WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
ý | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2014, or
¨ | 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 | 55987-1500 | |
(Address of principal executive offices) | (Zip Code) | |
(507) 454-5374
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 ý No ¨
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 ý No ¨
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 | ý | Accelerated Filer | ¨ | |||
Non-accelerated Filer | ¨ (Do not check if a smaller reporting company) | Smaller Reporting Company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.
Class | Outstanding at July 10, 2014 | |
Common Stock, par value $.01 per share | 296,770,069 | |
FASTENAL COMPANY
INDEX
Page No. | |
PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands except share information)
(Unaudited) | ||||||
Assets | June 30, 2014 | December 31, 2013 | ||||
Current assets: | ||||||
Cash and cash equivalents | $ | 105,940 | 58,506 | |||
Marketable securities | 453 | 451 | ||||
Trade accounts receivable, net of allowance for doubtful accounts of $10,588 and $9,248, respectively | 502,330 | 414,331 | ||||
Inventories | 818,771 | 784,068 | ||||
Deferred income tax assets | 17,279 | 18,248 | ||||
Prepaid income taxes | — | 24,869 | ||||
Other current assets | 111,009 | 107,988 | ||||
Total current assets | 1,555,782 | 1,408,461 | ||||
Property and equipment, less accumulated depreciation | 714,912 | 654,850 | ||||
Other assets, net | 12,279 | 12,473 | ||||
Total assets | $ | 2,282,973 | 2,075,784 | |||
Liabilities and Stockholders’ Equity | ||||||
Current liabilities: | ||||||
Line of credit | $ | 70,000 | — | |||
Accounts payable | 109,488 | 91,253 | ||||
Accrued expenses | 166,625 | 148,579 | ||||
Income taxes payable | 5,350 | — | ||||
Total current liabilities | 351,463 | 239,832 | ||||
Deferred income tax liabilities | 63,386 | 63,255 | ||||
Stockholders' equity: | ||||||
Preferred stock, 5,000,000 shares authorized | — | — | ||||
Common stock, 400,000,000 shares authorized, 296,764,444 and 296,753,544 shares issued and outstanding, respectively | 2,968 | 2,968 | ||||
Additional paid-in capital | 70,631 | 69,847 | ||||
Retained earnings | 1,782,873 | 1,688,781 | ||||
Accumulated other comprehensive income | 11,652 | 11,101 | ||||
Total stockholders' equity | 1,868,124 | 1,772,697 | ||||
Total liabilities and stockholders' equity | $ | 2,282,973 | 2,075,784 | |||
See accompanying notes to consolidated financial statements.
1
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
(Amounts in thousands except earnings per share)
(Unaudited) | (Unaudited) | ||||||||||||
Six Months Ended June 30, | Three Months Ended June 30, | ||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||
Net sales | $ | 1,826,439 | 1,653,922 | $ | 949,938 | 847,596 | |||||||
Cost of sales | 895,294 | 789,321 | 467,271 | 404,875 | |||||||||
Gross profit | 931,145 | 864,601 | 482,667 | 442,721 | |||||||||
Operating and administrative expenses | 545,859 | 498,084 | 276,016 | 250,750 | |||||||||
Gain on sale of property and equipment | (412 | ) | (456 | ) | (196 | ) | (243 | ) | |||||
Operating income | 385,698 | 366,973 | 206,847 | 192,214 | |||||||||
Interest income | 249 | 615 | 129 | 168 | |||||||||
Interest expense | (320 | ) | (37 | ) | (194 | ) | (3 | ) | |||||
Earnings before income taxes | 385,627 | 367,551 | 206,782 | 192,379 | |||||||||
Income tax expense | 143,182 | 137,494 | 76,268 | 71,370 | |||||||||
Net earnings | $ | 242,445 | 230,057 | $ | 130,514 | 121,009 | |||||||
Basic net earnings per share | $ | 0.82 | 0.78 | $ | 0.44 | 0.41 | |||||||
Diluted net earnings per share | $ | 0.82 | 0.77 | $ | 0.44 | 0.41 | |||||||
Basic weighted average shares outstanding | 296,667 | 296,711 | 296,691 | 296,779 | |||||||||
Diluted weighted average shares outstanding | 297,534 | 297,690 | 297,578 | 297,722 | |||||||||
See accompanying notes to consolidated financial statements.
2
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Amounts in thousands)
(Unaudited) | (Unaudited) | ||||||||||||
Six Months Ended June 30, | Three Months Ended June 30, | ||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||
Net earnings | $ | 242,445 | 230,057 | $ | 130,514 | 121,009 | |||||||
Other comprehensive income (loss), net of tax: | |||||||||||||
Foreign currency translation adjustments (net of tax of $0 in 2014 and 2013) | 549 | (7,359 | ) | 5,386 | (3,288 | ) | |||||||
Change in marketable securities (net of tax of $0 in 2014 and 2013) | 2 | 83 | — | 20 | |||||||||
Comprehensive income | $ | 242,996 | 222,781 | $ | 135,900 | 117,741 | |||||||
See accompanying notes to consolidated financial statements.
3
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited) | ||||||
Six Months Ended June 30, | ||||||
2014 | 2013 | |||||
Cash flows from operating activities: | ||||||
Net earnings | $ | 242,445 | 230,057 | |||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||
Depreciation of property and equipment | 35,190 | 30,969 | ||||
Gain on sale of property and equipment | (412 | ) | (456 | ) | ||
Bad debt expense | 5,421 | 4,336 | ||||
Deferred income taxes | 1,100 | (220 | ) | |||
Stock-based compensation | 3,000 | 2,700 | ||||
Excess tax benefits from stock-based compensation | (1,488 | ) | (2,093 | ) | ||
Amortization of non-compete agreements | 263 | 158 | ||||
Changes in operating assets and liabilities: | ||||||
Trade accounts receivable | (93,420 | ) | (68,629 | ) | ||
Inventories | (34,703 | ) | (9,724 | ) | ||
Other current assets | (3,021 | ) | (8,515 | ) | ||
Accounts payable | 18,235 | 11,734 | ||||
Accrued expenses | 18,046 | 13,135 | ||||
Income taxes | 31,707 | 16,558 | ||||
Other | 566 | (6,145 | ) | |||
Net cash provided by operating activities | 222,929 | 213,865 | ||||
Cash flows from investing activities: | ||||||
Purchases of property and equipment | (97,560 | ) | (92,561 | ) | ||
Proceeds from sale of property and equipment | 2,720 | 2,904 | ||||
Net increase in marketable securities | (2 | ) | (83 | ) | ||
Net (increase) decrease in other assets | (69 | ) | 37 | |||
Net cash used in investing activities | (94,911 | ) | (89,703 | ) | ||
Cash flows from financing activities: | ||||||
Borrowings under line of credit | 380,000 | 30,000 | ||||
Payments against line of credit | (310,000 | ) | (30,000 | ) | ||
Proceeds from exercise of stock options | 5,143 | 7,118 | ||||
Excess tax benefits from stock-based compensation | 1,488 | 2,093 | ||||
Purchases of common stock | (8,847 | ) | — | |||
Payments of dividends | (148,353 | ) | (89,000 | ) | ||
Net cash used in financing activities | (80,569 | ) | (79,789 | ) | ||
Effect of exchange rate changes on cash | (15 | ) | (1,131 | ) | ||
Net increase in cash and cash equivalents | 47,434 | 43,242 | ||||
Cash and cash equivalents at beginning of period | 58,506 | 79,611 | ||||
Cash and cash equivalents at end of period | $ | 105,940 | 122,853 | |||
Supplemental disclosure of cash flow information: | ||||||
Cash paid during each period for interest | $ | 320 | 37 | |||
Net cash paid during each period for income taxes | $ | 99,348 | 120,716 | |||
See accompanying notes to consolidated financial statements.
4
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands except share and per share information and where otherwise noted)
June 30, 2014 and 2013
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Fastenal Company and subsidiaries (collectively referred to as the Company, Fastenal, or by terms such as we, our, or us) have been prepared in accordance with United States generally accepted accounting principles for interim financial information. They do not include all information and footnotes required by United States generally accepted accounting principles for complete financial statements. However, except as described herein, there has been no material change in the information disclosed in the notes to consolidated financial statements included in our consolidated financial statements as of and for the year ended December 31, 2013. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
(2) Financial Instruments and Marketable Securities
Due to the varying short-term cash needs of our business, we periodically have marketable securities. We value these assets utilizing a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to measurements involving unobservable inputs (Level 3). The three levels of the fair value hierarchy and how they are determined are defined in our 2013 annual report on Form 10-K in Note 1 of the Notes to Consolidated Financial Statements.
The following table presents the placement in the fair value hierarchy of assets that are measured at fair value on a recurring basis:
June 30, 2014: | Total | Level 1 | Level 2 | Level 3 | ||||||||
Common stock | $ | 453 | 453 | — | — | |||||||
Total available-for-sale securities | $ | 453 | 453 | — | — | |||||||
December 31, 2013: | Total | Level 1 | Level 2 | Level 3 | ||||||||
Common stock | $ | 451 | 451 | — | — | |||||||
Total available-for-sale securities | $ | 451 | 451 | — | — | |||||||
June 30, 2013: | Total | Level 1 | Level 2 | Level 3 | ||||||||
Common stock | $ | 437 | 437 | — | — | |||||||
Total available-for-sale securities | $ | 437 | 437 | — | — | |||||||
There were no transfers between levels during the six and three month periods ended June 30, 2014 and 2013.
As of June 30, 2014, December 31, 2013, and June 30, 2013, our financial assets that are measured at fair value on a recurring basis consisted of common stock.
5
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands except share and per share information and where otherwise noted)
June 30, 2014 and 2013
(Unaudited)
Marketable securities, all treated as available-for-sale securities, consist of the following:
June 30, 2014: | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||
Common stock | $ | 197 | 256 | — | 453 | |||||||
Total available-for-sale securities | $ | 197 | 256 | — | 453 | |||||||
December 31, 2013: | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||
Common stock | $ | 197 | 254 | — | 451 | |||||||
Total available-for-sale securities | $ | 197 | 254 | — | 451 | |||||||
June 30, 2013: | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||
Common stock | $ | 197 | 240 | — | 437 | |||||||
Total available-for-sale securities | $ | 197 | 240 | — | 437 | |||||||
The unrealized gains and losses recorded in accumulated other comprehensive income and the realized gains and losses recorded in earnings were immaterial during the periods reported in these consolidated financial statements.
Future maturities of our available-for-sale securities consist of the following:
Less than 12 Months | Greater than 12 Months | |||||||||||
June 30, 2014: | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||
Common stock | $ | 197 | 453 | — | — | |||||||
Total available-for-sale securities | $ | 197 | 453 | — | — | |||||||
6
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands except share and per share information and where otherwise noted)
June 30, 2014 and 2013
(Unaudited)
(3) Stockholders’ Equity
Our authorized, issued, and outstanding shares (stated in whole numbers) consist of the following:
Par Value | June 30, 2014 | December 31, 2013 | June 30, 2013 | ||||||||
Preferred stock | $.01 | /share | |||||||||
Shares authorized | 5,000,000 | 5,000,000 | 5,000,000 | ||||||||
Shares issued and outstanding | — | — | — | ||||||||
Common stock | $.01 | /share | |||||||||
Shares authorized | 400,000,000 | 400,000,000 | 400,000,000 | ||||||||
Shares issued and outstanding | 296,764,444 | 296,753,544 | 296,860,119 | ||||||||
Dividends
On July 10, 2014, our board of directors declared a dividend of $0.25 per share of common stock. This dividend is to be paid in cash on August 22, 2014 to shareholders of record at the close of business on July 25, 2014. Since 2011 we have paid quarterly dividends. Our board of directors expects to continue paying quarterly dividends, provided the future determination as to payment of dividends will depend on the financial needs of the Company and such other factors as deemed relevant by the board of directors.
The following table presents the dividends either paid previously or declared by our board of directors for future payment:
2014 | 2013 | |||||
First quarter | $ | 0.25 | 0.10 | |||
Second quarter | 0.25 | 0.20 | ||||
Third quarter | 0.25 | 0.25 | ||||
Fourth quarter | 0.25 | |||||
Total | $ | 0.75 | 0.80 | |||
7
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands except share and per share information and where otherwise noted)
June 30, 2014 and 2013
(Unaudited)
Stock Options
The following tables summarize the details of grants made under our stock option plan that are still outstanding, and the assumptions used to value these options. All options granted were effective at the close of business on the date of grant.
Options Granted | Option Exercise (Strike) Price | Closing Stock Price on Date of Grant | June 30, 2014 | |||||||||||||
Date of Grant | Options Outstanding | Options Exercisable | ||||||||||||||
April 22, 2014 | 942,500 | $ | 56.00 | $ | 50.53 | 912,500 | — | |||||||||
April 16, 2013 | 205,000 | $ | 54.00 | $ | 49.25 | 162,500 | — | |||||||||
April 17, 2012 | 1,235,000 | $ | 54.00 | $ | 49.01 | 1,105,000 | — | |||||||||
April 19, 2011 | 410,000 | $ | 35.00 | $ | 31.78 | 330,000 | 25,000 | |||||||||
April 20, 2010 | 530,000 | $ | 30.00 | $ | 27.13 | 271,050 | 136,050 | |||||||||
April 21, 2009 | 790,000 | $ | 27.00 | $ | 17.61 | 388,700 | 208,700 | |||||||||
April 15, 2008 | 550,000 | $ | 27.00 | $ | 24.35 | 185,000 | 127,500 | |||||||||
April 17, 2007 | 4,380,000 | $ | 22.50 | $ | 20.15 | 1,629,730 | 1,314,730 | |||||||||
Total | 9,042,500 | 4,984,480 | 1,811,980 | |||||||||||||
Date of Grant | Risk-free Interest Rate | Expected Life of Option in Years | Expected Dividend Yield | Expected Stock Volatility | Estimated Fair Value of Stock Option | |||||||||
April 22, 2014 | 1.8 | % | 5.00 | 2.0 | % | 28.55 | % | $ | 9.57 | |||||
April 16, 2013 | 0.7 | % | 5.00 | 1.6 | % | 37.42 | % | $ | 12.66 | |||||
April 17, 2012 | 0.9 | % | 5.00 | 1.4 | % | 39.25 | % | $ | 13.69 | |||||
April 19, 2011 | 2.1 | % | 5.00 | 1.6 | % | 39.33 | % | $ | 11.20 | |||||
April 20, 2010 | 2.6 | % | 5.00 | 1.5 | % | 39.10 | % | $ | 8.14 | |||||
April 21, 2009 | 1.9 | % | 5.00 | 1.0 | % | 38.80 | % | $ | 3.64 | |||||
April 15, 2008 | 2.7 | % | 5.00 | 1.0 | % | 30.93 | % | $ | 7.75 | |||||
April 17, 2007 | 4.6 | % | 4.85 | 1.0 | % | 31.59 | % | $ | 5.63 | |||||
All of the options in the tables above vest and become exercisable over a period of up to eight years. Each option will terminate in approximately nine years.
The fair value of each share-based option is estimated on the date of grant using a Black-Scholes valuation method that uses the assumptions listed above. The expected life is the average length of time over which we expect the employee groups will exercise their options, which is based on historical experience with similar grants. Expected volatilities are based on the movement of our stock over the most recent historical period equivalent to the expected life of the option. The risk-free interest rate is based on the U.S. Treasury rate over the expected life at the time of grant. The dividend yield is estimated over the expected life based on our current dividend payout, historical dividends paid, and expected future cash dividends.
Compensation expense equal to the grant date fair value is recognized for all of these awards over the vesting period. The stock-based compensation expense for the six month periods ended June 30, 2014 and 2013 was $3,000 and $2,700, respectively. Unrecognized compensation expense related to outstanding unvested stock options as of June 30, 2014 was $20,024 and is expected to be recognized over a weighted average period of 4.76 years. Any future changes in estimated forfeitures will impact this amount.
8
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands except share and per share information and where otherwise noted)
June 30, 2014 and 2013
(Unaudited)
Earnings Per Share
The following tables present a reconciliation of the denominators used in the computation of basic and diluted earnings per share and a summary of the options to purchase shares of common stock which were excluded from the diluted earnings calculation because they were anti-dilutive:
Six-month Period | Three-month Period | ||||||||||
Reconciliation | 2014 | 2013 | 2014 | 2013 | |||||||
Basic weighted average shares outstanding | 296,666,992 | 296,711,326 | 296,691,232 | 296,778,588 | |||||||
Weighted shares assumed upon exercise of stock options | 867,481 | 978,224 | 887,187 | 943,682 | |||||||
Diluted weighted average shares outstanding | 297,534,473 | 297,689,550 | 297,578,419 | 297,722,270 | |||||||
Six-month Period | Three-month Period | ||||||||||||||
Summary of Anti-dilutive Options Excluded | 2014 | 2013 | 2014 | 2013 | |||||||||||
Options to purchase shares of common stock | 1,646,892 | 1,238,356 | 1,997,363 | 1,307,857 | |||||||||||
Weighted average exercise prices of options | $ | 54.44 | $ | 54.00 | $ | 54.72 | $ | 54.00 | |||||||
Any dilutive impact summarized above relates to periods when the average market price of our stock exceeded the exercise price of the potentially dilutive option securities then outstanding.
(4) Income Taxes
Fastenal, or one of its subsidiaries, files income tax returns in the United States federal jurisdiction, numerous states, and various local and foreign jurisdictions. With limited exceptions, we are no longer subject to income tax examinations by taxing authorities for taxable years before 2011 in the case of United States federal and non-United States examinations and 2010 in the case of state and local examinations.
As of June 30, 2014 and 2013, the Company had $3,916 and $7,660, respectively, of liabilities recorded related to gross unrecognized tax benefits. Included in this liability for unrecognized tax benefits is an immaterial amount for interest and penalties, both of which we classify as a component of income tax expense. The Company does not anticipate its total unrecognized tax benefits will change significantly during the next 12 months.
(5) Operating Leases
We lease certain pick-up trucks under operating leases. These leases have a non-cancellable lease term of one year, with renewal options for up to 72 months. The pick-up truck leases include an early buy out clause we generally exercise, thereby giving the leases an effective term of 28-36 months. Certain operating leases for vehicles contain residual value guarantee provisions which would become due at the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value. The aggregate residual value guarantee related to these leases is approximately $56,711. We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote, except for a $19 loss on disposal reserve provided at June 30, 2014. Our fleet also contains vehicles we estimate will settle at a gain. Gains on these vehicles will be recognized when we sell or dispose of the vehicle or at the end of the lease term.
9
FASTENAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands except share and per share information and where otherwise noted)
June 30, 2014 and 2013
(Unaudited)
(6) Commitments and Contingencies
Credit Facilities and Commitments
We have an unsecured revolving credit facility totaling $170,000 which expires December 13, 2015. The facility includes a $40,000 letter of credit subfacility. At June 30, 2014 and 2013 there were undrawn letters of credit outstanding under this facility, with a face amount of $34,411 and $29,250, respectively, and there were loans outstanding under this facility of $70,000 and $0, respectively. We have the right to prepay this debt and intend to repay this amount using cash within the next twelve months; therefore, we have classified the debt as a current liability. Loans under the facility are subject to certain financial covenants, and we are currently in compliance with these covenants.
Loans under the facility, other than swing line loans, bear interest at a rate per annum equal to, at our election, either (i) LIBOR for an interest period of one month, reset daily, plus 0.875%, or (ii) LIBOR for an interest period of one, two, three, six or twelve months as selected by us, reset at the end of the selected interest period, plus 0.875%. The outstanding loan amount at June 30, 2014 bears interest at a rate per annum equal to option (i) noted above. Swing line loans bear interest at a rate per annum equal to LIBOR for an interest period of one month, reset daily, plus 0.875%. We pay a commitment fee for the unused portion of the facility of 0.10% per annum if the average quarterly utilization of the facility is 20% or more, or 0.125% per annum if the average quarterly utilization of the facility is less than 20%. For each letter of credit issued under the facility, we pay a commission fee on the amount available to be drawn under such letter of credit equal to 0.875% per annum and, subject to certain exceptions, an issuance fee equal to 0.075% of the face amount of such letter of credit.
Legal Contingencies
The nature of our potential exposure to legal contingencies is described in our 2013 annual report on Form 10-K in Note 10 of the Notes to Consolidated Financial Statements. As of June 30, 2014 there were no litigation matters that we consider to be probable or reasonably possible to have a material adverse outcome.
(7) Subsequent Events
We evaluated all subsequent event activity and concluded that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements, with the exception of the dividend disclosed in Note (3) 'Stockholders' Equity'.
(8) New Accounting Pronouncements
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
10
ITEM 2 — MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements. (Dollar amounts are stated in thousands except for per share amounts and where otherwise noted.)
BUSINESS DISCUSSION
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, ranchers, 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.
Similar to previous quarters, we have included comments regarding several aspects of our business:
1. | Monthly sales changes, sequential trends, and end market performance – a recap of our recent sales trends and some insight into the activities with different end markets. |
2. | Growth drivers of our business – a recap of how we grow our business. |
3. | Profit drivers of our business – a recap of how we increase our profits. |
4. | Statement of earnings information – a recap of the components of our income statement. |
5. | Operational working capital, balance sheet, and cash flow – a recap of the operational working capital utilized in our business, and the related cash flow. |
While reading these items, it is helpful to appreciate several aspects of our marketplace: (1) it's big, the North American marketplace for industrial supplies is estimated to be in excess of $160 billion per year (and we have expanded beyond North America), (2) no company has a significant portion of this market, (3) many of the products we sell are individually inexpensive, (4) when our customer needs something quickly or unexpectedly our local store is a quick source, (5) the cost and time to manage and procure these products is meaningful, (6) the cost to move these products, many of which are bulky, can be significant, (7) many customers would prefer to reduce their number of suppliers to simplify their business, and (8) many customers would prefer to utilize various technologies to improve availability and reduce waste.
Our motto is Growth through Customer Service®. This is important given the points noted above. We believe in efficient markets – to us, this means we can grow our market share if we provide the greatest value to our customers. We believe our ability to grow is amplified if we can service our customers at the closest economic point of contact. For us, this 'closest economic point of contact' is the local store; therefore, our focus centers on understanding our customers' day, their opportunities, and their obstacles.
The concept of growth is simple, find more customers every day and increase your activity with them. However, execution is hard work. First, we recruit service minded individuals to support our customers and their business. Second, we operate in a decentralized fashion to help identify the greatest value for our customers. Third, we build a great machine behind the store to operate efficiently and to help identify new business solutions. Fourth, we do these things every day. Finally, we strive to generate strong profits; these profits produce the cash flow necessary to fund the growth and to support the needs of our customers.
11
SALES GROWTH
Net sales and growth rates in net sales were as follows:
Note – Daily sales are defined as the total net sales for the period divided by the number of business days (in the United States) in the period.
Six-month period | Three-month period | ||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||
Net sales | $ | 1,826,439 | 1,653,922 | $ | 949,938 | 847,596 | |||||||
Percentage change | 10.4 | % | 5.1 | % | 12.1 | % | 5.3 | % | |||||
Six-month period | Three-month period | ||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||
Daily sales growth rate | 10.4 | % | 5.9 | % | 12.1 | % | 5.3 | % | |||
Impact of currency fluctuations (primarily Canada) | -0.5 | % | -0.1 | % | -0.4 | % | -0.1 | % | |||
The increase in net sales in the periods noted for 2014 and 2013 came primarily from higher unit sales. Our growth in net sales was impacted by slight inflationary price changes in our non-fastener products and some price deflation in our fastener products, but the net impact was a drag on growth. Our growth in net sales was not meaningfully impacted by the introduction of new products or services, with one exception. Over the last several years, our FAST Solutions® (industrial vending) initiative has stimulated faster growth with a subset of our customers (discussed later in this document). 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 growth drivers of our business (discussed later in this document). The impact of change in currencies in foreign countries (primarily Canada) relative to the United States dollar is noted in the table above.
The stores opened greater than two years represent a consistent ‘same store’ view of our business (store sites opened as follows: 2014 group – opened 2012 and earlier, and 2013 group – opened 2011 and earlier). However, the impact of the economy is best reflected in the growth performance of our stores opened greater than five years (store sites opened as follows: 2014 group – opened 2009 and earlier, and 2013 group – opened 2008 and earlier) and opened greater than ten years (store sites opened as follows: 2014 group – opened 2004 and earlier, and 2013 group – opened 2003 and earlier). These two groups of stores are more cyclical due to the increased market share they enjoy in their local markets. The daily sales change for each of these groups was as follows:
Six-month Period | Three-month Period | ||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||
Store Age | |||||||||||
Opened greater than 2 years | 9.1 | % | 4.2 | % | 10.7 | % | 3.6 | % | |||
Opened greater than 5 years | 8.3 | % | 3.1 | % | 10.0 | % | 2.7 | % | |||
Opened greater than 10 years | 7.6 | % | 1.6 | % | 9.4 | % | 1.3 | % | |||
Note: The age groups above are measured as of the last day of each respective calendar year.
SALES BY PRODUCT LINE:
The mix of sales from the original fastener product line and from the other product lines was as follows:
Six-month Period | Three-month Period | ||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||
Fastener product line | 40.4 | % | 43.1 | % | 40.6 | % | 43.1 | % | |||
Other product lines | 59.6 | % | 56.9 | % | 59.4 | % | 56.9 | % | |||
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
12
MONTHLY SALES CHANGES, SEQUENTIAL TRENDS, AND END MARKET PERFORMANCE
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 month to the immediately preceding month, and also looking at the cumulative change from an earlier benchmark month) 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 noted below, all of our selling locations, when combined, had daily sales growth rates of (compared to the same month in the preceding year):
Jan. | Feb. | Mar. | Apr. | May | June | July | Aug. | Sept. | Oct. | Nov. | Dec. | ||||||||||||||||||||||||
2014 | 6.7 | % | 7.7 | % | 11.6 | % | 10.0 | % | 13.5 | % | 12.7 | % | |||||||||||||||||||||||
2013 | 6.7 | % | 8.2 | % | 5.1 | % | 4.8 | % | 5.3 | % | 6.0 | % | 2.9 | % | 7.2 | % | 5.7 | % | 7.7 | % | 8.2 | % | 6.7 | % | |||||||||||
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 | % | |||||||||||
Stores opened greater than two years – Our stores opened greater than two years (store sites opened as follows: 2014 group – opened 2012 and earlier, 2013 group – opened 2011 and earlier, and 2012 group – opened 2010 and earlier) represent a consistent 'same-store' view of our business. During the months noted below, the stores opened greater than two years had daily sales growth rates of (compared to the same month in the preceding year):
Jan. | Feb. | Mar. | Apr. | May | June | July | Aug. | Sept. | Oct. | Nov. | Dec. | ||||||||||||||||||||||||
2014 | 5.5 | % | 6.5 | % | 10.2 | % | 8.4 | % | 12.1 | % | 11.4 | % | |||||||||||||||||||||||
2013 | 5.0 | % | 6.5 | % | 3.4 | % | 3.1 | % | 3.5 | % | 4.3 | % | 1.4 | % | 5.5 | % | 4.2 | % | 6.1 | % | 6.2 | % | 4.9 | % | |||||||||||
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 | % | |||||||||||
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: 2014 group – opened 2009 and earlier, 2013 group – opened 2008 and earlier, and 2012 group – opened 2007 and earlier). This group, which represented about 90% of our total sales in the first six months of 2014, is more cyclical due to the increased market share they enjoy in their local markets. During the months noted below, the stores opened greater than five years had daily sales growth rates of (compared to the same month in the preceding year):
Jan. | Feb. | Mar. | Apr. | May | June | July | Aug. | Sept. | Oct. | Nov. | Dec. | ||||||||||||||||||||||||
2014 | 4.6 | % | 5.4 | % | 9.5 | % | 7.7 | % | 11.5 | % | 10.8 | % | |||||||||||||||||||||||
2013 | 3.2 | % | 5.6 | % | 2.3 | % | 2.0 | % | 2.7 | % | 3.4 | % | 0.6 | % | 4.7 | % | 3.2 | % | 5.3 | % | 6.1 | % | 4.8 | % | |||||||||||
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 | % | |||||||||||
Summarizing comments – There are three distinct influences to our growth: (1) execution, (2) currency fluctuations, and (3) economic fluctuations. This discussion centers on (2) and (3).
The change in currencies in foreign countries (primarily Canada) relative to the United States dollar impacted our growth over the last several years. During the years 2012 and 2013, it lowered our growth by 0.1% and 0.2%, respectively. In the first six months of 2014 it lowered our growth by 0.5%.
During 2012, the growth in the first three and a half months generally continued the relative strength we saw in 2011. Then we began to experience several distinct economic slowdowns. The first occurred in the late April/May time frame, and then moderated until September 2012. The second occurred in the October/November time frame. This was exaggerated by the impact of Hurricane Sandy and 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 of our customers, which are not as business day dependent, this can dilute the daily growth picture given the change in business day divisor). The third occurred in the spring of 2013. This involved our fastener product line and our construction business (primarily non-residential construction). This third slowdown, similar to the first two listed, mirrored or slightly led some softening in the PMI Index. The PMI Index is a composite index of economic activity in the United States manufacturing sector. It is published by the Institute for Supply Management and is available at http://www.ism.ws/. The fastener piece was heavily impacted by our industrial production business. These customers utilize our fasteners in the manufacture/assembly of their finished products. The end markets with the most pronounced weakening included heavy machinery manufacturers with exposure to: mining, military, agriculture, and construction. The fourth and fifth occurred in July 2013 and December 2013. The daily sales growth in July 2013 and
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December 2013 were negatively impacted by the timing of the July 4th holiday (Thursday in 2013, Wednesday in 2012, Monday in 2011) and the Christmas/New Year holiday (Wednesday in 2013, Tuesday in 2012, and Sunday in 2011). This resulted in a 'lone' business day on Friday, July 5, 2013, in which many of our customers were closed, and three distinct one to two day work periods in the last two weeks of December 2013. The December impact was amplified due to poor weather conditions.
Our daily sales growth trends have improved since September 2013. This was largely related to changing comparisons to 2012 and to the improving sequential patterns noted in the next discussion. Our sales to customers engaged in light and medium duty manufacturing (largely related to consumer products) are improving; this makes sense given the trends in the PMI Index.
In the first quarter of 2014, our sales growth was hampered in January and February due to a weak economy and foreign exchange rate fluctuations (primarily related to the Canadian dollar); however, the biggest impact was a severe winter in North America and its negative impact on our customers and our trucking network. In March 2014, the weak economy and negative foreign exchange rate fluctuations continued; however, the weather normalized and our daily sales growth expanded to 11.6%. This double digit growth in March was helped by the Easter timing (April in 2014), but the real story is good people, good execution, and minimal negative weather impacts. In the second quarter of 2014, the negative impact of the Easter timing was felt, and then a 'less noisy' picture emerged in May and June. One optimistic observation; our sales to customers engaged in heavy machinery manufacturing (primarily serving the mining, military, agricultural, and construction end markets), which represents approximately one fifth of our business, had a very weak 2013, but stabilized late in 2013 and has improved in the first six months of 2014.
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 2014, March 2013, and April 2012), 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 holiday. The holidays we noted impact the trends because they either move from month-to-month or because they move around during the week (the July 4th and Christmas/New Year holiday impacts are examples).
The table below shows the pattern to the sequential change in our daily sales. The line labeled 'Benchmark' is an historical average of our sequential daily sales change for the period 1998 to 2013, excluding 2008 and 2009. We believe this time frame will serve to show the historical pattern and could serve as a benchmark for current performance. We excluded the 2008 to 2009 time frame because it contains an extreme economic event and we don't believe it is comparable. The '2014', '2013', and '2012' lines represent our actual sequential daily sales changes. The '14Delta', '13Delta', and '12Delta' lines indicate the difference between the 'Benchmark' and the actual results in the respective year.
Cumulative | |||||||||||||||||||||||||||||||||||
Change from | |||||||||||||||||||||||||||||||||||
Jan. to | |||||||||||||||||||||||||||||||||||
Jan. 1 | Feb. | Mar. | Apr. | May | June | July | Aug. | Sept. | Oct. | June | Oct. | ||||||||||||||||||||||||
Benchmark | 0.8 | % | 2.2 | % | 3.8 | % | 0.4 | % | 3.1 | % | 2.7 | % | -2.1 | % | 2.5 | % | 3.7 | % | -1.2 | % | 12.6 | % | 15.9 | % | |||||||||||
2014 | -1.4 | % | 3.0 | % | 7.1 | % | -2.6 | % | 4.2 | % | 2.5 | % | 14.8 | % | |||||||||||||||||||||
14Delta | -2.2 | % | 0.8 | % | 3.3 | % | -3.0 | % | 1.1 | % | -0.2 | % | 2.2 | % | |||||||||||||||||||||
2013 | -0.4 | % | 2.0 | % | 3.4 | % | -1.1 | % | 1.0 | % | 3.2 | % | -5.5 | % | 5.5 | % | 2.9 | % | -2.9 | % | 8.7 | % | 8.2 | % | |||||||||||
13Delta | -1.2 | % | -0.2 | % | -0.4 | % | -1.5 | % | -2.1 | % | 0.5 | % | -3.4 | % | 3.0 | % | -0.8 | % | -1.7 | % | -3.9 | % | -7.7 | % | |||||||||||
2012 | -0.3 | % | 0.5 | % | 6.4 | % | -0.8 | % | 0.5 | % | 2.5 | % | -2.7 | % | 1.3 | % | 4.3 | % | -4.8 | % | 9.3 | % | 7.1 | % | |||||||||||
12Delta | -1.1 | % | -1.7 | % | 2.6 | % | -1.2 | % | -2.6 | % | -0.2 | % | -0.6 | % | -1.2 | % | 0.6 | % | -3.6 | % | -3.3 | % | -8.8 | % | |||||||||||
(1) | The January figures represent the percentage change from the previous October, whereas the remaining figures represent the percentage change from the previous month. |
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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:
End Market Performance:
The momentum has been building in our business during 2014. To highlight this strength, we included the June 2014 daily sales growth rate in the tables below.
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, when compared to the same period in the prior year, as follows:
Q1 | Q2 | Q3 | Q4 | Annual | |||||||||||
2014 | (June = 12.0%) | 9.0 | % | 11.2 | % | ||||||||||
2013 | 7.0 | % | 5.9 | % | 4.7 | % | 7.2 | % | 6.3 | % | |||||
2012 | 20.3 | % | 15.8 | % | 14.0 | % | 9.7 | % | 14.9 | % | |||||
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 is sometimes referred to as OEM - original equipment manufacturing) 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.
The best way to understand the change in our industrial production business is to examine the results in our fastener product line (just over 40% of our business) and to factor in the changes in our business with heavy equipment manufacturers (discussed earlier in this document). From a company perspective, sales of fasteners grew, when compared to the same period in the prior year, as follows (note: this information includes all end markets):
Q1 | Q2 | Q3 | Q4 | Annual | |||||||||||
2014 | (June = 6.6%) | 1.6 | % | 5.5 | % | ||||||||||
2013 | 1.7 | % | 1.9 | % | 1.0 | % | 1.9 | % | 1.6 | % | |||||
2012 | 15.4 | % | 8.0 | % | 6.0 | % | 2.6 | % | 7.8 | % | |||||
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. From a company perspective, sales of non-fasteners grew, when compared to the same period in the prior year, as follows (note: this information includes all end markets):
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Q1 | Q2 | Q3 | Q4 | Annual | |||||||||||
2014 | (June = 17.5%) | 14.2 | % | 17.1 | % | ||||||||||
2013 | 10.8 | % | 8.5 | % | 8.9 | % | 12.0 | % | 10.1 | % | |||||
2012 | 25.1 | % | 21.1 | % | 18.0 | % | 13.6 | % | 19.2 | % | |||||
The non-fastener business demonstrated greater relative resilience over the last several years, when compared to our fastener business and to the distribution industry in general, due to our strong FAST Solutions® (industrial vending) program; this is discussed in greater detail later in this document. However, this business was not immune to the impact of a weak industrial environment.
Our non-residential construction customers have historically represented 20% to 25% of our business. The daily sales to these customers grew when compared to the same period in the prior year, as follows:
Q1 | Q2 | Q3 | Q4 | Annual | |||||||||||
2014 | (June = 8.8%) | 2.9 | % | 7.5 | % | ||||||||||
2013 | 2.9 | % | 0.7 | % | 3.9 | % | 2.8 | % | 2.5 | % | |||||
2012 | 17.1 | % | 12.7 | % | 8.2 | % | 4.2 | % | 10.3 | % | |||||
We believe the weakness in the economy in the fourth quarter of 2012, throughout 2013, and during early 2014, particularly in the non-residential construction market, was amplified by the global economic uncertainty combined with the economic policy uncertainty in the United States. This weakness was amplified by severe winter weather conditions in January and February 2014.
A graph of the sequential daily sales trends to these two end markets in 2014, 2013, and 2012, starting with a base of '100' in the previous October and ending with the next October, would be as follows:
Manufacturing
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Non-Residential Construction
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.
For a little perspective, we began our business in 1967 with an idea to sell nuts and bolts (fasteners) through vending machines. We soon learned the technology of the 1960's wasn't ready, and also learned a lot of products didn't fit, so we went to 'Plan B'; sell to business users with a direct sales force. It took us a number of years to 'work out the bugs', but ten years later we began to pick up the pace of store openings. After another ten years of expansion we had approximately 50 stores and sales of about $20 million. Our need for cash was growing, as was our desire to allow employee ownership. This led us to a public offering in 1987.
In our first ten years of being public (1987 to 1997), we opened stores at an annual rate approaching 30%. In the next ten years (1997 to 2007), we opened stores at an annual rate of approximately 10% to 15% and, since 2007, at an annual rate of approximately 2% to 8%. We opened 17 stores in the first six months of 2014 and currently expect to open approximately 35 to 40 stores in total for 2014, or an annual rate of approximately 1% to 2%.
During our almost 50 years of business existence, we have constantly evolved to better serve the market (as is described in the paragraphs below) and have always been willing to challenge our approach. In our first 20 to 25 years we closed several store locations because we felt the market was insufficient to operate a profitable business. Every one of those locations was subsequently ‘reopened’ when our business model evolved to serve these markets profitably. During the last 20 to 25 years, we have enjoyed continued success with our store-based model, and we continue to challenge our approach. Based on this approach, we have closed approximately 85 stores in the last ten years - not because they weren’t successful, but rather because we felt we had a better approach to growth. In the first six months of 2014, we have continued to challenge our approach and closed 20 stores (all but four of these locations were in close proximity to another Fastenal store). In the second quarter of 2014 we took a hard look at our business and identified another 45 stores we intend to close in the second half of 2014 (all but eight of these locations are in close proximity to another Fastenal store). Several items we think are noteworthy: the group of stores we identified for closure in the second half of 2014 was profitable in the first quarter of 2014 (our analysis measurement period); they operated with average sales of about $36 thousand per month. We chose to close this group because we felt this was simply a better approach to growing our business profitably.
There is a short-term price for closing these stores; and, since we believe we will maintain the vast majority of the sales associated with these locations and since most of the impacted employees have a nearby store from which to operate, the price primarily relates to the future commitments related to the leased locations. During the second quarter of 2014, we recorded the impaired future costs related to these commitments. The expense was not material as these locations have relatively short lease commitments and minimal leasehold improvements.
17
During the years, our expanding footprint has provided us with greater access to more customers, and we have 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 (the non-fastener products now represent over 50% of our sales). 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 metalworking), and (5) FAST Solutions® (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 twelve years ago and our 'Master Stocking Hub' initiative approximately seven years ago. These strategies 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. During 2013 and 2014, we expanded our store based inventory offering around select industries (with an emphasis on fasteners, construction products, and safety products) and beginning in the latter half of 2013 we expanded two key employee groups: (1) the number of employees working in our stores and (2) the number of district and regional leaders supporting our stores. The theme that shines through in all these changes, particularly the last several, is a simple one – invest into and support our sales machine – the local store.
Over the last several years our FAST Solutions® (industrial vending) operation has been an expanding component of our business. We believe industrial vending will be an important 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. Given this, we have been investing aggressively to maximize the advantage.
Our expanded industrial vending fleet consists of thirteen different vending devices. We have learned much about these devices over the last several years and currently have target monthly revenue ranging from under $1,000 to in excess of $3,000 per device. The following two tables provide two views of our data: (1) actual device count regardless of the type of machine and (2) ‘machine equivalent' count based on the weighted target monthly revenue of each device (compared to the FAST 5000 device, which has a $2,000 monthly revenue target). For example, the 12-door locker, with target monthly revenue of $750, would be counted as ‘0.375 machine equivalent’ (0.375 = $750/$2,000).
The industrial vending information related to contracts signed during each period was as follows:
Q1 | Q2 | Q3 | Q4 | Annual | ||||||||||||
Device count signed during the period | 2014 | 4,025 | 4,137 | |||||||||||||
2013 | 6,568 | 6,084 | 4,836 | 4,226 | 21,714 | |||||||||||
2012 | 6,646 | 6,818 | 7,871 | 6,715 | 28,050 | |||||||||||
2011 | 1,812 | 2,710 | 2,930 | 2,753 | 10,205 | |||||||||||
'Machine equivalent' count signed during the period | 2014 | 2,974 | 3,179 | |||||||||||||
2013 | 4,825 | 4,505 | 3,656 | 3,244 | 16,230 | |||||||||||
2012 | 3,827 | 3,926 | 4,581 | 4,739 | 17,073 | |||||||||||
2011 | 1,264 | 1,915 | 2,035 | 1,880 | 7,094 | |||||||||||
The industrial vending information related to installed machines at the end of each period was as follows:
Q1 | Q2 | Q3 | Q4 | ||||||||||||
Device count installed at the end of the period | 2014 | 42,153 | 43,761 | ||||||||||||
2013 | 32,007 | 36,452 | 39,180 | 40,775 | |||||||||||
2012 | 12,600 | 16,964 | 21,998 | 26,975 | |||||||||||
2011 | 3,227 | 4,793 | 7,062 | 9,462 | |||||||||||
'Machine equivalent' count installed at the end of the | 2014 | 30,326 | 31,713 | ||||||||||||
period | 2013 | 22,020 | 25,512 | 27,818 | 29,262 | ||||||||||
2012 | 8,842 | 11,604 | 14,880 | 18,395 | |||||||||||
2011 | 2,462 | 3,548 | 5,154 | 6,771 | |||||||||||
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The following table includes some additional statistics regarding our sales and sales growth:
Q1 | Q2 | Q3 | Q4 | ||||||||||||
Percent of total net sales to customers with | 2014 | 37.8 | % | 37.0 | % | ||||||||||
industrial vending1 | 2013 | 27.5 | % | 30.0 | % | 33.3 | % | 36.6 | % | ||||||
2012 | 17.8 | % | 20.8 | % | 23.2 | % | 25.8 | % | |||||||
2011 | 8.9 | % | 10.5 | % | 13.1 | % | 15.7 | % | |||||||
Q1 | Q2 | Q3 | Q4 | ||||||||||||
Daily sales growth to customers with | 2014 | 19.7 | % | 20.9 | % | ||||||||||
industrial vending2 | 2013 | 23.9 | % | 18.9 | % | 15.2 | % | 18.7 | % | ||||||
2012 | 33.9 | % | 34.3 | % | 32.9 | % | 28.6 | % | |||||||
2011 | 50.6 | % | 43.9 | % | 42.5 | % | 40.7 | % | |||||||
1 The percentage of total sales (vended and traditional) to customers currently using a vending solution.
2 The growth in total sales (vended and traditional) to customers currently using a vending solution compared to the same period in the preceding year.
In addition to the industrial vending operation noted above, which primarily relates to our non-fastener business, we also provide bin stock programs (also known as ‘keep fill’ programs in the industry) to numerous customers. This business, which relates to both our maintenance customers (MRO fasteners and non-fasteners) and original equipment manufacturers (OEM fasteners), has many similar attributes to our industrial vending relationships. These attributes include a strong relationship with these customers, where we are often their preferred supplier, and also includes a frequent level of business transactions. This business is performed without the aid of a vending machine, but does make use of the latest scanning technologies, scales systems, and our fully integrated distribution network to manage the supply chain for all sizes of customers. In recent years, we have begun to refer to this business as FMI (Fastenal Managed Inventory).
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PROFIT DRIVERS OF OUR BUSINESS
As we state several times in this document, profit is important to us. For a distribution business profit and cash flow go hand in hand, and this cash flow funds our growth and creates value for our customers, our employees, our suppliers, and our shareholders. 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 profit, 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 second quarter of the last three years were as follows:
Sales per Month | Average Age (Years) | Number of Stores | Percentage of Stores | Pre-Tax Earnings Percentage | |||||||
Three months ended June 30, 2014 | Average store sales = $102,357 | ||||||||||
$0 to $30,000 | 5.9 | 147 | 5.5 | % | -12.7 | % | |||||
$30,001 to $60,000 | 8.5 | 622 | 23.2 | % | 11.8 | % | |||||
$60,001 to $100,000 | 10.8 | 816 | 30.4 | % | 20.1 | % | |||||
$100,001 to $150,000 | 13.3 | 528 | 19.7 | % | 24.7 | % | |||||
Over $150,000 | 16.0 | 430 | 16.0 | % | 27.4 | % | |||||
Strategic Account/Overseas Store | 141 | 5.2 | % | ||||||||
Company Total | 2,684 | 100.0 | % | 21.8 | % | ||||||
Three months ended June 30, 2013 | Average store sales = $91,947 | ||||||||||
$0 to $30,000 | 4.8 | 220 | 8.2 | % | -10.3 | % | |||||
$30,001 to $60,000 | 7.9 | 731 | 27.3 | % | 14.5 | % | |||||
$60,001 to $100,000 | 10.7 | 804 | 30.0 | % | 23.2 | % | |||||
$100,001 to $150,000 | 12.6 | 451 | 16.9 | % | 26.5 | % | |||||
Over $150,000 | 15.6 | 344 | 12.9 | % | 29.2 | % | |||||
Strategic Account/Overseas Store | 127 | 4.7 | % | ||||||||
Company Total | 2,677 | 100.0 | % | 22.7 | % | ||||||
Three months ended June 30, 2012 | Average store sales = $89,169 | ||||||||||
$0 to $30,000 | 4.2 | 266 | 10.1 | % | -11.8 | % | |||||
$30,001 to $60,000 | 7.3 | 769 | 29.2 | % | 12.6 | % | |||||
$60,001 to $100,000 | 10.0 | 757 | 28.7 | % | 22.3 | % | |||||
$100,001 to $150,000 | 12.1 | 419 | 15.9 | % | 26.1 | % | |||||
Over $150,000 | 15.2 | 316 | 12.0 | % | 29.3 | % | |||||
Strategic Account/Overseas Store | 108 | 4.1 | % | ||||||||
Company Total | 2,635 | 100.0 | % | 22.2 | % | ||||||
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 66.1% of our store base in the second quarter of 2014) and by increasing the average store sales from $71,600 (in the first three months of 2007) 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, we never lost sight of the simple 'economic math' of our business, and our ability to grow the level of profitability long-term. In the aftermath of 2009, we grew the average store size, we improved our gross profit, and we structurally lowered our operating expenses. The improvement in the latter two 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 $110,000 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 below 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 in our 2013 annual report on 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 net sales, the average monthly sales per store, the number of stores at quarter end, the absolute headcount at our stores during a quarter, the average FTE headcount during a quarter, and the percentage change for each were as follows for the first quarter of 2007 (the last completed quarter before we began the 'pathway to profit') and for each of the last five quarters:
Q1 2007 | Q2 2013 | Q3 2013 | Q4 2013 | Q1 2014 | Q2 2014 | ||||||||||||
Total net sales reported | $489,157 | $847,596 | $858,424 | $813,760 | $876,501 | $949,938 | |||||||||||
Less: Non-store sales (approximate) | 40,891 | 109,300 | 108,427 | 105,499 | 113,945 | 125,509 | |||||||||||
Store net sales (approximate) | $448,266 | $738,296 | $749,997 | $708,261 | $762,556 | $824,429 | |||||||||||
% change since Q1 2007 | 64.7 | % | 67.3 | % | 58.0 | % | 70.1 | % | 83.9 | % | |||||||
% change (twelve months) | 4.6 | % | 6.8 | % | 7.1 | % | 8.2 | % | 11.7 | % | |||||||
Percentage of sales through a store | 92 | % | 87 | % | 87 | % | 87 | % | 87 | % | 87 | % | |||||
Average monthly sales per store | $72 | $92 | $93 | $88 | $95 | $102 | |||||||||||
(using ending store count) | |||||||||||||||||
% change since Q1 2007 | 27.8 | % | 29.2 | % | 22.2 | % | 31.9 | % | 41.7 | % | |||||||
% change (twelve months) | 3.4 | % | 5.7 | % | 6.0 | % | 8.0 | % | 10.9 | % | |||||||
Company pre-tax earnings | 18.1 | % | 22.7 | % | 22.0 | % | 19.3 | % | 20.4 | % | 21.8 | % | |||||
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Q1 2007 | Q2 2013 | Q3 2013 | Q4 2013 | Q1 2014 | Q2 2014 | ||||||||||||
Store locations - quarter end count | 2,073 | 2,677 | 2,686 | 2,687 | 2,683 | 2,684 | |||||||||||
% change since Q1 2007 | 29.1 | % | 29.6 | % | 29.6 | % | 29.4 | % | 29.5 | % | |||||||
% change (twelve months) | 1.6 | % | 1.4 | % | |||||||||||||