January 17, 2013

Fastenal Company Reports 2012 Fourth Quarter and Annual Earnings

WINONA, Minn., Jan. 17, 2013 (GLOBE NEWSWIRE) -- Fastenal Company of Winona, MN (Nasdaq:FAST) reported the results of the quarter and year ended December 31, 2012. Except for per share information, or as otherwise noted below, dollar amounts are stated in thousands. Share and per share information in this document has been adjusted to give effect to the two-for-one split of our common stock in May 2011.





Net sales, pre-tax earnings, net earnings, and net earnings per share were as follows for the periods ended December 31:

  Twelve-month period Three-month period
  2012 2011 Change 2012 2011 Change
Net sales  $ 3,133,577 2,766,859 13.3%  $ 757,235 697,804 8.5%
Pre-tax earnings  $ 674,155 575,081 17.2%  $ 158,151 140,769 12.3%
 % of sales 21.5% 20.8%   20.9% 20.2%  
Net earnings  $ 420,536 357,929 17.5%  $ 98,716 87,472 12.9%
Net earnings per share (basic)  $ 1.42 1.21 17.4%  $ 0.33 0.30 10.0%

On a sequential basis in 2012, the first, second, third, and fourth quarters had 64, 64, 63, and 63 business days, respectively; and our daily sales average was $12,014, $12,576, $12,739, and $12,020, respectively.

On December 31, 2012, we had 2,652 stores. During 2012, we opened 80 new stores, an increase of 3.1% since December 2011 (we opened 122 new stores in 2011). On December 31, 2012, we operated 21,095 FAST SolutionsSM (industrial vending) machines. During 2012, we installed 13,642 new machines, an increase of 183.0% since December 2011 (we installed 5,528 machines in 2011). On December 31, 2012, we had 15,145 employees, a decrease of 0.2% since December 2011; however, our average full-time equivalent employee number increased by 4.4% from the fourth quarter of 2011 to 2012 (as discussed later in this document).

Similar to previous quarters, we have included comments regarding several aspects of our business:

  1. Monthly sales changes, sequential trends, and end market performance — a recap of our recent sales trends and some insight into the activities with different end markets.
  2. Growth drivers of our business — a recap of how we grow our business.
  3. Profit drivers of our business — a recap of how we increase our profits.
  4. Statement of earnings information — a recap of the components of our income statement.
  5. Operational working capital, balance sheet, and cash flow — a recap of the operational working capital utilized in our business, and the related cash flow.

While reading these items, it is helpful to appreciate several aspects of our marketplace: (1) it's big, the North American marketplace for industrial supplies is estimated to be in excess of $160 billion per year (and we have expanded beyond North America), (2) no company has a significant portion of this market, (3) many of the products we sell are individually inexpensive, (4) when our customer needs something quickly or unexpectedly our local store is a quick source, (5) the cost to manage and procure these products can be significant, and (6) the cost to move these products, many of which are bulky, can also be significant.

Our motto is Growth through Customer Service. This is important given the points noted above. We believe in efficient markets — to us, this means we can grow our market share if we provide the greatest value to the customer. We believe our ability to grow is amplified if we can service our customer at the closest economic point of contact. 

The concept of growth is simple, find more customers every day and increase your activity with them. However, execution is hard work. First, we recruit service minded individuals to support our customers and their business. Second, we operate in a decentralized fashion to help identify the greatest value for our customers. Third, we build a great machine behind the store to operate efficiently and to help identify new business solutions. Fourth, we do these things every day. Finally, we strive to generate strong profits; these profits produce the cash flow necessary to fund the growth and to support the needs of our customers.

MONTHLY SALES CHANGES, SEQUENTIAL TRENDS, AND END MARKET PERFORMANCE

Note — Daily sales are defined as the sales for the period divided by the number of business days (in the United States) in the period. 

This section focuses on three distinct views of our business — monthly sales changes, sequential trends, and end market performance. The first discussion regarding monthly sales changes provides a good mechanical view of our business based on the age of our stores. The second discussion provides a framework for understanding the sequential trends (that is, comparing a period to the immediately preceding period) in our business. Finally, we believe the third discussion regarding end market performance provides insight into activities with our various types of customers.

MONTHLY SALES CHANGES:

All company sales — During the months in 2012, 2011, and 2010, all of our selling locations, when combined, had daily sales growth rates of (compared to the comparable month in the preceding year):

  Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
2012 21.3% 20.0% 19.3% 17.3% 13.1% 14.0% 12.1% 12.0% 12.9% 6.8% 8.2% 9.7%
2011 18.8% 21.5% 22.8% 23.2% 22.6% 22.5% 22.4% 20.0% 18.8% 21.4% 22.2% 21.2%
2010 2.4% 4.4% 12.1% 18.6% 21.1% 21.1% 24.4% 22.1% 23.5% 22.4% 17.9% 20.9%

The growth in the first three and a half months of 2012 generally continued the relative strength we saw in 2011 and in most of 2010. During 2012, there were two distinct economic slowdowns. The first occurred in the late April/May time frame, and then moderated until September. The second occurred in the October/November time frame. This was exaggerated by an unusual business day comparison in October (23 days in 2012 versus 21 days in 2011 - the maintenance portion of our business is often linked to monthly spend patterns, which are not as business day dependent, this can dilute the daily growth picture given the change in business day divisor) and the impact of Hurricane Sandy. The change in currencies in foreign countries (primarily Canada) relative to the United States dollar lowered our daily sales growth rate by 0.1% during 2012 (this lowered our growth in the first, second, and third quarters by 0.1%, 0.4%, 0.2%, respectively and increased our growth in the fourth quarter by 0.2%). This was a sharp contrast to 2011 and 2010, when changes in foreign currencies increased our growth by 0.7% and 0.6%, respectively.

Stores opened greater than two years — Our stores opened greater than two years (store sites opened as follows: 2012 group — opened 2010 and earlier, 2011 group — opened 2009 and earlier, and 2010 group — opened 2008 and earlier) represent a consistent 'same-store' view of our business. During the months in 2012, 2011, and 2010, the stores opened greater than two years had daily sales growth rates of (compared to the comparable month in the preceding year):

  Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
2012 18.8% 17.1% 16.8% 14.5% 10.1% 11.1% 9.1% 8.6% 9.8% 3.8% 5.1% 6.6%
2011 16.0% 18.4% 19.4% 19.6% 19.2% 19.1% 18.7% 16.5% 15.2% 18.0% 18.5% 17.5%
2010 0.6% 2.3% 9.6% 16.3% 18.5% 18.3% 21.3% 19.2% 19.8% 18.8% 14.1% 16.8%

Stores opened greater than five years — The impact of the economy, over time, is best reflected in the growth performance of our stores opened greater than five years (store sites opened as follows: 2012 group — opened 2007 and earlier, 2011 group — opened 2006 and earlier, and 2010 group — opened 2005 and earlier). This group is more cyclical due to the increased market share they enjoy in their local markets. During the months in 2012, 2011, and 2010, the stores opened greater than five years had daily sales growth rates of (compared to the comparable month in the preceding year):

  Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
2012 17.4% 15.8% 15.7% 13.7% 9.0% 10.2% 8.3% 7.9% 8.5% 2.6% 4.6% 5.6%
2011 15.3% 17.9% 19.2% 19.1% 17.9% 18.2% 17.3% 15.2% 14.5% 17.0% 17.4% 16.9%
2010 -2.1% -0.5% 7.4% 14.9% 17.3% 16.2% 19.8% 18.2% 18.9% 17.9% 13.2% 16.0%

SEQUENTIAL TRENDS:

We find it helpful to think about the monthly sequential changes in our business using the analogy of climbing a stairway — This stairway has several predictable landings where there is a pause in the sequential gain (i.e. April, July, and October to December), but generally speaking, climbs from January to October. The October landing then establishes the benchmark for the start of the next year.

History has identified these landings in our business cycle. They generally relate to months with impaired business days (certain holidays). The first landing centers on Easter, which alternates between March and April (Easter occurred in April in 2012, 2011, and 2010), the second landing centers on July 4th, and the third landing centers on the approach of winter with its seasonal impact on primarily our construction business and with the Christmas / New Year holidays. The holidays we noted impact the trends because they either move from month-to-month or because they move around during the week.

The table below shows the pattern to our sequential change in our daily sales. The line labeled 'Past' is an historical average of our sequential daily sales change for the period 1998 to 2003. We chose this time frame because it had similar characteristics, a weaker industrial economy in North America, and could serve as a benchmark for a possible trend line. The '2012', '2011', and '2010' lines represent our actual sequential daily sales changes. The '12Delta', '11Delta', and '10Delta' lines indicate the difference between the 'Past' and the actual results in the respective year. 

 
Jan.(1)

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.
Cumulative change
from Jan. to Oct.
Past 0.9% 3.3% 2.9% -0.3% 3.4% 2.8% -2.3% 2.6% 2.6% -0.7% 15.9%
2012 -0.3% 0.5% 6.4% -0.8% 0.5% 2.5% -2.7% 1.3% 4.3% -4.8% 7.1%
12Delta -1.2% -2.8% 3.5% -0.5% -2.9% -0.3% -0.4% -1.3% 1.7% -4.1% -8.8%
2011 -0.2% 1.6% 7.0% 0.9% 4.3% 1.7% -1.0% 1.4% 3.4% 0.7% 21.7%
11Delta -1.1% -1.7% 4.1% 1.2% 0.9% -1.1% 1.3% -1.2% 0.8% 1.4% 5.8%
2010 2.9% -0.7% 5.9% 0.6% 4.8% 1.7% -1.0% 3.5% 4.5% -1.5% 19.0%
10Delta 2.0% -4.0% 3.0% 0.9% 1.4% -1.1% 1.3% 0.9% 1.9% -0.8% 3.1%

(1)  The January figures represent the percentage change from the previous October, whereas the remaining figures represent the percentage change from the previous month.

A graph of the sequential daily sales change pattern discussed above, starting with a base of '100' in the previous October and ending with the next October, would be as follows: http://media.globenewswire.com/cache/11647/file/17610.pdf

Several observations stand out while viewing the 2012 sequential pattern: (1) The direction of the historical sequential pattern (increased daily sales on a sequential basis in February, March, May, June, August, and September and decreased daily sales on a sequential basis in April and July) has played out each month; however, the cumulative growth in the daily sales from January to October has fallen short of the benchmark figure and of the actual results in 2011 and 2010. (2) The magnitude of the February and May '12Delta' of approximately -2.8% was similar. This fact, as well as the choppiness of the year in general, caused us to approach the year with a conservative tone. (3) The weakness in 2012 was amplified in the first three quarters of the year by changes in foreign currencies (primarily Canada) relative to the U.S. dollar as indicated earlier.

END MARKET PERFORMANCE:

Fluctuations in end market business — The sequential trends noted above were directly linked to fluctuations in our end markets. To place this in perspective — approximately 50% of our business has historically been with customers engaged in some type of manufacturing. The daily sales to these customers grew in the first, second, third, and fourth quarters (when compared to the same quarter in the previous year), and for the year, as follows:

  Q1 Q2 Q3 Q4 Annual
2012 20.3% 15.8% 14.0% 9.7% 14.9%
2011 15.5% 18.5% 18.3% 21.0% 20.0%
2010 15.7% 29.8% 30.6% 17.7% 22.4%

Our manufacturing business consists of two subsets: the industrial production business (this is business where we supply products that become part of the finished goods produced by our customers) and the maintenance portion (this is business where we supply products that maintain the facility or the equipment of our customers engaged in manufacturing). The industrial business is more fastener centered, while the maintenance portion is represented by all product categories. 

In the second, third, and fourth quarters of 2012, the decrease in the rate of growth was more pronounced in our industrial production business. This is in sharp contrast to the first quarter of 2012 where the growth was more pronounced in the industrial production business, a trend that had also existed in 2011 and 2010. The first quarter and prior quarters were a direct counter to the 2009 contraction, which was more severe in our industrial production business and less severe in the maintenance portion of our manufacturing business.  

The best way to understand the change in our industrial production business is to examine the results in our fastener product line. In the first three months of 2012, the daily sales growth in our fastener product line was approximately 15.4%. This growth dropped to 10.5%, 6.1%, and 8.6% in April, May, and June, respectively, and then averaged 6.0% and 2.6% in the third and fourth quarters, respectively. By contrast, the best way to understand the change in the maintenance portion of the manufacturing business is to examine the results in our non-fastener product lines. In the first three months of 2012, the daily sales growth in our non-fastener business was approximately 25.1%. This dropped to 24.4%, 19.0%, and 19.6% in April, May, and June, respectively, and averaged 18.0% and 13.6% in the third and fourth quarters, respectively. The non-fastener business has demonstrated relative resilience in 2012, when compared to our fastener business and to the distribution industry in general, due to our strong FAST SolutionsSM (industrial vending) program; this is discussed in greater detail later in this document.

The patterns related to the industrial production business, as noted above, are influenced by the movements noted in the Purchasing Manufacturers Index ('PMI') published by the Institute for Supply Management (http://www.ism.ws/), which is a composite index of economic activity in the United States manufacturing sector. The PMI in 2012, 2011, and 2010 was as follows:

  Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
2012 54.1 52.4 53.4 54.8 53.5 49.7 49.8 49.6 51.5 51.7 49.5 50.7
2011 59.9 59.8 59.7 59.7 54.2 55.8 51.4 52.5 52.5 51.8 52.2 53.1
2010 56.7 55.8 59.3 59.0 58.8 56.0 55.7 57.4 56.4 57.0 58.0 57.3

For background to readers not familiar with the PMI index, it is a monthly indicator of the economic health of the manufacturing sector. Five major indicators that influence the PMI index are new orders, inventory levels, productions, supplier deliveries, and the employment environment. When a PMI of 50 or higher is reported, this indicates expansion in the manufacturing industry compared to the previous month. If the PMI is below 50, this represents a contraction in the manufacturing sector.

Our non-residential construction customers have historically represented 20% to 25% of our business. The daily sales to these customers grew or contracted in the first, second, third, and fourth quarters (when compared to the same quarter in the previous year), and for the year, as follows:

  Q1 Q2 Q3 Q4 Annual
2012 17.1% 12.7% 8.2% 4.2% 10.3%
2011 17.7% 15.8% 15.8% 17.4% 17.1%
2010 -14.7% 0.5% 6.3% 10.3% -0.3%

We believe the weakness in the economy in the fourth quarter of 2012, particularly in the non-residential construction market, was amplified by the political uncertainty in the United States.

A graph of the sequential daily sales trends to these two end markets in 2012, 2011, and 2010, starting with a base of '100' in the previous October and ending with the next October, would be as follows: http://media.globenewswire.com/cache/11647/file/17611.pdf

GROWTH DRIVERS OF OUR BUSINESS

We grow by continuously adding customers and by increasing the activity with each customer. We believe this growth is enhanced by our close proximity to our customers, which allows us to provide a range of services and product availability that our competitors can't easily match. Historically, we expanded our reach by opening stores at a very fast pace. These openings were initially in the United States, but expanded beyond the United States beginning in the mid 1990's. 

In our first ten years of being public (1987 to 1997), we opened stores at a rate approaching 30% per year.  In the next ten years, we opened stores at an annual rate of approximately 10% to 15% and, over the last five years, at a rate of approximately 3% to 8% (we currently expect to open approximately 65 to 80 stores in 2013, or approximately 2.5% to 3.0%). As we gained proximity to more customers, we continued to diversify our growth drivers. This was done to provide existing store personnel with more tools to grow their business organically, and the results of this are reflected in our earlier discussion on sales growth at stores opened greater than five years. In the early 1990's, we began to expand our product lines, and we added new product knowledge to our bench. This was our first big effort to diversify our growth drivers. The next step began in the mid to late 1990's when we began to add sales personnel with certain specialties or focus. This began with our National Accounts group in 1995, and, over time, has expanded to include individuals dedicated to: (1) sales related to our internal manufacturing division, (2) government sales, (3) internet sales, (4) specific products (most recently metal working), and (5) FAST SolutionsSM (industrial vending). Another step occurred at our sales locations (this includes Fastenal stores as well as strategic account stores and in-plant locations) and at our distribution centers, and began with a targeted merchandising and inventory placement strategy that included our 'Customer Service Project' approximately ten years ago and our 'Master Stocking Hub' initiative approximately five years ago. This strategy allowed us to better target where to stock certain products (local store, regional distribution center, master stocking hub, or supplier) and allowed us to improve our fulfillment, lower our freight costs, and improve our ability to serve a broader range of customers.

Our FAST SolutionsSM (industrial vending) operation is a rapidly expanding component of our business. We believe industrial vending is the next logical chapter in the Fastenal story; we also believe it has the potential to be transformative to industrial distribution, and that we have a 'first mover' advantage. We are investing aggressively to maximize this advantage. At our investor day in May 2011, we discussed our progress with industrial vending. In addition to our discussion regarding progress, we discussed our goals with the rollout of the industrial vending machines. One of the goals we identified related to our rate of 'machine signings' (the first category below) — our goal was simple, sign 2,500+ machines per quarter (or an annualized run rate of 10,000 machines). In 2012, we hit our annual goal of 10,000 machines during July, and the momentum has continued as we finished the year. We intend to continue our aggressive push with FAST SolutionsSM (industrial vending) and, to this end, have established an internal goal to sign 30,000 machines in 2013, or 2,500 per month rather than per quarter. This is an aggressive goal, but we believe we can hit this run rate during 2013. In addition, during 2012 we developed plans to (1) reinvigorate our fastener growth and to (2) improve the performance (i.e. sales growth) at under-performing locations. These plans centered on expanding our sales team for industrial production business, improving our delivery systems for other fastener business, and expanding the team that supports under-performing stores and districts. 

The following table includes some statistics regarding our industrial vending business (note - we added the third category of information this quarter to highlight the mix change in the machines deployed as our business expands beyond the flagship FAST 5000 machine):

    Q1 Q2 Q3 Q4 Annual
Number of vending machines in  2012 4,568 4,669 5,334 5,591 20,162
 contracts signed during the period1 2011 1,405 2,107 2,246 2,084 7,842
  2010 257 420 440 792 1,909
Cumulative machines installed2 2012 9,798 13,036 17,013 21,095  
  2011 2,659 3,867 5,642 7,453  
  2010 892 1,184 1,515 1,925  
Percent of installed machines that are a FAST 5000 2012 69.7% 65.9% 60.6% 58.0%  
 (our most common helix vending machine) 2011 82.6% 77.5% 75.0% 72.5%  
  2010 99.5% 97.3% 92.4% 87.8%  
Percent of total net sales to  2012 17.8% 20.8% 23.2% 25.8%  
 customers with vending machines3 2011 8.9% 10.5% 13.1% 15.7%  
  2010 3.4% 4.6% 6.1% 7.5%  
Daily sales growth to customers 2012 33.9% 34.3% 32.9% 28.6%  
 with vending machines4 2011 50.6% 43.9% 42.5% 40.7%  
  2010 37.4% 54.0% 56.4% 60.2%  
  1 This represents the gross number of machines signed during the quarter, not the number of contracts.
  2 This represents the number of machines installed and dispensing product on the last day of the quarter.
  3 The percentage of total sales (vended and traditional) to customers currently using a vending solution.
  4 The growth in total sales (vended and traditional) to customers currently using a vending solution compared to the comparable period in the preceding year.

PROFIT DRIVERS OF OUR BUSINESS

We grow our profits by continuously working to grow sales and to improve our relative profitability. We also grow our profits by allowing our inherent profitability to shine through — we refer to this as the 'pathway to profit'. The distinction is important. 

We achieve improvements in our relative profitability by increasing our gross margin, by structurally lowering our operating expenses, or both. We advance on the 'pathway to profit' by increasing the average store size (measured in terms of monthly sales), and by allowing the changing store mix to improve our profits. This is best explained by comparing the varying profitability of our 'traditional' stores in the table below. The average store size for the group, and the average age, number of stores, and pre-tax earnings data by store size for the fourth quarter of 2012, 2011, and 2010, respectively, were as follows:

 
Sales per Month Average
Age
(Years)
Number of
Stores
Percentage
of Stores
Pre-Tax
Earnings
Percentage
Three months ended December 31, 2012 Average store sales = $83,098
$0 to $30,000 4.7 304 11.5% -14.4%
$30,001 to $60,000 7.6 830 31.3% 12.2%
$60,001 to $100,000 10.0 759 28.6% 21.3%
$100,001 to $150,000 12.9 375 14.1% 26.0%
Over $150,000 14.9 272 10.3% 28.8%
Strategic Account/Overseas Store   112 4.2%  
Company Total   2,652 100.0% 20.9%
         
   
Three months ended December 31, 2011 Average store sales = $78,781
$0 to $30,000 3.8 353 13.7% -13.7%
$30,001 to $60,000 7.2 882 34.1% 11.7%
$60,001 to $100,000 9.4 680 26.3% 21.3%
$100,001 to $150,000 12.0 352 13.6% 25.9%
Over $150,000 15.1 227 8.8% 27.4%
Strategic Account/Overseas Store   91 3.5%  
Company Total   2,585 100.0% 20.2%
         
   
Three months ended December 31, 2010 Average store sales = $67,643
$0 to $30,000 3.8 462 18.6% -13.2%
$30,001 to $60,000 6.8 952 38.2% 12.7%
$60,001 to $100,000 9.7 573 23.0% 22.0%
$100,001 to $150,000 12.2 276 11.1% 25.2%
Over $150,000 15.2 152 6.1% 27.1%
Strategic Account/Overseas Store   75 3.0%  
Company Total   2,490 100.0% 18.7%

Note — Amounts may not foot due to rounding difference.

When we originally announced the 'pathway to profit' strategy in 2007, our goal was to increase our pre-tax earnings, as a percentage of sales, from 18% to 23%. This goal was to be accomplished by slowly moving the mix from the first three categories ($0 to $30,000, $30,001 to $60,000, and $60,001 to $100,000, these groups represented 76.5% of our store base in the first three months of 2007, the last quarter before we announced the 'pathway to profit') to the last three categories ($60,001 to $100,000, $100,001 to $150,000, and over $150,000, these groups represented 53.0% of our store base in the fourth quarter of 2012) and by increasing the average store sales to approximately $125,000 per month. The weak economic environment in 2009 caused our average store size to decrease, and consequently lowered our level of profitability; however, subsequent to 2009 we improved our gross margin and structurally lowered our operating expenses. This improvement allowed us to amplify the 'pathway to profit' and effectively lowered the average store size required to hit our 23% goal. Today we believe we can accomplish our 'pathway to profit' goal with average store sales of approximately $100,000 to $110,000 per month. In the second quarter of 2012, we achieved a pre-tax earnings percentage of 22.2% with average store sales of $89,169 per month.

Note — Dollar amounts in this section are presented in whole dollars, not thousands.

Store Count and Full-Time Equivalent (FTE) Headcount — The table that follows highlights certain impacts on our business of the 'pathway to profit' since its introduction in 2007.  Under the 'pathway to profit' we increased both our store count and our store FTE headcount during 2007 and 2008. However, the rate of increase in store locations slowed and our FTE headcount for all types of personnel was reduced when the economy weakened late in 2008. In the table that follows, we refer to our 'store' net sales, locations, and personnel. When we discuss 'store' net sales, locations, and personnel, we are referring to (1) 'Fastenal' stores and (2) strategic account stores. 'Fastenal' stores are either a 'traditional' store, the typical format in the United States or Canada, or an 'overseas' store, which is the typical format outside the United States and Canada. This is discussed in greater detail in our 2011 annual report on Form 10-K. Strategic account stores are stores that are focused on selling to a group of large customers in a limited geographic market. The sales, outside of o


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