10-QPeriod: Q3 FY2010

FASTENAL CO Quarterly Report for Q3 Ended Sep 30, 2010

Filed October 21, 2010For Securities:FAST

Summary

Fastenal Company reported a significant rebound in its third quarter of 2010, with net sales increasing by 23.4% year-over-year, indicating a strong recovery from the economic downturn experienced in 2009. This growth was primarily driven by higher unit sales, reflecting improved demand in its core manufacturing and construction markets. The company's financial performance has strengthened, with notable increases in gross profit and operating income, while operating and administrative expenses, as a percentage of net sales, have decreased. Furthermore, Fastenal has demonstrated robust cash flow generation, enabling it to increase dividend payments. While the company faces ongoing litigation and potential liabilities, management believes these matters are unlikely to have a material adverse effect on its financial position. The company is focused on its 'pathway to profit' initiative, which emphasizes sales growth through customer service and operational efficiency, positioning it for continued recovery and growth.

Financial Highlights

46 data points
Beta

Revenue

$603.75M

51.8% Gross Margin

Net Income

$74.99M

12.4% Net Margin

EPS (Diluted)

$0.06

Total Assets

$1.47B

Cash & Equivalents

$172.56M

Free Cash Flow

$36.33M

Financial Statements
Beta
Revenue$603.75M
Cost of Revenue$291.10M
Gross Profit$312.65M
SG&A Expenses$192.14M
Operating Income$120.51M
Net Income$74.99M
EPS (Basic)$0.06
EPS (Diluted)$0.06
Shares Outstanding (Basic)1.18B
Shares Outstanding (Diluted)1.18B

Key Highlights

  • 1Net sales increased by 23.4% year-over-year to $603.8 million for the three months ended September 30, 2010, indicating a strong recovery from the previous year's contraction.
  • 2Gross profit margin improved to 51.8% for the quarter, up from 50.0% in the same period of 2009, driven by recovering pricing conditions and improved vendor allowances.
  • 3Operating income saw a substantial increase of 57.8% to $120.5 million, reflecting strong sales growth and improved operating leverage.
  • 4Net earnings grew by 57.6% to $75.0 million, with diluted earnings per share rising to $0.51 from $0.32 in the prior year's third quarter.
  • 5Operating cash flow for the nine months ended September 30, 2010, was $166.3 million, though lower than the prior year, it still demonstrates solid cash generation.
  • 6The company increased its dividend payments, reflecting confidence in its financial health and cash generation capabilities.
  • 7Fastenal is actively managing its 'pathway to profit' strategy, focusing on store growth, sales personnel expansion, and operational efficiency.

Frequently Asked Questions

The primary driver of Fastenal's sales growth in the third quarter of 2010 was higher unit sales, reflecting a recovery in demand from its core manufacturing and non-residential construction markets. This indicates a positive turn from the economic slowdown experienced in 2009.

Fastenal's profitability has significantly improved. Gross profit margin increased to 51.8% in Q3 2010 from 50.0% in Q3 2009. Operating income increased by 57.8% and net earnings rose by 57.6%, demonstrating strong operational leverage and effective cost management.

Yes, Fastenal is involved in two significant legal matters. One is with the Department of Justice (DOJ) regarding a contract with the U.S. General Services Administration (GSA), concerning alleged overcharges. The company has accrued $2.75 million as of September 30, 2010, though the DOJ is seeking $8.5 million. The second is a lawsuit from a California fastener supplier alleging breach of an exclusive distribution arrangement, with the supplier claiming $180 million in damages. While Fastenal believes it has strong defenses and the prospect of material liability is remote for both, these are ongoing and could result in significant payments or judgments.

Fastenal saw an increase in both accounts receivable (26.1%) and inventories (9.6%) compared to the prior year. The increase in accounts receivable is attributed to higher daily sales, while inventory growth is linked to expanding sales trends, confidence in their sustainability, and an increased rate of store openings. Management considers the inventory increase disappointing but overshadowed by the strong sales growth.