SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________________________________
FORM 10-K
(Mark One)
x | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2012, | |
or
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to | |
Commission file number 0-16125
____________________________________________________________
FASTENAL COMPANY
(Exact name of registrant as specified in its charter)
Minnesota | 41-0948415 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2001 Theurer Boulevard Winona, Minnesota | 55987-0978 |
(Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered |
Common Stock, par value $.01 per share | The NASDAQ Stock Market |
None
____________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | x | Accelerated Filer | o |
Non-accelerated Filer | o (Do not check if a smaller reporting company) | Smaller Reporting Company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 29, 2012, the last business day of the registrant’s most recently completed second fiscal quarter, was $10,886,627,594, based on the closing sale price of the Common Stock on that date. For purposes of determining this number, all executive officers and directors of the registrant as of June 29, 2012 are considered to be affiliates of the registrant. This number is provided only for the purposes of this report on Form 10‑K and does not represent an admission by either the registrant or any such person as to the status of such person.
As of February 1, 2013, the registrant had 296,635,127 shares of Common Stock issued and outstanding.
FASTENAL COMPANY
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the annual meeting of shareholders to be held Tuesday, April 16, 2013 (‘Proxy Statement’) are incorporated by reference in Part III. Portions of our 2012 Annual Report to Shareholders are incorporated by reference in Part II.
FORWARD LOOKING STATEMENTS
This Form 10-K and other portions of our 2012 Annual Report to Shareholders of which this Form 10-K forms a part contain statements that are not historical in nature and that are intended or may be interpreted to be, and are hereby identified as, ‘forward-looking statements’ as defined in the Private Securities Litigation Reform Act of 1995 (the ‘Reform Act’), including statements regarding (1) the goals of our long-term growth strategy, ‘pathway to profit’, including the growth in average store sales and profitability expected to result from that strategy and the expected timeline for achieving that growth (including our belief that we can achieve targeted profitability due to a structural lowering of our costs even if our average store sales do not grow as originally expected), (2) our expectations regarding sales growth (including our belief in the ability of our specialists to drive that growth) and our confidence in the sustainability of that growth, (3) our expectations regarding our range of gross margins, (4) our working capital goals and expected returns on total assets when working capital is appropriately managed, (5) our expansion plans, including our estimated 2013 capital expenditures, the expected rate of new store openings, the expected expansion of our foreign operations, the expected opening of new distribution centers as our number of stores increases, and our ability to fund our expansion plans, (6) our plans to increase automation at our distribution centers, (7) markets for North American stores, (8) the future payment of dividends, (9) the expected leasing of new store locations and expansion of owned locations for older stores, (10) the addition of new products, (11) the percentage of net sales expected to be contributed by manufacturing and support services, (12) protection from economic downturns believed to be provided by the number of our customers and varied markets they represent, (13) our ability to mitigate the effects of rising fuel prices by passing freight costs on to our customers, (14) the typical time required before new stores become profitable and achieve operating results comparable to existing stores, (15) the rate of growth and variability of sales at older store locations, (16) our goals for our industrial vending business, including machine signings in 2013, our belief in the transformative nature of industrial vending to leverage our sales growth, and our belief that a local storefront combined with industrial vending provides a business model not easily replicated by our competitors, and (17) our plans to reinvigorate our fastener growth and improve sales growth at our under-performing locations. In addition, certain statements in our future filings with the Securities and Exchange Commission, in our press releases, and in oral statements made by or with approval of our executive officers, constitute or will constitute ‘forward-looking statements’ under the Reform Act. Certain risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements are described below. We assume no obligation to update either such forward-looking statements or the discussion of such risks and uncertainties.
CERTAIN RISK AND UNCERTAINTIES
The following factors are among those that could cause our actual results to differ materially from those predicted in the forward-looking statements described above: (1) a downturn or continued weakness in the economy or in the manufacturing or commercial construction industries, changes in the expected rate of new store openings, difficulties in successfully attracting and retaining additional qualified sales personnel, an inability to realize or sustain improvements in our gross margins and savings from lowering our cost structure, and difficulties in changing our sales process could adversely impact our ability to achieve the goals of our ‘pathway to profit’ initiative and the expected time frame for achieving those goals, (2) a downturn or continued weakness in the economy or in the manufacturing or commercial construction industries could affect our ability to sustain our sales growth, (3) a downturn or continued weakness in the economy or in the manufacturing or commercial construction industries, a change in our current mix of products, customers or geographic locations, a change in our purchasing patterns, a significant change in commodity prices, or increased competitive pressure on our selling prices could impact our ability to achieve gross margins within the range we expect, (4) a downturn or continued weakness in the economy or in the manufacturing or commercial construction industries, a dramatic change in sales trends, a change in accounts receivable collections, a change in raw material costs, a change in buying patterns, or a change in vendor production lead times could cause us to fail to attain our goals regarding working capital and rates of return on assets, (5) a downturn or continued weakness in the economy or in the manufacturing or commercial construction industries, a change from that projected in the number of North American markets able to support stores, or an inability to recruit and retain qualified employees could cause the rate of new store openings to change from that expected, (6) difficulty in adapting our business model to different foreign business environments could alter our plans regarding expansion of foreign operations and negatively impact the growth expected to result from that expansion, (7) changes in the availability or price of commercial real estate, changes in our cash position, a change in distribution technology, or a change in our distribution model could delay the opening of new distribution centers, (8) changes in the rate of new store openings could cause us to modify our planned 2013 capital expenditures, (9) a change in
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our ability to generate free cash flow resulting from a slowdown in our sales or our inability to manage expenses could negatively impact the funding of our expansion plans, (10) high expenses involved in procuring necessary technology could impact our ability to increase automation at our distribution centers, (11) a change in our store format or the presence of a competitor’s store could alter our projections regarding the number of markets for North American stores, (12) changes in our financial condition or results of operations or in our tax laws could cause us to modify our expected dividend practices, (13) changes in the availability or price of commercial real estate, a change in our cash position, or a change in our business model could cause us to change our plans regarding the leasing of new stores and the expansion of owned locations for older stores, (14) changes in our cash position, a change in our business model, or a change in the manufacturing or commercial construction industries could cause us to alter the introduction of new products, (15) changes in customer needs or changes in our production capabilities could change the percentage of net sales expected to be contributed by manufacturing and support services, (16) an economic downturn across multiple industries and geographic regions could negate the protections thought to be provided to us by the number of our customers and the varied markets they represent, (17) our ability to pass freight costs on to our customers could be adversely impacted by, in the short term, changes in fuel prices and by competitive selling pressures, (18) an upturn or downturn in the economy could alter, from historic norms, the time it typically takes a new store to achieve profitability or operating results comparable to existing stores and the rate of growth, and variability, of sales at older store locations, (19) a weaker level of industry acceptance or adoption of vending technology from what we are currently experiencing could cause us to fail to meet our goals for our industrial vending business, including machine signings in 2013, or cause industrial vending to be less transformative than expected, (20) our competitors could choose, over time, to open additional locations and to develop their own vending platform which could allow our competitors to replicate our local storefront combined with industrial vending business model mitigating our first mover advantage, (21) difficulties in hiring, relocating, or training qualified sales personnel could adversely impact our ability to reinvigorate our fastener growth and improve sales at our under-performing locations, and (22) unpredictable activity by the national government in the United States could cause unusual economic patterns that could adversely effect our business. A discussion of other risks and uncertainties which could cause our operating results to vary from anticipated results or which could materially adversely affect our business, financial condition, or operating results is included later in this Form 10-K under the heading entitled ‘Item 1A. Risk Factors’.
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PRESENTATION OF DOLLAR AMOUNTS
All dollar amounts in this Form 10-K are presented in thousands, except for share and per share information or unless otherwise noted.
STOCK SPLIT
All information contained in this Form 10-K reflects the two-for-one stock split in May 2011.
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PART I
ITEM 1. | BUSINESS |
Note – information in this section is as of year end (December 31, 2012 and also sometimes other years when indicated) unless otherwise noted.
Fastenal Company (together with our wholly owned subsidiaries, hereinafter referred to as Fastenal or the Company or by terms such as we, our, or us) began as a partnership in 1967, and was incorporated under the laws of Minnesota in 1968. We had 2,652 store locations at year end. The various geographic areas in which we operate these store locations are summarized later.
Globally, we employed 15,145 people as of year end. We characterize these personnel as follows:
Store and in-plant | 10,158 | |
Non-store selling | 1,111 | |
Selling sub-total | 11,269 | |
Distribution | 2,451 | |
Manufacturing | 569 | |
Administrative | 856 | |
Non-selling sub-total | 3,876 | |
Total | 15,145 | |
We sell industrial and construction supplies in a wholesale and retail fashion. These industrial and construction supplies are grouped into eleven product lines described later in this document.
We operated 14 distribution centers in North America as of year end from which we distribute products to our store and in-plant locations.
Our Internet address for corporate and investor information is www.fastenal.com. The information contained on this website or connected to this website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report.
Development of the Business
Fastenal began in 1967 with a marketing strategy of supplying threaded fasteners to customers in small, medium-sized, and, in subsequent years, large cities. We believe our success can be attributed to our ability to offer our customers a full line of products at convenient locations and to the high quality of our employees.
We opened our first store in Winona, Minnesota, a city with a population of approximately 25,000. The following table shows our consolidated net sales for each fiscal year during the last ten years and the number of our store locations at the end of each of the last ten years:
2012 | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||
Net sales (in millions) | $3,133.6 | $2,766.9 | 2,269.5 | 1,930.3 | 2,340.4 | 2,061.8 | 1,809.3 | 1,523.3 | 1,238.5 | 994.9 | |||||||||
Number of stores at year end | 2,652 | 2,585 | 2,490 | 2,369 | 2,311 | 2,160 | 2,000 | 1,755 | 1,533 | 1,314 | |||||||||
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At year end, we operated the following number of store locations:
2012 | 2011 | ||||||
North America | United States | 2,380 | 2,335 | ||||
Puerto Rico & Dominican Republic | 9 | 9 | |||||
Canada | 195 | 183 | |||||
Mexico | 36 | 34 | |||||
Sub-total | 2,620 | 2,561 | |||||
Central & South America | Panama, Brazil, & Colombia | 4 | 3 | ||||
Asia | China | 8 | 8 | ||||
Southeast Asia | Singapore, Malaysia, & Thailand | 7 | 4 | ||||
Europe | The Netherlands, Hungary, United Kingdom, Germany, Czech Republic, Italy & Romania | 13 | 9 | ||||
Total | 2,652 | 2,585 | |||||
We select new locations for our stores based on their proximity to our distribution network, population statistics, and employment data for manufacturing and construction. Beginning in 2007, we disclosed our intention to continue opening new store locations at a rate of approximately 7% to 10% per year (calculated on the ending number of stores in the previous year). Given the economic slowdown, we decreased this to a range of 2% to 5% in 2009, and this lower rate continued into the first half of 2010. From July 2010 to December 2010, we opened stores at an annualized rate of approximately 7%. In 2011, we opened new stores at the rate of approximately 5%, and opened new stores at the rate of approximately 3% in 2012. We expect to open 65 to 80 stores in 2013, or a rate of approximately 2.5% to 3%.
We stock all new stores with inventory drawn from all of our product lines. Subsequent to a new opening, store and district personnel may supplement the inventory offering to customize the selection to the needs of our local customer base.
We currently have several versions of selling locations. The first type of selling location – a Fastenal store location – is either (1) a ‘traditional’ store, which services a wide variety of customers and stocks a wide selection of all the products we offer or (2) an ‘overseas’ store which focuses on manufacturing customers and on the fastener product line (this is the type of store format we have outside of North America).
In addition to the Fastenal store type discussed above, we also operate strategic account stores, strategic account sites, and ‘in-plant’ sites. A strategic account store is a unique location that sells to multiple large customers in a market. Because this location sells to multiple customers, it is included in our store count. A strategic account site is essentially the same, but it typically operates out of an existing store location, rather than a unique location; therefore, it is not included in our store count. An ‘in-plant’ site is a selling unit located in or near a customer’s facility that sells product solely to that customer. ‘In-plant’ sites are not included in the store count numbers as they represent a customer subset of an existing store.
We believe, based on the demographics of the marketplace in North America, that there is sufficient potential in this geographic area to support at least 3,500 total stores. Many of the new store locations may be in cities in which we currently operate. Fastenal has not operated outside of North America long enough to assess the market potential of those markets.
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We opened the following stores in the last five years:
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||
North America | United States | 58 | 101 | 111 | 62 | 138 | |||||||||
Puerto Rico & Dominican Republic | — | — | — | 1 | — | ||||||||||
Canada | 13 | 11 | 7 | 2 | 21 | ||||||||||
Mexico | 2 | 1 | 1 | 1 | 2 | ||||||||||
Sub-total | 73 | 113 | 119 | 66 | 161 | ||||||||||
Central & South America | Panama, Brazil, & Colombia | 1 | 1 | 2 | — | — | |||||||||
Asia | China | — | 3 | 3 | 1 | — | |||||||||
Southeast Asia | Singapore, Malaysia, & Thailand | 2 | — | 2 | 1 | — | |||||||||
Europe | The Netherlands, Hungary, United Kingdom, Germany, Czech Republic, Italy & Romania | 4 | 5 | 1 | 1 | — | |||||||||
Total | 80 | 122 | 127 | 69 | 161 | ||||||||||
We plan to open additional stores outside of the United States in the future. The stores located outside the United States contributed approximately 11% of our consolidated net sales in 2012, with approximately 65% of this amount attributable to our Canadian operations.
No assurance can be given that any of the expansion plans described above will be achieved, or that new store locations, once opened, will be profitable.
It has been our experience that near-term profitability has been adversely affected by the opening of new store locations. This adverse effect is due to the start-up costs and the time necessary to generate a customer base. A new store generates its sales from direct sales calls, a slow process involving repeated contacts. As a result of this process, sales volume builds slowly and it typically requires ten to twelve months for a new store to achieve its first profitable month, although this time frame has been longer in the current economic downturn. Of the 28 stores opened in the first quarter of 2012, 13 were profitable in the fourth quarter of 2012.
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The data in the following table shows the change in the average sales of our stores from 2011 to 2012 based on the age of each store. The stores opened in 2012 contributed approximately $24,859 (or approximately 0.8%) of our consolidated net sales in 2012, with the remainder coming from stores opened prior to 2012.
Age of stores on December 31, 2012 | Year opened | Number of stores in group on December 31, 2012 | Closed stores1 | Average monthly sales 2012 | Average monthly sales 2011 | Percent change | |||||||
0-1 year old | 2012 | 80 | — | $26 | 2 | N/A | — | ||||||
1-2 years old | 2011 | 123 | — | 58 | 18 | 2 | — | ||||||
2-3 years old | 2010 | 127 | 1/0 | 68 | 51 | 33.3% | |||||||
3-4 years old | 2009 | 67 | 0/3 | 104 | 90 | 15.6% | |||||||
4-5 years old | 2008 | 151 | 4/7 | 70 | 62 | 12.9% | |||||||
5-6 years old | 2007 | 152 | 2/6 | 81 | 70 | 15.7% | |||||||
6-7 years old | 2006 | 232 | 3/7 | 80 | 70 | 14.3% | |||||||
7-8 years old | 2005 | 212 | 4/3 | 74 | 65 | 13.8% | |||||||
8-9 years old | 2004 | 213 | 2/0 | 87 | 78 | 11.5% | |||||||
9-10 years old | 2003 | 144 | 0/2 | 83 | 75 | 10.7% | |||||||
10-11 years old | 2002 | 140 | — | 91 | 81 | 12.3% | |||||||
11-12 years old | 2001 | 124 | — | 110 | 104 | 5.8% | |||||||
12-16 years old | 1997-2000 | 405 | — | 113 | 105 | 7.6% | |||||||
16+ years old | 1967-1996 | 482 | — | 159 | 148 | 7.4% | |||||||
1 | We closed 16 stores and 28 stores in 2012 and 2011, respectively. The respective average sales above were calculated assuming the store closed mid year. The number of closed stores is noted in the table above as 2012 number/2011 number. We converted three non-store selling locations to stores in 2012. We converted one non-store selling location to a store in 2011. |
2 | The average sales include sales of stores open for less than the full fiscal year. |
Several years ago, we introduced our FAST SolutionsSM (industrial vending) offering and it has been a rapidly expanding component of our business. We believe industrial vending is the next logical chapter in the Fastenal story and also believe it has the potential to be transformative to industrial distribution, both because of its benefits to our customers such as reduced consumption, reduced inventory investment, reduced purchase orders, reduced product handling, and 24-hour product availability, and its benefits to us in that it allows us to strengthen our relationships with our customers and streamline the supply chain. We believe we have a 'first mover' advantage in industrial vending and are investing aggressively to maximize this advantage.
At year end, we operated eleven distribution centers in the United States—Minnesota, Indiana, Ohio, Pennsylvania, Texas, Georgia, Washington, California, Utah, North Carolina, and Kansas, and three outside the United States – Ontario, Canada; Alberta, Canada; and Nuevo Leon, Mexico. These 14 distribution centers give us over 2.7 million square feet of distribution capacity. These distribution centers are located so as to permit twice-a-week to five times-a-week deliveries to our stores using our trucks and overnight delivery by surface common carrier. As the number of stores increases, we intend to add new distribution centers.
We currently operate our Minnesota, Indiana, and Texas distribution centers with 'automated storage and retrieval systems' or ASRS. These distribution centers operate with greater speed and efficiency. We intend to invest in this type of ASRS distribution infrastructure over the next several years at our Ohio, Pennsylvania, Georgia, Kansas, and Ontario, Canada locations.
Our information systems department develops, implements, and maintains the computer based technology used to support business functions within Fastenal. Corporate, e-Business, and distribution center systems are primarily supported from a central location(s), while each store uses a locally installed Point-Of-Sale (POS) system. The systems consist of both customized and purchased software. A dedicated Wide Area Network (WAN) is used to provide connectivity between systems and authorized users.
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Trademarks and Service Marks
We conduct business under various trademarks and service marks, and we utilize a variety of designs and tag lines in connection with each of these marks, including First In Fasteners®. Although we do not believe our operations are substantially dependent upon any of our trademarks or service marks, we consider the ‘Fastenal’ name and our other trademarks and service marks to be valuable to our business.
Products
Our original product offerings were fasteners and other industrial and construction supplies, many of which are sold under the Fastenal® product name. This product line, which we refer to as the fastener product line, consists of two broad categories: threaded fasteners, such as bolts, nuts, screws, studs, and related washers; and miscellaneous supplies and hardware, such as various pins and machinery keys, concrete anchors, metal framing systems, wire rope, strut, rivets, and related accessories.
Threaded fasteners are used in most manufactured products and building projects, and in the maintenance and repair of machines and structures. Many aspects of the threaded fastener market are common to all cities. Variations from city to city that do exist typically relate to the types of businesses operating in a market or to the environmental conditions in a market. Therefore, we open each store with a broad selection of base stocks of inventory and then allow the local store and district leaders to tailor the additional inventory to the local market demand as it develops.
Threaded fasteners accounted for approximately 90% of the fastener product line sales in 2012, 2011, and 2010 and approximately 40%, 42%, and 45% of our consolidated net sales in 2012, 2011, and 2010, respectively.
Since 1993, we have added additional product lines. These product lines are sold through the same distribution channel as the original fastener product line. Our product lines include the following:
Product Line: | Year introduced | Approximate number of stock items | ||
Fasteners | 1967 | 592,000 | ||
Tools | 1993 | 75,000 | ||
Cutting tools | 1996 | 403,000 | ||
Hydraulics & pneumatics | 1996 | 111,000 | ||
Material handling | 1996 | 34,000 | ||
Janitorial supplies | 1996 | 23,000 | ||
Electrical supplies | 1997 | 39,000 | ||
Welding supplies1 | 1997 | 46,000 | ||
Safety supplies | 1999 | 51,000 | ||
Metals | 2001 | 18,000 | ||
Office supplies | 2010 | 6,000 | ||
Total | 1,398,000 | |||
1 | We do not sell welding gases. |
Each product line listed above may contain multiple product categories. During the last several years, we have added 'private label' brands (we sometimes refer to these as 'exclusive brands') to our offering. These 'private label' brands currently represent approximately 10% of total sales; most of these 'private label' products are in the non-fastener product lines.
We plan to continue to add other products in the future.
Inventory Control
Our inventory stocking levels are determined using our computer systems, our sales personnel at the store, district, and region levels, and our product managers. The data used for this determination is derived from sales activity from all of our stores, from individual stores, and from different geographic areas. It is also derived from vendor information and from customer demographic information. The computer system monitors the inventory level for all stock items and triggers replenishment, or prompts a buyer to purchase, as necessary, based on an established minimum-maximum level. All stores stock a base inventory and may expand beyond preset inventory levels as deemed appropriate by their district managers. Inventories in distribution
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centers are established from computerized data for the stores served by the respective centers. Inventory quantities are continuously re-balanced utilizing an automated transfer mechanism we call ‘inventory re-distribution’.
Manufacturing and Support Services Operations
In 2012, approximately 95% of our consolidated net sales were attributable to products manufactured by other companies to industry standards. The remaining 5% related to products manufactured, modified or repaired by our manufacturing businesses or our support services. The manufactured products consist primarily of non-standard sizes of threaded fasteners made to customers’ specifications or standard sizes manufactured under our Holo-Krome product line. The services provided by the support services group include, but are not limited to, items such as tool repair, band saw blade welding, third-party logistics, and light manufacturing. We engage in these activities primarily as a service to our customers and expect these activities in the future to continue to contribute in the range of 4% to 10% of our consolidated net sales.
Sources of Supply
We use a large number of suppliers for the standard stock items we distribute. Most items distributed by our network can be purchased from several sources, although preferred sourcing is used for some stock items to facilitate quality control. No single supplier accounted for more than 5% of our purchases in 2012.
Geographic Information
Information regarding our revenues and certain assets by geographic location is set forth in Note 8 of the 'Notes to Consolidated Financial Statements' included later in this Form 10-K under the heading ‘Item 8. Financial Statements and Supplementary Data’. Foreign currency fluctuations, changes in trade relations, or fluctuations in the relative strength of foreign economies could impact our ability to procure products overseas at competitive prices and our foreign sales.
Customers and Marketing
We believe our success can be attributed to our ability to offer customers a full line of quality products at convenient locations, and to the superior service orientation and expertise of our employees. Most of our customers are in the manufacturing and non-residential construction markets. The manufacturing market includes both original equipment manufacturers and maintenance and repair operations. The non-residential construction market includes general, electrical, plumbing, sheet metal, and road contractors. Other users of our products include farmers, truckers, railroads, mining companies, federal, state and local governmental entities, schools, and certain retail trades. During the fourth quarter of 2012, our total number of active customer accounts (defined as accounts having purchase activity within the last 90 days) was approximately 396,000.
During each of the three years ended December 31, 2012, no one customer accounted for 10% or more of our sales. We believe that our large number of customers together with the varied markets that they represent, provide some protection to us from economic downturns.
Store personnel generate a significant portion of our sales through direct calls on customers. Because of the nature of our business, historically, we have made limited use of the more expensive forms of mass media advertising such as television, radio, and newspapers. The forms of advertising we typically use include signs, catalogs, and direct mailings. In recent years, we have expanded our national advertising to include a NASCAR sponsorship utilizing Fastenal Racing® (sponsoring Carl Edwards since 2010), and in 2011 we did some limited national advertising of our FAST SolutionsSM (industrial vending) through publications such as USA Today.
Seasonality
Seasonality has some impact on our sales. During the winter months, our sales to customers in the non-residential construction market typically slow due to inclement weather. Also, sales to our industrial production customers may decrease during the Christmas and New Year holidays due to plant shut-downs.
Competition
Our business is highly competitive. Competitors include both large distributors located primarily in large cities and smaller distributors located in many of the same smaller markets in which we have stores. We believe the principal competitive factors affecting the markets for our products are customer service, price, convenience, product availability, and cost saving solutions.
Some competitors use vans to sell their products in markets away from their main warehouses, while others rely on mail order, websites, or telemarketing sales. We, however, believe that the convenience provided to customers by operating stores in small, medium, and large markets, each offering a wide variety of products, is a competitive selling advantage and that the large number of stores in a given area, taken together with our ability to provide frequent deliveries to such stores from centrally
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located distribution centers, makes possible the prompt and efficient distribution of products. We also believe our local storefront, combined with FAST SolutionsSM (industrial vending), provide a unique way to provide to our customers convenient access to products and cost saving solutions in a business model not easily replicated by our competitors. Having trained personnel at each store also enhances our ability to compete (see ‘Employees’ below).
Employees
At year end, we employed a total of 15,145 full and part-time employees, most of whom were employed at a store location. A breakout of the number of employees, and their respective roles, is contained earlier in this document.
We believe the quality of our employees is critical to our ability to compete successfully in the markets we currently serve and to our ability to open new stores in new markets. We foster the growth and education of skilled employees throughout the organization by operating training programs and by decentralizing decision-making. Wherever possible, our goal is to ‘promote from within’. For example, most new store managers are promoted from an outside sales position and district managers (who supervise a number of stores) are usually former store managers.
The Fastenal School of Business (our internal corporate university program) develops and delivers a comprehensive array of industry and company specific education and training programs that are offered to all employees. Our school of business provides core curricula focused on key competencies determined to be critical to the success of our employees’ performance. In addition, we provide specialized educational tracks within various institutes of learning. These institutes of learning are advanced levels that provide specific concentrations of education and development and have been designed to focus on the critical aspects of our business. These institutes provide a focused educational experience to enhance employee performance in relevant business areas such as leadership, effective store best practices, sales and marketing, product education, and distribution.
Our sales personnel are compensated with a modest base salary and an incentive bonus arrangement that places emphasis on achieving increased sales on a store, district, and regional basis, while still attaining targeted levels of, among other things, gross profit and collections. As a result, a significant portion of our total employment cost varies with sales volume. We also pay incentive bonuses to our leadership personnel based on one or more of the following factors: sales growth, profit growth (before and after taxes), profitability, and return on assets, and to our other personnel for achieving pre-determined departmental, project, and cost containment goals.
None of our employees is subject to a collective bargaining agreement and we have experienced no work stoppages. We believe our employee relations are good.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge on or through our website at www.fastenal.com as soon as reasonably practicable after such reports have been filed with or furnished to the SEC.
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ITEM 1A. | RISK FACTORS |
In addition to the other information in this Form 10-K, the following factors should be considered in evaluating our business. Our operating results depend upon many factors and are subject to various risks and uncertainties. The material risks and uncertainties known to us which may cause the operating results to vary from anticipated results or which may negatively affect our operating results and profitability are as follows:
A downturn in the economy and other factors may affect customer spending, which could harm our operating results. In general, our sales represent spending on discretionary items or consumption needs by our customers. This spending is affected by many factors, including, among others:
• | general business conditions, |
• | business conditions in our principal markets, |
• | interest rates, |
• | inflation, |
• | liquidity in credit markets, |
• | taxation, |
• | government regulations, |
• | fuel prices and electrical power rates, |
• | unemployment trends, |
• | terrorist attacks and acts of war, |
• | weather conditions, and |
• | other matters that influence customer confidence and spending. |
A downturn in either the national or local economy where our stores operate or changes in any of the other factors described above could negatively impact sales at our stores and their level of profitability.
This risk was demonstrated during the last several years. As the economic condition in North America weakened significantly in the fall of 2008 and into 2009, our customers, which operate principally in various manufacturing, non-residential construction, and services sectors, experienced a pronounced slowdown that adversely impacted our sales and operating results in those periods. A lag in these sectors, even as the general economy improves, could adversely impact our business.
Products that we sell may expose us to potential material liability for property damage, environmental damage, personal injury or death linked to the use of those products by our customers. The products that we sell may expose us to potential claims for property damage, environmental damage, personal injury or death arising out of the use of those products by our customers. Some of our customers operate in challenging industries where there is a material risk of catastrophic events. If any of these events are linked to the use by our customers of any of our products, claims could be brought against us by those customers, by governmental authorities and by third parties who are injured or damaged as a result of such events. In addition, our reputation could be adversely affected by negative publicity surrounding such events regardless of whether or not claims against us are successful. While we maintain insurance coverage to mitigate a portion of this risk and may have recourse against our suppliers for losses arising out of defects in products procured from them, we could experience significant losses as a result of claims made against us to the extent adequate insurance is not in place, the products are manufactured by us or legal recourse against our suppliers is otherwise not available, or our insurers or suppliers are unwilling or unable to satisfy their obligations to us.
Interruptions in the proper functioning of information systems could disrupt operations and cause unanticipated increases in costs and/or decreases in revenues. The proper functioning of our information systems is critical to the successful operation of our business. Although our information systems are protected with robust backup systems, including physical and software safeguards and remote processing capabilities, information systems are still vulnerable to natural disasters, power losses, unauthorized access, telecommunication failures, and other problems. If critical information systems fail or are otherwise unavailable, our ability to process orders, maintain proper levels of inventories, collect accounts receivable, pay expenses, and maintain the security of the Company and customer data could be adversely affected. Disruptions or failures of, or security breaches with respect to, our information technology infrastructure could have a negative impact on our operations.
We work hard to maintain the privacy and security of our customer and business information and the functioning of our computer systems and website. In the event of a security breach or other cyber security incident, we could experience certain operational problems or interruptions, incur substantial additional costs, or become subject to legal or regulatory proceedings, any of which could lead to damage to our reputation in the marketplace. The nature of our business requires us to receive, retain and transmit certain personally identifying information that our customers provide to purchase products or services, register on our websites, or otherwise communicate and interact with us. While we have taken and continue to undertake significant steps to protect our customer and confidential information and the functioning of our computer systems
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and website, a compromise of our data security systems or those of businesses we interact with could result in information related to our customers or business being obtained by unauthorized persons or other operational problems or interruptions. We develop and update processes and maintain systems in an effort to try to prevent this from occurring, but the development and maintenance of these processes and systems is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Consequently, despite our efforts, the possibility of intrusion, interruption of our business, cyber security incidents and theft cannot be eliminated entirely, and risks associated with each of these remain. While we also seek to obtain assurances that third parties we interact with will protect confidential information, there is a risk the confidentiality of data held or accessed by third parties may be compromised. If a compromise of our data security or function of our computer systems or website were to occur, it could have a material adverse effect on our operating results and financial condition and, possibly, subject us to additional legal, regulatory and operating costs and damage our reputation in the marketplace.
Our current estimate for total store market potential in North America could be incorrect. One of our primary growth strategies is to grow our business through the introduction of stores into new and existing markets. Based on a snapshot of current marketplace demographics in the United States, Canada, and Mexico, we currently estimate there is potential market opportunity in North America to support approximately 3,500 stores. We cannot guarantee that our market potential estimates are accurate or that we will open stores to reach the full market opportunity. In addition, a particular local market’s ability to support a store may change because of a change in our store format or the presence of a competitor’s store.
We may be unable to meet our goals regarding new store openings. Our growth is dependent primarily on our ability to attract new customers. Historically, the most effective way to attract new customers has been opening new stores. In 2007 and 2008, our business strategy focused on opening stores at a rate of approximately 7% to 10% each year, although the economic slowdown in the latter four months of 2008 and all of 2009 caused us to adjust this rate to 2% to 5% for 2009. We opened stores at an annualized rate of 7% in the second half of 2010. We opened stores at the rate of approximately 5% and 3% in 2011 and 2012, respectively. We expect to open new stores at the rate of approximately 2.5% to 3% in 2013; however, failure to open stores at this rate could negatively impact our long-term growth.
Our current business strategy 'pathway-to-profit', which involves reducing our rate of new store openings and using the money saved to add sales personnel at a faster rate, while successful over the last several years, has not yet proven successful on a long‑term basis. In April 2007, we introduced our 'pathway to profit' strategy. This strategy initially involved slowing our annual new store openings from our historical rate of 13% to 18% to approximately 7% to 10%. The funds saved by opening fewer stores would be invested in additional sales personnel, with the goal of increasing our average annual per store sales, capturing earnings leverage, and increasing our pre-tax earnings. At the time we introduced this strategy, we believed that, over the five year period from 2007 to 2012, we could grow our average store sales to $125 thousand per month and grow our pre‑tax earnings as a percent of net sales from 18% to 23%. The economic weakness that dramatically worsened in the fall of 2008 and continued into 2009 caused us to alter this strategy during 2009 by slowing our annual new store openings to a range of approximately 2% to 5% and temporarily stopping headcount additions except at newly opened stores and stores that are growing. Because of this economic setback, we previously indicated that the time required to achieve our pre-tax earnings percentage goals for 'pathway to profit' could be delayed 24 to 30 months. More recently, we have indicated we believe we could hit our pre-tax earnings percentage goal with less than the $125 thousand per month figure. We now believe the pre-tax earnings goal might be accomplished with average store sales as low as $100 to $110 thousand per month due to the structural lowering of our costs. We believe this will shorten the extended time line for achieving our goal to 2013; however, we cannot assure this will occur. A more prolonged downturn in the economy than expected, the prospect of future economic deterioration, changes in the rate of new store openings, difficulty in successfully attracting and retaining qualified sales personnel, an inability to realize anticipated savings from lowering our cost structure, and failure to successfully change our selling process could further adversely impact our ability to grow average store sales, capture earnings leverage, and achieve desired pre‑tax earnings results.
Changes in customer or product mix, downward pressure on sales prices, and changes in volume of orders could cause our gross margin percentage to fluctuate or decline in the future. Changes in our customer or product mix, downward pressure on sales prices, and changes in the volume of our orders could cause our gross margin percentage to fluctuate or decline. From time to time we have experienced changes in product mix. For example, marketing activities to existing customers and needs communicated to us from existing and prospective customers have caused us to change our product mix in the past. When we change our product mix, there can be no assurance that we will be able to maintain our historical gross margins. In addition, gross margins can deteriorate if we experience downward pressure on sales prices as a result of deflation, pressures on customers to reduce costs or increased competition, as was the case in 2009. Furthermore, reductions in our volume of purchases, as also happened in 2009, can adversely impact gross margins by reducing vendor volume allowances.
Opening stores in new markets presents increased risks that may prevent us from being profitable in these new locations. We intend to open stores in new markets pursuant to our growth strategy. New stores do not typically achieve operating results comparable to our existing stores until after several years of operation, and stores in new markets face additional challenges to
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achieving profitability. A new store generates its sales from direct sales calls, a slow process involving repeated contacts. In new markets, we have less familiarity with local customer preferences and customers in these markets are less familiar with our name and capabilities. In addition, entry into new markets may bring us into competition with new, unfamiliar competitors. We cannot assure success in operating our stores in new markets on a profitable basis.
New store openings may negatively impact our operating results. While new stores build the infrastructure for future growth, the first year sales in new stores are low, and the added expenses relating to payroll, occupancy, and transportation costs can impact our ability to leverage earnings. It has been our experience that new stores take at least ten to twelve months to achieve profitability. We cannot assure you that we will be successful in operating our new stores on a profitable basis.
The ability to identify new products and product lines, and integrate them into our store and distribution network, may impact our ability to compete and our sales and margins. Our success depends in part on our ability to develop product expertise at the store level and identify future products and product lines that complement existing products and product lines and that respond to our customers’ needs. We may not be able to compete effectively unless our product selection keeps up with trends in the markets in which we compete or trends in new products. In addition, our ability to integrate new products and product lines into our stores and distribution network could impact sales and margins.
Increases in energy costs and the cost of raw materials used in our products could impact our cost of goods and distribution and occupancy expenses, which may result in lower operating margins. Costs of raw materials used in our products (e.g., steel) and energy costs have fluctuated during the last several years. Increases in these costs result in increased production costs for our vendors. These vendors typically look to pass their increased costs along to us through price increases. The fuel costs of our distribution and store operations have fluctuated as well. While we typically try to pass increased vendor prices and fuel costs through to our customers or to modify our activities to mitigate the impact, we may not be successful. Failure to fully pass any such increased prices and costs through to our customers or to modify our activities to mitigate the impact would have an adverse effect on our operating margins.
Our ability to successfully attract and retain qualified personnel to staff our stores could impact labor costs, sales at existing stores, and the rate of new store openings. Our success depends in part on our ability to attract, motivate, and retain a sufficient number of qualified employees, including store managers, outside sales personnel, and other store associates, who understand and appreciate our culture and are able to adequately represent this culture to our customers. Qualified individuals of the requisite caliber and number needed to fill these positions may be in short supply in some areas, and the turnover rate in the industry is high. If we are unable to hire and retain personnel capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture and product knowledge, our sales could be materially adversely affected. Additionally, competition for qualified employees could require us to pay higher wages to attract a sufficient number of employees. An inability to recruit and retain a sufficient number of qualified individuals in the future may also delay the planned openings of new stores. Any such delays, material increases in employee turnover rates at existing stores, or increases in labor costs, could have a material adverse effect on our business, financial condition, or operating results.
Inclement weather and other disruptions to the transportation network could impact our distribution system. Our ability to provide efficient distribution of core business products to our store network is an integral component of our overall business strategy. Disruptions at distribution centers or shipping ports, due to events such as the hurricanes of 2005 and 2012 and the longshoreman’s strike on the West Coast in 2002, may affect our ability to both maintain core products in inventory and deliver products to our customers on a timely basis, which may in turn adversely affect our results of operations. In addition, severe weather conditions could adversely affect demand for our products in particularly hard hit regions.
We are exposed to foreign currency exchange rate risk, and changes in foreign exchange rates could increase our costs to procure products and our foreign sales. Because the functional currency related to most of our foreign operations is the applicable local currency, we are exposed to foreign currency exchange rate risk arising from transactions in the normal course of business, such as sales to customers and purchases from suppliers denominated in foreign currencies. In addition, fluctuations in the relative strength of foreign economies could impact our ability to procure products overseas at competitive prices and our foreign sales. Our primary exchange rate exposure is with the Canadian dollar.
We may not be able to compete effectively against our competitors, which could harm our business and operating results. The industrial, construction, and maintenance supply industry, although consolidating, still remains a large, fragmented industry that is highly competitive. Our current or future competitors include companies with similar or greater market presence, name recognition, and financial, marketing, and other resources, and we believe they will continue to challenge us with their product selection, financial resources, and services. Increased competition in markets in which we have stores or the adoption by competitors of aggressive pricing strategies and sales methods could cause us to lose market share or reduce our prices or increase our spending, thus eroding our margins.
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Our revenues and net income may be adversely affected by economic conditions, political situations, and changing laws and regulations, over which we have no control. We obtain certain of our products, and our suppliers obtain certain of their products, from China, Taiwan, South Korea, Mexico, and other foreign countries. Our vendors could discontinue selling products manufactured in foreign countries at any time for reasons that may or may not be in our control or the vendor’s control, including foreign government regulations, domestic government regulations, political unrest, war, disruption or delays in shipments, changes in local economic conditions and trade issues. Our operating results and inventory levels could suffer if we are unable to promptly replace a vendor who is unwilling or unable to satisfy our requirements with a vendor providing equally appealing products.
Our business may be adversely affected by political gridlock in the United States. We primarily operate in the United States. During the last several years there has been significant fiscal uncertainty in the country the resolution of which has been impeded by political gridlock. We believe this has adversely impacted our business and could negatively impact our business in the future.
Our FAST SolutionsSM (industrial vending) business is new, and our competitive advantage could be eliminated. We believe we have a competitive advantage due to our industrial vending platform (hardware and software), our local store presence, our 'vendible' product depth, and, in North America, our distribution strength. These advantages have developed over time; however, other competitors could respond to our rapidly expanding industrial vending business with highly competitive platforms of their own. These alternative solutions could negatively impact our ability to expand our business and/or negatively impact the economics of the industrial vending business.
The industrial, construction, and maintenance supply industry is consolidating, which could cause it to become more competitive and could negatively impact our business. The industrial, construction, and maintenance supply industry in North America is consolidating. This consolidation is being driven by customer needs and supplier capabilities, which could cause the industry to become more competitive as greater economies of scale are achieved by suppliers. Customers are increasingly aware of the total costs of fulfillment and of the need to have consistent sources of supply at multiple locations. We believe these customer needs could result in fewer suppliers as the remaining suppliers become larger and capable of being a consistent source of supply.
There can be no assurance that we will be able in the future to take advantage effectively of the trend toward consolidation. The trend in our industry toward consolidation could make it more difficult for us to maintain operating margins. Furthermore, as our industrial and construction customers face increased foreign competition, and potentially lose business to foreign competitors or shift their operations overseas in an effort to reduce expenses, we may face increased difficulty in growing and maintaining our market share and growth prospects.
We will need to begin disclosing our use of 'conflict minerals' in certain of the products we distribute, which will impose costs on us and could raise reputational and other risks. The SEC has promulgated final rules in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act, regarding disclosure of the use of certain minerals, known as 'conflict minerals', that are mined from the Democratic Republic of the Congo and adjoining countries. These new requirements will require due diligence efforts in fiscal year 2013 and thereafter, with initial disclosure requirements effective in May 2014. There will be costs associated with complying with these disclosure requirements, including costs to determine which of our products are subject to the new rules and the source of any 'conflict minerals' used in those products. In addition, the implementation of these rules could adversely affect the sourcing, supply, and pricing of materials used in those products. Also, we may face reputational challenges if we are unable to verify the origins for all metals used in products through the procedures we may implement. We may also encounter challenges to satisfy customers that may require all of the components of products purchased to be certified as conflict free. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier.
ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
None.
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ITEM 2. | PROPERTIES |
We own several facilities in Winona, Minnesota. These facilities are as follows:
Purpose | Approximate Square Feet | ||
Distribution center and home office | 259,000 | 1 | |
Manufacturing facility | 100,000 | ||
Computer support center | 13,000 | ||
Winona store | 15,000 | ||
Winona product support facility | 55,000 | ||
Rack and shelving storage | 42,000 | ||
Multi-building complex which houses certain operations of the distribution group, our support services group, and the home office support group | 30,000 | ||
1 | This facility was expanded in 2012 to include an auxiliary building which contains an automated storage and retrieval system with 253,000 tote locations for small parts. |
We also own the following facilities, excluding store locations, outside of Winona, Minnesota:
Purpose | Location | Approximate Square Feet | |||
Distribution center and manufacturing facility | Indianapolis, Indiana | 525,000 | 1 | ||
Storage facility | Indianapolis, Indiana | 262,000 | |||
Distribution center | Atlanta, Georgia | 198,000 | |||
Distribution center | Dallas, Texas | 176,000 | 2 | ||
Distribution center | Scranton, Pennsylvania | 160,000 | |||
Distribution center | Akron, Ohio | 102,000 | |||
Distribution center | Kansas City, Kansas | 300,000 | |||
Distribution center | Toronto, Ontario, Canada | 62,000 | |||
Distribution center | Greensboro, North Carolina | 250,000 | |||
Distribution center and manufacturing facility | Modesto, California | 328,000 | |||
Manufacturing facility | Rockford, Illinois | 100,000 | |||
Local re-distribution center and manufacturing facility | Johor, Malaysia | 27,000 | |||
Manufacturing facility | Wallingford, Connecticut | 187,000 | |||
1 | In addition, this facility has an auxiliary building which contains an automated storage and retrieval system with capacity of 52,000 pallet locations and 250,000 tote locations for small parts. |
2 | In addition, this facility contains an automated storage and retrieval system with capacity of 14,000 pallet locations and 42,000 tote locations for small parts. |
In addition, we own 176 buildings that house our store locations in various cities throughout North America.
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All other buildings we occupy are leased. Leased stores range from approximately 3,000 to 10,000 square feet, with lease terms of up to 60 months (most initial lease terms are for 36 to 48 months). We also lease the following:
Purpose | Location | Approximate Square Feet | Lease Expiration Date | Remaining Lease Renewal Options | ||||
Distribution center | Seattle, Washington | 100,000 | April 2017 | Two | ||||
Distribution center | Salt Lake City, Utah | 44,000 | July 2015 | Two | ||||
Distribution center | Monterrey, Nuevo Leon, Mexico | 14,000 | June 2014 | One | ||||
Distribution center and manufacturing facility | Edmonton, Alberta, Canada | 22,000 | July 2020 | One | ||||
Distribution center (supplemental site) | Edmonton, Alberta, Canada | 6,400 | August 2013 | None | ||||
Manufacturing facility | Houston, Texas | 20,500 | June 2014 | None | ||||
Local re-distribution center and manufacturing facility | Modrice, Czech Republic | 15,000 | July 2021 | None | ||||
If economic conditions are suitable, we will, in the future, consider purchasing store locations to house our older stores. It is anticipated the majority of new store locations will continue to be leased. It is our policy to negotiate relatively short lease terms to facilitate relocation of particular store operations, when desirable. Our experience has been that space suitable for our needs and available for leasing is more than sufficient.
ITEM 3. | LEGAL PROCEEDINGS |
A description of our legal proceedings, if any, is contained in Note 10 of the 'Notes to Consolidated Financial Statements'. The description of our legal proceedings, if any, in Note 10 is incorporated herein by reference.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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ITEM X. | EXECUTIVE OFFICERS OF THE REGISTRANT |
The executive officers of Fastenal Company are:
Name | Employee of Fastenal since | Age | Position | ||
Willard D. Oberton | 1980 | 54 | Chief Executive Officer and Director | ||
Leland J. Hein | 1985 | 52 | President | ||
Daniel L. Florness | 1996 | 49 | Executive Vice President and Chief Financial Officer | ||
Steven A. Rucinski | 1980 | 55 | Executive Vice President-Sales | ||
Gary A. Polipnick | 1983 | 49 | Executive Vice President-Sales | ||
Kenneth R. Nance | 1992 | 48 | Executive Vice President-Sales | ||
Reyne K. Wisecup | 1988 | 49 | Executive Vice President-Human Resources and Director | ||
Nicholas J. Lundquist | 1979 | 55 | Executive Vice President-Operations | ||
James C. Jansen | 1992 | 42 | Executive Vice President-Operations | ||
Michael S. Camp | 1991 | 44 | Executive Vice President-Product and Procurement | ||
Ashok Singh | 2001 | 50 | Executive Vice President-Information Technology | ||
Mr. Oberton has been our chief executive officer since December 2002. From July 2001 to July 2012, Mr. Oberton was our president and chief executive officer. From July 2001 through December 2002, Mr. Oberton was our president and chief operating officer. Mr. Oberton has also served as one of our directors since June 1999.
Mr. Hein has been our president since July 2012. From November 2007 to July 2012, Mr. Hein was one of our executive vice presidents – sales. Mr. Hein’s responsibilities as an executive vice president – sales included sales and operational oversight over a substantial portion of our business. Prior to November 2007, Mr. Hein served in various sales leadership roles, most recently as leader of our Winona and Kansas City based regions.
Mr. Florness has been our executive vice president and chief financial officer since December 2002. From June 1996 to November 2002, Mr. Florness was our chief financial officer.
Mr. Rucinski has been one of our executive vice presidents – sales since November 2007. Mr. Rucinski’s responsibilities include sales and operational oversight over our international business. Prior to November 2007, Mr. Rucinski served in various sales leadership roles, most recently as leader of national accounts.
Mr. Polipnick has been one of our executive vice presidents – sales since July 2012. Mr. Polipnick's responsibilities include sales and operational oversight of our western United States business. Prior to July 2012, Mr. Polipnick served in various sales leadership roles, most recently as leader of our Winona based region.
Mr. Nance has been one of our executive vice presidents – sales since July 2012. Mr. Nance's responsibilities include sales and operational oversight of our eastern United States and Mexican businesses. Prior to July 2012, Mr. Nance served in various sales leadership roles, most recently as leader of our Texas based region.
Ms. Wisecup has been our executive vice president – human resources since November 2007. Prior to November 2007, Ms. Wisecup served in various support roles, most recently as director of employee development. Ms. Wisecup has served as one of our directors since 2000.
Mr. Lundquist has been one of our executive vice presidents – operations since July 2012. Mr. Lundquist's responsibilities include distribution development. From November 2007 to July 2012, Mr. Lundquist was one of our executive vice presidents – sales. Mr. Lundquist’s responsibilities as an executive vice president – sales included sales and operational oversight over a substantial portion of our business. From December 2002 to November 2007, Mr. Lundquist was our executive vice president and chief operating officer.
Mr. Jansen has been an executive vice president – operations since December 2010. Since July 2012, Mr Jansen's responsibilities include oversight of our manufacturing and specialty sales areas. Specialty sales include government sales and industrial vending. Prior to July 2012, Mr. Jansen's responsibilities also included distribution development. From November 2007 to December 2010, Mr. Jansen was our executive vice president – internal operations. From May 2005 to November 2007, Mr. Jansen served as leader of systems development (this role encompassed both information systems and distribution
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systems development). From April 2000 to April 2005, Mr. Jansen served in the sales leadership role of our Texas based region.
Mr. Camp has been our executive vice president – product and procurement since January 2011. Mr. Camp’s responsibilities include product development, global sourcing, and procurement. From January 2008 through April 2008, Mr. Camp was our vice president – purchasing and supply chain and from May 2008 to December 2010, Mr. Camp was our vice president – product development and procurement. From January 2003 through December 2007, Mr. Camp served as the president of our FASTCO subsidiary, was based in Shanghai, China and was responsible for our sourcing, supplier development, and procurement functions within the Asia-Pacific region. From March 1996 to January 2003, Mr. Camp was the leader of our corporate purchasing departments.
Mr. Singh has been our executive vice president – information technology since January 2011. Mr. Singh joined Fastenal in 2001 and, prior to January 2011, served in various roles of increasing responsibility in the administration and application development areas within our information technology group.
The executive officers are elected by our board of directors for a term of one year and serve until their successors are elected and qualified. None of our executive officers are related to any other such executive officer or to any of our other directors.
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PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
Common Stock Data
Our shares are traded on The NASDAQ Stock Market under the symbol ‘FAST’. As of February 1, 2013, there were approximately 1,300 record holders of our common stock, which includes nominees or broker dealers holding stock on behalf of an estimated 149,000 beneficial owners.
The following table sets forth, by quarter, the high and low closing sale price of our shares on The NASDAQ Stock Market for 2012 and 2011.
2012: | High | Low | 2011 : | High | Low | ||||
First quarter | $54.59 | 43.76 | First quarter | $32.42 | 28.88 | ||||
Second quarter | $54.65 | 38.37 | Second quarter | $36.01 | 30.97 | ||||
Third quarter | $45.30 | 39.03 | Third quarter | $36.65 | 29.47 | ||||
Fourth quarter | $46.65 | 40.20 | Fourth quarter | $44.32 | 32.23 | ||||
In 2012, we paid quarterly dividends of $0.17, $0.17, $0.19, and $0.21 per share and a special supplemental dividend of $0.50 per share in December (total 2012 dividend equaled $1.24 per share). In 2011, we paid quarterly dividends of $0.25, $0.13, $0.13 and $0.14 per share (total 2011 dividend equaled $0.65 per share). In 2010, we paid semi-annual dividends of $0.20 and $0.21 per share and a special supplemental dividend of $0.21 per share (total 2010 dividend equaled $0.62 per share). On January 16, 2013, we announced a quarterly dividend of $0.10 per share to be paid on March 1, 2013 to shareholders of record at the close of business on February 1, 2013. We expect to pay a smaller quarterly dividend in the initial quarters of 2013 due to the large payout in late 2012. Our board intends to reassess our dividend payments each quarter as we progress through 2013 with the goal of returning to a dividend pattern more in-line with our quarterly dividends in 2012. This decision will be influenced by (1) the state of the economy, (2) the strength of our free cash flow (defined as operating cash flow less capital expenditures), (3) changes to the taxation of dividends, and (4) other factors deemed relevant by our board of directors.
Issuer Purchases of Equity Securities
The table below sets forth information regarding purchases by the Company of our common stock during each of the last three months of 2012:
(a) | (b) | (c) | (d) | ||||
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | |||
October 1-31, 2012 | 0 | $0.00 | 0 | 1,800,000 | |||
November 1-30, 2012 | 0 | $0.00 | 0 | 1,800,000 | |||
December 1-31, 2012 | 0 | $0.00 | 0 | 1,800,000 | |||
Total | 0 | $0.00 | 0 | 1,800,000 | |||
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The Fastenal Company Common Stock Comparative Performance Graph
Set forth below is a graph comparing, for the five years ended December 31, 2012, the yearly cumulative total shareholder return on our common stock with the yearly cumulative total shareholder return of the S&P Composite Index and an index (the 'Peer Group Index') of a group of peer companies selected by us (the 'Peer Group'). The companies in the Peer Group are Lawson Products, Inc., MSC Industrial Direct Co., Inc., Airgas, Inc., and W.W. Grainger, Inc. Fastenal is not included in the Peer Group.
In calculating the yearly cumulative total shareholder return of the Peer Group Index, the shareholder returns of the companies included in the Peer Group are weighted according to the stock market capitalization of such companies at the beginning of each period for which a return is indicated.
The comparison of total shareholder returns in the performance graph assumes that $100 was invested on December 31, 2007 in Fastenal Company, the S&P Composite Index and the Peer Group Index, and that dividends were reinvested when and as paid.
Comparison of Five Year Cumulative Total Return Among Fastenal Company,
Peer Group Index, and S&P Composite Index
2007 | 2008 | 2009 | 2010 | 2011 | 2012 | ||||||
Fastenal Company | 100.00 | 87.89 | 107.34 | 158.53 | 235.34 | 258.99 | |||||
Peer Group Index | 100.00 | 86.44 | 108.31 | 153.14 | 196.92 | 219.33 | |||||
S&P Composite Index | 100.00 | 63.01 | 79.69 | 91.69 | 93.63 | 108.62 | |||||
ITEM 6. | SELECTED FINANCIAL DATA |
Incorporated herein by reference is Ten-Year Selected Financial Data on page 5 of Fastenal’s 2012 Annual Report to Shareholders of which this Form 10-K forms a part, a portion of which is filed as Exhibit 13 to this Form 10-K.
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements. (Dollar amounts are in thousands except for per share amounts and where otherwise noted.)
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BUSINESS AND OPERATIONAL OVERVIEW:
Fastenal is a North American leader in the wholesale distribution of industrial and construction supplies. We distribute these supplies through a network of approximately 2,700 company owned stores. Most of our customers are in the manufacturing and non-residential construction markets. The manufacturing market includes both original equipment manufacturers (OEM) and maintenance and repair operations (MRO). The non-residential construction market includes general, electrical, plumbing, sheet metal, and road contractors. Other users of our product include farmers, truckers, railroads, mining companies, federal, state, and local governmental entities, schools, and certain retail trades. Geographically, our stores and customers are primarily located in North America.
Like most industrial and construction centric organizations, we have endured a roller coaster ride over the last several years. The third quarter of 2008 included the final months of an inflationary period related to both steel prices (between 40% and 50% of our sales consist of some type of fastener – nuts, bolts, screws, etc. – most of which are made of steel) and energy prices (a meaningful item for us given the amount of energy that is necessary in the production of our products and in the transportation of our products across North America).
In the fourth quarter of 2008, and throughout much of 2009, this inflation turned to deflation. When the swings are dramatic, this can hurt our gross margins because we are selling expensive inventory on the shelf at declining prices. This hurt our gross margins in 2009. The drop in energy costs over the same period provided some relief, but it was small in comparison to the impact of deflation. The deflation of 2009 ended and these conditions normalized and allowed our gross margins to recover in 2010 and 2011. (See later discussion on gross margins.)
The discussion that follows includes information regarding our sales growth and our sales by product line during 2012. This information provides a summary view to understand the dynamics of the year. However, we feel the real story is told in the monthly sales change, sequential trend, and end market information that follows – that information explains the real impact of the market dynamics affecting us over this period of uncertainty.
Over the last several years, we have continued to make significant investments in (1) store locations, (2) national accounts, (3) government sales, (4) internal manufacturing support, (5) international operations (now over 10% of our sales), (6) FAST SolutionsSM (industrial vending), (7) product expansion (with particular emphasis on metalworking products and on exclusive brands), (8) additional sales specialists to support safety products, metalworking products, and our manufacturing operations, and (9) additional sales operational support to focus on under performing stores and under performing industrial vending. We are excited about the prospects of each.
As always, the ‘pathway to profit’ is the cornerstone of our business evolution, and it influences everything we do. Remember, our business centers on our 2,700 stores – their individual success leads to the success of the entire organization over time. As always, we will continue to work to complete this task and maintain our goal of Growth through Customer Service.
SALES GROWTH:
Net sales and growth rates in net sales were as follows:
2012 | 2011 | 2010 | |||||||
Net sales | $ | 3,133,577 | 2,766,859 | 2,269,471 | |||||
Percentage change | 13.3 | % | 21.9 | % | 17.6 | % | |||
The increase in net sales in 2012 came primarily from higher unit sales. Our growth in net sales was impacted by price changes in our products, but the impact was limited. Our growth in net sales was not meaningfully impacted by the introduction of new products or services, but was helped by initiatives such as FAST SolutionsSM (industrial vending). The higher unit sales resulted primarily from increases in sales at older store locations (discussed below and again later in this document) and to a lesser degree the opening of new store locations in the last several years. The growth in net sales at the older store locations was hindered by weakness in the industrial production and non-residential construction industries served by our Company. The change in currencies in foreign countries (primarily Canada) relative to the United States dollar lowered our daily sales growth rate by 0.1% in 2012.
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The increase in net sales in 2011 came primarily from higher unit sales. Our growth in net sales was impacted by price changes in our products, but the impact was limited. Our growth in net sales was not meaningfully impacted by the introduction of new products or services, but was helped by initiatives such as FAST SolutionsSM (industrial vending). The higher unit sales resulted primarily from increases in sales at older store locations (discussed below and again later in this document) and to a lesser degree the opening of new store locations in the last several years. The growth in net sales at the older store locations was helped by the moderating impacts of the previous recessionary environment. The change in currencies in foreign countries (primarily Canada) relative to the United States dollar improved our daily sales growth rate by 0.7% in 2011.
The increase in net sales in 2010 came primarily from higher unit sales. Our growth in net sales was not meaningfully impacted by deflationary or inflationary price changes in our products or by the introduction of new products or services. The higher unit sales resulted primarily from increases in sales at older store locations (discussed below and again later in this document) and to a lesser degree the opening of new store locations in the last several years. The growth in net sales at the older store locations was due to the moderating impacts of the previous recessionary environment. The increase in net sales also resulted from the strengthening of the Canadian currency relative to the United States dollar and from our Holo-Krome business, which we acquired in December 2009. These two items added approximately 0.6 and 0.5 percentage points, respectively, to our growth in 2010.
The impact of the economy is best reflected in the growth performance of our stores opened greater than ten years ago (store sites opened as follows: 2012 group – opened 2002 and earlier, 2011 group – opened 2001 and earlier, and 2010 group – opened 2000 and earlier) and opened greater than five years ago (store sites opened as follows: 2012 group – opened 2007 and earlier, 2011 group – opened 2006 and earlier, and 2010 group – opened 2005 and earlier). These two groups of stores are more cyclical due to the increased market share they enjoy in their local markets. The stores opened greater than two years ago represent a consistent ‘same store’ view of our business (store sites opened as follows: 2012 group – opened 2010 and earlier, 2011 group – opened 2009 and earlier, and 2010 group – opened 2008 and earlier). The daily sales change for each of these groups was as follows:
Store Age | 2012 | 2011 | 2010 | ||
Opened greater than 10 years | 8.1% | 15.2% | 12.5% | ||
Opened greater than 5 years | 9.8% | 17.1% | 13.0% | ||
Opened greater than 2 years | 10.8% | 17.9% | 14.6% | ||
Note: The age groups above are measured as of the last day of each respective year.
Stores opened in 2012 contributed approximately $24,859 (or 0.8%) to 2012 net sales. Stores opened in 2011 contributed approximately $85,318 (or 2.7%) to 2012 net sales and approximately $27,120 (or 1.0%) to 2011 net sales. The rate of growth in sales of store locations generally levels off after they have been open for five years, and, as stated earlier, the sales generated at our older store locations typically vary more with the economy than do the sales of younger stores.
SALES BY PRODUCT LINE:
The approximate mix of sales from the fastener product line and from the other product lines was as follows:
2012 | 2011 | 2010 | |||
Fastener product line | 44% | 47% | 49% | ||
Other product lines | 56% | 53% | 51% | ||
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MONTHLY SALES CHANGES, SEQUENTIAL TRENDS, AND END MARKET PERFORMANCE
Note – Daily sales are defined as the sales for the period divided by the number of business days (in the United States) in the period.
This section focuses on three distinct views of our business – monthly sales changes, sequential trends, and end market performance. The first discussion regarding monthly sales changes provides a good mechanical view of our business based on the age of our stores. The second discussion provides a framework for understanding the sequential trends (that is, comparing a period to the immediately preceding period) in our business. Finally, we believe the third discussion regarding end market performance provides insight into activities with our various types of customers.
MONTHLY SALES CHANGES:
All company sales – During the months in 2012, 2011, and 2010, all of our selling locations, when combined, had daily sales growth rates of (compared to the comparable month in the preceding year):
Jan. | Feb. | Mar. | Apr. | May | June | July | Aug. | Sept. | Oct. | Nov. | Dec. | ||||||||||||||||||||||||
2012 | 21.3 | % | 20.0 | % | 19.3 | % | 17.3 | % | 13.1 | % | 14.0 | % | 12.1 | % | 12.0 | % | 12.9 | % | 6.8 | % | 8.2 | % | 9.7 | % | |||||||||||
2011 | 18.8 | % | 21.5 | % | 22.8 | % | 23.2 | % | 22.6 | % | 22.5 | % | 22.4 | % | 20.0 | % | 18.8 | % | 21.4 | % | 22.2 | % | 21.2 | % | |||||||||||
2010 | 2.4 | % | 4.4 | % | 12.1 | % | 18.6 | % | 21.1 | % | 21.1 | % | 24.4 | % | 22.1 | % | 23.5 | % | 22.4 | % | 17.9 | % | 20.9 | % | |||||||||||
The growth in the first three and a half months of 2012 generally continued the relative strength we saw in 2011 and in most of 2010. During 2012 there were two distinct economic slowdowns. The first occurred in the late April/May time frame, and then moderated until September. The second occurred in the October/November time frame. This was exaggerated by an unusual business day comparison in October (23 days in 2012 versus 21 days in 2011 - the maintenance portion of our business is often linked to monthly spend patterns, which are not as business day dependent, this can dilute the daily growth picture given the change in business day divisor) and the impact of Hurricane Sandy. The change in currencies in foreign countries (primarily Canada) relative to the United States dollar lowered our daily sales growth rate by 0.1% during 2012 (this lowered our growth in the first, second, and third quarters by 0.1%, 0.4%, 0.2%, respectively and increased our growth in the fourth quarter by 0.2%). This was a sharp contrast to 2011 and 2010, when changes in foreign currencies increased our growth by 0.7% and 0.6%, respectively.
Stores opened greater than two years – Our stores opened greater than two years (store sites opened as follows: 2012 group – opened 2010 and earlier, 2011 group – opened 2009 and earlier, and 2010 group – opened 2008 and earlier) represent a consistent 'same-store' view of our business. During the months in 2012, 2011, and 2010, the stores opened greater than two years had daily sales growth rates of (compared to the comparable month in the preceding year):
Jan. | Feb. | Mar. | Apr. | May | June | July | Aug. | Sept. | Oct. | Nov. | Dec. | ||||||||||||||||||||||||
2012 | 18.8 | % | 17.1 | % | 16.8 | % | 14.5 | % | 10.1 | % | 11.1 | % | 9.1 | % | 8.6 | % | 9.8 | % | 3.8 | % | 5.1 | % | 6.6 | % | |||||||||||
2011 | 16.0 | % | 18.4 | % | 19.4 | % | 19.6 | % | 19.2 | % | 19.1 | % | 18.7 | % | 16.5 | % | 15.2 | % | 18.0 | % | 18.5 | % | 17.5 | % | |||||||||||
2010 | 0.6 | % | 2.3 | % | 9.6 | % | 16.3 | % | 18.5 | % | 18.3 | % | 21.3 | % | 19.2 | % | 19.8 | % | 18.8 | % | 14.1 | % | 16.8 | % | |||||||||||
Stores opened greater than five years – The impact of the economy, over time, is best reflected in the growth performance of our stores opened greater than five years (store sites opened as follows: 2012 group – opened 2007 and earlier, 2011 group – opened 2006 and earlier, and 2010 group – opened 2005 and earlier). This group is more cyclical due to the increased market share they enjoy in their local markets. During the months in 2012, 2011, and 2010, the stores opened greater than five years had daily sales growth rates of (compared to the comparable month in the preceding year):
Jan. | Feb. | Mar. | Apr. | May | June | July | Aug. | Sept. | Oct. | Nov. | Dec. | ||||||||||||||||||||||||
2012 | 17.4 | % | 15.8 | % | 15.7 | % | 13.7 | % | 9.0 | % | 10.2 | % | 8.3 | % | 7.9 | % | 8.5 | % | 2.6 | % | 4.6 | % | 5.6 | % | |||||||||||
2011 | 15.3 | % | 17.9 | % | 19.2 | % | 19.1 | % | 17.9 | % | 18.2 | % | 17.3 | % | 15.2 | % | 14.5 | % | 17.0 | % | 17.4 | % | 16.9 | % | |||||||||||
2010 | -2.1 | % | -0.5 | % | 7.4 | % | 14.9 | % | 17.3 | % | 16.2 | % | 19.8 | % | 18.2 | % | 18.9 | % | 17.9 | % | 13.2 | % | 16.0 | % | |||||||||||
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SEQUENTIAL TRENDS:
We find it helpful to think about the monthly sequential changes in our business using the analogy of climbing a stairway – This stairway has several predictable landings where there is a pause in the sequential gain (i.e. April, July, and October to December), but generally speaking, climbs from January to October. The October landing then establishes the benchmark for the start of the next year.
History has identified these landings in our business cycle. They generally relate to months with impaired business days (certain holidays). The first landing centers on Easter, which alternates between March and April (Easter occurred in April in 2012, 2011, and 2010), the second landing centers on July 4th, and the third landing centers on the approach of winter with its seasonal impact on primarily our construction business and with the Christmas / New Year holidays. The holidays we noted impact the trends because they either move from month-to-month or because they move around during the week.
The table below shows the pattern to our sequential change in our daily sales. The line labeled 'Past' is an historical average of our sequential daily sales change for the period 1998 to 2003. We chose this time frame because it had similar characteristics, a weaker industrial economy in North America, and could serve as a benchmark for a possible trend line. The '2012', '2011', and '2010' lines represent our actual sequential daily sales changes. The '12Delta', '11Delta', and '10Delta' lines indicate the difference between the 'Past' and the actual results in the respective year.
Jan.(1) | Feb. | Mar. | Apr. | May | June | July | Aug. | Sept. | Oct. | Cumulative change from Jan. to Oct. | ||||||||||||||||||||||
Past | 0.9 | % | 3.3 | % | 2.9 | % | -0.3 | % | 3.4 | % | 2.8 | % | -2.3 | % | 2.6 | % | 2.6 | % | -0.7 | % | 15.9 | % | ||||||||||
2012 | -0.3 | % | 0.5 | % | 6.4 | % | -0.8 | % | 0.5 | % | 2.5 | % | -2.7 | % | 1.3 | % | 4.3 | % | -4.8 | % | 7.1 | % | ||||||||||
12Delta | -1.2 | % | -2.8 | % | 3.5 | % | -0.5 | % | -2.9 | % | -0.3 | % | -0.4 | % | -1.3 | % | 1.7 | % | -4.1 | % | -8.8 | % | ||||||||||
2011 | -0.2 | % | 1.6 | % | 7.0 | % | 0.9 | % | 4.3 | % | 1.7 | % | -1.0 | % | 1.4 | % | 3.4 | % | 0.7 | % | 21.7 | % | ||||||||||
11Delta | -1.1 | % | -1.7 | % | 4.1 | % | 1.2 | % | 0.9 | % | -1.1 | % | 1.3 | % | -1.2 | % | 0.8 | % | 1.4 | % | 5.8 | % | ||||||||||
2010 | 2.9 | % | -0.7 | % | 5.9 | % | 0.6 | % | 4.8 | % | 1.7 | % | -1.0 | % | 3.5 | % | 4.5 | % | -1.5 | % | 19.0 | % | ||||||||||
10Delta | 2.0 | % | -4.0 | % | 3.0 | % | 0.9 | % | 1.4 | % | -1.1 | % | 1.3 | % | 0.9 | % | 1.9 | % | -0.8 | % | 3.1 | % | ||||||||||
(1) | The January figures represent the percentage change from the previous October, whereas the remaining figures represent the percentage change from the previous month. |
A graph of the sequential daily sales change pattern discussed above, starting with a base of '100' in the previous October and ending with the next October, would be as follows:
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Several observations stand out while viewing the 2012 sequential pattern: (1) The direction of the historical sequential pattern (increased daily sales on a sequential basis in February, March, May, June, August, and September and decreased daily sales on a sequential basis in April and July) has played out each month; however, the cumulative growth in the daily sales from January to October has fallen short of the benchmark figure and of the actual results in 2011 and 2010. (2) The magnitude of the February and May '12Delta' of approximately -2.8% was similar. This fact, as well as the choppiness of the year in general, caused us to approach the year with a conservative tone. (3) The weakness in 2012 was amplified in the first three quarters of the year by changes in foreign currencies (primarily Canada) relative to the U.S. dollar as indicated earlier.
END MARKET PERFORMANCE:
Fluctuations in end market business – The sequential trends noted above were directly linked to fluctuations in our end markets. To place this in perspective – approximately 50% of our business has historically been with customers engaged in some type of manufacturing. The daily sales to these customers grew in the first, second, third, and fourth quarters (when compared to the same quarter in the previous year), and for the year, as follows:
Q1 | Q2 | Q3 | Q4 | Annual | ||||||||||
2012 | 20.3 | % | 15.8 | % | 14.0 | % | 9.7 | % | 14.9 | % | ||||
2011 | 15.5 | % | 18.5 | % | 18.3 | % | 21.0 | % | 20.0 | % | ||||
2010 | 15.7 | % | 29.8 | % | 30.6 | % | 17.7 | % | 22.4 | % | ||||
Our manufacturing business consists of two subsets: the industrial production business (this is business where we supply products that become part of the finished goods produced by our customers) and the maintenance portion (this is business where we supply products that maintain the facility or the equipment of our customers engaged in manufacturing). The industrial business is more fastener centered, while the maintenance portion is represented by all product categories.
In the second, third, and fourth quarters of 2012, the decrease in the rate of growth was more pronounced in our industrial production business. This is in sharp contrast to the first quarter of 2012 where the growth was more pronounced in the industrial production business, a trend that had also existed in 2011 and 2010. The first quarter and prior quarters were a direct counter to the 2009 contraction, which was more severe in our industrial production business and less severe in the maintenance portion of our manufacturing business.
The best way to understand the change in our industrial production business is to examine the results in our fastener product line. In the first three months of 2012, the daily sales growth in our fastener product line was approximately 15.4%. This growth dropped to 10.5%, 6.1%, and 8.6% in April, May, and June, respectively, and then averaged 6.0% and 2.6% in the third and fourth quarters, respectively. By contrast, the best way to understand the change in the maintenance portion of the manufacturing business is to examine the results in our non-fastener product lines. In the first three months of 2012, the daily sales growth in our non-fastener business was approximately 25.1%. This dropped to 24.4%, 19.0%, and 19.6% in April, May, and June, respectively, and averaged 18.0% and 13.6% in the third and fourth quarters, respectively. The non-fastener business has demonstrated relative resilience in 2012, when compared to our fastener business and to the distribution industry in general, due to our strong FAST SolutionsSM (industrial vending) program; this is discussed in greater detail later in this document.
The patterns related to the industrial production business, as noted above, are influenced by the movements noted in the Purchasing Manufacturers Index ('PMI') published by the Institute for Supply Management (http://www.ism.ws/), which is a composite index of economic activity in the United States manufacturing sector. The PMI in 2012, 2011, and 2010 was as follows:
Jan. | Feb. | Mar. | Apr. | May | June | July | Aug. | Sept. | Oct. | Nov. | Dec. | ||||||||||||||||||||||||
2012 | 54.1 | 52.4 | 53.4 | 54.8 | 53.5 | 49.7 | 49.8 | 49.6 | 51.5 | 51.7 | 49.5 | 50.7 | |||||||||||||||||||||||
2011 | 59.9 | 59.8 | 59.7 | 59.7 | 54.2 | 55.8 | 51.4 | 52.5 | 52.5 | 51.8 | 52.2 | 53.1 | |||||||||||||||||||||||
2010 | 56.7 | 55.8 | 59.3 | 59.0 | 58.8 | 56.0 | 55.7 | 57.4 | 56.4 | 57.0 | 58.0 | 57.3 | |||||||||||||||||||||||
For background to readers not familiar with the PMI index, it is a monthly indicator of the economic health of the manufacturing sector. Five major indicators that influence the PMI index are new orders, inventory levels, productions, supplier deliveries, and the employment environment. When a PMI of 50 or higher is reported, this indicates expansion in the manufacturing industry compared to the previous month. If the PMI is below 50, this represents a contraction in the manufacturing sector.
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Our non-residential construction customers have historically represented 20% to 25% of our business. The daily sales to these customers grew or contracted in the first, second, third, and fourth quarters (when compared to the same quarter in the previous year), and for the year, as follows:
Q1 | Q2 | Q3 | Q4 | Annual | ||||||||||
2012 | 17.1 | % | 12.7 | % | 8.2 | % | 4.2 | % | 10.3 | % | ||||
2011 | 17.7 | % | 15.8 | % | 15.8 | % | 17.4 | % | 17.1 | % | ||||
2010 | -14.7 | % | 0.5 | % | 6.3 | % | 10.3 | % | -0.3 | % | ||||
We believe the weakness in the economy in the fourth quarter of 2012, particularly in the non-residential construction market, was amplified by the political uncertainty in the United States.
A graph of the sequential daily sales trends to these two end markets in 2012, 2011, and 2010, starting with a base of '100' in the previous October and ending with the next October, would be as follows:
Manufacturing
Non-Residential Construction
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GROWTH DRIVERS OF OUR BUSINESS
We grow by continuously adding customers and by increasing the activity with each customer. We believe this growth is enhanced by our close proximity to our customers, which allows us to provide a range of services and product availability that our competitors can't easily match. Historically, we expanded our reach by opening stores at a very fast pace. These openings were initially in the United States, but expanded beyond the United States beginning in the mid 1990's.
In our first ten years of being public (1987 to 1997), we opened stores at a rate approaching 30% per year. In the next ten years, we opened stores at an annual rate of approximately 10% to 15% and, over the last five years, at a rate of approximately 3% to 8% (we currently expect to open approximately 65 to 80 stores in 2013, or approximately 2.5% to 3.0%). As we gained proximity to more customers, we continued to diversify our growth drivers. This was done to provide existing store personnel with more tools to grow their business organically, and the results of this are reflected in our earlier discussion on sales growth at stores opened greater than five years. In the early 1990's, we began to expand our product lines, and we added new product knowledge to our bench. This was our first big effort to diversify our growth drivers. The next step began in the mid to late 1990's when we began to add sales personnel with certain specialties or focus. This began with our National Accounts group in 1995, and, over time, has expanded to include individuals dedicated to: (1) sales related to our internal manufacturing division, (2) government sales, (3) internet sales, (4) specific products (most recently metal working), and (5) FAST SolutionsSM (industrial vending). Another step occurred at our sales locations (this includes Fastenal stores as well as strategic account stores and in-plant locations) and at our distribution centers, and began with a targeted merchandising and inventory placement strategy that included our 'Customer Service Project' approximately ten years ago and our 'Master Stocking Hub' initiative approximately five years ago. This strategy allowed us to better target where to stock certain products (local store, regional distribution center, master stocking hub, or supplier) and allowed us to improve our fulfillment, lower our freight costs, and improve our ability to serve a broader range of customers.
Our FAST SolutionsSM (industrial vending) operation is a rapidly expanding component of our business. We believe industrial vending is the next logical chapter in the Fastenal story; we also believe it has the potential to be transformative to industrial distribution, and that we have a 'first mover' advantage. We are investing aggressively to maximize this advantage. At our investor day in May 2011, we discussed our progress with industrial vending. In addition to our discussion regarding progress, we discussed our goals with the rollout of the industrial vending machines. One of the goals we identified related to our rate of 'machine signings' (the first category below) – our goal was simple, sign 2,500+ machines per quarter (or an annualized run rate of 10,000 machines). In 2012, we hit our annual goal of 10,000 machines during July, and the momentum has continued as we finished the year. We intend to continue our aggressive push with FAST SolutionsSM (industrial vending) and, to this end, have established an internal goal to sign 30,000 machines in 2013, or 2,500 per month rather than per quarter. This is an aggressive goal, but we believe we can hit this run rate during 2013. In addition, during 2012 we developed plans to (1) reinvigorate our fastener growth and to (2) improve the performance (i.e. sales growth) at under-performing locations. These plans centered on expanding our sales team for industrial production business, improving our delivery systems for other fastener business, and expanding the team that supports under-performing stores and districts.
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The following table includes some statistics regarding our industrial vending business (note - we added the third category of information in this report to highlight the mix change in the machines deployed as our business expands beyond the flagship FAST 5000 machine):
Q1 | Q2 | Q3 | Q4 | Annual | |||||||||||
Number of vending machines in | 2012 | 4,568 | 4,669 | 5,334 | 5,591 | 20,162 | |||||||||
contracts signed during the period1 | 2011 | 1,405 | 2,107 | 2,246 | 2,084 | 7,842 | |||||||||
2010 | 257 | 420 | 440 | 792 | 1,909 | ||||||||||
Cumulative machines installed2 | 2012 | 9,798 | 13,036 | 17,013 | 21,095 | ||||||||||
2011 | 2,659 | 3,867 | 5,642 | 7,453 | |||||||||||
2010 | 892 | 1,184 | 1,515 | 1,925 | |||||||||||
Percent of installed machines that are a FAST 5000 | 2012 | 69.7 | % | 65.9 | % | 60.6 | % | 58.0 | % | ||||||
(our most common helix vending machine) | 2011 | 82.6 | % | 77.5 | % | 75.0 | % | 72.5 | % | ||||||
2010 | 99.5 | % | 97.3 | % | 92.4 | % | 87.8 | % | |||||||
Percent of total net sales to | 2012 | 17.8 | % | 20.8 | % | 23.2 | % | 25.8 | % | ||||||
customers with vending machines3 | 2011 | 8.9 | % | 10.5 | % | 13.1 | % | 15.7 | % | ||||||
2010 | 3.4 | % | 4.6 | % | 6.1 | % | 7.5 | % | |||||||
Daily sales growth to customers | 2012 | 33.9 | % | 34.3 | % | 32.9 | % | 28.6 | % | ||||||
with vending machines4 | 2011 | 50.6 | % | 43.9 | % | 42.5 | % | 40.7 | % | ||||||
2010 | 37.4 | % | 54.0 | % | 56.4 | % | 60.2 | % | |||||||
1 | This represents the gross number of machines signed during the quarter, not the number of contracts. |
2 | This represents the number of machines installed and dispensing product on the last day of the quarter. |
3 | The percentage of total sales (vended and traditional) to customers currently using a vending solution. |
4 | The growth in total sales (vended and traditional) to customers currently using a vending solution compared to the comparable period in the preceding year. |
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PROFIT DRIVERS OF OUR BUSINESS
We grow our profits by continuously working to grow sales and to improve our relative profitability. We also grow our profits by allowing our inherent profitability to shine through – we refer to this as the 'pathway to profit'. The distinction is important.
We achieve improvements in our relative profitability by increasing our gross margin, by structurally lowering our operating expenses, or both. We advance on the 'pathway to profit' by increasing the average store size (measured in terms of monthly sales), and by allowing the changing store mix to improve our profits. This is best explained by comparing the varying profitability of our 'traditional' stores in the table below. The average store size for the group, and the average age, number of stores, and pre-tax earnings data by store size for the fourth quarter of 2012, 2011, and 2010, respectively, were as follows:
Sales per Month | Average Age (Years) | Number of Stores | Percentage of Stores | Pre-Tax Earnings Percentage | ||||||||
Three months ended December 31, 2012 | Average store sales = $83,098 | |||||||||||
$0 to $30,000 | 4.7 | 304 | 11.5 | % | -14.4 | % | ||||||
$30,001 to $60,000 | 7.6 | 830 | 31.3 | % | 12.2 | % | ||||||
$60,001 to $100,000 | 10.0 | 759 | 28.6 | % | 21.3 | % | ||||||
$100,001 to $150,000 | 12.9 | 375 | 14.1 | % | 26.0 | % | ||||||
Over $150,000 | 14.9 | 272 | 10.3 | % | 28.8 | % | ||||||
Strategic Account/Overseas Store | 112 | 4.2 | % | |||||||||
Company Total | 2,652 | 100.0 | % | 20.9 | % | |||||||
Three months ended December 31, 2011 | Average store sales = $78,781 | |||||||||||
$0 to $30,000 | 3.8 | 353 | 13.7 | % | -13.7 | % | ||||||
$30,001 to $60,000 | 7.2 | 882 | 34.1 | % | 11.7 | % | ||||||
$60,001 to $100,000 | 9.4 | 680 | 26.3 | % | 21.3 | % | ||||||
$100,001 to $150,000 | 12.0 | 352 | 13.6 | % | 25.9 | % | ||||||
Over $150,000 | 15.1 | 227 | 8.8 | % | 27.4 | % | ||||||
Strategic Account/Overseas Store | 91 | 3.5 | % | |||||||||
Company Total | 2,585 | 100.0 | % | 20.2 | % | |||||||
Three months ended December 31, 2010 | Average store sales = $67,643 | |||||||||||
$0 to $30,000 | 3.8 | 462 | 18.6 | % | -13.2 | % | ||||||
$30,001 to $60,000 | 6.8 | 952 | 38.2 | % | 12.7 | % | ||||||
$60,001 to $100,000 | 9.7 | 573 | 23.0 | % | 22.0 | % | ||||||
$100,001 to $150,000 | 12.2 | 276 | 11.1 | % | 25.2 | % | ||||||
Over $150,000 | 15.2 | 152 | 6.1 | % | 27.1 | % | ||||||
Strategic Account/Overseas Store | 75 | 3.0 | % | |||||||||
Company Total | 2,490 | 100.0 | % | 18.7 | % | |||||||
Note – Amounts may not foot due to rounding difference.
When we originally announced the 'pathway to profit' strategy in 2007, our goal was to increase our pre-tax earnings, as a percentage of sales, from 18% to 23%. This goal was to be accomplished by slowly moving the mix from the first three categories ($0 to $30,000, $30,001 to $60,000, and $60,001 to $100,000, these groups represented 76.5% of our store base in the first three months of 2007, the last quarter before we announced the 'pathway to profit') to the last three categories ($60,001 to $100,000, $100,001 to $150,000, and over $150,000, these groups represented 53.0% of our store base in the fourth quarter of 2012) and by increasing the average store sales to approximately $125,000 per month. The weak economic environment in 2009 caused our average store size to decrease, and consequently lowered our level of profitability; however, subsequent to 2009 we improved our gross margin and structurally lowered our operating expenses. This improvement allowed us to amplify the 'pathway to profit' and effectively lowered the average store size required to hit our 23% goal. Today we believe we can accomplish our 'pathway to profit' goal with average store sales of approximately $100,000 to $110,000 per month. In the second quarter of 2012 we achieved a pre-tax earnings percentage of 22.2% with average store sales of $89,169 per month.
Note – Dollar amounts in this section are presented in whole dollars, not thousands.
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Store Count and Full-Time Equivalent (FTE) Headcount – The table that follows highlights certain impacts on our business of the 'pathway to profit' since its introduction in 2007. Under the 'pathway to profit' we increased both our store count and our store FTE headcount during 2007 and 2008. However, the rate of increase in store locations slowed and our FTE headcount for all types of personnel was reduced when the economy weakened late in 2008. In the table that follows, we refer to our 'store' net sales, locations, and personnel. When we discuss 'store' net sales, locations, and personnel, we are referring to (1) 'Fastenal' stores and (2) strategic account stores. 'Fastenal' stores are either a 'traditional' store, the typical format in the United States or Canada, or an 'overseas' store, which is the typical format outside the United States and Canada. This is discussed in greater detail earlier in this Form 10-K. Strategic account stores are stores that are focused on selling to a group of large customers in a limited geographic market. The sales, outside of our 'store' group, relate to either (1) our in-plant locations, (2) the portion of our internally manufactured product that is sold directly to a customer and not through a store (including our Holo-Krome business acquired in December 2009), or (3) our direct import business.
The breakdown of our sales, the average monthly sales per store, the number of stores at quarter end, the average headcount at our stores during a quarter, the average FTE headcount during a quarter, and the percentage change were as follows for the first quarter of 2007 (the last completed quarter before we began the 'pathway to profit'), for the third quarter of 2008 (our peak quarter before the economy weakened), and for each of the last five quarters:
Q1 2007 | Q3 2008 | Q4 2011 | Q1 2012 | Q2 2012 | Q3 2012 | Q4 2012 | ||||||||||||||
Total net sales reported | $489,157 | $625,037 | $697,804 | $768,875 | $804,890 | $802,577 | $757,235 | |||||||||||||
Less: Non-store sales (approximate) | 40,891 | 57,267 | 86,737 | 92,459 | 98,735 | 100,124 | 95,951 | |||||||||||||
Store net sales (approximate) | $448,266 | $567,770 | $611,067 | $676,416 | $706,155 | $702,453 | $661,284 | |||||||||||||
% change since Q1 2007 | 26.7 | % | 36.3 | % | 50.9 | % | 57.5 | % | 56.7 | % | 47.5 | % | ||||||||
% change (twelve months) | 17.5 | % | 21.0 | % | 20.2 | % | 14.6 | % | 10.1 | % | 8.2 | % | ||||||||
Percentage of sales through a store | 92 | % | 91 | % | 88 | % | 88 | % | 88 | % | 88 | % | 87 | % | ||||||
Average monthly sales per store | $72 | $82 | $79 | $86 | $89 | $88 | $83 | |||||||||||||
(using ending store count) | ||||||||||||||||||||
% change since Q1 2007 | 13.9 | % | 9.7 | % | 19.4 | % | 23.6 | % | 22.2 | % | 15.3 | % | ||||||||
% change (twelve months) | 9.3 | % | 16.2 | % | 16.2 | % | 11.3 | % | 6.0 | % | 5.1 | % | ||||||||
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Q1 2007 | Q3 2008 | Q4 2011 | Q1 2012 | Q2 2012 | Q3 2012 | Q4 2012 | ||||||||||||||
Store locations - quarter end count | 2,073 | 2,300 | 2,585 | 2,611 | 2,635 | 2,650 | 2,652 | |||||||||||||
% change since Q1 2007 | 11.0 | % | 24.7 | % | 26.0 | % | 27.1 | % | 27.8 | % | 27.9 | % | ||||||||
% change (twelve months) | 7.2 | % | 3.8 | % | 3.5 | % | 3.0 | % | 3.3 | % | 2.6 | % | ||||||||
Store personnel - absolute headcount | 6,849 | 9,123 | 10,328 | 10,486 | 10,637 | 10,604 | 10,347 | |||||||||||||
% change since Q1 2007 | 33.2 | % | 50.8 | % | 53.1 | % | 55.3 | % | 54.8 | % | 51.1 | % | ||||||||
% change (twelve months) | 17.9 | % | 14.1 | % | 12.2 | % | 9.3 | % | 5.4 | % | 0.2 | % | ||||||||
Store personnel - FTE | 6,383 | 8,280 | 8,684 | 8,900 | 9,126 | 9,244 | 9,035 | |||||||||||||
Non-store selling personnel - FTE | 616 | 599 | 953 | 998 | 1,054 | 1,066 | 1,070 | |||||||||||||
Sub-total of all sales personnel - FTE | 6,999 | 8,879 | 9,637 | 9,898 | 10,180 | 10,310 | 10,105 | |||||||||||||
Distribution personnel-FTE | 1,646 | 1,904 | 1,820 | 1,815 | 1,881 | 1,887 | 1,872 | |||||||||||||
Manufacturing personnel - FTE 1 | 316 | 340 | 516 | 527 | 545 | 544 | 544 | |||||||||||||
Administrative personnel-FTE | 767 | 805 | 796 | 796 | 794 | 808 | 811 | |||||||||||||
Sub-total of non-sales personnel - FTE | 2,729 | 3,049 | 3,132 | 3,138 | 3,220 | 3,239 | 3,227 | |||||||||||||
Total - average FTE headcount | 9,728 | 11,928 | 12,769 | 13,036 | 13,400 | 13,549 | 13,332 | |||||||||||||
% change since Q1 2007 | ||||||||||||||||||||
Store personnel - FTE | 29.7 | % | 36.0 | % | 39.4 | % | 43.0 | % | 44.8 | % | 41.5 | % | ||||||||
Non-store selling personnel - FTE | -2.8 | % | 54.7 | % | 62.0 | % | 71.1 | % | 73.1 | % | 73.7 | % | ||||||||
Sub-total of all sales personnel - FTE | 26.9 | % | 37.7 | % | 41.4 | % | 45.4 | % | 47.3 | % | 44.4 | % | ||||||||
Distribution personnel-FTE | 15.7 | % | 10.6 | % | 10.3 | % | 14.3 | % | 14.6 | % | 13.7 | % | ||||||||
Manufacturing personnel-FTE 1 | 7.6 | % | 63.3 | % | 66.8 | % | 72.5 | % | 72.2 | % | 72.2 | % | ||||||||
Administrative personnel-FTE | 5.0 | % | 3.8 | % | 3.8 | % | 3.5 | % | 5.3 | % | 5.7 | % | ||||||||
Sub-total of non-sales personnel - FTE | 11.7 | % | 14.8 | % | 15.0 | % | 18.0 | % | 18.7 | % | 18.2 | % | ||||||||
Total - average FTE headcount | 22.6 | % | 31.3 | % | 34.0 | % | 37.7 | % | 39.3 | % | 37.0 | % | ||||||||