.92. Management guided its 2018 tax rate to 24%–26%.
The growth engine has shifted away from traditional branches. The company opened 18 public branches and closed 130 in 2017, leaving 2,383, and has had net branch declines every year since 2013. Growth is coming from alternative channels: Onsite locations rose 51%d to 605, industrial vending reached about 71,000 product-revenue devices, and national accounts reached 48.7% of sales.
Management says it expects 1,000 Onsite locations and 100,000 vending devices within 12 to 18 months. These channels carry lower gross margins but lower cost to serve, so the margin trade-off is central to the investment case. The balance sheet remains conservative, with $415.0 million of debt against $2.1 billion of equity.
Operating cash flow was $585.2 million and free cash flow $405.9 million. Capital spending was $112.5 million net, and shareholder returns totaled $451.7 million, including a $0.37 quarterly dividend declared for 2018. Key risks include gross margin pressure from mix, cyclicality tied to manufacturing and non-residential construction, rising operating costs from Onsite expansion, and exposure to trade policy changes and foreign-sourced products.
02—Key points
Key Highlights
- Net sales grew 10.8% to $4.39 billion, driven mainly by higher unit volume and a 13.1% rise in non-fastener sales, with daily sales up 11.3%.
- Diluted EPS rose 16.2% to $2.01 reported; excluding the one-time Tax Act benefit, EPS would have been $1.92, up about 11%.
- Gross margin declined to 49.3% from 49.6% due to product and customer mix shifts toward national accounts, OEM fasteners, and the Mansco acquisition.
- Onsite locations increased 51% to 605 and industrial vending devices reached 71,000 product-revenue units, with management targeting 1,000 Onsite locations and 100,000 devices within 12–18 months.
- Public branch count fell to 2,383 after 130 closures, continuing a net decline since 2013 as the company shifts toward Onsite and vending models.
- Total debt was $415.0 million at year-end, with operating cash flow of $585.2 million and free cash flow of $405.9 million, supporting $451.7 million returned to shareholders via dividends and buybacks.
- The 2018 effective tax rate is guided to 24%–26%, down from 33.7% in 2017 and 36.8% in 2016, which should provide a meaningful earnings tailwind.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Fastenal Co kept $0.13.
- Revenue$4.39B100.0%
- Cost of revenue−$2.23B50.7%
- Gross profit$2.16B49.3%
- Operating costs−$1.28B29.2%
- Operating income$881.8M20.1%
- Interest, other & tax−$303.2M6.9%
- Net income$578.6M13.2%
Where FY2017 revenue went
$4.39B- Cost of revenue: $2.23B, 51% of revenue
- SG&A: $1.28B, 29% of revenue
- Net income: $578.6M, 13% of revenue
- Interest, other & tax: $303.2M, 6.9% of revenue
Kept 13% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 5, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $4.39B$3.96B | +10.8% |
| Cost of Revenue | $2.23B$2.00B | +11.5% |
| Gross Profit | $2.16B$1.96B | +10.1% |
| SG&A Expenses | $1.28B$1.17B | +9.7% |
| Operating Income | $881.80M$795.80M | +10.8% |
| Interest Expense | $9.10M$6.50M | +40.0% |
| Net Income | $578.60M$499.40M | +15.9% |
| EPS (Basic) | $0.50$0.43 | +15.6% |
| EPS (Diluted) | $0.50$0.43 | +15.6% |
| Shares Outstanding (Basic) | 1.15B1.16B | −0.3% |
| Shares Outstanding (Diluted) | 1.15B1.16B | −0.3% |
05—Questions
Frequently Asked Questions
How much of Fastenal's 2017 earnings growth came from the Tax Act versus underlying operations?
Reported net earnings rose 15.8% to $578.6 million, but this includes a net discrete tax benefit of $24.4 million from the Tax Act. Excluding it, net earnings were about $554.2 million, up 11.0%, and diluted EPS would have been $1.92 instead of $2.01. Pre-tax earnings grew 10.6%, so underlying growth was roughly in line with sales.
Is the shift toward Onsite and vending hurting Fastenal's profitability?
Management acknowledges that these channels carry lower gross margins than traditional branch sales and that Onsite can pull revenue from existing branches in the short term. The company argues the cost to serve is materially lower, so operating margin held at 20.1%, flat year over year despite the mix headwind. Operating and administrative expenses fell to 29.2% of sales from 29.5%, helped by modest occupancy growth. Investors should watch whether margin leverage continues as these channels scale.
How concentrated is Fastenal's customer base and geographic exposure?
No single customer accounted for more than 5% of 2017 sales. The company has about 400,000 active accounts and 111,000 core accounts. Sales are highly concentrated in the U.S., which represented about $3.84 billion, or roughly 88% of revenue. Canada and other foreign countries made up the rest, with foreign sales growing faster than U.S. sales.
What are the main risks to Fastenal's growth outlook?
Key risks include cyclical exposure to manufacturing and non-residential construction, continued gross margin pressure from mix, rising employee and occupancy costs as Onsite and vending expand, and the company's ability to hit its Onsite and vending targets. Trade policy changes could raise sourcing costs since much product comes from Asia, and currency exposure is mainly to the Canadian dollar. Debt is modest but floating-rate under the Credit Facility, where a 1-point LIBOR increase would add about $2.8 million in interest expense.
06—Continue