10-QPeriod: Q3 FY2018

FASTENAL CO Quarterly Report for Q3 Ended Sep 30, 2018

Filed October 16, 2018For Securities:FAST

Summary

Fastenal Company (FAST) reported a strong third quarter and nine-month period ending September 30, 2018, characterized by robust sales growth driven by both underlying market demand and successful execution of growth initiatives like industrial vending and Onsite services. Net sales increased by 13.0% for the third quarter and 13.1% for the nine months compared to the prior year periods. Diluted earnings per share (EPS) saw a significant increase, reaching $0.69 in Q3 2018 and $2.03 for the nine months, up from $0.50 and $1.48 respectively in the prior year. This EPS growth was notably bolstered by the positive impact of the Tax Cuts and Jobs Act (TCJA), which lowered the effective tax rate. Despite strong top-line performance, the company experienced a slight contraction in gross profit margin, primarily attributed to a shift in product and customer mix, increased freight costs, and product cost inflation that outpaced pricing actions. However, operating and administrative expenses as a percentage of net sales improved, demonstrating effective cost management. The company also highlighted its continued investment in growth drivers, including employee headcount and in-market locations, while also managing its capital structure through dividends and share repurchases. Investors should note the potential impact of recent tariffs on goods from China and the company's ongoing efforts to mitigate these effects.

Financial Highlights

51 data points
Beta

Revenue

$1.28B

48.1% Gross Margin

Net Income

$197.60M

15.4% Net Margin

EPS (Diluted)

$0.17

Total Assets

$3.19B

Cash & Equivalents

$129.70M

Free Cash Flow

$148.10M

Financial Statements
Beta
Revenue$1.28B
Cost of Revenue$664.00M
Gross Profit$615.80M
SG&A Expenses$353.80M
Operating Income$262.30M
Interest Expense$3.00M
Net Income$197.60M
EPS (Basic)$0.17
EPS (Diluted)$0.17
Shares Outstanding (Basic)1.15B
Shares Outstanding (Diluted)1.15B

Key Highlights

  • 1Net sales increased by 13.0% year-over-year in the third quarter of 2018 and 13.1% for the first nine months.
  • 2Diluted EPS rose significantly to $0.69 in Q3 2018 and $2.03 for the nine months, up from $0.50 and $1.48 respectively in the prior year.
  • 3The Tax Cuts and Jobs Act (TCJA) provided a notable benefit, reducing the effective tax rate and contributing approximately $0.12 to Q3 2018 EPS growth and $0.36 to nine-month EPS growth.
  • 4Gross profit margin slightly declined due to product/customer mix shifts, higher freight costs, and product cost inflation outpacing price increases.
  • 5Operating and administrative expenses as a percentage of net sales improved, indicating operational leverage and cost control.
  • 6Investments in growth initiatives continued, with a significant increase in Onsite locations and industrial vending devices.
  • 7The company is monitoring and evaluating strategies to address the impact of new tariffs on products from China.

Frequently Asked Questions

Fastenal's sales growth is driven by a combination of factors. Strong underlying market demand, indicated by favorable Purchasing Managers' Index readings, is a key contributor. Additionally, the company's strategic growth initiatives, particularly the expansion of its industrial vending program and Onsite customer locations, are showing significant success and driving revenue.

The gross profit margin has seen a slight decline. This is primarily due to a shift in the sales mix towards larger customers and non-fastener products, which tend to have lower margins. Additionally, rising freight costs (fuel, driver wages) and increasing product cost inflation have put pressure on margins, and the company's price increases have not fully offset these rising costs yet.

The TCJA has had a positive impact by lowering the corporate income tax rate from 35% to 21% effective January 1, 2018. This resulted in a lower effective tax rate for Fastenal and contributed a significant amount to earnings per share growth in both the third quarter and the first nine months of 2018.

Fastenal acknowledges the recent tariffs imposed on products from China, which represent a meaningful portion of their procurement. The company is actively evaluating strategies to mitigate the impact, including exploring alternative sourcing, product substitutions, and adjusting pricing. They are monitoring the situation closely and will implement further actions as needed.