01—Abstract
Summary
Summary of the 10-K filed February 6, 2019. Cited figures are marked; the original filing is the authoritative source.
Fastenal Company (FAST) reported a strong 2018, with net sales rising 13.1% to $4,965.1 milliona and diluted EPS up 30.5% to $2.62.
Operating income was roughly flat as a share of sales at 20.1%, but the operating income dollar figure grew 13.3% to $999.2 millionb. Net earnings grew 29.9% to $751.9 million, though this was amplified by the lower tax rate under the Tax Act; management excludes the Tax Act effect, under which 2018 net earnings would have been $625.2 million (up 12.8%). Growth was driven by volume rather than price, with fastener sales growing 11.2% and non-fastener sales 14.7%, and by growth drivers such as Onsite locations (up 47.8% to 894), industrial vending devices (up 13.6% to about 81,000 installed), and national accounts (51.2% of sales).
The key concern for investors is margin pressure. Gross margin fell 100 basis points to 48.3%c, driven by product and customer mix shifts toward lower-margin national accounts and non-fastener products, rising freight costs, and steel and product inflation that price increases did not fully offset. Operating and administrative expenses improved to 28.2% of sales from 29.2%, which kept operating margin stable.
Working capital absorbed cash: operational working capital grew 17.2%, inventory rose 17.0%, and receivables grew amid customers stretching payment terms. Operating cash flow fell to 89.7% of net earnings from 101.1%. Total debt rose to $500 milliond, and management expects 2019 net capital expenditures of $195 to $225 million.
Fastenal also reported a net decline of 156 traditional branches in 2018, continuing a trend since 2013, as the company shifts resources toward Onsite, vending, and national accounts. The adoption of ASC 842 in 2019 is expected to add roughly $250 million to both assets and liabilities. Investors should weigh the strength of the growth drivers and volume momentum against the gross margin erosion and the rising working capital needs.
02—Key points
Key Highlights
- Net sales rose 13.1% to $4.97 billion; daily sales growth of 13.1% was driven mainly by unit volume, with price contributing only 0.7% to 0.8%.
- Diluted EPS was $2.62, up 30.5%; excluding discrete Tax Act items, EPS would have been $2.59, up 34.9%.
- Gross margin declined 100 basis points to 48.3% due to customer and product mix, freight costs, and inflation that pricing did not fully offset.
- Growth drivers expanded: Onsite locations grew 47.8% to 894, vending devices installed grew 13.6% to about 81,000, and national accounts reached 51.2% of sales.
- Operating and administrative expenses fell to 28.2% of sales from 29.2%, keeping operating margin flat at 20.1%.
- Operational working capital grew 17.2% to $1.99 billion, and operating cash flow dropped to 89.7% of net earnings, reflecting slower customer payments and extra tariff-driven inventory of about $12 million.
- Traditional branches declined by a net 156 to 2,227, and management expects Onsite locations to keep growing, with 375 to 400 new Onsites planned for 2019.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Fastenal Co kept $0.15.
- Revenue$4.97B100.0%
- Cost of revenue−$2.57B51.7%
- Gross profit$2.40B48.3%
- Operating costs−$1.40B28.2%
- Operating income$999.2M20.1%
- Interest, other & tax−$247.3M5.0%
- Net income$751.9M15.1%
Where FY2018 revenue went
$4.97B- Cost of revenue: $2.57B, 52% of revenue
- SG&A: $1.40B, 28% of revenue
- Net income: $751.9M, 15% of revenue
- Interest, other & tax: $247.3M, 5.0% of revenue
Kept 15% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 6, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $4.97B$4.39B | +13.1% |
| Cost of Revenue | $2.57B$2.23B | +15.2% |
| Gross Profit | $2.40B$2.16B | +10.9% |
| SG&A Expenses | $1.40B$1.28B | +9.2% |
| Operating Income | $999.20M$881.80M | +13.3% |
| Interest Expense | $12.60M$9.10M | +38.5% |
| Net Income | $751.90M$578.60M | +30.0% |
| EPS (Basic) | $0.66$0.50 | +31.0% |
| EPS (Diluted) | $0.66$0.50 | +31.0% |
| Shares Outstanding (Basic) | 1.15B1.15B | −0.4% |
| Shares Outstanding (Diluted) | 1.15B1.15B | −0.4% |
05—Questions
Frequently Asked Questions
How much of the 2018 earnings growth came from the Tax Act rather than operations?
A meaningful share. Reported net earnings rose 29.9% to $751.9 million, but excluding the Tax Act effect, net earnings were $625.2 million, up 12.8%. Operating earnings grew 13.3%, which management highlights as the cleaner measure of performance.
Why did gross margin decline even though sales grew strongly?
Three factors drove the 100 basis point decline: faster growth in lower-margin national accounts and non-fastener products, rising freight and fuel costs, and steel and product inflation that price increases only partly offset. Management said price increases lagged cost increases, especially for fasteners.
Is Fastenal's branch network growing?
Not in count. The company has had a net decline in traditional branches every year since 2013, including 156 in 2018, as Onsite locations, vending, and national accounts take on a larger role. Total in-market locations, which include Onsites, still rose 4.5% to 3,121.
What are the main capital and balance sheet considerations for investors?
Total debt rose to $500 million from $415 million, largely to fund vending expansion, distribution center automation, and share repurchases. 2019 net capex is guided to $195 to $225 million, and the ASC 842 lease standard will add about $250 million to assets and liabilities without changing cash flows.
06—Continue