Back to GetFilings.com



Table of Contents

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, 2004, 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


(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2001 Theurer Boulevard

Winona, Minnesota


 

55987-1500


(Address of principal executive offices)   (Zip Code)

 

(507) 454-5374


(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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    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 27, 2004


Common Stock, $.01 par value   75,877,376


Table of Contents

FASTENAL COMPANY

 

INDEX

 

     Page No.

Part I Financial Information:

    

Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003

   1

Consolidated Statements of Earnings for the three months ended March 31, 2004 and 2003

   2

Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003

   3

Notes to Consolidated Financial Statements

   4-7

Management’s discussion and analysis of financial condition and results of operations

   8-14

Quantitative and qualitative disclosures about market risk

   15

Controls and procedures

   15

Part II Other Information:

    

Exhibits and reports on Form 8-K

   16


Table of Contents

– 1 –

 

PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

FASTENAL COMPANY AND SUBSIDIARIES

 

Consolidated Balance sheets

(Amounts in thousands except share information)

 

Assets


  

(Unaudited)

March 31,
2004


  

December 31,
2003


Current assets:

           

Cash and cash equivalents

   $ 53,088    49,750

Marketable securities

     22,602    21,142

Trade accounts receivable, net of allowance for doubtful accounts of $4,302 and $4,070, respectively

     151,192    128,756

Inventories

     240,929    232,884

Deferred income tax asset

     4,154    4,154

Other current assets

     14,714    17,446

Refundable income taxes

     -    64
    

  

Total current assets

     486,679    454,196

Marketable securities

     28,580    24,725

Property and equipment, less accumulated depreciation

     171,853    169,553

Other assets, less accumulated amortization

     3,115    3,069
    

  

Total assets

   $ 690,227    651,543
    

  

Liabilities and Stockholders’ Equity


           

Current liabilities:

           

Accounts payable

   $ 42,878    40,124

Accrued expenses

     24,501    20,817

Income taxes payable

     15,979    -
    

  

Total current liabilities

     83,358    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

     578,643    561,878

Accumulated other comprehensive income

     4,160    4,658
    

  

Total stockholders’ equity

     593,007    576,740
    

  

Total liabilities and stockholders’ equity

   $ 690,227    651,543
    

  

 

The accompanying notes are an integral part of the consolidated financial statements.

 


Table of Contents

– 2 –

 

FASTENAL COMPANY AND SUBSIDIARIES

 

Consolidated Statements of Earnings

(Amounts in thousands except earnings per share)

 

 

 

    

(Unaudited)

Three months ended
March 31,


     2004

   2003

Net sales

   $ 284,206    235,843

Cost of sales

     141,227    119,146
    

  

Gross profit

     142,979    116,697

Operating and administrative expenses

     97,453    85,969

Loss on sale of property and equipment

     396    131
    

  

Operating income

     45,130    30,597

Interest income

     248    263
    

  

Earnings before income taxes

     45,378    30,860

Income tax expense

     17,231    11,819
    

  

Net earnings

     28,147    19,041
    

  

Basic and diluted net earnings per share

   $ 0.37    0.25
    

  

Basic weighted average shares outstanding

     75,877    75,877
    

  

Diluted weighted average shares outstanding

     75,965    75,877
    

  

 

The accompanying notes are an integral part of the consolidated financial statements.

 


Table of Contents

– 3 –

 

FASTENAL COMPANY AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

(Amounts in thousands)

 

    

(Unaudited)

Three months ended

March 31,


 
     2004

    2003

 

Cash flows from operating activities:

              

Net earnings

   $ 28,147     19,041  

Adjustments to reconcile net earnings to net cash provided by operating activities:

              

Depreciation of property and equipment

     5,533     4,874  

Loss on sale of property and equipment

     396     131  

Bad debt expense

     1,603     1,404  

Amortization of non-compete agreement

     17     17  

Changes in operating assets and liabilities:

              

Trade accounts receivable

     (24,039 )   (15,893 )

Inventories

     (8,045 )   (15,420 )

Other current assets

     2,732     734  

Accounts payable

     2,754     (2,104 )

Accrued expenses

     3,684     3,493  

Income taxes, net

     16,043     10,573  

Other

     (476 )   2,114  
    


 

Net cash provided by operating activities

     28,349     8,964  
    


 

Cash flows from investing activities:

              

Purchase of property and equipment

     (10,147 )   (15,064 )

Proceeds from sale of property and equipment

     1,918     568  

Net (increase) decrease in marketable securities

     (5,315 )   14,518  

Increase in other assets

     (63 )   (96 )
    


 

Net cash used in investing activities

     (13,607 )   (74 )
    


 

Cash flows from financing activities:

              

Payment of dividends

     (11,382 )   (4,553 )
    


 

Net cash used in financing activities

     (11,382 )   (4,553 )
    


 

Effect of exchange rate changes on cash

     (22 )   168  
    


 

Net increase in cash and cash equivalents

     3,338     4,505  

Cash and cash equivalents at beginning of period

     49,750     14,296  
    


 

Cash and cash equivalents at end of period

   $ 53,088     18,801  
    


 

Supplemental disclosure of cash flow information:

              

Cash paid during each period for:

              

Income taxes

   $ 1,188     1,246  
    


 

 

The accompanying notes are an integral part of the consolidated financial statements.

 


Table of Contents

– 4 –

 

FASTENAL COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except share and per share information)

 

March 31, 2004 and 2003

 

(Unaudited)

 

(1) Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Fastenal Company and subsidiaries (collectively referred to as the Company or Fastenal) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, there has been no material change in the information disclosed in the notes to consolidated financial statements included in the Company’s consolidated financial statements as of and for the year ended December 31, 2003. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

 

(2) Stockholders’ Equity and Stock-Based Compensation

 

The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation —Transition and Disclosure. SFAS No. 148 amends the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation. As of March 31, 2004, the Company has two stock option employee compensation plans.

 

Certain employees of the Company have been granted options to purchase common stock of the Company under the Robert A. Kierlin Stock Option Plan (RAK Option Plan). The RAK Option Plan was sponsored by the Company’s founder and does not involve a commitment by the Company. Mr. Kierlin granted options under the RAK Option Plan in 2002, 2001, and 2000. The options issued in 2002 will become exercisable on June 1, 2004 and will expire on November 30, 2004. The options issued in 2001 and 2000, not previously exercised, expired on December 31, 2003 and 2002, respectively.

 

On April 15, 2003, the shareholders of the Company approved the Fastenal Company Stock Option Plan (Fastenal Option Plan). The aggregate number of authorized and unissued shares of common stock of the Company for which options may be granted and which may be purchased upon the exercise of options granted under the Fastenal Option Plan was set at 3,793,865. The Company granted options to purchase 465,075 shares of common stock of the Company under the Fastenal Option Plan in May 2003. These options will become exercisable on June 1, 2006 and will expire on November 30, 2006. The exercise price for the granted options is $40 per share.

 

(Continued)


Table of Contents

– 5 –

 

FASTENAL COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except share and per share information)

 

March 31, 2004 and 2003

 

(Unaudited)

 

The following table presents a reconciliation of the denominators used in the computation of basic and diluted earnings per share related to the Fastenal Option Plan:

 

    

Three months ended

March 31,


     2004

   2003

Basic—weighted shares outstanding

   75,877    75,877

Weighted shares assumed upon exercise of stock options

   88    —  
    
  

Diluted—weighted shares outstanding

   75,965    75,877
    
  

 

The table above reflects dilution from the potentially dilutive option securities granted in May 2003 as the average market price exceeded the exercise price during the relevant period during which options were outstanding.

 

The Company accounts for both the RAK Option Plan and the Fastenal Option Plan under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net earnings as all options to purchase common stock of the Company granted under these two plans had an exercise price equal to, or greater than, the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 for all awards:

 

     Three months
ended March 31,


     2004

   2003

Reported net earnings

   $ 28,147    19,041

Stock-based employee compensation expense, net of related tax effects

     358    479
    

  

Pro forma net earnings

   $ 27,789    18,562
    

  

Reported basic and diluted net earnings per share

   $ .37    .25

Pro forma basic and diluted net earnings per share

   $ .37    .24
    

  

 

 

(Continued)


Table of Contents

– 6 –

 

FASTENAL COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except share and per share information)

 

March 31, 2004 and 2003

 

(Unaudited)

 

The fair value of each stock option is estimated as of the grant date using the Black-Scholes option-pricing model. The assumptions used and the estimated fair values are as follows:

 

Year of grant


   Risk-free
interest
rate


    Expected life
of option in
years


   Expected
dividend
yield


    Expected
stock
volatility


    Estimated
fair value of
stock option


2003

   4.5 %   3.42    0.2 %   30.33 %   $ 7.56

2002

   4.5 %   2.66    0.2 %   27.03 %   $ 6.65

2001

   5.0 %   2.75    0.2 %   37.66 %   $ 8.07
    

 
  

 

 

 

(3) Comprehensive Income

 

Comprehensive income and the components of other comprehensive income were as follows:

 

    

Three months ended

March 31,


     2004

    2003

Net earnings

   $ 28,147     19,041

Translation adjustment

     (498 )   2,282
    


 

Total comprehensive income

   $ 27,649     21,323
    


 

 

(4) Operating Leases with Guarantees

 

The Company leases certain pick-up trucks under operating leases. These leases typically have a 72 month term and include an early buy out clause the Company generally exercises, thereby giving the leases an effective term of 12-15 months. Certain operating leases for vehicles contain residual value guarantee provisions, which could 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 at lease expiration, of the leases that contain residual value guarantees, is approximately $5,780. We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote.

 

(Continued)


Table of Contents

– 7 –

 

FASTENAL COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except share and per share information)

 

March 31, 2004 and 2003

 

(Unaudited)

 

(5) Recent Accounting Pronouncements

 

In 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. FIN 46 is an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. The consolidation requirements of FIN 46 are effective for the first reporting period ending after December 15, 2003 for entities considered to be special-purpose entities. The consolidation requirements for all other entities subject to FIN 46 are effective for financial statements of the first reporting period ending after March 15, 2004. We do not have any ownership or other interest in any variable interest entities as of March 31, 2004. We will apply the consolidation requirements of FIN 46 in future periods should an interest in a variable interest entity be acquired.

 

(Continued)


Table of Contents

– 8 –

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is management’s discussion and analysis of certain significant factors that have affected the Company’s financial position and operating results during the periods included in the accompanying consolidated financial statements. (Dollar amounts are in thousands.)

 

The following discussion refers to the term daily sales. Daily sales are defined as sales for a period of time divided by the number of days in that period of time.

 

Business Overview—Fastenal is a North American leader in the wholesale distribution of industrial and construction supplies. Most of the Company’s customers are in the construction and manufacturing markets. The construction market includes general, electrical, plumbing, sheet metal, and road contractors. The manufacturing market includes both original equipment manufactures (OEM) and maintenance and repair operations (MRO). Other users of the Company’s product include farmers, truckers, railroads, mining companies, federal, state, and local governmental entities, schools, and certain retail trades. Geographically, our customers are primarily located in North America.

 

Financial Overview—Over the past three years the global manufacturing recession negatively impacted the Company’s performance, and that of the industry as a whole. This negative impact of the economy has reversed itself since July 2003. The impact of the economy is best reflected in the growth performance of our stores greater than five years old. These stores are more cyclical due to the increased market share they enjoy in their local markets. The net sales growth rate of stores more than five years old was as follows:

 

     Three months ended
March 31,


 
     2004     2003  


Growth percentage

   11.2 %   4.1 %


 

Our stores that are two to five years old are also impacted by the economy, but to a lesser degree. The net sales growth rate of our stores that are two to five years old was as follows:

 

     Three months ended
March 31,


 
     2004     2003  


Growth percentage

   24.9 %   23.1 %


 

Combined these two groups represent a consistent “same store” view of our business. These stores, which are more than two years old, had net sales growth rates as follows:

 

     Three months ended
March 31,


 
     2004     2003  


Growth percentage

   13.6 %   6.7 %


 

(Continued)


Table of Contents

– 9 –

 

ITEM 2. (Continued)

 

Net sales—Net sales were as follows:

     Three months ended
March 31,


     2004

   2003


Net sales

   $284,206    235,843

Percentage change

   20.5%     

 

The increases in net sales in both periods came primarily from higher unit sales, the benefit of one additional selling day (with respect to 2004 only), and to a lesser degree, increases in prices. Price increases, due to inflation in steel pricing, added approximately 2% to sales during the quarter. The higher unit sales resulted from increases in sales at older store sites (discussed earlier) and the opening of new store sites in 2003 and 2004.

 

The mix of sales from the original Fastenal® product line (which consists primarily of threaded fasteners) and from the newer product lines was as follows:

Product line    Three months ended
March 31,


 
     2004

    2003

 

 

Fastener product line

   55.0 %   55.2 %

Newer product lines

   45.0 %   44.8 %

 

 

Gross profit margins—Gross profit margins were:

     Three months ended
March 31,


 
     2004

    2003

 

 

Gross profit margins

   50.3 %   49.5 %

 

 

The improvement in gross profit margins resulted primarily from three factors. The largest factor 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% of additional sales dollars in the first quarter of 2004. To date, the price increases relate primarily to CSP (defined below) products, to changes in our wholesale (or list) pricing, and, to a lesser degree, to 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 impact cost of sales over the three to six month ‘turn’ period between purchase and sale of the product. Most of this short-term benefit will be eliminated as the year progresses; however, Fastenal’s ability to continue raising its prices in reaction to inbound cost increases should allow us to retain some of the increased gross profit margin.

 

(Continued)


Table of Contents

– 10 –

 

ITEM 2. (Continued)

 

The second factor impacting gross profit margins relates to vendor incentive programs, including vendor freight allowances and rebates. The third factor impacting gross profit margins relates to improvements in freight costs, primarily inbound. The strengthening economy and the related increase in selling activity positively impacted these last two items. We expect the current economic activity, and its impact on our sales growth rates, will continue to maintain the improvement related to vendor incentives and freight costs.

 

Operating and administrative expenses—Operating and administrative expenses, as a percentage of net sales, were:

    

Three months
ended

March 31,


 
     2004

    2003

 

 

Operating and administrative expenses

   34.3 %   36.5 %

 

 

The change in the percent resulted primarily from tight management of employee numbers throughout the organization. There were 5,014 store employees as of March 31, 2004, an increase of 3.7% from December 31, 2003 and an increase of 3.4% over March 31, 2003. As was previously discussed in our 2003 annual report, payroll and related expenses represent approximately 70% of operating and administrative expenses. Effective management of this expense allows us to leverage the sales growth more effectively.

 

Net earnings—Net earnings and net earnings per share were as follows:

 

    

Three months
ended

March 31,


     2004

    2003


Net earnings

   $ 28,147     19,041

Percentage change

     47.8 %    

Basic and diluted net earnings per share

   $ .37     .25

Percentage change

     48.0 %    

 

The Company increased its net earnings in the first quarter primarily due to the aforementioned: (1) growth in net sales, (2) improvements in gross profit margins and (2) the tight management of employee numbers throughout the organization which caused operating and administrative expenses to grow at a rate less that the growth in net sales.

 

(Continued)


Table of Contents

– 11 –

 

ITEM 2. (Continued)

 

General Discussion—The twelve months of 2001, 2002, and 2003 and the first three 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 %                                                      

 

The twelve months of 2001, 2002, and 2003 and the first three 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 %                                                      

 

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 included the first table above because we believe it provides a consistent presentation of the growth rates of Fastenal’s organic branch-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 March 2004 time frame represents some stabilization and 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 March 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 earlier.

 

 

(Continued)


Table of Contents

– 12 –

 

ITEM 2. (Continued)

 

As discussed in previous public statements, the Company’s goal is to continue opening approximately 10% to 15% new stores each year (calculated on the ending number of stores in the previous year). On December 31, 2003, the Company operated 1,314 stores; therefore, as previously announced, we expect to open approximately 135 to 200 new stores in 2004. The Company would consider raising that number if the economy continues to improve as we have seen over the last nine months. 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.

 

During 2002, Fastenal began its Customer Service Project (CSP). This project centers on stocking a broader inventory in each of our stores and displaying it so our customers can service themselves. The impact of this project on our inventory will vary from store to store. The inventory stocked under a CSP format consists of a core stocking level of approximately $55 per location. Existing stores stock some, but not all, of the inventory stocked under the CSP format. The existing stores converted have experienced increases in their inventory levels as they fill out the product selection. New stores, prior to the CSP, opened with approximately $25 of inventory per location, and would grow this amount to approximately $50 after operating for twelve months. On March 31, 2004, Fastenal had approximately 995 stores operating under this format. Fastenal currently intends to convert stores at the rate of approximately 20 to 40 stores per month through 2004.

 

Critical Accounting Policies—A discussion of the critical accounting policies related to accounting estimates is contained in the Company’s 2003 Annual Report.

 

 

(Continued)


Table of Contents

– 13 –

 

ITEM 2. (Continued)

 

Liquidity and Capital Resources—

 

Cash flow activity was as follows:

 

    

Three months ended

March 31,


     2004

   2003

Net cash provided by operating activities

   $ 28,349    8,964

Net cash used in investing activities

     13,607    74

Net cash used in financing activities

     11,382    4,553
    

  

 

Net cash provided by operating activities increased due to the growth in net earnings, the reduced growth in inventories, the growth in accounts payable, and the growth in income taxes payable. The latter is a first quarter item that typically reverses in the second quarter when two estimated tax payments become due. The decrease in inventory growth from 2003 to 2004 was primarily related to the aforementioned CSP initiative. The cash flow impacts of these items were partially offset due to the increase in trade accounts receivable. The growth in trade accounts was driven by the growth in sales and by the two additional business days in March 2004 versus March 2003.

 

Net cash used in investing activities increased primarily due to changes in marketable securities, with a partial offset from the decrease in property and equipment expenditures.

 

Property and equipment expenditures in 2004 consisted of: (1) the purchase of software and hardware for Fastenal’s information processing systems, (2) the addition of certain pickup trucks, (3) the renovations of the North Carolina distribution center (a relocation of the existing distribution center which will became operational in the future), (4) the purchase of signage, shelving, and other fixed assets related to the implementation of the CSP, and (5) the addition of manufacturing and warehouse equipment. In addition to the property and equipment expansion just noted, the Company has increased the number of owned locations to lower its occupancy costs. Disposals of property and equipment related to the planned disposition of certain pickup trucks, semi-tractors, and trailers in the normal course of business and from the disposal of the building formerly used to house the Company’s Indianapolis distribution center.

 

Cash requirements for these asset changes were satisfied from net earnings, cash on hand, and the proceeds of asset disposals. As of March 31, 2004, the Company had no material outstanding commitments for capital expenditures. Management anticipates funding its current expansion plans with cash generated from operations, from available cash and cash equivalents, and, to a lesser degree, from its borrowing capacity.

 

Net cash used in financing activities were entirely related to the payment of dividends.

 

A discussion of the nature and amount of future cash commitments is contained in Company’s 2003 Annual Report.

 

(Continued)


Table of Contents

– 14 –

 

ITEM 2. (Continued)

 

Certain Risks and Uncertainties—This report contains statements that are not historical in nature and that are intended to be, and are hereby identified as, “forward-looking statements” under the Private Securities Litigation Reform Act of 1995, including statements regarding planned store openings, the timeline for altering planned openings, the time before new stores typically achieve profitability, the continuance of our ‘customer service project’ conversion, the continuance of Fastenal’s ability to raise prices in reaction to inbound cost increases, the continuance of the improvements related to vendor incentives and freight costs, future operation of the relocated North Carolina distribution center, and the funding of expansion plans. The following factors are among those that could impact the Company’s plans and performance, and cause the Company’s actual results to differ materially from those predicted in such forward-looking statements: (i) an upturn or downturn in the economy could impact sales at stores, the rate of new store and distribution center openings, additions of new employees, and the time it typically takes a new store to achieve profitability, (ii) an upturn or downturn in the economy, or a change in product mix, could impact gross margins and the Company’s ability to earn vendor incentives and leverage freight costs, (iii) a change, from that projected, in the number of smaller and larger communities able to support future store sites could impact the rate of new store openings and additions of new employees, (iv) the ability of the Company to develop product expertise at the store level, to identify future product lines that complement existing product lines, to transport and store certain hazardous products and to otherwise integrate new product lines into the Company’s existing stores and distribution network could impact sales and margins, (v) increases or decreases in fuel and utility costs could impact distribution and occupancy expenses of the Company, (vi) the ability of the Company to successfully attract and retain qualified personnel to staff the Company’s smaller community stores could impact sales at stores and the rate of new store openings, (vii) changes in governmental regulations related to product quality or product source traceability could impact the cost to the Company of regulatory compliance, (viii) inclement weather could impact the Company’s distribution network, (ix) foreign currency fluctuations, changes in trade relations, or fluctuations in the relative strength of foreign economies could impact the ability of the Company to procure products overseas at competitive prices and the Company’s foreign sales, (x) disruptions caused by the implementation of the Company’s new management information systems infrastructure could impact sales, (xi) changes in the rate of new store openings could impact expenditures for computers and other capital equipment, (xii) changes in the availability of suitable land and buildings could impact expenditures for additional owned locations which house our store sites, which in turn could alter the Company’s plans to increase the number of owned locations, (xiii) disruption related to the ‘CSP’ implementation could cause expenses and inventory investments to increase, which in turn could cause the Company to reevaluate implementation of the project, (xiv) changes in stocking and buying patterns related to product, both domestic and imported, could result in the Company being unable to reduce its distribution center inventories to the extent anticipated and the Company failing to achieve inventory turns in the future similar to those before the CSP initiative began and could have a negative impact on cash flows from investing activities, and (xv) actions of competitors, suppliers, and customers could impact the Company’s ability to raise prices.

 


Table of Contents

– 15 –

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is exposed to certain market risks from changes in interest rates, foreign currency exchange rates, and commodity steel pricing. 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 $15 million line of credit of which $0 was outstanding at March 31, 2004. The line bears interest at 0.9% over the LIBOR rate. The Company pays no fee for the unused portion of the line of credit.

 

Foreign Currency Exchange Rates— Foreign currency fluctuations can affect the Company’s net investments and earnings denominated in foreign currencies. The Company’s primary exchange rate exposure is with the Canadian dollar against the U.S. dollar. The Company’s estimated net earnings exposure for foreign currency exchange rates was not material at March 31, 2004.

 

Commodity Steel Pricing— The Company buys and sells various types of steel products; these products consist primarily of different types of threaded fasteners. During the last decade, there has been nominal movement in overall product pricing, with some deflation occurring in the wake of the economic crisis of the Far East markets that occurred in the late 1990’s. The trend has reversed to inflation over the last twelve months. The Company is exposed to the impacts of commodity steel pricing and its related ability to pass through the impacts to its end customers.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures— As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer of Fastenal, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 


Table of Contents

– 16 –

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a) Exhibits:

 

    3.1 Restated Articles of Incorporation of Fastenal Company, as amended prior to May 10, 2002 (incorporated by reference to Exhibit 3.1 to Fastenal Company’s Form 10-Q for the quarter ended September 30, 1993)

 

    3.2 Articles of Amendment to Restated Articles of Incorporation of Fastenal Company effective May 10, 2002 (incorporated by reference to Exhibit 4.2 to Registration Statement No. 333-88170)

 

    3.3 Restated By-Laws of Fastenal Company (incorporated by reference to Exhibit 3.2 to Registration Statement No. 33-14923)

 

  31 Certifications under Section 302 of the Sarbanes-Oxley Act of 2002

 

  32 Certification under Section 906 of the Sarbanes-Oxley Act of 2002

 

(b) Reports on Form 8-K:

 

     Fastenal Company filed one report on Form 8-K during the quarter ended March 31, 2004. This Form 8-K was filed on January 27, 2004 and furnished a copy of the earnings press release issued on January 20, 2004.

 

 

 


Table of Contents

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/    Willard D. Oberton


           

(Willard D. Oberton, Chief Executive Officer)

(Duly Authorized Officer)

Date     April 30, 2004    

         

    /s/    Daniel L. Florness


           

(Daniel L. Florness, Chief Financial Officer)

(Principal Financial Officer)


Table of Contents

INDEX TO EXHIBITS

 

  3.1   Restated Articles of Incorporation of Fastenal Company, as amended prior to May 10, 2002   

(Incorporated by reference to

Exhibit 3.1 to Fastenal

Company’s Form 10-Q for the

quarter ended March 31, 1993)

  3.2   Articles of Amendment to Restated Articles of Incorporation of Fastenal Company effective May 10, 2002   

(Incorporated by reference to

Exhibit 4.2 to Registration

Statement No. 333-88170)

  3.3   Restated By-Laws of Fastenal Company   

(Incorporated by reference to

Exhibit 3.2 to Registration

Statement No. 33-14923)

31   Certifications under Section 302 of the Sarbanes-Oxley Act of 2002    Electronically Filed
32   Certification under Section 906 of the Sarbanes-Oxley Act of 2002    Electronically Filed