SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2001, or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________________ to ______________________
Commission file number 0-16125
FASTENAL COMPANY
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(Exact name of registrant as specified in its charter)
Minnesota 41-0948415
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2001 Theurer Boulevard
Winona, Minnesota 55987-1500
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(Address of principal executive offices) (Zip Code)
(507) 454-5374
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.
Class Outstanding at October 15, 2001
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Common Stock, $.01 par value 37,938,688
FASTENAL COMPANY
INDEX
Page No.
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Part I Financial Information:
Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000 1
Consolidated Statements of Earnings for the nine months and
three months ended September 30, 2001 and 2000 2
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and 2000 3
Notes to Consolidated Financial Statements 4-5
Management's discussion and analysis of financial condition and
results of operations 6-9
Quantitative and qualitative disclosures about market risk 10
Part II Other Information:
Exhibits and reports on Form 8-K 10
- 1 -
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands except share information)
(Unaudited)
September 30, December 31,
Assets 2001 2000
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Current assets:
Cash and cash equivalents $ 56,217 19,710
Marketable securities 2,000 4,028
Trade accounts receivable, net of allowance for doubtful
accounts of $3,354 and $2,238, respectively 121,753 106,120
Inventories 151,997 143,068
Deferred income tax asset 4,060 4,060
Other current assets 13,437 7,469
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Total current assets 349,464 284,455
Marketable securities 7,972 8,969
Property and equipment, less accumulated depreciation 117,443 105,807
Other assets, less accumulated amortization 3,104 3,233
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Total assets $ 477,983 402,464
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Liabilities and Stockholders' Equity
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Current liabilities:
Accounts payable $ 28,584 19,898
Accrued expenses 19,098 13,502
Income taxes payable 11,987 3,179
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Total current liabilities 59,669 36,579
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Deferred income tax liability 6,627 6,627
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Stockholders' equity:
Preferred stock 0 0
Common stock, 50,000,000 shares authorized
37,938,688 shares issued and outstanding 379 379
Additional paid-in capital 4,424 4,424
Retained earnings 408,591 355,248
Accumulated other comprehensive loss (1,707) (793)
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Total stockholders' equity 411,687 359,258
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Total liabilities and stockholders' equity $ 477,983 402,464
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The accompanying notes are an integral part of the consolidated financial
statements.
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FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
(Amounts in thousands except earnings per share)
(Unaudited)
Nine months ended Three months ended
September 30, September 30,
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2001 2000 2001 2000
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Net sales $ 613,000 557,779 207,077 192,922
Cost of sales 297,405 267,470 101,393 92,462
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Gross profit 315,595 290,309 105,684 100,460
Operating and administrative
expenses 225,089 190,984 78,674 66,883
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Operating income 90,506 99,325 27,010 33,577
Other income (expense):
Interest income 1,783 1,464 626 335
Loss on disposal of
property and equipment (298) (151) (81) (32)
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Total other income 1,485 1,313 545 303
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Earnings before
income taxes 91,991 100,638 27,555 33,880
Income tax expense 35,233 38,815 10,554 13,078
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Net earnings $ 56,758 61,823 17,001 20,802
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Basic and diluted earnings per share $ 1.50 1.63 .45 .55
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Weighted average shares
outstanding 37,939 37,939 37,939 37,939
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The accompanying notes are an integral part of the consolidated financial
statements.
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FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
Nine months ended
September 30,
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2001 2000
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Cash flows from operating activities:
Net earnings $ 56,758 61,823
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation of property and equipment 10,847 8,495
Loss on disposal of property and equipment 298 151
Bad debt expense 3,765 3,339
Deferred income taxes 0 2,000
Amortization of goodwill and non-compete 165 165
Changes in operating assets and liabilities,
net of impact of acquisition
Trade accounts receivable (12,477) (30,388)
Inventories (1,896) (27,783)
Other current assets (3,883) (5,083)
Accounts payable 6,649 5,980
Accrued expenses 2,755 1,961
Income taxes payable 8,808 693
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Net cash provided by operating activities 71,789 21,353
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Cash flows from investing activities:
Purchases of business and property and equipment (36,786) (28,796)
Proceeds from sale of property and equipment 2,844 5,965
Translation adjustment (804) 467
Net decrease in marketable securities 3,025 215
Increase in other assets (36) (60)
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Net cash used in investing activities (31,757) (22,209)
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Cash flows from financing activities:
Payment of dividends (3,415) (3,035)
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Net cash used in financing activities (3,415) (3,035)
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Effect of exchange rate changes on cash (110) (40)
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Net increase (decrease) in cash and cash equivalents 36,507 (3,931)
Cash and cash equivalents at beginning of period 19,710 27,849
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Cash and cash equivalents at end of period $ 56,217 23,918
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Supplemental disclosure of cash flow information:
Cash paid during each period for:
Income taxes $ 26,425 36,122
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Interest $ 0 0
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The accompanying notes are an integral part of the consolidated financial
statements.
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FASTENAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
September 30, 2001 and 2000
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Fastenal Company
and subsidiaries (collectively referred to as the Company) have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. They do not include all information
and footnotes required by generally accepted accounting principles for complete
financial statements. However, there has been no material change in the
information disclosed in the notes to consolidated financial statements included
in the Company's consolidated financial statements as of and for the year ended
December 31, 2000. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included.
(2) Derivative Instruments and Hedging Activities
During the first quarter of 2001 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities". The adoption of SFAS 133 did not impact the Company's
financial condition or results of operations.
(3) Comprehensive Income
Comprehensive income and the components of other comprehensive income (loss)
were as follows:
Nine months ended Three months ended
September 30, September 30,
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2001 2000 2001 2000
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Net earnings $ 56,758 61,823 17,001 20,802
Translation adjustment (914) 427 (829) 653
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Total comprehensive income $ 55,844 62,250 16,172 21,455
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(4) Reclassifications
Marketable securities included in cash and cash equivalents at December 31, 2000
have been reclassified to conform to the September 30, 2001 presentation.
(Continued)
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FASTENAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
September 30, 2001 and 2000
(Unaudited)
(5) Acquisition
On August 31, 2001 the Company completed the acquisition of certain assets and
liabilities of the retail fastener and related hardware business of two
subsidiaries of Textron, Inc. The results of the acquired business have been
included in the consolidated financial statements since that date. The acquired
business had sales of $2,341 since the acquisition.
The purchase price, which included a cash payment at closing plus the assumption
of certain liabilities, is contingent on the finalization of the closing balance
sheet. The preliminary purchase price was below the book value of the net assets
acquired and has been allocated to accounts receivable, inventory, and other
current assets and liabilities based on the preliminary closing balance sheet.
Upon final determination of the purchase price, any negative goodwill relating
to the potential excess of fair value of net assets acquired over the purchase
price will be recorded as an extraordinary gain pursuant to SFAS No. 141.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected the Company's financial position and operating
results during the periods included in the accompanying consolidated financial
statements. (Dollar amounts are in thousands.)
Nine months ended September 30, 2001 vs. 2000
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Net sales for the nine months ended September 30, 2001 were $613,000, an
increase of 9.9% over net sales of $557,779 for the comparable period in 2000.
The increase came primarily from higher unit sales rather than increases in
prices. Higher unit sales resulted primarily from the opening of new store sites
and, to a lesser degree, increases in sales at existing store sites. The
increases in sales at existing store sites are due primarily to increases in
market share and the introduction of new product lines. Sites opened in 1999 or
earlier had average sales increases of 3.2%. The remainder of the 9.9% sales
growth came from store sites opened in 2000 and during the first nine months of
2001.
The mix of sales during the first nine months of 2001 and 2000, from the
original Fastenal(R) product line (which consists primarily of threaded
fasteners) and from the newer product lines, was as follows:
PRODUCT LINE 2001 2000
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Fastener product line 59.9%* 64.9%
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Newer product lines 40.1%* 35.1%
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* This percentage is calculated before the impact of the August 31, 2001
acquisition discussed below.
The newer product lines consist of and were introduced as follows:
PRODUCT LINE INTRODUCED
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Tools 1993
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Cutting tools 1996
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Hydraulics & pneumatics 1996
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Material handling 1996
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Janitorial supplies 1996
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Electrical supplies 1997
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Welding supplies 1997
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Safety supplies 1999
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Net earnings for the nine months ended September 30, 2001 were $56,758, a
decrease of 8.2% from net earnings of $61,823 for the comparable period in 2000.
Operating income decreased 8.9% from 2000 to 2001. The decrease in operating
income occurred primarily because (1) gross margins decreased from 52.0% to
51.5% and (2) operating expenses increased at a 17.9% rate, a rate greater than
the net sales growth rate. The factors behind these two changes are included in
the 2001 discussion below.
The Company branch (store site) personnel totaled 4,418 on September 30, 2001,
an increase of 1.4% over the 4,356 on December 31, 2000.
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ITEM 2. (continued)
Three months ended September 30, 2001 vs. 2000
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Net sales for the three months ended September 30, 2001 were $207,077, an
increase of 7.3% over net sales of $192,922 for the comparable period in 2000.
The increase came primarily from higher unit sales rather than increases in
prices. Higher unit sales resulted from store sites opened in 2000 and during
the first nine months of 2001. Sites opened in 1999 or earlier had average sales
decreases of 1.7%.
The mix of sales during the third quarter of 2001 and 2000, from the original
Fastenal(R) product line (which consists primarily of threaded fasteners) and
from the newer product lines, was as follows:
PRODUCT LINE 2001 2000
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Fastener product line 58.2%* 63.1%
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Newer product lines 41.8%* 36.9%
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* This percentage is calculated before the impact of the August 31, 2001
acquisition discussed below.
Net earnings for the three months ended September 30, 2001 were $17,001, a
decrease of 18.3% from net earnings of $20,802 for the comparable period in
2000. Operating income decreased 19.6% from 2000 to 2001. The decrease in
operating income occurred primarily because (1) gross margins decreased from
52.1% to 51.0% and (2) operating expenses increased at a 17.6% rate, a rate
greater than the net sales growth rate. The factors behind these two changes are
included in the 2001 discussion below.
The Company branch (store site) personnel totaled 4,418 on September 30, 2001, a
decrease of 0.3% from the 4,433 on June 30, 2001.
2001 Discussion
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Note - Daily sales are defined as the sales for the month divided by the number
of business days in the month.
On August 31, 2001 the Company completed the acquisition of certain assets and
liabilities of the retail fastener and related hardware business of two
subsidiaries of Textron, Inc. The 2001 sales disclosed above include $2,341 of
sales from the acquired entity. The acquired operation lowered the Company's
gross margin from 51.3% to 51.0% for the quarter. For the quarter, the acquired
operation did not contribute materially to the earnings of the Company.
The remaining discussion excludes the impact from the acquisition discussed
above.
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ITEM 2. (continued)
The first nine months of 2001 had daily sales growth rates of 20.3%, 16.4%,
11.7%, 9.1%, 9.5%, 7.7%, 7.5%, 6.1%, and 4.9% when compared to the same month in
2000. The January 2001 growth of 20.3% represented a noticeable recovery from
the 17.8% growth in daily sales experienced in December 2000. However, the
general decline in the daily sales growth rates continues a trend, which began
in November 2000. This trend reflects the overall weakening of the industrial
economy we service in North America. We believe the September sales were
impacted approximately $1,500 due to the events of September 11th; and, absent
this, we believe our growth in September would have been just over 7%. This
would have indicated a possible bottom to the trend. The Company experienced
negative earnings leverage (growth in earnings versus growth in sales) during
the nine-month and three-month periods ended September 30, 2001. This was due to
(1) the decrease in gross margin, caused primarily by changes in product mix,
(2) the additional expenses of store site openings (see comments below), (3) the
added impact of increases in utility, motor fuel, and health care costs when
compared to the same period in 2000, and (4) the increase in depreciation
expense associated with additions of property and equipment, most notably
software and hardware for the Company's management information system.
The Company opened 36, 50, 44, and 25 new store sites during the fourth quarter
of 2000 and the first three quarters of 2001, respectively, for a total increase
of 155 store sites (or 18.0%) over September 30, 2000. While the new stores
continue to build the infrastructure for future growth, the added expenses
related to payroll, occupancy, and transportation costs impact the Company's
ability to leverage earnings in a slowing industrial economy. As disclosed in
the past, it has been the Company's experience that new stores take
approximately ten to twelve months to achieve profitability.
At the end of 2000 we indicated that we expected the rate of new store openings
to be approximately 10% to 15% per year (meaning that we expected to open from
90 to 135 new stores in 2001). Our current plans anticipate opening
approximately eleven additional stores, which would bring our total openings for
the year to approximately 130. Planned openings can be altered in a short time
span, usually less than 60 to 90 days. As the fourth quarter unfolds the Company
will continue to reevaluate the level of planned openings.
Liquidity and Capital Resources
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The higher level of sales during the nine-month period and the acquisition on
August 31, 2001 resulted in the growth of trade accounts receivable. The growth
of inventory and other current assets resulted primarily from the acquisition on
August 31, 2001. Property and equipment increased because of: (1) the
construction of a new distribution center in Kansas City which we expect to
occupy in the fourth quarter of 2001, (2) the expansion of our distribution
center in Scranton, PA, (3) the purchase of software and hardware for the
Company's information processing systems, (4) the addition of certain pickup
trucks and (5) the addition of manufacturing and warehouse equipment. In
addition to the property and equipment expansion just noted, the Company is
actively increasing the number of owned locations. The number of store locations
owned, versus leased, on September 30, 2001 was 40, an increase of 29.0% over
the 31 locations owned on December 31, 2001. The Company expects to add to this
number in the future to lower its occupancy costs. Disposals of property and
equipment related to the planned disposition of certain pickup trucks and
semi-tractors and trailers in the normal course.
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ITEM 2. (continued)
Cash requirements for these asset changes were satisfied from net earnings, cash
on hand, and the proceeds of asset disposals. As of September 30, 2001, the
Company had no material outstanding commitments for capital expenditures.
Management anticipates funding its current expansion plans with cash generated
from operations, from available cash and cash equivalents, and, to a lesser
degree, from its borrowing capacity.
Certain Risks and Uncertainties
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This discussion contains statements that are not historical in nature and that
are intended to be, and are hereby identified as, "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995, including statements
regarding planned store openings, the timeline for altering planned openings,
the expected time of occupancy of the Kansas City distribution center, expected
increases in the number of owned stores, the possible bottoming out of the
decline in daily sales growth rates, and the funding of expansion plans. The
following factors are among those that could impact the Company's plans and
performance, and cause the Company's actual results to differ materially from
those predicted in such forward-looking statements: (i) an upturn or downturn in
the economy could impact sales at existing stores and the rates of new store
openings and additions of new employees, (ii) an upturn or downturn in the
economy, or a change in product mix, could impact gross margins, (iii) a change,
from that projected, in the number of smaller communities able to support future
store sites could impact the rate of new store openings and additions of new
employees, (iv) the ability of the Company to develop product expertise at the
store level, to identify future product lines that complement existing product
lines, to transport and store certain hazardous products and to otherwise
integrate new product lines into the Company's existing stores and distribution
network could impact sales and margins, (v) increases or decreases in fuel and
utility costs could impact distribution and occupancy expenses of the Company,
(vi) the ability of the Company to successfully attract and retain qualified
personnel to staff the Company's smaller community stores could impact sales at
existing stores and the rate of new store openings, (vii) changes in
governmental regulations related to product quality or product source
traceability could impact the cost to the Company of regulatory compliance,
(viii) inclement weather could impact the Company's distribution network, (ix)
foreign currency fluctuations or changes in trade relations could impact the
ability of the Company to procure products overseas at competitive prices and
the Company's foreign sales, (x) disruptions caused by the implementation of the
Company's new management information systems infrastructure could impact sales,
(xi) changes in the rate of new store openings could impact expenditures for
computers and other capital equipment, and (xii) changes in the availability of
suitable land and buildings could impact expenditures for additional owned
locations which house our store sites.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks from changes in interest rates
and foreign currency exchange rates. Changes in these factors cause fluctuations
in the Company's earnings and cash flows. The Company evaluates and manages
exposure to these market risks as follows:
Interest Rates - The Company has a $10 million line of credit of which $0 was
outstanding at September 30, 2001. The line bears interest at 0.9% over the
LIBOR rate. The Company pays no fee for the unused portion of the line of
credit.
Foreign Currency Exchange Rates - Foreign currency fluctuations can affect the
Company's net investments and earnings denominated in foreign currencies. The
Company's primary exchange rate exposure is with the Canadian dollar against the
U.S. dollar. The Company's estimated net earnings exposure for foreign currency
exchange rates was not material at September 30, 2001.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Restated Articles of Incorporation of Fastenal Company, as amended
(incorporated by reference to Exhibit 3.1 to Fastenal Company's Form
10-Q for the quarter ended September 30, 1993)
3.2 Restated By-Laws of Fastenal Company (incorporated by reference to
Exhibit 3.2 to Registration Statement No. 33-14923)
(b) Reports on Form 8-K:
No report on Form 8-K was filed by Fastenal Company during the quarter
ended September 30, 2001.
SIGNATURES
Pursuant to the requirements 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.
FASTENAL COMPANY
/s/ Robert A. Kierlin
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(Robert A. Kierlin, President)
(Duly Authorized Officer)
Date October 31, 2001 /s/ Daniel L. Florness
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(Daniel L. Florness, Treasurer)
(Principal Financial Officer)
INDEX TO EXHIBITS
3.1 Restated Articles of Incorporation of Fastenal Company, as amended
(incorporated by reference to Exhibit 3.1 to Fastenal Company's
Form 10-Q for the quarter ended September 30, 1993).
3.2 Restated By-Laws of Fastenal Company (incorporated by reference to
Exhibit 3.2 to Registration Statement No. 33-14923).