<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1999, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________________ to ______________________
Commission file number 0-16125
FASTENAL COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0948415
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2001 Theurer Boulevard
Winona, Minnesota 55987
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(507) 454-5374
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(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.
Class Outstanding at April 15, 1999
- --------------------------------------------------------------------------------
Common Stock, $.01 par value 37,938,688
<PAGE>
FASTENAL COMPANY
INDEX
Page No.
--------
Part I Financial Information:
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 1
Consolidated Statements of Earnings for the three months
ended March 31, 1999 and 1998 2
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Management's discussion and analysis of financial condition
and results of operations 5-9
Quantitative and qualitative disclosures about market risk 10
Part II Other Information:
Exhibits and reports on Form 8-K 10
<PAGE>
-1-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,473,000 2,086,000
Trade accounts receivable, net of allowance for doubtful
accounts of $890,000 and $740,000, respectively 80,679,000 68,498,000
Inventories 94,051,000 93,734,000
Deferred income tax asset 2,312,000 2,312,000
Other current assets 6,060,000 6,637,000
- ------------------------------------------------------------------------------------------------
Total current assets 194,575,000 173,267,000
Marketable securities 215,000 265,000
Property and equipment, less accumulated depreciation 76,581,000 74,212,000
Other assets, less accumulated amortization 3,457,000 3,490,000
- ------------------------------------------------------------------------------------------------
Total assets $ 274,828,000 251,234,000
================================================================================================
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 20,996,000 17,411,000
Notes payable 0 4,055,000
Accrued expenses 11,013,000 8,999,000
Income taxes payable 8,387,000 343,000
- ------------------------------------------------------------------------------------------------
Total current liabilities 40,396,000 30,808,000
- ------------------------------------------------------------------------------------------------
Deferred income tax liability 2,780,000 2,780,000
- ------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock 0 0
Common stock, 50,000,000 shares authorized
37,938,688 shares issued and outstanding 379,000 379,000
Additional paid-in capital 4,424,000 4,424,000
Retained earnings 227,514,000 213,615,000
Accumulated other comprehensive loss (665,000) (772,000)
- ------------------------------------------------------------------------------------------------
Total stockholders' equity 231,652,000 217,646,000
- ------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 274,828,000 251,234,000
================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
-2-
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
Three months ended
March 31,
-----------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Net sales $ 140,634,000 116,707,000
Cost of sales 66,845,000 55,112,000
- --------------------------------------------------------------------------------
Gross profit 73,789,000 61,595,000
Operating and administrative
expenses 48,668,000 41,221,000
- --------------------------------------------------------------------------------
Operating income 25,121,000 20,374,000
Other income (expense):
Interest income 0 3,000
Interest expense (57,000) (299,000)
Gain on disposal of property
and equipment 14,000 72,000
- --------------------------------------------------------------------------------
Total other income (expense) (43,000) (224,000)
- --------------------------------------------------------------------------------
Earnings before
income taxes 25,078,000 20,150,000
Income tax expense 9,663,000 7,764,000
- --------------------------------------------------------------------------------
Net earnings $ 15,415,000 12,386,000
================================================================================
Basic and diluted earnings per share $ .41 .33
================================================================================
Weighted average shares
outstanding 37,938,688 37,938,688
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
-3-
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 15,415,000 12,386,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation of property and equipment 3,051,000 2,305,000
Gain on disposal of property and equipment (14,000) (72,000)
Amortization of goodwill and non-compete 55,000 55,000
Changes in operating assets and liabilities:
Trade accounts receivable (12,181,000) (9,629,000)
Inventories (317,000) (2,714,000)
Other current assets 577,000 (1,056,000)
Accounts payable 3,585,000 376,000
Accrued expenses 2,014,000 1,905,000
Income taxes payable 8,044,000 6,563,000
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 20,229,000 10,119,000
- ----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions of property and equipment, net (7,304,000) (6,481,000)
Proceeds from sale of property and equipment 1,898,000 2,127,000
Translation adjustment 107,000 11,000
Decrease in marketable securities 50,000 0
Increase in other assets (22,000) (44,000)
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,271,000) (4,387,000)
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net decrease in notes payable (4,055,000) (4,941,000)
Payment of dividends (1,516,000) (759,000)
- ----------------------------------------------------------------------------------------------------
Net cash used in
financing activities (5,571,000) (5,700,000)
- ----------------------------------------------------------------------------------------------------
Net increase in cash and
cash equivalents 9,387,000 32,000
Cash and cash equivalents at beginning of period 2,086,000 386,000
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 11,473,000 418,000
====================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during each period for:
Income taxes $ 986,000 1,201,000
====================================================================================================
Interest $ 7,000 290,000
====================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
-4-
FASTENAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Fastenal Company
and subsidiaries (collectively referred to as the Company) have been prepared in
accordance with generally accepted accounting principles for interim financial
information. They do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements.
However, there has been no material change in the information disclosed in the
notes to consolidated financial statements included in the Company's
consolidated financial statements as of and for the year ended December 31,
1998. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included.
<PAGE>
-5-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the accompanying consolidated financial
statements.
First three months of 1999 vs. 1998
Net sales for the first three months grew from $116,707,000 in 1998 to
$140,634,000 in 1999, an increase of 20.5%. The increase came primarily from
higher unit sales as unit prices experienced some deflation in certain products.
Higher unit sales came from increases in sales at existing store sites. The
increases in sales at existing store sites are due primarily to increases in
market share and, to a lesser extent, the introduction of new product lines at
the existing sites. Sites opened in 1997 or earlier had average sales increases
of 12.8%. The remainder of the 20.5% sales growth came from store sites opened
in 1998 and during the first three months of 1999. Seventy-seven new store sites
were added from April 1998 through March 1999.
During the first three months of 1999, 1 new site was opened; this site opened
as a Fastenal(R) store. The total sites at the end of the first quarter were
767, which consisted of 708 Fastenal(R) stores and 59 satellite stores.
The following table indicates product lines added to the original Fastenal(R)
product line, the year of introduction, and the approximate percentage of total
net sales related to each product line during the three months ended March 31,
1999 and 1998:
Product line Introduced 1999 1998
-----------------------------------------------------------------
Tools 1993 12.4% 10.9%
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Cutting tools 1996 5.1% 4.8%
-----------------------------------------------------------------
Hydraulics & pneumatics 1996 4.0% 3.3%
-----------------------------------------------------------------
Material handling 1996 5.9% 4.9%
-----------------------------------------------------------------
Janitorial supplies 1996 1.8% 1.3%
-----------------------------------------------------------------
Electrical supplies 1997 1.1% *
-----------------------------------------------------------------
Welding supplies 1997 * *
-----------------------------------------------------------------
* Less than 1% of net sales
<PAGE>
-6-
ITEM 2. (continued)
Net earnings for the first three months grew from $12,386,000 in 1998 to
$15,415,000 in 1999, an increase of 24.5%. Net earnings increased at a higher
rate than net sales primarily because operating and administrative expenses
increased at an 18.1% rate between the comparable periods, a rate lower than the
rate of increase in net sales. Payroll costs, the largest component of operating
and administrative expenses, increased 16.3% over the comparable period. The
Company increased its site personnel from 3,025 on December 31, 1998 to 3,204 on
March 31, 1999, an increase of 5.9%.
The first quarter of 1999 showed a continuation of the lower sales growth rate
experienced in the second half of 1998. This weakness relates to a slowdown in
the manufacturing activity of customers we sell to in the U.S. and Canada. The
weakness also reflects the impact of some deflation in the prices received for
the sale of certain products.
Suppliers of product from the Far East have indicated price increases of about
10% will begin around May 1, 1999. The price increases relate to increases in
both material and shipping costs. During late 1997 and all of 1998 the Company
experienced a reduction in the prices paid for product coming from the Far East.
These lower prices resulted in the deflationary impact on prices received from
customers discussed above.
As was discussed in the Company's Form 10-Q for the quarter ended September 30,
1998, the Company estimates that it will open approximately 50 store sites in
1999. The majority of these openings should occur in the second, third and
fourth quarters of 1999. The Company will continue to modify the planned
openings throughout the year based on current results and the strength of the
industrial marketplace.
Liquidity and Capital Resources
The higher level of sales during the three-month period resulted in the growth
of trade accounts receivable and inventories. Property and equipment increased
because of the expansion of two of the Company's distribution centers, the
purchase of software and hardware for the Company's information processing, the
addition of certain pickup trucks and, to a lesser extent, additions for
manufacturing and warehouse equipment. Disposals of property and equipment
related to the planned disposition of certain pickup trucks and semi-tractors
and trailers in the normal course. Cash requirements for these asset changes
were satisfied from net earnings and the proceeds of asset disposals. As of
March 31, 1999, the Company had no material outstanding commitments for capital
expenditures.
<PAGE>
-7-
ITEM 2. (continued)
Year 2000 Discussion
State of Readiness - The Company's information system can be broken down into
four distinct components: (1) point-of-sale (POS) system, (2) enterprise-wide
information system, (3) warehouse management system, and (4) other
systems/equipment. The state of readiness of each of these is as follows:
Beginning early in 1996, the Company began a rewrite of its point-of-sale system
(POS) which was, for the most part, completed in 1997. Testing began in 1997 and
continued into 1998. As of March 31, 1999 the Company had approximately 250
stores operating with the new POS software. By the end of 1999 the Company
expects to have all but approximately 100 stores converted to the new POS
software. The Company has been modifying its legacy POS system throughout 1998
and the first quarter of 1999 and plans to have it Year 2000 ready in the first
half of 1999.
Beginning early in 1997, the Company began to investigate new enterprise-wide
information systems to replace its legacy enterprise-wide information system. In
the second quarter of 1998 the Company finalized its selection of a Year 2000
ready enterprise-wide software package and hired an independent consulting firm
to assist in the design and implementation of the new software package. Although
the Company has significant depth within its own information system personnel,
the outside firm was hired to provide additional resources related to the design
and implementation of the new system and, more specifically, to assist in the
design, programming, and implementation of the key interfaces between the new
enterprise system, the POS system and the warehouse management systems. The
Company plans to implement this system in the third quarter of 1999 for its
material planning, inventory management, and financial management. The general
ledger system went on-line January 1, 1999. The Company's plan related to
payroll processing, which is currently performed on an in-house developed
system, is to implement this module of the new enterprise software in 2000. The
Company has been modifying its current payroll system throughout 1998 and the
first quarter of 1999 and plans to have it Year 2000 ready in the first half of
1999.
Beginning early in 1998, the Company began to investigate new warehouse
management systems to replace its legacy warehouse management system. At the
same time, the Company began identifying Year 2000 issues within its current
warehouse management system. The warehouse management system has relatively
little date sensitive information as most of the data is limited to warehouse
locations, part numbers, quantities, and other warehouse related information.
The Company does not plan to replace the warehouse management system by the year
2000. The Company began rewriting portions of the software in 1998 and plans to
have it Year 2000 ready in the first half of 1999.
Beginning early in 1998, the Company began to investigate the Year 2000
readiness of other systems/equipment. These consist primarily of technology in
the Company's buildings, the Company's distribution, manufacturing, and
transportation equipment, and in the Company's other infrastructure. The
Company's Year 2000 Project Team is currently conducting this investigation. The
Company believes, due to the age of the equipment involved, that the remediation
efforts will be limited and that they will be completed in the first half of
1999.
<PAGE>
-8-
ITEM 2. (continued)
In 1998 the Company's Year 2000 Project Team also began an ongoing process of
evaluating suppliers regarding their plans to remediate Year 2000 issues. The
Company has grouped its suppliers by the product they supply, as well as if they
are a domestic or foreign supplier. The Company has chosen to mitigate its
supplier risk by having multiple vendors available, when possible, for the
various products supplied. No single supplier accounted for more than 5% of the
Company's purchases in 1998 or in the first quarter of 1999.
In addition to suppliers, the Company also relies upon governmental agencies,
utility companies, telecommunication service companies, financial institutions
and other service providers outside of the Company's control. There can be no
assurance that such governmental agencies or other third parties will not suffer
a Year 2000 business disruption that could have a material adverse effect on the
Company's business, financial condition, or operating results.
Costs to Address the Year 2000 Issue - The total cost for hardware, software,
and implementation related to the POS system is estimated at $8.0 million. The
total cost for hardware, software, and implementation related to the
enterprise-wide information system is estimated at $9.0 million. The Company has
approximately $4.0 million yet to spend on its new POS system and approximately
$3.7 million yet to spend on the new enterprise-wide information system. The
Company does not separately track internal costs incurred for the Year 2000
issue. The internal costs primarily consist of payroll and related expenses.
The costs included above represent the total estimated costs related to the new
POS and enterprise-wide systems. The Company believes these costs are not, for
the most part, directly related to Year 2000 issues; but rather, are new systems
needed in the normal course due to the rapid growth the Company has experienced
over the last several years.
The Company does not have an estimate on Year 2000 remediation costs for its
warehouse management system or its other systems/equipment, but the Company
believes that such costs will not have a material adverse effect on the
Company's business, financial condition or operating results.
Management anticipates funding the costs to address the Year 2000 issue with
cash generated from operations, from borrowing capacity, and from available
cash, cash equivalents, and marketable securities.
Risks Presented By the Year 2000 Issue - There may be unanticipated delays in
completing the Company's planned Year 2000 remediation and, as the process of
inventorying the systems proceeds, the Company may identify additional systems
that present a Year 2000 risk. In addition, if any third parties who provide
goods or services essential to the Company's business activities fail to
appropriately address their Year 2000 issues, such failure could have a material
adverse effect on the Company's business, financial condition, or operating
results. For example, a Year 2000 related disruption on the part of the
financial institutions which process the Company's cash transactions could have
a material adverse effect on the Company's business, financial condition or
operating results.
<PAGE>
-9-
ITEM 2. (continued)
Contingency Plans - The Company's Year 2000 Project Team's initiatives include
the development of contingency plans in the event the Company has not completed
all of its remediation plans in a timely manner. In addition, the Year 2000
Project Team is in the process of developing contingency plans in the event that
any third parties who provide goods or services essential to the Company's
business fail to appropriately address their Year 2000 issues. The Year 2000
Project Team expects to conclude the development of these contingency plans by
the end of the second quarter of 1999. The Year 2000 Project Team consists of
personnel from management, information systems/technology and legal areas.
Certain Risks and Uncertainties - This discussion contains statements that are
not historical in nature and that are intended to be, and are hereby identified
as, "forward-looking statements" under the Private Securities Litigation Reform
Act of 1995 including statements regarding planned store openings, planned
technology conversions and remediation of Year 2000 issues. The following
factors are among those that could cause the Company's actual results to differ
materially from those predicted in such forward-looking statements: (i) a
downturn in the economy could impact sales at existing stores, (ii) a change,
from that projected, in the number of smaller communities able to support future
store sites could impact the rate of new store openings, (iii) the ability of
the Company to develop product expertise at the store level, to identify future
product lines that complement existing product lines, to transport and store
certain hazardous products and to otherwise integrate new product lines into the
Company's existing stores and distribution network could impact sales and
margins, (iv) the ability of the Company to successfully attract and retain
qualified personnel to staff the Company's smaller community stores could impact
sales at existing stores and the rate of new store openings, (v) changes in
governmental regulations related to product quality or product source
traceability could impact the cost to the Company of regulatory compliance, (vi)
inclement weather could impact the Company's distribution network, (vii) foreign
currency fluctuations or changes in trade relations could impact the ability of
the Company to procure products overseas at competitive prices and the Company's
foreign sales, (viii) disruptions caused by the implementation of the Company's
new management information systems infrastructure could impact sales, (ix)
unforeseen disruptions associated with "Year 2000 Computer Problems" could
impact sales and the Company's ability to order and pay for product, and (x)
changes in the rate of new store openings could impact expenditures for
computers and other capital equipment.
<PAGE>
-10-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks from changes in interest rates
and foreign currency exchange rates. Changes in these factors cause fluctuations
in the Company's earnings and cash flows. The Company evaluates and manages
exposure to these market risks as follows:
Interest Rates - The Company has a $25 million line of credit of which $0 was
outstanding at March 31, 1999. The line bears interest at .9% over the LIBOR
rate.
Foreign Currency Exchange Rates - Foreign currency fluctuations can affect the
Company's net investments and earnings denominated in foreign currencies. The
Company's primary exchange rate exposure is with the Canadian dollar against the
U.S. dollar. The Company's estimated net earnings exposure for foreign currency
exchange rates was not material at March 31, 1999.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Restated Articles of Incorporation of Fastenal Company, as amended
(incorporated by reference to Exhibit 3.1 to Fastenal Company's Form
10-Q for the quarter ended September 30, 1993)
3.2 Restated By-Laws of Fastenal Company (incorporated by reference to
Exhibit 3.2 to Registration Statement No. 33-14923)
27 Financial Data Schedule
(b) Reports on Form 8-K:
No report on Form 8-K was filed by Fastenal Company during the quarter
ended March 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FASTENAL COMPANY
/s/ Robert A. Kierlin
--------------------------------
(Robert A. Kierlin, President)
(Duly Authorized Officer)
Date April 16, 1999 /s/ Daniel L. Florness
-------------- --------------------------------
(Daniel L. Florness, Treasurer)
(Principal Financial Officer)
<PAGE>
INDEX TO EXHIBITS
3.1 Restated Articles of Incorporation of Fastenal Company, as amended
(incorporated by reference to Exhibit 3.1 to Fastenal Company's Form
10-Q for the quarter ended September 30, 1993).
3.2 Restated By-Laws of Fastenal Company (incorporated by reference to
Exhibit 3.2 to Registration Statement No. 33-14923).
27 Financial Data Schedule........................Electronically Filed
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF EARNINGS OF FASTENAL
COMPANY AND SUBSIDIARIES AS OF, AND FOR THE THREE MONTHS ENDED, MARCH 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,473,000
<SECURITIES> 0<F1>
<RECEIVABLES> 81,569,000
<ALLOWANCES> 890,000
<INVENTORY> 94,051,000
<CURRENT-ASSETS> 194,575,000
<PP&E> 115,930,000
<DEPRECIATION> 39,349,000
<TOTAL-ASSETS> 274,828,000
<CURRENT-LIABILITIES> 40,396,000
<BONDS> 0
0
0
<COMMON> 379,000
<OTHER-SE> 231,273,000
<TOTAL-LIABILITY-AND-EQUITY> 274,828,000
<SALES> 140,634,000
<TOTAL-REVENUES> 140,634,000
<CGS> 66,845,000
<TOTAL-COSTS> 66,845,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 813,000
<INTEREST-EXPENSE> 57,000
<INCOME-PRETAX> 25,078,000
<INCOME-TAX> 9,663,000
<INCOME-CONTINUING> 15,415,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,415,000
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
<FN>
<F1>Marketable securities in the amount of $215,000 have been classified as
non-current assets on the Consolidated Balance Sheet of Fastenal Company and
Subsidiaries as of March 31, 1999.
</FN>
</TABLE>
