01—Abstract
Summary
Summary of the 10-K filed February 6, 2020. Cited figures are marked; the original filing is the authoritative source.
Fastenal (FAST) closed 2019 with net sales of $5.33 billiona, up 7.4% from $4.97 billion in 2018, and diluted EPS of $1.38, up 5.2%.
Growth slowed sharply through the year: management describes daily sales growth moving from double digits in early 2019 to the mid-single digits by mid-year and about 1%b in December. Gross margin fell 110 basis points to 47.2%, driven by mix shift toward lower-margin non-fastener products and national accounts, weaker freight absorption, and tariff-related cost inflation. Operating margin slipped to 19.8% from 20.1%, though operating and administrative expenses leveraged to 27.4% of sales from 28.2%, helped by slower headcount growth in branches.
The company is deliberately reshaping its footprint toward its growth drivers. Onsite locations rose to 1,114 (up 24.6%c) and industrial vending devices to about 90,000 product-revenue units (up 10.8%), while the traditional public branch count fell by 113 net to 2,114. Management says Onsite economics carry lower gross margins and a short-term drag on branch profitability, but a lower cost to serve and higher revenue per customer.
Capital spending rose to $240 milliond net (4.5% of sales) to build out distribution and vending, exceeding the company's own target range. Balance-sheet and cash-flow metrics are solid. Operating cash flow was $843 million (106% of net earnings), and total debt fell to $345 million from $500 million.
Dividends of $0.87 per share were paid, and no shares were repurchased in 2019 (4.8 million shares remain under authorization). The company declared a $0.25 quarterly dividend for 2020 and guided 2020 net capital expenditures to $180-205 million. Key risks flagged include tariffs on Chinese-sourced product, the cyclical industrial and manufacturing end markets, competition from e-commerce, and the margin pressure from Onsite growth.
02—Key points
Key Highlights
- Net sales rose 7.4% to $5,333.7M, but growth decelerated from double digits to roughly 1% by December 2019 as industrial demand weakened (PMI averaged 47.9 in Q4 2019).
- Gross profit margin declined 110 bps to 47.2% due to product and customer mix shift (fasteners fell to 34.2% of sales; national accounts rose to 53.6%), freight absorption, and tariff-related inflation.
- Operating margin eased to 19.8% from 20.1%, while operating and administrative expenses improved to 27.4% of sales from 28.2%.
- Diluted EPS was $1.38, up 5.2%, and net earnings reached $790.9M. The effective tax rate rose to 24.2% from 23.8%.
- Growth drivers expanded: Onsite locations grew 24.6% to 1,114, industrial vending devices grew 10.8% to 89,937 installed, and 362 new Onsite locations were signed; branch count fell by a net 113.
- Strong cash generation: operating cash flow of $842.7M (106.5% of net earnings) funded $240M in net capex and $499M in dividends, while total debt was reduced to $345M from $500M.
- No share repurchases in 2019 (versus $103M in 2018); the board declared a $0.25 quarterly dividend for 2020, and 2020 net capex guidance is $180-205M.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, Fastenal Co kept $0.15.
- Revenue$5.33B100.0%
- Cost of revenue−$2.82B52.8%
- Gross profit$2.52B47.2%
- Operating costs−$1.46B27.3%
- Operating income$1.06B19.8%
- Interest, other & tax−$266.3M5.0%
- Net income$790.9M14.8%
Where FY2019 revenue went
$5.33B- Cost of revenue: $2.82B, 53% of revenue
- SG&A: $1.46B, 27% of revenue
- Net income: $790.9M, 15% of revenue
- Interest, other & tax: $266.3M, 5.0% of revenue
Kept 15% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 6, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $5.33B$4.97B | +7.4% |
| Cost of Revenue | $2.82B$2.57B | +9.8% |
| Gross Profit | $2.52B$2.40B | +4.9% |
| SG&A Expenses | $1.46B$1.40B | +4.1% |
| Operating Income | $1.06B$999.20M | +5.8% |
| Interest Expense | $13.90M$12.60M | +10.3% |
| Net Income | $790.90M$751.90M | +5.2% |
| EPS (Basic) | $0.69$0.66 | +5.3% |
| EPS (Diluted) | $0.69$0.66 | +5.3% |
| Shares Outstanding (Basic) | 1.15B1.15B | −0.1% |
| Shares Outstanding (Diluted) | 1.15B1.15B | 0.0% |
05—Questions
Frequently Asked Questions
Why did Fastenal's growth slow so much during 2019?
Growth fell from double digits in 2017 and 2018 to mid-single digits from Q2 2019 onward, and daily sales growth was only about 1% in December. Management attributes this to weaker industrial production and manufacturing PMI readings (averaging 55.4 in Q1 but 47.9 in Q4), along with trade uncertainty and tariffs that caused customers in components, capital goods, and heavy equipment to cut back spending. Fastener sales, the most cyclical product line, grew only 1.8% in Q4.
Is the Onsite model hurting Fastenal's profitability?
In the short term, partly. Onsite locations carry lower gross profit margins than traditional branches, and when an Onsite pulls revenue from an existing branch, that branch's fixed costs remain, which weighs on branch profitability. Onsite locations do, however, have lower operating expense profiles and a lower cost to serve. Management expects the rate of change in revenue per Onsite to stabilize in late 2020 or early 2021, after which revenue per location should begin to expand.
How exposed is Fastenal to tariffs and trade policy?
Significantly. A large share of its products is sourced from Asia, especially China, and the company has responded by raising prices, re-sourcing product, and seeking exemptions. These actions largely offset tariff costs in 2019, which the company describes as having a minor net impact for the full year. However, the 2019 gross margin was still pressured, particularly in the first half, and management says the effectiveness of these responses to future tariffs is unknown. Roughly 86% of revenue is generated in the United States.
What is the outlook for capital spending and shareholder returns?
Net capex is guided to $180-205M for 2020, down from $240M in 2019, as distribution center projects wind down. The company paid $0.87 per share in dividends in 2019 and declared a $0.25 quarterly dividend for 2020. It made no share repurchases in 2019 and has 4.8 million shares remaining under its authorization, with future buybacks left to board discretion.
06—Continue