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ITEM 7.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following is management's discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements.
Business and Operational Overview
Fastenal is a North American leader in the wholesale distribution of industrial and construction supplies. We distribute these supplies through a network of over 3,200 in-market locations. Most of our customers are in the manufacturing and non-residential construction markets. The manufacturing market includes both OEM and MRO customers. The non-residential construction market includes general, electrical, plumbing, sheet metal, and road contractors. Other users of our products include farmers, truckers, railroads, oil exploration companies, oil production and refinement companies, mining companies, federal, state, and local governmental entities, schools, and certain retail trades. Geographically, our branches, Onsite locations, and customers are primarily located in North America.
It is helpful to appreciate several aspects of our marketplace: (1) It's big. We estimate the North American marketplace for industrial supplies is in excess of $140 billion per year (and we have expanded beyond North America) and no company has a significant portion of this market. (2) Many of the products we sell are individually inexpensive, but the cost and time to manage, procure, and transport these products can be quite meaningful. (3) Purchasing professionals often expend disproportionate effort managing the high SKU count of low-volume, low value MRO supplies which is better allocated to their higher volume, higher value OEM supplies. (4) Many customers prefer to reduce their number of suppliers to simplify their business, while also utilizing various technologies and models (including our local branches when they need something quickly or unexpectedly) to improve availability and reduce waste. (5) We believe the markets are efficient. To us, this means we can grow our market share if we provide the greatest value to our customer.
Our approach to addressing these aspects of our marketplace is captured in our motto Growth through Customer Service. The concept of growth is simple: find more customers every day and increase our 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 have a great team behind our customer-facing resources to operate efficiently and to help identify new business solutions. Fourth, we strive to generate strong profits, which produce the cash flow necessary to fund our growth and to support the needs of our customers. Lastly, we identify drivers that allow us to get closer to our customers and gain market share.
We believe our ability to grow is amplified if we can serve our customers at the closest economic point of contact. At one point, the closest economic point of contact was the local branch. Today, in some cases, we have moved the branch inside the customer's facility. We also are frequently positioned right at the point of consumption within customers' facilities through our industrial vending or FMI capabilities. Therefore, our focus centers on understanding our customers' day, their opportunities, and their obstacles. By doing these things every day, Fastenal remains a growth-centric organization.
Executive Overview
Net sales increased $368.6, or 7.4%, in 2019 relative to 2018. Our gross profit as a percentage of net sales declined to 47.2% in 2019 from 48.3% in 2018. Our operating income as a percentage of net sales declined to 19.8% in 2019 from 20.1% in 2018.
Our net earnings in 2019 were $790.9, an increase of 5.2% when compared to 2018. Our diluted net earnings per share were $1.38 in 2019 compared to $1.31 in 2018, an increase of 5.2%. Discrete tax items benefited net earnings by $7.1 in 2018.
We continued to focus on our growth drivers in 2019. Daily sales to our national account customers (defined as customer accounts with a multi-site contract) grew 11.9% in the period. Additionally, we signed 362 new Onsite customer locations (defined as dedicated sales and service provided from within, or in close proximity to, the customer's facility) and 21,857 new industrial vending devices. We experienced sales growth in the mid-teens through both our vending devices and our Onsite locations (excluding sales transferred from a branch).
The table below summarizes our total employee headcount, our investments in in-market locations (defined as the sum of the total number of public branch locations and the total number of active Onsite locations), and industrial vending devices at the end of the periods presented and the percentage change compared to the end of the prior period.
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Q4
2019
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Q4
2018
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Twelve-month
% Change
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In-market locations - absolute employee headcount
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13,977
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14,015
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-0.3
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%
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Total absolute employee headcount
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21,948
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21,644
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1.4
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%
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Number of public branch locations
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2,114
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2,227
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-5.1
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%
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Number of active Onsite locations
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1,114
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894
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24.6
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%
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Number of in-market locations
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3,228
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3,121
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3.4
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%
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Industrial vending devices (installed count) (1)
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89,937
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81,137
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10.8
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%
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Ratio of industrial vending devices to in-market locations
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28:1
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26:1
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(1) This number primarily represents devices which principally dispense product and produce product revenues, and excludes approximately 15,000 devices that are part of a locker lease program where the devices are principally used for the check-in/check-out of equipment.
During the last twelve months, we reduced our absolute employee headcount by 38 people in our in-market locations and increased by 304 people in total. The reduction in our absolute employee headcount in our in-market locations reflects actions taken by leadership in our public branches over the past couple of quarters to control expenses in response to weaker demand, which was only partly offset by increases to support growth in our number of Onsite locations. The increase in our total absolute employee headcount is mostly from additions we have made to support customer acquisition, implementation, and growth in the field, particularly as it relates to our growth drivers and to support general corporate and hub functions.
We opened twelve branches and closed 125 branches, net of conversions, in 2019. We activated 312 Onsite locations and closed 92, net of conversions, in 2019. The number of closings reflects both normal churn in our business, whether due to exiting customer relationships, the shutting or relocation of a customer facility, or a customer decision, as well as a review of certain underperforming locations. Our in-market network forms the foundation of our business strategy, and we will continue to open or close locations as is deemed necessary to sustain and improve our network, support our growth drivers, and manage our operating expenses.
Results of Operations
The following sets forth consolidated statements of earnings information (as a percentage of net sales) for the periods ended December 31:
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2019
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2018
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2017
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Net sales
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100.0
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%
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100.0
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%
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100.0
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%
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Gross profit
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47.2
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%
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48.3
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%
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49.3
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%
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Operating and administrative expenses
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27.4
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%
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28.2
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%
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29.2
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%
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Gain on sale of property and equipment
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0.0
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%
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0.0
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%
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0.0
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%
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Operating income
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19.8
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%
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20.1
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%
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20.1
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%
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Net interest expense
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-0.3
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%
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-0.3
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%
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-0.2
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%
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Earnings before income taxes
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19.6
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%
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19.9
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%
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19.9
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%
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Note – Amounts may not foot due to rounding difference.
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Net Sales
Note – Daily sales are defined as the total net sales for the period divided by the number of business days (in the United States) in the period. The table below sets forth net sales and daily sales for the periods ended December 31, and changes in such sales from the prior period to the more recent period:
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2019
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2018
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2017
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Net sales
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$
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5,333.7
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4,965.1
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4,390.5
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Percentage change
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7.4
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%
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13.1
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%
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10.8
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%
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Business days
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254
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254
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254
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Daily sales
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$
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21.0
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19.5
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17.3
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Percentage change
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7.4
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%
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13.1
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%
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11.3
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%
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Daily sales impact of currency fluctuations
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-0.3
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%
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0.1
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%
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0.1
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%
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Daily sales impact of acquisitions
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0.1
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%
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0.4
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%
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1.0
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%
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The increases in net sales noted above for both 2019 and 2018 were a result of higher unit sales and, to a lesser degree, higher prices. Higher product prices were realized throughout 2019 and 2018 as a result of actions (beginning initially in late 2017) taken to offset increases in product costs, and we believe these increases contributed 0.9% to 1.0% and 0.7% to 0.8% to sales growth during 2019 and 2018, respectively. The increase in net sales for 2017 was driven primarily by higher unit sales. Price increases were not a material factor in 2017.
The higher unit sales in 2019 and 2018 resulted primarily from two sources. The first is higher underlying market demand, which we believe is reflected in a number of metrics. For instance, the U.S. Purchasing Managers Index, published by the Institute for Supply Chain Management, averaged 51.2 in 2019 and 58.8 in 2018. Readings above 50 are indicative of growing demand, and we believe these levels are consistent with the sales growth rates we experienced in the respective periods. In addition, U.S. Industrial Production, which is published by the Federal Reserve, increased 0.8% in 2019 and increased 3.9% in 2018. We believe U.S. Industrial Production is a good proxy for the state of our marketplace and that the growth in this metric is consistent with the sales growth rates we experienced in the respective periods. This was reflected as well in daily sales of fasteners, our most cyclical product line, which grew 5.5% and 11.2% in 2019 and 2018, respectively. We also experienced growth in sales to 75 of our top 100 customers in 2019, which compares to growth in sales to 84 of our top 100 customers in 2018.
Another explanation for our results is that while underlying demand throughout 2018 was stable at high levels, underlying demand in 2019 began strong but weakened throughout the year. For instance, the U.S. Purchasing Managers Index averaged 55.4 in the first quarter of 2019 but averaged 47.9 in the fourth quarter of 2019. In addition, U.S. Industrial Production increased 2.9% in the first quarter of 2019 but decreased 0.9% in the fourth quarter of 2019. The slowing in these metrics from the start to the end of 2019 mirrors the slowing growth we experienced in our unit sales over the same period.
A relatively greater contributor to our growth in 2019 was the success of our growth initiatives. We signed 21,857 industrial vending devices during 2019. While this represented a slight decrease in signings of 1.0% from 2018, it also contributed to growth in our installed base to 89,937 vending devices at the end of 2019, an increase of 10.8% over 2018. Growth in our installed base was primarily responsible for sales growth through our vending devices in the mid-teens during 2019. We signed 362 new Onsite locations in 2019, an increase of 7.7% over 2018, and had 1,114 active sites on December 31, 2019, an increase of 24.6% over December 31, 2018. Growth in our number of active sites was primarily responsible for sales growth through our Onsites in the mid-teens during 2019. The contribution of new national account contracts and strong penetration of existing national account customers resulted in daily sales from our national account customers growing 11.9% in 2019 compared to 2018.
We signed 22,073 industrial vending devices during 2018, an increase of 14.0% over 2017. In addition to an increase in our installed base, we achieved a low-single digit increase in average sales per device. These variables combined to generate sales growth through our vending devices in excess of 20% in 2018. We signed 336 new Onsite locations in 2018, an increase of 24.4% over 2017, and had 894 active sites on December 31, 2018, an increase of 47.8% over December 31, 2017. We signed 152 new national account contracts in 2018. The contribution of these new contracts and strong penetration of existing national account customers resulted in daily sales from our national account customers growing 18.1% in 2018 compared to 2017.
We signed 19,355 industrial vending devices during 2017, an increase of 7.2% over 2016. In addition to an increase in our
installed base, we were also more efficient with the existing base, resulting in a modest increase in average sales per device and
a decrease in our device removals of 3.8%. Combined sales through our vending devices accelerated throughout 2017, finishing
with growth in the high teens. We signed 270 new Onsite locations in 2017, an increase of 53.4% over 2016, and had 605 active
sites on December 31, 2017, an increase of 50.9% over December 31, 2016. We signed 168 new national account contracts in
2017. The contribution of these new contracts and strong penetration of existing national account customers resulted in daily
sales from our national account customers growing 14.5% in 2017 compared to 2016.
Sales by Product Line
The approximate mix of sales from fasteners, safety supplies, and all other product lines was as follows:
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2019
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2018
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2017
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Fasteners
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34.2%
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34.9%
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35.6%
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Safety supplies
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17.9%
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17.2%
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16.3%
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Other product lines
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47.9%
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47.9%
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48.1%
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The decrease in our fastener sales as a percentage of total sales arises from two factors. First, we believe non-fastener products represent a larger market opportunity than fasteners, and that we are relatively under-represented in this market. Over time, this has led to faster growth in the non-fastener product lines, a trend amplified by the growth of our industrial vending program through which we sell primarily non-fastener products. We believe this factor impacted each year shown and will continue to promote a lower mix of fasteners in our total sales over time. Second, a weak industrial production environment has a disproportionately negative effect on fastener sales, particularly OEM fasteners sales, relative to non-fastener sales (which relates more to plant operations than production). This weakness is more of a cyclical factor than a structural one, and as such was relevant in 2019, but not in 2018 or 2017 when a better economic environment at least partially mitigated the first factor discussed.
Annual Sales Changes, Sequential Trends, and End Market Performance
This section focuses on three distinct views of our business – annual sales changes by month, sequential trends, and end market performance. The first discussion regarding sales changes by month provides a good mechanical view of our business. The second discussion provides a framework for understanding the sequential trends (that is, comparing a month to the immediately preceding month, and also looking at the cumulative change from an earlier benchmark month) in our business. Finally, we believe the third discussion regarding end market performance provides insight into activities with our various types of customers.
Annual Sales Changes, by Month
During the months noted below, all of our selling locations, when combined, had daily sales growth rates of (compared to the same month in the preceding year):
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Jan.
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Feb.
|
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Mar.
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Apr.
|
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May
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June
|
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July
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|
Aug.
|
|
Sept.
|
|
Oct.
|
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Nov.
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Dec.
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2019
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13.3
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%
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10.5
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%
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12.7
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%
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7.4
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%
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9.5
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%
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7.0
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%
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6.1
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%
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6.3
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%
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5.8
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%
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4.3
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%
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5.7
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%
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1.0
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%
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2018
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12.0
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%
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14.8
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%
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13.1
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%
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|
13.4
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%
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|
12.5
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%
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|
13.5
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%
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|
12.0
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%
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|
13.7
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%
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|
13.5
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%
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12.4
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%
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|
12.3
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%
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|
14.5
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%
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2017
|
3.8
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%
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|
6.1
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%
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|
8.4
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%
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|
8.9
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%
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9.7
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%
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13.0
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%
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|
12.9
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%
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|
12.8
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%
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|
15.3
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%
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13.8
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%
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15.4
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%
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14.7
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%
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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 where certain holidays impair business days and/or seasons impact certain end markets, particularly non-residential construction. The first landing centers on Easter and the Good Friday holiday that precedes it, which alternates between March and April (Good Friday occurred in April 2019, March 2018, and April 2017, and will fall in April in 2020), the second landing centers on July 4th, and the third landing centers on the approach of winter with its seasonal impact on primarily our non-residential 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 the sequential change in our daily sales. The line labeled 'Benchmark' is an historical average of our sequential daily sales change for the trailing five year average (2014-2018). We believe this time frame serves to show the historical pattern and could serve as a benchmark for current performance. The '2019', '2018', and '2017' lines represent our actual sequential daily sales changes. The '19Delta', '18Delta', and '17Delta' lines indicate the difference between the 'Benchmark' and the actual results in the respective year.
It is important to note that these benchmarks are historical averages. In a year where demand is strong, our daily sales growth rates will tend to have more months that exceed the benchmark than fall below it. In a year where demand is weak, we will tend to have more months that fall short of the benchmark than exceed it. In both cases, there is a random element that makes it difficult to know how any single month will perform.
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Jan.(1)
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Feb.
|
|
Mar.
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|
Apr.
|
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May
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June
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July
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Aug.
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|
Sept.
|
|
Oct.
|
|
Cumulative Change from Jan. to Oct.
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Benchmark
|
-1.2
|
%
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1.5
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%
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3.7
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%
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0.1
|
%
|
|
2.0
|
%
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2.0
|
%
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-3.3
|
%
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3.7
|
%
|
|
1.8
|
%
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-1.9
|
%
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|
9.8
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%
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2019
|
-0.5
|
%
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|
1.4
|
%
|
|
4.2
|
%
|
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-2.4
|
%
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2.5
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%
|
|
1.4
|
%
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-4.4
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%
|
|
3.9
|
%
|
|
3.1
|
%
|
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-4.4
|
%
|
|
4.9
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%
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19Delta
|
0.6
|
%
|
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-0.1
|
%
|
|
0.5
|
%
|
|
-2.5
|
%
|
|
0.5
|
%
|
|
-0.6
|
%
|
|
-1.1
|
%
|
|
0.3
|
%
|
|
1.3
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%
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-2.5
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%
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-4.9
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%
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2018
|
-1.3
|
%
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|
4.0
|
%
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|
2.1
|
%
|
|
2.4
|
%
|
|
0.6
|
%
|
|
3.7
|
%
|
|
-3.6
|
%
|
|
3.8
|
%
|
|
3.6
|
%
|
|
-3.0
|
%
|
|
13.9
|
%
|
18Delta
|
-0.2
|
%
|
|
2.5
|
%
|
|
-1.6
|
%
|
|
2.4
|
%
|
|
-1.5
|
%
|
|
1.8
|
%
|
|
-0.3
|
%
|
|
0.1
|
%
|
|
1.7
|
%
|
|
-1.1
|
%
|
|
4.2
|
%
|
2017
|
0.2
|
%
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|
1.5
|
%
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|
3.6
|
%
|
|
2.2
|
%
|
|
1.4
|
%
|
|
2.8
|
%
|
|
-2.4
|
%
|
|
2.2
|
%
|
|
3.8
|
%
|
|
-2.1
|
%
|
|
13.5
|
%
|
17Delta
|
1.4
|
%
|
|
0.0
|
%
|
|
-0.1
|
%
|
|
2.1
|
%
|
|
-0.6
|
%
|
|
0.9
|
%
|
|
0.9
|
%
|
|
-1.4
|
%
|
|
2.0
|
%
|
|
-0.2
|
%
|
|
3.8
|
%
|
(1) The January figures represent the percentage change from the previous October, whereas the remaining figures represent the percentage change from the previous month.
Note – Amounts may not foot due to rounding difference.
A graph of the sequential daily sales change patterns discussed above, starting with a base of '100' in the previous October and ending with the next October, would be as follows:
End Market Performance
The sequential trends noted above were directly linked to fluctuations in our end markets. To place this in perspective – we estimate approximately 65% of our business has historically been with customers engaged in some type of manufacturing, a significant subset of which finds its way into the heavy equipment market. The daily sales growth rates to these manufacturing customers, when compared to the same period in the prior year, were as follows(1):
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Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Annual
|
2019
|
13.4
|
%
|
|
9.1
|
%
|
|
7.7
|
%
|
|
5.1
|
%
|
|
8.8
|
%
|
2018
|
14.3
|
%
|
|
13.3
|
%
|
|
13.0
|
%
|
|
13.3
|
%
|
|
13.5
|
%
|
2017
|
6.2
|
%
|
|
11.5
|
%
|
|
15.3
|
%
|
|
16.6
|
%
|
|
12.3
|
%
|
(1) In July 2017, we reclassified certain end market designations. The daily sales growth rates in the above table for all periods through the second quarter of 2017 differ from prior disclosures.
Our manufacturing business consists of two subsets: the industrial production business (this is business where we supply products that become part of the finished goods produced by our customers and is sometimes referred to as OEM - original equipment manufacturing) and the maintenance portion (this is business where we supply products that maintain the facility or the equipment of our customers engaged in manufacturing and is sometimes referred to as MRO - maintenance, repair, and operations). The industrial business is more fastener centered, while the maintenance portion is represented by all product categories.
The best way to understand the change in our industrial production business is to examine the results in our fastener product line (approximately 35% of our business) which is heavily influenced by changes in our business with heavy equipment manufacturers. From a company perspective, daily sales growth rates of fasteners, when compared to the same period in the prior year, were as follows (note: this information includes all end markets):
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|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Annual
|
2019
|
11.8
|
%
|
|
5.5
|
%
|
|
3.0
|
%
|
|
1.8
|
%
|
|
5.5
|
%
|
2018
|
11.8
|
%
|
|
11.1
|
%
|
|
10.8
|
%
|
|
11.3
|
%
|
|
11.2
|
%
|
2017
|
0.8
|
%
|
|
7.9
|
%
|
|
12.1
|
%
|
|
13.4
|
%
|
|
8.4
|
%
|
The daily sales growth rates of fasteners noted in the table above for first quarter of 2018, and the second, third, and fourth quarters of 2017, include 3.7, 3.6, 3.8, and 3.9 percentage points, respectively, attributable to Mansco (acquired on March 31, 2017).
By contrast, the best way to understand the change in the maintenance portion of the manufacturing business is to examine the results in our non-fastener product lines. From a company perspective, daily sales growth rates of non-fasteners, when compared to the same period in the prior year, were as follows (note: this information includes all end markets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Annual
|
2019
|
12.7
|
%
|
|
9.5
|
%
|
|
8.0
|
%
|
|
5.1
|
%
|
|
8.8
|
%
|
2018
|
14.5
|
%
|
|
14.8
|
%
|
|
14.9
|
%
|
|
14.6
|
%
|
|
14.7
|
%
|
2017
|
9.4
|
%
|
|
12.2
|
%
|
|
14.6
|
%
|
|
16.1
|
%
|
|
13.1
|
%
|
While not immune to the impact of a weak industrial environment as was experienced in the latter half of 2019, our non-fastener business did demonstrate greater relative resilience when compared to our fastener business and to the distribution industry in general. Non-fastener growth slowed, but remained above the growth of the fastener business. The strong relative performance of the non-fastener business when compared to the fastener business and to the distribution industry in general was also evident during the strong 2018 and 2017 periods. We believe this is due to both the growth of our vending business and our lower penetration of the non-fastener marketplace relative to our penetration of the fastener marketplace.
Our non-residential construction and reseller customers have historically represented 20% to 25% of our business. The daily sales growth rates to these customers, when compared to the same period in the prior year, were as follows(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Annual
|
2019
|
12.1
|
%
|
|
6.0
|
%
|
|
0.6
|
%
|
|
0.7
|
%
|
|
4.7
|
%
|
2018
|
11.7
|
%
|
|
17.6
|
%
|
|
19.2
|
%
|
|
16.4
|
%
|
|
16.3
|
%
|
2017
|
6.9
|
%
|
|
8.8
|
%
|
|
9.4
|
%
|
|
11.6
|
%
|
|
9.1
|
%
|
(1) In July 2017, we reclassified certain end market designations. The daily sales growth rates in the above table for all periods through the second quarter of 2017 differ from prior disclosures.
Our non-residential construction and reseller business is heavily influenced by the manufacturing economy as well as infrastructure spending. In 2019, the slowing production environment, as described above, and the accompanying worsening trends for commodities, caused the growth in our non-residential construction and reseller customers to slow. In 2018 and 2017, improving trends for commodities such as metals and energy, industrial capital spending, and the state of the broader economy contributed to an improvement in growth for these end markets.
Gross Profit
The gross profit percentage during each period was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Annual
|
2019
|
47.7
|
%
|
|
46.9
|
%
|
|
47.2
|
%
|
|
46.9
|
%
|
|
47.2
|
%
|
2018
|
48.7
|
%
|
|
48.7
|
%
|
|
48.1
|
%
|
|
47.7
|
%
|
|
48.3
|
%
|
2017
|
49.4
|
%
|
|
49.8
|
%
|
|
49.1
|
%
|
|
48.8
|
%
|
|
49.3
|
%
|
Our gross profit, as a percentage of net sales, was 47.2% in 2019 and 48.3% in 2018. The gross profit percentage for 2019 declined by 110 basis points based on three items. (1) A change in product and customer mix. Fasteners are our largest and highest gross profit margin product line due to the high transaction cost surrounding the sourcing and supply of the product for customers. Our fastener product line declined to 34.2% of sales in 2019 from 34.9% of sales in 2018. Larger customers (for which national accounts are a good proxy), whose more focused buying patterns allow us to offer them better pricing, also influence the gross profit margin. Sales to our national account customers increased to 53.6% in 2019 from 50.7% of sales in 2018. The combination of relatively slower growth in our fastener product line and relatively faster growth in sales to our largest customers contributed to the decline in our overall gross profit margin in 2019. (2) We operate our own fleet of trucks for moving product between suppliers, our distribution centers, and our in-market locations. We believe this provides us a competitive advantage in terms of our ability to move product efficiently and quickly. There is a cost to supporting and maintaining these assets, which we traditionally attempt to minimize by charging freight. During periods of weaker business conditions it can be more difficult to charge freight, and as a result our freight revenues were down in 2019. At the same time, the overall cost of our fleet assets is relatively stable, resulting in reduced absorption of our fixed costs. (3) We experienced an increase in the cost of our products due to generalized inflation and tariffs resulting from disputes between the United States and its trade partners. We implemented several actions to mitigate the impact of these cost increases in 2019, including price increases. For the full year, the net impact of these actions was minor. However, the impact through the year differed, with a larger negative impact on the gross profit percentage in the first half of 2019 and a relatively modest impact in the second half of 2019.
During 2018 and 2017, our gross profit, as a percentage of net sales, decreased when compared to the prior year. In each year, the decrease was primarily caused by the changes in product and customer mix noted above and rising freight expense as a result of costs related to transporting products, particularly shipping fees, driver wages, and fuel. In 2018, our gross profit percentage was also affected by rising product costs as a result of generalized inflation and tariffs. In 2017, our gross profit percentage was also affected by the acquisition of Mansco, the customer mix of which is more heavily oriented toward larger customers and its product mix tends to carry a lower gross profit product mix than the company's other products.
Operating and Administrative Expenses
Our operating and administrative expenses (including the gain on sales of property and equipment), as a percentage of net sales, improved to 27.3% in 2019 from 28.2% in 2018. This improvement was a function of the growth in employee-related, occupancy-related, and all other operating and administrative expenses being more modest than the growth in sales. Employee-related expenses reduced the ratio of operating and administrative expenses as a percentage of sales by approximately 40 to 45 basis points in 2019 from 2018. Occupancy-related and all other operating and administrative expenses each reduced the ratio of operating and administrative expenses as a percentage of sales by approximately 20 to 25 basis points each in 2019 from 2018.
The growth in employee-related, occupancy-related, and all other operating and administrative expenses (including the gain on sales of property and equipment) compared to the same periods in the preceding year, is outlined in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Percentage of Total Operating and Administrative Expenses
|
Twelve-month Period
|
|
2019
|
|
2018
|
|
2017
|
Employee-related expenses
|
65% to 70%
|
5.1
|
%
|
|
11.1
|
%
|
|
10.2
|
%
|
Occupancy-related expenses
|
15% to 20%
|
2.8
|
%
|
|
5.0
|
%
|
|
1.3
|
%
|
All other operating and administrative expenses
|
15% to 20%
|
1.5
|
%
|
|
5.2
|
%
|
|
21.4
|
%
|
Employee-related expenses include: (1) payroll (which includes cash compensation, stock option expense, and profit sharing), (2) health care, (3) personnel development, and (4) social taxes. Our employee-related expenses increased in 2019. This was related to: (1) an increase in full-time equivalent ('FTE') headcount related to efforts to support growth in our business, (2) higher performance bonuses and commissions due to growth in net sales and net earnings, (3) an increase in our profit sharing contribution and options awards, (4) increases in hourly base wages, and (5) increased health care costs. The increase in 2018, when compared to 2017, was related to: (1) an increase in FTE headcount related to efforts to support growth in our business, (2) higher performance bonuses and commissions due to growth in net sales and net earnings, (3) an increase in our profit sharing contribution, (4) increases in hourly base wages, and (5) increased health care costs. The increase in 2017, when compared to 2016, was related to: (1) an increase in FTE headcount related to efforts to support growth in our business, (2) higher performance bonuses and commissions due to growth in net sales and net earnings, as well as regulatory driven incremental compensation, (3) an increase in our profit sharing contribution and options awards, (4) increased health care costs, and (5) the inclusion of Mansco personnel.
The table below summarizes the percentage change in our FTE headcount at the end of the periods presented compared to the end of the prior period:
|
|
|
|
|
|
|
|
|
|
|
Twelve-month Period
|
|
2019
|
|
2018
|
|
2017
|
In-market locations
|
0.2
|
%
|
|
5.7
|
%
|
|
7.0
|
%
|
Total selling (includes in-market locations)
|
0.8
|
%
|
|
5.4
|
%
|
|
7.3
|
%
|
Distribution
|
2.2
|
%
|
|
12.2
|
%
|
|
8.4
|
%
|
Manufacturing
|
-2.7
|
%
|
|
12.0
|
%
|
|
8.4
|
%
|
Administrative
|
8.5
|
%
|
|
7.3
|
%
|
|
10.7
|
%
|
Total
|
1.4
|
%
|
|
6.8
|
%
|
|
7.7
|
%
|
Occupancy-related expenses include: (1) building rent and depreciation, (2) building utility costs, (3) equipment related to our branches and distribution locations, and (4) industrial vending equipment (we consider the vending equipment, excluding leased locker equipment, to be a logical extension of our in-market operations and classify the depreciation and repair costs as occupancy expense). The increase in occupancy-related expenses in 2019, when compared to 2018, was mainly driven by increases related to industrial vending equipment. The increase in occupancy-related expenses in 2018, when compared to 2017 was mainly driven by increases related to industrial vending equipment and non-branch occupancy and utility costs, only partly offset by a slight decline in branch occupancy costs from a lower public branch count. The slight increase in 2017, when compared to 2016, was mainly driven by increases in costs related to industrial vending equipment, FMI bins, and automation equipment at our distribution centers. The most significant components of our occupancy-related expenses, facility costs and utility expenses, were mostly flat in 2017, when compared to 2016 due to a reduction in our number of public branches.
All other operating and administrative expenses include: (1) selling-related transportation, (2) information technology (IT) expenses, (3) general corporate expenses, which consists of legal expenses, general insurance expenses, travel and marketing expenses, etc., and (4) the gain on sales of property and equipment. Combined, all other operating and administrative expenses increased in 2019 when compared to 2018. This was primarily due to higher IT spending. The increase in 2018 when compared to 2017, was due to an increase in selling-related transportation expenses, consisting of both higher vehicle movement and fuel costs, as well as higher IT spending. General corporate expenses were slightly down. The increase in 2017 when compared to 2016, was driven by increases in selling-related transportation, including higher vehicle movement and fuel costs, IT spending, and general corporate expenses.
Net Interest Expense
Our net interest expense was $13.6 in 2019 compared to $12.3 in 2018, and $8.7 in 2017. The increase in 2019, when compared to 2018, was mainly caused by higher average interest rates and a higher average debt balance during the period. The increase in 2018, when compared to 2017, was mainly caused by higher average interest rates and a higher average debt balance during the period.
Income Taxes
We recorded income tax expense of $252.8 in 2019, or 24.2% of earnings before income taxes. Our income tax expense was reduced by $2.6 as a result of applying guideline clarifications issued by the IRS on certain aspects of tax reform as well as tax benefits associated with the exercise of stock options. This reduced our tax rate in the period by 30 basis points.
We recorded income tax expense of $235.1 in 2018, or 23.8% of earnings before income taxes. The effective income tax rate was significantly impacted by the following two items: (1) The lower corporate tax rate provided by the Tax Act resulted in a
lower tax rate beginning in the first quarter of 2018. The effective income tax rate includes the immaterial impact of the U.S. tax on certain offshore earnings referred to as Global Intangible Low-Taxed Income (GILTI), a new deduction for Foreign Derived Intangible Income (FDII), and the new alternative U.S. tax on certain Base Erosion Anti-Avoidance (BEAT) payments from a U.S. company to any foreign related party. (2) Discrete income tax items to adjust our transition tax liability, reflect the impacts of accelerating depreciation for certain physical assets, and remeasure the impact of the U.S. tax rate on certain inter-company transactions. These discrete items resulted in approximately $7.1 of income tax benefit during 2018. The accounting for the income tax effects of the Tax Act is complete as of December 31, 2018.
We recorded a provisional income tax expense of $294.5 in 2017, or 33.7% of earnings before income taxes. This amount reflects a provisional estimate for the reduction in our deferred income tax liabilities of $30.8 as a result of the income tax rate decrease included in the Tax Act, partially offset by an estimated increase in income tax payable in the amount of $6.5 as a result of the transition tax on cash and cash equivalent balances related to accumulated earnings associated with our international operations, also included in the Tax Act. The decrease in our income tax rate from 2016 to 2017 was also related to changes in our reserve for uncertain tax positions and the adoption of the Financial Accounting Standards Board ('FASB') Accounting Standard Update ('ASU') 2016-09, Improvements to Employee Share-Based Payment Accounting, in the first quarter of 2017.
Net Earnings
Net earnings, net earnings per share ('EPS'), the percentage change in net earnings, and the percentage change in EPS, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Dollar Amounts
|
2019
|
|
2018 (1)
|
|
2017
|
Net earnings
|
$
|
790.9
|
|
|
751.9
|
|
|
578.6
|
|
Basic EPS
|
1.38
|
|
|
1.31
|
|
|
1.00
|
|
Diluted EPS
|
1.38
|
|
|
1.31
|
|
|
1.00
|
|
|
|
|
|
|
|
Percentage Change
|
2019
|
|
2018 (1)
|
|
2017
|
Net earnings
|
5.2
|
%
|
|
29.9
|
%
|
|
15.8
|
%
|
Basic EPS
|
5.3
|
%
|
|
30.5
|
%
|
|
16.1
|
%
|
Diluted EPS
|
5.2
|
%
|
|
30.5
|
%
|
|
16.2
|
%
|
|
2019
|
|
2018
|
|
2017
|
Tax Rate
|
24.2
|
%
|
|
23.8
|
%
|
|
33.7
|
%
|
(1) As a result of the Tax Act, discrete tax items benefited our net earnings by $7.1 during 2018.
During 2019, net earnings increased, primarily due to stronger sales and operating profits, and were only partly offset by an increase in income tax expense. During 2018, net earnings increased, primarily due to stronger sales and operating profits combined with a reduction in income tax expense. The increase in basic and diluted earnings per share also reflected the purchase of our shares of common stock in 2018. During 2017, net earnings increased, primarily due to stronger sales and operating profits combined with a reduction in income tax expense. The slightly higher increase in basic and diluted earnings per share was primarily due to the purchase of our shares of common stock in 2017.
Liquidity and Capital Resources
Net Cash Provided by Operating Activities
Net cash provided by operating activities in dollars and as a percentage of net earnings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net cash provided
|
$
|
842.7
|
|
|
674.2
|
|
|
585.2
|
|
% of net earnings
|
106.5
|
%
|
|
89.7
|
%
|
|
101.1
|
%
|
In 2019, the increase in our operating cash flow as a percentage of net earnings reflects a reduced drag from working capital investment than was experienced in 2018 and, to a lesser degree, higher net income. In 2018, the increase in net cash provided by operating activities was primarily due to our net earnings growth, which resulted from pre-tax earnings growth and a lower tax rate as a result of the Tax Act. The decline in our operating cash flow as a percentage of net earnings largely reflects working capital trends, as further described below. In 2017, the increase in net cash provided by operating activities was primarily due to our net earnings growth.
Operational Working Capital Assets
Operational working capital assets, which we define as accounts receivable, net and inventories, is highlighted below. The annual dollar change and the annual percentage change were as follows:
|
|
|
|
|
|
|
|
Dollar change
|
2019
|
|
2018
|
Accounts receivable, net
|
$
|
27.5
|
|
|
106.4
|
|
Inventories
|
87.7
|
|
|
185.8
|
|
Operational working capital assets
|
$
|
115.2
|
|
|
292.2
|
|
Annual percentage change
|
2019
|
|
2018
|
Accounts receivable, net
|
3.9
|
%
|
|
17.5
|
%
|
Inventories
|
6.9
|
%
|
|
17.0
|
%
|
Operational working capital assets
|
5.8
|
%
|
|
17.2
|
%
|
Note – Amounts may not foot due to rounding difference.
In 2019, the annual growth in net accounts receivable reflects not only our growth in sales, but also the fact that our growth is being driven disproportionately by our national accounts program where our customers tend to have longer payment terms than our customer base as a whole. Growth was also relatively stronger with customers outside the U.S., which similarly tend to have longer payment terms than our customer base as a whole. The rate of growth in receivables did slow throughout 2019, largely reflecting the impact on receivables of softer business activity. In 2018, the annual growth in net accounts receivable reflects accelerating growth in sales throughout the course of the year combined with relatively stronger growth of our national accounts and international business. In addition, two trends emerged among our customer base that increased our net accounts receivable. The first was a push from our customers to contractually increase the period between when they are invoiced and when payment is due. The second was customers delaying payments beyond the end of the applicable quarter. We saw these behaviors intensify throughout 2018.
Our inventory balances over time will respond to business activity, though various factors produce a looser relationship to our monthly sales patterns than we tend to experience in accounts receivable. One reason for this is cyclical. We source significant quantities of product from overseas, and the lead time involved in procuring these products is typically longer than the visibility we have into future monthly sales patterns. As a result, trends in our inventory will often lag trends in economic conditions. Another reason inventories may fluctuate independently of monthly sales patterns is based on strategic decisions. For instance, at various times we have increased our relative inventory levels to enhance product breadth and availability in our branches and distribution centers, expand direct sourcing, and broaden Fastenal brands. Our growth drivers, including industrial vending solutions, national accounts, and Onsite and international locations, have also required significant investments in inventory. In 2019, our inventories increased to support higher sales, largely reflecting large increases in the number of installed vending devices and active Onsite locations, and from inflation and tariffs. We intend to continue to invest in the inventory necessary to support our vending and Onsite initiatives. However, over the course of the year we did reduce other spending, both reflecting proactive efforts to reduce inventory and in reaction to the effect of softer business activity, which allowed us to meaningfully decelerate inventory growth in the fourth quarter of 2019. In 2018, our inventories increased as a result of growth in general demand and successful execution of our growth drivers. Inflation had an increasing impact in the second half of 2018, and our decision to accelerate shipments of product to the U.S. from overseas ahead of potential tariffs resulted in extra inventory of approximately $12.0 in the fourth quarter of 2018.
The approximate percentage mix of inventory stocked at our selling locations versus our distribution center and manufacturing locations was as follows at year end:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Selling locations
|
60
|
%
|
|
61
|
%
|
|
65
|
%
|
Distribution center and manufacturing locations
|
40
|
%
|
|
39
|
%
|
|
35
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Net Cash Used in Investing Activities
Net cash used in investing activities in dollars and as a percentage of net earnings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net cash used
|
$
|
239.7
|
|
|
173.9
|
|
|
179.3
|
|
% of net earnings
|
30.3
|
%
|
|
23.1
|
%
|
|
31.0
|
%
|
The changes in net cash used in investing activities were primarily related to changes in our net capital expenditures as discussed below for each period and cash paid for acquisitions in 2017.
Property and equipment expenditures typically consist primarily of: (1) purchases related to industrial vending, (2) purchases of property and equipment related to expansion of and enhancements to distribution centers, (3) spending on software and hardware for our information processing systems, (4) the addition of fleet vehicles, (5) expansion, improvement or investment in certain owned or leased branch properties, and (6) the addition of manufacturing and warehouse equipment. Disposals of property and equipment consisted of the planned disposition of certain pick-up trucks, distribution vehicles, and trailers in the normal course of business.
Set forth below is a recap of our 2019, 2018, and 2017 net capital expenditures in dollars and as a percentage of net sales and net earnings:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Manufacturing, warehouse and packaging equipment, industrial vending equipment, and facilities
|
172.7
|
|
|
110.7
|
|
|
66.2
|
|
Shelving and related supplies for in-market location openings and for product expansion at existing in-market locations
|
12.3
|
|
|
9.6
|
|
|
8.3
|
|
Data processing software and equipment
|
31.1
|
|
|
30.9
|
|
|
23.2
|
|
Real estate and improvements to branch locations
|
8.9
|
|
|
12.9
|
|
|
6.2
|
|
Vehicles
|
21.4
|
|
|
12.2
|
|
|
16.0
|
|
Purchases of property and equipment
|
246.4
|
|
|
176.3
|
|
|
119.9
|
|
Proceeds from sale of property and equipment
|
(6.6
|
)
|
|
(9.5
|
)
|
|
(7.4
|
)
|
Net capital expenditures
|
239.8
|
|
|
166.8
|
|
|
112.5
|
|
% of net sales
|
4.5
|
%
|
|
3.4
|
%
|
|
2.6
|
%
|
% of net earnings
|
30.3
|
%
|
|
22.2
|
%
|
|
19.4
|
%
|
Our net capital expenditures increased in 2019, when compared to 2018, primarily due to increased spending on hub property and equipment, both to expand current capacity and for potential future expansion, higher spending on vending devices to support the growth of our industrial vending program, and investment in our trucking assets. While the sources of the increase in our net capital spending in 2019 were expected, our total spend exceeded our targeted range of $195.0 to $225.0. We had significant spending in 2019 on facilities, with a couple of locations having higher costs than originally anticipated. Our net capital expenditures increased in 2018, when compared to 2017, primarily due to increased spending on hub property and equipment, both to expand current capacity and for potential future expansion, as well as vending devices to support the growth of our industrial vending program. Our net capital expenditures decreased in 2017, when compared to 2016, primarily due to lower spending in 2017 related to the absence of spending on vending equipment that occurred in 2016 related to the leased locker rollout, the absence of spending on shelving and signage that occurred in 2016 for the CSP 16 initiative, and timing associated with the addition of pick-up trucks.
We expect our net capital expenditures in 2020 to be within a range of $180.0 to $205.0. This decrease from 2019 is primarily attributable to reduced projects to develop and expand certain distribution center assets and, to a lesser degree, reduced fleet vehicle investment. We anticipate funding our capital expenditure needs with cash generated from operations, from available cash and cash equivalents, and from our borrowing capacity.
Net Cash Used in Financing Activities
Net cash used in financing activities in dollars and as a percentage of net earnings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net cash used
|
$
|
595.1
|
|
|
446.5
|
|
|
407.2
|
|
% of net earnings
|
75.2
|
%
|
|
59.4
|
%
|
|
70.4
|
%
|
The fluctuations in net cash used in financing activities are due to changes in the level of our dividend payments and in the level of common stock purchases. These amounts were partially offset by the exercise of stock options and net payments (proceeds) from debt obligations. These items in dollars and as a percentage of earnings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Dividends paid
|
$
|
498.6
|
|
|
441.9
|
|
|
369.1
|
|
% of net earnings
|
63.0
|
%
|
|
58.8
|
%
|
|
63.8
|
%
|
|
|
|
|
|
|
Common stock purchases
|
—
|
|
|
103.0
|
|
|
82.6
|
|
% of net earnings
|
—
|
|
|
13.7
|
%
|
|
14.3
|
%
|
|
|
|
|
|
|
Total returned to shareholders
|
$
|
498.6
|
|
|
544.9
|
|
|
451.7
|
|
% of net earnings
|
63.0
|
%
|
|
72.5
|
%
|
|
78.1
|
%
|
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
$
|
(58.5
|
)
|
|
(13.4
|
)
|
|
(9.5
|
)
|
% of net earnings
|
-7.4
|
%
|
|
-1.8
|
%
|
|
-1.6
|
%
|
|
|
|
|
|
|
Cash payments (borrowings), net
|
$
|
155.0
|
|
|
(85.0
|
)
|
|
(35.0
|
)
|
% of net earnings
|
19.6
|
%
|
|
-11.3
|
%
|
|
-6.0
|
%
|
|
|
|
|
|
|
Net cash used
|
$
|
595.1
|
|
|
446.5
|
|
|
407.2
|
|
% of net earnings
|
75.2
|
%
|
|
59.4
|
%
|
|
70.4
|
%
|
Stock Purchases
In 2019, we did not purchase any shares of our common stock. In 2018, we purchased 4,000,000 shares of our common stock at an average price of approximately $25.75 per share, and in 2017, we purchased 3,800,000 shares at an average price of approximately $21.72 per share.
Dividends
We declared a quarterly dividend of $0.25 per share on January 16, 2020. We paid aggregate annual dividends per share of $0.87, $0.77, and $0.64 in 2019, 2018, and 2017, respectively.
Debt
In order to fund the considerable cash needed to expand our industrial vending business, to expand capacity and increase the use of automation in our distribution centers, pay dividends, and to purchase our common stock in 2018, we have borrowed under our Credit Facility and our Master Note Agreement in recent periods.
Our borrowings under the Credit Facility peaked during each quarter of 2019 and 2018 as follows:
|
|
|
|
|
|
|
|
Peak borrowings
|
2019
|
|
2018
|
First quarter
|
$
|
450.0
|
|
|
335.0
|
|
Second quarter
|
400.0
|
|
|
360.0
|
|
Third quarter
|
395.0
|
|
|
330.0
|
|
Fourth quarter
|
310.0
|
|
|
435.0
|
|
As of December 31, 2019, we had loans outstanding under the Credit Facility of $210.0 and contingent obligations from letters of credit outstanding under the Credit Facility in an aggregate face amount of $36.3. As of December 31, 2019, we also had loans outstanding under the Master Note Agreement of $135.0. Descriptions of our Credit Facility and Master Note Agreement are contained in Note 9 of the Notes to Consolidated Financial Statements.
Unremitted Foreign Earnings
Approximately $122.7 of cash and cash equivalents are held by non-U.S. subsidiaries. These funds may create foreign currency translation gains or losses depending on the functional currency of the entity holding the cash. We have considered the financial requirements of each foreign subsidiary and our parent company and will continue to reinvest these funds to support our expansion activities outside the U.S., even after taking into consideration the deemed repatriation and transition tax under the Tax Act. The income tax impact of repatriating cash associated with investments in foreign subsidiaries is discussed in Note 7 of the Notes to Consolidated Financial Statements.
Effects of Inflation
We experienced higher product costs through 2019 relative to 2018 as a result of generalized inflation and tariffs, though the impact of these items did moderate later in the year as economic activity slowed and conditions around trade stabilized. We took actions during the year to mitigate the effects of higher product costs, including increasing product prices. These actions were not able to offset the pressure we experienced on our gross profit percentage in the first half of 2019, but were more effective at doing so in the second half of 2019. Throughout 2018, we experienced increasing product cost inflation for non-fastener and, especially, fastener products. We took actions in the latter part of 2017 and throughout 2018, including pricing adjustments, to offset this inflation. While we succeeded in raising prices through the year, we were not able to do so at the same rate that our costs rose which negatively affected our profit margins and earnings in 2018. Apart from generalized inflation, tariffs were instituted on certain products that we source from China, but this occurred later in the year and did not have a meaningful impact on sales or profits in 2018. Throughout 2017, we experienced increasing product cost inflation, particularly in our fastener products. We were able to take actions during the period, including pricing adjustments, to mostly offset this inflation. In the aggregate, the overall impact of inflation and pricing on sales and profits was not material in 2017.
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements in conformity with U.S. GAAP, we must make decisions that impact the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgments based on our understanding and analysis of relevant circumstances, historical experience, and actuarial valuations. Actual amounts could differ from those estimated at the time the consolidated financial statements are prepared.
Our most significant accounting policies, including Revenue Recognition and Inventories, are described in Note 1 of the Notes to Consolidated Financial Statements. Some of those significant accounting policies require us to make difficult, subjective, or complex judgments, or estimates. An accounting estimate is considered to be critical if it meets both of the following criteria: (i) the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made, and (ii) different estimates reasonably could have been used, or changes in the estimate that are reasonably likely to occur from period to period may have a material impact on the presentation of our financial condition, changes in financial condition, or results of operations. Our most critical accounting estimates include the following:
Allowance for doubtful accounts – This reserve is for accounts receivable balances that are potentially uncollectible. The reserve is based on an analysis of customer accounts and our historical experience with accounts receivable write-offs. Our methodology for estimating this reserve includes ongoing reviews of the aging of accounts receivable, the financial condition of a customer or industry, and general economic conditions. If business or economic conditions change, our estimates and assumptions may be adjusted as deemed appropriate. Historically, actual required reserves have not varied materially from estimated amounts.
Inventory obsolescence reserves – These reserves are based on an analysis of inventory trends including reviews of inventory levels, sales information, and the on-hand quantities relative to the sales history for the product. Our methodology for estimating these reserves is continually evaluated for factors that could require changes to the reserves including significant changes in product demand, market conditions, condition of the inventory, or liquidation value. If business or economic conditions change, our estimates and assumptions may be adjusted as deemed appropriate. Historically, actual required reserves have not varied materially from estimated amounts.
General insurance reserves – These reserves are for general claims related to workers' compensation, property and casualty losses, and other general liability self-insured losses. The reserves are based on an analysis of reported claims and claims incurred but not yet reported related to our historical claim trends. We perform ongoing reviews of our insured and uninsured risks and use this information to establish appropriate reserve levels. We analyze historical trends, claims experience, and loss development patterns to ensure the appropriate loss development factors are applied to the incurred costs associated with the claims made. Historically, actual required reserves have not varied materially from estimated amounts.
New Accounting Pronouncements
A description of new accounting pronouncements is contained in Note 1 of the Notes to Consolidated Financial Statements.
Geographic Information
Information regarding our revenues and long-lived assets by geographic area is contained in Note 2 and Note 3 of the Notes to Consolidated Financial Statements. Risks related to our foreign operations are described earlier in this Form 10-K under the heading 'Forward-Looking Statements' and 'Item 1A. Risk Factors'.
Certain Contractual Obligations
As of December 31, 2019, we had outstanding long-term debt and facilities, equipment, and vehicles leased under operating leases. Our future obligations to pay principal of and interest on such long-term debt and to make minimum lease payments under such operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2020
|
|
2021 and 2022
|
|
2023 and 2024
|
|
After 2024
|
Principal of long-term debt
|
$
|
345.0
|
|
|
3.0
|
|
|
75.0
|
|
|
267.0
|
|
|
—
|
|
Interest on long-term debt(1)
|
37.2
|
|
|
10.1
|
|
|
18.8
|
|
|
8.3
|
|
|
—
|
|
Operating leases(2)
|
261.5
|
|
|
105.1
|
|
|
117.2
|
|
|
35.5
|
|
|
3.7
|
|
Total
|
$
|
643.7
|
|
|
118.2
|
|
|
211.0
|
|
|
310.8
|
|
|
3.7
|
|
(1) Interest on the long-term debt outstanding under our Credit Facility was calculated using the interest rates and balances at December 31, 2019.
(2) Amounts include lease liabilities for pick-up truck leases, which typically have a non-cancelable lease term of less than one year and are not included on the consolidated balance sheets as an operating lease right-of-use asset.
Purchase orders and contracts for the purchase of inventory and other goods and services are not included in the table above. Our purchase orders are based on current distribution needs and are fulfilled by our suppliers within short time horizons. We do not have significant agreements for the purchase of inventory or other goods or services specifying minimum order quantities.
Liabilities for uncertain tax positions have been excluded from the table above due to the uncertainty surrounding the ultimate settlement and timing of these liabilities, which we believe will be immaterial. A discussion of income taxes is contained in Note 7 of the Notes to Consolidated Financial Statements.
|
|
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Fastenal Company:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Fastenal Company and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019 and the related notes and financial statement schedule listed in the table of contents at Item 15 (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for operating leases as of January 1, 2019 due to the adoption of ASU 2016-02, Leases (Topic 842).
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to an account or disclosure that is material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
Evaluation of the sufficiency of audit evidence over inventory
As disclosed in the consolidated balance sheets, the Company holds $1,366.4 million of inventory, the majority of which was held at 3,228 in-market locations, as of December 31, 2019. The Company’s processes to track and determine consolidated inventory relies on a perpetual inventory system which involves the interaction of multiple information technology (IT) systems.
We identified the evaluation of the sufficiency of audit evidence obtained related to the quantities of inventory as a critical audit matter. Evaluating the sufficiency of audit evidence over quantities of inventory required challenging auditor judgment to assess the number of in-market locations visited, and included the involvement of IT professionals with specialized skills and knowledge due to the interaction of multiple IT systems to track physical inventory quantities by locations.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s perpetual inventory process. The inventory controls included the testing of IT application controls, as well as controls related to access to program and data, program change, program development, and computer operations. It also included controls over the physical inventory cycle counts. We involved IT professionals with specialized skills and knowledge, who assisted in testing IT controls inclusive of the interface of multiple IT systems which support the Company’s perpetual inventory system. We evaluated the following information regarding the Company’s inventory quantities:
|
|
•
|
Historical inventory locations visited;
|
|
|
•
|
Inventory dollars by location; and
|
|
|
•
|
Inventory cycle count results of the Company, including the results of monitoring and compliance with cycle count program by in-market location.
|
On a sample basis, we tested the inventory by counting inventory quantities through location visits during the year to evaluate the Company’s perpetual inventory records. In addition, we evaluated the overall sufficiency of audit evidence obtained over the quantities of inventory.
/s/ KPMG LLP
We have served as the Company’s auditor since 1987.
Minneapolis, Minnesota
February 6, 2020
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in millions except share information)
|
|
|
|
|
|
|
|
|
December 31
|
|
2019
|
|
2018
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
174.9
|
|
|
167.2
|
|
Trade accounts receivable, net of allowance for doubtful accounts of $10.9 and $12.8, respectively
|
741.8
|
|
|
714.3
|
|
Inventories
|
1,366.4
|
|
|
1,278.7
|
|
Prepaid income taxes
|
16.7
|
|
|
9.0
|
|
Other current assets
|
157.4
|
|
|
147.0
|
|
Total current assets
|
2,457.2
|
|
|
2,316.2
|
|
Property and equipment, net
|
1,023.2
|
|
|
924.8
|
|
Operating lease right-of-use assets
|
243.2
|
|
|
—
|
|
Other assets
|
76.3
|
|
|
80.5
|
|
Total assets
|
$
|
3,799.9
|
|
|
3,321.5
|
|
Liabilities and Stockholders' Equity
|
|
|
|
Current liabilities:
|
|
|
|
Current portion of debt
|
$
|
3.0
|
|
|
3.0
|
|
Accounts payable
|
192.8
|
|
|
193.6
|
|
Accrued expenses
|
251.5
|
|
|
240.8
|
|
Current portion of operating lease liabilities
|
97.4
|
|
|
—
|
|
Total current liabilities
|
544.7
|
|
|
437.4
|
|
Long-term debt
|
342.0
|
|
|
497.0
|
|
Operating lease liabilities
|
148.2
|
|
|
—
|
|
Deferred income taxes
|
99.4
|
|
|
84.4
|
|
Commitments and contingencies (Notes 5, 8, 9, and 10)
|
|
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock: $0.01 par value, 5,000,000 shares authorized, no shares issued or outstanding
|
—
|
|
|
—
|
|
Common stock: $0.01 par value, 800,000,000 shares authorized, 574,128,911 and 571,803,838 shares issued and outstanding, respectively
|
2.9
|
|
|
2.9
|
|
Additional paid-in capital
|
67.2
|
|
|
3.0
|
|
Retained earnings
|
2,633.9
|
|
|
2,341.6
|
|
Accumulated other comprehensive loss
|
(38.4
|
)
|
|
(44.8
|
)
|
Total stockholders’ equity
|
2,665.6
|
|
|
2,302.7
|
|
Total liabilities and stockholders’ equity
|
$
|
3,799.9
|
|
|
3,321.5
|
|
See accompanying Notes to Consolidated Financial Statements.
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
(Amounts in millions except earnings per share)
For the year ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net sales
|
$
|
5,333.7
|
|
|
4,965.1
|
|
|
4,390.5
|
|
Cost of sales
|
2,818.3
|
|
|
2,566.2
|
|
|
2,226.9
|
|
Gross profit
|
2,515.4
|
|
|
2,398.9
|
|
|
2,163.6
|
|
Operating and administrative expenses
|
1,459.4
|
|
|
1,400.2
|
|
|
1,282.8
|
|
Gain on sale of property and equipment
|
(1.2
|
)
|
|
(0.5
|
)
|
|
(1.0
|
)
|
Operating income
|
1,057.2
|
|
|
999.2
|
|
|
881.8
|
|
Interest income
|
0.4
|
|
|
0.4
|
|
|
0.4
|
|
Interest expense
|
(13.9
|
)
|
|
(12.6
|
)
|
|
(9.1
|
)
|
Earnings before income taxes
|
1,043.7
|
|
|
987.0
|
|
|
873.1
|
|
Income tax expense
|
252.8
|
|
|
235.1
|
|
|
294.5
|
|
Net earnings
|
$
|
790.9
|
|
|
751.9
|
|
|
578.6
|
|
Basic net earnings per share
|
$
|
1.38
|
|
|
1.31
|
|
|
1.00
|
|
Diluted net earnings per share
|
$
|
1.38
|
|
|
1.31
|
|
|
1.00
|
|
Basic weighted average shares outstanding
|
573.2
|
|
|
573.9
|
|
|
576.4
|
|
Diluted weighted average shares outstanding
|
574.4
|
|
|
574.3
|
|
|
576.7
|
|
See accompanying Notes to Consolidated Financial Statements.
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Amounts in millions)
For the year ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net earnings
|
$
|
790.9
|
|
|
751.9
|
|
|
578.6
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
Foreign currency translation adjustments (net of tax of $0.0 in 2019, 2018, and 2017)
|
6.4
|
|
|
(19.7
|
)
|
|
22.2
|
|
Comprehensive income
|
$
|
797.3
|
|
|
732.2
|
|
|
600.8
|
|
See accompanying Notes to Consolidated Financial Statements.
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Common stock
|
|
|
|
|
|
Balance at beginning of year
|
$
|
2.9
|
|
|
2.9
|
|
|
2.9
|
|
Balance at end of year
|
2.9
|
|
|
2.9
|
|
|
2.9
|
|
Additional paid-in capital
|
|
|
|
|
|
Balance at beginning of year
|
3.0
|
|
|
8.5
|
|
|
37.4
|
|
Stock options exercised
|
58.5
|
|
|
13.4
|
|
|
9.5
|
|
Purchases of common stock
|
—
|
|
|
(24.0
|
)
|
|
(43.6
|
)
|
Stock-based compensation
|
5.7
|
|
|
5.1
|
|
|
5.2
|
|
Balance at end of year
|
67.2
|
|
|
3.0
|
|
|
8.5
|
|
Retained earnings
|
|
|
|
|
|
Balance at beginning of year
|
2,341.6
|
|
|
2,110.6
|
|
|
1,940.1
|
|
Net earnings
|
790.9
|
|
|
751.9
|
|
|
578.6
|
|
Dividends paid in cash
|
(498.6
|
)
|
|
(441.9
|
)
|
|
(369.1
|
)
|
Purchases of common stock
|
—
|
|
|
(79.0
|
)
|
|
(39.0
|
)
|
Balance at end of year
|
2,633.9
|
|
|
2,341.6
|
|
|
2,110.6
|
|
Accumulated other comprehensive income (loss)
|
|
|
|
|
|
Balance at beginning of year
|
(44.8
|
)
|
|
(25.1
|
)
|
|
(47.3
|
)
|
Other comprehensive income (loss)
|
6.4
|
|
|
(19.7
|
)
|
|
22.2
|
|
Balance at end of year
|
(38.4
|
)
|
|
(44.8
|
)
|
|
(25.1
|
)
|
Total stockholders' equity
|
$
|
2,665.6
|
|
|
2,302.7
|
|
|
2,096.9
|
|
|
|
|
|
|
|
Cash dividends paid per share of common stock
|
$
|
0.87
|
|
|
0.77
|
|
|
0.64
|
|
See accompanying Notes to Consolidated Financial Statements.
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in millions)
For the year ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Cash flows from operating activities:
|
|
|
|
|
|
Net earnings
|
$
|
790.9
|
|
|
751.9
|
|
|
578.6
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities, net of acquisitions:
|
|
|
|
|
|
Depreciation of property and equipment
|
144.6
|
|
|
134.1
|
|
|
123.6
|
|
Gain on sale of property and equipment
|
(1.2
|
)
|
|
(0.5
|
)
|
|
(1.0
|
)
|
Bad debt expense
|
5.5
|
|
|
8.1
|
|
|
8.2
|
|
Deferred income taxes
|
15.0
|
|
|
33.8
|
|
|
(30.0
|
)
|
Stock-based compensation
|
5.7
|
|
|
5.1
|
|
|
5.2
|
|
Amortization of intangible assets
|
4.1
|
|
|
4.1
|
|
|
3.8
|
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
Trade accounts receivable
|
(30.4
|
)
|
|
(120.3
|
)
|
|
(103.7
|
)
|
Inventories
|
(84.4
|
)
|
|
(193.3
|
)
|
|
(76.3
|
)
|
Other current assets
|
(10.4
|
)
|
|
(28.9
|
)
|
|
(15.6
|
)
|
Accounts payable
|
(0.8
|
)
|
|
46.1
|
|
|
36.3
|
|
Accrued expenses
|
10.7
|
|
|
46.8
|
|
|
37.6
|
|
Income taxes
|
(7.7
|
)
|
|
(15.5
|
)
|
|
19.4
|
|
Other
|
1.1
|
|
|
2.7
|
|
|
(0.9
|
)
|
Net cash provided by operating activities
|
842.7
|
|
|
674.2
|
|
|
585.2
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of property and equipment
|
(246.4
|
)
|
|
(176.3
|
)
|
|
(119.9
|
)
|
Proceeds from sale of property and equipment
|
6.6
|
|
|
9.5
|
|
|
7.4
|
|
Cash paid for acquisitions
|
—
|
|
|
(3.7
|
)
|
|
(58.7
|
)
|
Other
|
0.1
|
|
|
(3.4
|
)
|
|
(8.1
|
)
|
Net cash used in investing activities
|
(239.7
|
)
|
|
(173.9
|
)
|
|
(179.3
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from debt obligations
|
910.0
|
|
|
980.0
|
|
|
1,015.0
|
|
Payments against debt obligations
|
(1,065.0
|
)
|
|
(895.0
|
)
|
|
(980.0
|
)
|
Proceeds from exercise of stock options
|
58.5
|
|
|
13.4
|
|
|
9.5
|
|
Purchases of common stock
|
—
|
|
|
(103.0
|
)
|
|
(82.6
|
)
|
Payments of dividends
|
(498.6
|
)
|
|
(441.9
|
)
|
|
(369.1
|
)
|
Net cash used in financing activities
|
(595.1
|
)
|
|
(446.5
|
)
|
|
(407.2
|
)
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(0.2
|
)
|
|
(3.5
|
)
|
|
5.5
|
|
Net increase in cash and cash equivalents
|
7.7
|
|
|
50.3
|
|
|
4.2
|
|
Cash and cash equivalents at beginning of year
|
167.2
|
|
|
116.9
|
|
|
112.7
|
|
Cash and cash equivalents at end of year
|
$
|
174.9
|
|
|
167.2
|
|
|
116.9
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Cash paid for interest
|
$
|
13.9
|
|
|
12.6
|
|
|
8.7
|
|
Net cash paid for income taxes
|
$
|
242.7
|
|
|
215.3
|
|
|
304.1
|
|
See accompanying Notes to Consolidated Financial Statements.
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Business Overview and Summary of Significant Accounting Policies
Business Overview
Fastenal is a leader in the wholesale distribution of industrial and construction supplies operating a branch-based business (with an increasing number of Onsite locations). Collectively we refer to our branches and Onsite locations as in-market locations. We have over 3,200 in-market locations located primarily in North America.
Principles of Consolidation
The consolidated financial statements include the accounts of Fastenal Company and its subsidiaries (collectively referred to as 'Fastenal' or by terms such as 'we', 'our', or 'us'). All material intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition
Net sales include products and shipping and handling charges, net of estimates for product returns and any related sales
incentives. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All
revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue by transferring
the promised products to the customer, with the majority of revenue recognized at the point in time the customer obtains control
of the products. We recognize revenue for shipping and handling charges at the time the products are delivered to or picked up
by the customer. We estimate product returns based on historical return rates. Using probability assessments, we estimate sales
incentives expected to be paid over the term of the contract. The majority of our contracts have a single performance obligation
and are short term in nature. Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and
remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales.
Accounts Receivable
Credit is extended based upon an evaluation of the customer's financial condition. Accounts receivable are stated at their
estimated net realizable value. The allowance for doubtful accounts is based on an analysis of customer accounts and our
historical experience with accounts receivable write-offs.
Foreign Currency Translation and Transactions
The functional currency of our foreign operations is typically the applicable local currency. The functional currency is translated into United States dollars for balance sheet accounts, except retained earnings, using current exchange rates as of the balance sheet date, for retained earnings at historical exchange rates, and for revenue and expense accounts using a weighted average exchange rate during the applicable period. The translation adjustments are deferred as a separate component of stockholders' equity captioned accumulated other comprehensive income (loss). Gains or losses resulting from transactions denominated in foreign currencies are included in cost of sales or operating and administrative expenses.
Cash and Cash Equivalents
We consider all investments purchased with original maturities of three months or less to be cash equivalents.
Inventories
Inventories, consisting of finished goods merchandise held for resale, are stated at the lower of cost (first in, first out method) or net realizable value. We establish a reserve for excess, slow-moving, and obsolete inventory that is equal to the difference between the cost and estimated net realizable value for that inventory. These reserves are based on a review and comparison of the current inventory levels to projected and historical sales of inventory.
Property and Equipment
Property and equipment are stated at cost. Depreciation on property and equipment is provided for using the straight-line method over the anticipated economic useful lives of the related property. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by the asset or asset group to its carrying value. If the carrying value of the long-lived asset or
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. There were no impairments recorded during any of the three years reported in these consolidated financial statements.
Leases
We determine if an arrangement contains a lease at inception. Operating leases are included in our operating lease right-of-use ('ROU') assets, the current portion of operating lease liabilities, and the operating lease liabilities in our Consolidated Balance Sheets.
The ROU assets represent our right to control the use of an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The operating lease ROU assets also include any prepaid lease payments made and exclude lease incentives. Lease expense is recognized on a straight-line basis over the lease term.
Many of our leases include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and nonlease components (e.g., common-area or other maintenance costs) which are accounted for as a single lease component as we have elected the practical expedient to group lease and nonlease components for all leases. Our pick-up truck leases typically have a non-cancelable lease term of less than one year and therefore, we have elected the practical expedient to exclude these short-term leases from our ROU assets and lease liabilities.
Most leases include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our ROU assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. We have a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate.
Other Long-Lived Assets
Other assets consist of prepaid deposits, goodwill, and other definite-lived intangible assets. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is reviewed for impairment annually. The identifiable intangible assets are amortized on a straight-line basis over their estimated life.
Accounting Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles ('GAAP') requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent liabilities. Actual results could differ from those estimates.
Insurance Reserves
We are self-insured for certain losses relating to workers' compensation, automobile, health, and general liability costs. Specific stop-loss coverage is provided for catastrophic claims in order to limit exposure to significant claims. Self-insurance liabilities are based on our estimate of reported claims and claims incurred but not yet reported.
Product Warranties
We offer a basic limited warranty for certain of our products. The specific terms and conditions of those warranties vary depending upon the product sold. We typically recoup these costs through product warranties we hold with the original equipment manufacturers. Our warranty expense has historically been minimal.
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
Stock-Based Compensation
We estimate the value of stock option grants using a Black-Scholes valuation model. Stock-based compensation expense is recognized on a straight-line basis over the vesting period. Our stock-based compensation expense is recorded in operating and administrative expenses.
Income Taxes
We account 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.
We recognize the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits in income tax expense.
Earnings Per Share
Basic net earnings per share is calculated using net earnings available to common stockholders divided by the weighted average number of shares of common stock outstanding during the year. Diluted net earnings per share is similar to basic net earnings per share except that the weighted average number of shares of common stock outstanding includes the incremental shares assumed to be issued upon the exercise of stock options considered to be 'in-the-money' (i.e., when the market price of our stock is greater than the exercise price of our outstanding stock options).
Segment Reporting
We have determined that for our North American operations we meet the aggregation criteria outlined in the accounting standards as our various operations have similar (1) economic characteristics, (2) products and services, (3) customers, (4) distribution channels, and (5) regulatory environments. Considering the insignificance of our operations outside of North America, we report as a single business segment.
Stock Split
On April 17, 2019, the board of directors approved a two-for-one stock split of the company's outstanding common stock. Holders of the company's common stock, par value $0.01 per share, at the close of business on May 2, 2019, received one additional share of common stock for every share of common stock they owned. The stock split took effect at the close of business on May 22, 2019. All historical common stock share and per share information for all periods presented in the accompanying consolidated financial statements and notes thereto have been retroactively adjusted to reflect the stock split.
Recently Adopted Accounting Pronouncements
Effective January 1, 2019, we adopted the Financial Accounting Standards Board ('FASB') Accounting Standards Update ('ASU') 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which included an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the date of initial application of transition, which we elected. As a result of the adoption of ASC 842 on January 1, 2019, we recorded both operating lease ROU assets of $227.5 and lease liabilities of $228.3. The adoption of ASC 842 had an immaterial impact on our Consolidated Statement of Earnings and Consolidated Statement of Cash Flows for the year ended December 31, 2019. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard which allowed us to carry forward the historical lease classification.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which changes the way entities recognize impairment of most financial assets. This update is effective for periods beginning after December 15, 2019.
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
Short-term and long-term financial assets, as defined by the standard, are impacted by immediate recognition of estimated credit losses in the financial statements, reflecting the net amount expected to be collected. We have evaluated the requirements of this standard on our financial assets and have concluded that the adoption of this ASU, beginning January 1, 2020, will have an immaterial impact on our consolidated financial statements.
Note 2. Revenue
Disaggregation of Revenue
The accounting policies of the operations in the various geographic areas are the same as those described in the summary of significant accounting policies. Revenues are attributed to countries based on the selling location from which the sale occurred. In each of the years presented in the tables below, no single customer represented 5% or more of our consolidated net sales.
Our revenues related to the following geographic areas were as follows for the periods ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
Twelve-month period
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
4,568.9
|
|
|
4,285.5
|
|
|
3,842.9
|
|
Canada and Mexico
|
606.8
|
|
|
530.8
|
|
|
432.3
|
|
North America
|
5,175.7
|
|
|
4,816.3
|
|
|
4,275.2
|
|
All other foreign countries
|
158.0
|
|
|
148.8
|
|
|
115.3
|
|
Total revenues
|
$
|
5,333.7
|
|
|
4,965.1
|
|
|
4,390.5
|
|
The percentages of our sales by end market were as follows for the periods ended December 31:
|
|
|
|
|
|
|
|
|
|
|
Twelve-month period
|
|
2019
|
|
2018
|
|
2017
|
Manufacturing
|
67.5
|
%
|
|
66.7
|
%
|
|
66.5
|
%
|
Non-residential construction
|
12.9
|
%
|
|
13.1
|
%
|
|
13.0
|
%
|
Other
|
19.6
|
%
|
|
20.2
|
%
|
|
20.5
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
The percentages of our sales by product line were as follows for the periods ended December 31(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve-month Period
|
Type
|
Introduced
|
|
2019
|
|
2018
|
|
2017
|
Fasteners(2)
|
1967
|
|
34.2
|
%
|
|
34.9
|
%
|
|
35.6
|
%
|
Tools
|
1993
|
|
9.9
|
%
|
|
10.0
|
%
|
|
10.1
|
%
|
Cutting tools
|
1996
|
|
5.7
|
%
|
|
5.7
|
%
|
|
5.8
|
%
|
Hydraulics & pneumatics
|
1996
|
|
6.8
|
%
|
|
6.8
|
%
|
|
6.8
|
%
|
Material handling
|
1996
|
|
5.9
|
%
|
|
5.8
|
%
|
|
5.9
|
%
|
Janitorial supplies
|
1996
|
|
7.8
|
%
|
|
7.6
|
%
|
|
7.3
|
%
|
Electrical supplies
|
1997
|
|
4.7
|
%
|
|
4.7
|
%
|
|
4.9
|
%
|
Welding supplies
|
1997
|
|
4.2
|
%
|
|
4.1
|
%
|
|
4.2
|
%
|
Safety supplies
|
1999
|
|
17.9
|
%
|
|
17.2
|
%
|
|
16.3
|
%
|
Other
|
|
|
2.9
|
%
|
|
3.2
|
%
|
|
3.1
|
%
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
(1) In 2018, we reclassified certain product category designations and have conformed the prior period percentages to the current year presentation.
(2) The fastener product line represents fasteners and miscellaneous supplies.
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
Note 3. Long-Lived Assets
The accounting policies of the operations in the various geographic areas are the same as those described in the summary of significant accounting policies. Long-lived assets consist of net property and equipment, deposits, goodwill, and other net intangibles.
Property and equipment at year end consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable Life
in Years
|
|
2019
|
|
2018
|
Land
|
—
|
|
|
$
|
41.8
|
|
|
36.3
|
|
Buildings and improvements
|
15 to 40
|
|
|
423.7
|
|
|
323.1
|
|
Automated distribution and warehouse equipment
|
5 to 30
|
|
|
244.5
|
|
|
229.1
|
|
Shelving, industrial vending, and equipment
|
3 to 10
|
|
|
1,036.2
|
|
|
927.6
|
|
Transportation equipment
|
3 to 5
|
|
|
88.7
|
|
|
77.9
|
|
Construction in progress
|
—
|
|
|
132.0
|
|
|
152.2
|
|
|
|
|
1,966.9
|
|
|
1,746.2
|
|
Less accumulated depreciation
|
|
|
(943.7
|
)
|
|
(821.4
|
)
|
Property and equipment, net
|
|
|
$
|
1,023.2
|
|
|
924.8
|
|
Our long-lived assets related to the following geographic areas:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
1,238.4
|
|
|
947.7
|
|
|
919.5
|
|
Canada and Mexico
|
72.2
|
|
|
43.0
|
|
|
42.8
|
|
North America
|
1,310.6
|
|
|
990.7
|
|
|
962.3
|
|
All other foreign countries
|
32.1
|
|
|
14.6
|
|
|
12.5
|
|
Total long-lived assets
|
$
|
1,342.7
|
|
|
1,005.3
|
|
|
974.8
|
|
Note 4. Accrued Expenses
Accrued expenses at year end consisted of the following:
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Employee payroll and related taxes
|
$
|
28.7
|
|
|
27.6
|
|
Employee bonuses and commissions
|
17.9
|
|
|
22.8
|
|
Profit sharing contribution
|
13.8
|
|
|
13.0
|
|
Insurance reserves
|
41.1
|
|
|
37.6
|
|
Indirect taxes
|
67.4
|
|
|
63.6
|
|
Customer promotions and marketing
|
52.2
|
|
|
50.9
|
|
Other
|
30.4
|
|
|
25.3
|
|
Accrued expenses
|
$
|
251.5
|
|
|
240.8
|
|
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
Note 5. Stockholders' Equity
Dividends
On January 16, 2020, our board of directors declared a quarterly dividend of $0.25 per share of common stock to be paid in cash on February 28, 2020 to shareholders of record at the close of business on January 31, 2020. We paid aggregate annual dividends per share of $0.87, $0.77, and $0.64 in 2019, 2018, and 2017, respectively.
Stock Options
Effective January 2, 2020, the compensation committee of our board of directors granted to our employees options to purchase a total of 877,299 shares of our common stock at an exercise strike price of $38.00 per share. The closing stock price on the effective date of the grant was $37.23 per share. On the same date, certain of our non-employee directors elected to forgo all or a portion of the 2020 annual cash retainer in exchange for options to acquire a total of 24,964 shares of our common stock at an exercise price of $38.00 per share.
The following tables summarize the details of options granted under our stock option plans that were still outstanding as of December 31, 2019, and the assumptions used to value those grants. All such grants were effective at the close of business on the date of grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Granted
|
|
Option Exercise
(Strike) Price
|
|
Closing Stock
Price on Date
of Grant
|
|
December 31, 2019
|
Date of Grant
|
Options
Outstanding
|
|
Options
Exercisable
|
January 2, 2019
|
1,316,924
|
|
|
$
|
26.00
|
|
|
$
|
25.705
|
|
|
1,279,842
|
|
|
29,010
|
|
January 2, 2018
|
1,087,936
|
|
|
$
|
27.50
|
|
|
$
|
27.270
|
|
|
1,019,440
|
|
|
42,370
|
|
January 3, 2017
|
1,529,578
|
|
|
$
|
23.50
|
|
|
$
|
23.475
|
|
|
1,197,606
|
|
|
332,132
|
|
April 19, 2016
|
1,690,880
|
|
|
$
|
23.00
|
|
|
$
|
22.870
|
|
|
1,220,524
|
|
|
447,166
|
|
April 21, 2015
|
1,786,440
|
|
|
$
|
21.00
|
|
|
$
|
20.630
|
|
|
833,593
|
|
|
444,589
|
|
April 22, 2014
|
1,910,000
|
|
|
$
|
28.00
|
|
|
$
|
25.265
|
|
|
599,128
|
|
|
357,268
|
|
April 16, 2013
|
410,000
|
|
|
$
|
27.00
|
|
|
$
|
24.625
|
|
|
97,472
|
|
|
58,722
|
|
April 17, 2012
|
2,470,000
|
|
|
$
|
27.00
|
|
|
$
|
24.505
|
|
|
547,112
|
|
|
440,310
|
|
April 19, 2011
|
820,000
|
|
|
$
|
17.50
|
|
|
$
|
15.890
|
|
|
12,500
|
|
|
12,500
|
|
Total
|
13,021,758
|
|
|
|
|
|
|
6,807,217
|
|
|
2,164,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of Grant
|
Risk-free
Interest Rate
|
|
Expected Life
of Option in
Years
|
|
Expected
Dividend
Yield
|
|
Expected
Stock
Volatility
|
|
Estimated Fair
Value of Stock
Option
|
January 2, 2019
|
2.5
|
%
|
|
5.00
|
|
2.9
|
%
|
|
23.96
|
%
|
|
$
|
4.40
|
|
January 2, 2018
|
2.2
|
%
|
|
5.00
|
|
2.3
|
%
|
|
23.45
|
%
|
|
$
|
5.02
|
|
January 3, 2017
|
1.9
|
%
|
|
5.00
|
|
2.6
|
%
|
|
24.49
|
%
|
|
$
|
4.20
|
|
April 19, 2016
|
1.3
|
%
|
|
5.00
|
|
2.6
|
%
|
|
26.34
|
%
|
|
$
|
4.09
|
|
April 21, 2015
|
1.3
|
%
|
|
5.00
|
|
2.7
|
%
|
|
26.84
|
%
|
|
$
|
3.68
|
|
April 22, 2014
|
1.8
|
%
|
|
5.00
|
|
2.0
|
%
|
|
28.55
|
%
|
|
$
|
4.79
|
|
April 16, 2013
|
0.7
|
%
|
|
5.00
|
|
1.6
|
%
|
|
37.42
|
%
|
|
$
|
6.33
|
|
April 17, 2012
|
0.9
|
%
|
|
5.00
|
|
1.4
|
%
|
|
39.25
|
%
|
|
$
|
6.85
|
|
April 19, 2011
|
2.1
|
%
|
|
5.00
|
|
1.6
|
%
|
|
39.33
|
%
|
|
$
|
5.60
|
|
All of the options in the tables above vest and become exercisable over a period of up to eight years. Generally, each option will terminate approximately nine years after the grant date.
The fair value of each share-based option is estimated on the date of grant using a Black-Scholes valuation method that uses the assumptions listed above. The risk-free interest rate is based on the U.S. Treasury rate over the expected life of the option at the time of grant. The expected life is the average length of time over which we expect the employee groups will exercise their options, which is based on historical experience with similar grants. The dividend yield is estimated over the expected life of the option based on our current dividend payout, historical dividends paid, and expected future cash dividends. Expected stock
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
volatilities are based on the movement of our stock price over the most recent historical period equivalent to the expected life of the option.
A summary of activities under our stock option plans consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Exercise
Price(1)
|
|
Remaining
Life(2)
|
Outstanding as of January 1, 2019
|
7,999,264
|
|
|
$
|
24.765
|
|
|
5.61
|
Granted
|
1,316,924
|
|
|
$
|
26.000
|
|
|
9.00
|
Exercised
|
(2,325,073
|
)
|
|
$
|
25.150
|
|
|
|
Cancelled/forfeited
|
(183,898
|
)
|
|
$
|
24.630
|
|
|
|
Outstanding as of December 31, 2019
|
6,807,217
|
|
|
$
|
24.890
|
|
|
6.09
|
Exercisable as of December 31, 2019
|
2,164,067
|
|
|
$
|
24.510
|
|
|
4.30
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Exercise
Price(1)
|
|
Remaining
Life(2)
|
Outstanding as of January 1, 2018
|
7,897,816
|
|
|
$
|
24.140
|
|
|
5.89
|
Granted
|
1,087,936
|
|
|
$
|
27.500
|
|
|
9.00
|
Exercised
|
(620,766
|
)
|
|
$
|
21.655
|
|
|
|
Cancelled/forfeited
|
(365,722
|
)
|
|
$
|
24.430
|
|
|
|
Outstanding as of December 31, 2018
|
7,999,264
|
|
|
$
|
24.765
|
|
|
5.61
|
Exercisable as of December 31, 2018
|
3,108,756
|
|
|
$
|
25.530
|
|
|
3.69
|
(1) Weighted average exercise price.
(2) Weighted average remaining contractual life in years.
The total intrinsic value of stock options exercised during the years ended December 31, 2019, 2018, and 2017 was $20.2, $4.2, and $6.9, respectively. The intrinsic value represents the difference between the exercise price and fair value of the underlying shares at the date of exercise.
At December 31, 2019, there was $13.1 of total unrecognized stock-based compensation expense related to outstanding unvested stock options granted under the employee stock option plan. This expense is expected to be recognized over a weighted average period of 3.82 years. Any future change in estimated forfeitures will impact this amount. The total grant date fair value of stock options vested under our employee stock option plan during 2019, 2018, and 2017 was $5.9, $5.3, and $4.2, respectively.
Total stock-based compensation expense related to our employee stock option plan was $5.7, $5.1, and $5.2 for 2019, 2018, and 2017, respectively.
Shares Outstanding
Shares of common stock outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Balance at beginning of year
|
571,803,838
|
|
|
575,183,072
|
|
|
578,323,848
|
|
Stock options exercised
|
2,325,073
|
|
|
620,766
|
|
|
659,224
|
|
Purchases of common stock
|
—
|
|
|
(4,000,000
|
)
|
|
(3,800,000
|
)
|
Balance at end of year
|
574,128,911
|
|
|
571,803,838
|
|
|
575,183,072
|
|
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
Earnings Per Share
The following tables present a reconciliation of the denominators used in the computation of basic and diluted earnings per share and a summary of the options to purchase shares of common stock which were excluded from the diluted earnings calculation because they were anti-dilutive:
|
|
|
|
|
|
|
|
|
|
Reconciliation
|
2019
|
|
2018
|
|
2017
|
Basic weighted average shares outstanding
|
573,202,152
|
|
|
573,933,834
|
|
|
576,416,870
|
|
Weighted shares assumed upon exercise of stock options
|
1,239,476
|
|
|
391,694
|
|
|
268,596
|
|
Diluted weighted average shares outstanding
|
574,441,628
|
|
|
574,325,528
|
|
|
576,685,466
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Anti-dilutive Options Excluded
|
2019
|
|
2018
|
|
2017
|
Options to purchase shares of common stock
|
—
|
|
|
3,159,514
|
|
|
7,048,802
|
|
Weighted average exercise prices of options
|
$
|
—
|
|
|
27.510
|
|
|
24.925
|
|
Any dilutive impact summarized above related to periods when the average market price of our stock exceeded the exercise price of the potentially dilutive stock options then outstanding.
Note 6. Retirement Savings Plan
The Fastenal Company and Subsidiaries 401(k) and Employee Stock Ownership Plan covers all of our employees in the United States. Our employees in Canada may participate in a Registered Retirement Savings Plan. The general purpose of both of these plans is to provide additional financial security during retirement by providing employees with an incentive to make regular savings contributions. In addition to the participation of our employees, we make annual profit sharing contributions based on an established formula. The expense recorded under this profit sharing formula was approximately $13.8, $13.0, and $10.6 for 2019, 2018, and 2017, respectively.
Note 7. Income Taxes
Earnings before income taxes were derived from the following sources:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Domestic
|
$
|
977.6
|
|
|
905.0
|
|
|
809.4
|
|
Foreign
|
66.1
|
|
|
82.0
|
|
|
63.7
|
|
Earnings before income taxes
|
$
|
1,043.7
|
|
|
987.0
|
|
|
873.1
|
|
Components of income tax expense (benefit) were as follows:
|
|
|
|
|
|
|
|
|
|
|
2019:
|
Current
|
|
Deferred
|
|
Total
|
Federal
|
$
|
177.4
|
|
|
11.3
|
|
|
188.7
|
|
State
|
41.6
|
|
|
0.2
|
|
|
41.8
|
|
Foreign
|
22.1
|
|
|
0.2
|
|
|
22.3
|
|
Income tax expense
|
$
|
241.1
|
|
|
11.7
|
|
|
252.8
|
|
|
|
|
|
|
|
|
|
|
|
|
2018:
|
Current
|
|
Deferred
|
|
Total
|
Federal
|
$
|
143.8
|
|
|
27.4
|
|
|
171.2
|
|
State
|
38.8
|
|
|
0.2
|
|
|
39.0
|
|
Foreign
|
24.1
|
|
|
0.8
|
|
|
24.9
|
|
Income tax expense
|
$
|
206.7
|
|
|
28.4
|
|
|
235.1
|
|
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
|
|
|
|
|
|
|
|
|
|
|
2017:
|
Current
|
|
Deferred
|
|
Total
|
Federal
|
$
|
270.6
|
|
|
(33.1
|
)
|
|
237.5
|
|
State
|
33.2
|
|
|
3.3
|
|
|
36.5
|
|
Foreign
|
20.5
|
|
|
(0.0
|
)
|
|
20.5
|
|
Income tax expense
|
$
|
324.3
|
|
|
(29.8
|
)
|
|
294.5
|
|
Income tax expense in the accompanying consolidated financial statements differed from the expected expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
U.S. federal statutory income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
U.S. federal income tax expense at statutory rate
|
$
|
219.2
|
|
|
207.3
|
|
|
305.6
|
|
Increase (decrease) attributed to:
|
|
|
|
|
|
State income taxes, net of federal benefit
|
32.8
|
|
|
30.2
|
|
|
21.5
|
|
Transition tax
|
—
|
|
|
1.2
|
|
|
6.5
|
|
Remeasurement of deferred taxes for Tax Act
|
—
|
|
|
(11.5
|
)
|
|
(30.8
|
)
|
Other, net
|
0.8
|
|
|
7.9
|
|
|
(8.3
|
)
|
Total income tax expense
|
$
|
252.8
|
|
|
235.1
|
|
|
294.5
|
|
Effective income tax rate
|
24.2
|
%
|
|
23.8
|
%
|
|
33.7
|
%
|
The tax effects of temporary differences that give rise to deferred income tax assets and liabilities at year end consisted of the following:
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Deferred income tax assets (liabilities):
|
|
|
|
Inventory costing and valuation methods
|
$
|
4.3
|
|
|
4.2
|
|
Allowance for doubtful accounts
|
2.7
|
|
|
3.2
|
|
Insurance reserves
|
9.1
|
|
|
8.1
|
|
Customer promotions
|
1.9
|
|
|
1.9
|
|
Stock-based compensation
|
3.9
|
|
|
5.6
|
|
Operating lease liabilities
|
62.5
|
|
|
—
|
|
Federal and state benefit of uncertain tax positions
|
0.8
|
|
|
0.8
|
|
Foreign net operating loss and credit carryforwards
|
3.2
|
|
|
3.2
|
|
Foreign valuation allowances
|
(2.8
|
)
|
|
(2.7
|
)
|
Other, net
|
(0.0
|
)
|
|
1.3
|
|
Total deferred income tax assets
|
85.6
|
|
|
25.6
|
|
Property and equipment
|
(114.7
|
)
|
|
(104.7
|
)
|
Operating lease ROU assets
|
(61.7
|
)
|
|
—
|
|
Total deferred income tax liabilities
|
(176.4
|
)
|
|
(104.7
|
)
|
Deferred income tax liabilities
|
$
|
(90.8
|
)
|
|
(79.1
|
)
|
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits was as follows:
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance at beginning of year:
|
$
|
5.3
|
|
|
4.4
|
|
Increase related to prior year tax positions
|
0.2
|
|
|
1.8
|
|
Decrease related to prior year tax positions
|
(0.2
|
)
|
|
(0.6
|
)
|
Increase related to current year tax positions
|
4.7
|
|
|
0.7
|
|
Decrease related to statute of limitation lapses
|
(1.4
|
)
|
|
(0.9
|
)
|
Settlements
|
0.0
|
|
|
(0.1
|
)
|
Balance at end of year:
|
$
|
8.6
|
|
|
5.3
|
|
Included in the liability for gross unrecognized tax benefits is an immaterial amount for interest and penalties, both of which we classify as a component of income tax expense. The amount of gross unrecognized tax benefits that would favorably impact the effective tax rate, if recognized, is not material. We do not anticipate significant changes in total unrecognized tax benefits during the next twelve months. The 2019 and 2018 liability is included in deferred income taxes in the Consolidated Balance Sheets.
We file income tax returns in the United States federal jurisdiction, all states, and various local and foreign jurisdictions. We are no longer subject to income tax examinations by taxing authorities for taxable years before 2016 in the case of United States federal examinations, and with limited exception, before 2014 in the case of foreign, state, and local examinations.
On December 22, 2017, the Tax Act was signed into law. The Tax Act made broad and complex changes to the U.S. tax code which include: a lowering of the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018, accelerated expensing of qualified capital investments for a specific period, and a transition from a worldwide to a territorial tax system which requires companies to pay a one-time transition tax on certain unrepatriated earnings from foreign subsidiaries.
ASC 740 requires a company to record the effects of a tax law change in the period of enactment which, for us, was fiscal 2017. ASU 2018-05 provides guidance on the application of the Tax Act which includes allowing a company to record a provisional amount during the measurement period for the impacts when the necessary information is not available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.
We recorded income tax expense of $235.1 in 2018, or 23.8% of earnings before income taxes. The effective income tax rate was significantly impacted by the following two items: (1) The lower corporate tax rate provided by the Tax Act resulted in a lower tax rate beginning in the first quarter of 2018. The effective income tax rate includes the immaterial impact of the U.S. tax rate on certain offshore earnings referred to as GILTI, a new deduction for FDII, and the new alternative U.S. tax on certain BEAT payments from a U.S. company to any foreign related party. (2) Discrete income tax items to adjust our transition tax liability, reflect the impacts of accelerating depreciation for certain physical assets, and remeasure the impact of the U.S. tax rate on certain inter-company transactions. These discrete items resulted in approximately $7.1 of income tax benefit during 2018. The accounting for the income tax effects of the Tax Act was complete as of December 31, 2018.
In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when the tax impact is zero or very minimal and that position has not changed subsequent to the one-time transition tax under the Tax Act. Accordingly, no deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of our approximately $288.1 of undistributed earnings from foreign subsidiaries to the U.S. as those earnings continue to be permanently reinvested.
Note 8. Operating Leases
We lease space under non-cancelable operating leases for several distribution centers, several manufacturing locations, and certain branch locations. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions. We also lease certain semi-tractors, pick-up trucks, and computer equipment under operating leases.
Certain operating leases for pick-up trucks contain residual value guarantee provisions which would generally become due at the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value. The aggregate residual value guarantee related to these leases was approximately $90.0. We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote.
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
The cost components of our operating leases were as follows for the period ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Twelve-month Period
|
|
Leased
Facilities and
Equipment
|
|
Leased
Vehicles
|
|
Total
|
Operating lease cost
|
$
|
104.0
|
|
|
14.1
|
|
|
118.1
|
|
Variable lease cost
|
10.0
|
|
|
1.9
|
|
|
11.9
|
|
Short-term lease cost
|
—
|
|
|
27.4
|
|
|
27.4
|
|
Total
|
$
|
114.0
|
|
|
43.4
|
|
|
157.4
|
|
Variable lease costs are excluded from ROU assets and lease liabilities and consist primarily of taxes, insurance, and common area or other maintenance costs for our leased facilities and equipment which are paid based on actual costs incurred by the lessor as well as variable mileage costs related to our leased vehicles.
Maturities of our lease liabilities for all operating leases are as follows as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Leased
Facilities and
Equipment
|
|
Leased
Vehicles
|
|
Total
|
2020
|
$
|
88.3
|
|
|
12.7
|
|
|
101.0
|
|
2021
|
63.2
|
|
|
8.5
|
|
|
71.7
|
|
2022
|
39.5
|
|
|
6.0
|
|
|
45.5
|
|
2023
|
22.5
|
|
|
2.9
|
|
|
25.4
|
|
2024
|
10.0
|
|
|
0.1
|
|
|
10.1
|
|
2025 and thereafter
|
3.7
|
|
|
—
|
|
|
3.7
|
|
Total lease payments
|
$
|
227.2
|
|
|
30.2
|
|
|
257.4
|
|
Less: Imputed interest
|
(10.8
|
)
|
|
(1.0
|
)
|
|
(11.8
|
)
|
Present value of lease liabilities
|
$
|
216.4
|
|
|
29.2
|
|
|
245.6
|
|
The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of December 31, 2019:
|
|
|
Remaining lease term and discount rate:
|
December 31, 2019
|
Weighted average remaining lease term (years)
|
|
Leased facilities and equipment
|
3.26
|
Leased vehicles
|
2.89
|
Weighted average discount rate
|
|
Lease facilities and equipment
|
3.18%
|
Leased vehicles
|
2.70%
|
Supplemental cash flow information related to our operating leases was as follows for the period ended December 31, 2019:
|
|
|
|
|
|
Twelve-month Period
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash outflow from operating leases
|
$
|
117.2
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
116.1
|
|
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
Note 9. Debt Commitments
Credit Facility, Notes Payable, and Commitments
Debt obligations and letters of credit outstanding at year end consisted of the following:
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Outstanding loans under unsecured revolving credit facility
|
$
|
210.0
|
|
|
365.0
|
|
2.00% Senior unsecured promissory note payable
|
40.0
|
|
|
40.0
|
|
2.45% Senior unsecured promissory note payable
|
35.0
|
|
|
35.0
|
|
3.22% Senior unsecured promissory note payable
|
60.0
|
|
|
60.0
|
|
Total debt
|
345.0
|
|
|
500.0
|
|
Less: Current portion of debt
|
(3.0
|
)
|
|
(3.0
|
)
|
Long-term debt
|
$
|
342.0
|
|
|
497.0
|
|
|
|
|
|
Outstanding letters of credit under unsecured revolving credit facility - contingent obligation
|
$
|
36.3
|
|
|
36.3
|
|
Unsecured Revolving Credit Facility
We have a $700.0 committed unsecured revolving credit facility ('Credit Facility'). The Credit Facility includes a committed letter of credit subfacility of $55.0. The commitments under the Credit Facility will expire (and any borrowings outstanding under the Credit Facility will become due and payable) on November 30, 2023. In the next twelve months, we have the ability and intent to repay a portion of the outstanding loans using cash; therefore, we have classified this portion as a current liability. The Credit Facility contains certain financial and other covenants, and our right to borrow under the Credit Facility is conditioned upon, among other things, our compliance with these covenants. We are currently in compliance with these covenants.
Borrowings under the Credit Facility generally bear interest at a rate per annum equal to the London Interbank Offered Rate ('LIBOR') for interest periods of various lengths selected by us, plus 0.95%. Based on the interest periods we have chosen, our weighted per annum interest rate at December 31, 2019 was approximately 2.7%. We pay a commitment fee for the unused portion of the Credit Facility. This fee is either 0.10% or 0.125% per annum based on our usage of the Credit Facility.
Senior Unsecured Promissory Notes Payable
We have issued senior unsecured promissory notes under our master note agreement (the 'Master Note Agreement') in the aggregate principal amount of $135.0. Our aggregate borrowing capacity under the Master Note Agreement is $600.0; however, none of the institutional investors party to that agreement are committed to purchase notes thereunder.
The notes currently issued under our Master Note Agreement consist of three series. The first is in an aggregate principal amount of $40.0, bears interest at a fixed rate of 2.00% per annum, and is due and payable on July 20, 2021. The second is in an aggregate principal amount of $35.0, bears interest at a fixed rate of 2.45% per annum, and is due and payable on July 20, 2022. The third is in an aggregate principal amount of $60.0, bears interest at a fixed rate of 3.22% per annum, and is due and payable on March 1, 2024. There is no amortization of these notes prior to their maturity date and interest is payable quarterly.
Note 10. Legal Contingencies
We are involved in certain legal actions. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. In some actions, the claimants seek damages, as well as other relief, that could require significant expenditures or result in lost revenues. We record a liability for these legal actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. As of December 31, 2019, there were no litigation matters that we consider to be probable or reasonably possible to have a material adverse outcome.
Note 11. Subsequent Events
We evaluated all subsequent event activity and concluded that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the Notes to Consolidated Financial Statements, with the exception of the dividend declaration and stock option activities disclosed in Note 5.
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
Note 12. Selected Quarterly Financial Data (Unaudited)
(Amounts in millions except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019:
|
Net Sales
|
|
Gross
Profit
|
|
Pre-tax
Earnings
|
|
Net
Earnings
|
|
Basic Net
Earnings per Share
|
(1)
|
Diluted Net Earnings per Share
|
(1)
|
First quarter
|
$
|
1,309.3
|
|
|
624.7
|
|
|
257.5
|
|
|
194.1
|
|
|
0.34
|
|
|
0.34
|
|
|
Second quarter
|
1,368.4
|
|
|
641.2
|
|
|
271.4
|
|
|
204.6
|
|
|
0.36
|
|
|
0.36
|
|
|
Third quarter
|
1,379.1
|
|
|
651.1
|
|
|
278.4
|
|
|
213.5
|
|
|
0.37
|
|
|
0.37
|
|
|
Fourth quarter
|
1,276.9
|
|
|
598.4
|
|
|
236.4
|
|
|
178.7
|
|
|
0.31
|
|
|
0.31
|
|
|
Total
|
$
|
5,333.7
|
|
|
2,515.4
|
|
|
1,043.7
|
|
|
790.9
|
|
|
1.38
|
|
|
1.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018:
|
Net Sales
|
|
Gross
Profit
|
|
Pre-tax
Earnings
|
|
Net
Earnings
|
|
Basic Net
Earnings per Share
|
(1)
|
Diluted Net Earnings per Share
|
(1)
|
First quarter
|
$
|
1,185.8
|
|
|
577.6
|
|
|
231.9
|
|
|
174.3
|
|
|
0.30
|
|
|
0.30
|
|
|
Second quarter
|
1,267.9
|
|
|
617.7
|
|
|
265.9
|
|
|
211.2
|
|
|
0.37
|
|
|
0.37
|
|
|
Third quarter
|
1,279.8
|
|
|
615.8
|
|
|
259.4
|
|
|
197.6
|
|
|
0.34
|
|
|
0.34
|
|
|
Fourth quarter
|
1,231.6
|
|
|
587.8
|
|
|
229.8
|
|
|
168.8
|
|
|
0.29
|
|
|
0.29
|
|
|
Total
|
$
|
4,965.1
|
|
|
2,398.9
|
|
|
987.0
|
|
|
751.9
|
|
|
1.31
|
|
|
1.31
|
|
|
(1) Amounts may not foot due to rounding difference.
***End of Notes to Consolidated Financial Statements***