filings.toolsFastenal 10-K 2013-12-31
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Cover and table of contents
10-K 1 fast1231201310-k.htm 10-K
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, 2013, |
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) |
(507) 454-5374
(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 |
Securities registered pursuant to Section 12(g):
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 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, was $12,423,671,823, 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 28, 2013 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 January 24, 2014, the registrant had 296,772,269 shares of Common Stock issued and outstanding.
FASTENAL COMPANY
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the annual meeting of shareholders to be held Tuesday, April 22, 2014 (‘Proxy Statement’) are incorporated by reference in Part III. Portions of our 2013 Annual Report to Shareholders are incorporated by reference in Part II.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K, or in other reports of the Company and other written and oral statements made from time to time by the Company, do not relate strictly to historical or current facts. As such, they are considered 'forward-looking statements' that provide current expectations or forecasts of future events. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of terminology such as anticipate, believe, should, estimate, expect, intend, may, plan, goal, project, will, and similar words or expressions. Any statement that is not a historical fact, including estimates, projections, future trends, and the outcome of events that have not yet occurred, is a forward-looking statement. The Company’s forward-looking statements generally relate to our expectations regarding the business environment in which we operate, our projections of future performance, our perceived marketplace opportunities, and our strategies, goals, mission, and vision. You should understand that forward-looking statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially. Factors that could cause our actual results to differ from those discussed in the forward-looking statements include, but are not limited to, economic downturns, weakness in the manufacturing or commercial construction industries, competitive pressure on selling prices, changes in our current mix of products, customers or geographic locations, changes in our purchasing patterns, changes in customer needs, changes in fuel or commodity prices, inclement weather, changes in foreign currency exchange rates, difficulty in adapting our business model to different foreign business environments, weak acceptance or adoption of vending technology or increased competition in vending, difficulty in maintaining installation quality as our vending business expands, difficulty in hiring, relocating, training or retaining qualified personnel, failure to accurately predict the number of North American markets able to support stores or to meet store opening goals, difficulty in controlling operating expenses, difficulty in collecting receivables or accurately predicting future inventory needs, dramatic changes in sales trends, changes in supplier production lead times, changes in our cash position, changes in tax law, changes in the availability or price of commercial real estate, changes in the nature or price of distribution and other technology, cyber-security incidents, potential liability and reputational damage that can arise if our products are defective, and other risks and uncertainties detailed in this Form 10-K under the heading ‘Item 1A. Risk Factors’. Each forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any such statement to reflect events or circumstances arising after such date.
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.
PART I
Item 1. BUSINESS
Note – Information in this section is as of year end unless otherwise noted. The year end is typically December 31, 2013 unless additional years are included or noted.
Fastenal Company (together with our 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 have 2,687 store locations. The various geographic areas in which we operate these store locations are summarized later in this document.
We employ 17,277 people. We characterize these personnel as follows:
| 2013 | 2012 | |||
| Store and in-plant | 11,550 | 10,158 | ||
| Non-store selling | 1,242 | 1,111 | ||
| Selling subtotal | 12,792 | 11,269 | ||
| Distribution | 2,931 | 2,451 | ||
| Manufacturing | 603 | 569 | ||
| Administrative | 951 | 856 | ||
| Non-selling subtotal | 4,485 | 3,876 | ||
| Total | 17,277 | 15,145 |
We sell industrial and construction supplies to end-users (typically business-to-business), and also have some 'walk-in' retail business. These industrial and construction supplies are grouped into eleven product lines described later in this document.
We operate 14 distribution centers in North America from which we distribute products to our store and in-plant locations. Eleven of these are in the United States, two are in Canada, and one is in Mexico.
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
We 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 27,000. 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:
| 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||
| Net sales (in millions) | $3,326.1 | 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 | |||||||||
| Number of stores at year end | 2,687 | 2,652 | 2,585 | 2,490 | 2,369 | 2,311 | 2,160 | 2,000 | 1,755 | 1,533 |
We operated the following number of store locations:
| 2013 | 2012 | ||||||
| North America | United States | 2,394 | 2,380 | ||||
| Puerto Rico & Dominican Republic | 8 | 9 | |||||
| Canada | 204 | 195 | |||||
| Mexico | 41 | 36 | |||||
| Subtotal | 2,647 | 2,620 | |||||
| Central & South America | Panama, Brazil, Colombia & Chile | 8 | 4 | ||||
| Asia | China | 8 | 8 | ||||
| Southeast Asia | Singapore, Malaysia, & Thailand | 7 | 7 | ||||
| Europe | The Netherlands, Hungary, United Kingdom, Germany, Czech Republic, Italy, Romania & Poland | 17 | 13 | ||||
| Total | 2,687 | 2,652 |
We select new locations for our stores based on their proximity to our distribution network, population statistics, and employment data for manufacturing and construction. In 2013, 2012, and 2011, we opened new stores at a rate of approximately 2%, 3%, and 5%, respectively. We expect to open 50 to 70 stores in 2014, or a rate of approximately 2% 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 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 currently 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.
We opened the following stores in the last five years:
| 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||
| North America | United States | 30 | 58 | 101 | 111 | 62 | |||||||||
| Puerto Rico & Dominican Republic | — | — | — | — | 1 | ||||||||||
| Canada | 10 | 13 | 11 | 7 | 2 | ||||||||||
| Mexico | 5 | 2 | 1 | 1 | 1 | ||||||||||
| Subtotal | 45 | 73 | 113 | 119 | 66 | ||||||||||
| Central & South America | Panama, Brazil, Colombia & Chile | 4 | 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 & Poland | 4 | 4 | 5 | 1 | 1 | |||||||||
| Total | 53 | 80 | 122 | 127 | 69 |
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 2013, with approximately 61% 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 environment. Of the eleven stores opened in the first quarter of 2013, two were profitable in the fourth quarter of 2013.
The data in the following table shows the change in the average sales of our stores from 2012 to 2013 based on the age of each store. Included in the average monthly sales amounts, are sales from our non-store selling locations, such as our Holo-Krome® business (included in the 2009 group, the year it was acquired). The stores opened in 2013 contributed approximately $18,620 (or approximately 0.6%) of our consolidated net sales in 2013, with the remainder coming from stores opened prior to 2013 or from our non-store business.
| Age of Stores on December 31, 2013 | Year Opened | Number of Stores in Group on December 31, 2013 | Closed Stores1 | Converted Stores2 | Average Monthly Sales 2013 | Average Monthly Sales 2012 | Percent Change | |||||||||||||||
| 0-1 year old | 2013 | 53 | — | — | $ | 29 | 3 | N/A | — | |||||||||||||
| 1-2 years old | 2012 | 78 | 0/0 | -2/0 | 65 | 27 | 3 | 140.7 | % | |||||||||||||
| 2-3 years old | 2011 | 122 | 1/0 | 0/1 | 73 | 58 | 25.9 | % | ||||||||||||||
| 3-4 years old | 2010 | 123 | 4/1 | 0/0 | 75 | 70 | 7.1 | % | ||||||||||||||
| 4-5 years old | 2009 | 66 | 1/0 | 0/0 | 118 | 106 | 11.3 | % | ||||||||||||||
| 5-6 years old | 2008 | 149 | 2/4 | 0/1 | 72 | 71 | 1.4 | % | ||||||||||||||
| 6-7 years old | 2007 | 152 | 0/2 | 0/0 | 85 | 81 | 4.9 | % | ||||||||||||||
| 7-8 years old | 2006 | 231 | 1/3 | 0/0 | 86 | 80 | 7.5 | % | ||||||||||||||
| 8-9 years old | 2005 | 211 | 1/4 | 0/0 | 82 | 74 | 10.8 | % | ||||||||||||||
| 9-10 years old | 2004 | 212 | 1/2 | 0/0 | 93 | 87 | 6.9 | % | ||||||||||||||
| 10-11 years old | 2003 | 144 | 0/0 | 0/0 | 87 | 83 | 4.8 | % | ||||||||||||||
| 11-12 years old | 2002 | 139 | 1/0 | 0/0 | 99 | 92 | 7.6 | % | ||||||||||||||
| 12-16 years old | 1998-2001 | 371 | 2/0 | 0/0 | 116 | 110 | 5.5 | % | ||||||||||||||
| 16+ years old | 1967-1997 | 636 | 2/0 | 0/1 | 149 | 149 | 0.0 | % |
| 1 | We closed 16 stores in both 2013 and 2012. The number of closed stores is noted in the table above as 2013 number/2012 number. |
| 2 | We converted two store locations to non-store selling locations in 2013. We converted three non-store selling locations to store locations in 2012. The number of converted stores is noted in the table above as 2013 number/2012 number, with store locations converted to non-store locations shown as negative numbers. |
| 3 | The average sales include sales of stores open for less than the full fiscal year. |
Several years ago, we introduced our FAST Solutions® (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 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.
We operate eleven regional 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. The distribution centers in Indiana and California also serve as a 'master' hub to support the needs of the stores in their geographic region as well as provide a broader selection of products for the stores serviced by the other distribution centers.
We currently operate our Georgia, Indiana, Ohio, Minnesota, and Texas distribution centers with 'automated storage and retrieval systems' or ASRS. These five distribution centers operate with greater speed and efficiency, and currently handle approximately 66% of our picking activity. The Indiana facility also contains our centralized replenishment facility for a portion of our industrial vending business. This operation is also highly automated. We intend to invest in this type of ASRS distribution infrastructure over the next several years at our California, Kansas, North Carolina, Pennsylvania, 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.
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 encourage 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 2013, 2012, and 2011 and approximately 38%, 40%, and 42% of our consolidated net sales in 2013, 2012, and 2011, 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 | 632,000 | ||
| Tools | 1993 | 73,000 | ||
| Cutting tools | 1996 | 399,000 | ||
| Hydraulics & pneumatics | 1996 | 109,000 | ||
| Material handling | 1996 | 40,000 | ||
| Janitorial supplies | 1996 | 22,000 | ||
| Electrical supplies | 1997 | 42,000 | ||
| Welding supplies1 | 1997 | 50,000 | ||
| Safety supplies | 1999 | 55,000 | ||
| Metals | 2001 | 20,000 | ||
| Office supplies | 2010 | 6,000 | ||
| Total | 1,448,000 |
| 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 often refer to these as 'exclusive brands') to our offering. These 'private label' brands 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 the district and store managers. Inventories in
distribution 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 2013, approximately 95% of our consolidated net sales were attributable to products manufactured by other companies to industry standards or to customer specific requirements. 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 2013.
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 2013, our total number of active customer accounts (defined as accounts having purchase activity within the last 90 days) was approximately 405,000.
During each of the three years ended December 31, 2013, 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 that are not across multiple industries and geographic regions.
Direct marketing continues to be the backbone of our business through our local storefronts and selling personnel. We support our stores with multi-channel marketing including email marketing, catalogs, promotional flyers, events, online and store signage. Our national advertising has been focused on NASCAR® sponsorships over the past few years, including sponsoring No. 99 driver, Carl Edwards, in the Sprint Cup Series since 2012. Along with the NASCAR® sponsorship, we do limited print advertising across a variety of industry publications and Delta Sky magazine.
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 Fourth of July holiday period, the Thanksgiving holiday period (October in Canada and November in The United States), and the Christmas and New Year holiday period, 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 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 the convenience of a large number of stores in a given area, taken together with our ability to provide frequent deliveries to such stores from centrally located distribution centers, makes possible the prompt and efficient distribution of products. We also believe our FAST Solutions® (industrial vending), combined with our local storefront, provides 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
We employ a total of 17,277 full and part-time employees, most of whom are 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.
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 or in the principal markets served by us 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 in the principal markets served by us, 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. 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 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 that market, 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. We expect to open new stores at the rate of approximately 2% to 3% in 2014; however, we cannot assure you that we can open stores at this rate, and failure to do so, could negatively impact our long-term growth. We opened stores at the rate of approximately 2%, 3%, and 5% in 2013, 2012, and 2011, respectively.
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 were 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. 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 profit percentage to fluctuate or decline in the future. Changes in our customer or product mix could cause our gross profit percentage to fluctuate or decline. From time to time, we have experienced changes in customer or product mix that have caused gross profit to deteriorate. For example, the growth of our national accounts since the mid-1990’s and of our non-fastener product line since the early 1990’s has adversely affected gross profit, as national accounts have the leverage to negotiate lower prices, and as our non-fastener products generally carry lower gross profit than our fastener products. If our customer or product mix continues to change, there can be no assurance that we will be able to maintain our historical gross profit. Downward pressure on sales prices and changes in the volume of our orders could also cause our gross profit percentage to fluctuate or decline. Gross profit can deteriorate if we experience downward pressure on sales prices as a result of deflation, pressures from customers to reduce costs, or increased competition, as was the case in 2009 and the latter half of 2013. Furthermore, reductions in our volume of purchases, as also happened in 2009 and the latter half of 2013, can adversely impact gross profit by reducing supplier 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 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 and adversely impact demand for our products. 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. Fluctuations in the relative strength of foreign economies and their related currencies 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 may 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.
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 suppliers could discontinue selling products manufactured in foreign countries at any time for reasons that may or may not be in our control or our suppliers' control, including foreign government regulations, domestic government regulations, political unrest, war, disruption or delays in shipments, changes in local economic conditions or trade issues. Our operating results and inventory levels could suffer if we are unable to promptly replace a supplier who is unwilling or unable to satisfy our requirements with another supplier 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 Solutions® (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, or as competitors with new business models are willing and able to operate with lower gross profit on select products. 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 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 our current gross and 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.
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 rules have required and will continue to require due diligence efforts, with initial disclosure requirements becoming effective in May 2014. There are and will continue to 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.
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 | ||
| Supplemental warehouse, office space, and potential store space purchased in 2013, which is subject to a pre-existing retail and warehouse lease | 100,000 |
| 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 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 facilities | Indianapolis, Indiana | 389,000 | 2 | ||
| Distribution center | Atlanta, Georgia | 198,000 | 3 | ||
| Distribution center | Dallas, Texas | 176,000 | 4 | ||
| Distribution center | Scranton, Pennsylvania | 189,000 | 5 | ||
| Distribution center | Akron, Ohio | 152,000 | 6 | ||
| Distribution center | Kansas City, Kansas | 300,000 | |||
| Distribution center | Kitchener, Ontario, Canada | 62,000 | 7 | ||
| Distribution center | High Point, North Carolina | 256,000 | |||
| Distribution center and manufacturing facility | Modesto, California | 328,000 | 8 | ||
| 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 273,000 tote locations for small parts. The FAST Solutions® (industrial vending) automated replenishment facility ('T-Hub') is also located on this property and contains an additional 85,000 tote locations for small parts. |
| 2 | We purchased two additional storage facilities in 2013, one of which is subject to a pre-existing lease. |
| 3 | In addition, this facility contains an automated storage and retrieval system with capacity of 56,000 tote locations for small parts. |
| 4 | In addition, this facility contains an automated storage and retrieval system with capacity of 14,000 pallet locations and 41,000 tote locations for small parts. |
| 5 | This facility is currently under construction to add an automated storage and retrieval system with capacity of 117,000 tote locations for small parts. |
| 6 | In addition, this facility contains an automated storage and retrieval system with capacity of 117,000 tote locations for small parts. |
| 7 | A replacement distribution center with approximately 130,000 square feet is currently under construction. |
| 8 | This facility is currently under construction to add an automated storage and retrieval system with capacity of 83,000 tote locations for small parts. |
In addition, we own 180 buildings that house our store locations in various cities throughout North America.
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). In addition to our leased store locations, 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 - additional packaging facility | Salt Lake City, Utah | 26,000 | February 2016 | One | ||||
| Distribution center | Monterrey, Nuevo Leon, Mexico | 14,000 | June 2014 | One | ||||
| Distribution center and manufacturing facility | Edmonton, Alberta, Canada | 45,000 | July 2020 | One | ||||
| Manufacturing facility | Houston, Texas | 21,000 | 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.
| 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 | 55 | Chief Executive Officer and Director | ||
| Leland J. Hein | 1985 | 53 | President | ||
| Daniel L. Florness | 1996 | 50 | Executive Vice President and Chief Financial Officer | ||
| Steven A. Rucinski | 1980 | 56 | Executive Vice President – Sales | ||
| Gary A. Polipnick | 1983 | 51 | Executive Vice President – Sales | ||
| Kenneth R. Nance | 1992 | 49 | Executive Vice President – Sales | ||
| Reyne K. Wisecup | 1988 | 50 | Executive Vice President – Human Resources and Director | ||
| Nicholas J. Lundquist | 1979 | 56 | Executive Vice President – Operations | ||
| James C. Jansen | 1992 | 43 | Executive Vice President – Operations | ||
| Ashok Singh | 2001 | 51 | Executive Vice President – Information Technology | ||
| Sheryl A. Lisowski | 1994 | 46 | Controller and Chief Accounting Officer |
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. In addition to his financial role, Mr. Florness' responsibilities also include product development, supplier development, and supply chain.
Mr. Rucinski has been an executive vice president – 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 an executive vice president – sales since July 2012. Mr. Polipnick's responsibilities include sales and operational oversight of our business in the western United States. From November 2007 to July 2012, Mr. Polipnick served as the leader of our Winona based region. Prior to November 2007, Mr. Polipnick served in various sales leadership roles.
Mr. Nance has been an executive vice president – sales since July 2012. Mr. Nance's responsibilities include sales and operational oversight of our business in the eastern United States and Mexico. From June 2005 to July 2012, Mr. Nance served as the leader of our Texas based region. Prior to June 2005, Mr. Nance served in various sales leadership roles.
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 an executive vice president – 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. 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 systems development). From April 2000 to April 2005, Mr. Jansen served in the sales leadership role of our Texas based region.
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.
Ms. Lisowski has been our controller and chief accounting officer since October 2013. From March 2007 to October 2013, Ms. Lisowski served as our controller – accounting operations. Ms. Lisowski joined Fastenal in 1994 and, prior to March 2007, served in various roles of increasing responsibility within our finance and accounting team.
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.
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 January 24, 2014, there were approximately 1,300 record holders of our common stock, which includes nominees or broker dealers holding stock on behalf of an estimated 166,000 beneficial owners.
The following table sets forth, by quarter, the high and low closing sale price1 of our shares on The NASDAQ Stock Market for 2013 and 2012.
| 2013: | High | Low | 2012: | High | Low | ||||
| First quarter | $53.18 | 46.47 | First quarter | $54.59 | 43.76 | ||||
| Second quarter | $52.18 | 44.95 | Second quarter | $54.65 | 38.37 | ||||
| Third quarter | $50.98 | 43.99 | Third quarter | $45.30 | 39.03 | ||||
| Fourth quarter | $51.89 | 45.62 | Fourth quarter | $46.65 | 40.20 |
1 The closing sale price was obtained from Shareholder.com, a division of Nasdaq OMX.
The following table sets forth our dividend payout (per share basis) in each of the last three years:
| 2013 | 2012 | 2011 | |||||||||
| First quarter | $ | 0.10 | $ | 0.17 | $ | 0.25 | |||||
| Second quarter | 0.20 | 0.17 | 0.13 | ||||||||
| Third quarter | 0.25 | 0.19 | 0.13 | ||||||||
| Fourth quarter | 0.25 | 0.21 | 0.14 | ||||||||
| Total regular dividend | 0.80 | 0.74 | 0.65 | ||||||||
| Supplemental* | — | 0.50 | — | ||||||||
| Total | $ | 0.80 | $ | 1.24 | $ | 0.65 |
*Due to income tax rate uncertainties in the United States, we paid a supplemental dividend in December 2012.
On January 14, 2014, we announced a quarterly dividend of $0.25 per share to be paid on February 28, 2014 to shareholders of record at the close of business on January 31, 2014. Our Board of Directors intends to continue paying quarterly dividends, provided that any future determination as to payment of dividends will depend upon the financial condition and results of operations of the Company and such other factors as are deemed relevant by the Board of Directors.
Issuer Purchases of Equity Securities
The table below sets forth information regarding purchases of our common stock during each of the last three months of 2013:
| (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, 2013 | 0 | $0.00 | 0 | 1,600,000 | |||
| November 1-30, 2013 | 0 | $0.00 | 0 | 1,600,000 | |||
| December 1-31, 2013 | 0 | $0.00 | 0 | 1,600,000 | |||
| Total | 0 | $0.00 | 0 | 1,600,000 |
Purchases of shares of our common stock earlier in 2013 are described later in this Form 10-K under the heading ‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations’.
The Fastenal Company Common Stock Comparative Performance Graph
Set forth below is a graph comparing, for the five years ended December 31, 2013, the yearly cumulative total shareholder return on our common stock with the yearly cumulative total shareholder return of the S&P 500 Index, the Dow Jones US Industrial Suppliers Index, and an index (the 'Peer Group Index') of a group of peer companies selected by us (the 'Peer Group'). In prior years, we compared our total shareholder return with that of the S&P 500 Index and the Peer Group Index. However, we have decided to move away from the Peer Group Index because we believe that a broader-based index of public companies within our industry provides a more appropriate basis for comparison. Therefore, going forward, we will be comparing our total shareholder return with that of the S&P 500 Index and the Dow Jones US Industrial Suppliers Index. In accordance with SEC rules, we are including the total shareholder return of the Peer Group Index in this Form 10-K for transitional purposes, but will not be including the Peer Group information in future reports.
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, 2008 in Fastenal Company, the Peer Group Index, the S&P 500 Index, and the Dow Jones US Industrial Suppliers Index, and that dividends were reinvested when and as paid.
Comparison of Five Year Cumulative Total Return Among Fastenal Company, the Peer Group Index,
the S&P 500 Index, and the Dow Jones US Industrial Suppliers Index
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | ||||||
| Fastenal Company | 100.00 | 121.93 | 180.07 | 267.27 | 294.17 | 304.64 | |||||
| Peer Group Index | 100.00 | 125.31 | 177.17 | 227.82 | 253.75 | 313.59 | |||||
| S&P 500 Index | 100.00 | 126.46 | 145.51 | 148.59 | 172.37 | 228.19 | |||||
| Dow Jones US Industrial Suppliers Index | 100.00 | 127.17 | 180.70 | 240.29 | 262.04 | 303.35 |
Note - The graph and index table above were obtained from Zachs SEC Compliance Services Group.
Item 6. SELECTED FINANCIAL DATA
Incorporated herein by reference is Ten-Year Selected Financial Data on pages 4 and 5 of Fastenal’s 2013 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.)
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 profit because we are selling expensive inventory on the shelf at declining prices. This hurt our gross profit 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 profit to recover in 2010 and 2011. (See later discussion on gross profit.)
The discussion that follows includes information regarding our sales growth and our sales by product line during 2013. 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 capabilities, (5) international operations (over 10% of our sales), (6) FAST Solutions® (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, (9) additional sales operational support to focus on under performing stores and under performing industrial vending, and (10) in the case of 2013, additional region and district leadership and additional store personnel. 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:
| 2013 | 2012 | 2011 | |||||||
| Net sales | $ | 3,326,106 | 3,133,577 | 2,766,859 | |||||
| Percentage change | 6.1 | % | 13.3 | % | 21.9 | % |
The increase in net sales in 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, with the net impact being a slight 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 change in currencies in foreign countries (primarily Canada) relative to the United States dollar lowered our daily sales growth rate by 0.2% in 2013.
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 Solutions® (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.
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 Solutions® (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 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: 2013 group – opened 2003 and earlier, 2012 group – opened 2002 and earlier, and 2011 group – opened 2001 and earlier) and opened greater than five years ago (store sites opened as follows: 2013 group – opened 2008 and earlier, 2012 group – opened 2007 and earlier, and 2011 group – opened 2006 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: 2013 group – opened 2011 and earlier, 2012 group – opened 2010 and earlier, and 2011 group – opened 2009 and earlier). The daily sales change for each of these groups was as follows:
| | | | | | | | --- | --- | ---
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to certain market risks from changes in foreign currency exchange rates and commodity pricing. Changes in these factors cause fluctuations in our earnings and cash flows. We evaluate and manage exposure to these market risks as follows:
| (1) | Foreign Currency Exchange Rates – Foreign currency fluctuations can affect our net investments and earnings denominated in foreign currencies. Our primary exchange rate exposure is with the Canadian dollar against the United States dollar. Our estimated net earnings exposure for foreign currency exchange rates was not material at year end. |
| (2) | Commodity Steel Pricing – We buy and sell various types of steel products; these products consist primarily of different types of threaded fasteners. During the last several decades, there has been nominal movement in overall steel pricing, with some deflation occurring in the wake of the economic crisis of the Far East markets that occurred in the late 1990’s. This trend reversed to inflation in the period from late 2003 to the early part of 2005 and again from mid 2007 to the fall of 2008. In the first half of 2009, we noted meaningful deflation. In 2010, we noted minimal price changes except for stainless steel which did inflate. Stainless steel products represent approximately 5% of our business. In 2011 and 2012 we noted nominal price increases while pricing has been flat to nominally down in 2013. We are exposed to the impacts of commodity steel pricing and our related ability to pass through the impacts to our end customers. |
| (3) | Commodity Energy Prices – We have market risk for changes in gasoline, diesel fuel, natural gas, and electricity; however, this risk is mitigated in part by our ability to pass freight costs to our customers, the efficiency of our trucking distribution network, and the ability, over time, to manage our occupancy costs related to the heating and cooling of our facilities through better efficiency. |
| (4) | Interest Rates - We have a credit facility totaling $125,000 which expires December 13, 2015. This facility includes a $40,000 letter of credit subfacility. Loans under the facility bear interest at a rate per annum equal to LIBOR plus 0.875%, we pay a commitment fee of 0.10% to 0.125% per annum (depending on usage) on the unused portion of the facility, and we pay a fee of 0.875% per annum on the undrawn amount of outstanding letters of credit and, subject to certain exceptions, an issuance fee of 0.075% of the face amount of the outstanding letters of credit. During the year ended December 31, 2013, we received loan advances under the credit facility and repaid all advances during the year. On December 31, 2013, there were undrawn letters of credit outstanding under the letter of credit subfacility, with a face amount of $34,415. We do not believe our operations are currently subject to significant market risk for interest rates. |
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Fastenal Company:
We have audited the accompanying consolidated balance sheets of Fastenal Company and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in the table of contents at Item 15. We also have audited the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Fastenal Company’s management is responsible for these consolidated financial statements and the financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fastenal Company and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Furthermore, in our opinion, Fastenal Company and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG LLP
Minneapolis, Minnesota
February 6, 2014
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands except share information)
| December 31 | ||||||
| 2013 | 2012 | |||||
| ASSETS | ||||||
| Current assets: | ||||||
| Cash and cash equivalents | $ | 58,506 | 79,611 | |||
| Marketable securities | 451 | 354 | ||||
| Trade accounts receivable, net of allowance for doubtful accounts of $9,248 and $6,728, respectively | 414,331 | 372,159 | ||||
| Inventories | 784,068 | 715,383 | ||||
| Deferred income tax assets | 18,248 | 14,420 | ||||
| Prepaid income taxes | 24,869 | 7,368 | ||||
| Other current assets | 107,988 | 97,361 | ||||
| Total current assets | 1,408,461 | 1,286,656 | ||||
| Property and equipment, less accumulated depreciation | 654,850 | 516,427 | ||||
| Other assets, net | 12,473 | 12,749 | ||||
| Total assets | $ | 2,075,784 | 1,815,832 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
| Current liabilities: | ||||||
| Accounts payable | $ | 91,253 | 78,019 | |||
| Accrued expenses | 148,579 | 126,155 | ||||
| Total current liabilities | 239,832 | 204,174 | ||||
| Deferred income tax liabilities | 63,255 | 51,298 | ||||
| Commitments and contingencies (notes 5, 9, and 10) | ||||||
| Stockholders’ equity: | ||||||
| Preferred stock, 5,000,000 shares authorized | — | — | ||||
| Common stock, 400,000,000 shares authorized, 296,753,544 and 296,564,382 shares issued and outstanding, respectively | 2,968 | 2,966 | ||||
| Additional paid-in capital | 69,847 | 61,436 | ||||
| Retained earnings | 1,688,781 | 1,477,601 | ||||
| Accumulated other comprehensive income | 11,101 | 18,357 | ||||
| Total stockholders’ equity | 1,772,697 | 1,560,360 | ||||
| Total liabilities and stockholders’ equity | $ | 2,075,784 | 1,815,832 |
See accompanying notes to consolidated financial statements
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
(Amounts in thousands except earnings per share)
For the year ended December 31,
| 2013 | 2012 | 2011 | |||||||
| Net sales | $ | 3,326,106 | 3,133,577 | 2,766,859 | |||||
| Cost of sales | 1,606,661 | 1,519,053 | 1,332,687 | ||||||
| Gross profit | 1,719,445 | 1,614,524 | 1,434,172 | ||||||
| Operating and administrative expenses | 1,007,431 | 941,236 | 859,369 | ||||||
| (Gain) loss on sale of property and equipment | (643 | ) | (403 | ) | 194 |
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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the 'Securities Exchange Act')). Based on this evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including the principal executive officer and principal financial officer, to allow for timely decisions regarding required disclosure.
Attestation Report of Independent Registered Public Accounting Firm
The attestation report required under this item is contained earlier in this Form 10-K under the heading 'Item 8, Financial Statements and Supplementary Data'.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
| (i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| (ii) | provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| (iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2013. There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
| /s/ Willard D. Oberton | /s/ Daniel L. Florness | |
| Willard D. Oberton | Daniel L. Florness | |
| Chief Executive Officer | Executive Vice-President and Chief Financial Officer | |
| Winona, MN | ||
| February 6, 2014 |
Item 9B. OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Incorporated herein by reference is the information appearing under the headings 'Proposal #1 — Election of Directors', 'Corporate Governance and Director Compensation—Board Leadership Structure and Committee Membership', 'Corporate Governance and Director Compensation—Audit Committee', and 'Corporate Governance and Director Compensation—Section 16(a) Beneficial Ownership Reporting Compliance' in the Proxy Statement. See also Part I hereof under the heading 'Item X. Executive Officers of the Registrant'.
There have been no material changes to the procedures by which security holders may recommend nominees to the board of directors since our last report.
In January 2004, our board of directors adopted a supplement to our existing standards of conduct designed to qualify the standards of conduct as a code of ethics within the meaning of Item 406(b) of Regulation S-K promulgated by the SEC ('Code of Ethics'). The standards of conduct, as supplemented, apply to all of our directors, officers, and employees, including without limitation our chief executive officer, chief financial officer, principal accounting officer, and controller (if any), and persons performing similar functions ('Senior Financial Officers'). Those portions of the standards of conduct, as supplemented, that constitute a required element of a Code of Ethics are available without charge by submitting a request to us pursuant to the directions detailed under 'Does Fastenal have a Code of Conduct?' on the 'Investor FAQs' page of the 'Investors' section of our website at www.fastenal.com. In the event we amend or waive any portion of the standards of conduct, as supplemented, that constitutes a required element of a Code of Ethics and such amendment or waiver applies to any of our Senior Financial Officers, we intend to post on our website, within four business days after the date of such amendment or waiver, a brief description of such amendment or waiver, the name of each Senior Financial Officer to whom the amendment or waiver applies, and the date of the amendment or waiver.
Item 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information appearing under the headings 'Corporate Governance and Director Compensation—Compensation Committee Interlocks and Insider Participation', 'Executive Compensation', and 'Corporate Governance and Director Compensation—Compensation of our Directors' in the Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference is the information appearing under the heading ‘Security Ownership of Principal Shareholders and Management’ in the Proxy Statement.
Equity Compensation Plan Information
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants, and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | ||
| (a) | (b) | (c) | |||
| Equity compensation plans approved by security holders | 4,536,630 | $34.06 | 7,225,440 | ||
| Equity compensation plans not approved by security holders | — | — | — | ||
| Total | 4,536,630 | 7,225,440 |
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated herein by reference is the information appearing under the headings ‘Corporate Governance and Director Compensation—Director Independence and Other Board Matters’, ‘Corporate Governance and Director Compensation—Related Person Transaction Approval Policy’, and ‘Corporate Governance and Director Compensation—Transactions with Related Persons’ in the Proxy Statement.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated herein by reference is the information appearing under the heading ‘Audit and Related Matters—Audit and Related Fees’ and ‘Audit and Related Matters—Pre-Approval of Services’ in the Proxy Statement.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| a) | 1. Financial Statements: |
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Earnings for the years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
- Financial Statement Schedules:
Schedule II—Valuation and Qualifying Accounts
- Exhibits:
| 3.1 | Restated Articles of Incorporation of Fastenal Company, as amended effective as of April 17, 2012 (incorporated by reference to Exhibit 3.1 to Fastenal Company’s Form 10-Q for the quarter ended March 31, 2012) |
| 3.2 | Restated By-Laws of Fastenal Company (incorporated by reference to Exhibit 3.2 to Fastenal Company’s Form 8-K dated as of October 15, 2010) |
| 10.1 | Description of Bonus Arrangements for Executive Officers (incorporated by reference to the information appearing under the heading ‘Executive Compensation – Compensation Discussion and Analysis’ in the Proxy Statement)* |
| 10.2 | Fastenal Company Stock Option Plan (incorporated by reference to Exhibit A to Fastenal Company’s Proxy Statement dated February 23, 2007)* |
| 10.3 | Fastenal Company Incentive Plan (incorporated by reference to Appendix A to Fastenal Company’s Proxy Statement dated February 23, 2012)* |
| 10.4 | Credit Agreement dated as of December 13, 2012 among Fastenal Company, the Lenders from time to time party thereto, and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender and Issuing Lender (incorporated by reference to Exhibit 10.1 to Fastenal Company's Form 8-K dated as of December 19, 2012) |
| 13 | Portions of 2013 Annual Report to Shareholders not included in this Form 10-K (only those sections specifically incorporated by reference in this Form 10-K shall be deemed filed with the SEC) |
| 21 | List of Subsidiaries |
| 23 | Consent of Independent Registered Public Accounting Firm |
| 31 | Certifications under Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32 | Certification under Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101 | The following materials formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Stockholders’ Equity, and (vi) the Notes to Consolidated Financial Statements. |
We will furnish copies of these Exhibits upon request and payment of our reasonable expenses in furnishing the Exhibits.
- Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 15(b).
FASTENAL COMPANY
Schedule II—Valuation and Qualifying Accounts
Years ended December 31, 2013, 2012, and 2011
(Amounts in thousands)
| Description | Balance at Beginning of Year | “Additions” Charged to Costs and Expenses | “Other” Additions (Deductions) | “Less” Deductions | Balance at End of Year | ||||||||||
| Year ended December 31, 2013 | |||||||||||||||
| Allowance for doubtful accounts | $ | 6,728 | 9,421 | — | 6,901 | 9,248 | |||||||||
| Insurance reserves | $ | 25,188 | 52,658 | 1 | — | 46,966 | 2 | 30,880 | |||||||
| Year ended December 31, 2012 | |||||||||||||||
| Allowance for doubtful accounts | $ | 5,647 | 9,726 | — | 8,645 | 6,728 | |||||||||
| Insurance reserves | $ | 30,548 | 43,024 | 1 | — | 48,384 | 2 | 25,188 | |||||||
| Year ended December 31, 2011 | |||||||||||||||
| Allowance for doubtful accounts | $ | 4,761 | 9,217 | — | 8,331 | 5,647 | |||||||||
| Insurance reserves | $ | 28,067 | 46,287 | 1 | — | 43,806 | 2 | 30,548 |
| 1 | Includes costs and expenses incurred for premiums and claims related to health and general insurance. |
| 2 | Includes costs and expenses paid for premiums and claims related to health and general insurance. |
See accompanying Report of Independent Registered Public Accounting Firm incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: | February 6, 2014 | |
| FASTENAL COMPANY | ||
| By | /s/ Willard D. Oberton | |
| Willard D. Oberton, Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
| Date: | February 6, 2014 |
| /s/ Willard D. Oberton | /s/ Daniel L. Florness | |||||
| Willard D. Oberton, Chief Executive Officer | Daniel L. Florness, Chief Financial Officer | |||||
| (Principal Executive Officer) and | (Principal Financial Officer and | |||||
| Director | Principal Accounting Officer) | |||||
| /s/ Robert A. Kierlin | /s/ Stephen M. Slaggie | |||||
| Robert A. Kierlin, Director (Chairman) | Stephen M. Slaggie, Director | |||||
| /s/ Michael M. Gostomski | /s/ Michael J. Dolan | |||||
| Michael M. Gostomski, Director | Michael J. Dolan, Director | |||||
| /s/ Reyne K. Wisecup | /s/ Hugh L. Miller | |||||
| Reyne K. Wisecup, Director | Hugh L. Miller, Director | |||||
| /s/ Michael J. Ancius | /s/ Scott A. Satterlee | |||||
| Michael J. Ancius, Director | Scott A. Satterlee, Director | |||||
| /s/ Rita J. Heise | /s/ Darren R. Jackson | |||||
| Rita J. Heise, Director | Darren R. Jackson, Director |
INDEX TO EXHIBITS
| 3.1 | Restated Articles of Incorporation of Fastenal Company, as amended | Incorporated by Reference |
| 3.2 | Restated By-Laws of Fastenal Company | Incorporated by Reference |
| 10.1 | Description of Bonus Arrangements for Executive Officers | Incorporated by Reference |
| 10.2 | Fastenal Company Stock Option Plan | Incorporated by Reference |
| 10.3 | Fastenal Company Incentive Plan | Incorporated by Reference |
| 10.4 | Credit Agreement dated as of December 13, 2012 among Fastenal Company, the Lenders from time to time thereto, and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender and Issuing Lender | Incorporated by Reference |
| 13 | Portions of 2013 Annual Report to Shareholders not included in this Form 10-K (only those sections specifically incorporated by reference in this Form 10-K shall be deemed filed with the SEC) | Electronically Filed |
| 21 | List of Subsidiaries | Electronically Filed |
| 23 | Consent of Independent Registered Public Accounting Firm | Electronically Filed |
| 31 | Certifications under Section 302 of the Sarbanes-Oxley Act of 2002 | Electronically Filed |
| 32 | Certification under Section 906 of the Sarbanes-Oxley Act of 2002 | Electronically Filed |
| EX 101.INS | XBRL Instance Document | Electronically Filed |
| EX 101.SCH | XBRL Taxonomy Extension Schema Document | Electronically Filed |
| EX 101.CAL | XBRL Taxonomy Calculation Linkbase Document | Electronically Filed |
| EX 101.DEF | XBRL Taxonomy Definition Linkbase Document | Electronically Filed |
| EX 101.LAB | XBRL Taxonomy Label Linkbase Document | Electronically Filed |
| EX 101.PRE | XBRL Taxonomy Presentation Linkbase Document | Electronically Filed |