FAST Fastenal Company

Fastenal Company Reports Third Quarter Earnings WINONA, Minn., Oct. 12 /PRNewswire-FirstCall/ -- The Fastenal Company of Winona, MN (NASDAQ:FAST) reported the results of the nine months and the quarter ended September 30, 2004. Dollar amounts are in thousands. Net sales for the nine-month period ended September 30, 2004 totaled $920,027, an increase of 23.8% over net sales of $743,285 in the first nine months of 2003. Net earnings increased from $64,230 in the first nine months of 2003 to $97,720 in the first nine months of 2004, an increase of 52.1%. Earnings per share increased from $.85 to $1.29 for the comparable periods. Net sales for the three-month period ended September 30, 2004 totaled $325,678, an increase of 26.1% over net sales of $258,330 in the third quarter of 2003. Net earnings increased from $23,262 in the third quarter of 2003 to $34,741 in the third quarter of 2004, an increase of 49.3%. Earnings per share increased from $.31 to $.46 for the comparable periods. During the first nine months of 2004, Fastenal opened 189 new store sites. The 189 new sites represent an increase of 14.4% since December 31, 2003. There were 5,464 site employees as of September 30, 2004, an increase of 14.3% from December 31, 2003 and 16.2% from September 30, 2003. Management's comments on 2004: Note -- Daily sales are defined as the sales for the month divided by the number of business days in the month. The twelve months of 2001, 2002, 2003, and the first nine months of 2004, excluding the DIY Business, had daily sales growth rates of (compared to the comparable month in the preceding year): Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. 2001 20.0% 16.2% 11.4% 9.0% 9.4% 7.6% 7.4% 5.9% 4.8% 1.0% -0.5% 1.4% 2002 2.7% 4.8% 6.0% 9.3% 9.4% 11.0% 8.7% 10.4% 12.5% 13.3% 17.9% 11.6% 2003 13.3% 10.3% 14.5% 9.9% 9.5% 8.5% 11.0% 11.4% 10.8% 13.9% 14.5% 16.9% 2004 16.1% 20.1% 19.1% 22.1% 25.6% 25.7% 27.0% 24.9% 26.2% The twelve months of 2001, 2002, 2003, and the first nine months of 2004, including the DIY Business, had daily sales growth rates of (compared to the comparable month in the preceding year): Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. 2001 20.0% 16.2% 11.4% 9.0% 9.4% 7.6% 7.4% 5.9% 8.7% 4.1% 2.5% 5.1% 2002 5.6% 7.1% 8.9% 12.0% 12.3% 13.7% 11.6% 13.1% 11.0% 10.2% 14.3% 7.8% 2003 10.2% 7.9% 11.5% 7.2% 6.7% 6.0% 8.2% 8.8% 8.4% 13.7% 14.5% 16.9% 2004 16.1% 20.1% 19.1% 22.1% 25.6% 25.7% 27.0% 24.9% 26.2% The first table reflects growth rates of Fastenal excluding $16,974 and $8,526 of DIY Business net sales from January 1, 2002 to October 3, 2002 and from August 31, 2001 to December 31, 2001, respectively (the period of time the DIY Business was owned). Management has included the first table above because we believe it provides a consistent presentation of the growth rates of the organic store-based business and ongoing operations before, during, and after the period in which the DIY Business was owned and operated. The daily sales growth rates in the first table above represent several trends. The first being a downward trend in the first eleven months of 2001, which reflected the overall weakening of the industrial economy we service in North America. This trend reversed itself from December 2001 to June 2002; this was partly due to changing comparisons in the prior year and partly due to stronger month-to-month (i.e. April to May and May to June) growth rates compared to 2001. During July 2002, the daily sales growth rate decreased, began to improve again in August 2002 through November 2002, and slipped in December 2002, the final month of the year. The first six months of 2003 continued the choppy trend in net sales growth experienced in the second half of 2002, while the July 2003 to September 2004 time frame represents initial stabilization and then continued improvement in the growth rates. The choppy trend, which the Company experienced from July 2002 until June 2003, reflects the alternating strengthening and weakening in the industrial economy during that period, while the July 2003 to September 2004 improvement reflects continued strengthening in the economy as it relates to the customers we sell to in North America and the impact of the CSP initiative (as discussed below). See also the impact of price increases included in the gross profit discussion below. Gross profit margins in the first nine months of 2004 and 2003 were 50.4% and 49.3%, respectively. The largest impact to Fastenal's gross profit margin relates to the impact of rising steel prices. As a reseller of industrial products, primarily steel-based industrial products, Fastenal has been forced to increase its selling prices. These increases resulted in approximately 2.5% of additional sales dollars in the first nine months of 2004. To date, the increases relate primarily to CSP (defined below) products, to changes in our wholesale (or list) pricing, and, to a lesser degree, increases in the selling prices to our key account customers. The latter being less immediate. The short-term gross profit margin benefited from these changes as the increased cost of new inventory, still on the shelf, is included in ending inventory, and will be relieved through cost of goods over the three to six month 'turn' period between purchase and sale of the product. This 'turn' period impact resulted in gross profit margins of 50.3%, 50.7%, and 50.2% in the first, second, and third quarters of 2004, respectively. The comparable percentages in 2003 were 49.5%, 49.5%, and 49.0%, respectively. Some of this short-term benefit has been eliminated during the third quarter; however, Fastenal's ability to continue raising its prices in reaction to inbound product cost increases should allow us to retain some of the increased gross profit margin. The second factor impacting gross profit margins relates to the strength in our fastener product line in the current economy. This product line enjoys the highest gross profit margin percentage. The third impact is related to vendor incentive programs, including vendor freight allowances and rebates. The fourth impact is related to improvements in freight costs, primarily inbound. The strengthening economy and the related increase in selling activity has continued to positively impact these last two items. We expect the impact of the current economic activity to continue impacting our growth rates and the strength in our fastener business. This should allow us to maintain a portion of the improvements related to the first two factors, and should allow us to maintain most of the improvements related to vendor incentives and freight costs. Operating and administrative expenses in the first nine months grew at a rate of 16.5%, a rate less than the net sales growth rate of 23.8% discussed above. This was primarily due to the tight management of employee numbers throughout the organization in all of 2003 and in the first nine months of 2004. As discussed in our 2003 annual report, payroll and related expenses have historically represented approximately 70% of operating and administrative expenses. Effective management of this expense allows us to leverage the sales growth more effectively. We will continue to manage headcount in a similar fashion and expect to maintain most of the labor efficiency. As discussed in previous public statements, the Company's long-term goal has been to continue opening approximately 10% to 15% new stores each year (calculated on the ending number of stores in the previous year). In July 2004, the Company increased the 2004 range to 13% to 18% (calculated on the same base as above) in response to the current economic strength we are experiencing. On December 31, 2003, the Company operated 1,314 stores; therefore, the July range would be approximately 170 to 240 new stores in 2004. The Company opened 189 stores in the first nine months of 2004. The Company opened 151 new stores in 2003 (or an increase over December 31, 2002 of 12.9%) and 144 new store sites in 2002 (or an increase over December 31, 2001 of 14.0%). While the new stores continue to build the infrastructure for future growth, the first year sales are low, and the added expenses related to payroll, occupancy, and transportation costs do impact the Company's ability to leverage earnings. As disclosed in the past, it has been the Company's experience that new stores take approximately ten to twelve months to achieve profitability. The planned openings can be altered in a short time span, usually less than 60 to 90 days. In addition to the planned store expansion, we continued our 'customer service project' (or CSP) in 2004. The goals of this project include the expansion of the products stocked at each store site as well as a more consistent display theme at each of these store sites. On September 30, 2004, 1,289 (or approximately 86%) of Fastenal's stores were operating with the CSP layout and product selection. The Company's inventory grew approximately $57 million in the first nine months of 2004 (or 24.5% above the $232,884 of inventory on December 31, 2003). The growth was primarily driven by four factors. The first factor relates to the growth of the Company's sales, and the inventory necessary to support the business. The second factor relates to the aforementioned price inflation on inbound product; this resulted in approximately $10.0 million of additional inventory. The third factor relates to the combined impact of the number of store locations opened (new stores) and the number of existing stores converted to the CSP format or the expanded CSP format (converted stores). Combined, the new stores and converted stores resulted in approximately $16.0 million of additional inventory. The final factor relates to expansion of our manufacturer direct purchasing, this resulted in approximately $5.0 million of additional inventory. Additional information regarding certain Fastenal Company statistics for the current quarter is available on the Fastenal Company World Wide Web site at http://www.fastenal.com/ . The Company discloses sales and store information on a monthly basis. This information is posted at http://www.fastenal.com/ on the third business day following the end of each month. This press release contains statements that are not historical in nature and that are intended to be, and are hereby identified as, "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, including statements regarding retaining a portion of the gross profit margin improvements, continuation of the improvements in vendor incentives and inbound freight costs, increases in selling locations, the time it typically takes a new store to achieve profitability, and the timeline for altering planned store openings. A change in the inbound inventory costs, from that currently being experienced, or the inability to increase selling prices, could cause gross profit margins to decline, a change from expected buying patterns could cause vendor incentives and inbound freight to be negatively impacted, and a change in the economy, from that currently being experienced, could cause inbound inventory costs, vendor incentives, inbound freight, and the store openings to change from that expected. A discussion of other risks and uncertainties is included in the Company's 2003 annual and quarterly reports under the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations". FASTENAL COMPANY AND SUBSIDIARIES Consolidated Balance Sheets (Amounts in thousands except share information) (Unaudited) September 30, December 31, Assets 2004 2003 Current assets: Cash and cash equivalents $26,032 49,750 Marketable securities 7,583 21,142 Trade accounts receivable, net of allowance for doubtful accounts of $5,183 and $4,070, respectively 170,265 128,756 Inventories 289,910 232,884 Deferred income tax asset 4,154 4,154 Other current assets 22,073 17,446 Refundable income taxes - 64 Total current assets 520,017 454,196 Marketable securities 36,219 24,725 Property and equipment, less accumulated depreciation 185,715 169,553 Other assets, less accumulated amortization 3,202 3,069 Total assets $745,153 651,543 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $47,242 40,124 Accrued expenses 29,439 20,817 Income taxes payable 9,566 - Total current liabilities 86,247 60,941 Deferred income tax liability 13,862 13,862 Stockholders' equity: Preferred stock - - Common stock, 100,000,000 shares authorized 75,877,376 shares issued and outstanding 759 759 Additional paid-in capital 9,445 9,445 Retained earnings 629,247 561,878 Accumulated other comprehensive income 5,593 4,658 Total stockholders' equity 645,044 576,740 Total liabilities and stockholders' equity $745,153 651,543 FASTENAL COMPANY AND SUBSIDIARIES Consolidated Statements of Earnings (Amounts in thousands except earnings per share) (Unaudited) (Unaudited) Nine months ended Three months ended September 30, September 30, 2004 2003 2004 2003 Net sales $920,027 743,285 325,678 258,330 Cost of sales 456,281 376,707 162,118 131,823 Gross profit 463,746 366,578 163,560 126,507 Operating and administrative expenses 306,461 263,157 107,815 89,082 Loss on sale of property and equipment 564 192 52 38 Operating income 156,721 103,229 55,693 37,387 Interest income 892 870 361 314 Earnings before income taxes 157,613 104,099 56,054 37,701 Income tax expense 59,893 39,869 21,313 14,439 Net earnings 97,720 64,230 34,741 23,262 Basic and diluted net earnings per share $1.29 0.85 0.46 0.31 Basic weighted average shares outstanding 75,877 75,877 75,877 75,877 Diluted weighted average shares outstanding 75,981 75,877 76,009 75,877 FASTENAL COMPANY AND SUBSIDIARIES Consolidated Statements of Cash Flows (Amounts in thousands) (Unaudited) Nine months ended September 30, 2004 2003 Cash flows from operating activities: Net earnings $97,720 64,230 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation of property and equipment 17,304 15,107 Loss on sale of property and equipment 564 192 Bad debt expense 5,022 4,449 Amortization of non-compete agreement 50 50 Changes in operating assets and liabilities: Trade accounts receivable (46,531) (36,760) Inventories (57,026) (2,548) Other current assets (4,627) (1,384) Accounts payable 7,118 3,848 Accrued expenses 8,622 931 Income taxes, net 9,630 8,964 Other 878 4,804 Net cash provided by operating activities 38,724 61,883 Cash flows from investing activities: Purchase of property and equipment (37,994) (34,010) Proceeds from sale of property and equipment 3,964 3,081 Net decrease in marketable securities 2,065 14,215 Increase in other assets (183) (165) Net cash used in investing activities (32,148) (16,879) Cash flows from financing activities: Payment of dividends (30,351) (4,553) Net cash used in financing activities (30,351) (4,553) Effect of exchange rate changes on cash 57 380 Net (decrease) increase in cash and cash equivalents (23,718) 40,831 Cash and cash equivalents at beginning of period 49,750 14,296 Cash and cash equivalents at end of period $26,032 55,127 Supplemental disclosure of cash flow information: Cash paid during each period for: Income taxes $50,263 30,905 DATASOURCE: Fastenal Company CONTACT: Dan Florness, EVP-CFO of Fastenal Company, +1-507-453-8211 Web site: http://www.fastenal.com/

Copyright