EXHIBIT 13
FASTENAL COMPANY
---------------------------------
FIRST IN INDUSTRIAL SUPPLIES
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Annual Report
[9 PHOTOS OF COMPANY PRODUCTS AND COMPANY HEADQUARTERS]
Annual Report
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Fastenal Company Annual Report
1997
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10 Year Average Compound Annual
Net Sales Growth Rate in Excess of 30%
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Profile of
Fastenal Company
Fastenal Company was founded in 1967. As of December 31, 1997, the Company
operated 644 store sites located in 48 states, Puerto Rico and Canada and
employed 2,676 people at these sites. The Company sells industrial and
construction supplies in eight product lines. The traditional Fastenal(R)
product line consists of approximately 51,000 different types of threaded
fasteners and other industrial and construction supplies; the FastTool(R)
product line consists of approximately 21,000 different types of tools and
safety supplies; the SharpCut(R) product line consists of approximately 14,000
different types of metal cutting tool blades; the PowerFlow(TM) product line
consists of approximately 11,000 different types of fluid transfer components
and accessories for hydraulic and pneumatic power; the EquipRite(R) product line
consists of approximately 4,000 different types of material handling and storage
products; the CleanChoice(R) product line consists of approximately 3,000
different types of janitorial and paper products; the PowerPhase(TM) product
line consists of approximately 1,000 different types of electrical supplies; and
the FastArc(TM) product line consists of approximately 1,000 different types of
welding supplies (excluding gas and welding machines). The SharpCut(R),
PowerFlow(TM), EquipRite(R) and CleanChoice(R) product lines were introduced in
1996. The PowerPhase(TM) and FastArc(TM) product lines were introduced in 1997.
As of December 31, 1997, the Company also operated nine distribution centers
located in Minnesota, Indiana, Ohio, Pennsylvania, Texas, Georgia, Washington,
California and Utah, and a packaging facility in Tennessee. A tenth distribution
center located in North Carolina began operating in January 1998. Approximately
95.5% of the Company's 1997 sales were attributable to products manufactured by
others, and approximately 4.5% related to items manufactured or modified by the
Company's Manufacturing Division or repaired by the Company's tool repair
service. Since December 31, 1997, the Company has opened additional store sites
in the United States and Canada.
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This Annual Report, including the sections captioned "President's Letter to
Shareholders", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Stock and Financial Data", contains statements that
are not historical in nature and that are intended to be, and are hereby
identified as, "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), including statements regarding
expected results of operations, new store openings, value to be derived from
planned expansion, technology conversions, employee hiring, capital expenditures
and dividends. A discussion of certain risks and uncertainties that could cause
actual results to differ materially from those predicted in such forward-looking
statements is included in of the section of this Annual Report captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The Company assumes no obligation to update either such
forward-looking statements or the discussion of such risks and uncertainties.
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[FASTENAL LOGO] [FASTTOOL LOGO] [SHARPCUT LOGO] [POWERFLOW LOGO]
[EQUIPRITE LOGO] [CLEANCHOICE LOGO] [POWERPHASE LOGO] [FASTARC LOGO]
Fastenal(R), FastTool(R), SharpCut(R), PowerFlow (TM), EquipRite(R),
CleanChoice(R), PowerPhase(TM) and FastArc(TM) are trademarks and/or service
marks of the Company.
Fastenal Company
& Subsidiaries
Table of Contents
Page 2
Six-Year Selected Financial Data
Page 3 - 4
President's Letter to Shareholders
[PHOTO OF COMPANY HEADQUARTERS]
Page 5 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Page 9
Stock and Financial Data
Page 10
Consolidated Balance Sheets
Page 11
Consolidated Statements of Earnings
Page 12
Consolidated Statements of
Stockholders' Equity
Page 13
Consolidated Statements of Cash Flows
[PHOTO OF COMPANY EMPLOYEE]
Page 14 - 19
Notes to Consolidated Financial Statements
Page 20
Independent Auditors' Report
Inside Back Cover
Officers and Directors/Corporate Information
Fastenal Company
and Subsidiaries
6
Six-Year Selected Financial Data
Operating Results Percent
Years Ended Dec. 31 1997 Change 1996 1995 1994 1993 1992
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Net sales $397,992,000 +38.3 $287,691,000 222,555,000 161,886,000 110,307,000 81,263,000
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Gross profit 208,929,000 +36.7 152,880,000 118,944,000 85,927,000 58,552,000 43,683,000
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Earnings before
income taxes 67,336,000 +23.7 54,432,000 46,206,000 31,391,000 20,075,000 14,735,000
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Net earnings 40,834,000 +25.5 32,539,000 27,411,000 18,666,000 11,910,000 8,833,000
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Basic and diluted
earnings per share 1.08 +25.6 0.86 .72 .49 .31 .23
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Dividends per share 0.02 0.02 .02 .02 .015 .015
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Weighted average
shares outstanding 37,938,688 37,938,688 37,938,688 37,938,688 37,938,688 37,938,688
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Financial Position
December 31
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Net working capital $106,555,000 +35.9 $ 78,417,000 66,100,000 45,341,000 33,319,000 22,569,000
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Total assets 205,137,000 +35.4 151,545,000 109,320,000 81,795,000 57,463,000 43,937,000
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Total stockholders' equity 165,872,000 +31.7 125,967,000 94,323,000 67,649,000 49,809,000 38,468,000
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All information contained in this Annual Report reflects the 2-for-1 stock
splits effected in the form of a 100% stock dividend in 1992 and 1995.
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2 ------------------------------------------------------------------------------
1997 Annual Report
President's Letter
to Shareholders
Our Company experienced growing pains in 1997. We worked hard to add and
assimilate more people, products, and procedures throughout the year. Although
we experienced an occasional stumble, we begin 1998 by noticing light at the end
of the tunnel, and it doesn't appear to be from an oncoming train.
Our 1997 net sales of $397,992,000 represent a 38.3% increase over the
$287,691,000 of net sales in 1996. We started the year with six product groups
and added two more during the year - PowerPhase(TM), which includes electrical
supplies (cable, conduit, connectors, etc.), and FastArc(TM), which includes
welding supplies except for gas and welding machines. Approximately 23.1% of our
1997 sales came from the seven product lines added since 1993. All six of our
product lines introduced prior to 1997 showed sales increases during 1997.
Our 1997 net earnings were $40,834,000, a 25.5% increase over the 1996 net
earnings of $32,539,000. Those of you who have been shareholders since Fastenal
became a public company in 1987 may note that our 1997 earnings were double our
net sales of ten years ago. The percentage increase in net earnings trailed the
-----
percentage increase in net sales during 1997 because our operating and
administrative expenses increased at a rate greater than our net sales. Expense
categories that grew faster than the 38.3% rate of increase in net sales
included payroll, rents, utilities, training and vehicular expense. The
increased expenses are part of our planned expansion and should return their
value in the future.
During 1997 we opened an additional 160 store sites, bringing the total number
of store sites at the end of the year to 644. If the US and Canadian economies
stay strong and if we maintain our sales plan, we hope to open about 200 more
store sites in 1998. To do so we need more good people joining our Company. We
began 1997 with 3,073 employees and finished the year with 4,075. Of the added
1,002 people, 687 were employed in our store sites and the remainder in our
distribution, manufacturing, packaging, home office, or service operations.
Development of our personnel continues to receive high priority. At the start of
the year we had 15 people involved in training functions. We doubled this to 30
by the end of 1997. In addition to our own training staff, we continue to
receive training help from our vendors. In 1997 we also began using customized
training programs from vocational schools. Development of our people provides
for our growth. Despite the realization that our people are our most important
asset, we still haven't convinced the GAAP folks to allow such an entry on our
balance sheet.
During 1997 we employed significant resources to publish an all-encompassing
catalog for our eight product lines. This 824-page color-coded catalog rolled
off the presses in mid December. The first printing of 200,000 copies was
distributed to all of our stores by mid January, 1998. Our customers have given
us good reviews (and some nice orders) after looking through the catalog.
We added to our distribution and service facilities in 1997. We opened a new
distribution center in Salt Lake City, Utah, and set up an additional
distribution center in Winston-Salem, North Carolina, that opened in January,
1998. We also started planning work for a distribution center in Valparaiso,
Indiana. In a new concept, we set up a small satellite
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More Product Line Expansion in 1998
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1997 Annual Report
President's Letter
to Shareholders continued
distribution center in Billerica, Massachusetts. The Lowell facility opened in
January, 1998, and is supported out of our Scranton, Pennsylvania, distribution
center. In Winona we disposed of two properties in 1997 and purchased another 9-
acre property that included 4 buildings. Our SharpCut(R) regrind service, Winona
tool repair center, fabrication department and printing department are located
in the 4 buildings. We also began a 42,000 square foot addition to our Winona
distribution center in late 1997, with completion expected in the middle of
1998. We leased a larger building in Memphis, Tennessee, for our packaging
facility, and will move to that location in February, 1998.
In 1997 our Manufacturing Division purchased a CNC combined turning and milling
machine. This machine is our first step in pursuing medium quantity special
orders. Previously our equipment focused on small order quantities.
Our FastTool(R) service centers repair electric and air powered tools. We
started the first center with one employee in 1993 when we began selling tools.
The three centers operating in 1997 repaired 15,500 tools and contributed more
than $1 million of our net sales.
Our information systems people completed the coding for our new point-of-sale
system in 1997. The system is running in a few of our stores as we "debug" it.
We await a final version of the vendor-supplied software that will allow us to
use low-cost terminals with the system. Our largest stores will be the last to
convert to the new system, probably in the third quarter of 1998.
If overall economic conditions stay good during 1998, we expect to have a good
year at Fastenal. We have a lot of work to do, but we have and will hire more
people willing to do what work needs to be done. All of us at Fastenal work
together. Our goal in 1998 will be the same as it has been in the past: "To Grow
Our Company through Customer Service".
Thank you for believing in Fastenal.
/s/ Robert A. Kierlin
President and Chief Executive Officer
January 23, 1998
"growth
through
customer
service"
[REPRESENTATION OF COMPANY CATALOG]
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Over 640 Fastenal Company Stores
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4 ------------------------------------------------------------------------------
1997 Annual Report
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Net sales for 1997 exceeded net sales for 1996 by 38.3%. This compares with a
29.3% net sales growth rate experienced from 1995 to 1996. The increase in net
sales in 1997 and 1996 came primarily from new site openings, unit sales growth
in existing sites, and, to a lesser extent, the introduction of new products and
services, rather than from price increases. The following table indicates
product lines added to the original Fastenal(R) product line, the year of
introduction, and the approximate percentage of total net sales related to each
product line:
Percentage of Net Sales
Name Introduced 1997 1996
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FastTool(R) 1993 12.2% 12.0%
SharpCut(R) 1996 4.2% 3.0%
PowerFlow(TM) 1996 2.4% 1.0%
EquipRite(R) 1996 2.6% *
CleanChoice(R) 1996 1.1% *
PowerPhase(TM) 1997 * -
FastArc(TM) 1997 * -
* Less than 1% of net sales.
Sites opened in 1997 contributed approximately $18,175,000 (or 4.6%) to 1997 net
sales. Sites opened in 1996 contributed approximately $9,544,000 (or 3.0%) to
1996 net sales and approximately $39,694,000 (or 10.0%) to 1997 net sales. The
rate of growth in sales of sites generally levels off after sites have been open
for five years, and the sales of older sites typically vary more with the
economy than the sales of younger sites. Threaded fasteners accounted for
approximately 61%, 64% and 65% of the Company's consolidated sales in 1997, 1996
and 1995, respectively.
Gross profit as a percent of net sales was 52.5% in 1997, 53.1% in 1996 and
53.4% in 1995. The decrease from 1996 to 1997 and from 1995 to 1996 resulted
primarily from the mix of products being sold.
Operating and administrative expenses were 35.6% of net sales in 1997 after
having been 34.6% of net sales in 1996 and 33.0% of net sales in 1995. The 1997
and 1996 increases in operating and administrative costs were primarily due to
an increase in payroll and related costs and an increase in occupancy costs, the
rate of increase of both of which exceeded the growth rate of net sales. Payroll
costs increased due to a 1997 increase of 34.5% and 29.1% in sales and support
personnel, respectively, and a 1996 increase of 52.0% and 47.0% in sales and
support personnel, respectively. This increase was due to a 33.0% and 29.5%
increase in the number of sites in 1997 and 1996, respectively, and an
introduction of two and four new product lines in 1997 and 1996, respectively.
Occupancy costs increased in both years due to the aforementioned increase in
the number of sites and due to the relocation of existing sites to larger sites
to accommodate their growth in activity and the introduction of new product
lines. Distribution costs benefited from productivity gains in both 1997 and
1996.
Interest expense in 1997 increased $835,000 or 1,018% over 1996 due to the
increase in the weighted average amount of outstanding Company borrowings.
Interest income minus interest expense decreased 68.1% between 1995 and 1996
primarily because of less investable cash and the use of short-term borrowings.
The gains on disposal of property and equipment in 1997 came primarily from the
disposal of two buildings and, to a lesser extent, the disposal of used
vehicles. The gains on disposal of property and equipment in 1996 and 1995 came
primarily from the disposal of used vehicles owned by the Company. The 1996 gain
was significantly higher than the 1995 gain due to the increase in the number of
pickup trucks sold.
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1997 Annual Report
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Continued
Results of Operations continued
Net earnings grew 25.5% from 1996 to 1997, and 18.7% from 1995 to 1996. The
growth in net earnings in all years resulted primarily from increased net sales.
In 1997 and 1996 the net earnings growth rate was lower than that of net
sales because of the earlier mentioned increases in operating and administrative
expenses.
Effects of Inflation
Inflation had little effect on the Company's operations in 1997, 1996 and 1995.
Liquidity and Capital Resources
Working capital increased from $66,100,000 at December 31, 1995, to $78,417,000
at December 31, 1996 and to $106,555,000 at December 31, 1997. These increases
came primarily from higher trade accounts receivable and inventory levels
without comparable increases in current liabilities.
Net cash provided by operating activities decreased from $14,945,000 in 1995 to
$12,478,000 in 1996 and increased to 14,657,000 in 1997. The 1996 decrease came
primarily because the growth in inventories exceeded the growth in net earnings
and depreciation charges for such year. The 1997 increase came primarily because
the growth in net earnings, depreciation, accrued expenses and income tax
payable charges for such year exceeded the growth in accounts receivable and
inventories.
Net cash used in investing activities increased from $10,736,000 in 1995 to
$26,498,000 in 1996 and decreased to $21,619,000 in 1997. The 1996 increase in
net cash used in investing activities resulted primarily from an increase in
purchases of property and equipment and by an increase in other assets. The
increase in other assets was primarily due to the acquisition of a business in
1996. The 1997 decrease in net cash used in investing activities resulted
primarily from an increase in the disposal of vehicles. Additions to vehicles
and computer equipment are expected to be the largest part of cash used by
investing activities in 1998.
The Company had no long-term debt at December 31, 1997, 1996, or 1995. See
note 9 of the Notes to Consolidated Financial Statements for a description of
the Company's current lines of credit and note payable arrangements.
The Company paid an annual dividend of $.02 per share in 1997, 1996 and 1995.
At December 31, 1997, the Company had two outstanding commitments for capital
expenditures. The Company's commitments consisted of a $1,700,000 expansion of
the Winona, Minnesota warehouse and a $1,300,000 purchase of property for a
future distribution center.
The Company expects to make approximately $36,000,000 in total capital
expenditures in 1998 (including the $3,000,000 described above), this consists
of approximately $15,000,000 for pickup trucks, approximately $3,000,000 for
semi-tractors and trailers, approximately $8,500,000 for manufacturing,
warehouse and packaging equipment and facilities, approximately $8,000,000 for
data processing equipment and approximately $1,500,000 for land.
Management anticipates funding its commitments for capital expenditures and its
current expansion plans with cash generated from operations, from its borrowing
capacity and, to a lesser degree, from available cash, cash equivalents and
marketable securities.
6 ------------------------------------------------------------------------------
1997 Annual Report
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Continued
Liquidity and Capital Resources
continued
In addition to opening new sites in the United States, in 1998 the Company plans
to open additional sites in Canada and Puerto Rico and to continue selling its
products in Mexico from some of its existing sites in Texas. No assurance can be
given that any of the Company's expansion plans will be achieved or that new
sites, once opened, will be profitable.
Year 2000 Discussion
Like any other company, advances and changes in available technology can
significantly impact the business and operations of the Company. For example, a
challenging problem exists as many computer systems worldwide do not have the
capability of recognizing the year 2000 or years thereafter. No easy
technological "quick fix" has yet been developed for this problem. The Company
is expending resources to assure that its computer systems are reprogrammed or
replaced in time to effectively deal with transactions in the year 2000 and
beyond. The Company is constantly upgrading its computer systems in the normal
course to accommodate the rapid sales growth experienced over the last several
decades. The most recent upgrade has occurred in the Company's point-of-sale
system. The Company began to rewrite the software for this system in 1996. This
rewrite, which was completed and tested in 1997, addressed "Year 2000" issues
and is expected to be implemented in 1998. The software supporting the non-
branch operations is also being upgraded in the normal course. These upgrades
are expected to be completed in time to effectively deal with the "Year 2000"
issue. The "Year 2000 Computer Problem" creates risk for the Company from
unforeseen problems in its own computer systems and from third parties with whom
the Company deals on financial transactions worldwide. "Year 2000" failures of
the Company and/or third party computer systems could have a material impact on
the Company's ability to conduct its business, and especially to process and
account for the transfer of funds electronically.
Certain Risks and Uncertainties
Certain statements in this Annual Report, in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997, in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases and in oral statements make by or with approval of the Company's
executive officers constitute or will constitute "forward-looking statements"
under the Reform Act. The following factors are among those that could cause the
Company's actual results to differ materially from those predicted in such
forward-looking statements: (i) a downturn in the economy could impact sales at
existing stores, (ii) 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, (iii) 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, (iv) 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, (v) changes in governmental regulations related to
product quality or product source traceability could impact the cost to the
Company of regulatory compliance, (vi) inclement weather could impact the
Company's distribution network, (vii) foreign currency.
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1997 Annual Report
Management's Discussion and Analysis of
Financial Condition and Results of Operations
continued
Certain Risks and Uncertainties
continued
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, (viii) disruptions caused by the implementation of the Company's
new management information systems infrastructure could impact sales, (ix)
unforeseen disruptions associated with "Year 2000 Computer Problems" could
impact sales and the Company's ability to order and pay for product, and (x)
changes in the rate of new store openings could impact expenditures for
vehicles, computers and other capital equipment.
New Accounting Pronouncements
During 1997, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards (SFAS) No. 129, SFAS No. 130 and SFAS No. 131.
SFAS No. 129, Disclosure of Information about Capital Structure, consolidates
existing disclosure requirements and had no impact on the Company's financial
statements. SFAS No. 130, Reporting Comprehensive Income, establishes standards
for reporting and displaying the components of comprehensive income and will be
adopted by the Company in 1998. The statement requires additional disclosures,
but has no impact on consolidated net earnings. SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, establishes standards for
determining operating segments and reporting operating segment information. SFAS
No. 131 is required to be adopted beginning with Company's 1998 year-end annual
report. The Company has not yet evaluated the effects of this pronouncement to
determine what changes, if any, to its current reporting format will be
required.
8 ------------------------------------------------------------------------------
1997 Annual Report
Stock and
Financial Data $
Common Stock Data
The Company's shares are traded on The Nasdaq Stock Market under the symbol
"FAST". The following table sets forth, by quarter, the high and low closing
sale price of the Company's shares on The Nasdaq Stock Market for 1997 and 1996.
1997: High Low
First quarter $49-7/8 31-3/4
Second quarter 53 30-3/4
Third quarter 60-1/2 49
Fourth quarter 56 36
1996: High Low
First quarter $42-1/2 28-3/4
Second quarter 47 34-1/4
Third quarter 50 35
Fourth quarter 49-3/4 42-3/8
As of February 13, 1998, there were approximately 2,933 record holders of the
Company's Common Stock.
A $.02 annual dividend per share was paid during both 1996 and 1997. On January
20, 1998, the Company announced a $.02 annual dividend per share to be paid on
March 13, 1998 to shareholders of record at the close of business on February
27, 1998. The Company expects that it will continue to pay comparable cash
dividends in the foreseeable future, 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.
$
Selected Quarterly Financial Data (Unaudited)
1997: Net sales Gross profit Net earnings Earnings per share
First quarter $ 87,095,000 45,836,000 8,765,000 .23
Second quarter 98,232,000 51,165,000 10,479,000 .28
Third quarter 105,551,000 55,652,000 11,334,000 .30
Fourth quarter 107,114,000 56,276,000 10,256,000 .27
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$397,992,000 208,929,000 40,834,000 1.08
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1996: Net sales Gross profit Net earnings Earnings per share
First quarter $ 63,061,000 33,425,000 7,433,000 .20
Second quarter 70,850,000 38,036,000 8,445,000 .22
Third quarter 76,212,000 40,687,000 8,692,000 .23
Fourth quarter 77,568,000 40,732,000 7,969,000 .21
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$287,691,000 152,880,000 32,539,000 .86
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Annual Report
Consolidated
Balance Sheets December 31, 1997 and 1996
1997 1996
Assets
Current assets:
Cash and cash equivalents $ 386,000 426,000
Trade accounts receivable, net of allowance for
doubtful accounts of $660,000 and $540,000
as of December 31, 1997 and 1996, respectively 57,542,000 41,553,000
Inventories 79,415,000 56,526,000
Deferred income tax asset 1,591,000 1,219,000
Other current assets 5,237,000 3,731,000
-------------------------------
Total current assets 144,171,000 103,455,000
Marketable securities 265,000 515,000
Property and equipment, less accumulated depreciation 57,084,000 43,930,000
Other assets, net 3,617,000 3,645,000
-------------------------------
Total assets $ 205,137,000 151,545,000
-------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 12,950,000 10,010,000
Notes payable 16,303,000 8,622,000
Accrued expenses 7,314,000 5,611,000
Income tax payable 1,049,000 795,000
-------------------------------
Total current liabilities 37,616,000 25,038,000
-------------------------------
Deferred income tax liability 1,649,000 540,000
-------------------------------
Stockholders' equity:
Preferred stock of $.01 par value per share.
Authorized 5,000,000 shares; none issued - -
Common stock of $.01 par value per share.
Authorized 50,000,000 shares; issued and
outstanding 37,938,688 shares 379,000 379,000
Additional paid-in capital 4,424,000 4,424,000
Retained earnings 161,421,000 121,346,000
Translation adjustment (352,000) (182,000)
-------------------------------
Total stockholders' equity 165,872,000 125,967,000
-------------------------------
Total liabilities and stockholders' equity $ 205,137,000 151,545,000
-------------------------------
The accompanying notes are an integral part of the financial statements.
10 -----------------------------------------------------------------------------
1997 Annual Report
Consolidated Statements
of Earnings
Years ended December 31,
1997, 1996 and 1995
- --------------------------------------------------------------------------------
1997 1996 1995
Net sales $ 397,992,000 287,691,000 222,555,000
Cost of sales 189,063,000 134,811,000 103,611,000
-------------- ----------- -----------
Gross profit 208,929,000 152,880,000 118,944,000
Operating and administrative expenses 141,725,000 99,473,000 73,448,000
-------------- ----------- -----------
Operating income 67,204,000 53,407,000 45,496,000
Other income (expense):
Interest income 40,000 118,000 181,000
Interest expense (917,000) (82,000) (68,000)
Gain on disposal of property and equipment 1,009,000 989,000 597,000
-------------- ----------- -----------
Total other income 132,000 1,025,000 710,000
-------------- ----------- -----------
Earnings before income taxes 67,336,000 54,432,000 46,206,000
Income tax expense 26,502,000 21,893,000 18,795,000
-------------- ----------- -----------
Net earnings $ 40,834,000 32,539,000 27,411,000
-------------- ----------- -----------
Basic and diluted earnings per share $ 1.08 .86 .72
-------------- ----------- -----------
Weighted average shares outstanding 37,938,688 37,938,688 37,938,688
-------------- ----------- -----------
The accompanying notes are an integral part of the financial statements.
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1997 Annual Report
Consolidated Statements
of Stockholders' Equity
Years ended December 31,
1997, 1996 and 1995
- --------------------------------------------------------------------------------
Unrealized
holding gains
Additional (losses) on Total
Common stock paid-in Retained Translation marketable stockholders'
Shares Amount capital earnings adjustment securities equity
- ----------------------------------------------------------------------------------------------------------------------
Balances as of
December 31, 1994 37,938,688 $ 379,000 4,424,000 62,914,000 (11,000) (57,000) 67,649,000
Dividends paid in cash - - - (759,000) - - (759,000)
Net earnings for the year - - - 27,411,000 - - 27,411,000
Translation adjustment - - - - (41,000) - (41,000)
Unrealized
holding gains on
marketable securities - - - - - 63,000 63,000
- ----------------------------------------------------------------------------------------------------------------------
Balances as of
December 31, 1995 37,938,688 $ 379,000 4,424,000 89,566,000 (52,000) 6,000 94,323,000
Dividends paid in cash - - - (759,000) - - (759,000)
Net earnings for the year - - - 32,539,000 - - 32,539,000
Translation adjustment - - - - (130,000) - (130,000)
Unrealized
holding losses on
marketable securities - - - - - (6,000) (6,000)
- ----------------------------------------------------------------------------------------------------------------------
Balances as of
December 31, 1996 37,938,688 $ 379,000 4,424,000 121,346,000 (182,000) - 125,967,000
Dividends paid in cash - - - (759,000) - - (759,000)
Net earnings for the year - - - 40,834,000 - - 40,834,000
Translation adjustment - - - - (170,000) - (170,000)
- ----------------------------------------------------------------------------------------------------------------------
Balances as of
December 31, 1997 37,938,688 $ 379,000 4,424,000 161,421,000 (352,000) - 165,872,000
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
12 -----------------------------------------------------------------------------
1997 Annual Report
Consolidated Statements
of Cash Flows
Years ended December 31,
1997, 1996 and 1995
- --------------------------------------------------------------------------------
1997 1996 1995
Cash flows from operating activities:
Net earnings $40,834,000 32,539,000 27,411,000
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation of property and equipment 9,362,000 7,349,000 5,404,000
Gain on disposal of property and equipment (1,009,000) (989,000) (597,000)
Deferred income taxes 737,000 268,000 (218,000)
Amortization of goodwill and non-compete agreement 220,000 129,000 -
Amortization of premium on marketable securities - 6,000 36,000
Changes in operating assets and liabilities:
Trade accounts receivable (15,989,000) (9,687,000) (8,260,000)
Inventories (22,889,000) (16,348,000) (9,267,000)
Other current assets (1,506,000) (2,208,000) (415,000)
Accounts payable 2,940,000 2,128,000 68,000
Accrued expenses 1,703,000 637,000 828,000
Income taxes payable 254,000 (1,346,000) (45,000)
----------- ----------- -----------
Net cash provided by operating activities 14,657,000 12,478,000 14,945,000
----------- ----------- -----------
Cash flows from investing activities:
Sales of marketable securities 250,000 257,000 4,269,000
Additions of property and equipment (28,658,000) (26,243,000) (16,664,000)
Proceeds from sale of property and equipment 7,151,000 3,043,000 1,755,000
Translation adjustment (170,000) (130,000) (41,000)
Increase in other assets (192,000) (3,425,000) (55,000)
----------- ----------- -----------
Net cash used in investing activities (21,619,000) (26,498,000) (10,736,000)
----------- ----------- -----------
Cash flows from financing activities:
Net increase in line of credit 7,463,000 8,622,000 -
Proceeds of note payable 218,000 - -
Payment of dividends (759,000) (759,000) (759,000)
----------- ----------- -----------
Net cash provided by (used in) financing activities 6,922,000 7,863,000 (759,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (40,000) (6,157,000) 3,450,000
Cash and cash equivalents at beginning of year 426,000 6,583,000 3,133,000
----------- ----------- -----------
Cash and cash equivalents at end of year $ 386,000 426,000 6,583,000
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during each year for:
Income taxes $25,511,000 22,971,000 19,057,000
Interest $ 867,000 82,000 68,000
Supplemental disclosures on non-cash investing activities:
Unrealized holding gains (losses) on marketable securities $ - (6,000) 63,000
The accompanying notes are an integral part of the financial statements.
- ----------------------------------------------------------------------------- 13
1997 Annual Report
Notes to Consolidated
Financial Statements
Years ended December 31,
1997, 1996 and 1995
- --------------------------------------------------------------------------------
1 Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of
Fastenal Company and its wholly-owned subsidiaries, Fastenal Company
Services, Fastenal Company Purchasing, Fastenal Company Leasing, and
Fastenal Canada Company (collectively referred to as the Company).
All material intercompany balances and transactions have been
eliminated in consolidation.
Revenue Recognition
The Company recognizes sales and the related cost of sales on the
accrual basis of accounting at the time products are shipped to or
picked up by customers.
Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the
Company considers all highly-liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
Inventories
Inventories, consisting of merchandise held for resale, are stated at
the lower of cost (first in, first out method) or market.
Marketable Securities
Marketable securities as of December 31, 1997 and 1996 consist of
debt securities. The Company classifies its debt securities as
available-for-sale. Available-for-sale securities are recorded at
fair value based on current market value. Unrealized holding gains
and losses on available-for-sale securities are excluded from
earnings and are reported as a separate component of stockholders'
equity until realized, provided that a decline in the market value of
any available-for-sale security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of a
new cost basis for the security.
(continued)
14
- ------------------------------------------------------------------------------
1997 Annual Report
Notes to Consolidated
Financial Statements
Years ended December 31,
1997, 1996 and 1995
- --------------------------------------------------------------------------------
1 Summary of Significant Accounting Policies continued
Property and Equipment
Property and equipment are stated at cost. Except as provided below,
depreciation on buildings and equipment is provided for financial
statement reporting purposes by the methods and over the lives
mandated by Internal Revenue Service Regulations (IRS Regulations).
These lives approximate the anticipated economic useful lives of the
related property. Depreciation in 1997 and 1996 on transportation
equipment is provided by the straight-line method over lives mandated
by IRS Regulations which represents a change from 1995 when the
accelerated method was used. The 1996 change reflected a change in
the estimate of the salvage value of the transportation equipment.
This change was made to lessen the effect of increasing gains from
the planned disposal of transportation equipment. The impact of the
change was immaterial in 1996 and 1997.
Other Assets
Other assets consists of prepaid security deposits, goodwill and a
non-compete agreement. Goodwill represents the excess of the purchase
price over the fair value of net assets acquired and is amortized on
a straight-line basis over 15 years. The non-compete agreement is
amortized on a straight-line basis over 15 years. Goodwill and other
long-term asset balances are reviewed periodically to determine that
the unamortized balances are recoverable. In evaluating the
recoverability of these assets, the following factors, among others,
are considered: a significant change in the factors used to determine
the amortization period, an adverse change in legal factors or in the
business climate, a transition to a new product or services strategy,
a significant change in the customer base, and/or a realization of
failed marketing efforts. If the unamortized balance is believed to
be unrecoverable, the Company recognizes an impairment charge
necessary to reduce the unamortized balance to the amount of
undiscounted cash flows expected to be generated over the remaining
life. If the acquired entity has been integrated into other
operations and cash flows cannot be separately measured, the Company
recognizes an impairment charge necessary to reduce the unamorttized
balance to its estimated fair value. The amount of impairment is
charged to earnings as a part of operating and administrative
expenses in the current period.
Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets to Be
Disposed Of, in 1996. Adoption of this statement did not have a
material impact on the Company's financial position or results of
operations.
(continued)
- ----------------------------------------------------------------------------- 15
1997 Annual Report
Notes to Consolidated
Financial Statements
Years ended December 31,
1997, 1996 and 1995
- --------------------------------------------------------------------------------
1 Summary of Significant Accounting Policies continued
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results
could differ from those estimates.
Stock-Based Compensation
The Company does not have any stock options or any other types of
stock-based compensation.
Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date.
Earnings Per Share
Earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding. Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share,
establishes a new standard for computing and presenting earnings per
share information. The Company, as required, adopted SFAS No. 128 in
the interim and annual period ended December 31, 1997. Due to the
fact that the Company has a simple capital structure, there has been
no impact to the financial statements due to the adoption of this
standard.
2 Marketable Securities
The amortized cost, unrealized holding gains (losses), and fair value
of available-for-sale debt securities as of December 31 were as
follows:
Amortized Unrealized holding Fair
cost gains (losses) value
----------------------------------------------------------
1997 $265,000 - 265,000
1996 $515,000 - 515,000
16 -----------------------------------------------------------------------------
1997 Annual Report
Notes to Consolidated
Financial Statements
Years ended December 31,
1997, 1996 and 1995
3 Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, requires disclosure of the fair value of all
financial instruments to which the Company is a party. All financial
instruments are carried at amounts that approximate estimated fair value.
4 Property and Equipment
Property and equipment as of December 31 consists of the following:
Depreciable
life in years 1997 1996
- ---------------------------------------------------------------------------
Land - $ 2,266,000 1,934,000
Buildings and improvements 31 to 39 16,513,000 17,370,000
Equipment and shelving 3 to 10 33,726,000 25,765,000
Transportation equipment 3 to 5 28,475,000 17,464,000
Construction in progress - 4,317,000 2,078,000
--------------------------
85,297,000 64,611,000
Less accumulated depreciation 28,213,000 20,681,000
--------------------------
Net property and equipment $57,084,000 43,930,000
--------------------------
5 Accrued Expenses
Accrued expenses as of December 31 consist of the following:
1997 1996
--------------------------------------------------------------
Payroll and related taxes $ 4,232,000 2,766,000
Bonuses 852,000 1,108,000
Commissions 1,189,000 867,000
Sales and real estate taxes 734,000 570,000
Other 307,000 300,000
-----------------------------
$ 7,314,000 5,611,000
-----------------------------
6 Stockholders' Equity
Stock Splits
Dollar, share and per share amounts herein and in the accompanying
consolidated financial statements have been adjusted retroactively, where
appropriate, to reflect the 2-for-1 Common Stock split effected in the form
of a 100% stock dividend in 1995.
Dividends
On January 20, 1998, the Company's board of directors declared a dividend of
$.02 per share of Common Stock to be paid in cash on March 13, 1998 to
shareholders of record at the close of business on February 27, 1998.
- ----------------------------------------------------------------------------- 17
1997 Annual Report
Notes to Consolidated
Financial Statements
Years ended December 31,
1997, 1996 and 1995
- --------------------------------------------------------------------------------
7 Income Taxes
Components of income tax expense are as follows:
1997: Current Deferred Total
---------------------------------------------------------
Federal $ 21,385,000 599,000 21,984,000
State 4,380,000 138,000 4,518,000
--------------------------------------------
$ 25,765,000 737,000 26,502,000
--------------------------------------------
1996: Current Deferred Total
---------------------------------------------------------
Federal $ 17,324,000 216,000 17,540,000
State 4,301,000 52,000 4,353,000
--------------------------------------------
$ 21,625,000 268,000 21,893,000
--------------------------------------------
1995: Current Deferred Total
---------------------------------------------------------
Federal $ 15,192,000 (175,000) 15,017,000
State 3,821,000 (43,000) 3,778,000
--------------------------------------------
$ 19,013,000 (218,000) 18,795,000
--------------------------------------------
Income tax expense in the accompanying consolidated financial
statements differs from the "expected" tax expense as follows:
1997 1996 1995
- --------------------------------------------------------------------------------------------
Federal income tax expense at
the "expected" rate of 35% $ 23,568,000 19,051,000 16,172,000
Increase (reduction) attributed to:
State income taxes, net of federal benefit 2,937,000 2,829,000 2,371,000
Tax exempt interest (16,000) (16,000) (46,000)
Other, net 13,000 29,000 298,000
--------------------------------------------------
Total income tax expense $ 26,502,000 21,893,000 18,795,000
--------------------------------------------------
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities as of December 31 are as follows:
1997 1996
- -------------------------------------------------------------------------
Deferred taxes:
Inventory costing and valuation methods $ 1,343,000 1,007,000
Allowance for doubtful accounts receivable 254,000 218,000
Health claims payable 21,000 21,000
Fixed assets (1,649,000) (540,000)
Other, net (27,000) (27,000)
---------------------------
Net deferred tax asset (liability) $ (58,000) 679,000
---------------------------
No valuation allowance for deferred tax assets was necessary as of December 31,
1997 and 1996. The character of the federal tax assets is such that they can be
realized through carry-back to prior tax periods or offset against future
taxable income.
18 -----------------------------------------------------------------------------
1997 Annual Report
Notes to Consolidated
Financial Statements
Years ended December 31,
1997, 1996 and 1995
- --------------------------------------------------------------------------------
8 Operating Leases
The Company leases space under non-cancelable operating leases for its
California, North Carolina, Utah and Washington distribution centers, its
Tennessee packaging center, and certain store sites with initial terms of
one to 48 months. Minimum annual rentals, exclusive of taxes, insurance,
etc., for the leased facilities, are as follows:
Year ending Distribution centers,
December 31 packaging center and store sites
--------------------------------------------------
1998 $ 8,295,391
1999 6,436,067
2000 2,529,672
2001 and thereafter 615,602
Rent expense under all operating leases was as follows:
Year ended Distribution centers,
December 31 packaging center and store sites
--------------------------------------------------
1997 $ 9,460,000
1996 5,865,000
1995 4,003,000
9 Lines of Credit and Commitments
The Company has a line of credit arrangement with a bank which expires June
30, 1998. The line allows for borrowings of up to $20,000,000 at .9% over the
LIBOR rate. On December 31, 1997 there was $11,085,000 outstanding on the
line and the interest rate was 6.8%.
The Company also had $5,000,000 advanced under an uncommitted line of credit
as of December 31, 1997. The interest rate on such date was 6.25%. This
instrument will be repriced on March 3, 1998 at 0.5% over the LIBOR rate.
The Company has a note payable related to a 1997 purchase of property. The
note is due, with interest, on April 1, 1998. On December 31, 1997 there was
$218,000 outstanding on the note and the interest rate was 5.6%.
The Company currently has letters of credit issued on its behalf to suppliers
for large overseas purchases. As of December 31, 1997 and 1996, the total
undrawn balance of outstanding letters of credit was $209,000 and $101,000,
respectively.
At December 31, 1997, the Company had two outstanding commitments for capital
expenditures. These commitments consisted of a $1.7 million expansion of the
Winona, Minnesota warehouse and a $1.3 million purchase of property for a
future distribution center.
- ----------------------------------------------------------------------------- 19
Annual Report
Independent
Auditors' Report
The Board of Directors and Stockholders
Fastenal Company:
We have audited the accompanying consolidated balance sheets of Fastenal Company
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 23, 1998
20 -----------------------------------------------------------------------------
1997 Annual Report
Officers
Robert A. Kierlin
Chairman of the Board,
Chief Executive Officer and President
Willard D. Oberton
Chief Operating Officer
and Vice-President
Stephen M. Slaggie
Secretary
Daniel L. Florness
Chief Financial Officer
and Treasurer
Directors
Michael M. Gostomski
President and Chief Executive Officer
Winona Heating & Ventilating Co.
(sheet metal and roofing contractor)
Robert A. Kierlin
Henry K. McConnon
President
Wise Eyes, Inc.
(eyeglass retailer and wholesaler)
John D. Remick
President,
Rochester Athletic Club, Inc.
(health club)
Stephen M. Slaggie
Corporate Information
Annual Meeting
The annual meeting of shareholders will be held at 10:00 a.m., Tuesday, April
21, 1998, at Corporate Headquarters, 2001 Theurer Boulevard, Winona, Minnesota
Corporate Headquarters
Fastenal Company
2001 Theurer Boulevard
Winona, Minnesota 55987-1500
Phone: (507) 454-5374
Fax: (507) 453-8049
Transfer Agent
Norwest Bank Minnesota, N.A.
Minneapolis, Minnesota
FORM 10-K
A COPY OF THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K TO THE SECURITIES AND
EXCHANGE COMMISSION IS AVAILABLE WITHOUT CHARGE TO SHAREHOLDERS UPON WRITTEN
REQUEST TO THE SECRETARY OF THE COMPANY AT THE ADDRESS LISTED ON THIS PAGE FOR
THE COMPANY'S CORPORATE HEADQUARTERS.
Copies of our latest press release and unaudited supplemental Company
information are available at the Fastenal Company world wide web site at
www.fastenal.com
Legal Counsel
Faegre & Benson LLP
Minneapolis, Minnesota
Streater & Murphy, PA
Winona, Minnesota
Auditors
KPMG Peat Marwick LLP
Minneapolis, Minnesota
First in
Industrial Supplies
[8 PHOTOS OF COMPANY PRODUCTS]
Welding Electrical Janitorial Material Hydraulics Cutting Tools Fasteners
Handling
Our Approach
At Fastenal Company, we operate in an uncomplicated, straightforward way that
makes it easy for our customers to gain confidence and satisfaction based on our
performance. This concept, present when we opened our first Fastenal store in
1967, will remain unchanged.
Corporate Headquarters:
2001 Theurer Boulevard. Winona, MN 55987
Phone: 507-454-5374. Fax: 507-453-8049
For more information, e-mail us at: fastinfo@fastenal.com