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EX-21 - LIST OF SUBSIDIARIES - FASTENAL COfast1231201510-kexhibit21.htm
EX-31 - CERTIFICATIONS UNDER SECTION 302 OF THE SARBANES-OXELY ACT OF 2002 - FASTENAL COfast1231201510-kexhibit31.htm
EX-23 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - FASTENAL COfast1231201510-kexhibit23.htm
EX-32 - CERTIFICATIONS UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - FASTENAL COfast1231201510-kexhibit32.htm
EX-13 - PORTIONS OF 2015 ANNUAL REPORT TO SHAREHOLDERS NOT INCLUDED IN THIS FORM 10-K - FASTENAL COa2015annualreportcoverpa.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________________________________ 
FORM 10-K
(Mark One)
x
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2015,
or
o
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
55987-0978
(Address of principal executive offices)
(Zip Code)
(507) 454-5374
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share
The NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act:
None
____________________________________________________________  
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act    Yes  x    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act     Yes  o    No  x
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  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer
x
Accelerated Filer
o
 
 
 
 
Non-accelerated Filer
o  (Do not check if a smaller reporting company)
Smaller Reporting Company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  x
The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, was $12,195,658,299, based on the closing sale price of the Common Stock on that date. For purposes of determining this number, all executive officers and directors of the registrant as of June 30, 2015 are considered to be affiliates of the registrant. This number is provided only for the purposes of this report on Form 10-K and does not represent an admission by either the registrant or any such person as to the status of such person.
As of January 22, 2016, the registrant had 288,403,782 shares of Common Stock issued and outstanding.
 




FASTENAL COMPANY
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
 
 
 
 
Page
 
 
 
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item X.
 
 
 
 
Item 5.
 
Item 6.
 
Item 7.
 
Item 7A.
 
Item 8.
 
Item 9.
 
Item 9A.
 
Item 9B.
 
 
 
 
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.
 
Item 14.
 
 
 
 
Item 15.
 
 
 
 
 



DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the annual meeting of shareholders to be held Tuesday, April 19, 2016 (‘Proxy Statement’) are incorporated by reference in Part III. Portions of our 2015 Annual Report to Shareholders are incorporated by reference in Part II.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K, or in other reports of the Company and other written and oral statements made from time to time by the Company, do not relate strictly to historical or current facts. As such, they are considered 'forward-looking statements' that provide current expectations or forecasts of future events. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of terminology such as anticipate, believe, should, estimate, expect, intend, may, will, plan, goal, project, hope, trend, target, opportunity, and similar words or expressions, or by references to typical outcomes. Any statement that is not a purely historical fact, including estimates, projections, trends, and the outcome of events that have not yet occurred, is a forward-looking statement. Our forward-looking statements generally relate to our expectations regarding the business environment in which we operate, our projections of future performance, our perceived marketplace opportunities, and our strategies, goals, mission, and vision. You should understand that forward-looking statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially. Factors that could cause our actual results to differ from those discussed in the forward-looking statements include, but are not limited to, economic downturns, weakness in the manufacturing or commercial construction industries, competitive pressure on selling prices, changes in our current mix of products, customers or geographic locations, changes in our average store size, changes in our purchasing patterns, changes in customer needs, changes in fuel or commodity prices, inclement weather, changes in foreign currency exchange rates, difficulty in adapting our business model to different foreign business environments, weak acceptance or adoption of vending technology or increased competition in industrial vending, difficulty in maintaining installation quality as our industrial vending business expands, difficulty in hiring, relocating, training or retaining qualified personnel, failure to accurately predict the number of North American markets able to support stores or to meet store opening goals, difficulty in controlling operating expenses, difficulty in collecting receivables or accurately predicting future inventory needs, dramatic changes in sales trends, changes in supplier production lead times, changes in our cash position or our need to make capital expenditures, credit market volatility, changes in tax law, changes in the availability or price of commercial real estate, changes in the nature, price or availability of distribution, supply chain, or other technology (including software licensed from third parties) and services related to that technology, cyber-security incidents, potential liability and reputational damage that can arise if our products are defective, and other risks and uncertainties detailed in this Form 10-K under the heading 'Item 1A. Risk Factors'. Each forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any such statement to reflect events or circumstances arising after such date.


1


PRESENTATION OF DOLLAR AMOUNTS
All dollar amounts in this Form 10-K are presented in thousands, except for share and per share information or unless otherwise noted.
STOCK SPLIT
All information contained in this Form 10-K reflects the two-for-one stock split in 2011.

2


PART I

ITEM 1.
BUSINESS
Note – Information in this section is as of year end unless otherwise noted. The year end is typically December 31, 2015 unless additional years are included or noted.
Fastenal Company (together with our subsidiaries, hereinafter referred to as Fastenal or the Company or by terms such as we, our, or us) began as a partnership in 1967, and was incorporated under the laws of Minnesota in 1968. We have 2,622 store locations. The various geographic areas in which we operate these store locations are summarized later in this document.
We employ 20,746 people. We characterize these personnel as follows:

 
2015
2014
Store and Onsite
13,961

12,293

Non-store selling
1,566

1,349

  Selling subtotal
15,527

13,642

Distribution
3,459

3,120

Manufacturing
662

630

Administrative
1,098

1,025

  Non-selling subtotal
5,219

4,775

Total
20,746

18,417

We sell industrial and construction supplies to end-users (typically business-to-business), and also have some 'walk-in' retail business. These industrial and construction supplies are grouped into twelve product lines described later in this document.
We operate 14 distribution centers in North America from which we distribute products to our store and Onsite locations. Eleven of these are in the United States, two are in Canada, and one is in Mexico.
Our Internet address for corporate and investor information is www.fastenal.com. The information contained on this website or connected to this website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report.
Development of the Business
We began in 1967 with a marketing strategy of supplying threaded fasteners to customers in small, medium-sized, and, in subsequent years, large cities. We believe our success can be attributed to our ability to offer our customers a full line of products at convenient locations and to the high quality of our employees.
We opened our first store in Winona, Minnesota, a city with a population today of approximately 27,000. The following table shows our consolidated net sales for each fiscal year during the last ten years and the number of our store locations at the end of each of the last ten years:

 
2015
 
2014
 
2013
 
2012
 
2011
 
2010
 
2009
 
2008
 
2007
 
2006
Net sales (in millions)
$3,869.2
 
3,733.5
 
3,326.1
 
3,133.6
 
2,766.9
 
2,269.5
 
1,930.3
 
2,340.4
 
2,061.8
 
1,809.3
Number of stores
2,622
 
2,637
 
2,687
 
2,652
 
2,585
 
2,490
 
2,369
 
2,311
 
2,160
 
2,000

3


We operated the following number of store locations:
 
 
 
 
2015
 
2014
North America
United States
 
2,320

 
2,336

 
Puerto Rico and Dominican Republic
 
8

 
8

 
Canada
 
200

 
202

 
Mexico
 
47

 
44

 
Subtotal
 
2,575

 
2,590

Central & South America
Panama, Brazil, Colombia, and Chile
 
9

 
9

Asia
China and India
 
10

 
10

Southeast Asia
Singapore, Malaysia, and Thailand
 
7

 
7

Europe
The Netherlands, Hungary, United Kingdom, Germany, Czech Republic, Italy, Romania, Poland, and Sweden
 
20

 
20

Africa
South Africa
 
1

 
1

Total
 
 
2,622

 
2,637

 
 
 
 
 
 
We select new locations for our stores based on their proximity to our distribution network, population statistics, and employment data for manufacturing and construction. In 2015, 2014, and 2013, we opened new stores at a rate of approximately 2%, 1%, and 2%, respectively. We also closed or consolidated certain stores in 2015, 2014, and 2013, which resulted in a net decrease in store locations in the last two years. We expect to open 60 to 75 stores in 2016, which is an annual rate of 2% to 3%, and to continue to close or consolidate stores as the need arises.
We stock all new stores with inventory drawn from all of our product lines. Subsequent to a new opening, district and store personnel may supplement the inventory offering to customize the selection to the needs of our local customer base.
We currently have several versions of selling locations. The first type of selling location – a Fastenal store location – is either (1) a ‘traditional’ store, which services a wide variety of customers and stocks a wide selection of the products we offer or (2) an ‘overseas’ store, which focuses on manufacturing customers and on the fastener product line (this is the type of store format we typically have outside the United States and Canada).
In addition to the Fastenal store type discussed above, we also operate strategic account stores, strategic account sites, and Onsite locations. A strategic account store is a unique location that sells to multiple large customers in a market. Because this location sells to multiple customers, it is included in our store count. A strategic account site is essentially the same, but it typically operates out of an existing store location, rather than a unique location; therefore it is not included in our store count. An Onsite location is a selling unit located in or near a customer’s facility that sells product solely to that customer. Onsite locations are not included in our store count numbers as they represent a customer subset of an existing store.
We currently believe, based on the demographics of the marketplace in North America, there is sufficient potential in this geographic area to support at least 3,500 total stores. Many of the new store locations may be in cities in which we currently operate. While we believe there is sufficient potential in North America for 3,500 total stores, or approximately 900 more than today, we have slowed our store openings in recent years and instead have increased our investments in other growth drivers such as people (both inside and outside our stores), industrial vending, and end-market growth investments. This allows us to maintain an aggressive offense where competitors are investing for growth, and to maintain a steady offense where competitors aren't investing - namely store openings. Fastenal has not operated outside of North America long enough to assess the market potential of those markets.

4


We opened the following stores in the last five years:

 
 
2015
 
2014
 
2013
 
2012
 
2011
North America
United States
32

 
10

 
30

 
58

 
101

 
Puerto Rico and Dominican Republic

 

 

 

 

 
Canada
4

 
4

 
10

 
13

 
11

 
Mexico
3

 
3

 
5

 
2

 
1

 
Subtotal
39

 
17

 
45

 
73

 
113

Central & South America
Panama, Brazil, Colombia, and Chile
1

 
1

 
4

 
1

 
1

Asia
China and India
1

 
2

 

 

 
3

Southeast Asia
Singapore, Malaysia, and Thailand

 

 

 
2

 

Europe
The Netherlands, Hungary, United Kingdom, Germany, Czech Republic, Italy, Romania, Poland, and Sweden

 
3

 
4

 
4

 
5

Africa
South Africa

 
1

 

 

 

Total
 
41

 
24

 
53

 
80

 
122

We plan to open additional stores outside of the United States in the future. The stores located outside the United States contributed approximately 11% of our consolidated net sales in 2015, with approximately 52% of this amount attributable to our Canadian operations.
No assurance can be given that any of the expansion plans described above will be achieved, or that new store locations, once opened, will be profitable.
It has been our experience that near-term profitability has been adversely affected by the opening of new store locations. This adverse effect is due to the start-up costs and the time necessary to generate a customer base. A new store generates its sales from direct sales calls, a slow process involving repeated contacts. As a result of this process, sales volume builds slowly and it typically requires at least ten to twelve months for a new store to achieve its first profitable month. Of the two stores opened in the first quarter of 2015, one was profitable in the fourth quarter of 2015.

5


The data in the following table shows the change in the average sales of our stores from 2014 to 2015 based on the age of each store. The stores opened in 2015 contributed approximately $8,745 (or approximately 0.2%) of our consolidated net sales in 2015, with the remainder coming from stores opened prior to 2015 or from our non-store business.
Age of Stores on
December 31, 2015
Year
Opened
 
Number of
Stores in Group
on December
31, 2015
 
Closed Stores(1)
 
Converted Stores(2)
 
Average
Monthly
Sales
2015(3)
 
 
Average
Monthly
Sales
2014(3)
 
 
Percent
Change
0-1 year old
2015
 
41
 
0/0
 
0/0
 
$
18

(4) 
 
N/A
 
 

1-2 years old
2014
 
22
 
2/0
 
0/0
 
106

 
 
37

(4) 
 
186.5
 %
2-3 years old
2013
 
48
 
3/0
 
-2/0
 
100

 
 
90

 
 
11.1
 %
3-4 years old
2012
 
70
 
5/3
 
0/0
 
93

 
 
88

 
 
5.7
 %
4-5 years old
2011
 
109
 
4/8
 
0/-1
 
94

 
 
96

 
 
-2.1
 %
5-6 years old
2010
 
108
 
7/7
 
-1/0
 
104

 
 
96

 
 
8.3
 %
6-7 years old
2009
 
57
 
4/4
 
-1/0
 
149

 
 
146

 
 
2.1
 %
7-8 years old
2008
 
132
 
6/9
 
-2/0
 
92

 
 
93

 
 
-1.1
 %
8-9 years old
2007
 
141
 
3/8
 
0/0
 
104

 
 
104

 
 
0.0
 %
9-10 years old
2006
 
217
 
2/12
 
0/0
 
105

 
 
102

 
 
2.9
 %
10-11 years old
2005
 
202
 
3/6
 
0/0
 
97

 
 
95

 
 
2.1
 %
11-12 years old
2004
 
205
 
3/4
 
0/0
 
110

 
 
109

 
 
0.9
 %
12-16 years old
2000-2003
 
483
 
2/6
 
0/-1
 
119

 
 
115

 
 
3.5
 %
16+ years old
1967-1999
 
787
 
6/6
 
0/1
 
163

 
 
158

 
 
3.2
 %
(1) We closed 50 stores and 73 stores in 2015 and 2014, respectively. The number of closed stores is noted in the table above as 2015 number/2014 number.
(2) We converted six store locations to non-store selling locations in 2015. We converted two store locations to non-store selling locations, and one non-store selling location to a store in 2014. The number of converted stores is noted in the table above as 2015 number/2014 number, with store locations converted to non-store locations shown as negative numbers.
(3) 
Included in the average monthly sales amounts are sales from our non-store selling locations, such as our Holo-Krome® business (included in the 2009 group, the year it was acquired).
(4) The average sales include sales of stores open for less than the full fiscal year.
Several years ago, we introduced our industrial vending offering and it has been an expanding component of our business. We believe industrial vending is the next logical chapter in the Fastenal story and also believe it has the potential to be transformative to industrial distribution, both because of its benefits to our customers such as reduced consumption, reduced purchase orders, reduced product handling, and 24-hour product availability, and its benefits to us in that it allows us to strengthen our relationships with our customers and streamline the supply chain. We believe we have a 'first mover' advantage in industrial vending and are investing to maximize this advantage.
We operate eleven regional distribution centers in the United States – Minnesota, Indiana, Ohio, Pennsylvania, Texas, Georgia, Washington, California, Utah, North Carolina, and Kansas, and three outside the United States – Ontario, Canada; Alberta, Canada; and Nuevo Leon, Mexico. These 14 distribution centers give us approximately 3.4 million square feet of distribution capacity. These distribution centers are located so as to permit twice-a-week to five times-a-week deliveries to our stores using our trucks and overnight delivery by surface common carrier. As the number of stores increases, we intend to add new distribution centers. The distribution centers in Indiana and California also serve as a 'master' hub to support the needs of the stores in their geographic region as well as provide a broader selection of products for the stores serviced by the other distribution centers.
We currently operate our Minnesota, Indiana, Ohio, Pennsylvania, Texas, Georgia, California, and Ontario, Canada distribution centers with 'automated storage and retrieval systems' or ASRS. These eight distribution centers operate with greater speed and efficiency, and currently handle approximately 81% of our picking activity. The Indiana facility also contains our centralized replenishment facility for a portion of our industrial vending business. This operation is also highly automated. Construction of an ASRS has begun at our North Carolina distribution center, and we intend to invest in this type of ASRS distribution infrastructure over the next several years at our Washington and Kansas distribution centers.
Our information systems department develops, implements, and maintains the computer based technology used to support business functions within Fastenal. Corporate, e-business, and distribution center systems are primarily supported from central locations, while each store uses a locally installed Point-Of-Sale (POS) system. The systems consist of both customized and purchased software. A dedicated Wide Area Network (WAN) is used to provide connectivity between systems and authorized users.

6


Trademarks and Service Marks
We conduct business under various trademarks and service marks, and we utilize a variety of designs and tag lines in connection with each of these marks, including First In Fasteners®. Although we do not believe our operations are substantially dependent upon any of our trademarks or service marks, we consider the ‘Fastenal’ name and our other trademarks and service marks to be valuable to our business.
Products
Our original product offerings were fasteners and other industrial and construction supplies, many of which are sold under the Fastenal® product name. This product line, which we refer to as the fastener product line, consists of two broad categories: threaded fasteners, such as bolts, nuts, screws, studs, and related washers; and miscellaneous supplies and hardware, such as various pins and machinery keys, concrete anchors, metal framing systems, wire rope, strut, rivets, and related accessories.
Threaded fasteners are used in most manufactured products and building projects, and in the maintenance and repair of machines and structures. Many aspects of the threaded fastener market are common to all cities. Variations from city to city that do exist typically relate to the types of businesses operating in a market or to the environmental conditions in a market. Therefore, we open each store with a broad selection of base stocks of inventory and then encourage the local store and district leaders to tailor the additional inventory to the local market demand as it develops.
Threaded fasteners accounted for approximately 90% of the fastener product line sales in 2015, 2014, and 2013 and approximately 34%, 36%, and 38% of our consolidated net sales in 2015, 2014, and 2013, respectively.
Since 1993, we have added additional product lines. These product lines are sold through the same distribution channel as the original fastener product line, and more recently portions of our non-fastener product lines are also sold through industrial vending devices.
Detailed information about our sales by product line is provided later in this document in Note 10 of the Notes to Consolidated Financial Statements included later in this Form 10-K. Each product line may contain multiple product categories. During the last several years, we have added 'private label' brands (we often refer to these as 'Fastenal brands') to our offering. These 'private label' brands represented approximately 12% of our total net sales in 2015. Most of these 'private label' products are in the non-fastener product lines.
We plan to continue to add other products in the future.
Inventory Control
Our inventory stocking levels are determined using our computer systems, our sales personnel at the store, district, and region levels, and our product managers. The data used for this determination is derived from sales activity from all of our stores, from individual stores, and from different geographic areas. It is also derived from vendor information and from customer demographic information. The computer system monitors the inventory level for all stock items and triggers replenishment, or prompts a buyer to purchase, as necessary, based on an established minimum-maximum level. All stores stock a base inventory and may expand beyond preset inventory levels as deemed appropriate by the district and store personnel. Inventories in distribution centers are established from computerized data for the stores served by the respective centers. Inventory quantities are continuously re-balanced utilizing an automated transfer mechanism we call ‘inventory re-distribution’.
Manufacturing and Support Services Operations
In 2015, approximately 95% of our consolidated net sales were attributable to products manufactured by other companies to industry standards or to customer specific requirements. The remaining 5% related to products manufactured, modified or repaired by our manufacturing businesses or our support services. The manufactured products consist primarily of non-standard sizes of threaded fasteners made to customers’ specifications or standard sizes manufactured under our Holo-Krome® and Cardinal Fasteners® product lines. The services provided by the support services group include, but are not limited to, items such as tool repair, band saw blade welding, and light manufacturing. We engage in these activities primarily as a service to our customers and expect these activities in the future to continue to contribute in the range of 4% to 6% of our consolidated net sales.

7


Sources of Supply
We use a large number of suppliers for the standard stock items we distribute. Most items distributed by our network can be purchased from several sources, although preferred sourcing is used for some stock items to facilitate quality control. No single supplier accounted for more than 5% of our inventory purchases in 2015.
Beyond inventory, we have some concentration of purchasing activity. For example, we utilize a limited number of suppliers for distribution equipment, two main suppliers for our vehicle fleet, and primarily one supplier for our industrial vending equipment. However, we believe there are viable alternatives to each of these, if necessary.
Geographic Information
Information regarding our revenues and long-lived assets by geographic location is set forth in Note 7 of the Notes to Consolidated Financial Statements included later in this Form 10-K. Our ability to procure products overseas at competitive prices, as well as sales at our foreign locations, could be impacted by foreign currency fluctuations, changes in trade relations, or fluctuations in the relative strength of foreign economies.
Customers and Marketing
We believe our success can be attributed to our ability to offer customers a full line of quality products at convenient locations, and to the superior service orientation and expertise of our employees. Most of our customers are in the manufacturing and non-residential construction markets. The manufacturing market includes both original equipment manufacturers and maintenance, repair, and operations. 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, production, and refinement companies, mining companies, federal, state, and local governmental entities, schools, and certain retail trades. During the fourth quarter of 2015, our total number of active customer accounts (defined as accounts having purchase activity within the last 90 days) was approximately 394,000, while our total 'core accounts' (defined as the average number of accounts each month with purchase activity of at least $250 per month) was approximately 100,000.
In 2015, no one customer accounted for more than 5% of our sales. We believe that our large number of customers, together with the varied markets that they represent, provide some protection to us from economic downturns that are not across multiple industries and geographic regions. However, slumps in one industry served by us can rapidly spread to other interrelated industries, which can mute the benefit of this protection. Examples include the collapse of oil and other commodity prices, which has had a detrimental impact not only on customers in the oil and gas, agriculture, and mining industries, but also other industries, such as heavy equipment manufacturers, servicing these customers. This impact is compounded if it is a global rather than a regional issue.
Direct marketing continues to be the backbone of our business through our local storefronts and selling personnel. We support our stores with multi-channel marketing including email and online marketing, print and radio advertising, catalogs, promotional flyers, events, and store signage. In recent years, our national advertising has been focused on NASCAR® sponsorships through our partnership with Roush Fenway Racing®. In 2015, we presented the Fastenal® brand to millions of Sprint Cup fans as the primary sponsor of Ricky Stenhouse Jr.’s No. 17 car.
Seasonality
Seasonality has some impact on our sales. During the winter months, our sales to customers in the non-residential construction market typically slow due to inclement weather. Also, sales to our industrial production customers may decrease during the Fourth of July holiday period, the Thanksgiving holiday period (October in Canada and November in the United States), and the Christmas and New Year holiday period, due to plant shut-downs.
Competition
Our business is highly competitive. Competitors include large distributors located primarily in large cities, smaller distributors located in many of the same smaller markets in which we have stores, and on-line retailers. We believe the principal competitive factors affecting the markets for our products are customer service, price, convenience, product availability, and cost saving solutions.
Some competitors use vans to sell their products in markets away from their main warehouses, while others rely on mail order, websites, or telemarketing sales. We, however, believe the convenience provided to customers by operating stores in small, medium, and large markets, each offering a wide variety of products, is a competitive selling advantage and the convenience of a large number of stores in a given area, taken together with our ability to provide frequent deliveries to such stores from centrally located distribution centers, facilitates the prompt and efficient distribution of products. We also believe our industrial vending, combined with our local storefront, provides a unique way to provide to our customers convenient access to products

8


and cost saving solutions using a business model not easily replicated by our competitors. Having trained personnel at each store also enhances our ability to compete (see ‘Employees’ below).
Our Onsite service model provides a strategic advantage with our larger customers. Building on our core business strategy of the local store, the Onsite model provides customer value through a customized service model while giving us a stronger competitive advantage and customer relationship, all with a relatively low investment given the existing store and distribution structure.
Employees
We employ a total of 20,746 full and part-time employees, most of whom are employed at a store location. A breakout of the number of employees, and their respective roles, is contained earlier in this document.
We believe the quality of our employees is critical to our ability to compete successfully in the markets we currently serve and to our ability to open new stores in new markets. We foster the growth and education of skilled employees throughout the organization by operating training programs and by decentralizing decision-making. Wherever possible, our goal is to ‘promote from within’. For example, most new store managers are promoted from an outside sales position and district managers (who supervise a number of stores) are usually former store managers.
The Fastenal School of Business (our internal corporate university program) develops and delivers a comprehensive array of industry and company-specific education and training programs that are offered to our employees. Our school of business provides core curricula focused on key competencies determined to be critical to the success of our employees’ performance. In addition, we provide specialized educational tracks within various institutes of learning. These institutes of learning are advanced levels that provide specific concentrations of education and development and have been designed to focus on critical aspects of our business, such as leadership, effective store best practices, sales and marketing, product education, and distribution.
Our sales personnel are compensated with a base salary and an incentive bonus arrangement that places emphasis on achieving increased sales on a store, district, and regional basis, while still attaining targeted levels of, among other things, gross profit and trade accounts receivable collections. As a result, a significant portion of our total employment cost varies with sales volume. We also pay incentive bonuses to our leadership personnel based on one or more of the following factors: sales growth, earnings growth (before and after taxes), profitability, and return on assets, and to our other personnel for achieving pre-determined departmental, project, and cost containment goals.
None of our employees is subject to a collective bargaining agreement and we have experienced no work stoppages. We believe our employee relations are good.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge on or through our website at www.fastenal.com as soon as reasonably practicable after such reports have been filed with or furnished to the SEC.


9


ITEM 1A.
RISK FACTORS
In addition to the other information in this Form 10-K, the following factors should be considered in evaluating our business. Our operating results depend upon many factors and are subject to various risks and uncertainties. The most significant risks and uncertainties known to us which may cause the operating results to vary from anticipated results or which may negatively affect our operating results and profitability are as follows:
Company Risks
Products that we sell may expose us to potential material liability for property damage, environmental damage, personal injury, or death linked to the use of those products by our customers. Some of our customers operate in challenging industries where there is a material risk of catastrophic events, and we are actively seeking to expand our sales to certain categories of customers (such as those in the aerospace industry) whose businesses entail heightened levels of that type of risk. If any of these events are linked to the use by our customers of any of our products, claims could be brought against us by those customers, by governmental authorities, and by third parties who are injured or damaged as a result of such events. In addition, our reputation could be adversely affected by negative publicity surrounding such events regardless of whether or not claims against us are successful. While we maintain insurance coverage to mitigate a portion of this risk and may have recourse against our suppliers for losses arising out of defects in products procured from them, we could experience significant losses as a result of claims made against us to the extent adequate insurance is not in place, the products are manufactured by us or legal recourse against our suppliers is otherwise not available, or our insurers or suppliers are unwilling or unable to satisfy their obligations to us.
Interruptions in the proper functioning of information systems could disrupt operations and cause unanticipated increases in costs and/or decreases in revenues. The proper functioning of our information systems is critical to the successful operation of our business. Although our information systems are protected with robust backup systems, including physical and software safeguards and remote processing capabilities, information systems are still vulnerable to natural disasters, power losses, unauthorized access, telecommunication failures, and other problems. In addition, certain software used by us is licensed from, and certain services related to our information systems are provided by, third parties who could choose to discontinue their relationship with us. If critical information systems fail or these systems or related software or services are otherwise unavailable, our ability to process orders, maintain proper levels of inventories, collect accounts receivable, pay expenses, and maintain the security of Company and customer data could be adversely affected. Disruptions or failures of, or security breaches with respect to, our information technology infrastructure could have a negative impact on our operations.
In the event of a cyber security incident, we could experience certain operational problems or interruptions, incur substantial additional costs, or become subject to legal or regulatory proceedings, any of which could lead to damage to our reputation in the marketplace. In addition, compliance with cyber security laws, regulations, and standards could be difficult and costly, and failure to comply could expose us to legal risk. The nature of our business requires us to receive, retain, and transmit certain personally identifying information that our customers provide to purchase products or services, register on our websites, or otherwise communicate and interact with us. While we have taken and continue to undertake significant steps to protect our customer and confidential information and the functioning of our computer systems and website, a compromise of our data security systems or those of businesses we interact with, could result in information related to our customers or business being obtained by unauthorized persons or other operational problems or interruptions. We develop and update processes and maintain systems in an effort to try to prevent this from occurring, but the development and maintenance of these processes and systems are costly and require ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Consequently, despite our efforts, the possibility of intrusion, interruption of our business, cyber security incidents and theft cannot be eliminated entirely, and risks associated with each of these remain. While we also seek to obtain assurances that third parties we interact with will protect confidential information, there is a risk the confidentiality of data held or accessed by third parties may be compromised. If a compromise of our data security or in the function of our computer systems or website were to occur, it could have a material adverse effect on our operating results and financial condition, subject us to additional legal, regulatory, and operating costs, and damage our reputation in the marketplace. In addition, our handling and use of personal information is regulated at the international, federal, and state levels. Privacy and information security laws, regulations, and standards such as the Payment Card Industry Data Security Standard change from time to time, and compliance with them may result in cost increases due to necessary system changes and the development of new processes, and may be difficult to achieve. If we fail to comply with these laws, regulations, and standards, we could be subjected to legal risk.
We may be unable to meet our goals regarding new store openings and other growth drivers of our business. Our growth is dependent primarily on our ability to attract new customers and increase our activity with existing customers. Historically, the most effective way to attract new customers has been opening new stores, although that has not been our primary growth driver in recent years. We expect to open new stores at the rate of approximately 2% to 3% in 2016; however, we cannot assure you that we can open stores at this rate and we may continue to close or consolidate stores as the need arises. In recent years we have devoted increased resources to other growth drivers, including our industrial vending and Onsite businesses, and our

10


national accounts team. We have targeted the signing of 200 additional Onsite locations in 2016. While we believe this is achievable with some additional focus from our district managers and our national accounts team, this goal is aggressive and we cannot assure you that we can achieve it. Similarly, while we have taken steps to build momentum in our industrial vending business, we cannot assure you that those steps will lead to additional growth in that business. Failure to achieve any of our goals regarding new store openings, our industrial vending and Onsite businesses, or national accounts signings, could negatively impact our long-term sales growth.
Our ‘pathway-to-profit’ strategy, the goal of which is to improve our pre-tax profit margins by growing the average annual sales of our stores, may prove unsuccessful on a long-term basis. In April 2007, we introduced our ‘pathway-to-profit’ strategy. That strategy involved slowing our annual new store openings and investing the funds saved by opening fewer stores in additional sales and sales leadership personnel. Under the 'pathway-to-profit' strategy, our goal is to increase our average annual sales per store, which would allow us to capture earnings leverage (by spreading operating and administrative expenses over higher sales) and grow our pre-tax profit margin. Our gross profit margin generally decreases as our average per store sales increase, as larger stores sell to larger customers whose more focused buying patterns merit better pricing. However, our operating and administrative expenses, expressed as a percentage of net sales, typically improve as average per store sales grow. In most years the net effect is an increase in our pre-tax profit margin, as the relative improvement in operating and administrative expenses offsets the decrease in gross profit margin. A downturn in the economy or in the principle markets served by us or difficulty in attracting and retaining qualified sales and sales leadership personnel could adversely impact our ability to continue to grow our average per store sales. In addition, greater than expected decreases in our gross profit margin resulting from changes in customer mix or other factors noted below, or the failure to control operating and administrative expenses to the degree necessary to offset expected decreases in our gross profit margin, could adversely impact our pre-tax profit margin even as average per store sales increase. The latter was evidenced in 2015 and 2014, when the improvement in our operating and administrative expenses as a percentage of net sales was not sufficient to counterbalance the decrease in our gross profit margin, due in part to our push to add more personnel and labor hours in our stores (2015 and 2014) and more district and regional leaders to better serve our stores (2014), and in part to rising miscellaneous expenses.
Changes in customer or product mix, downward pressure on sales prices, and changes in volume of orders could cause our gross profit percentage to fluctuate or decline in the future. Changes in our customer or product mix could cause our gross profit percentage to fluctuate or decline. From time to time, we have experienced changes in customer or product mix that have caused our gross profit percentage to deteriorate. For example, the portion of our sales attributable to fasteners has been decreasing in recent years. That has adversely affected our gross profit percentage as our non-fastener products generally carry lower gross profit margin than our fastener products. Also, as noted above, our strategy of growing our pre-tax profit margin by increasing our average annual sales per store has contributed to a drop in our gross profit percentage due to resulting changes in our customer mix. If our customer or product mix continues to change, our gross profit percentage may decline further. Downward pressure on sales prices and changes in the volume of our orders could also cause our gross profit percentage to fluctuate or decline. We can experience downward pressure on sales prices as a result of deflation, pressure from customers to reduce costs, or increased competition, as was the case in 2009 and the latter half of 2013. Furthermore, reductions in our volume of purchases, as also happened in 2009 and the latter half of 2013, can adversely impact gross profit by reducing supplier volume allowances. During 2015, our gross profit continued to be impacted by changes in customer and product mix, the latter of which was amplified by a reduction in our customers' discretionary spending in the fourth quarter.
The ability to identify new products and product lines, and integrate them into our store and distribution network, may impact our ability to compete and our sales and profit margins. Our success depends in part on our ability to develop product expertise at the store level and identify future products and product lines that complement existing products and product lines and that respond to our customers’ needs. We may not be able to compete effectively unless our product selection keeps up with trends in the markets in which we compete or trends in new products. In addition, our ability to integrate new products and product lines into our stores and distribution network could impact sales and profit margins.
Our ability to successfully attract and retain qualified personnel to staff our stores could impact labor costs, sales at existing stores, and the rate of new store openings, and our ability to transition and retain key senior management may impact our business and financial results. Our success depends in part on our ability to attract, motivate, and retain a sufficient number of qualified employees, including store managers, outside sales personnel, and other store associates, who understand and appreciate our culture and are able to adequately represent this culture to our customers. Qualified individuals of the requisite caliber and number needed to fill these positions may be in short supply in some areas, and the turnover rate in the industry is high. If we are unable to hire and retain personnel capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture and product knowledge, our sales could be materially adversely affected. Additionally, competition for qualified employees could require us to pay higher wages to attract a sufficient number of employees. An inability to recruit and retain a sufficient number of qualified individuals in the future may also delay the planned openings of new stores and planned expansion of our other selling channels. Any such delays, material increases in employee turnover rates, or increases in labor costs, could have a material adverse effect on our business, financial condition, or operating results.

11


Our success also depends on the efforts and abilities of certain key senior management and we have had some transition in our executive officers over the last couple of years. Difficulties in smoothly implementing that transition or the loss of the services of one or more of such key personnel could have a material adverse effect on our business, financial condition, or operating results.
We may not be able to compete effectively against our competitors, which could harm our business and operating results. The industrial, construction, and maintenance supply industry, although consolidating, still remains a large, fragmented industry that is highly competitive. Our current or future competitors may include companies with similar or greater market presence, name recognition, and financial, marketing, and other resources, and we believe they will continue to challenge us with their product selection, financial resources, and services. Increased competition from brick and mortar retailers in markets in which we have stores or from on-line retailers (particularly those major internet providers who can offer a wide range of products and rapid delivery), and the adoption by competitors of aggressive pricing strategies and sales methods, could cause us to lose market share or reduce our prices or increase our spending, thus eroding our operating income.
Our competitive advantage in our industrial vending business could be eliminated and the loss of key suppliers of equipment and services for that business could be disruptive. We believe we have a competitive advantage in industrial vending due to our vending hardware and software, our local store presence (allowing us to service machines more rapidly), our 'vendible' product depth, and, in North America, our distribution strength. These advantages have developed over time; however, other competitors could respond to our expanding industrial vending business with highly competitive platforms of their own. Such competition could negatively impact our ability to expand our industrial vending business or negatively impact the economics of that business. In addition, we currently rely on a limited number of suppliers for the vending machines used in, and certain software and services needed to operate, our industrial vending business. While these machines, software, and services can be obtained from other sources, loss of our current suppliers could be disruptive.
We are required to disclose the use of 'conflict minerals' in certain of the products we distribute, which imposes costs on us and could raise reputational and other risks. The SEC has promulgated rules in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding disclosure of the use of certain minerals, known as 'conflict minerals', that are mined from the Democratic Republic of the Congo and adjoining countries. These rules have required and will continue to require due diligence and disclosure efforts. There are and will continue to be costs associated with complying with these disclosure requirements, including costs to determine which of our products are subject to the rules and the source of any 'conflict minerals' used in those products. In addition, compliance with these rules could adversely affect the sourcing, supply, and pricing of materials used in those products. Also, we may face reputational challenges if we are unable to verify the origins for all 'conflict minerals' used in products through the procedures we have implemented. We may also encounter challenges to satisfy customers that may require all of the components of products purchased to be certified as conflict free. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier.
We may not be successful in integrating acquisitions and achieving intended benefits and synergies. We have completed several acquisitions of businesses, including, in 2015, our acquisition of certain assets of Fasteners, Inc., a regional industrial construction supply distributor with store locations in the states of Washington, Idaho, Oregon, and Montana. We expect to continue to pursue strategic acquisitions that we believe will either expand or complement our business in new or existing markets or further enhance the value and offerings we are able to provide to our existing or future potential customers. Acquisitions involve numerous risks and challenges, including, among others, a risk of potential loss of key employees of an acquired business, and inability to achieve identified operating and financial synergies anticipated to result from an acquisition, diversion of our capital and our management's attention from other business issues, and risks related to the integration of the acquired business including unanticipated changes in our business, our industry, or general economic conditions that affect the assumptions underlying the acquisition. Any one or more of these factors could cause us to not realize the benefits anticipated to result from the acquisitions.
Industry and General Economic Risks
A downturn in the economy or in the principal markets served by us and other factors may affect customer spending, which could harm our operating results. In general, our sales represent spending on discretionary items or consumption needs by our customers. This spending is affected by many factors, including, among others:
general business conditions,
business conditions in our principal markets,
interest rates,
inflation,
liquidity in credit markets,
taxation,
government regulations,
energy and fuel prices and electrical power rates,

12


unemployment trends,
terrorist attacks and acts of war,
weather conditions, and
other matters that influence customer confidence and spending.
A downturn in either the national or local economy where our stores operate, or in the principal markets served by us, or changes in any of the other factors described above, could negatively impact sales at our stores, sales through our other selling channels, and the level of profitability of those stores and other selling channels.
This risk was demonstrated during recent years. As the economic condition in North America weakened significantly in the fall of 2008 and into 2009, our customers, which operate principally in various manufacturing, non-residential construction, and services sectors, experienced a pronounced slowdown that adversely impacted our sales and operating results in those periods. A lag in these sectors, even as the general economy improved, has continued to adversely impact our business. In a more recent example, 2015 saw a collapse in the price of oil. When oil companies make less money, they also spend less money. This cut-back had a ripple effect throughout not just the oil and gas industry, but also businesses catering to that industry, and resulted in a slowdown of our business with customers in those markets.
Our current estimate for total store market potential in North America could be incorrect. One of our strategies is to grow our business through the introduction of stores into new and existing markets. Based on a snapshot of current marketplace demographics in the United States, Canada, and Mexico, we currently estimate there is potential market opportunity in North America to support approximately 3,500 stores, or approximately 900 more stores than we have today. This estimate is based on our business model today, and market changes such as industrial vending and the internet, or other types of e-business, could cause it to change. In addition, a particular local market’s ability to support a store may change because of a change in that market, a change in our store format, or the presence of a competitor’s store. We cannot guarantee that our market potential estimates are accurate or that we will decide to open stores to reach the full market opportunity. While we estimate we have the potential in North America for approximately 900 more stores than we have today, we have slowed our store openings in recent years and have focused instead on other growth drivers of our business.
Changes in energy costs and the cost of raw materials used in our products could impact our net sales, gross profit percentage, cost of goods, distribution expenses, and occupancy expenses, which may result in lower operating income. Costs of raw materials used in our products (e.g., steel) and energy costs have fluctuated during the last several years. Increases in these costs result in increased production costs for our suppliers. These suppliers typically look to pass their increased costs along to us through price increases. The fuel costs of our distribution and store operations have fluctuated as well. While we typically try to pass increased supplier prices and fuel costs through to our customers or to modify our activities to mitigate the impact, we may not be successful, particularly if supplier prices or fuel costs rise rapidly. Failure to fully pass any such increased prices and costs through to our customers or to modify our activities to mitigate the impact would have an adverse effect on our operating income. While increases in the cost of fuel or raw materials could be damaging to us, decreases in those costs, particularly if severe, could also adversely impact us by creating deflation in selling prices, which could cause our gross profit margin to deteriorate, or by negatively impacting customers in certain industries, which could cause our sales to those customers to decline. This was evidenced in 2015, when our operating results were negatively impacted by a slow down in our business with customers associated with oil exploration, production, and refinement.
Inclement weather and other disruptions to the transportation network could impact our distribution system and adversely impact demand for our products. Our ability to provide efficient distribution of core business products to our store network is an integral component of our overall business strategy. Disruptions at distribution centers or shipping ports, due to events such as the hurricanes of 2005 and 2012 and the longshoreman’s strike on the West Coast in 2002, may affect our ability to both maintain core products in inventory and deliver products to our customers on a timely basis, which may in turn adversely affect our results of operations. In addition, severe weather conditions could adversely affect demand for our products in particularly hard hit regions. This risk was felt in the first quarter of 2014 as our sales growth was hampered in January and February due to a severe winter in North America and its negative impact on our customers and our trucking network.
We are exposed to foreign currency exchange rate risk, and changes in foreign exchange rates could increase our costs to procure products and our foreign sales. Because the functional currency related to most of our foreign operations is the applicable local currency, we are exposed to foreign currency exchange rate risk arising from transactions in the normal course of business. Fluctuations in the relative strength of foreign economies and their related currencies could impact our ability to procure products overseas at competitive prices and our foreign sales. Our primary exchange rate exposure is with the Canadian dollar.
Products manufactured in foreign countries may cease to be available, which could adversely affect our inventory levels and operating results. We obtain certain of our products, and our suppliers obtain certain of their products, from China, Taiwan, South Korea, Mexico, and other foreign countries. Our suppliers could discontinue selling products manufactured in foreign countries at any time for reasons that may or may not be in our control or our suppliers' control, including foreign government

13


regulations, domestic government regulations, political unrest, war, disruption or delays in shipments, changes in local economic conditions, or trade issues. Our operating results and inventory levels could suffer if we are unable to promptly replace a supplier who is unwilling or unable to satisfy our requirements with another supplier providing equally appealing products.
Our business may be adversely affected by political gridlock in the United States. We primarily operate in the United States. During recent years there has been significant fiscal uncertainty in the country, the resolution of which has been impeded by political gridlock. We believe this has adversely impacted our business and could negatively impact our business in the future.
The industrial, construction, and maintenance supply industry is consolidating, which could cause it to become more competitive and could negatively impact our business. The industrial, construction, and maintenance supply industry in North America is consolidating. This consolidation is being driven by customer needs and supplier capabilities, which could cause the industry to become more competitive as greater economies of scale are achieved by suppliers, or as competitors with new business models are willing and able to operate with lower gross profit on select products. Customers are increasingly aware of the total costs of fulfillment and of the need to have consistent sources of supply at multiple locations. We believe these customer needs could result in fewer suppliers as the remaining suppliers become larger and capable of being a consistent source of supply.
There can be no assurance we will be able in the future to take advantage effectively of the trend toward consolidation. The trend in our industry toward consolidation could make it more difficult for us to maintain our current gross profit and operating income. Furthermore, as our industrial customers face increased foreign competition, and potentially lose business to foreign competitors or shift their operations overseas in an effort to reduce expenses, we may face increased difficulty in growing and maintaining our market share.
Tight credit markets could impact our ability to obtain financing on reasonable terms or increase the cost of existing or future financing. As of December 31, 2015, we had loans outstanding under our revolving credit facility of $350,000. Loans under the credit facility bear interest at a floating rate based on LIBOR. During periods of volatility and disruption in the U.S. credit markets, financing may become more costly and more difficult to obtain. Although the credit market turmoil of several years ago did not have a significant adverse impact on our liquidity or borrowing costs given that we had not entered into our current credit facility or started borrowing material amounts until after that time, the availability of funds tightened and credit spreads on corporate debt increased. If credit market volatility were to return, then obtaining additional or replacement financing could be more difficult and the cost of doing so could be higher than under our current facility. In addition, due to the floating interest rate provided for under our current credit facility, the cost of servicing loans under that facility could increase. Tight credit conditions could limit our ability to finance stock purchases, dividends, capital expenditures, and other liquidity needs on terms acceptable to us. For more information relating to borrowing and interest rates, see the following sections below: Liquidity and Capital Resources under the heading 'Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations', 'Item 7A. Quantitative and Qualitative Disclosures about Market Risk', and Note 9 of the Notes to Consolidated Financial Statements.
Investment Risk
We cannot provide any guaranty of future dividend payments or that we will continue to purchase shares of our common stock pursuant to our stock purchase program. Although our board of directors has historically authorized the payment of quarterly cash dividends on our common stock and indicated an intention to do so in the future, there are no assurances that we will continue to pay dividends in the future or continue to increase dividends at historic rates. In addition, although our board of directors has authorized share purchase programs and we have purchased shares in 2016, 2015, and in prior years through these programs, we may discontinue doing so at any time. Any decision to continue to pay quarterly dividends on our common stock, to increase those dividends, or to purchase our common stock in the future will be based upon our financial condition and results of operations, the price of our common stock, credit conditions, and such other factors as are deemed relevant by our board of directors.






14


ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
We own the following facilities in Winona, Minnesota:
Purpose
 
Tote Locations (ASRS)(1)
 
Approximate
Square Feet
Distribution center and home office
 
253,000

 
259,000

Manufacturing facility
 
 
 
100,000

Computer support center
 
 
 
13,000

Winona store
 
 
 
15,000

Winona product support facility
 
 
 
55,000

Rack and shelving storage
 
 
 
42,000

Multi-building complex which houses certain operations of the distribution group, the support services group, and the home office support group
 
 
 
30,000

Supplemental warehouse, office, and potential store space, which is subject to a pre-existing retail lease
 
 
 
100,000

(1) Total number of tote locations for small parts storage included in facilities with an automated storage and retrieval system ('ASRS').
We own the following facilities, excluding store locations, outside of Winona, Minnesota:
Purpose
Location
Tote Locations (ASRS)(1)
 
Approximate
Square Feet
Distribution center
Indianapolis, Indiana
539,000

(2) 
1,039,000

Manufacturing facility
Indianapolis, Indiana
 
 
220,000

Distribution center
Atlanta, Georgia
78,000

 
198,000

Distribution center
Dallas, Texas
41,000

(3) 
176,000

Distribution center
Scranton, Pennsylvania
87,000

 
189,000

Distribution center
Akron, Ohio
74,000

 
152,000

Distribution center
Kansas City, Kansas

 
300,000

Distribution center
Kitchener, Ontario, Canada
105,000

 
142,000

Distribution center
High Point, North Carolina

(4) 
256,000

Distribution center and manufacturing facility
Modesto, California
83,000

 
328,000

Manufacturing facility
Rockford, Illinois
 
 
100,000

Local re-distribution center and manufacturing facility
Johor, Malaysia
 
 
27,000

Manufacturing facility
Wallingford, Connecticut
 
 
187,000

(1) Total number of tote locations for small parts storage included in facilities with an ASRS.
(2) This property contains an ASRS with capacity of 52,000 pallet locations, in addition to the 539,000 tote locations for small parts noted above; 185,000 of these small part tote locations are located in the industrial vending automated replenishment facility ('T-Hub'), which is also located on this property.
(3) This facility contains an ASRS with capacity of 14,000 pallet locations, in addition to the 41,000 tote locations for small parts noted above.
(4) 
This facility is currently under construction to add an ASRS with capacity of approximately 112,000 tote locations for small parts.
In addition, we own 177 buildings that house our store locations in various cities throughout North America.

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All other buildings we occupy are leased. Leased stores range from approximately 3,000 to 10,000 square feet, with lease terms of up to 60 months (most initial lease terms are for 36 to 48 months). In addition to our leased store locations, we also lease the following facilities:
Purpose
Location
 
Approximate
Square Feet
 
Lease Expiration
Date
 
Remaining
Lease
Renewal
Options
Distribution center
Seattle, Washington
 
100,000

 
April 2017
 
Two
Distribution center
Salt Lake City, Utah
 
74,000

 
July 2017
 
Two
Distribution center and packaging facility
Salt Lake City, Utah
 
26,000

 
July 2017
 
One
Distribution center
Apodaca, Nuevo Leon, Mexico
 
46,000

 
March 2020
 
None
Distribution center and manufacturing facility
Edmonton, Alberta, Canada
 
45,000

 
July 2020
 
One
Manufacturing facility
Houston, Texas
 
21,000

 
July 2019
 
None
Local re-distribution center and manufacturing facility
Modrice, Czech Republic
 
15,000

 
July 2021
 
None
If economic conditions are suitable, we will, in the future, consider purchasing store locations to house our older stores. It is anticipated the majority of new store locations will continue to be leased. It is our policy to negotiate relatively short lease terms to facilitate relocation of particular store operations, when desirable. Our experience has been that space suitable for our needs and available for leasing is sufficient.

ITEM 3.
LEGAL PROCEEDINGS
A description of our legal proceedings, if any, is contained in Note 9 of the Notes to Consolidated Financial Statements.

ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.


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ITEM X.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Fastenal Company are:
Name
Employee of
Fastenal
Since
 
Age
 
Position
Daniel L. Florness
1996
 
52
 
President, Chief Executive Officer, and Director
Leland J. Hein
1985
 
55
 
Senior Executive Vice President – Sales and Director
James C. Jansen
1992
 
45
 
Executive Vice President – Manufacturing
Sheryl A. Lisowski
1994
 
48
 
Interim Chief Financial Officer, Controller, and Chief Accounting Officer
Nicholas J. Lundquist
1979
 
58
 
Executive Vice President – Operations
Charles S. Miller
1999
 
41
 
Executive Vice President – Sales
Terry M. Owen
1999
 
47
 
Senior Executive Vice President – Sales Operations
Gary A. Polipnick
1983
 
53
 
Executive Vice President – FAST Solutions®
Ashok Singh
2001
 
53
 
Executive Vice President – Information Technology
John L. Soderberg
1993
 
44
 
Executive Vice President – Sales Operations and Support
Reyne K. Wisecup
1988
 
52
 
Executive Vice President – Human Resources and Director
Mr. Florness has been our president and chief executive officer since January 2016. From December 2002 to December 2015, Mr. Florness was an executive vice president and our chief financial officer. From June 1996 to November 2002, Mr. Florness was our chief financial officer. During his time as chief financial officer, Mr. Florness' responsibilities expanded beyond finance, including leadership of product development and procurement and the company's national accounts business. Mr. Florness has served as one our directors since January 2016.
Mr. Hein has been our senior executive vice president – sales since January 2016. Mr. Hein's responsibilities include sales and operational oversight of our western United States business. From July 2015 to December 2015, Mr. Hein was our chief operating officer. Mr. Hein was our president and chief executive officer from January 2015 to July 2015, and our president from July 2012 to December 2014. From November 2007 to July 2012, Mr. Hein was one of our executive vice presidents – sales. Prior to November 2007, Mr. Hein served in various sales leadership roles at our Company. Mr. Hein has served as one of our directors since 2014.
Mr. Jansen has been our executive vice president – manufacturing since January 2016. Mr. Jansen's responsibilities include oversight of our manufacturing operations. From December 2010 to December 2015, Mr. Jansen was our executive vice president - operations. From November 2007 to December 2010, Mr. Jansen was our executive vice president – internal operations. From May 2005 to November 2007, Mr. Jansen served as leader of systems development (this role encompassed both information systems and distribution systems development). From April 2000 to April 2005, Mr. Jansen served as sales leader of our Texas based region.
Ms. Lisowski has been our interim chief financial officer since January 2016, and our controller and chief accounting officer since October 2013. From March 2007 to October 2013, Ms. Lisowski served as our controller – accounting operations. Ms. Lisowski joined Fastenal in 1994 and, prior to March 2007, served in various roles of increasing responsibility within our finance and accounting team.
Mr. Lundquist has been our executive vice president – operations since July 2012. Mr. Lundquist's responsibilities include distribution development, product development, supplier development, and supply chain. From November 2007 to July 2012, Mr. Lundquist was one of our executive vice presidents – sales. From December 2002 to November 2007, Mr. Lundquist was our executive vice president and chief operating officer.
Mr. Miller has been our executive vice president - sales since November 2015. Mr. Miller’s responsibilities include sales and operational oversight of our eastern United States business. From January 2009 to October 2015, Mr. Miller served as regional vice president of our southeast central region based primarily in Tennessee and Kentucky. Prior to January 2009, Mr. Miller served in various sales leadership roles at our Company.
Mr. Owen has been our senior executive vice president – sales operations since January 2016. Mr. Owen's responsibilities include oversight of our information technology, sales operations and support, international sales, national accounts, FAST Solutions®, and manufacturing operations. From July 2015 to December 2015, Mr. Owen was one of our executive vice president – sales. From May 2014 to June 2015, Mr. Owen served as our executive vice president – e-business, and from December 2007 to May 2014, Mr. Owen was regional vice president of our Texas based and Mexico regions. Prior to December 2007, Mr. Owen served in various distribution center leadership roles.

17


Mr. Polipnick has been our executive vice president – FAST Solutions® since January 2016. Mr. Polipnick's responsibilities include our FAST Solutions® programs, e-commerce sales, and store inventory modeling and merchandising programs. From July 2015 to December 2015, Mr. Polipnick was our executive vice president – e-business. From July 2012 to June 2015, Mr. Polipnick served as one of our executive vice president – sales. From November 2007 to July 2012, Mr. Polipnick was regional vice president of our Winona based region. Prior to November 2007, Mr. Polipnick served in various sales leadership roles at our Company.
Mr. Singh has been our executive vice president – information technology since January 2011. Mr. Singh joined Fastenal in 2001 and, prior to January 2011, served in various roles of increasing responsibility in the administration and application development areas within our information technology group.
Mr. Soderberg has been our executive vice president – sales operations and support since May 2014. Mr. Soderberg’s responsibilities include industry sales, pricing, contracts, and sales support. From April 2010 to May 2014, Mr. Soderberg was one of our vice presidents – sales. From April 2005 to April 2010, Mr. Soderberg served as regional vice president of our Washington based region. Prior to April 2005, Mr. Soderberg served in various sales leadership roles at our Company.
Ms. Wisecup has been our executive vice president – human resources since November 2007. Prior to November 2007, Ms. Wisecup served in various support roles, most recently as director of employee development. Ms. Wisecup has served as one of our directors since 2000.
The executive officers are elected by our board of directors for a term of one year and serve until their successors are elected and qualified. None of our executive officers is related to any other such executive officer or to any of our directors.

18


PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock Data
Dollar amounts in this section are stated in whole numbers.
Our shares are traded on The NASDAQ Stock Market under the symbol ‘FAST’. As of January 22, 2016, there were approximately 1,200 record holders of our common stock, which includes nominees or broker dealers holding stock on behalf of an estimated 185,000 beneficial owners.
The following table sets forth, by quarter, the high and low closing sale price(1) of our shares on The NASDAQ Stock Market for 2015 and 2014.
2015
High
 
Low
 
2014
 
High
 
Low
First quarter
$
47.40

 
$
39.82

 
First quarter
 
$
50.43

 
$
42.70

Second quarter
43.41

 
40.01

 
Second quarter
 
51.20

 
47.80

Third quarter
42.82

 
36.13

 
Third quarter
 
50.08

 
43.74

Fourth quarter
41.64

 
35.50

 
Fourth quarter
 
48.21

 
40.78

(1) The closing sale price was obtained from Shareholder.com, a division of Nasdaq OMX.
The following table sets forth our dividend payout (on a per share basis) in each of the last two years:
 
2015
 
2014
First quarter
$
0.28

 
$
0.25

Second quarter
0.28

 
0.25

Third quarter
0.28

 
0.25

Fourth quarter
0.28

 
0.25

Total
$
1.12

 
$
1.00

On January 14, 2016, we announced a quarterly dividend of $0.30 per share to be paid on February 26, 2016 to shareholders of record at the close of business on January 29, 2016. Our board of directors intends to continue paying quarterly dividends, provided that any future determination as to payment of dividends will depend upon the financial condition and results of operations of the Company and such other factors as are deemed relevant by the board of directors.
Issuer Purchases of Equity Securities
The table below sets forth information regarding purchases of our common stock during each of the last three months of 2015:
 
(a)
 
(b)
 
(c)
 
(d)
Period
Total Number of Shares
Purchased
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
 
Maximum Number (or
Approximate Dollar
Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1)
October 1-31, 2015
200,000
 
$38.55
 
 
200,000
 
3,200,000
November 1-30, 2015
200,000
 
$38.77
 
 
200,000
 
3,000,000
December 1-31, 2015
100,000
 
$39.97
 
 
100,000
 
2,900,000
Total
500,000
 
$38.92
 
 
500,000
 
2,900,000
(1) On May 1, 2015, our board of directors authorized the purchase by us of an additional 4,000,000 shares of our common stock. The reported purchases were made under this authorization, which does not have an expiration date. As of December 31, 2015, we had remaining authority to purchase 2,900,000 shares under this authorization. See Note 4 of the Notes to Consolidated Financial Statements for a description of certain additional purchases by us of shares of our common stock effected after December 31, 2015.
Purchases of shares of our common stock earlier in 2015 are described later in this Form 10-K under the heading ‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations’.

19


The Fastenal Company Common Stock Comparative Performance Graph
Set forth below is a graph comparing, for the five years ended December 31, 2015, the yearly cumulative total shareholder return on our common stock with the yearly cumulative total shareholder return of the S&P 500 Index and the Dow Jones US Industrial Suppliers Index.
The comparison of total shareholder returns in the performance graph assumes that $100 was invested on December 31, 2010 in Fastenal Company, the S&P 500 Index, and the Dow Jones US Industrial Suppliers Index, and that dividends were reinvested when and as paid.
Comparison of Five Year Cumulative Total Return Among Fastenal Company, the S&P 500 Index, and the Dow Jones US Industrial Suppliers Index
 
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015
Fastenal Company
$
100.00
 
148.43
 
163.37
 
169.18
 
173.16
 
152.71
S&P 500 Index
 
100.00
 
102.11
 
118.45
 
156.82
 
178.28
 
180.75
Dow Jones US Industrial Suppliers Index
 
100.00
 
132.98
 
145.02
 
167.88
 
167.78
 
136.77
Note - The graph and index table above were obtained from Zachs SEC Compliance Services Group.

ITEM 6.
SELECTED FINANCIAL DATA
Incorporated herein by reference is Ten-Year Selected Financial Data on pages 4 and 5 of Fastenal’s 2015 Annual Report to Shareholders of which this Form 10-K forms a part, a portion of which is filed as Exhibit 13 to this Form 10-K.


20


ITEM 7.
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 our financial position and operating results during the periods included in the accompanying consolidated financial statements. (Dollar amounts are in thousands except for per share amounts and where otherwise noted.)
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 approximately 2,600 company owned stores. Most of our customers are in the manufacturing and non-residential construction markets. The manufacturing market includes both original equipment manufacturers (OEM) and maintenance, repair, and operations (MRO). The non-residential construction market includes general, electrical, plumbing, sheet metal, and road contractors. Other users of our product include farmers, truckers, railroads, oil exploration, production and refinement companies, mining companies, federal, state, and local governmental entities, schools, and certain retail trades. Geographically, our stores and customers are primarily located in North America.
BUSINESS DISCUSSION
We are a growth focused organization and we constantly strive to make investments into the growth drivers of our business. These investments typically center on people. By adding more people we add to our ability to interact with and to serve our customers from our local store and to back them up in some type of support role. In recent years this investment has also centered on more industrial vending devices to serve our customers’ needs on a 24 hours a day, 7 days a week basis.
The table below summarizes our store employee count and our total employee count at the end of the periods presented. This is intended to demonstrate the energy (or capacity) added. Later in this document we discuss the average full-time equivalent employee count to help explain the expense trends in more detail. The final two items below summarize our investments in industrial vending devices and in store locations.
 
Q4
2014
 
Q4
2015
 
Twelve-month
% Change
End of period total store employee count
12,293

 
13,961

 
13.6
 %
Change in total store employee count

 
1,668

 
 
End of period total employee count
18,417

 
20,746

 
12.6
 %
Change in total employee count

 
2,329

 
 
Industrial vending machines (installed device count)
46,855

 
55,510

 
18.5
 %
Number of store locations
2,637

 
2,622

 
-0.6
 %
For a quick recap of some positive and negative aspects of our business, we would note the following:
Positive –
(1)
During 2015, we added 1,668 people into our stores. We stated in January 2015 we would add people in an aggressive fashion during 2015. This is the result.
(2)
After several years of holding back on store openings and even contracting our total store base, we plan to expand our pace of store openings in 2016 with a goal of opening 60 to 75 new stores (an increase of approximately 2% to 3% over our number of stores as of December 31, 2015). We opened 41 and 24 stores in 2015 and 2014, respectively, and we closed or consolidated 50 and 73 stores in 2015 and 2014, respectively.
(3)
We are seeing a very strong pace of national account signings. During 2015, we signed more new contracts (defined as new customer accounts with a multi-site contract) with national account customers than in 2014. This increase reversed the declining trend in the previous year. Similar to the third quarter of 2015, the business with our top 100 national account customers (representing approximately 25% of sales) experienced poor sales results in the fourth quarter of 2015, with net sales contraction of approximately 4.3%, while sales to our remaining national account customers (representing approximately 22% of sales) grew approximately 8.1%.
(4)
We have also seen an expansion of our Onsite business (defined as dedicated sales and service provided from within the customer's facility) during 2015. During the year we signed 82 new Onsite customer locations.
(5)
We converted approximately 800 stores to the CSP 16 (Customer Service Project 2016) format in the fourth quarter of 2015. This merchandising footprint, disclosed at our November 2015 Investor Day, involves expanded inventory placement at our store locations to enhance same-day capabilities.

21


Negative –
(1)
2015 was hit hard by a slowdown in our business with customers connected to the oil and gas industry. Those customers include direct industry participants as well as other customers serving those participants.
(2)
2015 was negatively affected by a strong U.S. dollar, relative to other currencies, which hurts our U.S. customer base (which accounts for approximately 89% of sales).
(3)
The net sales of our Canadian business, which grew about 4% in 'local currency' during the fourth quarter of 2015, slowed from 6% growth in the third quarter of 2015.
(4)
During the fourth quarter of 2015 we decided to terminate our manufacturing joint venture in Brazil and settled several unrelated disputes. These items resulted in approximately $4 million of additional expense in the quarter. We listed these as negative due to the immediate financial impact, but consider these to be positive developments allowing us to focus on growth.
(5)
In late November 2015, and even more so in late December 2015, we experienced a greater number and longer duration of customer plant shutdowns related to the holiday season.

The following sections contain an overview of the following:
1.
Sales and sales trends – a recap of our recent sales trends and some insight into the activities with different end markets.
2.
Growth drivers of our business – a recap of how we grow our business.
3.
Profit drivers of our business – a recap of how we increase our profits.
4.
Statement of earnings information – a recap of the components of our income statement.
5.
Cash flow impact items – a recap of the operational working capital utilized in our business, and the related cash flow.
The most important thing to note before you read this is to remember Fastenal is several businesses within itself; a fastener distributor (about 40% of our business) and a non-fastener distributor (about 60% of our business).
FASTENER SALES
First and foremost, we are a fastener distributor. We have been in this business for almost 50 years. We are good at it. We have strong capabilities at sourcing and procurement, at quality control, at logistics, and at local customer service. Each of these capabilities is focused on the customer at the end of the supply chain. This business is split about 60% production/construction needs and about 40% maintenance needs. The former is a great business, but it can be cyclical because about 75% of our manufacturing customer base is engaged in some type of heavy manufacturing. The sale of production fasteners is also a sticky business in the short-term as it is expensive and time consuming for our customers to change their supplier relationships. While our customer base values the capabilities we bring to the table, in the last twelve months this group of customers has seen a contraction in its production and therefore its need for fasteners. During this time frame, our fastener product line has seen its daily growth decrease from about 10% growth in the last six months of 2014 to about 6% contraction in the fourth quarter of 2015. Said another way, our market share gains continue to be strong, but the contraction from our existing customers, plus some price deflation, has eliminated our growth and created contraction.
NON-FASTENER SALES
Second, we have a non-fastener maintenance and supply business. We have actively pursued this business in the last 20 to 25 years. The capabilities we developed as a fastener distributor, described above, provide a backbone to growing this ‘newer’ business. This backbone has been enhanced in the last five years with our added capabilities in industrial vending. Given our local customer service, we believe we have a structural advantage in the industrial vending business. There is more to industrial vending than the device or the financial resources to deploy; we believe the ability to replenish with a local team from an integrated supply chain network (i.e., the 'Team behind the Machine') is critical to the long-term success of this channel. Because of these capabilities, the non-fastener business remains more resilient. However, similar to our fastener business, our non-fastener business has weakened in the last twelve months. During this time frame, our non-fastener product line has seen its daily sales growth decrease from about 18% growth in the last six months of 2014 to about 1% growth in the fourth quarter of 2015.
Please read through the detailed Sales and Sales Trends section later in this document for additional insight.
Our gross profit decreased from 50.5% in both the fourth quarter of 2014 and third quarter of 2015 to 49.9% in the fourth quarter of 2015. The relationship between sales and gross profit depends on our success within our large account business (an area that is still under-represented in our customer mix). The large account end market produces a below average gross profit; however, as demonstrated in recent quarters, it leverages our existing network of capabilities and allows us to enjoy strong incremental operating income growth. This customer mix change (large versus smaller), as well as our product mix change (from fasteners to non-fasteners), over time are a constant drain on our gross profit, a trend we expect to continue in the future.

22


However, this trend had limited relevance in the fourth quarter of 2015. Rather, we saw a noticeable squeezing of discretionary spending by our customers in November and December of 2015 (see related discussion about 2015 later in 'summarizing comments'), which produced a noticeable drop in the sale of less frequently purchased products. This resulted in all of the drop in gross profit, when compared to the third quarter of 2015 and substantially all of the change from the fourth quarter of 2014. We believe this to be a temporary issue; however, we don’t know when this drop will subside. Our gross profit is also impacted by supplier incentives. With weaker net sales growth and our tight management of inventory levels, the growth of spending with our suppliers is lower; hence, our supplier incentives are reduced.
In regards to operating expenses, we added 2,329 people to the Fastenal organization in the last twelve months (about 81% of these people were added to a store or some other type of selling location). This provided a meaningful increase in our capacity. However, we needed to fund this increased capacity. We did this by (1) managing our total operating and administrative expenses outside of payroll related costs, and (2) managing our hours worked in a very focused site by site fashion (our store headcount grew by 13.6% in the last twelve months, but our average full-time equivalent store headcount only grew by 10.2%). These two items allowed us to invest in store personnel and fund that investment in a weak economic environment. Below is a quick recap of our full-time equivalent headcount to supplement the information discussed earlier in this document:
 
Q4
2014
 
Q4
2015
 
Twelve-month
% Change
Average full-time equivalent store employee count
10,376

 
11,436

 
10.2
%
Average full-time equivalent employee count
15,512

 
16,901

 
9.0
%
Note – Full-time equivalent is based on 40 hours per week.
 
 
 
 
 
We touched on our industrial vending earlier, but here is a quick recap: During the fourth quarter of 2015, we signed 4,016 devices (we signed 4,689 devices in the third quarter of 2015 and we signed 4,108 devices during the fourth quarter of 2014), our installed device count on December 31, 2015 was 55,510 (an increase of 18.5% over December 31, 2014), and the percent of total net sales to customers with industrial vending was 43.9%. Our total daily sales to customers with industrial vending during the fourth quarter of 2015 grew 0.7% over the fourth quarter of 2014. However, daily sales of non-fastener products to customers with vending grew approximately 4%, while daily sales of fasteners to customers with vending contracted approximately 8%.
Finally, some thoughts on capital allocation: During the latter half of 2014 and throughout 2015, we have been modifying our capital allocation by buying back some common stock. One factor influencing our stock buybacks is our external valuation. Our relative stock valuation has weakened over the last several years, which prompted us to reassess our cash deployment. To this end, we have spent approximately $337 million buying back stock in the last six quarters and have repurchased approximately 2.7% of our outstanding shares from the start of this time frame. We are mindful of our shareholders’ expectations relative to our dividend paying history and have primarily funded this buyback with debt. Over the last three to four years, we had dramatically increased our capital expenditures, relative to our net earnings, for the rapid deployment of distribution automation and industrial vending over where those expenditures had been in prior years. These investments will continue in the future; however, we expect capital expenditures, relative to our net earnings, will moderate and will allow us to continue to fund our cash needs for our day-to-day business primarily from continuing operations. Please read through the detailed Cash Flow Impact Items section, and the Consolidated Statements of Cash Flows later in this document, for additional insight.
SALES AND SALES TRENDS
While reading these items, it is helpful to appreciate several aspects of our marketplace: (1) it's big, the North American marketplace for industrial supplies is estimated to be in excess of $160 billion per year (and we have expanded beyond North America), (2) no company has a significant portion of this market, (3) many of the products we sell are individually inexpensive, (4) when our customer needs something quickly or unexpectedly our local store is a quick source, (5) the cost and time to manage and procure these products is meaningful, (6) the cost to move these products, many of which are bulky, can be significant, (7) many customers would prefer to reduce their number of suppliers to simplify their business, and (8) many customers would prefer to utilize various technologies to improve availability and reduce waste.
Our motto is Growth through Customer Service®. This is important given the points noted above. We believe in efficient markets – to us, this means we can grow our market share if we provide the greatest value to our customers. We believe our ability to grow is amplified if we can service our customers at the closest economic point of contact. For us, this 'closest economic point of contact' is the local store; therefore, our focus centers on understanding our customers' day, their opportunities, and their obstacles. 

23


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 the store to operate efficiently and to help identify new business solutions. Fourth, we do these things every day. Finally, we strive to generate strong profits; these profits produce the cash flow necessary to fund our growth and to support the needs of our customers.
SALES GROWTH
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.
Net sales and daily sales were as follows:
 
2015
 
2014
 
2013
Net sales
$
3,869,187

 
3,733,507

 
3,326,106

Percentage change
3.6
 %
 
12.2
 %
 
6.1
 %
Business days
254

 
253

 
254

Daily sales
$
15,233

 
14,757

 
13,095

Percentage change
3.2
 %
 
12.7
 %
 
6.1
 %
Impact of currency fluctuations (primarily Canada)
-1.2
 %
 
-0.5
 %
 
-0.2
 %
The increase in net sales in 2015, 2014, and 2013 came primarily from higher unit sales. Our growth in net sales was impacted by slight inflationary price changes in our non-fastener products and some price deflation in our fastener products, with the net impact being a slight drag on growth. The higher unit sales resulted primarily from increases in sales at older store locations (discussed below and again later in this document) and to a lesser degree the opening of new store locations in the last several years. Our growth in net sales was not meaningfully impacted by the introduction of new products or services, with one exception. Over the last several years, our industrial vending initiative has stimulated faster growth with a subset of our customers (discussed later in this document). The growth in net sales at the older store locations was due to the growth drivers of our business (discussed later in this document). The rate of growth in net sales in 2015 was hindered by weakness in the industrial production and non-residential construction industries served by us. The added growth in 2014 was largely related to two things – the expansion, which began in the latter half of 2013, in the number of our store employees and the number of district and regional leaders supporting our stores, all in effort to generate more selling energy within our stores, and a stabilization in our OEM fastener business.
The impact of the economy is best reflected in the growth performance of our stores opened greater than ten years ago (store sites opened as follows: 2015 group – opened 2005 and earlier, 2014 group – opened 2004 and earlier, and 2013 group – opened 2003 and earlier) and opened greater than five years ago (store sites opened as follows: 2015 group – opened 2010 and earlier, 2014 group – opened 2009 and earlier, and 2013 group – opened 2008 and earlier). These two groups of stores are more cyclical due to the increased market share they enjoy in their local markets. The stores opened greater than two years ago represent a consistent ‘same store’ view of our business (store sites opened as follows: 2015 group – opened 2013 and earlier, 2014 group – opened 2012 and earlier, and 2013 group – opened 2011 and earlier). The daily sales change for each of these groups was as follows:

Store Age
2015
 
2014
 
2013
Opened greater than 10 years
2.7%
 
10.5%
 
2.1%
Opened greater than 5 years
2.5%
 
10.9%
 
3.6%
Opened greater than 2 years
2.5%
 
11.5%
 
4.4%
Note: The age groups above are measured as of the last day of each respective year.
Stores opened in 2015 contributed approximately $8,745 (or 0.2%) to 2015 net sales. Stores opened in 2014 contributed approximately $28,028 (or 0.7%) to 2015 net sales and approximately $9,762 (or 0.3%) to 2014 net sales. The rate of growth in sales of store locations generally levels off after they have been open for five years, and, as stated earlier, the sales generated at our older store locations typically vary more with the economy than do the sales of younger stores.

24


SALES BY PRODUCT LINE
The approximate mix of sales from the fastener product line and from the other product lines was as follows:
 
2015
 
2014
 
2013
Fastener product line
38%
 
40%
 
42%
Other product lines
62%
 
60%
 
58%
The decrease in our fastener sales as a percentage of total sales has been driven by the continued success of our non-fastener product lines, which we began to add in the 1990's, and by the growth of our industrial vending program. Since we sell primarily non-fastener products in our industrial vending machines, this program has led to greater resilience to weak industrial production of our non-fastener business compared to our fastener business.
MONTHLY SALES CHANGES, SEQUENTIAL TRENDS, AND END MARKET PERFORMANCE
This section focuses on three distinct views of our business – monthly sales changes, sequential trends, and end market performance. The first discussion regarding monthly sales changes provides a good mechanical view of our business based on the age of our stores. 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.
Monthly Sales Changes:
All company sales – 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):
 
Jan.
 
Feb.
 
Mar.
 
Apr.
 
May
 
June
 
July
 
Aug.
 
Sept.
 
Oct.
 
Nov.
 
Dec.
2015
12.0
%
 
8.6
%
 
5.6
%
 
6.1
%
 
5.3
%
 
3.7
%
 
3.2
%
 
1.6
%
 
-0.3
 %
 
-0.8
 %
 
-1.1
 %
 
-3.8
 %
2014
6.7
%
 
7.7
%
 
11.6
%
 
10.0
%
 
13.5
%
 
12.7
%
 
14.7
%
 
15.0
%
 
12.9
 %
 
14.6
 %
 
15.3
 %
 
17.4
 %
2013
6.7
%
 
8.2
%
 
5.1
%
 
4.8
%
 
5.3
%
 
6.0
%
 
2.9
%
 
7.2
%
 
5.7
 %
 
7.7
 %
 
8.2
 %
 
6.7
 %
Stores opened greater than two years – Our stores opened greater than two years (store sites opened as follows: 2015 group – opened 2013 and earlier, 2014 group – opened 2012 and earlier, and 2013 group – opened 2011 and earlier) represent a consistent 'same-store' view of our business. During the months noted below, the stores opened greater than two years had daily sales growth rates of (compared to the same month in the preceding year):
 
Jan.
 
Feb.
 
Mar.
 
Apr.
 
May
 
June
 
July
 
Aug.
 
Sept.
 
Oct.
 
Nov.
 
Dec.
2015
11.2
%
 
7.8
%
 
4.8
%
 
5.4
%
 
4.6
%
 
3.2
%
 
2.6
%
 
1.0
%
 
-0.9
 %
 
-1.1
 %
 
-2.1
 %
 
-5.0
 %
2014
5.5
%
 
6.5
%
 
10.2
%
 
8.4
%
 
12.1
%
 
11.4
%
 
13.4
%
 
14.0
%
 
11.8
 %
 
13.5
 %
 
14.0
 %
 
16.5
 %
2013
5.0
%
 
6.5
%
 
3.4
%
 
3.1
%
 
3.5
%
 
4.3
%
 
1.4
%
 
5.5
%
 
4.2
 %
 
6.1
 %
 
6.2
 %
 
4.9
 %
Stores opened greater than five years – The impact of the economy, over time, is best reflected in the growth performance of our stores opened greater than five years (store sites opened as follows: 2015 group – opened 2010 and earlier, 2014 group – opened 2009 and earlier, and 2013 group – opened 2008 and earlier). This group, which represented about 90% of our total sales in 2015, is more cyclical due to the increased market share they enjoy in their local markets. During the months noted below, the stores opened greater than five years had daily sales growth rates of (compared to the same month in the preceding year):
 
Jan.
 
Feb.
 
Mar.
 
Apr.
 
May
 
June
 
July
 
Aug.
 
Sept.
 
Oct.
 
Nov.
 
Dec.
2015
10.8
%
 
7.2
%
 
4.8
%
 
5.6
%
 
4.6
%
 
3.1
%
 
3.1
%
 
1.3
%
 
-1.1
 %
 
-1.0
 %
 
-1.8
 %
 
-5.3
 %
2014
4.6
%
 
5.4
%
 
9.5
%
 
7.7
%
 
11.5
%
 
10.8
%
 
12.9
%
 
13.4
%
 
11.7
 %
 
13.3
 %
 
13.6
 %
 
16.2
 %
2013
3.2
%
 
5.6
%
 
2.3
%
 
2.0
%
 
2.7
%
 
3.4
%
 
0.6
%
 
4.7
%
 
3.2
 %
 
5.3
 %
 
6.1
 %
 
4.8
 %
Summarizing comments There are three distinct influences to our growth: (1) execution, (2) currency fluctuations, and (3) economic fluctuations. This discussion centers on (2) and (3).
The change in currencies in foreign countries (primarily Canada) relative to the United States dollar impacted our net sales growth over the last several years. During the years 2013, 2014, and 2015, it lowered our net sales growth by 0.2%, 0.5%, and 1.2%, respectively.

25


During the first half of 2013, the fastener product line was heavily impacted by our industrial production business. These customers utilize our fasteners in the manufacture/assembly of their finished products. The end markets with the most pronounced weakening included heavy machinery manufacturers with exposure to: mining, military, agriculture, and construction. The daily sales growth in July 2013 and December 2013 were negatively impacted by the timing of the July 4th holiday (Thursday in 2013 versus Wednesday in 2012) and the Christmas/New Year holiday (Wednesday in 2013 versus Tuesday in 2012). This resulted in a 'lone' business day on Friday, July 5, 2013, in which many of our customers were closed, and three distinct one to two day work periods in the last two weeks of December 2013. The December 2013 impact was amplified due to poor weather conditions.
Our sales to customers engaged in light and medium duty manufacturing (largely related to consumer products) began to improve late in 2013 and into 2014. This made sense given the trends in the PMI Index at that time. In the first quarter of 2014, our sales growth was hampered in January and February due to a weak economy and foreign exchange rate fluctuations (primarily related to the Canadian dollar); however, the biggest impact was a severe winter in North America and its negative impact on our customers and our trucking network. In March 2014, the weak economy and negative foreign exchange rate fluctuations continued; however, the weather normalized and our daily sales growth expanded to 11.6%. This double digit growth in March was helped by the Easter timing (April in 2014). In the second quarter of 2014, the negative impact of the Easter timing was felt, and then a 'less noisy' picture emerged in May and June. Our sales to customers engaged in heavy machinery manufacturing (primarily serving the mining, military, agricultural, and construction end markets), which represents approximately one fifth of our business, had a very weak 2013, but stabilized late in 2013 and improved in 2014.
During 2015, our business weakened. As mentioned earlier in this document and in prior quarterly disclosures, the weakening initially involved customers tied to the oil and gas sector, but grew during the course of the year to include customers across additional industries and in geographic areas not typically associated with the oil and gas sector. In November and December one distinct trend emerged involving customer plant shutdowns. This is not uncommon during the holiday season; however, we experienced a greater number and duration of shutdowns than in prior years during both late November and late December, with the trend more pronounced in late December.
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 with impaired business days (certain holidays). The first landing centers on Easter, which alternates between March and April (Easter occurred in April 2015, in April 2014, and in March 2013), the second landing centers on July 4th, and the third landing centers on the approach of winter with its seasonal impact on primarily our 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 July 4th and Christmas/New Year holiday impacts are examples).
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 period 1998 to 2013, excluding 2008 and 2009. We believe this time frame will serve to show the historical pattern and could serve as a benchmark for current performance. We excluded the 2008 to 2009 time frame because it contains an extreme economic event and we don't believe it is comparable. The '2015', '2014', and '2013' lines represent our actual sequential daily sales changes. The '15Delta', '14Delta', and '13Delta' lines indicate the difference between the 'Benchmark' and the actual results in the respective year.
 
Jan.(1)
 
Feb.
 
Mar.
 
Apr.
 
May
 
June
 
July
 
Aug.
 
Sept.
 
Oct.
 
Cumulative Change from Jan. to Oct.
Benchmark
0.8
 %
 
2.2
 %
 
3.8
 %
 
0.4
 %
 
3.1
 %
 
2.7
 %
 
-2.1
 %
 
2.5
%
 
3.7
 %
 
-1.2
 %
 
15.9%
2015
-3.6
 %
 
-0.1
 %
 
4.2
 %
 
-2.1
 %
 
3.4
 %
 
0.9
 %
 
-4.3
 %
 
4.1
%
 
-0.9
 %
 
-2.0
 %
 
2.9%
15Delta
-4.4
 %
 
-2.3
 %
 
0.4
 %
 
-2.5
 %
 
0.3
 %
 
-1.8
 %
 
-2.2
 %
 
1.6
%
 
-4.6
 %
 
-0.8
 %
 
-13.0%
2014
-1.4
 %
 
3.0
 %
 
7.1
 %
 
-2.6
 %
 
4.2
 %
 
2.5
 %
 
-3.8
 %
 
5.8
%
 
1.0
 %
 
-1.5
 %
 
16.2%
14Delta
-2.2
 %
 
0.8
 %
 
3.3
 %
 
-3.0
 %
 
1.1
 %
 
-0.2
 %
 
-1.7
 %
 
3.3
%
 
-2.7
 %
 
-0.3
 %
 
0.3%
2013
-0.4
 %
 
2.0
 %
 
3.4
 %
 
-1.1
 %
 
1.0
 %
 
3.2
 %
 
-5.5
 %
 
5.5
%
 
2.9
 %
 
-2.9
 %
 
8.2%
13Delta
-1.2
 %
 
-0.2
 %
 
-0.4
 %
 
-1.5
 %
 
-2.1
 %
 
0.5
 %
 
-3.4
 %
 
3.0
%
 
-0.8
 %
 
-1.7
 %
 
-7.7%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) The January figures represent the percentage change from the previous October, whereas the remaining figures represent the percentage change from the previous month.

26


A graph of the sequential daily sales change pattern 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:
Fluctuations in end market business – The sequential trends noted above were directly linked to fluctuations in our end markets. To place this in perspective – approximately 50% of our business has historically been with customers engaged in some type of manufacturing. The daily sales growth rates to these customers, when compared to the same period in the prior year, were as follows:
 
Q1
 
Q2
 
Q3
 
Q4
 
Annual
2015
6.9
%
 
3.8
%
 
1.1
%
 
-2.2
 %
 
2.3
%
2014
9.0
%
 
11.2
%
 
13.7
%
 
13.8
 %
 
12.0
%
2013
7.0
%
 
5.9
%
 
4.7
%
 
7.2
 %
 
6.3
%
As indicated earlier, 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 (just under 40% of our business) which is heavily influenced by changes in our business with heavy equipment manufacturers. From a company perspective, 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):
 
Q1
 
Q2
 
Q3
 
Q4
 
Annual
2015
5.5
%
 
0.0
%
 
-4.4
 %
 
-6.2
 %
 
-1.4
 %
2014
1.6
%
 
5.5
%
 
9.9
 %
 
11.4
 %
 
6.9
 %
2013
1.7
%
 
1.9
%
 
1.0
 %
 
1.9
 %
 
1.6
 %

27


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, 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
2015
11.7
%
 
9.0
%
 
5.9
%
 
1.2
%
 
6.8
%
2014
14.2
%
 
17.1
%
 
17.6
%
 
19.0
%
 
17.2
%
2013
10.8
%
 
8.5
%
 
8.9
%
 
12.0
%
 
10.1
%
The non-fastener business demonstrated greater relative resilience over the last several years, when compared to our fastener business and to the distribution industry in general, due to our strong industrial vending program. However, this business was not immune to the impact of a weak industrial environment.
Our non-residential construction 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:
 
Q1
 
Q2
 
Q3
 
Q4
 
Annual
2015
6.2
%
 
1.6
%
 
-1.7
 %
 
-6.1
 %
 
-0.2
 %
2014
2.9
%
 
7.5
%
 
9.3
 %
 
12.6
 %
 
7.8
 %
2013
2.9
%
 
0.7
%
 
3.9
 %
 
2.8
 %
 
2.5
 %

Our non-residential construction business is heavily influenced by the industrial economy, particularly the energy sector. The volatility and weakness of energy prices has weakened this business, particularly in the last three quarters.
A graph of the sequential daily sales trends to these two end markets in 2015, 2014, and 2013, starting with a base of '100' in the previous October and ending with the next October, would be as follows: 

Manufacturing


28


Non-Residential Construction
GROWTH DRIVERS OF OUR BUSINESS
Note – Dollar amounts in this section are presented in whole dollars, not thousands.
We grow by continuously adding customers and by increasing the activity with each customer. We believe this growth is enhanced by great people located in close proximity to our customers. This allows us to provide a range of services and product availability that our competitors can't easily match. Historically, we expanded our reach by opening stores at a very fast pace. These openings were initially in the United States and expanded beyond the United States beginning in the mid 1990's. 
For a little perspective, we began our business in 1967 with an idea to sell nuts and bolts (fasteners) through vending machines. We soon learned the technology of the 1960's wasn't ready, and also learned a lot of products didn't fit, so we went to 'Plan B': sell to business users with a direct sales force. It took us a number of years to 'work out the bugs', but ten years later we began to pick up the pace of store openings. After another ten years of expansion we had approximately 50 stores and sales of about $20 million. Our need for cash to fund our growth was growing, as was our desire to allow employee ownership. This led us to a public offering in 1987.
In our first ten years of being public (1987 to 1997), we opened stores at an annual rate approaching 30% per year. In the next ten years (1997 to 2007), we opened stores at an annual rate of approximately 10% to 15% and, since 2007, at an annual rate of approximately 1% to 8%. We opened 24 stores in 2014, at an annual rate of approximately 1%, and 41 stores in 2015, at an annual rate of approximately 2%. Our preliminary estimate for 2016 is to open 60 to 75 stores, which is an annual rate of approximately 2% to 3%.
During our almost 50 years of business existence, we have constantly evolved to better serve the market (as is described in the paragraphs below) and have always been willing to challenge our approach. In our first 20 to 25 years, we closed several store locations because we felt the market was insufficient to operate a profitable 'fastener only' business. Every one of those locations was subsequently ‘reopened’ when our business model evolved to serve these markets profitably. During the last 20 to 25 years, we have enjoyed continued success with our store-based model, but we continue to challenge our approach. This resulted in our closing approximately 85 stores in the ten years prior to 2014 - not because they weren’t successful, but rather because we felt we had a better approach to growth. During 2014, we continued to challenge our approach and closed 73 stores. Several items we think are noteworthy: the group of stores we identified for closure in the second half of 2014 was profitable in the first quarter of 2014 (our 2014 analysis measurement period); those stores operated with average sales of about $36 thousand per month. We chose to close this group because we felt this was simply a better approach to growing our business profitably. During 2015, we closed 50 stores. Similar to 2014, we chose to close this group of stores because we felt this was

29


simply a better approach. During the third quarter of 2014 (our 2015 analysis measurement period), 35 of these 50 stores were profitable.
There is a short-term price for closing these stores; and, since we believe we will maintain the vast majority of the sales associated with these locations and most of the impacted employees have a nearby store from which to operate, the price primarily relates to the future commitments related to the leased locations. We have recorded the impaired future costs related to these commitments. The related expense was not material as these locations have relatively short lease commitments and minimal leasehold improvements. We use the term closed; however, we consider them to be consolidated into another location since the vast majority are in close proximity to another store.
During the years, our expanding footprint has provided us with greater access to more customers, and we have continued to diversify our growth drivers. This was done to provide existing store personnel with more tools to grow their business organically, and the results of this are reflected in our earlier discussion on sales growth at stores opened greater than five years. In the early 1990's, we began to expand our product lines beyond primarily fasteners, and we added new product knowledge to our bench (the non-fastener products now represent about 60% of our sales). This was our first big effort to diversify our growth drivers. The next step began in the mid to late 1990's when we began to add sales personnel with certain specialties or focus. This began with our National Accounts group in 1995, and over time, has expanded to include individuals dedicated to: (1) sales related to our internal manufacturing division, (2) government sales, (3) internet sales, (4) construction, (5) specific products (most recently metalworking), and (6) industrial vending. Another step occurred at our sales locations (this includes Fastenal stores as well as strategic account stores and Onsite locations) and at our distribution centers, and began with a targeted merchandising and inventory placement strategy that included our 'Customer Service Project' approximately thirteen years ago and our 'Master Stocking Hub' initiative approximately eight years ago. These strategies allowed us to better target where to stock certain products (local store, regional distribution center, master stocking hub, or supplier) and allowed us to improve our fulfillment, lower our freight costs, and improve our ability to serve a broader range of customers. During 2013 and 2014, we expanded our store-based inventory offering around select industries (with an emphasis on fasteners, construction products, and safety products) and beginning in the latter half of 2013 we expanded two key employee groups: (1) the number of employees working in our stores and (2) the number of district and regional leaders supporting our stores. To improve the efficiency, accuracy, and capacity of our distribution centers, we made significant investments into distribution automation over the last several years (a majority of our facilities are now automated, and greater than 80% of our picking occurs at an automated distribution center). Finally, we also added a high frequency distribution center, internally known as T-hub, to support vending and other high frequency selling activities. During 2015, we continued to enhance the technology in our automated distribution centers, and sharpened our focus on growing our Onsite business. In the fourth quarter of 2015, we also began further expansion of our store-based inventory offering (CSP 16). This merchandising footprint involves expanded inventory placement at our store locations to enhance same-day delivery capabilities. The theme that shines through in all these changes is a simple one – invest into and support our sales machine – the local store.
Over the last several years, our industrial vending operation has been an expanding component of our store-based business. We believe industrial vending will be an important chapter in the Fastenal story; we also believe it has the potential to be transformative to industrial distribution, and that we have a 'first mover' advantage. Given this, we have been investing aggressively to maximize the advantage.
Our expanded industrial vending portfolio consists of 20 different vending devices, with the FAST 5000 device, our helix based machine (think candy machine), representing approximately 40% of the installed machines. We have learned much about these devices over the last several years and currently have target monthly revenue ranging from under $1,000 to in excess of $3,000 per device. The following two tables provide two views of our data: (1) actual device count regardless of the type of machine and (2) ‘machine equivalent' count based on the weighted target monthly revenue of each device (compared to the FAST 5000 device, which has a $2,000 monthly revenue target). For example, the 12-door locker, with target monthly revenue of $750, would be counted as ‘0.375 machine equivalent’ (0.375 = $750/$2,000).

30


The industrial vending information related to contracts signed during each period was as follows:
 
 
 
Q1
 
Q2
 
Q3
 
Q4
 
Annual
Device count signed during the period
2015
 
3,962

 
5,144

 
4,689

 
4,016

 
17,811

 
2014
 
4,025

 
4,137

 
4,072

 
4,108

 
16,342

 
2013
 
6,568

 
6,084

 
4,836

 
4,226

 
21,714

 
 
 
 
 
 
 
 
 
 
 
 
'Machine equivalent' count signed during the period
2015
 
2,916

 
3,931

 
3,769

 
3,319

 
13,935

 
2014
 
2,974

 
3,179

 
3,189

 
3,243

 
12,585

 
2013
 
4,825

 
4,505

 
3,656

 
3,244

 
16,230


The industrial vending information related to installed machines at the end of each period was as follows:
 
 
 
Q1
 
Q2
 
Q3
 
Q4
 
 
Device count installed at the end of the period
2015
 
48,545

 
50,620

 
53,547

 
55,510

 
 
 
2014
 
42,153

 
43,761

 
45,596

 
46,855

 
 
 
2013
 
32,007

 
36,452

 
39,180

 
40,775

 
 
 
 
 
 
 
 
 
 
 
 
 
 
'Machine equivalent' count installed at the end of the
2015
 
35,997

 
37,714

 
40,067

 
41,905

 
 
    period
2014
 
30,326

 
31,713

 
33,296

 
34,529

 
 
 
2013
 
22,020

 
25,512

 
27,818

 
29,262

 
 
The following table includes some additional statistics regarding our sales and sales growth:
 
 
 
Q1
 
Q2
 
Q3
 
Q4
 
 
Percent of total net sales to customers with
2015
 
40.5
%
 
40.9
%
 
42.1
%
 
43.9
%
 
 
  industrial vending(1)
2014
 
37.8
%
 
37.0
%
 
37.8
%
 
39.3
%
 
 
 
2013
 
27.5
%
 
30.0
%
 
33.3
%
 
36.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Daily sales growth to customers with
2015
 
12.3
%
 
8.6
%
 
4.8
%
 
0.7
%
 
 
  industrial vending(2)
2014
 
19.7
%
 
20.9
%
 
21.9
%
 
20.0
%
 
 
 
2013
 
23.9
%
 
18.9
%
 
15.2
%
 
18.7
%
 
 
(1) The percentage of total sales (vended and traditional) to customers currently using a vending solution.
(2) The growth in total sales (vended and traditional) to customers currently using a vending solution compared to the same period in the preceding year.
Our total daily sales growth to customers with industrial vending declined during 2015, which was primarily the result of the slowdown in our business with customers connected to the oil and gas industry, including direct industry participants as well as other customers serving those participants. To put this into perspective, in the third quarter of 2015, daily sales to customers with vending grew 4.8% over the third quarter of 2014; however, daily sales of non-fastener products to customers with vending grew approximately 8%, while daily sales of fasteners to customers with vending contracted approximately 3%. Further, in the fourth quarter of 2015, daily sales to customers with vending grew 0.7% over the fourth quarter of 2014; however, daily sales of non-fastener products to customers with vending grew approximately 4%, while daily sales of fasteners to customers with vending contracted approximately 8%.
In addition to the industrial vending operation noted above, which primarily relates to our non-fastener business, we also provide bin stock programs (also known as ‘keep fill’ programs in the industry) to numerous customers. This business, which relates to both our maintenance customers (MRO fasteners and non-fasteners) and original equipment manufacturers (OEM fasteners), has many similar attributes to our industrial vending relationships. These attributes include a strong relationship with these customers, where we are often their preferred supplier, and a frequent level of business transactions. This business is performed without the aid of a vending machine, but does make use of the latest scanning technologies, scale systems, and our fully integrated distribution network to manage the supply chain for all sizes of customers. In recent years, we have begun to refer to this business as FMI (Fastenal Managed Inventory).

31


PROFIT DRIVERS OF OUR BUSINESS
As we state several times in this document, profit is important to us. For a distribution business profit and cash flow go hand in hand, and this cash flow funds our growth; creates value for our customers, our employees, our suppliers, and our shareholders; and provides us with short-term and long-term flexibility. Over time, we grow our profits by continuously working to grow sales and to improve our relative profitability. We achieve our improvements in relative profitability by improving our relative gross profit, by structurally lowering our operating and administrative expenses, or both.
We also grow our profits by allowing our inherent profitability to shine through - we refer to this as the 'pathway to profit'. The distinction is important. The ‘pathway to profit’ to which we refer is merely the natural ‘per store’ leverage that occurs as the average net sales per month of a store increases. There are two diverging trends that occur as a store grows; first, the gross profit percentage at a store generally declines and, second, our operating and administrative expenses as a percentage of net sales generally improve. The expense improvement starts on day one, the gross profit percentage decline typically occurs when the average sales at a store move above $100 thousand per month. Fortunately, the expense improvements typically far outweigh the gross profit percentage declines.
The best way to appreciate this dynamic is to look at the cost components of our business. The cost components of a store include the following: (1) cost of sales and (2) operating and administrative expenses. The operating and administrative expenses can be further split into (listed by relative size): (1) people costs (base pay, incentive pay, benefits, training, and payroll related taxes), (2) occupancy costs (facility expenses such as rent, property taxes, repairs, and depreciation on owned facilities, as well as utility costs, equipment expenses, and vending machine related expenses), and (3) ‘all other’ expenses. The largest component of the last category is the vehicles needed in each store to support selling activities.
The first component, costs of sales, is directly related to sales and fluctuations in sales. However, it is also heavily influenced by product and customer mix. Because of this influence, our gross profit (the residual of net sales after deducting the related cost of sales), when stated as a percentage of net sales, generally declines as the average monthly net sales of a store increases. This is due to the mix impact of larger customers.
The second component, operating and administrative expenses, does just the opposite, it generally improves as a percentage of net sales. This is due to the fixed nature of our ‘open for business’ expenses and the attractive incremental profit margin typically realized in our remaining variable expenses. The ‘open for business’ expenses are the expenses needed to ‘just keep the front door open’, and they relate to a base staffing level, a base facility cost, and base vehicle costs. These expenses do not generate a profit; however, they create the opportunity for future sales growth that will generate profits. This drives our ‘pathway to profit’.
STATEMENT OF EARNINGS INFORMATION (percentage of net sales) for the periods ended December 31:
 
 
 
 
 
Twelve-month Period
 
 
2015
 
2014
 
2013
Net sales
 
100.0
 %
 
100.0
%
 
100.0
%
Gross profit
 
50.4
 %
 
50.8
%
 
51.7
%
Operating and administrative expenses
 
29.0
 %
 
29.8
%
 
30.3
%
Gain on sale of property and equipment
 
0.0
 %
 
0.0
%
 
0.0
%
Operating income
 
21.4
 %
 
21.1
%
 
21.4
%
Net interest income (expense)
 
-0.1
 %
 
0.0
%
 
0.0
%
Earnings before income taxes
 
21.3
 %
 
21.1
%
 
21.5
%
Note – Amounts may not foot due to rounding difference.
 
 
 
 
 
 
Gross profit – The gross profit percentage in the first, second, third, and fourth quarters was as follows:
 
 
Q1
 
Q2
 
Q3
 
Q4
2015
 
50.8
%
 
50.3
%
 
50.5
%
 
49.9
%
2014
 
51.2
%
 
50.8
%
 
50.8
%
 
50.5
%
2013
 
52.3
%
 
52.2
%
 
51.7
%
 
50.6
%
Over the last several years our gross profit has fluctuated due to our mix of store sizes, customer sizes, products, geographies, end markets, and end market uses (such as industrial production business versus maintenance business). We have previously indicated a short-term expectation for gross profit of around 51%; however, we would expect this percentage to decline over time as our average store size grows (see discussion earlier under 'Profit Drivers of our Business' and below). As stated below,

32


this structural gross profit change centers primarily on customer mix and, to a lesser degree, product mix. However, as discussed in the operating and administrative expenses section below, we would expect this structural change to improve operating and administrative expenses as a percentage of net sales.
Ignoring the long-term trend just noted, our short-term gross profit percentages historically fluctuate due to impacts related to (1) transactional gross profit (either related to product and customer mix or to freight), (2) organizational gross profit (sourcing strength that can occur as we leverage buying scale and efficiency), and (3) supplier incentive gross profit (impacts from supplier volume allowances). In the short-term, periods of inflation or deflation can influence the first two categories, while sudden changes in business volume can influence the third. The transactional gross profit, our most meaningful component, is heavily influenced by our store-based compensation programs, which are directly linked to sales growth and gross profit, and incentivize our employees to improve both.
An important aspect of our gross profit relates to our locations, our product mix, and our customer mix. Given the close proximity of our sales personnel to our customer’s business, we offer a very high service level with our sales, which is valued by our customers and improves our gross profit. Fasteners are our highest gross profit product line given the high transaction cost surrounding the sourcing and supply of the product for our customers. Fasteners currently account for approximately 40% of our sales. We expect any reduction in the mix of our sales attributable to fasteners to negatively impact gross profit, particularly as it relates to maintenance fasteners. Gross profit is also influenced by average store sales as noted earlier in this document. Larger stores have larger customers, whose more focused buying patterns allow us to offer them better pricing. As a result, growth in average store sales is expected to negatively impact gross profit. A final item of note, our fourth quarter has typically been the season with the most challenges surrounding gross profit. This relates to the decline in sales in November and December due to the ‘holiday season’ and due to the drop off in non-residential construction business. This drop off in sales reduces the utilization of our trucking network and can slightly reduce our gross profit.
During 2015, our gross profit, as a percentage of net sales, decreased when compared to 2014. This decrease centered on transactional impacts driven by changes in product and customer mix. Our gross profit, as a percentage of net sales, also decreased in the fourth quarter of 2015 when compared to the fourth quarter of 2014. We saw a noticeable squeezing of discretionary spending by our customers in November and December of 2015, which produced a noticeable drop in sales of less frequently purchased products. This resulted in all of the drop in gross profit when compared to the third quarter of 2015, and substantially all of the change from the fourth quarter of 2014.
During 2014, our gross profit dropped below 51%. The drop generally centered on transactional impacts driven by product and customer mix and our strong emphasis on growing average store sales.
Operating and administrative expenses - as a percentage of sales improved from 2014 to 2015. 
Historically, our two largest components of operating and administrative expenses have consisted of employee related expenses (approximately 65% to 70%) and occupancy related expenses (approximately 15% to 20%). The remaining expenses cover a variety of items with selling transportation typically being the largest.
The three largest components of operating and administrative expenses grew (or contracted) as follows for the periods ended December 31 (compared to the same periods in the preceding year):
 
Twelve-month Period
 
2015
 
2014
 
2013
Employee related expenses
0.7
 %
 
11.7
%
 
4.6
%
Occupancy related expenses
7.4
 %
 
6.9
%
 
11.2
%
Selling transportation costs
-13.1
 %
 
10.1
%
 
0.8
%
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. The slight increase in 2015, when compared to 2014, was caused by increases in full-time equivalent headcount (see table below) and growth in our profit sharing contribution, primarily due to our expanding growth in operating income. Offsetting factors included lower performance bonuses and commissions due to the decrease in our gross profit percentage, and a focused reduction in overtime hours paid. The increase in 2014, when compared to 2013, was driven by (1) an increase in performance bonuses and commissions due to our expanding sales growth from the past year, (2) a contraction in profit sharing contribution due to lower relative profitability, and (3) an increase in health care costs. These factors, combined with an increase in full-time equivalent headcount (see table below), caused employee related costs to grow.

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On average, the full-time equivalent (FTE) headcount grew as follows (compared to the same period in the preceding years):
 
Twelve-month Period
 
2015
 
2014
 
2013
Store based
6.2
%
 
12.5
%
 
2.3
%
Total selling (includes store)
6.1
%
 
12.3
%
 
3.3
%
Distribution
6.1
%
 
11.5
%
 
4.3
%
Manufacturing
0.1
%
 
10.7
%
 
6.0
%
Administrative
6.7
%
 
8.9
%
 
7.1
%
Total average FTE headcount
5.9
%
 
11.9
%
 
3.8
%
Occupancy related expenses include: (1) building rent and depreciation, (2) building utility costs, (3) equipment related to our stores and distribution locations, and (4) industrial vending equipment (we consider the vending equipment to be a logical extension of our store operation and classify the expense as occupancy). The increase in 2015, when compared to 2014, was driven by (1) an increase in the amount of industrial vending equipment as discussed earlier in this document, and (2) an increased investment in our distribution infrastructure over the last several years, primarily related to automation. The increase in 2014, when compared to 2013, was driven by (1) an increase in the amount of industrial vending equipment as discussed earlier in this document, (2) an increase in building utility cost due to a severe winter in January and February 2014 and increases in natural gas prices during the 2014 heating season, (3) an increased investment in our distribution infrastructure over the last several years, primarily related to automation, and (4) an accrual related to store closings. In 2015 and 2014, the industrial vending component represented approximately 42% and 45%, respectively, of the increase.
Our selling transportation costs consist primarily of our store fleet as most of the distribution fleet costs are included in cost of sales. Selling transportation costs included in operating and administrative expenses contracted in 2015, when compared to 2014. This was driven by the decline in fuel costs (see discussion below). The growth in selling transportation costs included in operating and administrative expenses in 2014, when compared to 2013, was driven by the increase in store headcount and by a reduction in mileage per gallon associated with severe winter driving conditions.
The last several years have seen some variation in the cost of diesel fuel and gasoline. During the first, second, third, and fourth quarters of 2015, our total vehicle fuel costs were approximately $8.8 million, $9.1 million, $8.6 million, and $7.8 million, respectively. During the first, second, third, and fourth quarters of 2014, our total vehicle fuel costs were approximately $11.9 million, $12.5 million, $11.5 million, and $9.5 million, respectively. The changes resulted from variations in fuel costs, variations in the service levels provided to our stores from our distribution centers, changes in the number of vehicles at our store locations, changes in the number of other sales centered vehicles as a result of store openings and the expansion of our non-store sales force, and changes in driving conditions. These fuel costs include the fuel utilized in our distribution vehicles (semi-tractors, straight trucks, and sprinter trucks) which is recorded in cost of sales and the fuel utilized in our store delivery and other sales centered vehicles which is included in operating and administrative expenses (the split in the last several years has been approximately 50:50 between distribution and store and other sales centered use). 
Income taxes Income taxes, as a percentage of earnings before income taxes, were approximately 37.5%, 37.2%, and 37.1% for 2015, 2014, and 2013, respectively. The increase in our income tax rate from 2014 to 2015 was driven by an increase in valuation allowances on deferred tax assets and changes in the reserve for uncertain tax positions. Our income tax rate increased slightly from 2013 to 2014. As our international business and profits grew the past several years, the lower income tax rates in those jurisdictions, relative to the United States, have lowered our effective tax rate.
Net earnings – Net earnings, net earnings per share (EPS), percentage change in net earnings, and the percentage change in EPS, were as follows:
Dollar Amounts
2015
 
2014
 
2013
Net earnings
$
516,361

 
494,150

 
448,636

Basic EPS
1.77

 
1.67

 
1.51

Diluted EPS
1.77

 
1.66

 
1.51

Percentage Change
2015
 
2014
 
2013
Net earnings
4.5
%
 
10.1
%
 
6.7
%
Basic EPS
6.0
%
 
10.6
%
 
6.3
%
Diluted EPS
6.6
%
 
9.9
%
 
6.3
%

34


During 2015, the net earnings increase was greater than that of sales primarily due to the effective management of operating expenses. During 2014, the net earnings increase was less than that of sales primarily due to the reduction in the gross profit percent realized. During 2013, the net earnings increase was greater than that of sales primarily due to the expansion in the gross profit percent realized and a slightly lower income tax rate.

CASH FLOW IMPACT ITEMS
Operational working capital – Operational working capital, which we define as accounts receivable, net and inventories, are highlighted below. The annual dollar change and the annual percentage change were as follows:
Dollar change
2015
 
2014
Accounts receivable, net
$
6,298

 
47,746

Inventories
44,039

 
85,156

Operational working capital
$
50,337

 
132,902

Annual percentage change
2015
 
2014
Accounts receivable, net
1.4
%
 
11.5
%
Inventories
5.1
%
 
10.9
%
Operational working capital
3.8
%
 
11.1
%
The growth in net accounts receivable noted above was comparative to our sales growth in the final two months of the year. The strong growth in recent years with our international business and of our large customer accounts ha