10-QPeriod: Q2 FY2018

FASTENAL CO Quarterly Report for Q2 Ended Jun 30, 2018

Filed July 16, 2018For Securities:FAST

Summary

Fastenal Company (FAST) reported strong top-line growth in its second-quarter and first-half 2018 results, with net sales increasing by 13.1% year-over-year for both periods. This growth was primarily driven by higher unit sales stemming from a strengthening business environment and successful execution of the company's growth initiatives, including an expansion in industrial vending devices and Onsite locations. The company also benefited from price increases implemented to mitigate marketplace inflation, though these contributed a smaller portion to the sales increase. Despite the robust sales performance, gross profit margin experienced a slight decline, attributed to a less favorable product and customer mix (fewer high-margin fasteners and more sales to larger national accounts) and increased transportation costs. However, operating and administrative expenses as a percentage of net sales improved, demonstrating improved operational leverage. Net earnings saw a significant increase of 41.9% in the second quarter and 36.2% in the first half, partly due to the positive impact of the Tax Cuts and Jobs Act, which lowered the effective tax rate. Investors will be watching the company's ability to manage product mix, control transportation costs, and sustain growth from its strategic initiatives.

Financial Highlights

51 data points
Beta

Revenue

$1.27B

48.7% Gross Margin

Net Income

$211.20M

16.7% Net Margin

EPS (Diluted)

$0.18

Total Assets

$3.10B

Cash & Equivalents

$135.50M

Free Cash Flow

$122.80M

Financial Statements
Beta
Revenue$1.27B
Cost of Revenue$650.20M
Gross Profit$617.70M
SG&A Expenses$349.30M
Operating Income$269.00M
Interest Expense$3.20M
Net Income$211.20M
EPS (Basic)$0.18
EPS (Diluted)$0.18
Shares Outstanding (Basic)1.15B
Shares Outstanding (Diluted)1.15B

Key Highlights

  • 1Net sales increased by 13.1% for both the three months and six months ended June 30, 2018, compared to the prior year periods.
  • 2Gross profit margin slightly decreased from 49.8% to 48.7% for the three months ended June 30, 2018, and from 49.6% to 48.7% for the six months ended June 30, 2018, due to product/customer mix and higher freight costs.
  • 3Operating income margin remained stable at 21.2% for the three months ended June 30, 2018, compared to the prior year.
  • 4Net earnings grew significantly, up 41.9% for the three months and 36.2% for the six months ended June 30, 2018, driven by sales growth and a lower effective tax rate due to the Tax Cuts and Jobs Act.
  • 5Diluted EPS increased to $0.74 for the three months and $1.34 for the six months ended June 30, 2018, up from $0.52 and $0.98 respectively in the prior year periods.
  • 6The company continues to expand its growth drivers, with significant increases in active Onsite locations (up 56.6% year-over-year) and industrial vending devices (installed count up 14.3% year-over-year).
  • 7Net cash provided by operating activities increased to $311.6 million for the six months ended June 30, 2018, from $293.3 million in the prior year, primarily due to higher net earnings.

Frequently Asked Questions

Fastenal's sales growth in Q2 2018 was primarily driven by increased unit sales resulting from a strengthening business environment and the success of their growth initiatives, such as a higher number of industrial vending devices and active Onsite locations. Price increases implemented to mitigate inflation also contributed to sales growth, though to a lesser extent.

The decline in gross profit margin was attributed to two main factors: a shift in product and customer mix. Sales of fasteners, which typically have higher margins, grew slower than other product lines. Additionally, increased sales to national accounts, which tend to have better pricing, also impacted the margin. Higher transportation costs, including shipping fees, driver wages, and fuel, further compressed the gross profit margin.

The Tax Cuts and Jobs Act, enacted in late 2017, resulted in a lower corporate income tax rate for Fastenal starting in 2018. This led to a reduction in the company's effective tax rate and a decrease in income tax expense. The company estimates that the Tax Act benefited diluted earnings per share by approximately $0.15 in the second quarter of 2018 and $0.24 in the first half of 2018.

Fastenal's strong demand for industrial vending solutions has led them to increase their expected capital expenditures for 2018. They now anticipate net spending on property and equipment to increase by $9.0 million to $158.0 million for the full year 2018, an increase of 40.4% from 2017, driven by investments in areas like distribution centers, equipment, and industrial vending.