10-QPeriod: Q2 FY2019

FASTENAL CO Quarterly Report for Q2 Ended Jun 30, 2019

Filed July 16, 2019For Securities:FAST

Summary

Fastenal Company (FAST) reported its financial results for the quarter ending June 29, 2019. The company saw a modest increase in net sales, driven by both higher unit sales and price increases to offset inflation and tariffs. However, gross profit margin declined due to a less favorable product and customer mix, increased transportation costs, and a lag in passing through rising product costs. This pressure on gross profit, combined with a one-time tax benefit in the prior year's comparable quarter, led to a slight decrease in net earnings for the current quarter compared to the prior year. Despite the margin pressures, Fastenal continues to invest in its growth drivers, including Onsite locations and industrial vending devices, which saw significant increases in active sites and installed units, respectively. The company also expanded its national account contracts. While overall market demand showed signs of slowing, Fastenal's strategic initiatives are demonstrating traction, contributing positively to sales growth. The company anticipates continued investment in capital expenditures to support its growth strategies.

Financial Highlights

51 data points
Beta

Revenue

$1.37B

46.9% Gross Margin

Net Income

$204.60M

15.0% Net Margin

EPS (Diluted)

$0.18

Total Assets

$3.76B

Cash & Equivalents

$175.00M

Free Cash Flow

$59.40M

Financial Statements
Beta
Revenue$1.37B
Cost of Revenue$727.20M
Gross Profit$641.20M
SG&A Expenses$366.70M
Operating Income$275.00M
Interest Expense$3.70M
Net Income$204.60M
EPS (Basic)$0.18
EPS (Diluted)$0.18
Shares Outstanding (Basic)1.15B
Shares Outstanding (Diluted)1.15B

Key Highlights

  • 1Net sales increased by 7.9% in the second quarter of 2019 compared to the same period in 2018, reaching $1,368.4 million.
  • 2Gross profit margin declined to 46.9% in Q2 2019 from 48.7% in Q2 2018, attributed to product/customer mix, rising transportation costs, and price/cost deficits.
  • 3Operating income as a percentage of net sales decreased to 20.1% in Q2 2019 from 21.2% in Q2 2018.
  • 4Net earnings for Q2 2019 were $204.6 million, a decrease of 3.1% from Q2 2018. Excluding a one-time tax benefit in Q2 2018, net earnings would have grown by 1.5%.
  • 5Diluted Earnings Per Share (EPS) for Q2 2019 was $0.36, down from $0.37 in Q2 2018. Adjusted for the prior year's tax benefit, EPS would have grown by 1.5%.
  • 6Significant growth in Onsite customer locations (up 34.8% year-over-year) and industrial vending devices (up 12.9% year-over-year) highlights continued investment in growth initiatives.
  • 7The company adopted new lease accounting standards (ASC 842) effective January 1, 2019, resulting in the recognition of operating lease right-of-use assets and liabilities.

Frequently Asked Questions

Fastenal's gross profit margin declined primarily due to three factors: a less favorable mix of product sales (slower growth in higher-margin fasteners) and customer sales (faster growth from larger customers who receive better pricing), a price/cost deficit where increased product costs outpaced price increases, and rising transportation costs, particularly shipping fees and driver wages, which are impacting net freight expense.

Fastenal adopted ASC 842, Leases, effective January 1, 2019. This standard requires lessees to recognize operating lease right-of-use (ROU) assets and lease liabilities on the balance sheet. The adoption had an immaterial impact on the Condensed Consolidated Statement of Earnings and Statement of Cash Flows for the periods presented, but it resulted in the recognition of $227.5 million in ROU assets and $228.3 million in lease liabilities as of January 1, 2019.

While Fastenal reported sales growth driven by higher unit sales and price increases, management noted a slowing trend in industrial production and softening in certain markets like oil and gas and heavy machinery in the second quarter of 2019. Despite this, the company's growth initiatives, such as expanding Onsite locations and industrial vending devices, continue to perform well and contribute to sales growth. Fastenal is actively managing pricing to counteract inflation and tariffs.

Accounts receivable increased 11.7% year-over-year, influenced by sustained sales growth, the higher proportion of national accounts (which have longer payment terms), and timing of customer payments. Management stated there has been no erosion in the quality of receivables. Inventory increased by 15.7% year-over-year, driven by efforts to improve service, support sales growth, and account for inflation and tariffs, particularly for vending and Onsite initiatives. The company expects to moderate inventory growth through the rest of 2019.